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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 33-40804
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Modern Records, Inc.
(Exact name of registrant as specified in its charter)
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California 95-3404374
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
468 North Camden Drive, Third Floor 90210
Beverly Hills, California (Zip Code)
(Address of Principal Executive Offices)
(Registrant's telephone number, including area code) (310) 285-5370
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 [ ] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of
February 29, 2000 was 27,369,114 shares.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ ]
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Modern Records, Inc. AND SUBSIDIARIES
Quarter Ended January 31, 2000
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)............................... 3
Condensed Balance Sheets as of January 31, 2000 and
October 31, 1999............................................... 3
Condensed Statements of Operation for the Three Months
Ended January 31, 2000 and 1999................................ 4
Condensed Statements of Shareholders' Deficiency as of
January 31, 2000............................................... 5
Condensed Statements of Cash Flows as of January 1,
2000........................................................... 6
Notes to Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 10
SIGNATURE............................................................................ 11
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MODERN RECORDS, INC.
CONDENSED BALANCE SHEETS
January 31, October 31,
2000 1999
----------- -----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 355,216 $ 16,535
Accounts receivable, net of allowance in
January 31, 1999 of $20,000 67,985 87,985
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TOTAL CURRENT ASSETS 423,201 104,520
PREPAID ROYALTIES 931,090 808,808
EQUIPMENT - Net of accumulated depreciation 40,854 42,474
OTHER ASSET 20,404 16,012
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$1,415,549 $ 971,814
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,086,288 $ 804,101
Notes payable 21,205 21,205
Deferred revenue 23,599 23,599
Due to related parties 342,842 419,200
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TOTAL CURRENT LIABILITIES 1,473,934 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 - 26,733,364 (2000) and
25,110,864 shares (1999) 4,757,739 3,948,462
Accumulated deficit (4,841,124) (4,269,753)
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TOTAL SHAREHOLDERS' DEFICIENCY (83,385) (321,291)
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$1,415,549 $ 971,814
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See accompanying notes to financial statements.
3
MODERN RECORDS, INC.
CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
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January 31, January 31,
2000 1999
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(unaudited) (unaudited)
REVENUE
Modern/Atlantic agreement $ 108,282 $ 144,560
COST OF REVENUE - -
------------ ------------
GROSS PROFIT 108,282 144,560
EXPENSES
Officer's salaries 62,500 62,500
Other marketing, general and administrative expenses 617,153 213,705
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679,653 276,205
------------ ------------
NET LOSS $ (571,371) $ (131,645)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.02) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 23,660,864 20,297,696
============ ============
See accompanying notes to financial statements.
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 1,622,500 809,277 809,277
Net loss (571,371) (571,371)
--------- ------------ ------------- ----------- ------------- ----------
Balance, January 31, 2000 - - 26,733,364 $ 4,757,739 $ (4,841,124) $ (83,385)
========= ============ ============= =========== ============= ==========
See accompanying notes to financial statements.
MODERN RECORDS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended
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January 1, January 1,
2000 1999
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (571,371) $ (131,645)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 1,620 -
Changes in operating assets and liabilities:
Accounts receivable 20,000 (13,404)
Other assets (4,392) (2,434)
Accounts payable and accrued expenses 281,812 (6,250)
Accrued interest on notes payable 375 2,000
Due to related party for compensation - 62,500
Deferred revenue - 24,984
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NET CASH USED IN OPERATING ACTIVITIES (271,956) (64,249)
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CASH FLOWS FROM INVESTING ACTIVITIES
Prepaid royalties (122,282) -
Purchase of equipment - (21,717)
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NET CASH USED IN INVESTING ACTIVITIES (122,282) (21,717)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft - (3,544)
Advances from related parties - 63,223
Repayments to related parties (76,358)
Common stock issued 809,277 -
Special warrants issued - 838,910
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NET CASH PROVIDED BY FINANCING ACTIVITIES 732,919 898,589
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INCREASE IN CASH AND CASH EQUIVALENTS 338,681 812,623
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,535 1,656
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CASH AND CASH EQUIVALENTS, END OF PERIOD $355,216 $814,279
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SUPPLEMENTAL INFORMATION OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for services $ 72,500 $ -
========= ===========
See accompanying notes to financial statements.
MODERN RECORDS, INC.
NOTES TO FINANCIAL STATEMENTS INC.
THREE MONTHS ENDED JANUARY 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 months ended January
31, 2000 and 1999, (b) the financial position at January 31, 2000, (c)
shareholders' deficiency for the three months ended January 31, 2000, (d) the
cash flows for the three months ended January 31, 2000 and 1999. Interim results
are not necessarily indicative of results for a full year.
The balance sheet presented as of October 31, 1999 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 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward-looking statements regarding
events and financial trends that may affect Modern Record's future operating
results and financial position. The following discussion should be read in
conjunction with the Modern Record's financial statements and the notes thereto
appearing elsewhere in this Quarterly Report on Form 10-QSB.
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
works of Stevie Nicks, one of the founders of Modern Records. Ms. Nicks is no
longer under contract with us but these sales continue to provide us with a
significant source of revenue. Additional revenues are provided from the sales
of other less successful artists in our catalogue, although we may not maintain
these sources in the future.
In the past, we have also licensed our 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.
Funds from sales of securities have provided us with the means to
attract additional talent to our label. 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 fiscal
2000 will provide us with an additional source of revenue. In addition, we
expect to release The Jackson's new album in the third quarter of fiscal 2000.
We also recently signed Tiffany to the Modern Records label with a commitment
for four new albums and one greatest hits album. Tiffany has sold over 14
million records to date and we expect this addition to our artist roster will be
a significant source of additional revenue. We expect to release a single from
the new album in May 2000 with the full album release to follow in June 2000. In
February 1999, we also signed and agreement with Butterfly Productions, LLC for
the exclusive rights to record and distribute the original cast recording of the
off-Broadway musical, "Inappropriate." We expect to receive significant revenues
from the distribution of this CD.
A significant recurring funding requirement for us are the expenses
associated with A&R. 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 payment each quarter for these expenses to
maintain and enhance our artist roster. To the extent possible, these costs are
recouped form 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 a steady source of revenue, as well as our ability to successfully market
such talent.
Results of Operations
Three Months Ended January 31, 2000 Compared to Three Months Ended
January 31, 1999.
Revenues. For the three months ended January 31, 2000 Modern Records
had revenues of $108,282 compared to revenues of $144,560 for the same period in
1999, a decrease of $36,278 or approximately 25%. This decrease in revenues was
due primarily to a decrease in revenues derived from our distribution agreement
with Atlantic. This decrease reflects declining sales for the three-CD box set
by Stevie Nicks entitled "Enchanted," which was released in May 1998 through a
distribution agreement with Atlantic.
8
Expenses. Total expenses for the three months ended January 31, 2000
increased to $679,653 from $276,205 for the same period in 1999, an increase of
$403,448 or approximately 146%. The increase is mainly due to our continued
commitment to developing a strategic business plan, attracting appropriate
equity and debt financing and establishing an organizational infrastructure.
In connection with developing our organizational infrastructure,
marketing, general and administrative expenses increased to $617,153 for the
three months ended January 31, 2000 from $213,705 for the corresponding period
in 1999, an increase of $403,448 or approximately 188%.
Liquidity and Capital Resources
Our growth strategy is focused on signing new artists to the Modern Records
label, advancing funds for the production of new albums, marketing albums on the
Modern Records label and retaining an experienced and talented management team.
This strategy requires substantial expenditures before any revenue is realized.
Our current revenue stream is derived largely from the sale of Stevie Nicks'
albums for which we have realized $296,000 in gross profits. This revenue is
insufficient to fund our growth strategy.
As of January 31, 2000 we had approximately $355,216 in cash and cash
equivalents, compared to $16,535 as of October 31, 1999. We do not have access
to a line of credit. Since Mr. Jackson obtained a controlling interest in
Modern Records in May 1997, our growth strategy has been financed primarily
through the private placement of common stock, no par value, of Modern Records.
In the fiscal year ended October 31, 1999, we raised approximately $1,449,092
through the private placement of common stock and warrants to purchase common
stock. In November 1999, we raised approximately $809,300 through the private
placement of common stock and warrants to purchase common stock.
At January 31, 2000 we owed an aggregate of $37,414 in principal plus
accrued and unpaid interest to the father of one of our shareholders pursuant to
a note dated November 7, 1994 and a note dated April 19, 1995. All principal
plus accrued interest thereon is due and payable on demand. In addition, as
of January 31, 2000, we owed an aggregate of $21,205 to two shareholders
pursuant to notes dated September 12, 1995. At January 31, 2000 we also owed an
aggregate of $575,000 in accrued compensation to Mr. Jackson which is due and
payable on demand.
Our ability to successfully implement our growth strategy depends on our
ability to obtain additional financing. If we are unable to raise additional
funds through the private placement of our securities, we may seek additional
financing from affiliated or unaffiliated third parties. We are currently in
discussions with potential lenders regarding the possibility of obtaining long
term financing. Such financing may not be available on acceptable terms, or at
all. If we are unable to obtain financing to meet our working capital needs,
repay indebtedness or advance royalty payments as they become due, we will have
to consider alternative sources of funding to meet our obligations.
9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
In November 1999, we issued 1,622,500 units in a private placement.
Each unit consists of one share of common stock and one non-transferable
warrant to purchase an additional share of common stock for two years at C$.90
(approximately US$.62) for the first year, and at C$1.25 (approximately US$.86)
for the second year. Of these units, (1) 20,000 units were issued to Jordac
Investments Ltd., (2) 14,000 units were issued to each of Reidar Ostman and
Anders Alsing, and (3) 24,500 units were issued to Yorkton Securities in
consideration of their services in placing the units. The issuances were made in
reliance on Section 4(2) of the Securities Act to investors who were accredited
or sophisticated and had access to information regarding Modern Records. The
proceeds from this offering will be used for continued development of our
organizational infrastructure and general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
3.1 Articles of Incorporation of Modern Records (incorporated by
reference to Exhibit 3.1 of Modern Records's Registration
Statement on Form S-1 (File No. 33-40804) (the "S-1").
3.2 Bylaws of Modern Records (incorporated by reference to Exhibit
3.2 of Modern Record's Annual Report on Form 10-KSB for the
fiscal year ended October 31, 1998 (the "1998 10-KSB")).
3.3 Certificate of Amendment to the Articles of Incorporation of
Modern Records (incorporated by reference to Exhibit 3.3 of the
1998 10-KSB).
10.1 Distribution Agreement dated July 1, 1979 between Modern
Records and Atlantic Recording Corporation as amended
(incorporated by reference to Exhibit 10.1 of the1998 10-KSB).
10.2 Stock Option Agreement dated July 10, 1998 entered into between
Modern Records and Randy Jackson directors (incorporated by
reference to Exhibit 10.16 of the 1998 10-KSB).
10.3 Stock Option Agreement dated July 10, 1998 between Modern
Records and Jackie Jackson (incorporated by reference to
Exhibit 10.17 of the 1998 10-KSB).
10.4 Stock Option Agreement dated July 10, 1998 between Modern
Records and Lawrence W. Gallo (incorporated by reference to
Exhibit 10.18 of the 1998 10-KSB).
10.5 Stock Option Agreement dated July 10, 1998 between Modern
Records and Johan Grandin (incorporated by reference to
Exhbit 10.19 to the 1998 10-KSB).
10.6 Loan Agreement dated March 16, 1998 between Modern Records and
Randy Jackson (incorporated by reference to Exhibit 10.21 of
the 10-KSB).
10.7 Employment Agreement dated May 15, 1997 between Modern Records
and Randy Jackson (incorporated by reference to Exhibit 10.22
of the 1998 10-KSB).
10.8 Recording Agreement dated March 1, 1999 between United Leisure
Corporation and Modern Records and The Jacksons (incorporated
by reference to Exhibit 10.17 of the 1997 10-KSB).
10.9 Employment Agreement dated May 17, 1999 between Modern Records
and Henley Regisford, Jr. (incorporated by reference to Exhibit
10.16 of the 1997 10-KSB).
10.10 Financing Agreement dated May 1, 1997 between United Film
Distributors, Inc. and Modern Records (incorporated by
reference to Exhibit 10.12 of Modern Record's Quarterly Report
on Form 10-QSB for the period ended July 31, 1999 (the
"July 31, 1999 10-QSB")).
10.11 Letter Agreement dated June 11, 1999 between Modern Records and
Roland Perry (incorporated by reference to Exhibit 10.2 of the
July 31, 1999 10-QSB).
10.12 Incentive Stock Option Agreement dated June 11, 1999 between
Modern Records and Roland Perry (incorporated by reference to
Exhibit 10.3 of the July 31, 1999 10-QSB).
10.13 License Agreement dated August 18, 1999 between Modern Records
and MCY Music World, Inc. (incorporated by reference to Exhibit
10.4 the July 31, 1999 10-QSB).
10.14 Incentive Stock Option Agreement dated January 28, 2000 between
Modern Records and Randy Jackson (incorporated by reference to
Exhibit 10.14 of Modern Record's Annual Report on form 10-KSB
for the fiscal year ended October 31, 1999)
10.15 Agreement dated February 9, 2000 between Modern Records and
Butterfly Productions, LLC
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
10
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
March 30, 2000 By: /s/ Stephen Randall Jackson
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Stephen Randall Jackson
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer and Principal Financial
Officer)
11