U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended December 31, 1999
[.] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File No. 333-9809
MCY.COM, INC.
(Name of Small Business Issuer in its charter)
Delaware 13-4049302
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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: None
(Title of Class)
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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
---
The issuer's revenues for its most recent fiscal year: $343,000.
The aggregate market value of the voting common stock held by
non-affiliates of the registrant (36,339,320 shares) as of March 23, 2000 was
$517,835,310 (computed by reference to the average bid and asked price ($14.25)
of such common equity).
The number of shares outstanding of the issuer's common stock as of
March 23, 2000: 59,635,004.
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TABLE OF CONTENTS
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Item Number Page Number
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PART I............................................................................................................3
ITEM 1. DESCRIPTION OF BUSINESS..........................................................................3
ITEM 2. DESCRIPTION OF PROPERTY.........................................................................23
ITEM 3. LEGAL PROCEEDINGS...............................................................................24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................25
PART II..........................................................................................................26
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................................26
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS......................................30
ITEM 7. FINANCIAL STATEMENTS............................................................................35
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE......................................................................................36
PART III.........................................................................................................37
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT...............................................................37
ITEM 10. EXECUTIVE COMPENSATION..........................................................................39
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................42
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................44
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................................................46
SIGNATURES.......................................................................................................48
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PART I
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 concert events and purchase various
music products and services including digital music downloads and pay-per-view
"webcast" events, which are events or performances broadcast over the Internet;
(ii) obtain information on various artists, musical genres, new music releases,
concert events, articles and reviews; and (iii) view videotaped and real-time
artist interviews and concerts.
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. MCY Music World, Inc. ("MusicWorld") was
incorporated on January 8, 1999 in the state of Delaware to acquire certain
predecessor companies based in Germany and to further develop its planned
operations, which include the creation and opening to the public of an online
service platform to provide worldwide promotional and sales services for the
music buying public and the music industry. On August 2, 1999, MusicWorld
completed a reverse merger into Health Builders International, Inc. ("HBI"), a
public company incorporated in the state of Delaware which had no commercial
operations at the time of the merger. The merger was consummated through an
exchange of shares that resulted in stockholders of MusicWorld holding
43,324,988 shares of common stock (excluding 121,667 shares of common stock
issuable to creditors) or 90.4% of the outstanding common shares of HBI and
1,000,000 shares of Series 1 Preferred Stock (100% of such class) and existing
stockholders of HBI holding 4,611,000 shares of common stock. The merger is
being accounted for as a recapitalization and retroactive effect has been given
to the recapitalization in the accompanying financial statements. In connection
with the merger, HBI changed its name to MCY.com, Inc. (the "Company").
On July 2, 1999, MusicWorld acquired the assets of Datatek Services
Limited ("Datatek") including the stock of MCY America, Inc. ("MCY America") and
Fritsch & Friends (collectively the "predecessor companies") in exchange for
cash of $1,050,000, 4,500,000 shares of MusicWorld's common stock valued at
$22,500,000 and 5-year warrants to acquire 2,000,000 shares of common stock at
an exercise price of $5.00 per share, valued at $3,000,000, for an aggregate
cost of $26,550,000. In addition, the Company agreed to pay to Datatek, on a
quarterly basis, 1% of gross revenues either, (i) for a period of 20 years, or
(ii) until such time as the payments total $9,000,000. As of the date of the
acquisition, the predecessor companies owed MusicWorld $1,243,000 representing
the balance of loans made by MusicWorld prior to the acquisition. MusicWorld's
founder, controlling stockholder and Chairman was the Chief Executive Officer, a
director and owned a 47.5% beneficial interest in Datatek which was transferred
to the other Datatek stockholders for no consideration immediately prior to the
closing of the acquisition. Datatek and its subsidiaries had been involved in
the development, purchase and licensing of the technology, intellectual property
and other business assets that are required for MusicWorld's intended business
operations. The transaction has been accounted for as a purchase by MusicWorld
of a 52.5% ownership in the Datatek assets and a contribution to MusicWorld of
the 47.5% interest formerly owned by MusicWorld's founder and controlling
stockholder. Such contributed interest has been recorded at the predecessor
basis to the controlling stockholder which approximates 47.5% of the
stockholders' deficiency of the predecessor companies at the acquisition date.
In addition, 47.5% of the loss of predecessor companies for the period from
January 1, 1999 through July 2, 1999 is reflected in the Company's results of
operations on the equity method and 100% of the results of operation of the
predecessor companies are consolidated with those of the Company from July 2,
1999. The aggregate cost of the acquisition of the 52.5% interest, amounting to
$27,793,900, including $1,243,000 of loans receivable from predecessor
companies, reduced by $1,069,000 representing 47.5% of the stockholders'
deficiency of the predecessor companies at the acquisition date has been
allocated to assets acquired and liabilities assumed at date of acquisition as
follows:
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Cash $ 565,000
Sundry receivables 137,000
Due from related parties 109,000
Equipment and software, net 370,000
Other assets 146,000
Intangibles 28,321,000
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29,648,000
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Accounts payable, accrued expenses and sundry liabilities 2,884,000
Line of credit 40,000
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2,924,000
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Cost of net assets acquired $ 26,724,000
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The contingent consideration will be accounted for as royalty expense
as it becomes payable. Also in connection with this transaction, founders of
MusicWorld agreed to return 2,000,000 shares of common stock, which were then
canceled. Assuming the acquisition had occurred as of January 8, 1999, the
Company's unaudited pro-forma net loss, including amortization of the acquired
intangibles, would have amounted to $(73,467,000) or $(1.66) per common share
for the period January 8, 1999 through December 31, 1999.
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, a German
corporation; and (vii) MCY West, Inc., a California corporation. MusicWorld is
our operating company. From time to time we may use the terms "we", "our" or the
"Company"; such terms refer to MCY.com, Inc. and our subsidiaries.
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 music from independent record labels and recording
artists. We currently offer consumers "NETrax downloads" of music and
pay-per-view "streams" of concerts and music performances. "Streaming" is a
method of transmission via the Internet, similar to traditional broadcast of
radio or television, that transmits audio files or video files to a user's
computer in such a manner that the user is unable to make a digital recording
for future use. Prior to the advent of "streaming technology", Internet users
could not initiate the playback of audio or video clips until such content was
downloaded in its entirety, resulting in significant waiting times. As a result,
live broadcasts of audio content over the Internet were not possible.
"Streaming" allows audio or video segments to be played immediately as they are
downloaded from the Internet, rather than first being stored in a file in the
receiving computer. Streaming is accomplished by way of web-browser "plug-ins"
which decompress and play the audio or video file in "real-time". "Plug-ins" are
accessory programs such as software upgrades and additions that enhance a main
application such as enabling an existing software program to be compatible with
or operate with another software program or software file format.
The Moving Pictures Experts Group has developed a popular
non-proprietary format called the MPEG-1 Audio Layer 3 or "MP3" that allows
audio 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 compact disc or CD, converted to MP3 format, can be
downloaded over a cable modem in approximately 20 minutes). We distribute our
audio files using a proprietary enhanced and encrypted version of the MP3 format
called "NETrax." We expect the NETrax format 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" which is the quality of stereo sound available on a
CD).
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o Instantaneous sales "tracking" ability to drive marketing and
promotional campaign research. "Tracking" is the process by
which we utilize information obtained from users of our
website including purchases by users and payments due to
licensors, rights holders, publishing agents, administrators
and publishers.
o Point of sale royalty tracking to ensure prompt and accurate
payment to artists and license holders.
We intend to offer CDs and music-related merchandise including
T-shirts, videos and books through our website during 2000.
STRATEGY
We intend to become a global retailer of digitally downloadable music,
music-related products and services, and an Internet broadcaster of music
events. Key elements of our business strategy include:
Focus on Digital Music Distribution. We are focused on digital music
distribution. We believe that adoption of digitally downloaded music will
increase slowly over the next two to three years as broadband adoption increases
and as handheld electronic playback devices gain penetration into consumer
markets. Until such time as digital music distribution reaches critical mass, we
offer and intend to continue to offer, in addition to our catalog of digital
music tracks, unique webcast events from "top artists" and mail order
distribution of compact discs ("CD's") to maintain consumer engagement and site
traffic. We believe that the future of the music industry lies with digital
distribution and we will attempt to "convert" our webcast and CD mail order
customers to digital music purchasers by offering special promotions including
free NETrax downloads. Our research and development efforts have been and will
continue to be focused on achieving a position as a premier online distributor
of digital entertainment media. Pending widespread adoption of digital music
distribution by the mass consumer market, we expect that our primary source of
revenue will come from pay-per-view webcasts of live events, sponsorship,
advertising and sublicensing rights. We expect digital download revenues to be
our primary source of revenue commencing in 2003. We currently generate revenue
primarily from advertising on our website and sponsorship of webcast streaming
events. We currently charge for webcast events and digital downloads, however,
revenue from such sources has been minimal.
Broaden Retail Content. We negotiate directly with labels, artists and
rights holders to acquire music for retail digital distribution. We have
licensed an extensive catalog of music in a variety of genres and intend to
continue our efforts in this regard, including a deal signed in February 2000 to
digitally deliver limited content from Arista Records, Inc. (a record label
owned by BMG) artist LFO. Although we do not yet have rights to distribute
content provided by the other three major record label companies, namely Sony
Music Entertainment, Inc., Universal/Polygram Records and Warner/EMI Music
Group, we do not believe that such distribution rights are a requisite for our
business. To the extent that we do not obtain any further content owned or
controlled by the "major" labels, we may proceed with a strategy of dealing
directly with top artists to acquire music directly from such artists. However,
because most internationally recognized artists typically sign multi-year
exclusive recording contracts with record labels, negotiations with such artists
may be limited.
Expand Rights of Ownership and Exploitation. In addition to securing
rights for the digital download of music files and the streaming of music
events, we intend to secure rights for distribution via other media including
CD, CD-ROM, DVD and television. We believe that by acquiring comprehensive
master and/or distribution rights to a music work or performance, we can (i)
generate revenues through sublicensing, (ii) create unique advertising and
sponsorship opportunities, and (iii) control the introduction of and access to
music in the market place to maximum benefit.
Expand Entertainment Content. Our strategy 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 have and intend to
continue to seek out unique content such as videotaped interviews, articles and
music reviews. These items are a part of our library of digital entertainment
content, some of which is only available through MCY. By expanding the type of
content we offer, we intend to differentiate ourselves from our competitors.
Establish a Brand Name. We promote the "MCY.com" brand through the
exploitation of our "top star" webcast events. We have webcast numerous "top
star" events such as Michael Jackson, Luciano Pavarotti and Paul McCartney on a
no fee basis to bring traffic to our web site and promote our brand. We will
offer additional webcasts on a pay-per-view basis commencing March 2000 from
leading artists and bands such as The Backstreet
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Boys, NSync, Pete Townshend, Puff Daddy, Steel Pulse and others. In addition,
we intend to market and promote the "MCY.com" brand through online and
conventional marketing channels.
Engage in Customer Profiling and Direct Marketing. We obtain
information about our website's use, our customers' preferences and purchase
history through our customers' emails and communications. This data will enable
us to market directly to our customers through email, to further customize our
website, and to tailor product development and promotions to customers' tastes.
Provide Superior Customer Service. Our focus is to provide consumers
with 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 may outsource
all or a portion of 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 secure digital music distribution. We intend to maintain this
competitive advantage by continuing to emphasize further research and
development. Our belief that such technology is superior to that of our
competitors is based upon our evaluation of the current SDMI Phase I
requirements which rely on "watermarking" technology which allow the tracing of
the source of a digital file, however, does not prevent the unauthorized use of
the file. Under our technology, unauthorized access to digital content is
prevented using MMP encryption technology licensed from the Fraunhofer Institute
(for a more comprehensive description of this technology refer to the Encryption
subsection of the TECHNOLOGY section).
Actively Pursue Globalization. We plan to develop a network of
international regional-specific operations 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", or the electronic screen
containing information data fields for information or data to be provided by a
computer user. Through region-specific operations, 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 efforts are focused initially on the United States and
Germany and will be expanded as appropriate worldwide. Marketing is primarily
focused on: (i) increasing awareness and trial of MCY's digital music
experiences and products, and (ii) increasing consumer and trade awareness and
understanding of the MCY brand and of digital music.
MCY Audiences. Our consumer marketing is focused more on targeting
affinity groups (i.e. "Boy Band fans") than demographic groups. Nonetheless, we
track and assign priority to the four dominant demographic groups: "Boomers"
(ages 34-52); "Gen X" (Ages 25-33); "Gen Y" (ages 18-25), and "Teens" (ages
12-17).
We also target current and potential partners from the music, Internet
and technology industries.
Marketing Plan
We intend to utilize both traditional and alternative conduits in an
effort to reach our target audiences through the following actions:
Marketing Initiatives. Event sponsorship, online promotion and webcasts
are the predominant vehicles through which we intend to target and attract
consumers. We promote and broadcast premium events and concerts from our website
on a regular basis. Our webcasts to-date include the live 8-hour webcast of the
Michael Jackson & Friends concert from Munich in June 1999, the exclusive
webcast of Luciano Pavarotti from Helsinki in November 1999, and the live
webcast of Paul McCartney from the Cavern Club in Liverpool in December 1999. We
are under contract to webcast the Backstreet Boys Millennium Tour in March 2000,
NSync's No Strings Attached Tour commencing in the summer of 2000, the Puff
Daddy & Friends European Tour and Pete Townshend's Lifehouse Concert. We
selectively sponsor the events that we webcast, for which we receive primary
brand positioning at the concert venue and in supporting print, television and
radio promotions.
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MCY.com Website and Artist "Portals". Our retail website is designed to
enable customers to quickly find, sample and purchase digital music experiences.
In order to maximize consumer use of and return to the website, we have
developed "portals" for our top artists that showcase our artists' digital music
offerings, including downloads and events, and provide unique information,
interviews and community features. We believe that these portals provide a
"sticky" experience that prolongs repeat fan visits to our website and
reinforces our brand through increased artist affinity and fan service.
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).
Global Public Relations. Our public relations are focused on increasing
the exposure of the MCY brand and music offerings to consumers, partners (music,
technology and Internet), investors and "influencers" worldwide. "Influencers"
or "Influentials" are people, companies or organizations who by their nature,
demographic or interests reach and influence a target audience of individuals or
consumers. To date we have received coverage in the United States and in Germany
through media outlets including Time Magazine online, The New York Times, Wall
Street Journal, the Los Angeles Times, Der Spiegel, Bild, Billboard, Variety,
Hollywood Reporter, ABC, NBC, CNBC and CBS Radio.
Trade Shows. Following our industry launch at Cannes MIDEM in January
1999, we 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 and the New York Music and Internet Expo 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.
Strategic Alliances. We maintain a number of strategic alliances to
obtain marketing, music and technological support for our products, our product
development and for retail purposes. We have established a relationship with
Mediaways GmbH ("Mediaways"), a subsidiary of Daimler-Chrysler Information
Systems or Debis, and the European service provider for America Online, for
networking services and bandwidth services for the operation of our website that
provides digital downloads. Under our agreement with Mediaways we make monthly
payments and certain other payments to lease the server, for server hosting and
for the bandwidth. On December 31, 1999, we entered into a website linking and
co-branded site development agreement with US West Communications Services, Inc.
("US West") 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 ("DSL") sites. The initial term of the
development agreement is for one year from December 31, 1999 to December 30,
2000. We have the right to renew the agreement for an additional two years upon
written notice thirty days prior to the expiration of the initial term. Under
the agreement, we pay a monthly payment of $ 25,000 to US West. In return, US
West has agreed to place our website as a digital music destination in its
narrowband and broadband (DSL) portals. The narrowband portal will be a
co-branded site with a US West navigation bar. The broadband co-branded site
will be part of US West's DSL portal called "Online Avenue". US West will
receive a percentage of all digital download sales, after expenses, made through
the portals. The co-branded site is expected to be implemented in the second
quarter of 2000.
Advertising. Our advertisements, including but not limited to, banner
advertisements, buttons and newsletters have appeared on internet portals (such
as Yahoo!, MSN and RealNetworks), on official artist fan club sites (such as
www.backstreetboys.com), unofficial artist fan club sites (such as
www.geocities.com), musical destination websites (such as Opera News and Sony)
and musical affinity websites (such as www.bolt.com). Our banner advertisements,
including the banner advertisement for the Pavarotti webcast in November 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. 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. Since inception, we have spent approximately $
2.2 million on advertising and related activities.
On and Offline Advertising. To date, we have advertised our products
and website through co-op radio spots and paid print advertising in the New York
Times, Wall Street Journal, Times of London, Billboard and
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Variety. We intend to expand paid and co-op television, radio and print
advertising efforts in 2000 in the United States, Germany and the UK, with
primary objectives including: (i) promoting consumer trial of our "top-star"
events and digital music products (leveraging existing consumer brand awareness
of these artists), (ii) building consumer awareness, understanding and trial of
our brand and retail websites, and (iii) building awareness of key strategic
developments among our investor and trade audiences.
Alternative Online Media. We utilize inexpensive alternative online
media, including chat groups and bulletin boards, to communicate in "real time"
with consumer, investor, trade and business audiences.
OPERATIONS
Potential customers can find MCY on the World Wide Web at the addresses
www.mcy.com, www.mcy.de, www.musiconclick.com and www.entertainmentonclick.com.
Our commercial websites are routed through our main servers in the United States
and in Germany. The websites located at www.mcy.com and www.mcy.de are currently
identical except that the language of the website located at www.mcy.de is in
German. 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.
Searching and Selecting
Our consumers will be able to search, "pre-listen", select and purchase
items online using our sales platform. A "pre-listen" is a short sample of a
song or musical performance, between 15-25 seconds, that allows the consumer
and/or potential purchaser of a download to listen to a portion of the song for
evaluation purposes. 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 approximately 11 music
categories to be further divided into over 100 specific sub-categories.
"Genre-based" refers to classifying music by a certain type or style such as
classical, rock/pop, R&B or country. 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. Digital
downloads vary in price from $0.99 per song to $1.99 per song. Webcast
pay-per-view events will have varying prices starting from approximately $3.99
depending upon the popularity of the event, length of the segment ordered and
whether other products are ordered with the event.
Ordering and Payment
Orders are made using a customer "shopping cart". A "shopping cart" is
a screen which shows downloads or other items that the consumer has selected for
purchase. The shopping cart may also contain downloads that the consumer or user
has previously purchased on our website. Payments can be made using most major
credit cards. We utilize Cybercash and Paylinx software to transmit transactions
to our merchant bank account. American Express, Bridgeview Bank and The Chase
Manhattan 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 by clicking on its icon in the customer's browser. The song
is automatically downloaded onto the customer's hard drive. Download time may
range from less than 30 seconds per song (for high-speed connections) to over 10
minutes per song (for 28.8K modems). "28.8K Modems" refers to computer modems
which connect a user's computer to the Internet via traditional phone lines and
have a maximum data transfer rate of approximately 28.8 kilobytes per second. 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 in 2000. We do not maintain a physical inventory of
CDs, instead, we will rely on an international distribution and fulfillment
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provider 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, we expect that the ordered product will generally be shipped to the
customer within 48 to 72 hours.
Sales Support
We intend to outsource mail order customer service functions to a
fulfillment partner. Otherwise, customers can 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 provide our 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
Fritsch had filed patent applications based upon previously filed provisional
applications for several key technological inventions including our sales and
royalty tracking systems, shopping list, and the personalized NETrax player
which he has licensed to us. We can give no assurance as to when the patent
applications will be approved or the patents granted. The U.S. Patent and
Trademark Office states in its 1998 Annual Report which is located on its
website at www.uspto.gov/web/offices/com/annual/1998/ that "at the end of fiscal
year 1998, cycle time (or processing time) [for applications] averaged 16.9
months, with 32 percent of applications processed in 12 months or less....By the
end of FY 1999....we expect to process 75 percent of inventions in 12 months or
less, with an average cycle time of 10.9 months." 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.
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 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 pursuant to a non-exclusive license from Thomson Consumer Electronic
Sales GmbH, the licensor. Under this license agreement, we are required to pay a
royalty payment to the licensor of 1% of our gross revenue from digital
downloads with a US$15,000 annual minimum. The license agreement was effective
on January 1, 1999 and expires on the expiration date of the last to expire of
the licensed patents. 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. Fritsch & Friends entered into the
non-exclusive perpetual license agreement with the Fraunhofer Institut on March
20, 1997. Under the license agreement, a payment of DM 25,000 was due on March
20, 1997 and a payment of DM 25,000 was due on June 30, 1997. On May 14, 1999,
we entered into a non-exclusive five year license with Fraunhofer Gesellschaft
zur Forderung der angewandten Forschung e.V. for the 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
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played a limited number of times, and allow us to sublicense the technology to
our strategic alliance partners. Under the license agreement, we pay a royalty
payment of DM 468,000 in consideration of the rights and license granted to us.
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
which provides "connectivity" and communication between our network and global
and local internet service providers. "Connectivity" refers to the connection
between various computer resources that make up the MCY web site. 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. "Firewalls" are software security
systems that attempt to prevent unauthorized access to the MCY site, systems and
the data contained on those systems.
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. "Cybercasting" refers
to the digital transmission, in this case, specifically via the Internet, of
digital entertainment data (by analogy, the computer network version of a
traditional broadcast). Our 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.
"Plug-ins" are software upgrades and additions that enable an existing software
program to be compatible with or operate with another software program or
software file format. Research and development costs will continue to be
incurred as our business evolves. From inception to December 31, 1999, we have
spent approximately $ 2.1 million on research and development.
COMPETITION
Key Success Factors
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 our existing competition, our main priorities are (i) the aggressive
acquisition of exclusive premium music distribution rights; (ii) the production
and sale of unique entertainment experiences from these rights; and (iii) the
development of the MCY brand.
DIGITAL DISTRIBUTION
General. There are currently few established players in the field of
retail distribution of digital audio files and fewer still engaged in secure
retail distribution. We believe that eventually only three to five main
competitors will exist and a substantial number of smaller companies focusing on
niche markets. In addition to our company, we believe the main players are
currently Amazon.com, CDNow, Emusic and Liquid Audio. These companies are
expected to have significant market share in the United States. 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. The
challenge they
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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., AudioSoft and Artist Direct (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 digital 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. We believe 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.
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. International Data Corporation estimates
that 97 million people worldwide in 1998 had access to the Internet, and
projects that this number will almost triple to approximately 310 million users
by the year 2002. 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.
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 $47 billion by the year 2004.
Online Sales of Music
In 1998, Jupiter Communications estimated that online sales of
prerecorded music would increase exponentially, reaching $2.6 billion by the
year 2003. 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. 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 the majority of digital distribution is presently done both illegally
and free of charge and partially because of the lack of broadband access
available to the general market (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
as broadband access becomes available to most households 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
primarily related to the reluctance of record labels and
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customers to embrace the new technology and the slow speed at which music is
currently downloaded. See "Risk Factors".
ADVANTAGES OF DIGITAL DISTRIBUTION
<TABLE>
<CAPTION>
- ---------------------------------------------------------- -----------------------------------------------------
BENEFITS TO THE RECORD COMPANY BENEFITS TO THE CUSTOMER
- ---------------------------------------------------------- -----------------------------------------------------
<S> <C>
Margins can jump from between $2 to $3 per CD (10-15 Immediate availability of all selections for
songs) to between $0.42 to $0.84 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 demographics Lower prices (made possible by the elimination of
and preferences substantial overhead)
Ability to market out-of-print and less popular items at Large assortment of available songs/albums,
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 levels
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. We can
give no assurance, however, that our predictions regarding the total revenue and
margins to be generated from digital distribution will be accurate or that
digital distribution will be able to generate such revenue.
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.
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.
While we believe that digital distribution as a source of music has
recently become known to consumers, we 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. We believe that broadband access and the speed with which music
can be digitally downloaded through broadband access will accelerate the
adoption of the digital distribution of music. The speed 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
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downloads as they did compact disc technology. A second issue that the music
industry is starting to address is that technology must allow customers to
listen to music obtained through digital downloads where and when they wish.
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 approximately 50, medium independents, which number in the
hundreds, and small independents, of which there are several thousand. We
currently acquire download and downstream rights directly from artists, record
labels and master rights owners. We currently have contractual downloading or
downstreaming rights agreements with over 80 record labels. We do not yet have
any rights to distribute content provided by Sony Music Entertainment, Inc.,
Warner/EMI and Universal/Polygram and we have the rights to digitally deliver
only limited content from Arista Records (a record label owned by BMG).
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. 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
The Internet, a platform which allows companies to fulfill customer
needs by providing 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 our advanced encryption and sales-tracking software, we
will be able to meet the needs of the major record labels although we can give
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
"broadband" high-speed connections through cable and digital subscriber lines.
"Broadband" refers to an Internet connection system which allows a computer to
connect to the Internet with a data transfer rate that exceeds traditional
dial-up services that utilize standard telephone service and connect using 28.8K
and 56K modems.
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 generally store from 32MB to 64MB of audio
data (up to 30 songs); however, manufacturers have announced plans to introduce
players with greater memory capacity which will allow music fans to carry a
large volume of music with them in a pocket-sized
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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 $0.58 - $1.16(3) $0.42 - $0.84 42%
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.
(3) The following assumptions were used in arriving at the direct costs
related to digital downloads as a percentage of per song revenue:
<TABLE>
<CAPTION>
<S> <C>
- Cost per download based on 1999 megabyte transfer rate: 5%
- Credit card processing cost of 3% per download: 3%
- Thomson MP3 patent license of 1% per download: 1%
- Bernhard Fritsch 0.25% trademark license fee on download revenue: 0.25%
- Mechanical royalty is fixed at $.07 per song or 0.5% of each download: 5%
- Datatek shareholder technology royalty on downloads: 1%
- Master license fee is 40% of sales price to artist for download: 40%
- Commission agents 4% of MCY share; i.e., 2.4% per download: 2.4%
----
Total percentage of download revenue considered direct cost of sale: 58%
====
</TABLE>
Projections and statements regarding gross margins achievable through
the sale of digital downloads are based on current existing and reasonably
foreseeable market conditions. Due to the rapidly changing Internet and online
music markets, however, we can give no assurances that the markets will not
experience significant changes including, but not limited to, increased costs
for the transmission of digital files, increased credit card and transaction
processing fees, a change in the royalty payment structure for digital downloads
and increased licensing costs which changes could have a material adverse effect
on the gross margins achievable from the sale of digital downloads.
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 advertisements 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. "Impressions" is an advertising/media term that quantifies the exposure
of media and advertising to members of the target audience, such as consumers.
"Click-through rates" are the rates at which an Internet user clicks on or
selects
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images, links or advertisement banners which are present on the page of a
website currently being viewed and which bring the user through to the various
pages on the website or to another site represented by the image, link or
advertisement banner on a particular page. 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 recouped in the long term through repeat
purchases and word-of-mouth. Nevertheless, it is this single cost item which to
date has caused most "E-commerce" companies to remain unprofitable.
"E-commerce", otherwise known as electronic commerce, is the process of
browsing, shopping and making purchases via the Internet. 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. Our predecessors, for operating
history purposes, were Datatek Services Limited, originally formed in November
1997, MCY America, Inc., originally formed in December 1997, and Fritsch &
Friends Audio Productions GmbH, originally formed in 1991. 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. To achieve and sustain profitability, we believe
we must, among other things, do the following: (i) provide compelling and unique
content to Internet music users; (ii) effectively develop new and maintain
existing relationships with artists and music content providers; (iii) continue
to develop and upgrade our technology and network infrastructure; (iv) respond
to competitive developments; (v) successfully introduce enhancements to our
existing products and services to address new technologies and standards; and
(vi) effectively sell our products and services. We can give no assurance that
we will be able to successfully provide an Internet-based digital music delivery
business.
HISTORY OF LOSSES; ANTICIPATED LOSSES; NEGATIVE CASH FLOW
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 losses of $69,713,000
(including non-cash charges of approximately $49,904,000 for share compensation)
for the year ended December 31, 1999. As of December 31, 1999, we had generated
only $343,000 in revenues from operations. We can give no assurance that we can
achieve, sustain or increase revenues or profitability in the future. There also
can be no assurance that our revenue will increase in the future or that we will
achieve or maintain profitability or generate cash from operations in future
periods. 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 and sublicensing rights
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 acceptance of
related services is highly uncertain. Leading record labels continue to take a
highly conservative approach to permitting 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 digital downloads, streaming pay-per-view events,
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, producers, artists and
other rights holders; and
o maintain our digital distribution technology.
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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;
o downloading of musical content over the Internet is not widely
accepted by consumers;
o the technology for listening to digitally downloaded material
is not widely available, not available on a timely basis at
reasonable prices or is not otherwise convenient or portable
for the consumer;
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;
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; or
o there are significant delays in the rollout, penetration or
acceptance of broadband services such as DSL or cable modems
in the consumer market.
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
four major record label companies including Bertelsmann Music Group, Inc., Sony
Music Entertainment, Inc., Warner/EMI and Universal/Polygram Records, which in
the aggregate account for the majority of the record industry's revenue, and
smaller independent record label companies. While we recently signed a limited
content agreement with Arista Records, Inc. with respect to the artist LFO, we
do not have any content agreements with Sony Music Entertainment, Inc.,
Warner/EMI or Universal/Polygram Records. If we do not succeed in obtaining
additional or material licenses for digital music distribution from one or more
of the major record labels, we will be limited in the content we can offer on
our website. Although we have established arrangements with artists and
independent labels directly and are 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
Our future success depends upon the continued services of certain key
management personnel including Mr. Bernhard Fritsch. The loss of one or more of
our key management personnel could materially adversely affect our business,
results of operations and financial condition. We have a five year employment
agreement with Mr. Fritsch which includes a non-competition provision which
prohibits Mr. Fritsch from gaining employment with or associating or investing
in any entity in the United States which is involved in the digital distribution
of music for a period of one year after the termination of his employment with
us. We have also entered into a license agreement with Mr. Fritsch for the use
of certain significant intellectual property rights, including with respect to
the technology and patents, when and if granted, for the encryption, shopping
cart and royalty tracking features of our delivery and sales systems. This
license agreement, however, only continues in effect so long as we continue to
pay Mr. Fritsch compensation of 0.25% of our gross revenue as provided in his
employment agreement, and will survive the termination of Mr. Fritsch's
employment, so long as such payments are made. Furthermore, under the terms of
the license agreement between MCY and Mr. Fritsch, Mr. Fritsch possesses sole
discretion over whether further prosecution of any patent applications with
respect to such technology will continue. Several of our employees, including
Mr. Fritsch, have entered into agreements agreeing, among other things, not to
compete with us if they leave MCY. If those employees, including Mr. Fritsch,
breach those agreements and become employed by or
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associated with one of MCY's competitors, such action will likely have a
materially adverse effect on our business, results of operations and financial
condition. We have no key-man life insurance for any of our officers or
directors.
NEED FOR ADDITIONAL FINANCING; FINANCING MAY NOT BE AVAILABLE; 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,
the development of our websites and the development of our
technology;
o Establish studio/production facilities for creation and
editing of proprietary content;
o Acquire or partner with other complementary businesses or
assets;
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 streaming pay-per-view 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 "top star" webcasts and brand development in
order to establish, maintain and/or increase our 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.
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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.
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. In addition, we may be subject to "hacker
attacks" such as those recently made on the sites of companies including Yahoo!,
Inc., eBay, Inc. and E*Trade Group Inc. We may be required to expend significant
capital resources to protect against the threat of such security breaches or
"hacker attacks" or to alleviate problems caused by such events. 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,
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and financial condition. If any litigation is determined against us, such
adverse determination may subject us to 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. "Bandwidth" refers to the capacity of the
Internet, a network or an Internet connection and connections to handle the
transfer of data. 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.
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
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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.
The Children's Online Privacy Protection Act ("COPPA") which becomes
effective on April 21, 2000 and its implementing rules regulates the online
collection and use of personal information provided by and concerning children
under the age of thirteen years. COPPA specifically requires operators of
websites that are either directed to children under the age of thirteen years or
that have actual knowledge that such children are providing information to a
website to provide notice of the information that it collects and how it will
use such information, to provide parents with access to review and change such
information and the manner in which it is used, and to obtain verifiable
parental consent before collecting and using certain personal information. In
addition, such website operators must provide for the secure maintenance of the
collected information, and not collect more information than is reasonably
necessary under the circumstances to allow children to participate in activities
on their website.
We currently share statistical information about users of our website
to our business partners. We do not currently sell information about users of
our website to third parties. Laws such as COPPA, if applicable, could restrict
or limit our ability to share and use information about our users or require us
to incur additional expenses in order to comply with the requirements of such
laws. 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 DIGITAL CATALOG
Although we have completed the initial development of our websites, we
have to continually update them to incorporate new features, services and
purchases of new and existing content. The number of digitally downloadable
music tracks which may be acquired by purchasers are limited and we can give no
assurance that we will be able to expand the selection of tracks available for
purchase. If we are unable to increase the number and marketability of NETrax
available for purchase, we will be unable to generate sufficient revenue to
support continued development.
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
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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". 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 CONTROLS APPROXIMATELY 80% OF STOCKHOLDERS' VOTES
Mr. Bernhard Fritsch beneficially owns approximately 23,680,078 shares
of our common stock and all of our outstanding Series 1 preferred stock which
collectively carries approximately 80% of all voting rights held by all of our
stockholders. Mr. Fritsch is 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.
LITIGATION
A former trade partner, Mr. Xavier Ghali, 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. In February
2000, we received a notice from the American Arbitration Association ("AAA")
indicating that a request for arbitration had been filed. To date, however, we
have not received any documents indicating the basis or the grounds for the
claim. 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 or arbitration with Mr. Ghali or with
the investment group will not have a materially adverse effect upon our
financial condition.
On December 16, 1999, Mr. Peter Rohde, a former employee of MusicWorld
filed a complaint against us in New York State Supreme Court. Mr. Rohde, the
plaintiff, had been employed by MCY America, Inc., a subsidiary of MusicWorld,
as an assistant manager in November 1998 pursuant to a letter employment
agreement dated November 10, 1998. The plaintiff entered into a subsequent
employment agreement with MusicWorld dated July 9, 1999 as a content manager and
a trust and confidentiality agreement which contained noncompetition and
confidentiality provisions. In August 1999, the plaintiff was observed entering
our offices at unusual hours. On August 21, 1999, he was observed exiting our
offices with what was believed to be a personal computer and a large bag
containing proprietary information about our company. As a result, we terminated
the plaintiff on August 27, 1999. In his complaint, his claims included breach
of contract, wrongful termination and fraud related to his inability to collect
fees due to alleged fraudulent misrepresentations by the company concerning the
effectiveness of the technology. 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. Based upon our understanding of the facts, we
believe that Mr. Rohde's claims lack substantial merit and we intend to
vigorously defend against this action. We filed an answer and counterclaims
against Mr. Rohde in March 2000. To date, the plaintiff has not provided any
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calculation to support the financial basis of his claim. If his claim is
adjudicated against us we can give no assurance that such determination will not
have a materially adverse effect upon our financial condition.
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. Our
common stock is subject to such regulations. 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 77 staff members in New York, Munich and Los
Angeles, separated into the following categories:
Operations and Development 35
Sales and Marketing 7
General and Administration 12
Content Acquisition 23
=====
Total 77
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.
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ITEM 2.
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 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. 64 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.
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ITEM 3.
LEGAL PROCEEDINGS
A former trade partner, Mr. Xavier Ghali, 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. In February
2000, we received a notice from the American Arbitration Association ("AAA")
indicating that a request for arbitration had been filed. To date, however, we
have not received any documents indicating the basis or the grounds for the
claim. We believe that it is unlikely that we will sustain material losses in
connection with these matters in excess of amounts previously accrued.
On December 16, 1999, Mr. Peter Rohde, a former employee of MusicWorld
filed a complaint against us in New York State Supreme Court. Mr. Rohde, the
plaintiff, had been employed by MCY America, Inc., a subsidiary of MusicWorld,
as an assistant manager in November 1998 pursuant to a letter employment
agreement dated November 10, 1998. The plaintiff entered into a subsequent
employment agreement with MusicWorld dated July 9, 1999 as a content manager and
a trust and confidentiality agreement which contained noncompetition and
confidentiality provisions. In August 1999, the plaintiff was observed entering
our offices at unusual hours. On August 21, 1999, he was observed exiting our
offices with what was believed to be a personal computer and a large bag
containing proprietary information about our company. As a result, we terminated
the plaintiff on August 27, 1999. In his complaint, his claims included breach
of contract, wrongful termination and fraud related to his inability to collect
fees due to alleged fraudulent misrepresentations by the company concerning the
effectiveness of the technology. 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. Based upon our understanding of the facts, we
believe that Mr. Rohde's claims lack substantial merit and we intend to
vigorously defend against this action. We filed an answer and counterclaims
against Mr. Rohde in March 2000. To date, the plaintiff has not provided any
calculation to support the financial basis of his claim.
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ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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 MusicWorld.
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) $ 27.00 $ 11.88
Fourth Quarter 1999 (October, November, December) $ 13.63 $ 5.50
(b) Holders of our common stock
---------------------------
As of March 23, 2000, there were approximately 210 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.
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(d) 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 $ 25,000
(2) 1,857,480 January 8, 1999 $ 137,000
(3) 8,521,220 April 26, 1999 $ 2,386,000
(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 $ 140,000
$ 0
(12) 2,872,500 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) 6,322,333 August 27, 1999 $ 34,500,000
(17) 5,000 August 27, 1999 $ 30,000
(18) 251,000 October 20, 1999 $ 1,384,770
(19) 476,190 December 31, 1999 $ 2,247,000
(20) 110,000 December 31, 1999 $ 1,155,000
</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.
(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, to Mr. Edmund Krix for cash. In connection
with this transaction and the related transactions described in
footnotes 6 and 7, we paid an aggregate $220,000 in commissions to
Gruntal & Co., L.L.C., our placement agent.
(6) On May 7, 1999, we issued 2,400,000 shares of our common stock, valued
at $3.75 per share less costs, to Mr. Edmund Krix for cash. (See also
footnote 5 regarding commissions paid).
-27-
<PAGE>
(7) On May 17, 1999, we issued 200,000 shares of our common stock, valued
at $5.00 per share less costs, to Mr. Thomas Schrank for cash. (See
also footnote 5 regarding commissions paid).
(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 for a total consideration of $140,000.
(12) On August 2, 1999, in connection with the merger our predecessor HBI
enacted a two-for-1 forward stock split increasing the number of issued
and outstanding shares of its common stock to 4,611,000 shares (of
which 2,872,500 were unregistered securities).
(13) On August 2, 1999, upon the consummation of the merger, we (f/k/a HBI)
issued: (i) 42,924,988 shares of our common stock to the holders of the
common stock of MusicWorld, a wholly-owned subsidiary, for 42,924,988
shares of MCY.com, Inc.; (ii) warrants to purchase up to 2,000,000
shares, at $5.00 per share, of our common stock to holders of
MusicWorld warrants, for warrants to purchase up to 2,000,000 shares of
MCY.com, Inc. at $5.00 per share; and (iii) to holders of MusicWorld
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 HBI for options to purchase
3,419,400 shares of MCY.com, Inc. 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 HBI)
issued: (i) 42,924,988 shares of our common stock to the holders of the
common stock of MusicWorld, a wholly-owned subsidiary, for 42,924,988
shares of MCY.com, Inc.; (ii) warrants to purchase up to 2,000,000
shares, at $5.00 per share, of our common stock to holders of
MusicWorld warrants, for warrants to purchase up to 2,000,000 shares of
MCY.com, Inc. at $5.00 per share; and (iii) to holders of MusicWorld
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 HBI for options to purchase
3,419,400 shares of MCY.com, Inc. 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.
(15) On August 2, 1999, upon the consummation of the merger, we (f/k/a HBI)
issued: (i) 42,924,988 shares of our common stock to the holders of the
common stock of MusicWorld, a wholly-owned subsidiary, for 42,924,988
shares of MCY.com, Inc.; (ii) warrants to purchase up to 2,000,000
shares, at $5.00 per share, of our common stock to holders of
MusicWorld warrants, for warrants to purchase up to 2,000,000 shares of
MCY.com, Inc. at $5.00 per share; and (iii) to holders of MusicWorld
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 HBI for options to purchase
3,419,400 shares of MCY.com, Inc. 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 27, 1999, we issued 4,000,000 shares to Gontard & Metallbank,
500,000 shares to Knorr Capital, and 1,822,333 shares of our common
stock to qualified individual investors 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
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<PAGE>
our common stock at an exercise price of $6.00 per share in connection
with the offering. In connection with the August 27, 1999 offering, we
paid $2,054,705 in commissions to Gruntal & Co., LLC and $1,200,000 to
Gontard & Metallbank.
(17) On August 2, 1999, we issued 116,667 shares of our common stock, valued
at $6.00 per share, to Gunter Brinkoff to repay a loan in the amount of
$700,000. On August 27, 1999, we issued 5,000 shares of our common
stock to David Rowland, a stockholder, in consideration for the making
of a loan in the amount of $100,000 and in consideration for the
accrued interest.
(18) In October, 1999, we issued 251,000 shares of our common stock to
qualified individual investors 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 and $120,480 in commissions.
(19) 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 $2,247,000.
(20) On December 31, 1999, in connection with a transaction with U.S. West
Communications Services, Inc., we agreed to issue to Corporate Capital
Research, Inc., 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 such shares were fully informed and advised about
matters concerning our company, including our business, financial affairs and
other matters.
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<PAGE>
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
When used in this discussion and analysis, the words "anticipates,"
"estimates," "expects" and similar terms are intended to identify
forward-looking statements, which include statements concerning the timing of
the development of the markets for webcasting pay-per-view and digital
downloading of musical content, the our ability to secure rights to premium
content for distribution or sale of streamed audio visual media and digitally
downloadable music, and announcements or actions of existing and future
competitors, are subject to risks and uncertainties, including those set forth
above under "Risk Factors" that could cause actual results to differ materially
from those projected. These forward-looking statements refer only to the date
hereof. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any changes in events, conditions or circumstances on which
any statement is based. You should read this discussion and analysis in
conjunction with the financial statements and other financial information
contained in this Annual Report on Form 10-KSB.
Results of Operations
MusicWorld is a development stage company which commenced operations on
January 8, 1999. Through December 31, 1999, 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 are 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:
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 its 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
Because of our limited history, we believe that period-to-period
comparisons of our operations are not meaningful. Accordingly, we have not
included comparisons in the discussions set forth below.
Net Revenues
For the year ended December 31, 1999, our consolidated revenues totaled
$343,000. Our revenues to date consist of advertising revenue and sales of
physical merchandise and downloadable music recordings. In the future, we expect
sales of merchandise to be limited.
Sales, Marketing and Public Relations Expenses
Sales, marketing and public relations expenses consist primarily of:
o Sales and marketing salaries and benefits
o The cost of 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 through December 31, 1999
totaled $8,519,000 most of which was expended in the last six months of 1999. As
part of our marketing strategy and in an effort to aggressively
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<PAGE>
create brand awareness, a significant portion of these costs were expended on
free events, trade shows and related promotional activities during the six month
period ended December 31, 1999.
We also expect to enter into various strategic alliances, begin other
targeted advertising and direct promotion campaigns, attend tradeshows and begin
other activities to attract new customers. As a result, we expect to incur
significant sales and marketing expenses in future periods.
Approximately $10 million has been budgeted for the next twelve months
for the purpose of engaging in various forms of promotion. We expect to attend a
minimum of 30 key trade shows during 2000, participate in numerous online email
and viral marketing campaigns as well as perform traditional sales and marketing
activities. In addition, our sales force will actively market specific webcast
events to potential sponsors on an event by event basis. Key marketing
opportunities are expected to arise from the recent signings of the Backstreet
Boys Millenium Tour, NSync No Strings Attached Tour and other streaming events
including concerts by Puff Daddy, Pete Townshend and other comparable artists.
Product Development Expenses
We began our development efforts in June 1999. Product development
expenses consist principally of:
o website development, including software engineering, audio production
and graphic design
o telecommunications charges
o salaries, rent, depreciation and other expenses related to building
its music distribution business
o amortization of music content
Product development expenses were $2,129,000 for the year ended
December 31, 1999. These costs reflect the ongoing investment in our product
development efforts, particularly in software engineering, graphic design and
development of the infrastructure required to stream webcast pay-per-view events
and to deliver downloadable music to customers.
Content Development
Costs incurred with respect to content development relates directly to
amounts paid to secure rights to music and related media for the purpose of
selling digital downloads of songs and the webcasts of concerts and other
footage in connection with pay-per-view activities. Total content development
costs, which include the costs of employee salaries as well as consultants
dedicated to content acquisition activities totaled $1,583,000 through December
31, 1999.
For the concerts and events that we have sponsored and webcasted to
date, costs incurred to obtain the rights to sponsor and webcast the concerts
and events totaled $3.2 million through December 31, 1999. Costs incurred to
obtain content in 2000 totaled $2.4 million and warrants to purchase shares of
our common stock. The benefits we realized include: (i) the right to digitally
download songs for a fee; (ii) the right to webcast events on a pay-per-view
basis; and (iii) the right to physically distribute CDs and other music-related
merchandise. As of December 31, 1999, the Company had generated no revenues from
webcast pay-per-view events. However, we believe that events currently scheduled
in 2000 are expected to generate revenues from pay-per-views, digital downloads
and other bases.
Approximately $15 million has been budgeted for the next twelve months
for the purpose of acquiring various rights to premium content across a number
of genres. Management expects to acquire master rights from master rights
holders (i.e., directly from labels as well as artists) for exploitation via
digital downloads, webcast events, physical distribution and related
sublicensing. Activities involved in acquiring musical content include
identifying premium musical content, negotiating with master rights holders,
obtaining proper clearances and, ultimately, signing rights to such content to
exploit through e-commerce. Currently, we have rights to over 30,000 musical
works and performances including such top acts as the Backstreet Boys and NSync.
Further, management is involved in numerous negotiations with other comparable
premium artists and expects to close on various agreements with the majority of
these artists by the June 2000.
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<PAGE>
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. We have incurred costs of $4,470,000 from inception through
December 31, 1999 related to general and administrative expenses. We expect
general and administrative expenses to continue to increase as we expand our
staff and to incur additional costs related to the growth of our business.
Amortization of Acquired Intangibles
During 1999, MusicWorld acquired certain predecessor companies. As a
result, we 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 are being amortized over three years while the
excess of cost over fair value of identifiable net assets acquired is being
amortized over 5 years. Total amortization expense for 1999 totaled $3,168,000.
Future amortization related to acquired intangibles will be:
Year Ending December 31, Amount
------------------------ ------
2000 $6,336,000
2001 $6,336,000
2002 $5,496,000
2003 $4,656,000
2004 $2,328,000
Prior to MusicWorld's acquisition of the above-referenced predecessor
companies, Bernhard Fritsch and certain other individuals employed by the
predecessor companies engaged in research and development activities which
included the development, purchase, licensing and otherwise acquisition of
rights to utilize technology and property rights including patent, copyright,
trademark and trade secrets. These acquired rights and software assets developed
by Mr. Fritsch and others to distribute media under these rights include:
o Digital distribution and encrypted delivery of all forms of media
o Physical distribution and delivery of such media
o Online, internet or electronic distribution, transfer or delivery of such
media
o Digital warehousing of such media
o Physical warehousing of such media
o Database storage of such media
o Search of such media by any means and through any medium now known or as
may become known in the future and,
o Operation of a "shopping basket" for the purchase of such media.
Costs incurred as a result of engaging in the above described
activities were primarily concentrated in the rights acquisition area followed
by the payment of salaries in the development of the software to exploit such
rights. The result of such activities and costs incurred in obtaining the
various rights described above prior to the acquisition of the predecessor
companies by MusicWorld was the development of the NETrax player, our
proprietary software for playing downloadable music and proprietary encryption
software contained with the NETrax player. On-going research and development is
focused on protected digital downloads to player hardware such as the Rio
product and related hardware. In addition, we will continue to evolve and
develop new features within the NETrax software and other web appliances,
further develop webcast pay-per-view technology and create digital warehousing
services for digital entertainment content.
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<PAGE>
Stock Based Compensation
We recorded charges related to stock based compensation for 1999
totaling $49,904,000. Included in this amount is amortization of deferred
compensation arising from options issued to employees and consultants at various
dates amounting to $22,491,000. 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 and consultants for services.
Future amortization related to stock based compensation will be:
Year Ending December 31, Amount
------------------------ ------
2000 $ 11,207,000
2001 $ 4,902,000
2002 $ 2,847,000
Liquidity and Capital Resources
Our cash balance as of December 31, 1999 was $26,060,000. For the
period from inception through December 31, 1999, net cash of $15,132,000 was
used for operating activities consisting of net losses of $69,713,000,
substantially offset by:
o non-cash expense of $49,904,000 associated with stock and stock-based
compensation
o non-cash expense of $3,168,000 associated with amortization of
intangibles
o non-cash expense of $663,000 associated with the Company's share of
losses of predecessor companies
Additionally, we purchased approximately $689,000 in capital equipment
from inception through December 31, 1999. In addition, we incurred $777,000 to
develop internal-use software. We expect to incur negative cash flow from
operations for the foreseeable future, as we continue to develop our business.
During the period from May through December 1999, we raised net
proceeds of approximately $45,656,000 through the sale of common stock as
follows:
o 363,636 shares at $2.75 per share less related costs of $10,000 - May
1999
o 2,400,000 shares at $3.75 per share less related costs of $310,000 -
May 1999
o 200,000 shares at $5.00 per share less related costs of $10,000 - May
1999
o 6,573,333 shares at $6.00 per share less related costs of $4,454,000 -
August and October 1999
We lease facilities and equipment under noncancellable operating leases
expiring through October, 2004. Such leases provide for annual payments as
detailed below. In connection with the aforementioned leases, we are required to
provide security totaling $925,000. Such security has been provided by deposits
totaling $731,000 and letters of credit collateralized by restricted cash of
$194,000.
Future minimum annual lease payments as of December 31, 1999 are as
follows:
For The Period Ending
December 31,
---------------------
2000 $ 1,263,000
2001 1,130,000
2002 987,000
2003 398,000
2004 332,000
-------------
$ 4,110,000
=============
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<PAGE>
Since inception, we have experienced significant losses and negative
cash flows from operations. We believe that our existing capital resources will
be sufficient to fund our planned level of operating activities, capital
expenditures and other obligations through the next 12 months. However, we may
need to raise additional funds in future periods through public or private
financings, or other sources, to fund our operations and potential acquisitions,
if any, until we achieve profitability, if ever. We may not be able to obtain
adequate or favorable financing at that time. Failure to raise capital when
needed could harm our business. If we raise additional funds through the
issuance of equity securities, the percentage of ownership of our stockholders
would be reduced. Furthermore, these equity securities might have rights,
preferences or privileges senior to our common stock.
During 1999, we employed 6 employees in Berlin for the purpose of
running a facility for the digitization of music into a database for later use
in distribution of such media via digital download. Management decided that such
facility should be moved to the U.S. due to cost and oversight considerations.
Management does not expect any significant change in the number of staff to run
the facility once moved to the U.S. which is expected to occur by June 2000.
Management expects increases in head count in the following areas:
o Transaction processing - as the number of transactions increase related to
the purchase of webcast events and digital download sales, additional
personnel will be added to handle the related traffic. Assuming we meet
budgeted sales levels for the year 2000, approximately four additional
people will be added in the next twelve months to handle transaction
processing increases. The year to year increase is not expected to be
significant, however, since we currently outsource, and expect to continue
to outsource, a substantial portion of the transaction processing burden to
professional processing companies.
o Content acquisition - management believes that we will need to hire
approximately ten individuals in the next twelve months at all levels in
order to maintain a steady pipeline of premium content acquisition. This
number is expected to increase significantly year after year as we fulfill
our goal of creating one of the most comprehensive catalogues of premium
content.
o Sales, marketing and publicity - considering the importance of drawing
general traffic to our website, generating attention in all media formats
and sponsorship support of webcast events, we plan to hire vice presidents
in charge of publicity, marketing and business development in the first
quarter of 2000. Further, an additional seven to ten sales, marketing and
business development professionals are expected to be hired in the next
twelve months to support the executive levels in garnering attention and
support for webcast events and increasing website traffic. In addition, we
have engaged and will continue to engage outside consultants to attract
webcast sponsors and other advertisers to our website.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are included at the end of this Annual Report
on Form 10-KSB beginning on page 49.
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<PAGE>
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
(a) Directors and Executive Officers
--------------------------------
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. 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.
<TABLE>
<CAPTION>
- --------------------------------------------- ------------------- ----------------------------------------------------
Name Age Position
- ---- --- --------
<S> <C> <C>
- -------------------------------------------- ------------------- ----------------------------------------------------
Bernard Fritsch 39 Chairman of the Board, Chief
Executive Officer, President and
Director
- --------------------------------------------- ------------------- ----------------------------------------------------
Lisa Short 26 Secretary and Vice President -
Marketing
- --------------------------------------------- ------------------- ----------------------------------------------------
Hubertus von Hesse 40 Director
- --------------------------------------------- ------------------- ----------------------------------------------------
Norbert Jahns* 47 Director
- --------------------------------------------- ------------------- ----------------------------------------------------
Susanne Weblus** 35 Director
- --------------------------------------------- ------------------- ----------------------------------------------------
</TABLE>
- -----------------------------------
* Appointed on January 18, 2000
** Appointed on January 24, 2000
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
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<PAGE>
Munich Ludwig- Maximilians-University and University of Lausanne. He received
his law degree from Munich 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.
(b) Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
Not applicable.
-38-
<PAGE>
ITEM 10.
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.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
- ---------------------------------- ---------- ----------------- ---------------- ----------------- -------------------
Long-Term
Name and Principal Positions of Fiscal Other Annual Compensation
the Named Executive Officers Year 1999 Annual Salary Bonus Compensation Options
- ---------------------------------- ---------- ----------------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
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 (10) 450,000(5)
- ---------------------------------- ---------- ----------------- ---------------- ----------------- -------------------
Mitchell Lampert, 1999 $ 250,000 $ 95,000 $ 1,000(1) 400,000(3)
General Counsel 450,000(4)
1,000,000(5)
- ---------------------------------- ---------- ----------------- ---------------- ----------------- -------------------
Scott Citron,* 1999 $ 175,000 $ 4,000 -0- 100,000(6)
Senior Website Producer 10,000(7)
- ---------------------------------- ---------- ----------------- ---------------- ----------------- -------------------
Ray Short, 1999 $175,000 $ 35,000 $ 600(1) 200,000(8)
Senior Vice President
- ---------------------------------- ---------- ----------------- ---------------- ----------------- -------------------
Thomas Noack, 1999 $165,000 $ 2,000 $ 600(1) 50,000(9)
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, 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.
(10) We have agreed to pay Mr. Fritsch a sum equal to 0.25% of our gross
revenues in accordance with our employment agreement with Mr. Fritsch
dated July 11, 1999, as amended.
* Scott Citron ceased to be employed by us effective March 16, 2000.
-39-
<PAGE>
Option/SAR Grants in Last Completed Fiscal Year (1999)
- ------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------- --------------------- ---------------- ---------------- --------------- ------------------
Market Price
of Shares
Underlying
Option on
Date of Grant
Percent of if the
Number of Total Exercise
Securities Options/SARs Price is less
Underlying Granted to than the
Options/SARs Employees in Exercise or Market Price
Granted in Fiscal Fiscal Year Base Price on the Date
Name of Executive Officer 1999 1999 ($/sh) of Grant Expiration Date
- --------------------------- --------------------- ---------------- ---------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Bernhard Fritsch 400,000 shares 5.7% $ 1.50/sh $ 6.00 Five years
450,000 shares 6.4% $ 3.20/sh $ 12.88 from the date
450,000 shares 6.4% $ 3.20/sh $ 12.69 of grant
- --------------------------- --------------------- ---------------- ---------------- --------------- ------------------
Mitchell Lampert 400,000 shares 5.7% $ 1.50/sh $ 6.00 Five years
1,450,000 shares 20.7% $ 3.20/sh $ 12.69 from the date
- --------------------------- --------------------- ---------------- ---------------- --------------- ------------------
Scott Citron* 100,000 shares 1.4% $ 6.00/sh $ 6.00 Five years
10,000 shares 0.1% $12.50/sh $ 13.69 from the date
of grant
- --------------------------- --------------------- ---------------- ---------------- --------------- ------------------
Ray Short 200,000 shares 2.9% $ 9.50/sh $ 12.88 Five years
from the date
of grant
- --------------------------- --------------------- ---------------- ---------------- --------------- ------------------
Thomas Noack 50,000 shares 0.7% $12.50/sh $ 12.50 Five years
from the date
of grant
- --------------------------- --------------------- ---------------- ---------------- --------------- ------------------
</TABLE>
* Scott Citron ceased to be employed by us effective March 16, 2000.
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>
- ------------------------ ----------- ----------- --------------- ------------------ ------------------ -----------------
Number of
Shares Value of Value of
Underlying Number of Shares Unexercised Unexercised
Unexercised Underlying In-the-Money In-the-Money
Shares Options at Unexercised Options at Options at
Acquired Fiscal Options at Fiscal Year-End Fiscal Year-End
Name of "Named on Value Year-End Fiscal Year-End Year-End Year-End
Executive Officer" Exercise Realized (Exercisable) (Unexercisable) (Exercisable) (Unexercisable)
- ------------------------ ----------- ----------- --------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Bernhard Fritsch None None 570,000 730,000 $ 4,365,000 $ 5,805,000
- ------------------------ ----------- ----------- --------------- ------------------ ------------------ -----------------
Mitchell Lampert None None 845,000 1,005,000 $ 6,372,500 $ 7,812,500
- ------------------------ ----------- ----------- --------------- ------------------ ------------------ -----------------
</TABLE>
-40-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------ ----------- ----------- --------------- ------------------ ------------------ -----------------
Number of
Shares Value of Value of
Underlying Number of Shares Unexercised Unexercised
Unexercised Underlying In-the-Money In-the-Money
Shares Options at Unexercised Options at Options at
Acquired Fiscal Options at Fiscal Year-End Fiscal Year-End
Name of "Named on Value Year-End Fiscal Year-End Year-End Year-End
Executive Officer" Exercise Realized (Exercisable) (Unexercisable) (Exercisable) (Unexercisable)
- ------------------------ ----------- ----------- --------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Scott Citron* None None 33,000 77,000 $ 148,500 $ 301,500
- ------------------------ ----------- ----------- --------------- ------------------ ------------------ -----------------
Ray Short None None 20,000 180,000 $ 20,000 $ 180,000
- ------------------------ ----------- ----------- --------------- ------------------ ------------------ -----------------
Thomas Noack None None 0 50,000 $ 0 $ 0
- ------------------------ ----------- ----------- --------------- ------------------ ------------------ -----------------
</TABLE>
* Scott Citron ceased to be employed by us effective March 16, 2000.
Long-Term Incentive Plan ("LTIP") Awards
- ----------------------------------------
During fiscal year 1999, we did not give any LTIP awards to any of our
Named Executive Officers.
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 entered into a five-year employment agreement with us
on July 11, 1999, as amended, 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 annual 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 entered into a three-year employment agreement with us
on July 11, 1999 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.
-41-
<PAGE>
ITEM 11.
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 10 of this Annual Report on Form 10-KSB; and (iv) all of
our directors and executive officers as a group.
At December 31, 1999, there are (i) 54,340,988 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 Percent of Share of Series 1 Percent of
Name and Address Common Stock 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
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 *** 33,000 (9) *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036
Ray Short 20,000 (10) *
c/o MCY.com, Inc.
1133 Avenue of the Americas
New York, New York 10036
Thomas Noack 5,000 (11) *
c/o MCY.com, Inc.
1133 Avenue of the Americas
</TABLE>
-42-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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 33,000 shares underlying options exercisable at $ 6.00 per
share held by Mr. Citron. Mr. Citron ceased to be employed by us
effective March 16, 2000.
(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. Noack.
** Tintagle Trading Co., Ltd. is an entity which we believe is controlled
by Michael Wilson-Smith.
*** Scott Citron ceased to be employed by us effective March 16, 2000.
-43-
<PAGE>
ITEM 12. 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 (fair value
$0.001 per share) issued to founders; 1,857,480 shares (fair value $0.074 per
share) which we were contractually obligated to issue to employees and
consultants prior to incorporation; and 8,721,220 shares (fair value of $0.28
per share) 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. Bernhard Fritsch, our Chairman of the Board of Directors, President
and Chief Executive Officer 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 in cash; (ii) 4,500,000 shares of our common stock valued at $
22,500,000 (fair value $5.00 per share); 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, Bernard Fritsch's mother 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, our former 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. We believe that the
terms of this license agreement are as fair to us as terms under a license
agreement which we could have obtained from an unrelated third party through
arms-length negotiations.
On August 2, 1999, we completed a merger with MusicWorld, whereby an
acquisition subsidiary merged with and into MusicWorld, with MusicWorld becoming
a subsidiary of our company. As a result, outstanding shares of common stock and
preferred stock of MusicWorld 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 MusicWorld 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, HBI, our predecessor, enacted a 2-for-1 forward
stock split, increasing the number of issued and outstanding shares of its
common stock to 4,611,000. In connection with the merger, HBI 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, HBI
issued: (A) 42,924,988 shares of our common stock to the holders of the common
stock of MusicWorld, (B) 2,000,000 warrants to the holders of MusicWorld
warrants, (C) options to holders of MusicWorld options to acquire shares under
the HBI 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.
-44-
<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 HBI common stock,
agreed to sell approximately 3,970,000 of such shares to Mr. William Bossung,
Mr. Todd Sanders and their associates for $0.02 per share. Ms. Hall and Messrs.
Hatch, Blackley and Jensen were shareholders of our predecessor and currently
have no affiliation with us. Messrs. Bossung and Sanders were former consultants
to our company and currently have no affiliation with us.
In August, 1999, we issued 5,000 shares (fair value of $6.00 per share)
of our common stock to David Rowland, one of our stockholders, in consideration
for the making a loan to us in the amount of $100,000 and for the accrued
interest on the loan.
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 MusicWorld, 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 MusicWorld 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 made non-interest-bearing advances which
contained no repayment terms of approximately $107,000 to Mr. Fritsch.
-45-
<PAGE>
ITEM 13.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Index
------------------
Exhibit Number Description of Exhibits
-------------- -----------------------
2.1 Agreement and Plan of Reorganization dated as of
August 2, 1999 among Health Builders International,
Inc., HBI Sub, Inc. and MCY Music World, Inc. 1
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 3
10.3 Confidentiality and Non-Circumvention Agreement
effective as of November 28, 1999.3
10.4 Employment Agreement made as of July 11, 1999 by and
between MCY Music World, Inc. and Bernhard Fritsch. 3
10.5 Amendment to Employment Agreement made as of July 28,
1999 by and between MCY Music World, Inc. and Bernhard
Fritsch. 3
10.6 Employment Agreement made as of July 11, 1999 by and
between MCY Music World, Inc. and Mitchell Lampert. 3
10.7 Employment Agreement between MCY Music World, Inc. and
Scott Citron dated as of July 21, 1999. 3 *
10.8 Employment Agreement between MCY Music World, Inc. and
Ray Short dated as of August 8, 1999. 3
10.9 Employment Agreement dated September 1, 1999 by and
between MCY Music World, Inc. and Thomas Noack. 3
21.1 Subsidiaries of Registrant.3
27.1 Financial Data Schedule. 3
99.1 MCY.com, Inc. Amended and Restated 1999 Stock
Incentive Plan 1
99.2 Form of Award Agreement ("Stock Option Agreement")
under the MCY.com, Inc Amended and Restated 1999 Stock
Incentive Plan 4
- --------------------------
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 File #: 333-9809.
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.
* Scott Citron ceased to be employed by us effective March 16, 2000.
-46-
<PAGE>
(b) Reports on Form 8-K.
--------------------
On October 15, 1999, we filed a report on Form 8-K reporting a change
in our certifying accountant from Pritchett, Siler & Hardy, P.C. to Richard A.
Eisner & Co., LLP and reporting on other events including a sale of our common
stock and amendments to our 1999 Incentive Stock Option Plan. The Report on Form
8-K included the audited financial statements of MCY.com, Inc. and subsidiaries
for the period ended July 31, 1999 and the audited financial statements of the
Predecessor for the period ended July 2, 1999. The consolidated pro forma
financial statements as at July 31, 1999 were annexed as an exhibit.
-47-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this Report on Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized.
MCY.com, Inc.
By: /s/ Bernhard Fritsch
-------------------------
Name: Bernhard Fritsch
Title: President
Date: March 30, 2000
In accordance with the Exchange Act, this Report on Form 10-KSB has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Bernhard Fritsch Chairman of the Board of Directors, Chief Executive
- -------------------------------- Officer, President and Director
Name: Bernhard Fritsch
Date: March 30, 2000
/s/ Lisa Short Secretary and Vice President - Marketing
- --------------------------------
Name: Lisa Short
Date: March 30, 2000
/s/ Robert Frezza Chief Financial Officer
- --------------------------------
Name: Robert Frezza
Date: March 30, 2000
/s/ Hubertus von Hesse Director
- --------------------------------
Name: Hubertus von Hesse
Date: March 30, 2000
/s/ Norbert Jahns Director
- --------------------------------
Name: Norbert Jahns
Date: March 30, 2000
/s/ Susanne Weblus Director
- --------------------------------
Name: Susanne Weblus
Date: March 30, 2000
</TABLE>
-48-
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
MCY.com, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of MCY.com, Inc. and
subsidiaries (a development stage company) as of December 31, 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period from January 8, 1999 (date of inception) through December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of MCY.com, Inc. and
subsidiaries, as of December 31, 1999, and the consolidated results of their
operations and their cash flows for the period from January 8, 1999 (date of
inception) through December 31, 1999 in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
January 21, 2000 except for Note L, as to
which the date is March 9, 2000
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 26,060,000
Sundry receivables 397,000
Advances to officer 107,000
Other current assets, including prepaid advertising of $2,247,000 2,793,000
----------------
Total current assets 29,357,000
Equipment and software, net 1,585,000
Intangible assets, net 25,153,000
Other assets, including security deposit and record company advances of
$925,000 and $350,000, respectively 1,279,000
----------------
$ 57,374,000
================
LIABILITIES
Current liabilities:
Accounts payable, accrued expenses and sundry liabilities, representing total
current liabilities $ 3,381,000
----------------
Commitments and contingencies (Note G)
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
Common stock - $.001 par value; 100,000,000 shares authorized;
54,340,988 shares issued and outstanding 54,000
Common stock payable 1,155,000
Additional paid-in capital 144,063,000
Deficit accumulated during the development stage (72,283,000)
Cumulative foreign currency translation adjustment (15,000)
----------------
72,975,000
Unamortized deferred compensation (18,956,000)
Stock subscriptions receivable (26,000)
----------------
53,993,000
----------------
$ 57,374,000
================
</TABLE>
See notes to financial statements 2
<PAGE>
<TABLE>
<CAPTION>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 8, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
<S> <C>
REVENUE:
Revenues $ 343,000
----------------
EXPENSES:
Sales, marketing and public relations 8,519,000
Product development 2,129,000
Content development 1,583,000
General and administrative 4,470,000
Depreciation and amortization 276,000
Amortization of acquired intangibles 3,168,000
Stock based compensation 49,904,000
----------------
70,049,000
-----------------
Operating loss (69,706,000)
Share of loss of predecessor companies (663,000)
Interest income, net of interest expense 656,000
----------------
NET LOSS $ (69,713,000)
================
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $(1.66)
======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 41,929,000
================
See notes to financial statements 3
</TABLE>
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 8, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON
--------------- ------------ STOCK
SHARES AMOUNT SHARES AMOUNT PAYABLE
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Issuance of common stock at par ($.001 per share) to founders
as of January 8, 1999, net of shares returned (Note B) 25,282,652 $ 25,000
Issuance of common stock to employees and consultants at
$0.074 per share, as of January 8, 1999 1,857,480 2,000
Issuance of common stock to employees, consultants and
creditors at $0.28 per share - April 1999 8,721,220 9,000
Sale of common stock at $2.75 per share - May 1999
less related costs of $10,000 363,636
Sale of common stock at $3.75 per share - May 1999
less related costs of $310,000 2,400,000 2,000
Sale of common stock at $5.00 per share - May 1999
less related costs of $10,000 200,000
Issuance of preferred stock at par ($.001 per share) to a
founder - June 1999 1,000,000 $ 1,000
Issuance of common stock in connection with acquisition at
$5.00 per share - July 1999 4,500,000 5,000
Issuance of warrants to purchase 2,000,000 shares of common
stock
issued in connection with acquisition - July 1999
Issuance of warrants to purchase 50,000 shares of common
stock issued in connection with acquisition - July 1999
Issuance of warrants to purchase 33,333 shares of common
stock for services to the Company - July 1999
Stockholders' deficiency of acquired entities applicable to
47.5%
Interest owned by the Company's controlling stockholder
Cancellation of common stock issued to a consultant - July 1999 (400,000)
Stock issued for outstanding HBI shares - August 2, 1999 in
connection with reverse merger 4,611,000 5,000
Compensation resulting from sale by HBI shareholders of
3,970,000shares at $0.02 per share - August 1999
Sale of common stock at $6.00 per share - August
and October 1999, less related costs of $4,454,000 6,573,333 6,000
Issuance of common stock in payment of debt and accrued
interest at $6.00 per share - August 1999 121,667
Issuance of warrants for minimal consideration to purchase
476,190 shares of common stock in connection with
collaborative
agreement - December 1999
Common stock issuable to a consultant in connection with
collaborative agreement - December 1999 110,000 1,155,000
Options issued to employees & consultants - various dates
Amortization of deferred compensation
Comprehensive loss:
Loss on foreign currency translation
Net loss for period
Total comprehensive loss ----------- -------- ----------- --------- -----------
Balances at December 31, 1999 1,000,000 $ 1,000 54,340,988 $ 54,000 $ 1,155,000
=========== ======== =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DEFICIT CUMULATIVE
ACCUMULATED FOREIGN
ADDITIONAL DURING THE CURRENCY UNAMORTIZED
PAID-IN DEVELOPMENT TRANSLATION DEFERRED
CAPITAL STAGE ADJUSTMENT COMPENSATION
------- ----- ---------- ------------
<S> <C> <C> <C> <C>
Issuance of common stock at par ($.001 per share) to founders
as of January 8, 1999, net of shares returned (Note B)
Issuance of common stock to employees and consultants at
$0.074 per share, as of January 8, 1999 $ 135,000
Issuance of common stock to employees, consultants and
creditors at $0.28 per share - April 1999 2,433,000
Sale of common stock at $2.75 per share - May 1999
less related costs of $10,000 990,000
Sale of common stock at $3.75 per share - May 1999
less related costs of $310,000 8,688,000
Sale of common stock at $5.00 per share - May 1999
less related costs of $10,000 990,000
Issuance of preferred stock at par ($.001 per share) to a
founder - June 1999
Issuance of common stock in connection with acquisition at
$5.00 per share - July 1999 22,495,000
Issuance of warrants to purchase 2,000,000 shares of common
stock
issued in connection with acquisition - July 1999 3,000,000
Issuance of warrants to purchase 50,000 shares of common
stock issued in connection with acquisition - July 1999 90,000
Issuance of warrants to purchase 33,333 shares of common
stock for services to the Company - July 1999 50,000
Stockholders' deficiency of acquired entities applicable to
47.5%
Interest owned by the Company's controlling stockholder 2,164,000 $(2,570,000)
Cancellation of common stock issued to a consultant - July 1999 (112,000)
Stock issued for outstanding HBI shares - August 2, 1999 in
connection with reverse merger (5,000)
Compensation resulting from sale by HBI shareholders of
3,970,000shares at $0.02 per share - August 1999 23,741,000
Sale of common stock at $6.00 per share - August
and October 1999, less related costs of $4,454,000 34,980,000
Issuance of common stock in payment of debt and accrued
interest at $6.00 per share - August 1999 730,000
Issuance of warrants for minimal consideration to purchase
476,190 shares of common stock in connection with
collaborative
agreement - December 1999 2,247,000
Common stock issuable to a consultant in connection with
collaborative agreement - December 1999
Options issued to employees & consultants - various dates 41,447,000 (41,447,000)
Amortization of deferred compensation 22,491,000
Comprehensive loss:
Loss on foreign currency translation $ (15,000)
Net loss for period (69,713,000)
Total comprehensive loss ------------ ------------- ---------- -------------
Balances at December 31, 1999 $144,063,000 $(72,283,000) $ (15,000) $(18,956,000)
-=========== ============ ========= ============
</TABLE>
<TABLE>
<CAPTION>
STOCK
SUBSCRIPTIONS
RECEIVABLE TOTAL
---------- -----
<S> <C> <C>
Issuance of common stock at par ($.001 per share) to founders
as of January 8, 1999, net of shares returned (Note B) $ (25,000) $ 0
Issuance of common stock to employees and consultants at
$0.074 per share, as of January 8, 1999 137,000
Issuance of common stock to employees, consultants and
creditors at $0.28 per share - April 1999 2,442,000
Sale of common stock at $2.75 per share - May 1999
less related costs of $10,000 990,000
Sale of common stock at $3.75 per share - May 1999
less related costs of $310,000 8,690,000
Sale of common stock at $5.00 per share - May 1999
less related costs of $10,000 990,000
Issuance of preferred stock at par ($.001 per share) to a
founder - June 1999 (1,000) 0
Issuance of common stock in connection with acquisition at
$5.00 per share - July 1999 22,500,000
Issuance of warrants to purchase 2,000,000 shares of common
stock
issued in connection with acquisition - July 1999 3,000,000
Issuance of warrants to purchase 50,000 shares of common
stock issued in connection with acquisition - July 1999 90,000
Issuance of warrants to purchase 33,333 shares of common
stock for services to the Company - July 1999 50,000
Stockholders' deficiency of acquired entities applicable to
47.5%
Interest owned by the Company's controlling stockholder (406,000)
Cancellation of common stock issued to a consultant - July 1999 (112,000)
Stock issued for outstanding HBI shares - August 2, 1999 in
connection with reverse merger 0
Compensation resulting from sale by HBI shareholders of
3,970,000shares at $0.02 per share - August 1999 23,741,000
Sale of common stock at $6.00 per share - August
and October 1999, less related costs of $4,454,000 34,986,000
Issuance of common stock in payment of debt and accrued
interest at $6.00 per share - August 1999 730,000
Issuance of warrants for minimal consideration to purchase
476,190 shares of common stock in connection with
collaborative
agreement - December 1999 2,247,000
Common stock issuable to a consultant in connection with
collaborative agreement - December 1999 1,155,000
Options issued to employees & consultants - various dates 0
Amortization of deferred compensation 22,491,000
Comprehensive loss:
Loss on foreign currency translation (15,000)
Net loss for period (69,713,000)
------------
Total comprehensive loss (69,728,000)
--------- ------------
Balances at December 31, 1999 $ (26,000) $ 53,993,000
========= ============
</TABLE>
See notes to financial statements 4
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 8, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $ (69,713,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of equipment and software 276,000
Amortization of intangibles 3,168,000
Stock-based compensation 49,904,000
Share of loss of predecessor companies 663,000
Changes in:
Receivables (261,000)
Other current assets (350,000)
Other assets (482,000)
Accounts payable, accrued expenses and sundry liabilities 1,663,000
----------------
Net cash used in operating activities (15,132,000)
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of developing internal-use software (777,000)
Datatek acquisition, net of acquired companies cash of $565,000 (1,748,000)
Payment of security deposits (925,000)
Purchase of equipment (689,000)
----------------
Net cash used in investing activities (4,139,000)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on line of credit (40,000)
Proceeds from sale of stock, net of related costs 45,656,000
---------------
Net cash provided by financing activities 45,616,000
---------------
Effect of exchange rate changes on cash (285,000)
----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 26,060,000
================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of stock for stock subscription receivable $ 26,000
Issuance of stock and warrants in connection with Datatek acquisition $ 25,590,000
Deferred compensation to consultants and employees by issuance of options $ 41,447,000
Issuance of stock for notes payable and accrued interest $ 730,000
Issuance of warrants relating to prepaid advertising and marketing expenses in connection
with joint venture agreement $ 2,247,000
</TABLE>
See notes to financial statements 5
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE A - THE COMPANY
MCY Music World, Inc. ("MusicWorld") was incorporated on January 8, 1999 in the
state of Delaware to acquire certain predecessor companies based in Germany (see
Note B) and to further develop its planned operations, which include the
creation and opening to the public of an online service platform to provide
worldwide promotional and sales services for the music buying public and the
music industry. On August 2, 1999, MusicWorld completed a reverse merger into
Health Builders International, Inc. ("HBI"), an inactive public company
incorporated in the state of Delaware. The merger was consummated through an
exchange of shares that resulted in stockholders of MusicWorld holding
43,324,988 shares of common stock (excluding 121,667 shares of common stock
issuable to creditors) or 90.4% of the outstanding common shares of HBI and
1,000,000 shares of Series 1 Preferred Stock (100% of such class) and existing
stockholders of HBI holding 4,611,000 shares of common stock. The merger is
being accounted for as a recapitalization and retroactive effect has been given
to the recapitalization in the accompanying financial statements. In connection
with the merger, HBI changed its name to MCY.com, Inc. (the "Company").
The Company intends to operate 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 is in the development stage, since planned
operations have not commenced.
The Company is subject to those general risks associated with development stage
companies, as well as special risks unique to emerging E-commerce companies
which, by definition, seek to create new markets for their innovative products
and services. As shown in the accompanying financial statements, the Company has
incurred a substantial net loss and the Company and its predecessor companies
have generated minimal revenues related to the Company's planned operations.
Further, the Company's business concept and business model are unproven and,
accordingly, the Company's viability is uncertain. These conditions may result
in a future write-down of the carrying value of the intangibles arising from the
acquisition of the predecessor companies (reflecting their impairment), or a
reduction in the remaining estimated lives of said intangibles, which may result
in their accelerated amortization (see Notes C[6] and E). In order to finance
its continued development the Company is presently attempting to raise
additional financing through additional private placements. However, there is no
assurance that the Company will be successful in that effort, nor that it will
ever attain profitable operations and operating cash flow.
NOTE B - ACQUISITION
On July 2, 1999, MusicWorld acquired the assets of Datatek Services Limited
("Datatek") including the stock of MCY America, Inc. ("MCY America") and Fritsch
& Friends Mediagroup GmbH ("Fritsch & Friends") (collectively the "predecessor
companies") in exchange for cash of $1,050,000, 4,500,000 shares of MusicWorld's
common stock valued at $22,500,000 and 5-year warrants to acquire 2,000,000
shares of common stock at an exercise price of $5.00 per share, valued at
$3,000,000, for an aggregate cost of $26,550,000. In addition, the Company
agreed to pay to Datatek, on a quarterly basis, 1% of gross revenues either, (i)
for a period of 20 years, or (ii) until such time as the payments total
$9,000,000. As of the date of the acquisition, the predecessor companies owed
MusicWorld $1,243,000 representing the balance of loans made by MusicWorld prior
to the acquisition. MusicWorld's founder, controlling stockholder and Chairman
was the Chief Executive Officer, a director and owned a 47.5% beneficial
interest in Datatek which was transferred to the other Datatek stockholders for
no consideration immediately prior to the closing of the acquisition. Datatek
and its subsidiaries had been involved in the development, purchase and
licensing of the technology, intellectual property and other business assets
that are required for MusicWorld's intended business operations. The transaction
has been accounted for as a
6
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE B - ACQUISITION (CONTINUED)
purchase by MusicWorld of a 52.5% ownership interest in the Datatek assets and a
contribution to MusicWorld of the 47.5% interest formerly owned by MusicWorld's
founder and controlling stockholder. Such contributed interest has been recorded
at the predecessor basis to the controlling stockholder which approximates 47.5%
of the stockholders' deficiency of the predecessor companies at the acquisition
date. In addition, 47.5% of the loss of predecessor companies for the period
from January 1, 1999 through July 2, 1999 is reflected in the Company's results
of operations on the equity method and 100% of the results of operations of the
predecessor companies are consolidated with those of the Company from July 2,
1999. The aggregate cost of the acquisition of the 52.5% interest, amounting to
$27,793,000, including $1,243,000 of loans receivable from predecessor
companies, reduced by $1,069,000 representing 47.5% of the stockholders'
deficiency of the predecessor companies at the acquisition date has been
allocated to assets acquired and liabilities assumed at date of acquisition as
follows:
Cash $ 565,000
Sundry receivables 137,000
Due from related parties 109,000
Equipment and software, net 370,000
Other assets 146,000
Intangibles (see Note E) 28,321,000
---------------
29,648,000
---------------
Accounts payable, accrued expenses and sundry liabilities 2,884,000
Line of credit 40,000
--------------
2,924,000
---------------
Cost of net assets acquired $ 26,724,000
===============
The contingent consideration will be accounted for as royalty expense as it
becomes payable. Also in connection with this transaction, founders of
MusicWorld agreed to return 2,000,000 shares of common stock, which were then
canceled. The return of the shares was accounted for as an adjustment of the
original issuance of shares to partners.
Assuming the acquisition had occurred as of January 8, 1999, the Company's
unaudited pro-forma net loss, including amortization of the acquired
intangibles, would have amounted to $(73,467,000) or $(1.66) per common share
for the period January 8, 1999 through December 31, 1999.
NOTE C - SIGNIFICANT ACCOUNTING POLICIES
[1] BASIS OF PRESENTATION:
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and include the accounts of
the Company and it's wholly-owned subsidiaries after elimination of all
significant inter-company transactions and balances.
7
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE C - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[2] CASH:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. From time to time, the Company's
cash balances with any single financial institution exceed Federal
Deposit Insurance Corporation ("FDIC") and Securities Investor Protection
Corporation ("SIPC") limits. At December 31, 1999 cash equivalents amount
to $24,962,000 and consist of one investment in a money market fund.
[3] EQUIPMENT AND SOFTWARE, NET:
In accordance with Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use"
costs related to the development of software in connection with the
Company's Internet website, other than those costs incurred during the
application development stage, are expensed as incurred. Costs incurred
during the application development stage are capitalized and amortized
using the straight-line method over an estimated useful life of three
years beginning when the software is ready for its intended use.
Equipment is stated at cost less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful
lives of three to seven years.
[4] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates.
[5] STOCK-BASED COMPENSATION:
The Company has elected to follow the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" in accounting for its stock option incentive plan. As such,
deferred compensation expense is recorded on the date of grant of
employee options if the current market price of the underlying stock
exceeds the exercise price of the option, and such deferral is amortized
and charged to operations over the vesting period of the options. Options
or stock awards issued to non-employees are valued using the fair value
method and expensed over the period services are provided in accordance
with the applicable provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
[6] IMPAIRMENT OF LONG-LIVED ASSETS:
The Company evaluates the recoverability of its identifiable intangibles
and other long-lived assets in accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of." SFAS No. 121 requires recognition of impairment of
long-lived assets in the event the net book value of these assets exceeds
the estimated future undiscounted cash flows attributable to these
assets. The Company assesses potential impairment to its long-lived
assets when there is evidence that events or changes in circumstances
have made recovery of the asset's carrying value unlikely. Should an
impairment exist, the impairment loss would be measured based on the
excess of the carrying value of the asset over the asset's fair value or
discounted estimates of future cash flows.
8
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE C - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[6] IMPAIRMENT OF LONG-LIVED ASSETS: (CONTINUED)
The Company periodically evaluates the amortization period assigned to
the excess of cost over fair value of identifiable net assets acquired to
determine whether later events and circumstances warrant revised
estimates of useful life. If estimates are changed, the unamortized cost
will be allocated to the revised number of remaining periods. In
addition, a reduction in the carrying amount of the unamortized excess
would be made if it exceeds the estimated future undiscounted cash flows
to be generated by the Company. Should such an impairment exist, the
impairment loss would be measured based on the excess of the carrying
value of the asset over its fair value or discounted estimates of future
cash flows.
[7] REVENUE RECOGNITION:
Upon commencement of planned operations, the Company will recognize
revenue applicable to the delivery of music when the digital files and/or
streams are delivered or, in the case of revenue to be derived from the
sales of CDs or music-related merchandise, upon shipment. Related
royalties will be charged to cost of sales to match the recognition of
revenue, as applicable. Advertising revenue, which consists of
advertising space on the Company web-site, is recorded during the period
in which the advertising services are provided. Included in revenue is
advertising revenue in the amount of $330,000 during the period January
8, 1999 through December 31, 1999. The Company purchased prepaid
television advertising time of $325,000 from the same customer. There
were no amounts due to or from the customer at December 31, 1999.
[8] ADVERTISING:
Advertising expense is comprised of print, television and internet
related marketing expenses. Advertising expenses are charged to
operations during the period incurred, except for expenses related to the
development of major commercial or media campaigns which are charged to
operations during the period in which the advertising campaign is first
presented by the media. Advertising and marketing expenses charged to
operations totaled $1,015,000 during the period January 8, 1999 through
December 31, 1999. Included in prepaid expenses at December 31, 1999 were
$2,247,000 related to prepaid advertising and marketing resulting from
the issuance of warrants in connection with a joint venture arrangement
(see Note K).
[9] NET LOSS PER SHARE:
Basic and diluted net loss per share was computed by dividing the net
loss for the period by the weighted average number of common shares
outstanding during the period including shares issuable to creditors
after giving retroactive effect to a 2-for-1 stock split during May 1999.
All share issuances prior thereto reflected in the statement of
stockholders equity have been retroactively adjusted to reflect the
split.
[10] FOREIGN CURRENCY:
The assets and liabilities of the Company's German subsidiaries, whose
functional currency is the Deutsche Mark, are translated into U.S.
dollars at exchange rates as of the balance sheet date. Expenses are
translated at the average of the rates prevailing during the period.
Translation adjustments are accumulated as a separate component of
stockholders' equity.
9
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE C - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[11] COMPREHENSIVE INCOME:
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net
assets) during a period from non-owner sources. Comprehensive loss for
the period consists of the net loss and the loss from foreign currency
translation.
[12] SEGMENT INFORMATION:
The Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 requires
public companies to report financial and descriptive information about
their reportable operating segments. The Company identifies its operating
segments based on how management internally evaluates separate financial
information, business activities and management responsibility. The
Company believes that its operations, as they are presently developing,
constitute a single, reportable segment. Non U.S. results of operations,
equipment and software, and total assets are immaterial.
[13] FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's cash and cash equivalents,
receivables, and accounts payable approximate fair value.
NOTE D - EQUIPMENT AND SOFTWARE
Equipment and software at December 31, 1999 consisted of the following
components:
Equipment $ 1,065,000
Software 796,000
---------------
1,861,000
Less: accumulated depreciation and amortization (276,000)
---------------
$ 1,585,000
===============
10
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE E - INTANGIBLE ASSETS
In connection with MusicWorld's acquisition of the predecessor companies (see
Note B), the Company has 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
Less: accumulated amortization (3,168,000)
----------
$ 25,153,000
===============
</TABLE>
The identifiable intangible assets are being amortized over a thirty-six month
period and the excess of cost over fair value of identifiable net assets
acquired is being amortized over a sixty-month period.
NOTE F - INCOME TAXES
As of December 31, 1999, the Company has an estimated United States net
operating loss carry-forward of approximately $18,600,000 which expires in 2019.
As of December 31, 1999 Fritsch & Friends and MCY Europe have a combined
estimated net operating loss carry-forward of approximately $3,000,000 (DM
5,900,000) which under German tax law does not expire. The Company has a net
deferred tax asset of $8,562,000 consisting of a deferred tax asset of
$9,895,000, resulting from operating loss carry-forwards and a deferred tax
liability of $1,333,000 resulting from the different tax and financial bases of
the Company's identifiable intangibles. Such net amount is fully offset by a
valuation allowance as the Company has not determined that it is more likely
than not that the available net operating loss carryforwards will be utilized.
The reconciliation of income tax benefit computed at the federal statutory tax
rate to the income tax benefit in the consolidated statement of operations is as
follows:
Federal (34)%
State and local, net of federal benefit (11)%
Increase in valuation allowance 45 %
--
Income tax benefit 0 %
==
The Company has recorded state and local franchise taxes based on capital in the
amount of $94,000 which is included under the caption general and administrative
expenses on the statement of operations.
11
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE G - COMMITMENTS AND CONTINGENCIES
[1] LEASE COMMITMENTS:
The Company leases facilities and equipment under noncancellable
operating leases expiring through October 2004. Such leases provide
for annual payments as detailed below. In connection with the
aforementioned leases, the Company is required to provide security
totaling $925,000. Such security has been provided by deposits
totaling $731,000 and letters of credit collateralized by restricted
cash of $194,000.
Future minimum annual lease payments as of December 31, 1999 are as
follows:
FOR THE PERIOD ENDING
DECEMBER 31,
-----------------------
2000 $ 1,263,000
2001 1,130,000
2002 987,000
2003 398,000
2004 332,000
-------------
$ 4,110,000
=============
Rent expense for the period ended December 31, 1999 approximated
$402,000.
[2] LEGAL PROCEEDINGS:
On December 16, 1999, a former employee of Music World filed a complaint
against the Company in New York 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. Due to the
fact that the complaint was only recently filed, discovery in the case
has not started. 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. 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.
12
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE H - STOCKHOLDERS' EQUITY
The Board of Directors has the authority to issue 10,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions, including dividend, conversion, voting, redemption (including
sinking fund provisions), and other rights, liquidation preferences, and the
number of shares constituting any series and the designations of such series,
without any further vote or action by the stockholders of the Company. On June
14, 1999, the Company designated and issued 1,000,000 shares of Series 1
Preferred Stock to its founder and Chairman for $1,000. Each of these shares
entitles the holder to 100 votes for each share held on all matters submitted to
a vote of stockholders. The Series 1 Preferred Stock does not carry any
dividend, liquidation, conversion or preemptive rights.
On August 2, 1999, concurrent with the merger of MusicWorld into HBI (described
below), the Certificate of Incorporation of HBI was amended whereby it:
[.] Effected a 2-for-1 stock split, increasing its authorized capital from
50,000,000 shares of common stock to 100,000,000 shares of common
stock, and increasing its outstanding common stock to 4,611,000
shares;
[.] Designated 1,000,000 shares of its 10,000,000 authorized shares of
preferred stock as Series 1 Preferred Stock, and
[.] Changed its name from Health Builders International, Inc. to MCY.com,
Inc.
Also on August 2, 1999, the Company completed its merger with MusicWorld whereby
a subsidiary of the Company merged with and into MusicWorld with MusicWorld
becoming a subsidiary of the Company. In connection therewith, outstanding
shares of MusicWorld common stock and preferred stock were converted,
respectively, on a 1-for-1 basis into common and preferred shares of MCY.com
having identical rights. Furthermore, all holders of options and warrants of
MusicWorld were given identical options and warrants of the Company under a
newly adopted stock option plan, and their existing options and warrants were
canceled.
In connection with the merger, holders of 4,000,000 shares of HBI common stock
sold approximately 3,970,000 of such shares for $0.02 per share to certain of
the Company's stockholders who also served as advisors to the Company. The
Company recorded a compensation charge to operations of approximately
$23,741,000 in connection with this transaction during August 1999.
In August and October, 1999, the Company sold in a private placement an
aggregate of 6,573,333 shares of common stock at a price of $6.00 per share, for
proceeds of $35,886,000 net of commissions and fees to the placement agent. Also
in connection with this transaction, the Company paid $900,000 to other parties
who facilitated the transaction. Additionally, warrants to acquire 657,333
shares of common stock at $6.00 per share were issued to a placement agent in
connection with this private placement.
On December 31, 1999, the Company issued warrants to purchase 476,190 shares of
common stock at a price of $10.50 per share pursuant to a collaborative
agreement (see Note K). Additionally, the Company authorized the issuance of
110,000 shares of common stock at $10.50 per share to an outside consultant who
initiated the aforementioned joint venture. Such amount was recorded as common
stock payable.
13
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
As of December 31, 1999, outstanding warrants to purchase shares of the
Company's common stock were as follows:
EXERCISE
PRICE SHARES EXPIRATION
----- ------ ----------
$ 5.00 2,033,333 July 2, 2004 and July 21, 2004
$ 6.00 707,333 July 21, 2004 and October 20, 2004
$ 10.50 476,190 December 31, 2004
------------
3,216,856
=========
NOTE I - OPTIONS
The Company adopted the 1999 Stock Incentive Plan, as amended (the "99 Plan")
under which options (qualified or nonqualified) and other stock awards, covering
an aggregate of 15,000,000 shares of common stock may be granted to employees,
nonemployee directors and consultants. The exercise price established for any
awards granted under the 99 Plan shall be determined by a Committee of the
Company's Board of Directors. During the period ended December 31, 1999, options
to purchase 7,760,234 shares of the Company's common stock under the 99 Plan
have been granted to officers, other employees, directors and consultants of the
Company at exercise prices ranging from $1.50 to $12.75 per share. Generally,
options become exercisable over periods ranging from immediately to three years
and expire five years from the date of grant. The Company has reserved
15,000,000 shares of common stock for issuance under the 99 Plan. During the
period ended December 31, 1999 in connection with the resignation of certain
employees, 761,200 non-vested options previously granted were cancelled.
Additionally, with respect to those certain employees, the period over which
vested options are exercisable was modified to 90 days from date of resignation.
None of these vested options were exercised within the shortened period.
Additionally, 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.
The following table presents information relating to stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------- -------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE EXERCISE LIFE IN EXERCISE
PRICE SHARES PRICE YEARS SHARES PRICE
----- ------ ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$ 1.50 2,683,200 4.6 778,080
$ 3.20 2,800,000 4.8 1,400,000
$ 6.00 275,000 4.6 48,000
$ 9.50 200,000 4.6 20,000
$10.00 250,000 4.7 6,000
$11.00 50,000 5.0 0
$12.00 580,834 5.0 108,334
$12.50 60,000 4.8 3,300
$12.75 100,000 5.0 0
------------ ------------
6,999,034 $ 4.08 2,363,714 $ 3.18
============ ============
</TABLE>
14
<PAGE>
MCY.COM, INC. AND SUBSIDIARIES
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE I - OPTIONS (CONTINUED)
The effect of applying SFAS No.123 to the Company's December 31, 1999 net loss
as stated below is not necessarily representative of the effects on reported net
loss for future years due to, among other things, the vesting period of the
stock options and the fair value of additional stock options in future years.
The weighted average fair value of the options granted during the period ended
December 31, 1999, has been estimated at $6.82 per share on the date of grant
using the Black-Scholes option-pricing model with the following assumptions: no
dividend yield, volatility of 60%, a risk-free interest rate range of 5.7-6.0%
and an expected life of three years from date of grant. Had compensation cost to
employees and directors for the Company's stock option plan been determined
based upon the fair value of the options at the grant date for awards under the
plan consistent with the methodology prescribed under SFAS No.123, the Company's
net loss and net loss per share would have been as follows:
Net loss - as reported $(69,713,000)
============
- pro forma $(71,509,000)
============
Net loss per share - as reported $(1.66)
======
- pro forma $(1.71)
======
NOTE J - RELATED PARTY TRANSACTIONS
On July 29, 1999, MusicWorld entered into a license agreement with its principal
stockholder who is also the Company's Chairman and CEO for exclusive worldwide
rights to certain technology. The license shall continue to be in effect as long
as compensation equal to 0.25% of gross revenues is paid annually to the CEO
until the later of 20 years or the expiration of the underlying patents as
provided in his employment agreement.
At December 31, 1999, advances to the Company's Chairman and CEO totaled
$107,000.
See Note B for information with respect to the Datatek acquisition.
NOTE K - COLLABORATIVE AGREEMENT
On December 31, 1999, the Company entered into a collaborative agreement to
develop co-branded Narrowband and Broadband Music Channels on internet sites. In
connection with the agreement, the Company will pay $25,000 per month and share
a percentage of digital music download revenues initiated on specific co-branded
internet sites during the 12 month period ending December 31, 2000. In
connection with this agreement, the Company issued a warrant to purchase 476,190
shares of the Company's common stock at an exercise price of $10.50 per share
for total consideration of $5,000. Such warrant has been valued at $2,252,000.
The excess of the value over the amount paid has been recorded as prepaid
advertising and marketing expense and will be amortized during the year ending
December 31, 2000 commencing with the month in which the music internet sites
are launched. The Company authorized the issuance, to an independent consultant,
of 110,000 shares of common stock valued at $1,155,000 for services rendered in
connection with the collaborative agreement. Such amount has been recorded as
compensation expense during the period ended December 31, 1999.
NOTE L - SUBSEQUENT EVENT
From February 16, 2000 through March 9, 2000, the Company sold in a private
placement an aggregate of approximately 5,000,000 shares of common stock at a
price of $7.50 per share, for proceeds of approximately $35,000,000 net of
commissions and fees to the placement agent.
15
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibits
-------------- -----------------------
2.1 Agreement and Plan of Reorganization dated as of
August 2, 1999 among Health Builders International,
Inc., HBI Sub, Inc. and MCY Music World, Inc. 1
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 3
10.3 Confidentiality and Non-Circumvention Agreement
effective as of November 28, 1999.3
10.4 Employment Agreement made as of July 11, 1999 by and
between MCY Music World, Inc. and Bernhard Fritsch. 3
10.5 Amendment to Employment Agreement made as of July 28,
1999 by and between MCY Music World, Inc. and Bernhard
Fritsch. 3
10.6 Employment Agreement made as of July 11, 1999 by and
between MCY Music World, Inc. and Mitchell Lampert. 3
10.7 Employment Agreement between MCY Music World, Inc. and
Scott Citron dated as of July 21, 1999. 3 *
10.8 Employment Agreement between MCY Music World, Inc. and
Ray Short dated as of August 8, 1999. 3
10.9 Employment Agreement dated September 1, 1999 by and
between MCY Music World, Inc. and Thomas Noack. 3
21.1 Subsidiaries of Registrant.3
27.1 Financial Data Schedule. 3
99.1 MCY.com, Inc. Amended and Restated 1999 Stock
Incentive Plan 1
99.2 Form of Award Agreement ("Stock Option Agreement")
under the MCY.com, Inc Amended and Restated 1999 Stock
Incentive Plan 4
- --------------------------
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 File #: 333-9809.
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.
* Scott Citron ceased to be employed by us effective March 16, 2000.
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:
<PAGE>
ARTICLE 1.
EXCLUSIVE LICENSE
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
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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.
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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.
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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.
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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.
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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
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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.
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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
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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.
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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
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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.
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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
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(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.
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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;
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(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
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Executive as a result of employment by another employer or by retirement
benefits, after the date of termination, or otherwise.
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(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
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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.
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(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.
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<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> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 26,060,000
<SECURITIES> 0
<RECEIVABLES> 397,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,357,000
<PP&E> 1,585,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 57,374,000
<CURRENT-LIABILITIES> 3,381,000
<BONDS> 0
0
1,000
<COMMON> 54,000
<OTHER-SE> 53,938,000
<TOTAL-LIABILITY-AND-EQUITY> 57,374,000
<SALES> 343,000
<TOTAL-REVENUES> 343,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 70,056,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (69,713,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,713,000)
<EPS-BASIC> (1.66)
<EPS-DILUTED> (1.66)
</TABLE>
