SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Form 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
October 13, 1999
MCY.com, Inc.
(Formerly Health Builders International, Inc.)
Delaware
(State or other jurisdiction of incorporation)
333-9809 87-0561634
(Commission file number) (IRS employer identification no.)
1133 Avenue of the Americas, 28rd Floor
New York, NY 10036
(Address of principal executive offices) (Zip Code)
(212) 944-6664
(Registrants telephone number, including area code)
Health Builders International, Inc.
2077 Elderberry Way
Sandy, Utah 84092
(former name and address of registrant)
Item 4. Changes in Registrant's Certifying Accountant
In September 1999, the Registrant's former accountants, Pritchett,
Siler & Hardy, P.C. resigned as the Registrant's auditors. Pritchett, Siler &
Hardy, P.C. were the auditors of the Registrant prior to its acquisition of MCY
Music World, Inc. In connection therewith, Richard A. Eisner & Co., LLP, the
Auditors of MCY Music World, Inc., were appointed as the auditors for the
Registrant.
There have been no disagreements between registrant and the firm of
Pritchett, Siler & Hardy, P.C. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure. "The
report of said firm dated February 26, 1999 related to the December 31,1998
financial statements did not contain an adverse opinion."
Item 5. Other Events
In August 1999, the Company sold an aggregate of 6,322,333 shares of
its Common Stock to its investors through Gruntal & Co. at a price of $6 per
share. After taking into account the shares which were sold in the August
Private Offering, the Company had issued and outstanding 53,979,988 shares of
Common Stock and 1,000,000 shares of Series 1 Preferred Stock. The shares of
Series 1 Preferred Stock entitle the holder to 100 votes per share and do not
carry any liquidation, dividend or other rights or preferences.
On September 17, 1999 the Company amended its 1999 Incentive Stock
Option Plan by increasing the authorized number of options or awards from
5,000,000 to 15,000,000 and by deleting the provision of the Plan which limited
the number of Options or Awards issuable in any year to 500,000 per employee.
Item 7. Financial statements and Exhibits.
(a) Financial Statements of businesses acquired.
1. Audited financial statements of MCY.Com, Inc. and subsidiaries for
the period ending July 31, 1999.
2. Audited financial statements of the Predecessor Companies of
MCY.Com, Inc. for the period ending July 2, 1999.
b) Pro Forma Financial Information
Consolidated pro-forma financial statements as at July 31, 1999 are
annexed
hereto as an Exhibit.
c) Exhibits.
10.0 Amended and Restated 1999 Incentive Stock Option
Plan.
16.0 Letter from Pritchett, Siler & Hardy, P.C. regarding
change in accountants.
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 hereunto duly authorized.
MCY.COM,INC.
By:
-------------------------------
Bernhard Fritsch, President
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Pro Forma Condensed Consolidated Financial Statements (Unaudited)
The following pro forma condensed consolidated balance sheet assumes that the
merger into Health Builders International, Inc. ("Health Builders")
(accounted for as a recapitalization) and subsequent sale of common shares in
a private placement in August 1999 occurred on July 31, 1999. The following
pro forma condensed consolidated statement of operations assumes that the
Datatek acquisition which occurred on July 2, 1999 had occurred on January 8,
1999. The pro forma statements are based on the historical consolidated
financial statements of MCY.com, Inc. and its subsidiaries, and the
historical combined financial statements of the predecessor companies
acquired from Datatek, giving effect to the assumptions and adjustments in
the accompanying notes to the pro forma financial statements. The pro forma
statement of operations may not be indicative of the results that actually
would have occurred if the acquisition had occurred on the date indicated or
that may be obtained in the future. The pro forma financial statements should
be read in conjunction with the audited financial statements and notes of
MCY.com and its predecessor companies contained elsewhere herein.
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Pro Forma Condensed Consolidated Balance Sheet (Unaudited)
July 31, 1999
(US Dollars)
Pro Forma
Historical Adjustments Pro Forma
---------------- ---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,098,000 3) $ 35,700,000 $ 37,798,000
Sundry receivables, including refundable taxes of
$256,000 344,000 344,000
Advances to officer 113,000 113,000
Other current assets 156,000 156,000
---------------- ----------------
Total current assets 2,711,000 38,411,000
Equipment and software, net 751,000 751,000
Intangible assets, net 29,366,000 29,366,000
Other assets, including security deposit and deferred
offering costs of $519,000 and $455,000, respectively 1,219,000 1,219,000
---------------- ---------------- ----------------
$ 34,047,000 $ 35,700,000 $ 69,747,000
================ ================ ================
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and sundry
liabilities, representing total current liabilities $ 2,420,000 $ 2,420,000
---------------- ----------------
Non-current liability:
Deferred income taxes 1,556,000 1,556,000
---------------- ----------------
Commitments and contingencies (Note G)
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 shares
authorized; 1,000,000 issued and outstanding 1,000 1,000
Common stock - $.001 par value; 100,000,000 shares
authorized; 42,924,988 (historical) and 53,979,988
(pro forma) shares issued and outstanding 43,000 1) $ 5,000 54,000
3) 6,000
Common stock payable 790,000 4) (790,000)
Additional paid-in capital 56,483,000 1) (5,000) 116,224,000
3) 35,694,000
2) 23,322,000
4) 730,000
Deficit accumulated during the development stage (11,938,000) 2) (23,322,000) (35,200,000)
4) 60,000
Cumulative foreign currency translation adjustment 19,000 19,000
---------------- ---------------- ----------------
45,398,000 35,700,000 81,098,000
Unamortized deferred compensation (15,301,000) (15,301,000)
Stock subscriptions receivable (26,000) (26,000)
---------------- ---------------- ----------------
30,071,000 35,700,000 65,771,000
---------------- ---------------- ----------------
$ 34,047,000 $ 35,700,000 $ 69,747,000
================ ================ ================
2
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Pro Forma Condensed Consolidated Statement of Operations (Unaudited)
For the Period From January 8, 1999 (Date of Inception) Through July 31, 1999
(US Dollars)
MCY.com, Predecessor
Inc. and Companies to Pro Forma
Subsidiaries MCY.com, Inc.* Adjustments Pro Forma
---------------- ---------------- ---------------- -----------------
Expenses:
Research and development
expenses $ 216,000 $ 51,000 $ 267,000
Selling, general and administrative
expenses 5,202,000 1,344,000 6,546,000
Stock-based compensation 2,776,000 2,776,000
Amortization of acquired intangibles 555,000 6) $3,328,000 3,883,000
---------------- ---------------- -----------------
(8,749,000) (1,395,000) (13,472,000)
Deferred income tax benefit 44,000 6) 267,000 311,000
---------------- ---------------- -----------------
(8,705,000) (1,395,000) (13,161,000)
Share of loss of predecessor
companies 663,000 5) (663,000)
---------------- ---------------- ---------------- -----------------
Net loss $ (9,368,000) $ (1,395,000) $ (2,398,000) $ (13,161,000)
=============== ================ ================ =================
Net loss per common share -
basic and diluted $ (.29) $ (.35)
=============== =================
Weighted average common
shares outstanding 32,660,000 37,227,000
=============== =================
* For the period from January 1, 1999 to July 2, 1999
3
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
1) Record issuance of 4,610,000 shares of common stock held by existing
common stockholders of Health Builders upon merger on August 2, 1999.
2) Record compensation resulting from sale for $0.02 per common share of
approximately 3,900,000 shares of common stock by existing Health
Builders stockholders to advisors and stockholders of MCY.com.
Compensation has been recorded at the difference between the private
placement offering price of $6.00 per common share and the $0.02 per
common share paid. The non-recurring compensation charge is not reflected
in the pro forma consolidated statement of operations.
3) Sale of 6,322,333 shares of common stock at $6.00 per common share in
connection with a private placement during August 1999, resulting in net
proceeds of $35,700,000.
4) Reflect issuance of 121,667 common shares payable and cancellation of
10,000 common shares payable (for accrued interest of $60,000) during
August 1999 reflected as common shares payable at July 31, 1999.
5) Eliminate share of loss of predecessor companies.
6) Record additional amortization of acquired intangibles and related
deferred tax benefit from the beginning of the period.
7) Pro forma net loss per share is based on 37,405,000 common shares,
representing the weighted average number of common shares outstanding
during the period after giving retroactive effect to 710,000 shares
issued in connection with the merger into Health Builders (excluding the
3,900,000 shares which results in compensation) and assuming the shares
issued in connection with the Datatek acquisition were outstanding for
the entire period.
4
PREDECESSOR COMPANIES OF
MCY.COM, INC.
(development stage companies)
COMBINED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED
DECEMBER 31, 1996, 1997 and 1998,
and JULY 2, 1999
PREDECESSOR COMPANIES OF
MCY.COM, INC.
(development stage companies)
Contents
Page
----
Combined Financial Statements
Independent auditors' report 1
Balance sheets as of December 31, 1996, 1997 and 1998 2
Statements of operations for the years ended December 31, 1996, 1997 and
1998, the period from January 1, 1999 through July 2, 1999, and the period
January 1, 1996 through July 2, 1999 3
Statements of stockholders' deficiency for the years ended December 31, 1996, 1997
and 1998 and the period from January 1, 1999 through July 2, 1999 4
Statements of cash flows for the years ended December 31, 1996, 1997 and
1998, the period from January 1, 1999 through July 2, 1999, and the period
January 1, 1996 through July 2, 1999 5
Notes to financial statements 6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Predecessor Companies of MCY.com, Inc.
New York, New York
We have audited the accompanying combined balance sheets of the predecessor
companies of MCY.com, Inc. (development stage companies) as described in Note A,
as of December 31, 1996, 1997 and 1998 and the related combined statements of
operations, stockholders' deficiency and cash flows for the years ended December
31, 1996, 1997 and 1998, for the period from January 1, 1999 through July 2,
1999 and for the period from January 1, 1996 through July 2, 1999. These
combined financial statements are the responsibility of the predecessor
companies' management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the combined financial position of the predecessor companies
of MCY.com, Inc. as of December 31, 1996, 1997 and 1998, and the combined
results of their operations and their cash flows for the years ended December
31, 1996, 1997 and 1998, for the period from January 1, 1999 through July 2,
1999 and for the period from January 1, 1996 through July 2, 1999 in conformity
with generally accepted accounting principles.
As described in Note B[2] to the financial statements, the predecessor companies
changed their method of accounting for software development costs in the 1999
period.
New York, New York
September 17, 1999
PREDECESSOR COMPANIES OF
MCY.COM, INC.
(development stage companies)
Combined Balance Sheets
(US Dollars)
December 31,
------------------------------------------------
1998 1997 1996
--------------- --------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 347,000 $ 33,000 $ 65,000
Accounts receivable, net 63,000 10,000 10,000
Advances to officer 109,000 96,000 11,000
Other current assets 7,000 227,000
--------------- --------------- ------------
Total current assets 526,000 139,000 313,000
Equipment, at cost, net 99,000 107,000 44,000
Other assets 15,000 10,000
--------------- --------------- ------------
$ 640,000 $ 256,000 $ 357,000
=============== =============== ============
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and sundry liabilities $ 2,090,000 $ 1,670,000 $ 419,000
Due to former stockholder 552,000 568,000 180,000
Line of credit payable - bank 115,000 60,000 228,000
--------------- --------------- ------------
Total current liabilities 2,757,000 2,298,000 827,000
--------------- --------------- ------------
Commitments and contingencies (Note E)
STOCKHOLDERS' DEFICIENCY
Common stock 57,000 56,000 56,000
Additional paid-in capital 3,347,000 82,000
Deficit accumulated during the development stage (5,410,000) (2,304,000) (534,000)
Cumulative foreign currency translation adjustments (111,000) 124,000 8,000
--------------- --------------- ------------
(2,117,000) (2,042,000) (470,000)
--------------- --------------- ------------
$ 640,000 $ 256,000 $ 357,000
=============== =============== ============
SEE NOTES TO FINANCIAL STATEMENTS 2
PREDECESSOR COMPANIES OF
MCY.COM, INC.
(development stage companies)
Combined Statements of Operations
(US Dollars)
For the
Period From
January 1, January 1,
1999 1996
Through For the Years Ended December 31, Through
July 2, ----------------------------------------------- July 2,
1999 1998 1997 1996 1999
--------------- -------------- --------------- ------------ ---------------
Revenue:
Sales $ 418,000 $ 418,000
------------ ---------------
Costs and expenses:
Cost of sales 249,000 249,000
Research and development $ 51,000 $ 653,000 $ 582,000 428,000 1,714,000
Selling, general and
administrative expenses 1,344,000 2,453,000 1,188,000 274,000 5,259,000
--------------- -------------- --------------- ------------ ---------------
Total costs and expenses 1,395,000 3,106,000 1,770,000 951,000 7,222,000
--------------- -------------- --------------- ------------ ---------------
Net loss $ (1,395,000) $ (3,106,000) $ (1,770,000) $ (533,000) $ (6,804,000)
=============== ============== =============== ============ ===============
SEE NOTES TO FINANCIAL STATEMENTS 3
PREDECESSOR COMPANIES OF
MCY.COM, INC.
(development stage companies)
See notes to financial statements
Combined Statement of Stockholders' Deficiency
(US Dollars)
Deficit
Accumulated
Common Additional During the Foreign
Stock Paid-in Development Currency Comprehensive
Amount Capital Stage Translation Total Loss
----------- ----------- ------------ ----------- ------------ ------------
Balance, January 1, 1996 $ 56,000 $ (1,000) $ 55,000
Foreign currency adjustments $ 8,000 8,000 $ 8,000
Net loss for the year ended December 31, 1996 (533,000) (533,000) (533,000)
----------- ------------ ----------- ------------ ------------
Balance, December 31, 1996 56,000 (534,000) 8,000 (470,000) $ (525,000)
============
Capital contributions by parent $ 82,000 82,000
Foreign currency adjustments 116,000 116,000 $ 116,000
Net loss for the year ended December 31, 1997 (1,770,000) (1,770,000) (1,770,000)
----------- ----------- ------------ ----------- ------------ ------------
Balance, December 31, 1997 56,000 82,000 (2,304,000) 124,000 (2,042,000) $ (1,654,000)
============
Capital contribution in connection with formation
of MCY America and other entities 1,000 61,000 62,000
Capital contributions by parent 3,204,000 3,204,000
Foreign currency adjustments (235,000) (235,000) $ (235,000)
Net loss for the year ended December 31, 1998 (3,106,000) (3,106,000) (3,106,000)
----------- ----------- ------------ ----------- ------------ ------------
Balance, December 31, 1998 57,000 3,347,000 (5,410,000) (111,000) (2,117,000) $ (3,341,000)
============
Capital contributions by parent 1,203,000 1,203,000
Foreign currency adjustments 59,000 59,000 $ 59,000
Net loss for the period ended July 2, 1999 (1,395,000) (1,395,000) (1,395,000)
----------- ----------- ------------ ----------- ------------ ------------
Balance, July 2, 1999 $ 57,000 $ 4,550,000 $ (6,805,000) $ (52,000) $ (2,250,000) $ (1,336,000)
=========== =========== ============ =========== ============ ============
SEE NOTES TO FINANCIAL STATEMENTS 4
PREDECESSOR COMPANIES OF
MCY.COM, INC.
(development stage companies)
See notes to financial statements
Combined Statements of Cash Flows
(US Dollars)
For the Period For the Period
January 1, January 1,
1999 1996
Through For the Years Ended December 31 Through
July 2, ------------------------------------------ July 2,
1999 1998 1997 1996 1999
------------- ------------ ------------ ----------- -------------
Cash flows from operating activities:
Net loss $ (1,395,000) $ (3,106,000) $ (1,770,000) $ (533,000) $ (6,804,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 20,000 39,000 43,000 22,000 124,000
Salaries and consultants' fees allocated from
Datatek 404,000 706,000 1,110,000
Changes in:
Accounts receivable (86,000) (51,000) (1,000) 345,000 207,000
Other current assets 7,000 (7,000) 201,000 (43,000) 158,000
Other assets (83,000) (4,000) (9,000) (1,000) (97,000)
Accounts payable, accrued expenses and
sundry liabilities (101,000) 291,000 1,260,000 1,000 1,451,000
------------ ----------- ----------- ---------- -------------
Net cash used in operating activities (1,234,000) (2,132,000) (276,000) (209,000) (3,851,000)
------------- ------------ ------------ ----------- -------------
Cash flows from investing activities:
Advances to officer (13,000) (6,000) (89,000) (11,000) (119,000)
Purchase of equipment (62,000) (27,000) (114,000) (39,000) (242,000)
Cost of developing software (246,000) (246,000)
------------- ------------ ------------ ----------- -------------
Net cash used in investing activities (321,000) (33,000) (203,000) (50,000) (607,000)
------------- ------------ ------------ ----------- -------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit (65,000) 49,000 (141,000) 225,000 68,000
Advances from (repayments to) former stockholder (56,000) 529,000 70,000 543,000
Advances from MCY Music World, Inc. 1,243,000 1,243,000
Capital contributions 799,000 2,560,000 82,000 3,441,000
------------- ------------ ------------ ----------- -------------
Net cash provided by financing activities 1,977,000 2,553,000 470,000 295,000 5,295,000
------------- ------------ ------------ ----------- -------------
Effect of exchange rate changes on cash (204,000) (74,000) (23,000) (5,000) (306,000)
------------- ------------ ------------ ----------- -------------
Net change in cash and cash equivalents 218,000 314,000 (32,000) 31,000 531,000
Cash and cash equivalents, beginning of period 347,000 33,000 65,000 34,000 34,000
------------- ------------ ------------ ----------- -------------
Cash and cash equivalents, end of period $ 565,000 $ 347,000 $ 33,000 $ 65,000 $ 565,000
============= ============ ============ =========== =============
SEE NOTES TO FINANCIAL STATEMENTS 5
PREDECESSOR COMPANIES OF
MCY.COM, INC.
(development stage companies)
Notes to Financial Statements
(US Dollars)
NOTE A - BASIS OF PRESENTATION
On July 2, 1999, MCY Music World, Inc. ("MCY Music World"), which was
incorporated on January 8, 1999, acquired the assets of Datatek Services Limited
("Datatek") including the stock of MCY America, Inc. ("MCY America") and Fritsch
& Friends Mediagroup GmbH ("Fritsch & Friends"). On August 2, 1999, MCY Music
World became a wholly-owned subsidiary of MCY.com, Inc. MCY Music World's
founder, controlling shareholder and Chairman was the Chief Executive Officer, a
director and owned a 47.5% beneficial ownership interest in Datatek. Datatek,
which functioned primarily as a holding company, and its subsidiaries had been
involved in the development, purchase and licensing of the technology,
intellectual property and other business assets that are required for MCY Music
World's intended business operations which include the creation and opening to
the public of an online service platform to provide worldwide promotional and
sales services for the music buying public and the music industry. MCY Music
World intends to operate an Internet web site offering an interactive
environment and virtual music store where music buyers can purchase digital
music downloads in an encrypted and enhanced format, as well as other products.
The combined financial statements, which have been prepared in accordance with
generally accepted accounting principles, include the accounts of Fritsch &
Friends and MCY America (collectively the "predecessor companies") after
elimination of all significant intercompany transactions and balances. Fritsch &
Friends was incorporated in Germany in 1991 and MCY America was incorporated in
the United States in December 1997. On June 1, 1999, in connection with the
acquisition, MCY Music of Germany GmbH and Datatek Services Germany GmbH, two
subsidiaries of Datatek, which were incorporated in Germany during October 1998,
transferred all of their assets to Fritsch & Friends. Such transaction has been
accounted for on a pooling-of-interests basis and accordingly, the transferred
assets were recorded at historical carrying amounts and the results of
operations of such subsidiaries are reflected in the accompanying combined
financial statements from their inception.
The predecessor companies are considered to be in the development stage
effective January 1, 1996, which approximates the time Fritsch & Friends
commenced activities in the field of Internet digital music distribution. Sales
during 1996 are not from planned business operations but represent revenue from
processing computer CDs.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
[1] Cash:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
[2] Equipment and software, net:
During March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The SOP, which has been adopted
prospectively as of January 1, 1999, requires the capitalization of
certain costs incurred in connection with developing or obtaining internal
use software. Prior to the adoption of SOP 98-1, the Company expensed all
internal use software related costs as incurred. Capitalized costs will be
amortized using the straight-line method over their estimated useful life
beginning when the software is ready for its intended use. The effect of
adopting SOP 98-1 was to decrease net loss for the period from January 1,
1999 through July 2, 1999 by $246,000.
6
PREDECESSOR COMPANIES OF
MCY.COM, INC.
(development stage companies)
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[2] Equipment and software, net: (continued)
Equipment is stated at cost less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of
three to seven years. Accumulated depreciation at the balance sheet dates
amounted to $10,000 (1998), $113,000 (1997) and $79,000 (1996.)
[3] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates.
[4] Foreign currency:
The assets and liabilities of Fritsch & Friends, whose functional currency
is the Deutsche Mark, ("DM") are translated into U.S. dollars at exchange
rates as of the balance sheet date. Revenue and expenses are translated at
the average of the rates prevailing during the period. Adjustments are
accumulated as a separate component of the capital deficiency.
[5] Comprehensive income:
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources.
Comprehensive loss for all periods presented consists of the net loss and
foreign currency translation adjustments
NOTE C - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND SUNDRY LIABILITIES
Accounts payable, accrued expenses and sundry liabilities at December 31, 1998,
1997 and 1996 consisted of the following:
December 31,
1998 1997 1996
------------- ------------- -----------
Litigation and claims payable $ 1,139,000 $ 973,000
Trade payables and other liabilities 547,000 522,000 $ 304,000
Employee wages and related benefits 202,000 142,000
Other 202,000 33,000 115,000
------------- ------------- -----------
$ 2,090,000 $ 1,670,000 $ 419,000
============= ============= ===========
7
PREDECESSOR COMPANIES OF
MCY.COM, INC.
(development stage companies)
NOTE D - INCOME TAXES
As of December 31, 1998, Fritsch & Friends has an estimated net operating loss
carryforward of approximately $2,169,000 (DM 3,637,000), under German tax law,
which does not expire. The related income tax benefit, approximately $1,085,000
has been fully offset by a valuation allowance as it has not been determined
that it is more likely than not that the available net operating loss
carryforward will be utilized.
NOTE E - COMMITMENTS AND CONTINGENCIES
[1] Lease:
The predecessor companies lease facilities under a month-to-month lease
which requires a six-month termination notice. Rent expense for the period
ended July 2, 1999 and for the years ended December 31, 1998, 1997 and
1996 totaled approximately $16,000, $32,000, $32,000 and $32,000,
respectively.
[2] Legal proceedings:
The Company is a party to various claims and legal proceedings incidental
to their business. The Company believes that adequate liabilities to cover
any resulting loss have been reflected in the accompanying financial
statements, and in management's opinion, the outcome of these claims and
proceedings will not have a material adverse effect on the financial
statements of the predecessor companies.
NOTE F - STOCKHOLDERS' EQUITY
In connection with the acquisition by MCY Music World on July 2, 1999, the then
existing intercompany balances of Fritsch & Friends and of MCY America with
Datatek, arising from intercompany transactions, were canceled. Accordingly, the
intercompany transactions during the years ended December 31, 1997 and 1998 and
for the period from January 1, 1999 through July 2, 1999 with Datatek have been
accounted for as capital contributions to the extent of cash received from
Datatek during the respective periods. In addition, salaries and consulting fees
accrued by Datatek to officers and consultants have been reflected as expenses
in the accompanying combined statements of operations and related capital
contributions in the accompanying combined statements of stockholders'
deficiency.
Common stock of the predecessor companies as of July 2, 1999 consists of the
following:
Par Shares Shares Issued and
Value Authorized Outstanding Amount
----- ---------- ----------------- -----------
Fritsch & Friends 1 DM 80,000 80,000 $ 56,000
MCY America None 200 200 1,000
-----------
$ 57,000
===========
8
PREDECESSOR COMPANIES OF
MCY.COM, INC.
(development stage companies)
NOTE G - RELATED PARTY TRANSACTIONS
During the period ended July 2, 1999, MCY Music World made non-interest bearing
advances to Fritsch & Friends and MCY America. As of July 2, 1999, the
outstanding balances of such advances amounted to approximately $1,243,000.
NOTE H - OPERATIONS IN GERMANY
Equipment of Fritsch & Friends included in the financial statements amounted to
$44,000, $81,000 and $47,000 as of December 31, 1996, 1997 and 1998,
respectively. Revenue reflected in the statement of operations for 1996 relates
solely to Fritsch & Friends.
9
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
CONTENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report 1
Balance sheet as of July 31, 1999 2
Statement of operations for the period from January 8, 1999
(date of inception) through July 31, 1999 3
Statement of stockholders' equity for the period from
January 8, 1999 (date of inception) through July 31, 1999 4
Statement of cash flows for the period from January 8, 1999
(date of inception) through July 31, 1999 5
Notes to financial statements 6
[LETTERHEAD OF RICHARD A. EISNER & COMPANY, LLP]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
MCY.com, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheet of MCY.com, Inc. and
subsidiaries (a development stage company) as of July 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from January 8, 1999 (date of inception) through July 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of MCY.com, Inc. and
subsidiaries, as of July 31, 1999, and the consolidated results of their
operations and their cash flows for the period from January 8, 1999 (date of
inception) through July 31, 1999 in conformity with generally accepted
accounting principles.
/s/ Richard A. Eisner & Company, LLP
New York, New York
September 17, 1999
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED BALANCE SHEET
JULY 31, 1999
(US dollars)
ASSETS
Current assets:
Cash and cash equivalents $ 2,098,000
Sundry receivables, including refundable taxes of $256,000 344,000
Advances to officer 113,000
Other current assets 156,000
------------
Total current assets 2,711,000
Equipment and software, net 751,000
Intangible assets, net 29,366,000
Other assets, including security deposit and deferred
offering costs of $519,000 and $455,000, respectively 1,219,000
------------
$ 34,047,000
============
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and sundry liabilities,
representing total current liabilities $ 2,420,000
------------
Non-current liability:
Deferred income taxes 1,556,000
------------
Commitments and contingencies (Note G)
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 shares authorized;
1,000,000 issued and outstanding 1,000
Common stock - $.001 par value; 100,000,000 shares authorized;
42,924,988 shares issued and outstanding 43,000
Common stock payable 790,000
Additional paid-in capital 56,483,000
Deficit accumulated during the development stage (11,938,000)
Cumulative foreign currency translation adjustment 19,000
------------
45,398,000
Unamortized deferred compensation (15,301,000)
Stock subscriptions receivable (26,000)
------------
30,071,000
------------
$ 34,047,000
============
SEE NOTES TO FINANCIAL STATEMENTS
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 8, 1999 (DATE OF INCEPTION) THROUGH JULY 31, 1999
(US dollars)
Expenses:
Research and development expenses $ 216,000
Selling, general and administrative expenses 5,202,000
Stock-based compensation 2,776,000
Amortization of acquired intangibles 555,000
------------
(8,749,000)
Deferred income tax benefit 44,000
------------
(8,705,000)
Share of loss of predecessor companies 663,000
------------
NET LOSS $ (9,368,000)
============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (.29)
============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 32,660,000
============
SEE NOTES TO FINANCIAL STATEMENTS
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 8, 1999 (DATE OF INCEPTION) THROUGH JULY 31, 1999
(US dollars)
COMMON
PREFERRED STOCK COMMON STOCK STOCK
SHARES AMOUNT SHARES AMOUNT PAYABLE
--------- -------- ---------- -------- ----------
Issuance of common stock at par ($.001 per share) to founders,
as of January 8, 1999, net of shares returned (Note A) 25,282,652 $ 25,000
Issuance of common stock to employees and consultants at
$0.074 per share, as of January 8, 1999 1,857,480 2,000
Issuance of common stock to employees, consultants
and creditors at $0.28 per share - April 1999 8,721,220 9,000
Sale of common stock at $2.75 per share - May 1999
less related costs of $10,000 363,636
Sale of common stock at $3.75 per share - May 1999
less related costs of $310,000 2,400,000 2,000
Sale of common stock at $5.00 per share - May 1999
less related costs of $10,000 200,000
Issuance of preferred stock at par ($.001 per share)
to a founder - June 1999 1,000,000 $ 1,000
Issuance of common stock in connection with acquisition at
$5.00 per share - July 1999 4,500,000 5,000
Issuance of warrants to purchase 2,000,000 shares of common
stock issued in connection with acquisition - July 1999
Issuance of warrants to purchase 50,000 shares of common
stock issued in connection with acquisition - July 1999
Issuance of warrants to purchase 33,333 shares of common stock
for services to the Company - July 1999
Stockholders' deficiency of acquired entities applicable to 47.5%
interest owned by the Company's controlling stockholder
Cancellation of common stock issued to a consultant - July 1999 (400,000)
Common shares (131,667) to be issued in payment of debt
and accrued interest at $6.00 per share $ 790,000
Options issued to employees and consultants
Amortization of deferred compensation
Comprehensive loss:
Gain on foreign currency translation
Net loss for period
Total comprehensive loss
---------- -------- ----------- -------- ----------
1,000,000 $ 1,000 42,924,988 $ 43,000 $ 790,000
========== ======== =========== ======== ==========
DEFICIT CUMULATIVE
ACCUMULATED FOREIGN
ADDITIONAL DURING THE CURRENCY
PAID-IN DEVELOPMENT TRANSLATION
CAPITAL STAGE ADJUSTMENT
------------ ------------ ----------
Issuance of common stock at par ($.001 per share) to founders,
as of January 8, 1999, net of shares returned (Note A)
Issuance of common stock to employees and consultants at
$0.074 per share, as of January 8, 1999 $ 135,000
Issuance of common stock to employees, consultants
and creditors at $0.28 per share - April 1999 2,433,000
Sale of common stock at $2.75 per share - May 1999
less related costs of $10,000 990,000
Sale of common stock at $3.75 per share - May 1999
less related costs of $310,000 8,688,000
Sale of common stock at $5.00 per share - May 1999
less related costs of $10,000 990,000
Issuance of preferred stock at par ($.001 per share)
to a founder - June 1999
Issuance of common stock in connection with acquisition at
$5.00 per share - July 1999 22,495,000
Issuance of warrants to purchase 2,000,000 shares of common
stock issued in connection with acquisition - July 1999 3,000,000
Issuance of warrants to purchase 50,000 shares of common
stock issued in connection with acquisition - July 1999 90,000
Issuance of warrants to purchase 33,333 shares of common stock
for services to the Company - July 1999 50,000
Stockholders' deficiency of acquired entities applicable to 47.5%
interest owned by the Company's controlling stockholder 2,164,000 $ (2,570,000)
Cancellation of common stock issued to a consultant - July 1999
Common shares (131,667) to be issued in payment of debt
and accrued interest at $6.00 per share
Options issued to employees and consultants 15,448,000
Amortization of deferred compensation
Comprehensive loss:
Gain on foreign currency translation $ 19,000
Net loss for period (9,368,000)
Total comprehensive loss
------------ ------------- --------
$ 56,483,000 $(11,938,000) $ 19,000
============ ============= ========
UNAMORTIZED STOCK
DEFERRED SUBSCRIPTIONS
COMPENSATION RECEIVABLE TOTAL
------------ ---------- ------------
Issuance of common stock at par ($.001 per share) to founders,
as of January 8, 1999, net of shares returned (Note A) $(25,000) $ 0
Issuance of common stock to employees and consultants at
$0.074 per share, as of January 8, 1999 137,000
Issuance of common stock to employees, consultants
and creditors at $0.28 per share - April 1999 2,442,000
Sale of common stock at $2.75 per share - May 1999
less related costs of $10,000 990,000
Sale of common stock at $3.75 per share - May 1999
less related costs of $310,000 8,690,000
Sale of common stock at $5.00 per share - May 1999
less related costs of $10,000 990,000
Issuance of preferred stock at par ($.001 per share)
to a founder - June 1999 (1,000) 0
Issuance of common stock in connection with acquisition at
$5.00 per share - July 1999 22,500,000
Issuance of warrants to purchase 2,000,000 shares of common
stock issued in connection with acquisition - July 1999 3,000,000
Issuance of warrants to purchase 50,000 shares of common
stock issued in connection with acquisition - July 1999 90,000
Issuance of warrants to purchase 33,333 shares of common stock
for services to the Company - July 1999 50,000
Stockholders' deficiency of acquired entities applicable to 47.5%
interest owned by the Company's controlling stockholder (406,000)
Cancellation of common stock issued to a consultant - July 1999 0
Common shares (131,667) to be issued in payment of debt
and accrued interest at $6.00 per share 790,000
Options issued to employees and consultants $(15,448,000) 0
Amortization of deferred compensation 147,000 147,000
Comprehensive loss:
Gain on foreign currency translation 19,000
Net loss for period (9,368,000)
------------
Total comprehensive loss (9,349,000)
------------ -------- ------------
$(15,301,000) $(26,000) $ 30,071,000
============ ======== ============
SEE NOTES TO FINANCIAL STATEMENTS
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 8, 1999 (DATE OF INCEPTION) THROUGH JULY 31, 1999
(US dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,368,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of equipment and software 16,000
Amortization of intangible asset 555,000
Stock-based compensation 2,776,000
Share of loss of predecessor companies 663,000
Other 109,000
Deferred tax benefit (44,000)
Changes in:
Receivables (207,000)
Other current assets (86,000)
Other assets (169,000)
Accounts payable, accrued expenses and sundry liabilities 252,000
------------
Net cash used in operating activities (5,503,000)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Datatek acquisition, net of acquired companies cash of $565,000 (1,748,000)
Payment of security deposit (519,000)
Purchase of equipment (166,000)
Cost of developing internal-use software (231,000)
------------
Net cash used in investing activities (2,664,000)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on line of credit (40,000)
Proceeds from sale of stock, net of related costs 10,670,000
Payment of deferred offering costs (365,000)
------------
Net cash provided by financing activities 10,265,000
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,098,000
============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Shares payable for notes payable and accrued interest $ 790,000
Issuance of stock for stock subscription receivable $ 26,000
Issuance of stock and warrants in connection with Datatek acquisition $ 25,590,000
Deferred compensation to consultants and employees by issuance of options $ 15,448,000
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
(US dollars)
NOTE A - THE COMPANY
MCY Music World, Inc. (the "Company") was incorporated on January 8, 1999 in the
state of Delaware to acquire certain predecessor companies based in Germany (see
Note B) and to further develop its planned operations, which include the
creation and opening to the public of an online service platform to provide
worldwide promotional and sales services for the music buying public and the
music industry. The Company intends to operate an Internet website offering an
interactive environment and virtual music store where music buyers can purchase
digital music downloads in an encrypted and enhanced format, as well as other
products. The Company is in the development stage, since its presently planned
operations have not commenced.
On August 2, 1999, the Company completed a reverse merger into Health Builders
International, Inc. ("HBI"), an inactive public company incorporated in the
state of Delaware. The merger was consummated through an exchange of shares that
resulted in stockholders of the Company holding 43,324,988 shares of common
stock (excluding 131,667 shares of common stock issuable to creditors) or 90.4%
of the outstanding common shares of HBI and 1,000,000 shares of Series 1
Preferred Stock (100% of such class) and existing stockholders of HBI holding
4,610,000 shares of common stock. The merger is being accounted for as a
recapitalization and retroactive effect has been given to the recapitalization
in the accompanying financial statements, however, the statements do not reflect
the issuance of the 4,610,000 common shares owned by HBI's existing stockholders
as of August 2, 1999, nor do they reflect the charge to operations arising from
the transaction described in Note K elsewhere herein. In connection with the
merger, HBI changed its name to MCY.com, Inc. ("MCY.com")
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 a substantial net loss and the Company and its predecessor companies
have generated no 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. These conditions may result in a future
write-down of the carrying value of the intangibles arising from the acquisition
of the predecessor companies (reflecting their impairment), or a reduction in
the remaining estimated lives of said intangibles, which may result in their
accelerated amortization (see Notes C[6] and D). In order to finance its
continued development, the Company, during August 1999, raised $35,700,000, net
of placement costs, in a private placement of 6,322,333 common shares and is
presently attempting to raise additional financing through placement of common
shares on the Frankfurt (Germany) Neuer Markt. However, there is no assurance
that the Company will be successful in that effort, nor that it will ever attain
profitable operations and operating cash flow.
NOTE B - ACQUISITION
On July 2, 1999, the Company acquired the assets of Datatek Services Limited
("Datatek") including the stock of MCY America, Inc. ("MCY America") and Fritsch
& Friends Mediagroup GmbH ("Fritsch & Friends") (collectively the "predecessor
companies") in exchange for cash of $1,050,000, 4,500,000 shares of the
Company's common stock valued at $22,500,000 and 5-year warrants to acquire
2,000,000 shares of common stock at an exercise price of $5.00 per share, valued
at $3,000,000, for an aggregate cost of $26,550,000. In addition, the Company
agreed to pay to Datatek, on a quarterly basis, 1% of gross revenues either, (i)
for a period of 20 years, or (ii) until such time as the payments total
$9,000,000. As of the date of the acquisition, the predecessor companies owed
the Company $1,243,000 representing the balance of loans made by the Company
prior to the acquisition. The
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
(US dollars)
NOTE B - ACQUISITION (CONTINUED)
Company's founder, controlling stockholder and Chairman was the Chief Executive
Officer, a director and owned a 47.5% beneficial interest in Datatek which was
transferred to the other Datatek stockholders for no consideration immediately
prior to the closing of the acquisition. Datatek and its subsidiaries had been
involved in the development, purchase and licensing of the technology,
intellectual property and other business assets that are required for the
Company's intended business operations. The transaction has been accounted for
as a purchase by the Company of a 52.5% ownership interest in the Datatek assets
and a contribution to the Company of the 47.5% interest formerly owned by the
Company's founder and controlling stockholder. Such contributed interest has
been recorded at the predecessor basis to the controlling stockholder which
approximates 47.5% of the stockholders' deficiency of the predecessor companies
at the acquisition date. In addition, 47.5% of the loss of the predecessor
companies for the period from January 1, 1999 through July 2, 1999 is reflected
in the Company's results of operations on the equity method and 100% of the
results of operations of the predecessor companies are consolidated with those
of the Company from July 2, 1999. The aggregate cost of the acquisition of the
52.5% interest, amounting to $27,793,000, including $1,243,000 of loans
receivable from predecessor companies, reduced by $1,069,000 representing 47.5%
of the stockholders' deficiency of the predecessor companies at the acquisition
date has been allocated to assets acquired and liabilities assumed at date of
acquisition as follows:
Cash $ 565,000
Sundry receivables 137,000
Due from related parties 109,000
Equipment and software, net 370,000
Other assets 146,000
Intangibles (see Note D) 29,921,000
-----------
31,248,000
-----------
Accounts payable, accrued expenses and sundry liabilities 2,884,000
Line of credit 40,000
Deferred income taxes 1,600,000
-----------
4,524,000
-----------
Cost of net assets acquired $26,724,000
===========
The contingent consideration will be accounted for as royalty expense as it
becomes payable. Also in connection with this transaction, founders of the
Company agreed to return 2,000,000 shares of common stock, which were then
canceled.
Assuming the acquisition had occurred as of January 8, 1999, the Company's
unaudited pro forma net loss, including amortization of the acquired
intangibles, would have amounted to $(13,161,000) or $(.35) per common share for
the period January 8, 1999 through July 31, 1999.
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
(US dollars)
NOTE C - SIGNIFICANT ACCOUNTING POLICIES
[1] BASIS OF PRESENTATION:
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and include the accounts of
the Company and its wholly-owned subsidiaries after elimination of all
significant intercompany transactions and balances.
[2] CASH:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. From time to time, the Company's
cash balances with any single financial institution may exceed Federal
Deposit Insurance Corporation limits.
[3] EQUIPMENT AND SOFTWARE, NET:
In accordance with Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use"
costs related to the development of software in connection with the
Company's Internet website, other than those costs incurred during the
application development stage, are expensed as incurred. Costs incurred
during the application development stage are capitalized and amortized
using the straight-line method over an estimated useful life of three
years beginning when the software is ready for its intended use.
Equipment is stated at cost less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful
lives of three to seven years.
[4] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates.
[5] STOCK-BASED COMPENSATION:
The Company has elected to follow the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" in accounting for its stock option incentive plan. As such,
deferred compensation expense is recorded on the date of grant of
employee options if the current market price of the underlying stock
exceeds the exercise price of the option, and such deferral is amortized
and charged to operations over the vesting period of the options. Options
or stock awards issued to non-employees are valued using the fair value
method and expensed over the period services are provided in accordance
with the applicable provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
(US dollars)
NOTE C - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates the recoverability of its intangibles and other
long-lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of." SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of these assets exceeds the
estimated future undiscounted cash flows attributable to these assets.
The Company assesses potential impairment to its long-lived assets when
there is evidence that events or changes in circumstances have made
recovery of the asset's carrying value unlikely. Should an impairment
exist, the impairment loss would be measured based on the excess of the
carrying value of the asset over the asset's fair value or discounted
estimates of future cash flows.
[7] REVENUE RECOGNITION:
Upon commencement of planned operations, the Company will recognize
revenue applicable to the delivery of music when the digital files are
delivered or, in the case of revenue to be derived from the sales of
CDs or music-related merchandise, upon shipment. Related royalties will
be charged to cost of sales to match the recognition of revenue, as
applicable.
[8] NET LOSS PER SHARE:
Basic and diluted net loss per share was computed by dividing the net
loss for the period by the weighted average number of common shares
outstanding during the period including shares issuable to creditors
after giving retroactive effect to a 2-for-1 stock split during May
1999. All share issuances prior thereto reflected in the statement of
stockholders' equity have been retroactively adjusted to reflect the
split.
[9] FOREIGN CURRENCY:
The assets and liabilities of the Company's German subsidiary, whose
functional currency is the Deutsche Mark, are translated into U.S.
dollars at exchange rates as of the balance sheet date. Expenses are
translated at the average of the rates prevailing during the period.
Translation adjustments are accumulated as a separate component of
stockholders' equity.
[10] COMPREHENSIVE INCOME:
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net
assets) during a period from non-owner sources. Comprehensive loss for
the period consists of the net loss and the loss from foreign currency
translation.
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
(US dollars)
NOTE C - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[11] SEGMENT INFORMATION:
The Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 requires
public companies to report financial and descriptive information about
their reportable operating segments. The Company identifies its
operating segments based on how management internally evaluates
separate financial information, business activities and management
responsibility. The Company believes that its operations, as they are
presently developing, constitute a single, reportable segment. Non-U.S.
equipment is immaterial.
NOTE D - INTANGIBLE ASSETS
In connection with the Company's acquisition of the predecessor companies (see
Note B), the Company has 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 24,881,000
---------------
29,921,000
Less: accumulated amortization (555,000)
---------------
$ 29,366,000
===============
The identifiable intangible assets are being amortized over a thirty-six month
period and the excess of cost over fair value of identifiable net assets
acquired is being amortized over a sixty-month period.
NOTE E - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND SUNDRY LIABILITIES
Accounts payable, accrued expenses and sundry liabilities at July 31, 1999
consisted of the following:
Litigation and claims payable $ 1,045,000
Estimated liability arising from the pending closure of
the Berlin facility 200,000
Employee wages and related benefits 213,000
Trade payables and other liabilities 677,000
Professional fees 195,000
Deferred offering costs 90,000
-----------
$ 2,420,000
===========
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
(US dollars)
NOTE F - INCOME TAXES
The tax effects of significant items comprising the Company's net deferred tax
asset and liability as of July 31, 1999 are as follows:
Net operating loss carryforwards $ 4,010,000
Less: valuation allowance (4,010,000)
-----------
Net deferred tax asset 0
Excess of book basis over tax basis of identifiable intangibles (1,556,000)
-----------
Net deferred tax liability $(1,556,000)
===========
As of July 31, 1999, the Company has an estimated United States net operating
loss carryforward of approximately $7,700,000 which expires in 2019. As of
December 31, 1998 Fritsch & Friends has an estimated net operating loss
carryforward of approximately $2,169,000 (DM 3,637,000) under German tax law
which does not expire. The Company has recorded a deferred tax asset fully
offset by a valuation allowance as the Company has not determined that it is
more likely than not that the available net operating loss carryforwards will be
utilized during the reversal period of existing taxable temporary differences,
nor at any time thereafter.
The income tax benefit for the period ended July 31, 1999 relates to the
amortization of the identifiable acquired intangibles.
NOTE G - COMMITMENTS AND CONTINGENCIES
[1] LEASE COMMITMENTS:
The Company leases its facilities under noncancellable operating leases
expiring through December 31, 2002. The Company also leases facilities
under a month-to-month lease which requires a six month termination
notice. During July 1999, the Company entered into a lease agreement
for the period from September 1, 1999 through December 31, 2002. Such
lease provides for an annual rental of $519,000 as well as certain
additional amounts. The Company was also required to provide a security
deposit equal to one year's lease payments.
Future minimum annual lease payments as of July 31, 1999 are as
follows:
FOR THE PERIODS ENDED
DECEMBER 31,
----------------------------------
1999 (August 1 - December 31) $ 275,000
2000 733,000
2001 666,000
2002 519,000
----------
$2,193,000
==========
Rent expense for the period ended July 31, 1999 approximated $22,000.
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
(US dollars)
NOTE G - COMMITMENTS AND CONTINGENCIES (CONTINUED)
[2] LEGAL PROCEEDINGS:
The Company and certain of the predecessor companies, are parties to
various 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
(see Note E), 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 H - STOCKHOLDERS' EQUITY
The Board of Directors has the authority to issue 10,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions, including dividend, conversion, voting, redemption (including
sinking fund provisions), and other rights, liquidation preferences, and the
number of shares constituting any series and the designations of such series,
without any further vote or action by the stockholders of the Company. On June
14, 1999, the Company designated and issued 1,000,000 shares of Series 1
Preferred Stock to its founder and Chairman for $1,000. Each of these shares
entitles the holder to 100 votes for each share held on all matters submitted to
a vote of stockholders. The Series 1 Preferred Stock does not carry any
dividend, liquidation, conversion or preemptive rights.
As of July 31, 1999, 131,667 shares of common stock (valued at $6.00 per share)
were issuable to creditors in satisfaction of $790,000 of debt. Also, warrants
to purchase 33,333 and 50,000 shares of common stock at exercise prices of $5.00
and $6.00 per share, respectively, issued to a service provider and a creditor
were outstanding. In addition, warrants to purchase 2,000,000 shares of common
stock at an exercise price of $5.00 per share issued in connection with the
Datatek acquisition (see Note B) were outstanding.
NOTE I - OPTIONS
The Company adopted the 1999 Stock Incentive Plan (the "99 Plan") under which
options (qualified or nonqualified) and other stock awards, covering an
aggregate of 5,000,000 shares of common stock may be granted to employees,
nonemployee directors and consultants. The exercise price established for any
awards granted under the 99 Plan shall be determined by a Committee of the
Company's Board of Directors. During the period ended July 31, 1999, options to
purchase 3,419,400 shares of the Company's common stock under the 99 Plan have
been granted to officers, other employees, directors and consultants of the
Company at exercise prices ranging from $1.50 to $6.00 per share. Generally,
options become exercisable over periods ranging to three years and expire ten
years from the date of grant. The Company has reserved 5,000,000 shares of
common stock for issuance under the 99 Plan. Subsequent to July 31, 1999 through
September 1999, the Company issued additional options to employees and
consultants to purchase a total of 1,270,000 shares of common stock at exercise
prices ranging from $3.20 to $12.50 per share.
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
(US dollars)
NOTE I - OPTIONS (CONTINUED)
The following table presents information relating to stock options outstanding
at July 31, 1999.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE EXERCISE LIFE IN EXERCISE
PRICE SHARES PRICE YEARS SHARES PRICE
$1.50 2,999,400 $1.50 10 $1.50
$3.00 150,000 3.00 10 50,000 3.00
$6.00 270,000 6.00 10 6.00
---------- ------
3,419,400 $1.92 50,000 $3.00
========== ===== ====== =====
The effect of applying Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") to the Company's July 31,
1999 net loss as stated below is not necessarily representative of the effects
on reported net loss for future years due to, among other things, the vesting
period of the stock options and the fair value of additional stock options in
future years. The weighted average fair value of the options granted during the
period ended July 31, 1999, has been estimated at $5.56 per share on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: no dividend yield, volatility of 100%, a risk-free interest rate of
5.70% and an expected life of eight years from date of grant. Had compensation
cost for the Company's stock option plan been determined based upon the fair
value of the options at the grant date for awards under the plan consistent with
the methodology prescribed under SFAS 123, the Company's net loss and net loss
per share would have been as follows:
Net loss - as reported $(9,368,000)
===========
- pro forma $(9,411,000)
===========
Net loss per share - as reported $(.29)
=====
- pro forma $(.29)
=====
NOTE J - RELATED PARTY TRANSACTIONS
On July 29, 1999, the Company entered into a license agreement with its
principal stockholder who is also the Company's Chairman and CEO for exclusive
worldwide rights to certain technology. The license shall continue to be in
effect as long as compensation equal to 0.25% of gross revenues is paid annually
to the CEO until the later of 20 years or the expiration of the underlying
patents as provided in his employment agreement.
At July 31, 1999, advances to the Company's Chairman and CEO totaled $113,000.
See Note B for information with respect to the Datatek acquisition.
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1999
(US dollars)
NOTE K - SUBSEQUENT EVENTS
[1] REVERSE ACQUISITION:
a) On August 2, 1999, concurrently with the merger of the Company
into HBI (item (b) below) the Certificate of Incorporation of
HBI was amended whereby it:
i) Effected a 2-for-1 stock split, increasing its
authorized capital from 50,000,000 shares of common
stock to 100,000,000 shares of common stock, and
increasing its outstanding common stock to 4,610,000
shares;
ii) Designated 1,000,000 shares of its 10,000,000
authorized shares of preferred stock as Series 1
Preferred Stock, and
iii) Changed its name from Health Builders International,
Inc. to MCY.com, Inc.
(b) Also on August 2, 1999, MCY.com completed its merger with the
Company whereby a subsidiary of MCY.com merged with and into
the Company with the Company becoming a subsidiary of MCY.com.
In connection therewith, outstanding shares of the Company's
common stock and preferred stock were converted, respectively,
on a 1-for-1 basis into common and preferred shares of MCY.com
having identical rights. Furthermore, all holders of options
and warrants of the Company were given identical options and
warrants of MCY.com under a newly adopted stock option plan,
and their existing options and warrants were canceled.
(c) In connection with the merger, holders of 4,000,000 shares of
HBI common stock sold approximately 3,900,000 of such shares
for $0.02 per share to certain of the Company's stockholders
who also served as advisors to the Company. The Company will
record a compensation charge to operations of approximately
$23,322,000 in connection with this transaction during August
1999.
[2] EQUITY FINANCING:
On August 9 and 17, 1999, the Company sold an aggregate of 6,322,333
shares of common stock at a price of $6.00 per share, for net proceeds
of $35,700,000 in a private placement. Additionally, options to acquire
632,230 shares of common stock at $6.00 per share were issued to a
placement agent in connection with this private placement.