U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-25167
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MCY.COM, INC.
-----------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 13-4049302
- ------------------------------- --------------------------
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
1133 Avenue of the Americas
New York, NY 10036
-------------------------
(Address of Principal Executive Offices)
Issuer's Telephone Number: (212) 944-6664
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Company was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes X No (2) Yes X No
--- --- --- ---
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes____ No ___
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the Issuer's
classes of common equity, as of the latest practicable date:
59,554,301 at June 30, 2000 of common stock (.001 per value)
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
Transitional Small Business Issuer Format Yes No X
--- ---
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Condensed Consolidated Balance Sheets
June 30, December 31,
2000 1999
(Unaudited) (Note*)
ASSETS
Current assets:
Cash and cash equivalents $ 21,034,000 $ 26,060,000
Available-for-sale securities 6,276,000 0
Sundry receivables 1,376,000 397,000
Advances to officer 101,000 107,000
Other current assets, including prepaid advertising of $2,247,000 and
$2,075,000 and prepaid event costs of $5,460,000 and $0 8,405,000 2,793,000
----------------- -----------------
Total current assets 37,192,000 29,357,000
Equipment and software, net 10,588,000 1,585,000
Intangible assets, net 25,153,000
Other assets, including security deposits of $2,515,000 and $925,000, and
record company advances of $111,000 and $350,000, respectively 2,657,000 1,279,000
----------------- -----------------
$ 50,437,000 $ 57,374,000
================= =================
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and sundry liabilities, representing
total current liabilities $ 6,382,000 $ 3,381,000
----------------- -----------------
Commitments and contingencies (Note B)
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 shares authorized;
1,000,000 shares of Series 1 Preferred Stock issued and outstanding 1,000 1,000
Common stock - $.001 par value; 100,000,000 shares authorized;
59,614,301 and 54,340,988 shares issued and outstanding, respectively 59,000 54,000
Common stock payable (110,000 shares) 1,155,000 1,155,000
Additional paid-in capital 185,611,000 144,063,000
Treasury stock (277,000 shares) (1,835,000) 0
Deficit accumulated during the development stage (127,767,000) (72,283,000)
Accumulated other comprehensive income 345,000 (15,000)
----------------- -----------------
57,569,000 72,975,000
Unamortized deferred compensation (13,450,000) (18,956,000)
Stock subscriptions receivable (64,000) (26,000)
----------------- -----------------
44,055,000 53,993,000
----------------- -----------------
$ 50,437,000 $ 57,374,000
================= =================
*The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. See notes to condensed consolidated financial statements
2
Condensed Consolidated Statements of Operations
(Unaudited)
Inception
For the Three Months For the Six Months (January 8, 1999)
Ended June 30, Ended June 30, Through
2000 1999 2000 1999 June 30, 2000
Revenues $ 225,000 $ 0 $ 263,000 $ 0 $ 606,000
--------------- ------------- --------------- ------------- -----------------
Expenses:
Sales, marketing and public
relations 2,610,000 2,750,000 6,275,000 2,781,000 14,794,000
Product development 2,135,000 524,000 3,390,000 524,000 5,519,000
Content acquisition 3,446,000 175,000 4,677,000 175,000 6,260,000
General and administrative 3,170,000 333,000 5,422,000 349,000 9,892,000
Depreciation and amortization 271,000 2,000 431,000 2,000 707,000
Amortization of acquired
intangibles 1,584,000 0 3,168,000 0 6,336,000
Write-off of impaired
intangible assets 21,985,000 21,985,000 21,985,000
Stock based compensation 3,631,000 2,579,000 11,242,000 2,579,000 61,146,000
--------------- ------------- --------------- ------------- -----------------
38,832,000 6,363,000 56,590,000 6,410,000 126,639,000
--------------- ------------- --------------- ------------- -----------------
Operating loss (38,607,000) (6,363,000) (56,327,000) (6,410,000) (126,033,000)
Share of loss of predecessor
companies 0 (279,000) 0 (663,000) (663,000)
Interest income, net of interest
expense 408,000 33,000 843,000 33,000 1,499,000
--------------- ------------- --------------- ------------- -----------------
Net loss $ (38,199,000) $ (6,609,000) $ (55,484,000) $ (7,040,000) $ (125,197,000)
=============== ============= =============== ============= =================
Net loss per common share -
basic and diluted $(0.64) $(0.19) $(0.96) $(0.23)
====== ====== ====== ======
Weighted average common
shares outstanding 59,599,000 34,717,000 57,699,000 30,928,000
========== ========== ========== ==========
See notes to condensed consolidated financial statements 3
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Preferred Stock Common Stock Common Additional
Number of Number of Stock Paid-In
Shares Amount Shares Amount Payable Capital
Balance - January 1, 2000 1,000,000 $ 1,000 54,340,988 $ 54,000 $ 1,155,000 $ 144,063,000
Sale of common stock (Note C[1]) 5,006,390 5,000 34,348,000
Repurchase of stock (Note C[2]) (277,000)
Exercise of options (Note C[3]) 187,626
Options granted (Note C[4]) 5,678,000
Options exercised (Note C[4]) 25,000 38,000
Options cancelled (Note C[4]) (2,422,000)
Warrants issued (Note C[5]) 3,906,000
Warrants exercised (Note C[5]) 331,297
Amortization of deferred compensation
Comprehensive loss:
Gain on foreign currency translation
Unrealized gain on securities
Net loss for period
Total comprehensive loss
---------- -------- ----------- --------- ----------- -------------
Balance - June 30, 2000 1,000,000 $ 1,000 59,614,301 $ 59,000 $ 1,155,000 $ 185,611,000
=========== ======== =========== ========= =========== =============
- --------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated Accumulated
During the Other Unamortized Stock
Treasury Development Comprehensive Deferred Subscription
Stock Stage Income Compensation Receivable Total
Balance - January 1, 2000 $ (72,283,000) $(15,000) $ (18,956,000) $(26,000) $ 53,993,000
Sale of common stock (Note C[1]) 34,353,000
Repurchase of stock (Note C[2]) $(1,835,000) (1,835,000)
Exercise of options (Note C[3])
Options granted (Note C[4]) (5,678,000) 0
Options exercised (Note C[4]) (38,000) 0
Options cancelled (Note C[4]) 2,422,000 0
Warrants issued (Note C[5]) 3,906,000
Warrants exercised (Note C[5])
Amortization of deferred
compensation 8,762,000 8,762,000
Comprehensive loss:
Gain on foreign currency
translation 198,000 198,000
Unrealized gain on securities 162,000 162,000
Net loss for period (55,484,000) (55,484,000)
-------------
Total comprehensive loss (55,124,000)
----------- ------------- ---------- ------------- ---------- -------------
Balance - June 30, 2000 $(1,835,000) $(127,767,000) $345,000 * $ (13,450,000) $(64,000) $ 44,055,000
=========== ============= ======== ============= ======== =============
*Consists of unrealized gains on securities of $162,000 and cumulative foreign
currency transaction adjustment of $183,000.
See notes to condensed consolidated financial statements 4
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Inception
For the Six Months (January 8, 1999)
Ended June 30, Through
2000 1999 June 30, 2000
Cash flows from operating activities:
Net loss $ (55,484,000) $ (7,040,000) $(125,197,000)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 431,000 2,000 707,000
Amortization of intangibles 3,168,000 0 6,336,000
Write-off of impaired intangible assets 21,985,000 21,985,000
Stock-based compensation 11,242,000 2,579,000 61,146,000
Share of loss of predecessor companies 0 663,000 663,000
Changes in:
Record company advances 195,000 (123,000) (287,000)
Receivables (979,000) (256,000) (1,240,000)
Prepaid expenses (2,921,000) (408,000) (3,271,000)
Accounts payable, accrued expenses and sundry liabilities 3,001,000 870,000 4,664,000
--------------- ------------- -----------------
Net cash used in operating activities (19,362,000) (3,713,000) (34,494,000)
--------------- ------------- -----------------
Cash flows from investing activities:
Investment in available-for-sale securities, net (6,115,000) (6,115,000)
Datatek acquisition, net of acquired cash of $565,000 0 0 (1,748,000)
Loans to affiliates 0 (1,243,000)
Payment of security deposits (2,863,000) 0 (3,788,000)
Cost of developing internal-use software (6,202,000) 0 (6,979,000)
Purchase of equipment (3,200,000) (99,000) (3,889,000)
--------------- ------------- -----------------
Net cash used in investing activities (18,380,000) (1,342,000) (22,519,000)
--------------- ------------- -----------------
Cash flows from financing activities:
Purchase of treasury stock (1,835,000) 0 (1,835,000)
Payment on line of credit (40,000)
Deferred offering costs (190,000)
Proceeds from sale of stock, net of related costs 34,353,000 10,790,000 80,009,000
--------------- ------------- -----------------
Net cash provided by financing activities 32,518,000 10,600,000 78,134,000
--------------- ------------- -----------------
Effect of exchange rate changes 198,000 0 (87,000)
--------------- ------------- ------------------
Change in cash and cash equivalents (5,026,000) 5,545,000 21,034,000
Cash and cash equivalents - beginning 26,060,000 0 0
--------------- ------------- -----------------
Cash and cash equivalents - ending $ 21,034,000 $ 5,545,000 $ 21,034,000
=============== ============= ================
Supplemental disclosures of noncash activities:
Issuance of warrants relating to events $ 3,889,000 $ 3,889,000
Issuance of stock for receivable $ 26,000 $ 26,000
Issuance of stock and warrants in connection with acquisition $ 25,590,000
Deferred compensation by grant of options $ 5,678,000 $ 47,125,000
Issuance of stock for notes payable and accrued interest $ 730,000
Issuance of warrants relating to prepaid expenses in connection
with joint venture agreement. $ 2,247,000
See notes to condensed consolidated financial statements 5
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
NOTE A - THE COMPANY
The accompanying financial statements include the accounts of MCY.com, Inc. (the
"Company") and its wholly-owned subsidiaries after elimination of all
intercompany transactions.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-QSB. 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 accruals, except for
the write-off of impaired intangible assets described in Note D) considered
necessary for a fair presentation have been included. The results of operations
for the six months ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full year. For further information, refer to the
Company's annual report filed on Form 10-KSB for the year ended December 31,
1999.
The Company operates an Internet website offering an interactive environment and
virtual music store where music buyers can purchase digital music downloads and
webcasts in an encrypted and enhanced format, as well as other products. The
Company also intends to engage in the production of entertainment events and
other related activities. The Company is in the development stage, since planned
operations have commenced but there have been no significant revenues therefrom.
The Company is subject to those general risks associated with development stage
companies, as well as special risks unique to emerging E-commerce companies
which, by definition, seek to create new markets for their innovative products
and services. As shown in the accompanying financial statements, the Company has
incurred substantial net losses since inception and the Company and its
predecessor companies have generated minimal revenues related to the Company's
planned operations. Further, the Company's business concept and business model
are unproven and, accordingly, the Company's viability is uncertain. There is no
assurance that the Company will ever attain profitable operations and operating
cash flow.
NOTE B - COMMITMENTS AND CONTINGENCIES
On December 16, 1999, a former employee of MCY Music World, Inc., a
subsidiary, filed a complaint against the Company in New York State Supreme
Court. The complaint asserts five claims including breach of contract, wrongful
termination and fraud related to compensation due to him for the signing and
distribution of content as well as fees related to a private placement of the
Company's stock on October 25, 1999. The complaint asks for damages of
approximately $23,000,000 on each claim including 20,000 shares of the Company's
common stock, stock options, fees and royalties. The Company believes that the
former employee's claims lack substantial merit, and intends to vigorously
defend against this action. On January 14, 2000, the Company filed a motion to
dismiss the complaint. The Company's motion to dismiss was partially granted on
June 6, 2000 in a decision and order which dismissed three of the plaintiff's
claims. The decision and order, however, allow the plaintiff to pursue certain
contract claims pending the results of discovery. Management believes that the
outcome of this litigation will not have a material adverse effect on the
financial position or results of operations of the Company.
6
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
NOTE B - COMMITMENTS AND CONTINGENCIES (CONTINUED)
A former trade partner, contributed DM 1,600,000 to the development of the
Company's technological platform and subsequently demanded repayment of DM
1,210,000 of this amount on January 30, 1998. Fritsch & Friends rejected this
demand on February 3, 1998, and since then the partner has not pursued this
alleged claim. In addition, Fritsch & Friends entered into an agreement with an
investment group in November 1997, which it subsequently revoked. In an
unrelated matter, in February 2000, we received a notice from the American
Arbitration Association ("AAA") indicating that a request for arbitration had
been filed. To date, however, we have not received any documents indicating the
basis or the grounds for the claim. We believe that it is unlikely that we will
sustain material losses in connection with these matters in excess of amounts
previously accrued.
On May 3, 2000, an individual, who had been retained by MCY America, Inc. and
MCY Music World, Inc. to obtain equity capital from a specific investor for MCY
Music World, Inc., filed a complaint against MCY America, Inc. and MCY Music
World, Inc. in federal district court in New York City, alleging claims for
breach of contract, promissory estoppel and unjust enrichment. The complaint
does not appear to allege a claim for breach of a written engagement agreement
but rather appears to allege that the Company and the subsidiaries allegedly
breached an oral agreement to compensate the plaintiff for enabling the Company
to obtain financing through a well-known investment banking firm. Claimant
asserts further that he is entitled to a cash fee, as well as stock options, in
return for his alleged involvement in the financing, and seeks damages of at
least $13,315,000, together with prejudgment interest and costs. As the Company
believes that the claims lack substantial merit, the Company intends to
vigorously defend this action and has filed a motion for summary judgement.
Management believes that the outcome of this litigation will not have a material
adverse effect on the financial position or results of operations of the
Company.
The Company and certain of the predecessor companies, are parties to various
other claims and legal proceedings incidental to their business. Management
believes that adequate liabilities to cover any resulting losses have been
reflected in the accompanying financial statements, and that the outcome of
these claims and proceedings will not have a material adverse effect on the
financial position or results of operations of the Company.
NOTE C - STOCKHOLDERS' EQUITY
[1] From February 16, 2000 through March 9, 2000, the Company sold in a
private placement an aggregate of 5,006,390 shares of common stock at a
price of $7.50 per share, for proceeds of approximately $34,400,000 net
of commissions and fees to the placement agent and others.
[2] In May 2000, management initiated a stock buyback plan offering certain
stockholders the ability to sell back a specified number of shares to the
Company. The offer expired on May 31, 2000. One employee, one officer and
one director sold back a total of 200,000 shares at $7.00 per share. One
non-employee stockholder sold back 25,000 shares at $7.00 per share.
Three employee stockholders sold back 52,000 shares at $5.00 per share.
[3] During January 2000, 42,500 options with an exercise price of $1.50 per
share and 225,000 options with an exercise price of $3.20 per share were
exercised and paid for by the return to the Company of 79,874 shares of
common stock at an estimated market price of $9.8125 per share.
7
NOTE C - STOCKHOLDERS' EQUITY (CONTINUED)
[4] During the six months ended June 30, 2000, the Company granted additional
options to employees to purchase an aggregate of 1,245,000 common shares
at an average exercise price of $6.00 per share. In addition, unvested
options previously granted to certain employees to purchase approximately
734,000 shares of common stock at exercise prices of $1.50 to $12.75 per
share were cancelled and vested options to purchase approximately 198,000
shares of common stock at exercise prices of $1.50 to $12.00 per share
expired unexercised.
[5] During the six months ended June 30, 2000, the Company issued warrants,
principally to artists in connection with contracts to provide
pay-per-view webcasts of concerts. Such warrants permit the purchase of
1,106,400 shares of common stock at exercise prices of $8.44 to $16.63.
The warrants were valued using the Black-Scholes valuation model at
approximately $3,906,000 and are exercisable over one to three year
periods.
[6] During the six months ended June 30, 2000, the holder of warrants to
purchase 657,330 common shares at $6.00 per share exercised the warrants
which were paid for by the return to the Company of 326,033 shares of
common stock at an estimated market price of $12.10 per share.
NOTE D - INTANGIBLE ASSETS
The Company accounts for impairment of long-lived assets, including its
intangible assets, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". SFAS No. 121 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the book value of the asset may not be recoverable.
The Company evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment. In accordance
with SFAS No. 121, the Company uses an estimate of the future undiscounted net
cash flows of the related assets over their remaining estimated useful lives in
measuring whether the assets are recoverable. Based on the limited revenues to
date earned by the Company related to its acquired intangibles, and giving
further consideration to the impact of events outside of the Company's control
such as rapidly changing market circumstances on consumer acceptance of the
Company's business model and proposed product offerings, delays in delivery of
technology to the Company necessary for its inteneded operations, including, but
not limited to the development of broadband transmission networks, the Company
has revised its projections of future cash flows as they relate to the acquired
intangibles. As a result, the Company no longer expects reasonably estimable
future net cash flows related to the use of its acquired technology over the
remaining estimated useful lives of the intangibles to be adequate to recover
its investment in the acquired intangibles, and further believes the fair value
of such intangibles to be nominal. Accordingly, as of June 30, 2000, the Company
has written off $21,985,000, representing the then unamortized balance of such
intangibles, consisting principally of the excess of cost over the fair value of
identifiable net assets acquired.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MCY.com, Inc. owns and operates an Internet website located at
http://www.mcy.com, which provides an interactive environment and virtual music
store where music buyers can: (i) view live concert events and purchase various
music products and services including digital music downloads, compact discs and
pay-per-view live events; (ii) obtain information on various artists, musical
genres, new music releases, concert events, articles, reviews; and (iii) view
videotaped and real-time artist interviews and concerts. In addition to its
Internet operations, the Company is engaged in the business of acquiring and
licensing complete media rights, including television and home video rights, and
reselling, sublicensing and syndicating these rights to third parties. The
Company was incorporated on January 8, 1999 and has since been in the
development stage devoting its efforts to recruiting management and technical
staff, aggregating premium content, acquiring operating assets, raising capital
and organizing itself as a public reporting entity. The Company currently
operates within one industry segment on a global basis.
In addition to historical statements, this Quarterly Report on Form
10QSB contains certain forward-looking statements that are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from those stated or implied. Forward-looking statements are those that use the
words "anticipates," "believes," "estimates," "expects," "may," "will," and
similar expressions. These forward-looking statements reflect management's
opinions only as of the date hereof, and the Company assumes no obligation to
update this information. Risks and uncertainties include, but are not limited to
those discussed in the Company's prior SEC filings.
Results of Operations
Through June 30, 2000, we incurred costs to design, organize and
develop an Internet website to conduct our businesses. We began selling musical
recordings over the Internet in August 1999 and began our first significant
selling and marketing initiatives in the quarter ended September 30, 1999. We
may experience significant fluctuations in operating results in future periods
due to a variety of factors, including:
o the demand for downloadable and streaming music content and Internet advertising
o the addition or loss of advertisers
o the level of traffic on its Internet sites
o the amount and timing of capital expenditures and other costs relating to the expansion of its operations
o the introduction of new sites and services by us or our competitors
o seasonal trends in Internet use, purchases of downloadable music and advertising placements
o price competition or pricing changes in the industry
o technical difficulties or system downtime
o general economic conditions and economic conditions specific to the Internet
o the cost and availability of premium music and entertainment content
o market conditions and demand for the sale, sublicensing and syndication of music and entertainment content
Net Revenues
For the quarter and six months ended June 30, 2000, our consolidated
revenues totaled $225,000 and $263,000, respectively. Revenues for the quarter
and six months ended June 30, 2000 consisted of revenue from sublicensing
agreements, webcast pay-per-view revenue, the sale of NETrax software over the
Internet, and rental revenue received from a sublease of certain premises. The
Company had no revenues for the quarter or six months ended June 30, 1999 as the
Company had not yet begun its sales and marketing initiatives nor had its
technological infrastructure been fully operational to deliver digital
entertainment. Revenues from inception through June 30, 2000 totaled $606,000
and consisted primarily of advertising and sublicensing revenue with a minimal
percentage arising from the sale of webcast pay-per-views, digital downloads and
NETrax software over the Internet.
Sales, Marketing and Public Relations Expenses
Sales, marketing and public relations expenses consist primarily of:
o Sales and marketing salaries and benefits
o The cost of presenting free events and trade shows
o Consulting fees and related expenses for public relations activities, and
o European promotional activities including travel and entertainment
costs of participating individuals
Sales, marketing and public relations costs for the quarters ended June 30,
2000 and 1999 totaled $2,610,000 and $2,750,000, respectively. Sales, marketing
and public relations costs for the six months ended June 30, 2000 and 1999
totaled $6,275,000 and $2,781,000, respectively. During the quarter ended June
30, 1999, the Company began to incur significant sales, marketing and public
relations expenses due to the production of our first webcast. Sales, marketing
and public relations costs for the period from inception through June 30, 2000
totaled $14,794,000. These costs increased during the periods with the
development of the Company's marketing and branding strategy. As part of our
marketing strategy and in an effort to aggressively create brand awareness, a
significant portion of these costs were expended on presenting free events,
event sponsorship, trade shows and related promotional activities during the
twelve month period ended June 30, 2000.
We also expect to enter into various strategic alliances, begin other
targeted advertising and direct promotion campaigns, attend trade shows and
begin other activities to attract new customers. As a result, we expect to incur
significant sales and marketing expenses in future periods.
Product Development Expenses
We began our development efforts in June 1999. Product development
expenses consist principally of:
o website and content development, including software engineering, audio and video production and graphic design.
o telecommunications charges.
o salaries, rent, depreciation and other expenses related to building its music distribution business.
o amortization of premium content advances made to master rights holders/artists.
Product development expenses for the quarters ended June 30, 2000 and
1999 were $2,135,000 and $524,000, respectively. Product development expenses
for the six months ended June 30, 2000 and 1999 were $3,390,000 and $524,000,
respectively. These costs reflect the ongoing investment in our product
development efforts, particularly in software engineering and graphic design. We
started to incur product development costs during the quarter ended June 30,
1999, as the Company had not yet began its development towards the end of the
quarter. Product development expenses for the period from inception through June
30, 2000 totaled $5,519,000. The increase in product development costs over the
periods reflects the commencement of the Company's operations and continuing
development of the Company's website. Such costs consist mainly of personnel
costs related to technical and creative staff and managers.
Content Development
Content development consists primarily of costs incurred to maintain a
department dedicated to the acquisition of premium musical and other
entertainment-related content, including the costs of employee salaries and
related benefits, fees paid to consultants dedicated to content acquisition
activities and royalties paid to secure rights to music and related media.
Content development costs for the quarter ended June 30, 2000 and 1999 totaled
$3,446,000 and $175,000, respectively. Content development costs for the six
months ended June 30, 2000 and 1999 $4,677,000 and $175,000, respectively. We
began incurring content development costs towards the end of the quarter ended
June 30, 1999. Content development costs for the period from inception through
June 30, 2000 totaled $6,260,000. The increase in content development costs
during the periods is a reflection of the Company's aggressive content
acquisition strategy.
General and Administrative Expenses
General and administrative expenses consist primarily of executive
management, finance, legal, administrative and related overhead costs, such as
rent and insurance. General and administrative expenses for the quarters ended
June 30, 2000 and 1999 were $3,170,000 and $333,000, respectively. General and
administrative costs for the six months ended June 30, 2000 and 1999 were
$5,422,000 and $349,000, respectively. General and administrative costs totaled
$9,892,000 from inception through June 30, 2000. General and administrative
expenses increased during the periods principally as a result of additional
headcount required to manage the Company's growing operations.
Amortization of Acquired Intangibles
During 1999, MusicWorld acquired certain predecessor companies. As a
result, the Company recorded intangible assets comprised as follows:
Technology and related contracts $ 4,410,000
Record label contracts and catalogs 630,000
Excess of cost over fair value of identifiable net assets acquired 23,281,000
----------
$ 28,321,000
==========
Amortization of technology and related contracts as well as record label
contracts and catalogs are being amortized over three years resulting in an
amortization expense of $420,000 per quarter through June 2002. The excess of
cost over fair value of identifiable net assets acquired was being amortized
over 5 years, prior to Company's determination at June 30, 2000 to write-off
such intangibles in their entirety - see below.
The combined amortization expenses for the quarter and six months ended June 30,
2000 were $1,584,000 and $3,168,000, respectively. There were no similar charges
for the quarter or six months ended June 30, 1999. Combined amortization
expenses for the period from inception through June 30, 2000 totaled $6,336,000.
Write-off of Impaired Intangible Assets
As of June 30, 2000, the Company wrote off the unamortized balance
($21,985,000) of the intangible assets it acquired on July 2, 1999 as part of
its transaction with Datatek. The intangible assets consisted primarily of
certain technology, know how, etc., which the Company capitalized pursuant to
the acquisition which closed July 2, 2000. As stated above prior, to the
write-down during the three months ended June 30, 2000, the carrying amount of
the intangible assets was being amortized over a period of three and five years.
Based on recent changes in the digital music landscape, including, but not
limited to, the proliferation of a music sharing program known as "Napster",
litigation involving the major record labels and Napster, the delay of existing
physical music labels in adopting digital downloading as a delivery mechanism
for music, the limited penetration of broadband access to the consumer and
delays in technology delivery, the Company is presently of the belief that the
ability of such intangible assets to generate net cash flows over the planned
amortization period has been impaired to the extent that the value of the
acquired intangible assets should be written off in their entirety.
Stock Based Compensation
The Company recorded charges related to stock based compensation for the
quarter and six months ended June 30, 2000 of $3,631,000 and $11,242,000,
respectively. The Company recorded charges of $2,579,000 related to stock based
compensation for the quarter and six month period ended June 30, 1999.
Stock-based compensation for the period from inception to March 31, 2000 totaled
$61,146,000. Included in this amount is amortization of deferred compensation
arising from options issued to employees and consultants at various dates
amounting to $31,253,000. In addition, we recorded a compensation charge to
operations of approximately $23,741,000 during August 1999 in connection with a
sale by holders of 4,000,000 shares of HBI common stock of approximately
3,970,000 of such shares to certain of our stockholders who also served as
advisors to the Company. The balance of stock based compensation charges arose
from common stock, warrants and options issued to employees, consultants and
artists for services.
As of June 30, 2000, estimated future amortization related to stock based
compensation will be:
Employees and
Year Ending December 31, Consultants Artists
------------------------
2000 (from July 1 through December 31) $ 2,896,000 $1,427,000
2001 5,791,000
2002 4,142,000
2003 621,000
---------------------------------------------
$ 13,450,000 $1,427,000
=============================================
Share of Loss of Predecessor Companies
Share of loss of predecessor companies reflects the net loss incurred by
the Company as part of MusicWorld's acquisition of Datatek and Fritsch &
Friends. The Company's share of loss of predecessor companies for the quarter
and six months ended June 30, 1999 was $279,000 and $663,000, respectively.
Liquidity and Capital Resources
Our cash and available for sale securities balance as of June 30, 2000 was
$27,310,000. Net cash of $19,362,000 was used for operating activities for the
six months ended June 30, 2000. Such amounts were used principally as a result
of net losses of $55,484,000 generated during the period and the increase in
current assets of $3,900,000, offset by the increase in current liabilities of
$3,001,000, non-cash expenses associated with stock and stock-based compensation
of $11,242,000, non-cash expense associated with depreciation and the
amortization of intangibles of $3,599,000 and the non-cash write-down of
intangible assets of $21,985,000. The Company expects to incur negative cash
flow from operations for the foreseeable future, as we continue to develop our
business.
Additionally, the Company purchased approximately $3,200,000 in capital
equipment and incurred $6,202,000 to develop internal-use software during the
six months ended June 30, 2000. In addition, the Company made deposits relating
to the purchase of equipment totaling $2,863,000 during the six months ended
June 30, 2000, respectively. The company also repurchased $1,835,000 of common
stock from certain shareholders during the quarter ended June 30, 2000.
During the six months ended June 30, 2000, the Company raised net proceeds
of approximately $34,353,000 through the sale of 5,006,390 shares of its common
stock at $7.50 per share, in a private placement managed by three placement
agents.
The Company has commitments to spend approximately $1.3 million for
computer hardware and related equipment under a non-cancelable operating lease
expiring in March 2003.
Since inception, the Company has experienced significant losses and
negative cash flows from operations. Management believes that existing capital
resources will be sufficient to fund the planned level of operating activities,
capital expenditures and other obligations through the next 12 months. However,
the Company may need to raise additional funds in future periods through public
or private financings, or other sources, to fund operations and potential
acquisitions, if any, until profitability is achieved, if ever. The Company may
not be able to obtain adequate or favorable financing at that time. Failure to
raise capital when needed could harm the Company's business. If the Company
raises additional funds through the issuance of equity securities, the
percentage of ownership of the Company's stockholders would be reduced.
Furthermore, these equity securities might have rights, preferences or
privileges senior to the current common stock outstanding.
CERTAIN TRANSACTIONS
Set forth below are certain transactions in securities of MCY and MCY.com
which occurred during the six months ended June 30, 2000.
From February through March 2000, MCY.com sold an aggregate of 5,006,390
shares of its common stock at $7.50 per share, in a private placement managed by
three placement agents, resulting in net proceeds of approximately $34,353,000.
In January 2000, MCY.com agreed to issue the Backstreet Boys and their
nominees an eighteen month warrant to acquire up to 500,000 shares of MCY.com
common stock at a price of $9.75 per share.
In March 2000, MCY.com agreed to issue to Bad Boy Touring, Inc., the label
of the artist Sean "Puffy" Combs, a twelve month warrant to acquire up to
100,000 shares of MCY.com common stock at a price of $16.00 per share.
In March 2000, MCY.com agreed to issue the band *NSYNC and their nominees a
twelve month warrant to acquire up to 500,000 shares of MCY.com common stock at
a price of $13.17 per share.
In each of March, April, May and June 2000, MCY.com agreed to issue the
public relations firm, Susan Blonde, Inc., a twelve month warrant to acquire up
to 1,600 shares of MCY.com common stock at a price of $12.75, $12.63, $9.75, and
$8.44 per share, respectively.
In May 2000, warrants previously granted to a placement agent to purchase
657,330 shares of common stock at an exercise price of $6.00 per share were
exercised and paid for by the return to the Company of 326,033 shares of common
stock at an estimated market of $12.10 per share.
Incentive Option Plan
During January 2000, 42,500 options with an exercise price of $1.50 per
share and 225,000 options with an exercise price of $3.20 per share were
exercised and paid for by the return to the Company of 79,874 shares of Common
Stock at an estimated market price of $9.81 per share.
In April and May 2000, MCY.com granted additional options to employees and
consultants to purchase an aggregate of 1,245,000 common shares at an average
exercise price of $6.00 per share.
As of June 30, 2000, 7,019,500 options were outstanding under the Company's
Incentive Option Plan, at a weighted average exercise price of $4.38 per share
of MCY.com Common Stock. The options generally vest over a period of three years
from the date of grant and are exercisable at different prices corresponding to
the date of grant. Each option entitles the holder to purchase one share of
MCY.com Common Stock.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
A former trade partner, Mr. Xavier Ghali, contributed DM 1,600,000 to the
development of our technological platform and subsequently demanded repayment of
DM 1,210,000 of this amount on January 30, 1998. Fritsch & Friends rejected this
demand on February 3, 1998, and since then the partner has not pursued this
alleged claim. In addition, Fritsch & Friends entered into an agreement with an
investment group in November, 1997, which it subsequently revoked. In February
2000, we received a notice from the American Arbitration Association ("AAA")
indicating that a request for arbitration had been filed by the above-mentioned
investment group. To date, however, we have not received any documents
indicating the basis or the grounds for the claim. We believe that it is
unlikely that we will sustain material losses in connection with these matters
in excess of amounts previously accrued.
On December 16, 1999, Mr. Peter Rohde, a former employee of MusicWorld
filed a complaint against us in New York State Supreme Court. Mr. Rohde, the
plaintiff, had been employed by MCY America, Inc., a subsidiary of MusicWorld,
as an assistant manager in November 1998 pursuant to a letter employment
agreement dated November 10, 1998. The plaintiff entered into a subsequent
employment agreement with MusicWorld dated July 9, 1999 as a content manager and
a trust and confidentiality agreement which contained non-competition and
confidentiality provisions. In August 1999, the plaintiff was observed entering
our offices at unusual hours. On August 21, 1999, he was observed exiting our
offices with what was believed to be a personal computer and a large bag
containing proprietary information about our company. As a result, we terminated
the plaintiff on August 27, 1999. In his complaint, his claims included breach
of contract, wrongful termination and fraud related to his inability to collect
fees due to alleged fraudulent misrepresentations by the company concerning the
effectiveness of the technology. In his complaint, he asked for damages of
approximately $23,000,000 including 20,000 shares of MCY.com, Inc. common stock,
stock options, fees and royalties. Based upon our understanding of the facts, we
believe that Mr. Rohde's claims lack substantial merit and we intend to
vigorously defend against this action. We filed an answer and counterclaims
against Mr. Rohde in March 2000. To date, the plaintiff has not provided any
calculation to support the financial basis of his claim. The defendants' motion
to dismiss was partially granted on June 6, 2000 in a decision and order which
dismissed three of the plaintiff's causes of action. The decision and order,
however, allow the plaintiff to pursue certain contract claims pending the
results of discovery.
On May 3, 2000, Andrew Sugerman, an individual who had been retained by MCY
America, Inc. and MCY Music World, Inc. to obtain equity capital from a specific
investor for MCY Music World, Inc., filed a complaint against the defendants MCY
America, Inc. and MCY Music World, Inc. in federal District Court in New York
City, alleging claims for breach of contract, promissory estoppel and unjust
enrichment. The complaint does not appear to allege a claim for breach of a
written engagement agreement but rather appears to allege that the defendants
allegedly breached an oral agreement to compensate the plaintiff for enabling
the defendants to obtain financing through a well-known investment banking firm.
The plaintiff asserts further that he is entitled to a cash fee, as well as
stock options, in return for his alleged involvement in the financing, and seeks
damages of at least $13,315,000, together with prejudgment interest and costs.
As we believe that the plaintiff's claims lack substantial merit, we intend to
vigorously defend against this action and have filed a motion for summary
judgment. We believe that the outcome of this litigation will not have a
material adverse effect on our financial position or results of operations.
From time to time, we are parties to various other claims and legal
proceedings incidental to our business. We believe that adequate liabilities to
cover any resulting losses have been reflected in our financial statements, and
that the outcome of these claims and proceedings will not have a material
adverse effect on our the financial position or results of operations.
Item 2. Changes in Securities.
None; not applicable.
Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's security holders during
the second quarter of the calendar year covered by this Report or during the two
previous calendar years.
Item 5. Other Information.
None; not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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.
MCY.COM, INC.
Date: 08/21/00 By /s/ Bernhard Fritsch
-------- --------------------------------
Bernhard Fritsch, CEO & Chairman
and President