As Filed with the Securities and Exchange Commission on August 2, 2004
Registration No. 333-110934
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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RIDDLE RECORDS, INC.
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(Name of Small Business Issuer in its Charter)
Nevada 3652 88-0507969
- ------------------------------- ---------------------------- ----------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
9595 Wilshire Boulevard, Suite 700
Beverly Hills, CA 90212
(310) 273-2407
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(Address, including zip code, and telephone number, including
area code, of Registrant's Principal Executive Offices)
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Jacques Tizabi
President
9595 Wilshire Boulevard, Suite 700
Beverly Hills, CA 90212
(310) 273-2407
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(Name, address, including zip code, and telephone number of Agent for Service)
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Copies to
Thomas J. Poletti, Esq.
Ted Weitzman, Esq.
Kirkpatrick & Lockhart LLP
10100 Santa Monica Blvd., 7th Floor
Los Angeles, CA 90067
Telephone (310) 552-5000
Facsimile (310) 552-5001
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered
Maximum
Maximum aggregate aggregate
Amount to be offering price offering Amount of
registered per share(1) price(1) registration fee
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Class A common stock, $0.001 par value 8,000,000 $.002 $16,000 $1.30*
======================================================== ================ =================== ================= ===================
* Previously paid.
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) and (o) to the Securities Act of 1933.
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The Registrant amends this registration statement on such date or dates as may
be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall hereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
SUBJECT TO COMPLETION, DATED AUGUST 2, 2004
PROSPECTUS
RIDDLE RECORDS, INC.
8,000,000 SHARES OF CLASS A COMMON STOCK
We are registering 8,000,000 shares of our Class A common stock on behalf
of our selling stockholders. We will not receive any proceeds from this
offering. This offering will terminate on _________ ___, 2004.
There is no public market for these shares prior to this offering. The
current offering price as of the date of this prospectus is $.002 per Class A
common share, which is equal to the per share purchase price paid by the selling
stockholders. Selling stockholders will sell these shares at the fixed price of
$.002 per Class A common share until the shares are quoted on the OTC Bulletin
Board. However, once our Class A common stock is quoted on the OTC Bulletin
Board and there is an established market for these shares, the selling
stockholders may sell the shares of Class A common stock from time to time at
market prices prevailing on the OTC Bulletin Board at the time of offer and
sale, or at prices related to such prevailing market prices or in negotiated
transactions or a combination of such methods of sale directly or through
brokers.
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD INVEST IN OUR CLASS A COMMON STOCK ONLY IF YOU CAN AFFORD TO LOSE YOUR
ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
________________________________________________________________________________
The information in this prospectus is not complete and may be amended. Our
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
________________________________________________________________________________
The date of this prospectus is _______, 2004
RIDDLE RECORDS, INC.
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as to
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
PROSPECTUS SUMMARY.................................................. 4
RISK FACTORS........................................................ 7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS................... 16
USE OF PROCEEDS..................................................... 16
DIVIDEND POLICY..................................................... 16
DILUTION............................................................ 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS.......... 17
BUSINESS............................................................ 20
MANAGEMENT.......................................................... 26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 29
PRINCIPAL STOCKHOLDERS.............................................. 30
DESCRIPTION OF CAPITAL STOCK........................................ 31
SHARES ELIGIBLE FOR FUTURE SALE..................................... 35
SELLING STOCKHOLDERS................................................ 36
PLAN OF DISTRIBUTION................................................ 38
DETERMINATION OF OFFERING PRICE..................................... 40
LEGAL MATTERS....................................................... 40
EXPERTS............................................................. 40
WHERE YOU CAN FIND MORE INFORMATION ABOUT US........................ 40
INDEX TO FINANCIAL STATEMENTS....................................... F-1
PROSPECTUS SUMMARY
This summary highlights selected information in this prospectus, but it may
not contain all of the information that is important to you. To better
understand this offering, and for a more complete description of the offering,
you should read this entire prospectus carefully, including the "Risk Factors"
section and the financial statements and the notes to those statements, which
are included elsewhere in this prospectus.
Our Company
We were incorporated in Nevada in August 2001 and recently established our
company as an independent record label to capitalize on the growth of the music
industry and that of the "hip-hop" and rap genres in particular. By identifying
and representing new, high-potential artists in these categories, our primary
objective will be to successfully introduce these artists to large audiences and
create a loyal following from fans. As a record label, Riddle Records expects to
be directly involved in each stage of developing the careers of our artists. We
do not have any clients to date, although our plan for the next twelve months is
to focus on acquiring artists as clients and developing our brand name within
the music industry. The four key responsibilities of Riddle Records will include
the production, manufacturing, distribution and promotion of our artists' music.
The Offering
Total shares outstanding:
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Class A common stock(1)(2)................................ 20,771,750 shares
Class B common stock(2)................................... 12,000,000 shares
Maximum Class A common shares of offered by
selling stockholders...................................... 8,000,000 shares
Price per Class A common share offered to the public........ $.002
Termination of the offering................................. The offering will
terminate on ____,
2004.
Use of proceeds from the sale of the We will not receive
Class A common any proceeds from
shares.................................................... this offering.
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(1) Excludes 5,000,000 shares of our Class A common stock reserved for
issuance under our stock option plan, none of which have been issued
to date.
(2) The holders of Class A common stock are entitled to one vote per share
and holders of Class B common stock are entitled to ten votes per
share.
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Additional Information
In this prospectus, the terms "Riddle Records," "we," "us," and "our" refer
to Riddle Records, Inc., a Nevada corporation, and, unless the context otherwise
requires, "Class A common stock" refers to our Class A common stock, par value
$0.001 per share and "Class B Common Stock" refers to our Class B common stock,
par value $0.001 per share. Unless otherwise noted, all share and per share
information in this prospectus gives effect to the recapitalization discussed
below and a 480-for-1 stock split, each effected in November 2003.
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4
Our executive offices are located at 9595 Wilshire Boulevard, Suite 700,
Beverly Hills, California 90212. Our telephone number is (310) 273-2407. Our
website is www.riddlerecords.com. None of the information on or hyperlinked from
our website is incorporated by reference into this prospectus.
The Recapitalization
In November 2003, we effected a recapitalization whereby we authorized two
new classes of common stock, Class A common stock and Class B common stock.
Prior to the recapitalization, Jacques Tizabi and Ali Moussaui, who are the sole
officers and directors of our company, each held 12,000,000 shares of our common
stock. Pursuant to the recapitalization, shares of our common stock were
converted into shares of Class A common stock and Class B common stock, and as a
result, Jacques Tizabi and Ali Moussavi each received 6,000,000 shares of our
Class A common stock and 6,000,000 shares of our Class B common stock. All other
shares of common stock held by our other stockholders were converted into shares
of our Class A common stock. The Class A common stock and the Class B common
stock have identical rights other than with respect to voting, conversion and
transfer. The Class A common stock is entitled to one vote per share while the
Class B common stock is entitled to ten votes per share on all matters submitted
to a vote of our stockholders. The shares of Class B common stock are
convertible at any time at the option of the holder into shares of Class A
common stock on a share-for-share basis. In addition, shares of Class B common
stock are automatically converted into a like number of shares of Class A common
stock upon any transfer to any person or entity which is not a permitted
transferee (as defined in our articles of incorporation). After the
recapitalization, each of Jacques Tizabi and Ali Moussavi was the beneficial
owner of 6,000,000 shares of our Class A common stock, and 6,000,000 shares of
Class B common stock, which represented 58.0% of our issued and outstanding
Class A common stock, 100% of our issued and outstanding Class B common stock,
73.4% of our total equity and 93.8% of our total voting power. As a result of
such ownership, Jacques Tizabi and Ali Moussavi will be able to control the vote
on substantially all matters submitted to a vote of our stockholders, including
the election of directors and the approval of extraordinary corporate
transactions.
5
Summary Financial Data
The following table sets forth summary financial data for Riddle Records.
The information should be read in conjunction with the financial statements and
the notes to those financial statements appearing elsewhere in this prospectus.
August 8, 2001
(Inception)
through June Year Ended Nine Months Ended
30, 2002 June 30, 2003 March 31, 2004
------------ ------------- -----------------
Statement of Operations Data:
Revenue.................................. -- -- --
Expenses................................. 146 411 88,743
Net (loss) (1)........................... (146) (454) 89,726
Net (loss) per common share (1).......... * * *
Weighted average shares
outstanding............................ 24,000,000 24,000,000 30,255,369
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As of March 31, 2004
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Balance Sheet Data
Cash ................................................... 2,428
Working capital/(deficit)............................... (45,335)
Total current assets.................................... 2,428
Total assets............................................ 5,250
Total current liabilities............................... 47,763
Long-term obligations, excluding current portion........ -------
Total stockholders' equity/(deficit).................... (42,513)
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* Less than $.01 per share.
(1) See note 1 of the notes to financial statements for a description of
the computation of net loss per share and the number of shares used in
the per share calculation.
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6
RISK FACTORS
This offering and any investment in our Class A common stock involve a high
degree of risk. You should carefully consider the risks described below and all
of the information contained in this prospectus before deciding whether to
purchase our Class A common stock. If any of the following risks actually occur,
our business, financial condition and results of operations could be harmed. The
trading price of our Class A common stock could decline, and you may lose all or
part of your investment in our Class A common stock.
RISKS RELATED TO OUR FINANCIAL RESULTS
If we are unable to successfully obtain additional financing we will not
have sufficient cash to continue operations.
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We will need to raise additional funds in order to satisfy our future
liquidity requirements. We currently anticipate that our available cash
resources will be sufficient to meet our anticipated needs for working capital
and capital expenditures through June, 2004. However, we may require additional
funds earlier to the extent our level of operations significantly expands. It is
unlikely that we will be able to generate sufficient cash flows from operations
to meet any unexpected cash requirements during the next six months or to meet
our anticipated needs for working capital and capital expenditures thereafter.
It is likely that we will seek to meet these liquidity requirements through
public or private equity offerings or debt financings. Current market conditions
present uncertainty as to our ability to secure additional financing. There can
be no assurances that we will be able to secure additional financing, or obtain
favorable terms on such financing if it is available, or as to our ability to
achieve positive cash flow from operations. Continued negative cash flows create
substantial doubt about our ability to implement our operating plan and we may
have to reduce the scope of our planned operations. If cash and cash
equivalents, together with cash generated from operations, if any, are
insufficient to satisfy our liquidity requirements, we will not have sufficient
resources to continue operations.
We have experienced operating losses since our inception and our auditors
have indicated substantial doubt concerning our ability to continue
operations as a going concern.
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We have earned no revenue since our inception and have incurred a net loss
of $90,326 from inception through March 31, 2004. We expect to continue to
incur substantial losses and may not generate significant revenue, if any, for
the immediate future. Our independent certified public accountants have noted
that we have an accumulated deficit, so our ability to continue as a going
concern prior to the generation of significant revenue is dependent upon
obtaining additional financing for our planned operations. If we fail to
generate enough working capital, either from future equity or debt sales or
revenue from operations, our ability to expand and complete our business plan
will be materially affected, and you may lose all or substantially all of your
investment.
It is difficult to evaluate our business and prospects because we have a
limited operating history.
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Although we were incorporated in August 2001, we are a development stage
company and have had no significant operations to date. Because we have a
limited operating history, it is difficult to accurately predict whether and
when we will generate any revenue or to evaluate our future prospects and an
investment in our Class A common stock. Our prospects are uncertain and must be
considered in light of the risks, expenses and difficulties frequently
encountered by independent record labels in the early stages of development.
7
Our operating results may prove unpredictable, and, if a market for our
Class A common stock develops, our Class A common stock price may decrease
or fluctuate significantly.
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Our operating results are likely to fluctuate significantly in the future
due to a variety of factors, many of which are outside of our control. If a
market for our Class A common stock develops and our operating results fluctuate
negatively in any future quarter, the trading price of our Class A common stock
may fall significantly. Factors that may cause our operating results to
fluctuate significantly include the following:
o our ability to generate enough working capital from future equity sales;
o our ability to recruit and retain new artists;
o the level of commercial acceptance by the public of the music offerings of
our artists;
o the long-term commercial success of our artists and their songs with the
public;
o the timing and success of our promotions of our artists;
o fluctuations in the levels of consumer purchasing activity relating to the
purchase of recorded music;
o the level of commercial success achieved by new music and new music
products introduced by us or by our competitors;
o our ability to enter into joint venture distribution and promotion
agreements, which reduce our risk in investing in new unproven artists;
o fluctuations in the demand for recorded music sales and products associated
with music and other entertainment events;
o extensive competition in the music industry, including direct competition
for talent from major recording labels, substantially all of which have
significantly greater capital resources and infrastructure than we have;
o the general threat to the music industry posed by the dissemination of free
music over the internet;
o the amount and timing of operating costs and capital expenditures relating
to expansion of our business, operations and infrastructure; and
o general economic conditions and economic conditions specific to the music
industry.
We expect that we will experience seasonality in our business, reflecting
traditional retail seasonality patterns affecting sales of recorded music. Sales
in the traditional retail music industry are significantly higher in the fourth
calendar quarter of each year than in the preceding three quarters. However, to
date, our limited operating history makes it difficult to ascertain the effects
of seasonality on our business.
8
RISKS RELATED TO OUR BUSINESS
We are a development stage independent record label with no experience in
the market, and failure to successfully compensate for this inexperience
may adversely impact our ability to successfully generate revenue.
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We operate as independent record label with no substantial tangible assets
in a highly competitive industry. Our management has no significant experience
in managing an independent record label. We have little operating history, no
client base and no revenue to date. This makes it difficult to evaluate our
future performance and prospects. Our prospectus must be considered in light of
the risks, expenses, delays and difficulties frequently encountered in
establishing a new business in an emerging and evolving industry characterized
by intense competition, including:
o our business model and strategy are still evolving and are continually
being reviewed and revised;
o we may not be able to raise the capital required to develop our initial
client base and reputation;
o we may not be able to successfully implement our business model and
strategy; and
o our management has not worked together for very long.
We cannot be sure that we will be successful in meeting these challenges
and addressing these risks and uncertainties. If we are unable to do so, our
business will not be successful and the value of your investment in our company
will decline.
If we are initially unable to attract new artists to our label, we will not
succeed in our business plan, and even if we are initially able to attract
new artists, we will be dependent on their success with us to sign
additional new artists.
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We have not signed any artists and may not be successful in signing any
artists. In order to attract and sign our initial artists, we will need to
overcome the fact that we are a start-up independent record label with no
experience in the industry. Artists may be unwilling to be associated with our
company because of our lack of expertise and lack of brand name. Even if we do
attract initial artists, in order for us to sign additional new artists, any
principal artists that we initially sign must remain with us, become popular
with our customers and thereafter sustain their popularity. Our business would
be adversely affected by:
o our inability to recruit new artists with commercial promise and to enter
into production and promotional agreements with them;
o the loss of popularity of any artists that we may sign;
o increased competition to maintain relationships with any artists that we
may sign;
9
o non-renewals of current agreements with any artists that we may sign; and
o poor performance or negative publicity of any artists that we may sign.
If we are not successful in promoting any artists that we may sign, we will
be unable to successfully generate revenue.
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We expect that any future revenues will be primarily derived from a
specified percentage of the income generated by any artists that we may sign so,
to operate successfully, we must attract and retain highly qualified artists as
clients. We face intense competition for qualified personnel in the
entertainment industries, and any clients that we may sign will face intense
competition in achieving success and steady income generation in these
industries. If we are unable to successfully promote our clients, we will not
generate revenues.
If our music offerings are not commercially successful, we will be unable
to successfully generate revenue.
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We expect a significant amount of our revenue to come from the production
and distribution of records, as well as the use of our artists' music in feature
films and television programs. The success of these music offerings depends
primarily upon their acceptance by the public, which is difficult to predict.
The commercial success of a record, feature film or television program depends
on consumer taste, the quality and acceptance of competing offerings released
into the marketplace at or near the same time, the availability of alternative
forms of entertainment and leisure time activities, general economic conditions
and other tangible and intangible factors, all of which can change quickly.
Because we expect the popularity of our music offerings to be a significant
factor driving the growth of our company, if we fail to produce records with
broad consumer appeal, we will be unable to successfully generate revenue.
The music industry is extremely competitive and we may not be able to
compete successfully against other record labels, both large and small, for
both artists and the public's attention.
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The market for the promotion and distribution of music is extremely
competitive and rapidly changing. We currently and in the future face
competitive pressures from numerous actual and potential competitors. Many of
our current and potential competitors in the recorded music business have more
substantial competitive advantages than we have, including:
o longer operating histories;
o significantly greater financial, technical and marketing resources;
o greater brand name recognition;
o better distribution channels;
o larger client bases of artists; and
o more popular content or artists.
10
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in the public's musical tastes and devote greater
resources to identify, develop and promote artists, and distribute and sell
their music offerings than we can.
Our success depends in large part on our current key personnel and our
ability to attract and retain additional key personnel, which we may or may
not be able to do.
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Our success depends largely on the skills, experience and reputation of our
president, Jacques Tizabi and our director, Ali Moussavi, and the contacts that
they each have with a number of music and entertainment industry professionals.
Additionally, we hope to attract additional key personnel who can contribute to
our success in various ways. The loss or unavailability of either Messrs. Tizabi
or Moussavi for any significant period of time, and/or our inability to attract
additional key personnel could have a material adverse effect on our ability to
conduct our business. We do not have any employment agreements with any of our
officers, directors or employees.
The members of our management team have limited experience in
leadership roles in the music industry or in a public company and may be
unable to successfully lead us to profitability.
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We cannot assure you that our management team will be able to successfully
lead an independent record label. Our officers have limited significant
experience in this industry. We have not signed any artists and may not be
successful in signing any. The failure of our management team to adequately
handle these challenges would have a material adverse effect on our ability to
conduct our business.
Unless our artists develop a strong brand identity, our business may not
grow and our financial results may suffer.
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We believe that historical growth and brand recognition are important
factors not only in persuading artists to choose us as their record label, but
also in our ability to effectively utilize the dominant marketing resources in
the music industry (radio, public relations, trade publications, etc.). We
believe that our ability to promote and strengthen our brand will be critical to
attracting artists and achieving widespread acceptance of their music. However,
brand promotion activities may not yield revenues, and even if they do, any such
revenues may not offset the expenses we incur in building our brand.
We may be liable to third parties for music and other content that is on
the compact discs we will produce and distribute.
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We may be liable to third parties for the content on the compact discs that
we expect to distribute:
o if the music, text, graphics, or other content on our compact discs
violates their copyright, trademark, or other intellectual property rights;
o if our artists violate their contractual obligations to others by providing
content on our compact discs; or
o if anything on our compact discs is deemed obscene, indecent or defamatory.
11
We will attempt to minimize these types of liability by requiring
representations and warranties relating to our artists' ownership of and rights
to distribute and submit their music and by taking related measures to review
content on our compact discs. However, alleged liability could harm our business
by damaging our reputation, requiring us to incur legal costs in defense,
exposing us to awards of damages and costs and diverting management's attention
away from our business.
Many of our anticipated artist agreements are expected to be short-term and
we will face the risk of losing them to competitors with greater resources.
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We believe that our future success will depend in large part upon our
ability to maintain any anticipated artist agreements. If we become unable to
provide valuable services to any artists that we may sign, or if we otherwise
fail to maintain good relations with such artists, they may elect to terminate
their agreements with us when their contractual term expires, or they may elect
not to renew their agreements with us. We expect that our agreements with many
artists will have a term of only one year, and these artists will have the
option of electing whether or not to renew their contracts on a year-to-year
basis. If an artist elects to terminate his or her agreement with us, we would
not necessarily earn any revenues from recordings, tours other commercial
properties, which we have not produced during the term of our relationship. In
addition, if we cannot provide adequate incentives for these artists to remain
with us, our efforts to sign new artists will be impaired. Furthermore,
historically, when recording artists have achieved substantial commercial
success they have sought to renegotiate the terms of their recording agreements.
This may adversely effect our future profitability with respect to such artists.
If we have difficulty enforcing our intellectual property right our future
profitability may suffer.
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The decreasing cost of electronic equipment and related technology has made
it easier to create unauthorized versions of audio and audiovisual products such
as compact discs, videotapes and DVDs. A substantial portion of our revenue is
expected to come from the sale of audio and audiovisual products potentially
subject to unauthorized copying. Similarly, advances in Internet technology have
increasingly made it possible for computer users to share audio and audiovisual
information without the permission of the copyright owners and without paying
royalties to holders of applicable intellectual property or other rights. While
we do not currently hold any intellectual property rights, intellectual property
rights to information that is potentially subject to widespread, uncompensated
dissemination on the Internet is expected to represent a substantial portion of
our market value. If we fail to obtain appropriate relief through the judicial
process or the complete enforcement of judicial decisions issued in our favor,
or if we fail to develop effective means of protecting our intellectual property
or entertainment-related products and services, our future profitability may
suffer.
12
RISKS RELATED TO OUR CAPITAL STRUCTURE
The control by our majority stockholders, and their disparate voting
rights, may make certain transactions impossible without the approval of
these majority stockholders.
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We are controlled by Jacques Tizabi and Ali Moussavi, who beneficially own
57.8% of our Class A common stock and 100% of our outstanding Class B common
stock (or approximately 73.2% of our outstanding capital stock). The holders of
Class A common stock and Class B common stock have identical rights except that
holders of Class A common stock are entitled to one vote per share while holders
of Class B common stock are entitled to ten votes per share on all matters
submitted to a vote of the stockholders. As a result, Messrs. Tizabi and
Moussavi hold approximately 93.8% of the aggregate number of votes eligible to
be cast by our stockholders. Therefore, Messrs. Tizabi and Moussavi will be able
to control substantially all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions, and will also have control over our
management and affairs. As a result of such control, certain transactions may
not be possible without the approval of Messrs. Tizabi and Moussavi, including
proxy contests, tender offers, open market purchase programs or other
transactions that could give our stockholders the opportunity to realize a
premium over the then-prevailing market prices for their shares of Class A
common stock. The differential in the voting rights could adversely affect the
value of the Class A common stock to the extent that investors or any potential
future purchaser of our company view the superior voting rights of the Class B
common stock to have value.
Some provisions of our articles of incorporation and bylaws may deter
takeover attempts, which may limit the opportunity of our stockholders to
sell their shares at a favorable price.
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Some of the provisions of our articles of incorporation and bylaws could
make it more difficult for a third party to acquire us, even if doing so might
be beneficial to our stockholders by providing them with the opportunity to sell
their shares possibly at a premium over the then market price.
For example, our articles of incorporation authorizes the board of
directors to issue up to 10,000,000 shares of preferred stock. The preferred
stock may be issued in one or more series, the terms of which may be determined
at the time of issuance by our board of directors without further action by the
stockholders. These terms may include voting rights including the right to vote
as a series on particular matters, preferences as to dividends and liquidation,
conversion rights, redemption rights and sinking fund provisions. No shares of
preferred stock are outstanding or will be outstanding upon the closing of this
offering and we have no present plans for the issuance of any preferred stock.
The issuance of any preferred stock, however, could diminish the rights of
holders of our Class A common stock, and therefore could reduce the value of our
common stock. In addition, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell
assets to, a third party. The ability of our board of directors to issue
preferred stock could make it more difficult, delay, discourage, prevent or make
it more costly to acquire or effect a change in control, thereby preserving the
current stockholders' control.
13
In addition, Messrs. Tizabi's and Moussavi's substantial beneficial
ownership position, together with the authorization of preferred stock, the
disparate voting rights between the Class A and Class B common stock, and the
lack of cumulative voting in the Company's Certificate of Incorporation and
Bylaws, may have the effect of delaying, deferring or preventing a change in
control of our company, may discourage bids for our Class A common stock at a
premium over the market price of the Class A common stock and may adversely
affect the market price of our Class A common stock.
RISKS RELATED TO THIS OFFERING
Since our Class A common stock has never been traded, prices for our Class
A common stock may decline after the offering and investors may have
difficulty selling their securities.
- --------------------------------------------------------------------------------
There is no public market for our Class A common stock and we cannot assure
you that a market will develop or that any stockholder will be able to liquidate
his investment without considerable delay, if at all. Neither we nor our selling
stockholders have engaged an underwriter for this offering, and we cannot assure
you that any brokerage firm will act as a market maker of our securities. A
trading market may not develop in the future, and if one does develop, it may
not be sustained. If an active trading market does develop, the market price of
our Class A common stock is likely to be highly volatile due to, among other
things, the nature of our business and because we are a new public company with
a limited operating history. The market price of our Class A common stock may
also fluctuate significantly in response to the following factors, most of which
are beyond our control:
o variations in our quarterly operating results;
o changes in securities analysts estimates of our financial performance;
o changes in general economic conditions and in the music retailing industry;
o changes in market valuations of similar companies;
o announcements by us or our competitors of significant new contracts with
artists, acquisitions, strategic partnerships or joint ventures, or capital
commitments;
o loss of a major artist, partner or joint venture participant or the failure
to effectively exploit the catalogs of our musicians; and
o the addition or loss of key managerial and creative personnel.
The equity markets have, on occasion, experienced significant price and
volume fluctuations that have affected the market prices for many companies'
securities and that have often been unrelated to the operating performance of
these companies. Any such fluctuations may adversely affect the market price of
our Class A common stock, regardless of our actual operating performance. As a
result, stockholders may be unable to sell their shares, or may be forced to
sell them at a loss.
14
There is a substantial number of shares eligible for future sale which
could adversely affect the price of our Cass A common stock.
- --------------------------------------------------------------------------------
The sales of substantial amounts of our Class A common stock in the public
market or the prospect of such sales could materially and adversely affect the
market price of our Class A common stock. Jacques Tizabi and Ali Moussavi, who
each beneficially own 6,000,000 shares of our Class A common stock and 6,000,000
shares of our Class B common stock, have received certain registration rights to
sell shares of Class A common stock held by them and issuable upon conversion of
their shares of Class B common stock in the public market. We also intend to
register the shares of our Class A common stock reserved for issuance pursuant
to our Stock Option Plan.
We do not intend to pay dividends to our stockholders, so you will not
receive any return on your investment in our company prior to selling your
interest in Riddle Records.
- --------------------------------------------------------------------------------
We have never paid any dividends to our stockholders. We currently intend
to retain any future earnings for funding growth and, therefore, do not expect
to pay any dividends in the foreseeable future. If we determine that we will pay
dividends to the holders of our Class A common stock, we cannot assure that such
dividends will be paid on a timely basis. As a result, you will not receive any
return on your investment prior to selling your shares in our company.
15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates", "believes", "plans",
"expects", "future", "intends" and similar expressions to identify these
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.
Our actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks described in
"Risk Factors" and elsewhere in this prospectus. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of Class A
common stock by the selling stockholders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business, and we do not expect to pay any cash dividends in the foreseeable
future. The decision whether to pay cash dividends on our Class A common stock
will be made by our board of directors, in their discretion, and will depend on
our financial condition, operating results, capital requirements and other
factors that the board of directors considers significant.
DILUTION
As we are not receiving any proceeds of this offering, and none of the
shares offered in this prospectus are currently being offered, as of the date of
this prospectus, at a price higher than the value paid by the selling
stockholders at the time of purchase, we do not anticipate any dilutive effect
in connection with this offering.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
PLAN OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with our financial statements and
related notes appearing elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. The actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited to, those presented under "Risk Factors" and elsewhere in this
prospectus.
Plan of Operations
We were incorporated in Nevada in August 2001 and recently established our
company as an independent record label to capitalize on the growth of the music
industry and that of the "hip-hop" and rap genres in particular. By identifying
and representing new, high-potential artists in these categories, our primary
objective will be to successfully introduce these artists to large audiences and
create a loyal following from fans. As a record label, Riddle Records expects to
be directly involved in every stage of developing the careers of our artists.
The four key responsibilities of Riddle Records will include the production,
manufacturing, distribution and promotion of our artists' music.
We have a limited operating history, no client base and no revenue to date.
Our specific plan of operations for the next 12 months is based primarily on the
development of our business, including our brand name within the music industry,
and the signing of our initial artists. During the next 12 months, we plan to
focus on acquiring two to five artists as clients and developing our brand name
within the music industry. We anticipate expenditures of approximately $275,000
over the next 12 months to maintain our business. Of this amount, approximately
$25,000 will be spent on rent for a sub-lease for office space expected to be
entered into with Astor Capital within the next six months and possibly for
studio rental time as part of the production costs for the artists that we sign
as clients, $125,000 on general and administrative costs (which includes legal
and other professional costs including the costs of this offering), and $125,000
on artist development, which includes entertainment, travel, costs to promote
those artists that we acquire as clients and $20,000 for consultant and advisory
fees. We expect that these amounts will be sufficient to cover all of our
anticipated costs including general and administrative expenses for the next 12
months, and we do not anticipate any other material operational costs for the
next 12 months. Given the current lack of revenues, the lack of proceeds from
this offering and the lack of a client base, we will be required to rely
primarily on the sale of additional equity and debt securities to fund our
operations. If we raise less than $275,000, we expect to scale back our planned
operations and cut back our general and administrative and artist development
costs in equal proportions. To the extent we are unable to raise sufficient
financing, we will not have sufficient cash to continue operations. See "Risk
Factors -- Risks Related to Our Financial Results."
We expect that our promotional efforts on behalf of our clients will
primarily consist of the creation of electronic presentations of their projects
and talent typically on compact disc or online, the distribution of these
presentations to the appropriate parties in the music industry, the introduction
of our clients to related industry decision-makers, and the making of personal
presentations on behalf of our clients to prospective interested parties.
During the next 12 months, we intend to focus our efforts on creating an
awareness within the music industry of our business. While none of our existing
directors or officers has prior business experience with a record label company,
these persons have arranged informal advisory arrangements with a number of
industry professionals who have agreed to afford our company access to their
existing relationships in the music and entertainment industry. We have entered
into an arrangement with Malik Miller, who is providing us legal services in the
areas of music and entertainment law for approximately $1,500 per month. In
addition, two artist and repertoire (A&R) advisors are providing us with
introductions to their contacts within the music and entertainment industry as
well as scouting and identifying for us new, high-potential artists performing
at showcases, clubs and other small venues. These A&R advisors are providing
their services with the understanding that if we sign any artists that they
introduce to us, they will receive compensation at a negotiated royalty rate on
future sales of those artists' products. We have and intend to continue to
market our business by generally making those in the music and entertainment
industry aware of the services we will provide. Our marketing efforts undertaken
to date include generating interest in our record label by word-of-mouth and
passing out cards and other promotional materials and at concerts and other
music events, and networking with other professionals at courses, seminars and
other music and entertainment industry gatherings. Our goal is to build a
database of industry participants through these advisory relationships and to
thereafter build upon that database through referrals from existing
17
After our initial marketing campaign, we anticipate that further marketing of
our company will be conducted almost exclusively through word-of-mouth. During
our first year of operations, we intend to start identifying clients that show
promise but require our services to move forward, and clients that we determine
are likely to generate recurring revenues. We intend to derive these initial
clients from that pool of industry referrals and relationships referenced above.
Following that, we anticipate using these initial clients to generate sufficient
revenue to maintain our operating expenses.
As discussed in our risk factors, we are engaged in a highly competitive
environment. A continued slowness in the economy, as a result of terrorist
attacks, market decline, the war in Iraq, or a combination thereof appears to
have resulted in a general reduction in music industry. In addition, new
technology, such as the ability of individuals to burn their own compact discs,
rather than purchase new compact discs, has reduced the amount of revenue
artists receive for their work. This may affect our revenue stream in projects
in which we receive a percentage of the artist's revenue.
Results Of Operations
We are a development stage company. We have not generated any revenue since
inception through March 31, 2004.
Operating expenses from inception through March 31, 2004 is comprised of
general and administrative fees of $88,520, and depreciation expenses of $780.
We had a net loss for the period from inception through March 31, 2004
of $90,326.
Liquidity and Capital Resources
We are not engaged in a capital-intensive business. Our costs are primarily
incurred by the business development costs, travel and entertainment related to
our business operations, and business overhead normal to an independent record
label business. We have generated a net amount of $52,413 as of June 30,
2004 through the private sales of restricted Class A common stock to 28
accredited investors and received loans from our principal shareholders in the
aggregate amount of $3,700. The loan, which was recently extended for six
months, bears interest at the rate of 5% per annum and is payable upon the
sooner of October 7, 2004 or upon our company raising additional funding of more
than $50,000. Of these amounts, $29,000 has been used to date to pay
professional fees secured in connection with this offering and $5,212 was paid
as placement agent fees to Astor Capital, Inc., of which each of our directors
is a co-founder and managing partner.
As of June 30, 2004, we had approximately $2,518 in available cash. We will
need to raise additional funds in order to satisfy our future liquidity
requirements, including working capital to fund the cash requirements of our
company as well as expand our business during the next six months and capital
expenditures that primarily relate to the costs of this offering and the initial
costs involved with the organization of our company. It is unlikely that we will
be able to generate sufficient cash flows from operations to meet any cash
requirements during the next six months or to meet our anticipated needs for
working capital and capital expenditures thereafter. Depending on the number of
artists that we sign as clients within the next 12 months, we anticipate being
required to raise between $200,000 and $1,000,000 in order to satisfy future
liquidity requirements. We will have to meet these liquidity requirements
through public or private equity offerings or debt financings. We may be unable
to obtain any required additional financing on terms favorable to us, if at all.
If adequate funds are not available on acceptable terms, we will be unable to
fund our expansion, successfully promote our brand, sign and develop any artists
and promote and produce any signed artists, respond to competitive pressures
18
or take advantage of acquisition opportunities, any of which would have a
material adverse effect on our business. If we raise additional funds through
the issuance of equity securities, our stockholders may experience dilution of
their ownership interest, and the newly-issued securities may have rights
superior to those of our Class A common stock. If we raise additional funds by
issuing debt, we may be subject to limitations on our operations, including
limitations on the payment of dividends. There can be no assurances that we will
be able to secure additional financing, or obtain favorable terms on such
financing if it is available. Continued negative cash flows create substantial
doubt about our ability to fully implement our operating plan and we may have to
reduce the scope of our planned operations, which may jeopardize our ability to
continue our business. If cash and cash equivalents, together with any cash
generated from operations, are insufficient to satisfy our liquidity
requirements, we will not have sufficient resources to continue operations. We
estimate that the expenses of this offering will be approximately $119,000, of
which $25,000 has been paid to date. We will be required to raise additional
funds through the sale of equity or debt securities to satisfy these payables
related to this offering.
19
BUSINESS
We recently established our company as an independent record label to focus
on signing artists in the "hip-hop" and rap genres particularly. We believe the
"hip-hop" and rap genres represent a growing portion of the music industry. By
identifying and representing new, high-potential artists in these categories,
our primary objective will be to successfully introduce these artists to large
audiences and create a loyal following from fans. As a record label, Riddle
Records expects to be directly involved in every stage of developing the careers
of our artists. Our plan for the next 12 months is to focus on acquiring artists
as clients and developing our brand name within the music industry.
We had no substantial operations from inception through August 2003. In
August 2003, we commenced operations as an independent record label by
establishing our business model, raising initial monies through the sale of our
equity securities and solidifying informal advisory agreements with a number of
industry professionals who agreed to afford our company access to their existing
relationships in the music and entertainment industry. We have, and intend to
continue to market our business model by generally making those in the music and
entertainment industries aware of the services we will provide. We have had
discussions with a number of artists, but have not signed any artist as of the
date of this Prospectus.
Industry Background
The record label industry consists of companies that sign music artists and
distribute their record products. We believe that most new artists seek a record
label that will finance the production, manufacture, distribution and promotion
of an album in return for a vested interest in the artist's commercial success.
While these costs are not substantial as compared to costs associated with
similar efforts for more established artists, many new artists are unable to
finance even these limited costs at this early stage of their careers. The
substantial portion of music produced, manufactured and distributed in the
United States is effected by five major companies that control more than 200
"large record labels." The remaining portion is effected by "independent record
labels," which are those labels not affiliated with the five major companies.
We believe that most artists who sign with an independent record label do
so only after first attempting to obtain a contract with a major record label.
Most agreements between independent record labels and artists are relatively
short, typically for one or two albums, or even just a few singles.
Record labels, whether large or independent, derive revenue from two key
forms of assets--the artists whom they sign and copyrights on the artists'
music. Signed artists comprise a record label's product base, while copyrights
and other intellectual property represent the quantifiable assets of the record
label.
Independent record labels typically do not pay their artists advances or
royalties. Instead, it is common for these smaller labels to agree to a "profit
sharing deal" with their artists. In this way, any profits generated from record
sales after the recoupment of recording and other costs by the record label can
be split between the label and the artist in such percentages and duration as
determined by the parties when the artist agrees to sign with the label.
20
With regard to copyright, record labels generally own not only the master
tapes of the sound recordings, but also the intellectual property rights
assigned to them, which are collectively referred to as "phonographic master
rights" within the music industry. Phonographic master rights can generate a
long term or perpetual revenue stream stemming from a variety of sources
including album sales, broadcasting and synchronization rights for films and
television programming. Owning the rights to the master recordings also empowers
the record label with the right to seek out licensing deals with other third
party record labels and distributors.
Strategy
We believe that there are a number of potentially commercially viable
hip-hop and rap artists whom are not signed by one of the large record labels.
Since the number of artists vying for the attention of each of the major record
labels exceeds the number of artists that they can properly evaluate, we believe
that a substantial number of these artists are rejected with many of their demo
tapes never being heard. For this reason, we believe that these rejections are
not always a reflection of the artists' potential. We believe this provides an
opportunity for an independent record label such as us to sign quality artists
at an early stage in their careers and benefit from their future success.
While most artists would most likely prefer to sign with one of the large
record labels, we believe an increasing number of artists view independent
labels not only as a second option, but are interested in negotiating a deal
with an independent label because of the following:
o more overall creative control;
o production credit (more royalty points);
o artist's choice of producer;
o greater flexibility (a record deal consisting of up to three
commercial releases of music recordings to the public rather than a
substantially larger record deal with a major label for up to seven
commercial releases to the public);
o more attention and promotional support; and
o successful release with an independent record label gives greater
leverage to artist who may wish to later deal with a major record
label.
Our strategy will be to take advantage of these factors to attract hip-hop
and rap artists who we believe have the potential for commercial success,
particularly with people under 30 years of age.
We intend to remain an independent record label and have no intentions of
merging with or being acquired by one of the major record labels in the
foreseeable future.
Our Approach
The four key responsibilities of Riddle Records are expected to include the
production, manufacture, distribution and promotion of our artists' music. We
intend to recruit and hire consultants and experienced personnel to aid in each
of these areas.
21
Production
This is the process through which the artist records a master tape to be
used in producing the album in formats such as compact discs and cassette tapes.
As the record label representing an artist, our production responsibilities will
include funding the rehearsal and recording studio time, in addition to
presiding over the mixing and the mastering of the artist's master tape. We
expect that the average production cost of any album would be approximately
$5,000 to $50,000, which varies depending on the time an album takes to record,
mix and master.
Manufacture
In this process, the master tape is used to create various formats of the
album such as compact disc and cassette tape. All packaging, including artwork,
liner notes and lyric sheets are inserted during the manufacturing stage. We
expect to contract with third parties for the manufacture of our artists'
albums. We intend to enter into agreements with distributors who will bear the
manufacturing costs of our artists' products in exchange for a percentage of
sales of those products. This percentage is typically between 10% and 30%,
depending on the marketing and promotion costs that the distributor agrees to
pay. This is a typical arrangement between distributors and independent record
labels in the music industry, and as a result, there will be no material cost to
us regarding manufacture.
Distribution
We intend to initially utilize independent distributors to distribute our
artists' products to retail locations. Use of an independent distributor is
substantially less expensive than distribution through major record labels. As a
result, there will be no material costs to us regarding distribution.
Distribution companies take a percentage from each sale in exchange for
performing the logistical work required to place recorded products into mass
merchandisers, record chains, independent record stores and other retailers.
If our artists become commercially accepted, we may utilize a major record
label company to further distribute our artists' products. Major label
distribution is generally more expensive than utilizing independent distributors
but is more effective due to more complete coverage of the consumer market.
We expect to set up a website, thus ensuring an online presence, which can
be used as an informational resource to promote our artists and their music, as
well as potentially for e-commerce sales of their recorded products. Another
alternative for us would be to sell our artist's products on third-party retail
websites.
Promotion
Our philosophy is that every promotional effort we perform on behalf of our
artists will be for the purpose of selling their records. We expect to fulfill
this philosophy by focusing our efforts on promoting our artists to a target
market of people under 30 years of age through their live performances to help
generate record sales. We expect that the average promotion cost of any album
would be approximately $2,500 to $20,000.
We will initially concentrate our promotion efforts towards increasing
sales of our recording artists' albums in the areas in which they perform live
in concert. We believe that the shows should provide an opportunity to promote
and sell the performing artists' albums at the concert venues and in the related
cities, while also allowing for cross-promotion and sales of our other artists'
albums that share a similar genre of music.
22
We will also promote our artists and their music using a variety of
marketing vehicles which may include music videos, print advertising, radio
and/or television advertising, radio airplay, in-store appearances by artists,
retail displays and product giveaways.
Clients
We do not have any clients to date, although we expect to focus on
acquiring between two and five artists as clients as part of our plan of
operations for the next 12 months.
Competition
The record label industry is largely dominated by five companies who
collectively manufacture and distribute and supply the substantial portion of
the music of more than 200 large record labels to the domestic market. These
five companies are (1) Universal Music Group, (2) Sony Music Entertainment, (3)
EMI Group, (4) Warner Brothers Music and (5) BMG Entertainment, which through
the large record labels account for approximately 80% of domestic music sales.
The remaining 20% of the U.S. music market is shared by approximately 2,500
independent record labels with whom we directly compete for musical talent. Due
to the large number of independent record labels that exist, we are not aware of
any specific independent record label with significant market share to warrant
consideration as a direct competitor, but competition is fierce among all of the
independent record labels as well as with the large record labels.
The market for the promotion and distribution of music is extremely
competitive and rapidly changing. We face competitive pressures from numerous
actual and potential competitors. Many of our current and potential competitors
in the recorded music business have more substantial competitive advantages than
we have, including:
o longer operating histories;
o significantly greater financial, technical and marketing resources;
o greater brand name recognition;
o better distribution channels;
o larger client bases of artists; and
o more popular content or artists.
Intellectual Property
Our business, like that of other companies involved in recorded music will
rely on ownership, control and exploitation of musical works and sound
recordings. While we do not currently hold any intellectual property rights,
phonographic master rights inclusive of the sound recordings expected to be
produced by our artists will be protected under applicable domestic and
international copyright laws.
23
Although circumstances may vary, rights and royalties relating to a
particular recording typically operate as follows: when a recording is made,
copyright in that recording vests either in the recording artist (and is
licensed to the record company) or in the record company itself, depending on
the terms of the agreement between them. Similarly, when a musical composition
is written, copyright in the composition vests either in the writer (and is
licensed to the music publishing company) or in the publishing company itself.
Artists generally record songs that are controlled by music publishers. For
songs that will be recorded by our clients in the future, we would obtain the
rights to reproduce such songs on formats such as compact disc or cassette tape
from the music publishers. The manufacture and sale of a compact disc, cassette
tape or other sound carrier would result in royalties being payable by us to the
publishing company at industry agreed upon or statutory rates for the use of the
composition (and the publishing company in turn pays a royalty to the writer)
and by us to the recording artist for the use of the recording.
We operate in an industry in which revenues are adversely affected by the
unauthorized reproduction of recordings for commercial sale, commonly referred
to as "piracy," dissemination of recordings over the internet for free, and by
home taping for personal use. We will rely on existing copyright laws to prevent
unauthorized reproduction and distribution of recordings expected to be produced
by our artists. However, existing copyright laws afford only limited protection.
Policing unauthorized use of these recordings will be difficult and music piracy
is expected to be a persistent problem, especially in certain international
markets. We are aware that unauthorized copying occurs within our industry and
if a significant amount of unauthorized copying of our recordings were to occur,
our business would be harmed. In addition, the laws of some countries in which
our recordings may be distributed either do not protect our recordings and
intellectual property rights to the same extent as the laws of the United
States, or these laws are weakly enforced. Legal protection of our rights may be
ineffective in these countries, and as we utilize emerging technologies, such as
the Internet and online services, our ability to protect our intellectual
property rights is expected to become more difficult. In addition, intellectual
property laws are less clear with respect to such emerging technologies.
Accordingly, existing intellectual property laws may not provide adequate
protection to our recordings that are disseminated in connection with emerging
technologies.
Priority and enforceability of intellectual property rights can be
difficult to verify. If we violate third-party proprietary rights, including but
not limited to any potential infringement resulting from our use of "Riddle
Records" as our company name, we cannot assure you that we would be able to
arrange licensing agreements or other satisfactory resolutions on commercially
reasonable terms, if at all. Any claims, made either by us or against us,
related to the infringement of third party proprietary rights could result in
the expenditure of significant financial and managerial resources and/or
injunctions preventing us from providing services. Such claims could severely
harm our operations and ability to compete, particularly if our name becomes
recognizable in the entertainment industry, as well as harm our financial
position.
Employees
As of June 30, 2004, we have two employees, Jacques Tizabi, who is our
Chief Executive Officer and President, and Ali Moussavi, who is our Secretary
and Treasurer. Messrs. Tizabi and Moussavi each expect to devote at least 20
hours per week on our business. We also utilize outside consultants and advisors
from time to time to provide various services, including Malik Miller and Arthur
Bernstein, who as outside legal counsel provide expertise in the areas of music
and entertainment law, Amir Ettehadieh who scouts music talent and does
promotional work, and Sohrab Ghodoosi who actively recruits talent as an artist
and repertoire representative. These persons work under informal advisory
relationships. Mr. Miller has more than five years of experience in music and
entertainment law, and he has most recently worked as an independent legal
consultant to various companies, as in-house counsel to D&D Studios, which is a
music and entertainment studio, and as an attorney at the law firm of Manatt,
Phelps & Phillips, LLP. Mr. Bernstein also has more than five years of expertise
in music and entertainment law, and his most recent experience includes working
as an independent legal consultant to various companies and as in-house counsel
to Producers Entertainment Group, which is a production company. Relevant
experience of each of Messrs. Ettehadieh and Ghodoosi includes extensive
networking and development of contacts within the music and entertainment
industry and the completion of coursework through UCLA Extension that focuses on
the business aspects of the music and entertainment industry. Mr. Ettehadieh
also serves as director of research and development for Universal Detection
Technology (OTCBB:UDTT), which is an SEC reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In addition, Randall
Murchison and Jo D. Jonz are two artist and repertoire (A&R) advisors providing
us with introductions to their contacts within the music and entertainment
industry as well as scouting and identifying for us new, high-potential artists.
Mr. Murchison is well-known and very involved with the hip-hop scene in Los
Angeles, including having organized numerous hip-hop and rap showcases through
his Music & Strength Workshop. He has also produced, edited and marketed music,
video and graphics. Mr. Jonz is well-known in the rap music scene in Los
Angeles, he has written and produced music, and he has performed at many clubs
in Los Angeles. We expect to hire additional employees as needed in the future
as our infrastructure grows. None of our employees are represented by a labor
union. We consider our employee relations to be good.
Properties
We currently do not own or lease any property. As of February 2004, we
moved our corporate headquarters to 9595 Wilshire Boulevard, Suite 700, Beverly
Hills, California, an office space leased by Astor Capital, Inc., a company
owned by our Directors. We are occupying the office space rent-free until a
sub-lease agreement is entered into with Astor Capital. We believe that this
space is adequate for our current needs and plan to lease property as our
business demands require in the future.
24
Legal Proceedings
From time to time, we may become involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this prospectus, we are not a party to any legal proceedings.
25
MANAGEMENT
Executive Officers and Directors
The following table sets forth specific information regarding our executive
officers and directors as of June 30, 2004.
Executive Officers and Directors Age Position(s)
- -------------------------------- --- -----------
Jacques Tizabi..................... 33 Chief Executive Officer, President
and Chairman of the Board
Ali Moussavi....................... 32 Secretary, Treasurer and Director
Mr. Tizabi has been the Chief Executive Officer, President and Chairman of
the Board of Directors of our company since October 2001. He is the co-founder
and managing partner of Astor Capital, Inc., which was founded in July 1995 and
specializes in investment banking and asset management, predominantly in the
area of direct private investment in public companies. Astor Capital is a
registered broker-dealer. Mr. Tizabi has substantial experience in evaluating,
structuring and negotiating direct investments in public companies and later
stage private companies. Since October 2001, Mr. Tizabi has served as the Chief
Executive Officer, President and Chairman of the Board of Universal Detection
Technology formerly known as Pollution Research and Control Corp. (OTCBB:UDTT),
which primarily develops and markets bio-terror detection equipment and is an
SEC reporting company under the Exchange Act. Since June 2003, he has also
served as a board member of Ecast Media Corporation, Inc. ("Ecast"), which is a
subsidiary of NT Media Corp. of California, Inc. ("NT Media") (OTCBB:NTMM) that
specializes in media and entertainment property development and is an SEC
reporting company under the Exchange Act. From May 1993 to June 1995, he was a
portfolio manager for AMG Capital Management, a hedge fund based in Los Angeles.
Mr. Tizabi holds a B.S. degree in Business from New York University and an
M.B.A. from Pepperdine University.
Mr. Moussavi has been our Secretary and Treasurer since October 2001 and a
member of our Board of Directors since August 2001. He is the co-founder and
managing partner of Astor Capital, Inc., which was founded in July 1995 and
specializes in investment banking and asset management, predominantly in the
area of direct private investment in public companies. From January 1993 to June
1995, Mr. Moussavi was a portfolio manager for AMG Capital Management. Mr.
Moussavi holds a B.A. in Mathematics from New York University. Since June 2003,
he has also served as a board member of each of NT Media, an SEC reporting
company under the Exchange Act (OTCBB:NTMM), and its subsidiary Ecast, which
specialize in media and entertainment property development.
Neither of our directors or officers have previous business experience with
a record label company. Neither of our officers or directors believe a conflict
of interest will develop between their obligations to our company and any other
professional activities they engage in. However, if such conflicts do develop,
we anticipate effecting a formal conflict of interest policy at that time. All
directors hold office until the next annual meeting of stockholders and the
election and qualification of their successors. Officers are elected annually
by, and serve at the discretion of, the Board of Directors. Board members are
not presently compensated, but are reimbursed for their expenses associated with
attending Board meetings.
26
Limitations on Directors' Liabilities and Indemnification
Our articles of incorporation, as amended, provide that, except to the
extent prohibited by Nevada law, our directors shall not be personally liable to
us or our stockholders for monetary damages for any breach of fiduciary duty
unless the breach related to acts or omissions involving intentional misconduct,
fraud, or a knowing violation of law. Each of our directors will be liable under
Nevada law for breach of the director's duty of loyalty to us for acts or
omissions that are found by a court of competent jurisdiction to be not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited by
Nevada law.
Our amended and restated bylaws provide that we shall and do indemnify our
directors and officers to the fullest extent permitted by Nevada law. Such right
of indemnification shall continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs and personal
representatives of such a person. The indemnification provided by our articles
of incorporation shall not be deemed exclusive of any other rights that may be
provided now or in the future under any provision currently in effect or
hereafter adopted by our articles of incorporation, by any agreement, by vote of
our stockholders, by resolution of our directors, by provision of law or
otherwise. We also intend to secure liability insurance on behalf of our
directors and officers in the near future.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
Executive Compensation
Summary Compensation Table
The following table sets forth the total compensation earned by or paid to
our Chief Executive Officer and our other most highly compensated executive
officers earning over $100,000.
- --------------------------------------------------------------------------------
Annual Compensation
----------------------------------------
Name and Principal Other Annual
Position Year Salary($) Bonus($) Compensation($)
- ------------------------------ ---- --------- -------- ---------------
Jacques Tizabi.............. 2003 -0- -0- -0-
President, Chief 2002 -0- -0- -0-
Executive Officer and
Chairman of the Board
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Option/SAR Grants in the Fiscal Year 2002
----------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Option/SARs Employees in
Name Year Granted (#) Fiscal Year Exercise Price
---- ---- ----------- ----------- --------------
Jacques Tizabi.... 2003 -0- 0.00% N/A
2002 -0- 0.00% N/A
- --------------------------------------------------------------------------------
27
We have made no provisions for cash compensation to our officers and
directors, Jacques Tizabi and Ali Moussavi for their services as officers or
directors. No salaries are being paid at the present time, and will not be paid
unless and until there is available cash flow from operations to pay salaries.
There were no grants of options or SAR grants given to our executive officers
during the last fiscal year.
Stock Option Plan
In November 2003, our Board of Directors and stockholders adopted the 2003
Stock Option, Deferred Stock and Restricted Stock Plan (the "Plan"), which
provides for the grant of qualified incentive stock options ("ISOs") that meet
the requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), stock options not so qualified ("NQSOs"), deferred stock and
restricted stock awards ("Awards"). The Plan may be administered by either the
Board of Directors or a committee of directors appointed by the Board of
Directors (the "Committee"). ISOs may be granted to the officers and key
employees of our company or any of its subsidiaries. The exercise price for any
ISO granted under the Plan may not be less than 100% (or 110% in the case of
ISOs granted to an employee who is deemed to own in excess of 10% of the
outstanding shares of our Class A common stock) of the fair market value of the
shares of our Class A common stock at the time the option is granted. The
exercise price for any NQSO granted under the Plan may not be less than 85% of
the fair market value of the shares of our Class A common stock at the time the
option is granted. The purpose of the Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects our
company.
The Plan authorizes the grant of options to purchase, and Awards of, an
aggregate of up to 5,000,000 shares of our Class A common stock. The number of
shares of Class A common stock reserved for issuance under the Plan is subject
to anti-dilution provisions for stock splits, stock dividends and similar
events. If an option granted under the Plan expires or terminates, or an Award
is forfeited, the shares subject to any unexercised portion of such option or
Award will again become available for the issuance of further options or Awards
under the Plan.
Under the Plan, we may make loans available to stock option holders who are
not insiders, directors or officers of our company, subject to the Committee's
approval, in connection with the exercise of stock options granted under the
Plan. If shares of our Class A common stock are pledged as collateral for such
indebtedness, such shares may be returned to us in satisfaction of such
indebtedness. If so returned, such shares of Class A common stock shall again be
available for issuance in connection with future stock options and Awards under
the Plan.
No options or Awards may be granted under the Plan after November 21, 2013,
provided that our Board of Directors does not otherwise amend or terminate the
Plan prior to such date.
Options granted under the Plan will become exercisable according to the
terms of the grant made by the Board of Directors or the Committee. Awards will
be subject to the terms and restrictions of the award made by the Board of
Directors or the Committee. The Board of Directors and the Committee have
discretionary authority to select participants from among eligible persons and
to determine at the time an option or Award is granted, and in the case of
options, whether it is intended to be an ISO or a NQSO, and when and in what
increments shares covered by the option may be purchased. Under current law,
ISOs may not be granted to any individual who is not also an officer or employee
of our company or any subsidiary.
28
The exercise price of any option granted under the Plan is payable in full
(i) in cash, (ii) by surrender of shares of our Class A common stock already
owned by the option holder having a market value equal to the aggregate exercise
price of all shares to be purchased, (iii) by cancellation of indebtedness owed
by our company to the option holder, (iv) by a full recourse promissory note
executed by the option holder, (v) by arrangement with a broker or (vi) by any
combination of the foregoing. The terms of any promissory note may be changed
from time to time by the Board of Directors to comply with applicable Internal
Revenue Service or Securities and Exchange Commission regulations or other
relevant pronouncements.
The Board of Directors may from time to time revise or amend the Plan and
may suspend or discontinue it at any time. However, no such revision or
amendment may impair the rights of any participant under any outstanding stock
option or Awards without such participant's consent or may, without stockholder
approval, increase the number of shares of our Class A common stock subject to
the Plan or decrease the exercise price of a stock option to less than 100% of
fair market value on the date of grant (with the exception of adjustments
resulting from changes in capitalization), materially modify the class of
participants eligible to receive options or Awards under the Plan, materially
increase the benefits accruing to participants under the Plan or extend the
maximum option term under the Plan.
As of June 30, 2004, no options to purchase shares of our Class A common
stock had been granted or were outstanding under the Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our promoters, as defined in Rule 405 of the Securities Act, consist of
Jacques Tizabi, our Chief Executive Officer, President and Chairman of the
Board, and Ali Moussavi, our Secretary, Treasurer and a Director.
In August 2001, Messrs. Tizabi and Moussavi were each issued 12,000,000
shares of our common stock which were exchanged in November 2003 pursuant to the
recapitalization described herein for 6,000,000 shares of our Class A common
stock and 6,000,000 shares of our Class B common stock.
During the year ended June 30, 2003, Mr. Tizabi advanced $3,700 to our
company under a bridge note payable agreement due upon the sooner of April 7,
2004, or upon our company raising additional funding of more than $50,000, with
interest at a rate of 5%. The loan was recently extended for six months and is
payable upon the sooner of October 7, 2004 or upon our company raising
additional funding of more than $50,000.
Between July 2003 and April 2004, our company issued an aggregate of
8,371,250 shares of our Class A common stock to 26 accredited investors for net
proceeds of $51,913 pursuant to six private offerings of securities under
Section 4(2) and Rule 506 of Regulation D under the Securities Act of 1933, as
amended. Placement agent fees in the aggregate amount of approximately $5,212
were paid to Astor Capital, Inc., of which each of Messrs. Tizabi and Moussavi
is a co-founder and managing partner. We expect to continue to pay placement
agent fees equal to approximately 10% of proceeds in the foreseeable future for
private offerings of our securities that are placed by Astor Capital.
Since February 2004, our corporate headquarters have been located at 9595
Wilshire Boulevard, Suite 700, Beverly Hills, California, which is an office
space leased by Astor Capital, Inc. We are occupying this space rent-free until
a sub-lease agreement is entered into with Astor Capital, which is expected to
occur within the next six months at a yet to be determined rental amount.
29
Shares of our Class A common stock issuable upon conversion of shares of
Class B common stock held by Messrs. Tizabi and Moussavi are subject to certain
registration rights.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with respect
to the beneficial ownership of our Class A and Class B common stock on June 30,
2004 by (i) each of our directors, (ii) each of our executive officers, (iii)
each person known to us to beneficially own more than 5% of our common stock and
(iv) all of our directors and executive officers as a group. Each of such
persons can be contacted at 9595 Wilshire Boulevard, Suite 700, Beverly Hills,
California 90212.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of Class A common stock underlying options or warrants held by that
person that are currently exercisable or will become exercisable within 60 days
after the effective date of this offering are deemed outstanding, while such
shares are not deemed outstanding for computing percentage ownership of any
other person. To our knowledge, except pursuant to applicable community property
laws or as indicated in the footnotes to this table, each stockholder identified
in the table possesses sole voting and investment power with respect to all
shares shown as beneficially owned by such stockholder.
The percentage of total voting power is calculated based on 20,771,250
shares of Class A common stock and 12,000,000 shares of Class B common stock
outstanding on June 30, 2004.
Name of Percentage of
Beneficial Owner Number of Shares Beneficially Owned Total Voting Power
- ---------------------------------- ----------------------------------------------------------- ------------------
Class A Common Stock Class B Common Stock
--------------------------- ------------------------------
Number of
Class A Percentage of Number of Percentage of
Shares Class A Shares Class B Shares Class B Shares
----------- -------------- -------------- --------------
Jacques Tizabi.................... 6,000,000 28.9% 6,000,000 50.0% 46.9%
Ali Moussavi...................... 6,000,000 28.9% 6,000,000 50.0% 46.9%
All directors and executive
officers as a group (2 persons)... 12,000,000 57.8% 12,000,000 100.0% 93.8%
30
DESCRIPTION OF CAPITAL STOCK
Of the 110,000,000 shares of capital stock authorized, 100,000,000 shares
of common stock are authorized, 80,000,000 shares of which are designated as
Class A common stock and 20,000,000 shares of which are designated as Class B
common stock and 10,000,000 shares of preferred stock are authorized. As of
June 30, 2004, there were 20,771,250 shares of Class A common stock
outstanding, 12,000,000 shares of Class B common stock outstanding and no shares
of preferred stock outstanding. The following description of our capital stock
does not purport to be complete and is governed by and qualified by our articles
of incorporation and bylaws, which are included as exhibits to the Registration
Statement of which this prospectus forms a part, and by the provisions of
applicable Nevada law.
Class A common stock and Class B common stock
General
The holders of our Class A common stock and Class B common stock have
identical rights except with respect to voting, conversion and transfer.
Our Class A common stock is not listed on any recognized exchange or quoted
on any quotation medium. We cannot assure you that our Class A common stock will
ever develop a market.
Voting Rights
Holders of our Class A common stock are entitled to one vote per share
while holders of our Class B common stock are entitled to ten votes per share on
all matters to be voted on by the stockholders. Holders of shares of Class A
common stock and Class B common stock are not entitled to cumulate their votes
in the election of directors. Generally, all matters to be voted on by
stockholders must be approved by a majority of the votes entitled to be cast by
all shares of Class A common stock and Class B common stock present in person or
represented by proxy, voting together as a single class, subject to any voting
rights granted to holders of any preferred stock. Except as otherwise provided
by law or in our Certificate of Incorporation, and subject to any voting rights
granted to holders of any outstanding preferred stock, amendments to our
Certificate of Incorporation must be approved by a majority of the votes
entitled to be cast by all shares of our Class A common stock and Class B common
stock present in person or represented by proxy, voting together as a single
class. However, amendments to our Certificate of Incorporation that would alter
or change the powers, preferences or special rights of our Class A common stock
so as to affect them adversely also must be approved by a majority of the votes
entitled to be cast by the holders of our Class A common stock, voting as a
separate class. Any amendment to our Certificate of Incorporation to increase
the authorized shares of any class requires the approval of a majority of the
votes entitled to be cast by all shares of our Class A common stock and Class B
common stock present in person or represented by proxy, voting together as a
single class, subject to the rights set forth in any series of preferred stock
created as described below.
Dividends, Distributions and Stock Splits
Holders of our Class A common stock and Class B common stock will share
equally on a per share basis in any dividend declared by our Board of Directors,
subject to any preferential rights of any outstanding preferred stock.
31
Dividends or distributions consisting of shares of our Class A common stock
and Class B common stock may be paid only as follows: (1) shares of Class A
common stock may be paid only to holders of Class A common stock, and shares of
Class B common stock may be paid only to holders of Class B common stock; and
(2) the number of shares so paid will equal on a per share basis with respect to
each outstanding share of Class A common stock and Class B common stock. In the
case of dividends or distributions consisting of other voting shares of ours, we
will declare and pay such dividends in two separate classes of such voting
securities, identical in all respects, except that the voting rights of each
such security paid to the holders of the Class A common stock shall be one-tenth
of the voting rights of each such security paid to the holders of Class B common
stock, and such security paid to the holders of Class B common stock shall
convert into the security paid to the holders of the Class A common stock upon
the same terms and conditions applicable to the Class B common stock. In the
case of dividends or distributions consisting of securities convertible into, or
exchangeable for, our voting securities, we will provide that such convertible
or exchangeable securities and the underlying securities be identical in all
respects, except that the voting rights of each security underlying the
convertible or exchangeable security paid to the holders of the Class A common
stock shall be one-tenth of the voting rights of each security underlying the
convertible or exchangeable security paid to the holders of Class B common
stock, and such underlying securities paid to the holders of Class B common
stock shall convert into the security paid to the holders of the Class A common
stock upon the same terms and conditions applicable to the Class B common stock.
We may not reclassify, subdivide or combine shares of either class of our
common stock without at the same time proportionally reclassifying, subdividing
or combining shares of the other class.
Conversion of Class B common stock
A share of our Class B common stock is convertible into a share of our
Class A common stock on a share-for-share basis at the option of the holder
thereof at any time, or automatically upon transfer to a person or entity which
is not a permitted transferee (as defined in our articles of incorporation). In
general, permitted transferees will include all holders of the Class B common
stock outstanding immediately prior to this offering and any person (as defined
in our articles of incorporation) that is an affiliate, spouse or descendent of
any such holder, their estates or trusts for their benefit. Our Class A common
stock has no conversion rights.
Liquidation
In the event of any dissolution, liquidation, or winding up of our affairs,
whether voluntary or involuntary, after payment of our debts and other
liabilities and making provision for the holders of preferred stock, if any, our
remaining assets will be distributed ratably among the holders of our Class A
common stock and Class B common stock, treated as a single class.
Mergers and Other Business Combination
Upon our merger, combination or other similar transaction in which shares
of our common stock are exchanged for or changed into other stock or securities,
cash and/or any other property, holders of each class of common stock will be
entitled to receive an equal per share amount of stock, securities, cash and/or
any other property, as the case may be, into which or for which each share of
any other class of common stock is exchanged or changed; provided that in any
transaction in which shares of capital stock are distributed, such shares so
exchanged for or changed into may differ as to voting rights and certain
conversion rights to the extent and only to the extent that the voting rights
and certain conversion rights of our Class A common stock and Class B common
stock differ at that time.
32
Other Provisions
The holders of our Class A common stock and Class B common stock are not
entitled to preemptive rights. There are no redemption provisions or sinking
fund provisions applicable to our Class A common stock or Class B common stock.
Penny Stock
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that is not traded on a
national securities exchange or the NASDAQ Stock Market and that has a market
price of less than $5.00 per share or an exercise price of less than $5.00 per
share. A security of an issuer, generally, that has net tangible assets in
excess of $2 million or $5 million, respectively, depending upon whether the
issuer has been continuously operating for less or more than three years, or
"average revenue" of at least $6 million for the last three years, would also be
excluded from the definition of "penny stock." As long as we do not meet these
financial requirements and our Class A common stock is trading at less than
$5.00 per share on the OTC Bulletin Board, our Class A common stock by
definition will be a "penny stock." The principal result or effect of being
designated a "penny stock" is that broker-dealers cannot recommend our stock but
generally must trade it on an unsolicitated basis. The SEC's rules governing
"penny stock" impose additional sales practice requirements on broker-dealers
who sell our securities to persons other than established customers and
accredited investors. These rules require, among other things, that any broker
engaging in a transaction in our securities provide its customers with the
following:
o a risk disclosure document,
o disclosure of market quotations, if any,
o disclosure of the compensation of the broker and its salespersons the
transaction, and
o monthly account statements showing the market values of our securities
held in the customer's accounts.
Broker-dealers trading in these securities must provide the bid and offer
quotations and compensation information in the customer's confirmation before
effecting the transaction, provide a written determination that the penny stock
is a suitable investment for the purchaser, and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the trading activity in the secondary market for a stock that is
subject to the penny stock rules. Holders of shares of our Class A common stock
may have difficulty selling their shares because our Class A common stock will
likely be subject to the penny stock rules.
Preferred Stock
Under our certificate of incorporation, our Board of Directors has the
authority to issue up to 10,000,000 shares of preferred stock in one or more
series and to fix the rights, privileges, preferences, powers and designations
of the preferred stock, including dividend rights, conversion rights, voting
rights, redemption terms, liquidation preferences and the number of shares
constituting any series, without any vote or action of our stockholders.
Although we do not currently have any plans to issue preferred stock, our Board
of Directors retains the right to elect to issue preferred stock in the future.
33
Registration Rights
We have entered into a registration rights agreement with Jacques Tizabi,
our Chief Executive Officer, President and Chairman of the Board, and Ali
Moussavi, our Secretary, Treasurer and a Director, pursuant to which we have
agreed that we will, on up to two separate occasions, register the shares of our
Class A common stock and Class A common stock issuable upon conversion of the
shares of our Class B common stock beneficially owned by each of them. All
expenses of such registrations shall be at our expense.
Anti-takeover Effects of Provisions of Nevada Law
Certain provisions of Nevada law could make it more difficult to acquire us
by means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of us to first negotiate
with us. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent if an unfriendly or unsolicited proposal
to acquire or restructure us outweigh the disadvantages of discouraging takeover
or acquisition proposals because, among other things, negotiation of these
proposals could result in an improvement of their terms.
We are governed by Sections 78.411 -- 78.444 of the Nevada Revised
Statutes, which are anti-takeover laws. In general, Sections 78.411 -- 78.444
prohibit a publicly held Nevada corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless, with
exceptions, the business combination or the transaction in which the person
became an interested stockholder is approved in a prescribed manner. Generally,
a business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an interested stockholder is a person who, together with affiliates
and associates, owns, or within three years prior to the determination of
interested stockholder status, did own, 15% or more of a corporation's voting
stock. The existence of this provision would be expected to have an
anti-takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is OTR Incorporated.
OTR Incorporated is located at 1000 Southwest Broadway, Suite 920, Portland,
Oregon, and its telephone number is (503) 225-0375.
34
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
Class A common stock. Future sales of substantial amounts of Class A common
stock in the public market could adversely affect the market price of our Class
A common stock. There are 30 individual stockholders of our Class A common
stock, two of which are also individual stockholders of our Class B common
stock, as of the date of this prospectus, without aggregating family or related
party units.
All of the shares of Class A common stock sold in this offering will be
freely tradable without restrictions or further registration under the
Securities Act. If shares of Class A common stock are purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act, their
sales of shares would be subject to the limitations and restrictions that are
described below.
All of our currently outstanding shares of our capital stock are
"restricted securities" and, in the future, may be sold upon compliance with
Rule 144. Adopted under the Securities Act of 1933, as amended, Rule 144
provides, in essence, that a person holding "restricted securities" for a period
of one year may sell only an amount every three months equal to the greater of
(a) one percent of our issued and outstanding shares of Class A common stock, or
(b) the average weekly volume of sales of our Class A common stock during the
four calendar weeks preceding the sale. The amount of "restricted securities"
which a person who is not an affiliate of Riddle Records may sell is not so
limited, since non-affiliates may sell without volume restrictions.
35
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
selling stockholders' beneficial ownership of shares of our Class A common stock
as of June 30, 2004 and as adjusted to give effect to the sale of all shares of
Class A common stock in the offering. None of the selling stockholders currently
is an affiliate of Riddle Records and none has had a material relationship with
Riddle Records during the past three years. See "Plan of Distribution." Each of
the selling stockholders possesses sole voting and investment power with respect
to the securities shown. None of the selling stockholders had any position,
office or other material relationship with our company during the past three
years, none of them had any family relationship with any of our officers or
directors, and none of them are broker-dealers or affiliates of broker-dealers.
Class A Common Stock Beneficially Owned
Before Offering
--------------------------------------------
Number of Class A
Number of Percentage of Number of Class Common Stock
Class A Percentage of Total Voting A Common Stock Beneficially Owned
Name Shares Class A Shares Power Being Offered(1) After the Offering
- ---------------------------- ----------- --------------- ------------ ----------------- --------------------
European Equity Group
V. l'Abeille
1264 St Cergue
Switzerland 1,000,000(2) 4.8% * 1,000,000 -0-
Silverline Partners, Ltd.
37 Shepherd Street
London W1Y 7LH
England 1,000,000(3) 4.8% * 1,000,000 -0-
Exponential Investments,
Ltd.
27 Wellington Road
Cork
Republic of Ireland 1,000,000(4) 4.8% * 1,000,000 -0-
Triangle Fund Management,
Ltd.
556 Main Street
Memorial Square
Charlestown
Nevis, West Indies 1,000,000(5) 4.8% * 1,000,000 -0-
36
Class A Common Stock Beneficially Owned
Before Offering
--------------------------------------------
Number of Class A
Number of Percentage of Number of Class Common Stock
Class A Percentage of Total Voting A Common Stock Beneficially Owned
Name Shares Class A Shares Power Being Offered(1) After the Offering
- ---------------------------- ----------- --------------- ------------ ----------------- --------------------
Zebra Equities Limited
414 Balboa Plaza
Balboa Avenue
P.O. Box 9012 Panama 6
Panama 1,000,000(6) 4.8% * 1,000,000 -0-
Julius Investments, Ltd.
91 Cheyne Walk
London SW10 ODQ
England 1,000,000(7) 4.8% * 1,000,000 -0-
Stellar Ventures, Ltd.
38 Hertford Street
London W1J 7SG
England 1,000,000(8) 4.8% * 1,000,000 -0-
Wang Finance, Ltd.
Suite 4002a
Central Plaza
18 Harbour Road
Wanchai, Hong Kong 1,000,000(9) 4.8% * 1,000,000 -0-
- ------------
* Less than 1%
(1) Assumes that all shares of Class A common stock being offered pursuant to
this prospectus will be resold by the selling stockholders and none will be
held by the selling stockholders for their own accounts.
(2) Sophie Leacacos, in her capacity as director of European Equity Group, has
investment power and voting control over securities held by European Equity
Group. Ms. Leacacos disclaims beneficial ownership of the securities held
by European Equity Group, and the filing of this registration statement
shall not be construed as an admission that Ms. Leacacos, for the purposes
of Section 13(d) or 13(g) of the Exchange Act is the beneficial owner of
these securities.
(3) Paul Collins Graznak, in his capacity as manager of Silverline Partners,
Ltd., has investment power and voting control over securities held by
Silverline Partners, Ltd. Mr. Graznak disclaims beneficial ownership of the
securities held by Silverline Partners, Ltd., and the filing of this
registration statement shall not be construed as an admission that Mr.
Graznak, for the purposes of Section 13(d) or 13(g) of the Exchange Act is
the beneficial owner of these securities.
(4) Siobhan Mareuse, in his capacity as manager of Exponential Investments,
Ltd., has investment power and voting control over securities held by
Exponential Investments, Ltd. Mr. Mareuse disclaims beneficial ownership of
the securities held by Exponential Investments, Ltd., and the filing of
this registration statement shall not be Construed as an admission that Mr.
Mareuse, for the purposes of Section 13(d) or 13(g) of the Exchange Act is
the beneficial owner of these securities.
(5) James Loughran, in his capacity as director of Triangle Fund Management,
Ltd., has investment power and voting control over securities held by
Triangle Fund Management, Ltd. Mr. Loughran disclaims beneficial ownership
of the securities held by Triangle Fund Management, Ltd., and the filing of
this registration statement shall not be Construed as an admission that Mr.
Loughran, for the purposes of Section 13(d) or 13(g) of the Exchange Act is
the beneficial owner of these securities.
(6) Daniel Martin, in his capacity as manager of Zebra Equities Limited, has
investment power and voting control over securities held by Zebra Equities
Limited. Mr. Martin disclaims beneficial ownership of the securities held
by Zebra Equities Limited., and ====== the filing of this registration
statement shall not be construed as an admission that Mr. Martin, for the
purposes of Section 13(d) or 13(g) of the Exchange Act is the beneficial
owner of these securities.
(7) Margareta Hedstrom, in her capacity as managing director of Julius
Investments, Ltd., has investment power and voting control over securities
held by Julius Investments, Ltd. Ms. Hedstrom disclaims beneficial
ownership of the securities held by Julius Investments, Ltd., and the
filing of this registration statement shall not be Construed as an
admission that Ms. Hedstrom, for the purposes of Section 13(d) or 13(g) of
the Exchange Act is the beneficial owner of these securities.
37
(8) Heather Shimizu, in her capacity as manager of Stellar Ventures, Ltd., has
investment power and voting control over securities held by Stellar
Ventures, Ltd. Ms. Shimizu disclaims beneficial ownership of the securities
held by Stellar Ventures, Ltd., and the filing of this registration
statement shall not be construed as an admission that Ms. Shimizu, for the
purposes of Section 13(d) or 13(g) of the Exchange Act is the beneficial
owner of these securities.
(9) Bill Murray, in his capacity as managing member of Wang Finance, Ltd., has
investment power and voting control over securities held by Wang Finance,
Ltd. Mr. Murray disclaims beneficial ownership of the disclaims beneficial
ownership of the securities held by Wang Finance, Ltd., and the filing of
this registration statement shall not be construed as an admission that Mr.
Graznak, for the purposes of Section 13(d) or 13(g) of the Exchange Act is
the beneficial owner of these securities.
We will not receive any of the proceeds from the sale of the shares of
Class A common stock by the selling stockholders. We have agreed to bear
expenses incurred, which are estimated to be $119,000, that relate to the
registration of the shares of Class A common stock being offered and sold by the
selling stockholders, including the Securities and Exchange Commission
registration fee and legal, accounting, printing and other expenses of this
offering.
PLAN OF DISTRIBUTION
The current offering price is $0.002 per share, which is the price at which
selling stockholders will sell these Class A common shares until the shares are
quoted on the OTC Bulletin Board. However, once our common stock is quoted on
the OTC Bulletin Board and there is an established market for the shares, the
selling stockholders may, from time to time, sell any of all of their shares of
Class A common stock on any stock exchange, market or trading facility on which
the shares are traded or in private transactions. The selling stockholders may
use any one or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus.
The selling stockholders may sell shares of Class A common stock short, and
they may deliver shares of common stock covered by this prospectus to close out
short positions if the short sale is made after the registration statement is
declared effective and a copy of this prospectus is delivered in connection with
the short sale. The selling stockholders may also engage in puts and calls and
other transactions in our securities or derivatives of our securities and may
sell or deliver shares in connection with these trades.
38
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved. Any
profits on the resale of shares of Class A common stock by a broker-dealer
acting as principal might be deemed to be underwriting discounts or commissions
under the Securities Act of 1933. Discounts, concessions, commissions and
similar selling expenses, if any, attributable to the sale of shares will be
borne by a selling stockholder. The selling stockholders may agree to indemnify
any agent, dealer or broker-dealer that participates in transactions involving
sales of the shares if liabilities are imposed on that person under the
Securities Act of 1933.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of Class A common stock owned by them and,
if they default in the performance of their secured obligations, the pledges or
secured parties may offer and sell the shares of common stock from time to time
under this prospectus after we have filed an amendment to this prospectus under
Rule 424(b)(3) or other applicable provision of the Securities Act of 1933
amending the list of selling stockholders to include the pledgee, transferee or
other successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer the shares of Class A common
stock in other circumstances, in which case the transferees, pledges or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus and may sell the shares of Class A common stock from time to
time under this prospectus after we have filed an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933
amending the list of selling stockholders to include the pledgee, transferee or
other successors in interest as selling stockholders under this prospectus.
The selling stockholders and any broker-dealers or agents that are involved
in selling the shares of Class A common stock may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales. In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares of Class A common stock purchased by them may be
deemed to be underwriting commissions on discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares of Class A common stock. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages, and liabilities, including
liabilities under the Securities Act of 1933.
We are not aware of any agreements, understandings or arrangements between
any of the selling stockholders and any underwriters or broker-dealers regarding
the sale of their shares of Class A common stock, nor are we aware of any
underwriter or coordinating broker acting in connection with a proposed sale of
shares of Class A common stock by any selling stockholder. If we are notified by
any selling stockholder that any material arrangement has been entered into with
a broker-dealer for the sale of shares of Class A common stock, if required, we
will file a supplement to this prospectus. If the selling stockholders use this
prospectus for any sale of the shares of Class A common stock, they will be
subject to the prospectus delivery requirements of the Securities Act.
39
The anti-manipulation rules of Regulation M under the Securities Exchange
Act of 1934 may apply to sales of our Class A common stock and activities of the
selling stockholders.
The selling stockholders will act independently of us in making decisions
with respect to the timing, manner and size of each sale. The current offering
price as of the date of this prospectus is $.002 per Class A common share, which
is equal to the per share purchase price paid by the selling stockholders.
Selling stockholders will sell these shares at the fixed price of $.002 per
Class A common share until the shares are quoted on the OTC Bulletin Board.
However, once our Class A common stock is listed on the OTC Bulleting Board and
there is an established market for these shares, the selling stockholders may
sell the shares of Class A common stock from time to time at market prices
prevailing on the OTC Bulletin Board at the time of offer and sale, or at prices
related to such prevailing market prices, or in negotiated transactions, or a
combination of such methods of sale directly or through brokers.
No affiliate of any of our officers or directors will be involved in or
will be paid any fees in connection with this offering.
DETERMINATION OF OFFERING PRICE
There is no established public market for the Class A common stock being
offered under this prospectus. We are not currently registered on the
Over-the-Counter Bulletin Board system or any national exchange. We intend to
trade our shares of Class A common stock on the OTC Bulletin Board system.
However, we are unable to determine the price at which the Class A common stock
will trade if and when we become eligible on the OTC Bulletin Board.
The offering price of the Class A common stock as of the date of this
prospectus is identical to the original current issuance price of these shares.
The offering price should not be considered to bear any relationship to our
assets, book value or net worth and should not be considered to be an indication
of our value.
LEGAL MATTERS
The validity of the Class A common stock offered by this prospectus will be
passed upon for us by Woodburn and Wedge, Reno, Nevada.
EXPERTS
The consolidated financial statements as of June 30, 2003, for the period
from August 8, 2001 (inception) through June 30, 2002 and for the year ended
June 30, 2003 included in this prospectus and elsewhere in the registration
statement have been audited by AJ. Robbins, PC independent auditors, as stated
in their reports appearing herein and elsewhere in the registration statement,
and have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act for the shares of Class A common
stock in this offering. This prospectus does not contain all of the information
in the registration statement and the exhibits and schedule that were filed with
40
the registration statement. For further information with respect to our Class A
common stock and us, we refer you to the registration statement and the exhibits
and schedule that were filed with the registration statement. Statements
contained in this prospectus about the contents of any contract or any other
document that is filed as an exhibit to the registration statement are not
necessarily complete, and we refer you to the full text of the contract or other
document filed as an exhibit to the registration statement. A copy of the
registration statement and the exhibits and schedules that were filed with the
registration statement may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of
the registration statement may be obtained from the SEC upon payment of the
prescribed fee. Information regarding the operation of the Public Reference Room
may be obtained by calling the Commission at 1(800) SEC-0330. The Securities and
Exchange Commission maintains a Web site that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of the
site is http://www.sec.gov.
We are not required to deliver annual reports to stockholders, and we do
not intend to voluntarily send annual reports with audited financial statements
to stockholders. However, upon completion of this offering, we will become
subject to the information and periodic reporting requirements of the Securities
Exchange Act and, in accordance with the requirements of the Securities Exchange
Act will file periodic reports, proxy statements, and other information with the
Securities and Exchange Commission. These periodic reports, proxy statements,
and other information will be available for inspection and copying at the
regional offices, public reference facilities and Web site of the Securities and
Exchange Commission referred to above. We have not filed any reports or
statements with the Securities and Exchange Commission prior to filing this
registration statement and prospectus.
41
RIDDLE RECORDS, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report..............................................F-2
Balance Sheets............................................................F-3
Statements of Operations..................................................F-4
Statement of Changes in Stockholders' Equity (Deficit)....................F-7
Statements of Cash Flows..................................................F-9
Notes to Financial Statements............................................F-11
F-1
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
216 SIXTEENTH STREET
SUITE 600
DENVER, CO 80202
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Riddle Records, Inc.
Beverly Hills, California
We have audited the accompanying balance sheet of Riddle Records, Inc (a
development stage company) as of June 30, 2003 and the related statements of
operations, changes in stockholders' equity (deficit), and cash flows for the
year then ended and for the periods from Inception (August 8, 2001) to June 30,
2002. 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 in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Riddle Records, Inc. at June
30, 2003 and the results of its operations and its cash flows for the year then
ended and for the period from Inception (August 8, 2001) to June 30, 2002, in
conformity with generally accepted accounting principles in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage and has not
commenced operations. Its ability to continue as a going concern is dependent
upon its ability to develop additional sources of capital, and ultimately
achieve profitable operations. These conditions raise substantial doubt about
its ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ AJ. ROBBINS, P.C.
-----------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Denver, Colorado
November 21, 2003
F-2
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
------
March 31, June 30,
2004 2003
-------- --------
(Unaudited)
CURRENT ASSETS:
Cash $ 2,428 $ 581
Common stock subscriptions receivable -- 19,975
-------- --------
Total current assets 2,428 20,556
EQUIPMENT, net of accumulated depreciation of $780
and $240, respectively 2,822 3,362
-------- --------
$ 5,250 $ 23,918
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
==============================================
CURRENT LIABILITIES:
Accounts payable $ 42,582 $ --
Accrued interest payable to stockholder 181 43
Amounts due to related parties 1,300 2,298
Note payable to stockholder 3,700 3,700
-------- --------
Total current liabilities 47,763 6,041
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock: 10,000,000 shares authorized,
-0- issued and outstanding -- --
Class A Common Stock: 80,000,000 shares
authorized, $.001 par value, 20,761,250 and
12,000,000 shares issued and outstanding,
respectively 20,761 250
Class B Common Stock: 20,000,000 shares
authorized, $.001 par value, 12,000,000 shares
issued and outstanding 250 250
Class A Common Stock subscribed -- 17,977
Additional Paid-in Capital 26,802 --
Deficit accumulated during the development stage (90,326) (600)
-------- --------
Total stockholders' equity (deficit) (42,513) 17,877
-------- --------
$ 5,250 $ 23,918
======== ========
See accompanying notes to financial statements
F-3
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
For the Three For the Three
Months Ended Months Ended
March 31, 2004 March 31, 2003
------------- ------------
(Unaudited) (Unaudited)
EXPENSES:
General and administrative $ 39,287 $ 40
Depreciation 180 60
------------- ------------
Total expenses 39,467 100
OTHER EXPENSE:
Interest expense, related party 47 --
(LOSS) BEFORE INCOME TAXES (39,514) (100)
============= ============
Provision for income taxes, state 844 --
============= ============
NET (LOSS) $ (40,358) $ (100)
============= ============
(Loss) per common share - basic
and diluted $ * $ *
============= ============
Weighted average number of shares outstanding -
basic and diluted 32,753,558 24,000,000
============= ============
* Less than $.01 per share
See accompanying notes to financial statements.
F-4
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
From Inception
(August 8,
For the Nine For the Nine 2001) to
Months Ended Months Ended March 31,
March 31, 2004 March 31, 2003 2004
-------------- -------------- --------------
(Unaudited) (Unaudited)
(Unaudited)
EXPENSES:
General and administrative $ 88,203 $ 136 $ 88,520
Depreciation 540 60 780
------------ ------------ ------------
Total expenses 88,743 196 89,300
OTHER EXPENSE:
Interest expense, related party 139 -- 182
------------ ------------ ------------
(LOSS) BEFORE INCOME TAXES (88,882) (196) (89,482)
============ ============ ============
Provision for income taxes, state 844 -- 844
============ ============ ============
NET (LOSS) $ (89,726) $ (196) $ (90,326)
============ ============ ============
(Loss) per common share - basic and diluted $ * $ * $ *
============ ============ ============
Weighted average number of shares
outstanding - basic and diluted 30,255,369 24,000,000
============ ============
* Less than $.01 per share
See accompanying notes to financial statements.
F-5
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
From Inception
For the Year (August 8,
Ended 2001) to
June 30, 2003 June 30, 2002
------------- -------------
EXPENSES:
General and administrative $ 171 $ 146
Depreciation 240 --
------------- ------------
Total expenses 411 146
OTHER EXPENSE:
Interest expense, related party 43 --
------------- ------------
NET (LOSS) $ (454) $ (146)
============= ============
(Loss) per common share - basic
and diluted $ * $ *
============= ============
Weighted average number of shares
outstanding - basic and diluted 24,000,000 24,000,000
============= ============
* Less than $.01 per share
See accompanying notes to financial statements.
F-6
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (AUGUST 8, 2001) TO JUNE 30, 2002,
FOR THE YEAR ENDED JUNE 30, 2003 AND
FOR THE NINE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
SPLIT TABLE - SEE BELOW
Common Stock Class A Common Stock Class B Common Stock
---------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balance, August 8, 2001 -- $ -- -- $ -- -- $ --
Issuance of common stock
at $.00002 per share,
February 11, 2002 24,000,000 500 -- -- -- --
Stock cancellation due to
recapitalization (24,000,000) (500) -- -- -- --
Stock issuance due to
recapitalization -- -- 12,000,000 250 12,000,000 250
Net (loss) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2002 -- -- 12,000,000 250 12,000,000 250
Class A Common Stock
subscribed at $.10 per share,
net of offering costs of $1,998,
June 27, 2003 -- -- -- -- -- --
Net (loss) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, June 30, 2003 -- -- 12,000,000 250 12,000,000 250
Class A Common stock issued
for services at $.001 per
share, July 1, 2003 -- -- 400,000 400 -- --
Issuance of Class A Common
Stock subscribed, July 11, 2003 -- -- 199,750 11,950 -- --
Issuance of Class A Common
Stock at $.002 per share, net
of offering costs of $1,599,
September 22, 2003 -- -- 8,000,000 8,000 -- --
SPLIT TABLE - SEE ABOVE
Deficit
Accumulated
Additional Common During Total
Paid-In Stock Development Stockholders'
Capital Subscribed Stage Equity (Deficit)
------------ ------------ ------------ -----------------
Balance, August 8, 2001 $ -- $ -- $ -- $ --
Issuance of common stock
at $.00002 per share,
February 11, 2002 -- -- -- 500
Stock cancellation due to
recapitalization -- -- -- (500)
Stock issuance due to
recapitalization -- -- -- 500
Net (loss) -- -- (146) (146)
------------ ------------ ------------ ------------
Balance, June 30, 2002 -- -- (146) 354
Class A Common Stock
subscribed at $.10 per share,
net of offering costs of $1,998,
June 27, 2003 -- 17,977 -- 17,977
Net (loss) -- -- (454) (454)
------------ ------------ ------------ ------------
Balance, June 30, 2003 -- 17,977 (600) 17,877
Class A Common stock issued
for services at $.001 per
share, July 1, 2003 -- -- -- 400
Issuance of Class A Common
Stock subscribed, July 11, 2003 6,027 (17,977) -- --
Issuance of Class A Common
Stock at $.002 per share, net
of offering costs of $1,599,
September 22, 2003 6,401 -- -- 14,401
See accompanying notes to financial statements.
F-7
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (AUGUST 8, 2001) TO JUNE 30, 2002,
FOR THE YEAR ENDED JUNE 30, 2003 AND
FOR THE NINE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
SPLIT TABLE - SEE BELOW
Common Stock Class A Common Stock Class B Common Stock
------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
Issuance of Class A Common
Stock at $.10 per share, net
of offering costs of $1,000,
October 1, 2003 -- -- 100,000 100 -- --
Issuance of Class A Common
Stock at $.10 per share, net
of offering costs of $115,
November 11, 2003 -- -- 11,500 11 -- --
Class A Common Stock at $.10
per share, net of offering
costs of $500, January 14, 2004 -- -- 50,000 50 -- --
Net (loss) for nine months
ended March 31, 2004 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance March 31, 2004 -- $ -- 20,761,250 $ 20,761 12,000,000 $ 250
=========== =========== =========== =========== =========== ===========
SPLIT TABLE - SEE ABOVE
Deficit
Accumulated
Additional Common During Total
Paid-In Stock Development Stockholders'
Capital Subscribed Stage Equity(Deficit)
----------- ------- ----------- -----------
Issuance of Class A Common
Stock at $.10 per share, net
of offering costs of $1,000,
October 1, 2003 8,900 -- -- 9,000
Issuance of Class A Common
Stock at $.10 per share, net
of offering costs of $115,
November 11, 2003 1,024 -- -- 1,035
Class A Common Stock at $.10
per share, net of offering
costs of $500, January 14, 2004 4,450 -- -- 4,500
Net (loss) for nine months
ended March 31, 2004 -- -- (89,726) (89,726)
----------- ------- ----------- -----------
Balance March 31, 2004 $ 26,802 $ -- $ (90,326) $ (42,513)
=========== ======= =========== ===========
See accompanying notes to financial statements.
F-8
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
From Inception
For the Nine For the Nine (August 8, 2001)
Months Ended Months Ended to
March 31, March 31, March 31,
2004 2003 2004
-------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net (loss) $ (89,726) $ (196) $ (90,326)
Adjustments to reconcile net (loss) to net cash (used
in) operations:
Depreciation 540 60 780
Class A Common Stock issued for services 400 -- 400
Changes in operating assets and liabilities:
Increase(decrease) in amounts due to related
parties 1,000 -- 1,300
Increase in accounts payable 42,582 -- 42,582
Increase (decrease) in accrued expenses 138 -- 181
-------------- -------------- --------------
Net cash (used in) operating activities (45,066) (136) (45,083)
-------------- -------------- --------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of equipment -- -- (3,602)
-------------- -------------- --------------
Net cash (used in) investing activities -- -- (3,602)
-------------- -------------- --------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from the sale of common shares 52,125 -- 52,625
Payment of offering costs (5,212) -- (5,212)
Proceeds from note payable to stockholder -- -- 3,700
-------------- -------------- --------------
Net cash provided by financing activities 46,913 -- 51,113
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH 1,847 (136) 2,428
CASH, BEGINNING OF PERIOD 581 654 --
-------------- -------------- --------------
CASH, END OF PERIOD $ 2,428 $ 518 $ 2,428
============== ============== ==============
See accompanying notes to financial statements.
F-9
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
For the Year From Inception
Ended (August 8, 2001)
June 30, To
2003 June 30, 2002
------------ ------------
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net (loss) $ (454) $ (146)
Adjustments to reconcile net (loss) to net cash (used in) operations:
Depreciation 240 --
Changes in operating assets and liabilities:
Increase (decrease) in amounts due to related parties -- 300
Increase (decrease) in accrued expenses 43 --
------------ ------------
Net cash (used in) operating activities (171) 154
------------ ------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of equipment (3,602) --
------------ ------------
Net cash (used in) investing activities (3,602) --
------------ ------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from issuance of common shares -- 500
Proceeds from note payable to stockholder 3,700 --
------------ ------------
Net cash provided by financing activities 3,700 500
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (73) 654
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 654 --
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 581 $ 654
============ ============
OTHER NONCASH FINANCING ACTIVITIES:
Common stock subscriptions $ 19,975 $ --
============ ============
See accompanying notes to financial statements.
F-10
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information for the Periods Ended March 31, 2004 and 2003 is Unaudited)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
- -------------------------
Riddle Records, Inc. (the "Company") (a development stage company) was
incorporated on August 8, 2001 under the laws of the State of Nevada to engage
in business as an independent record label that was established to capitalize on
the growth of the music industry and that of the "hip-hop" and "rap" genres in
particular. The fiscal year end is June 30. The Company is considered to be in
the development stage as defined in Statement of Financial Accounting Standards
("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises.
The Company had initially authorized 500,000 shares of no par value Common
Stock. In October 2003, the Board of Directors approved an amendment to the
Articles of Incorporation, authorizing an increase in the authorized Common
Stock to 100,000,000 shares, a par value of $.001 to the Common Stock, and a 480
for 1 forward stock split of the outstanding Common Stock. All per share amounts
and number of shares outstanding in this report have been restated for the stock
split. The Board of Directors also authorized 10,000,000 shares of Preferred
Stock.
In November 2003, the Board of Directors approved an amendment to the Articles
of Incorporation, eliminating the previously authorized Common Stock and
replacing it with 80,000,000 shares of Class A Common Stock and 20,000,000
shares of Class B Common Stock. Each outstanding share of Common Stock was
converted to one share of Class A Common Stock except for the shares owned by
the Company's Directors, each share of which was converted to one half share of
Class A Common Stock and one half share of Class B Common Stock.
Going Concern and Plan of Operation
- -----------------------------------
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company is in the
development stage and has not earned any revenues from operations to date.
The Company is currently devoting its efforts to raising investment capital. The
Company's ability to continue as a going concern is dependent upon its ability
to develop additional sources of capital, and ultimately, achieve profitable
operations. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
F-11
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information for the Periods Ended March 31, 2004 and 2003 is Unaudited)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Financial Instruments and Concentrations of Credit Risk
- -------------------------------------------------------
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash.
The Company's cash equivalents are placed with major financial institutions. The
investment policy limits the Company's exposure to concentrations of credit
risk.
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.
Valuation of the Company's Common Stock
- ---------------------------------------
Unless otherwise disclosed, all stock based transactions entered into by the
Company have been valued at the market value of the Company's common stock on
the date the transaction was entered into or have been valued using the
Black-Scholes Model to estimate the fair market value.
Fair Value of Financial Instruments
- -----------------------------------
Unless otherwise specified, the Company believes the carrying value of financial
instruments approximates their fair value.
Cash Equivalents
- ----------------
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Equipment
- ---------
Equipment is recorded at cost. Depreciation of equipment is computed using
straight-line methods based on the estimated useful lives of the assets.
Equipment has estimated useful lives of five years. Depreciation expense for the
nine months ended March 31, 2004 and 2003 was $540 and $60, respectively.
Depreciation expense for the year ended June 30, 2003 and for the period ended
June 30, 2002 was $240 and $-0-, respectively.
F-12
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information for the Periods Ended March 31, 2004 and 2003 is Unaudited)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Income Taxes
- ------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating
loss and tax credit carryforwards. If deferred tax asset realizability is not
considered to be more likely than not, a valuation allowance is provided.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Revenue Recognition
- -------------------
The Company is currently in the development stage and has realized no revenue
from operations to date. When the Company begins earning revenue, revenue will
be recognized using the accrual basis of accounting.
Earnings (Loss) per Share
- -------------------------
The Company computes earnings (loss) per common share in accordance with SFAS
No. 128, Earnings per Share. This Statement simplifies the standards for
computing earnings per share ("EPS") previously found in Accounting Principles
Board ("APB") Opinion No. 15, Earnings per Share, and makes them more comparable
to international EPS standards. SFAS No. 128 replaces the presentation of
primary EPS with a presentation of basic EPS. In addition, the Statement
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. During the nine
months ended March 31, 2004 and 2003, the year ended June 30, 2003 and the
period ended June 30, 2002, there was no dilution from preferred stock, options
or warrants to be considered in calculating earnings per share.
F-13
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information for the Periods Ended March 31, 2004 and 2003 is Unaudited)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
- ------------------------
The Company accounts for stock based compensation in accordance with the
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123). Under the
provisions of SFAS No. 123, companies can either measure the compensation cost
of equity instruments issued under employee compensation plans using a fair
value based method, or can continue to recognize compensation cost using the
intrinsic value method under the provisions of APB No. 25. However, if the
provisions of APB No. 25 are continued, proforma disclosures of net income or
loss and earnings or loss per share must be presented in the financial
statements as if the fair value method had been applied. The Company recognizes
compensation costs under the provisions of APB No. 25 and provides the expanded
disclosure required by SFAS No. 123. To date the company has not issued any
equity instruments under its employee compensation plans.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS 123." This Statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Under the provisions of SFAS No. 148, companies that choose to adopt the
accounting provisions of SFAS No. 123 will be permitted to select from three
transition methods: Prospective method, Modified prospective method and
Retroactive restatement method. The transition and annual disclosure provisions
of SFAS No. 148 are effective for the fiscal years ending after December 15,
2002. Implementation of this Statement has not had a material impact on the
Company's financial statements.
Recently Issued Pronouncements
- ------------------------------
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
149, Accounting for Derivative Instruments and Hedging Activities, which is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. This statement amends and
clarifies financial accounting and reporting for derivative instruments
including certain instruments embedded in other contracts and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The adoption of this standard is not expected to have a material
impact on the Company's financial statements.
F-14
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information for the Periods Ended March 31, 2004 and 2003 is Unaudited)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Recently Issued Pronouncements (continued)
- ------------------------------------------
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The adoption of this standard is
not expected to have a material impact on the Company's financial statements.
In December 2002, Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45) was issued. FIN 45 requires a guarantor entity, at the inception
of a guarantee covered by the measurement provisions of the interpretation, to
record a liability for the fair value of the obligation undertaken in issuing
the guarantee. Interpretation 45 applies prospectively to guarantees the Company
issues or modifies subsequent to December 31, 2002. The Company has historically
not issued guarantees and therefore FIN 45 will not have a material effect on
its financial statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, for certain
entities which do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities will be required to be consolidated by their primary beneficiary. The
primary beneficiary of a variable interest entity is determined to be the party
that absorbs a majority of the entity's expected losses, receives a majority of
its expected returns, or both, as a result of holding variable interests, which
are ownership, contractual, or other pecuniary interests in an entity. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after December 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 applies to public enterprises as of the beginning of the applicable
interim or annual period. The Company's adoption of FIN 46 did not have any
impact upon the Company's financial condition or results of operations.
F-15
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information for the Periods Ended March 31, 2004 and 2003 is Unaudited)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Recently Issued Pronouncements (continued)
- ------------------------------------------
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue 00-21, Accounting for Revenue Arrangements with Multiple-Deliverables
("EITF 00-21"). EITF 00-21 addresses how to account for arrangements that may
involve the delivery or performance of multiple products, services and/or rights
to use assets. The consensus mandates how to identify whether goods or services
or both which are to be delivered separately in a bundled sales arrangement
should be accounted for separately because they are "separate units of
accounting." The guidance can affect the timing of revenue recognition for such
arrangements, even though it does not change rules governing the timing or
pattern of revenue recognition of individual items accounted for separately. The
final consensus will be applicable to agreements entered into in fiscal years
beginning after June 15, 2003 with early adoption permitted. Additionally,
companies will be permitted to apply the consensus guidance to all existing
arrangements as the cumulative effect of a change in accounting principle in
accordance with APB Opinion No. 20, Accounting Changes. The Company does not
believe the adoption of EITF 00-21 will have a material impact on our financial
position or results of operations
NOTE 2 - RISKS AND UNCERTAINTIES
The Company was established to operate as an independent record label to
capitalize on the growth of the music industry and that of the "hip-hop" and
"rap" genres in particular. By identifying and representing new, high-potential
artists in these categories, the primary objective is to successfully introduce
these artists to large audiences and create a loyal following from fans. The
Company has a limited operating history, no client base and no revenue to date.
The ultimate success of the Company may be dependent upon increasing market
acceptance of its product and the addition of significant artists, neither of
which is assured.
F-16
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information for the Periods Ended March 31, 2004 and 2003 is Unaudited)
NOTE 3 - COMMON STOCK SUBSCRIPTIONS RECEIVABLE
In June 2003, the Company received subscriptions to 199,750 shares of its $.001
par value Class A Common Stock at $.10 per share. Proceeds of $19,975 were
received in July 2003, less a $1,998 commission paid to a related party
controlled by the Company's directors.
NOTE 4 - INCOME TAXES
In assessing the realizability of deferred tax assets, management considered
whether it is more likely than not that the deferred tax asset would be
realized. The ultimate realization of the deferred tax asset is dependent on the
generation of future taxable income in the period in which the temporary
differences become deductible. The Company has established a valuation allowance
for deferred taxes due to the uncertainty that the deferred tax asset will be
realized. In determining the valuation allowance, management considered factors
including the reversal of existing temporary differences and estimates of future
taxable income.
As of June 30, 2003, the Company had accounted for all expenses as startup costs
for tax purposes.
NOTE 5 - RELATED PARTY TRANSACTIONS
During the period ended June 30, 2002, the stockholders advanced a total of $300
for the payment of operating expenses. During the three months ended March 31,
2004, the Company's President advanced an additional $1,000 for the payment of
operating expenses.
During the year ended June 30, 2003, the Company's President advanced $3,700 to
the Company under a bridge note payable agreement due upon the sooner of April
7, 2004, or upon the Company raising additional funding of more than $50,000,
with interest at a rate of 5%. In April 2004, the note was extended for six
months and is payable upon the sooner of October 7, 2004 or upon the Company
raising additional funds of more than $50,000.
NOTE 6 - STOCKHOLDERS' EQUITY
The Company had initially authorized 500,000 shares of no par value Common
Stock. In October 2003, the Board of Directors approved an amendment to the
Articles of Incorporation, authorizing an increase in the authorized Common
Stock to 100,000,000 shares, a par value of $.001 to the Common Stock, and a 480
for 1 forward stock split of the outstanding Common Stock. All per share amounts
and number of shares outstanding in this report have been restated for the stock
split. The Board of Directors also authorized 10,000,000 shares of Preferred
Stock.
F-17
RIDDLE RECORDS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Information for the Periods Ended March 31, 2004 and 2003 is Unaudited)
NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)
In November 2003, the Board of Directors approved an amendment to the Articles
of Incorporation, eliminating the previously authorized Common Stock and
replacing it with 80,000,000 shares of Class A Common Stock and 20,000,000
shares of Class B Common Stock. Each outstanding share of Common Stock was
converted to one share of Class A Common Stock except for the shares owned by
the Company's Directors, each share of which was converted to one half share of
Class A Common Stock and one half share of Class B Common Stock.
Each share of Class A Common Stock entitles the holder to one vote. In contrast,
each share of Class B Common Stock entitles the holder to ten votes. Ownership
of Class B Common Stock is limited to the holders of such stock prior to the
Company's initial public offering of any class of its capital stock and to their
affiliates, spouses, or descendants.
In June 2003, the Company sold 199,750 shares of Class A Common Stock to 10
investors for proceeds of $19,975 less a $1,998 placement fee paid to a related
party controlled by the Company's directors. The Company applied $11,950 to par
value (in excess of the actual par value on the stock issuance) in order to
"catch up" the par value to actual. This was necessary because the Company,
prior to its initial filings with the SEC, did not have par value common stock
and issued shares of its Class A Common Stock at values less than the current
par value. Subsequent issuances of Class A common shares were issued at or above
par value.
During July 2003, the Company issued a total of 400,000 shares of its Class A
Common Stock to two individuals as consideration for services rendered. The
stock issued was valued at $400, the fair value of the services.
During September 2003, the Company sold 8,000,000 shares of its Class A Common
Stock to eight investors for proceeds of $16,000 less a $1,599 placement fee
paid to a related party controlled by the Company's directors.
In October 2003, the Company sold an additional 100,000 shares of its Class A
Common Stock to five investors for proceeds of $10,000 less a placement fee of
approximately $1,000 payable to a related party controlled by the Company's
directors.
In November 2003, the Company sold an additional 11,500 shares of its Class A
Common Stock to an investor for proceeds of $1,150 less a placement fee of
approximately $115 payable to a related party controlled by the Company's
directors.
In January 2004, the Company sold an additional 50,000 shares of its Class A
Common Stock to an investor for proceeds of $5,000 less a placment fee of
approximately $500 payable to a related party controlled by the Company's
directors.
Stock Option Plan
- -----------------
In November 2003, the Company's Board of Directors adopted the Stock Option Plan
under which 5,000,000 shares of the Company's Class A Common Stock were reserved
for issuance at prices not less than fair market value on the date of grant. The
board may grant options to key management employees, officers, directors and
consultants. To date, no options have been issued under the Plan.
F-18
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
UNTIL ______________, 2004, 90 DAYS AFTER THE COMMENCEMENT OF THE OFFERING,
ALL DEALERS THAT BUY, SELL OR TRADE SHARES, WHETHER OR NOT PARTICIPATING IN THIS
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN
ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24 Indemnification of Directors And Officers
Section 78.7502 of the Nevada Revised Statutes permits the Registrant to,
and Article VII, Section One, of the Registrant's Amended and Restated Bylaws
provide that the Registrant may, indemnify each person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was, or has agreed to become, a director
or officer of the Registrant, or is or was serving, or has agreed to serve, at
the request of the Registrant, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or on his behalf relating to
such action, suit or proceeding and any appeal therefrom.
Item 25 Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, if any, payable by the Registrant
relating to the sale of common stock being registered. All amounts are estimates
except the SEC registration fee.
SEC registration fee...................................... $ 1
Printing and engraving expenses........................... 5,000
Legal fees and expenses................................... 75,000
Accounting fees and expenses.............................. 20,000
Transfer agent and registrar's fees and expenses.......... 4,000
Fees and expenses (including legal fees) for
qualifications under state securities laws............ 10,000
Miscellaneous expenses.................................... 4,999
Total................................................ $ 119,000
============================================================================
Item 26 Recent Sales of Unregistered Securities
In connection with our organization in August, 2001, 25,000 restricted
shares of our common stock (pre-split) were issued for $250 to each of Jacques
Tizabi and Ali Moussavi, each of whom is an accredited investor and is an
officer and director of our company.
In July 2003, 416.667 shares of our common stock (pre-split) were issued
for $200 to each of Amir Ettehadieh and Nima Montazeci. The shares were issued
in exchange for services provided to our company. Each of these individuals were
accredited investors and the transaction was conducted in full compliance with
the requirements of Rule 506 of Regulation D under the Securities Act of 1933
(the "Securities Act"). No general solicitation, offering or sale was conducted
in connection with the issuance of shares. No finders or broker-dealers were
used in connection with this offering, and all investors were friends and/or
family of the founders. All investors had access to information about the
II-1
company, and all were sophisticated investors or had access to advisors as
necessary. The company ensured that all investors were aware that the securities
acquired in the transaction were restricted, and cannot be resold without
registration under the Securities Act, or an exemption therefrom. The company
exercised reasonable inquiry to determine that the investor was acquiring the
securities for himself or for other persons, executed written subscription
agreements prior to sale notifying each investor that the securities have not
been registered under the Act or unless an exemption from registration is
available, and ensured that a legend was placed on the certificate or other
document that evidences the securities stating that the securities have not been
registered under the Act and setting forth or referring to the restrictions on
transferability and sale of the securities.
Between July and October 2003, an aggregate of 624.479 restricted shares of
our common stock (pre-split) were issued for $29,975 to 15 investors pursuant to
a private placement offering under Section 4(2) and Rule 506 of Regulation D
under the Securities Act. The investors were Kathy Mary Thompson, John David
Vaugh, Cecil Cousley, Declan Bennet, Robert Forster, Sheila Deen, Jan Derycke,
David Lee, David Clark, Mats Leksell, David Wheatcroft, Bjorn Engblom, Katherine
Glass, Andrew Whiting and Robert Burgess. All investors were accredited
investors and the transaction was conducted in full compliance with the
requirements of Regulation D. No general solicitation, offering or sale was
conducted in connection with the issuance of shares, and all investors were
friends and/or family of the founders. All investors had access to information
about the company, and all were sophisticated investors or had access to
advisors as necessary. The company ensured that all investors were aware that
the securities acquired in the transaction were restricted, and cannot be resold
without registration under the Securities Act of 1933, as amended, or an
exemption therefrom. The company exercised reasonable inquiry to determine that
the investor was acquiring the securities for himself or for other persons,
executed written subscription agreements prior to sale notifying each investor
that the securities have not been registered under the Act or unless an
exemption from registration is available, and ensured that a legend was placed
on the certificate or other document that evidences the securities stating that
the securities have not been registered under the Act and setting forth or
referring to the restrictions on transferability and sale of the securities.
Placement agent fees of approximately $3,000 were paid to Astor Capital, Inc.,
of which each of our directors is a co-founder and managing partner.
In September 2003, we issued an aggregate of 16,666.667 shares of
restricted common stock (pre-split) for $16,000 to eight investors pursuant to a
private placement offering. This transaction was conducted as a private
placement under Section 4(2) and Rule 506 of Regulation D under the Securities
Act. All investors were accredited investors, and the transaction was conducted
in full compliance with the requirements of Regulation D. All investors are
currently identified as the selling stockholders in this prospectus. No general
solicitation, offering or sale was conducted in connection with the issuance of
shares. All investors had access to information about the company, and all were
sophisticated investors or had access to advisors as necessary. The company
ensured that all investors were aware that the securities acquired in the
transaction were restricted, and cannot be resold without registration under the
Securities Act, or an exemption therefrom. The company exercised reasonable
inquiry to determine that the investor was acquiring the securities for himself
or for other persons, executed written subscription agreements prior to sale
notifying each investor that the securities have not been registered under the
Securities Act or unless an exemption from registration is available, and
ensured that a legend was placed on the certificate or other document that
evidences the securities stating that the securities have not been registered
under the Securities Act and setting forth or referring to the restrictions on
transferability and sale of the securities. The decision to register the
securities and create a public trading market was made by the company, not the
investors, and was not an inducement in the purchase of the securities.
Placement agent fees of $1,599 were paid to Astor Capital, Inc., of which each
of our directors is a co-founder and managing partner.
II-2
In November 2003, 23.958 restricted shares of our common stock (pre-split)
were issued for $1,150 to one investor, Pembrooke Partners, pursuant to a
private placement offering under Section 4(2) and Rule 506 of Regulation D under
the Securities Act. The investor was an accredited investor and the transaction
was conducted in full compliance with the requirements of Regulation D. No
general solicitation, offering or sale was conducted in connection with the
issuance of shares. The investor had access to information about the company,
and was a sophisticated investor or had access to advisors as necessary. The
company ensured that the investor was aware that the securities acquired in the
transaction were restricted, and cannot be resold without registration under the
Securities Act of 1933, as amended, or an exemption therefrom. The company
exercised reasonable inquiry to determine that the investor was acquiring the
securities for himself or for other persons, executed a written subscription
agreement prior to sale notifying the investor that the securities have not been
registered under the Act or unless an exemption from registration is available,
and ensured that a legend was placed on the certificate or other document that
evidences the securities stating that the securities have not been registered
under the Act and setting forth or referring to the restrictions on
transferability and sale of the securities. Placement agent fees of
approximately $115 were paid to Astor Capital, Inc., of which each of our
directors is a co-founder and managing partner.
In November 2003, we effected a 480-for-1 stock split of our common stock.
Pursuant to an amendment to our articles of incorporation effected by us in
November 2003, we effected a recapitalization whereby we authorized two new
classes of common stock, Class A common stock and Class B common stock. Pursuant
to the recapitalization, shares of common stock held by each of Jacques Tizabi
and Ali Moussavi were converted into 6,000,000 shares of our Class A common
stock (post-split), and 6,000,000 shares of our Class B common stock
(post-split). All other shares of common stock were converted into shares of our
Class A common stock. The Class A common stock and the Class B common stock have
identical rights other than with respect to voting, conversion and transfer. The
Class A common stock is entitled to one vote per share while the Class B common
stock is entitled to ten votes per share on all matters submitted to a vote of
stockholders. The shares of Class B common stock are convertible at any time at
the option of the holder into shares of Class A common stock on a
share-for-share basis. In addition, shares of Class B common stock are
automatically converted into a like number of shares of Class A common stock
upon any transfer to any person or entity which is not a permitted transferee
(as defined in our articles of incorporation).
In January 2004, we issued an aggregate of 50,000 shares of restricted
common Stock for gross proceeds of $5,000 to one investor, Pembrooke Partners,
pursuant to a private placement offering. This transaction was conducted as a
private placement under Section 4(2) and Rule 506 of Regulation D under the
Securities Act. All investors were accredited investors, and the transaction was
conducted in full compliance with the requirements of Regulation D. All
investors are currently identified as the selling stockholders in this
prospectus. No general solicitation, offering or sale was conducted in
connection with the issuance of shares. All investors had access to information
about the company, and all were sophisticated investors or had access to
advisors as necessary. The company ensured that all investors were aware that
the securities acquired in the transaction were restricted, and cannot be resold
without registration under the Securities Act, or an exemption therefrom. The
company exercised reasonable inquiry to determine that the investor was
acquiring the securities for himself or for other persons, executed written
subscription agreements prior to sale notifying each investor that the
securities have not been registered under the Securities Act or unless an
exemption from registration is available, and ensured that a legend was placed
on the certificate or other document that evidences the securities stating that
the securities have not been registered under the Securities Act and setting
forth or referring to the restrictions on transferability and sale of the
securities. The decision to register the securities and create a public trading
market was made by the company, not the investors, and was not an inducement in
the purchase of the securities. Placement agent fees of $500 were paid to Astor
Capital, Inc., of which each of our directors is a co-founder and managing
partner.
In April 2004, we issued an aggregate of 10,000 shares of restricted common
Stock for gross proceeds of $5,000 to one investor, Mark Ashley, pursuant to a
private placement offering. This transaction was conducted as a private
placement under Section 4(2) and Rule 506 of Regulation D under the Securities
Act. All investors were accredited investors, and the transaction was conducted
in full compliance with the requirements of Regulation D. All investors are
currently identified as the selling stockholders in this prospectus. No general
solicitation, offering or sale was conducted in connection with the issuance of
shares. All investors had access to information about the company, and all were
sophisticated investors or had access to advisors as necessary. The company
ensured that all investors were aware that the securities acquired in the
transaction were restricted, and cannot be resold without registration under the
Securities Act, or an exemption therefrom. The company exercised reasonable
inquiry to determine that the investor was acquiring the securities for himself
or for other persons, executed written subscription agreements prior to sale
notifying each investor that the securities have not been registered under the
Securities Act or unless an exemption from registration is available, and
ensured that a legend was placed on the certificate or other document that
evidences the securities stating that the securities have not been registered
under the Securities Act and setting forth or referring to the restrictions on
transferability and sale of the securities. The decision to register the
securities and create a public trading market was made by the company, not the
investors, and was not an inducement in the purchase of the securities.
As of June 30, 2004, there were 20,771,250 shares of Class A common stock
(post-split) and 12,000,000 shares of our Class B common stock (post-split)
issued and outstanding. Other than the fact that shares of our Class B Common
Stock are convertible into shares of our Class A Common Stock as described
above, there are no issued and outstanding debt or equity securities of any type
or class other than the Class A and Class B common stock. None of the Class A
and Class B common stock issued have any convertible or other unique features,
and contain all and only those characteristics identified in our discussion
entitled "Description of Securities - Common Stock." There are 27 individual
stockholders of our Class A common stock, two of which are also individual
holders of our Class B common stock, without aggregating family or related party
units.
II-3
Item 27 Exhibits and Financial Statement Schedules
(A) Exhibits
Exhibit Number Description of Exhibit
- -------------- -------------------------------------------------------------
3.1 (a)+ Articles of Incorporation of the Registrant.
3.1 (b)+ Certificate of Amendment to Articles of Incorporation
3.1 (c)+ Certificate of Amendment to Articles of Incorporation
3.2+ Amended and Restated Bylaws of the Registrant
4.1+ Specimen Class A Common Stock Certificate
5.1+ Opinion of Woodburn and Wedge.
10.1+ 2003 Stock Option, Deferred Stock and Restricted Stock Plan
10.2+ Promissory note dated as of April 7, 2003 by and between
Jacques Tizabi and the Registrant.
10.2(a) Amendment to note dated as of April 7, 2004 by and between
Jacques Tizabi and the Registrant.
10.3+ Registration Rights Agreement dated as of November 21, 2003
by and between Messrs. Tizabi and
Moussavi and the Registrant.
23.1 Consent of AJ Robbins PC.
23.2+ Consent of Kirkpatrick & Lockhart LLP (contained in
Exhibit 5.1).
24.1+ Power of attorney (included on signature page of Registration
Statement).
- -----------------
+ Previously filed.
- -----------------
Item 28 Undertakings
The undersigned Registrant hereby undertakes with respect to the securities
being offered and sold in this offering:
(1) To file, during any period in which it offers or sells securities, a
post- effective amendment to this Registration Statement to:
(a) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in this
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(c) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act of 1933, treat each
post- effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
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any action, suit or proceeding) is asserted by director, officer or controlling
person relating to the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 3 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on the 2nd day of August, 2004.
RIDDLE RECORDS, INC.
By: /s/ Jacquest Tizabi
----------------------------
Jacques Tizabi
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------- -------------------------------------- ----------------
/s/ Jacques Tizabi President, Chief Executive Officer and August 2, 2004
- ------------------- Director (Principal Executive Officer)
Jacques Tizabi
/s/ Ali Moussavi
- -------------------
Ali Moussavi Secretary, Treasurer and Director August 2, 2004
(Principal Financial and Accounting
Officer)
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INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
- -------------- -------------------------------------------------------------
3.1 (a)+ Articles of Incorporation of the Registrant.
3.1 (b)+ Certificate of Amendment to Articles of Incorporation
3.1 (c)+ Certificate of Amendment to Articles of Incorporation
3.2+ Amended and Restated Bylaws of the Registrant
4.1+ Specimen Class A Common Stock Certificate
5.1+ Opinion of Woodburn and Wedge.
10.1+ 2003 Stock Option, Deferred Stock and Restricted Stock Plan
10.2+ Promissory note dated as of April 7, 2003 by and between
Jacques Tizabi and the Registrant.
10.2(a) Amendment to note dated as of April 7, 2004 by and between
Jacques Tizabi and the Registrant.
10.3+ Registration Rights Agreement dated as of November 21, 2003
by and between Messrs. Tizabi and
Moussavi and the Registrant.
23.1 Consent of AJ Robbins PC.
23.2+ Consent of Kirkpatrick & Lockhart LLP (contained in
Exhibit 5.1).
24.1+ Power of attorney (included on signature page of Registration
Statement).
- -----------------
+ Previously filed.
- -----------------
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