U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended April 30, 1996
|_| Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ________ to ________
Commission file number 2-90794
VERITAS MUSIC ENTERTAINMENT, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Tennessee 62-1587889
- ------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
Cummins Station, 209 10th Avenue South, Suite 500, Nashville, TN 37203
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(Address of Principal Executive Offices)
(615) 244-9585
-----------------------------------------------
(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 |_|
As of June 12, 1996, the Company had outstanding 4,738,000 shares of
common stock, no par value.
Traditional Small Business Disclosure Format (check one):
Yes |X| No |_|
Page 1 of 90 sequentially
numbered pages.
Exhibit Index begins on page 15.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERITAS MUSIC ENTERTAINMENT, INC.
(A Development Stage Company)
BALANCE SHEETS
ASSETS
April 30, January 31,
1996 1996
---- ----
Current assets:
Cash and cash equivalents $4,138,488 $4,405,672
Investments, commercial paper -- 999,733
Other current assets 37,120 94,008
---------- ----------
4,175,608 5,499,413
---------- ----------
Fixed assets, net 429,287 348,631
---------- ----------
Other assets:
Organization and other costs, net 21,597 23,103
Other assets 36,546 45,108
---------- ----------
58,143 68,211
---------- ----------
$4,663,038 $5,916,255
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 97,783 $ 78,163
----------- -----------
Commitments
Shareholders' equity:
Common stock, no par value;
authorized, 9,000,000 shares;
issued and outstanding, 4,738,000 shares 6,301,792 6,301,792
Additional paid-in capital 577,425 577,425
Deficit accumulated during the
development stage (2,313,962) (1,041,125)
----------- -----------
4,565,255 5,838,092
----------- -----------
$ 4,663,038 $ 5,916,255
=========== ===========
See notes to financial statements.
2
VERITAS MUSIC ENTERTAINMENT, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
December 8, 1994
Three months Year (inception) to
ended ended April 30, 1996
April 30, 1996 January 31, 1996 (cumulative)
Sales $ -- $ -- $ --
----------- ----------- -----------
Expenses:
Artist development
and promotion
(approximately $61,000
paid to a related
party for year ended
January 31, 1996) 763,848 502,079 1,265,927
General and admin-
istrative expenses 570,706 606,691 1,184,401
----------- ----------- -----------
1,334,554 1,108,770 2,450,328
----------- ----------- -----------
Loss from operations (1,334,554) (1,108,770) (2,450,328)
----------- ----------- -----------
Interest expense -- (98,071) (98,071)
Interest income 61,717 172,720 234,437
----------- ----------- -----------
61,717 74,649 136,366
----------- ----------- -----------
Net loss ($1,272,837) ($1,034,121) ($2,313,962)
=========== =========== ===========
Net loss per common
stock share $ .27 $ .26 $ .56
=========== =========== ===========
Weighted average
shares outstanding 4,738,000 4,026,769 4,104,824
=========== =========== ===========
See notes to financial statements.
3
VERITAS MUSIC ENTERTAINMENT, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
December 8, 1994
Three months Year (inception) to
ended ended April 30, 1996
April 30, 1996 January 31, 1996 (cumulative)
-------------- ---------------- ------------
Cash flows from operating activities:
Net loss ($1,272,837) ($1,034,121) ($2,313,962)
Adjustments to
reconcile net loss
to net cash used in
operating activities:
Amortization 22,685 103,410 127,099
Changes in assets and liabilities:
Other current assets 56,888 (94,008) (37,120)
Organization costs -- (30,131) (30,131)
Other assets 8,562 (45,108) (36,546)
Accrued expenses 19,620 72,161 97,781
----------- ----------- -----------
Net cash used in
operating activities (1,165,082) (1,027,797) (2,192,879)
----------- ----------- -----------
Cash flow from investing activities:
Leasehold improvements (639) (220,196) (220,835)
Furniture and equipment (101,196) (135,507) (236,703)
Investments purchased,
commercial paper -- (999,733) (999,733)
Investments sold,
commercial paper 999,733 -- 999,733
----------- ----------- -----------
Cash provided (used) in
investing activities 897,898 (1,355,436) (457,538)
----------- ----------- -----------
Cash flows from financing activities:
Deferred loan cost -- (15,312) (15,312)
Deferred stock offering costs -- (252,390) (252,390)
Shareholder loan - proceeds -- 1,400 1,400
Shareholder loan - payment -- (1,400) (1,400)
Notes payable - proceeds -- 225,000 225,000
Notes payable - payment -- (300,000) (300,000)
Issuance of common stock
and warrants, net of stock
offering costs -- 7,131,372 7,131,607
----------- ----------- -----------
Net cash provided by
financing activities -- 6,788,670 6,788,905
----------- ----------- -----------
(Decrease) increase in cash (267,184) 4,405,437 4,138,488
Cash and cash equivalents,
beginning 4,405,672 235 --
----------- ----------- -----------
Cash and cash equivalents,
ending $ 4,138,488 $ 4,405,672 $ 4,138,488
=========== =========== ===========
Supplemental disclosure,
interest paid $ -- $ 7,759 $ 7,759
=========== =========== ===========
See notes to financial statements.
4
VERITAS MUSIC ENTERTAINMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
The condensed financial statements contained herein should be read in
conjunction with the financial statements and related notes contained in the
Company's Form 10-KSB for year ended January 31, 1996. In the opinion of
management, the accompanying unaudited interim financial statements contain all
adjustments (consisting only of normal accruals) necessary to present fairly the
Company's financial position as of April 30, 1996 and results of its operations
and cash flows for the three months then ended. (The results of operations for
the three month period ended April 30, 1996 are not necessarily indicative of
the results to be expected for the full year.)
1. Summary of significant accounting policies and business activity:
Business activity:
Veritas Music Entertainment, Inc. ("Company"), a Tennessee corporation, is
engaged in the music recording and production business. The Company
develops new and emerging Country music artists targeted for the Country
music market. The Company is considered to be in the development stage as
no revenues have been derived from operations.
In August, 1995, the U.S. Patent and Trademark Office rejected the
Company's application to register "Veritas" as the tradename of the
Company. In January, 1996, a third party objected in writing to the
Company's use of the name "Veritas" and demanded that the Company cease
doing so. Since February, 1996, the Company has been doing business under
the name "Imprint Records" and the Board of Directors of the Company has
determined to change the Company's corporate name to "Imprint Records,
Inc.".
Artist development and promotion costs:
Artist development and promotion costs, including advances, are charged to
expense as incurred.
Cash and cash equivalents:
Cash and cash equivalents include all cash balances and highly liquid
investments purchased with a maturity of three months or less.
Organization costs:
Organization costs represent costs incurred in connection with organizing
the Company. These costs are being amortized on a straight-line basis over
5 years.
Fixed assets:
Fixed assets consist of furniture, equipment, and leasehold improvements,
which are stated at cost. Depreciation is provided on the straight-line
method over the estimated useful lives of the respective assets. Leasehold
improvements are amortized over the lesser of the term of the lease or the
estimated useful lives of the improvements.
Deferred stock offering costs:
Deferred stock offering costs represent costs incurred in connection with
the Company's public offering. These costs were offset against the proceeds
from the public offering.
5
VERITAS MUSIC ENTERTAINMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies and business activity:
(continued)
Net loss per share:
Net loss per share is based on the average number of shares of common stock
outstanding during the periods, after giving effect to the issuance of
874,000 shares in February, 1995 as if such shares were outstanding since
inception. No effect was given to common stock equivalents in the
calculation of loss per share because such effect would be antidilutive.
Concentration of credit risk:
Financial instruments which subject the Company to concentrations of credit
risk consist of temporary cash investments. The Company places its
temporary cash investments with creditworthy, high quality financial
institutions. Although the Company is directly affected by the well-being
of these financial institutions, management does not believe significant
credit risk exists at April 30, 1996.
2. 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 these
estimates.
3. Investments:
Investments consist of commercial paper at an interest rate of 5.83% which
matured during February, 1996. Investments are valued at market value.
4. Commitments and contingencies:
Employment agreements:
The Company has entered into employment agreements with five
officers/executives. The employment agreements provide for aggregate
compensation as follows: During the year ending April 30, 1997, $680,000;
April 30, 1998, $516,667; April 30, 1999, $333,333; April 30, 2000,
$300,000; and April 30, 2001, $75,000.
Lease:
The Company leases office space under an operating lease which commenced
July, 1995 and expires in 2000. This lease contains two five year renewal
options. Occupancy commenced on February 1, 1996. The lease provides for an
annual rental of approximately $68,600 in years one and two and
approximately $79,100 in years three, four and five.
6
VERITAS MUSIC ENTERTAINMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
4. Commitments and contingencies: (continued)
Executive incentive plan:
Effective for year ending January 31, 1997, the Company implemented an
Executive Incentive Plan ("EIP"). The EIP's participants are certain
executive employees. In the event that actual sales and actual pre-tax
income meet or exceed certain goals, the EIP requires the Company to
establish a bonus compensation pool, not to exceed 30 per cent of the
aggregate base salaries of the EIP participants.
Artist contracts:
The Company has entered into exclusive long-term recording contracts with
four artists. The contracts provide for non-refundable advances on the
initial album (which advances are recoupable from future royalties) and
provide the Company with an option to record additional albums. The
contracts also provide for a base royalty to be paid to the artist upon the
sale of albums.
5. Fixed assets:
April 30, January 31,
1996 1996
---------- -------
Leasehold improvements $220,835 $220,196
Equipment 236,703 135,507
-------- --------
457,538 355,703
Less: accumulated depreciation and amortization ( 28,251) ( 7,072)
-------- --------
$429,287 $348,631
======== ========
6. Notes payable and warrants:
In March, 1995, the Company issued $300,000 of notes payable and 300,000
warrants to various investors in exchange for $300,000. Of the $300,000 of
proceeds, $225,000 has been allocated to the notes payable and $75,000 to
the warrants. The notes were paid in July, 1995. The 300,000 warrants were
converted into 300,000 redeemable warrants having terms identical to the
warrants included in the public offering. See Note 7.
7. Public offering:
In July and August, 1995, the Company closed an initial public offering of
its common stock and redeemable warrants. A total of 1,518,000 shares of
common stock and 2,310,000 redeemable warrants were issued. The redeemable
warrants are exercisable at any time during a four year period commencing
July, 1995 at an exercise price of $7.00 per share. The redeemable warrants
include an option whereby, under certain conditions, the Company can redeem
the warrants.
In connection with the initial public offering, the investment banker
received, for nominal consideration, five year warrants to purchase 138,000
shares of common stock and 210,000 redeemable warrants. These warrants are
exercisable at any time during a four year period commencing July, 1996 for
$7.25 per share of common stock and $.36 per redeemable warrant. The
Company has also agreed to utilize the services of the investment banker on
a consulting basis for two years at a monthly fee of $2,000. The aggregate
fee of $48,000 was paid at closing.
7
VERITAS MUSIC ENTERTAINMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
7. Public offering:(continued)
In February, 1995, the Company issued 874,000 shares of common stock for
$.0001 per share to four retail customers and one potential retail customer
of the investment banker. The amount of $.0001 per share was considered
fair market value by the Company as no significant changes in operations,
financial condition or liquidity had taken place since the initial issuance
of common stock for $.0001 in December, 1994.
8. Income taxes:
For federal income tax purposes, as of April 30, 1996 and January 31, 1996,
the Company has net operating loss carryforwards approximating the
financial accounting net loss. These carryforwards expire in the year 2011.
The net operating loss carryforwards result in deferred tax assets of
approximately $925,600 and $416,500, respectively; however, a valuation
reserve has been recorded for the full amount due to the uncertainty of
realization of the deferred tax assets.
9. Incentive stock option plan:
In February, 1995, the Company implemented the 1995 Stock Option Plan
("Plan"). The Plan provides for the granting of options to purchase up to
230,000 shares of common stock at an exercise price equal to the fair
market value of the common stock on date of the grant. Options may be
awarded to officers, senior management or other key employees.
Plan activity as follows:
Weighted-
Number average
of exercise
Shares price
------ -----
Outstanding at February 1, 1995 -- --
Granted 121,500 $5.50
Exercised -- --
Forfeited -- --
------- -----
Outstanding at January 31, 1996 121,500 5.50
Granted -- --
Exercised -- --
Forfeited -- --
------- -----
Outstanding at April 30, 1996 121,500 $5.50
======= =====
Options exercisable at April 30, 1996 --
=======
Weighted-average remaining
contractual life, years 10
=======
10. Related parties:
During the three months ended April 30, 1996 and the year ended January 31,
1996, the Company incurred $37,972 and $61,692, respectively, of
promotional and artist expenses payable to a company which is related to an
officer/director/shareholder.
During the three months ended April 30, 1996 and the year ended January 31,
1996, the Company incurred $2,028 and $18,641, respectively, of business
management fees to a financial firm which is related to two
officers/directors/shareholders of the Company.
8
VERITAS MUSIC ENTERTAINMENT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
11. New authoritative accounting pronouncements:
The Financial Accounting Standards Board has issued Financial Accounting
Standard No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"). FAS
123 requires an entity to adopt either a fair value based method of
accounting for stock-based compensation or to continue to measure
compensation cost as prescribed by the previously issued APB Opinion No.
25, "Accounting for Stock Issued to Employees". ("APB 25"). Entities
electing to remain with the accounting prescribed by APB 25 must present
pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting had been applied. The accounting
requirements of FAS 123 are effective for transactions entered into in the
Company's fiscal year beginning February 1, 1996. The disclosure
requirements of FAS 123 are effective for financial statements for the
Company's fiscal year beginning February 1, 1996. The pro forma disclosures
required if the Company elects to continue to account for compensation cost
as prescribed by APB 25 must include the effects of all awards granted in
the Company's fiscal year beginning February 1, 1995. The Company's
election under FAS 123 has not been determined and the effect of adoption
of FAS 123 on the Company's financial statements has not been determined.
9
Item 2. PLAN OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Financial Statements and
Notes thereto appearing elsewhere in this report.
The Company was incorporated in December 1994 under the laws of Tennessee,
and began operations after its initial public offering in July, 1995.
Consequently, there are no comparable prior periods for purposes of the
following discussion.
Results Of Operations
The Company is in the development stage and has had no revenues from
operations since its incorporation.
Plan Of Operations
Recent Developments.
Gretchen Peters's album, The Secret of Life, was released and shipped for
retail distribution starting June 4, 1996. The Company's distributor has shipped
an aggregate of approximately 67,000 units of the album in cassette and CD
format to the major national music store chains in the U.S.
Gretchen Peters's second single from The Secret of Life, "I Ain't Ever
Satisfied," was released to Country music radio in mid-May, and is receiving
modest radio airplay.
The Company has signed an agreement with Distribution North America to
distribute the Company's CDs and cassettes in the U.S. retail market;
Distribution North America is currently distributing Gretchen Peters's The
Secret of Life album.
The Company has executed an agreement regarding Charlie Major, a Canadian
Country music artist who has released one successful album in Canada, to acquire
the U.S. rights to distribute Major's releases. Major's first album on the
Company's label, Here and Now, is complete and is scheduled for retail release
in the U.S. in August 1996. His first single from that album, "I Do It For the
Money," was released to Country music radio on June 10, 1996.
The Company has reached an understanding with Bob Woodruff's prior record
label to acquire the exclusive rights to distribute worldwide Woodruff's first
(and only) album recorded on that label, Dreams & Saturday Nights, for a period
of five years. The Company expects a definitive agreement with respect to the
acquisition of the rights to be executed in the next two to three weeks, which
agreement the Company expects will provide for a royalty payment to Woodruff's
prior label for each copy of Dreams & Saturday Nights sold by the Company.
Since Inception.
In addition to the recent developments outlined above, since its inception
in late 1994 and the commencement of operations after its initial public
offering in late July 1995, the Company has leased space in the vicinity of
Nashville's Music Row for use as the Company's headquarters; completed the
hiring of its senior management team; signed four Country music artists;
released a single on the Company's label by Gretchen Peters, "When You Are Old;"
and identified a manufacturer to meet the Company's requirements for the
manufacture of CD and cassette recordings for retail sale in the U.S. market.
10
The Company currently has a recording contract with Gretchen Peters. In
addition to the initial advance to Peters, the Company has incurred $150,000 in
recording costs (recoupable from the artist's royalties) in connection with The
Secret of Life, which was shipped for retail distribution starting June 4, 1996.
The Company currently has a recording contract with Country music artist
Bob Woodruff. To date, the Company has incurred $70,000 in recording costs in
connection with Woodruff's album (recoupable from the artist's royalties). The
album is currently in production, and the Company estimates that an additional
$55,000 in recording costs will be incurred over the next nine months to
finalize it for retail release in the U.S.
The Company currently has recording contracts with Al Anderson and Jeff
Wood. In addition to the initial advances paid to these artists by the Company,
to date, the Company has incurred recording costs of $50,000 in connection with
Anderson's album, and $120,000 in recording costs in connection with Wood's
album (in each case recoupable from royalties). The Company estimates that an
additional $10,000 in costs will be incurred in connection with Anderson's
album, and another $40,000 in costs will be incurred in connection with Wood's
album over the next nine months.
The Company has finalized an agreement to acquire the U.S. distribution
rights to distribute Charlie Major's releases. The Company has released Major's
first single on the Company's label, "I Do It For the Money," to Country music
radio on June 10, 1996, and expects to distribute his just-completed first album
for the Company in the U.S., Here and Now, in August 1996. In connection with
the foregoing, the Company has incurred approximately $75,000 to modify Major's
album for release in North America, most of which amount is recoupable against
artist royalties, and plans to spend approximately $125,000 in radio advertising
to promote Major's release.
During the next twelve months, the Company intends to (a) release Charlie
Major's first album on the Company's label, entitled Here and Now, in August
1996, (b) continue production on and release the first albums by Al Anderson,
Jeff Wood and Bob Woodruff, (c) sign an agreement with Bob Woodruff's prior
record label to acquire, for a period of five years, the worldwide distribution
rights to Woodruff's first album, Dreams & Saturday Nights, recorded on that
label; and (d) seek a distributor or distributors to sell the Company's albums
in certain foreign markets.
Based on the Company's current business plan, the Company believes that it
can continue to satisfy its cash requirements for operations for at least
another fourteen months without raising additional funds.
Other Country Music Artists
The Company continues to explore the opportunities available in the
marketplace for the signing of new Country music artists.
11
PART II
OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
On August 22, 1995, the U.S. Patent and Trademark Office rejected the
Company's application to register "Veritas" as the tradename of the Company. On
January 17, 1996, a third party objected in writing to the Company's use of the
name "Veritas" and demanded that the Company cease doing so. The Company
acquiesced in this request and since February 9, 1996, the Company has been
doing business under the name "Imprint Records" in accordance with Section
48-14-101(d) of the Tennessee Business Corporation Act.
Based on the foregoing developments, the Company has determined to cease
using the "Veritas" name in connection with its business. On April 23, 1996, the
Board of Directors of the Company approved for submission to the Company's
stockholders an amendment to the Company's Charter to change the Company's
corporate name to "Imprint Records, Inc." The Board of Directors plans to submit
this amendment for approval by the stockholders at the Company's Annual Meeting
of Stockholders scheduled to be held on June 28, 1996. If the stockholders
approve the recommended change of the Company's corporate name at the Annual
Meeting, the Company will file an Amendment to its Charter with the Tennessee
Secretary of State to change its name to Imprint Records, Inc. The Company filed
an application for registration of the tradename "Imprint Records" with the U.S.
Patent and Trademark Office on February 9, 1996, and is awaiting the outcome of
that application.
12
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
10.1 Distribution Agreement between the Company and Distribution North
America dated as of April 1, 1996.
10.2 Agreement between the Company and Timtojay Music, Inc. dated as
of April 30, 1996.
(b) The Company has not filed any reports on Form 8-K.
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VERITAS MUSIC ENTERTAINMENT, INC.
DATE: June 14, 1996 By: /s/Roy W. Wunsch
------------------
Roy W. Wunsch, Chairman
and Chief Executive Officer
DATE: June 14, 1996 By: /s/Wayne Halper
-----------------
Wayne Halper, Chief Financial
Officer/Vice President -
Business Development
14
EXHIBIT INDEX
Exhibit Page No.
- --------- -------
10.1 Distribution Agreement between the Company and Distribution 16
North America dated as of April 1, 1996
10.2 Agreement between the Company and Timtojay Music, Inc. dated
as of April 30, 1996 31
15