SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q-SB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 31, 2000
[_] Transition report under to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________ to_________
Commission File Number 33-40804
MODERN RECORDS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
California 95-3404374
- -------------------------------- ------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
468 North Camden Drive, Third Floor, Beverly Hills, CA 90212
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(800) 505-5655
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [___]
The number of shares of the Registrant's Common Stock outstanding as of
July 31, 2000 was 27,454,114 shares.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MODERN RECORDS, INC,
CONDENSED BALANCE SHEETS
July 31, October 31,
2000 1999
--------- -----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ - $ 16,535
Accounts receivable, net of allowance in
July 31, 2000 of $20,000 67,985 87,985
----------- -----------
TOTAL CURRENT ASSETS 67,985 104,520
PREPAID ROYALTIES 927,090 808,808
EQUIPMENT - Net of accumulated depreciation 48,352 42,474
OTHER ASSET 20,404 16,012
----------- -----------
$ 1,063,831 $ 971,814
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 68,395 $ -
Accounts payable and accrued expenses 1,070,381 804,101
Notes payable 21,205 21,205
Deferred revenue 23,599 23,599
Due to related parties 609,777 419,200
----------- -----------
TOTAL CURRENT LIABILITIES 1,793,357 1,268,105
LONG-TERM DEBT 25,000 25,000
SHAREHOLDERS' DEFICIENCY
Preferred stock; authorized - 20,000,000 shares, none issued - -
Common stock, no par value; authorized - 40,000,000 shares;
issued and outstanding - 27,138,364 (2000) and
25,110,864 shares (1999) 4,874,932 3,948,462
Accumulated deficit (5,629,458) (4,269,753)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIENCY (754,526) (321,291)
----------- -----------
$ 1,063,831 $ 971,814
=========== ===========
See accompanying notes to financial statements.
2
MODERN RECORDS, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
----------------------- -----------------------
July 31, July 31, July 31, July 31,
2000 1999 2000 2000
--------- --------- --------- --------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUE
Modern/Atlantic agreement $ 197,140 $ 101,719 $ 305,422 $ 301,494
COST OF REVENUE - - 6,500 -
------------ ----------- ----------- -----------
GROSS PROFIT 197,140 101,719 298,922 301,494
EXPENSES
Officer's salaries 62,500 62,500 235,508 187,500
Other marketing, general and administrative expenses 106,875 377,007 1,423,119 941,829
----------- ----------- ----------- -----------
169,375 439,507 1,658,627 1,129,329
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 27,765 $ (337,788) $(1,359,705) $ (827,835)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE $ 0.00 $ (0,02) (0.06) $ (0,04)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 24,093,739 21,105,713 23,913,364 20,633,608
=========== =========== =========== ===========
See accompanying notes to financial statements.
3
MODERN RECORDS, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
(unaudited)
Preferred Stock Common Stock
---------------- --------------------- Accumulated
Shares Amount Shares Amount Deficit Total
------ ------ ------ ------ ------------ -----
Balance, October 31, 1999 - - 25,110,864 $3,948,462 $(4,269,753) $ (321,291)
Private placements, November 1999 1,622,500 809,277 809,277
Warrants exercise, April 2000 405,000 117,193 117,193
Net loss (1,359,705) (1,359,705)
----- ----- ---------- ---------- ----------- -----------
Balance, January 1, 2000 - - 27,138,364 $4,874,932 $(5,629,458) $ (754,526)
===== ===== ========== ========== =========== ===========
See accompanying notes to financial statements.
4
MODERN RECORDS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
-------------------------------------
July 31, July 31,
2000 1999
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,359,705) $ (827,835)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 12,200 4,500
Allowance for doubtful accounts 20,000 -
Changes in operating assets and liabilities:
Advances - (10,000)
Accounts receivable - 156,140
Other assets (4,392) (7,831)
Accounts payable and accrued expenses 266,280 217,207
Due to related party for compensation 190,577 166,667
Recoupable advance (50,000)
Deferred revenue - 23,599
----------- ----------
NET CASH USED IN OPERATING ACTIVITIES (875,040) (327,553)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Deferred record master cost - (26,269)
Prepaid royalties (118,282) (762,914)
Purchase of equipment (18,078) (48,841)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (136,360) (838,024)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 68,395 (3,544)
Advances from related parties - (34,343)
Common stock issued 809,277 336,925
Special warrants issued 117,193 988,612
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 994,865 1,287,650
----------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS (16,535) 122,073
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,535 1,656
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ 123,729
=========== ==========
See accompanying notes to financial statements.
5
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JULY 31, 2000
(unaudited)
BASIS OF PRESENTATION
The interim financial statements presented have been prepared by Modern Records,
Inc. (the "Company") without audit and, in the opinion of the management,
reflect all adjustments of a normal recurring nature necessary for a fair
statement of (a) the results of operations for the three and nine months ended
July 31, 2000 and 1999, (b) the financial position at July 31, 2000 and October
31, 1999, (c) shareholders' deficiency at July 31, 2000, (d) the cash flows for
the nine months ended July 31, 2000 and 1999. Interim results are not
necessarily indicative of results for a full year.
The balance sheet presented as of July 31, 2000 has been derived from the
financial statements that have been audited by the Company's independent
auditors. The financial statements and notes are condensed as permitted by Form
10-QSB and do not contain certain information included in the annual financial
statements and notes of the Company. The financial statements and notes included
herein should be read in conjunction with the financial statements and notes
included in the Company's Annual Report on Form 10-KSB.
SHAREHOLDERS' EQUITY
Private Placement - On November 8, 1999 and November 18, 1999, the Company
- -----------------
offered 200,000 Units and 1,350,000 Units, respectively, at $0.75 Cdn. per unit
to private parties. Each unit comprised of one share of common stock and one
non-transferable share purchase warrant. Each share purchase warrant will
entitle the holder to purchase an additional share of common stock for two years
at $0.90 Cdn. per share for the first year and at $1.25 Cdn. per share for the
second year. Modern Entertainment, a company owned by Mr. R. Jackson, purchased
600,000 units. Payment for this purchase was offset against certain monies
advances by Mr. R. Jackson. The Company paid 72,500 shares as finder's fee. Both
private placements were completed on January 6, 2000.
Exercise of Warrants - In April 2000, warrant holders exercised warrants to
- --------------------
purchase 405,000 shares of the Company's common stock at $0.60 Cdn. per share
for net proceeds to the Company of approximately $172,240 Cdn. (US$117,170).
6
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion contains forward-looking statements regarding events
and financial trends that may affect Modern Records' future operating results
and financial position. The following discussion should be read in conjunction
with Modern Records' financial statements and the notes thereto appearing
elsewhere in this Quarterly Report on Form 10Q-SB.
Overview
Our principal business activities are producing, acquiring, licensing, marketing
and distributing audio recordings.
To date, our primary source of revenue has been from the sales of the work of
Stevie Nicks, one of the founders of Modern Records. Ms. Nicks is no longer
under contract with us but these sales continue to provide us with a significant
source of revenue. Additional revenues are provided from the sales of other
less successful artists in our catalogue, although we may not maintain these
sources in the future.
In the past, we have also licensed our catalogue to others. We believe that
this potential source of revenue has been underutilized and we intend to pursue
additional sources of licensing revenue in the future.
In the fiscal year ended October 31, 1998, we signed Abel Mason, a previously
unsigned R&B artist, to our label with a five album commitment. We expect that
the release of his debut album in the second quarter of fiscal 2001 will provide
us with an additional source of revenue. Tiffany is another artist who has been
signed by Modern Records. Tiffany's new album is scheduled for release in
October 2000. Tiffany has sold over 14 million records to date and we expect
this addition to our artist roster to provide a significant source of additional
revenue.
We incur significant expenses in the operation of our business. These include
recording costs and advances to artists prior to distribution of the final
product and before we realize any potential profits. We make substantial
payments each quarter for these expenses to maintain and enhance our artist
roster. To the extent possible, these costs are recouped from the royalties
otherwise payable to the artist from future albums. When an artist's current
popularity and past performance provide a sound basis for estimating the extent
to which we will be able to recoup such costs from royalties, the advances are
capitalized as an asset.
Our ability to achieve and maintain profitability in the future will depend on
our ability to attract and maintain the talent that will provide us with steady
sources of revenue, as well as our ability to successfully market such talent.
7
Three Months Ended July 31, 2000 Compared to Three Months Ended July 31, 1999
For the three months ended July 31, 2000, Modern Records had revenues of
$197,140 compared to revenues of $101,719 for the same period in 1999, an
increase of $95,421 or approximately 94%. This increase in revenue was due
primarily to an increase in revenues derived from our distribution agreement
with Atlantic Records. This increase reflects increased sales of the three-CD
box set by Stevie Nicks entitled "Enchanted", which was released in May 1998
through a distribution agreement with Atlantic Records. The increase in sales
reflects increased interest in her album to be released in December 2000.
Marketing, general and administrative expenses decreased to $106,875 for the
three months ended July 31, 2000, from $377,007 for the corresponding period in
1999, a decrease of $270,132 or approximately 72%. The decrease was due to the
Company not having any projects in the third quarter as well as a lack of
working capital to fund operations, resulting in decreased activities.
Nine Months Ended July 31, 2000 Compared to Nine Months Ended July 31, 1999
For the nine months ended July 31, 2000, Modern Records had revenues of $305,422
compared to revenues of $301,494 for the same period in 1999, an increase of
$3,928 or approximately 1%. This change reflects an increase in sales of the
three-CD box set by Stevie Nicks entitled "Enchanted" in the third quarter,
which was released in May 1998 though a distribution agreement with Atlantic
Records, offset by a decrease in sales of this album in the first two quarters
due to a decreased promotion of the album as compared to the same period in
1999.
In connection with developing our organizational infrastructure, marketing,
general and administrative expenses increased to $1,423,119 for the nine months
ended July 31, 2000, from $941,829 for the corresponding period in 1999, an
increase of $481,290 or approximately 51%. This increase primarily reflects
increased expenses related to negotiations and signings of new artists to Modern
Records.
Liquidity and Capital Resources
Our business strategy is focused on signing artists to the Modern Records label,
advancing funds for the production of new albums and marketing albums on the
Modern Records label. This strategy requires substantial expenditures before
any revenue is realized. Our current revenue stream is derived largely from the
sale of Stevie Nicks' albums; however, this revenue is insufficient to meet all
our operational requirements.
At July 31, 2000, we had a negative bank balance of $(68,395), compared to a
positive bank balance of $16,535 at July 31, 1999. We do not have access to a
line of credit. The
8
main source of financings in the past has been in the form of private placements
of our common stock, the proceeds of which were exhausted by July 31, 2000.
At July 31, 2000, we owed an aggregate of $37,414 in principal plus accrued and
unpaid interest to the father of one of our shareholders. All principal plus
accrued interest theron is due and payable on demand. In addition, as of July
31, 2000, we owed an aggregate of $21,205 to two shareholders pursuant to notes
dated September 12, 1995. At July 31, 2000 we also owed an aggregate of
$609,777 in accrued compensation to Randy Jackson.
At present, our ability to continue to fund operations depends primarily on
obtaining additional financing. If we are unable to raise additional funds
through the private placement of our securities, we may seek additional
financing from affiliated or unaffiliated parties. We are also currently in
discussion with potential lenders regarding the possibility of obtaining long
term financing. Such financing may not be available on acceptable terms, or at
all. If we are unable to obtain financing to meet our working capital needs,
repay indebtedness or advance royalty payments as they become due, we will have
to consider alternative sources of funding, including entering into distribution
arrangements with other labels for our signed artists, or the sale of some of
our assets.
9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MODERN RECORDS, INC.,
a California corporation
Date: October 19, 2000 By: /s/ Stig Hans Johan Grandin
---------------------------------
Stig Hans Johan Grandin,
Chief Executive Officer
(Principal Financial Officer)
10