SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the Fiscal Year Ended December 31, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number: 000-22172
RecordLab Corporation
(formerly Midisoft Corporation)
(Exact name of small business issuer as specified in its charter)
Washington 91-1345532
(State or other jurisdiction of (I.R.S.employer Identification No.)
incorporation or organization)
1605 NW Sammamish Road, Suite 205,
Issaquah, Washington 98027
(Address of principal executive offices)
(425) 391-3610
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $574,497.
Aggregate market value of voting stock held by non-affiliates of the registrant
as of April 10, 2000 was $22,674,429 (based upon the closing sale price of $2.75
per share on such date). Number of shares of Common Stock outstanding as of
April 10, 2000: 16,642,291 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
Part I
Page
Item 1. Description of Business...........................................3
Item 2. Description of Property...........................................7
Item 3. Legal Proceedings.................................................8
Item 4. Submission of Matters to a Vote of Security Holders...............8
Part II
Item 5. Market for Common Equity and Related Shareholder Matters..........9
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................9
Item 7. Financial Statements.............................................17
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................38
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................38
Item 10. Executive Compensation...........................................38
Item 11. Security Ownership of Certain Beneficial Owners and Management...38
Item 12. Certain Relationships and Related Transactions...................38
Item 13. Exhibits List and Reports on Form 8-K............................38
SIGNATURES..................................................................41
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PART I
Item 1. DESCRIPTION OF BUSINESS
IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS SUCH AS STATEMENTS OF THE COMPANY'S EXPECTATIONS, PLANS, OBJECTIVES
AND BELIEFS. THESE STATEMENTS USE SUCH WORDS AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "BELIEVE," "PLAN," AND OTHER SIMILAR TERMINOLOGY. ACTUAL RESULTS
COULD DIFFER MATERIALLY DUE TO CHANGES IN THE MARKET ACCEPTANCE OF RECORDLAB
PRODUCTS, MARKET INTRODUCTION OR PRODUCT DEVELOPMENT DELAYS, GLOBAL AND LOCAL
BUSINESS CONDITIONS, LEGISLATION AND GOVERNMENTAL REGULATIONS, COMPETITION, THE
COMPANY'S ABILITY TO EFFECTIVELY MAINTAIN AND UPDATE ITS PRODUCT PORTFOLIO,
SHIFTS IN TECHNOLOGY, POLITICAL OR ECONOMIC INSTABILITY IN LOCAL MARKETS, AND
CURRENCY AND EXCHANGE RATES. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF
THE DATE HEREOF. THIS DISCUSSION SHOULD BE READ TOGETHER WITH THE FINANCIAL
STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED IN THIS FORM 10-K.
General
recordLab Corporation (formerly Midisoft Corporation) (the "Company") has since
its incorporation in 1986 developed software for the creation and distribution
of music and the control of sound on personal computers. The products have
enabled users to learn to play instruments, create and share music, produce
print quality sheet music and view the musical notation of sounds as they are
being played on the computer or just enjoy the experience of sound on the PC.
The Company has refined and expanded these products to include playing and
viewing other forms of media, such as video.
In the past the Company has marketed its products in several ways. Media
utilities were sold to original equipment manufacturers ("OEM's"), who
incorporated these utilities into their products for sale to computer
manufacturers or end users. The Company has also formed alliances with Internet
content aggregators and providers to download its Internet Media Player and
other Internet products. Although these sources of revenue are unpredictable,
the costs of revenues are minimal and the Company continues to pursue
opportunities in this area.
The Company's consumer products have been sold primarily through retail stores
specializing in the sale of personal computers and software. As the ownership of
PC's has become more common, the Company added direct sales channels in an
effort to reach more potential users of its boxed products. Two years ago the
Company began selling through music and instrument stores to reach amateur
musicians and in 1999 the introduction of Worship Studio made distribution
through Christian bookstores an essential new channel.
The explosive growth of the Internet in recent years has provided the Company
with the avenue it has needed to reach its target customer, the nation's
millions of amateur musicians. According to a Gallup Survey conducted for the
National Association of Music Merchants, MusicUSA 1998, 25% of the U.S.
population, or approximately 68 million Americans, are amateur musicians. These
amateurs have a passion for playing music and want to become more knowledgeable
and proficient at recording their music for their personal satisfaction.
The Company believes that amateur musicians and aspiring artists do not have a
place to go on the Internet to learn how to make music or to make their music
better. They are limited to their local stores, teachers and network of friends.
The Company intends to change that by providing easy and direct access to top
music industry talent, expertise, technology and learning opportunities. With
this category-creation opportunity, the Company is focused on reaching the
broadest number of musicians possible and intends to capture and sustain the
leadership position in the music creation space on the Internet.
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In the fourth quarter of 1999, the Company announced sweeping changes in its
business and revealed a new corporate identity and strategies that deploy its
proprietary music creation technology, and complimentary services and products,
over the Internet. The Company's core customer focus continues to be the amateur
and non-professional musician and aspiring artist. In order to implement this
change in strategy, recordLab diverted marketing resources from traditional
sales channels to invest in website infrastructure development and product
technology engineering. These changes have had the effect of removing the
Company's products from the computer/software retail channel, which has been the
source of most of the Company's revenue since its founding in 1986. The
withdrawal from this channel has resulted in a significant reduction in 1999's
last quarter revenues and an increase in cost of revenues, as a percent of
revenues, resulting from providing for product returns and inventory writedowns
during the same period.
The Company believes this reduction in sales will continue until the development
of the recordLab.com website infrastructure, product engineering and
complimentary content and service creation is substantially completed, which the
Company anticipates will take place during the year 2000. However, the Company
will not be able to fund this development from operations and will require
additional investment to continue operations and complete implementation of its
plans. The Company has invested and intends to continue investing the majority
of its financial and management resources on website and product development,
marketing and promotion, strategic relationships and technology and operating
infrastructure.
In November 1999 the Company opened its flagship website, recordLab.com. When
completed later this year, the website will present a series of online learning
laboratories providing information, education, downloadable music creation
software, musical equipment, business and entertainment services that offer
visitors access to the knowledge and technology that simplifies the process of
composing, writing, recording, editing and publishing music.
Products
The fundamental focus of the Company's products is to provide software
applications and add-ons to fully outfit musicians for their musical journeys.
The following describes the Company's current software products:
Internet TapeDeck(TM): Internet TapeDeck is a multi-track digital audio
recording application for Windows 9x PC's. Internet TapeDeck emulates the
functionality of a $300 - $1,500 hardware-based four or eight-track cassette
recorder (e.g., Tascam Portastudio(TM)), which is currently one of the most
popular pieces of equipment sold in the musical instrument stores. A hardware
multi-track cassette recorder is typically the first equipment amateur artists
or music enthusiasts acquire to capture and perfect their own music.
Studio(TM) 6.0 and Desktop Sheet Music(TM) 2.0: These are the Company's
signature music software products. Studio 6.0 is the first notation-based
sequencing product for Windows `95 and `98, while Desktop Sheet Music 2.0
enables amateur musicians to create and print professional quality sheet music.
Worship Studio(TM) is the Company's first foray into creating higher margin,
niche-specific versions that cater to the needs of a specific, target market,
church worship or music directors.
PlayPiano(R) 2.0: Play Piano is a tutorial software package that takes learning
to play the piano and is designed to be useful to users at all skill levels. The
"student" selects a song to learn and the program creates a lesson plan
"on-the-fly" based on the players proficiency and perceived skills. Some music
theory and music history is also provided, making it an edutainment title as
well as an instructional tool. The product is rich with multimedia content
(audio and video clips and animation) and has potential for the music education
market.
MediaWorks(TM): MediaWorks is the Company's lead audio utility which supports
playback and management of popular local media and CD audio on the PC. A
significant upgrade is in the design phase that will dramatically increase the
number of media formats supported and will add many new features including
support for CD Audio "ripping" and MP3 encoding, integrated support for Diamond
Multimedia's Rio MP3 Player and streaming audio playback.
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Internet Media Player(TM): Internet Media Player is a free companion, add-on
utility for the Microsoft Windows Media Player that provides users with
much-improved content management and playback of popular Internet-oriented media
including streaming audio/video and MP3. Internet Media Player is positioned as
the "deluxe player" for content supported by Windows Media Technologies. It
features an innovative ad banner and content management architecture that allows
the Company to automatically refresh and update ads and "pre-loaded" content. It
also delivers player and content usage demographics that are used for soliciting
advertisers and sponsorships.
Future products include a major product, iDrum,(TM) add-on effects for Internet
TapeDeck and percussion sounds for iDrum. iDrum is a software-only product
designed to emulate a hardware electronic drum machine. The drum machine, like
the four or eight track cassette recorder is a popular piece of musical gear
sold in the music instrument channel. Using high-quality drum sound "samples,"
drum machines are programmed to create and replay a drum or percussion pattern
that can be used during a performance or in the studio. It is particularly well
suited for the solo musician who does not play percussion and needs a beat for
practicing, performing or recording.
Enhancements to current titles are also planned. MediaWorks(TM) i2000:
MediaWorks i2000 is a product under development that combines the features and
functionality of Internet Media Player and MediaWorks '98 into a single, modular
and configurable code base upon which future version of Internet Media Player
and MediaWorks will be built. New features include an updated user interface,
support for additional file formats, more extensive user configuration control,
support for audio effect "plug-ins" and improved support for co-branded and
private label opportunities with strategic partners and advertisers. A Content
Developer's Kit will provide third-party developers of content the ability to
plug-in their content to the recording platform.
Market
The demand for music content on the Internet is substantial and growing. Amateur
musicians abound in large numbers today and the Internet has provided the means
by which these highly active groups can connect and interact. The Company
believes it is well positioned to take advantage of this growth and driving
trend in the marketplace.
The number of Internet companies and websites that offer musical content is
expanding rapidly. These companies generally operate under a distribution-only
model that allows users to download compressed music (typically as MP3 files).
In so doing, the Company believes they miss the larger universe of amateur
musicians who have a desire or need to create music but who have not yet
recorded their music. The Company plans to address this larger universe of
amateur musicians by offering a range of vertically-integrated knowledge and
technology products and services, for example online video seminars on
production techniques and other topics, music creation software, merchandise and
business services on recordLab.com.
Strategy
The Company's core strategy is to create THE platform for amateur the creation
of original musical content on the Internet. recordLab.com will provide music
authoring software, craft enhancement seminars and career development services
that allow amateur musicians to produce and improve their music. Presented as a
community-based online "laboratory," recordLab.com will provide members with: 1]
access to expert knowledge of those practicing specific crafts within the music
industry; and 2] the Company's technology that aims to simplify the process of
recording, editing, printing and distributing their music. The Company believes
that these are the keys to enabling amateur musicians to contribute original
artistic content and to creating communities of interest. This in turn, creates
a platform for the Company to deliver a number of additional complimentary
services to amateur musicians. The Company believes that this strategy
establishes significant differentiation between the Company and its competition.
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Distribution
The Company will continue to sell its boxed product directly to consumers,
through existing retail channels and through its websites. The Company will also
generate revenues by selling downloadable music software (recording and sheet
music applications and sound and effects add-ons for Internet TapeDeck and
iDrum), selling classes, coursework and seminars (streaming videos of
professional producers, arrangers, vocal coaches and publishers) and selling ads
on the website and on its Internet Media Player. Revenue from music fans will be
generated from advertising accompanying compelling content and consumer
electronic merchandise.
Competition
The software market for audio and music on the PC is highly competitive and
changing rapidly. The Company's competitors, many of which have greater
financial, marketing and technical resources than the Company, offer similar
products and target the same customers. The Company believes its ability to
compete depends upon many factors within and outside its control, including the
ability to offer product enhancements, functionality, performance, price,
reliability, customer support, sales and marketing efforts and distribution.
There can be no assurance that competition will not adversely affect future
operating results or financial condition.
Manufacturing
The Company had used a third-party contractor for assembly and outbound
distribution, but moved these activities in-house in 1999. The Company uses
in-house capability for customer order processing, component inventory
procurement, material requirements planning and production scheduling. The
manufacturing process for software involves duplication of software code onto
floppy diskettes or CD's, printing of packaging and documentation and assembly
of final packaged products. Manufacturing output can generally be increased
rapidly to respond to increases in demand. The Company has experienced
occasional delays in manufacturing its products resulting from not consistently
remaining within credit terms with some of its vendors. The Company has not
encountered unusual levels of returns resulting from product defects.
The Company also generates and responds to customer demand through Web-based
distribution whereby customers order products and download the Company's
software directly to their PCs, This eliminates most of the traditional order
processing and manufacturing steps. Third-party sales require duplication of the
Company's software code onto a CD, generally referred to as a "golden master."
The manufacturer then transfers the software code from golden masters onto their
hardware.
Proprietary Rights
The Company relies primarily on trade secret, trademark and copyright laws,
treaties and contractual agreements, to protect its proprietary rights. The
Company attempts to keep results of its research and development programs
proprietary to protect its marketed software products against misappropriation
and infringement by third parties. However, there can be no assurance that the
Company will in all instances be able to prevent others from misappropriating or
infringing upon the Company's proprietary information and software products.
The Company intends to maintain the integrity of its trade name, trademarks,
copyrights and other proprietary rights against unauthorized use and to protect
against infringement and unfair competition where circumstances warrant.
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Although the Company believes that its products do not infringe on any copyright
or other proprietary rights of third parties, there are currently significant
legal uncertainties relating to the application of copyright and patent law in
the field of software. The Company has no assurance that third parties will not
obtain, or do not have, patents covering features of the Company's products, in
which event the Company or its customers might be required to obtain licenses to
use such features. If a patent holder refuses to grant a license on reasonable
terms or at all, the Company may be required to alter certain products or stop
marketing them.
Employees
The Company, as of April 10, 2000, employed 25 persons. Of these, 9 are employed
in administration, 8 in product development and 8 in sales and marketing.
Employees are covered by confidentiality agreements, and no employee has an
employment contract. None of the Company's employees are represented by a union
or other bargaining group. The Company believes it maintains good employee
relations. The Company also utilizes independent consultants for a number of
purposes, primarily in the area of product development. These consultants are
also covered by confidentiality agreements.
Dividends
The Company has declared no dividends on its Common Stock since its inception.
While subject to review if the Company achieves an operating surplus, the Board
of Directors has no plans to declare a dividend on the Company's Common Stock.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and such statements are subject to the safe harbors
created thereby. These forward-looking statements include the plans and
objectives of management for future operations, including plans and objectives
relating to (a) the development of new music, strategic and Internet products,
(b) the expansion of domestic and international marketing, sales and
distribution programs, (c) the continued protection of proprietary technologies
and (d) the ability to fund continued operations out of existing working
capital, additional capital infusion and cash flow from future operations. The
forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. The forward-looking statements
also assume that the Company will be able to raise the capital necessary to
continue as a going concern, but there can be no assurance that sources of
capital to sustain operations will be available. These forward-looking
statements are based on assumptions that the Company will continue to develop
and introduce new music, strategic and Internet products on a timely basis, that
rapid changes in technology will not make the Company's products obsolete or
otherwise reduce their ability to compete in the marketplace, that competitive
conditions within the industry will not change materially or adversely, that the
use of multimedia PC's in homes and small offices will continue to grow, and
that there will be no material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, there can be
no assurance that the forward-looking information will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
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Item 2. DESCRIPTION OF PROPERTY
The Company's principal offices are located in approximately 17,000 square feet
of office space in Issaquah, Washington, which the Company leases pursuant to a
lease expiring in April 2002. The Company will pay $41,500 per month under its
lease agreement. The Company considers its leased properties to be in good
condition, well maintained, and generally suitable and adequate for its present
and foreseeable future needs.
Item 3. LEGAL PROCEEDINGS
In 1997, an entity ("Claimant") which sold substantially all of its assets to
the Company in 1995 demanded that the Company arbitrate certain claims arising
from the sale. The claims aggregated in excess of $1 million. The parties
reached an agreement in July 1998 outside of arbitration. In exchange for the
mutual release of all claims and counterclaims, the Company agreed to provide
total consideration of $420,000, $25,000 in cash and the remainder comprised of
forgiveness of $112,000 in debt and issuance of approximately 633,000 recordLab
common shares. The Company agreed to file a registration statement for these
shares within 30 days after final authorization by the shareholders in 1998, but
has not filed the registration statement as of this date. Payments totaling
$20,000 have been made. The debt of $112,000 has been fully reserved and expense
of $283,000 for the additional common shares has been booked as of December 31,
1998. recordLab agreed to remove restrictive legends on 166,667 of previously
issued shares. The Company believes that the Claimant's subsequent actions
nullified this agreement. In July 1999 the Company demanded the return of all
consideration. In December 1999 the Company cancelled the 633,000 shares
previously issued and reserved the $269,000 related to recording those shares.
recordLab has petitioned the court to dismiss the case. The Company intends to
vigorously defend against the claim and to pursue collection.
In March 1997, a former sales representative ("Plaintiff") filed suit in
Michigan against the Company under a certain manufacturer's representative
agreement ("Agreement") entered into between the parties in November 1994.
Plaintiff claims that the Company breached the Agreement by failing to pay
commissions and is seeking damages in excess of $75,000. Midisoft denies that it
failed to pay commissions under the Agreement and is asserting counterclaims for
over payments and return credits. Damages asserted by the Company equal the
damages claimed by the Plaintiff. The case is on the May Docket in federal court
in Michigan and the Company is awaiting a trial date. The ultimate outcome
cannot be determined at this time, but the Company believes that it has
meritorious defenses and is vigorously defending against the claim.
On April 3, 1997 the Company began arbitration proceedings against a former
customer. On September 24, 1997, the Company was awarded a judgement in the
amount of $194,983.37 against the former customer. The amount of the award
represents the sum of 1) $160,000.00, the unpaid portion of the base annual
license royalty under the Company's OEM License Agreement and 2) $34,983.37,
representing interest on the unpaid installments from their respective due dates
through the date of the award computed at 12% per annum. In November 1998, the
former customer had exhausted its appeals when the Washington State Court of
Appeals denied the former customer's appeal motion, thereby terminating the
appellate process. In March 1999, the Company amended the judgement to add
attorneys' fees and interest accrued since the original judgement was entered.
The total amount of the amended judgement is $247,925.34. The Company has
engaged a California law firm to enforce judgement in the state of California,
the headquarters location of the former customer. The Company has reserved the
entire sum of the debt on the financial statements as of December 31, 1999.
As of December 31, 1999, the Company had $457,000 of accounts payable that were
current, $152,000 extended to between 31 and 60 days and $590,000 extended over
60 days. The level of extended accounts payable results from the Company's
negative operating cashflows. The Company has entered into plans to extend
payments beyond due dates in the original purchase orders. There is no certainty
that the Company will be able to continue to meet extended payment terms. The
Company has received demand letters from certain vendors requesting immediate
payment of amounts owing them totaling approximately $395,000. Four of these
vendors have initiated litigation for claims received judgments totaling
approximately $28,000. The Company has reached settlement agreements with some
vendors and is negotiating with the remainder. Some vendors have stopped making
sales to the Company and others have required cash on delivery terms.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information: The Company's Common Stock is traded under the symbol "RCLB"
on the OTC Bulletin Board. The following table sets forth the range of high and
low closing bid prices, as reported, from January 1, 1998 through December 31,
1999. The prices set forth reflect closing price, without retail markups,
markdowns or commissions. As of April 10, 2000, the number of holders of record
of the Company's Common Stock was approximately 1,418. Since certain of the
shares of Common Stock are held in street name, there may be additional
beneficial holders of the Company's Common Stock.
High Low
1998
First quarter $ 1.2500 $ 0.6250
Second quarter 0.8125 0.3125
Third quarter 1.0000 0.3750
Fourth quarter 0.7500 0.2300
1999
First quarter $ 1.0313 $ 0.3750
Second quarter 3.8750 0.9063
Third quarter 3.6563 1.8125
Fourth quarter 4.7500 2.3750
Dividends: The Company has declared no dividends on its Common Stock since its
inception. While subject to review if the Company achieves an operating surplus,
the Board of Directors has no plans to declare a dividend on the Company's
Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and notes thereto.
General
This table provides comparative results of the twelve months ended December 31,
1999 and 1998. A general discussion of these results follows.
Twelve months ended December 31,
1999 1998
% of Revenue % of Revenue
Net Sales Revenue 100% 100%
Gross Profit 52% 62%
Sales & Marketing Expense 130% 68%
General & Administrative Expense 612% 106%
Research & Development 166% 36%
Total Operating Expenses 908% 209%
Net Operating Income (Loss) 857% -147%
Other (Income) Expense -232% -89%
Net Income (Loss) 1089% -236%
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The Company's revenues include sales of software and software licenses net of
sales returns. The Company made a strategic decision in 1999 to significantly
reduce the distribution of its products through the computer/software retail
channel. This channel had typically produced large revenues in the third and
fourth quarter of each year followed by large sales returns in the first and
second quarter of the following year. As the ratio of these sales to returns has
deteriorated in recent years, the Company decided to change its focus for the
sale of its boxed products to retail channels that might find a higher
proportion of customers interested in its products. The Company believes this
will result in lower returns of products distributed to retailers. In 1998 the
Company began distribution through music and instrument stores. In 1999, with
the release of Worship Studio, the Company began distribution through Christian
bookstores.
In 1999 the Company began developing a new marketing plan designed to take
maximum advantage of the growing access of its potential customer base to the
Internet. The Company changed its name to recordLab Corporation. The Company's
strategy is based on its belief that the Internet provides an ideal platform for
promoting, marketing and selling music and related products and services. The
Company diverted marketing resources from traditional channels to invest in
website, product and technology engineering. These changes had the effect of
reducing revenues. The Company has invested and intends to continue to invest
significant financial and management resources on the website and product
development, marketing and promotion, strategic relationships and technology and
operating infrastructure. The website, recordLab.com, opened as a Beta site for
public access in the Fall, 1999. This website will be developed over the coming
year to include online laboratories, downloadable software, musical instruments
and other music related products and services. recordLab.com will seek to serve
a large market of amateur musicians and songwriters and will provide all the
tools and services necessary for non-professional musicians to create, produce
and distribute their music. The Company will not be able to fund this
development from operations and will require additional investment to continue
operations and complete the development of this website. If the Company cannot
obtain additional working capital immediately, it may not be able to continue as
a going concern.
Success of the Company's strategy depends in large part on the global
development of an infrastructure for providing Internet access and services.
Because global e-commerce and online exchange of information and compelling
music content on the Internet and other similar open wide area networks are new
and evolving, it is not possible to anticipate with assurance whether the
Internet will prove to be a viable commercial marketplace for the Company's
technology. Even though the Internet has experienced, and is expected to
continue to experience significant and rapid growth in the number of users and
amount of traffic, there can be no assurance that the Internet infrastructure
will continue to be able to support the demands placed on it by this continued
growth. In addition, the Internet could lose its viability because of delays in
the development or adoption of new standards and protocols to handle increased
levels of Internet activity, or increased governmental regulation. If the
necessary infrastructure or complementary services or facilities are not
developed, or if the Internet does not become a viable commercial marketplace,
the Company's ability to execute its strategy could be seriously limited and
this would materially and adversely affect its results of operations and
financial position.
The principal competitive factors affecting the music creation software and
Internet music creation and distribution markets include product functionality,
ease of use, performance and reliability; customer service and support; product
availability; vendor credibility; brand awareness; ability to keep pace with
technological change; and price. Although the Company believes that its products
currently compete favorably with respect to these factors, there can be no
assurance that the Company can achieve an improved competitive position in the
face of increasing competition from new products and enhancements introduced by
existing competitors and new companies entering its markets. Markets for the
Company's products are characterized by significant price competition, and the
Company expects it will continue to face increasing pricing pressures. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial position
and results of operations.
Certain of the Company's competitors have substantially greater financial,
marketing or technical resources than the Company. There can be no assurance
that other companies have not developed or marketed or will not develop or
market products that are superior to those of the Company, that are offered at
substantially lower prices than those of the Company or that have or will
achieve greater market acceptance than those of the Company.
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Revenue from products licensed to OEMs consisting of one-time license fees and
contracts for minimum advances against future unit licenses are recognized when
the criteria for fixed fee revenue recognition under American Institute of
Certified Public Accountants' Statement of Position No. 97-2, Software Revenue
Recognition (SOP 97-2) is satisfied. These criteria include, but are not limited
to, delivery of the software master, the Company's lack of other significant
obligations to the customer and a determination that the collectability of the
amount due is probable. Contracts that do not meet the fixed fee revenue
recognition criteria in SOP 97-2 included in deferred revenue are recognized as
revenue on the installment basis as payments from customers are received, or
until the Company has no significant obligations. Additional royalty use or unit
copy royalty fees are recognized when they are earned pursuant to the license
agreements and upon notification of shipment from the OEMs. Revenue from sales
to distributors, other resellers and end-users net of a provision for
anticipated returns, is recognized when the products are shipped. The allowance
for returns is evaluated each quarter taking into consideration, among other
things, known return requests from distributors, anticipated return requests
based on the distributor's rate of product sale, returns due to product upgrades
and historical distributor return patterns.
Cost of revenues includes the costs of manuals, software duplication, packaging
materials, assembly, paper goods, shipping and royalty fees paid to licensors of
third-party software bundled with the Company's products.
Research and development expenses consist primarily of personnel and equipment
costs and the cost of services from consultants required to conduct the
Company's development effort.
During 1999 and 1998, the Company's research and development efforts were
focused upon the Company's core technologies in sound and music. In 1999 the
Company substantially increased its expenditures for product development as it
began development of recordLab.com and content for the website. The Company
believes that successful execution of this strategy will result in higher gross
margins for its software business. These development efforts may not result in
timely introduction of new products, and these new products may not be
commercially successful. Inability to successfully develop new products, delays
in the introduction of these new products, or lower-than-anticipated demand for
these products could have a material and adverse effect on the Company's
business and results of operations.
At December 31, 1999, the Company had Federal net operating loss carryovers of
approximately $30.6 million, which expire beginning 2008. In certain
circumstances, as specified in Section 382 of the Internal Revenue Code, a 50%
or more ownership change by certain combinations of the Company's stockholders
during any three-year period would result in limitations on the Company's
ability to utilize its net operating loss carryovers. An investor who owned
$3,200,000 in principal amount of convertible debentures and associated warrants
converted that debt to 8.4 million shares of the Company's common stock in the
fourth quarter. The investor still holds warrants for about 3.78 million shares
A change in control has occurred as a result of the above investments.
Seasonality
Sales to distributors have tended to be greater in the third and fourth quarter
as consumers buy software to supplement their holiday computer hardware
purchases. The change in channels of distribution may balance the sales of boxed
product more evenly throughout the year. OEM sales are concentrated in a small
number of customer contracts and tend to occur sporadically. Direct sales
generally increase when software upgrades become available. Sales of services
and products through the recordLab.com website have not begun.
-12-
<PAGE>
Comparison of Years Ended December 31, 1999 and 1998
In the fourth quarter of 1999, the Company announced sweeping changes in its
business and revealed a new corporate identity and strategies that deploy its
proprietary music creation technology, and complimentary services and products,
over the Internet. The Company's core customer focus continues to be the amateur
and non-professional musician. In order to implement this change in strategy,
recordLab diverted marketing resources from traditional sales channels to invest
in website infrastructure development and product technology engineering. These
changes have had the effect of removing the Company's products in the
computer/software retail channel, which has been the source of most of the
Company's revenue since its founding in 1986. The withdrawal from this channel
has resulted in a significant reduction during 1999's last quarter in revenues
and an increase in cost of revenues, as a percent of revenues, resulting from
providing for product returns and inventory writedowns during the same period.
The Company believes this reduction in sales will continue until the development
of the recordLab.com website infrastructure, product engineering and
complimentary content and service creation is substantially completed, which the
Company anticipates will take place during the year 2000. However, the Company
will not be able to fund this development from operations and will require
additional investment to continue operations and complete implementation of its
plans. If the Company does not obtain additional working capital immediately, it
may not be able to continue as a going concern. The Company has invested and
intends to continue investing the majority of its financial and management
resources on website and product development, marketing and promotion, strategic
relationships and technology and operating infrastructure. The website,
recordLab.com, opened as a Beta site for public access in Novmeber 1999.
Revenues for 1999 were $574 thousand compared to $1.8 million in 1998. Sales to
software distributors and resellers, together with direct sales, represented 44%
and 79% of revenues for the years ended December 31, 1999 and 1998,
respectively. Withdrawal from the computer/software retail channel in 1999
resulted in lower sales and higher returns and reserves for returns. OEM
revenues represented 56% and 21% during the same periods. Sales to distributors
and resellers were lower in large part from higher returns and lower unit sales
in 1999 compared to 1998. The Company believes that the decline in OEM revenues
is substantially related to significant industry-wide reductions in PC prices,
which began in the fourth quarter of 1997. International sales accounted for 5%
of the Company's revenues in 1999 compared to 8% of revenues in 1998 resulting
from the Company's continued emphasis on US sales in 1999.
Gross profit for 1998 was $297 thousand, a decrease of $791 thousand, compared
to $1.1 million for the prior year. As a percentage of net revenues, gross
profit decreased to 52% in 1999 from 62% in 1998. Gross profits, in general, are
affected by the mix of OEM licensing sales versus music product sales as well as
the mix within music products. The retail channel and inside sales channel for
music products consist of boxed software product. $125 thousand of obsolete
inventory for boxed products were written off in 1999. OEM cost of revenues are
nearly zero in that they generally consist of one master CD from which OEMs
duplicate the Company's software. The Company's withdrawal from the
computer/software retail channel in 1999 resulted in higher than normal sales
returns and provisions for reductions in inventory carrying values.
Research and development expenses for 1999 were $955,000, an increase of
$329,000 compared to $626,000 for 1998. As a percentage of net revenues,
research and development expenses increased to 166% in 1999 from 36% in 1998.
This increase reflects the Company's initial investment in the recordLab.com
website (less $201 thousand capitalized as website development cost) and
continuing product upgrades.
Sales and marketing expenses for 1999 were $746 thousand, a decrease of $444
thousand, compared to $1.2 million for 1998. As a percent of net revenues, sales
and marketing expenses increased to 130% in 1999 from 68% in 1998. Principal
cost reductions were in sales and marketing employees, advertising, and trade
shows. The increase in sales and marketing expense as a percentage of revenues
resulted from lower revenues. The reduction in expense levels reflects the
Company's continuing emphasis on cost controls and targeting marketing and sales
efforts into direct sales channels.
-13-
<PAGE>
General and administrative expenses for 1999 were $3.5 million, an increase of
$1.6 million, compared to $1.9 million for 1998. As a percentage of net
revenues, these expenses for 1999 increased to 612% from 106% in 1998. The
increase in general and administrative expenses in 1999 is due to an increase of
$700 thousand in non-cash compensation to consultants, a $450 thousand increase
in compensation expense and a one time non-cash charge of $400 thousand
associated with the issuance of warrants.
Interest expense for 1999 was $1.3 million, a decrease of $0.3 million compared
to $1.6 million in 1998. The decrease in interest expense results from lower
non-cash charges relating to the intrinsic value of in-the-money conversion
options associated with convertible debentures and detachable warrants issued by
the Company in 1999 off-set buy non-cash charges relating to warrants issued to
the guarantors of the Company's $2 million line of credit.
Liquidity and Capital Resources
As of December 31, 1999, the Company's principal sources of liquidity included
cash and cash equivalents of $198,000, net accounts receivable of $63,000 and
$500,000 available under the Company's $2 million line of credit. As of December
31, 1999, working capital was a negative $2.9 million, a decrease of $1.5
million from the negative $1.2 million at December 31, 1998.
The Company's operating activities used cash of $2.8 million for the year ended
December 31, 1999 due primarily to operating losses of $4.9 million.
Current assets decreased $299,000 to $311,000 at December 31, 1999 from $610,000
at the end of 1998. The decrease was due to reductions of cash, accounts
receivable, inventories and prepaid expenses. Long term assets increased
$555,000 to $922,000 at December 31, 1999 from $367,000 at the end of 1998. This
increase resulted largely from capitalization of website development costs for
recordLab.com and debt issuance costs. Current liabilities totaled $3.2 million
at December 31, 1999, an increase of $1.4 million from the balance at December
31, 1998 of $1.8 million. The increase was due to a new note payable of $1.5
million and the cancellation of shares in a settlement being reserved for
$269,000, which was partially offset by a decrease of $100,000 in accrued
expenses and the conversion of a $250,000 note to common stock. Long term debt
and warrant obligations were eliminated as the debt was converted to common
stock and the warrant was exercised. Shareholders'deficit increased $1.7 million
to negative $2 million at December 31, 1999 from a negative $3.1 million at
the end of 1998. The change in equity resulted from a net loss recorded in 1999
of $6.3 million, offset by approximately $4.9 million in additions to common
stock from the sale for $1 million, $3.5 million of debt converted to common
stock, cancellation of common stock issued for $269,000 in a settlement and
$400,000 issued for the exercise of options and warrants and for payment for
services and accounts payable.
On October 28, 1997, the Company entered into a Securities Purchase Agreement,
which was amended on January 7, 1998, (the "Agreement") with an unrelated third
party (the "Lender"). The Agreement provided for the sale of $2 million of
convertible debentures with the option for an additional $2 million through June
1999. The Company sold $500,000 of debentures on each of October 28, 1997,
November 28, 1997, January 9, 1998 and January 28, 1998. The first $1 million in
debentures sold were convertible into a total of 1,666,667 shares of Common
Stock and were issued with warrants to purchase an additional 833,333 shares of
Common Stock at a price of $1.50 per share. The second $1 million in debentures
sold were convertible into a total of 1,923,077 shares of Common Stock and were
issued with warrants to purchase an additional 961,538 shares of Common Stock at
a price of $1.25 per share. The debentures earned interest at the rate of 1% per
annum payable in cash or, at the Company's option, in shares of Common Stock.
The Company was obligated to pay a finder's fee of 3% of the money raised as
that money was received by the Company. The Company had the right to redeem
these debentures at any time prior to conversion for an amount equal to the sum
of the outstanding principal amount plus accrued interest plus a redemption
premium which increased from 7% of the principal amount if redeemed within 45
days from issuance to 25% of the outstanding principal amount if the redemption
date was more than 90 days from the issuance date. For so long as the debentures
were outstanding or the Lender owns at least 25% of the Company's outstanding
Common Stock, the Lender shall have the right to (i) approve certain merger or
acquisition transactions, (ii) appoint two of the Company's five Directors with
the Company's concurrence and (iii) purchase any equity securities the Company
may propose to sell. Item (ii) above was later amended to "appoint three of the
Company's seven Directors with the Company's concurrence and".
-14-
<PAGE>
The Company and the debenture holder amended the Securities Purchase Agreement,
with respect to the proposed June 15, 1998 sale of $1,000,000 of convertible
debentures, to provide for the sale of up to $1,000,000 of Senior Convertible
Secured Notes in 1998 and another $1,000,000 of Senior Convertible Secured Notes
in 1999. The first $500,000 of these notes were for five years and earned
interest at the rate of one percent (1%) per annum, payable in cash annually on
the anniversary date of the notes. These notes were convertible into 2,500,000
shares of Common Stock. The note holder also received five year warrants to
purchase 500,000 shares of Common Stock at an exercise price of $0.75 per share.
The notes were secured by first, prior and perfected interests in all
intellectual property rights, fixed assets and contracts for product delivery.
The note holder had the option to purchase an additional $500,000 of notes with
terms and conditions similar to those referenced above, with a conversion price
equal to forty-seven percent (47%) of the value of each share of common stock
for the ten trading days prior to exercise of the conversion option. This option
was exercised in two installments. The Company sold $250,000 of these notes in
December 1998 and a like amount in March 1999. Each of these notes were
convertible into 1,000,000 shares of Common Stock. The note holder also received
five year warrants to purchase 500,000 shares of Common Stock at an exercise
price of $0.75 per share with each note. On April 30, 1999 the Company sold
another $200,000 of convertible notes bearing interest at 1% per annum, payable
annually in cash, or shares of the Company's common stock, and convertible into
250,000 shares of common stock. The note holder received five-year detachable
warrants to purchase 250,000 shares of the Company's common stock for $1.75 per
share. In the October 1999 all of the $3.2 million of debt and all accrued
interest were converted by the lender to 8.4 million shares of the Company's
common stock. This conversion eliminated all of the Company's long term debt.
Simultaneous with the execution of the original Agreement, the Company entered
into a Registration Rights Agreement with the Lender, whereby the Company agreed
to use its reasonable best efforts to file a registration statement to register
the Common Stock which is issuable upon the conversion and exercise of the
debentures and warrants. The Company has agreed that it will bear all costs
associated with such registration, excluding underwriting commissions or
discounts.
In September 1997 the Company received $250,000 for which it was to issue an 8%
convertible note due September 1998 (the Note). The Note and accrued interest
were to be convertible into common stock at a conversion price of $0.65 per
share, at the option of the holder, at any time after October 30, 1997 through
maturity. A debt discount of $135,000 was recorded related to the intrinsic
value of the in-the-money conversion option at the close of the debt
transaction. The discount was expensed on October 30, 1997. In September 1999
the note and all accrued interest were converted to 451,000 shares of the
Company's common stock.
In June 1999 the Company opened two lines of credit with Key Bank of Washington
for $750,000 each, or $1,500,000 combined. These lines of credit jointly
obligated the Company and the Company's largest shareholder.. These credit lines
were expanded to $1,000,000 each, or $2,000,000 combined, on July 15, 1999. All
outstanding principal and interest was to have been paid on both lines by March
4, 2000. In October 1999 the notes were modified to include one of the Company's
board members, Mr. Kaye, as a guarantor. In March 2000 the repayment date was
extended to June 4, 2000. The amount borrowed under the lines at December 31,
1999 was $1,500,000.
On July 14, 1999 the Company entered into Subscription and Registration Rights
Agreements to sell 781,250 shares of the Company's common stock to a new
investor for total consideration of $1,000,000. The funds were received on July
14, 1999. As part of the transaction, the Company agreed to pay a finder's fee
of $30,000 to an unrelated third party. The finder's fee was paid with the
issuance of 9,321 shares of the Company's common stock in September 1999.
-15-
<PAGE>
Through April 14, 2000, the Company has financed its operations principally
through net proceeds from two public offerings and private placements of debt
and equity. The Company believes that cash on hand, along with cash generated
from the sale of products and collections of accounts receivable, will not be
sufficient to meet the Company's requirements for the month of April 2000 and
there are no remaining funds available under the Company's lines of credit. The
Company's ability to fund continued operations depend on raising additional
capital immediately. Should the Company be unable to raise additional capital,
the Company will be required to significantly reduce operations, reduce
expenses, and may find it necessary to file for protection under the bankruptcy
code. Such steps would likely have a material adverse effect on the Company's
ability to establish profitable operations in the future. The Company will
continue to pursue financing arrangements to increase its cash reserves. There
can be no assurance the Company will be capable of raising additional capital or
that the terms upon which such capital will be available to the Company will be
acceptable.
Trade Debt and Other Matters
As of December 31, 1999, the Company had $457,000 of accounts payable that were
current, $152,000 extended to between 31 and 60 days and $590,000 extended over
60 days. The level of extended accounts payable results from the Company's
negative operating cashflows. The Company has entered into plans to extend
payments beyond due dates in the original purchase orders. There is no certainty
that the Company will be able to continue to meet extended payment terms. The
Company has received demand letters from certain vendors requesting immediate
payment of amounts owing them totaling approximately $395,000. Four of these
vendors have initiated litigation for claims received judgments totaling
approximately $28,000. The Company has reached settlement agreements with some
vendors and is negotiating with the remainder. Some vendors have stopped making
sales to the Company and others have required cash on delivery terms.
Nasdaq
Effective with the close of business September 9, 1997 the Nasdaq delisted the
Company's Common Stock from the Nasdaq National Market. The Company was unable
to evidence a minimum of $2,000,000 in net tangible assets and compliance with
all the requirements for continued listing on the Nasdaq National Market.
Although the Common Stock trades on the OTC Bulletin Board, the Company believes
that the delisting of its stock has adversely affected its ability to raise
capital.
YEAR 2000
The information provided below complies with the disclosure requirements under
the Year 2000 Information and Readiness Disclosure Act.
The Company established a Y2K task force in early 1999 to identify and correct
any computer problems that may arise with hardware or software resulting from
the change of year from 1999 to 2000. The task force worked with vendors and
suppliers to assure that no disruptions would occur that would interfere with
the Company's operations. The Company's existing accounting system was not Y2K
compliant and the Company used this opportunity to change to a more capable
accounting system rather than upgrade the old system. The new system is
completely installed and data entry is proceeding. The Company does not
anticipate any significant problems arising from this new installation. To date
the Company has encountered no disruptions and is not aware of any problems with
any of its internal systems or the operation of any of its vendors or suppliers.
The total cost of this program has not been determined, but the Company believes
the cost of this program has not and will not have a material impact on the
Company's operating results.
While the Company is not aware of any disruptions or losses of data resulting
from Year 2000 problems, there is no assurance that problems may not arise after
the anticipated event date. If such problems were to occur, there could be
significant loss of data that may affect the Company's future operations. As
part of the Y2K program the Company developed contingency plans in the event of
any system failures. These plans call for frequent backups of critical data and
arrangements for substitute systems in the event of hardware or software
failures.
Subsequent Events
In February and March 2000 the Company sold 267,818 shares of the Company's
common stock to several investors under stock subscription agreements. These
agreements provided for investment at $2.75 per share, yielding a total
investment of $736,500. The agreements further provided for three year warrants
to purchase 10% of the shares purchased under the agreements, or a total of
26,782 shares for $4.00 per share.
-16-
<PAGE>
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS
Report of Independent Accountants
To the Board of Directors and Shareholders of
recordLab Corporation
In our opinion, the accompanying balance sheets and related statements of
operations, of changes in shareholders' deficit and of cash flows present
fairly, in all material respects, the financial position of recordLab
Corporation at December 31, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States. 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 audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continued as a going concern. As described in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Seattle, Washington
March 1, 2000
-17-
<PAGE>
- --------------------------------------------------------------------------------
recordLab Corporation
Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1999 1998
Assets:
Current assets
Cash and cash equivalents $ 198,000 $ 270,000
Accounts receivable, net 63,000 183,000
Inventories, net 38,000 115,000
Prepaids and other 12,000 42,000
---------------- -----------------
Total current assets 311,000 610,000
Long-term receivable, net 0 195,000
Property and equipment, net 476,000 116,000
Debt issuance costs, net of
accumulated amortization of
$770,000 in 1999 and $23,000 in 1998 446,000 56,000
---------------- -----------------
Total assets $ 1,233,000 $ 977,000
================ =================
Liabilities and Shareholders' Deficit:
Current liabilities
Note payable to bank $ 1,500,000 $ 0
Trade accounts payable 1,199,000 1,181,000
Current portion of long-term debt 0 250,000
Accrued wages and payroll taxes 118,000 93,000
Other accrued expenses 414,000 273,000
Deferred revenue 6,000 6,000
---------------- -----------------
Total current liabilities 3,237,000 1,803,000
---------------- -----------------
Long-term debt, net of discount 0 2,258,000
---------------- -----------------
Warrant obligations 0 81,000
---------------- -----------------
Commitments and contingencies
Shareholders' deficit:
Preferred stock, Series A convertible,
no par value; 2,500,000 shares
authorized, zero issued and outstanding
in 1999 and 1998 0 0
Common stock, no par value; 25,000,000
shares authorized,16,565,000 and
7,251,000 issued and outstanding in
1999 and 1998, respectively 25,121,000 20,488,000
Additional paid-in capital 5,885,000 3,026,000
Deferred stock compensation (162,000) 0
Notes receivable from shareholders (109,000) (191,000)
Accumulated deficit (32,739,000) (26,488,000)
---------------- -----------------
Total shareholders' deficit (2,004,000) (3,165,000)
---------------- -----------------
Total liabilities and shareholders' deficit $ 1,233,000 $ 977,000
================ ===============
</TABLE>
See accompanying notes to financial statements.
-18-
<PAGE>
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recordLab Corporation
Statements of Operations
For the years ending December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1999 1998
Revenues $ 574,000 $ 1,760,000
Cost of revenues 277,000 672,000
---------------- ----------------
Gross profit 297,000 1,088,000
---------------- ----------------
Operating expenses:
Sales and marketing 746,000 1,190,000
General and administrative 3,513,000 1,864,000
Research and development 955,000 626,000
---------------- ----------------
Total operating expenses 5,214,000 3,680,000
---------------- ----------------
Operating loss (4,917,000) (2,592,000)
Other income (expense):
Interest expense (1,317,000) (1,565,000)
Interest income 19,000 17,000
Other expense (36,000) (20,000)
---------------- --------------
Total other income (expense) (1,334,000) (1,568,000)
---------------- ----------------
Net loss $ (6,251,000) $ (4,160,000)
================ ================
Basic and diluted net loss per share $ (0.67) $ (0.64)
================ ================
Weighted average shares used in computing
basic and diluted net loss per share 9,267,000 6,457,000
================ ================
</TABLE>
See accompanying notes to financial statements.
-19-
<PAGE>
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recordLab Corporation
Statements of Changes in Shareholders' Deficit
For the years ending December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Notes
Additional Deferred Receivable Total
Common Stock Paid-In Stock From Accumulated Shareholders'
------------------------------
Shares Amount Capital Compensation Shareholders Deficit Deficit
------------- -------------- ------------- ------------ ------------ --------------- --------------
Balance at December 31, 1997 6,359,000 $ 20,165,000 $ 1,245,000 $ 0 $ (191,000) $ (22,328,000) $ (1,109,000)
Common stock issued 91,000
Common stock issued in
settlement of claims 650,000 283,000 283,000
Common stock issued in
settlement of accounts payable 128,000 38,000 38,000
Exercise of stock options 23,000 2,000 2,000
Warrants issued with convertible
debt 416,000 416,000
In the money conversion option on
convertible debt 1,334,000 1,334,000
In the money options granted 31,000 31,000
Net loss (4,160,000) (4,160,000)
--------------- -------------- ------------- ------------ ------------ -------------- -------------
Balance at December 31, 1998 7,251,000 $ 20,488,000 $ 3,026,000 $ (191,000) $ (26,488,000) $ (3,165,000)
Common stock issued 790,000 1,000,000 1,000,000
Common stock issued in settlement
of accounts payable 7,000 17,000 17,000
Common stock issued in exchange
for goods and services 76,000 153,000 153,000
Common stock cancelled (633,000) (269,000) (269,000)
Exercise of stock options 137,000 109,000 109,000
Convertible debt and interest
converted to common stock 8,848,000 3,542,000 (558,000) 2,984,000
Options issued for compensation 646,000 $ (162,000) 484,000
Warrants issued to consultants
for services 1,105,000 1,105,000
Warrants issued in connection
with financing 1,666,000 1,666,000
Warrents exercised 89,000 81,000 81,000
Repayment of shareholder note 82,000 82,000
Net loss (6,251,000) (6,251,000)
--------------- -------------- ------------- ------------ ------------ -------------- --------------
Balance at December 31, 1999 16,565,000 $ 25,121,000 $ 5,885,000 $ (162,000) $ (109,000) $ (32,739,000) $ (2,004,000)
=============== ============== ============= ============ ============ ============== ==============
</TABLE>
See accompanying notes to financial statements.
-20-
<PAGE>
- --------------------------------------------------------------------------------
recordLab Corporation
Statements of Cash Flows
For the years ending December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1999 1998
Cash flows from operating activities:
Net loss $ (6,251,000) $ (4,160,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 80,000 127,000
Provision for returns and bad debt 590,000 172,000
Provision for long-term receivable 195,000 0
Amortization of debt discount and
debt issuance costs 1,253,000 1,541,000
Options issued for compensation 484,000 31,000
Warrants issued to consultants for
services 1,105,000 0
Common stock issued in settlement
of claims (269,000) 283,000
Common stock issued for goods and
services 153,000 0
Accrued interest 43,000 0
Changes in operating assets and liabilities:
Accounts receivable (470,000) 219,000
Inventories 77,000 107,000
Prepaids and other 30,000 40,000
Trade accounts payable 35,000 250,000
Accrued wages and payroll taxes 25,000 (7,000)
Other accrued expenses, net of
accrued interest converted to
common stock 168,000 (118,000)
Deferred revenue 0 (24,000)
---------------- ----------------
Net cash used in operating activities (2,752,000) (1,539,000)
---------------- ----------------
Cash flows from investing activities:
Additions to property and equipment (440,000) (4,000)
---------------- ----------------
Net cash used in investing activities (440,000) (4,000)
---------------- ----------------
Cash flows from financing activities:
Exercise of stock options 109,000 2,000
Issuance of common stock 1,000,000
Repayment of shareholder receivables 82,000
Proceeds from borrowings on note
payable to bank 1,500,000
Proceeds from issuance of long-term
debt and warrants, net of debt issue costs 429,000 1,721,000
---------------- ----------------
Net cash provided by financing activities 3,120,000 1,723,000
---------------- ----------------
Net increase (decrease) in cash and
cash equivalents (72,000) 180,000
Cash and cash equivalents, beginning of year 270,000 90,000
---------------- ----------------
Cash and cash equivalents, end of year $ 198,000 $ 270,000
================ ================
Supplemental cash flow information:
Cash paid during year for interest $ 33,000 $ 0
================ ================
</TABLE>
See Note 15 for supplemental information of noncash financing activities.
See accompanying notes to financial statements.
-21-
<PAGE>
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1. Organization and Business:
recordLab Corporation (the Company) (formerly known as Midisoft
Corporation) provides knowledge, services and technology to amateur and
aspiring musicians to help them create and improve their music. The
Company was incorporated in Washington in 1986 and introduced its first
product, Midisoft Studio, in that year. The Company has focused its
product lines to include music learning, music creation and the
integration of sound and media in today's PC environment. In November
1999 the Company launched recordLab.com, which the Company is developing
to provide a full spectrum of know-how, products and services that
enable and empower amateur musicians to develop their craft and create
music.
Going concern and liquidity
The Company has incurred substantial operating losses during the
past several years and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern.
The financial statements have been prepared assuming the Company
will continue as a going concern and do not include any adjustments
to reflect the possible future effects on the recoverability and
classification of assets and liabilities that may result from this
uncertainty.
The Company has required substantial working capital to fund its
operations. To date, the Company has financed its operations
principally through the net proceeds from its initial public
offering and other debt and equity transactions. The Company's
ability to continue as a going concern is dependent upon numerous
factors, including its ability to obtain additional financing, the
level of future revenues and its ability to reduce operating
expenses. The Company is actively pursuing possible sources of
additional working capital. There can be no assurance that the
Company will be able to obtain additional financing.
If the Company is unable to obtain sufficient funds to satisfy its
cash requirements, it may be forced to curtail operations, dispose
of assets or seek extended payment terms from its vendors. Such
events would materially and adversely affect the value of the
Company's equity securities. There can be no assurance that the
Company will be able to reduce expenses or successfully complete
other steps necessary to continue as a going concern.
2. Significant Accounting Policies:
Revenue recognition
Revenue from products licensed to original equipment manufacturers
(OEMs) consisting of one-time license fees and contracts for minimum
advances against future unit licenses are recognized when the
criteria for fixed fee revenue recognition under Statement of
Position No. 97-2, Software Revenue Recognition, (SOP 97-2) are
satisfied. These criteria include, but are not limited to, delivery
of the software master, the Company's lack of other significant
obligations to the customer and a determination that collectibility
of the amount due is probable. Revenues on contracts which do not
meet the fixed fee revenue recognition criteria in SOP 97-2 are
included in deferred revenue in the accompanying balance sheet and
are recognized as revenue on the installment basis as payments are
received or until the Company has no significant obligations.
Additional royalty use or unit copy royalty fees are recognized when
they are earned pursuant to the license agreements and upon
notification of shipment and
-22-
<PAGE>
2. Significant Accounting Policies, Continued:
Revenue recognition, continued
payment from the OEMs. Revenue from sales to distributors, other
resellers and end users, net of a provision for anticipated returns,
is recognized when the products are shipped, or upon receipt of
payment if an estimate for anticipated returns cannot reasonably be
made. The allowance for returns is evaluated each quarter taking
into consideration, among other things, known return requests from
distributors, anticipated return requests based on the distributor's
rate of product sale, returns due to product upgrades and historical
distributor return patterns.
Warranties and returns
The Company warrants products against defects and has policies
permitting the return of products under certain circumstances. The
Company's distributor agreements provide for sales returns, stock
rotation, co-operative advertising and price protection. Customers
are granted price protection for a period of up to 60 days after the
Company reduces the price of a product. The Company provides for
warranties and estimated returns at the time of product sale.
Advertising costs
The Company generally provides for cooperative advertising at
agreed-upon rates. Advertising costs, included in sales and
marketing expenses, are expensed as incurred and were $178,000 and
$330,000 for the years ended December 31, 1999 and 1998,
respectively.
Research and development
Research and development expenses consist principally of consulting
fees, payroll and related expenses and are expensed as incurred.
Website development costs
Costs incurred in the development of core software for the Company's
website infrastructure are capitalized in accordance with SOP 98-1,
Accounting for the Costs of Software Developed or Obtained for
Internal Use. Costs incurred in the development of content for the
Company's website are expensed as incurred. Capitalized costs are
amortized over a period of eighteen months and are included in
property and equipment in the accompanying balance sheet.
Income taxes
The Company follows the asset and liability method of accounting for
income taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to the difference between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. If it is more likely
than not that some portion of a deferred tax asset will not be
realized, a valuation allowance is recorded.
Net loss per share
The Company computed net loss per share in accordance with Statement
of Financial Accounting Standards No. 128 (FAS 128), Earnings per
Share. Basic earnings per share is computed by dividing the net loss
for the period by the weighted average number of common shares
outstanding during the period. Diluted net loss per share includes
the dilutive effects
-23-
<PAGE>
2. Significant Accounting Policies, Continued:
Net loss per share, continued
of options, warrants and convertible securities. Diluted net loss
per share for the years ended December 31, 1999 and 1998 is equal to
basic net loss per share due to the fact that the effect of common
equivalent shares outstanding during the periods is anti-dilutive.
The following table sets forth the computation of basic and diluted
net loss per share:
<TABLE>
<S> <C> <C>
Year Ended December 31,
------------------------------------
---------------- -----------------
1999 1998
---------------- -----------------
Numerator:
Net loss $ (6,251,000) $ (4,160,000)
Denominator:
Weighted-average shares 9,267,000 6,457,000
---------------- -----------------
Basic and diluted net loss per share $ (0.67) $ (0.64)
================ =================
</TABLE>
Common stock equivalents, consisting of warrants, stock options and
convertible securities, are anti-dilutive for all periods presented,
and are detailed in Note 10.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity
of three months or less at the date of purchase to be cash
equivalents.
Inventories
Inventories are valued at the lower of cost or market using the
first-in, first-out method. The Company continuously reviews its
inventories for obsolete, slow-moving and nonsalable items and
establishes a reserve for such items.
Property and equipment
Property and equipment are recorded at cost less accumulated
depreciation and amortization, and are depreciated using the
straight-line method over the estimated useful lives of the related
assets, which range from three to seven years. Leasehold
improvements are amortized over the shorter of the economic useful
lives or the term of the lease.
Valuation of long-lived assets
The Company periodically evaluates the carrying value of long-lived
assets to be held and used, including, but not limited to, property
and equipment and other assets, when events and circumstances
warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from
such asset is separately identifiable and is less than its carrying
value. In that event, a loss is recognized based on the amount by
which the carrying value exceeds the fair value of the long-lived
asset. Fair value is determined primarily using the anticipated cash
flow discounted at a rate commensurate with the risk involved. Loss
on long-lived assets to be disposed of is determined in a similar
manner, except that fair values are reduced for the cost to dispose.
-24-
<PAGE>
2. Significant Accounting Policies, Continued:
Debt issued with stock purchase warrants
Proceeds from debt issued with stock purchase warrants are allocated
between the debt and the warrants based on their relative fair
values, and the value ascribed to the warrants, based on the
Black-Scholes option pricing model, is amortized to interest expense
over the term of the related debt using the effective interest
method.
Concentration of credit risk/financial instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts
receivable, for which collateral is not required. The Company's
trade receivables include amounts due from U.S. and foreign
customers in the computer software and hardware industry and are
derived from sales of products, OEM licensing fees and unit
royalties (Note 3). The Company performs ongoing credit evaluations
of its customers' financial condition and limits its exposure to
losses by limiting the amount of credit extended whenever deemed
necessary.
The carrying values of cash and cash equivalents and other assets
and liabilities (such as accounts receivable and payable)
approximate fair value at December 31, 1999 and 1998. Fair values of
note payable to bank and long-term debt are determined using future
cash flows discounted at a rate of interest currently offered for
debt with similar remaining maturities and approximate the carrying
values.
Fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial
instruments. Because no market exists for certain of these financial
instruments, fair value estimates are based on judgments regarding
current economic conditions and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates. Accordingly, the estimates presented herein are not
necessarily indicative of what the Company could realize in a
current market exchange.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Stock compensation
The Company accounts for stock-based compensation to employees using
the intrinsic-value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Compensation cost for stock options is
measured as the excess, if any, of the fair market value of the
Company's common stock at the date of grant over the exercise price.
The Company has elected to apply the disclosure-only provisions of
FAS 123, Accounting for Stock-Based Compensation (FAS 123).
-25-
<PAGE>
2. Significant Accounting Policies, Continued:
Stock compensation, continued
The Company accounts for stock-based non-employee compensation under
the provisions of FAS 123 and Emerging Issues Task Force ("EITF")
96-18.
Other comprehensive income
The Company had no items of other comprehensive income in any
periods presented.
3. Accounts Receivable and Major Customer Information:
The Company operates a single business segment. During 1999 and 1998,
the Company had revenue from foreign customers of $27,000 and $147,000,
respectively. Foreign sales as a percentage of the Company's total
revenue in 1999 and 1998 were 5% and 8%, respectively. In 1999 and 1998,
separate domestic reseller customers accounted for revenues of $0 and
$1,079,000, equal to 0% and 61%, respectively, of the Company's total
revenue in the periods. During 1999, sales to one OEM customer
individually accounted for 40% of total revenue. During 1998, sales to
one domestic reseller customer accounted for 46% of total revenue.
Accounts receivable are summarized as follows:
<TABLE>
<S> <C> <C>
Year Ended December 31,
----------------------------------
--------------- ---------------
1999 1998
--------------- ---------------
OEM's $ 7,000 $ 17,000
Resellers and other 548,000 411,000
--------------- ---------------
555,000 428,000
--------------- ---------------
Less: Allowance for doubtful accounts (22,000) (72,000)
Less: Allowance for warranty and returns (470,000) (173,000)
--------------- ---------------
$ 63,000 $ 183,000
=============== ===============
</TABLE>
Accounts receivable consist principally of amounts due from OEMs and
reseller customers for licensing fees, royalties and direct sales of
products. OEM customer payment terms typically are one year in duration
and require payments to be made in quarterly installments. At December
31, 1999 and 1998, OEM accounts receivable amounts not yet due were $0
and $1,000, equal to 0% and 6%, respectively, of total OEM receivables.
At December 31, 1999 and 1998, reseller accounts receivable amounts not
yet due were $1,000 and $257,000 equal to 1% and 60%, respectively, of
total reseller receivables.
The Company's primary credit concentrations involve domestic and foreign
OEM and reseller customers. Foreign customers comprised $0 and $13,000
of accounts receivable at December 31, 1999 and 1998, respectively. At
December 31, 1999 and 1998, two and four customers accounted for an
aggregate balance of $440,000 and $359,000 of gross accounts receivable,
respectively.
-26-
<PAGE>
4. Inventories:
Inventories are summarized as follows:
<TABLE>
<S> <C> <C>
December 31,
----------------------------------
---------------- ---------------
1999 1998
---------------- ---------------
Raw materials and work-in-process $ 17,000 $ 106,000
Finished goods 27,000 29,000
Less: Allowance for obsolescence (6,000) (20,000)
---------------- ---------------
$ 38,000 $ 115,000
================ ===============
</TABLE>
5. Property and Equipment:
Property and equipment are summarized as follows:
<TABLE>
<S> <C> <C>
December 31,
-----------------------------------
---------------- ----------------
1999 1998
---------------- ----------------
Equipment $ 1,164,000 $ 925,000
Furniture 91,000 91,000
Website development costs 201,000 0
Leasehold improvements 30,000 30,000
---------------- ----------------
Property and equipment, at cost 1,486,000 1,046,000
Less: Accumulated depreciation
and amortization (1,010,000) (930,000)
---------------- ----------------
$ 476,000 $ 116,000
================ ================
</TABLE>
6. Note Payable to Bank:
In June 1999 the Company obtained two lines of credit with Key Bank of
Washington for a total of $1,500,000. All unpaid principal and interest
was due in March 2000. In March 2000, the Company and the bank agreed to
extend the agreements to June 2000. These lines of credit jointly
obligate the Company, the Company's largest shareholder and a member of
the Board of Directors. The lines of credit were extended to a total of
$2,000,000 on July 15, 1999 and bear interest at Prime plus 2% (10.50%
at December 31, 1999). In connection with the guarantees provided for
the Company under the line-of-credit agreements, the guarantors were
granted warrants for each borrowing by the Company. In the first
borrowing, the guarantors were granted warrants to purchase 110,000
shares of the Company's common stock at $1.10 per share, expiring in
2004, and warrants to purchase 50,000 shares of the Company's common
stock at $1.50 per share, expiring in 2004. The borrowing associated
with these warrants had an original maturity date of December 1999. In
the second borrowing, the guarantors were granted warrants to purchase
100,000 shares of the Company's common stock at $3.00 per share,
expiring in 2001 and warrants to purchase 200,000 shares of the
Company's common stock at $3.00 per share expiring in 2002. The
borrowing associated with these warrants had an original maturity date
of March 2000.
-27-
<PAGE>
6. Note Payable to Bank, Continued:
These warrants were valued using the Black Scholes option pricing model
using the following assumptions:
Expected Life 2 - 5 years
Volatility 169% - 177%
Risk free interest rate 5.5%
The Company recorded a total debt discount of $1,216,000 related to the
fair value of the warrants. The discount is amortized using the
effective interest method over the term of the debt. At December 31,
1999, the Company had $446,000 of unamortized debt discounts associated
with these warrants.
In addition, certain of the guarantors were provided with the right to
apply any funds used to cover the obligation to the purchase of the
Company's common stock at 69% of the share price in effect at the
conversion date (and in any event not to exceed $0.75 and $1.50 for the
first and second borrowings, respectively), plus a five-year and
three-year warrant for 1/2 the shares purchased at a price of not more
than $1.50 per share for the first and second borrowings, respectively.
In the event that warrants are issued additional debt discount will be
recorded.
7. Other Accrued Expenses:
The following table summarizes the components of other accrued expenses:
<TABLE>
<S> <C> <C>
December 31,
---------------------------------
--------------- ---------------
1999 1998
--------------- ---------------
Accrued tax liabilities $ 97,000 $ 133,000
Other accrued expenses 317,000 140,000
--------------- ---------------
$ 414,000 $ 273,000
=============== ===============
</TABLE>
8. Convertible Debt:
In September 1997, the Company received $250,000 for which it was to
issue a 5% convertible note due September 1998 (the Note). The Note and
accrued interest were to be convertible into common stock at a
conversion price of $0.65 per share, at the option of the holder, at any
time after October 30, 1997 through maturity. A debt discount of
$135,000 was recorded related to the intrinsic value of the in-the-money
conversion option at the close of the debt transaction. The discount was
expensed on October 30, 1997. In September 1999 the note and accrued
interest of $43,000 were converted to 451,000 shares of the Company's
common stock.
-28-
<PAGE>
8. Convertible Debt, Continued:
In October and November 1997, the Company issued $500,000 of 1%
convertible debentures (the Debentures) due October and November 2000,
respectively, for a total of $1,000,000. The Debentures were
collateralized by a perfected security interest in all assets of the
Company and were convertible into common stock at a conversion price of
$0.60 per share at any time through maturity, unless previously redeemed
or repurchased. The Debentures were issued with detachable warrants that
entitle the holders to purchase 833,333 shares of the Company's common
stock at a price of $1.50 per share, and expire in October and November
2002. A debt discount of $273,000 was recorded related to the fair value
of the warrants. In addition, a debt discount of $727,000 was recorded
related to the intrinsic value of the in-the-money conversion option.
This discount was expensed immediately as the Debentures may be
converted at any time. Debt issue costs of $50,000 related to the
Debenture sale were capitalized. In October 1999, the Debentures and
accrued interest of $20,000 were converted to 1,684,000 shares of the
Company's common stock.
In January 1998, an additional 1% debenture was issued in exchange for
proceeds totaling $1,000,000. The Debenture was convertible into
1,923,077 shares of common stock plus accrued interest at a conversion
price of $0.84 per share and carries detachable warrants to purchase an
additional 961,538 shares of common stock at a price of $1.25 per share.
The debenture matures in January 2001. A debt discount of $278,000 was
recorded related to the fair value of the warrant. The discount is
amortized using the effective interest method over the term of the debt.
An additional discount of $722,000 was recorded related to the intrinsic
value of the in-the-money conversion option. The discount related to the
conversion option was expensed on the issue date. In October 1999, the
Debenture and accrued interest of $18,000 were converted to 1,944,000
shares of the Company's common stock.
In June and December 1998, the Company issued another $500,000 and
$250,000, respectively, of 1% convertible debentures due June 2003 and
December 2003. The Debentures were convertible into common stock at a
conversion price of $0.20 per share and $0.25 per share, respectively,
at any time through maturity, unless previously redeemed or repurchased.
The Debentures were issued with detachable warrants that entitle the
holders to purchase 1,000,000 shares of the Company's common stock at a
price of $0.75 per share, and expire between June and December 2003. A
debt discount of $138,000 was recorded related to the fair value of the
warrants. The discount is amortized using the effective interest method
over the term of the debt. In addition, a debt discount of $612,000 was
recorded related to the intrinsic value of the in-the-money conversion
option. This discount was expensed immediately as the Debentures may be
converted at any time. In October 1999, the Debentures and accrued
interest of $9,000 were converted to 3,518,000 shares of the Company's
common stock.
In March 1999, the Company issued another $250,000 of 1% convertible
debentures due March 2004. The Debentures are convertible into 1,000,000
shares of common stock, and carry detachable warrants to purchase an
additional 500,000 shares of common stock at a price of $0.75 per share.
In April 1999, the Company issued another $200,000 of 1% convertible
debentures due April 2004. The Debentures are convertible into 250,000
shares of common stock and carry detachable warrants to purchase an
additional 250,000 shares of common stock at a price of $1.75 per share.
A debt discount of $169,000 was recorded related to the fair value of
the 1999 detachable warrants. The discount was amortized using the
effective interest method over the term
-29-
<PAGE>
8. Convertible Debt, Continued:
of the debt. In addition, a debt discount of $280,440 was recorded
related to the intrinsic value of the in-the-money conversion options.
This discount was expensed immediately as the Debentures may be
converted at any time. In October 1999, the Debentures and accrued
interest of $2,000 were converted to 1,251,000 shares of the Company's
common stock.
9. Income Taxes:
There is no provision for income taxes for the years ended December 31,
1999 and 1998 due to the net losses incurred. A valuation allowance has
been recorded for deferred tax assets because realization is primarily
dependent on generating sufficient taxable income prior to the
expiration of net operating loss carryforwards.
The components of deferred income taxes are summarized as follows:
<TABLE>
<S> <C> <C>
December 31,
-------------------------------------
----------------- -----------------
1999 1998
----------------- -----------------
Deferred income tax assets:
Net operating losses $ 10,388,000 $ 8,887,000
Accrued liabilities and allowances 190,000 76,000
Equity instruments 525,000 72,000
Other 288,000 227,000
----------------- -----------------
11,391,000 9,262,000
Deferred income tax liabilities:
Other (9,000) (9,000)
Valuation allowance (11,382,000) (9,253,000)
----------------- -----------------
$ 0 $ 0
================= =================
</TABLE>
At December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $30,552,000 that expire beginning in
2008. In certain circumstances, as specified in Internal Revenue Code
Section 382, a 50% or more ownership change by certain combinations of
the Company's stockholders during any three-year period results in
limitations on the Company's ability to utilize its net operating loss
carryforwards. As a result of the conversion of convertible promissory
notes in October 1999, a 50% or more ownership change occurred. The
value of the Company's stock at the time of the ownership change is the
primary factor in determining the limit on the Company's ability to
utilize its net operating loss carryforwards. In 1999 and 1998 the
change in the valuation allowance of $2,129,000 and $936,000 is due
primarily to the increase in net operating losses.
Certain net operating losses arise from the deductibility for tax
purposes of compensation under nonqualified stock options equal to the
difference between the fair value of the stock on the date of exercise
and the exercise price of the options. For financial reporting purposes,
the tax effect of this deduction when recognized will be accounted for
as a credit to shareholders' deficit.
-30-
<PAGE>
10. Shareholders' Deficit:
Common stock
During the year ended December 31, 1998, the Company finalized the
terms of the sale of common stock which was recorded in fiscal 1997.
Under the new terms, the Company issued 91,000 additional shares of
common stock to the investors.
As further described in Note 13, the Company issued 650,000 shares
of common stock in settlement of claims. The Company recorded
expense totaling $283,000 in 1998 based on the fair market value of
the common stock on the settlement date. In December 1999 the
Company cancelled 633,000 of these shares previously issued and
reserved the $269,000 related to the value of those shares.
In July 1999 the Company entered into Subscription and Registration
Rights Agreements to sell 781,250 shares of the Company's common
stock to a new investor for total consideration of $1,000,000. The
funds were received on July, 14, 1999. As part of the transaction,
the Company paid a finders fee of 9,231 shares of common stock with
a fair value of $30,000, to an unrelated third party.
During the year ended December 31, 1999 the Company agreed to issue
76,000 shares of the Company's common stock valued at $153,000 as
compensation for services.
Additionally, during the years ended December 31, 1999 & 1998, the
Company issued 7,000 and 128,000 shares of common stock in
settlement of outstanding accounts payable totaling $17,000 and
$38,000, respectively.
At December 31, 1999, the Company has reserved the following shares
of common stock:
Warrants 4,393,050
Stock options 2,830,771
Private placement offering 4,800,000
Warrants
In connection with the conversion of the Series A Preferred Stock,
the Company issued warrants to purchase an aggregate of 747,797
shares of common stock at a price equal to $8.50 per share. The
warrants expired in 1998 without exercise. Additionally, the Company
agreed to issue the Placement Agent warrants to purchase 25,000
shares of common stock at a price of $6.00 per share.
Additionally, a warrant to purchase 40,171 shares of the Company's
common stock at an exercise price of $1.17 was issued to a bank in
connection with short-term bank borrowings. The warrant expires in
September 2002 and carries a right to require the Company to
purchase the warrant for $63,000 or the fair value of the warrant,
at the holder's option, at any time after December 31, 1997. The
warrant is subject to certain anti-dilution provisions. The fair
value of the warrant of $81,000 was expensed during 1997. This
warrant was exercised in October 1999 for 89,000 shares of the
Company's common stock.
-31-
<PAGE>
10. Shareholders' Deficit, Continued:
Warrants, continued
In connection with an attempt to arrange a private placement of
equity financing, the Company agreed to sell to the agent, for
nominal consideration, a warrant to purchase 10,000 shares of common
stock at a price of $1.25 per share. The warrant expired in 1998
without exercise. The fair value of the warrant of $10,000 was
expensed during 1997.
In connection with the sale of common stock, the Company issued
warrants in August 1997 to purchase 100,000 shares of common stock
at a price of $1.25 per share. These warrants expired in 1999
without exercise.
In connection with an uncollateralized loan of $40,000 from an
officer, the Company issued a warrant to purchase 75,000 shares of
common stock at a price of $.75 per share. The warrant will expire
in 2002.
As described in Note 8, during 1999 and 1998, the Company issued
warrants to purchase 750,000 and 1,961,538, respectively of common
stock to the holder of convertible debentures.
As described in Note 6, during 1999 the Company issued warrants to
purchase 460,000 shares of common stock to the guarantors of the
Company's lines of credit.
In connection with services provided by a contractor in 1999, the
Company agreed to issue a warrant to purchase 40,000 shares of the
Company's common stock at $3.25 per share. The warrant will expire
in 2004. Consulting expense of $124,000 was recognized for the year
ended December 31, 1999 for the fair value of the warrant.
In connection with services provided by a contractor in 1999, the
Company agreed to issue a warrant to purchase 150,000 shares of the
Company's common stock at $4.25 per share. The warrant will expire
in 2002. Consulting expense of $562,000 was recognized for the year
ended December 31, 1999 for the fair value of the warrant.
The Company issued warrants for the purchase of 123,179 shares at
prices ranging from $0.75 to $1.50 per share to an existing
shareholder. The fair value of the warrants, $418,000, was charged
to general and administrative expense in the fourth quarter of 1999.
The warrants expire in 2002 and 2003.
Stock option plan
The Company adopted the 1989 Stock Option Plan (the 1989 Plan), as
amended September 28, 1994, to provide for the granting of both
Incentive Stock Options (ISOs) and Nonqualified Stock Options for
employees, directors and consultants of the Company to acquire
ownership in the Company and provide them with incentives for their
service.
-32-
<PAGE>
10. Shareholders' Deficit, Continued:
Stock option plan, continued
Under the terms of the 1989 Plan, 1,350,000 shares of common stock
may be issued. The 1989 Plan was administered by the Compensation
and Option Committee of the Board of Directors which determined the
terms and conditions of the options granted under the 1989 Plan,
including exercise price, number of option shares granted and the
vesting period of such options. Upon termination of a participant's
employment or consulting relationship with the Company, unvested
options terminated and vested options remained exercisable for a
period not to exceed three months. The exercise price of all ISOs
granted under the 1989 Plan must have been at least equal to the
fair market value of the common stock of the Company on the date of
grant. The exercise price of all ISOs granted under the 1989 Plan
were determined by the Compensation and Option Committee and the
term could not exceed ten years. In February 1999, the 1989 Plan was
terminated.
On February 10, 1998 the Company adopted the 1998 Stock Option Plan
(the 1998 Plan) to provide for the granting of options to
independent directors and outside consultants. Under the terms of
the 1998 Plan, 1,000,000 shares of common stock may be issued. The
1998 Plan is currently administered by the Board of Directors which
determines the terms and conditions of the options granted and the
vesting of such options.
On April 9, 1998, the Company's board of directors authorized the
repricing of all options outstanding at September 17, 1997 to $0.75
per share.
On June 2, 1999 the Company adopted the 1999 Stock Option Plan (the
1999 Plan) to provide for the granting of both Incentive Stock
Options (ISOs) and Nonqualified Stock Options for employees,
directors and consultants of the Company.
Under the terms of the 1999 Plan, 1,500,000 shares of common stock
may be issued. The 1999 Plan is currently administered by the
Compensation and Option Committee of the Board of Directors which
determines the terms and conditions of the options granted under the
1999 Plan, including exercise price, number of option shares granted
and the vesting period of such options. Upon termination of a
participant's employment or consulting relationship with the
Company, unvested options terminate and vested options remain
exercisable for a period not to exceed three months. The exercise
price of all ISOs granted under the 1999 Plan must be at least equal
to the fair market value of the common stock of the Company on the
date of grant. The exercise price of all ISOs granted under the 1999
Plan are determined by the Compensation and Option Committee and the
term may not exceed ten years.
In August 1999 all remaining shares reserved under the Company's
three option plans, a total of 2,976,250 shares of common stock,
were registered on Form S-8.
-33-
<PAGE>
10. Shareholders' Deficit, Continued:
Stock option plan, continued
At December 31, 1999 and 1998, options for 981,109 and 361,436
shares, respectively, of common stock were exercisable. Activity
with respect to the plans is as follows:
<TABLE>
<S> <C> <C> <C>
Weighted-
Average
Options Exercise
Authorized Outstanding Price
-------------- ---------------- ---------------
Balance, December 31, 1997 160,000 561,922 $ 2.02
Additional shares authorized 500,000
Granted (941,922) 941,922 0.81
Exercised (22,875) 0.10
Canceled 789,297 (789,297) 1.72
-------------- ---------------- ---------------
Balance, December 31, 1998 507,375 691,672 0.78
Additional shares authorized 2,000,000
Granted (1,377,791) 1,377,791 1.95
Exercised (136,750) 0.80
Canceled 91,875 (91,875) 0.78
Authorized shares expired (231,526)
-------------- ---------------- ---------------
Balance, December 31, 1999 989,933 1,840,838 $ 1.66
============== ================ ===============
</TABLE>
The following table summarizes information about fixed-price options
outstanding and exercisable at December 31, 1999:
Options outstanding Options exercisable
- --------------------------------------------------- ---------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
- -------------------------------------------------- ----------------------------
0.10 - 1.19 882,105 7.88 $ 0.78 646,043 $ 0.77
1.97 - 2.81 764,333 9.58 2.17 185,066 2.16
3.00 - 4.03 194,000 9.87 3.67 150,000 3.58
-34-
<PAGE>
10. Shareholders' Deficit, Continued:
Stock option plan, continued
The Company follows the instrinsic value method of accounting for
its stock options. Under this method, the Company recognized no
compensation expense or stock options issued to employees if the
exercise price of the option equals or exceeds the fair market value
of the Company's common stock on the date of grant. For options
granted with an exercise price less than fair market value the
Company recognized $251,000 and $31,000 of compensation expense for
the years ended December 31, 1999 and 1998, respectively. Had
compensation cost been recognized based on the fair value at the
grant date for options awarded under the Plan, the pro forma amounts
of the Company's net loss and net loss per share for the years ended
December 31, 1999 and 1998 would have been as follows:
<TABLE>
<S> <C> <C>
December 31,
----------------------------------
---------------- ---------------
1999 1998
---------------- ---------------
Net loss as reported $ (6,251,000) $ (4,160,000)
================ ===============
Net loss pro forma $ (6,456,000) $ (4,465,000)
================ ===============
Loss per share as reported $ (0.67) $ (0.64)
================ ===============
Loss per share pro forma $ (0.69) $ (0.69)
================ ===============
</TABLE>
The Company recorded an additional $234,000 of compensation expense
for options granted to non-employees under the fair value method of
accounting for stock-based compensation.
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the
following assumptions for the years ended December 31, 1999 and
1998, respectively: risk-free interest rates ranging from 5.07% to
6.49% and 5.512% to 5.673%, expected option lives ranging from five
to ten years; expected volatility of 175% and 124%; and no expected
dividends, respectively. The weighted-average fair value of options
granted during 1999 and 1998 was $1.93 and $0.79, respectively, for
options with an exercise price equal to market. The weighted-average
fair value of options granted during 1998 at a price above market
was $0.59. There were no such options granted in 1999. The
weighted-average fair value of options granted in 1999 at a price
below market was $1.99.
11. License Agreements:
The Company has license agreements with various developers and producers
of computer software that require the Company to pay royalties. The
royalties are due on a per-unit sale basis and the agreements stipulate
no minimum liability. The products related to the royalty agreements are
not a significant part of the Company's product mix. During the years
ended December 31, 1999 and 1998, total royalty expense was $2,000 and
$13,000, respectively.
-35-
<PAGE>
12. Lease Commitments:
The Company leases office facilities for its operations. The lease
contains renewal and expansion provisions, exercisable at the discretion
of the Company. The Company's lease includes scheduled increases over
the term of the lease. The total payment amount is being recognized as
expense on a straight-line basis over the term of the lease. Future
minimum lease commitments for all noncancelable operating leases are
summarized as follows:
Year Ended
December 31,
-------------------
2000 $ 403,000
2001 468,000
2002 156,000
---------------
$ 1,027,000
===============
Rent expense for 1999 and 1998 was $280,000 and $256,000, respectively.
The Company received $0 and $86,000 from sublease income for the years
ended December 31, 1999 and 1998, respectively.
13. Contingencies:
In 1997 an entity, which sold substantially all of its assets to the
Company in 1995, demanded that the Company arbitrate certain claims
arising from the sale. The claims aggregated in excess of $1 million.
The parties reached an agreement in July 1998 outside of arbitration. In
exchange for the mutual release of all claims and counterclaims, the
Company agreed to provide consideration of $420,000, $25,000 in cash and
the remainder comprised of forgiveness of $112,000 in debt and issuance
of approximately 633,000 shares of the Company's common stock. At
December 31, 1998, the Company had paid $20,000 of the $25,000, the debt
was fully reserved and $283,000 of expense was recognized related to the
issuance of common stock. The Company believes that the Claimant's
subsequent actions nullified this agreement. In July 1999 the Company
demanded the return of all consideration. In December 1999 the Company
cancelled the 633,000 shares previously issued and reserved the $269,000
related to recording those shares. recordLab has petitioned the court
to dismiss the case.
The Company is subject to various claims and lawsuits in the ordinary
course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
14. Notes Receivable from Shareholders:
The Company has made advances and loans to employees in connection with
the purchase of common stock under the Employee Stock Option Plan. At
December 31, 1999 a promissory note totaling $109,000 was held by the
Company from the Company's Chief Executive Officer. This loan bears
interest at 8% per annum. The officer has pledged the common stock as
collateral for this loan. The full unpaid principal and accrued interest
amounts are due and payable on August 1, 2000, but can be prepaid at any
time. The terms of this note receivable cause variable accounting
treatment for these stock options. Compensation on such options is
measured as the amount by which the quoted market value of the shares
exceeds the option price at each balance sheet date until the loan is
repaid.
-36-
<PAGE>
15. Supplemental Cash Flow Information:
The following items are supplemental information of noncash financing
activities:
<TABLE>
<S> <C> <C>
December 31,
---------------------------------
--------------- ---------------
1999 1998
--------------- ---------------
Common stock issued in exchange for
accounts payable $ 17,000 $ 38,000
=============== ===============
Warrants issued in connection with
financing $ 1,666,000 $ 1,750,000
=============== ===============
Warrants exercised $ 81,000 $ 0
=============== ===============
Conversion of debt and accrued interest
into common stock, net of unamortized
debt discount and issue costs $ 2,984,000 $ 0
=============== ===============
</TABLE>
16. Employee Benefit Plans:
In June 1996, the Company adopted a qualified profit-sharing plan under
the provisions of Internal Revenue Code 401(k). The plan is available to
all employees meeting the eligibility requirements. Contributions by the
Company are based on a matching formula as defined in the plan. The
Company made no contributions to the plan in 1999 or 1998.
17. Related Party Transactions:
In April 1999, Mr. Smart, a director, was issued options for 75,000
shares of common stock as compensation for consulting services. In April
and June 1999, Ms. Murry, a director, was issued options for 25,558 and
34,442 shares, respectively, for consulting services performed in 1998
and 1999.
In June 1999, the Company contracted with Big Online for consulting
services. At that time Mr. Smart was a director on the Board of both the
Company and Big Online. Mr. Smart resigned from the Company's Board of
Directors in November 1999 to pursue other activities.
As discussed in Note 6, Mr. Kaye, a director, was issued options for
300,000 shares of common stock in October 1999 in consideration for
becoming a guarantor of one of the Company's lines of credit.
18. Subsequent Events:
In February and March 2000 the Company sold 267,818 shares of the
Company's common stock to several investors under stock subscription
agreements. These agreements provided for investment at $2.75 per share,
yielding a total investment of $736,500. The agreements further provided
for three-year warrants to purchase 10% of the shares purchased under
the agreements, or a total of 26,782 shares for $4.00 per share.
-37-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
This information will be provided not later than 120 days after the
close of the fiscal year ended December 31, 1999 by amendment.
ITEM 10. EXECUTIVE COMPENSATION
This information will be provided not later than 120 days after the
close of the fiscal year ended December 31, 1999 by amendment.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be provided not later than 120 days after the
close of the fiscal year ended December 31, 1999 by amendment.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be provided not later than 120 days after the
close of the fiscal year ended December 31, 1999 by amendment.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements: The following are filed as a part of this report
under ITEM 7. Page
Report of PricewaterhouseCoopers LLP................................17
Balance Sheets - At December 31, 1999 and 1998......................18
Statements of Operations - For the Years Ended
December 31, 1999 and 1998........................................19
Statements of Changes in Shareholders' Deficit - For the Years
Ended December 31, 1999 and 1998..................................20
Statements of Cash Flows - For the Years Ended
December 31, 1999 and 1998........................................21
Notes to Financial Statements - For the Years
Ended December 31, 1999 and1998...................................22
(b) Reports on Form 8-K.
None
(c) Exhibits. The following exhibits are filed as part of this report:
Exhibit No. Description
3.1.1 a Articles of Incorporation of the Company as filed
on September 23, 1986 with the Secretary of State
of the State of Washington.
3.1.2 b Articles of Amendment to Articles of Incorporation
of the Company as filed on February 22, 1989 with
the Secretary of State of the State of Washington.
-38-
<PAGE>
3.1.3 b Articles of Amendment to Articles of Incorporation
of the Company as filed on July 13, 1994 with the
Secretary of State of the State of Washington.
3.1.4 Articles of Amendment to Articles of Incorporation
of the Company as filed on November 13, 1998 with
the Secretary of State of the State of Washington.
3.2.1 b By-laws of the Company.
3.2.2 a Amended and Restated By-laws of the Company.
4.1 b Form of specimen certificate for Common Stock of the
Company.
4.2 f Designation of Rights and Preferences of Series A
Convertible Preferred Stock.
4.3 h Form of Securities Purchase Agreement dated
October 28, 1997
4.4 h Form of Registration Rights Agreement dated
October 28, 1997
4.5 k Form of Debenture dated October 28, 1997
4.6 l Form of amendment to the Securities Purchase
Agreement dated June 15, 1998
10.1.1b Combined Incentive and Nonstatutory Stock Option Plan,
adopted February 22, 1989, and as amended April 30, 1994
and September 28, 1994, authorizing 1,200,000 shares of
Common Stock for issuance pursuant to the combined Plan.
10.1.2m 1998 Nonstatutory Option Plan, adopted February 10, 1998,
authorizing 500,000 shares of Common Stock for issuance
pursuant to the Plan.
10.1.3m 1999 Incentive and Nonstatutory Option Plan, adopted June
2, 1999, authorizing 1,000,000 of Common Stock for
issuance pursuant to the Plan.
10.2.1 dIndustrial Lease, dated March 9, 1995, by and between
I-90 Lake Place II Limited Partnership, as landlord, and
the Company, as tenant.
10.3.1b Software License Agreement, dated June 4, 1994, by and
between Music Technology Associates and the Company.
10.3.2b Software Rights Purchase Agreement, dated May 5, 1994, by
and between Music Technology Associates and the Company.
10.3.3c Software License Agreement, dated August 6, 1994 by and
between Dennis McMahon d/b/a Asystem, and the Company.
10.3.4a Software Purchase Agreement, dated April 15, 1994 by and
between Dennis McMahon d/b/a Asystem, and the Company.
10.3.5d Software Purchase Agreement, dated November 10, 1994 by
and between Dennis McMahon d/b/a Asystem, and the Company.
10.3.6d Software Purchase Agreement, dated December 22, 1994 by
and between Dennis McMahon d/b/a Asystem, and the Company.
10.4.1b Reseller Agreement, dated January 3, 1992, by and between
WestPoint Creative Ltd. and the Company.
10.4.2b Reseller Agreement, dated December 31, 1991, by and
between CPS Computer Distribution GmbH and the Company.
10.4.3b Reseller Agreement, dated February 13,1992, by and
between Walop Electronics B.V. and the Company.
-39-
<PAGE>
Exhibit No. Description
10.5.1b Distribution Agreement, dated August 26, 1992, by and
between Merisel, Inc. and the Company.
10.5.2b Distribution Agreement, dated July 14, 1992, by and
between Ingram Micro Inc. and the Company.
10.6.1b OEM License Agreement, dated August 26, 1992, by and
between MPC (Distribution) Ltd. and the Company.
10.6.2b OEM License Agreement, dated January 8, 1994, by and
between Ad Lib Multimedia Inc. and the Company.
10.6.3b OEM License Agreement, dated October 26, 1994 by and
between Media Vision Corporation
10.6.4b Form of OEM License Agreement between various OEM
licensees and the Company.
10.6.5a OEM License Agreement, dated May 10, 1994, by and between
International Business Machines and the Company.
10.6.6a OEM License Agreement, dated May 17, 1994, by and between
Gateway 2000 and the Company.
10.6.7a OEM License Agreement, dated May 20, 1994, by and between
ASCII Corporation and the Company.
10.6.8a OEM License Agreement, dated May 20, 1994, by and between
I-O Data Devices and the Company.
10.6.9e OEM License Agreement, dated March 6, 1995, by and between
Genoa Systems Corporation and the Company.
10.6.10eOEM License Agreement, dated June 2, 1995, by and between
Acer America Corporation and the Company.
10.6.11eOEM License Agreement, dated June 5, 1995, by and between
NEC Technologies, Inc. and the Company.
10.7.1eAsset Purchase and Sale Agreement by and among Midisoft
Corporation, Ask Me Multimedia, Inc. and Michael O'Donnell
dated April 14, 1995.
------------------
a Incorporated by reference from the Company's Registration
Statement on Form SB-2
(S.E.C. File No. 33-80064).
b Incorporated by reference from the Company's Registration
Statement on Form SB-2
(S.E.C. File No. 33-62468-5).
c Incorporated by reference from the Company's Form 10-KSB
filed March 30, 1994 (S.E.C. File No. 000-22172).
d Incorporated by reference from the Company's Form 10-KSB
filed April 13, 1995 (S.E.C. File No. 000-22172).
e Incorporated by reference from the Company's Form 10-KSB/A
filed August 4, 1995 (S.E.C. File No. 000-22172).
f Incorporated by reference from the Company's Form 10-KSB
filed April 15, 1997 (S.E.C. File No. 000-22172).
g Incorporated by reference from the Company's Form 10-KSB/A
filed June 20, 1997 (S.E.C. File No. 000-22172).
h Incorporated by reference from the Company's Form 10-QSB
filed November 12, 1997 (S.E.C. File No. 000-22172).
i Incorporated by reference from the Company's Form 8-K
filed January 9, 1997 (S.E.C. File No. 000-22172).
j Incorporated by reference from the Company's Form 8-K
filed November 3, 1997 (S.E.C. File No. 000-22172).
k Incorporated by reference from the Company's Form 10-KSB
filed April 15, 1998 (S.E.C. File No. 000-22172).
l Incorporated by reference from the Company's Form 10-QSB
filed August 14, 1998 (S.E.C. File No. 000-22172).
m Incorporated by reference from the Company's Form 10-QSB
filed August 14, 1999
(S.E.C. File No. 000-22172).
-40-
<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.
recordLab Corporation
(Registrant)
Date: April 14, 2000 By: /S/ LARRY D. FOSTER
Larry Foster, Chairman of the Board,
President and Chief Executive Officer
In accordance with the 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.
Signature Title Date
__/S/ LARRY D. FOSTER______ Chairman of the Board, April 14, 2000
Larry D. Foster President and Chief Executive
Officer
__/S/ GARY M. CULLY________ Vice President, Finance, April 14, 2000
Gary M. Cully Chief Financial Officer and
Principal Accounting Officer
__/S/ JOHN BAUER__________ Director April 14, 2000
John Bauer
__/S/ MARK CHASAN________ Director April 14, 2000
Mark Chasan
__________________________ Director April 14, 2000
Dalton Kaye
__/S/ MICHAEL LLOYD_______ Director April 14, 2000
Michael Lloyd
__/S/ MARSHA MURRY_______ Director April 14, 2000
Marsha Murry
__/S/ ROBERT ORBACH ____ Director April 14, 2000
Robert Orbach
-41-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET DATED DEC. 31, 1999 AND THE STATEMENT OF OPERATIONS FOR THE TWELVE MONTH
PERIOD ENDING DEC. 31, 1999 FOUND ON PAGES 18 AND 19 OF THE COMPANY'S 10-KSB FOR
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000882692
<NAME> recordLab Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 198
<SECURITIES> 0
<RECEIVABLES> 63
<ALLOWANCES> 0
<INVENTORY> 38
<CURRENT-ASSETS> 311
<PP&E> 1,486
<DEPRECIATION> 1,010
<TOTAL-ASSETS> 1,233
<CURRENT-LIABILITIES> 3,237
<BONDS> 0
0
0
<COMMON> 25,121
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,233
<SALES> 574
<TOTAL-REVENUES> 574
<CGS> 277
<TOTAL-COSTS> 5,214
<OTHER-EXPENSES> 36
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,317
<INCOME-PRETAX> (6,251)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,251)
<EPS-BASIC> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
