10-Q 1 jbird25597.txt J-BIRD MUSIC LTD. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - QSB QUARTERLY REPORT UNDER REGULATION SB OF THE SECURITIES EXCHANGE ACTS OF 1934 For the Quarter Ended Commission File Number: September 30, 2001 0-24449 J-BIRD MUSIC GROUP LTD. (Exact Name of Registrant as specified in its charter) Pennsylvania 06-1411727 (State or other jurisdiction) (IRS Employer of incorporation or organization) Identification Number) 396 Danbury Road Wilton, Connecticut 06897 (Address and zip code of principal executive officers) (203) 761-9393 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required by Regulation SB of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES (X) NO ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: Number of Shares Outstanding Class Date 1,720,960 Common Stock September 30, 2001 $.001 par value J-BIRD MUSIC GROUP LTD. Index PART I FINANCIAL INFORMATION Balance Sheet September 30, 2001 3 Statements of Operations Nine Months Ended September 30, 2001 and 2000 4 Statements of Cash Flow Nine Months Ended September 30, 2001 and 2000 5 Notes to Unaudited Financial Statements September 30, 2001 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II Other Information 13 Signatures 13 2

5 J-BIRD MUSIC GROUP LTD. NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 Note 1. Organization The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the provisions of Regulation SB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. J-Bird Records, Inc. is the first WorldWide Web Recording Label ((TM)). The Company was officially launched on November 1, 1996 to market, distribute and sell music via a new medium - the Internet. At its Website, located at http://www.j-birdrecords.com, the Company attracts and signs recording artists through its on-line office and promotes, markets and sells their recordings through its on-line record store. J-Bird Records is a wholly owned subsidiary of J-Bird Music Group LTD. The Company has experienced operating losses since its inception and has experienced significant cash flow problems. The Company is in the process of raising capital through various sources to fund its operations and has implemented certain operating strategies to obtain profitably. Furthermore, the Company has secured a $100,000 loan from their distributor, Navarre Corporation, in the fourth quarter of operations. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, J-Bird Records, Inc. Material inter-company balances and transactions have been eliminated in consolidation. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying financial statements should be read in conjunction with the Company's Form 10-KSB filed for the year ended December 31, 2000. Earnings (loss) per share are based on the weighted average number of shares outstanding. Common stock equivalents have not been considered as their effect would be anti-dilutive. 6 Note 2. Related Party Transactions In October 1998, the Company entered into a credit agreement with I.M.M. International, Inc., a shareholder of the company, whereby I.M.M. will provide up to $500,000 in financing to the Company for working capital purposes. At September 30, 2001, I.M.M. International had advanced $57,115 to the Company. Note 3. Salaries On March 1, 2001 four employees entered into a restricted stock purchase agreement whereas the employees received the right to purchase 800,000 shares (20,000 shares post split) resulting in 200,000 shares (5,000 shares post split) per employee. The issue price of the common stock on March 1, 2001 was $0.0825 per share ( $3.40 per share post split) with a cumulative value of $68,000 ($17,000 per employee). An additional 60,000 shares were issued to three employees ( 20,000 shares per employee) on August 3, 2001 at an issue price of $0.80 per share of common stock for a cumulative total of $48,000 ( $16,000 per employee). Note 4. Stock Split On May 24, 2001 the Board of Directors of J Bird Music Group, LTD approved a reverse split of 1:40 effective June 1, 2001. As a result of the split, the total shares authorized remained at 50,000,000 shares while the total number of shares outstanding have been adjusted to reflect the reverse split. Additionally, the weighted average common stock shares in 2001 reflect the reverse split. Note 5. Professional Services On May 21, 2001 12,500 shares (post split) were issued in lieu of past legal services performed. The stock was valued for the past invoice of $10,730. An additional 20,000 shares were issued on August 3, 2001 in lieu of legal services performed through the third quarter of 2001. The cumulative value of the shares issued in August was $10,385. Note 6. Note Payable The Company borrowed $100,000 under its line of credit with a bank. As of September 30, 2001 the full amount of $37,050 is due pursuant to a court order dated July 31, 2001. The Company expects a settlement agreement to be reached before the Company's year end. 7 Note 7. Consultants In the second quarter of 2001 the Company issued 4,060,000 shares (101,500 post split) in lieu of past consulting services performed for the Company. The total shares issued in the second quarter resulted in a cumulative value of $203,000. On August 3, 2001 260,000 shares were issued in lieu of past and future consulting services performed for the Company. The issue price of the common stock on August 3, 2001 was $0.87 per share resulting in a cumulative value of $226,200. 8 Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of J-Bird Music Group LTD's, consolidated results of operations and financial condition for the nine months ended September 30, 2001. The discussion should be read in conjunction with the Company's consolidated financial statements and accompanying notes. J-Bird Records began in 1996 as "The First World Wide Web Recording Label" (jbirdrecords.com), signing, promoting and selling its artists' CDs exclusively online. The company quickly developed a traditional brick and mortar presence to enhance its efforts, thereby creating a hybrid label combining the best of both offline and online worlds. J-Bird Records is an independent label with a roster of over 350 artists including Rockapella, Boy George, the Guess Who, Impulse Ride, Jimmie Van Zant, Lee Rocker, The Rembrants and more. The label utilizes traditional and online marketing and distribution methods for the promotion of its artists. The Navarre Corporation is the label's exclusive North American distributor to retail accounts. Navarre is the leading independent distributor of music and music-related products throughout North America. J-Bird Records' business model combines sustained profitability in the traditional retail marketplace along with the online world, thus enabling it to withstand the dot-com fallout as compared to exclusive online music-related companies, who have not. As a result, the company has emerged as a strong industry competitor, anticipating profitability in future years. J-Bird Records attracts a wide array of established and emerging talent by offering artists a greater level of creative control and involvement. J-Bird Records offers recording contracts which allow artists to exercise a large amount of self-direction in their career planning, while driving those careers toward a successful future. In addition to its expanding talent list, J-Bird is also building its base of assets by acquiring existing libraries of recordings including collections of music from Duke Ellington and Bing Crosby. The Company has already begun positioning itself to take advantage of the new opportunities for promotion and revenue growth from online sources. According to Jupiter Communications, US online music sales are expected to reach $5.4 billion in the year 2005, up from $387 million in 1999. These numbers are based on combined digital music downloads and physical product sold via online resources. Online music is expected to secure approximately one fourth of the total US market sales in 4 years, with digitally distributed products representing 28% of total online dollars (or $1.5 billion by 2005). With peer-to-peer file sharing (such as Napster) coming under fire for not allowing the artist to be compensated for sharing of digital music files, the distribution of 9 digital music appears ready to move to subscriptions to digital music services that will allow the consumer access to music files and reward the artist and label as well. The Company is poised to take advantage of the financial and promotional opportunities presented to it by aligning itself with third-party digital music providers by licensing its catalog and marketing its services to media and commerce partners, already established as destination sites for music, who provide networked sharing subscription services and digital downloads. These services, industry-wide, are expected to reach approximately $1 billion in 2005, and music downloads will grow to $530 million in the same timeframe. Physical music products (CDs) purchased online are expected to grow from $380 million in 1999 to $3.8 billion in 2005. In addition to the above strategies, J-Bird has recently streamlined operating costs, reduced overhead and consolidated inventory, all helping to reduce the company's breakeven point. These combined factors are designed to enable the Company to achieve profitability in the years ahead. Liquidity and Capital Resources The Company has financed its operations and capital expenditures primarily from equity financing and loans from shareholders and a bank. The Company borrowed $100,000 under its line of credit agreement with a bank. As of July 31, 2001 a court order was brought against the Company for full payment of the $37,050. The Company expects a settlement agreement to be reached before the Company's year end. The Company is currently pursuing long term financing for its operating activities and a potential acquisition. The only source of financing that has occurred to date is in the fourth quarter of the Company's year. The Company obtained a loan from Navarre Corporation in the amount of $100,000. However, there can be no assurance that further financing will be available, or if available, that it will be on acceptable terms. The ability to finance existing and future operations will be dependent upon external sources. Results of Operations - Nine months ended September 30, 2001 compared to nine months ended September 30, 2000 2001 2000 ---- ---- Net Sales $334,408 $538,988 ------------ Cost of Sales $365,909 $742,480 The decrease in net sales for 2001 is a result of an increasing number of returns which occurred in the second quarter regardless of the Company's acquiring contracts with additional artists. The Company currently has over 350 artists under agreements at September 30, 2001 compared to 262 at September 30, 2000. 10 2001 2000 ---- ---- Advertising and Promotion Expenses $ 16,724 $ 84,877 ---------------------------------- The decrease in advertising and promotion is due to the level of operations of the Company. Professional Fees $ 107,542 $ 56,211 ----------------- The increase in professional fees is due to the higher level of legal and consulting fees of the Company. Salaries $ 116,000 $ 108,155 -------- There was no salary expense in the first quarter of 2001. On March 1, 2001 four employees of the Company entered into a restricted stock purchase agreement whereas the employees received the right to purchase 800,000 shares ( 20,000 shares post split) resulting in 200,000 shares (5,000 shares post split) per employee. The issue price of the common stock on March 1, 2001 was $0.0825 per share ($3.40 per share post split) for a cumulative value of $68,000 ($17,000 per employee). An additional 60,000 shares were issued to three employees ( 20,000 shares per employee) on August 3, 2001 at an issue price of $0.80 per share of common stock for a cumulative value of $48,000 ( $16,000 per employee). Administrative Expenses $ 788,054 $ 1,161,957 ----------------------- The decrease in administrative expenses is due to the decreased operations of the Company. Other Expenses Bad Debt $ 63,438 $ 0 -------- This represents a write off of the net amount due from the former President of the Company per agreement. The Company received 2,500 shares (post split) of common stock with a value of $4,690 reflected as a treasury stock transaction. 11 Other Expenses (cont.) Royalty Adjustment $ 36,390 $ 0 ------------------ This represents an agreement with one artist for royalties due for the year 1999 as a result of the company misinterpreting the recording contract. 12 PART II OTHER INFORMATION Item 1. Legal Proceedings Form 8-K filed 07/16/01 Item 2. Changes in Securities Not applicable Item 3. Default upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K Not applicable SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. J-Bird Music Group LTD. (Registrant) Dated: Nov 26,2001 By: Hope D. Trowbridge President 13

J BIRD MUSIC GROUP LTD 10-Q