U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File No. 0-25167
------
MCY.COM, INC.
-----------------------------------
(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 13-4049302
------------------------------- --------------------------
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
</TABLE>
1133 Avenue of the Americas
New York, NY 10036
-------------------------
(Address of Principal Executive Offices)
Issuer's Telephone Number: (212) 944-6664
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Company was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes X No (2) Yes X No
--- --- --- ---
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes____ No ___
(APPLICABLE ONLY TO CORPORATE ISSUERS)
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
59,631,801 at September 30, 2000 of common stock (.001 per value)
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
Transitional Small Business Issuer Format Yes No X
--- ---
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited) (Note*)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 19,128,000 $ 26,060,000
Sundry receivables 531,000 397,000
Advances 95,000 107,000
Other current assets, including prepaid advertising of $1,035,000 and
$2,247,000 and prepaid event costs of $5,839,000 and $0 8,062,000 2,793,000
----------------- -----------------
Total current assets 27,816,000 29,357,000
Equipment and software, net 12,535,000 1,585,000
Intangible assets, net 0 25,153,000
Other assets, including security deposits of $2,515,000 and $925,000, and
record company advances of $100,000 and $350,000, respectively 2,682,000 1,279,000
----------------- -----------------
$ 43,033,000 $ 57,374,000
================= =================
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and sundry liabilities, representing
total current liabilities $ 5,205,000 $ 3,381,000
----------------- -----------------
Commitments, contingencies and subsequent event (Notes B & E)
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 shares authorized;
1,000,000 shares of Series 1 Preferred Stock issued and outstanding 1,000 1,000
Common stock - $.001 par value; 100,000,000 shares authorized;
59,631,801 and 54,340,988 shares issued and outstanding, respectively 59,000 54,000
Common stock payable (1,330,063 and 110,000 shares, respectively) 2,367,000 1,155,000
Additional paid-in capital 184,422,000 144,063,000
Deficit accumulated during the development stage (136,833,000) (72,283,000)
Accumulated other comprehensive income (243,000) (15,000)
------------------ -----------------
49,773,000 72,975,000
Unamortized deferred compensation (11,881,000) (18,956,000)
Stock subscriptions receivable (64,000) (26,000)
----------------- -----------------
37,828,000 53,993,000
----------------- -----------------
$ 43,033,000 $ 57,374,000
================= =================
</TABLE>
*The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. See notes to condensed consolidated financial statements.
2
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Inception
For the Three Months For the Nine Months (January 8, 1999)
Ended September 30, Ended September 30, Through
2000 1999 2000 1999 September 30, 2000
Revenues $ 211,000 $ 165,000 $ 474,000 $ 165,000 $ 817,000
--------------- ------------- --------------- --------------- -----------------
Expenses:
<S> <C> <C> <C> <C> <C>
Sales, marketing and public
relations 2,120,000 2,302,000 8,395,000 5,083,000 16,914,000
Product development 1,488,000 815,000 4,878,000 1,339,000 7,007,000
Content acquisition 1,550,000 475,000 6,227,000 650,000 7,810,000
General and administrative 2,312,000 1,908,000 7,734,000 2,257,000 12,204,000
Depreciation and amortization 406,000 120,000 837,000 122,000 1,113,000
Amortization of acquired
intangibles 0 1,664,000 3,168,000 1,664,000 6,336,000
Write-off of impaired
intangible assets 0 0 21,985,000 0 21,985,000
Stock based compensation 1,894,000 37,943,000 13,136,000 40,522,000 63,040,000
--------------- ------------- --------------- --------------- -----------------
45,227,000 66,360,000 51,637,000 136,409,000
------------------------------- --------------- --------------- -----------------
9,770,000
Operating loss (9,559,000) (45,062,000) (65,886,000) (51,472,000) (135,592,000)
Share of loss of predecessor
companies 0 0 0 (663,000) (663,000)
Deferred income tax benefit 0 133,000 0 133,000 0
Interest income, net of interest
Expense 493,000 195,000 1,336,000 228,000 1,992,000
--------------- ------------- --------------- --------------- -----------------
Net loss $ (9,066,000) $ (44,734,000) $ (64,550,000) $ (51,774,000) $ (134,263,000)
================ ============= =============== =============== =================
Net loss per common share -
basic and diluted $(0.15) $(0.89) $(1.10) $(1.38)
====== ====== ====== ======
Weighted average common
Shares outstanding 59,970,000 50,295,000 58,556,000 37,398,000
=============== ============= =============== ===============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Common Additional
Number of Number of Stock Paid-In
Shares Amount Shares Amount Payable Capital
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 2000 1,000,000 $ 1,000 54,340,988 $ 54,000 $ 1,155,000 $ 144,063,000
Sale of common stock (Note C[1]) 5,006,390 5,000 34,348,000
Repurchase of stock (Note C[2])
Cancellation of treasury stock (277,000) (1,835,000)
Stock payable (Note C[7]) 1,842,000
Stock payable reduction (Note C[7]) (630,000)
Non-cash exercise of options (Note C[3]) 187,626
Options granted (Note C[4]) 5,678,000
Options exercised (Note C[4]) 25,000 38,000
Options cancelled (Note C[4]) (2,571,000)
Sale of warrants (Note C[5]) 750,000
Warrants issued (Note C[5]) 3,951,000
Warrants canceled (Note C[7]) 17,500
Non-cash exercise of warrants (Note C[6]) 331,297
Amortization of deferred compensation Comprehensive loss:
Loss on foreign currency translation
Net loss for period
Total comprehensive loss
---------- -------- ----------- --------- ----------- -------------
Balance - September 30, 2000 1,000,000 $ 1,000 59,631,801 $ 59,000 $ 2,367,000 $ 184,422,000
=========== ======== =========== ========= =========== =============
Deficit
Accumulated Accumulated
During the Other Unamortized Stock
Treasury Development Comprehensive Deferred Subscription
Stock Stage Income Compensation Receivable Total
Balance - January 1, 2000 $ (72,283,000) $(15,000) $ (18,956,000) $(26,000) $ 53,993,000
Sale of common stock (Note C[1]) 34,353,000
Repurchase of stock (Note C[2]) (1,835,000) (1,835,000)
Cancellation of treasury stock 1,835,000 0
Stock payable (Note C[7]) 1,842,000
Stock payable reduction (Note C[7]) (630,000)
Non-cash exercise of 0
options (Note C[3])
Options granted (Note C[4]) (5,678,000) 0
Options exercised (Note C[4]) (38,000) 0
Options cancelled (Note C[4]) 2,571,000 0
Sale of warrants (Note C[5]) 750,000
Warrants issued (Note C[5]) 3,951,000
Warrants canceled (Note C[7])
0
Non-cash exercise of
0
Warrants (Note C[6])
Amortization of deferred 10,182,000 10,182,000
compensation
Comprehensive loss:
Loss on foreign currency
translation (228,000) (228,000)
Net loss for period (64,550,000) (64,550,000)
-------------
Total comprehensive loss (64,778,000)
----------- ------------- ------------- ------------- ---------- -------------
Balance - September 30, 2000 $ 0 $(136,833,000) $(243,000) * $ (11,881,000) $(64,000) $ 37,828,000
=========== ============= ========== ============= ======== =============
</TABLE>
*Consists of a cumulative foreign currency translation adjustment of $243,000.
See notes to condensed consolidated financial statements
4
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Inception
For the Nine Months (January 8, 1999)
Ended September 30, Through
2000 1999 September 30, 2000
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (64,550,000) $ (51,774,000) $(134,263,000)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 837,000 122,000 1,113,000
Amortization of intangibles 3,168,000 1,664,000 6,336,000
Write-off of impaired intangible assets 21,985,000 0 21,985,000
Stock-based compensation 13,136,000 40,522,000 63,040,000
Stock-based sales and marketing 1,212,000 0 1,212,000
Deferred tax benefit 0 (133,000) 0
Share of loss of predecessor companies 0 663,000 663,000
Changes in:
Record company advances 1,422,000 (171,000) 940,000
Receivables (134,000) (428,000) (395,000)
Prepaid expenses (6,141,000) (459,000) (6,491,000)
Accounts payable, accrued expenses and sundry liabilities 623,000 647,000 2,286,000
--------------- ------------- -----------------
Net cash used in operating activities (28,442,000) (9,347,000) (43,574,000)
--------------- ------------- -----------------
Cash flows from investing activities:
Datatek acquisition, net of acquired cash of $565,000 0 (1,748,000) (1,748,000)
Payment of security deposits (1,625,000) (619,000) (2,550,000)
Cost of developing internal-use software (6,202,000) (590,000) (6,979,000)
Purchase of equipment (3,683,000) (408,000) (4,372,000)
--------------- ------------- -----------------
Net cash used in investing activities (11,510,000) (3,365,000) (15,649,000)
--------------- ------------- -----------------
Cash flows from financing activities:
Sale of 750,000 0 750,000
warrants
Payment on line of credit 0 (40,000) (40,000)
Purchase of treasury stock (1,835,000) 0 (1,835,000)
Proceeds from sale of stock, net of related costs 34,353,000 44,271,000 80,009,000
--------------- ------------- -----------------
Net cash provided by financing activities 33,268,000 44,231,000 78,884,000
--------------- ------------- -----------------
Effect of exchange rate changes (248,000) 0 (533,000)
---------------- ------------- ------------------
Change in cash and cash equivalents (6,932,000) 31,519,000 19,128,000
Cash and cash equivalents - beginning 26,060,000 0 0
--------------- ------------- -----------------
Cash and cash equivalents - ending $ 19,128,000 $ 31,519,000 $ 19,128,000
=============== ============ ================
Supplemental disclosures of noncash activities:
Issuance of warrants relating to events $ 3,889,000 $ 3,889,000
Issuance of stock for receivable $ 38,000 $ 26,000 $ 64,000
Issuance of stock and warrants in connection with acquisition $ 25,590,000
Deferred compensation by grant of options $ 5,678,000 $ 47,125,000
Issuance of stock and warrants for software development $ 1,835,000 $ 1,835,000
Issuance of stock for notes payable and accrued interest $ 730,000
Issuance of warrants relating to prepaid expenses in connection
with joint venture agreement. $ 2,247,000
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(Unaudited)
NOTE A - THE COMPANY
The accompanying financial statements include the accounts of MCY.com, Inc. (the
"Company") and its wholly-owned subsidiaries after elimination of all
intercompany transactions.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals, except for
the write-off during the nine month period ended September 30, 2000 of impaired
intangible assets described in Note D) considered necessary for a fair
presentation have been included. The results of operations for the nine months
ended September 30, 2000 are not necessarily indicative of the results to be
expected for the full year. For further information, refer to the Company's
annual report filed on Form 10-KSB for the year ended December 31, 1999.
The Company operates an Internet website offering an interactive environment and
virtual music store where music buyers can purchase digital music downloads and
webcasts in an encrypted and enhanced format, as well as other products. The
Company also intends to engage in the production of entertainment events and
other related activities. The Company is in the development stage, since planned
operations have commenced but there have been no significant revenues therefrom.
The Company is subject to those general risks associated with development stage
companies, as well as special risks unique to emerging E-commerce companies
which, by definition, seek to create new markets for their innovative products
and services. As shown in the accompanying financial statements, the Company has
incurred substantial net losses since inception and the Company and its
predecessor companies have generated minimal revenues related to the Company's
planned operations. Further, the Company's business concept and business model
are unproven and, accordingly, the Company's viability is uncertain. There is no
assurance that the Company will ever attain profitable operations and operating
cash flow.
NOTE B - COMMITMENTS AND CONTINGENCIES
On December 16, 1999, a former employee of MCY Music World, Inc., a subsidiary,
filed a complaint against the Company in New York State Supreme Court. The
complaint asserts five claims including breach of contract, wrongful termination
and fraud related to compensation due to him for the signing and distribution of
content as well as fees related to a private placement of the Company's stock on
October 25, 1999. The complaint asks for damages of approximately $23,000,000 on
each claim including 20,000 shares of the Company's common stock, stock options,
fees and royalties. The Company believes that the former employee's claims lack
substantial merit, and intends to vigorously defend against this action. On
January 14, 2000, the Company filed a motion to dismiss the complaint. The
Company's motion to dismiss was partially granted on June 6, 2000 in a decision
and order which dismissed three of the plaintiff's claims. The decision and
order, however, allow the plaintiff to pursue certain contract claims pending
the results of discovery. Management believes that the outcome of this
litigation will not have a material adverse effect on the financial position or
results of operations of the Company.
6
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(Unaudited)
NOTE B - COMMITMENTS AND CONTINGENCIES (CONTINUED)
A former trade partner, contributed DM 1,600,000 to the development of the
Company's technological platform and subsequently demanded repayment of DM
1,210,000 of this amount on January 30, 1998. Fritsch & Friends rejected this
demand on February 3, 1998, and since then the partner has not pursued this
alleged claim. In addition, Fritsch & Friends entered into an agreement with an
investment group in November 1997, which it subsequently revoked. In an
unrelated matter, in February 2000, the Company received a notice from the
American Arbitration Association ("AAA") indicating that a request for
arbitration had been filed. To date, however, the Company has not received any
documents indicating the basis or the grounds for the claim. The Company
believes that it is unlikely that it will sustain material losses in connection
with these matters in excess of amounts previously accrued.
On May 3, 2000, an individual, who had been retained by MCY America, Inc. and
MCY Music World, Inc. to obtain equity capital from a specific investor for MCY
Music World, Inc., filed a complaint against MCY America, Inc. and MCY Music
World, Inc. in federal district court in New York City, alleging claims for
breach of contract, promissory estoppel and unjust enrichment. The complaint
does not appear to allege a claim for breach of a written engagement agreement
but rather appears to allege that the Company and the subsidiaries allegedly
breached an oral agreement to compensate the plaintiff for enabling the Company
to obtain financing through a well-known investment banking firm. Claimant
asserts further that he is entitled to a cash fee, as well as stock options, in
return for his alleged involvement in the financing, and seeks damages of at
least $13,315,000, together with prejudgment interest and costs. As the Company
believes that the claims lack substantial merit, the Company intends to
vigorously defend this action and has filed a motion for summary judgement.
Management believes that the outcome of this litigation will not have a material
adverse effect on the financial position or results of operations of the
Company.
The Company and certain of the predecessor companies, are parties to various
other claims and legal proceedings incidental to their business. Management
believes that adequate liabilities to cover any resulting losses have been
reflected in the accompanying financial statements, and that the outcome of
these claims and proceedings will not have a material adverse effect on the
financial position or results of operations of the Company.
NOTE C - STOCKHOLDERS' EQUITY
[1] From February 16, 2000 through March 9, 2000, the Company sold in a
private placement an aggregate of 5,006,390 shares of common stock at a
price of $7.50 per share, for proceeds of approximately $34,400,000 net
of commissions and fees to the placement agent and others.
[2] In May 2000, management initiated a stock buyback plan offering certain
stockholders the ability to sell back a specified number of shares to the
Company. The offer expired on May 31, 2000. One employee, one officer and
one director sold back a total of 200,000 shares at $7.00 per share. One
non-employee stockholder sold back 25,000 shares at $7.00 per share.
Three employee stockholders sold back 52,000 shares at $5.00 per share.
[3] During January 2000, 42,500 options with an exercise price of $1.50 per
share and 225,000 options with an exercise price of $3.20 per share were
exercised and paid for by the return to the Company of 79,874 shares of
common stock at an estimated market price of $9.8125 per share.
7
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(Unaudited)
NOTE C - STOCKHOLDERS' EQUITY (CONTINUED)
[4] During the nine months ended September 30, 2000, the Company granted
additional options to employees to purchase an aggregate of 2,245,000
common shares at an average exercise price of $6.00 per share. In
addition, unvested options previously granted to certain employees to
purchase approximately 1,142,000 shares of common stock at exercise
prices of $1.50 to $12.75 per share were cancelled due to termination of
employment and vested options to purchase approximately 209,000 shares of
common stock at exercise prices of $1.50 to $12.00 per share expired
unexercised.
[5] During the nine months ended September 30, 2000, the Company issued
warrants, principally to artists in connection with contracts to provide
pay-per-view webcasts of concerts and to vendors. Such warrants permit
the purchase of 1,161,200 shares of common stock at exercise prices of
$2.13 to $16.63. The warrants were valued using the Black-Scholes
valuation model at approximately $3,951,000 and are exercisable over one
to three year periods. All of the warrants were issued for services
rendered. In addition, the Company sold to a vendor a warrant to purchase
1,071,428 shares of stock at an exercise price of $2.25 for $750,000
cash.
[6] During the nine months ended September 30, 2000, the holder of warrants
to purchase 657,330 common shares at $6.00 per share exercised the
warrants which were paid for by the return to the Company of 326,033
shares of common stock at an estimated market price of $12.10 per share.
[7] During the nine months ended September 30, 2000, the Company signed
agreements with vendors to issue 1,280,063 shares of common stock in
payment for services. Additionally, the Company entered into a settlement
agreement to reduce the number of shares payable to a consultant from
110,000 to 50,000. Finally, the Company issued 17,500 shares of common
stock to one vendor in exchange for the cancellation of a previously
issued warrant to purchase 33,333 shares of common stock at $5 per share.
NOTE D - INTANGIBLE ASSETS
The Company accounts for impairment of long-lived assets, including its
intangible assets, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". SFAS No. 121 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the book value of the asset may not be recoverable.
The Company evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment. In accordance
with SFAS No. 121, the Company uses an estimate of the future undiscounted net
cash flows of the related assets over their remaining estimated useful lives in
measuring whether the assets are recoverable. Based on the limited revenues to
date earned by the Company related to its acquired intangibles, and giving
further consideration to the impact of events outside of the Company's control
such as rapidly changing market circumstances on consumer acceptance of the
Company's business model and proposed product offerings, and the delayed
development of technology conducive to its intended operations, including, but
not limited to the development of broadband transmission networks, the Company
has revised its projections of future cash flows as they relate to the acquired
intangibles. As a result, the Company no longer expects reasonably estimable
future net cash flows related to the use of its acquired technology over the
remaining estimated useful lives of the intangibles to be adequate to recover
its investment in the acquired intangibles, and further believes the fair value
of such intangibles to be nominal. Accordingly, as of June 30, 2000, the Company
has written off $21,985,000, representing the then unamortized balance of such
intangibles, consisting principally of the excess of cost over the fair value of
identifiable net assets acquired.
8
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
Notes to Condensed Consolidated Financial Statements
September 30, 2000
(Unaudited)
NOTE E - SUBSEQUENT EVENT
In October 2000, the Company signed an agreement to license their proprietary
secure digital encryption and distribution technologies, including its NETrax
software to a provider of e-business solutions. The agreement allows the
licensee to utilize the Company's NETrax technologies for certain
non-entertainment business-to-business applications. Under the terms of the
agreement, the Company will receive net consideration of approximately $30
million for the grant of the license, consisting of registered stock of the
licensee, a publicly held company whose shares are traded on the NASDAQ.
Revenue, net of related costs, will be recognized when certain conditions are
met, which the Company anticipates will be either in the fourth quarter ending
December 31, 2000 or the first quarter ending March 31, 2001.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MCY.com, Inc. owns and operates an Internet website located at
http://www.mcy.com, which provides an interactive environment and virtual music
store where music buyers can: (i) view live concert events and purchase various
music products and services including digital music downloads, compact discs and
pay-per-view live events; (ii) obtain information on various artists, musical
genres, new music releases, concert events, articles, reviews; and (iii) view
videotaped and real-time artist interviews and concerts. The Company was
incorporated on January 8, 1999 and has since been in the development stage
devoting its efforts to recruiting management and technical staff, aggregating
premium content, acquiring operating assets, raising capital and organizing
itself as a public reporting entity. The Company currently operates within one
industry segment on a global basis.
In addition to historical statements, this Quarterly Report on Form
10QSB contains certain forward-looking statements that are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from those stated or implied. Forward-looking statements are those that use the
words "anticipates," "believes," "estimates," "expects," "may," "will," and
similar expressions. These forward-looking statements reflect management's
opinions only as of the date hereof, and the Company assumes no obligation to
update this information. Risks and uncertainties include, but are not limited to
those discussed in the Company's prior SEC filings.
Results of Operations
Through September 30, 2000, we incurred costs to design, organize and
develop an Internet website to conduct our businesses. We began selling musical
recordings over the Internet in August 1999 and began our first significant
selling and marketing initiatives in the quarter ended September 30, 1999. We
may experience significant fluctuations in operating results in future periods
due to a variety of factors, including:
<TABLE>
<CAPTION>
<S> <C>
o the demand for downloadable music content and Internet advertising
o the addition or loss of advertisers
o the level of traffic on its Internet sites
o the amount and timing of capital expenditures and other costs relating to the expansion of its operations
o the introduction of new sites and services by us or our competitors
o seasonal trends in Internet use, purchases of downloadable music and advertising placements
o price competition or pricing changes in the industry
o technical difficulties or system downtime
o general economic conditions and economic conditions specific to the Internet
o the cost and availability of premium music and entertainment content
o market conditions and demand for the sale, sublicensing and syndication of music and entertainment content
</TABLE>
<PAGE>
Net Revenues
For the quarter and nine months ended September 30, 2000, our consolidated
revenues totaled $211,000 and $474,000, respectively. Revenues for the quarter
and nine months ended September 30, 2000 consisted primarily of revenue from
advertising with a minimal percentage arising from sublicensing agreements,
webcast pay-per-view revenue and the sale of digital downloads over the
Internet. The Company had revenues of $165,000 for the quarter and nine months
ended September 30, 1999, which consisted of advertising revenue. Revenues from
inception through September 30, 2000 totaled $817,000 and consisted primarily of
advertising and sublicensing revenue with a minimal percentage arising from the
sale of webcast pay-per-views and digital downloads over the Internet.
Sales, Marketing and Public Relations Expenses
Sales, marketing and public relations expenses consist primarily of:
<TABLE>
<CAPTION>
<S> <C>
o Sales and marketing salaries and benefits
o The cost of presenting free events and trade shows
o Consulting fees and related expenses for public relations activities, and
o European promotional activities including travel and entertainment
costs of participating individuals Sales, marketing and public
relations costs for the quarters ended September 30, 2000 and 1999
totaled $2,120,000 and $2,302,000 respectively.
</TABLE>
Sales, marketing and public relations costs for the nine months ended
September 30, 2000 and 1999 totaled $8,395,000 and $5,083,000, respectively.
During the quarter ended June 30, 1999, the Company began to incur significant
sales, marketing and public relations expenses due to the production of our
first webcast. Sales, marketing and public relations costs for the period from
inception through September 30, 2000 totaled $16,914,000. Sales, marketing and
public relations costs decreased during the quarter ended September 30, 2000
because the Company outsourced less of its activities and conducted more
directed marketing programs. These costs increased during the nine months ended
September 30, 2000 with the development of the Company's marketing and branding
strategy. As part of our marketing strategy and, in an effort to aggressively
create brand awareness, a significant portion of these costs were expended on
presenting free events, event sponsorship, trade shows and related promotional
activities during the fifteen month period ended September 30, 2000.
We also expect to enter into various strategic alliances, begin other
targeted advertising and direct promotion campaigns, attend trade shows and
begin other activities to attract new customers. As a result, we expect to incur
significant sales and marketing expenses in future periods.
<PAGE>
Product Development Expenses
We began our development efforts in June 1999. Product development
expenses consist principally of:
<TABLE>
<CAPTION>
<S> <C>
o Website and content development, including software engineering, audio and video production and graphic design.
o telecommunications charges.
o salaries, rent, depreciation and other expenses related to building its music distribution business.
o amortization of premium content advances made to master rights holders/artists.
</TABLE>
Product development expenses for the quarters ended September 30, 2000 and
1999 were $1,488,000 and $815,000, respectively. Product development expenses
for the nine months ended September 30, 2000 and 1999 were $4,878,000 and
$1,339,000, respectively. These costs reflect the ongoing investment in our
product development efforts, particularly in software engineering and graphic
design. We started to incur product development costs during the quarter ended
June 30, 1999. Product development expenses for the period from inception
through September 30, 2000 totaled $7,007,000. The increase in product
development costs over the periods reflects the continuing development of the
Company's website. Such costs consist mainly of personnel costs related to
technical and creative staff and managers.
Content Acquisition
Content acquisition consists primarily of costs incurred to maintain a
department dedicated to the acquisition of premium musical and other
entertainment-related content, including the costs of employee salaries and
related benefits, fees paid to consultants dedicated to content acquisition
activities and royalties paid to secure rights to music and related media.
Content acquisition costs for the quarter ended September 30, 2000 and 1999
totaled $1,550,000 and $475,000, respectively. Content acquisition costs for the
nine months ended September 30, 2000 and 1999 $6,227,000 and $650,000,
respectively. We began incurring content acquisition costs towards the end of
the quarter ended June 30, 1999. Content acquisition costs for the period from
inception through September 30, 2000 totaled $7,810,000. The increase in content
acquisition costs during the periods is a reflection of the Company's aggressive
content acquisition strategy.
General and Administrative Expenses
General and administrative expenses consist primarily of executive
management, finance, legal, administrative and related overhead costs, such as
rent and insurance. General and administrative expenses for the quarters ended
September 30, 2000 and 1999 were $2,312,000 and $1,908,000, respectively.
General and administrative costs for the nine months ended September 30, 2000
and 1999 were $7,734,000 and $2,257,000, respectively. General and
administrative costs totaled $12,204,000 from inception through September 30,
2000. General and administrative expenses increased during the periods
principally as a result of additional headcount required to manage the Company's
growing operations. The Company's general and administrative expenses decreased
during the quarter ended September 30, 2000, primarily due to a temporary
decrease in staff as the Company refocuses its efforts on the growth of its
business. The Company expects general and administrative expenses to increase as
the Company expands its staff and incurs additional costs related to the growth
of its business.
<PAGE>
Amortization of Acquired Intangibles
During 1999, MusicWorld acquired certain predecessor companies. As a
result, the Company recorded intangible assets comprised as follows:
<TABLE>
<CAPTION>
<S> <C>
Technology and related contracts $ 4,410,000
Record label contracts and catalogs 630,000
Excess of cost over fair value of identifiable net assets acquired 23,281,000
----------
$ 28,321,000
==========
</TABLE>
Amortization of technology and related contracts as well as record label
contracts and catalogs was being recorded over three years resulting in an
amortization expense of $420,000 per quarter through June 2002. The excess of
cost over fair value of identifiable net assets acquired was being amortized
over five years, prior to the Company's determination at June 30, 2000 to
write-off such intangibles in their entirety - see below.
The combined amortization expense for the quarter and nine months ended
September 30, 2000 were $0 and $3,168,000, respectively. The combined
amortization expense for the quarter and nine months ended September 30, 1999
were $1,664,000 and $1,664,000, respectively. Combined amortization expense for
the period from inception through September 30, 2000 totaled $6,336,000.
Write-off of Impaired Intangible Assets
As of June 30, 2000, the Company wrote off the unamortized balance
($21,985,000) of the intangible assets it acquired on July 2, 1999 as part of
its transaction with Datatek. The intangible assets consisted primarily of
certain technology, know how, etc., which the Company capitalized pursuant to
the acquisition which closed July 2, 1999. As stated above, prior to the
write-down during the three months ended June 30, 2000, the carrying amount of
the intangible assets was being amortized over a period of three and five years.
Based on recent changes in the digital music landscape, including, but not
limited to, the proliferation of a music sharing program known as "Napster",
litigation involving the major record labels and Napster, the delay of existing
physical music labels in adopting digital downloading as a delivery mechanism
for music, the limited penetration of broadband access to the consumer and
delays in technology delivery, the Company believed that the ability of such
intangible assets to generate net cash flows over the planned amortization
period has been impaired to the extent that the value of the acquired intangible
assets should be written off in their entirety.
As of June 30, 2000, the Company did not anticipate the licensing
transaction that occurred in October 2000, pursuant to which, upon closing, the
Company will realize net consideration of approximately $30 million for the
license of its proprietary software. See Note E to the financial statements.
<PAGE>
Stock Based Compensation
The Company recorded charges related to stock based compensation for the
quarter and nine months ended September 30, 2000 of $1,894,000 and $13,136,000,
respectively. Stock-based compensation for the quarter and nine-month period
ended September 30, 1999 were $37,943,000 and $40,522,000, respectively.
Stock-based compensation for the period from inception to September 30, 2000
totaled $63,040,000. Included in this amount is amortization of deferred
compensation arising from options issued to employees and consultants at various
dates amounting to $32,047,000. In addition, we recorded a compensation charge
to operations of approximately $23,741,000 during August 1999 in connection with
a sale by holders of 4,000,000 shares of HBI common stock of approximately
3,970,000 of such shares to certain of our stockholders who also served as
advisors to the Company. The balance of stock based compensation charges arose
from common stock and options issued to employees, consultants and artists for
services.
As of September 30, 2000, future amortization related to stock based
compensation will be:
<TABLE>
<CAPTION>
Employees and
Year Ending December 31, Consultants Artists
------------------------
<S> <C> <C> <C> <C>
2000 (from October 1 through December 31) $ 1,435,000 $114,000
2001 5,577,000 227,000
2002 4,097,000
2003 772,000
----------------------------------------------------------------------
$ 11,881,000 $341,000
======================================================================
</TABLE>
Share of Loss of Predecessor Companies
Share of loss of predecessor companies reflects the net loss incurred by
the Company as part of MusicWorld's acquisition of Datatek and Fritsch &
Friends. The Company's share of loss of predecessor companies for the quarter
and nine months ended September 30, 1999 was $0 and $663,000, respectively.
Liquidity and Capital Resources
Our cash balance as of September 30, 2000 was $19,128,000. Net cash of
$28,442,000 was used for operating activities for the nine months ended
September 30, 2000. Such amounts were used principally as a result of net losses
of $64,550,000 generated during the period and the increase in current assets of
$6,275,000, offset by the increase in current liabilities of $623,000 and
non-cash expenses associated with stock and stock-based compensation of
$13,136,000, stock-based sales and marketing of $1,212,000, depreciation and the
amortization of intangibles of $4,005,000 and the write-down of intangible
assets of $21,985,000. The Company expects to incur negative cash flow from
operations for the foreseeable future, as we continue to develop our business.
<PAGE>
Additionally, the Company purchased approximately $3,683,000 in capital
equipment and incurred $6,202,000 to develop internal-use software during the
nine months ended September 30, 2000. In addition, the Company made deposits
relating to the purchase of equipment totaling $1,625,000 during the nine months
ended September 30, 2000. The company also repurchased $1,835,000 of common
stock from certain shareholders during the nine months ended September 30, 2000.
During the nine months ended September 30, 2000, the Company raised net
proceeds of approximately $34,353,000 through the sale of 5,006,390 shares of
its common stock at $7.50 per share, in a private placement managed by three
placement agents.
The Company has commitments to spend approximately $1.3 million for
computer hardware and related equipment under a non-cancelable operating lease
expiring in March 2003.
Since inception, the Company has experienced significant losses and
negative cash flows from operations. Management believes that existing capital
resources will be sufficient to fund the planned level of operating activities,
capital expenditures and other obligations through the next 12 months. However,
the Company may need to raise additional funds in future periods through public
or private financings, or other sources, to fund operations and potential
acquisitions, if any, until profitability is achieved, if ever. The Company may
not be able to obtain adequate or favorable financing at that time. Failure to
raise capital when needed could harm the Company's business. If the Company
raises additional funds through the issuance of equity securities, the
percentage of ownership of the Company's stockholders would be reduced.
Furthermore, these equity securities might have rights, preferences or
privileges senior to the current common stock outstanding.
CERTAIN TRANSACTIONS
Set forth below are certain transactions in securities of MCY.com which
occurred during the nine months ended September 30, 2000.
From February through March 2000, MCY.com sold an aggregate of 5,006,390
shares of its common stock at $7.50 per share, in a private placement managed by
three placement agents, resulting in net proceeds of approximately $34,353,000.
In January 2000, MCY.com agreed to issue the Backstreet Boys and their
nominees an eighteen month warrant to acquire up to 500,000 shares of MCY.com
common stock at a price of $9.75 per share.
In March 2000, MCY.com agreed to issue to Bad Boy Touring, Inc., the label
of the artist, Sean "Puffy" Combs, a twelve month warrant to acquire up to
100,000 shares of MCY.com common stock at a price of $16.00 per share.
In March 2000, MCY.com agreed to issue the band `NSYNC and their nominees a
twelve month warrant to acquire up to 500,000 shares of MCY.com common stock at
a price of $13.17 per share.
In each of March, April, May, June, July, August and September 2000,
MCY.com agreed to issue the public relations firm, Susan Blonde, Inc., a twelve
month warrant to acquire up to 1,600 shares of MCY.com common stock at a price
of $12.75, $12.63, $9.75, $8.44, $7.00, $3.50, and $2.13 per share,
respectively.
<PAGE>
In August 2000, MCY.com issued 17,500 shares of common stock to Frankfurt
Balkind, Inc. in conjunction with an agreement to cancel a warrant to purchase
50,000 shares of common stock previously issued.
In September 2000, MCY.com agreed to issue the web development consulting
company, Sapient Corporation, 1,276,313 shares of MCY.com common stock valued at
$1.44 per share. Sapient Corporation also purchased a five year warrant to
purchase 1,071,428 shares of common stock at $2.25 per share. Sapient
Corporation paid $750,000 for such warrant. In conjunction with the warrant
purchased, a warrant to purchase 50,000 shares of common stock at $2.25 was
issued to an individual.
In October 2000, the Company signed an agreement to license their
proprietary secure digital encryption and distribution technologies. The
agreement allows the licensee to utilize such technologies for certain
business-to-business applications. The company will receive net revenues of
approximately $30 million for the grant of the license. Such revenues will be
recognized when certain conditions are met, which the Company anticipates will
be either in the fourth quarter ending December 31, 2000 or the first quarter
ending March 31, 2001.
Incentive Option Plan
During January 2000, 42,500 options with an exercise price of $1.50 per
share and 225,000 options with an exercise price of $3.20 per share were
exercised and paid for by the return to the Company of 79,874 shares of Common
Stock at an estimated market price of $9.81 per share.
In April and May 2000, MCY.com granted additional options to employees and
consultants to purchase an aggregate of 1,245,000 common shares at an average
exercise price of $6.00 per share.
In August 2000, MCY.com granted options to an employee to purchase
1,000,000 shares at an exercise price of $6.00 per share.
As of September 30, 2000, 7,600,265 options were outstanding under the
Company's Incentive Option Plan, at a weighted average exercise price of $4.24
per share of MCY.com Common Stock. The options generally vest over a period of
three years from the date of grant and are exercisable at different prices
corresponding to the date of grant. Each option entitles the holder to purchase
one share of MCY.com Common Stock.
<PAGE>
Item 2. Changes in Securities.
None; not applicable.
Item 3. Defaults Upon Senior Securities.
None; not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's security holders during
the second quarter of the calendar year covered by this Report or during the two
previous calendar years.
Item 5. Other Information.
None; not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MCY.COM, INC.
Date: 11/14/00 By /s/ Bernhard Fritsch
-------- --------------------------------
Bernhard Fritsch, CEO & Chairman
and President
