As filed with the Securities and Exchange Commission on January ___, 2000
Registration No. _________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
MCY.COM, INC.
(Name of Small Business Issuer in its charter)
Delaware 13-4049302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1133 Avenue of the Americas, 28th Floor
New York, New York 10036
(Address of principal executive offices and zip code)
(212) 944-6664
(Issuer's telephone number, including area code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None None
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $ 0.001 per share
(Title of Class)
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Item Number Page Number
- - ----------- -----------
Part I
<S> <C>
Item 1. Description of Business 3
Item 2. Management's Discussion and Analysis or Plan of Operations 23
Item 3. Description of Property 24
Item 4. Security Ownership of Certain Beneficial Owners and Management 25
Item 5. Directors and Executive Officers, Promoters and Control Persons 27
Item 6. Executive Compensation 29
Item 7. Certain Relationships and Related Transactions 32
Item 8. Description of Securities 34
Part II
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters 36
Item 2. Legal Proceedings 37
Item 3. Changes in and Disagreements with Accountants 37
Item 4. Recent Sales of Unregistered Securities 38
Item 5. Indemnification of Directors and Officers 42
Part F/S Financial Statements 43
Part III
Item 1. Index 44
Item 2. Description of Exhibits 45
Signatures 46
Exhibits 47
</TABLE>
-2-
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained under "Description of Business",
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and elsewhere in this Registration Statement on Form 10-SB regarding
matters that are not historical facts are "forward-looking statements", as such
term is defined in the Private Securities Litigation Reform Act of 1995
(promulgated under the Securities Act of 1933, as amended) and are subject to
the safe-harbor created by that act. Because such forward-looking statements
include risks and uncertainties, actual results may differ materially from those
expressed in or implied by such forward-looking statements. There are several
important factors that could cause actual results to differ materially from
those anticipated by the forward-looking statements contained in such
discussions. We undertake no obligation to release publicly the result of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this Registration Statement on Form 10-SB or
to reflect the occurrence of unanticipated events.
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
MCY.com, Inc. owns and operates an Internet website located at
http://www.mcy.com. Our website provides an interactive environment and virtual
music store where music buyers can: (i) view live concert events and purchase
various music products and services including digital music downloads, compact
discs or CDs and pay-per-view live events; (ii) obtain information on various
artists, musical genres, new music releases, concert events, articles, reviews;
and (iii) view videotaped and real-time artist interviews and concerts. We plan
to develop a network of international regional operations called "MCY Music
Cities" that will provide services to regional music buyers in the United
States, Europe, Japan and Latin America in areas such as selection and local
language interface.
HISTORY
The concept behind our business was developed by Mr. Bernhard Fritsch,
our chief executive officer, who has been involved in the production and
marketing of multi-media and electronic music entertainment products since 1979.
In 1991, Mr. Fritsch formed Fritsch & Friends Audio Produktions GmbH (now
Fritsch & Friends Mediagroup GmbH or "Fritsch & Friends") for high-end audio
post-production and multimedia content production, sales and distribution.
Starting in 1995, Fritsch & Friends entered into the nascent field of Internet
digital music distribution. In 1998, Fritsch & Friends was sold to Datatek
Services Limited or Datatek in 1998 in exchange for a 50% interest in Datatek.
In January 1999, Mr. Fritsch formed MCY Music World, Inc. On July 2, 1999, we
acquired the stock and certain assets of the subsidiaries of Datatek including
MCY America, Inc. and Fritsch & Friends as well as the technology, music rights,
trademarks, names, logos and related business assets and rights that were owned
by Datatek. In August 1999, we completed a merger and reorganization with Health
Builders International, Inc. As a result of the merger, MCY Music World became a
wholly-owned subsidiary of Health Builders and Health Builders changed its name
to MCY.com, Inc.
Our principal executive offices are located at 1133 Avenue of the
Americas, 28th Floor, New York, New York 10036, and our telephone number is
(212) 944-6664. We also have the following 7 wholly-owned subsidiaries: (i) MCY
Music World, Inc., a Delaware corporation, which acts as our operating company;
(ii) MCY America, Inc., a New York corporation; (iii) MCY Events Inc., a
Delaware corporation; (iv) MCY Latin, Inc., a Delaware corporation; (v) Fritsch
& Friends Mediagroup GmbH, a German corporation; (vi) MCY Europe GmbH i.Gr., a
German corporation; and (vii) MCY West, Inc., a California corporation.
PRODUCTS
Our website was launched in June 1999 and features a selection of
digitally downloadable audio files from our music library. Our music library
holds a broad range of independent record labels and recording artists. We
intend to offer consumers the following core music products, all of which would
be accessible through the website listed below.
-3-
<PAGE>
o Digital music downloads which can be selected from our digital
warehouse, in 16-bit stereo quality.
o Pre-recorded CDs which will be delivered by mail order.
o Pay-Per-View live events.
o Mail order music-related merchandise (T-shirts, videos, books,
etc.).
o Promotional features, such as web broadcasting of live events,
videotaped interviews, articles and music reviews.
The Moving Pictures Experts Group has developed a popular
non-proprietary format called the MPEG-1 Audio Layer 3 or "MP3" that allows
music files to be compressed to approximately 1/12th of their original size with
no audible loss of quality. These compressed MP3 files can be downloaded very
quickly (an entire CD, converted to MP3 format, can be downloaded over a cable
modem in approximately 20 minutes). We intend to distribute our audio files
using a proprietary enhanced and encrypted version of the MP3 format called
"NETrax." NETrax is expected to offer several compelling advantages compared
with the currently available MP3 technology, including:
o Anti-piracy features to prevent unauthorized duplication.
o Excellent sound quality of downloaded audio files (16-bit
stereo).
o Instantaneous sales tracking ability to drive marketing and
promotional campaign research.
o Point of sale royalty tracking to ensure prompt and accurate
payment to artists and license holders.
STRATEGY
We intend to become a global retailer of digitally downloadable music
and music-related products and services. Key elements of our business strategy
include:
Focus on Digital Music Distribution. We are focused on digital music
distribution. Although we intend to offer mail order distribution, we strongly
believe that the future of the music industry lies with digital distribution and
we will attempt to "convert" any mail order customers to digital technology by
offering premium streaming content, free NETrax downloads and special
promotions. Our research and development efforts will be focused on achieving a
position as a premier online distributor of digital entertainment media. We
expect that our primary source of revenue will come from sales of NETrax
downloads, pay-per-view live events and advertising.
Broaden Retail Content. We will attempt to attract customers by
providing a music catalog on the Internet, in both digital download and CD mail
order formats. We continually court artists and independent record labels for
new distribution rights. Although we do not yet have any rights to distribute
content provided by the five major record label companies including Bertelsmann
Music Group, Inc., Sony Music Entertainment, Inc., EMI and its subsidiaries
Polygram Records, Inc. and Warner Music Group, Inc. other than a publishing
agreement signed between MCY Europe Gmbh and EMI Publishing Germany Gmbh, a
primary focus of our technological development is to satisfy the security
concerns of major record labels so that we will be able to obtain the rights to
their content for digital distribution. We believe that we can reduce our
dependence upon major record label content by consummating distribution
arrangements directly with artists. However, because most
internationally-recognized artists typically sign multi-year exclusive recording
contracts with record labels that may prevent them from posting music on our
website without the recording company's permission, our access to such artists
and our ability to distribute or place their music on our website is limited.
Expand Entertainment Content. Our goal is not to be simply a retail
site, but to become a music and digital entertainment destination and content
owner and creator. In order to achieve this goal, we intend to seek out
non-retail content such as web broadcasts, videotaped interviews, articles and
music reviews. These items, if made available, will become a part of our library
of digital entertainment content, some of which will only be available through
us. By expanding the type of content we offer, we intend to differentiate
ourselves from our competition.
Establish a Brand Name. We intend to promote our brand and attract new
customers by attempting to add major music stars to our digital catalog and
utilizing their name recognition to strengthen our own brand. In addition, we
plan to initiate a marketing and promotional campaign through online and
conventional marketing channels.
-4-
<PAGE>
Engage in Customer Profiling. By storing important information about
customer music purchasing preferences, we will attempt to tailor product
offerings and promotional activities to customers' specific needs on a "one to
one" basis. We believe that our customer database will represent valuable data
for advertisers and our music industry partners.
Provide Superior Customer Service. We intend to provide streamlined and
efficient shopping processes, advanced features, instant delivery of digital
products, rapid turnaround and delivery of mail order products and fast and
friendly responses to customer inquiries. In key areas such as fulfillment and
order tracking of mail order purchases, we will attempt to outsource these
activities to organizations with expertise in these functions.
Maintain Technological Leadership. We currently possess technology
which we believe is superior to the technology of our competitors, especially in
the field of digital music distribution. We intend to maintain this competitive
advantage by continuing to emphasize further research and development.
Actively Pursue Globalization. Through MCY Music Cities, we aim to
provide an interface which is sensitive to local language, tastes and interests.
It is important to note that many major markets are oriented towards domestic
content that most online providers do not offer. Accordingly, we will attempt to
develop a global network which actively maintains local sites and seeks local
content to exploit the growth of global online markets.
MARKETING
Our marketing campaign is being implemented initially in the United
States and will be expanded, as appropriate, to local markets worldwide. Our
marketing program is designed to accomplish several goals, with the primary
focus of establishing MCY.com, Inc. as a global retailer in the digital
distribution of music. Through our marketing program, we intend to increase
consumer familiarity with the concept of quality digital music downloaded from
the Internet and to educate the music industry on the benefits we offer, our
features and the advantages of digital distribution. In addition, we intend to
generate consumer traffic to our website as a result of our marketing and
advertising efforts.
Target Audiences
We have identified the following groups as the target audiences for our
marketing activities:
o Consumers, Internet music buyers from the following groups (in
order of priority):
- Baby Boomers (ages 34-52)
- College students (ages 18-25)
- Baby Busters (ages 25-33)
- Teens (ages 12-17)
o Current and potential business partners from the music and online
industries
o The business and investment community
o Influentials, including traditional and online media, trade
associations, industry analysts, artists and employees
Marketing Plan
We intend to utilize both traditional and alternative conduits in an
effort to reach our target audiences. In the upcoming months, we plan the
following actions:
Entertainment Promotions. Sponsorships and event promotions are a major
vehicle through which we plan to reach our target audiences. Such activities
have the benefit of allowing effective targeting of audiences and access to
exclusive content. We intend to regularly broadcast an event or concert from our
website. We kicked off these efforts with the sponsorship of the Michael Jackson
& Friends concert in Munich in June 1999. In November 1999, we webcast the live
performance of Luciano Pavarotti on our site, and in December 1999, we webcast
the Paul McCartney concert live from Liverpool, England. We are currently under
contract as a sponsor and to webcast the Backstreet Boys tour starting February
2000 with the webcast schedule to start in March 2000. Additionally, we have in
the past and intend to continue to
-5-
<PAGE>
create our own content pages promoting individual artists, featuring exclusive
information, downloads and interviews.
Artists/Spokespersons. We believe that an extremely cost-effective way
to promote our brand is through agreements with well-known artists who would
promote our website in exchange for an advance payment and a share of the
applicable download revenue. In this manner, we intend to leverage the name
recognition that these artists have already achieved.
Marketing Materials. We have created a range of marketing materials for
distribution to members of the press and business communities. Materials include
a corporate brochure, fact sheet, and press kit (containing press releases, fact
sheets, biographies and photographs). The first version of these materials was
prepared for the Cannes MIDEM conference in January 1999. We presently update
and revise these materials monthly to reflect our progress in the market and
recently produced an expanded update and revision for the Cannes MIDEM
conference in January 2000..
Public Relations. Our public relations strategy is to seek more global
exposure to music consumers as well as to the business and financial community.
We have received continuing print, online, radio and television coverage in both
the United States and Germany including print coverage in Time Magazine, The New
York Times, Wall Street Journal and Los Angeles Times, trade publications
including Billboard, Variety and Hollywood Reporter, television coverage on
CNBC, NBC and ABC as well a radio coverage on CBS Radio News. We have continued
to receive regular coverage in the major German print and broadcast news.
Trade Shows and Special Events. Following our industry launch at MIDEM
Cannes in January 1999, we have increased our exposure to the music and online
industries by attending trade shows including the AFIM and MIDEM Americas Music
Conferences and the New York Music and Internet Expo. For MIDEM in January 2000,
we constructed a new modular trade show booth for scalable use in future shows.
We have attended several other music industry and Internet trade shows to build
excitement including PopKomm, IMX, IFA, CMC, Webnoize, Internet World, Digital
Hollywood and MIDEM in 2000. As a result of our participation in these
conferences and our media coverage we have been asked to be on panel discussions
at Digital Hollywood at the Consumer Electronics Show, CMC, the American
Conference Institute and MIDEM. We are also currently under contract to be the
sponsor of the Backstreet Boys tour scheduled to begin in February 2000.
Free Online Advertising/Publicity Channels. In conjunction with our
website launch, we engaged a specialist to assist in the designation of keywords
and the placement of our website's listings in leading portals and search
engines including Yahoo!, AltaVista and Lycos. We also intend to develop a
network of reciprocal links to other music-related sites. We intend to
participate in banner exchange programs such as Link Exchange in order to gain
access to free or low-cost banner placements. We also plan to develop affiliate
programs in order to gain consumer traffic based on commission payments to other
sites that host our links or banners.
Strategic Alliances. We have established a relationship with Mediaways,
the European service provider for America Online, and hope to use this
relationship to generate traffic to our site. On December 31, 1999, we entered
into a website linking and co-branded site development agreement with US West
Communications Services, Inc. under which we have agreed to develop a MCY/US
West co-branded Website to sell digital music downloads on the US West Internet
and in-development digital subscriber line sites.
Advertising. We will identify appropriate media for highly targeted,
strategic ad buys and placements designed to drive traffic to our website and to
encourage trial purchases. We initially plan to focus on music-related sites
such as Vibe, Spin, MTV and Rolling Stone. Our banner advertisements, including
the banner advertisement for the Pavarroti webcast in November of 1999, are
intended to leverage well-known artists who are featured in our catalog, thus
benefiting from the promotional dollars which have already been spent
establishing these artists' reputations. Another inexpensive and cost-effective
advertising medium that we plan to use is music-related newsgroups, such as
alt.music.acid-jazz or rec.music.opera, which provide low-cost access to very
targeted audiences. We have also developed and will continue to expand print
advertising campaigns. To date, we have placed advertisements in newspaper
publications including the New York Times, Wall Street Journal and London Times
and entertainment industry magazine publications including Billboard and
Variety.
OPERATIONS
Potential customers can find us on the World Wide Web at the address
www.mcy.com or www.mcy.de. Our commercial websites are routed through our main
server in Gutersloh, Germany. These two websites are
-6-
<PAGE>
currently identical with the exception of the language. The websites provide
details about the full range of our products including all digital music files
stored in our digital warehouse. Our websites are periodically redesigned to
improve appearance and functionality. Local content and local language interface
will be managed by the local MCY Music Cities.
Searching and Selecting
Our consumers will be able to search, pre-listen, select and purchase
items online using our sales platform. Our search engine allows consumers to
locate music according to song title, artist and album title. Our website also
supports genre-based browsing and we have plans to develop 11 music categories
to be further divided into over 100 specific sub-categories. The customer can
base his or her selection on a wide variety of available pre-listens, including
pre-listens for most digitally downloadable selections. A pre-listen allows a
customer to listen to a short segment of an individual song in 8-bit sound
quality at no cost. The customer can then make a decision whether to purchase
such song.
Ordering and Payment
Orders are made using a customer shopping cart. Payments can be made
using most major credit cards. We utilize Cybercash software to transmit
transactions to our merchant bank account. American Express and Bridgeview Bank
(Visa, Mastercard) provide us with merchant services for transaction
authorization, address verification and transaction processing.
Delivery of Digital Download
Once a customer has paid for a song for digital download, the customer
may obtain that song simply by clicking on its icon in the customers browser.
The song is automatically downloaded onto the customer's hard drive. Download
time may range from less than 30 seconds (for high-speed connections) to over 10
minutes per song (for 28.8K modems). To listen to digitally downloaded
selections, customers must register and download a free NETrax player which is
encoded based on each user's profile. Customers who download a song can replay
that song only on their own NETrax player, which is fitted with an individual
encryption code, making our Internet music sales more secure than traditional
retail sales. Songs can be downloaded 24 hours a day.
Delivery of Mail Order
Mail-order CDs are not currently available on our website but are
expected to be available shortly. We do not maintain a physical inventory of
CDs. Instead, we will rely on an international distribution and fulfillment
expert for our fulfillment and mail order delivery. This should allow us to
offer an extensive selection of CDs while avoiding the high costs and capital
requirements associated with owning, warehousing and distributing product from
inventory. When the customer orders a pre-recorded product for mail order
delivery it is expected that the ordered product will generally be shipped
within 48 to 72 hours.
Sales Support
It is intended that for mail order-related inquiries, customer service
will be outsourced to a fulfillment partner. Otherwise, customers will be able
to contact us by e-mail with questions, comments and suggestions or call a
toll-free telephone number. We plan to hire customer service representatives and
intend to expand our staff as traffic increases. We also intend to provide
online customers with answers to frequently asked questions, such as inquiries
about payment, credit card security and digital downloads.
TECHNOLOGY
We have developed, licensed and integrated systems which enable online
retailing and digital delivery in secure and user-friendly formats. With a
combination of proprietary solutions and licensed technologies, we have
established systems for online content delivery and online transaction
processing, and are close to the completion of systems for sales and royalty
tracking and electronic data interchange. As of January 18, 2000, Mr. Bernhard
-7-
<PAGE>
Fritsch filed patent applications based upon previously filed provisional
applications for several of the key technological inventions, including our
sales and royalty tracking systems, shopping list, and the personalized NETrax
player which he has licensed to us. In addition, Mr. Fritsch has licensed
certain trademarks to us under a license agreement. The exclusive worldwide
license has a term of either the later of twenty (20) years or the expiration of
any patents licensed thereunder, and requires that we pay Mr. Fritsch an annual
fee of $1,000. Mr. Fritsch may terminate the license if we fail to pay Mr.
Fritsch compensation equal to 0.25% of our gross revenue pursuant to the terms
of his employment agreement. In December 1999, we also filed several other
strategic trademark applications and registered corresponding uniform resource
locators ("URLs").
Digitization
When we obtain the rights for digital distribution of a given recording
from a recording company or artist, the record company or artist must give us a
copy of the master recording. This recording is immediately sent to our
digitization factory in New York to be digitized. Digitization is the process of
converting digital or analog music into digital audio files that can be
compressed into files which can be downloaded through our website. We use MP3
technology, which we employ under license on a non-exclusive basis from Thomson
Consumer Electronic Sales GmbH. The terms of this agreement call for a royalty
payment of 1% of our gross revenue from digital downloads with a US$15,000
annual minimum, which is fully creditable against annual sales. In addition to
digitization of files, information on each digitized track (artist, title,
length, rightsholder information, etc.) is entered into our database.
Encryption.
To overcome industry fears of online piracy, we use advanced
encryption and security protocols to ensure that transactions conducted on our
website are secure and music selections cannot be pirated or unlawfully
distributed over the Internet. Our download technology is based on an encryption
technology called Multimedia Protection Protocol or "MPP". Our subsidiary,
Fritsch & Friends, currently has a non-exclusive perpetual license from
Fraunhofer Institut fur Integrierte Schaltungen to incorporate Version 1 of
its proprietary MMP software into our products, which enables us to offer for
download encrypted versions of songs recorded in the MP3 format. We have
recently signed a new non-exclusive license from FraunhoferGesellschaft zur
Forderung der angewandten Forschung e.V. for use of Version 2 of its MMP
software which will enable us to provide more advanced encryption capabilities,
such as downloads that can only be played a limited number of times, and allow
us to sublicense the technology to our strategic alliance partners.
Digital Warehouse.
Our digital warehouse is used to store all digital tracks. Our
warehouse is run on a SUN E4000 server hosted by the global network of
mediaways, a subsidiary of Daimler-Benz Information Systems, Germany, which
provides connectivity and communication between our network and global and local
internet service providers. This system allows audio files to be distributed
effectively worldwide. Our digital warehouse has the capacity to store up to
5,000,000 tracks. Our servers are monitored on a 24-hour basis by technology
personnel and are protected by firewalls and other security technologies.
Sales and Royalty Tracking.
To overcome industry concerns about royalty payments, we are offering
proprietary software which, when fully developed, is intended to automatically
track royalty disbursements. Our proprietary software network will also offer
the music industry a number of exclusive features, including fast, global
tracking of sales and activities, which will be continually updated 24 hours a
day for instant marketing feedback and analysis.
RESEARCH AND DEVELOPMENT
Our research and development activities cover various areas, including
database programming, website management, player development, digitization,
interface design, cybercasting and network management. Our
-8-
<PAGE>
development team has specialists in each of these areas which are continuously
updated. We have several development priorities including: (i) the creation of
"plug-ins" to allow for compatibility of the NETrax format with hardware players
and other software players; (ii) the completion and enhancement of sales and
royalty tracking software; (iii) the introduction of personalization software to
support "one to one" relationships with customers; (iv) the further development
of genre-based features and other proprietary content; and (v) the development
of advanced marketing tools.
COMPETITION
Key Success Factors
Competition among companies in the online music retail and digital
delivery business is intense. We compete against a number of technology
companies that are offering or plan to offer products, services or technologies
for the digital delivery of music over the Internet. We believe that in the near
future, the keys to success in the market for retail sales of digital downloads
will be categorized into the areas of content and product/technology. Other
important factors will include quality of management, marketing strategy and
strategic alliances. Based on an analysis of the existing competition, we
believe that our main priorities going forward must be the aggressive
establishment of our brand and the expansion of our digital music catalog. By
achieving these goals, we believe that we should command a strong global market
share in digital distribution. We anticipate that digital distribution, and not
mail order, will be the major engine of future growth in online music sales.
Digital Distribution
General. There are currently few established players in the field of
retail distribution of digital audio files. We believe that eventually only
three to five main competitors will exist and a substantial number of smaller
companies focusing on niche markets. Excluding us, the main players are
currently MP3.com, Amazon.com, CDNow, Emusic and Liquid Audio. These companies
are expected to have significant market share in the U.S.
Because major record labels have been slow to commit themselves to
digital distribution, some companies, such as a2b music, Lucent, Microsoft and
Liquid Audio, have focused on the development of a standard audio player for
digitally downloaded music. As such, these companies are generally software
providers, not music distributors, and we believe that the quality of their
products is not as strong as our products with regard to security and the
ability to warehouse and deliver a large library of digital downloads. The
challenge they represent is that they license their software to major existing
or new distributors (such as EMI's reported licensing of Liquid Audio's
technology), which will then become our main competitors in the digital
distribution market. A second group of potential competitors includes companies
such as Emusic.com Inc. (formerly GoodNoise), AudioSoft and Audio Explosion's
MJuice, which appear to be trying to build a digital distribution presence
mainly by licensing content from small independent labels. A third group of
competitors includes the major record labels themselves, which may elect either
to operate or launch their own websites for the delivery of digitized music
downloads or to partner with online retailers other than MCY.com, Inc. Finally,
a major challenge to our success and to the recording industry as a whole is the
increasingly popular free, unlicensed distribution of digital downloads for play
on the widespread MP3 audio players from companies such as MP3.com, which denies
artists and the record industry their share of the revenue.
Pre-recorded CDs
The online mail order market is currently dominated by several
companies whose major advantage is that they have succeeded in developing brand
awareness. The two dominant players in online CD sales are CDNow and online
retail giant Amazon.com. We do not expect to gain a substantial share of this
market.
-9-
<PAGE>
INDUSTRY BACKGROUND
Growth of the Internet and Online Commerce
The Internet has become an increasingly significant global medium for
online commerce and communications, allowing millions of people to share and
transfer information electronically. Market Tracking International estimates
that 94 million people worldwide have access to the Internet, and projects that
this number will almost triple over the next five years to approximately 240
million users by the year 2003. The total value of services and products
purchased over the Internet is expected to expand even more rapidly over the
next five years to the extent that online shopping gains greater acceptance
among buyers and sellers. For example, according to International Data Corp.,
this means an increase from approximately $10 billion in online retail commerce
in 1998 to over $50 billion by the year 2002. A recent study by the Boston
Consulting Group placed 1998 online retail sales at over $13 billion, suggesting
that previous projections may have been significantly underestimated. Based on
these figures, it appears that there is significant growth potential for online
commerce.
Retail Sales in the Music Industry
The International Federation of the Phonographic Industry estimates
1998 sales reached $38.7 billion. Industry projections anticipate steady growth
in the global market, since sales of music and entertainment products
traditionally remain strong even during times of economic downturn. Market
Tracking International estimates that revenue from the sale of prerecorded music
will reach nearly $50 billion by the year 2002.
Online Sales of Music
In late 1998, Market Tracking International estimated that online sales
of prerecorded music would increase exponentially, reaching $2.7 billion by the
year 2003 (1998 online music sales were $134 million). Recent developments
suggest that there may be even faster growth, especially considering both the
rapid adoption of Internet shopping by customers and the superior momentum which
the digital music download medium has gained recently.
Although Internet music sales are predicted to increase greatly in the
United States, Market Tracking International predicts that the U.S. market share
of total online music sales will fall from 83% in 1998 to 70% in 2003 and should
continue to decline as sales growth in the rest of the world outpaces the U.S.
market.
Online retailers have the potential to build large, global customer
bases quickly, and at a considerably lower cost than traditional music
retailers. Online music retailers can offer 24 hour shopping, the ability to
pre-listen to music samples and the opportunity to download music from a
repertoire much wider than that offered through even the largest music stores.
Online retailers are also free from the physical constraints of traditional
music retailing which requires high-traffic retail locations, considerable
inventory and the need to primarily limit inventory to high turnover items.
Digital Distribution of Music
Industry participants generally expect that digital distribution will
play a major role in the future of the music industry, because it provides
numerous advantages for both consumers and record companies. Currently, digital
distribution is in its infancy and overall revenue is quite low, partially
because presently the majority of digital distribution is done both illegally
and free of charge (Jupiter Communications estimates less than $1 million in
sales occurred in 1998). Nevertheless, many industry participants believe that
the rapid development of the digital distribution market will occur due to the
numerous advantages of digital distribution for both record companies and
consumers (see figure below).
Despite the numerous advantages of digital distribution, there is still
controversy as to how quickly this new medium will be adopted. Factors which may
hinder the development of the digital distribution market are
-10-
<PAGE>
primarily related to the reluctance of record labels and customers to embrace
the new technology and the slow speed at which music is currently downloaded.
See "Risk Factors".
<TABLE>
<CAPTION>
ADVANTAGES OF DIGITAL DISTRIBUTION
<S> <C>
- - -------------------------------------------------------- -----------------------------------------------------
BENEFITS TO THE RECORD COMPANY BENEFITS TO THE CUSTOMER
- - -------------------------------------------------------- -----------------------------------------------------
Margins can jump from between $2 to $3 per CD (10-15 Immediate availability of all selections for
songs) to between $0.27 to $0.72 per song download -- no need to physically visit the
retailer or to wait for mail order delivery
Elimination of costs of manufacturing, distribution,
packaging and warehousing Simple, fast, secure online selections and payment
Elimination of inventory obsolescence High quality audio (16-bit stereo)
Tracking of up-to-date, precise information on music Access to pre-listens on 100% of available
sales and trends selections
Ability to pre-test popularity of releases and change Ability to select individual songs, rather than
pricing policy immediately based on sales trends full albums
Improved access to information on customer Lower prices (made possible by the elimination of
demographics and preferences substantial overhead)
Ability to market out-of-print and less popular items Large assortment of available songs/albums,
at no cost to the label including formerly out-of-print items
Worldwide market reach -- all titles available in all
markets
- - -------------------------------------------------------- -----------------------------------------------------
</TABLE>
We plan to entice customers and record companies to adopt the new
technology at an accelerated pace through strategic alliances, aggressive
promotions, premium content, high-quality digital delivery, high security level
and excellent service. We believe that the widespread adoption of digital
download technology will occur over the next several years and predict that the
total revenue from digital distribution in the year 2003 could be as much as $2
billion out of overall anticipated online music sales of over $4 billion. This
belief is based on the fact that digital distribution presents clear advantages
to record companies, artists and consumers. In addition, technological solutions
to the major obstacles to industry growth are being rapidly developed.
Consumer Market
Recent research by ICONOCAST indicates that there are already 10
million Internet users who shop for music online. The vast majority of these
users are between the ages 25 and 45, with the age group 35 to 44 representing
31% of all purchasers. Previous studies have shown that it was exactly this
generation of customers who have reduced their music purchases as a result of
their frustration with the music shopping experience in consumer-unfriendly
music stores, leading to sluggish market growth. We believe that user-friendly
online shopping will encourage a resurgence of music purchases from this
generation of customers and that the number of online music buyers will increase
dramatically, creating opportunities for both digital and mail order
distributors.
In addition, we believe that digital distribution has great potential
to succeed in attracting music customers with several search engines reporting
MP3 as the second most popular search term. ICONOCAST surveys show that the
primary customer purchasing criteria are (in order of importance) price,
selection, information content, ease of use, loyalty programs and speed of
delivery. Digital distributors are capable of providing greater benefits to the
customer than mail order in almost all of these areas, and especially in the two
most important areas of price and selection.
-11-
<PAGE>
While we believe that digital distribution has already begun to realize
its potential, we also recognize that there are several obstacles to be overcome
before digital distribution will be widely accepted by the consumer market. As
with the introduction of the compact disc, changes in customer behavior will
need to occur to allow digital distribution to succeed on a large scale. One
aspect of such behavior is that customers must adapt to the concept of digital
downloads, rather than CDs, as a medium for music distribution. The rapidity
with which music listeners adopted compact disc technology in the 1980s suggests
that music buyers adapt quickly when a superior technology is introduced and
made available at reasonable prices. However, there can be no assurance that
music listeners will adopt digital downloads as they did compact disc
technology.
A second issue that the industry is starting to address is that
technology must allow customers to listen to music obtained through digital
downloads where and when they feel like it. Although hardware and software that
allows for the reproduction of digital downloads onto CDs, tapes and minidisks
currently exists and prices for such technology have been decreasing rapidly,
this new technology has not yet been fully adopted by the general public.
Supplier Market -- Content
The rights to distribution of musical content are the single most
important "input" for music distributors, including online distributors such as
our company. The supply market is divided among the five major record labels,
which, in the aggregate, account for almost 80% of the record industry's
revenue, and smaller independent record labels which account for the remainder.
The independent labels can be further categorized as large independents, of
which there are roughly 50, medium independents, which number in the hundreds,
and small independents, of which there are several thousand.
The major obstacle to the development of the digital distribution
market has been the reluctance of major record labels to license their content
for use by online distributors permitting digital downloads. Their hesitation is
based mainly on fears of Internet music piracy, as well as concerns about having
to shut down CD pressing plants, and an unwillingness to create conflict with
existing retail channels. In response to the piracy issue, the major record
labels have joined with the Recording Industry Association of America, a
coalition which is attempting to define standards for the digital distribution
of music through the Internet, to promote the Secure Digital Music Initiative
("SDMI"). We are a participant in SDMI and expect to play an active role in the
determination of a secure digital distribution format.
Other important ways to obtain content are through cooperation with
independent record labels and directly with artists. A major focus of our
content acquisition efforts is on negotiating with individual artists in order
to gain digital distribution rights to their content. We currently have
contractual relationships with over 80 independent record labels. By building
commerce through legitimate digital downloads of content licensed from these
sources, we intend to demonstrate to the major record labels the financial
advantages of digital distribution and the security of our encryption software.
A threat to the major record companies is that the use of the Internet
will not only lead to a shift in the method of purchase but will also alter the
total volume and composition of music actually purchased, facilitating the
direct distribution of material from artists to customers and the mass
distribution of previously localized independent offerings. Thus, there is great
scope for digital music distribution even without the participation of the
leading record labels. At the same time, we believe that the growth of digital
distribution will force the major labels to participate in this expanding
market.
Technology Issues
On the Internet, a platform which fulfills customer needs such as
24-hour sales, ease of use, and effective search and purchase mechanisms, has
become more a competitive necessity than a competitive advantage. The battle
within the mail order industry has thus shifted away from technology issues to
issues of brand and content. For digital distributors, however, the issue of
content raises a crucial technological consideration. Major record labels and
artists will not license their music for digital distribution without software
that protects their music against unauthorized copying and that allows them to
gain quick access to sales and royalty data. We believe that through
-12-
<PAGE>
our advanced encryption and sales-tracking software, we will be able to meet the
needs of the major record labels, although there can be no assurance that the
major record labels will adopt our technology.
A second technological issue is download time. Through the Internet, it
can take over 10 minutes to download an individual song using a 28.8K modem. The
future of digital downloading will thus depend heavily on the spread of
4"broadband" high-speed connections through cable and digital subscriber lines.
The spread of broadband has been more rapid than expected. We believe that we
are ready to distribute digitally through broadband channels and we expect to
benefit from the growth of broadband.
A third technological issue is the playback of digital downloads. Since
customers are not accustomed to using the computer as a vehicle for music
playback, they will require equipment that allows them to listen to digital
downloads when and where they want. Equipment that makes digitally downloaded
music playable through media other than the computer is becoming widely
available. It is currently possible to record digitally downloaded music from
one's computer onto conventional media such as CDs, cassettes, or minidiscs. In
addition, the first walkman-like players of digital downloads have recently been
introduced. The current players can store 64MB of audio data (up to 30 songs);
however, within 12 months, manufacturers have announced plans to introduce
players with up to 2GB of memory, which will allow music fans to carry a full
music library (up to 500 songs) with them in a pocket-sized player. Further
developments are expected to allow the playing of digital downloads through home
and automobile stereos. This field is developing rapidly and we believe that
customers will soon be able to enjoy their digital downloads wherever and
whenever they want. There can be no assurances, however, as to whether or when
such developments will be made available to the public in a format that is
widely accepted.
The Economics of the Business
Gross Margins. Gross margins for digital distribution are expected to
be almost double those for online mail order distribution of compact discs. This
is because the only unit cost items for digital distribution are mechanical
royalties (7-10 cents per song), license fees (40-80 cents per song), credit
card fees (6-8 cents per song) and server charges (20-30 cents per song), which
generally total between 70 cents and a dollar per song. CDs are more expensive
because record companies must also be compensated for manufacturing, packaging,
warehousing, distribution and the cost of pressing unsold albums. For online
mail orders, customers must also bear the added cost of delivery. Advertising
and merchandise sales can further augment margins, but the volume of revenue in
these areas will not be as large. The following are gross margin estimates:
<TABLE>
<CAPTION>
TYPE OF SALE PRICE DIRECT COSTS GROSS PROFIT GROSS MARGIN
- - ------------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Compact Disc (1) $12 - $15/CD $9 - $13 $2 - $3 15% - 25%
Digital Download $1 - $2/song $0.73 - $1.28 $0.27 - $0.72 27% - 36%
Advertising $40/CPM (2) $6 $34 85%
Merchandise (T-shirts, $10 - $20/unit $5 - $10 $5 - $10 50%
videos, etc.)
</TABLE>
- - ----------
(1) Does not include postage and handling, which is billed separately.
(2) Cost per thousand impressions.
Indirect Costs. Brand development requires significant up-front
expenditures on sales and marketing activities. For example, leading electronic
retailers such as Amazon.com and CDNow spend 25-50% of their revenue on sales
and marketing, while smaller Internet companies typically spend an even greater
percentage. Since online banner ads cost roughly $30 to $40 per thousand
impressions and click-through rates are generally 1% to 2%, advertisers pay
$1.50 to $4.00 just to get potential customers to look at their sites. With
purchase rates of 2% to 3%, advertisers can pay more than $50 to make a first
sale. This investment in new customer acquisition should be
-13-
<PAGE>
recouped in the long term through repeat purchases and word-of-mouth -- in fact,
CDNow has reported that over 50% of its revenue is from repeat customers.
Nevertheless, it is this single cost item which to date has caused most
E-commerce companies to remain unprofitable.
Research and development is also a significant expense item in this
technology-driven industry. Based on a comparison with selected E-commerce
companies, this expense item typically amounts to from 5% to 10% of sales, with
the relative percentage declining as sales increase.
RISK FACTORS
LIMITED OPERATING HISTORY
We were organized in January 1999, while Health Builders, our
predecessor was organized in 1996. We have no operating history upon which an
evaluation of our prospects can be based. Our prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in an early stage of development, particularly companies engaged in
new and rapidly evolving markets, such as an Internet-based digital music
delivery service. We can give no assurance that we will be able to successfully
provide an Internet-based digital music delivery business.
HISTORY OF LOSSES; LACK OF REVENUE
Our research, development, sales, marketing and general and
administrative expenses have resulted in significant losses and are expected to
continue to result in significant losses for the foreseeable future. The
entities we acquired in the reorganization incurred cumulative net losses of
approximately $5,410,000 through December 31, 1998, while we and the acquired
entities (on a historical basis) incurred consolidated net loss of $51,774,000
(including non-cash charges of approximately $40,552,000 for share compensation)
for the period from January 1 through September 30, 1999. As of September 30,
1999, we had generated only $ 165,000 in revenues from operations. We expect to
incur additional operating losses and to experience continued negative cash flow
from operations for the foreseeable future. We can give no assurance that we can
achieve, sustain or increase revenues or profitability in the future.
UNPROVEN BUSINESS MODEL; ABILITY TO DEVELOP PRODUCTS AND MARKET
Our business model for generating revenue streams through the
distribution of digital music downloads, online sales of CDs, pay-per-view live
events and website advertising fees from third parties is unproven. Use of the
Internet by consumers as a medium for entertainment and for downloading music is
at an early stage of development and their acceptance of related services is
highly uncertain. Leading record labels are reluctant to permit the digital
distribution of their recordings through the Internet because they fear illegal
copying and are unwilling to create conflicts with their existing distribution
relationships.
As a result, our future success will depend significantly upon our
ability to successfully:
o deliver entertaining and compelling music-related content over
the Internet;
o attract a sufficient number of users to our websites to purchase
music and related merchandise and to attract advertisers to our
websites;
o develop and maintain volume usage of our digital music
distribution services;
o establish and maintain licensing and distribution relationships
with record companies, producer and artists; and
o create and maintain a market for its digital distribution
technology.
Our business, results of operations and financial condition would be
materially adversely affected if:
o we are unable to develop Internet content that allows us to
attract, retain, and expand a loyal user base;
-14-
<PAGE>
o Internet-based downloading of musical content is not widely
accepted by consumers;
o the technology for listening to digitally downloaded material is
not widely available or available on a timely basis at reasonable
prices;
o the technology we use to prevent illegal copying of music content
proves to be ineffective;
o we are not able to successfully compete with other entities
offering services and products similar or superior to our
services and products; or
o we are unable to anticipate, monitor, and successfully respond to
rapidly changing consumer tastes and preferences so as to
continually attract a sufficient number of users to our websites.
DEPENDENCE ON MAJOR RECORD COMPANIES AS SUPPLIERS OF CONTENT
The rights to distribution of musical content are the single most
important "input" for music distributors. The supply market is divided among the
five major record label companies including Bertelsmann Music Group, Inc., Sony
Music Entertainment, Inc., EMI and its subsidiaries Polygram Records, Inc. and
Warner Music Group, Inc., which in the aggregate account for the majority of the
record industry's revenue, and smaller independent record label companies. Other
than a publishing agreement signed between MCY Europe Gmbh and EMI Publishing
Germang gmbh, we do not have agreements with any of the five major record
companies. If we do not succeed in obtaining licenses for digital music
distribution from one or more of the major record labels, we will be limited in
what content we can offer on our website. Although we will seek other sources of
revenue by seeking to establish arrangements with artists directly or by
developing our own artists, we can give no assurance that we will be able to
enter into arrangements with major record labels or that we can successfully
exploit other sources of revenue.
RAPID GROWTH MAY STRAIN OUR RESOURCES
We expect to grow rapidly in the future. If we are correct in this
expectation, such growth will place a significant strain on our managerial,
operational and financial resources. To manage any such growth, we will be
required to implement and improve our managerial controls and procedures and
operational and financial systems. In addition, we will be required to hire,
train, integrate, manage and retain our workforce including technical support,
advertising, sales and business development staff. Locating and retaining
qualified personnel in our business is extremely competitive. We can give no
assurances that we have adequately allowed for the costs and risks associated
with our proposed expansion or that our systems, procedures or controls will be
adequate to support our operations. We can also give no assurances that we will
be able to successfully locate, train and integrate personnel into our
workforce.
DEPENDENCE ON KEY MANAGEMENT PERSONNEL
We depend on key management personnel including Mr. Fritsch. Several of
our employees, including Mr. Fritsch, have entered into agreements agreeing,
among other things, not to compete with us if they leave us. If those employees,
including Mr. Fritsch, breach those agreements and become employed by or
associated with one of our competitors, such action will likely have a
materially adverse effect on our business, results of operations and financial
condition.
NEED FOR ADDITIONAL FINANCING; FUTURE DILUTION
We may need to raise additional funds to do the following:
o Pay cash advances to record labels and artists to gain
distribution rights for top quality content;
o Invest in aggressive marketing, advertising and promotional
campaigns to develop our brands and NETrax brands;
o Purchase new hardware and software to support our development and
the development of our technology;
o Market and distribute digital-download-related consumer
electronics and portable devices;
o Establish studio/production facilities for creation and editing
of proprietary content;
o Acquire or partner with other complementary businesses or assets;
-15-
<PAGE>
o Develop content acquisition and digital retail outlets in
non-U.S. markets to provide cross cultural access for consumers;
o Fund working capital and/or other obligations.
If we raise additional funds by issuing equity or convertible debt
securities in the future, such securities may have rights, preferences or
privileges senior to those of our existing stockholders and the percentage
ownership of our stockholders will be diluted. We can give no assurance that
additional financing will be available on favorable terms or at all. If adequate
funds are not available or are not available on acceptable terms, our ability to
fund our expansion, take advantage of opportunities, develop or enhance services
or products or otherwise respond to competitive pressures would be significantly
limited.
DIFFICULTIES ASSOCIATED WITH BRAND DEVELOPMENT
The importance of brand recognition will increase in the future as the
number of websites providing digital music delivery increases. There are many
music distributors and other retailers, both online and traditional, which enjoy
customer brand recognition and may attempt to compete with us in the digital
distribution and mail order markets. Many of these distributors have superior
financial strength and resources. We believe that establishing and increasing
awareness of our brand and the technology it represents is a critical aspect of
our efforts to continue to attract customers and content providers. We will need
to invest heavily in brand development in order to establish a market presence.
We can give no assurances that our efforts to build brand awareness will be
successful or that we will have sufficient financing to pursue brand development
successfully.
THE YEAR 2000
The Year 2000 issue is the result of computer programs written using
two digits rather than four to define the applicable year. As a result,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This may have resulted in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. Our systems and software (both licensed and proprietary)
are relatively new and we have not experienced any Year 2000 issues related to
our internal systems. We can give no assurance that the systems of suppliers or
other companies on which we rely have been converted in a timely manner and will
not have a material adverse effect on our systems. Additionally, we can give no
assurance that the third party computer systems necessary to maintain the
viability of the Internet or any of the websites that direct consumers to our
websites have not experienced or will not experience Year 2000 problems.
SIGNIFICANT COMPETITION
The market for online promotion and distribution of music and
music-related products is competitive. Barriers to entry on the Internet are
relatively low and competition is likely to increase significantly in the
future. We face competitive pressures from numerous actual and potential
competitors, many of which have longer operating histories, greater brand name
recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. Such competition could result in
reduced margins, lower growth or loss of market share, any of which could have a
material adverse effect on our business, results of operations and financial
condition.
POTENTIAL LIABILITY FOR INFORMATION DISPLAYED ON OUR WEBSITES
We may be subject to claims for defamation, libel, violation of
privacy, copyright or trademark infringement or claims based on other theories
relating to the information we publish or gather on our websites. These types of
claims have been brought, sometimes successfully, against online services in the
past. We could also be subject to claims based upon the content that is
accessible from our websites through links to other websites. Our insurance may
not adequately protect us against these claims.
-16-
<PAGE>
SECURITY RISKS
A party who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our Internet
operations. Consumer concern over Internet security has been, and could continue
to be, a barrier to commercial activities requiring consumers to send their
credit card information over the Internet. Computer viruses, break-ins, or other
security problems could lead to misappropriation of proprietary information and
interruptions, delays, or cessation in service to our customers. Moreover, until
more comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet merchandising medium. We may be required to expend significant capital
resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. We can give no assurance that our
Internet operations are completely secure against potential interruptions or
that we can alleviate the problems should they occur.
INTELLECTUAL PROPERTY
We expect to rely on a combination of patent law, copyright law,
trademark law, contract law, and other intellectual property protection methods
to protect our musical content, license rights, and proprietary technology and
information, but we can give no assurance that such laws will provide sufficient
protection or that the laws will not be amended or repealed. Our chief executive
officer, Mr. Fritsch has applied for the registration of trademarks used by us
in the United States and internationally, and has applied for "intent to use"
trademark registrations for a number of trademarks, including "MCY," "MCY.com"
and "NETrax," in the United States Patent and Trademark Office ("USPTO"). In
1999, we also filed several other "intent to use" trademark applications
including for the following: "on click", "music on click" and "entertainment on
click". We can give no assurance that the USPTO will grant the requested
trademarks.
We believe that our use of material on our websites is protected under
current provisions of copyright law. However, effective trademark, copyright,
and other intellectual property protection may not be available in every country
in which our musical content and technology are distributed or made available
through the Internet. We can give no assurance that our methods of protecting
our proprietary rights in the United States or abroad will be adequate. In
addition, because patent law relating to the scope of claims in the technology
field in which we do business is still evolving, the degree of future protection
for our proprietary and licensed rights is uncertain.
Mr. Fritsch is pursuing patent protection with respect to certain
technology that is important to us, including the encryption, shopping cart and
royalty tracking technology. Mr. Fritsch has filed patent applications for these
technologies in the United States. We can give no assurance that any patents
will be issued. Until such time as such patents are issued, if ever, the license
will be ineffective to grant any patent rights with respect to this technology.
Moreover, Mr. Fritsch is under no obligation to pursue the prosecution of these
patent claims. See "Risk Factors - Dependence on Key Management Personnel",
"-Dependence on Licensed Technology and Music Rights".
We can give no assurance that others will not develop technologies that
are similar or superior to ours, that third parties will not copy or otherwise
obtain and use our content or technologies without authorization and that we
will be able to continue to maintain our rights to information, including
webcasting of popular sound recordings, downloadable music samples, and artist,
entertainment and other information. If we are unable to offer such information,
such failure will be likely to have a material adverse effect on our business,
results of operations, and financial condition.
There are no pending lawsuits against us regarding infringement of any
existing patents or other intellectual property rights of others. We can give no
assurance that patent or intellectual property litigation will not be asserted
by third parties in the future. If any such claims are asserted and determined
to be valid, we can give no assurance that we will be able to obtain licenses of
the intellectual property rights in question on reasonable terms. If we become
involved in any patent dispute, other intellectual property dispute, or action
to protect proprietary rights, our involvement, regardless of outcome, will
likely have a material adverse effect on our business, results of operations,
and financial condition. If any litigation is determined against us, such
adverse determination may subject us to
-17-
<PAGE>
significant liabilities to third parties, require us to seek licenses from third
parties, and prevent us from manufacturing and selling our products. In
addition, we can give no assurance that any of the provisional patent
applications to which we have exclusive rights will result in issued patents,
that we will develop additional proprietary technologies that are patentable,
that any patents licensed or issued to us or our strategic partners will provide
a basis for commercially viable products or will provide us with any competitive
advantages or will not be challenged by third parties, or that patents of others
will not have an adverse effect on our ability to do business. Furthermore, we
can give no assurance that others will not independently develop similar,
alternative or superior technologies, or design around the patented technologies
developed by us. Any of these situations may have a material adverse effect on
our business, results of operations, and financial condition.
POTENTIAL FOR ERRORS IN PRODUCTS AND SERVICES
We offer and expect to offer complex products and services which may
contain undetected errors when first introduced or when new versions are
released. If we market products and services that have errors or that do not
function properly, we may experience negative publicity, loss of or delay in
market acceptance or claims against us by customers, any of which may have a
material adverse effect on our business, results of operation, and financial
condition.
DEPENDENCE ON THE INTERNET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR
COMMERCE
Use of the Internet by consumers is at an early stage of development,
and market acceptance of the Internet as a medium for commerce is subject to a
high level of uncertainty. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary infrastructure,
such as reliable network backbones, or complementary services, such as
high-speed modems and security procedures for financial transactions or delays
in the development and adoption of new standards and protocols (for example, the
next generation Internet protocol) to handle increased levels of Internet
activity or due to increased government regulation. Our future success will
depend on our ability to significantly increase revenue which will require the
development and widespread acceptance of the Internet as a medium for commerce.
We can give no assurance that the Internet will be a successful retailing
channel. If use of the Internet does not continue to grow, or if the necessary
Internet infrastructure or complementary services are not developed to
effectively support growth that may occur, our business, results of operations,
and financial condition could be materially adversely affected. We can give no
assurance that we will not continue to be largely dependent on the Internet.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS; BANDWIDTH
The delivery of music online is and will continue to be, like the
Internet, characterized by rapidly changing technology, evolving industry
standards, changes in customer requirements, and frequent new service and
product introductions. Online delivery of music, at current compression rates,
requires large amounts of Internet bandwidth to download to a customer's
computer in an acceptable time span. Currently, only a limited number of
consumers have such bandwidth capability. Unless there is widespread access to
high speed Internet connections or deeper compression of music files, consumers
may become frustrated with long download times and the market for online digital
music distribution will remain limited. Our success will depend upon the
development of Internet infrastructure that makes large amounts of bandwidth
available to a wide number of users through such high-speed technology as cable
and digital subscriber lines. Our success will also depend on our ability to
effectively use leading technologies to continue to develop our technological
expertise to enhance our current services, to develop new services that meet
changing customer requirements and to influence and respond to emerging industry
standards and other technological changes on a timely and cost-effective basis.
If major record labels or the market accept a universal standard for the
electronic delivery of music, such as contemplated by the Secured Digital Music
Initiative, which is not compatible or otherwise competes with NETrax, such
acceptance will likely have a material adverse effect on our business, results
of operations, and financial condition. In addition, our business could be
adversely affected if an industry standard for hardware used in the storage and
playback of our products fails to develop in a timely manner or at all.
-18-
<PAGE>
DEPENDENCE ON THIRD PARTIES FOR INTERNET OPERATIONS
Our ability to advertise on other Internet sites and the willingness of
the owners of such sites to direct users to our websites through hypertext links
are critical to the success of our Internet operations. We also rely on the
cooperation of owners of copyrighted materials and Internet search services and
on our relationships with third party vendors of Internet development tools and
technologies. We can give no assurance that the necessary cooperation from third
parties will be available on acceptable commercial terms or at all. If we are
unable to develop and maintain satisfactory relationships with such third
parties on acceptable commercial terms, or if our competitors are better able to
leverage such relationships, our business, results of operations and financial
condition will be materially adversely affected.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO THE WORLD WIDE WEB
Existing domestic and international laws or regulations specifically
regulate communications or commerce on the World Wide Web or the Internet.
Furthermore, laws and regulations that address issues such as user privacy,
pricing, online content regulation, taxation and the characteristics and quality
of online products and services are under consideration by federal, state, local
and foreign governments and agencies. Several telecommunications companies have
petitioned the United States Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
the regulation of long distance telephone carriers and to impose access fees on
such companies. This regulation, if imposed, could increase the cost of
transmitting data over the World Wide Web. Moreover, it may take years to
determine the extent to which existing laws relating to issues such as
intellectual property ownership and infringement, libel, obscenity and personal
privacy are applicable to the World Wide Web. The United States Federal Trade
Commission and government agencies in certain states have been investigating
certain Internet companies regarding their use of personal information. We could
incur additional expenses, and could also be subject to restrictions on our
ability to use and provide customers information, if any new regulations
regarding the use of personal information are introduced or if these agencies
choose to investigate our privacy practices. Any new laws or regulations
relating to the World Wide Web, or certain application or interpretation of
existing laws, could decrease the growth in the use of the World Wide Web,
decrease the demand for our website or otherwise materially adversely affect our
business.
DEVELOPMENT OF WEBSITES AND NETRAX CATALOG
Although we have completed the initial development of our websites, we
have to continually update them to incorporate purchases of new and existing
content. The number of NETrax which may be acquired by purchasers are limited
and we can give no assurance that we will be able to expand the selection of
NETrax available for purchase. If we are unable to increase the number of NETrax
available for purchase, we will be unable to generate sufficient revenue to
support continued development. Our ability to expand our NETrax offerings
depends significantly upon our ability to negotiate licenses with major record
labels. We currently have no such licenses. See "Risk Factors - Dependence on
Major Record Labels".
DEPENDENCE ON LICENSED TECHNOLOGY AND MUSIC RIGHTS
We rely on certain technology licensed from third parties, including
Mr. Fritsch, our chief executive officer, from whom we license certain key
technologies and trademarks. We may need to license additional technologies in
the future in order to support its platform. There can be no assurance that new
third party technology licenses will be available to us on acceptable terms or
at all. In addition, we license music content from record labels and artists,
and we can give no assurance that any particular music content will be available
to us on acceptable terms or at all. The intellectual property upon which we
rely includes certain technology which is licensed to us by Mr. Fritsch. Such
license, however, only continues in effect so long as we pay compensation equal
to 0.25% of gross revenue to Mr. Fritsch (until the later of 20 years or the
expiration of any such patents which may be issued). If we fail to pay Mr.
Fritsch such compensation, we will lose our license and our ability to utilize
such technology. We can give no assurance that Mr. Fritsch will not terminate
the license for other reasons. If Mr. Fritsch were to terminate the license,
such termination will likely have a materially adverse effect on our business.
See "Business - Technology".
-19-
<PAGE>
We have not obtained licenses for the public performance of all
copyrighted musical works which will be the subject of our business operations.
We do not believe such licenses are necessary for the conduct of our business,
but will seek to obtain such licenses if necessary. The companies that
administer the reporting and collection of royalties based on musical
performances believe that the downloading of digital music files is a
"performance," entitling them to receive payment. If such licenses are necessary
and we fail to obtain them, we may become subject to claims of copyright
infringement.
INTERNATIONAL MARKETS
Our success depends on our ability to generate international sales. We
can give no assurance that we will be successful in generating international
sales of our products.
Our sales to customers in certain foreign countries may be subject to a
number of risks including: foreign currency risk; the risks that agreements may
be difficult or impossible to enforce and receivables difficult to collect
through a foreign country's legal system; foreign customers may have longer
payment cycles; or foreign countries could impose withholding taxes or otherwise
tax our foreign income, impose tariffs, embargoes, or exchange controls, or
adopt other restrictions on foreign trade. In addition, the laws of certain
countries do not protect our offerings and intellectual property rights to the
same extent as the laws of the United States. Our failure to compete
successfully or to expand the distribution of our offerings in international
markets could have a material adverse effect on our business, results of
operations, and financial condition.
SINGLE STOCKHOLDER WILL CONTROL APPROXIMATELY 80% OF STOCKHOLDERS' VOTES
Mr. Fritsch will beneficially own approximately 23,680,078 shares of
our common stock and all of our outstanding Series 1 preferred stock which
collectively carry approximately 80% of all voting rights held by all of our
stockholders. Mr. Fritsch will be able to control all matters requiring approval
by our stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration in ownership will make
some transactions more difficult or impossible without the support of Mr.
Fritsch and may have the effect of delaying, deterring or preventing a change of
control in our company.
POTENTIAL LITIGATION
A former trade partner contributed DM 1,600,000 to the development of
the our platform and subsequently demanded repayment of DM 1,210,000 of this
amount on January 30, 1998. Fritsch & Friends rejected this demand on February
3, 1998, and since then the partner has not pursued this alleged claim. In
addition, Fritsch & Friends entered into an agreement with an investment group
in November, 1997, which it subsequently revoked. We believe that it is unlikely
that we will sustain material losses in connection with these matters in excess
of amounts previously accrued. We can give no assurance that future litigation
by these groups will not have a materially adverse effect upon our financial
condition.
On December 16, 1999, a former employee of MCY Music World, Inc. filed
a complaint against us in New York State Supreme Court. In his complaint, his
claims included breach of contract, wrongful termination and fraud related to
compensation due to him for the signing and distribution of content as well as
fees related to a private placement of our stock on October 25, 1999. In his
complaint, he asked for damages of approximately $23,000,000 including 20,000
shares of MCY.com, Inc. common stock, stock options, fees and royalties. Due to
the fact that the complaint was only recently filed, discovery in the case has
not started and we have limited information upon which to assess the validity of
this suit. Based upon our understanding of the facts as of January 14, 2000, we
believe that the former employee's claims lack substantial merit and we intend
to vigorously defend against this action. On January 14, 2000, we filed a motion
to dismiss the complaint. We can give no assurance that the motion to dismiss
will be granted.
-20-
<PAGE>
POTENTIAL FLUCTUATIONS IN QUARTERLY FINANCIAL RESULTS
If we are unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall, any significant revenue shortfall will
likely have an immediate material adverse effect on our business, operating
results and financial condition. In addition, we intend to substantially
increase our operating expenses for product development, sales and marketing. To
the extent such expenses precede or are not subsequently followed by increased
revenue, our operating results will fluctuate and net anticipated losses in a
given quarter may be greater than expected. Accordingly, quarter-to-quarter
comparisons of our revenue and operating results will not necessarily be
meaningful, and such comparisons may not be accurate indicators of future
performance. In addition, quarterly fluctuations in our operating results may
create volatility in the market price for our common stock.
CERTAIN IMPLICATIONS OF TRADING OVER-THE COUNTER; "PENNY STOCK" REGULATIONS
Our common stock is quoted for sale in the over-the-counter market on
the OTC Electronic Bulletin Board. An investor will find it more difficult to
dispose of securities trading over-the-counter than if such securities had been
approved for listing on a national securities exchange or on the NASDAQ SmallCap
market. We have not applied for listing on a national securities exchange or the
NASDAQ SmallCap market, but we intend to so in the future. We can give no
assurance that our securities will be listed on any such market or that any
market will develop for our securities.
The Securities and Exchange Commission (the "Commission") has adopted
"penny stock" regulations which apply to securities traded over-the-counter.
These regulations generally define "penny stock" to be any equity security that
has a market price of less than $5.00 per share, a warrant that has an exercise
price of less than $5.00 per share, an equity security of an issuer (assuming
the corporation has been in existence for at least three years) with net
tangible assets of less than $2,000,000 or an equity security of an issuer with
average revenue in the last three fiscal years of less than $6,000,000 as
indicated in audited financial statements. Subject to certain limited
exceptions, the rules for any transaction involving a "penny stock" require the
delivery, prior to the transaction, of a risk disclosure document prepared by a
broker-dealer that contains certain information describing the nature and level
of risk associated with investments in the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Monthly
account statements must be sent by the broker-dealer disclosing the estimated
market value of each penny stock held in the account or indicating that the
estimated market value cannot be determined because of the unavailability of
firm quotes. In addition, the rules impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and institutional accredited investors (generally
institutions with assets in excess of $5,000,000). These practices require that,
prior to the purchase, the broker-dealer determined that transactions in penny
stocks were suitable for the purchaser and obtained the purchaser's written
consent to the transaction. Consequently, the "penny stock" rules may in the
future restrict the ability of broker-dealers to sell our securities and may
affect the ability of purchasers of our securities to sell them in the secondary
market.
EMPLOYEES
We have approximately 65 staff members in New York, Munich and Los
Angeles, separated into the following categories:
DECEMBER 31, 1999
-----------------
Operations and Development 25
Sales and Marketing 16
General and Administration 9
Content Acquisition 15
----
Total 65
-21-
<PAGE>
None of our employees are covered by a collective bargaining agreement
or are represented by a labor union or works council. We believe that our
relationship with our employees is good.
-22-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
We are an early-stage company. As of September 30, 1999, we had
generated approximately $165,000 in revenues. Through December 31, 1998, we and
the companies which we acquired in the reorganization have incurred cumulative
net losses of approximately $5,410,000, a substantial portion of which have been
expended in developing our digital music distribution platform and brand. On a
historical basis from January 8, 1999 (date of inception) through September 30,
1999, we and the companies we acquired in the reorganization (from the date of
the acquisition through September 30, 1999) incurred consolidated net losses of
approximately $51,774,000. The consolidated net losses of $ 51,774,000 include
non-cash charges of approximately $40,552,000 for share compensation (including
$ 23.3 million in connection with the merger of Health Builders, $ 2.7 million
to employees and certain contractors and $ 14.5 million of compensation in
connection with stock options issued). The majority of our remaining
expenditures were incurred in further development of our product and brand.
During August 1999 and October 1999, we received a net equity infusion
of cash amounting to $34.5 million and $1.325 million, respectively. These funds
are being used for the following activities:
- - - marketing and promotional activities;
- - - 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; and
- - - general operating activities including modest increases in staff from
time to time as needed.
We anticipate that we have sufficient resources to satisfy our cash
requirements for the next twelve months. Given that the markets for our main
products are high-growth markets which require significant investments in
marketing, content and technology, we anticipate that we will need to raise
additional funds shortly after October 2000.
-23-
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY
Our New York corporate headquarters, located at 1133 Avenue of the
Americas, 28th Floor, New York, New York 10036, contains approximately 14,000
square feet and is leased at a rate of $58,000 per month. We also maintain an
office in New York for a digitization factory located at 307 7th Avenue, 23rd
Floor, New York, New York 10001, which contains approximately 2,500 square feet
and is leased at a rate of $2,379 per month. 51 full-time employees work in our
New York offices, as well as several programming and creative staff working on a
freelance basis.
Our Munich office contains approximately 7,000 square feet and is
leased at a rate of $22,000 per month. 9 employees work in the Munich office.
Our Los Angeles office contains approximately 7,750 square feet and is
leased at a rate of $15,500 per month. 4 employees work in the Los Angeles
office.
-24-
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of and percentage of
outstanding shares of our securities, as of December 31, 1999, owned by: (i)
holders of our securities known to us to beneficially own more than five (5%)
percent of our securities; (ii) each of our directors; (iii) each executive
officer named in the Summary Compensation Table under the caption "Executive
Compensation" in Item 6 of this registration statement; and (iv) all of our
directors and executive officers as a group.
As of December 31, 1999, there are (i) 54,230,988 shares of our common
stock issued and outstanding; and (ii) 1,000,000 shares of our Series 1
preferred stock issued and outstanding.
<TABLE>
<CAPTION>
Shares of
Shares of Percent of Series 1 Percent of
Name and Address Common Stock(1) Class(2) Preferred Stock Class(2)
- - ---------------- --------------- -------- --------------- --------
<S> <C> <C> <C> <C>
Bernhard Fritsch 24,250,078 (3) 44% 1,000,000 100%
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036
Tintagle Trading Co., Ltd. 3,388,700 6%
c/o Chapman Davis & Co.
No. 2 Chapel Court
London SE1 England
William C. Bossung 3,282,000 (4) 6%
25 Cos Cob Road
Greenwich, CT 06807
Hubertus von Hesse 465,000 (5) *
c/o MCY Europe Gmbh i. Gr.
Maximilian Strasse 35b
80538 Munich Germany
Lisa Short 195,480 (6) *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036
Norbert Jahns 320,000 (7) *
Bilingerweg 2
14089 Berlin, Germany
Susanne Weblus _____ *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036
Mitchell Lampert 1,105,000 (8) 2%
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036
Scott Citron 32,000 (9) *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036
-25-
<PAGE>
Ray Short 20,000 (10) *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036
Thomas Noak 5,000 (11) *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036
All directors and named 26,392,558 47%
executive officers as a group
(9 persons)
</TABLE>
- - ----------
(1) We believe that the beneficial owners of our common stock listed above
have sole investment and voting power with respect to such shares.
Shares subject to options are considered beneficially owned to the
extent currently exercisable or exercisable within 60 days after
December 31, 1999.
(2) Asterisk indicates less than 1%. Shares subject to such options that
are considered to be beneficially owned are considered outstanding only
for the purpose of computing the percentage of outstanding common stock
which would be owned by the option holder if such options were
exercised, but (except for the calculation of beneficial ownership by
all executive officers and directors as a group) are not considered
outstanding for the purpose of computing the percentage of outstanding
common stock owned by any other person.
(3) Includes: (i) 120,000 shares underlying options exercisable at $1.50
per share; and (ii) 450,000 shares underlying options exercisable at
$3.20 per share, held by Mr. Fritsch.
(4) Includes 20,000 shares underlying options exercisable at $1.50 per
share held by Mr. Bossung.
(5) Includes: (i) 40,000 shares underlying options exercisable at $1.50 per
share; and (ii) 225,000 shares underlying options exercisable for $3.20
per share, held by Mr. von Hesse.
(6) Includes 20,000 shares underlying options exercisable at $1.50 per
share held by Ms. Short.
(7) Includes 20,000 shares underlying options which are exercisable at $
1.50 per share held by Mr. Jahns.
(8) Includes: (i) 120,000 shares underlying options exercisable at $ 1.50
per share; (ii) 225,000 shares underlying options exercisable at $ 3.20
per share; and (iii) 500,000 shares underlying options exercisable at $
3.20 per share, held by Mr. Lampert.
(9) Includes 32,000 shares underlying options exercisable at $ 6.00 per
share held by Mr. Citron.
(10) Includes 20,000 shares underlying options exercisable at $ 9.50 per
share held by Mr. Short.
(11) Includes 5,000 shares underlying options exercisable at $ 12.50 per
share held by Mr. Noak.
-26-
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our directors, executive officers and all persons nominated or chosen
to become such and their ages, as of December 31, 1999, are listed on the table
below.
(a) Directors and Executive Officers
--------------------------------
- - --------------------------------------------------------------------------------
Name Age Position
- - --------------------------------------------------------------------------------
Bernard Fritsch 39 Chairman of the Board, Chief
Executive Officer, President and
Director
- - --------------------------------------------------------------------------------
Lisa Short 26 Secretary and Vice President -
Marketing and Secretary
- - --------------------------------------------------------------------------------
Hubertus von Hesse 40 Director
- - --------------------------------------------------------------------------------
Norbert Jahns 47 Director
- - --------------------------------------------------------------------------------
Susanne Weblus 35 Director
- - --------------------------------------------------------------------------------
BERNHARD FRITSCH has served as Chairman of the Board, Chief Executive
Officer, President and a Director since the completion of the merger on August
2, 1999. Mr. Fritsch is also Chairman of the Board, Chief Executive Officer,
President and a director of MCY Music World, Inc. Mr Fritsch is also a member of
our Audit Committee and Compensation Committee. Mr. Fritsch has also served as
President and Chief Executive Officer of Datatek Services Limited since its
formation in 1997. In 1991, Mr. Fritsch founded Fritsch & Friends Mediagroup
GmbH, a company which functioned as a high-end audio post-production house and
also maintained a significant presence in multimedia content production, sales
and distribution. From 1989 to 1991, Mr. Fritsch served on the executive
management team of Harman International where he worked to develop and execute
their digital equipment marketing strategy. Prior to 1989, Mr. Fritsch worked on
radio and television audio productions in West Berlin. Mr. Fritsch received a
Tonmeister Degree from the Technical University of Berlin. For the past six
years, Mr. Fritsch has been a guest lecturer at New York University's
graduate-level studies in Music Technologies.
LISA SHORT has served as Secretary since the completion of the merger
on August 2, 1999. Ms. Short also serves as Secretary of MCY Music World, Inc.
Ms Short joined the MCY management team in June 1997 as the first employee in
the New York office. Under her direction, MCY operations were shifted from
Berlin to the new headquarters in New York City, New York. Since the start up of
the New York office, Ms. Short has implemented strategic partnerships and
alliances, communications direction and strategy and has set up a public
relations network for us as we move forward. As a company veteran, she has been
involved in the staffing and training of the MCY team. Prior to joining us, she
worked in the production and strategic management of fashion and music shows. In
1996, Ms. Short served in a public relations role in organizing and overseeing
radio spots, promotional material distribution and sponsorship organization for
a mid-sized Salt Lake City-based production studio. Ms. Short holds a Bachelor
of Arts Degree in French and Spanish from the University of Oregon. She has also
studied in Switzerland, France and Spain.
HUBERTUS VON HESSE has served as a Director since the completion of the
merger of August 2, 1999. Mr. von Hesse also serves as a director of MCY Music
World, Inc. Mr. von Hesse, a founding partner of the law firm of Merleker & v.
Hesse, advises on commercial, corporate and real estate law matters. He has
advised MCY on legal matters since its incorporation. After a two year training
program at Hypovereinsbank AG/Munich, he studied law at Munich Ludwig-
Maximilians-University and University of Lausanne. He received his law degree
from Munich
-27-
<PAGE>
LMU. Mr. von Hesse passed the First state exam in 1986 and the Second (final) in
1989. He was admitted to the Bar in Berlin in 1990.
NORBERT JAHNS, has served as a Director since January 18, 2000. Mr.
Jahns is a business consultant and has been self-employed since 1985. Prior to
1985, Mr. Jahns was employed by Wirtschaftspruefergesellschaft Berlin. In 1971,
Mr. Jahns studied business and management at the Technology University of Berlin
and obtained a FU Berlin Business degree in 1973. Mr. Jahns became a
state-licensed accountant in 1974. Mr. Jahns also obtained a Master of Business
degree in 1975. Mr. Jahns is a member of our Audit Committee and Compensation
Committee and was appointed to those committees effective January 18, 2000.
SUSANNE WEBLUS, has served as a Director since January 24, 2000. Ms.
Weblus is an attorney practicing in the areas of tax law and corporate law. Ms.
Weblus worked for the law firm of Merleker & Von Hesse until late 1999. Ms.
Weblus recently formed her own law firm. Ms. Weblus was admitted to the Bar in
Berlin in 1992. Ms. Weblus received her law degree in 1990. Ms. Weblus is a
member of our Audit Committee and Compensation Committee as was appointed to
those committees effective January 24, 2000.
All directors hold office until the next annual meeting of shareholders
or until their successors have been duly elected or qualified or until his
earlier death, resignation or removal. Executive officers are appointed by and
serve at the discretion of our board of directors.
-28-
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table shows information concerning the annual and
long-term compensation of our chief executive officer and each of the following
executives (collectively, the "Named Executive Officers") at the end of our
fiscal year 1999 for services in all capacities to our company and its
subsidiaries the last fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
<S> <C> <C> <C> <C> <C>
- - ---------------------------------------------------------------------------------------------------------------
Name and Principal Positions Fiscal Annual Bonus Other Annual Long-Term
- - ----------------------------- ------- ------- ----- -------------- ---------
of the Named Executive Year 1999 Salary Compensation Compensation
- - ----------------------- --------- ------ ------------ ------------
Officers
- - --------
Options
-------
- - ---------------------------------------------------------------------------------------------------------------
Bernhard Fritsch, 1999 $ 300,000 $100,000 $1,500(1) 400,000(3)
Chief Executive Officer,
Chairman of the Board, $ 6,000(2) 450,000(4)
President and Director
450,000(5)
- - ---------------------------------------------------------------------------------------------------------------
1999 $ 250,000 $ 95,000 $ 1,000(1) 400,000(3)
Mitchell Lampert,
General Counsel 450,000(4)
1,000,000(5)
- - ---------------------------------------------------------------------------------------------------------------
1999 $ 175,000 $ 4,000 -0- 100,000(6)
Scott Citron,
Senior Website Producer 10,000(7)
- - ---------------------------------------------------------------------------------------------------------------
1999 $175,000 $ 35,000 $ 600(1) 200,000(8)
Ray Short,
Senior Vice President
- - ---------------------------------------------------------------------------------------------------------------
1999 $165,000 $ 2,000 $ 600(1) 50,000(9)
Thomas Noak,
Senior Vice President of
Technology
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
- - -----------------------------
(1) We provide the employee with a monthly automobile allowance of up to
such amount.
(2) We reimburse Mr. Fritsch for business-related housing expenses of up
to $6,000 per month.
(3) The option was granted on August 2, 1999. 50,000 options vested on
August 2, 1999. The balance of 350,000 options vest over three years
at an exercise price of $ 1.50 per share.
(4) The option was granted on September 20, 1999. 225,000 options vested on
September 20, 1999 and 225,000 options vest on March 20, 2000 at an
exercise price of $ 3.20 per share.
(5) The option was granted on September 27, 1999. For Mr. Fritsch, 225,000
options vested on September 27, 1999; 225,000 options vest on March 27,
2000 at an exercise price of $ 3.20 per share. For Mr. Lampert,
-29-
<PAGE>
500,000 options vested on September 27, 1999; 500,000 options vest on
March 27, 2000 at an exercise price of $ 3.20 per share.
(6) The option was granted on August 2, 1999. The options vested 25,000 on
August 2, 1999 and 75, 000 over 36 months at an exercise price of $
6.00 per share.
(7) The option was granted on August 31, 1999. The options vest over a 36
month period at an exercise price of $ 12.50 per share.
(8) The option was granted on August 11, 1999. The options vest over a 36
month period at an exercise price of $ 9.50 per share.
(9) The option was granted on October 1, 1999. The options vest over a 36
month period at an exercise price of $ 12.50 per share.
Option/SAR Grants in Last Completed Fiscal Year (1999)
- - ------------------------------------------------------
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Name of Executive Number of Securities Percent of Total Exercise Market Price of Expiration
Officer Underlying Options/SARs Granted or Base Share Date
Options/SARs Granted to Employees in Price Underlying
in Fiscal 1999 Fiscal Year 1999 ($/sh) Option on Date
of Grant if
theExercise
Price is less
than the Market
Price on the
Date of Grant
- - --------------------------------------------------------------------------------------------------------------------
Bernhard Fritsch 400,000 shares 5.7% $ 1.50/sh $ 13.50 Five years
450,000 shares 6.4% $ 3.20/sh $ 12.87 from the date
450,000 shares 12.1% $ 3.20/sh $ 12.68 of grant
- - --------------------------------------------------------------------------------------------------------------------
Mitchell Lampert 400,000 shares 5.7% $ 1.50/sh $ 13.50 Five years
450,000 shares 6.4% $3.20/sh $ 12.87 from the date
1,000,000 shares 14.3% $3.20/sh $ 12.68 of grant
- - --------------------------------------------------------------------------------------------------------------------
Scott Citron 100,000 shares 1.4% $ 6.00/sh $ 13.50 Five years
10,000 shares .1% $12.50/sh $ 13.78 from the date
of grant
- - --------------------------------------------------------------------------------------------------------------------
Ray Short 200,000 shares 2.9% $10.00/sh $ 12.87 Five years
from the date
of grant
- - --------------------------------------------------------------------------------------------------------------------
Thomas Noak 50,000 shares .7% $12.50/sh $ 12.50 Five years
from the date
of grant
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
-30-
<PAGE>
Aggregated Option/SAR Exercises in Last Completed Fiscal Year (1999)
--------------------------------------------------------------------
and Fiscal Year-End 1999
- - ------------------------
Option/SARs Values
- - ------------------
During fiscal year 1999, no options to purchase shares of our common
stock were exercised by any of the Named Executive Officers. The following table
shows certain information concerning the number and value at December 31, 1999
of shares of our common stock subject to unexercised options held by each Named
Executive Officer.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Name of Shares Value Number of Number of Shares Value of Value of
"Named Acquired Realized Shares Underlying Unexercised Unexercised
Executive on Underlying Unexercised Options In-the-Money In-the-Money
Officer" Exercise Unexercised at Fiscal Year-End Options at Options at Fiscal
Options at (Unexercisable) Fiscal Year-End Year-End
Fiscal Year-End (Exercisable) (Unexercisable)
(Exercisable)
- - ----------------------------------------------------------------------------------------------------------------------
Bernhard None None 570,000 730,000 $ 4,365,000 $ 5,805,000
Fritsch
- - ----------------------------------------------------------------------------------------------------------------------
Mitchell None None 845,000 1,005,000 $ 6,372,500 $ 7,812,500
Lampert
- - ----------------------------------------------------------------------------------------------------------------------
Scott Citron None None 33,000 77,000 $ 148,000 $ 301,500
- - ----------------------------------------------------------------------------------------------------------------------
Ray Short None None 20,000 180,000 $ 20,000 $ 180,000
- - ----------------------------------------------------------------------------------------------------------------------
Thomas Noak None None 0 50,000 $ 0 $ 0
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Compensation of Directors
-------------------------
Members of the board of directors are not compensated in such capacity.
However, members of the board are reimbursed for reasonable travel expenses
incurred in attending board of directors meetings.
Employment Contracts and Termination of Employment, and Change-in-Control
- - --------------------------------------------------------------------------
Arrangements
- - ------------
Bernhard Fritsch has entered into a five-year employment agreement with
us pursuant to which he receives: (i) a base salary of $300,000 which increases
10% per annum; (ii) a guaranteed bonus of $100,000; (iii) a sum equal to 0.25 %
of consolidated gross revenue generated by us; (iv) an automobile allowance of
$1,500 per month; (v) reimbursement for business-related housing of up to $6,000
per month; (vi) upon a change of control, a payment equal to the product of 2.99
and his base salary; and (vii) such other compensation as our board of directors
may grant.
Mitchell Lampert has entered into a three-year employment agreement
with us pursuant to which he receives: (i) a base salary of $ 250,000 which
increases 10% per annum; (ii) a guaranteed bonus of $ 65,000; (iii) an
automobile allowance of $ 1,000 per month; (iv) upon a change of control, a
payment equal to the product of 1.00 and his base salary; and (v) such other
compensation as our board of directors may grant.
-31-
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All share numbers presented below have been adjusted to reflect the
two-for-one split of our common stock effected on May 20, 1999.
On April 26, 1999, we issued an aggregate of 35,661,352 shares of
common stock to our 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 we were contractually obligated to issue to
employees and consultants prior to incorporation; and 8,521,220 shares issued on
April 26, 1999 to employees and consultants for services rendered.
On June 14, 1999, we issued 1,000,000 shares of series 1 preferred
stock to Mr. Fritsch for $1,000.
On July 2, 1999, we acquired the assets of Datatek including the stock
of MCY America, Inc. and Fritsch & Friends or the "Predecessor Companies" in
exchange for an aggregate consideration of $ 26,550,000 structured as: (i) $
1,050,000 cash; (ii) 4,500,000 shares of our common stock valued at $
22,500,000; and (iii) 5-year warrants to purchase 2,000,000 shares of our common
stock at an exercise price of $ 5.00 per share valued at $ 3,000,000. In
addition, we agreed to pay 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
had totaled $ 9,000,000. As of July 2, 1999, the predecessor companies owed us
approximately $ 1,243,000, representing the balance of loans made by us prior to
the acquisition. Mr. Fritsch was Datatek's chief executive officer, director and
a 47.5% beneficial owner of Datatek which 47.5% interest was transferred to
other Datatek stockholders for no consideration. Datatek and its subsidiaries
had been involved in the development, purchase and licensing of the technology,
intellectual property and other business assets required for our business
operations. Mr. Fritsch and Mrs. Sibylle Fritsch returned an aggregate of
2,000,000 shares of our common stock to us for cancellation.
On July 2, 1999, we issued to Mr. James Burger, former chief financial
officer, general manager and treasurer, options to acquire an aggregate of
400,000 shares of common stock. Mr. Burger resigned in all capacities in
September, 1999. In December 1999 we entered into a termination agreement with
Mr. Burger, pursuant to which we paid him the sum of $100,000 as termination
compensation under his employment agreement and further as compensation for the
cancellation of all of his options.
On July 29, 1999, we entered into a license agreement with Mr. Fritsch
for exclusive worldwide rights to certain technology. The license remains in
effect as long as the compensation equal to 0.25% of gross revenues is paid
annually to Mr. Fritsch until the later of 20 years or the expiration of the
underlying patents as provided in his employment agreement.
On August 2, 1999, we completed a merger with MCY Music World, Inc.,
whereby an acquisition subsidiary merged with and into MCY Music World, Inc.,
with MCY Music World, Inc. becoming a subsidiary of our company. As a result,
outstanding shares of common stock and preferred stock of MCY Music World, Inc.
were converted, respectively, on a 1-for-1 basis into our common stock and
preferred stock of having identical rights. In addition, all holders of options
and warrants of MCY Music World, Inc. were given options and warrants having
identical features under a newly adopted stock option plan and their existing
options and warrants were cancelled.
On August 2, 1999, Health Builders, our 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 and did the following: (i) increased
its authorized capital from 50,000,000 shares of common stock to 100,000,000
shares of common stock; (ii) designated 1,000,000 shares of preferred stock
"Series 1 Preferred Stock"; and (iii) changed its corporate name to MCY.com,
Inc. In addition, Health Builders issued: (A) 43,241,655 shares of our 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 Mr. Fritsch. All of our former officers and
directors resigned and the current officers and directors were subsequently
elected.
-32-
<PAGE>
In connection with the merger, L. Dee Hall, Glen Hatch, Robert Blackley
and Reed Jensen, the holders of approximately 4,000,000 shares of Health
Builders common stock, agreed to sell approximately 3,500,000 of such shares to
Mr. William Bossung, Mr. Todd Sanders and their associates for $0.02 per share.
In August, 1999, we issued 5,000 shares of our common stock to David
Rowland as consideration for a loan he made to us in the amount of $100,000.
From August, 1999 through October, 1999, we issued 6,573,333 shares of
our common stock at $6.00 per share in connection with a private offering of
securities. The gross proceeds of the offering were approximately $39,439,998.
Gruntal & Co., L.L.C., the placement agent, received warrants to acquire 657,333
shares of our common stock at an exercise price of $ 6.00 per share in
connection with this offering.
In December 1999, we entered into an agreement with DL Hawk
Communications, Inc. (the "Consultant Company"), a company owned by Richard
Lubic, a former director of MCY, pursuant to which we paid such company the sum
of $100,000 as compensation for terminating a consulting agreement with the
Consulting Company. In connection with such agreement, Mr. Lubic resigned as a
director of MCY and we entered into a new consulting agreement with the
Consultant Company. The new agreement is for one year and reduces payments to
the Consulting Company from $175,000 per annum under the old, terminated
agreement to $50,000 per annum.
As of December 31, 1999, we had paid advances of $113,000 to Mr.
Fritsch.
On December 31, 1999, in connection with the execution of a
co-development agreement, we issued a warrant to U.S. West Internet Ventures,
Inc. pursuant to which U.S. West Internet Ventures, Inc. may acquire up to
476,190 shares of our common stock at a purchase price of $ 10.50 per share for
a five-year period. In addition, Greg Orlandella received, as a finder's fee for
this transaction, 110,000 shares of our common stock at $10.50 per share.
-33-
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of common
stock, $0.001 par value, and 10,000,000 shares of preferred stock, $0.0001 par
value.
COMMON STOCK
Each holder of our common stock is entitled to one vote for each share
standing in such holder's name in our records on all matters submitted to a vote
of our stockholders, except as otherwise required by law. Holders of our common
stock do not have cumulative voting rights so that, subject to the right of the
holders of our Series 1 voting preferred stock as discussed below, holders of
more than 50% of the combined shares of our common stock voting for the election
of directors may elect all of the directors is they choose to do so and, in that
event, the holders of the remaining shares of our common stock will not be able
to elect any members to our board of directors. In addition, the rights,
privileges and preferences of holders of our common stock will be subject to,
and may be adversely affected by, the rights of the holders of any shares of
preferred stock which we may designate and issue in the future.
Holders of our common stock are entitled to equal dividends and
distributions per share when, as and if declared by our board of directors from
funds legally available. Holders of our common stock do not have pre-emptive
rights to subscribe for any of our securities nor are any shares of our common
stock redeemable or convertible into any of our other securities. If we
liquidate, dissolve or wind up our business or affairs, our assets will be
divided up pro-rata on a share-for-share basis among the holders of our common
stock after creditors and preferred shareholders are paid.
PREFERRED STOCK
Our board of directors has the authority to issue 10,000,000 shares of
our 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 our stockholders. To date,
1,000,000 shares of our series 1 preferred stock have been issued to Mr.
Fritsch. 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.
REGISTRATION RIGHTS
Individuals who purchased 6,573,333 shares of our common stock in a
private placement of our stock which was completed in October 1999 will be
entitled to certain "piggyback" registration rights with respect to their
shares. If we register any of our securities under the Securities Act, those
individuals who purchased shares in the October 1999 private placement are
entitled, subject to certain restrictions, to include the shares of our common
stock that they purchased in the registration. However, those holders have no
registration rights with respect to our first public offering. The piggyback
registration rights are subordinate to the registration rights of (i) the
Datatek Holders with respect to 4,500,000 shares of our common stock and
2,000,000 shares of our common stock underlying warrants which were previously
issued to the Datatek Holders in connection with the reorganization and are pari
passu with respect to (A) 657,333 shares of our common stock underlying the
warrants which were previously issued go Gruntal & Co., L.L.C.; and (B) 175,075
shares of our common stock owned by Gruntal & Co., L.L.C.
We have granted additional piggyback registration rights to U.S. West
Internet Ventures, Inc. with respect to 476,190 shares or our common stock
underlying a warrant issued to U.S. West Internet Ventures, Inc. on December 31,
1999. In addition, we have granted Greg Orlandella (i) the right to register
100,000 shares of our common stock and 100,000 shares of our common stock
underlying a warrant, each of which were issued to Mr. Orlandella on December
31, 1999, in a registration statement on Form S-8, if available, or additional
piggyback registration rights if a registration statement on Form S-8 is
unavailable. All of the piggyback registrations rights
-34-
<PAGE>
granted to U.S. West Internet Ventures, Inc. and to Mr. Orlandella, if
applicable, are subordinated to the rights granted to the persons in the
preceding paragraph.
-35-
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
(a) Market Information
------------------
Our common stock is presently traded on the Over-the-Counter Electronic
Bulletin Board ("OTCBB") under the trading symbol "MCYC".
Our common stock's high and low bid information for each quarter within
the last two fiscal years and through the quarterly period ended December 31,
1999 as reported by IDD Information Services, Tradeline (R) is shown below. The
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not represent actual transactions. Prior to August 2, 1999,
our common stock traded under the trading symbol "HBII". On August 2, 1999 we
acquired MCY Music World, Inc.
Period High Low
- - ------ ---- ---
Fiscal Year 1998:
First Quarter 1998 (January, February, March) $ .61 $ .25
Second Quarter 1998 (April, May, June) $ .61 $ .25
Third Quarter 1998 (July, August, September) $ .63 $ .27
Fourth Quarter 1998 (October, November, December) $ .63 $ .28
Fiscal Year 1999:
First Quarter 1999 (January, February, March) $ .63 $ .28
Second Quarter 1999 (April, May, June) $ 17.75 $ .28
Third Quarter 1999 (July, August, September) $ 27 $ 11.88
Fourth Quarter 1999 (October, November, December) $ 13.63 $ 5.50
(b) Holders of our common stock
---------------------------
As of December 31, 1999, there were approximately 175 holders of record
of our common stock as reported to us by our transfer agent, Interwest Transfer
Co., Inc.
(c) Dividends
---------
To date, we have not paid any dividends on our common stock and do not
expect to do so in the foreseeable future. Instead, we expect to retain all
earnings to finance the growth and development of our business.
-36-
<PAGE>
ITEM 2. LEGAL PROCEEDINGS
On December 16, 1999, a former employee of MCY Music World, Inc. filed
a complaint against us in New York State Supreme Court. In his complaint, his
claims included breach of contract, wrongful termination and fraud related to
compensation due to him for the signing and distribution of content as well as
fees related to a private placement of our stock on October 25, 1999. In his
complaint, he asked for damages of approximately $23,000,000 including 20,000
shares of MCY.com, Inc. common stock, stock options, fees and royalties. Due to
the fact that the complaint was only recently filed, discovery in the case has
not started and we have limited information upon which to assess the validity of
this suit. Based, however, upon our understanding of the facts as of January 14,
2000, we believe that the former employee's claims lack substantial merit, and
we intend to vigorously defend against this action. On January 14, 2000, we
filed a motion to dismiss the complaint.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
-37-
<PAGE>
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth certain information concerning all
securities issued by us which have not been registered under the Securities Act
for the past three years (1997, 1998 and 1999). In the following table, all
references to securities means our common stock, unless otherwise indicated. In
addition, the number of shares of our common stock reflect a 2 for 1 stock split
that was effected as of May 20, 1999.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth certain information concerning all
securities issued by us which have not been registered under the Securities Act
for the past three years (1997, 1998 and 1999). In the following table, all
references to securities means our common stock, unless otherwise indicated. In
addition, the number of shares of our common stock reflect a 2 for 1 stock split
that was effected as of May 20, 1999.
<TABLE>
<CAPTION>
NOTE REFERENCE SHARES ISSUED DATE ISSUED CONSIDERATION RECEIVED
-------------- ------------- ----------- ----------------------
<S> <C> <C> <C>
(1) 25,282,652 January 8, 1999 $ 0
(2) 1,857,480 January 8, 1999 $ 137,000
(3) 8,521,220 April 26, 1999 $ 2,378,000
(4) 200,000 April 29, 1999 $ 56,000
(5) 363,636 May 5, 1999 $ 990,000
(6) 2,400,000 May 7, 1999 $ 8,690,000
(7) 200,000 May 17,1999 $ 990,000
(8) 1,000,000 of series 1 June 14, 1999 $ 1,000
preferred stock
(9) 4,500,000 July 2, 1999 $ 22,500,000
(10) 2,000,000 July 2, 1999 $ 3,000,000
(11) 83,333 July 21,1999 $ 0
(12) 4,611,000 August 2, 1999 $ 0
(13) 42,924,988 August 2, 1999 $ 0
(14) 2,000,000 August 2, 1999 $ 0
(15) 116,667 August 2, 1999 $ 700,000
(16) 3,274,833 August 17, 1999 $ 17,870,000
(17) 3,047,500 August 27, 1999 $ 16,630,000
(18) 5,000 August 27, 1999 $ 30,000
(19) 251,000 October 20, 1999 $ 1,384,770
(20) 476,190 December 31, 1999 $ 5,000
(21) 110,000 December 31, 1999 $ 0
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As of January 8, 1999, we issued 25,282,652 shares of our common stock, par
value $0.001 per share, net of shares returned on July 2, 1999 to our founders
for no consideration. The 25,282,652 shares of our common stock is exclusive of:
(a) warrants to purchase 2,000,000 shares of our common stock issued in
conjunction with the reorganization; (b) options to purchase 3,419,400 shares
issued under our incentive option plan; (c) 116,667 shares of our common stock
issued to a creditor; (c) cancellation of 200,000 shares of our common stock
issued to a consultant; (e) warrants for the purchase of 33,333 shares of our
common stock issued to a trade partner; and (f) 5,000 shares issued to a
creditor on completion of an offering on August 2, 1999.
-38-
<PAGE>
(2) As of January 8, 1999, we issued 1,857,480 shares of our common stock,
valued at $0.074 per share, to employees and consultants in consideration for
services rendered.
(3) On April 26, 1999, we issued 8,521,220 shares of our common stock, valued at
$0.28 per share, to employees, consultants and creditors in consideration for
services rendered.
(4) On April 29, 1999, we issued 200,000 shares of our common stock, valued at
$0.28 per share, to our legal counsel, Lampert, Lampert & Ference (f/k/a Lampert
& Lampert), for services rendered.
(5) On May 5, 1999, we issued 363,636 shares of our common stock, valued at
$2.75 per share less costs, for cash.
(6) On May 7, 1999, we issued 2,400,000 shares of our common stock, valued at
$3.75 per share less costs, for cash.
(7) On May 17, 1999, we issued 200,000 shares of our common stock, valued at
$5.00 per share less costs, for cash.
(8) On June 14, 1999, we issued 1,000,000 shares of our series 1 preferred
stock, par value $0.001 per share, to Mr. Fritsch for $1,000.
(9) On July 2, 1999, as consideration for the purchase of the assets of Datatek
Services Limited including the stock of MCY America, Inc. and Fritsch & Friends
Mediagroup Gmbh, we paid an aggregate purchase price of $ 26,500,000 structured
as follows: (i) $1,050,000 cash; (ii) we issued 4,500,000 shares of our common
stock valued at $ 22,500,000; and (iii) we issued 5-year warrants to purchase
2,000,000 shares of our common stock at an exercise price of $ 5.00 per share
valued at $ 3,000,000.
(10) On July 2, 1999, as consideration for the purchase of the assets of Datatek
Services Limited including the stock of MCY America, Inc. and Fritsch & Friends
Mediagroup Gmbh, we paid an aggregate purchase price of $ 26,500,000 structured
as follows: (i) $1,050,000 cash; (ii) we issued 4,500,000 shares of our common
stock valued at $ 22,500,000; and (iii) we issued 5-year warrants to purchase
2,000,000 shares of our common stock at an exercise price of $ 5.00 per share
valued at $ 3,000,000.
(11) On July 21, 1999, we issued warrants for 83,333 shares of our common stock,
at prices ranging from $5.00 to $6.00 per share, to various creditors.
(12) On August 2, 1999, in connection with the merger, our predecessor, Health
Builder International, Inc. ("Health Builder"), enacted a two-for-1 forward
stock split increasing the number of issued and outstanding shares of its common
stock to 4,610,000 shares.
(13) On August 2, 1999, upon the consummation of the merger, we (f/k/a Health
Builders International, Inc.) issued: (i) 42,924,988 shares of our common stock
to the holders of the common stock of MCY Music World, Inc. ("MCY"), a
wholly-owned subsidiary, for 42,924,988 shares of MCY; (ii) warrants to purchase
up to 2,000,000 shares, at $ 5.00 per share, of our common stock to holders of
MCY warrants, for warrants to purchase up to 2,000,000 shares of MCY at $ 5.00
per share; and (iii) to holders of MCY options, options to purchase up to
3,419,400 shares of common stock, at exercise prices ranging from $ 1.50 to
$6.00 per share, under the 1999 incentive option plan of our predecessor, Health
Builder, for options to purchase 3,419,400 shares of MCY common stock at the
same price. Additionally, 400,000 shares of common stock which were to be issued
to Mark Ross, a consultant, were cancelled for failure of consideration.
(14) On August 2, 1999, upon the consummation of the merger, we (f/k/a Health
Builders International, Inc.) issued: (i) 42,924,988 shares of our common stock
to the holders of the common stock of MCY Music World, Inc. ("MCY"), a
wholly-owned subsidiary, for 42,924,988 shares of MCY; (ii) warrants to purchase
up to 2,000,000 shares, at $ 5.00 per share, of our common stock to holders of
MCY warrants, for warrants to purchase up to 2,000,000 shares of MCY at $ 5.00
per share; and (iii) to holders of MCY options, options to purchase up to
3,419,400 shares of common stock, at exercise prices ranging from $ 1.50 to
$6.00 per share, under the 1999 incentive option plan of our predecessor, Health
Builder, for options to purchase 3,419,400 shares of MCY common stock at the
same price. Additionally, 400,000 shares of common stock which were to be issued
to Mark Ross, a consultant, were cancelled for failure of consideration.
-39-
<PAGE>
(15) On August 2, 1999, upon the consummation of the merger, we (f/k/a Health
Builders International, Inc.) issued: (i) 42,924,988 shares of our common stock
to the holders of the common stock of MCY. Music World, Inc. ("MCY"), a
wholly-owned subsidiary, for 42,924,988 shares of MCY; (ii) warrants to purchase
up to 2,000,000 shares, at $ 5.00 per share, of our common stock to holders of
MCY warrants, for warrants to purchase up to 2,000,000 shares of MCY at $ 5.00
per share; and (iii) to holders of MCY options, options to purchase up to
3,419,400 shares of common stock, at exercise prices ranging from $ 1.50 to
$6.00 per share, under the 1999 incentive option plan of our predecessor, Health
Builder, for options to purchase 3,419,400 shares of MCY common stock at the
same price. Additionally, 400,000 shares of common stock which were to be issued
to Mark Ross, a consultant, were cancelled for failure of consideration.
(16) On August 17, 1999 and on August 27, 1999, we issued 3,274,833 and
3,047,500 shares of our common stock, respectively, at $6.00 per share in
connection with a private offering of securities. The net proceeds of the
offering were approximately $ 34,500,000. Gruntal & Co., L.L.C, the placement
agent, received warrants to acquire 632,233 shares of our common stock at an
exercise price of $ 6.00 per share in connection with the offering.
(17) On August 17, 1999 and on August 27, 1999, we issued 3,274,833 and
3,047,500 shares of our common stock, respectively, at $6.00 per share in
connection with a private offering of securities. The net proceeds of the
offering were approximately $ 34,500,000. Gruntal & Co., L.L.C, the placement
agent, received warrants to acquire 632,233 shares of our common stock at an
exercise price of $ 6.00 per share in connection with the offering.
(18) On August 2, 1999, we issued 116,667 shares of our common stock, valued at
$6.00 per share, to Gunter Brinkof in lieu of payment equal to $ 700,000. On
August 27, 1999, we issued 5,000 shares of our common stock to David Rowland, a
consultant, for payment of accrued interest.
(19) In October, 1999, we issued 251,000 shares of our common stock at $ 6.00
per share pursuant to the prior offering. The net proceeds of the offering were
$ 1,384,770. Gruntal & Co., L.L.C., the placement agent, received warrants to
acquire 25,100 shares of our common stock at an exercise price of $6.00 per
share in connection with the offering.
(20) On December 31, 1999, in connection with a transaction with U.S. West
Communications Services, Inc., we issued a warrant to U.S. West Internet
Ventures, Inc. pursuant to which it may acquire up to 476,190 shares of our
common stock at $ 10.50 per share for a five-year period, for consideration of $
5,000.
(21) On December 31, 1999, in connection with a transaction with U.S. West
Communications Services, Inc., we issued to Greg Orlandella, as a finder's fee
for the transaction, 110,000 shares of our common stock at a price of $ 10.50
per share.
The transactions described in the table above were exempt transactions
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), Regulation D thereunder as transactions by an issuer not involving a
public offering. All such shares of common stock issued were deemed "restricted
securities" (as such term is defined under the Securities Act) and subject to
substantial restrictions on transfer. All of the shares of common stock were
issued for investment purposes only and without a view to distribution. All of
the persons who acquired
-40-
<PAGE>
such shares were fully informed and advised about matters concerning our
company, including our business, financial affairs and other matters.
-41-
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides, in general, that a corporation incorporated under the laws of the
State of Delaware, such as the registrant, may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than a derivative action by or in
the right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another enterprise, against expenses (including attorney's fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful.
Article VII of our amended and restated certificate of incorporation
provides that to the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, none of our
directors shall be personally liable to us or to our stockholders for or with
respect to any acts or omissions in the performance of his or her duties as one
of our directors. If Article VII of our amended and restated certificate of
incorporation is amended or repealed, the amendment or repeal will not eliminate
or reduce the effect of any right or protection of our directors that existed
immediately prior to such amendment or repeal.
Our by-laws, as amended, provide that we shall indemnify our officers,
directors and employees. The rights to indemnity continue if even a person has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the person's heirs, executors and administrators. In addition, we
shall pay for any expenses incurred by a director or officer in defending any
action, suit or proceeding by reason of the fact that he or she is or was one of
our directors or officers unless such officer, director or employee is adjudged
liable for negligence or misconduct in performing his or her duties. If we do
not pay in full the claim for indemnification of any such officer, director or
employee within thirty days after we receive the written claim, the claimant may
at any time thereafter sue us to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. We may, by action of our board of
directors, indemnify our employees and agents with the same scope and effect as
the foregoing indemnification of our directors and officers.
We maintain directors and officers liability insurance coverage with a
$10,000,000 annual aggregate limit of liability. National Union Fire Insurance
Company provides us with a primary $ 2,000,000 layer while Royal Insurance
Company provides us with a $ 3,000,000 layer in excess of the National Union
policy. TIG Insurance Company provides us with a $5,000,000 layer in excess over
the National Union and Royal Insurance policies. All of these policies expire on
July 15, 2000.
-42-
<PAGE>
PART F/S
(i) Consolidated Financial Statements of MCY.com, Inc. as of July 31, 1999 and
for the period from January 8, 1999 (inception) through July 31, 1999
(incorporated by reference from the MCY.com, Inc. Current Report on Form 8-K
dated October 13, 1999, as filed with the Securities and Exchange Commission on
October 15, 1999, SEC File #: 333-09809);
(ii) Combined Financial Statements of the predecessor companies of MCY.com, Inc.
as of and for the years ended December 31, 1996, 1997, 1998 and for the periods
from January 1, 1999 through July 2, 1999 and January 1, 1996 through July 2,
1999 (incorporated by reference from the MCY.com, Inc. Current Report on Form
8-K dated October 13, 1999, as filed with the Securities and Exchange Commission
on October 15, 1999, SEC File #: 333-09809); and
(iii) MCY.com, Inc. Quarterly Report on Form 10-QSB Under Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the Quarter Ended September 30, 1999
(incorporated by reference from the MCY.com, Inc. Quarterly Report on Form
10-QSB Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
Quarter Ended September 30, 1999, as filed with the Securities and Exchange
Commission on November 15, 1999, SEC File #: 333-09809).
-43-
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- - ------ -----------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 By-laws, as amended (2)
4.1 Warrant to Purchase Common Stock of MCY.com, Inc. issued to U S West Internet
Ventures, Inc., December 31, 1999 (3)
10.1 License Agreement dated July 29, 1999 by and between Bernhard Fritsch and MCY
Music World, Inc. (3)
10.2 U S West Communications Services, Inc. and MCY Music World, Inc. Collaborative
Development Agreement effective as of December 31, 1999
10.3 Confidentiality and Non-Circumvention Agreement effective as of November 28, 1999
10.4 Employment Agreement made as of July 11, 1999 by and between MCY Music World,
Inc. and Bernhard Fristsch
10.5 Amendment to Employment Agreement made as of July 28, 1999 by and between MCY
Music World, Inc. and Bernhard Fritsch
10.6 Employment Agreement made as of July 11, 1999 by and between MCY Music World,
Inc. and Mitchell Lampert
10.7 Employment Agreement between MCY Music World, Inc. and Scott Citron dated as of
July 21, 1999
10.8 Employment Agreement between MCY Music World, Inc. and Ray Short dated as of
August __, 1999
10.9 Employment Agreement dated September 1, 1999 by and between MCY Music World,
Inc. and Thomas Noak
21.1 Subsidiaries of Registrant (3)
27.1 Financial Data Schedule (3)
99.1 Consolidated Financial Statements of MCY.com, Inc. as of July 31, 1999 and for the period from January
8, 1999 (inception) through July 31, 1999. (4)
99.2 Combined Financial Statements of the predecessor companies of MCY.com, Inc. as of and for the years
ended December 31, 1996, 1997, 1998 and for the periods from January 1, 1999 through July 2, 1999 and
January 1, 1996 through July 2, 1999. (5)
99.3 MCY.com, Inc. Quarterly Report on Form 10-QSB Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Quarter Ended September 30, 1999. (6)
- - ------------------
</TABLE>
(1) Incorporated by reference from our current report on Form 8-K dated
August 2, 1999 (date of earliest event reported), as filed with the
Securities and Exchange Commission on August 17, 1999, SEC Filed #:
333-09809.
(2) Incorporated by reference from Exhibit 3.3 to our registration
statement on Form SB-2 as filed with the Securities Exchange Commission
on August 9, 1996, SEC File #: 333-9809.
(3) Filed herewith.
(4) Incorporated by reference from the MCY.com, Inc. Current Report on Form
8-K dated October 13, 1999, as filed with the Securities and Exchange
Commission on October 15, 1999, SEC File #: 333-09809).
(5) Incorporated by reference from the MCY.com, Inc. Current Report on Form
8-K dated October 13, 1999, as filed with the Securities and Exchange
Commission on October 15, 1999, SEC File #: 333-09809).
(6) Incorporated by reference from the MCY.com, Inc. MCY.com, Inc.
Quarterly Report on Form 10-QSB Under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarter Ended September 30,
1999, as filed with the Securities and Exchange Commission on November
15, 1999, SEC File #: 333-09089).
-44-
<PAGE>
ITEM 2. DESCRIPTION OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- - ------ -----------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 By-laws, as amended (2)
4.1 Warrant to Purchase Common Stock of MCY.com, Inc. issued to U S West Internet
Ventures, Inc., December 31, 1999 (3)
10.1 License Agreement dated July 29, 1999 by and between Bernhard Fritsch and MCY
Music World, Inc. (3)
10.2 U S West Communications Services, Inc. and MCY Music World, Inc. Collaborative
Development Agreement effective as of December 31, 1999
10.3 Confidentiality and Non-Circumvention Agreement effective as of November 28, 1999
10.4 Employment Agreement made as of July 11, 1999 by and between MCY Music World,
Inc. and Bernhard Fristsch
10.5 Amendment to Employment Agreement made as of July 28, 1999 by and between MCY
Music World, Inc. and Bernhard Fritsch
10.6 Employment Agreement made as of July 11, 1999 by and between MCY Music World,
Inc. and Mitchell Lampert
10.7 Employment Agreement between MCY Music World, Inc. and Scott Citron dated as of
July 21, 1999
10.8 Employment Agreement between MCY Music World, Inc. and Ray Short dated as of
August __, 1999
10.9 Employment Agreement dated September 1, 1999 by and between MCY Music World,
Inc. and Thomas Noak
21.1 Subsidiaries of Registrant (3)
27.1 Financial Data Schedule (3)
99.1 Consolidated Financial Statements of MCY.com, Inc. as of July 31, 1999 and for the period from January
8, 1999 (inception) through July 31, 1999. (4)
99.2 Combined Financial Statements of the predecessor companies of MCY.com, Inc. as of and for the years
ended December 31, 1996, 1997, 1998 and for the periods from January 1, 1999 through July 2, 1999 and
January 1, 1996 through July 2, 1999. (5)
99.3 MCY.com, Inc. Quarterly Report on Form 10-QSB Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Quarter Ended September 30, 1999. (6)
- - ------------------
</TABLE>
(1) Incorporated by reference from our current report on Form 8-K dated
August 2, 1999 (date of earliest event reported), as filed with the
Securities and Exchange Commission on August 17, 1999, SEC Filed #:
333-09809.
(2) Incorporated by reference from Exhibit 3.3 to our registration
statement on Form SB-2 as filed with the Securities Exchange Commission
on August 9, 1996, SEC File #: 333-9809.
(3) Filed herewith.
(4) Incorporated by reference from the MCY.com, Inc. Current Report on Form
8-K dated October 13, 1999, as filed with the Securities and Exchange
Commission on October 15, 1999, SEC File #: 333-09809).
(5) Incorporated by reference from the MCY.com, Inc. Current Report on Form
8-K dated October 13, 1999, as filed with the Securities and Exchange
Commission on October 15, 1999, SEC File #: 333-09809).
(6) Incorporated by reference from the MCY.com, Inc. MCY.com, Inc.
Quarterly Report on Form 10-QSB Under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarter Ended September 30,
1999, as filed with the Securities and Exchange Commission on November
15, 1999, SEC File #: 333-09089).
-45-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE: January 24, 2000 MCY.com, Inc.
By: /s/ Bernhard Fritsch
------------------------
Name: Bernhard Fritsch
Title: President
Pursuant to the requirements of the Section 12 of the Securities and
Exchange Act of 1934, as amended, this registration statement has been signed
below by the following persons in the capacities indicated on the 24th day of
January, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Bernhard Fritsch
- - ----------------------------- Chairman of the Board of Directors, Chief Executive
Name: Bernhard Fritsch Officer, President and Director
/s/ Lisa Short Secretary
- - -----------------------------
Name: Lisa Short
/s/ Hubertus von Hesse Director
- - -----------------------------
Name: Hubertus von Hesse
/s/ Norbert Jahns Director
- - -----------------------------
Name: Norbert Jahns
</TABLE>
-46-
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT.
WARRANT TO PURCHASE COMMON STOCK
OF
MCY.COM, INC.
VOID AFTER DECEMBER 31, 2004
This Warrant (the "Warrant") is issued to U S WEST Internet Ventures,
Inc., a subsidiary of U S WEST, Inc. or its registered assigns ("Holder") by
MCY.com, Inc., a Delaware corporation (the "Company"), on December 31, 1999 (the
"Warrant Issue Date") for consideration of [$5,000] in the aggregate, receipt of
which is hereby acknowledged.
1. Purchase Shares. Subject to the terms and conditions herein set
forth, the Holder is entitled, upon surrender of this Warrant at the principal
corporate office of the Company (or at such other place as the Company shall
notify the Holder hereof in writing), to purchase from the Company up to 476,190
shares of common stock (the "Warrant Shares") of the Company, $.001 par value
(the "Common Stock") at the Exercise Price (defined below), subject to
adjustment as provided in Section 8.
2. Exercise Price. The purchase price for the Shares shall be $10.50
per Warrant Share, as adjusted from time to time pursuant to Section 8 hereof
(the "Exercise Price").
3. Exercise Period. This Warrant shall be exercisable, in whole or in
part, during the period commencing on the Warrant Issue Date and ending at 5:00
p.m. on December 31, 2004 (the "Exercise Period").
4. Method of Exercise. While this Warrant remains outstanding and
exercisable in accordance with Section 3 above, the Holder may exercise, in
whole or in part, the rights to purchase the Warrant Shares evidenced hereby.
Such exercise shall be effected by:
(a) the surrender of the Warrant, together with a duly
executed copy of the form of Notice of Exercise attached hereto, to the
Secretary of the Company at its principal corporate offices; and
(b) the payment to the Company of an amount equal to the
aggregate Exercise Price for the number of Warrant Shares being
purchased.
<PAGE>
5. Net Exercise. In lieu of exercising this Warrant pursuant to Section
4, the Holder may elect to receive, without the payment by the Holder of any
additional consideration, Warrant Shares equal to the value of this Warrant (or
the portion thereof being canceled) by surrender of this Warrant at the
principal office of the Company together with the Notice of Exercise attached
hereto indicating such election, in which event the Company shall issue to the
holder hereof a number of Warrant Shares computed using the following formula:
Y (A - B)
X = A
Where: X = The number of Warrant Shares to be issued to the
Holder pursuant to this net exercise;
Y = The number of Warrant Shares in respect of
which the net issue election is made;
A = The fair market value of one Warrant Share
at the time the net issue election is made;
B = The Exercise Price (as adjusted to the date of
the net issuance).
For purposes of this Section 5, the fair market value of one Warrant Share as of
a particular date shall be determined as follows: (i) if traded on a securities
exchange or through the Nasdaq National Market, the value shall be deemed to be
the average of the closing prices of the securities on such exchange over the
thirty (30) day period ending three (3) days prior to the net exercise election;
(ii) if traded over-the-counter, the value shall be deemed to be the average of
the closing bid and offer prices (whichever is applicable) over the thirty (30)
day period ending three (3) days prior to the net exercise; and (iii) if there
is no active public market, the value shall be the fair market value thereof, as
determined in good faith by the Board of Directors of the Company.
6. Certificates for Shares. Upon the exercise of the purchase rights
evidenced by this Warrant, one or more certificates for the number of Warrant
Shares so purchased shall be issued as soon as practicable thereafter (with
appropriate restrictive legends, if applicable), and in any event within thirty
(30) days of the delivery of the subscription notice and the Holder's compliance
with Section 4 or 5 (as applicable) hereof.
7. Issuance of Shares. The Company covenants that the Warrant Shares,
when issued pursuant to the exercise of this Warrant, will be duly and validly
issued, fully paid and nonassessable and free from all taxes, liens, and charges
with respect to the issuance thereof.
<PAGE>
8. Adjustment of Exercise Price and Kind and Number of Shares. The
number and kind of securities purchasable upon exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and Other Issuances. If the
Company shall at any time during the Exercise Period of this Warrant
(i) subdivide its Common Stock, by split-up or otherwise, or combine
its Common Stock, or (ii) issue additional shares of its Common Stock
or other equity securities as a dividend with respect to any shares of
its Common Stock, the number of shares of Common Stock issuable on the
exercise of this Warrant shall forthwith be proportionately increased
in the case of a subdivision or stock dividend, or proportionately
decreased in the case of a combination. Appropriate adjustments shall
also be made to the Exercise Price payable per Warrant Share, but the
aggregate Exercise Price payable for the total number of Warrant Shares
purchasable under this Warrant (as adjusted) shall remain the same. Any
adjustment under this Section 8(a) shall become effective at the close
of business on the date the subdivision or combination becomes
effective, or as of the record date of such dividend, or in the event
that no record date is fixed, upon the making of such dividend.
(b) Reclassification, Reorganization and Consolidation. In
case of any reclassification, capital reorganization, or change in the
Common Stock of the Company (other than as a result of a subdivision,
combination, or stock dividend provided for in Section 8(a) above),
then, as a condition of such reclassification, reorganization, or
change, lawful provision shall be made, and duly executed documents
evidencing the same from the Company or its successor shall be
delivered to the Holder, so that the Holder shall have the right at any
time prior to the expiration of this Warrant to purchase, at a total
price equal to that payable upon the exercise of this Warrant (subject
to adjustment of the Exercise Price as provided in Section 8, the kind
and amount of shares of stock and other securities and property
receivable in connection with such reclassification, reorganization, or
change by a holder of the same number of shares of Common Stock as were
purchasable by the Holder immediately prior to such reclassification,
reorganization, or change. In any such case appropriate provisions
shall be made with respect to the rights and interest of the Holder so
that the provisions hereof shall thereafter be applicable with respect
to any shares of stock or other securities and property deliverable
upon exercise hereof, and appropriate adjustments shall be made to the
purchase price per share payable hereunder, provided the aggregate
purchase price shall remain the same.
(c) Notice of Adjustment. When any adjustment is required to
be made in the number or kind of shares purchasable upon exercise of
the Warrant, or in the Exercise Price, the Company shall promptly
notify the Holder of such event and of the number of shares of Common
Stock or other securities or property thereafter purchasable upon
exercise of this Warrant.
<PAGE>
(d) Issuance of New Warrant. Upon the occurrence of any of the
events listed in this Section 8 that results in an adjustment of the
type, number or exercise price of the securities underlying this
Warrant, the Holder shall have the right to receive a new warrant
reflecting such adjustment upon the Holder tendering this Warrant in
exchange. The new warrant shall otherwise have terms identical to this
Warrant.
9. Covenants and Conditions.
(a) No Impairment. Pursuant to the terms and conditions of
this Warrant, Company shall: (i) reserve an appropriate number of
shares of Company's Common Stock to facilitate the issuance of shares
to Holder pursuant to this Warrant, (ii) not amend its articles in a
manner which would materially impair Company's ability to comply with
the terms of the Warrant or otherwise unfairly impair the rights of the
Holder.
(b) Registration Rights. The Company covenants that it will
use its best efforts to take all action necessary to enter into an
agreement with the Holder no later than 60 days from the date hereof,
which agreement shall grant to the Holder one piggyback registration
right on customary terms and conditions (including the Company's
agreement to pay all expenses of such registrations other than
underwriting discounts). Notwithstanding the foregoing, Holder's rights
hereunder shall be subordinate to holders of securities of the Company
who currently hold piggyback registration rights.
10. Representations and Warranties. Pursuant to the terms and
conditions of this Warrant, the Company represents and warrants that (i) the
Company is duly organized under the laws of the State of Delaware, and (ii) the
issuance of this Warrant has been duly authorized by all necessary corporate
action of the Company and does not conflict with the terms any of the bylaws,
articles of incorporation or any material agreements of the Company.
11. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant, but in lieu of such fractional shares the Company shall make a cash
payment therefor on the basis of the Exercise Price then in effect.
12. No Stockholder Rights. Prior to exercise of this Warrant, the
Holder shall not be entitled to any rights of a stockholder with respect to the
shares of Common Stock issuable on the exercise hereof, including, without
limitation, the right to vote such shares of Common Stock, receive dividends or
other distributions thereon, exercise preemptive rights or be notified of
stockholder meetings, and such Holder shall not be entitled to any notice or
other communication concerning the business or affairs of the Company.
13. Successors and Assigns. The terms and provisions of this Warrant
shall inure to the benefit of, and be binding upon, the Company and the Holder
and their respective successors and assigns.
14. Amendments and Waivers. Any term of this Warrant may be amended and
the observance of any term of this Warrant may be waived (either generally or in
a particular instance and either retroactively or prospectively), with the
written consent of the Company and the Holder. Any waiver or amendment effected
in accordance with this Section shall be binding upon each holder of any shares
of Common Stock purchased under this Warrant at the time
<PAGE>
outstanding (including securities into which such shares have been converted),
each future holder of all such Shares, and the Company.
15. Notices. All notices required under this Warrant shall be deemed to
have been given or made for all purposes (i) upon personal delivery, (ii) upon
an automatic machine generated confirmation receipt that the communication was
successfully sent to the applicable number if sent by facsimile; (iii) one
business day after being sent, when sent by professional overnight courier
service, or (iv) five business days after posting when sent by registered or
certified mail. Notices to the Company shall be sent to the principal corporate
office of the Company (or at such other place as the Company shall notify the
Holder hereof in writing). Notices to the Holder shall be sent to the address of
the Holder on the books of the Company (or at such other place as the Holder
shall notify the Company hereof in writing).
16. Captions. The section and subsection headings of this Warrant are
inserted for convenience only and shall not constitute a part of this Warrant in
construing or interpreting any provision hereof.
17. Governing Law. This Warrant shall be governed by the laws of the
State of Delaware as applied to agreements among Delaware residents made and to
be performed entirely within the State of Delaware, and without reference to any
of its conflict of laws principles.
<PAGE>
IN WITNESS WHEREOF, MCY.com, Inc. caused this Warrant to be executed by
an officer thereunto duly authorized.
MCY.COM, INC.
By: /s/ Bernhard Fritsch
Name: Bernhard Fritsch
CEO
Address:
Fax Number:
<PAGE>
NOTICE OF EXERCISE
------------------
To:
The undersigned hereby elects to [check applicable
subsection]:
________ (a) Purchase _________________ shares of Common Stock
of _____________, pursuant to the terms of the
attached Warrant and payment of the Exercise Price
per share required under such Warrant accompanies
this notice;
OR
________ (b) Exercise the attached Warrant for [all of the
shares] [________ of the shares] [cross out
inapplicable phrase] purchasable under the Warrant
pursuant to the net exercise provisions of Section 5
of such Warrant.
The undersigned hereby represents and warrants that the
undersigned is acquiring such shares for its own account for investment purposes
only, and not for resale or with a view to distribution of such shares or any
part thereof.
WARRANTHOLDER:
-----------------------------------------
By:
[NAME]
Address:
Date:
Name in which shares should be registered:
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement") is entered into this 29th day
of July, 1999 by and between Bernhard Fritsch (herein referred to as "Licensor")
and MCY Music World, Inc. (hereinafter referred to as "Licensee").
W I T N E S S E T H:
WHEREAS, Licensor is the owner of certain technology relating to a (i)
sales tracking system; (ii) music delivery system; (iii) shopping basket system;
(iv) music interface system; (v) shopping history system; and (vi) digital
delivery chain and player system, for which he has filed provisional patent
applications described on Exhibit A annexed hereto (hereinafter collectively the
"Technology");
WHEREAS, Licensor is the owner of certain trademarks which are
described on the annexed Exhibit A (collectively the "Trademarks");
WHEREAS, Licensor is the owner of certain copyrights which are
described on the annexed Exhibit A (collectively the "Copyrights");
WHEREAS, the Licensor is the Chief Executive Officer of Licensee and in
connection with his employment by Licensee has agreed to license the Technology,
the Trademarks and the Copyrights to Licensee;
WHEREAS, the Licensor desires to further develop, exploit and
commercialize the Technology through the granting of an exclusive license for
the Technology, the Trademarks and the Copyrights to the Licensee;
WHEREAS, the Licensee desires to acquire an exclusive license to
commercialize and exploit and commercialize the Technology, the Trademarks and
the Copyrights (collectively the "Licensed Products"); and
WHEREAS, in connection with the granting of the License to the
Technology, the Licensor desires to grant and the Licensee desires to acquire an
exclusive license under all patents which may issue pursuant to the provisional
patent applications described on the annexed Exhibit A (collectively the
"Licensed Patents").
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties agree to the following:
ARTICLE 1.
EXCLUSIVE LICENSE
<PAGE>
1.1 The Licensor hereby grants to Licensee an exclusive worldwide right
and license (i) to commercialize and exploit the Licensed Products; and (ii) to
make, use, sell or offer for sale and in any way commercialize the inventions
disclosed in or claimed by the Licensed Patents.
1.2 Licensee shall have the exclusive right to manufacture, acquire and
assemble all equipment, apparatus, machinery, auxiliaries and devices required
to manufacture or distribute or utilize the Licensed Products and to carry same
into commercial practice.
1.3 The licenses hereby granted may not be sublicensed without the
prior written approval of Licensor.
1.4 The exclusive rights and license herein granted shall include all
patents throughout the world which may issue from or claim priority from the
Licensed Patents, including all divisionals, continuations or continuations in
part, which may issue from the provisional patent applications described on the
annexed Exhibit A.
1.5 Promptly, upon execution of this Agreement and from time to time,
Licensor shall provide to Licensee all source codes and other data and
information which is available to enable Licensee to exploit the Technology and
manufacture or distribute the Licensed Products.
1.6 As used herein, the term "Technology" shall include all patents,
inventions discoveries, know-how, show-how or intellectual property as same
relates to a (i) sales tracking system; (ii) music delivery system; (iii)
shopping basket system; (iv) music interface system; (v) shopping history
system; (vi) digital delivery chain and player system; or (vii) the digital
delivery of music. The term "Technology" shall also include any improvements to
the Technology or the mode of using, processing, commercializing or exploiting
the Technology obtained either through patents or otherwise.
1.7 The License granted to Licensee under this Agreement shall commence
on the date hereof and shall terminate on the later of the date on which the
last patent licensed hereunder to Licensee shall expire or twenty years from the
date of commencement of this Agreement.
ARTICLE 2.
DEVELOPMENT OF THE TECHNOLOGY
2.1 Licensee shall pay all fees for all past and future development of
the Technology and the Licensed Products, including the costs associated with
the prosecution of any patent applications or issuance of any patents based upon
the Technology.
2.2 The Licensor shall not have any financial obligation to the
Licensee hereunder.
<PAGE>
2.3 The Licensee shall provide the facilities necessary for any further
development of the Technology and the exploitation and commercialization of the
Technology and the Licensed Products.
3
<PAGE>
ARTICLE 3
NON-DISCLOSURE AND CONFIDENTIALITY
3.1 The Licensee agrees to report to the Licensor all inventions and
discoveries when first conceived or reduced to practice, to the extent such
inventions or discoveries relate to the Licensed Products or the Licensed
Patents. Licensee and Licensor both agree that all inventions and discoveries
are to be kept confidential and both of said parties hereby agree not to
disclose any confidential information to any person or entity outside of the
Licensor and Licensee's organization. This same caution and confidentiality must
be exercised by all Licensee employees and other agents who work for the
Licensee or Licensor or have access to the confidential information.
Furthermore, Licensee and Licensor each represent and warrant to the other that
each such employee or agent will, before gaining access to any confidential
information or any derivative thereof, have personally recognized in writing his
obligations regarding the confidential information to be disclosed pursuant to
this Agreement. Notwithstanding the foregoing, in the event that (i) the
Licensee becomes a public corporation; or (ii) the Licensee is acquired by a
public corporation, the Licensee shall have the right to make such releases,
filings and disclosures regarding this Agreement, the Technology and license
granted hereunder as shall be necessary or required under State and Federal
Securities Laws.
<PAGE>
ARTICLE 4.
INTELLECTUAL PROPERTY RIGHTS
4.1 All right, title and interest in all inventions and discoveries
identified or developed pursuant to this Agreement and any trademarks or
copyrights developed hereunder shall belong to the Licensor and are hereby
exclusively licensed to Licensee subject to the terms and conditions of this
Agreement.
4.2 All inventions and discoveries which are conceived and/or reduced
to practice during the course of this Agreement and which are generated by the
development by Licensee shall become the property of Licensor and are hereby
licensed to the Licensee.
4.3 Licensor may seek patent protection for any discovery and/or
invention developed pursuant to this Agreement. All costs to prosecute the
patent will be paid by the Licensee, upon presentation by Licensor of invoices
for same.
4.4 In the event that the Licensor shall determine to prosecute the
patent for any discovery and/or invention pursuant to this Agreement, the
Licensee will provide the Licensor with all the necessary source codes,
information, drawings and other data requested by Licensor.
4
<PAGE>
ARTICLE 5
PAYMENT FOR LICENSE
5.1 As partial consideration for the License granted hereunder, the
Licensee agrees to pay the Licensor a Fee of $1,000 per annum.
ARTICLE 6.
EMPLOYMENT OF LICENSEE; TERMINATION OF LICENSE
6.1 As further consideration for the grant of this License, the
Licensee hereby agrees to employee the Licensor pursuant to the terms of his
Employment Agreement dated July 11, 1999 and as amended on the July 28, 1999. In
the event that Licensee fails to pay the compensation to Licensor as provided in
Section 3.5 or 5.5 of the Employment Agreement, as amended, this License shall
thereupon terminate upon thirty (30) days written notice to Licensee. The
Licensee shall have the right to cure any breach of such Section 3.5 or 5.5
during said thirty (30) day notice period.
<PAGE>
ARTICLE 7.
INDEMNIFICATION
7.1 Licensee hereby agrees to indemnify and hold harmless Licensor, his
heirs and assigns from and against any and all losses, damages, or liabilities,
joint or several, which Licensor, his heirs or assigns may become subject under
this Agreement or in connection with the exploitation or commercialization of
the Technology or the Licensed Products. Licensee will reimburse Licensor, his
heirs and/or assigns for any legal or any other expenses reasonably incurred by
Licensor, his heirs or assigns in defending any such actions.
ARTICLE 8.
MISCELLANEOUS
8.1 If any term or provision of this Agreement or the application
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Agreement or the application of such term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each such term and
provision of this Agreement shall be valid and shall be enforced to the fullest
extent permitted by law.
8.2 No waiver of any breach of any covenant or provision herein
contained shall be deemed a waiver of any preceding or succeeding breach
thereof, or of any other covenant or provision herein contained. No extension of
time for performance of any obligation or act shall be deemed an extension of
the time for performance of any other obligation or act.
5
<PAGE>
8.3 All notices or other communications required or permitted hereunder
shall be in writing, and shall be sent by registered or certified mail, postage
prepaid, return receipt requested, or by Federal Express Priority Overnight
delivery and shall be deemed received upon mailing thereof.
To: The Chief Executive Officer
and Secretary of
MCY Music World, Inc.
1133 Avenue of the Americas
New York, New York
To: Bernhard Fritsch
c/o MCY Music World, Inc.
1133 Avenue of the Americas
New York, New York
Notices of change of address shall be given by written notice in the
manner detailed in this subparagraph 8.3.
8.4 This Agreement shall be binding upon and shall inure to the benefit
of the permitted successors and assigns of the parties hereto.
8.5 In the event of the bringing of any action or suit by a party
hereto against another party hereunder by reason of any breach of any of the
covenants, agreements or provisions on the part of the other party arising out
of this Agreement, then in that event the prevailing party shall be entitled to
have and recover from the other party all costs and expenses of the action or
suit, including actual attorneys' fees, accounting fees, and any other
professional fees resulting therefrom.
8.6 This Agreement is the final expression of, and contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior understandings with respect thereto. This Agreement may not
be modified, changed, supplemented or terminated, nor may any obligations
hereunder be waived, except by written instrument signed by the party to be
charged or by his agent duly authorized in writing or as otherwise expressly
permitted herein.
8.7 Heading at the beginning of each paragraph are solely for the
convenience of the parties and are not a part of the Agreement. Whenever
required by the context of this Agreement, the singular shall include the plural
and the masculine shall include the feminine. This Agreement shall not be
construed as if it had been prepared by one of the parties, but rather as if
both parties had prepared the same. Unless otherwise indicated, all references
to paragraphs and subparagraphs are to this Agreement. In the event the date on
which any party is required to take any action under the terms of this Agreement
is not a business day, the action shall be taken on the next succeeding day.
8.8 This Agreement may be executed in counterparts.
<PAGE>
8.9 The parties hereto expressly agree that this Agreement shall be
governed by, interpreted under, and construed and enforced in accordance with
the laws of the State of New York.
8.10 From and after the date hereof, all persons subject to or bound by
this Agreement shall from time and without further consideration, do, execute
and deliver, or cause to be done, executed and delivered, all such further acts,
things and instruments as may be reasonably be requested or required more
effectively to evidence and give effect to the provisions of this Agreement
(including, without limitation, certificates to the effect that this Agreement
and the representations made herein continue to be operative and as to any
defaults hereunder or modifications hereof).
8.11 This Agreement can only be assigned by the Licensor and may not be
assigned by the Licensee without the prior written consent of the Licensor.
Notwithstanding the foregoing, in order for any assignment by Licensor to be
effective, any party to whom Licensor may assign this Agreement must agree to
abide by the terms of this Agreement with Licensee, so that any such assignment
will not adversely affect the rights granted to Licensee hereunder.
IN WITNESS WHEREOF, the parties hereto have executed as of the 29th day
of July, 1999.
BERNHARD FRITSCH
By: /s/ Bernhard Fritsch
Bernhard Fritsch
MCY MUSIC WORLD, INC.
By: /s/ Bernhard Fritsch
Bernhard Fritsch, Chief
Executive Officer
ATTEST:
By: /s/ Hubertus Von Hesse
--------------------------
Hubertus Von Hesse
Director
7
U S WEST COMMUNICATIONS SERVICES, INC. AND MCY MUSIC WORLD, INC.
COLLABORATIVE DEVELOPMENT AGREEMENT
This Agreement ("Agreement"), is effective as of December 31, 1999 between MCY
MUSIC WORLD, INC. ("MCY.com"), a Delaware corporation, having a place of
business at 1133 Avenue of the Americas, 28th Floor, New York, NY 10036 and U S
WEST COMMUNICATIONS SERVICES, INC., a Colorado corporation, having a place of
business at 1999 Broadway, 8th Floor, Denver, CO 80202 ("U S WEST").
1. PURPOSE. Under this Agreement, MCY.com will be an on-line provider of
digital music downloads for U S WEST broadband initiatives, starting with
a co-branded site (the "Broadband Music Channel") in Online Avenue, the U
S WEST broadband portal scheduled to launch in or about April, 2000.
Concurrent with the implementation of the Broadband Music Channel, MCY.com
will introduce a modified narrowband version of the Broadband Music
Channel portal (the "Narrowband Music Channel"), that will link to U S
WEST.net pursuant to the terms of this Agreement. U S WEST will consult in
the development, by MCY.com, of the Broadband Music Channel, provide
internet connections ("links") from U S WEST.net to the modified Broadband
Music Channel and perform other marketing and promotion activities
pursuant to the terms of this Agreement.
2. RESPONSIBILITIES OF THE PARTIES.
2.1. BROADBAND MUSIC CHANNEL IMPLEMENTATION
2.1.1 MCY.com Responsibilities:
A) Technical Trial. MCY.com shall participate and cooperate with U S
WEST in the Online Avenue Technical Trial ("Technical Trial") of the
broadband portal as soon as possible. MCY.com shall share any
Technical Trial information it obtains or develops during the trial
period with U S WEST.
B) Site Development. MCY.com shall build the Broadband Music Channel, a
co-branded music download content site to be integrated within U S
WEST's secure-access broadband portal, Online Avenue, scheduled to
launch as a market trial on or about April, 2000. This site will
contain music content, products, and services normally available on
the English language www.MCY.com web site, optimized as appropriate
to DSL parameters or such other broadband internet services that U S
WEST shall make available to the public for sale during the Term of
this Agreement.
2.1.2 U S WEST Responsibilities:
A) Online Avenue Implementation. U S WEST shall designate the Broadband
Music Channel a preferred digital download music offer relative to
1) the Online Avenue Technical Trial and 2) subsequent U S
WEST-related broadband offerings; and implement the Broadband Music
Channel at the time of the Online Avenue Technical Trial launch.
B) Trade and Press Promotion. U S WEST shall use its best efforts to
promote both the Broadband Music Channel and MCY.com's role in the
Technical Trial and subsequent and/or related projects in certain
press and trade communications developed or sponsored by U S WEST
for the promotion of said projects.
C) Consumer Promotion. actively provide "best efforts" toward the on
and offline consumer marketing and promotion of the Broadband Music
Channel, including, but not limited to, banners, links and buttons
in other areas of Online Avenue and promotional direct print
directed to current and potential Online Avenue users.
<PAGE>
2.1. Narrowband Music Channel IMPLEMENTATION
2.2.1 MCY.com Responsibilites:
A. Site Development. MCY.com shall develop, host, and maintain the
Narrowband Music Channel, a co-branded, English-language version
of the Broadband Music Channel which will launch on or around the
same time as the Broadband Music Channel and which will be
accessed by U S WEST.net customers by means of multiple links from
the US WEST.net Web Site and affiliate web sites. This site will
incorporate a U S WEST.net universal navigation bar on each Site
page, and be developed, managed, hosted, and maintained solely by
MCY.com. Development and management of the content on this
co-branded site is the sole responsibility of MCY.com. U S WEST is
not a content provider and acts as only an active conduit to the
Co-branded Site(s).
B. Technology. MCY.com shall ensure that the server hosting the
Narrowband Music Channel be (1) located in a locked, secured
facility; (2) be connected to the Internet at all times at no less
than 1.5 Mbps (the Internet access lines), and (3) be monitored
for problems by staff available on call (at least by pager) 24
hours per day, 7 days per week, 365 days per year (24 x 7 x
365).The Internet access lines must be monitored at least every
two hours to actively watch for possible problems reaching major
connectivity points on the intranet/Internet backbone.
Connectivity will be monitored automatically by using the "PING"
utility. If problems persist, a technician will be paged and will
use "best-efforts" to respond within two (2) hours. Backups of the
system will be performed each business day. The live system will
be placed behind a secure router firewall, preventing outside
access to the server except for ports 80 (HTTP) and 443 (SSL) or
consistent with the secure router firewall specifications. The
Site(s) will be monitored for unauthorized modification
("hacking"). Pages containing unauthorized modifications ("hacked
pages") will be removed immediately upon discovery, and will be
restored from backup as soon as feasible. Server (co-branded web
Site(s) access and transaction) logs (both raw and analyzed, if
any) will, (1) be considered the confidential information of both
parties and shall not be released without written consent of the
disclosing party, (2) be made available at any time to U S WEST
upon request, and (3), be retained by MCY.com for a period of
eighteen (18) months following termination of this Agreement.
C. Customer Service. MCY.com shall provide help for users of the
Narrowband Music Channel at least equivalent to that provided to
users of the general MCY.com Web Site(s). Such help shall include,
but will not be limited to, frequently asked questions and an
e-mail address or email help button displayed on every web Page
for support, which will be answered with every reasonable effort
by a live (phone or email) customer service representative within
two (2) business days of receipt.
D. Technical Service. MCY.com shall provide contact information by
e-mail to U S WEST Content Development and Implementation Manager
no later than one week before any co-branded Site(s) are made
publicly available under the following terms: for technical help,
MCY.com shall provide U S WEST with the telephone number and pager
number of a technician(s) available on a 24/7 basis; for customer
service assistance, MCY.com shall make such service available
during regular business hours. Contact information for both
technical help and customer service assistance shall be updated as
needed.
E. Data/Privacy. MCY.com shall ensure that customer data collected
through the Narrowband Music Channel will not be resold or
otherwise be made available to outside entities, or in any way
used for unsolicited commercial e-mail. The Site(s) privacy policy
(privacy policy subject to approval of U S WEST's Content
Development and Implementation Manager) will be accessible from
every page of the Narrowband Music Channel Site(s). Any e-mail
sent
<PAGE>
to users will be solely under a voluntary "opt-in" or registration
procedure performed by the user.
F. Reporting. MCY.com shall provide usage reports and transaction
reports in a manner that is in keeping with standard industry
practice. Access to these reports will be provided both
electonically (in MS Excel spreadsheet format, e-mailed to the
designated U S WEST Content Development and Implemenation Manager)
and through a secure server. The relevant portion of such records
and accounts shall be available for inspection and audit by an
auditing Party or its representative (but not more than once in
any six (6) month period) during regular business hours and upon
reasonable advance written notice.
G. Approval. MCY.com shall solicit and receive approval on any
co-branded site introduction or revision from U S WEST's
designated point of contact before launching.
H. MCY.com Linkage. MCY.com shall establish and maintain one or more
Internet Hypertext links ("Site links") from the MCY.com Site
located at Uniform Resource Locator ("URL") www.MCY.com site to
the U S WEST.net home page.
I. Link Expansion. MCY.com shall work with U S WEST, on an ongoing
basis, to identify music categories within the U S WEST.net Site
from which it would be reasonable to provide links to the
Narrowband music channel co-branded Site(s).
J. Graphic Elements. MCY.com shall provide "logo buttons," banners
and hypertext mark-up language ("HTML") (link(s)) for display in
all appropriate Content Provider area(s) of the U S WEST.net Site.
K. Performance. MCY.com shall be responsible for the professional and
timely implementation of all services due from MCY.com under this
Agreement, and correct errors or deficiencies resulting from
MCY.com development after receiving written notice of said
deficiencies from U S WEST.
2.2.2 U S WEST Responsibilities:
A. Link Specifications. U S WEST shall provide MCY.com with site link
specifications, including graphic design, size and location for
placement, via written notification two (2) weeks prior to the
date a Site(s) link(s) is to be established. The parties shall
cooperate to resolve any issues concerning Site link
specifications.
B. Link Establishment. U S WEST shall establish and maintain Site(s)
links from the US WEST.net Site(s) to the corresponding level of
co-branded Sites by way of the MCY.com button(s), banners, and
HTML links.
C. Link Expansion. U S WEST shall work with MCY.com, on an ongoing
basis, to identify other content categories within the US WEST.net
Site from which it would be appropriate to provide links to the
co-branded Area(s).
D. Linkable Platform Expansion. U S WEST shall work with MCY.com, on
an ongoing basis, to identify other U S WEST platforms and
appliances from which it would be appropriate to provide Site
links to areas in the co-branded Site(s).
E. Designate and Reponsiveness. U S WEST shall provide MCY.com with a
dedicated contact during the Term of this Agreement, and provide
professional and timely responses to any reasonable requests from
MCY.com related to the implementation of this Agreement. Any
delays or errors due to lack of timely response from U S WEST will
not be the responsibility of MCY.com.
<PAGE>
F. Consumer Promotion. U S WEST shall use its best efforts to develop
and implement joint marketing and promotion of the Narrowband
Music Channel, including, but not limited to banner ads on U S
WEST.net pages, in the "feature partner box" on the Home page, and
U S WEST.net direct mail.
G. Press and Trade Promotion: U S WEST shall use it best efforts to
promote MCY.com's involvement with U S WEST.net in certain
communications developed or sponsored by U S WEST to promote and
publicize the portal and related/subsequent narrowband ISP offers.
3. LICENSES.
Trademark License. Each party grants to the other party during the Term
of this Agreement a non-exclusive, royalty-free, non-transferable,
world-wide right and license to use its trade names, trademarks,
service names and service marks ("Marks") in compliance with any
guidelines which may be provided from time to time. Such use shall be
solely in connection with the U S WEST.net Site(s), the MCY.com
Site(s), and the Broadband Music Channel, including, but not limited
to, use for promotion and demonstration purposes. The parties agree to
cooperate with the other in facilitating the monitoring and control of
the other's Marks. Each party may immediately terminate the other
party's license to use the Marks if either party reasonably believes
that such use dilutes or tarnishes the value of the Marks. Each party
agrees not to take any action inconsistent with the other party's
ownership of Marks and agrees that any benefits accruing from use of
such Marks shall automatically vest in the Mark's owner. Each party
shall place a "(R)" or a "TM" (as appropriate) with the Marks as
requested by the other party. Nothing in this Agreement shall be deemed
to grant to the other party any ownership interest in the Marks.
4. USE OF THE MARK.
4.1. Use by Licensee; Ownership of the Mark. Each party which utilizes a mark of
the other party hereunder shall be deemed a "Licensee" and the party whose
mark is being utilized shall be deemed a "Licensor." Licensee may use the
Mark so long as that use conforms to the terms of this Agreement. Licensee
acknowledges that Licensor is the owner of the Mark. Licensee shall not at
any time do or suffer to be done any act or thing which will in any way
impair the rights of Licensor in and to the Mark or the goodwill inherent
in such Mark. It is understood that Licensee shall not acquire and shall
not claim any title to the Mark adverse to Licensor by virtue of the
license granted herein, or through the Licensee's use of the Mark, it being
expressly agreed that all use of the Mark by Licensee shall inure to the
benefit of Licensor. Licensee is stopped from challenging the validity of
the Mark or from setting up any claim adverse to Licensor.
4.2. Use and Appearance of the Marks. Licensee shall comply with the conditions
set forth in the Licensor's Corporate Identity Guidelines, as may be
amended from time to time, or as directed by Licensor, with respect to the
style, color, appearance and manner of use of the Mark, allowing for
limitations imposed by the digital media. Prior to producing, distributing
or displaying any advertising or other material containing the Marks,
Licensee shall obtain prior written approval from Licensor. Licensee is
solely responsible for ensuring that any uses of the Mark in any
advertising or promotional materials or otherwise is approved by Licensor.
4.3. Quality Control and Right To Inspect. Licensee shall maintain a standard of
quality for the Services offered under the Mark commensurate with standards
previously achieved and maintained by Licensor and its subsidiaries, and
shall, at a minimum, provide the Services in compliance with all laws and
regulations. Representatives of Licensor shall have the right, at
reasonable times to visit Licensee's facilities or inspect the rendering of
the Services to ensure compliance with this paragraph.
<PAGE>
4.4. Veto Power. Each party shall have the exclusive right to veto use of their
corporate brand by the other party, upon written notice to the "Address for
Notices" contained in the signature portion of this contract.
5. GENERAL.
5.1. Each party shall be solely responsible for supplying and managing its
Site(s) at its own expense and neither party shall have any obligations
whatsoever with respect to the Site(s) of the other. Each party shall
manage, review, delete, edit, create, update and otherwise manage all
content and/or services available on or through its respective Site(s).
Neither party has any obligation to pre-screen content posted by users of
its Site(s).
5.2. Neither party shall be required to provide any personal information
regarding specific users, including, without limitation, their names and
addresses or any other information the provision of which could violate any
privacy or other rights of users or third parties. Neither party will be
required to include in any reports any information the provision of which
to the other would cause such party to violate any law, rule or regulation
or any contractual or legal obligation of such party to any other person.
5.3. Hosting Service: U S WEST agrees to enter into certain additional server
and network hosting agreement(s), at the request of MCY, to provide MCY
with server hosting and network hosting services. U S WEST hereby agrees
that any such server hosting and network hosting services shall be provided
to MCY at pricing which is equal to or on more favorable terms than that
which is being provided to any other entity. The foregoing shall include,
but not be limited to, providing MCY with U S WEST authorized services
related to hardware licenses, service and support, applications licenses,
services and support, hosting and monitoring, bandwidth, data storage and
retrieval. Furthermore, U S WEST hereby agrees to modify any such server
hosting and network hosting services agreement(s) in the event that it
enters into an agreement with any other entity after the date of any such
agreement (i) which is on terms more favorable than those being provided to
MCY at such time; or (ii) which is at a lower price than that being paid by
MCY at such time. In any such event, each server and network hosting
agreement with MCY shall be modified to the extent that it shall be recast
on terms no less favorable than the agreement with such third party. The
intent of this provision is to provide MCY with what is commonly known as
"favored nations" benefits. Any modification under any such agreement shall
in no way terminate the Agreement with MCY or U S WEST's obligations
thereunder.
5.4. Each party shall: (i) provide the other with specified graphic files and
Site(s) link addresses and give two (2) weeks advance nofication to the
other of any changes in its URL(s) and , (ii) if developed and maintained
by a party, provide a Site link(s) from such party's appropriate business
alliance index (or similar link listing index) to the other party's
Site(s).
5.5. Either party shall promptly inform the other of (i) any information related
to its Site(s) or this Agreement that could reasonably lead to a claim,
demand, or liability of or against the other party by any third party; and
(ii) any changes in its Site(s) or other intellectual property which would
substantially change the content in any Area(s) to which the other party
has linked.
5.6. Each party retains the right, in its sole discretion, to immediately cease
linking to the other party's Site(s) if in such party's opinion, the other
party's Site(s) infringes on or violates any applicable law or regulation;
any proprietary right of any third party; or is defamatory, obscene,
offensive or controversial. Notwithstanding any exercise of, or failure to
exercise, such right, each party shall have the sole and exclusive
responsibility for its respective Site(s).
5.7. MCY.com shall retain all right, title, and interest in and to the MCY.com
Site(s). U S WEST shall retain all right, title, and interest in and to the
U S WEST.net Site(s). The parties will jointly retain all right, title, and
interest in and to the Co-branded Area(s).
<PAGE>
5.8. Each party shall work with the other to develop collaborative traffic
driving and brand awareness-building marketing programs.
6. FEES
6.1. MCY.com shall remit $25,000 per month to U S WEST beginning January 3,
2000. All subsequent payments are due and payable by the 10th calendar day
of each month. Late payment charges may be assessed on past due amounts at
1 1/2% percent per month, or the highest lawful rate, whichever is less.
Customer accepts responsibility for all federal, state and local taxes paid
or payable under this Agreement, including but not limited to sales, use,
excise and gross receipt taxes.
6.2. Revenue Sharing of Transactional Revenue. In addition to the MCY Payments
specified in Section 6.1 above, when MCY.com sells digital music downloads
from its Broadband Music Channel and Narrowband Music Channel, the revenue
from each digital music download sale will be allocated as 50% of the Net
Revenue to the other Party and 50% of the Net Revenue to the selling Party.
Net Revenue shall be defined as Gross Revenues net of direct costs (e.g.
agency and third-party commissions, artist and software royalities,
mechanical royalties, bandwidth and internet access costs, credit card
processing fees, taxes, duties and credits). All advertising or other
revenue (other than from the sale of digital downloads) which are produced
or realized from exploitation of the Broadband Music Channel or any
co-branded site shall be the sole property of MCY.com.
6.3. Payments pursuant to sections 6.1 and 6.2 shall be made by check and
remitted to the following address: U S WEST Communications Services, Inc.
Department 232, Denver, CO 80271. Payments will be accompanied by reports
containing sufficient information for the calculation of such amounts.
These reports will be provided both electronically (in MS Excel spreadsheet
format, e-mailed to the designated U S WEST representative) and printed.
6.4. Taxes based on either party's net income will remain that party's
responsibility. MCY.com agrees to pay directly taxes it incurs under the
law.
7. TERM/TERMINATION
7.1. The initial term of this Agreement shall begin on the Effective Date and
shall continue for one (1) year ("Initial Term"). MCY.com may, at its
option, extend the term of this Agreement an additional one (1) year upon
providing U S WEST with written notice thirty (30) days prior to the
conclusion of the Initial Term. Either party may terminate this Agreement
at any time upon thirty (30) days written notice. Except as specified in
Section 7.2 below, in the event MCY.com terminates this Agreement without
cause during the Initial Term, MCY.com shall remit to U S WEST a
termination fee equal to $250,000 or the total amount due remaining in the
Agreement, whichever is less. A termination fee will not apply if MCY.com
terminates this Agreement at the conclusion of the Initial Term, or
thereafter, pursuant to this section.
7.2. Notwithstanding anything to the contrary herein, upon written notice,
either party may immediately terminate this Agreement, in whole or in part,
without liability to the other party, if such party cancels their Site(s)
or any component thereof necessary to offer the Site link(s) as
contemplated hereby.
7.3. Upon the termination or expiration of this Agreement, (i) each party shall
promptly return all confidential and proprietary information and other
information, documents, manuals, equipment and other materials belonging to
the other party; (ii) each party shall immediately cease using all
Materials of the other party in any form; (iii) each party shall terminate
the Site link(s) established pursuant to this Agreement; and (iv) all
licenses granted herein shall terminate. All Co-branded web pages covered
under this agreement shall be removed from the server no later than one (1)
business day following termination of the agreement.
<PAGE>
8. CONFIDENTIALITY.
Each party acknowledges and agrees that any and all information relating to
the other party's business and not publicly known including, without
limitation, the contents of this Agreement, technical processes and
formulas, source codes, names, addresses and information about users and
advertisers, product designs, sales, costs and other unpublished financial
information, product plans, and marketing data is confidential and
proprietary information. Each party agrees that it shall take reasonable
steps, at least substantially equivalent to the steps as it takes to
protect its own proprietary information, during the Term of this Agreement,
and for a period of two (2) years following termination of this Agreement,
to prevent the duplication or disclosure of any such confidential and
proprietary information. To the extent that such information is publicly
known, already known by, or in the possession of the non-disclosing party;
is independently developed by the non-disclosing party; is thereafter
rightly obtained by the non-disclosing party from a source other than the
disclosing party; or is required to be disclosed by law, regulation, or
court order; then there shall be no restriction of the use of such
information.
9. REPRESENTATIONS WARRANTIES AND INDEMNIFICATION.
9.1. Representations and warranties. U S WEST represents and warrants to MCY.com
that (i) its Site(s) is/are or will be functional Internet Site(s)
accessible to subscribers of U S WEST.net and to potential subscribers of
Online Avenue; (ii) the Site(s) do not and will not contain any content,
materials, advertising or services that infringe on or violate any
applicable law or regulation, any proprietary right of any third party
(including copyright, trademark, patent, and trade secret), or which is
defamatory, obscene or offensive; (iii) it has the right and authority to
enter into and perform all obligations under this Agreement; and (iv) it
shall comply with all applicable laws, statutes, ordinances, rules and
regulations with respect to its Site(s). In the event of an error, delay,
defect, breakdown or failure of its Site(s), U S WEST's obligation shall be
limited to the use of reasonable diligence under the circumstances to
restore its Site(s) to operation.
9.2. Representations and warranties. MCY.com represents and warrants to U S WEST
that (i) all Co-branded Area(s) will be developed in a workmanlike manner;
(ii) all Co-branded Area(s) will conform to the specifications and
functions set forth in this Agreement; (iii) its Site(s) is/are or will be
functional Internet Site(s) accessible to subscribers and users of the
Internet; (iv) the Co-branded Area(s) do not and will not contain any
content, materials, advertising or services that infringe on or violate any
applicable law or regulation, any proprietary right of any third party
(including copyright, trademark, patent, and trade secret); (v) the Site(s)
do not and will not contain any content, materials, advertising or services
that give rise to any private cause of action, or which is defamatory,
obscene or offensive; (vi) it has the right and authority to enter into and
perform all obligations under this Agreement; and (vii) it shall comply
with all applicable laws, statutes, ordinances, rules and regulations with
respect to its Site(s). In the event of an error, delay, defect, breakdown
or failure of its Site(s), MCY.com's obligation shall be limited to the use
of reasonable diligence under the circumstances to restore its Site(s) to
operation. Notwithstanding any respresentation or warranty to the contrary
in this Paragraph, U S WEST understands that MCY.com distributes, streams
and offers for sale or digital download all forms of musical expression and
entertainment content, some of which may be considered controversial to the
general public or subscribers of U S WEST services. Accordingly, no term,
representation or warranty in this Paragraph shall be deemed to give U S
WEST a right to cancel, or otherwise place MCY.com in breach or default of
this Agreement as a result of MCY.com making such content available for
distibution, including, but not limited to, digital download, streaming or
sale on the MCY.com site or any co-branded site.
9.3. Indemnity. Each party will defend, indemnify, save and hold harmless the
other party, the other party's Affiliates, and their officers, directors,
agents, and employees from any and all third-party claims, demands,
liabilities, costs or expenses, including reasonable attorney fees
("Liabilities"), resulting from the indemnifying party's breach of any
material duty, representation, or warranty
<PAGE>
contained in this Agreement, except there shall be no obligation to
indemnify, defend, save and hold harmless where Liabilities result from the
gross negligence or knowing and willful misconduct of the other party. Each
party agrees to (i) promptly notify the other party in writing of any
indemnifiable claim and (ii) give the other party the opportunity to defend
or negotiate a settlement of any such claim at such other party's expense
and cooperate fully with the other party, at that other party's expense, in
defending or settling such claim. Each party reserves the right, at its own
expense, to participate in the defense of any matter otherwise subject to
indemnification by the other party.
9.4. The parties, their Affiliates and their owners, directors, officers,
employees, or agents shall indemnify and hold harmless each other (the
"Indemnified Party"), against all liability (including, but not limited to,
court costs and reasonable attorneys' fees) arising from any claims that
either party's content infringes any trade secrets, trademark, copyright or
United States patent rights of any third party. The Indemnified Party
agrees to promptly notify the other party of any such claims, permit the
other party to control any resulting litigation or settlement, and
reasonably cooperate with the defense of any such claims at the other
party's expense.
10. LIMITATION OF LIABILITY AND DISCLAIMER.
10.1. Liability. EXCEPT FOR THE INDEMNIFICATION OBLIGATIONS SPECIFICALLY SET
FORTH IN THIS AGREEMENT or DAMAGES FOR PERSONAL INJURY OR PROPERTY DAMAGE,
OR FOR GROSS NEGLIGENCE OR WILFUL MISCONDUCT, NEITHER PARTY SHALL BE LIABLE
TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR
EXEMPLARY DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES) ARISING FROM THIS AGREEMENT, SUCH AS, BUT NOT LIMITED TO,
LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS, except that either
party shall be entitled to receive consequential damages for a breach OF
ANY LICENSES GRANTED UNDER this Agreement.
10.2. No Additional Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY
Representations OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING ANY MATTER
SUBJECT TO THIS AGREEMENT, INCLUDING ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR IMPLIED WARRANTIES
ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.
11. GENERAL PROVISIONS.
11.1. Amendment. No change, amendment or modification of any provision of this
Agreement shall be valid unless set forth in a written instrument signed by
both parties. This Agreement sets forth the entire Agreement and supersedes
any and all prior Agreements, written or oral, of the parties with respect
to the transactions set forth herein.
11.2. Assignment. Neither this Agreement, nor any rights hereunder in whole or
in part, shall be assignable or otherwise transferable by either party;
provided that either party may assign or transfer this Agreement and rights
and obligations hereunder to any current or future Affiliate or successor
if such assignee agrees in writing to the terms and conditions herein.
11.3. Compliance with Laws. This Agreement and the parties' actions under this
Agreement shall comply with all applicable federal, state, and local laws,
rules, regulations, court orders, and governmental or regulatory agency
orders.
11.4. Construction. In the event that any provision of this Agreement conflicts
with the law under which this Agreement is to be construed, or if any such
provision is held invalid by a court with
<PAGE>
jurisdiction over the parties to this Agreement, such provision shall be
deemed to be restated to reflect as nearly as possible the original
intentions of the parties in accordance with applicable law, and the
remainder of this Agreement shall remain in full force and effect. There
shall be no presumption for or against either party as a result of such
party being the principle drafter of this Agreement.
11.5. Dispute Resolution. Any claim, controversy or dispute between the parties,
the parties' Affiliates, their agents, employees, officers, or directors
("Dispute") shall be resolved by arbitration conducted by a single
arbitrator engaged in the practice of law and familiar with the subject
matter of the Dispute, under the then current rules of the American
Arbitration Association ("AAA"). The arbitrator shall have authority to
award compensatory damages only. The arbitrator's award shall be final and
binding and may be entered in any court having jurisdiction thereof. Each
party shall bear its own costs and attorneys' fees and shall share equally
in the fees and expenses of the arbitrator. The arbitration shall occur in
the City and State of the party against whom the arbitration is brought,
and the laws of such state shall govern the construction and interpretation
of the Agreement. It is expressly agreed that the arbitrator shall be
authorized to issue injunctive relief pending an award in arbitration and
either party may seek relief in an appropriate court of law to enforce such
determination by an arbitrator.
11.6. Independent Contractors. The parties to this Agreement are independent
contractors. Neither party is an agent, representative, or partner of the
other party. Neither party shall have any right, power or authority to
enter into any agreement for, or on behalf of, or incur any obligation or
liability of, or to otherwise bind, the other party. This Agreement shall
not be interpreted or construed to create an association, agency, joint
venture or partnership between the parties or to impose any liability
attributable to such a relationship upon either party.
11.7. No Waiver. The failure of either party to insist upon or enforce strict
performance by the other party of any provision of this Agreement, or to
exercise any right under this Agreement, shall not be construed as a waiver
or relinquishment of such party's right to enforce any such provision or
right in any other instance.
11.8. Notice. Any notice, approval, request, authorization, direction or other
communication under this Agreement shall be given in writing and shall be
deemed to have been delivered and given for all purposes (i) on the
delivery date if delivered personally to the party to whom the same is
directed; (ii) one (1) business day after deposit with a commercial
overnight carrier with written verification of receipt; or (iii) five (5)
business days after the mailing date whether or not actually received, if
sent by U.S. mail, return receipt requested, postage and charges prepaid,
or any other means of rapid mail delivery for which a receipt is available
to the Contact at the address of the party to whom the same is directed.
11.9. Facsimile Signature Authorized. If a Party returns this Agreement by
facsimile machine, the signing Party intends the copy of this authorized
signature printed by the receiving facsimile machine to be its original
signature.
<PAGE>
12. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
<TABLE>
<CAPTION>
MCY MUSIC WORLD, INC. U S WEST COMMUNICATIONS SERVICES, INC.
<S> <C>
/s/ Bernhard Fritsch /s/ Audrey Thompson
- - ------------------------------------------- -----------------------------------------------------
Authorized Signature Authorized Signature
Bernhard Fritsch Audrey Thompson
- - ------------------------------------------- -----------------------------------------------------
Name Typed or Printed Name Typed or Printed
Chief Executive Officer Director - Internet Services
- - ------------------------------------------- -----------------------------------------------------
Title: Title
12/31/99 12/30/99
- - ------------------------------------------- -----------------------------------------------------
Date: December 31, 1999 Date
Address for Notices: Address for Notices:
1133 Avenue of the Americas, 28th Floor 1999 Broadway, Suite 700
New York, NY 10036 Denver, CO 80202
Attn: Ray Short Attn: Audrey Thompson
With a Copy to: With a Copy to:
Mitchell Lampert U S WEST Law Department
MCY Music World, Inc. 1801 California Street, Suite 5100
1133 Avenue of the Americas, 28th Floor Denver, CO 80202
New York, New York 10036
</TABLE>
CONFIDENTIALITY AND NON-CIRCUMVENTION AGREEMENT
This AGREEMENT effective and entered into as of this November 28, 1999,
BETWEEN: GREG ORLANDELLA AND CORPORATE CAPITAL RESEARCH, INC.
24422 Santa Clara Dana Point, CA 92629
AND: MCY.COM, INC. AND BERNHARD FRITSCH
1133 Avenue of the Americas, 28th Floor NY,NY 10036
In order to pursue mutual business purposes, the parties recognize that there
may be a need to disclose to each other certain Confidential Information and to
provide for mutual agreement to protect such Confidential Information which is
to be used only for the stated purpose. In consideration of the mutual promises
contained herein, the parties agree as follows:
1. This Agreement shall apply to all confidential and proprietary
information disclosed by the parties to each other, including, but not
limited to information listed in attached Schedule A (hereafter
referred to as "Confidential Information").
2. The parties acknowledge that disclosure of the existence of discussions
between them regarding the business purpose specified in Schedule A
could result in irreparable damage to the business and goodwill of the
other party, whether such disclosure should occur in the course of such
discussions or should follow their discontinuation of discussions. Each
party agrees to hold such discussions in strictest confidence and not
disclose their existence, nature or substance to any third party for
any reason without the prior written consent of the other.
3. Each party agrees to hold the Confidential Information of the other in
strict confidence and not to disclose such Confidential Information to
any third parties. Any party may disclose the other's Confidential
Information to their respective responsible employees, but only to the
extent necessary to carry out the purposes for which the Confidential
Information was disclosed, and the parties agree to instruct all such
employees not to disclose such Confidential Information to third
parties, including consultants, without the prior written permission of
the party disclosing such Confidential information.
4. The obligations under paragraph 3 shall not apply to Confidential
Information which is already known to the receiving party at the time
that it is disclosed, or which, before being divulged to the receiving
party, (a) has become publicly known through no wrongful act of the
receiving party; (b) has been rightfully received from a third party
without restriction on disclosure and without breach of this Agreement;
(c) has been independently developed by the receiving party; (d) has
been approved for release by written authorization of the disclosing
party; (e) has been furnished by the disclosing party to a third party
without a similar restriction on disclosure; or (f) has been disclosed
pursuant to a requirement of a governmental agency.
5. The parties hereby acknowledge that all Confidential Information shall
be owned solely by the disclosing party and that the unauthorized
disclosure or use of Confidential Information could cause irreparable
harm and significant injury which may be difficult to ascertain.
Accordingly, the parties agree that the disclosing party shall have the
right to seek an immediate injunction enjoining any breach of this
Agreement.
6. The parties hereby enter into a non-circumvention relationship whereby
each will respect and will not circumvent the other with respect to any
third party relationships introduced to the other, which relationships
may include, but not be limited to funding sources.
SIGNED FOR AND ON BEHALF OF SIGNED FOR AND ON BEHALF OF
Greg Orlandella, Corporate Capital Research Bernhard Fritsch, MCY.Com, Inc.
By: /s/ Greg Orlandella By: /s/ Bernhard Fritsch
Date: Date:
--------------------- ---------------------
<PAGE>
SCHEDULE A
All information provided by the parties one to the other or by their
representatives, either orally, in writing or in electronic form marked
"confidential" and relating to all matters, including information relating to
internet, internet eCommerce and communications and information systems.
EMPLOYMENT AGREEMENT
This agreement ("Agreement") is made as of July 11, 1999, and is by and
between MCY MUSIC WORLD, INC., a Delaware company (the "Company") and Bernhard
Fritsch (the "Executive").
In consideration of the mutual covenants herein contained, the parties
agree as follows:
1. Position and Responsibilities.
------------------------------
1.1 The Executive shall serve as Chief Executive Officer and
shall perform the duties commensurate with such capacity for the Company and for
any subsidiary or affiliate of the Company, if applicable. The Executive shall
devote such amount of working time and attention to the business and affairs of
the Company as the Executive deems necessary. render such services to the best
of his ability and use his best efforts to promote the interests of the Company.
The Executive shall not be assigned any duties inconsistent with his position as
Chief Executive Officer.
2. Employment Term.
----------------
2.1 The initial term of employment shall be for a period of
five years, commencing with the date hereof, unless sooner terminated as
provided in this Agreement. This Agreement shall be renewed annually for a term
of one year unless the Company or the Executive gives notice to the other of
termination at least six (6) months prior to the expiration of the initial term,
or any successive term, as the case may be. Each of the Executive and the
Company at his or its sole discretion and without any reason, may elect not to
renew this Agreement at the end of the initial term or any successive term.
2.2 Notwithstanding the provisions of paragraph 2.1 above, the
Company shall have the right to terminate the Executive's employment for Cause
(as defined in paragraph 2.3 below); provided, however, that the Executive shall
not be deemed to have been terminated for Cause unless and until the Board of
Directors at a meeting duly called and held for that purpose shall have
determined that the Executive committed an act falling within the definition of
Cause and specifying the basis for such determination. If the Executive's
employment shall be terminated by the Company for Cause, then the Company shall
pay to the Executive any unpaid salary through the effective date of
termination.
2.3 For purposes of this Agreement the term, "Cause" shall
mean the Executive's: (a) engagement in gross misconduct materially injurious to
the Company: (b) knowing and willful neglect or refusal to attend to the
material duties assigned to him by the Board of Directors of the Company, which
is not cured within 30 days after written notice; (c) intentional
misappropriation or property of the Company to the Executives own use; (d)
commission of an act of fraud or embezzlement; or (e) conviction for a crime
(excluding misdemeanors and minor traffic offenses).
1
<PAGE>
2.4 Any purported termination of the Executive's employment by
the Company hereunder shall be communicated by a Notice of Termination to the
Executive in accordance with paragraph 13. For purposes of this Agreement, a
"Notice of Termination" shall mean a written notice which shall indicate those
specific termination provisions in this Agreement relied upon and which sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provisions so
indicated.
2.5 For purposes of this Agreement, the date of termination
shall be: (a) if this Agreement is terminated by the Company for Incapacity (as
defined in paragraph 4.1 below), the date on which a Notice of Termination is
given, (b) if the Executive's employment is terminated by the Company for any
other reason (other than death), the date on which a Notice of Termination is
given or (c) if the Executive terminates his employment for any reason, the date
on, which he gives the Company notice of such termination.
3. Compensation.
-------------
3.1 The Company shall pay to the Executive for the services to
be rendered by the Executive hereunder, a salary for the initial term of
employment under this Agreement at the rate of $300,000 per annum. The salary
shall be payable in accordance with the Company's regular policies, subject to
applicable withholding and other taxes. Such salary will be increased each
January 1 during the term of this Agreement by an amount equal to 10% of the
Executive's salary for the prior fiscal year.
3.2 The Executive shall receive a cash bonus with respect to
each fiscal year of the Company during which he is employed hereunder,
commencing with the year ending December 31, 1999, in an amount to be to be
determined at the discretion of the Board of Directors of the Company, but in no
event less than the sum of $100,000.
3.3 The Executive shall be entitled to participate in, and
receive benefits from any vacation, holiday, insurance, medical, disability or
other employee benefit plan of the Company which may be in effect at any time
during the course of his employment by the Company and which shall be generally
available to senior executives of the Company occupying positions of comparable
status or responsibility. In addition, the Executive shall be entitled to four
weeks of paid vacation. The Company shall also obtain comprehensive health and
travel insurance for the Executive and his immediate family.
3.4 The Company agrees promptly to reimburse the Executive for
all reasonable and necessary business expenses, including without limitation,
telephone and facsimile charges incurred by him on behalf of the Company in the
course of his duties hereunder, upon the presentation by the Executive of
appropriate evidence thereof. In addition, the Company agrees to promptly
reimburse or pay all housing costs or expenses of the Executive in the event
that the Executive deems it necessary to obtain such housing for Company
purposes, provided that such amounts shall not exceed $6,000 per month, and all
automobile expenses, provided such amounts
2
<PAGE>
shall not exceed $1,500 per month, upon presentation by the Executive of
appropriate evidence thereof.
4. Death; Incapacity.
------------------
4.1 If, during the term of employment hereunder, because of
illness or other incapacity, the Executive shall fail for a period of six (6)
consecutive months ("Incapacity"), to render the services contemplated
hereunder, then the Company, at its option, may terminate the employment
hereunder by notice to the Executive, effective on the giving of such notice;
provided however, that the Company shall (i) pay to the Executive any unpaid
salary through the effective date of termination specified in such notice; (ii)
pay to the Executive his accrued but unpaid incentive compensation, if any, for
any bonus period ending on or before the date of termination of the Executive's
employment with the Company; (iii) continue to pay the Executive for a period of
twenty-four (24) months following the effective date of termination, an amount
equal to the excess, if any, of (A) the salary he was receiving at the time of
his Incapacity, over (B) any benefit the Executive is entitled to receive during
such period under any disability insurance policies provided to the Executive by
the Company or maintained by the Executive, such amount to be paid in the manner
and at such time as the salary otherwise would have been payable to the
Executive; and (iv) pay to the Executive (within 45 days after the end of the
fiscal quarter in which such termination occurs) a pro-rata portion (based upon
the period ending on the date of termination of the Executive's employment
hereunder) of the incentive compensation, if any, for the bonus period in which
such termination occurs. The Company shall have no further liability hereunder
(other than for reimbursement for reasonable business expenses incurred prior to
the date of the Executive's Incapacity and other reimbursable expenses due under
Section 3.4 through the date of Executive's Incapacity, and repayment of
compensation for unused vacation days that have accumulated during the calendar
years in which such termination occurs).
4.2 In the event of the death of the Executive during the
Employment Term, the Employment Term hereunder shall terminate on the date of
death of the Executive; provided, however, that the Company shall (i) pay to the
estate of the deceased Executive any unpaid Salary through the Executive's date
of death; (ii) pay to the estate of the deceased Executive his accrued but
unpaid incentive compensation if any, for any bonus period ending on or before
the Executive's date of death; (iii) pay to the estate of the deceased Executive
(based upon the period ending on the date of death) a pro rata portion of any
incentive compensation, if any for the bonus period in which termination occurs;
and (iv) continue to pay the Executive for a period of twenty-four (24) months
following the Executive's date of death, an amount equal to the excess, if any,
of (A) the salary he was receiving at the time of his death, over (B) any
benefit the Executive is entitled to receive during such period under any life
insurance policies provided to the Executive by the Company, such amount to be
paid in the manner and at such time as the salary otherwise would have been
payable to the Executive. The Company shall have no further liability hereunder
(other than for (x) reimbursement for reasonable business expenses incurred
prior to the date of the Executive's death and other reimbursable expenses due
under Section 3.4 through the date of Executive's death, and
3
<PAGE>
(y) payment of compensation for unused vacation days that have accumulated
during the calendar year in which such termination occurs).
4
<PAGE>
5. Severance compensation Upon Termination of Employment.
------------------------------------------------------
5.1 (a) If the Executive's employment with the Company shall
be terminated (x) by the Company as a result of a Major Event (as definite in
paragraph 5.3 below), or (y) by the Executive for Good Reason in connection with
a Major Event, then the Company shall:
(i) pay to Executive as severance pay, payable at the
time of termination, an amount equal to the sum of (z) any unpaid salary through
the effective date of termination, and (w) an amount equal to two and
ninety-nine one-hundredths (2.99) multiplied by the Executive's "base amount"
(as determined in accordance with Section 28OG of the Internal Revenue Code of
1986 (the "Code")); and
(ii) arrange to provide Executive, for a twelve-month
period (or such shorter period as Executive may elect), with disability,
accident and health insurance substantially similar to those insurance benefits
which Executive is receiving immediately prior to the earlier of a Major Event,
if any, or the date of termination to the extent obtainable upon reasonable
terms, provided, however, if it is not so obtainable, the Company shall pay to
the Executive in cash, the annual amount paid by the Company for such benefits
during the previous year of the Executive's employment.
(iii) Notwithstanding the foregoing, the payments made
to the Executive pursuant to this Section 5.1(a) shall be reduced to the extent
necessary to prevent such payments from constituting an "excess parachute
payment" within the meaning of Section 2800 of the Code, and in the event that
such payments are reduced, the Executive shall be permitted to direct the manner
in which the payments shall be reduced.
(b) If the Executive's employment shall be terminated (x)
by the Company other than pursuant to paragraph 2.2. paragraph 4 or paragraph
5.1(a), or (y) by the Executive for Good Reason other than in connection with a
Major Event, then the Company shall:
(i) Pay to the Executive as severance pay, payable at
the time of termination, an amount equal, to any unpaid salary through the end
of the term of this Agreement, plus an amount equal to one year of Executive's
base salary as shall be in effect at the time of termination.
5.2 For purposes of this Agreement the term "Good Reason,"
shall mean any of the following:
(i) a Major Event;
(ii) the assignment to the Executive by the Company of
duties in connection with, or a substantial alteration in the nature or status
of, Executive's responsibility on
5
<PAGE>
the later of the date of this Agreement or on the last date on which such
responsibilities are increased;
(iii) a reduction by the Company in the Executive's base
salary as in effect on the later of the date of this Agreement or the last date
on which such base salary is increased:
(iv) any breach by the Company of any material provision
of this Agreement; provided, however, that the Executive shall give written
notice to the Company which shall indicate those specified provisions in this
Agreement relied upon and which shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for such termination; or
(v) any failure by the Company to obtain the assumption
of this Agreement by any successors or assigns of the Company.
5.3 For purposes of this Agreement, a "Major Event" shall be
deemed to have occurred if (i) there shall be consummated any consolidation or
merger of the Company in which the Company is not the continuing or surviving
Company or pursuant to which shares of the Company's common stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's common stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving Company immediately after the merger; (ii) there shall be consummated
any sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company; (iii) proceedings or actions for the liquidation or dissolution of the
Company are initiated by the Company; or (iv) any "Person" (as defined in
Sections 13(d) and 14(d) of the Exchange Act) (other than the Executive or
persons who beneficially own more than 25% of the capital stock of the Company
on a fully diluted and as converted basis outstanding as of the date hereof)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended ("Exchange Act")), directly or indirectly, of
30% or more of the Company's outstanding capital stock on a fully diluted and as
converted basis at such time; provided, however, that a "Major Event" shall not
be deemed to have occurred solely by reason of the consummation of a firmly
underwritten Public offering by the Company of common stock registered under the
Securities Act of 1933, as amended. As used in this paragraph 5.3, for purposes
of defining a "Major Event", "Company" shall also mean the parent corporation of
the Company (ie. Health Builders International, Inc. or any such reverse merger
entity).
5.4 (a) The Executive shall not be required to mitigate
damages or the amount of any payment provided for under this Agreement by
seeking other employment or otherwise, nor, except to the extent provided in
paragraph 5.1 above, shall the amount of any payment provided for under this
Agreement be reduced by any compensation earned by the Executive as a result of
employment by another employer or by retirement benefits, after the date of
termination, or otherwise.
6
<PAGE>
(b) The provisions of this Agreement, and any payment
provided for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish the Executive's existing rights, or rights which would accrue
solely as a result of the passage of time, under any benefit plan of the
Company, or other contract, plan or arrangement, or pursuant to applicable law.
6. Restrictive Covenant.
---------------------
6.1 Non-Competition. From and after the date hereof, to and
including the first (1st) anniversary of the date of termination of this
Agreement, the Executive shall not directly or indirectly become employed by any
person, company, partnership or other entity which is primarily engaged in the
business of distribution of music or music CD's via the internet or the World
Wide Web, in each case in the Territory. The term "Territory" shall mean the
United States of America. The Executive shall be deemed directly or indirectly
to engage in a business if he participates therein as a director, officer,
stockholder, employee, agent, consultant, manager, salesman, partner or
individual proprietor, or as an investor who has made advances or loans,
contributions to capital or expenditures for the purchase of stock, or in any
capacity or manner whatsoever; provided, however, that the foregoing shall not
be deemed to prevent the Executive from investing in securities of a company, so
long as such investment does not exceed 5% of the voting stock of any class of
such company's securities.
6.2 Nondisclosure. The Executive shall not at any time
divulge, communicate, use to the detriment of the Company or for the benefit of
any other person or persons, or misuse in any way, any Confidential Information
(as hereinafter defined) pertaining to the business of the Company. Any
Confidential Information or data now or hereafter acquired by the Executive with
respect to the business of the Company (which shall include, but not be limited
to, information concerning the Company's financial condition, prospects,
technology, customers, suppliers, sources of leads and methods of doing
business) shall be deemed a valuable, special and unique asset of the Company
that is received by the Executive in confidence and as a fiduciary, and
Executive shall remain a fiduciary to the Company with respect to all of such
information. For purposes of this Agreement, "Confidential Information" means
information disclosed to the Executive or known by the Executive as a
consequence of or through his employment by the Company (including information
conceived, originated, discovered or developed by the Executive) prior to or
after the date hereof, and not generally known, about the Company or its
business. Notwithstanding the foregoing, nothing herein shall be deemed to
restrict the Executive from disclosing Confidential information to the extent
required by law.
6.3 Nonsolicitation of Employees and Clients. At all times
while the Executive is employed by the Company and for a one (1) year period
after the termination of the Executive's employment with the Company for any
reason, the Executive shall not, directly or indirectly, for himself or for any
other person, firm, corporation, partnership, association or other entity (a)
employ or attempt to employ or enter into any contractual arrangement with any
employee or former employee of the Company, unless such employee or former
employee has not been employed by the Company for a period in excess of six (6)
months; and/or (b) call on or solicit any of the actual or targeted prospective
clients of the Company on behalf of any person or entity in connection with
7
<PAGE>
any business competitive with the business of the Company; nor make known the
names and addresses of such client or any information relating in any manner to
the Company's trade or business relationships with such customers, other than in
connection with the performance of Executive's duties under this Agreement.
8
<PAGE>
7. Options. Executive shall be granted 400,000 options to purchase
common stock of the Company on or before the date hereof, with (i) 50,000 of
such options being exercisable immediately upon execution of this Agreement at a
price of $1.50 per share; (ii) 350,000 options being exercisable over a period
of three years at $1.50 per share as follows: 35,000 on August 26, 1999; 35,000
on December 26, 1999; 49,000 on April 26, 2000; 56,000 on October 26, 2000;
56,000 on April 26, 2001; 56,000 on October 26, 2001; 63,000 on April 26, 2002,
plus such additional options as shall be granted to Executive from time to time
at the discretion of the Board of Directors of the Company. The Company shall
register such shares for sale under the Securities Act of 1933 at any time upon
the request of the Executive. In addition, in the event that the Company
completes a merger or reorganization with a public company (such as with Health
Builders International, Inc.) all of the foregoing options shall relate to and
be exchange for a proportionate number of options to acquire shares of Health
Builders International, Inc. or such other public company, it being the
intention that the Options will be exercisable into publically traded
securities.
8. Arbitration. Any dispute, controversy or claim arising under or in
connection with this Agreement, or the breach hereof, shall be settled
exclusively by arbitration in accordance with the rules then in effect of the
American Arbitration Association under its Employment Mediation Rules. Judgment
upon the award rendered by the Arbitrator(s) may be entered in any court having
jurisdiction thereof. Any arbitration held pursuant to this Section 8 shall take
place in New York. Should either party hereto, or any heirs, personal
representatives, successors or assigns of either patty hereto, resort to
litigation or arbitration to enforce this Agreement, the party or parties
prevailing in such litigation shall be entitled, in addition to such other
relief as may be granted, to recover its or their reasonable attorney's fees and
costs in such litigation or arbitration from the party or parties against whom
enforcement was sought.
9. Successor to the Company. (a) The Company will require any
successors or assigns (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
asset of the Company, by agreement expressly, absolutely and unconditionally to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. As used in this Agreement "Company" shall mean the
Company as herein defined and any successors or assigns to its business and/or
assets as aforesaid, which executes and delivers the agreement provided for in
this paragraph 9 or which otherwise becomes bound by all the term and provisions
of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, electors,
administrators, heirs, distributees, devises and legates. If the Executive
should die while any amounts are still payable to him hereunder, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's estate. This Agreement shall not
otherwise be assignable by the Executive.
9
<PAGE>
10. No Third Party Beneficiaries. This Assignment does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement except as provided in paragraph 9 hereof.
11. Headings. The headings of the paragraphs hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
12. Interpretation. In case any one or more of the provisions contained
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidly, illegality or unenforceability
shall not affect any other provisions of tho Agreement, and this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein. If, moreover, any one or more of the provisions contained
in the Agreement shall for any reason be held to be excessively broad as to
duration, geographical scope, activity or subject, it shall be construed by
limiting and reducing it, so as to be enforceable to the extent compatible with
the applicable law as it shall then appear.
13. Notices. All notices under this Agreement shall be in writing and
shall be deemed to have been given at the time when delivered personally or by
facsimile transmission, sent by recognized overnight courier service, or mailed
by registered or certified mail, addressed to the address set forth at the end
of this Agreement, or to such changed address as such party may have fixed by
notice; provided, however, that any notice of change of address shall be
effective only upon receipt.
14. Waivers. If either party should waive any breach of any provision
of this Agreement, he or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement. No waiver shall be effective unless it is in writing and signed by an
authorized representative of the waiving party.
15. Complete Agreement; Amendments. The foregoing is the entire
agreement of the parties with respect to the subject matter hereof and
supersedes in its entirety any letter agreement or other writings by and among
the Executive and the Company. This Agreement may not be amended, supplemented,
canceled or discharged except by written instrument executed by both parties
hereto.
16. Governing Law. This Agreement is to be governed by and construed in
accordance with the laws of New York, without giving effect to principles of
conflicts of law.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written and the parties acknowledge that
this Agreement memorializes their agreement since the effective date set forth
below.
MCY MUSIC WORLD, INC. EXECUTIVE
By: /s/ Bernhard Fritsch By: /s/ Bernhard Fritsch
Name: Bernhard Fritsch Name: Bernhard Fritsch
Title: Chairman, Chief Exective Officer, Title: Chief Executive Officer
and President
Address for Notice: Address for Notices:
MCY Music World Inc. MCY Music World Inc.
307 7th Avenue, 23rd Floor 307 7th Avenue, 23rd Floor
New York, NY 10001 New York, NY 10001
Exhibit 10.5
AMENDMENT TO EMPLOYMENT AGREEMENT
This amending agreement (the "Amending Agreement") is made as of the 28th
day of July, 1999, and is by and between MCY MUSIC WORLD, INC., a Delaware
company (the "Company") and Bernhard Fritsch (the "Executive").
WHEREAS: A. The Company and the Executive have executed and delivered an
Employment Agreement dated July 11, 1999 (the Employment Agreement is herein
referred to as the "Agreement"); and
WHEREAS: B. The Company and the Employee wish to amend the Agreement as set
forth herein.
NOW THEREFORE, the Company and the Employee hereby agree as follows:
1. Section 3.5 is hereby added to the Agreement and made a part thereof as
if originally set forth therein. Section 3.5 is as follows:
3.5 Notwithstanding anything herein to the contrary, in addition to
the compensation provided for elsewhere in this Agreement, the
Executive shall receive additional annual compensation in an amount
equal to 1/4% of the annual gross revenues reported by the Company in
each fiscal year commencing with the year ending December 31, 1999 and
terminating twenty years thereafter. This compensation shall be paid
to Executive on an annual basis within 90 days after the end of each
fiscal year. The obligation of the Company to pay the compensation set
forth in this Section 3.5 shall not require that Executive be employed
after the termination of this Agreement; such compensation is being
paid over time as provided herein as an inducement for Executive to
enter into this Agreement.
2. Section 5.5 is hereby added to the Agreement and made a part thereof as
if originally set forth therein. Section 5.5 is as follows:
5.5 Notwithstanding anything herein to the contrary, in the event that
Executive is terminated for any reason whatsoever, including a
voluntary resignation as an Employee of the Company, he shall under
any and all circumstances be entitle to receive, in addition to other
severance compensation provided for herein, payment of the
compensation set forth in Section 3.5 hereof.
3. All other provisions of the Agreement shall remain in force and effect.
1
<PAGE>
IN WITNESS WHEREOF, the Company and the Executive have caused this Amending
Agreement to be duly executed as of the date first written above.
MCY MUSIC WORLD, INC. EXECUTIVE
By: /s/ Bernhard Fritsch By: /s/ Bernhard Fritsch
Name: Bernhard Fritsch Name: Bernhard Fritsch
Title: President Title:
Address for Notice: Address for Notices:
MCY Music World Inc.
307 7th Avenue, 23rd Floor
New York, NY 10001
2
EMPLOYMENT AGREEMENT
This agreement ("Agreement") is made as of July 11, 1999, and is by and
between MCY MUSIC WORLD, INC., a Delaware company (the "Company") and Mitchell
Lampert (the "Executive").
In consideration of the mutual covenants herein contained, the parties
agree as follows:
1. Position and Responsibilities.
------------------------------
1.1 The Executive shall serve as General Counsel and shall
perform the duties commensurate with such capacity for the Company and for any
subsidiary or affiliate of the Company, if applicable. The Executive shall
devote such amount of working time and attention to the business and affairs of
the Company as the Executive deems necessary and shall render such services to
the best of his ability and use his best efforts to promote the interests of the
Company. The Executive shall not be assigned any duties inconsistent with his
position as General Counsel. Notwithstanding the foregoing, the Executive may
engage in aircraft manufacturing and legal activities outside of the scope of
his employment, for other clients and for compensation, so long as such
activities do not in any way compete with the business of the Company.
2. Employment Term.
----------------
2.1 The initial term of employment shall be for a period of
three years, commencing with the date hereof, unless sooner terminated as
provided in this Agreement. This Agreement shall be renewed annually for a term
of one year unless the Company or the Executive gives notice to the other of
termination at least six (6) months prior to the expiration of the initial term,
or any successive term, as the case may be. Each of the Executive and the
Company at his or its sole discretion and without any reason, may elect not to
renew this Agreement at the end of the initial term or any successive term.
2.2 Notwithstanding the provisions of paragraph 2.1 above, the
Company shall have the right to terminate the Executive's employment for Cause
(as defined in paragraph 2.3 below); provided, however, that the Executive shall
not be deemed to have been terminated for Cause unless and until the Board of
Directors at a meeting duly called and held for that purpose shall have
determined that the Executive committed an act falling within the definition of
Cause and specifying the basis for such determination. If the Executive's
employment shall be terminated by the Company for Cause, then the Company shall
pay to the Executive any unpaid salary through the effective date of termination
plus such compensation as set forth in paragraph 5.1(b)(i).
2.3 For purposes of this Agreement the term, "Cause" shall
mean the Executive's: (a) engagement in gross misconduct materially injurious to
the Company: (b) knowing and willful neglect or refusal to attend to the
material duties assigned to him by the Board of Directors of the Company, which
is not cured within 30 days after written notice; (c) intentional
misappropriation or
<PAGE>
property of the Company to the Executives own use; (d) commission of an act of
fraud or embezzlement; or (e) conviction for a crime (excluding misdemeanors and
minor traffic offenses).
2.4 Any purported termination of the Executive's employment by
the Company hereunder shall be communicated by a Notice of Termination to the
Executive in accordance with paragraph 13. For purposes of this Agreement, a
"Notice of Termination" shall mean a written notice which shall indicate those
specific termination provisions in this Agreement relied upon and which sets
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment under the provisions so
indicated.
2.5 For purposes of this Agreement, the date of termination
shall be: (a) if this Agreement is terminated by the Company for Incapacity (as
defined in paragraph 4.1 below), the date on which a Notice of Termination is
given, (b) if the Executive's employment is terminated by the Company for any
other reason (other than death), the date on which a Notice of Termination is
given or (c) if the Executive terminates his employment for any reason, the date
on, which he gives the Company notice of such termination.
3. Compensation.
-------------
3.1 The Company shall pay to the Executive for the services to
be rendered by the Executive hereunder, a salary for the initial term of
employment under this Agreement at the rate of $250,000 per annum. The salary
shall be payable in accordance with the Company's regular policies, subject to
applicable withholding and other taxes. Such salary will be increased each
January 1 during the term of this Agreement by an amount equal to 10% of the
Executive's salary for the prior fiscal year.
3.2 The Executive shall receive a cash bonus with respect to
each fiscal year of the Company during which he is employed hereunder,
commencing with the year ending December 31, 1999, in an amount to be to be
determined at the discretion of the Board of Directors of the Company, but in no
event less than the sum of $65,000.
3.3 The Executive shall be entitled to participate in, and
receive benefits from any vacation, holiday, insurance, medical, disability or
other employee benefit plan of the Company which may be in effect at any time
during the course of his employment by the Company and which shall be generally
available to senior executives of the Company occupying positions of comparable
status or responsibility. In addition, the Executive shall be entitled to two
weeks of paid vacation. The Company shall also obtain comprehensive health and
travel insurance for the Executive and his immediate family.
3.4 The Company agrees promptly to reimburse the Executive for
all reasonable and necessary business expenses, including without limitation,
telephone and facsimile charges incurred by him on behalf of the Company in the
course of his duties hereunder, upon the presentation by the Executive of
appropriate evidence thereof. In addition, the Company agrees to
2
<PAGE>
promptly reimburse or pay automobile expenses of Executive, provided such
amounts shall not exceed $1,000 per month, upon presentation by the Executive of
appropriate evidence thereof.
4. Death; Incapacity.
------------------
4.1 If, during the term of employment hereunder, because of
illness or other incapacity, the Executive shall fail for a period of six (6)
consecutive months ("Incapacity"), to render the services contemplated
hereunder, then the Company, at its option, may terminate the employment
hereunder by notice to the Executive, effective on the giving of such notice;
provided however, that the Company shall (i) pay to the Executive any unpaid
salary through the effective date of termination specified in such notice; (ii)
pay to the Executive his accrued but unpaid incentive compensation, if any, for
any bonus period ending on or before the date of termination of the Executive's
employment with the Company; (iii) continue to pay the Executive for a period of
twelve (12) months following the effective date of termination, an amount equal
to the excess, if any, of (A) the salary he was receiving at the time of his
Incapacity, over (B) any benefit the Executive is entitled to receive during
such period under any disability insurance policies provided to the Executive by
the Company or maintained by the Executive, such amount to be paid in the manner
and at such time as the salary otherwise would have been payable to the
Executive; and (iv) pay to the Executive (within 45 days after the end of the
fiscal quarter in which such termination occurs) a pro-rata portion (based upon
the period ending on the date of termination of the Executive's employment
hereunder) of the incentive compensation, if any, for the bonus period in which
such termination occurs. The Company shall have no further liability hereunder
(other than for reimbursement for reasonable business expenses incurred prior to
the date of the Executive's Incapacity and other reimbursable expenses due under
Section 3.4 through the date of Executive's Incapacity, and repayment of
compensation for unused vacation days that have accumulated during the calendar
years in which such termination occurs).
4.2 In the event of the death of the Executive during the
Employment Term, the Employment Term hereunder shall terminate on the date of
death of the Executive; provided, however, that the Company shall (i) pay to the
estate of the deceased Executive any unpaid Salary through the Executive's date
of death; (ii) pay to the estate of the deceased Executive his accrued but
unpaid incentive compensation if any, for any bonus period ending on or before
the Executive's date of death; (iii) pay to the estate of the deceased Executive
(based upon the period ending on the date of death) a pro rata portion of any
incentive compensation, if any for the bonus period in which termination occurs;
and (iv) continue to pay the Executive for a period of twelve (12) months
following the Executive's date of death, an amount equal to the excess, if any,
of (A) the salary he was receiving at the time of his death, over (B) any
benefit the Executive is entitled to receive during such period under any life
insurance policies provided to the Executive by the Company, such amount to be
paid in the manner and at such time as the salary otherwise would have been
payable to the Executive. The Company shall have no further liability hereunder
(other than for (x) reimbursement for reasonable business expenses incurred
prior to the date of the Executive's death and other reimbursable expenses due
under Section 3.4 through the date of Executive's death, and
<PAGE>
(y) payment of compensation for unused vacation days that have accumulated
during the calendar year in which such termination occurs).
5. Severance compensation Upon Termination of Employment.
------------------------------------------------------
5.1 (a) If the Executive's employment with the Company shall
be terminated (x) by the Company as a result of a Major Event (as defined in
paragraph 5.3 below), or (y) by the Executive for Good Reason in connection with
a Major Event, then the Company shall:
(i) pay to Executive as severance pay, payable at the time
of termination, an amount equal to the sum of (z) any unpaid salary through the
effective date of termination, and (w) an amount equal to one (1.00) multiplied
by the Executive's "base amount" (as determined in accordance with Section 28OG
of the Internal Revenue Code of 1986 (the "Code")); and
(ii) arrange to provide Executive, for a twelve-month
period (or such shorter period as Executive may elect), with disability,
accident and health insurance substantially similar to those insurance benefits
which Executive is receiving immediately prior to the earlier of a Major Event,
if any, or the date of termination to the extent obtainable upon reasonable
terms, provided, however, if it is not so obtainable, the Company shall pay to
the Executive in cash, the annual amount paid by the Company for such benefits
during the previous year of the Executive's employment.
(iii) Notwithstanding the foregoing, the payments made to
the Executive pursuant to this Section 5.1(a) shall be reduced to the extent
necessary to prevent such payments from constituting an "excess parachute
payment" within the meaning of Section 2800 of the Code, and in the event that
such payments are reduced, the Executive shall be permitted to direct the manner
in which the payments shall be reduced.
(b) If the Executive's employment shall be terminated (x) by
the Company other than pursuant to paragraph 4 or paragraph 5.1(a), or (y) by
the Executive for Good Reason other than in connection with a Major Event, then
the Company shall:
(i) Pay to the Executive as severance pay, payable at the
time of termination, an amount equal, to any unpaid salary through the end of
the term of this Agreement, plus an amount equal to one year of Executive's base
salary as shall be in effect at the time of termination.
5.2 For purposes of this Agreement the term "Good Reason,"
shall mean any of the following:
(i) a Major Event;
4
<PAGE>
(ii) the assignment to the Executive by the Company of
duties in connection with, or a substantial alteration in the nature or status
of, Executive's responsibility on the later of the date of this Agreement or on
the last date on which such responsibilities are increased;
(iii) a reduction by the Company in the Executive's base
salary as in effect on the later of the date of this Agreement or the last date
on which such base salary is increased:
(iv) any breach by the Company of any material provision
of this Agreement; provided, however, that the Executive shall give written
notice to the Company which shall indicate those specified provisions in this
Agreement relied upon and which shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for such termination; or
(v) any failure by the Company to obtain the assumption of
this Agreement by any successors or assigns of the Company.
5.3 For purposes of this Agreement, a "Major Event" shall be
deemed to have occurred if (i) there shall be consummated any consolidation or
merger of the Company in which the Company is not the continuing or surviving
Company or pursuant to which shares of the Company's common stock would be
converted into cash, securities or other property, other than a merger of the
Company in which the holders of the Company's common stock immediately prior to
the merger have the same proportionate ownership of common stock of the
surviving Company immediately after the merger; (ii) there shall be consummated
any sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company; (iii) proceedings or actions for the liquidation or dissolution of the
Company are initiated by the Company; or (iv) any "Person" (as defined in
Sections 13(d) and 14(d) of the Exchange Act) (other than the Executive or
persons who beneficially own more than 25% of the capital stock of the Company
on a fully diluted and as converted basis outstanding as of the date hereof)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended ("Exchange Act")), directly or indirectly, of
30% or more of the Company's outstanding capital stock on a fully diluted and as
converted basis at such time; provided, however, that a "Major Event" shall not
be deemed to have occurred solely by reason of the consummation of a firmly
underwritten Public offering by the Company of common stock registered under the
Securities Act of 1933, as amended. As used in this paragraph 5.3, for purposes
of defining a "Major Event", "Company" shall also mean the parent corporation of
the Company (ie. Health Builders International, Inc. or any such reverse merger
entity).
5.4 (a) The Executive shall not be required to mitigate
damages or the amount of any payment provided for under this Agreement by
seeking other employment or otherwise, nor, except to the extent provided in
paragraph 5.1 above, shall the amount of any payment provided for under this
Agreement be reduced by any compensation earned by the
5
<PAGE>
Executive as a result of employment by another employer or by retirement
benefits, after the date of termination, or otherwise.
6
<PAGE>
(b) The provisions of this Agreement, and any payment
provided for hereunder, shall not reduce any amounts otherwise payable, or in
any way diminish the Executive's existing rights, or rights which would accrue
solely as a result of the passage of time, under any benefit plan of the
Company, or other contract, plan or arrangement, or pursuant to applicable law.
6. Restrictive Covenant.
6.1 Non-Competition. From and after the date hereof, to and
including the first (1st) anniversary of the date of termination of this
Agreement, the Executive shall not directly or indirectly become employed by any
person, company, partnership or other entity which is primarily engaged in the
business of distribution of music or music CD's via the internet or the World
Wide Web, in each case in the Territory. The term "Territory" shall mean the
United States of America. The Executive shall be deemed directly or indirectly
to engage in a business if he participates therein as a director, officer,
stockholder, employee, agent, consultant, manager, salesman, partner or
individual proprietor, or as an investor who has made advances or loans,
contributions to capital or expenditures for the purchase of stock, or in any
capacity or manner whatsoever; provided, however, that the foregoing shall not
be deemed to prevent the Executive from investing in securities of a company, so
long as such investment does not exceed 5% of the voting stock of any class of
such company's securities.
6.2 Nondisclosure. The Executive shall not at any time
divulge, communicate, use to the detriment of the Company or for the benefit of
any other person or persons, or misuse in any way, any Confidential Information
(as hereinafter defined) pertaining to the business of the Company. Any
Confidential Information or data now or hereafter acquired by the Executive with
respect to the business of the Company (which shall include, but not be limited
to, information concerning the Company's financial condition, prospects,
technology, customers, suppliers, sources of leads and methods of doing
business) shall be deemed a valuable, special and unique asset of the Company
that is received by the Executive in confidence and as a fiduciary, and
Executive shall remain a fiduciary to the Company with respect to all of such
information. For purposes of this Agreement, "Confidential Information" means
information disclosed to the Executive or known by the Executive as a
consequence of or through his employment by the Company (including information
conceived, originated, discovered or developed by the Executive) prior to or
after the date hereof, and not generally known, about the Company or its
business. Notwithstanding the foregoing, nothing herein shall be deemed to
restrict the Executive from disclosing Confidential information to the extent
required by law.
6.3 Nonsolicitation of Employees and Clients. At all times
while the Executive is employed by the Company and for a one (1) year period
after the termination of the Executive's employment with the Company for any
reason, the Executive shall not, directly or indirectly, for himself or for any
other person, firm, corporation, partnership, association or other entity (a)
employ or attempt to employ or enter into any contractual arrangement with any
employee or former employee of the Company, unless such employee or former
employee has not been employed by the Company for a period in excess of six (6)
months; and/or (b) call on or solicit any of the actual or
7
<PAGE>
targeted prospective clients of the Company on behalf of any person or entity in
connection with any business competitive with the business of the Company; nor
make known the names and addresses of such client or any information relating in
any manner to the Company's trade or business relationships with such customers,
other than in connection with the performance of Executive's duties under this
Agreement.
7. Options. Executive shall be granted 400,000 options to purchase
common stock of the Company on or before the date hereof, with (i) 50,000 of
such options being exercisable immediately upon execution of this Agreement at a
price of $1.50 per share; (ii) 350,000 options being exercisable over a period
of three years at $1.50 per share as follows: 35,000 on August 26, 1999; 35,000
on December 26, 1999; 49,000 on April 26, 2000; 56,000 on October 26, 2000;
56,000 on April 26, 2001; 56,000 on October 26, 2001; 63,000 on April 26, 2002,
plus such additional options as shall be granted to Executive from time to time
at the discretion of the Board of Directors of the Company. The Company shall
register such shares for sale under the Securities Act of 1933 at any time upon
the request of the Executive. In addition, in the event that the Company
completes a merger or reorganization with a public company (such as with Health
Builders International, Inc.) all of the foregoing options shall relate to and
be exchange for a proportionate number of options to acquire shares of Health
Builders International, Inc. or such other public company, it being the
intention that the Options will be exercisable into publically traded
securities.
8. Arbitration. Any dispute, controversy or claim arising under or in
connection with this Agreement, or the breach hereof, shall be settled
exclusively by arbitration in accordance with the rules then in effect of the
American Arbitration Association under its Employment Mediation Rules. Judgment
upon the award rendered by the Arbitrator(s) may be entered in any court having
jurisdiction thereof. Any arbitration held pursuant to this Section 8 shall take
place in New York. Should either party hereto, or any heirs, personal
representatives, successors or assigns of either patty hereto, resort to
litigation or arbitration to enforce this Agreement, the party or parties
prevailing in such litigation shall be entitled, in addition to such other
relief as may be granted, to recover its or their reasonable attorney's fees and
costs in such litigation or arbitration from the party or parties against whom
enforcement was sought.
9. Successor to the Company. (a) The Company will require any
successors or assigns (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
asset of the Company, by agreement expressly, absolutely and unconditionally to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. As used in this Agreement "Company" shall mean the
Company as herein defined and any successors or assigns to its business and/or
assets as aforesaid, which executes and delivers the agreement provided for in
this paragraph 9 or which otherwise becomes bound by all the term and provisions
of this Agreement by operation of law.
8
<PAGE>
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, electors,
administrators, heirs, distributees, devises and legates. If the Executive
should die while any amounts are still payable to him hereunder, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's estate. This Agreement shall not
otherwise be assignable by the Executive.
10. No Third Party Beneficiaries. This Assignment does not create, and
shall not be construed as creating, any rights enforceable by any person not a
party to this Agreement except as provided in paragraph 9 hereof.
11. Headings. The headings of the paragraphs hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
12. Interpretation. In case any one or more of the provisions contained
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidly, illegality or unenforceability
shall not affect any other provisions of tho Agreement, and this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein. If, moreover, any one or more of the provisions contained
in the Agreement shall for any reason be held to be excessively broad as to
duration, geographical scope, activity or subject, it shall be construed by
limiting and reducing it, so as to be enforceable to the extent compatible with
the applicable law as it shall then appear.
13. Notices. All notices under this Agreement shall be in writing and
shall be deemed to have been given at the time when delivered personally or by
facsimile transmission, sent by recognized overnight courier service, or mailed
by registered or certified mail, addressed to the address set forth at the end
of this Agreement, or to such changed address as such party may have fixed by
notice; provided, however, that any notice of change of address shall be
effective only upon receipt.
14. Waivers. If either party should waive any breach of any provision
of this Agreement, he or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement. No waiver shall be effective unless it is in writing and signed by an
authorized representative of the waiving party.
15. Complete Agreement; Amendments. The foregoing is the entire
agreement of the parties with respect to the subject matter hereof and
supersedes in its entirety any letter agreement or other writings by and among
the Executive and the Company. This Agreement may not be amended, supplemented,
canceled or discharged except by written instrument executed by both parties
hereto.
16. Governing Law. This Agreement is to be governed by and construed in
accordance with the laws of New York, without giving effect to principles of
conflicts of law.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written and the parties acknowledge that
this Agreement memorializes their agreement since the effective date set forth
below.
MCY MUSIC WORLD, INC. EXECUTIVE
By: /s/ Bernhard Fritsch By: /s/ Mitchell Lampert
Name: Bernhard Fritsch Name: /s/ Mitchell Lampert
Title: President Title:
Address for Notice: Address for Notices:
MCY Music World Inc. 60 Little Fox Lane
307 7th Avenue, 23rd Floor Wilton, Connecticut 06897
New York, NY 10001
10
Employment Agreement between MCY Music World, Inc. and Scott Citron,
318 West 100th Street, Apartment 4C, New York, New York 10025
TITLE: Senior Website Producer
SALARY: $140,000 per year paid bimonthly on the 1st and 15th of each month. The
employees salary will be increased to $175,000 on October 1st, 1999.
RESPONSIBILITIES: Employees responsibility as Senior Website Producer of MCY
Music World, Inc. will be to extend his best endeavors in order to achieve the
best possible production and development of the MCY website. Responsibilities
include the following:
Overall responsibility for development of the MCY website
Determining new features and functionalities to be added to the MCY website
Timely implementation of new features and functionalities
Oversight and coordination of activities between the departments
responsible for development and implementation of new features and
functionalities
Coordination with all other departments in integrating the MCY website and
other MCY development activities
REPORTING: Employee will be working to the instructions of the Chief Executive
Officer or another person to be appointed by him. Written reports on activities
may be required from time to time.
BENEFITS:
a. Employee will be enrolled on the Company health plan.
b. Employee will be enrolled in the executive stock option plan provided
to all executives of the company and allowed 100,000 stock options
vesting over 3 years according the company's stock option plan which
will be delivered soon.
c. Employee will be allotted 2 weeks paid vacation per year and 5 sick days.
d. Employee will be allotted paid traditional holiday vacation in accordance
with MCY policy and US law.
EXPENSES: MCY will cover business-related expenses incurred by the employee
during the course of his work. In order to receive remuneration for expenses,
Employee must report his expenses monthly in a manner to be prescribed by MCY.
MCY reserves the right to impose a limit on the amount of expenses for which the
Employee will be reimbursed.
TERM: The term of this agreement starts on July 21, 1999 and shall extend for 3
years. Any alterations to this contract must be made in writing and must be
mutually agreed upon in a duly signed amendment form.
<PAGE>
EARLY TERMINATION: Either party may terminate this contract at any time and for
any reason with 30 days prior notice. Any breach of contract shall constitute
grounds for termination without notice. If the company terminates the contract
the employee will be compensated with 3 months salary. If the employee
terminates at will then the employee will not receive a compensation.
CONFIDENTIAL NATURE OF WORK: The nature of employees work for MCY will mean
that confidential information may from time to time be disclosed to him and that
he may be involved in the creation of works of MCY. Accordingly it is agreed
that employee will keep all information that he receives and work carried out in
the course of employment strictly private and confidential, and all copyright
and intellectual property rights in the employees work will be the property of
MCY. The employee agrees to sign MCYs Trust and Confidentiality Agreement,
which is attached.
ASSIGNMENT: In the event MCY is acquired in part or in whole by an affiliate,
parent company, or third party obtaining a substantial portion of MCYs assets
or stock, this employee agreement shall continue to be binding.
AMENDMENTS: Changes or amendments to this contract may be made in written form
only and must be signed by both parties to the contract.
Agreed and accepted this August 5, 1999.
MCY Music World, Inc. Scott Citron
Bernhard Fritsch, CEO and President Senior Website Producer
By: /s/ Bernhard Fritsch By: /s/ Scott Citron
Exhibit 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT Agreement (the "Agreement") is made and entered into on
the 11th day of August, 1999 by and between MCY Music World, Inc., a Delaware
corporation with offices at 307 7th Avenue, New York, New York 10001 (the
"Company"), and Raymond Short, an individual residing at
___________("Employee").
W I T N E S S E T H:
--------------------
WHEREAS, the Company desires to employ Employee as its Senior
Vice-President of Marketing; and
WHEREAS, Employee desires to gain employment with the Company
as its Senior Vice-President of Marketing under the terms and conditions herein
stated; and
NOW, THEREFORE, in consideration of the mutual premises,
covenants and Agreements hereinafter set forth, the parties hereby agree as
follows:
I. Term. The Company hereby employs Employee, and Employee
hereby accepts employment hereunder, for a term of thirty-six (36) months (the
"Term") commencing on the date hereof, subject to prior termination as provided
in Section 8 herein.
1. Position and Duties. Employee shall serve as the Senior
Vice-President of Marketing of the Company, shall be based in the New York area
and shall perform the following duties in addition to those which may from time
to time be prescribed by the Board of Directors or bylaws of the Company:
(i) Creation and implementation of an overall marketing
plan for the Company;
(ii) Advice to the Board with respect to competition, market
trends, demographic trends and market conditions; and
(iii)Management of Marketing, Media, Public Relations and
Advertising.
2. Compensation.
2.1 Base Salary. For Employee's services hereunder, the
Company shall pay to Employee an annual salary of $175,000 (such amount is
referred to herein as the " Base Salary"). The Base Salary shall be payable in
equal installments in conformity with
<PAGE>
the Company's normal payroll period. The Base Salary shall be subject to a 10%
annual increase on each anniversary of this Agreement during the Term hereof.
2.2 Stock Options. In connection with the execution of this
Agreement, the Company shall cause MCY.com, Inc. ("MCY.com") to issue to
Employee options to purchase 200,000 shares of MCY.com's common stock, par value
$.001 per share at the exercise price of $13.00 per share, pursuant to MCY.com's
1999 Stock Incentive Plan (the "Plan"). These options shall vest over a period
of thirty-six months commencing four months from the date of this Agreement as
set forth on the annexed Stock Option Agreement.
2.3 Bonus Options; Definitions. Within one month from the end
of each consecutive six month period (the "Period") commencing on the date of
this Agreement, the Company shall make a calculation to determine whether the
Employee shall be entitled to receive additional options under the Plan (the
"Bonus Options") as a result of exceeding certain Milestones (as hereinafter
defined) during such Period. For purposes of determining whether Bonus Options
have been earned under this Section 3.3, the Company shall calculate, for the
Period immediately preceding such calculation (i) the number of "hits" or times
that the Company's web site has been visited (the "Hits") during such Period;
and (ii) the number of customers who have purchased at least one NETrax during
such Period (each person referred to herein as a "Customer").
2.4 Bonus Options; Calculation. Employee shall be entitled to
and shall receive up to a maximum 300,000 Bonus Options as follows:
(i) Employee shall receive 1,000 Bonus Options for every 20,000,000
Hits the Company's web site receives during the Period above the Milestone
established during the preceding Period; and
(ii) Employee shall receive 1,000 Bonus Options for every 150,000
Customers who purchase NETrax during the Period above the Milestone established
during the preceding Period.
2.5 Bonus Options; Milestones. 0 Hits and 0 Customers shall
become the respective first milestones (the "Milestones") from which the number
of Bonus Options which may be earned shall be calculated. Thereafter, the
Milestone utilized for the determination of Bonus Option calculations shall be
equal to the number of Hits which the Company has received on its web site and
the number of Customers who have purchased NETrax during the Period immediately
preceding such calculation.
2
<PAGE>
3. Employee Benefits.
3.1 Automobile Allowance. The Company shall pay to Employee a
monthly automobile allowance equal to the Employee's monthly lease payments, not
to exceed $600 per month, upon the submission of receipt for same by the
Employee.
3.2 Other Benefits. During the Term, Employee shall be
entitled to receive other perquisites and fringe benefits in accordance with the
plans and policies of the Company, including, without limitation, medical
insurance, disability and life insurance, participation in retirement and
savings plans, and other such perquisites and fringe benefits generally made
available by the Company to its executives and key management employees, subject
to and on a basis consistent with the terms, conditions, and overall
administration of such plans and policies.
4.3 Vacation. Employee shall be entitled to two weeks paid
vacation as is consistent with the Company's policies for its senior management.
The Employee shall additionally be paid for up to five (5) sick days and all
traditional holiday vacation days in accordance with Company policy and US Law.
4. Insurance. The Company shall have the right to apply for and
take out, in the Company's own name or otherwise, at the Company's expense,
life, health, accident, or other insurance covering Employee, in any amount the
Company deems necessary to protect the Company's interest hereunder, and
Employee shall have no right, title or interest in or to any such insurance.
Employee shall assist the Company in obtaining such insurance by submitting to
usual and customary medical and other examinations and by signing such
applications, statements and other instruments as may be reasonably required by
any insurance company.
6. Expenses. During the Term, Employee shall be entitled to
receive reimbursement for all reasonable business expenses incurred by him (in
accordance with the policies and procedures from time to time adopted by the
Board of Directors of the Company for its senior executives) in performing
services hereunder, provided that Employee properly accounts therefor in
accordance with such policy and procedures. All expenses over $5,000 shall be
pre-approved in writing by an officer of the Company.
7. Deductions and Withholdings. All amounts payable or which
become payable under any provision of this Agreement shall be subject to any
deductions authorized by Employee and any deductions and withholdings required
by law.
3
<PAGE>
8. Termination.
8.1 Death. This Agreement shall terminate immediately upon
Employee's death, unless sooner terminated hereunder, subject to Section 8.6 (a)
and (d) below.
8.2 Termination by the Company With Cause. The Company shall
have the right to terminate Employee's employment hereunder for Cause, subject
to Section 8.6 (c) and (d) below. For purposes of this Agreement, "Cause" means
(a) the failure by Employee substantially to perform his duties or obligations
hereunder; (b) Employee engaging in misconduct which is materially injurious to
the Company; (c) Employee's conviction of a crime of moral turpitude; or (d)
Employee's conviction by, or entry of a plea of guilty or nolo contendere in, a
court of competent jurisdiction of a crime constituting a felony.
8.3 Termination by the Company Without Cause. The Company may
terminate Employee's employment hereunder without Cause at any time during the
Term of this Agreement, subject to Section 8.6 (b) and (d) below.
8.4 Disability. If Employee shall be unable to perform his
services hereunder by reason of illness or other incapacity, his failure so to
perform his duties will not be grounds for terminating his employment for Cause
by the Company; provided, however, should the period of such incapacity exceed
three months, or if on 50% or more of the normal working days throughout six (6)
consecutive months Employee is unable to perform his duties fully due to such
incapacity, then the Company may terminate his employment hereunder, subject to
Section 8.6 (a) and (d) below.
8.5 Termination by the Employee. In the event that the
Employee terminates this Agreement, all rights and obligations of the Company
hereunder shall thereupon immediately terminate, as set forth in Section 8.6 (c)
and (d) below.
8.6 Effect of Termination.
(a) Upon termination of this Agreement or Employee's
employment hereunder pursuant to Sections 8.1 or 8.4
hereof, all compensation and benefits payable by the
Company hereunder shall be immediately terminated;
provided, however, Employee or his estate, as the case
may be, shall be entitled to receive any payments under
any applicable life or disability insurance plans. Such
payments, if any, shall be made
4
<PAGE>
at the time and in accordance with the terms and conditions
of such plans.
(b) Upon termination of Employee's employment pursuant to
Section 8.3 hereof, within 10 days after such
termination Employee shall be entitled to receive a
payment equal to three (3) months of Base Salary as
consideration for such termination.
(c) Upon termination of Employee's employment pursuant to
Sections 8.2 or 8.5 hereof, Employee shall not be
entitled to receive any payment upon such termination,
other than compensation and expenses accrued as at the
date of termination.
(d) Notwithstanding the termination of this Agreement or
any provision herein to the contrary, the Employee
shall in all events be subject to the Confidentiality
Agreement (as hereinafter defined) after the
termination of this Agreement pursuant to its terms.
9. General Provisions.
9.1 Notices. All notices required to be given under the terms
of this Agreement shall be in writing and shall be deemed to have been duly
given only if delivered to the addressee in person or mailed by certified mail,
return receipt requested, to the address as included in the Company's records or
to any such other address as the party to receive the notice shall advise by due
notice given in accordance with this paragraph. Any party hereto may change its
or his address for the purpose of receiving notices, demands and other
communications as herein provided, by a written notice given in the manner
aforesaid to the other party hereto.
9.2 Benefit of Agreement and Assignment. This Agreement shall
inure to the benefit of and be binding upon the parties hereto and their
respective executors, administrators, successors and assigns; provided, however,
that Employee may not assign any of his rights or duties hereunder except upon
the prior written consent of the Board of Directors of the Company.
5
<PAGE>
9.3 Applicable Law. This Agreement is made in and is to be
governed by and construed under the laws of the State of New York.
9.4 Captions. The captions appearing at the commencement of
the sections hereof are descriptive only and for convenience of reference only
and are not intended to be part of or to effect the meaning or interpretation of
this Agreement.
9.5 Severability. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
9.6 Entire Agreement. This Agreement contains the entire
Agreement of the parties, and supersedes any and all other Agreements, either
oral or in writing, between the parties hereto with respect to the subject
matter hereof. Each party to this Agreement acknowledges that no
representations, inducements, promises, or Agreements, oral or otherwise, have
been made by either party, or anyone acting on behalf of either party, which are
not embodies herein, and that no other Agreement, statement or promise not
contained in this Agreement shall be valid or binding.
9.7 Amendments. This Agreement may be modified or amended only
by an Agreement in writing signed by the Company and Employee.
9.8 Waiver. No waiver of any provision hereof shall be valid
unless made in writing and signed by the party making the waiver. No waiver of
any provision of this Agreement shall constitute a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a continuing
waiver.
9.9 Attorneys' Fees. Should any party hereto institute any
action or proceeding at law or in equity, or in connection with any arbitration,
to enforce any provision of this Agreement, including an action for declaratory
relief, or for damages by reason of an alleged breach of any provision of this
Agreement, or otherwise in connection with this Agreement, or any provision
hereof, the prevailing party shall be entitled to recover from the losing party
or parties reasonable attorneys' fees and costs for services rendered to the
prevailing party in such action or proceeding.
6
<PAGE>
9.10 Representations and Warranties. Each party hereto
represents and warrants that it or he has the power and authority to execute and
deliver this Agreement and to perform its or his obligations hereunder.
9.11 Compliance with Laws and Policies. Employee agrees that
he will at all times comply strictly with all applicable laws and all current
and future policies of the Company, including but not limited to the Trust and
Confidentiality Agreement of even date herewith by and among the Employee and
the Company, the provisions of which are hereby incorporated herein by reference
and made a part hereof.
9.12 Arbitration. Any dispute or controversy arising under or
in connection with this Agreement, other than matters pertaining to injunctive
relief, including, without limitation, temporary restraining orders, preliminary
injunctions and permanent injunctions, shall, upon the written demand of either
party served upon the other party, be submitted to arbitration. Such arbitration
shall be held in the City of New York, New York, and conducted in accordance
with the Rules of the American Arbitration Association.
IN WITNESS WHEREOF, this Agreement is executed on the day and year
first above written.
MCY MUSIC WORLD, INC. EMPLOYEE
By: /s/ Bernhard Fritsch By: /s/ Raymond Short
Bernhard Fritsch, Raymond Short
President
7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT Agreement (the "Agreement") is made and entered into on
the 1st day of September, 1999 by and between MCY Music World, Inc., a Delaware
corporation with offices at 1133 Avenue of the Americas, New York, New York (the
"Company"), and Thomas Noack, an individual residing at 1917 W. Westwind, Santa
Ana, California 92704 ("Employee").
W I T N E S S E T H:
--------------------
WHEREAS, the Company desires to employ Employee as a Director
of Technology Projects; and
WHEREAS, Employee desires to gain employment with the Company
as a Director of Technology Projects under the terms and conditions herein
stated; and
NOW, THEREFORE, in consideration of the mutual premises,
covenants and Agreements hereinafter set forth, the parties hereby agree as
follows:
1. TERM. The Company hereby employs Employee, and Employee hereby
accepts employment hereunder, for a term of thirty-six (36) months (the "Term")
commencing on the date hereof, subject to prior termination as provided in
Section 8 herein.
2. POSITION AND DUTIES. In connection with his employment hereunder,
Employee (i) shall serve as a Director of Technology Projects of the Company;
(ii) shall serve at the direction of and report to the Chief Executive Officer
of the Company, or such other officer of the Company as the Chief Executive
Officer shall from time to time designate; (iii) shall allocate approximately
50% of his working time (at least 12 days per month) at the Company's offices in
New York; (iv) shall manage and oversee the Company's Los Angeles office at such
times as Employee is not present in New York (together with such other duties in
Los Angeles as may be prescribed by the Chief Executive Officer or such other
officer of the Company as the Chief Executive Officer may designate); and (v)
shall manage technology products and projects of the Company as set forth below:
(i) Design, develop, supervise and maintain the technological
platform of the Company and its subsidiaries on a global basis;
<PAGE>
(ii) Develop, supervise, update and maintain the U.S. and global web
sites for the Company and its subsidiaries;
(iii)Design, develop and supervise all digital download and streaming
technology of the Company and its subsidiaries;
(iv) Develop, supervise, update and maintain the U.S. and global
credit card, electronic payment and electronic commerce systems
of the Company and its subsidiaries;
(v) Develop, supervise, update and maintain the U.S. and global
Graphic User Interface for Germany, Latin America, China, Japan
and such other countries as the Company shall dictate;
(vi) Develop, supervise, update and maintain a new artist upload page
for the web site of the Company and its subsidiaries;
(vii)Develop, supervise, update and maintain a Christmas page for the
web site of the Company and its subsidiaries;
(viii) Develop, supervise, update and maintain reggae and other genre
specific pages for the web site of the Company and its
subsidiaries;
(ix) Develop, supervise, update and maintain a business to business
interface to facilitate the license of music, film and other
digital products to third parties; and
(x) Develop, supervise, update and maintain a karaoke and kiosk
system for the Company and its subsidiaries.
3. COMPENSATION.
3.1 BASE SALARY. For Employee's services hereunder, the Company
shall pay to Employee an annual salary of $145,000 (such amount is referred to
herein as the "Base Salary"). The Base Salary shall be payable in equal
installments in conformity with the Company's normal payroll period. In
addition, the Employee shall receive additional compensation of $20,000 per
annum for his services in supervising the Los Angeles office and for performing
the services referred to in Section 2 (iv) above, provided however, that such
additional compensation shall not become payable until eight weeks from the
execution of this Agreement. Such additional salary shall be
2
<PAGE>
payable in equal installments commencing eight weeks from the date of this
Agreement in conformity with the Company's normal payroll period.
3.2 STOCK OPTIONS. In connection with the execution of this
Agreement, the Company shall cause MCY.com, Inc. ("MCY.com") to issue to
Employee options to purchase 50,000 shares of MCY.com's common stock, par value
$.001 per share, at an exercise price of $12.50 per share, pursuant to MCY.com's
1999 Stock Incentive Plan (the "Plan"). The foregoing options shall vest over a
period of thirty-six months as set forth on the annexed Stock Option Agreement,
commencing eight weeks from the execution of this Agreement (unless this
Agreement is terminated prior to the last day of such eight week period).
3.3 SIGNING BONUS. The Employee shall receive a one time bonus of
$5,000 upon execution of this Agreement.
4. EMPLOYEE BENEFITS.
4.1 AUTOMOBILE ALLOWANCE. Commencing eight weeks from the
executionof this Agreement, the Company shall pay to Employee a monthly
automobile allowance in an amount not to exceed $600 per month.
4.2 OTHER BENEFITS. During the Term, Employee shall be entitled to
receive other perquisites and fringe benefits in accordance with the plans and
policies of the Company, including, without limitation, medical insurance,
disability and life insurance, participation in retirement and savings plans,
and other such perquisites and fringe benefits generally made available by the
Company to its executives and key management employees, subject to and on a
basis consistent with the terms, conditions, and overall administration of such
plans and policies.
4.3 VACATION. Employee shall be entitled to two weeks paid vacation
as is consistent with the Company's policies for its senior management. The
Employee shall additionally be paid for up to five (5) sick days and all
traditional holiday vacation days in accordance with Company policy and US Law.
5. INSURANCE. The Company shall have the right to apply for and take
out, in the Company's own name or otherwise, at the Company's expense, life,
health, accident, or other insurance covering Employee, in any amount the
Company deems necessary to protect the Company's interest hereunder, and
Employee shall have no right, title or interest in or to any such insurance.
Employee shall assist the Company in obtaining such insurance by submitting to
usual and customary medical and other *examinations
3
<PAGE>
and by signing such applications, statements and other instruments as may be
reasonably required by any insurance company.
6. EXPENSES. During the Term, Employee shall be entitled to receive
reimbursement for all reasonable business expenses (inclusive of air travel
between New York and Los Angeles) incurred by him, (in accordance with the
policies and procedures from time to time adopted by the Board of Directors of
the Company for its senior executives) in performing services hereunder,
provided that Employee properly accounts therefor in accordance with such policy
and procedures. All expenses over $5,000 in any calendar month shall be
pre-approved in writing by an officer of the Company. In addition, the Company
shall provide Employee with suitable housing in New York in an amount not to
exceed the sum of $2,500 per month whenever, Employee shall be working in New
York on Company business.
7. DEDUCTIONS AND WITHHOLDINGS. All amounts payable or which become
payable under any provision of this Agreement shall be subject to any deductions
authorized by Employee and any deductions and withholdings required by law.
8. TERMINATION.
8.1 DEATH. This Agreement shall terminate immediately upon
Employee's death, unless sooner terminated hereunder, subject to Section 8.6 (a)
and (d) below.
8.2 TERMINATION BY THE COMPANY WITH CAUSE. The Company shall have
the right to terminate Employee's employment hereunder for Cause, subject to
Section 8.6 (c) and (d) below. For purposes of this Agreement, "Cause" means (a)
the failure by Employee substantially to perform his duties or obligations
hereunder; (b) Employee engaging in misconduct which is materially injurious to
the Company; (c) Employee's conviction of a crime of moral turpitude; or (d)
Employee's conviction by, or entry of a plea of guilty or nolo contendere in, a
court of competent jurisdiction of a crime constituting a felony.
8.3 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may
terminate Employee's employment hereunder without Cause at any time during the
Term of this Agreement, subject to Section 8.6 (b) and (d) below.
Notwithstanding any provision herein to the contrary, if the Company terminates
the Employee within eight (8) weeks from the execution of this Agreement,
Employee shall receive four (4) weeks severance of Base Salary as opposed to the
compensation set forth in Section 8.6 (b) below.
4
<PAGE>
8.4 DISABILITY. If Employee shall be unable to perform his services
hereunder by reason of illness or other incapacity, his failure so to perform
his duties will not be grounds for terminating his employment for Cause by the
Company; provided, however, should the period of such incapacity exceed three
months, or if on 50% or more of the normal working days throughout six (6)
consecutive months Employee is unable to perform his duties fully due to such
incapacity, then the Company may terminate his employment hereunder, subject to
Section 8.6 (a) and (d) below.
8.5 TERMINATION BY THE EMPLOYEE. In the event that the Employee
terminates this Agreement, all rights and obligations of the Company hereunder
shall thereupon immediately terminate, as set forth in Section 8.6 (c) and (d)
below.
8.6 EFFECT OF TERMINATION.
(a) Upon termination of this Agreement or Employee's employment
hereunder pursuant to Sections 8.1 or 8.4 hereof, all
compensation and benefits payable by the Company hereunder
shall be immediately terminated; provided, however, Employee
or his estate, as the case may be, shall be entitled to
receive any payments under any applicable life or disability
insurance plans. Such payments, if any, shall be made at the
time and in accordance with the terms and conditions of such
plans.
(b) Upon termination of Employee's employment pursuant to
Section 8.3 hereof, within 10 days after such termination
Employee shall be entitled to receive a payment equal to
forty-five (45) calendar days of Base Salary as
consideration for such termination.
(c) Upon termination of Employee's employment pursuant to
Sections 8.2 or 8.5 hereof, Employee shall not be entitled
to receive any payment upon such termination.
(d) Notwithstanding the termination of this Agreement or any
provision herein to the contrary, the Employee shall in all
events be subject to the Confidentiality Agreement (as
hereinafter defined) after the termination of this Agreement
pursuant to its terms.
5
<PAGE>
9. TRUST AND CONFIDENTIALITY. The Company and the Employee acknowledge
that each of such parties shall be required to execute a Trust and
Confidentiality Agreement upon the execution of this Agreement. Employee agrees
to abide by the terms of said Trust and Confidentiality Agreement.
10. GENERAL PROVISIONS.
10.1 NOTICES. All notices required to be given under the terms of
this Agreement shall be in writing and shall be deemed to have been duly given
only if delivered to the addressee in person or mailed by certified mail, return
receipt requested, to the address as included in the Company's records or to any
such other address as the party to receive the notice shall advise by due notice
given in accordance with this paragraph. Any party hereto may change its or his
address for the purpose of receiving notices, demands and other communications
as herein provided, by a written notice given in the manner aforesaid to the
other party hereto.
10.2 BENEFIT OF AGREEMENT AND ASSIGNMENT. This Agreement shall inure
to the benefit of and be binding upon the parties hereto and their respective
executors, administrators, successors and assigns; provided, however, that
Employee may not assign any of his rights or duties hereunder except upon the
prior written consent of the Board of Directors of the Company.
10.3 APPLICABLE LAW. This Agreement is made in and is to be governed
by and construed under the laws of the State of New York.
10.4 CAPTIONS. The captions appearing at the commencement of the
sections hereof are descriptive only and for convenience of reference only and
are not intended to be part of or to effect the meaning or interpretation of
this Agreement.
10.5 SEVERABILITY. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
10.6 ENTIRE AGREEMENT. This Agreement contains the entire Agreement
of the parties, and supersedes any and all other Agreements, either oral or in
writing, between the parties hereto with respect to the subject matter hereof.
Each party to this Agreement acknowledges that no representations, inducements,
promises, or Agreements,
6
<PAGE>
oral or otherwise, have been made by either party, or anyone acting on behalf of
either party, which are not embodies herein, and that no other Agreement,
statement or promise not contained in this Agreement shall be valid or binding.
10.7 AMENDMENTS. This Agreement may be modified or amended only by
an Agreement in writing signed by the Company and Employee.
10.8 WAIVER. No waiver of any provision hereof shall be valid unless
made in writing and signed by the party making the waiver. No waiver of any
provision of this Agreement shall constitute a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
10.9 ATTORNEYS' FEES. Should any party hereto institute any action
or proceeding at law or in equity, or in connection with any arbitration, to
enforce any provision of this Agreement, including an action for declaratory
relief, or for damages by reason of an alleged breach of any provision of this
Agreement, or otherwise in connection with this Agreement, or any provision
hereof, the prevailing party shall be entitled to recover from the losing party
or parties reasonable attorneys' fees and costs for services rendered to the
prevailing party in such action or proceeding.
10.10 REPRESENTATIONS AND WARRANTIES. Each party hereto represents
and warrants that it or he has the power and authority to execute and deliver
this Agreement and to perform its or his obligations hereunder.
10.11 COMPLIANCE WITH LAWS AND POLICIES. Employee agrees that he
will at all times comply strictly with all applicable laws and all current and
future policies of the Company, including but not limited to the Trust and
Confidentiality Agreement of even date herewith by and among the Employee and
the Company, the provisions of which are hereby incorporated herein by reference
and made a part hereof.
10.12 ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement, other than matters pertaining to injunctive
relief, including, without limitation, temporary restraining orders, preliminary
injunctions and permanent injunctions, shall, upon the written demand of either
party served upon the other party, be submitted to arbitration. Such arbitration
shall be held in the City of New York, New York, and conducted in accordance
with the Rules of the American Arbitration Association.
IN WITNESS WHEREOF, this Agreement is executed on the day and year
first above written.
7
<PAGE>
MCY MUSIC WORLD, INC. EMPLOYEE
By: /s/ Bernhard Fritsch By: /s/ Thomas Noack
Bernhard Fritsch, President Thomas Noack
8
<TABLE>
<CAPTION>
Exhibit 21.1 Subsidiaries of Registrant
--------------------------
Name State of Incorporation Names Under Which It Does Business
- - ---- ---------------------- ----------------------------------
<S> <C> <C>
1. MCY Music World, Inc. Delaware MCY Music World, Inc.
2. MCY West, Inc. California MCY West, Inc.
3. MCY America, Inc. New York MCY America, Inc.
4. MCY Events Inc. Delaware MCY Events Inc.
5. MCY Latin, Inc. Delaware MCY Latin, Inc.
6. Fritsch & Friends Mediagroup GmbH Germany Fritsch & Friends Mediagroup GmbH
7. MCY Europe Gmbh i. Gr. Germany MCY Europe Gmbh i. Gr.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from Balance Sheet,
Statement of Operations, Statement of Cash Flows and Notes thereto
incorporated in Part I, Item 1 of this Form 10-QSB and is qualified in its
entirety by reference to such financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1999
<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>
