<PAGE>
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 September 30, 1999
------------------
[ ] 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:
53,979,988 at September 30, 1999 of common stock (.001 per value)
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
Transitional Small Business Issuer Format Yes No X
--- ---
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None; not applicable.
Item 2. Changes in Securities.
During the period covered by this report, the Company sold an
aggregate of 6,322,333 shares of its common stock to investors pursuant to an
exemption from registration afforded by Section 4(2) and Rule 506 promulgated
under the Securities Act of 1933, as amended.
The shares were offered and sold through Gruntal & Co., LLC,
resulting in gross proceeds of $37,935,798 to the Company. After expenses of
the Offering and commission of $3,435,798 which were paid to Gruntal, the
Company realized net proceeds of $34,500,000. The Company additionally issued
a warrant to Gruntal & Co., LLC which granted it the right to acquire up to
632,233 shares of common stock from the Company at a price of $6 per share.
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 third quarter of the calendar year covered by this Report or
during the two previous calendar years.
Item 5. Other Information.
None; not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
MCY.COM, INC.
Date: 11/15/99 By /s/ Bernhard Fritsch
-------- --------------------------------
Bernhard Fritsch, CEO & Chairman
and President
<PAGE>
MCY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-QSB
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
COMMON STOCK .001 PAR VALUE. 53,979,988 SHARES OUTSTANDING AS OF
SEPTEMBER 30, 1999.
TAX ID #13-4049302
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,519,000
Sundry receivables 565,000
Advances to officer 113,000
Other current assets 361,000
----------------
Total current assets 32,558,000
Equipment and software, net 1,246,000
Intangible assets, net 28,257,000
Other assets, including security deposit and record company advances of $519,000 and
$168,000, respectively 864,000
----------------
$ 62,925,000
-----------------
-----------------
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and sundry liabilities, representing total
Current liabilities $ 2,406,000
----------------
Non-current liability:
Deferred income taxes 1,467,000
-----------------
Commitments and contingencies (Note F)
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;
53,979,988 shares issued and outstanding 54,000
Additional paid-in capital 141,489,000
Deficit accumulated during the development stage (54,344,000)
Cumulative foreign currency translation adjustment (27,000)
-----------------
87,173,000
Unamortized deferred compensation (28,095,000)
Stock subscriptions receivable (26,000)
-----------------
59,052,000
-----------------
$ 62,925,000
-----------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS 2
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIOD FROM JANUARY 8, 1999 (DATE OF INCEPTION) THROUGH SEPTEMBER 30,
1999
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE MONTHS JANUARY 8, 1999
ENDED THROUGH
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
<S> <C> <C>
Revenue:
Advertising revenue $ 165,000 $ 165,000
Expenses:
Research and development expenses $ (1,095,000) $ (1,339,000)
Selling, general and administrative expenses (4,330,000) (7,884,000)
Stock-based compensation (37,943,000) (40,522,000)
Amortization of acquired intangibles (1,664,000) (1,664,000)
------------------- -------------------
(44,867,000) (51,244,000)
Deferred income tax benefit 133,000 133,000
------------------ ------------------
(44,734,000) (51,111,000)
Share of loss of predecessor companies 0 663,000
------------------ ------------------
NET LOSS $ (44,734,000) $ (51,774,000)
================== ==================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $(0.89) $(1.38)
====== ======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 50,295,000 37,398,000
============== ==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS 3
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE PERIOD FROM JANUARY 8, 1999 (DATE OF INCEPTION) THROUGH SEPTEMBER 30,
1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (51,774,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of equipment and software 122,000
Amortization of intangible asset 1,664,000
Stock-based compensation 40,522,000
Share of loss of predecessor companies 663,000
Deferred tax benefit (133,000)
Changes in:
Receivables (428,000)
Other current assets (171,000)
Other assets (459,000)
Accounts payable, accrued expenses and sundry liabilities 647,000
---------------
Net cash used in operating activities (9,347,000)
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Datatek acquisition, net of acquired companies cash of $565,000 (1,748,000)
Payment of security deposit (619,000)
Purchase of equipment (408,000)
Cost of developing internal-use software (590,000)
---------------
Net cash used in investing activities (3,365,000)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on line of credit (40,000)
Proceeds from sale of stock, net of related costs 44,271,000
Net cash provided by financing activities 44,231,000
---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,519,000
===============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
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 $ 42,794,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS 4
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30,1999
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 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
4,611,000 shares of common stock. The merger is being accounted for as a
recapitalization. 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 minimal revenues related to the
Company's planned operations. Further, the Company's business concept and
business model are unproven and, accordingly, the Company's viability is
uncertain. 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 is presently attempting to raise additional financing
through a private offering of its common stock. 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 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
5
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30,1999
NOTE B - ACQUISITION (CONTINUED)
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:
<TABLE>
<S> <C>
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
===============
</TABLE>
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 $(54,840,000) or $(1.47) per common share
for the period January 8, 1999 through September 30, 1999.
NOTE C - SIGNIFICANT ACCOUNTING POLICIES
[1] BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements of MCY.com,
Inc. and subsidiaries (collectively, the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB, after
elimination of all significant inter-company transactions and balances.
It is the Company's opinion that all necessary adjustments (consisting
of normal and recurring adjustments) have been included to present a
fair statement of results for the interim periods.
These statements should be read in conjunction with the Company's
financial statements included in the Company's Current Report on Form 8-K
dated October 13, 1999. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations promulgated by the Securities and
Exchange Commission.
6
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30,1999
NOTE C - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 and Securities Investor Protection
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."
[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
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30,1999
NOTE C - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 accompanying
financial statements have been retroactively adjusted to reflect
the split.
[9] FOREIGN CURRENCY:
The assets and liabilities of the Company's German subsidiaries, 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.
[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:
<TABLE>
<S> <C>
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 (1,664,000)
---------------
</TABLE>
8
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30,1999
<TABLE>
<S> <C>
$ 28,257,000
---------------
---------------
</TABLE>
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 - INCOME TAXES
The tax effects of significant items comprising the Company's net deferred tax
asset and liability as of September 30, 1999 are as follows:
<TABLE>
<S> <C>
Net operating loss carryforwards $5,930,000
Less: valuation allowance (5,930,000)
------------
Net deferred tax asset 0
Excess of book basis over tax basis of identifiable intangibles (1,467,000)
------------
Net deferred tax liability $(1,467,000)
------------
------------
</TABLE>
As of September 30, 1999, the Company has an estimated United States net
operating loss carryforward of approximately $11,000,000 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 periods ended September 30, 1999 relates to the
amortization of the identifiable acquired intangibles.
NOTE F - 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. On October 1, 1999, the Company
amended this lease to include additional space bringing the annual rental
to $693,000. Pursuant to the amendment the Company provided an additional
security of $174,000. Also, in September 1999, new office space was
acquired in Munich, Germany for a term of 10 years beginning November 1,
1999 with the option to terminate on October 31, 2004. The lease provides
an annual rent of $261,000 for the first 3 years increasing to $398,000
thereafter. The Company was required to provide a security deposit of
$99,000.
Future minimum annual lease payments as of September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
FOR THE PERIODS ENDED
DECEMBER 31,
<S> <C>
1999 (October 1 - December 31) $180,000
2000 $983,000
2001 $961,000
2002 $976,000
</TABLE>
9
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30,1999
<TABLE>
<S> <C>
2003 398,000
2004 332,000
Thereafter 0
$3,830,000
==========
</TABLE>
Rent expense for the period ended September 30, 1999 approximated
$125,000.
[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, 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 G - 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.
In August of 1999, 121,667 shares of common stock (valued at $6.00 per share)
were issued to creditors in satisfaction of $730,000 of debt. 10,000 shares
previously issuable to creditors were cancelled by agreement.
On August 2, 1999, concurrently with the merger of the Company into HBI the
Certificate of Incorporation of HBI was amended whereby it:
- 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;
- Designated 1,000,000 shares of its 10,000,000 authorized
shares of preferred stock as Series 1 Preferred Stock, and
- Changed its name from Health Builders International, Inc. to
MCY.com, Inc.
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.
10
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30,1999
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 recorded a compensation charge to operations of approximately
$23,322,000 in connection with this transaction during August 1999.
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 $34,500,000 in a
private placement. Additionally, warrants to acquire 632,233 shares of common
stock at $6.00 per share were issued to a placement agent in connection with
this private placement. Also in connection with this transaction the company
paid $900,000 to other parties who facilitated the transaction.
At September 30, 1999 (i) warrants to purchase 33,333 and 50,000 shares of
common stock at exercise price of $5.00 and $6.00 per share, respectively,
issued to a service provider and a creditor were outstanding; (ii) 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 and (iii) warrants to acquire 632,230 shares of common stock at an
issuance price of $6.00 per share issued to a placement agent referred to
above were outstanding.
NOTE H - OPTIONS
The Company adopted the 1999 Stock Incentive Plan, as amended (the "99 Plan")
under which options (qualified or nonqualified) and other stock awards,
covering an aggregate of 15,000,000 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
September 30, 1999, options to purchase 6,539,400 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 $12.50 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. During the period ending September 30th in connection with
the resignation of certain employees, non-vested options previously granted
for 315,000 shares were cancelled. Additionally, with respect to such
employees, the period over which vested options are exercisable was limited
to 90 days from date of resignation. Subsequent to September 30, 1999, the
Company issued additional options to employees to purchase a total of 50,000
shares of common stock at an exercise price of $12.50 per share.
The following table presents information relating to stock options outstanding
at September 30, 1999.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE EXERCISE LIFE IN EXERCISE
PRICE SHARES PRICE YEARS SHARES PRICE
-------- -------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
$1.50 2,719,400 $1.50 5 439,940 $1.50
$3.00 60,000 3.00 5 6,000 3.00
$3.20 2,800,000 3.20 5 1,400,000 3.20
$6.00 325,000 6.00 5 30,000 6.00
$9.50 200,000 9.50 5 0 9.50
$10.00 110,000 10.00 5 0 10.00
$12.50 10,000 12.50 5 0 12.50
------ ---------- -----
6,224,400 $2.94 1,875,940 $2.85
========== ===== ========= =====
</TABLE>
11
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30,1999
The effect of applying Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") to the Company's 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 September 30, 1999, has been estimated at $8.92 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 range of 5.7-6.0% 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 for the period January 8,
1999 through September 30, 1999 would have been as follows:
<TABLE>
<S> <C>
Net loss - as reported $(51,774,000)
============
- pro forma $(55,684,000)
============
Net loss per share - as reported $(1.38)
=======
- pro forma $(1.49)
=======
</TABLE>
NOTE I - 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 September 30, 1999, advances to the Company's Chairman and CEO totaled
$113,000.
See Note B for information with respect to the Datatek acquisition.
NOTE J - SUBSEQUENT EVENTS
In October, 1999, the Company issued 251,000 shares of common stock at $6 per
share, pursuant to the August offering. Net proceeds from this issuance amounted
to $1,384,770. In connection with this offering, the placement agent received
warrants to acquire 25,100 shares of common stock at an exercise price of $6.
12
<PAGE>
MCY.COM, INC. STAGE AND SUBSIDIARIES
(A DEVELOPMENT COMPANY)
MANAGEMENT'S DISCUSSION AND ANALYSIS: ANALYSIS OF RESULTS AND PLAN OF OPERATION
MCY is a development-stage company and as such has had minimal revenue during
the course of its existence. Through December 31, 1998, MCY and the companies
which it has acquired in the Reorganization had accumulated losses of
approximately $5.4 million, a substantial portion of which had been expended in
development of MCY's digital music distribution platform and brand. On a
historical basis from January 1, 1999 through September 30, 1999, MCY and the
companies which it has acquired in the Reorganization incurred losses of roughly
$51.8 million. This amount includes non-cash expenditures of $40.5 million for
share compensation. Such amount includes $23.3 million in connection with the
merger of Health Builders, $2.7 million to employees and certain contractors,
and $14.5 million of deferred compensation in connection with stock options
issued. The majority of MCY's remaining expenditures were incurred in further
development of the MCY product and brand.
During August 1999, MCY received a net equity infusion of cash amounting to
$34.5 million. These funds are being used for the following:
- marketing and promotional activities
- the purchase of rights for distribution of music content
- software and hardware
- strategic alliances, especially in the area of consumer
electronics expansion of software development activities
- general operating activities, including expansion of staff
from the current level to roughly 100 full-time employee
equivalents
MCY anticipates that it has sufficient resources to satisfy the cash
requirements for MCY and MCY.com over the next twelve months.
CERTAIN TRANSACTIONS
Set forth below are certain transactions in securities of MCY and MCY.com since
the formation of MCY. All share numbers presented below have been adjusted to
reflect the two-for-one split of the common stock of MCY effected on May 20,
1999.
MCY
On April 26, 1999, MCY issued an aggregate of 35,661,352 shares of common stock
to its stockholders (net of 2,000,000 shares returned on July 2, 1999 as
described below). This amount includes: 25,282,652 shares issued to founders;
1,857,480 shares which MCY was contractually obligated to issue to employees and
consultants prior to its incorporation; and 8,521,220 shares issued on April 26,
1999 to employees and consultants for services rendered.
On April 29, 1999, MCY issued 200,000 shares of common stock to its legal
counsel for services rendered.
Between May 5 and May 17, 1999, MCY sold 363,636 shares of common stock to an
investor at a purchase price of $2.75 per share, 2,400,000 shares of common
stock to the same investor at a purchase price of $3.75 per share and 200,000
shares of common stock to an additional investor at a purchase price of $5.00
per share.
On June 14, 1999, MCY issued 1,000,000 shares of Series 1 preferred stock to Mr.
Bernhard Fritsch for $1,000.
In connection with the Reorganization, on July 2, 1999, MCY issued an aggregate
of 4,500,000 shares of common stock to Datatek, as well as warrants to purchase
an additional 2,000,000 shares of common stock, exercisable over five years at
an exercise price of $5.00 per share. The warrants contain customary
anti-dilution protection. Mr. Bernhard Fritsch and Mrs. Sibylle Fritsch returned
to MCY an aggregate of 2,000,000 shares of common stock of MCY for cancellation
pursuant to the reorganization.
On July 2, 1999, MCY issued a former officer of MCY, options to acquire an
aggregate of 400,000 shares of common stock issuable at an average exercise
price of $3.00. The officer resigned from his position with MCY in September
1999.
13
<PAGE>
MCY.COM AND HEALTH BUILDERS
Effective on the closing of the Merger, Health Builders (MCY.com's predecessor)
enacted a 2-for-1 forward stock split, increasing the number of issued and
outstanding shares of its common stock to 4,610,000. In connection with the
Merger, Health Builders amended its Certificate of Incorporation; whereby it (I)
increased its authorized capital from 50,000,000 shares of common stock to
100,000,000 shared of common stock; (ii) designated 1,000,000 shares of
Preferred Stock "Series 1 Preferred Stock"; and (iii) changed its corporate name
from Health Builders International, Inc. to MCY.com, Inc. In addition, on the
closing of the Merger, MCY.com (formerly Health Builders) issued (A) 43,241,655
shares of MCY.com Common Stock to the holders of the common stock of MCY, (B)
2,000,000 warrants to the holders of MCY warrants, (C) options to holders of MCY
options to acquire shares under the Health Builders 1999 Incentive Option Plan,
and (D) 1,000,000 shares of Series 1 Preferred Stock to Bernhard Fritsch, the
holder of Series 1 preferred stock of MCY. Furthermore, all of the former
officers and directors of MCY.com resigned and the current officers and
directors were elected.
In connection with the Merger, the holders of approximately 4,000,000 shares of
Health Builders common stock agreed to sell approximately 3,900,000 of such
shares to two current stockholders of the Company and their associates for $0.02
per share.
Through the period July - September 1999, MCY.com issued an aggregate of
6,224,000 options at exercise prices ranging from $1.50 per share to $12.50 per
share pursuant to MCY's Incentive Option Plan to certain employees, consultants
and directors. MCY also issued 121,667 shares of common stock to creditors and
canceled 410,000 shares of common stock which were to be issued to a consultant
and issued as payment for accrued interest. MCY also issued warrants to purchase
33,333 shares of common stock at an exercise price of $5.00 per share and
warrants to purchase 50,000 shares of common stock at an exercise price of $6.00
per share.
In August, 1999, MCY.com issued 6,322,333 shares of MCY.com Common Stock at
$6.00 per share in connection with a private offering of securities. The net
proceeds of the offering were approximately $34,500,000. The Placement Agent
received warrants to acquire 632,230 shares of MCY.com Common Stock at an
exercise price of $6.00 per share in connection with this Offering.
In October, 1999, MCY.com issued 251,000 shares of MCY.com Common Stock at
$6.00 per share pursuant to the Prior Offering. The net proceeds of the
offering were $1,384,770. The Placement Agent received warrants to acquire
25,100 shares of MCY.com Common Stock at an exercise price of $6.00 per share
in connection with this offering.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET,
STATEMENT OF OPERATIONS, STATEMENT OF CASH FLOW AND NOTES THERETO INCORPORATED
IN PART I, ITEM I OF THIS FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 31,519,000
<SECURITIES> 0
<RECEIVABLES> 565,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,558,000
<PP&E> 1,246,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 62,925,000
<CURRENT-LIABILITIES> 2,406,000
<BONDS> 0
0
1,000
<COMMON> 54,000
<OTHER-SE> 141,489,000
<TOTAL-LIABILITY-AND-EQUITY> 59,052,000
<SALES> 165,000
<TOTAL-REVENUES> 165,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 51,224,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (51,224,000)
<INCOME-TAX> 133,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,774,000)
<EPS-BASIC> (1.38)
<EPS-DILUTED> (1.38)
</TABLE>
