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, 2001
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File No. 0-25167
------
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:
62,149,507 at June 30, 2001 of common stock (.001 per value)
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
Transitional Small Business Issuer Format Yes x No
PART I - FINANCIAL INFORMATION
MCY.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
MCY.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, December 31,
2001 2000
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,047,000 $ 10,300,000
Sundry receivables 368,000 343,000
Available-for-sale securities 3,708,000
Advances to officer 91,000 101,000
Other current assets 55,000 63,000
----------------- -----------------
Total current assets 8,269,000 10,807,000
Equipment and software, net 3,523,000 9,034,000
Other assets, including security deposits of $850,000 and $3,789,000, record
company advances of $0 and $500,000 and prepaid costs
of $401,000 and $670,000, respectively. 1,273,000 4,989,000
----------------- -----------------
$ 13,065,000 $ 24,830,000
================= =================
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and sundry liabilities $ 3,934,000 $ 4,538,000
Obligation related to securities 2,666,000
Current portion of capital lease obligation 713,000
Deferred revenue 542,000 471,000
----------------- -----------------
Total current liabilities 7,142,000 5,722,000
Capital lease obligation, net of current portion 1,681,000
----------------- -----------------
7,142,000 7,403,000
----------------- -----------------
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;
62,149,507 and 59,670,551 shares issued and outstanding, respectively 62,000 59,000
Common stock payable (50,000 and 1,326,313 shares) 525,000 2,360,000
Additional paid-in capital 185,230,000 182,961,000
Deficit accumulated during the development stage (172,037,000) (158,491,000)
Cumulative foreign currency translation adjustment (183,000) (190,000)
------------------ -----------------
13,598,000 26,700,000
Unamortized deferred compensation (7,611,000) (9,209,000)
Stock subscriptions receivable (64,000) (64,000)
----------------- -----------------
5,923,000 17,427,000
----------------- -----------------
$ 13,065,000 $ 24,830,000
================= =================
2
MCY.COM, INC. AND SUBSIDIARIES
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
2001 2000 2001 2000 June 30, 2001
Revenues (Note D) $ 521,000 $ 225,000 $ 1,099,000 $ 263,000 $ 1,916,000
--------------- ------------- --------------- --------------- -----------------
Expenses:
Sales, marketing and public
relations 188,000 2,712,000 1,051,000 6,446,000 21,017,000
Product development 1,314,000 2,366,000 3,305,000 3,780,000 11,939,000
Content acquisition 545,000 5,844,000 1,688,000 7,308,000 22,712,000
General and administrative 3,050,000 4,341,000 6,968,000 13,903,000 80,874,000
Amortization of acquired
intangibles 1,584,000 3,168,000 6,336,000
Write-off of impaired
intangible assets 21,985,000 21,985,000 28,385,000
--------------- ------------- --------------- --------------- -----------------
5,097,000 38,832,000 13,011,000 56,590,000 171,263,000
--------------- ------------- --------------- --------------- -----------------
Operating loss (4,576,000) (38,607,000) (11,913,000) (56,327,000) (169,347,000)
Share of loss of predecessor
companies (663,000)
Realized loss on disposition (1,869,000)
of securities (1,869,000) (1,869,000)
Interest income, net of interest
expense 60,000 408,000 237,000 843,000 2,413,000
--------------- ------------- --------------- --------------- -----------------
Net loss $ (6,386,000)$ (38,199,000) $ (13,546,000) $ (55,484,000) $ (169,467,000)
============================== =============== ================ ==================
Net loss per common share -
Basic and diluted $(0.10) $(0.64) $(0.22) $(0.96)
====== ====== ====== ======
Weighted average common
shares outstanding 62,186,000 59,599,000 61,602,000 57,699,000
=============== ============= =============== ===============
3
MCY.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Preferred Stock Common Stock Common
---------------------------------- -----------------------------------
# of # of Par Stock
Shares Amount Shares Value Payable
----------------- ---------------- ----------------- ----------------- --------------
Balances - January 1, 2001 1,000,000 $ 1,000 59,670,551 $ 59,000 $ 2,360,000
Issuance of common stock in
connection with services to
the Company 586,667 1,000
Issuance of stock to ADSX 615,976 1,000
Issuance of common stock
payable 1,276,313 1,000 (1,835,000)
Issuance of common stock
options in connection with
services to the Company
Cancellation of non-vested
options issued to employees
and consultants
Amortization of deferred
compensation
Comprehensive loss:
Gain on foreign currency
translation
Net loss for period
Balances - June 30, 2001 1,000,000 $ 1,000 62,149,507 $ 62,000 $ 525,000
============== ============== ============== ============== =========
MCY.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(cont'd)
Deficit Cumulative
Accumulated Foreign
Additional During the Currency Unamortized Stock
Paid-In Development Translation Deferred Subscription
Capital Stage Adjustment Compensation Receivable Total
----------------- ---------------- -------------- ---------------- -------------- ------------
Balances - January 1, 2001 $ 182,961,000 $(158,491,000) $ (190,000) $ (9,209,000) $ (64,000) $17,427,000
Issuance of common stock in
connection with services to
the Company 298,000 299,000
Issuance of stock to ADSX 306,000 307,000
Issuance of common stock
payable 1,834,000
Issuance of common stock
options in connection with
services to the Company 550,000 (550,000)
Cancellation of non-vested
options issued to employees
and consultants (719,000) 719,000
Amortization of deferred
compensation 1,429,000 1,429,000
Comprehensive loss:
Gain on foreign currency
translation 7,000 7,000
Net loss for period (13,546,000) (13,546,000)
------------
(13,539,000)
------------
Balances - June 30, 2001 $ 185,230,000 $(172,037,000) $ (183,000) $ (7,611,000) $ (64,000) $ 5,923,000
============== ============== ============== ============== ============ ============
4
MCY.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
(Unaudited)
For the For the
Six Months Ended Six Months Ended Inception (January
8, 1999)
June 30, June 30, Through
2001 2000 June 30, 2001
Cash flows from operating activities:
Net loss $ (13,546,000) $ (55,484,000) $ (169,467,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of equipment
and software 1,357,000 431,000 2,447,000
Amortization of intangibles 3,168,000 6,336,000
Write-off of impaired intangibles, equipment
and software 21,985,000 28,385,000
Stock-based compensation 1,728,000 11,242,000 68,594,000
Compensation paid in securities 882,000 882,000
Realized loss on disposition of securities 1,869,000 1,869,000
Share of loss of predecessor companies 663,000
Changes in:
Record company advances 195,000
Receivables (25,000) (979,000) (373,000)
Other current assets 18,000 (2,921,000) 654,000
Other assets 1,322,000 690,000
Accounts payable, accrued expenses, sundry
liabilities and deferred revenue (533,000) 3,001,000 1,774,000
----------------- ---------------- ----------------
Net cash used in operating activities (6,928,000) (19,362,000) (57,546,000)
---------------- ---------------- ----------------
Cash flows from investing activities:
Cost of developing internal-use software (6,202,000) (7,558,000)
Datatek acquisition, net of acquired cash of $565,000 (1,748,000)
Decrease (increase) in security deposits 2,394,000 (2,863,000) (1,398,000)
Proceeds from sale of available-for-sale securities 500,000 3,700,000
Investment in available-for-sale securities (3,200,000) (3,200,000)
Purchase of equipment (6,115,000) (4,372,000)
---------------- ---------------- -----------------
Net cash provided by (used in) investing activities 2,894,000 (18,380,000) (14,576,000)
---------------- ---------------- -----------------
Cash flows from financing activities:
Purchase of treasury stock (1,835,000) (1,835,000)
Principal payments on line of credit (40,000)
Principal payments on capital lease obligation (2,394,000) (2,394,000)
Proceeds from sale of stock and warrants, net of related costs 34,353,000 80,759,000
---------------- ---------------- ----------------
Net cash (used in) provided by financing activities (2,394,000) 32,518,000 76,490,000
----------------- ---------------- ----------------
Effect of exchange rate changes on cash 175,000 198,000 (321,000)
---------------- ---------------- ----------------
Net (decrease) increase in cash and cash equivalents (6,253,000) 5,461,000 4,047,000
Cash and cash equivalents, beginning of period 10,300,000 26,060,000
---------------- ----------------
Cash and cash equivalents, end of period $ 4,047,000 $ 21,034,000 $ 4,047,000
================ ================ ================
5
MCY.COM, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows (Continued)
(Unaudited)
For the For the
Six Months Ended Six Months Ended Inception (January
8, 1999)
June 30, June 30, Through
2001 2000 June 30, 2001
Supplemental disclosures of non-cash investing and financing
activities:
Issuance of warrants relating to events $ 3,894,000
Deferred compensation to consultants and employees by
issuance of options $ 550,000 $ 41,997,000
Acquisition of securities in connection with sale of
internal-use software ($3,986,000), incurrence of related
obligation ($9,000,000) and issuance of common
stock ($307,000) $ 13,293,000 $ 13,293,000
Reduction in market value of securities and related
obligation $ 6,334,000 $ 6,334,000
Issuance of common stock payable $ 1,835,000 $ 1,835,000
Issuance of stock for stock subscription receivable $ 64,000
Issuance of stock and warrants in connection with Datatek
acquisition $ 25,590,000
Issuance of stock for notes payable and accrued interest $ 730,000
Acquisition of fixed assets by capital lease $ 2,394,000
6
MCY.COM, INC. AND SUBSIDIARIES
Condensed Notes to Financial Statements
June 30, 2001
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) considered
necessary for a fair presentation have been included. The results of operations
for the six months ended June 30, 2001 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,
2000.
The Company operates an Internet website offering an interactive
environment and virtual music store where music buyers can purchase digital
music downloads and web-casts in an encrypted and enhanced format, as well as
other products. Due to several factors which occurred in the year ended December
31, 2000, it repositioned its operations to focus on (i) the acquisition,
production and sales through broadcast, cable, Internet and physical
distribution channels of premium music and media products, and (ii) the
development and sale of NETrax technology that will provide customers with
solutions for the secure and accountable distribution of digital assets across
all of the emerging digital channels, i.e., Internet, broadband and wireless.
These two businesses, although complementary, are not dependent upon each other
for customers or revenue. The Company is considered to be in the development
stage since, although planned operations have commenced, 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, including the write-down of the carrying value
of intangibles and certain equipment and software, and utilized substantial cash
in operating activities. Further, the Company has generated minimal revenues. In
response thereto, management has repositioned its operations as described above
and implemented a plan to reduce operating expenses, including the reduction of
personnel. The Company's business concept and business model are unproven and,
accordingly, the Company's viability is uncertain.
Management believes that operating losses and negative operating cash flows will
continue in fiscal year 2001 and thereafter which raises substantial doubt about
the Company's ability to continue as a going concern. The Company's continued
existence is dependent on its ability to obtain additional equity and/or debt
financing to fund its operations and ultimately to achieve profitable
operations. The Company may attempt to raise additional financing through
additional private placements. There is no assurance that the Company will
obtain additional financing or achieve profitable operations. The financial
statements do not include any adjustments relating to the recoverability or
classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary as a result of this uncertainty.
NOTE B - COMMITMENTS AND CONTINGENCIES
[1] Lease commitments:
(a) Operating:
The Company leases facilities and equipment under noncancellable
operating leases expiring through October 2004. Such leases provide for
annual payments as detailed below. In connection with the aforementioned
leases, the Company has provided security deposits of $850,000 (included
in other assets.)
7
Future minimum annual lease payments as of June 30, 2001 are as follows:
For The Year Ending
December 31,
2001 (July 1 through December 31) $ 468,000
2002 876,000
2003 7,000
2004 0
2005 0
---------------
$ 1,351,000
---------------
(b) Capital:
The Company entered into a 36-month lease, effective January 1, 2001, to
finance computer equipment and software. This lease was accounted for as
a capital lease. The net book amount of equipment held under this capital
lease was $2,394,000 at December 31, 2000. In connection with the lease,
the Company provided deposits of $75,000 and deposited $2,529,000 as
collateral for letters of credit issued by a bank to the lessor and
equipment vendor.
On March 23, 2001, the Company and the lessor entered into an agreement
to terminate the lease. In return for a cash payment of $2,330,000 to the
lessor, the Company took ownership of the leased equipment and software.
The carrying value of the equipment and software was increased by the
$262,000 excess of the payment over the $2,068,000 carrying amount of the
capital lease obligation at such date.
[2] Legal proceedings:
On May 3, 2000, an individual who had been retained by MCY America, Inc. and
MusicWorld to obtain equity capital from a specific investor for MusicWorld
filed a complaint against the defendants MCY America, Inc. and MusicWorld in
federal District Court in New York City, alleging claims for breach of contract,
promissory estoppel and unjust enrichment. The plaintiff appears to allege a
claim for breach of a written engagement agreement and 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.
The Company believes that the plaintiff's claims lack substantial merit and
intends to vigorously defend against this action. The Company's motion for
summary judgment is currently pending before the court.
In November 2000, Ozzy Osbourne, Osbourne Management and other performers who
appeared in the Ozzfest 2000 tour commenced an action against the Company and
its sub-licensees DirecTV Enterprises, Inc. ("DirecTV") and iN Demand LLC ("iN
Demand") in the United States District Court for the Central District of
California in reference to pay-per-view television broadcasts of performances
from the Ozzfest 2000 tour on DirectTV and iN Demand. The plaintiffs seek
$20,000,000 in damages, as well as profits earned by the defendants, copyright
infringement damages, legal fees and the film footage. The plaintiffs followed
the filing of the action with an application to the court for a temporary
restraining order which was subsequently denied. The matter arises out of a
Sponsorship Agreement executed in April, 2000 (the "Agreement") among
MusicWorld, Osbourne Management and SFX Holdings, Inc. ("SFX"), whereby
defendants allege that MusicWorld obtained the right, amongst other things, to
produce a videotape of the Ozzfest 2000 concert tour and license the program for
broadcast in various media outlets including pay-per-view television. Pursuant
to the Agreement, MusicWorld thereafter entered into license agreements with
DirecTV and iN Demand licensing the program for specified time periods to
broadcast the videotape produced by MusicWorld pursuant to the Agreement, on a
pay-per-view television or cable basis. In summary, the complaint filed by the
plaintiffs alleges that the Agreement only provided MusicWorld the right to
broadcast the MusicWorld videotape as a Web-cast over the Internet and that the
defendants proceeded with the pay-per-view television and cable broadcasts
without obtaining the allegedly required consents of the plaintiffs.
Furthermore, plaintiffs allege claims against MusicWorld, iN Demand and DirecTV
8
for federal copyright infringement, federal trademark infringement, federal
trademark dilution, commercial appropriation of identity, state statutory and
common law trademark dilution, unfair competition and constructive trust.
Plaintiff Osbourne Management further has alleged a claim against MusicWorld for
breach of the Agreement. Among other claims and defenses, MusicWorld contends
that it acted within its rights under the Agreement; that the Agreement was
breached by Osbourne Management; and that under the Agreement, Osbourne
Management was obligated to provide MusicWorld with all necessary clearances for
the pay-per-view broadcasts which occurred. MusicWorld further contends that,
under the Agreement, as a result of the breach of the Agreement by Osbourne
Management, SFX is obligated to indemnify, hold harmless and defend MusicWorld
for any breach of the Agreement by Osbourne Management, and that both Osbourne
Management and SFX are obligated to indemnify, hold harmless and defend
MusicWorld for the claims asserted by the plaintiffs who are not parties to the
Agreement, as well as any claims which hereafter may be asserted by any third
parties. MusicWorld intends to vigorously defend this action and has filed
several counterclaims with its answer against the Osbourne plaintiffs, including
breach of contract and interference with contract. This matter is in the early
discovery stage.
In July 2000, MusicWorld commenced an action in the Supreme Court of the State
of New York, New York County against TBA Entertainment Corp. ("TBA"), arising
out of a contract to acquire certain rights relative to musical performances at
the "2000 Hard Rock Rockfest" concert festival. In the action, the Company
alleges breach of contract, misrepresentation and fraud in the inducement for
TBA's knowing failure to deliver rights necessary for MusicWorld to exploit the
concert rights on the Internet and television pursuant to the terms of the
contract between the companies and to recover damages in the amount of
out-of-pocket costs incurred thereby. Defendant TBA and counterclaim plaintiff
Hard Rock International (USA), Inc. have asserted counterclaims for $1,000,000
against MusicWorld for breach of contract. MusicWorld has filed motions to
dismiss the counterclaims and amend the complaint which are currently pending
before the court and intends to vigorously pursue its claims and defenses. This
matter is in the discovery stage.
During the quarter ended March 31, 2001, MusicWorld filed for arbitration with
the American Arbitration Association against SFX Marketing, Inc. ("SFX")
claiming breach of contract arising out of an agreement between parties entered
into in September, 2000. In summary, among other claims, the Company claims that
SFX failed to perform under the terms of the agreement between the parties and
seeks rescission of the agreement and return of payments aggregating $150,000
made by the Company to SFX. SFX has filed a counter arbitration arising out of
the same agreement seeking payments under the contract totaling $600,000. The
parties are currently in arbitration.
The ultimate outcome of the litigation and arbitration referred to in the second
through fifth paragraphs above is not presently determinable, however,
management believes that an adverse outcome in any of such matters could have a
material adverse effect on the financial position or results of operations of
the Company.
NOTE C - STOCKHOLDERS' EQUITY
[1] During the six months ended June 30, 2001, the Company issued to a vendor
1,742,980 shares of common stock (including 1,276,313 shares previously
recorded as issuable) in payment for services, 120,000 shares of common
stock to artists and 615,976 shares (see Note D) in connection with the
ADSX transaction.
[2] During the six months ended June 30, 2001, in connection with the
resignation of certain employees, approximately 1,555,000 non-vested
options previously granted were cancelled. Additionally, with respect to
those certain employees, the period over which approximately 538,000
vested options are exercisable will expire 90 days from date of
resignation and, as of June 30, 2001, 445,000 of those vested options
expired.
[3] During the six months ended June 30, 2001, the Company issued an option
to purchase 2,500,000 shares of the Company's stock at an exercise price
of $0.35 to a consultant. Such option was valued at $550,000 utilizing
the Black-Scholes valuation model and the following factors; a fair
market value of $0.43 per share, an expected life of 3 years, a risk-free
interest rate of 5.70%, a dividend rate of $0.00 and a volatility of 60%.
NOTE D - LICENSE AGREEMENT
In October 2000, the Company signed an agreement to license their proprietary
secure digital encryption and distribution technologies, including its NETrax
software, to Applied Digital Solutions, Inc. ("ADSX"), a provider of e-business
solutions (the "Agreement".) The Agreement, as amended on March 30, 2001, allows
ADSX to utilize the Company's NETrax technologies for certain non-entertainment
business-to-business applications. Under the terms of the Agreement, on April 3,
9
2001, the Company received net consideration of approximately $3,986,000 for the
grant of the license, consisting of $13,293,000, representing the quoted market
value of the approximately 11.8 million shares of common stock of ADSX (a
publicly held company whose shares are traded on the NASDAQ); reduced by
$307,000, representing the quoted market value of the approximately 615,000
shares of common stock of the Company issued to ADSX and cash, not to exceed
$9,000,000, payable to ADSX from certain proceeds of the sale by the Company of
ADSX's stock. Such net consideration is based on the quoted market price of the
common stock of ADSX and the Company on April 3, 2001, the date the software and
shares were released from escrow. The net consideration received was applied in
accordance with SOP 98-1 to reduce the approximately $3,986,000 carrying value
of the NETrax software.
Under the terms of the Agreement, the Company is to keep the first $2,000,000
realized from the sale of ADSX shares, with the next $9,000,000 realized to be
paid to ADSX in satisfaction of the $9,000,000 payable, and any proceeds in
excess of $11,000,000 are to be kept by the Company. Alternately, the $9,000,000
payable to ADSX can be satisfied by the return to ADSX of any unsold shares held
by the Company at October 13, 2001. As of June 30, 2001, the Company is deemed
to have realized a total of $958,000 in proceeds from the disposition of ADSX
shares and is entitled to retain the next $1,042,000 in proceeds. The quoted
market price at June 30, 2001 of the remaining ADSX shares held by the Company
amounted to approximately $3,708,000. As of June 30, 2001, the obligation to
ASDX has been reduced to $2,666,000 by realized and unrealized losses
aggregating $6,334,000 due to the decline in market value of the ADSX shares
which are for the account of ADSX. Any future proceeds, up to $9,000,000,
realized in excess of $1,042,000, together with any remaining unsold shares may
be transferred to ADSX in full payment of any remaining obligation. During the
three months ended June 30, 2001, the Company has realized losses aggregating
$1,869,000 on disposition of the ADSX shares, including the loss referred to
below. Such amount is net of $562,000 of realized losses charged to ADSX.
In accordance with the terms of amended employment agreements entered into on
April 1, 2001, the Company's Chairman and CEO, and its Manager of Business
Affairs, each was entitled to receive; (i) shares of ADSX stock valued at
$200,000 based on the closing bid price on April 3, 2001 and (ii) 10% of the
ADSX shares remaining (if any) after satisfaction of the $9,000,000 obligation
payable out of proceeds of the sale of ADSX shares. Compensation expense of
$400,000 was recognized by the Company as a result of such agreement. The
transfer of shares to the individuals was delayed until June 15, 2001 when the
registration statement filed by ADSX registering the Company's shares was
declared effective by the SEC. As a result of the delay and the intervening
decline in quoted market price of the ADSX stock, the Company agreed to provide
additional shares to the Company's Chairman and CEO, and its Manager of Business
Affairs so that the quoted market price of the total shares issued to each
individual totaled $200,000 on June 15, 2001. As a result, the Company
recognized an additional $283,000 in compensation and $681,000 in realized loss
on disposition of securities. . In addition, two other individuals each received
ADSX stock as compensation for assistance in completing the transaction,
resulting in $199,000 of compensation expense.
NOTE E - SUBSEQUENT EVENT
On July 7, 2001, the Company .entered into a Letter of Intent to acquire a
privately held sports and entertainment company (the "Target") in an exchange of
stock, whereby the Company would receive all of the outstanding stock of the
Target in exchange for 5,000,000 shares of the Company's common stock. The
acquisition is contingent upon the Target's acquiring a music catalog from a
third party. There can be no assurance that any of these transactions will
occur.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
When used in this discussion and analysis, the words "anticipates,"
"estimates," "expects" and similar terms are intended to identify
forward-looking statements regarding our activities that are subject to risks
and uncertainties, including those set forth above under "Risk Factors," that
could cause actual results to differ materially from those projected. These
forward-looking statements refer only to the date hereof. We expressly disclaim
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statements contained herein to reflect any changes in
events, conditions or circumstances on which any statement is based. You should
read this discussion and analysis in conjunction with the financial statements
and other financial information contained in this Quarterly Report on Form
10-QSB.
In addition to historical statements, this Quarterly Report on Form
10-QSB 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
We are a next-generation media company, focused on the acquisition,
production and sale of premium music and media products across all available
channels. To enable the secure and accountable delivery of digital assets over
digital channels, we also develop and license proprietary digital rights
management and digital asset management technologies.
During the first six months of 2001, we focused our efforts on the
commercialization of our content assets and the completion of our technology
platform.
We are subject to the general risks associated with, in the case of our
technology business, the growth of a development stage technology company that
is moving to commercialize its products, and in the case of our media business,
a competitive market for the acquisition, production and licensing of music and
media products.
We have incurred significant net losses since inception and generated
minimal revenues related to our planned operations during the first six months
of 2001. We may experience significant fluctuations in operating results in
future periods due to a variety of factors, including:
o general global economic conditions;
o the amount and timing of capital expenditures and other costs relating
to the expansion of our operations;
o the speed and nature of broadband growth;
o consumer and business demand for music media products;
o consumer and business demand for digital content delivery solutions;
o the introduction of new products and services by us or our competitors;
o price competition or pricing changes in the entertainment and
technology industries;
o the availability of event and other music product rights for
acquisition; and
o actions of major music and media conglomerates.
Net Revenues
For the quarter and six months ended June 30, 2001, our consolidated
revenue totaled $521,000 and $1,099,000, respectively. Revenue for the quarter
and six months ended June 30, 2001 consisted primarily of licensing fees derived
from the exploitation of media rights and products related to music
concert events.
11
Revenue from the licensing and distribution of content through
broadcast, cable, wireless and physical distribution channels is recorded in the
licensing period in which the broadcast and/or distribution takes place. This
licensing period may have a lifetime of several months or, in some cases,
several years. Advertising revenues are derived from the sale of advertising
space on our website and are recorded during the period in which the advertising
services are provided. We recognize revenue applicable to delivery of music when
the digital files and/or streams are delivered with related royalties charged to
the cost of sales.
Sales, Marketing and Public Relations Expenses
Sales, marketing and public relations expenses consist primarily of:
o Sales and marketing salaries and benefits, including stock-based compensation;
o The cost of producing and promoting events and attending trade shows;
o Consulting fees and related expenses for public relations activities.
Sales, marketing and public relations costs for the quarters ended June
30, 2001 and 2000 totaled $188,000 and $2,712,000, respectively. Sales and
marketing expenses costs for the six months ended June 30, 2001 and 2000 totaled
$1,051,000 and $6,446,000, respectively. A significant portion of 2000 sales
and marketing budgets were expended on activities designed to increase MCY
consumer brand awareness. In 2001 sales and marketing activities have been
entirely focused on the acquisition and management of business-to-business
customers.
We expect a continued reduction in sales and marketing expenditures in
2001 due to: (1) increased outsourcing of technology sales through
performance-based compensation agreements; and (2) the shift of almost all
content marketing expenditures to business-to-business licensing and
distribution partners.
Product Development Expenses
Our predecessor companies began developing the NETrax(TM) suite of
products in 1995. Product development expenses consist principally of:
o software development;
o telecommunications and network services charges;
o www.mcy.com website development and maintenance; and
o salaries, including stock-based compensation, and other expenses
related to building our digital music distribution platform and
partnerships.
Since inception, we have spent over $23,000,000 designing and building
NETrax(TM) including expenses related to software, equipment, personnel and
direct product development expenses. Our direct product development expenses for
the quarters ended June 30, 2001 and 2000 were $1,314,000 and $2,366,000,
respectively. Product development expenses for the six months ended June 30,
2001 and 2000 were $3,305,000 and $3,780,000, respectively.
We expect minimal technology product development costs for the
remainder of 2001. Furthermore, with the formation of our NETrax Technologies,
Inc. ("NTI") subsidiary, subject to availability of sufficient capital, we
expect an increase in the level of operational and developmental activities.
Content Acquisition
Costs incurred with respect to content acquisition include amounts paid
to secure rights to music and related media as well as the costs related to the
production and delivery of finished products to our customers, including
stock-based compensation and the costs of employee salaries as well as
consultants dedicated to content acquisition activities. Content acquisition
costs for the quarter ended June 30, 2001 and 2000 totaled $545,000 and
$5,844,000, respectively. Content acquisition costs for the six months ended
June 30, 2001 and 2000 $1,688,000 and $7,308,000, respectively. The reduction in
content acquisition costs is due to a reduction in rights related sponsorship
activities, and to an increased focus on smaller, more cost effective event
production.They were offered at no charge and, therefore, were included in sales
and marketing expenses. In 2001, we no longer use such strategy.
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General and Administrative Expenses
General and administrative expenses consist primarily of stock-based
compensation, and executive management, finance, legal, administrative and
related overhead costs, such as rent and insurance. General and administrative
expenses for the quarters ended June 30, 2001 and 2000 were $3,050,000 and
$4,341,000, respectively. General and administrative costs for the six months
ended June 30, 2001 and 2000, were $6,968,000 and $13,903,000, respectively. In
2000, $7,287,000 of our general and administrative expenses was attributable to
stock-based compensation. In 2001, stock-based compensation totaled $1,728,000.
This decrease in general and administrative expenses is primarily attributable
to the decrease in stock-based compensation which accounted for $5,559,000 of
this difference, partially offset by an increases in other expenses. For the
remainder 2001, we expect general and administrative expenses to decrease due to
cost cutting initiatives begun in August 2000.
Equipment and Software
Based on the limited revenues to date earned by us related to our
equipment and software, and giving further consideration to the impact of events
outside of our control such as rapidly changing market circumstances on consumer
acceptance of our business model and proposed product offerings, and the delayed
development of technology conducive to our intended operations, including, but
not limited to the development of broadband transmission networks, we have
revised our projections of future cash flows as they relate to certain of our
investments in equipment and software. As a result, we no longer expect
reasonable estimable future net cash flows related to the use of certain of our
equipment and software over the remaining estimated useful lives of these assets
to be adequate to recover our investment in the selected equipment and software,
and further believe the fair value of such equipment and software to be nominal.
Accordingly, as of December 31, 2000, we wrote off $6,400,000, representing the
then undepreciated balance of such equipment and software.
Amortization of Acquired Intangibles
During 1999, Music World acquired certain predecessor companies. As a
result, we 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
The identifiable intangible assets were being amortized over a thirty-six month
period and the excess of cost over fair value of identifiable net assets
acquired was being amortized over a sixty month period until June 30, 2000 as
discussed below.
We account for impairment of long-lived assets, including our
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.
We evaluate at each balance sheet date whether events and circumstances have
occurred that indicate possible impairment. In accordance with SFAS No. 121, we
use 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 our acquired
intangibles, and giving further consideration to the impact of events outside of
our control such as rapidly changing market circumstances related to consumer
acceptance of the company's business model and proposed product offerings, and
the delayed development of technology conducive to its intended operations,
including, but not limited to the development of broadband transmission
networks, we have revised our projections of future cash flows as they relate to
the acquired intangibles. As a result, we no longer expect reasonably estimable
future net cash flows related to the use of our acquired technology over the
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remaining estimated useful lives of the intangibles to be adequate to
recover our investment in the acquired intangibles, and further believe the fair
value of such intangibles to be nominal. Accordingly, as of June 30, 2000, we
wrote 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.
Prior to Music World's acquisition of the above-referenced predecessor
companies, Bernhard Fritsch and certain other individuals employed by the
predecessor companies engaged in research and development activities which
included the development, purchase, licensing and acquisition of rights to
utilize technology and property rights including patent, copyright, trademark
and trade secrets. These acquired rights and software assets developed by Mr.
Fritsch and others to distribute media under these rights include:
o digital distribution and encrypted delivery of all forms of media;
o physical distribution and delivery of such media;
o online, Internet or electronic distribution, transfer or delivery of
such media;
o digital warehousing of such media;
o physical warehousing of such media;
o database storage of such media ;
o search of such media by any means and through any medium now known or
as may become known in the future; and
o operation of a "shopping basket" for the purchase of such media.
Prior to the formation of NTI, costs incurred as a result of engaging
in the above described activities were primarily concentrated in the rights
acquisition area followed by the payment of salaries in the development of the
software to exploit such rights. The result of such activities and costs
incurred in obtaining the various rights described above prior to the
acquisition of the predecessor companies by Music World was the development of
the NETrax(TM) player, our proprietary software for playing downloadable music
and proprietary encryption software contained within the NETrax(TM) player.
Stock Based Compensation
We recorded charges related to stock based compensation for the quarter
and six months ended June 30, 2001 of $514,000 and $1,728,000, respectively.
Future amortization related to stock based compensation will be:
Year Ending December 31, Amount
------------------------ ------
2001 (July 1 through December 31 only) $ 4,049,000
2002 $ 3,114,000
2003 $ 448,000
Liquidity and Capital Resources
Our cash balance as of June 30, 2001 was $4,047,000. Net cash of
$6,928,000 was used for operating activities during the six months ended June
30, 2001 consisting of net losses of $13,546,000, substantially offset by:
non-cash expenses of $1,728,000 associated with stock and stock-based
compensation and $1,357,000 associated with the depreciation of capital assets,
as well as realized loss on sale of securities of $1,869,000.
During the six months ended June 30, 2000, net cash of $19,362,000 was
used for operating activities consisting of net losses of $55,484,000,
substantially offset by non-cash items such as stock-based compensation of
$11,242,000, depreciation of $431,000, amortization of intangibles of $3,168,000
and write-off of impaired intangibles of $21,985,000.
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During the six months ended June 30, 2000, we purchased $6,115,000 in
capital equipment and incurred $6,202,000 in internal-use software development
costs. No such costs were incurred during the six months June 30, 2001. We
expect to incur negative cash flow from operations for the foreseeable future,
as we continue to develop our business.
The Company has incurred substantial operating losses and sustained
substantial operating cash outflows. Management believes that operating losses
and negative operating cash flows will continue in fiscal year 2001 and
thereafter which raise substantial doubt about the Company's ability to continue
as a going concern. The Company's continued existence is dependent on its
ability to obtain additional equity and/or debt financing to fund its operations
and ultimately to achieve profitable operations. The Company is attempting to
raise additional financing through additional private placements. There is no
assurance that the Company will obtain additional financing or achieve
profitable operations. The financial statements do not include any adjustments
relating to the recoverability or classification of recorded asset amounts or
the amount and classification of liabilities that might be necessary as a result
of this uncertainty.
During the six months ended June 30, 2000, we raised net proceeds of
approximately $34,353,000 through the sale of 5,006,390 shares of our common
stock at $7.50 per share less related costs of approximately $3,200,000. No
proceeds were raised during the six months ended June 30, 2001.
We lease facilities and equipment under non-cancelable operating leases
expiring through October 2004. Such leases provide for annual payments as
detailed below. In connection with the aforementioned leases, we are required to
provide security totaling $850,000. Such security has been provided by deposits
and collateralized letters of credit.
Since inception, we have experienced significant losses and negative
cash flows from operations. We believe that our existing capital resources will
be sufficient to fund our planned level of operating activities, capital
expenditures and other obligations through the next 12 months. However, we may
need to raise additional funds in future periods through public or private
financings, or other sources, to fund our operations and potential acquisitions,
if any, until we achieve profitability, if ever. We may not be able to obtain
adequate or favorable financing in a timely manner or at all. Failure to raise
capital when needed could harm our business. If we raise additional funds
through the issuance of equity securities, the percentage of ownership of our
stockholders would be reduced. Furthermore, these equity securities might have
rights, preferences or privileges senior to our common stock.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On May 3, 2000, an individual who had been retained by MCY America, Inc. and
MusicWorld to obtain equity capital from a specific investor for MusicWorld
filed a complaint against the defendants MCY America, Inc. and MusicWorld in
federal District Court in New York City, alleging claims for breach of contract,
promissory estoppel and unjust enrichment. The plaintiff appears to allege a
claim for breach of a written engagement agreement and 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.
The Company believes that the plaintiff's claims lack substantial merit and
intends to vigorously defend against this action. The Company's motion for
summary judgment is currently pending before the court.
In November 2000, Ozzy Osbourne, Osbourne Management and other performers who
appeared in the Ozzfest 2000 tour commenced an action against the Company and
its sub-licensees DirecTV Enterprises, Inc. ("DirecTV") and iN Demand LLC ("iN
Demand") in the United States District Court for the Central District of
California in reference to pay-per-view television broadcasts of performances
from the Ozzfest 2000 tour on DirectTV and iN Demand. The plaintiffs seek
$20,000,000 in damages, as well as profits earned by the defendants, copyright
infringement damages, legal fees and the film footage. The plaintiffs followed
the filing of the action with an application to the court for a temporary
restraining order which was subsequently denied. The matter arises out of a
Sponsorship Agreement executed in April, 2000 (the "Agreement") among
MusicWorld, Osbourne Management and SFX Holdings, Inc. ("SFX"), whereby
defendants allege that MusicWorld obtained the right, amongst other things, to
produce a videotape of the Ozzfest 2000 concert tour and license the program for
broadcast in various media outlets including pay-per-view television. Pursuant
to the Agreement, MusicWorld thereafter entered into license agreements with
DirecTV and iN Demand licensing the program for specified time periods to
broadcast the videotape produced by MusicWorld pursuant to the Agreement, on a
pay-per-view television or cable basis. In summary, the complaint filed by the
plaintiffs alleges that the Agreement only provided MusicWorld the right to
broadcast the MusicWorld videotape as a Web-cast over the Internet and that the
defendants proceeded with the pay-per-view television and cable broadcasts
without obtaining the allegedly required consents of the plaintiffs.
Furthermore, plaintiffs allege claims against MusicWorld, iN Demand and DirecTV
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for federal copyright infringement, federal trademark infringement, federal
trademark dilution, commercial appropriation of identity, state statutory and
common law trademark dilution, unfair competition and constructive trust.
Plaintiff Osbourne Management further has alleged a claim against MusicWorld for
breach of the Agreement. Among other claims and defenses, MusicWorld contends
that it acted within its rights under the Agreement; that the Agreement was
breached by Osbourne Management; and that under the Agreement, Osbourne
Management was obligated to provide MusicWorld with all necessary clearances for
the pay-per-view broadcasts which occurred. MusicWorld further contends that,
under the Agreement, as a result of the breach of the Agreement by Osbourne
Management, SFX is obligated to indemnify, hold harmless and defend MusicWorld
for any breach of the Agreement by Osbourne Management, and that both Osbourne
Management and SFX are obligated to indemnify, hold harmless and defend
MusicWorld for the claims asserted by the plaintiffs who are not parties to the
Agreement, as well as any claims which hereafter may be asserted by any third
parties. MusicWorld intends to vigorously defend this action and has filed
several counterclaims with its answer against the Osbourne plaintiffs, including
breach of contract and interference with contract. This matter is in the early
discovery stage.
In July 2000, MusicWorld commenced an action in the Supreme Court of the State
of New York, New York County against TBA Entertainment Corp. ("TBA"), arising
out of a contract to acquire certain rights relative to musical performances at
the "2000 Hard Rock Rockfest" concert festival. In the action, the Company
alleges breach of contract, misrepresentation and fraud in the inducement for
TBA's knowing failure to deliver rights necessary for MusicWorld to exploit the
concert rights on the Internet and television pursuant to the terms of the
contract between the companies and to recover damages in the amount of
out-of-pocket costs incurred thereby. Defendant TBA and counterclaim plaintiff
Hard Rock International (USA), Inc. have asserted counterclaims for $1,000,000
against MusicWorld for breach of contract. MusicWorld has filed motions to
dismiss the counterclaims and amend the complaint which are currently pending
before the court and intends to vigorously pursue its claims and defenses. This
matter is in the discovery stage.
During the quarter ended March 31, 2001, MusicWorld filed for arbitration with
the American Arbitration Association against SFX Marketing, Inc. ("SFX")
claiming breach of contract arising out of an agreement between parties entered
into in September, 2000. In summary, among other claims, the Company claims that
SFX failed to perform under the terms of the agreement between the parties and
seeks rescission of the agreement and return of payments aggregating $150,000
made by the Company to SFX. SFX has filed a counter arbitration arising out of
the same agreement seeking payments under the contract totaling $600,000. The
parties are currently in arbitration.
The ultimate outcome of the litigation and arbitration referred to in the second
through fifth paragraphs above is not presently determinable, however,
management believes that an adverse outcome in any of such matters could have a
material adverse effect on the financial position or results of operations of
the Company.
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 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.
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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: 8/14/01 By /s/ Bernhard Fritsch
Bernhard Fritsch, CEO & Chairman
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