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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER
SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
musicmusicmusic inc.
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(Exact Name of Small Business Issuer Specified in Its Charter)
DELAWARE (applied for)
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(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) No.)
99 Atlantic Avenue, Suite 100, Toronto, Ontario M6K 3J8 Canada
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(Address, Including Zip Code of Principal Executive Offices)
Telephone Number: (416) 537-2165
Securities to be Registered Pursuant to Section 12(b) of the Act: None
Securities to be Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
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(Title of Class)
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TABLE OF CONTENTS
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Page
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Item 1. Description of Business........................................ 3
Item 2. Financial Information.................... ..................... 49
Item 3. Description of Property................... .................... 57
Item 4. Security Ownership of Certain Beneficial Owners and
Management......... ........................................... 57
Item 5. Directors, Executive Officers, Promoters and Control Persons... 59
Item 6. Executive Compensation......................................... 63
Item 7. Certain Relationships and Related Transactions................. 67
Item 8. Legal Proceedings.............................................. 68
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Other Stockholders Matters................... 68
Item 10. Recent Sales of Unregistered
Securities..................................................... 69
Item 11. Description of Registrant's
Securities..................................................... 70
Item 12. Indemnification of Directors and
Officers....................................................... 73
Item 13. Financial Statements and Supplementary
Data........................................................... 74
Item 14. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure....................................... 74
Item 15. Financial Statements and Exhibits.............................. 75
SIGNATURES............................................................... 77
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ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT.
musicmusicmusic inc. (the "Company") was incorporated on May 1, 1997 in Ontario,
Canada. On May 4, 1999 the Company moved its corporate domicile to the State of
Delaware in accordance with the Ontario Business Corporation Act (Canada) and
the General Corporation Law of Delaware (the "Delaware Law"). The Company is
now registered with the Secretary of State of Delaware under the corporation
number 3032246. The Company's Amended and Restated Certificate of Incorporation
provides for the unlimited duration of the Company. The Company's principal
business office is located at 99 Atlantic Avenue, Suite 100, Toronto, Ontario
M6K 3J8 Canada, and its telephone number is (416) 537-2165. The Company's world
wide web (the "Web") sites are www.musicmusicmusic.com and www.radiomoi.com.
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The Company's websites are not incorporated into this Registration Statement.
The registered office of the Company in Delaware is located at 15 East North
Street, Dover, Kent County, 19901. The Company's registered agent at such
address is United Corporate Services, Inc.
The registered purpose of the Company as set out in the Amended and Restated
Certificate of Incorporation is to engage in any lawful act or activity for
which corporations may be organized under the Delaware Law.
The Company currently has one subsidiary, musicmusicmusic europe AG formed in
Zuerich, Switzerland, on April 27, 2000. The Company's principal business office
is located at 99 Atlantic Avenue, Suite 100, Toronto, Ontario M6K 3J8 Canada.
The Company maintains branch offices in Toronto, Ontario (Canada) and at 580
Broadway, Suite 306, New York, New York 10012. The Company's wholly-subsidiary
office is located in Zuerich, Switzerland.
GENERAL.
General Information: The Company is an Internet enterprise. The Company has
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developed a digital music database and has the infrastructure and expertise to
deliver or "stream" high quality audio programs to business-to-business clients
and individual users worldwide. The Company's digital music database currently
contains a comprehensive and rapidly growing collection of more than 100,000
recordings which have been digitized into more than 600,000 music files
providing for delivery of music over the Internet in various high quality modes.
During its two years of operations, the Company's Web site has obtained the
following results:
. Aggregate delivery of more than 13.5 million songs over the Internet as
of April 2000
. Aggregate of more than 260,000 users in month of April 2000
. Monthly delivery of more than 700,000 songs in month of April 2000
. Average delivery of more than 26,000 songs per day in month of April
2000
. Average of 80 songs played by each user in month of April 2000
. Average of 241 minutes listening time by each user in month of
April 2000
The Company's Internet and proprietary distribution models provide for revenue
generation to be derived from advertising, sponsored promotion, merchandise and
CD sales, artist and record industry services, record store listening posts,
business-to-business digital music delivery
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services, digital database access and sales to radio stations and custom
produced music programs delivered via digital satellite systems.
According to Company research, the Company's database represents one of the
largest collections of digital music available on the Internet. The database is
expected to grow from its present size of close to over 1.4 terabytes (one
thousand gigabytes) at a rate of approximately more than 60,000 new digital
music files per month.
The Company's database of over 600,000 digitized music files provides the core
resource for the Company's five product lines:
1. radiomoi An interactive entertainment Webcasting site
which generates revenues through advertising,
sponsored promotions, artist and record industry
services, and merchandise and CD sales.
2. Web Bar A stand-alone unit which permits customers in
Listening Post record stores to sample virtually any CD in
stock via the Internet and enables the Company
to generate income from database access and
cross advertising.
3. Broadcast Services Sells access to the Company's digital music
database and broadcasts quality music files to
radio stations, disc jockeys and other businesses
requiring digital music files.
4. Industrial Sound Services Delivers background music and sound environments
to businesses.
5. The Solutions Group The Company's hardware, software and programming
division which supplies computers and technology
to music industry businesses (record companies,
publishers, performing rights societies) as well
as the Company's franchise operators and other
companies.
Franchises. In addition to the Company's five product lines, the Company
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expects to generate income from world-wide franchise partners, as derived by
franchise fees, support fees and royalties. The Company's first franchisee is
khaleej.com, a United Arab Emirates' Abu Dhabi-based company dedicated to taking
Middle Eastern culture and music out into the world. The franchise territory
for khaleej.com covers the Arab world in 40 Middle Eastern, African and Asian
countries. Each franchise includes territorial rights to radiomoi, the Web Bar
Listening Post, Broadcast Services, and Industrial Sound Services. khaleej.com,
which appropriately means "crossing the Gulf (of Persia)" and idiomatically "the
Gulf of Knowledge", has a potential customer base in the 200 million Arab
speaking people around the world.
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As of March 2000, two of the Company's product lines, radiomoi and The Solutions
Group, and the Company's franchise operations are producing revenues and as of
April 2000, the Company's Web Bar Listening Post, Broadcast Services and
Industrial Sound Services product lines are delivering revenues.
The Company provides for delivery of the music database by compressing digital
files at conventional kilobyte per second ("kbps") speeds of 16kbps, 32kbps and
56kbps bitstreams, and also at higher quality 112kbps and 256kbps bitstreams.
These higher bitstreams files are expected to be the basis of the Company's Web
site when ADSL, Microsoft's satellites, MCI's super-speed network and other
future technology provide technical feasibility to deliver CD quality music
live-streaming directly to a user's computer.
The Company obtained the first "Webcasting" license from the Recording Industry
Association of America (the "RIAA"), the world's largest music association that
includes among its members EMI, Polygram/Universal, Warner Music, Sony and BMG.
The RIAA license permits the Company to legally play music via the Internet.
The Company broadcasts music on the Internet 24 hours a day, seven days a week.
INDUSTRY OVERVIEW
Recorded Music Industry
Music is one of the most popular forms of entertainment in the world. Music is
also a substantial business. According to the RIAA, worldwide sales of recorded
music were $14.6 billion in 1999, 37% of which were in the U.S. According to a
recent Soundata study, over 70 million consumers in the United States purchased
three or more pieces of pre-recorded music in 1999.
The Internet
The Internet has emerged as a global platform that allows millions of
individuals to share information, communicate and conduct business.
International Data Corporation estimates that the number of Internet users
worldwide will grow from approximately 100 million users recently to 320
million by the end of 2002. The Company believes that the Internet is becoming
an attractive medium for advertising and direct marketing because the Internet
allows for the collection of key demographic data from consumers. Advertisers
can better target specific groups based on customer tastes and buying patterns
on the Internet. Jupiter Communications estimates that the dollar volume of
online advertising is expected to increase from approximately $2 billion
recently to $7.7 billion by the end of 2002 and that online direct marketing is
expected to increase from approximately $200 million recently to $1.3 billion
the end of 2002.
As users have come to realize the convenience of faster Internet connections,
many have upgraded from a 28.8 Kbps modem to a cable, ADSL or ISDN modem.
According to Jupiter Communications, the number of subscribers using cable, ADSL
or ISDN modems is projected to increase from approximately one million recently
to 10.5 million at year end 2002.
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The Company believes that broadcasting audio content over the Internet offers
certain opportunities that are not generally available from traditional media.
Currently available analog technology and government regulations limit the
ability of radio and television stations to broadcast beyond certain geographic
areas. Radios and televisions are not widely used in office buildings and other
workplaces where Internet access has become commonplace. In addition,
traditional broadcasters are limited in their ability to measure or identify in
real time the listeners or viewers of a program. By adapting Internet delivery
technology, targeted streaming media content can be Webcast to a geographically
dispersed audience of customers, suppliers, employees and stockholders at
relatively low costs. Internet users can interact with the Webcast content by
responding to online surveys, voting in polls and obtaining additional
information. In addition, Internet Webcasters can provide highly specific
information about a program's audience to content providers, advertisers and
users of Internet business services. The convergence of the Internet's
capabilities and attributes has accelerated its acceptance as a business tool,
leading to rapidly growing economic opportunities in Web-based advertising and
business service offerings, including audio programs, electronic commerce and
video transmission, among others.
Digital Music
In recent years, consumers have increasingly used their computers to play music.
Dataquest estimates that in 1999, 30% of U.S. households had multimedia PCs with
a sound card, speakers and either a CD-ROM or DVD-ROM drive. Consumers can now
play CDs on their computers with the ease and fidelity formerly associated only
with stereo systems.
In general, music files can be very large. For example, a three minute song can
occupy more than thirty megabytes of storage. Storing and transferring audio
files can be expensive and slow. To address this problem, compression formats
have been developed. One of the first widely accepted standards for the
compression of music was MP3, adopted by the Moving Picture Experts Group. The
MP3 standard offers at least 10:1 compression and audio integrity at near-CD
quality. MP3 playback is currently available on most operating environments
such as Microsoft Windows 95, Windows 98, Windows NT and MacOS, most major
versions of UNIX and many other operating environments. Free copies of MP3
playback software are widely available on the Internet. Forrester Research,
Inc. reports that there are over 50 million MP3-capable users as of June 30,
1999. The development of compression formats such as MP3 has made it practical
to transmit music over the Internet in downloaded files or in live-streaming
mode.
Internet Radio
Innovations of the last several years have dramatically affected the manner in
which the public obtains access to music. There are now hundreds of web sites
dedicated to music, including sites that promote one artist or one label's
complete offerings. Many sites sell CDs, books about music and other
merchandise. In addition to conventional broadcasting, MP3 technology now makes
broadcasting possible from home computers. Sites which gather online content
into one location have appeared. Labels and artists can now publish and make
available their recordings completely on the Internet. The Company believes
that providing consumers with interactive access to self-selected listening
choices will be the development path of Internet Radio. Internet
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radio broadcasts are expected to provide program content parameters which may be
customized by each listener according to their particular tastes. Unlike
conventional broadcasting where one stream is sent out to many listeners, the
Internet provides the flexibility for each listener to personalize their
Internet radio experience. The Company's Internet radio Webcasting site,
radiomoi.com, offers listeners interactive entertainment with a wide range of
choices of genres and pre-programmed shows, as well as options to create
personalized Internet radio shows and listening access to the personalized
Internet radio shows of other users.
The Company's Internet radio business concept for radiomoi is based entirely on
the streaming media model. The alternative mode of delivery, employed by
several competitors of the Company, is to provide for downloading music files
over the Internet to a user's computer. A music file which is delivered via
download must be transferred in its entirety to the user's local computer before
the music file can be opened and played. See Item 1, "Description of Business-
Risk Factors -Uncertain Acceptance Of Streaming Media Technology."
Listening Posts
A listening post is a stand-alone unit which permits customers in record stores
to sample CDs in stock. The prevalent type of a listening post incorporates a
CD player which usually holds from one to ten CDs and has a small control unit
consisting of three or four buttons to control the play from which a customer
can select any track from the limited selection of titles. The other preview
system incorporates a single CD programmed with 30 second fragments of several
songs.
Each of these types of conventional listening posts have distinct disadvantages.
Mechanical units may easily break down. Because each type of system uses actual
CDs, expensive promotional copies must be supplied by record companies, or the
retail vendors must use their own inventories. In addition, such listening
posts provide only very limited selection of music for a consumer to sample.
In response to conventional listening post shortcomings, the Company has
invented the Web Bar Listening Post which has the capability to play any song
from any CD via the Internet. The Web Bar Listening Post functions by
association of the Company's digital music database to CD package barcodes. No
actual CD is required at the retail listening site.
There have been attempts to offer a similar system but to date the Company
believes that none have been successful. The Company believes that the Web Bar
Listening Post provides substantially improved features over conventional models
currently available in this market segment and it is expected to provide
substantial benefits to retailers, record companies and consumers.
Broadcast Content
The broadcast industry is highly fragmented. A radio station may be a single
stand-alone entity or a part of a broadcast group, some consisting of more than
a thousand stations, and range in its respective technology from low wattage
analog to state-of-the-art digital systems.
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Large U.S. broadcast groups often operate on a model of conformed programming
and centrally mandated hardware, software, music, and Web design for all of
their member stations. Such systems provide little flexibility for market
variation and the Company believes that the potential performance of this type
of radio station is impaired under this system.
Conversely, small broadcast groups and single stand-alone stations owned by an
individual or family tend to be prevalent in small to mid-sized markets.
Technologically, they often lag behind the major broadcast groups. Many of
these types of stations find themselves in need of a variety of equipment,
content and music delivery services.
The Company, which sells products, including database access and broadcast
quality music files to radio stations and other businesses requiring digital
music files, may benefit both the large and small broadcast groups by offering
broader music programming options which may be customized without the need for
investment in expensive technology, content and equipment.
Industrial Sound Services
Muzak(R) is a trade name which has become synonymous with piped-in music. The
Company believes that product for the most part is impersonal and generic, does
not reflect its surroundings and generally does not appeal to its audience.
Many commercial and other establishments such as stores, restaurants and offices
could offer customized music environments as background for their business to a
greater extent available than through conventional systems. The Company
believes there is a void in this market for customized music that takes into
account context, surroundings, appeals to particular audiences, and promotional
opportunities. The Company believes that it is well positioned to fill such
void with its Industrial Sound Services, an innovative customizable Internet
music delivery system.
Protection of Content Providers
Record companies, publishers and performing rights societies market, promote and
administer the product of creative artists and are responsible for collecting
royalties upon use of such product for the distribution of royalties to
copyright owners. Such royalty payments are administered through national
organizations created for this purpose. Illegal use and reproduction of
copyrighted content is a substantial concern of the industry, particularly with
the expansion of the Internet. The Company has structured its system to protect
content providers from illegal copying of their materials as well as to provide
for royalty payments arising from use of such content through the Company's
products and services. The Company can precisely determine each music selection
played, the number of times a selection has been played and the origin of
request for play.
The Company has conformed to the regulations of the publishers, performing
rights societies, the record companies and the RIAA with respect to the payment
of royalties. For this reason the Company has been granted the first
"Webcasting" license issued by the RIAA.
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COMPANY PRODUCT LINES
The following section discusses in detail the Company's five main product lines:
(1) radiomoi; (2) the Web Bar Listening Post; (3) Broadcast Services; (4)
Industrial Sound Services; and (5) The Solutions Group. As of March 2000, two of
the Company's product lines, radiomoi and The Solutions Group, and the Company's
franchise operations are producing revenues. As of April 2000, the Company's Web
Bar Listening Post, Broadcast Services and Industrial Sound Services product
lines are delivering revenues.
radiomoi Product Line
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radiomoi.com is an interactive entertainment Webcasting site which generates
revenues through advertising, sponsored promotions and gift shop sales. It
offers consumers one of the largest databases of musical content available on
the Internet through a rapidly expanding collection of digitized recordings.
Consumers can listen to streaming audio musical selections on a personal
computer solely at the cost of the telephone line or other Internet connection.
radiomoi offers music 24 hours a day seven days a week from the convenience of
home, school or office. The Company's music collection spans most categorized
genres, including pop, rock, classical, country, alternative, children's, easy
listening, electronic, hip-hop, rap, blues, jazz and international. In
addition, consumers can access Company programs representing established labels
and independent artists from all 50 states in the U.S. and many foreign
countries.
In order to access radiomoi, the user must first register to receive a password.
Basic registration on radiomoi is currently free and the Company does not
anticipate charging a fee in the foreseeable future. Users currently provide
information about their age, geographic location, musical preferences and more.
Immediately following completion of the registration information, the user is
granted instant access to all of radiomoi's music programs.
In accordance with the terms of intellectual property licensing agreements
permitting Webcasting of the Company's music content, there are two modes for
listeners to select music on radiomoi: programmed shows and music-on-demand.
The listener to programmed shows cannot choose a particular song or know exactly
when a particular song will be played. The listener can, however, choose the
genre and type of music from an extensive array of such programmed shows. Each
programmed show has a minimum of 150 recordings. Upon listener selection of a
programmed show, 25 recordings from that show will be randomly selected and
played. The listener can elect to play a show again and a new random set of 25
recordings will play. The listener can mix shows and create a composite show
from different genres. The customized radiomoi player permits the listener to
skip particular recording tracks and move on to the next one by simply clicking
the forward button, which is an exclusive feature of the radiomoi player.
radiomoi has over 100 contracts to stream songs from licensed record companies
fully on demand which permits a listener to choose particular recordings from a
list by artist, song, label or genre, and play it any time they wish. The
listener can also create a custom show with these titles which can be saved and
played at radiomoi at any time.
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On April 26, 1999, the Recording Industry Association of America, the trade
group representing U.S. record labels, announced the signing of the first-ever
Webcasting licensing agreement. The agreement reached with the Company for its
radiomoi Internet radio station provides the Company with the right to publicly
perform sound recordings pursuant to the terms of the newly created statutory
license under the Digital Millennium Copyright Act of 1998. The RIAA agreement
with the Company is for an initial period that expires on December 31, 2000.
The Company has agreed to pay a royalty of approximately 15 per cent of gross
revenues derived from Webcast music to the RIAA to be paid to the copyright
owners of such music. There is also a minimum performance amount required.
This same royalty rate applies to the on-demand license agreements which the
Company has entered into with more than 100 private labels. On August 11, 1999,
the Company and the RIAA entered into an agreement with respect to ephemeral
rights, providing the Company with a license to make multiple records via
digital transmissions over the Internet (the "Ephemeral Rights Agreement"). The
Company has agreed to pay the RIAA a royalty of approximately 2% of gross
revenues for such rights. The Company also has applied for the necessary
licensing with ASCAP and BMI that represent the publishers and songwriters, and
the Harry Fox Agency that collects royalties with respect to mechanical
reproduction and usage rights.
radiomoi provides music live-streamed to the listener using the MPEG Layer 3
compression standard (commonly referred to as MP3), which is copyright protected
with Fraunhofer Institut Integrierte Schaltungen MultiMedia Protection protocol.
These technologies, together with the Company's extensive server-side security,
ensure that no permanent copies of sound files ever exist on the listener's
computer. The Company has the capability to provide music to listeners in 6
different qualities of Internet transmission compressions. Internet connections
as slow as a 28.8 Kbps modem can receive the Company's signal, while listeners
with the latest high capacity connections can receive FM stereo quality audio.
Additionally, the Company believes that it will be feasible to rapidly adapt to
changing technologies and offer new compression levels or types as the market
evolves.
Drawing on data collected from Company listeners, radiomoi can target
advertising at precisely defined demographic groups, provide advertisers with
potential follow-up communications paths (subject to listener approval) and
obtain detailed reports on audience interactivity, including without limitation
pageviews, audio selections and advertisement reaches.
As of April 2000, radiomoi has signed up over 265,000 subscribers and has played
almost 13.5 million songs to its listeners in the first 28 months of operation.
The Company expects radiomoi's subscriber base to significantly increase during
the next two years. The Company believes that large numbers of consumers will
be drawn to radiomoi because of the Company's brand advertising and increased
marketing efforts as well as the radiomoi Website extensive selection and
innovative programming structure.
After the listener checks into the radiomoi site by entering a user
identification and password, the radiomoi "front lobby" Web page offers a menu
of the following available programs:
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1. "radiomoi Presents" provides listening options that are developed by the
Company's expert musicologists and specially designed algorithms that select
recordings automatically from the Company's music database. In each case the
actual show sent to the listener is not compiled until it is requested by the
listener. radiomoi offers the following listening options for on-line users:
. Music Shows: series developed by the Company's musicologists to
provide the listener with a comprehensive experience of major music
genres. These shows cover an extensive range of modern music, from rave
dance to jazz, from oldies to the hottest new music, as well as an
"Ultimate Show" and "e.j.'s Choice Show."
. Time Machine/Time Traveler: listeners can randomly sample hits of a
selected era, or travel through time year by year, according to their
specifications.
. Instant Radio: allows listeners to pick a genre or multiple genres and
hear a show selected randomly from the Company's music database.
. My radiomoi: designed to emulate All-Request Radio stations.
Requested songs become part of an ever-growing show, which can be
customized to each listener's tastes and personalities.
. Commercial Free Shows: series features commercial free productions
sponsored by third party companies.
2. "Music On Demand" offers music-on-demand from a database of almost 14,000
recordings digitized into more than 84,000 music files. As the Company's
extended licensing agreements with individual record companies increase, which
permit the Company to provide music on-demand access to listeners, the music
selection in this segment will continue to expand. Listeners can find songs by
browsing through albums by genre, or they can use the Company's powerful,
proprietary search engine. Any song they find in the Jukebox can be listened to
immediately, or added to fully personalized shows. These shows become the
listener's personal archive of favorite music, and may be accessed on an
unlimited basis during the period such listener is registered with radiomoi.
3. "I'm the DJ" and "Other DJs" Pages permit shows created in the Music On
Demand Jukebox to be played and edited from the "I'm the DJ" pages. Listeners
can sort their song lists into any order they choose. Once finished the show can
be shared with other radiomoi listeners through the "Other DJs" pages. This
feature has been particularly popular to date and has created a dynamic sub-
community within the radiomoi Web site.
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4. Music Library: Contains the complete catalogue of songs available to radiomoi
listeners as well as various information about music and anecdotes about artists
and songs.
5. radiomoi Gift Shop features a large catalogue of music and related products
which can be ordered online. The Gift Shop is designed to offer product
suggestions to listeners while they listen to music. Products can be liked to
related music tracks, artists and genres to facilitate optimum advertising sales
and marketing programs.
6. "New Music Jukebox" designed to present new music to A&R directors,
publishers, band managers, producers of music, film and television and other
creative management. The New Music Jukebox permits artists and songwriters to
present their new material at a fraction of the cost of conventional mail-outs.
The New Music Jukebox provides free access to qualified management to source new
material with a minimum of effort and time.
7. "The Record" - On March 1, 2000, the Company purchased a Canadian music
information company, The Record. The Company believes this acquisition will
enhance its customer base, create additional advertising revenue and give the
Company advantages in the Canadian music industry. Expected revenues from The
Record's existing contracts are expected to be $165,000 in the first short year.
The Record, often described as the Billboard or "bible" of the Canadian music
industry, has been an established presence in Canada for 20 years. In August of
1999, The Record transformed itself from a print vehicle, transferring weekly
information to a select paid-subscriber list, to a password-protected web site
with daily up-dates. The Company's contract with the RIAA will allow The Record
to legally stream audio along with information to music industry executives
around the globe, and provide a portal for music fans to easily access
information about Canada's vibrant music industry. Among Canada's notables are
acts such as Bryan Adams, Jann Arden, Bare Naked Ladies, Blue Rodeo, Shania
Twain, k.d. lang, Celine Dion, Leonard Cohen, Gordon Lightfoot, Neil Young, Joni
Mitchell, Loreen McKennitt, Daniel Lanois, the Tragically Hip, David Foster,
Deborah Cox and Diana Krall.
radiomoi Ancillary Record Industry Products
The Company expects to continue to introduce new products and services through
its radiomoi product line designed with innovative approaches to entertainment,
e-commerce, communications and information needs, including the following record
industry products:
Digital Downloadable Albums: The Company pioneered the "Digital
Downloadable Album" (the "DDA") on the Internet. Invented in June 1998, the DDA
is a new format that presents a complete album in a single, downloadable,
copyrighted and password protected file. It retains order of song play and, in
addition to presenting songs, credits, pictures and other elements now available
on the CD, it may include videos, games, animation and links to artist and
company Web sites. A Company security feature encrypts the DDA file with the
purchaser's name and credit card number which requires such information to be
entered in order to make a legal copy of the DDA. The Company believes it
unlikely that purchasers will share such information on bulletin boards or
otherwise, thus preventing illegal copies in lieu of making such copies merely
traceable, as alternative illegal prevention systems do, such as digital
watermarks. The Company believes that DDA will lower inventory costs, and
prevent returns and deletions.
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Demographic Reports: The Company can provide demographic makeup of the
listeners who have listened to a unique track or all of a label's tracks,
including their sex, age, income and musical preferences. In addition, the
Company publishes Top-40 Charts daily, weekly and monthly.
Web Bar Listening Post Product Line
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The Web Bar Listening Post permits customers in record stores to sample
virtually any CD in stock and enables the Company to generate income from sale
of hardware, database access fees and cross advertising. The Company believes
that the average store can accommodate two to four Web Bar Listening Posts with
revenue streams derived from each unit.
The Web Bar Listening Post functions by association of the Company's digital
music database to CD package barcodes. No actual CD is required. A customer
can simply scan the barcode from store inventory at the listening post and music
plays automatically. Additional selections can be played at the touch of the
"Next Track" button or another selection can be scanned at any time. Vendors
have the option of limiting sample selections to one or more particular tracks
from each CD.
The Company has three standard kiosk designs for the Web Bar Listening Post,
including two floor models and one wall mount unit. For advanced video systems,
large screen monitors can be ceiling-mounted allowing all customers within the
store to view selections. These large format systems could be used to preview a
live band, for example, debuting a new album and be broadcast to all stores
within a chain.
Sound options provide for the use of headphones with replaceable ear pads to
reduce health issues, and speakers or sound cones which eliminate health issues
and breakage problems.
Connectivity can be accommodated through cable, ISDN, T1 or similar internal
communication systems such as WAN or Satellite. The Company has designed all of
its Web Bar Listening Posts with remote access programs and on-board diagnostic
systems in order to make repairs and update software.
The Web Bar Listening Post has been designed to accommodate third party
promotions and various types of advertising both during use and while the
machine sits idle or in neutral mode. A variety of reports can be generated
from the Web Bar Listening Post, providing retailers, record labels and artists
with valuable sales and marketing information on local and regional basis. The
Web Bar Listening Post also has the ability to interact with corporate programs
and offer a version of an Artist/Title/Song catalogue.
As of April 30, 2000, the Company has been able to secure contracts for its Web
Bar Listening Post Product with two major North American chains, Future Shop and
Zellers, after successful trials. In addition, the Company is negotiating with
several large retail record store chains for additional Web Bar Listening Post
installations.
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Broadcast Services
-------------------
The Company offers Broadcast Services including digital music file database
access and ancillary services to industry and institutional clients.
1. Company Database Access: The Company sells access to its digital music
database and broadcast quality music files to radio stations, disc jockeys and
other businesses requiring digital music files.
2. Digital conversion of client music libraries: Traditionally, music libraries
have consisted of digital and analog physical media. These libraries are labor-
intensive and costly to manage. The Company believes that it can significantly
reduce the broadcasters' operating costs by completely eliminating the need for
a physical library. The Company can convert conventional recording libraries to
completely digital archives, stored on the Company's servers. As additional
recordings are desired to be added, the broadcaster need only send the original
media to the Company, and generally within forty- eight hours it will be
digitally available on broadcast quality MP3 files stored on Company servers.
Clients will be able to access the digital music library, download the music
over the Internet into a cache and proceed with broadcast music program
scheduling on systems they are currently using.
3. Fee-Per-Song Conversion: As an alternative to digitizing entire music
libraries, the Company offers clients the ability to supplement their libraries
by downloading digitized music from Company servers at a fee per song. For the
broadcaster who prefers to receive physical media, the Company can supply the
music burned onto CDs with larger numbers of tracks. One CD can accommodate 50
to 100 tracks at 256 kbps, or more at lower bitstream qualities.
4. Web Services: The Company offers ancillary Web site design services. The
Company's creative and technical team can design, implement, and maintain a Web
site that is responsive to the specifications of the broadcaster and provide the
necessary hardware and software. The Company can Web-host music on the
broadcaster's Web site. Visitors to the station's Web site can live-stream
music which appears to be coming from the client's station, but is actually
being played from the Company's servers. The client's station DJs can introduce
the music and commercials and/or community service announcements can be
inserted. The Company has recently entered into a contractual relationship with
Citadel Communications, one of the largest broadcast networks in the United
States, to design their web presence and stream music for each and every one of
their radio stations.
5. Kiosks: The client broadcaster can also use the Company's Listening Kiosks,
which are similar to the Web Bar Listening Post, to promote its music in various
special purpose locations, such as at radio stations, office lobbies and special
event sites. The Company's technology permits visitors to the Kiosk to choose
from music that the broadcaster has pre-selected. The music is kept in a local
cache and the selections can be updated as often as required. The Kiosk can be
built to blend with the decor of its surroundings. The monitor can display
album cover graphics and/or anecdotal information about music that is playing as
well as other promotional and advertising segments. The broadcaster may also
choose to have the monitor display its Web site. Each Kiosk may be customized
to the specifications of the broadcaster.
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Industrial Sound Services Product Line
--------------------------------------
The Company provides Industrial Sound Services for the music delivery needs of
various commercial establishments and businesses such as offices, shopping
malls, hotels, industrial plants, hospitals, nursing homes, airports, bars,
restaurants, stores, garages and elevators. The Company believes that its
digitized and compressed music library provides substantial improvement over
conventional public music delivery systems. The Company's MP3 Files stored on
its servers provide high quality sound delivery. Significantly, the Company can
customize programs to the specifications of each client. Industrial Sound
Services offers numerous promotional opportunities for inclusion of commercials
to sell products and/or services, messages to motivate employees or clients,
information bulletins, community information as well as news and sports updates.
The Solutions Group Product Line
--------------------------------
The Solutions Group ("TSG") is the Company's hardware, software and programming
product which supplies computers and technology to music industry businesses
(record companies, publishers, performing rights societies) as well as the
Company's franchise operators and other companies. The Company acquired TSG on
March 1, 1998. TSG's role is to source hardware, software, and maintenance
programs to support the Company, its music industry clients, Company franchise
operators and other business technical consulting accounts.
Franchise Alliances
-------------------
On January 24, 2000, the Company signed its first franchisee, khaleej.com, a
United Arab Emirates' Abu Dhabi-based company. The focus of khaleej.com is
Middle Eastern culture and music. The franchise includes territorial
distribution rights to radiomoi, the Web Bar Listening Post, Broadcast Services,
and the ISS product lines. The franchise territory for khaleej.com covers the
Arab world in 40 Middle Eastern, African and Asian countries. khaleej.com,
appropriately means "crossing the Gulf (of Persia)" and idiomatically "the Gulf
of Knowledge". The Company believes that khaleej.com has a potential customer
base of 200 million Arab speaking people around the world.
The Company is currently negotiating with potential franchise operators for
other territorial franchise rights in the following countries: India, Korea,
Taiwan, Singapore, Holland, Hungary, Scandanavia and Germany. The Company
expects to enter negotiations with other potential franchisees from other
countries and regions as well. The Company's franchise operators will be
contractually required to digitize and compress at least 1,000 songs of their
local music genres per month which will be included in the Company's digital
music database, and will, on a reciprocal basis, have rights to provide portal
access to the Company's digital music database, sell the Company's products and
services as well as advertisements in their geographic territory. The
contemplated franchise agreements are expected to provide that franchise
operators will pay franchise purchase fees, development commitments, annual
support payments and royalties. The Company's growth strategy anticipates the
addition of up to twenty franchise operators worldwide within three years.
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The Company expects to supply hardware, software, installation and remote
support services to all franchise operators.
As franchise operators will have the full support of the Company's resources,
they are expected to be able to provide local access to the Company's Web site
within 90 days from the date of franchise purchase, and to provide local
language and regional digital music content within six to nine months.
BUSINESS STRATEGY
The Company's objective is to enhance its leadership position in Internet
Webcasting by providing a broad range of high quality music and streaming media
content over the Internet as well as specific business-to-business and business-
to-consumer services related to the music industry. Key elements of the
Company's strategy include:
1. Diversify Revenue Streams Across Advertising, E-Commerce and Other Products
The Company's strategy is to harvest the breadth and uniqueness of music as the
global language which the Company believes can generate multiple commercially
feasible revenue streams. The Company's primary focus to date has been on
building a core digital music database which can be leveraged through a variety
of exploitation and delivery modes. The Company's content presentation will
continue to provide selections for a broad range of musical interests, tastes,
and genre. The interactive structure will enable the Company to collect valuable
consumer data. The Company believes its ability to provide access to large,
demographically profiled audiences and deliver client-specified digital music
resources will be a valuable asset in developing a variety of marketing, data
mining, advertising and high quality responsive music delivery services.
2. Create a Unique and Robust Music-Based Experience for Consumers and Business
Clients
The Company's strategy focuses on creating an unmatched experience for consumers
by offering one of the largest collections of music available online, a rich
browsing experience with multiple search classifications and a cost and time
efficient way to access music tailored to personal tastes and interests. As
bandwidth availability continues to improve, the Company expects to deliver
video and an increasing array of interactive multimedia experiences for both
individual consumers and business clients. The Company believes the Company's
ability to create a personal, engaging experience and permit the Company's
business clients to do the same will retain the Company's customer base and
increase the Company's audience in the future.
3. Build Brand Awareness
The Company plans to increase brand awareness through a combination of online
and offline advertising and promotional activities. The Company has
historically benefited from word-of-mouth and growing public awareness of the
accessibility of music over the Internet. The
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Company intends to achieve greater online and offline awareness by targeted
Internet advertising and conventional marketing channels as well as including
specific sales programs for the Company's business-to-business products and
services.
4. Expand The Company's International Presence
The Company believes it can dramatically increase the number of international
consumers through the Company's use of the Internet and the Company's
contemplated franchise arrangements. The Company believes its global reach and
resources will provide significant attractions for the Company users. The
Company intends to increase its international presence by expanding local
content and merchandising to various international regions through the Company's
franchisees, who will also provide reciprocal local and regional foreign content
to the Company.
5. Support New Technology Formats and Standards
The Company intends to support a variety of leading audio compression formats.
To date, the Company has primarily utilized the MP3 format due to its high audio
quality and status as a widely accepted standard. In the event other compression
formats become prevalent, the Company believes that its digital music database
can be conformed to substantially all other modes of delivery without
interruption and within a very short period of time. The Company's intention is
to support standards that are widely accepted by the Internet community.
6. Expand Applications for our Digital Music Database
Some of Company's anticipated future applications for the Company's database of
music files include in-flight entertainment, on-site digital jukeboxes, Internet
karaoke, chart services, books of music anecdotes, downloads of licensed music,
digital downloadable albums, psychedelic light shows over the Internet, pay-for-
play and video on demand.
SALES AND MARKETING
Brand recognition of the Company's products and services, especially with
respect to radiomoi and the Web Bar Listening Post, is instrumental to the
Company's growth. The Company expects that a conventional sales program,
including direct mail, telemarketing, trade show appearances and industry
association networking will be the key to success of the other product lines and
the franchise effort. Since inception, the Company's management team has focused
on compilation of the digital music database and Webcasting infrastructure
efforts. The Company believes much of the public awareness of radiomoi has been
generated by word of mouth. The Company has also benefited from frequent and
visible national and local media exposure. The Company expects this media
exposure to continue and have undertaken the expansion of its public relations
efforts that are focused on generating awareness of the Company and the products
and services of all of its product lines both within the music industry and
among the general public. The Company's marketing program includes enhancement
of priority results of web searches run by persons using search engines such as
GoTo.com. During January 2000, GoTo.com alone provided the Company with more
than 40,000 visits to the front page of the Company's
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Web site. The Company believes that such priority enhancement is an effective
marketing tool and intends to continue such practices as an element of the
Company's Web site marketing program. In addition, the Company has used a
combination of online and offline advertising to generate awareness of the
Company's Web site, including an Internet advertising banner campaign to attract
new users.
Advertising and Sales
The radiomoi.com website has the capability to deliver revenues through banner
advertising, audio radio spots, music industry advertising, radiomoi gift shop
sales, and artist and songwriter promotions. The Company sells banner
advertising through Flycast Communications Corporation ("Flycast"), a Web-based
direct response advertising broker with whom the Company has had an agreement
since October 1998. Flycast obtains advertisers for the Company's Web site,
subject to Company screening for objectionable content, from a range of
advertisers. The pricing and payment for ads varies, with the highest priced
ads placed first and if space remains, lower price ads are placed. In the event
the Company has surplus ad space available it is contributed to charity. The
Company's agreement with Flycast is non-exclusive and may be terminated by
either party on 30 days notice. The turnover of advertisers provided by Flycast
is substantial and no single advertiser represents a material quantity of
Company advertising revenues. In addition to the Company's arrangement with
Flycast, the Company intends to offer banner and on-line audio advertising
directly to advertisers in the near future. Sponsorship advertising contracts
are expected to involve integration with the Company's Web site, such as the
placement of buttons that provide users with direct links to the advertiser's
Web site. The Company also intends to sell banner and audio advertising on Web
Bar Listening Posts. The Company expects radiomoi revenues from audio
advertising to commence in the near future.
The Company currently has a full-time sales team of eight persons and expects to
grow the team significantly in the near future.
Customers and Suppliers
TSG's principal role is to source hardware, software, and maintenance programs
to support the Company, its music industry clients and franchise operators. TSG
will also continue to provide information technology consulting services to its
own Product clients. The Company believes that the TSG Product has a stable base
of clients that will continue to provide revenue to the Company during the
foreseeable future, however, there can be no assurance in this regard. The
Company believes that TSG's commercial relationships are good and the Company
has no reason to believe that it will not continue to do business on the same or
similar basis with such clients during the foreseeable future, however, there
can be no assurance in this regard. In addition, TSG relies on three principal
suppliers for a significant quantity of its supplies: Merisel Canada, Techdata
Canada and Ingram Micro Canada. The Company believes that any one of the
foregoing suppliers can provide TSG with substantially all materials necessary
for it to continue to conduct its business and that additional companies are
readily available as commercially reasonable alternative sources to meet TSG
Product requirements, however there can be no assurance in this regard.
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The Company uses a secure third party data center in Buffalo, New York for
access to the Internet. The facility maintains suitable environmental
conditions, redundant power sources and network connectivity which are expected
to be sufficient for the Company's needs during the foreseeable future. The
Company believes that its month-to-month lease at such facility will be
renewable as needed on commercially reasonable terms during the foreseeable
future and that several alternative Internet access service providers are
available to provide substantially the same service on a similar basis in the
event of termination of access by such facility, however, there can be no
assurance in this regard.
TECHNOLOGY INFRASTRUCTURE
Data Mining, Administration and Warehousing Activities
The Company maintains relational databases which are structured to track the
digital music database, Web-site access, music requested and played by
individual users and business clients, e-commerce transactions and end-user
information. These databases are used to enhance Company administration and
provide the Company with valuable information for marketing, sales and
development activities. The Company's statistics databases maintain traffic and
site analysis information including without limitation, page views, request and
search counts, and artist, song and category rankings. The Company's customer
and commerce databases, which are firewalled for protection, contain full
customer information and transaction histories.
Infrastructure
The Company's technology infrastructure is based on a diverse and redundant
architecture designed to be scalable, secure and reliable. The Company's
software is a combination of proprietary applications, third party database
software and open operating systems that support content acquisition, content
management, Web site publication, live streaming of music and media files,
business client access to the digital music database and deliveries therefrom,
registration and tracking of users, and reporting of information for both
internal and external use. The Company has designed its infrastructure to allow
each component to be independently scaled to meet or exceed future capacity
requirements.
Data Center
The Company's primary Internet servers are located in a secure third party data
center in Buffalo, New York, with near 100% redundancy for the entire system
available through the Company's principal offices in Toronto. The facility
maintains suitable environmental conditions, redundant power sources and network
connectivity.
Monitoring of all servers, networks and systems occurs on a continuous basis.
The Company employs numerous security systems to protect information stored on
the Company's servers, including without limitation, the Company's databases,
customer information and music archive. Backups of all databases, data and
media files are performed on a daily basis. Data back-up tapes are archived on
a regular basis at a remote location.
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COMPETITION
The market for the online promotion and distribution of music and music-related
products is intensely competitive, barriers to entry to the Internet marketplace
are relatively low and the Company expects that competition will continue to
increase. The Company has existing competitors with respect to each of its
operating product lines. The Company's competition may include, without
limitation, (i) Web sites and Internet Webcasters to attract Internet users,
(ii) Internet advertising venues, as well as traditional media such as
television, radio and print, for a share of advertisers' total advertising
budgets; (iii) conventional retail listening post systems; (iv) Internet and
conventional business-to-business music delivery services; (v) purveyors of
digital music content who may include, without limitation, Internet and
conventional entertainment companies, Internet portals and service providers,
local radio and television stations and national radio and television networks;
and (vi) Internet and proprietary system computer-related technical service
consulting businesses. There can be no assurance that the Company will be able
to compete successfully or that the competitive pressures faced by the Company
will not have a material adverse effect on the Company's business, results of
operations and financial condition. For a comprehensive overview of the
competitive environment affecting the Company, please carefully read the
discussion in Item 1 "Description of Business-Risk Factors-The Company Expects
Competition to Increase Significantly in the Future."
Increased competition could result in reduced revenues, reduced margins and/or
loss of market share, any of which could harm the Company's business.
GOVERNMENT REGULATION
The laws and regulations that govern the Company's business change rapidly.
Although the Company's operations are currently based in New York State, the
United States government and the governments of other states and foreign
countries have attempted to regulate activities on the Internet. The following
are some of the evolving areas of law that are relevant to the Company's
business:
. Privacy Law. Current and proposed federal, state and foreign privacy
regulations and other laws restricting the collection, use and disclosure
of personal information could limit the Company's ability to use the
information in the Company's databases to generate revenues.
. Encryption Laws. Record industry associations have lobbied the federal
government for laws requiring music transmitted over the Internet to be
digitally encrypted in order to track music rights and prevent unauthorized
use of copyrighted music. If these laws are adopted, the Company may need
to incur substantial costs to comply with these requirements or change the
way the Company does business.
. Content Regulation. Both foreign and domestic governments have adopted and
proposed laws governing the content of material transmitted over the
Internet. These include laws relating to obscenity, indecency, libel and
defamation. The Company could be liable if
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content delivered by the Company or placed on the Company's website
violates these regulations.
. Sales and Use Tax. The Company does not currently collect sales, use or
other taxes on the sale of goods and services on its website other than on
sales in Canada. However, states or foreign jurisdictions may seek to
impose tax collection obligations on companies like the Company that engage
in online commerce. If they do, these obligations could limit the growth of
electronic commerce in general and limit the Company's ability to profit
from the sale of goods and services over the Internet.
Because of this rapidly evolving and uncertain regulatory environment, the
Company cannot predict how these laws and regulations might affect the Company's
business. In addition, these uncertainties make it difficult to ensure
compliance with the laws and regulations governing the Internet. These laws and
regulations could harm the Company by subjecting the Company to liability or
forcing the Company to change how the Company does business.
RESEARCH AND DEVELOPMENT
Under the Company's research and development program, Company products are
continually subject to re-design and adapted to take advantage of direct
improvements in applicable technologies. The Company closely monitors
technology developments in digital music delivery over the Internet. The
Company's development program also endeavors to incorporate into Company
products and services collateral improvements in Web server and Internet related
software and hardware systems to remain competitive and synchronized with
ancillary and third-party technologies and trends. New Company products and
services are conceived, designed and tested by the Company on technology
platforms of proven as well as emergent systems. The Company believes that such
approach generally minimizes delivery-to-market periods for new products and
services. The Company also believes that such undertakings provide the
additional benefit of continually enhancing technological expertise for the
Company's team of programmers, designers, and systems specialists. With respect
to fiscal year ending January 31, 1998, substantially all of the Company's
operating budget was committed to research and development of the digital music
database and Webcasting technology, amounting to approximately $300,000. The
Company expended approximately $237,000 during the fiscal year ended January 31,
1999, for research and development of the digital music database, proprietary
software and hardware products, and Webcasting technology, and approximately
$661,000 during the fiscal year ended January 31, 2000 for continuing research
and development in the same areas.
INTELLECTUAL PROPERTY AND PATENTS
The Company's success will depend in part on its ability to protect proprietary
software and other intellectual property. To protect the Company's proprietary
rights, the Company relies generally on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers. Despite these
protections, a third party could, without authorization, copy or otherwise
obtain access to and use
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the Company's digital music database, as well as the Company's other products
and technologies to develop similar products and technologies independently.
The primary forms of intellectual property protection for the Company's products
and services are copyrights and trademarks. The Company has filed an
application for a United States trademark registration for musicmusicmusic.com
and various other Company brand marks. However, there can be no assurance that
the Company will be able to secure such registered trademarks. A significant
portion of the Company's marks begin with the words "music" and "radio". The
Company is aware of other companies that use "music" and "radio" in their marks,
alone or in combination with other words, and the Company does not expect to be
able to prevent all third-party uses of the words "music" and "radio". It is
possible that competitors of the Company or others will adopt service names
similar to the Company's, thereby impeding the Company's ability to build brand
identity and possibly leading to customer confusion. There could also be
potential infringement claims brought by owners of other registered trademarks
or trademarks that incorporate variations of the term "music" and "radio".
The Company also intends to pursue the registration of its trademarks based upon
their anticipated use internationally. There can be no assurance that the
Company will be able to secure adequate protection for these trademarks in
foreign countries. Many countries have a "first-to-file" trademark registration
system and thus the Company may be prevented from registering its marks in
certain countries if third parties have previously filed applications to
register or have registered the same or similar marks. The laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the U.S., and effective patent, copyright, trademark and trade
secret protection may not be available in these jurisdictions. The Company will
provide access to certain of its proprietary rights to franchisees, and these
franchisees may fail to abide by compliance and quality control guidelines with
respect to the Company's proprietary rights or take actions that could harm the
Company's business.
The Company has recently submitted a patent application relating to the
Company's digital music database architecture and technology. The Company has
no patents which have been granted as of the date of this Report and except for
one patent pending have made no other applications for patents. Any pending or
future patent applications may not be granted, existing or future patents may be
challenged, invalidated or circumvented, and the rights granted under a patent
that has issued or any patent that may issue may not provide competitive
advantages to the Company. Many of the Company's current and potential
competitors dedicate substantially greater resources to protection and
enforcement of intellectual property rights, especially patents. If a blocking
patent has issued or issues in the future, the Company may need either to obtain
a license or to design around the patent. The Company may not be able to obtain
a required license on acceptable terms, if at all, or to design around the
patent.
In addition, patent protection throughout the world is generally established on
a country-by-country basis. To date, the Company has not applied for any
patents outside the United States. The Company may do so in the future.
Copyrights throughout the world are protected by several international treaties,
including the Berne Convention for the Protection of Literary and Artistic
Works. Despite these international laws, the level of practical protection for
intellectual property varies among countries. In particular, United States
government officials have criticized
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countries such as China and Brazil for inadequate intellectual property
protection. If the Company's intellectual property is infringed in any country
without a high level of intellectual property protection, the Company's business
could be harmed.
The Company's agreements with employees, consultants and others who participate
in product and service development activities may be breached, the Company may
not have adequate remedies for any breach, and the Company's trade secrets may
become known or independently developed by competitors.
The Company intends to attempt to avoid infringing on known proprietary rights
of third parties. However, it is difficult to proceed with certainty in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
technologies employed by the Company. If the Company were to discover that its
products violate third-party proprietary rights, the Company might not be able
to obtain licenses to continue offering these products without substantial
reengineering. Efforts to undertake this reengineering might not be successful,
licenses might be unavailable on commercially reasonable terms, if at all, and
litigation might not be avoided or settled without substantial expense and
damage awards.
Any claims relating to the infringement of third-party proprietary rights, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources and could result in injunctions preventing the Company from
distributing certain products and services. These claims could harm the
Company's business. The Company also relies on technology that the Company
licenses from third parties, including software that is integrated with
internally developed software and used in the Company's products and services,
to perform key functions. Third-party technology licenses may not continue to be
available to the Company on commercially reasonable terms. The loss of any of
these technologies could harm the Company's business. Moreover, although the
Company is generally indemnified against claims that third-party technology
infringes the proprietary rights of others, this indemnification may be
unavailable for all types of intellectual property rights, for example, patents
may be excluded, and in some cases the scope of indemnification is limited. Even
if the Company receives broad indemnification, third-party indemnitors are not
always well capitalized and may not be able to indemnify the Company in the
event of infringement, resulting in substantial exposure to the Company.
Infringement or invalidity claims may arise from the incorporation of third-
party technology, and the Company's customers may make claims for
indemnification. These claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources in addition to
potential product and service redevelopment costs and delays, all of which could
harm the Company's business.
The Company currently licenses a software product from Fraunhofer-Gesellschaft
that enables the Webcast of streaming media in a secure form to protect against
copyright violations through unauthorized copying or distribution. Users are
currently able to download electronically copies of the WinPlay3 streaming media
player software free of charge. The Company may need to acquire additional
licenses from other streaming media companies to meet its future needs. If
Fraunhofer-Gesellschaft and providers of other streaming media software charge
license fees to consumers and/or the Company for the use of their products,
refuse to license such products to
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the Company, fail to develop products specific to the Company's needs or fail to
provide timely support and updates to users, such actions could have a material
adverse effect on the Company's business, results of operations and financial
condition.
See Item 1 "Description of Business-Risk Factors-Intellectual Property
Protection May Be Inadequate."
EMPLOYEES
As of April 30, 2000, the Company had 100 employees, including 46 in production,
10 in sales and marketing, 15 in database development and quality assurance, 10
in web support and musicology, 10 in technology and operations, and 9 in
corporate and finance. At January 31, 1999, the Company had 28 employees (5 in
sales and marketing, 7 in database development and quality assurance, 5 in web
support and musicology, 6 in technology and operations, and 5 in corporate and
finance compared to January 31, 1998 when the Company had 12 employees (1 in
sales and marketing, 4 in database development and quality assurance, 4 in
technology and operations and 3 in corporate and finance). There has been
negligible turnover among employees of the Company since inception. The Company
considers its relations with its employees to be good. The Company has never had
a work stoppage, and no employees are represented under collective bargaining
agreements. The Company believes that its future success will depend in part on
the Company's continued ability to attract, integrate, retain and motivate
highly qualified personnel, and upon the continued service of the Company's
senior management and key technical personnel. Competition for qualified
personnel in the Company's industry and geographical location is intense, and
the Company cannot assure investors that it will be successful in attracting,
integrating, retaining and motivating a sufficient number of qualified personnel
to conduct the Company's business in the future.
RISK FACTORS
The shares of the Company are highly speculative and involve an extremely high
degree of risk. Shareholders of the Company should consider the following risk
factors.
RISKS RELATED TO THE COMPANY'S STAGE OF DEVELOPMENT AND BUSINESS MODEL.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND ANTICIPATION OF FUTURE LOSSES.
The Company was incorporated in May 1997. The Company commenced Webcasting live
audio programming on the Internet on December 25, 1997. The Company first
recognized business services revenues in March 1998 and media advertising
revenues in October 1998. The Company had net losses in 1999, 1998 and 1997 and
the Company expects to incur substantial losses during the next 2 years in
connection with growth and development plans. The Company has a limited
operating history on which to base an evaluation of its business and prospects.
The Company's prospects must be considered in light of the risks, difficulties
and uncertainties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving markets such as
the market for Internet content, business services and advertising. To achieve
and sustain profitability, the Company believes it must, among other
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things, (i) provide easily accessible and extensive music content to Internet
users, (ii) successfully market and sell its business products and services,
(iii) effectively develop new and maintain existing relationships with
advertisers, content providers, business customers and advertising agencies,
(iv) continue to develop and upgrade its technology and network infrastructure,
(v) respond to competitive developments, (vi) successfully introduce
enhancements to its existing products and services to address new market
demands, technologies and standards, (vii) successfully establish worldwide
franchise relationships, and (viii) attract, retain and motivate qualified
personnel. The Company's operating results are also dependent on factors outside
the control of the Company, such as the availability of continued rights to
Webcast music over the Internet and the development of broadband networks that
support multimedia streaming. There can be no assurance that the Company will be
successful in addressing these and other risks, and failure to do so could have
a material adverse effect on the Company's business, results of operations and
financial condition. Additionally, the limited operating history of the Company
makes the prediction of future operating results difficult or impossible, and
there can be no assurance that the Company's revenues will increase or even
continue at their current level, or that the Company will achieve or maintain
profitability or generate sufficient cash from operations in future periods. The
Company expects to continue to incur significant losses on a quarterly and
annual basis for the foreseeable future. For these and other reasons, there can
be no assurance that the Company will ever achieve profitability or, if
profitability is achieved, that it can be sustained. See Item 2 "Financial
Information-Management's Discussion and Analysis of Financial Condition and
Results of Operations."
THE COMPANY HAS A NEW AND UNPROVEN BUSINESS MODEL.
The Company's model for conducting business and generating revenues is new and
unproven. The Company's business model depends upon the Company's ability to
generate revenue streams from multiple untested sources, including:
. radiomoi: banner advertising, audio radio spots, music industry
advertising, radiomoi gift shop sales, artist and songwriter promotions;
. Web Bar Listening Post: hardware sales, access to barcoded database
advertising and custom programming;
. Broadcast Services: use of digital archive, Webcaster Web site design and
promotions;
. Industrial Sound Services: hardware sales, commercial access to the
Company's digital music database; design and implementation of customized Web
sound-delivery systems;
. The Solutions Group: continued sales of hardware and software to its
existing customer base enhanced by sales to its new streaming music customer
base;
. Franchising: sales of franchises, adequate franchise fees, setup charges,
annual fees and royalties; and
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. Leveraging joint ventures/acquisitions and the Company's aggregated
marketing information.
It is uncertain whether a company that relies principally on a digital music
database and computer technology expertise can generate sufficient revenues to
survive. As of March 2000, two of the Company's product lines, radiomoi and The
Solutions Group, and the Company's franchise operations are producing revenues
and as of April 2000, the Company's Web Bar Listening Post, Broadcast Services
and Industrial Sound Services product lines are producing revenues. The Company
cannot assure investors that the Company's business model will succeed or will
be sustainable.
In order for the Company's business to be successful, the Company must not only
develop services that directly generate revenue, but also provide content and
services that attract consumers and business clients to the Company's digital
music database frequently through the Company's Web site or other modes of
access. The Company will need to expand the Company's digital database of
music, develop new formats and offerings as consumer preferences and business
needs change and as new competitors emerge. The Company cannot assure investors
that the Company will be able to provide consumers and businesses with an
acceptable blend of products, services, and other offerings that will continue
to attract consumers and/or generate revenues. The Company provides many
products and services without charge, and the Company may not be able to
generate sufficient revenue to adequately compensate the Company for these
products and services. Accordingly, the Company is not certain that the
Company's business model will be successful or that it can sustain revenue
growth or be profitable.
THE COMPANY IS COMPETING IN A NEW MARKET.
The market for Internet music promotion and distribution is new and rapidly
evolving. As a result, demand and market acceptance for the Company's products
and services are subject to a high degree of uncertainty and risk. The Company
cannot assure investors that consumers will continue to be interested in
listening to or purchasing music through the Internet, or if so, through the
Company's facilities. If this new market fails to develop, develops more slowly
than expected or becomes saturated with competitors, or the Company's products
and services do not achieve or sustain market acceptance, the Company's business
could be harmed.
The Company believes the future popularity of live-streaming digital music will
depend, in part, on the availability of adequate technology owned by the
consumer to play this music. To the extent that consumer acceptance or
distribution of this software is not available without charge or at affordable
prices, the Company's market, and thus a portion of the Company's revenues, may
not grow at a sufficient pace and the Company's business could be harmed.
UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS.
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Because of the Company's limited operating history and the emerging nature of
the markets in which it competes, the Company is unable to accurately forecast
its revenues. The market for the Company's business services and products,
including without limitation, and the long-term acceptance of web based
advertising, are uncertain. The Company currently intends to increase
substantially its operating expenses in order to, among other things, (i) expand
its bandwidth capacity, (ii) fund increased sales and marketing activities,
(iii) acquire additional content, (iv) develop and upgrade technology, (v)
purchase equipment for its operations, (vi) employ additional personnel and
(vii) expand its administrative and operations facilities. The Company's
expense levels are based, in part, on its expectations with regard to future
revenues, and to a large extent such expenses are fixed, particularly in the
short term. To the extent the Company is unsuccessful in increasing its
revenues, the Company may be unable to appropriately adjust spending in a timely
manner to compensate for any unexpected revenue shortfall or will have to reduce
its operating expenses, causing it to forego potential revenue generating
activities, either of which could cause a material adverse effect in the
Company's business, results of operations and financial condition.
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. Factors that may affect the Company's quarterly operating
results include (i) the cost of acquiring content, (ii) demand for the Company's
business services, (iii) demand for Internet advertising, (iv) seasonal trends
in Internet and advertising placements, (v) advertising cycles for, or the
addition or loss of, individual advertisers, (vi) the level of traffic on the
Company's Web site, (vii) the amount and timing of capital expenditures and
other costs relating to the expansion of the Company's operations, (viii) price
competition or pricing changes in Internet broadcasting services, and in
Internet advertising, (ix) retained demand for record store listening posts, (x)
the level of and seasonal trends in the demand for digital music files and the
use of the Internet, (xi) technical difficulties or system downtime, (xii) the
cost to acquire sufficient bandwidth or to integrate efficient Webcasting
technologies to meet the Company's needs, (xiii) introduction of new products or
services by the Company or its competitors, (xiv) general economic conditions
and economic conditions specific to the Internet, such as electronic commerce
and online media and (xv) sufficient interest on the part of potential
franchisees to purchase Company franchise licenses. Lack of performance of any
one of these factors could cause the Company's revenues and operating results to
vary significantly in the future. In addition, as a strategic response to
changes in the competitive environment, the Company may from time to time make
certain pricing, service or marketing decisions or acquisitions that could cause
significant declines in the Company's quarterly operating results.
Due to all of the foregoing factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Furthermore, it
is possible that the Company's operating results in one or more quarters will
fail to meet the expectations of securities analysts or investors. In such
event, the price of the Company's Common Stock (the "Common Stock") could be
materially adversely affected. See Item 2 "Financial Information-Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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The Solutions Group Product has produced the most significant amount of Company
revenues as of the date of this Report. The Company believes that this product
has a stable base of clients that will continue to provide revenue to the
Company during the foreseeable future, however, there can be no assurance in
this regard. Two clients each represent a significant portion of TSG's
revenues. The Company believes that TSG's commercial relationships are good
with these clients and the Company has no reason to believe that it will not
continue to do business on the same or similar basis with these clients during
the foreseeable future, however, there can be no assurance in this regard. In
addition, TSG relies on three principal suppliers for a significant quantity of
its materials. The Company believes that any one of its suppliers can provide
TSG with substantially all materials necessary to conduct its business and that
additional companies are readily available as commercially reasonable
alternative sources to meet TSG's requirements, however, there can be no
assurance in this regard. If TSG is not able to sustain its client and supplier
business relationships on the same or similar basis as presently conducted, the
Company's business, results of operations and financial condition could be
adversely affected.
FAILURE TO MANAGE GROWTH COULD HARM THE COMPANY.
The Company is experiencing a period of rapid expansion in product development,
Web site traffic, facilities and infrastructure. The Company expects further
significant expansion will be required to address potential growth in the
Company's consumer bases, the breadth of the Company's product and service
offerings, and other opportunities. This expansion has placed, and the Company
expects it will continue to place, a significant strain on the Company's
management, operational and financial resources. If the Company is not able to
adequately manage growth the Company may be adversely affected.
UNCERTAIN ACCEPTANCE OF THE INTERNET AS AN ADVERTISING MEDIUM.
The market for Internet advertising has only recently begun to develop, is
rapidly evolving and is characterized by an increasing number of market
entrants. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. The Company's ability to generate
advertising revenue will depend on, among other factors, (i) development of the
Internet as an advertising medium, (ii) pricing of advertising on other Web
sites, (iii) the amount of traffic on the Company's Web site, (iv) the Company's
ability to achieve and demonstrate user and member demographic characteristics
that are attractive to advertisers, (v) development and expansion of the
Company's advertising sales force and (vi) establishment and maintenance of
desirable advertising sales agency relationships. Most potential advertisers
and their advertising agencies have only limited experience with the Internet as
an advertising medium and have not devoted a significant portion of their
advertising expenditures to Web-based advertising. There can be no assurance
that advertisers or advertising agencies will be persuaded to allocate or
continue to allocate portions of their budgets to Web-based advertising or, if
so persuaded, that they will find such advertising to be effective for promoting
their products and services relative to traditional print and broadcast media.
No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising, and there can be no assurance that such
standards will develop sufficiently to enable Web-based advertising to become a
significant advertising medium. Acceptance of the Internet among advertisers
and advertising agencies will also
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depend, to a large extent, on the level of use of the Internet by consumers and
upon growth in the commercial use of the Internet. If widespread commercial use
of the Internet does not develop, or if the Internet does not develop as an
effective and measurable medium for advertising, the Company's business, results
of operations and financial condition could be materially adversely affected.
See Item 1 "Description of Business-Sales and Marketing."
RIAA LICENSE AND LICENSE FEES PAYABLE TO CONTENT PROVIDERS.
On April 26, 1999, the Company became the first Webcaster to be licensed by the
Recording Industry Association of America, (the "RIAA"), the trade group
representing U.S. record labels. This license (the "Webcasting Agreement")
gives radiomoi the rights to publicly perform sound recordings in accordance
with the Digital Millennium Copyright Act. The Company has agreed to pay to the
RIAA a royalty of 15 per cent of gross revenues which it derives through Webcast
music. On August 11, 1999, the Company and the RIAA entered into an agreement
with respect to ephemeral rights, providing the Company with a license to make
multiple records by digital transmissions (the "Ephemeral Rights Agreement").
The Company has agreed to pay the RIAA a royalty of approximately 2% gross
revenues for such rights. Each of the Webcasting and Ephemeral Rights
Agreements shall continue through December 31, 2000. The Company expects that
it will be able to renew each of the Webcasting and Ephemeral Rights Agreements
following their initial terms, however, the RIAA may choose not to renew such
agreements or may terminate such agreements prior to the expiration of their
terms if the Company fails to fulfill its contractual obligations. The early
termination of such RIAA agreements or the Company's inability to renew such
agreements would materially and adversely affect the Company's ability to
continue its Webcasting business. In addition, the Company's inability to
secure or arrange for similar licenses from foreign performance rights societies
with respect to Company franchisees would decrease the availability of content
that the Company can offer users, which could also have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company and the RIAA have agreed in principle to enter into an additional
agreement with respect to business-to-business delivery of music over the
Internet (the "Business-To-Business Agreement"). There can be no assurance that
the Company will be able to renew the Webcasting and Ephemeral Rights Agreements
or enter into a Business-To-Business Agreement on favorable terms, if at all.
There can be no assurance that the Company's content providers, performance
rights societies and other licensing agencies will enter into or renew
agreements with the Company on the same or similar terms as those currently in
effect or on terms acceptable to the Company if no agreement is in effect. In
addition, if the Company is required to pay increased licensing fees with
respect to its content licenses, increased payments could have a material
adverse effect on the Company's business, results of operations and financial
condition.
UNCERTAIN ACCEPTANCE OF THE COMPANY'S SERVICES AND BUSINESS PRODUCT LINES.
The Company's ability to establish and maintain a leadership position in
Internet and intranet broadcasting for businesses and in the distribution of
music will depend on, among other things, (i) the Company's success in providing
quality programming selections, (ii) the Company's marketing and sales efforts,
(iii) market acceptance of the Company's current and future service
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and product offerings, (iv) the reliability of the Company's networks, services
and products and (v) the extent to which end users are able to receive the
Company's broadcasts at adequate bitstream rates to provide for high quality
services, none of which can be assured. The Company operates in a market that is
at a very early stage of development, is rapidly evolving and is characterized
by an increasing number of market entrants who have introduced or developed
competing broadcasting and distribution services. As is typical in the case of a
new and rapidly evolving industry, demand and market acceptance for recently
introduced services are subject to a high level of uncertainty and risk. Sales
of the Company's business services may require an extended sales effort in
certain cases. In addition, potential customers must accept the Company's audio
Webcast services as a viable alternative to traditional media. Because the
market for the Company's business services is new and evolving, it is difficult
to predict the size of this market and its growth rate, if any. In addition, it
is not known whether businesses and other organizations will utilize digital
music files and/or the Internet to any significant degree. There can be no
assurance that the market for the Company's business services will continue to
develop or be sustainable. If the market fails to develop, develops more slowly
than expected or becomes saturated with competitors, or if the Company's Web
site does not achieve or sustain market acceptance, the Company's business,
results of operations and financial condition could be materially adversely
affected.
UNCERTAIN ACCEPTANCE OF STREAMING MEDIA TECHNOLOGY.
The Company's success depends on market acceptance of streaming media
technology. Prior to the advent of streaming technology, Internet users could
not initiate the playback of audio clips until such content was downloaded in
its entirety, resulting in significant waiting times. As a result, true
broadcasts of audio content over the Internet or intranets were not possible.
Early streaming media technology suffered from poor audio quality, and in some
cases is still of lower quality than traditional media broadcasts. In addition,
congestion over the Internet and packet loss may interrupt audio streams,
resulting in unsatisfying user experiences. In order to receive streamed media
adequately, users generally must have multimedia PCs with certain microprocessor
requirements and at least 28.8 kbps Internet access as well as streaming media
software. Users typically electronically download such software and install it
on their PCs. Although the Company provides a streaming media player without
charge over the Internet to its users, such installation may require technical
expertise that some users do not possess. In addition, older versions of
certain Web browsers may need to be reconfigured in order to receive streaming
media from the Company's Web site. Furthermore, in order for users to receive
streaming media over corporate intranets, information systems managers may need
to reconfigure their intranets. Because of bandwidth constraints on corporate
intranets, some information systems managers may elect to block reception of
streamed media. Widespread adoption of streaming media technology depends on
overcoming the foregoing obstacles, improving audio quality for all users and
educating customers and users in the use of streaming media technology. If
streaming media technology fails to achieve broad commercial acceptance or such
acceptance is delayed, the Company's business, results of operations and
financial condition could be materially adversely affected. See Item 1
"Description of Business-Risks Related To Sales, Marketing And Competition" and
"Description of Business-Competition."
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The Company's Internet radio business concept for radiomoi is based entirely on
the streaming media model. The alternative mode of delivery, employed by
several competitors of the Company, is to provide for downloading music files
over the Internet. A music file that is downloaded must be transferred in its
entirety to the user's local PC before it can be opened and played. Although
the same music file can be accessed and heard in streamed-media within a much
quicker time frame, consumers may prefer downloaded media because it can be of
very high quality, essentially equal to CD audio, and can be saved to a local
hard drive and/or transferred onto writable CDs, or stored in digital storage
devices such as the "Diamond Rio" player. Conversely, the Company's streaming
media content is copyright protected, but it is not widely used, is generally of
lesser quality, and cannot be saved on local media or played from portable
devices. Streaming media may also be subject to interruption due to network
limitations on the end-user's computer or between the source and recipient. If
consumers prefer to use the download mode for delivery of music files instead of
accessing streaming media content, this could have a material adverse effect on
the Company's business, results of operations and financial condition.
DEPENDENCE ON PROVIDERS OF STREAMING MEDIA PRODUCTS.
The Company currently licenses a software product from Fraunhofer-Gesellschaft,
the WinPlay 3, that enables the Webcast of streaming media in a secure form to
protect against copyright violations through unauthorized copying or
distribution. The Company may need to acquire additional licenses from other
streaming media companies to meet its future needs. Users are currently able to
electronically download copies of the WinPlay3 streaming media player software
free of charge. If providers of streaming media software substantially increase
license fees charged to the Company for the use of their products, refuse to
license such products to the Company, fail to develop products specific to the
Company's needs, begin charging users for copies of their player software, or
fail to provide timely updates in response to industry developments, such
actions could have a material adverse effect on the Company's business, results
of operations and financial condition.
DEVELOPMENT OF NEW STANDARDS FOR THE ELECTRONIC DELIVERY OF MUSIC MAY THREATEN
THE COMPANY'S BUSINESS.
The Company currently relies on MP3 technology as a delivery method for the
digital distribution of music. MP3 is an open standard adopted by the Moving
Picture Experts Group for the compression of audio files. The Company does not
own or control MP3 technology. The onset of competing industry standards for
the electronic delivery of music could significantly affect the way the Company
operates its business. For example, some of the major recording studios have
recently announced a plan to develop a universal standard for the electronic
delivery of music, called the Secured Digital Music Initiative, or SDMI, and
have announced their intention to make this the standard Internet delivery
method for music. In addition, major corporations such as Microsoft
Corporation, IBM Corporation, AT&T Corp. and Sony Corporation have launched
efforts to establish proprietary audio formats that will compete with the MP3
format. Some competitive formats offer security and rights-tracking features
that MP3 technology does not currently offer. These features are especially
popular among certain groups associated with the traditional music industry, and
are being promoted by some of the Company's
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competitors. Widespread industry and consumer acceptance of any of these audio
formats could significantly harm the Company's business if the Company is unable
to adapt and respond to such changing standards.
Although the Company is not tied exclusively to the use of MP3 technology or to
any other specific standard for the electronic delivery of music, if a
proprietary, or closed, music delivery format receives widespread industry and
consumer acceptance, the Company may be required to license additional
technology and information from third parties in order to adopt such a format.
The Company cannot assure investors that this third-party technology and
information will be available to the Company on commercially reasonable terms,
if at all. In the event other compression formats become the industry norm, any
failure by the Company to obtain any of these technology and information
licenses or to successfully reconfigure the Company's music library to support
these technologies could prevent the Company from making the Company's music
available in the most widely accepted formats, which could make the Company's
offerings less popular or inaccessible to the Company's consumers and thus harm
the Company's business.
MP3 TECHNOLOGY IS CONTROVERSIAL WITHIN THE TRADITIONAL MUSIC INDUSTRY AND MAY
FACE CONTINUED OPPOSITION, WHICH MAY HARM THE COMPANY'S BUSINESS.
The traditional music industry has not embraced the development of the MP3
format to deliver music, in part because users of MP3 technology can download
and distribute unauthorized or "pirated" copies of copyrighted recorded music
over the Internet. Although the Company's business model for the digital
distribution of music does not facilitate music piracy and can support multiple
audio compression and delivery technologies, the Company's brand identity is
largely linked to the MP3 technology. As a result and despite the Company's
Webcasting license granted by the Record Industry Association of America, the
Company may face public opinion opposition from a number of different sources
due solely to the Company's use of MP3 technology and its potentially negative
associations. In addition, adverse news or events relating to MP3 technology
may lead to confusion in the public markets regarding the Company and its
prospects, and may harm the Company's business.
THE COMPANY'S BUSINESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT AND MAINTENANCE
OF THE INTERNET, AVAILABILITY OF INCREASED BANDWIDTH TO CONSUMERS AND STREAMING
MEDIA CONTENT ON THE INTERNET.
Rapid growth and interest in the Internet is a recent phenomenon and there can
be no assurance that acceptance of the Internet will continue to develop or that
a sufficient base of users will emerge to support the Company's business.
Future revenues of the Company will depend largely on the widespread acceptance
and use of the Internet as a source of multimedia information and entertainment
and as a vehicle for commerce in goods and services. The Internet may not be
widely accepted as a viable commercial medium for broadcasting multimedia
content, if at all, for a number of reasons, including (i) potentially
inadequate development of the necessary infrastructure, (ii) inadequate
development of enabling technologies, (iii) lack of acceptance of the Internet
as a medium for distributing streaming media content and (iv) inadequate
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commercial support for Web-based advertising. To the extent that the Internet
continues to experience an increase in users, an increase in frequency of use or
an increase in the bandwidth requirements of users, there can be no assurance
that the Internet infrastructure will be able to support the demands placed upon
it, specifically the demands of delivering high-quality audio content.
Furthermore, user experiences on the Internet are affected by access speed.
There is no assurance that broadband access technologies, such as ADSL and cable
modems, will become widely adopted. In addition, the Internet could lose its
viability as a commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or due to increased government regulation. Changes in or insufficient
availability of telecommunications services to support the Internet also could
result in unacceptable response times and could adversely affect use of the
Internet, generally, and of the Company's Web site and delivery of the Company's
products over the Internet in particular. If use of the Internet does not
continue to grow or grows more slowly than expected, or if the Internet
infrastructure does not effectively support the growth that may occur, the
Company's business, results of operations and financial condition could be
materially adversely affected.
RISK OF TECHNOLOGICAL CAPACITY AND CHANGE.
The market for Internet broadcast services is characterized by rapid
technological developments, frequent new product introductions and evolving
industry standards. The emerging character of these products and services and
their rapid evolution will require the Company to effectively use leading
technologies, continue to develop its technological expertise, enhance its
current services and continue to improve the performance, features and
reliability of its infrastructure. Changes in infrastructure, transmission and
content delivery methods and underlying software platforms and the emergence of
new broadband technologies, such as ADSL and cable modems, could dramatically
change the structure and competitive dynamic of the market for streaming media
solutions. In particular, technological developments or strategic partnerships
that accelerate the adoption of broadband access technologies or advancements in
streaming and compression technologies may require the Company to expend
significant resources to address these developments. There can be no assurance
that the Company will be successful in responding quickly, cost effectively and
sufficiently to these or other such developments. In addition, the widespread
adoption of new Internet technologies or standards could require substantial
expenditures by the Company to modify or adapt its digital music database, Web
site, services, products and delivery modes. A failure by the Company to
rapidly respond to technological developments could have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, the Internet has experienced a variety of outages and other delays
as a result of damage to portions of its infrastructure, and it could face
outages and delays in the future. This might include outages and delays
resulting from the "hackers" problems. These outages and delays could reduce
the level of Internet usage as well as the level of traffic, and could result in
the Internet becoming an inconvenient or uneconomical source of music as well as
an inconvenient or uneconomical source of access to, and delivery of, music-
related products and services. The infrastructure and complementary products or
services necessary to make the Internet a viable commercial marketplace for the
long term may not be developed successfully or in a timely manner. Even if
these products or services are developed, the Internet may not
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become a viable commercial marketplace for the products and services that the
Company offers. See Item 2 "Financial Information-Management Discussion and
Analysis of Financial Condition and Results of Operations-Year 2000 Disclosure."
THE COMPANY MAY HAVE DIFFICULTY COMPETING FOR OR EXECUTING STRATEGIC ALLIANCES
AND ACQUISITIONS.
The Company's business strategy includes entering into franchise arrangements.
The Company may also pursue the acquisition of new or complementary businesses,
services or technologies, although the Company has no present understandings,
commitments or agreements with respect to any material acquisitions or
investments at this time. The Company cannot assure investors that its
franchise strategy or any other strategic alliance will be successful. The
Company may be unable to enter into future franchise arrangements on
commercially reasonable terms, if at all. Even if the Company is successful in
entering into franchise agreements, the Company may not be able to maintain
adequate uniform standards, controls, procedures and policies, and the demands
of such franchise arrangements may impair relationships with employees,
customers and other strategic partners. Granting franchises or entering into
other strategic alliances could disrupt the Company's ongoing business, distract
the Company's management and employees and increase the Company's expenses.
FINANCIAL RISKS
---------------
THE COMPANY EXPECTS NET LOSSES IN THE FUTURE.
The Company expects substantial net losses and negative cash flow for the
foreseeable future. The Company believes it is critical to its long term
success that it continue to develop brand awareness and loyalty through
marketing and promotion, expand the Company's consumer networks, develop the
Company's online content and expand the Company's other products and services.
The Company expects that its operating expenses will increase significantly
during the next several years, especially in sales and marketing. With
increased expenses, the Company will need to generate significant additional
revenues to achieve profitability. As a result, the Company may never achieve
or sustain profitability and, if the Company does achieve profitability in any
period, it may not be able to sustain or increase profitability on a quarterly
or annual basis.
THE COMPANY MAY NEED TO OBTAIN ADDITIONAL FINANCING.
The Company may need to raise additional funds in order to (i) finance
unanticipated working capital requirements; (ii) develop or enhance existing
services or products; (iii) fund certain distribution relationships; (iv)
respond to competitive pressures; or (v) acquire complementary businesses,
technologies, content or products. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership of
the stockholders of the Company will be reduced, stockholders may experience
dilution and such securities may have rights, preferences or privileges senior
to those of the holders of Common Stock. The Company does not currently have
any contractual restrictions on its ability to incur debt and, accordingly, the
Company could incur significant amounts of indebtedness to finance its
operations. Any
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such indebtedness could contain covenants that would restrict the Company's
operations. There can be no assurance that additional financing will be
available on terms favorable to the Company, or at all. If additional funds are
not available or are not available on acceptable terms, the Company may not be
able to adequately respond to competitive pressures and the Company's business
could be harmed.
FOREIGN CURRENCY EXCHANGE.
The treaty establishing the European Community, as amended by the Treaty on
European Union (the "Maastricht Treaty"), to which the Federal Republic of
Germany is a signatory, provided that on January 1, 1999, the Euro became legal
tender in those Member States of the European Monetary Union ("EMU") that
satisfied the convergence criteria set forth in the Maastricht Treaty, including
Germany. Prices quoted for the shares of Common Stock on the Neuer Markt of the
Frankfurt Stock Exchange are quoted in Euros.
The Company does not currently anticipate paying any dividends to shareholders.
However, any dividends declared by the Company would be paid in U.S. dollars,
and exchange rate fluctuations would affect the Euro equivalent of any cash
dividend received by holders of shares of Common Stock whose local currency is
in Euros.
A substantial portion of the Company's revenues is denominated in currencies
other than the U.S. dollar. Accordingly, the Company's results of operations and
financial condition may be effected by fluctuations in the rate of exchange
between such currencies and the U.S. dollar. Moreover, the Company may incur
costs in connection with conversions between currencies. Although the Company
attempts to monitor its exposure to currency fluctuations by continuously
reviewing actual and anticipated changes in exchange rates and general economic
conditions in the countries in which the Company operates, as well as its actual
and anticipated sources and uses of various foreign currencies, there can be no
assurance that exchange rate fluctuations will not have a material adverse
effect on the Company's results of operations and financial condition.
Furthermore, a substantial amount of assets of the Company are held in Euros.
The value of the Euro has declined approximately 10% since the Company's
offering of Common Stock on the Neuer Markt of the Frankfurt Stock Exchange.
Any further decline in the value of the Euro in relation to the U.S. and/or
Canadian dollar could materially and adversely affect the Company's operations.
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RISKS RELATED TO SALES, MARKETING AND COMPETITION
-------------------------------------------------
THE COMPANY'S GROWTH WILL DEPEND ON ITS ABILITY TO DEVELOP BRAND RECOGNITION FOR
ITS PRODUCT LINES.
The Company believes that its historical growth and brand recognition have been
largely attributable to word of mouth. The Company has also benefited from
frequent and visible media exposure. The frequency or quality of this media
exposure may not continue. The Company believes that continuing to strengthen
the Company's brand will be critical to achieve widespread acceptance of the
Company's products and services. Favorable public perception of the Company's
brand will depend largely on the Company's ability to continue providing users
with high quality products and services and the success of the Company's
marketing efforts. The Company plans to increase its marketing expenditures to
create and maintain brand recognition. However, brand promotion activities may
not yield increased revenues and, even if they do, any increased revenues may
not offset the expenses the Company incurs in building its brand.
The growth of the Company's business will also depend on the Company's ability
to develop a brand identity that transcends a mere identity as an Internet music
broadcaster. The Company must pursue a brand development strategy that
identifies the Company as a comprehensive Internet resource for high quality
music and entertainment.
THE COMPANY'S MARKETING AND SALES EFFORTS RELY HEAVILY ON ITS ABILITY TO COLLECT
INFORMATION.
The Company plans to use consumer data to expand, refine and target its
marketing and sales efforts. The Company collects most of its data from usage of
its digital music database. If a large proportion of users impede the Company's
ability to collect data or if they falsify data, the Company's marketing and
sales efforts and advertising revenues would be less effective. In addition,
laws relating to privacy and use of the Internet to collect personal information
could limit the Company's ability to collect data and utilize the Company's
database.
THE COMPANY EXPECTS COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE.
The market for Internet broadcasting and services is highly competitive and the
Company expects that competition will continue to intensify. The Company
competes with (i) other Web sites and Internet Webcasters to attract users, (ii)
Internet and conventional business-to-business music delivery services, (iii)
other Internet advertising venues, as well as traditional media such as
television, radio and print, for a share of advertisers' total advertising
budgets and (iv) local radio and television stations and national radio and
television networks for sales of advertising. There can be no assurance that the
Company will be able to compete successfully or that the competitive pressures
faced by the Company, including those described below, will not have a material
adverse effect on the Company's business, results of operations and financial
condition.
The market for the online promotion and distribution of music and music-related
products in particular is competitive. Barriers to entry on the Internet are
relatively low, and the Company
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expects competition to increase significantly in the future. The Company faces
competitive pressures from numerous actual and potential competitors, including:
. Providers of online music content, of which the Company currently
estimates there are more than 2,000 of varying subject matter, size, fee
structure, music delivery mode, and visibility, including, but not limited
to, mp3.com, www.com, crunch music, eatsleepmusic.com, emusic.com, Internet
Underground Music Archive, LiquidAudio.com, listen.com, ubl.com,
musicmatch.com, riffage.com, shoutcast.com, spinner.com, netradio.com and
worldwidebands.com.
. Providers of online multimedia content, which may include music
content, such as audible.com, audiohighway.com, bn.com (Barnes and Noble),
broadcast.com, download.com, launch.com, librius.com, sighsound.com,
sonicnet.com, and Web sites of other companies.
. Companies offering MP3 or other audio compression formats, such as
those of AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft
Corporation and RealNetworks, Inc. Some of these companies also offer
customers the ability to download music from their Web sites.
. Online destination sites with greater resources than the Company, such
as online music retailers like Amazon.com, Inc. and online "portals" such
as America Online, Inc., Excite, Inc., Infoseek Corporation, Lycos, Inc.
and Yahoo!, Inc.
. Traditional music industry companies, including BMG Entertainment, a
unit of Bertelsmann AG; EMI Group plc; Sony Corporation; Time Warner Inc.;
and Universal Music Group, a unit of the Seagram Company Ltd., have
recently entered the online commercial community and are currently backing
the SDMI security format.
Competition among Web sites that provide broad public appeal content, including
streaming media content, is intense and is expected to increase significantly in
the future. The Company competes against a variety of businesses that provide
content through one or more mediums, such as print, radio, television, cable
television and the Internet. Traditional media companies that have not
established a significant presence on the Internet may expend resources to
establish such a presence in the future. The Company competes generally with
other content providers for the time and attention of users and for advertising
revenues. To compete successfully, the Company must provide sufficiently
compelling and popular content to generate users, support advertising intended
to reach such users and attract business and other organizations seeking
Internet broadcasting and distribution services. The Company believes that the
principal competitive factors in attracting Internet users are the quality of
service and the relevance, timeliness, depth and breadth of content and services
offered. In the market for Internet distribution of radio broadcasts, the
Company competes with Internet Service Providers ("ISPs") and conventional radio
stations and networks that originate their own Internet broadcasts. The Company
also competes for the time and attention of Internet users with thousands of
unrelated Web sites operated by businesses and other organizations, individuals,
governmental agencies and educational institutions. For example, certain Web
sites may provide a collection of links to
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other Web sites with streaming media content. The Company expects competition to
intensify and the number of competitors to increase significantly in the future.
In addition, as the Company expands the scope of its content and services, it
will compete directly with a greater number of Web sites and other media
companies. Because the operations and strategic plans of existing and future
competitors are undergoing rapid change, it is extremely difficult for the
Company to anticipate which companies are likely to offer competitive services
in the future.
Competitive elements in the online music promotion and distribution industry
include: quantity and variety of digital recorded music content; ability of
consumers to search and sample music according to their preferences; ease of
downloading music; fidelity and quality of sound of the music; and ability to
promote our Web site, both online and through traditional marketing, concerts
and strategic alliances. The Company believes that the web site generally
competes favorably with respect to the foregoing criteria. However, many of the
Company's existing and potential competitors have longer operating histories,
greater brand name recognition, larger consumer bases and significantly greater
financial, technical and marketing resources than the Company does. The Company
cannot assure investors that Web sites maintained by its existing and potential
competitors will not be perceived by consumers, artists, talent management
companies and other music-related vendors or advertisers as being superior. The
Company also cannot assure investors that it will be able to maintain or
increase the Company's Web site traffic levels, purchase inquiries and number of
click-throughs on its online advertisements or that competitors will not
experience greater growth than the Company in these areas.
With respect to each of the Company's operating product lines, the Company has
competitors, including, without limitation, other Internet Webcasting companies,
conventional retail listening post companies, conventional radio station
broadcasters, companies that provide "canned" services to businesses, and
existing technical consulting organizations. Principal competitive factors
include selection, price, transmission quality, transmission speed, reliability
of service, ease of access, ease of use, customer support, brand recognition,
operating experience and duration of existing contractual relationships. The
Company's current and potential competitors may have significantly greater
financial, technical and marketing resources, longer operating histories and
greater brand recognition. Traditional vendors may allow for a more familiar
user experience. As prices for Webcasting systems decrease and transmission
quality increases, the installed base of webcasting systems may increase.
Companies that provide media streaming software may also enter the market for
Internet broadcast services. If media streaming technology and backbone
bandwidth becomes more readily available to companies at low prices, some of the
Company's customers may decide to compete with the Company. In addition, local
exchange carriers, ISPs and other data communication service providers may
compete in the future with a portion of, or all of, the Company's business
services as technological advancements facilitate the ability of these providers
to offer such services, provided they have access to or can construct a
comparable database of digital music. There can be no assurance that the
Company will be able to compete successfully against its current or future
competitors.
The Company also competes with online services, other Web site operators and
advertising networks, as well as traditional media such as television, radio and
print, for a share of advertisers' total advertising budgets. The Company
believes that the principal competitive factors for attracting advertisers
include the number of users accessing the Company's Web site,
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the demographics of the Company's users, the Company's ability to deliver
focused advertising and interactivity through its Web site and the overall cost-
effectiveness and value of advertising offered by the Company. There is intense
competition for the sale of advertising on high-traffic Web sites, which has
resulted in a wide range of rates quoted by different vendors for a variety of
advertising services, making it difficult to project levels of Internet
advertising that will be realized generally or by any specific company. Any
competition for advertisers among present and future Web sites, as well as
competition with other traditional media for advertising placements, could
result in significant price competition. The Company believes that the number of
companies selling Web-based advertising and the available inventory of
advertising space has recently increased substantially. Accordingly, the Company
may face increased pricing pressure for the sale of advertisements. Reduction in
the Company's Web advertising revenues in the future would have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company competes for conventional media advertising sales with national
radio and television networks, as well as local radio and television stations.
Local radio and television content providers and national radio and television
networks may have larger and more established sales organizations than the
Company. These companies may have greater name recognition and more established
relationships with advertisers and advertising agencies than the Company. Such
competitors may be able to undertake more extensive marketing campaigns, obtain
a more attractive inventory of ad spots, adopt more aggressive pricing policies
and devote substantially more resources to selling advertising inventory. The
Company's conventional media advertising sales efforts may depend on the
Company's ability to obtain an inventory of ad spots in targeted radio and
television markets. If the Company is unable to obtain such inventory, it could
have a material adverse effect on the Company's business, results of operations
and financial condition.
In addition, certain companies have agreed to work together to offer music over
the Internet, and the Company may face increased competitive pressures as a
result. For example, in May 1999, Microsoft Corporation and Sony Corporation
announced an agreement to pursue a number of cooperative activities. Sony has
announced that it will make its music content downloadable from the Internet
using Microsoft's multimedia software. In addition, Universal Music Group and
BMG Entertainment have recently announced a joint venture to form an online
music store.
With respect to all of the Company's product lines, many of the Company's
existing and potential competitors have longer operating histories, greater
brand name recognition, larger consumer bases and significantly greater
financial, technical and marketing resources than the Company does. The Company
cannot assure investors that products and services delivered by existing and
potential competitors will not be perceived by consumers and music-related
vendors or advertisers as being superior to the Company's. The Company also
cannot assure investors that the Company will be able to establish, maintain and
increase a sustainable level of sales of products and services or that
competitors will not experience greater growth in these areas than the Company
does.
Increased competition in one or more of the Company's operating Product areas
could result in reduced margins and loss of market share which could harm the
Company's business.
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RISKS RELATED TO OPERATIONS
---------------------------
THE COMPANY'S BUSINESS COULD BE HARMED IF THE COMPANY LOSES MEMBERS OF OR FAILS
TO DEVELOP ITS MANAGEMENT TEAM.
The Company's future performance will be substantially dependent on the
continued services of the Company's management and the Company's ability to
attract, retain and motivate them. The loss of the services of any of the
Company's officers or senior managers could harm the Company's business. See
Item 6 "Executive Compensation-Employment and Consulting Contracts."
The Company expects to recruit middle and senior level management to provide for
the growth of the Company's business. Most of these individuals will not have
previously worked together and will have to be integrated as a management team.
If the Company's managers are unable to work effectively as a team, the
Company's business would be harmed. The Company does not maintain "key person"
life insurance policies on certain of the Company's personnel, including the
Company's President and Chief Executive Officer.
THE COMPANY MAY NOT BE ABLE TO HIRE AND RETAIN A SUFFICIENT NUMBER OF QUALIFIED
EMPLOYEES.
The Company's future success will depend on the Company's ability to attract,
train, retain and motivate other highly skilled technical, managerial, marketing
and customer support personnel. Competition for these personnel is intense,
especially for engineers, Web designers and advertising sales personnel, and the
Company may be unable to successfully attract sufficiently qualified personnel.
To manage the expected growth of the Company's operations, the Company will need
to integrate these employees into the Company's business. The Company's
inability to hire, integrate and retain qualified personnel in sufficient
numbers may reduce the quality of the Company's products and services, and could
harm the Company's business.
THE COMPANY MUST CONTINUE TO UPGRADE ITS TECHNOLOGY INFRASTRUCTURE.
The Company must continue to add hardware and enhance software to accommodate
the increased content and use of the Company's digital music database. If the
Company is unable to increase the data storage and processing capacity of the
Company's systems at least as fast as the growth in demand, the Company's
digital music database may become unstable and may fail to operate for unknown
periods of time which could affect the Company's Web site traffic and delivery
of products and services in all of the Company's operating product lines.
Unscheduled downtime could harm the Company's business and also could discourage
users of the Company's Web site and reduce future revenues.
RISK OF SYSTEM FAILURE, DELAYS AND INADEQUACY; SINGLE SITE.
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The performance, reliability and availability of the Company's digital music
database Web site and network infrastructure are critical to the Company's
reputation and ability to attract and retain users, advertisers and content
providers. A large portion of the Company's server infrastructure is located at
a single facility located in Buffalo, New York. The Company's systems and
operations are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, Internet breakdowns, break-ins, other natural
disasters and similar events. Although the Company maintains backup data
systems and carries business interruption insurance in amounts which the Company
believes reasonable to compensate it for losses that may occur in the event of
unexpected disruption of business operations, the Company does not presently
have redundant physical facilities or a formal disaster recovery plan. Services
based on sophisticated software and computer systems often encounter development
delays and the underlying software may contain undetected errors that could
cause system failures when introduced. Any system error or failure that causes
interruption in availability of content or an increase in response time could
result in a loss of potential or existing business services customers, users,
advertisers or content providers and, if sustained or repeated, could reduce the
attractiveness of the Company's Web site to such entities or individuals. In
addition, because a substantial portion of the Company's revenues are directly
related to the digital music database, system interruptions that result in the
unavailability of the Company's Web site or slower response times for access to
the digital music database could have a material adverse effect on the Company's
business, results of operations and financial condition.
A sudden and significant increase in traffic on the Company's Web site could
strain the capacity of the software, hardware and telecommunications systems
deployed or utilized by the Company, which could lead to slower response times
or system failures. The Company is also dependent upon Web browsers, ISPs and
online service providers ("OSPs") to provide Internet users access to the
Company's Web site. Users may experience difficulties accessing or using the
Company's Web site due to system failures or delays unrelated to the Company's
systems. These difficulties may negatively affect audio quality or result in
intermittent interruption in programming. In addition, the Company relies on
third party ISPs to provide hosting services with respect to some of the
Company's content providers. Any sustained failure or delay could reduce the
attractiveness of the Company's business service customers, Web site users,
advertisers and content providers. The occurrence of any of the foregoing
events could have a material adverse effect on the Company's business, results
of operations and financial condition.
THE COMPANY WOULD BE HARMED IF SECURITY MEASURES FAIL.
The Company's networks may be vulnerable to unauthorized access, computer
viruses and other disruptive problems despite the Company's implementation of
security measures. A party who is able to circumvent security measures could
misappropriate proprietary information or cause interruptions in the Company's
Internet operations. ISPs and OSPs have in the past experienced, and may in the
future experience, interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
The Company may be required to expend significant capital or other resources to
protect against the threat of security breaches or to alleviate problems caused
by such breaches. Although the Company intends to continue to implement
industry-standard security measures, there can be no assurance that measures
implemented by the Company will not be circumvented in the future. Eliminating
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computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to users accessing the Company's
Web site, which could have a material adverse effect on the Company's business,
results of operations and financial condition.
If the security measures that the Company uses to protect personal information
are ineffective, the Company may lose visitors and its business would be harmed.
The Company relies on security and authentication technology licensed from third
parties. The Company cannot predict whether new technological developments
could allow these security measures to be circumvented.
In addition, the Company's software, databases and servers may be vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. The
Company may need to spend significant resources to protect against security
breaches or to alleviate problems caused by any breaches. The Company cannot
assure that it can prevent all security breaches.
RISKS RELATED TO GOVERNMENT REGULATION, CONTENT AND INTELLECTUAL PROPERTY
-------------------------------------------------------------------------
GOVERNMENT REGULATION MAY REQUIRE THE COMPANY TO CHANGE THE WAY IT DOES
BUSINESS.
The Company's business is subject to rapidly changing laws and regulations.
Although the Company's principal executive offices are currently based in
Toronto, Canada, the Company is a Delaware corporation and subject to United
States law. The United States government and the governments of other states
and foreign countries have attempted to regulate activities on the Internet.
Evolving areas of law that are relevant to the Company's business include
privacy law, proposed encryption laws, content regulation and sales and use tax.
Because of this rapidly evolving and uncertain regulatory environment, the
Company cannot predict how these laws and regulations might affect the Company's
business. In addition, these uncertainties make it difficult to ensure
compliance with the laws and regulations governing the Internet. These laws and
regulations could harm the Company by subjecting the Company to liability or by
forcing the Company to change how the Company does business.
Although there are currently few laws and regulations directly applicable to the
Internet, it is likely that new laws and regulations will be adopted in the
United States and elsewhere covering issues such as music licensing, Webcast
license fees, copyrights, privacy, pricing, sales taxes and characteristics and
quality of Internet services. The adoption of restrictive laws or regulations
could slow Internet growth or expose the Company to significant liabilities
associated with content available on the Company's Web site. The application of
existing laws and regulations governing Internet issues such as property
ownership, libel and personal privacy is also subject to substantial
uncertainty. There can be no assurance that current or new government laws and
regulations, or the application of existing laws and regulations (including laws
and regulations governing issues such as property ownership, content, taxation,
defamation and personal injury), will not expose the Company to significant
liabilities, significantly slow Internet growth or otherwise cause a material
adverse effect on the Company's business, results of operations or financial
condition.
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The U.S. Government has adopted and is considering adopting legislation and
regulations regarding the collection and use of personal identifying information
obtained from individuals when accessing Web sites, with particular emphasis on
access by minors. Recent initiatives in this regard include the U.S. Children's
Online Privacy Protection Act of 1998 and the U.S. Consumer Internet Privacy
Protection Act of 1999. Such legislation and regulations include or may include
requirements that companies establish certain procedures to, among other things:
(i) give adequate notice to consumers regarding information collection and
disclosure practices, (ii) provide consumers with the ability to have personal
identifying information deleted from a company's database, (iii) provide
consumers with access to their personal information and with the ability to
rectify inaccurate information, (iv) clearly identify affiliations or a lack
thereof with third parties that may collect information or sponsor activities on
a company's Web site and (v) obtain express parental consent prior to collecting
and using personal identifying information obtained from children aged twelve or
under. Under current proposals, the U.S. Federal Trade Commission (the "FTC")
would be responsible for enforcement. While the Company has implemented or
intends to implement programs designed to enhance the protection of the privacy
of the Company's users, including children, there can be no assurance that such
programs will conform to any new legislation or regulation which may be adopted.
Moreover, even in the absence of such regulations, the FTC has begun
investigations into the privacy practices of companies that collect information
on the Internet. One such investigation has resulted in a final consent decree
pursuant to which an Internet company agreed to establish programs to implement
the principles noted above. The Company may become subject to such an
investigation, or the FTC's regulatory and enforcement efforts may adversely
affect the ability to collect demographic and personal information from the
Company's users, which could have an adverse effect on the Company's ability to
provide highly targeted opportunities for advertisers and e-commerce marketers.
The Communications Decency Act (the "CDA") was enacted in 1996. Although those
sections of the CDA that, among other things, proposed to impose criminal
penalties on anyone distributing "indecent" material to minors over the Internet
were held to be unconstitutional by the U.S. Supreme Court, there can be no
assurance that similar laws will not be proposed and adopted in a modified form.
Although the Company does not currently distribute the types of materials that
the CDA may have deemed illegal, the nature of such similar legislation and the
manner in which it may be interpreted and enforced cannot be fully determined,
and legislation similar to the CDA could subject the Company to potential
liability, which in turn could have an adverse effect on the Company's business,
financial condition and results of operations. Such laws could also damage the
growth of the Internet generally and decrease the demand for the Company's
products and services, which could adversely affect the Company's business,
results of operations and financial condition.
The European Union has also adopted various regulations protecting privacy of
its citizens and otherwise regulating the Internet, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. See Item 1 "Description of Business-Intellectual Property and
Patents."
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THE COMPANY MAY HAVE LIABILITY FOR CONTENT.
As a distributor of Internet content, the Company faces potential liability for
negligence, copyright, patent, trademark, defamation, indecency and other claims
based on the nature and content of the materials that the Company Webcasts.
Such claims have been brought, and sometimes successfully pressed, against
Internet content distributors. In addition, the Company could be exposed to
liability with respect to the content or unauthorized duplication or broadcast
of content. The Company could also be exposed to liability for third party
content posted by the Company's customers in chat rooms or bulletin boards
offered on the Company's Web site. It is also possible that if any information
provided on the Company's Web site contains errors or false or misleading
information, third parties could make claims against the Company for losses
incurred in reliance on such information. In addition, the provision of such
information may be illegal in some jurisdictions. In the future the Company's
Web site may contain a significant number of links to other Web sites. As a
result, the Company may be subject to claims alleging that, by directly or
indirectly providing links to other Web sites, the Company is liable for
copyright or trademark infringement or the wrongful actions of third parties
through their respective Web sites. Although the Company maintains general
liability insurance, the Company's insurance may not cover potential claims of
this type or may not be adequate to indemnify the Company for all liability that
may be imposed. In addition, although the Company generally requires the
Company's content providers to indemnify the Company for such liability, such
indemnification may be inadequate. Any imposition of liability that is not
covered by insurance, is in excess of insurance coverage or is not covered by an
indemnification by a content provider could have a material adverse effect on
the Company's business, results of operations and financial condition.
Liability or alleged liability could harm the Company's business by damaging the
Company's reputation, requiring the Company to incur legal costs in defense,
exposing the Company to awards of damages and costs and diverting management's
attention away from the Company's business. See Item 1 "Description of Business-
Intellectual Property and Patents."
THE COMPANY'S INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE.
The Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to the Company's success, and the Company
relies on a combination of copyright and trademark laws, trade secret
protection, confidentiality and non-disclosure agreements and contractual
provisions with its employees and with third parties to establish and protect
the Company's proprietary rights. In addition, the Company has applied for a
patent to protect the Company's digital music database architecture and
technology. There can be no assurance that these steps will be adequate, that
the Company will be able to secure a patent under the Company's application or
trademark registrations for all of the Company's marks in the United States or
other countries or that third parties will not infringe upon or misappropriate
the Company's patent if granted, or the Company's copyrights, trademarks,
service marks and similar proprietary rights. In addition, effective
intellectual property protection may be unenforceable or limited in certain
countries, and the global nature of the Internet makes it impossible to control
the ultimate destination of the Company's broadcasts. In the future, litigation
may be necessary to enforce and protect the Company's patents, trademarks, trade
secrets, copyrights and other
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intellectual property rights. Use of the Company's name by others could dilute
the Company's brand identity and confuse the market.
The Company may also be subject to litigation to defend against claims of
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others. For example, Sightsound.com, Inc.
has asserted that many online music providers violate patent rights that it
allegedly owns covering the sale of music over the Internet through digital
downloads. To the Company's knowledge, Sightsound.com, Inc. has not been
successful in asserting such claims, however, if successful, these claims, or
similar claims by others, could seriously harm the Company's business by forcing
the Company to cease using certain intellectual property. If competitors of the
Company prepare and file applications in the United States that claim trademarks
used or registered by the Company, the Company may oppose those applications and
be required to participate in proceedings before the United States Patent and
Trademark Office to determine priority of rights to the trademark, which could
result in substantial costs to the Company. An adverse outcome could require
the Company to license disputed rights from third parties or to cease using such
trademark. Even if unsuccessful, these claims could harm the Company's business
by damaging the Company's reputation and requiring the Company to incur legal
costs. Any litigation regarding the Company's proprietary rights could be
costly and divert management's attention, result in the loss of certain of the
Company's proprietary rights, require the Company to seek licenses from third
parties and prevent the Company from selling the Company's services, any one of
which could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, as the Company intends to
obtain rights to use a portion of the Company's content from franchisees and
other third parties, its exposure to copyright infringement action may increase
because the Company must rely upon such franchisees and third parties for
information as to the origin, ownership and rights to use such licensed content.
The Company generally obtains representations as to the origins, ownership and
authorization for usage of such licensed content and generally obtain
indemnification to cover any breach of any such representations; however, there
can be no assurance that such representations will be accurate or that such
indemnification will adequately protect the Company.
The Company has filed an application for a United States trademark registration
for radiomoi.com, musicmusicmusic.com and other Company brand marks. There can
be no assurance that the Company will be able to secure such registered
trademarks. The Company intends to pursue the registration of the Company's
trademarks based upon anticipated use internationally. There can be no
assurance that the Company will be able to secure adequate protection for these
trademarks in foreign countries. Many countries have a "first-to-file"
trademark registration system and thus the Company may be prevented from
registering the Company's marks in certain countries if third parties have
previously filed applications to register or have registered the same or similar
marks. It is possible that competitors of the Company or others will adopt
service names similar to the Company's, thereby impeding the Company's ability
to build brand identity and possibly leading to customer confusion. In
addition, there could be potential trademark or trademark infringement claims
brought by owners of other registered trademarks or trademarks that incorporate
variations of the term musicmusicmusic. The inability of the Company to protect
its marks adequately could have a material adverse effect on the Company's
business, results of operations and financial condition.
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As part of the Company's confidentiality procedures, the Company generally
enters into agreements with the Company's employees and consultants and limit
access to and distribution of the Company's software, documentation and other
proprietary information. There can be no assurance that the steps taken by the
Company will prevent misappropriation of the Company's proprietary information
or that agreements entered into for that purpose would be enforceable.
Notwithstanding the precautions taken by the Company, it might be possible for a
third party to copy or otherwise obtain and use the Company's proprietary
information without authorization. The laws of some countries may afford the
Company little or no effective protection of the Company's intellectual
property.
RISK OF JURISDICTIONAL EXPOSURE
Due to the global nature of the Internet, it is possible that, although
transmissions by the Company over the Internet originate primarily in the U.S.,
the governments of Canada and other countries might attempt to regulate the
Company's transmissions or prosecute the Company for violations of their laws.
Certain of the Company's servers are expected to be located in foreign countries
and this would likely be sufficient to bring the Company under the jurisdiction
of such countries, particularly in areas relating to data protection, privacy
and Internet content. As the Company's service is available over the Internet
in multiple states in the U.S. and other countries, these jurisdictions may
claim that the Company is required to qualify to do business as a foreign
corporation in each such state in the U.S. or other country or that the Company
is required to notify certain authorities of the Company's activities, including
those activities relating to the collection and processing of user data. The
Company is qualified to do business only in Delaware and the province of
Ontario, Canada, and failure by the Company to qualify as a foreign corporation
in a jurisdiction where it is required to do so could subject the Company to
taxes and penalties and could result in the inability of the Company to enforce
contracts in such jurisdictions. Any such new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not
currently apply to the Company's business, or the application of existing laws
and regulations to the Internet and other online services could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company currently does not collect sales or other taxes with respect to the
sale of services or products in states and countries where the Company believe
it is not required to do so. The Company does collect sales and other taxes in
states in which the Company has offices and is required by law to do so. One or
more states or countries have sought to impose sales or other tax obligations on
companies that engage in online commerce within their jurisdictions. A
successful assertion by one or more states or countries that the Company should
collect sales or other taxes on products and services, or remit payment of sales
or other taxes for prior periods, could have a material adverse effect on the
Company's business, results of operations and financial condition.
GENERAL RISKS
-------------
THE COMPANY'S COMMON STOCK IS PARTICULARLY SUBJECT TO INTERNET STOCK VOLATILITY.
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The stock market in general has recently experienced extreme price and volume
fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to or
disproportionate to the operating performance of such companies. These broad
market fluctuations could adversely affect the market price of the Company's
Common Stock.
THE COMPANY'S EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS CONTROL
APPROXIMATELY 32.4% OF THE COMPANY'S COMMON STOCK
Executive officers and directors as a group control approximately 10.8% of the
Company's outstanding Common Stock. The holders of 5% or more of the outstanding
Common Stock control in the aggregate approximately 21.6% of the Company's
outstanding Common Stock. As a result, the executive officers and directors of
the Company as a group together with the holders of 5% or more of the
outstanding Common Stock own in the aggregate approximately 32.4% of the
Company's outstanding Common Stock. These stockholders would be able to
significantly influence all matters requiring approval by the Company's
stockholders, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying, deterring or preventing a change in control of the
Company and may make some transactions more difficult or impossible to complete
without the support of these stockholders. See Item 4 "Security Ownership of
Certain Beneficial Owners and Management".
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE THE COMPANY, AND THIS COULD
DEPRESS THE COMPANY'S STOCK PRICE.
The Delaware Law and the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws contain provisions that could
delay, defer or prevent a change in control of the Company or the Company's
management. These provisions could also discourage proxy contests and make it
more difficult for investors and other stockholders to elect directors and take
other corporate actions. As a result, these provisions could limit the price
that investors are willing to pay in the future for shares of the Company's
Common Stock. These provisions include, without limitation, authority to issue
"blank check" Preferred Stock, which is preferred stock that can be created and
issued by the Board of Directors without prior stockholder approval, with rights
senior to those of Common Stock.
FUTURE SALES OF THE COMPANY'S COMMON STOCK MAY DEPRESS ITS STOCK PRICE.
The Company currently has outstanding an aggregate of 7,813,705 shares of Common
Stock. All of such securities are registered to trade on the Neuer Markt of the
Frankfurt Stock Exchange, the Company's only public market for its securities.
The 7,813,705 shares of Common Stock outstanding are "restricted securities" as
such term is defined in Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). As a result they cannot be resold in the United States
or to "U.S. Persons" ("U.S. Persons") as such term is defined in Regulation S
promulgated under the Securities Act without registration under the Securities
Act or the
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availability of an exemption therefrom. In general, under Rule 144, a person who
has beneficially owned such restricted securities in a non-public transaction
for at least one year, including persons who may have been deemed "affiliates"
of the Company as that term is defined under the Securities Act, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares or the average weekly
trading volume on all national securities exchanges and through NASDAQ during
the four calendar weeks preceding such sale, provided that certain current
public information regarding the Company is then available. In addition,
restricted securities may generally be freely offered or sold in the United
States or to a U.S. Person after the expiration of a two-year period from the
date the restricted securities have been acquired from the Company or an
affiliate of the Company if the seller is not an affiliate of the Company and
has not been an affiliate of the Company during the three month period
immediately prior to such sale.
In general, under Rule 701 of the Securities Act, as currently in effect, shares
purchased from the Company by an employee, consultant or advisor of the Company
pursuant to Rule 701 in connection with a compensatory stock or option plan or
other written agreement are restricted securities, and such restricted
securities are eligible to be resold only in connection with a registration
statement or an exemption therefrom. In general, subject to Rule 144, non-
affiliates of the Company are eligible to resell such restricted securities 90
days after the Company becomes subject to the reporting requirements of section
13 or 15(d) of the Securities and Exchange Act (the "Exchange Act"), without
compliance with certain restrictions contained in Rule 144, including adequate
current public information, holding period, amount of securities sold and
notice. In addition, such restricted securities may be resold by "affiliates"
of the Company 90 days after the Company becomes subject to the reporting
requirements of section 13 or 15(d) of the Exchange Act, without compliance with
the holding period contained in Rule 144. If a substantial number of the
restricted securities were sold pursuant to Rule 144 or a registered offering,
the market price of the Company's Common Stock could be adversely affected.
INVESTORS SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS IN THIS REPORT.
This Report contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or the Company's future
financial performance. In some cases, investors can identify forward-looking
statements by terminology such as "could," "may," "will," "should," "expect,"
"plan," "anticipate," "believe," "estimate," "predict," "potential" or
"continue," the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, investors should specifically
consider various factors, including the risks described above and in other parts
of this Report. These factors may cause the Company's actual results to differ
materially from any forward-looking statement. Although the Company believes
that the expectations reflected in the forward-looking statements are
reasonable, the Company cannot guarantee future results, levels of activity,
performance or achievements. Moreover, neither the Company nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. The Company is under no duty to update any of the forward-
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looking statements after the date of this Report to conform them to actual
results or to changes in the Company's expectations.
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The accompanying selected financial data for the fiscal years ended January 31,
1999 and January 31, 2000, have been derived from, and are qualified in their
entirety by reference to, the Financial Statements and Notes thereto included
elsewhere in this Report, which have been audited by KPMG as indicated in the
respective report thereon, which appears in this Report. Unless otherwise
indicated herein, all information included in this Report has been presented in
accordance with U.S. GAAP. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements included elsewhere in this Report.
Year Ended Year Ended
January 31, January 31,
1999(1) 2000
------------------ ------------------
(audited) (audited)
Statement of Operations Data:
Revenues $1,373,802 $ 959,341
Cost of revenue 1,093,563 810,598
Gross profit (loss) 280,239 148,743
Operating expenses 620,119 3,765,060
Loss from operations (339,880) (3,616,317)
Future Tax recovery - -
Net loss (339,880) (3,616,317)
Basic net loss per share $ (0.11) $ (.60)
Weighted average shares
outstanding used in basic per
share outstanding 3,035,273 6,027,195
Employees 28 100
(1) The Company moved its corporate domicile on May 4, 1999 from Ontario
(Canada) to the State of Delaware. The Company incorporated in Ontario, Canada
on May 1, 1997, but did not have material operations until the period covered
by fiscal year end January 31, 1999.
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SELECTED FINANCIAL DATA
(continued)
Summary Balance Sheet at
January 31, 2000
(audited)
<TABLE>
<CAPTION>
Actual
------
<S> <C>
Balance Sheet Data:
Cash and cash equivalents.................... 11,427,720
Working capital.............................. 11,368,422
Total assets................................. 13,425,242
Current liabilities.......................... 546,568
Long-term debt............................... -
Deficit...................................... (3,987,550)
Total stockholders' equity (deficit)......... 12,878,674
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and the notes thereto and the other financial information
appearing elsewhere in this Report. In addition to historical information, the
following discussion and other parts of this Report contain forward-looking
information that involves risks and uncertainties. The Company's actual results
could differ materially from those anticipated by such forward-looking
information due to factors discussed under Item 1 "Description of Business-Risk
Factors" and elsewhere in this Report.
The Company was incorporated on May 1, 1997 as an Ontario (Canada) corporation
and transferred the domicile of the corporation to Delaware, U.S.A. effective as
of May 4, 1999. Since inception, the Company's operating activities have
consisted largely of developing a digital music database and the infrastructure
necessary to live-stream music on the Internet as well as the development of
ancillary hardware, software and content products.
Given the Company's short operating history and its limited operations for the
fiscal period ended January 31, 1998, the Company believes that comparisons
between any period for such fiscal period and the comparable period for the
fiscal years ended January 31, 1999 and January 31, 2000 would not be
meaningful; therefore, these comparisons are not discussed below.
OVERVIEW
The Company is an Internet enterprise that has developed a digital music
database, infrastructure and expertise to deliver or "stream" high quality audio
programs to business-to-business clients and individual users worldwide. The
Company's Web site currently offers a comprehensive and rapidly growing database
of more than 100,000 recordings, which have been digitized into more
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than 600,000 music files providing for delivery of music over the Internet in
various high quality modes. According to research by the Company, the Company's
database represents one of the largest collections of digital music available on
the Internet. The Company's database and distribution models provide for revenue
generation to be derived from advertising, sponsored promotion, merchandise
sales, business-to-business digital music delivery, digital database access and
sales to radio stations and custom produced music programs delivered via digital
satellite services. In addition, the Company expects to derive revenue through
technical consulting and franchise licenses. The Company's five main product
lines include: (1) radiomoi, an interactive Internet radio station providing
"Music Over the Internet"; (2) the Web Bar Listening Post, a music sampling
station placed in retail record stores; (3) Broadcast Services Product, turn-key
solutions including broadcast quality music files for the music database needs
of radio stations and broadcast groups; (4) Industrial Sound Services, providing
custom music programs to businesses over the Internet; and (5) The Solutions
Group ("TSG"), providing hardware, software, programming and consulting services
to music industry businesses and other third party customers. As of March 2000,
two of the Company's Product's, radiomoi and TSG, and the Company's franchise
operations are producing revenues, and as of April 2000, the Company's Web Bar
Listening Post, Broadcast Services Product and Industrial Sound Services Product
are delivering revenues.
RESULTS OF OPERATIONS
Revenue
To date, revenues have consisted primarily of services rendered by The Solutions
Group and to a lesser extent, the sale of online banner advertisements on the
Company's radiomoi Web site. Company revenues were $959,341 for the fiscal year-
ended January 31, 2000, compared to $1,373,802 for the fiscal year-ended January
31, 1999. Geographically, substantially all income since inception has been
derived from Canada. The 30% decline in net revenue is mainly attributed to a
shift in focus from selling hardware, software and programming support to third
party customers, to providing similar support internally to assist in the
development of the Company's streaming Internet music products and services.
The Company acquired The Solutions Group on March 1, 1998. As of March 2000, TSG
generates substantially all of the Company's revenue. Revenues from TSG products
and services were $936,714 and $1,351,200 for the fiscal years ending January
31, 2000 and January 31, 1999, respectively. The Company believes that TSG has a
stable base of clients that will continue to provide revenue streams to the
Company during the foreseeable future. These revenue streams will be enhanced by
the growth in the Company's music lines. However, there can be no assurance in
this regard. Two clients each represent a significant portion of TSG's revenues.
The Company believes that TSG's commercial relationships with these clients are
good and the Company has no reason to believe that it will not continue to do
business on the same or similar basis with these two clients during the
foreseeable future.
The Company's radiomoi Web site first recognized media advertising revenues in
October 1998. radiomoi has the capability to deliver revenues through banner
advertising, audio radio spots, music industry advertising and artist and
songwriter promotions.
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However, no material revenues has been derived to date. Revenues from radiomoi
were $13,833, and $14,101, for the fiscal years ending January 31, 2000 and
January 31, 1999, respectively. The Company sells banner advertising through
Flycast Communications Corporation ("Flycast"), a Web-based direct response
advertising broker with whom the Company has had an agreement since October
1998. The Company's agreement with Flycast is non-exclusive and may be
terminated by either party on 30 days notice. In addition to the Company's
arrangement with Flycast, the Company intends to offer banner and on-line audio
advertising directly to advertisers in the near future. Sponsorship advertising
contracts are expected to involve integration with the Company's Web site, such
as the placement of buttons that provide users with direct links to the
advertiser's Web site. The Company expect revenues from audio advertising to
commence in the near future.
The Company in January 2000 signed its first Franchise agreement with
the United Arab Emirates' Abu Dhabi-based khaleej.com. The Company's franchise
will include the ability to market all of the Company's music products and
services including radiomoi, the Web Bar Listening Post, Broadcast Services and
Industrial Sound Services. The three-year franchising agreement provides for
the implementation of the Company's music database technology in Abu Dhabi.
Revenue will start in April 2000 with the initial training fee of $35,000 and
then another $250,000 will be earned over the remaining term of the agreement in
consideration for the delivery and installation of the Company's Intellectual
Property, the access to and use of the Company's digital music database and
ongoing software support services. Revenue through royalties will be delivered
as a percentage of the Franchisee's income ranging from two to seven percent of
income depending on which product or service generated that income. As well,
advertising revenue, other than advertising sold by Franchisee and streamed
solely in the franchisee's territory, will be shared on a 70/30 basis with the
greater percentage going to the seller of the advertising. The Company also
expects to derive additional revenue through hardware sales and programming
support services provided to the Franchisee. Income from investments for all
fiscal periods to date has been derived only from short-term financial
instruments such as bank deposits. As of April 30, 2000, the Company has not
made any equity, debt or derivative investments.
Cost of Sales
Cost of sales primarily represents hardware and software costs and were $810,598
(84.5% of revenue) and $1,093,563 (79.6% of revenue) for the fiscal years ended
January 31, 2000 and January 31, 1999, respectively. The level of cost of sales
decreased in absolute dollar amounts and increased as a percentage of revenue,
due primarily to a shift in focus from selling hardware, software and
programming support to third party customers, to providing similar support
internally to assist in the development of the Company's streaming Internet
music products and services. The Company anticipates that future gross margins
will improve as the Company begins to realize revenue from the Company's higher
margin Internet music services, including the Company's franchise operations.
On April 26, 1999, the Company became the first interactive Internet radio
station or Webcaster to be licensed by the Recording Industry Association of
America ("RIAA"), the trade group representing U.S. record labels. This license
gives radiomoi the rights to publicly perform sound
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<PAGE>
recordings in accordance with the Digital Millennium Copyright Act. The Company
has agreed to pay to the RIAA a royalty of 15% of the greater of gross revenue
or operating expenses, which are derived from streaming music (the "Webcasting
Agreement"). On August 11, 1999, the Company and the RIAA entered into a
agreement with respect to ephemeral rights, providing a license for the Company
to make multiple records by digital transmissions via the Internet. The Company
has agreed to pay the RIAA a royalty of approximately 2% of the greater of gross
revenue or operating expenses derived through streaming music for such rights
(the "Ephemeral Rights Agreement"). Each of the Webcasting and Ephemeral Rights
Agreements shall continue through December 31, 2000. The Company and the RIAA
have agreed in principle to enter into an additional agreement with respect to
business-to-business delivery of music over the Internet. The Company believes
that it will be able to negotiate commercially reasonable terms for such
additional agreement and renew all of the Company's agreements with the RIAA on
favorable terms in the foreseeable future, however, there can be no assurance in
this regard.
Advertising and Promotion
Advertising and promotion expenses consist primarily of web based advertising,
commissions, promotional activities, trade shows, consulting and other marketing
costs.
Advertising and promotion expenses were $750,471 (78.2% of revenues) and
$51,888 (3.8% of revenues) for the fiscal years ended January 31, 2000 and
January 31, 1999, respectively. The
significant increase in advertising and promotional expenses, both in absolute
dollar amounts and as a percentage of revenue, was primarily due to the costs
incurred in the promotion of the Company's Internet music products and services,
and development of the radiomoi subscriber base which increased by 160,000 to
over 200,000 subscribers from one year ago. The majority of the Company's
investment in advertising and promotion was made in the last quarter of the
fiscal year ended January 31, 2000. The Company anticipates that this last
quarter's significant level of investment in advertising and promotion will
continue in the foreseeable future; however, advertising and promotion expenses
as a percentage of revenue may fluctuate depending on the timing of new
marketing programs and the generation of sales.
In the future, the Company anticipates that it will enter into arrangements with
franchisees to secure international promotional and marketing services and
obtain access to their foreign musical offerings. Future expenses may include
costs related to promotional events, which will be expensed to advertising and
promotion in the period the event is held. Proceeds from these events, if any,
will be credited against promotional expenses incurred. Depending upon the
terms and timing of promotional activities, substantial sales and marketing
expenses may be incurred in any quarterly or annual period.
Salaries, Wages and Subcontractors
Salaries, wages and subcontractors expense consists primarily of compensation
expenses for the Company's sales, marketing, general and administrative staff,
and subcontractors' costs.
Salaries, wages and subcontractors expense was $1,019,507 (106.3% of revenue)
and $247,905 (18% of revenue) for the fiscal years ended January 31, 2000 and
January 31, 1999, respectively.
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The increase in the salaries, wages and subcontractors expense both in absolute
terms and as a percentage of net revenue was directly attributable to the hiring
of additional sales, marketing and general and administrative employees bringing
the number to 38 as at January 31, 2000. The Company anticipates that overall
salaries, wages and subcontractors expenses as a percentage of revenue may
fluctuate depending on the level of future revenue and the timing of the hiring
of additional sales and support staff required to support the growth in revenue.
General and Administrative
General and administrative expense consists primarily of telecommunication
costs, legal, accounting and other outside consulting fees, travel expenses,
royalty costs, facilities related costs, insurance, and other overhead costs.
General and administrative expenses was $984,893 (102.7% of revenues) and
$235,926 (17.2% of revenues) for the fiscal years ended January 31, 2000, and
January 31, 1999, respectively. The increase in general and administrative
expense, both in absolute dollar amount and as a percentage of revenue, was
primarily a result of increased legal, accounting and other outside consulting
fees (from 1.4% to 44.6% of revenue), and costs associated with the increase in
the size of the Company's organization. The Company anticipates that overall
general and administrative expense will increase in the foreseeable future,
however, general and administrative expense as a percentage of revenue may
fluctuate depending on the level of future revenue and the timing of additional
investments in general and administrative infrastructure.
Interest Income
The Company had interest income of $165,597 and nil for the fiscal years ended
January 31, 2000, and January 31, 1999, respectively. During the year, the
Company raised $15,382,555 in net proceeds after the issuance of approximately
3.9 million common shares. Net proceeds of $12,469,523 were received from the
Company's offering of restricted securities made under Regulation S of the
Securities Act of 1933, as amended, and which are trading on the Neuer Markt of
the Frankfurt Stock Exchange in Germany since their issuance in September 1999
(the "September 1999 Regulation S Offering".) These funds were invested in short
term interest bearing deposits and generated interest income in the fourth
quarter of the fiscal year ended January 31, 2000 of $116,462.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1999, the Company's operations were
financed from internally generated cash, the sale of Common Stock and, to a
lesser extent, loan arrangements, none of which are currently outstanding. On
October 1, 1999, the Company received $12,469,523 in net proceeds from the
September 1999 Regulation S offering of 1.5 million shares of the Company's
Common Stock. As of the fiscal year ended January 31, 2000, the Company had
$11,427,720 in cash and cash equivalents.
During the year ended January 31, 2000, cash and cash equivalents increased by
$11,215,356 due primarily to net proceeds from the issuance of common shares of
$15,382,555 partially
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offset by $2,290,109 used in operations and $1,309,245 used for investments
mainly in fixed assets and intellectual property. This compares with an increase
in cash and cash equivalents for the year ended January 31, 1999 of $136,072,
due primarily to the issuance of common shares of $460,604 and the proceeds from
a demand loan of $268,456 largely offset by $358,213 used in operations and
$245,170 used for investments in fixed assets and intellectual property.
Investment in fixed assets during the fiscal years ended January 31, 2000 and
January 31, 1999, was $632,519 and $7,668 respectively, and consisted primarily
of the acquisition of computer equipment.
Intellectual property represents direct wages, subcontractors fees and other
direct costs incurred in relation to the development of the Internet website
music database. The Company capitalizes the intellectual property costs as they
are incurred and amortizes them on a straight-line basis over 5 years.
The costs incurred in the development of the music database and capitalized as
intellectual property was $661,341 (68.9% of revenue) and $237,502 (17.3% of
revenue) for the fiscal years ended January 31, 2000, and January 31, 1999,
respectively. The increase in the level of investment in intellectual property,
both in absolute dollar amount and as a percentage of revenue, was primarily due
to the continued investment in the development of the music database which grew
by 55,000 streaming MP3 files to over 80,000 at January 31, 2000. The Company
anticipates that overall investment in intellectual property will increase in
the foreseeable future as the Company continues to expand the music database;
however, intellectual property expenses as a percentage of revenue may fluctuate
depending on the level of future revenue and the timing of investments made in
intellectual property.
As of April 30, 2000, the Company had no material financial commitments other
than obligations under the Company's operating leases, its royalty agreement
with the RIAA and a commitment to provide music streaming web services to a
third party in exchange for radio media advertising. The Company expects to
substantially increase expenditures during the current fiscal year, including,
without limitation, the following:
. computer equipment and furniture and fixtures associated with increased
headcount and facility expansion;
. Web site computer equipment and increased headcount for Web site
maintenance personnel;
. Web Bar Listening Post equipment;
. product fulfillment equipment, infrastructure and headcount;
. bandwidth and networking equipment and infrastructure;
. increased headcount related to sales and marketing efforts;
. equipment and increased headcount related to product development;
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. increased promotion and branding efforts; and
. development and acquisition of content.
Capital requirements in any particular period will depend on the timing of these
expenditures. To the extent the Company's revenues increase in the future, the
Company anticipates significant increases in its working capital requirements to
finance higher relative levels of associated accounts receivable and other
assets, offset by increases in accounts payable and other liabilities. However,
the Company does not expect the increases in accounts payable and other
liabilities will offset the increases in accounts receivable and other assets.
The Company believes that its cash and cash equivalent balances and net proceeds
from the IPO will be sufficient to satisfy the Company's cash requirements
during the foreseeable future, however, there can be no assurance in this
regard. The Company intends to invest its cash in excess of current operating
requirements in short-term, interest-bearing, investment-grade securities. The
Company may need to raise additional capital if it expands more rapidly than
initially planned, to develop new or enhanced products and/or services, to
respond to competitive pressures or to acquire complementary products, content,
businesses or technologies. If additional funds are raised through the issuance
of equity or convertible debt securities, the percentage ownership of the
Company's stockholders will be reduced, the Company's stockholders may
experience additional dilution and such securities may have rights, preferences
or privileges senior to those of the Company's stockholders. There can be no
assurance that additional financing will be available or on terms favorable to
the Company. If adequate funds are not available or are not available on
acceptable terms, the Company's ability to fund the Company's expansion, take
advantage of unanticipated opportunities, develop or enhance products or
services or otherwise respond to competitive pressures could be significantly
limited. The Company's business may be harmed by such limitations.
INTEREST AND EXCHANGE RATE RISK
The Company is not exposed to changes in interest rates at this time because the
Company has no long-term debt arrangements. There can be no assurance that the
Company will not be required to seek additional financing in the future, which
may require credit arrangements that may have inherent interest rate risks.
The Company holds a substantial amount of its cash assets in foreign currencies
and as well conducts a substantial amount of business in foreign currencies. As
a result, the Company could be adversely affected in the event of unfavorable
fluctuations in exchange rates.
YEAR 2000 READINESS DISCLOSURE
There is a risk that the Company, the Company's service partners and/or third
party Internet service providers, could still be disrupted by computer systems
that cannot accurately process date-related information after December 31, 1999,
because they may use computer programs which provide only the last two digits to
refer to a year and therefor cannot distinguish between a
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year beginning with "20" and a year beginning with "19". This failure is often
referred to as the year 2000 or "Y2K" problem. For example, these programs
cannot tell the difference between the year 2000 and the year 1900. As a result,
these programs may malfunction or fail completely.
After thorough review of the Company's "mission critical" hardware and software,
the Company believes all the Company's systems and those of the Company's
principal service providers are Y2K compliant. The Company does not expect any
residual year Y2K problems to materially affect the Company's operations.
Nevertheless, investors should be aware that because the Company's business
relies almost entirely on computer systems, including those of suppliers,
customers and other third parties, any as yet undetected Y2K problem could
seriously harm the Company's business.
Recent Events
On March 1, 2000, the Company purchased the assets of a leading Canadian music
trade publication, The Record, for $187,613 in cash. The Company believes this
acquisition will enhance the Company's customer base, create additional
advertising revenue and give the Company advantages in the Canadian music
industry by providing digital delivery of streamed audio and instant delivery of
niche market information to a global audience of music industry executives and
consumers. Projected revenue from The Record's existing contracts are estimated
to be $165,000 in the first short year.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company's principal administrative, marketing and product development
facilities are located in approximately 9,800 square feet of office space in
Toronto, Canada. The lease for this space expires in September 2000 and
provides for a year-to-year renewal option. The Company expects to need to
lease additional space within the near future, and the Company expects to
commence a search for appropriate locations and facilities. The Company's
Internet servers are located in a secure third-party data center in Buffalo, New
York. The Company believes that the Buffalo facility maintains suitable
security, environmental conditions, redundant power sources and network
connectivity, which are expected to be sufficient for the Company's needs during
the foreseeable future. The Company's subsidiary operates in approximately 600
square feet of office space in Zurich, Switzerland that houses sales and
marketing staff. The lease for this space is on a month to month basis and the
Company believes this space will be sufficient to meet the Company's needs in
the near future. The Company does not own any real estate. The Company maintains
a branch office in New York City and leases space at 580 Broadway, Suite 306,
New York, NY 10012.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information Regarding beneficial
ownership of the shares of Common Stock as of April 30, 2000 and reflects the
beneficial ownership of shares of Common Stock by (i) each shareholder known by
the Company to own beneficially more than 5% of the outstanding shares, (ii)
each director and executive officer of the Company, and (iii) all directors and
executive officers of the Company as a group. Unless otherwise indicated, the
address for
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each person or entity named below is c/o musicmusicmusic inc., 99 Atlantic
Avenue, Suite 100, Toronto, Ontario M6K 3J8 Canada. To the knowledge of the
Company, it is not directly or indirectly owned or controlled by any corporation
or any foreign government. For additional information, see Item 7 "Certain
Relationships and Related Transactions."
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and except
for community property laws where applicable, the persons named in the table
below have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them. The percentage of beneficial
ownership is based on 7,813,705 shares of common stock outstanding as of April
30, 2000.
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficial Owner Beneficially Owned (1)
---------------- ---------------------------------
Shares Percent
--------------- ---------------
<S> <C> <C>
Wolfgang Spegg (2) 836,162 10.7%
Temple Trust
Company Limited (3) 666,666 8.5%
Remaco Invest AG (4) 521,110 6.7%
Berliner Effektenbeteiligungsgesellschaft AG (5) 500,000 6.4%
Alexander Henry (6) 2,000 *
Dr. Guido Sandler (7) 0 *
Edward R. Irwin (8) 10,000 *
All directors and officers 848,162 10.8%
of the Company as a group (9)
</TABLE>
* Less than 1%.
(1) Unless otherwise indicated, each person has sole voting and sole investment
power with respect to the shares listed. In computing the number of shares
beneficially owned by an organization or individual and the percentage ownership
of that organization or individual, shares subject to options held by that
organization or individual which are currently exercisable or exercisable within
60 days of the date of this Report are deemed outstanding. Such shares, however,
are not deemed outstanding for the purposes of computing the percentage
ownership of any other organization or individual.
(2) Mr. Spegg is President and CEO of the Company and is a member of the
Company's Board of Directors.
(3) The address of the stockholder is Temple Trust Company Ltd., Temple
Building, Leeward Highway, Providenciales, Turks & Caicos Islands, British West
Indies.
(4) The address of the stockholder is Remaco Invest AG, Lintheschergasse 21,
Post box, 8001 Zurich/Switzerland.
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<PAGE>
(5) The Berliner Effektenbeteiligungsgesellschaft AG ("BEAG") is an
investment banking affiliate of the Berliner Effektenbank AG. Such amount does
not include any shares of Common Stock held by Berliner Effektenbank AG ("BEB")
in its capacity as a bank, held in customer deposit accounts of the BEB, all of
which shares BEB disclaims beneficial ownership. Dr. Guido Sandler, a member of
the Company's Board of Directors, is a partner of BEAG and BEB but disclaims
personal beneficial ownership of any shares of Common Stock owned or held in a
fiduciary capacity by BEB. The address of BEAG and BEB is Kurfurstendamm 119,
10711 Berlin, Germany.
(6) Mr. Henry is a director of the Company. Such amount includes an option
exercisable for 2,000 shares of Common Stock granted under the Company's 1999
Equity Incentive Plan, which is fully exercisable and expires on July 30, 2004.
(7) Dr. Guido Sandler is a director of the Company. Dr. Sandler is a partner
of BEAG and BEB but disclaims personal beneficial ownership of any shares of
Common Stock owned or held in a fiduciary capacity by BEB or any of its
affiliates. See Note 5 above.
(8) Mr. Irwin is CFO and Secretary of the Company. Includes options
exercisable for 10,000 shares of Common Stock at an exercise price of $5.20 per
share that is fully exercisable and expires on April 1, 2005.
(9) Such amount includes shares owned by all officers and directors as a
group, including options exercisable for 2,000 shares held by Mr. Henry and
options exercisable for 10,000 shares held by Mr. Irwin, and excludes shares
held by BEAG and BEB, of which Dr. Guido Sandler, a director of the Company, is
a partner and disclaims beneficial ownership of any and all shares directly or
indirectly owned or held in a fiduciary capacity by BEAG or BEB.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS and CONTROL PERSONS.
The following table sets forth the names, ages and positions of all of the
Company's directors, executive officers and key personnel as of April 30, 2000.
NAME AGE POSITION
Wolfgang Spegg (1) 54 President and CEO;
Director
Dr. Guido Sandler (2) 36 Non-Executive Director
Alexander Henry (1)(2) 53 Non-Executive Director
Edward R. Irwin 39 Chief Financial Officer and
Secretary
(1) Member of the Compensation Committee
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<PAGE>
(2) Member of the Audit Committee
Key Employees:
Phil Lubman 53 Vice President, radiomoi
Tom Hall 49 Vice President, Sales and Technology
Ian McDonald 36 Vice President, Database
Development
David Farrell 49 General Manager, The Record
Christophe Roth 42 General Manager, Europe
Victor Goldman 49 Manager, Retail Sales
Geri Rockstein 46 Manager, Broadcast
Carrie Connolly 36 Manager, Industrial Sound Services
Tracey Reid 40 Manager, Corporate
Development/Investor Relations
Wolfgang Spegg has served as President, Chief Executive Officer and Director of
the Company since its inception in 1997. Mr. Spegg was born and raised in
Germany and has an extensive background in the music industry. From 1972
through 1978, Mr. Spegg held a number of general management positions at Capitol
Records Inc., Germandisk Records and PJ Records Imports Inc. He established
Bomb Records and Music Inc. in 1978 and his own record label in collaboration
with Columbia Records, Teldec, Ariola, EMI, among others. In 1984 he
established two enterprises in the telecommunications sectors, Metrotech Telex-
equipment, which evolved into PC-system design and implementation of complex
music-processing systems. Mr. Spegg completed his undergraduate university
studies in the United States and holds a Master of Business Administration from
York University, Toronto, Canada.
Dr. Guido Sandler became a member of the Board of Directors in April 1999. He
has served as a member of the Board of Management of Berliner
Effektengesellschaft AG (formerly Berliner Freiverkehr (Aktien) AG), Berliner
Effektenbank AG and Berliner Effektenbeteiligungsgesellschaft AG since January
1998. Dr. Sandler has held senior management positions in the Corporate Finance
and Corporate Clients' division of a major German private bank. Dr. Sandler
holds a doctorate from University of St. Gallen, Switzerland and a Master of
Management degree from Northwestern University, Kellogg Graduate School of
Management, Chicago, USA. Dr. Sandler is a member of the Board of Progeo
Holding AG, Berlin (Chairman of the Board), Lipro Holding AG, Berlin, Solon AG
fur Solartechnik, and Online Securities Holding, Inc.
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<PAGE>
Alexander D. Henry became a member of the Board of Directors in March 1999. He
qualified as a Chartered Accountant with Touche Ross & Co. (now, Deloitte &
Touche) in Toronto, Ontario in 1973. From 1981-1991 Mr. Henry participated as a
consultant and principal in syndication of real estate tax sheltered investment
vehicles, commercial real estate and real estate/debt mortgage investments.
From 1991-1993, Mr. Henry served as a member of LOM & Associates, the "small
cap" group at Loewen, Ondaatje, McCutcheon where he organized and managed
various tax-assisted and other specialized real estate offerings. From 1993 to
present, Mr. Henry has been a member of Hampton Equity Management, Inc.,
financing computer software developers and providing seed capital financing for
emerging companies. Mr. Henry sits on the boards of Advanced Systems
International Inc. and Jax Mold & Machine, Inc.
Edward R. (Ted) Irwin has been with the Company since November, 1999. Mr. Irwin
was born in Ontario, Canada. Prior to his present position as CFO, Mr. Irwin was
Vice President, Finance and Chief Operating Officer with TRC Fitness Inc., a
privately-owned fitness product distributor. Prior to that, he held the position
of Director, Distribution and Logistics with RJR-MacDonald Inc., between 1989
and 1999. Mr. Irwin is a Chartered Account and received his C.A. from the
Ontario Institute of Chartered Accountants in 1985, and holds a Bachelor of
Commerce with Honours from Queens University. Mr. Irwin was elected Secretary of
the Company in February, 1999.
The Board of Directors is responsible for managing the Company in accordance
with the provisions of the Amended and Restated Certificate of Incorporation and
applicable law. The number of directors which constitutes the Board of Directors
is established by the Board. In accordance with the terms of the Company's
Amended and Restated Certificate of Incorporation, the Board of Directors are
elected at the Annual Meeting of Stockholders and hold office for one year
terms, renewable annually until the due election and qualification of their
successor.
Executive officers of the Company are appointed by the Board of Directors
annually at the first meeting of the Board of Directors following the annual
meeting of stockholders and generally serve until the next annual meeting of
stockholders and their successors have been duly appointed and qualified.
Each of the directors and officers may be contacted at the principal executive
offices of the company located at 99 Atlantic Ave., Suite 100, Toronto, Ontario
M6K 3J8 Canada.
Key Employees
Phil Lubman, age 53, has served as Vice President of radiomoi since June of
1999. Mr. Lubman was born in the United Kingdom. Mr. Lubman has been involved
in the music industry since the `70's and is responsible for licensing record
companies and the programming of radiomoi's `ultimate shows'. Mr. Lubman is a
graduate of the London School of Economics.
Tom Hall, age 47, has served as General Manager of The Solutions Group Product
prior to its acquisition by the Company since June 1996. Mr. Hall was born in
Ontario, Canada. Before joining The Solutions Group, Mr. Hall was affiliated
with the Metrotech company since 1986, where he became a full-service PC-system
designer. Prior to such position, Mr. Hall held the position of Vice President
of Sales for Donald Choi Canada (one of the main importers for a
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<PAGE>
national chain of hardware stores in Canada) whose sales today exceed $30
million annually. Mr. Hall completed business and psychology courses at the
University of Waterloo and Wilfred Laurier University in Ontario, Canada.
Ian Macdonald, age 36, began his career at the Company in March of 1997. Mr.
Macdonald was born in Ontario, Canada. Mr. Macdonald was hired as a computer
service technician with Metrotech (an ancestor of TSG). He began working part-
time with the Company in April of that year and became a full-time employee by
the end of May. His initial responsibilities were as a database administrator
and manager, developing the initial production team and workplace methods.
Later he began writing code for the administrative `back end' to improve input
error-checking, work flow and reporting. Since that time, he has taken on an
increased responsibility for the database `back end', as well as the publicly
accessable site. Mr. Macdonald holds a Masters degree in Library Sciences, as
well as an Honours BA in Arts and Science (Political Theory).
David Farrell, age 49, has served as Editor of The Record prior to its
acquisition by the Company in April of this year. Mr. Farrell was born in the
United Kingdom and emigrated to Canada in 1975. From 1971 to 1981 Mr. Farrell
was the Canadian correspondent for CashBox magazine, and for four held the
position of Canadian Bureau Chief for Billboard magazine. Mr. Farrell also
wrote regular items for a variety of music trade-related publications such as
Performance, and Amusement Business.
Christophe Roth, age 42, has served as General Manager, Europe since January
2000. Mr. Roth was born in Switzerland. Mr. Roth has been involved in and
around the music industry since 1987 when he held the position of Marketing and
Label Manager for Warner Music Int'l in Zurich, Switzerland. In 1997 he moved to
BMG Ariola as the Deputy Director, Sales. Mr. Roth then moved to Polygram in
1998. Mr. Roth is now responsible for creating a sales force for Europe. Mr.
Roth holds a BA, Type E from the "Institute Dr. Pfister" at Oberaegeri, and a
law degree from the University of Bern.
Victor Goldman, age 49, has served as Manager, Web Bar Listening Post since
January 1999. Mr. Goldman was born in Nova Scotia, Canada. Prior to his
current position, Mr. Goldman held the position of Operations Manager for a
chain of retail record stores in Canada from 1981 to 1998. In 1998 he became
Vice President of Retails Sales and National Coordinator for Music World, a
retail record chain. Mr. Goldman brings a wealth of music industry experience
to the Company.
Geri Rockstein, age 46, has served as Manager, Broadcast since January 1999.
Ms. Rockstein was born in Quebec, Canada, and is a graduate of McGill
University. Ms. Rockstein has held numerous sales and marketing positions, and
ran her own import/export business for 13 years.
Tracey Reid, age 40, has served as Manager, Corporate Development/Investor
Relations since February of 1999. Ms. Reid was born in Ontario, Canada.
Previous positions held were Assistant to the Chairman, Polygram/Universal
Canada, Operations Manager for Yanagi Canada, a major retailer, and Marketing
Coordinator for DelWilber + Associates, a Sport Marketing firm from the US.
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<PAGE>
Board Committees
The Board of Directors has established an audit committee and a compensation
committee. The audit committee consists of Dr. Guido Sandler and Alexander
Henry. The audit committee makes recommendations to the Board of Directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by the Company's independent auditors
and reviews and evaluates the Company's audit and control functions.
The compensation committee consists of Alexander Henry and Wolfgang Spegg. The
compensation committee makes recommendations regarding the Company's equity
compensation plans and makes decisions concerning salaries and incentive
compensation for the Company's employees and consultants. Mr. Spegg's salary,
bonuses and 1999 Equity Incentive Plan grants are determined by the Board of
Directors as a whole and Mr. Spegg does participate in the deliberations and
determinations related to such subject matter.
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth summary information concerning compensation
awarded to, earned by, or accrued for services by the Company's Chief Executive
Officer for services rendered to the Company in all capacities during the fiscal
years ended January 31, 1999 and January 31, 2000. Except as set forth below,
no profit-sharing, allowances, insurance payments, commissions or other
remuneration paid or benefits in kind were made to Company executives during the
fiscal years ended January 31, 1999 and January 31, 2000. No other executive
officer of the Company earned more than $100,000 during such fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Compensation Awards
------------------------ -------------------
Fiscal Other Securities
Year Annual Underlying All other
Name and ended Compen- Restricted Options /SAR's Compen-
Principal Position Jan. 31 Salary Bonus sation (#) sation
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Wolfgang Spegg, President, Chief 1999 $21,094 - - - 80,000 -
Executive Officer and director (1) 2000 $70,451 - - - - -
</TABLE>
(1) The Company has entered into an employment agreement with Mr. Spegg
effective August 1, 1999 with an annual salary of $100,000. See Item 6
"Executive Compensation-Employment and Consulting Contracts."
No loans have been made by the Company to any executive officer, nor have any
guarantees or other assurances been given by the Company for the benefit of such
persons.
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<PAGE>
Option Grants in Fiscal Year ended January 31, 2000
The following chart summarizes the stock options granted during fiscal year
ended January 31, 2000, to the Company's Chief Executive Officer.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term (1)
------------------------------------------------ -------------------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise
Options in Fiscal or Base Expiration
Name Granted Year Price Date 5% 10%
---- ------- ---- ----- ---- - --
<S> <C> <C> <C> <C> <C> <C>
Wolfgang Spegg......................... 0 0% - - - -
</TABLE>
(1) These columns show the hypothetical gains or "option spreads" of the
outstanding options granted based on assumed annual compound stock appreciation
rates of 5% and 10% over the options' terms. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the Commission and do not represent
the Company's estimate or projections of future prices of the Company's Common
Stock.
Aggregated Option Exercises in Fiscal Year-End January 31, 2000
and Fiscal Year-End 2000 Option Values
The following table sets forth certain information regarding exercised options
and the number of shares of Common Stock covered by both exercisable and
unexercisable options on Common Stock held by the Company's Chief Executive
Officer as of January 31, 2000. These options were granted at exercise price of
$.75 Canadian dollars per share. The options have a one-year term, subject to
earlier termination in the event of the optionee's termination of employment.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options at Options at
Fiscal Year-End Fiscal Year-End
--------------------------- ----------------------------
Shares
------
Acquired on Value
----------- -----
Name Exercise (#) Realized ($) (1) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Wolfgang Spegg................. 80,000 $636,000 - - - -
</TABLE>
_________
(1) Value realized is based on the market value of the Company's Common Stock
on the date of exercise, minus the exercise price, and does not necessarily
indicate that the optionee sold such stock.
The Company does not have a long-term incentive plan or a defined benefit or
actuarial plan.
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<PAGE>
1999 Equity Incentive Plan
On August 16, 1999, the Company's stockholders adopted the Company's 1999 Equity
Incentive Plan reserving a total of 440,000 shares of Common Stock for issuance
thereunder. As of April 30, 2000, options exercisable for 253,000 shares of
Common Stock have been granted under the Company's 1999 Equity Incentive Plan
and 187,000 shares of Common Stock remain reserved and available for issuance
thereunder.
The 1999 Equity Incentive Plan permits the grant of options to the Company's
directors, officers, key employees and consultants and certain of the Company's
advisors. Options may be either incentive stock options within the meaning of
Section 422 of the Internal Revenue Code to employees or nonqualified stock
options. In addition, the 1999 Equity Incentive Plan permits the grant of stock
bonuses and rights to purchase restricted stock. No person may be granted
options covering more than 100,000 shares of Common Stock in any calendar year.
The 1999 Equity Incentive Plan is administered by the Board of Directors. Under
the 1999 Equity Incentive Plan, the Board of Directors may also delegate the
authority to administer the 1999 Equity Incentive Plan to a duly authorized
committee composed of members of the Board of Directors (the "Plan Committee").
Subject to the limitations set forth in the 1999 Equity Incentive Plan, the Plan
Committee has the authority to select the eligible persons to whom award grants
are to be made, to designate the number of shares to be covered by each award,
to determine whether an option is to be an incentive stock option or a
nonqualified stock option, to establish vesting schedules, to specify the
exercise price of options and the type of consideration to be paid upon exercise
and, subject to certain restrictions, to specify other terms of awards. The
maximum term of options granted under the 1999 Equity Incentive Plan is ten
years. Incentive stock options granted under the 1999 Equity Incentive Plan
generally are non-transferable. Nonqualified stock options generally are
nontransferable, although the applicable option agreement may permit certain
transfers. Options generally expire three months after the termination of an
option holder's service. However, if an option holder is permanently disabled or
dies during his or her service, such person's options generally may be exercised
up to 12 months following disability or 18 months following death.
The exercise price of options granted under the 1999 Equity Incentive Plan is
determined by the Board of Directors, or duly appointed committee in accordance
with the guidelines set forth in the 1999 Equity Incentive Plan. The exercise
price of an incentive stock option cannot be less than 100% of the fair market
value of the Common Stock on the date of the grant. The exercise price of a
nonqualified stock option cannot be less than 85% of the fair market value of
the Common Stock on the date of grant.
Options granted under the 1999 Equity Incentive Plan vest at the rate determined
by the Plan Committee and specified in the option agreement. The terms of any
stock bonuses or restricted stock purchase awards granted under the 1999 Equity
Incentive Plan will be determined by the Plan Committee. The purchase price of
restricted stock under any restricted stock purchase agreement will not be less
than 85% of the fair market value of the Company's Common Stock on the date of
grant. Stock bonuses and restricted stock purchase agreements awarded under the
1999 Equity Incentive Plan are generally nontransferable, although the
applicable award agreement may permit certain transfers.
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<PAGE>
Upon certain changes in control in the Company's ownership the vesting and
exercisability of outstanding awards will accelerate simultaneously with a
change in control.
The Board of Directors may amend or terminate the 1999 Equity Incentive Plan at
any time. Amendments will generally be submitted for stockholder approval only
to the extent required by applicable law.
Director Compensation
The Company's directors do not currently receive any cash compensation for
services on the Board of Directors or any committee thereof for service rendered
to the Company in their respective capacity as director. Mr. Spegg receives
compensation in his capacity as an officer of the Company. See Item 6
"Executive Compensation-Employment and Consulting Contracts" below. Directors
may be reimbursed for certain expenses in connection with attendance at Board of
Directors and committee meetings. All directors are eligible to participate in
the Company's 1999 Equity Incentive Plan. There were no salaries, profit-
sharing, allowances, insurance payments, commissions or other remuneration paid
or benefits in kind granted by the Company to Non-Executive Directors during the
fiscal year ended January 31, 2000. As of April 30, 2000, all directors and
officers as a group beneficially held an aggregate of 848,162 shares of Common
Stock, constituted of 836,162 shares of Common Stock, and options exercisable
for an aggregate of 12,000 shares of Common Stock. Such holdings represented
approximately 10.8% of issued and outstanding stock of the Company as of such
date. On July 30, 1999, Mr. Henry received an option exercisable for 2,000
shares of the Company's Common Stock granted under the Company's 1999 Equity
Incentive Plan, at an exercise price of $2.50 per share. The option is fully
exercisable and expires on July 30, 2004. See Item 4 "Security Ownership of
Certain Beneficial Owners and Management."
Employment and Consulting Contracts
As of August 1, 1999, the Company entered into an Employment Agreement with
Wolfgang Spegg, President, Chief Executive Officer and a director of the
Company. The agreement has a five-year term, renewable annually thereafter, and
provides for an annual base salary of $100,000 and eligibility for an annual
performance bonus of up to $100,000. In addition, Mr. Spegg is eligible for
participation in our 1999 Equity Incentive Plan and he is also eligible to
receive supplemental bonuses at the discretion of the Board of Directors.
Compensation Committee Interlocks and Insider Participation
The compensation committee of the Company's Board of Directors was established
on June 2, 1999 and during the last completed fiscal year was comprised of
Wolfgang Spegg, Dr. Alexander Paulus and Alexander Henry. Mr. Spegg was and
still is an officer of the Company. Dr. Paulus was an officer of the Company
during the last completed fiscal year. Prior to that date, the Company did not
have a compensation committee. Mr. Spegg, the Company's Chief Executive
Officer, made all decisions concerning executive compensation from inception
until the establishment of the compensation committee.
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<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following is a description of transactions since the Company's inception in
May 1997 to which the Company has been a party and in which any director,
executive officer or holder of more than 5% of the Company's capital stock had
or will have a direct or indirect material interest, other than the Company's
compensation arrangements with the Company's chief executive officer which is
described under Item 6 "Executive Compensation-Employment and Consulting
Contracts." The term "common shares" refers to common equity of the Company
under its Ontario (Canada) charter prior to the transfer of the Company's
corporate domicile to the State of Delaware and conversion of equity interests
of the Company to Common Stock on a 1-for-1 basis. All transactions disclosed
below were duly authorized by the then-serving Board of Directors.
At inception of the Company in 1997, Wolfgang Spegg, President, CEO and a
director of the Company, and Sean Wenzel, a founder of the Company, transferred
computer equipment in exchange for 180,000 common shares in the Company. The
equipment was transferred at a value of $27,589, which was the approximate cost
of such equipment to the transferees. In February 1998, Mr. Spegg transferred
his collection of recorded music to the Company in partial consideration for
397,800 common shares of the Company. The music collection had been appraised
at a market value of $127,279 as of February 18, 1998. The contribution of such
collection to the Company was made at a value of $61,423 by Mr. Spegg. On March
15, 1998, Mr. Spegg transferred his interest in The Solutions Group, a computer
consulting business, to the Company in exchange for 120,000 common shares valued
at nil.
On June 30, 1998, the Company entered into a demand loan agreement with an
affiliate of Temple Trust Company Limited ("Temple") which included provisions
for issuance of 333,334 common shares to such affiliate at $.10 Canadian dollars
per share (the "Temple Loan"). On May 18, 1999, the Company converted and
terminated the Temple Loan by issuing 666,666 shares of Common Stock to Temple
(taking into account the 2-for-1 stock split on April 30, 1999), thereby
releasing any and all obligations of the Company under the Temple Loan.
On February 5, 1999, the Company entered into a Mutual Global Agreement with the
Berliner Effektenbank AG regarding its undertaking of the Company's initial
public offering of Common Stock ("IPO"). As part of a bridge financing to
provide operating capital to the Company prior to the Company's IPO, the Company
sold 400,000 shares of Common Stock to the investment banking affiliate of
Berliner Effektenbank AG, the Berliner Effektenbeteiligungsgesellschaft AG, at a
purchase price of $2.50 per share and granted an option exercisable for 100,000
shares of Common Stock at an exercise price of $.75 Canadian Dollars per share.
Dr. Guido Sandler, a partner of each of Berliner Effektenbank AG and The
Berliner Effektenbeteiligungsgesellschaft AG, was elected to the Company's board
of directors on April 30, 1999.
On March 18, 1998, the Company entered into a consulting arrangement with
Claudio Faoro, a former Vice President and director of the company. The
consulting arrangement was entered into through a Cooperation Agreement with
LicensePro Inc., a Swiss corporation headed by Claudio Faoro (the "Consulting
Agreement"). Pursuant to the Consulting Agreement, LicensePro Inc. agreed to
provide consulting services related to marketing, promotion, and sales of
Company products and services. The Consulting Agreement has a term of six
months, renewable automatically unless notice is provided otherwise 60 days
prior to a renewal date. The Consulting Agreement provides for payment of fees
to LicensePro at commercially reasonable consulting rates. In connection with
the Consulting Agreement, the Company granted Mr. Faoro options to purchase
200,000 shares of Common Stock at a purchase price of $.75 Canadian Dollars per
share. Such option was fully exercised by Mr. Faoro on May 4, 1999. The
Company reimbursed Mr. Faoro for reasonable expenses incurred in connection with
consulting services rendered to the Company by LicensePro.
In September 1998 the Company entered into an agreement with Dr. Alexander
Paulus, a former Treasurer and director of the Company, for management
consulting services in conjunction with the organization and establishment of
baseline Company data for submission of an application to the Berliner
Effektenbank AG with respect to their consideration of the Company as a
candidate for an initial public offering of Common Stock. In consideration for
such services, the Company granted to Dr. Paulus stock options exercisable for
100,000 shares of Common Stock at an exercise price of $.75 Canadian Dollars per
share. In addition to the foregoing, one-time consulting fees of $10,725 were
paid to Dr. Paulus for supplemental consulting services in conjunction with the
Company's preparations for the initial public offering of its Common Stock.
As of November 29, 1999, the Company entered into an Employment Agreement with
Edward R. Irwin, Chief Financial Officer and Secretary of the Company. The
agreement has a one-year term, renewable annually thereafter, and provides for
an annual base salary of $120,000 and eligibility for an annual performance
bonus of up to $60,000. In addition, Mr. Irwin is eligible
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<PAGE>
for participation in the Company's 1999 Equity Incentive Plan and he is also
eligible to receive supplemental bonuses at the discretion of the Board of
Directors.
ITEM 8. LEGAL PROCEEDINGS
Sightsound.com, Inc. has asserted that many online music providers violate
patent rights that it allegedly owns covering the sale of music over the
Internet through digital downloads. To the Company's knowledge, Sightsound.com,
Inc. has not been successful in asserting such claims; however, if successful,
these claims, or similar claims by others, could harm the Company's business by
forcing the Company to cease using certain intellectual property. The Company
is not presently, and have not been since inception, involved in any material
legal proceedings nor is the Company aware of any threatened material legal
proceedings. See Item 1 "Description of Business-Risk Factors."
ITEM 9 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER STOCKHOLDER MATTERS.
There is currently no public market for the Company's Common Stock in the United
States. The Company's Common Stock is currently trading on the Neuer Markt of
the Frankfurt Stock Exchange under the symbol MU5, and began trading on October
1, 1999. The following table sets forth the range of the high and low closing
sales prices in Euros for the Company's Common Stock for the last three fiscal
quarters since it began trading on October 1, 1999. The information is obtained
from Bloomberg.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1999:
Third Quarter........................... 9.00 8.25
Fourth Quarter.......................... 10.00 6.15
2000:
First Quarter........................... 11.80 6.15
</TABLE>
As of April 30, 2000, the Company has outstanding options which are exercisable
for the purchase of an aggregate of 112,000 shares of Common Stock, including
253,000 share options issued under the 1999 Equity Incentive Plan of which
187,000 shares of Common Stock remain reserved and available for issuance.
As of April 30, 2000, there are approximately 150 or more holders of record and
the Company estimates it has approximately 500 or more beneficial owners of
Common Stock who hold such Common Stock through institutional nominees admitted
to trading to the Neuer Markt of the Frankfurt Stock Exchange.
The Company has never declared or paid any cash dividends on the Company's
capital stock. The Company currently intends to retain any future earnings to
finance the growth and development of the Company's business and therefore does
not anticipate paying any cash
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<PAGE>
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, results of operations, capital
requirements, general business condition and other factors that the Board of
Directors may deem relevant. Any dividends declared by the Company would be paid
in U.S. Dollars.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The Common Stock amounts and per-share exercise prices in the descriptions below
reflect the two for one stock split of the Company's Common Stock which took
place on April 30, 1999. The recipients of the securities represented their
intention to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. All recipients had adequate access,
through employment or other relationships, to information about the Company.
Prior to May 4, 1999, the Company issued securities in a series of transactions,
but was incorporated under the Ontario Business Corporation Act (Canada).
On May 18, 1999, the Company issued 666,666 shares of Common Stock under a
demand loan agreement to an affiliate of Temple Trust Company Limited for the
conversion of debt valued at $269,070. These shares were issued in reliance on
the exemption from the registration requirements under the Securities Act
provided by Section 4(2) under the Securities Act and Regulation S promulgated
thereunder.
In June 1999, the Company issued and sold 177,043 shares of Common Stock for an
aggregate purchase price of $424,000 to Non-U.S. persons as such term is defined
under Regulation S of the Securities Act. These shares were issued in reliance
on the exemption from the registration requirements under the Securities Act
provided by Section 4(2) of the Securities Act and Regulation S promulgated
thereunder.
In July 1999, the Company issued and sold 400,000 shares of Common Stock to
Berliner Effektenbeteiligungsgesellschaft AG as part of a bridge financing to
provide operating capital to the Company prior to its IPO for an aggregate
purchase price of $1,000,000. These shares were issued in reliance on the
exemption from the registration requirements under the Securities Act provided
by Section 4(2) of the Securities Act and Regulation S promulgated thereunder.
In September 1999, the Company issued and sold 1,500,000 shares of Common Stock
for an aggregate purchase price of $14,319,268 to Non-U.S. persons as such term
is defined under Regulation S of the Securities Act. These shares were issued
in reliance on the exemption from the registration requirements under the
Securities Act and Regulation S promulgated thereunder.
As of April 30, 2000, the Company has issued and sold 631,000 shares of Common
Stock for per-share weighted average exercise price of $.59 to employees and
consultants pursuant to their exercise of non-qualified stock options. These
shares were issued in reliance on the exemption from the
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<PAGE>
registration requirements under the Securities Act provided by Regulation S
under the Securities Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES.
GENERAL.
The following sets forth information regarding the securities of the Company as
provided in the Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and the Company's Amended and Restated Bylaws (the "Bylaws"). The
authorized capital stock of the Company consists of 30,000,000 shares of Common
Stock, par value $.0001, and 1,000,000 shares of Preferred Stock, par value
$.0001.
Common Stock
As of April 30, 2000, there were 7,813,705 shares of Common Stock issued and
outstanding. On April 30, 1999, the Company effected a stock split on a 2-for-1
basis. As of April 30, 2000, there are options exercisable for the purchase of
an aggregate of 112,000 shares of Common Stock. The stockholders of the Company
authorized up to 440,000 shares of Common Stock which may be issued in
connection with options and/or other instruments granted under the 1999 Equity
Incentive Plan. As of April 30, 2000, options exercisable for 253,000 shares of
Common Stock have been granted under the 1999 Equity Incentive Plan and 187,000
shares of Common Stock remain reserved and available for issuance thereunder.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and no cumulative voting rights are
provided for in the Certificate. Accordingly, holders of a majority of the
shares entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor, subject to any preferential
dividend rights of any outstanding Preferred Stock. Upon the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive ratably the net assets of the Company available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding Preferred Stock. Holders of the Common Stock have no pre-
emptive, subscription, redemption or conversion rights. The outstanding shares
of Common Stock are fully paid and non-assessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any Preferred Stock which
the Company may designate and issue in the future without further stockholder
approval.
Preferred Stock
The Board of Directors is authorized, without stockholder approval, to issue
from time to time up to an aggregate of 1,000,000 shares of Preferred Stock in
one or more series and to determine and fix such voting powers, full or limited,
or no voting powers, and such designations, preferences and relative
participating, optional or other special rights and qualifications, limitations
or restrictions thereof, including, without limitation thereof, dividend rights,
70
<PAGE>
conversion rights, redemption privileges and liquidation preferences as shall be
stated and expressed in such resolutions, as permitted by law. The Company has
no present plans to issue any shares of Preferred Stock. See Item 11
"Description of Registrant's Securities-Anti-Takeover Effects of Certain
Provisions of Delaware Law and the Company's Amended and Restated Certificate of
Incorporation and Bylaws."
Share Certificates
Stockholders are entitled to certificates, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by the stockholder in the Company. Each such certificate shall be signed
by, or in the name of the Company by, the Chairman or Vice Chairman, if any, of
the Board of Directors, or the President or a Vice President, and the Treasurer
or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Company. The Board of Directors may provide by resolution or resolutions that
some, or all, of any or all classes or series of the Company's stock shall be
uncertificated shares.
Transfers of Shares of Common Stock
Except as otherwise established by rules and regulations adopted by the Board of
Directors, and subject to applicable law, shares of Common Stock may be
transferred on the books of the Company by the surrender to the Company or to
such transfer agent appointed by the Company for such purpose, of the
certificate representing such shares properly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer. If the shares
transferred are uncertificated, the Company shall record the transaction upon
its records when presented with the instructions signed by the transferor or its
agent.
Registration Rights
There are presently no registration rights relating to any shares of Common
Stock or any shares of Preferred Stock.
Anti-Takeover Effects of Certain Provisions of Delaware Law and the Company's
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws
The Company is subject to the provisions of Section 203 of the Delaware Law.
Subject to certain exceptions, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained such status with the approval of the board of directors or
unless the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's outstanding voting stock. This statute could prohibit or delay
the accomplishment of mergers or other takeover or change in control attempts
with respect to the Company and, accordingly, may discourage attempts to acquire
the Company.
71
<PAGE>
In addition, certain provisions of the Certificate and Bylaws, which are
summarized in the following paragraphs, may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares of Common Stock
held by stockholders.
Stockholder Meetings
All meetings of stockholders shall be held at such place within or without the
State of Delaware as shall be designated from time to time by the Board of
Directors. The annual meeting of stockholders for the election of directors and
for the transaction of such other business as may properly be brought before the
meeting shall be held on a date at the time and place to be fixed by the Board
of Directors and stated in the notice of the meeting. If no annual meeting is
held in accordance with the foregoing provisions, the Board of Directors shall
cause the meeting to be held as soon thereafter as convenient. The Bylaws
provide that stockholders may take action by written consent in lieu of a
meeting.
Special meetings of stockholders may be called at any time by the Chairman of
the Board of Directors or the Board of Directors. Business transacted at any
special meeting of stockholders shall be limited to matters relating to the
purpose or purposes stated in the notice of meeting.
Except as otherwise provided by law, written notice of each meeting of
stockholders, whether annual or special, shall be given not less than 10 nor
more than 60 days before the date of the meeting to each stockholder entitled to
vote at such meeting. The notices of all meetings shall state the place, date
and hour of the meeting. The notice of a special meeting shall state, in
addition, the purpose or purposes for which the meeting is called.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating to such purpose.
Authorized but unissued shares are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares could render more difficult or discourage an
attempt to obtain control of the stockholders by means of a proxy contest,
tender offer, merger or otherwise.
The Delaware Law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation, unless a corporation's certificate of
incorporation requires a greater percentage. The Certificate
72
<PAGE>
does not provide for a greater percentage and specifies that provisions
contained in it may be amended or repealed as provided by the Delaware Law.
The Delaware Law provides that bylaws may be amended or repealed by action of
the stockholders entitled to vote thereon or if the certificate of incorporation
so provides, by action of the board of directors. The Certificate provides that
the Board of Directors is expressly authorized to adopt, amend, or repeal
Bylaws.
Transfer Agent
The Company's registrar and transfer agent is American Stock Transfer and Trust
Company located in New York, New York.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware Law, the Company has broad powers to indemnify
its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act.
The Company's Amended and Restated Bylaws provide that the Company shall
indemnify the Company's directors and officers and may indemnify the Company's
other employees and agents to the fullest extent permitted by Delaware law,
except with respect to certain proceedings initiated by such persons. The
Company is also empowered under the Company's Amended and Restated Bylaws to
enter into indemnification contracts with its directors and officers and to
purchase insurance on behalf of any person the Company is required or permitted
to indemnify.
In addition, the Company's Amended and Restated Certificate of Incorporation
provides that the Company's directors will not be personally liable to the
Company or the Company's stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability (a) for any breach of the
director's duty of loyalty to the Company or the Company's stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, or (c) for any transaction from which the director
derives an improper personal benefit. The Amended and Restated Certificate of
Incorporation also provides that if the Delaware Law is amended after the
approval by the Company's stockholders to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of the Company's directors shall be eliminated or limited to the fullest extent
permitted by the Delaware Law, as so amended. The provision does not affect a
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws.
Pursuant to Section 145 of the Delaware Law, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Company believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate the directors' duty
73
<PAGE>
of care, and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware Law. In addition, each director will continue to be subject to
liability as provided in the Amended and Restated Certificate of Incorporation.
The provision also does not affect a director's responsibilities under any other
law, such as the federal securities law or state or federal environmental laws.
The Company has entered into indemnity agreements with each of the Company's
directors and officers that requires the Company to indemnify such persons
against expenses, judgments, fines, settlements and other amounts incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or an officer of the
Company or any of its affiliated enterprises, provided that such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful. The
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
At present, there is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought nor are we
aware of any threatened litigation that may result in claims for indemnification
by any officer or director.
The Company has an insurance policy covering the officers and directors of the
Company with respect to certain liabilities, including liabilities arising under
the Securities Act or otherwise.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are included herein, commencing on page
F-1 hereof.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
74
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Auditors' Report to the Shareholders F-1
Balance Sheet as at January 31, 2000, with comparative figures for 1999........ F-2
Statement of Operations for the Year
Ended January 31, 2000, with comparative figures for 1999.................... F-3
Statement of Shareholders' Equity and Comprehensive Loss for the year
Ended January 31, 2000, with comparative figures for 1999.................... F-4
Statement of Cash Flows for the Year
Ended January 31, 2000, with comparative figures for 1999.................... F-5
Notes to Financial Statements.................................................. F-6
</TABLE>
75
<PAGE>
(b) The exhibits filed as part of this registration statement are listed below
and are attached to this registration statement as indicated.
Exhibit No.
-----------
3.1 Amended and Restated Certificate of Incorporation (Delaware)
3.2 Amended and Restated Bylaws (Delaware)
10.1 Webcasting Performance License Agreement between Recording
Industry Association of America, Inc. and musicmusicmusic dated
April 26, 1999.
10.2 Franchise Agreement between musicmusicmusic inc. and IDARA dated
January 26, 2000.
10.3 1999 Equity Incentive Plan
10.4 Employment Agreement between musicmusicmusic inc. and Wolfgang
Spegg dated August 1, 1999.
10.5 Employment Agreement between musicmusicmusic inc. and Edward R.
Irwin dated November 29, 1999.
10.6 Indemnification Agreement between musicmusicmusic inc. and
Company officers and directors.
21 Subsidiaries of the Registrant
27 Financial Data Schedule
76
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
musicmusicmusic inc.
Date: May 30, 2000 By: /s/ Wolfgang Spegg
-------------------------------------
Wolfgang Spegg
President, Chief Executive Officer
and Director
77
<PAGE>
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the balance sheet of musicmusicmusic inc. as at January 31, 2000
and the statements of operations, shareholders' equity and comprehensive loss
and cash flows for the year then ended. 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 Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at January 31, 2000 and the
results of its operations and its cash flows for the year then ended in
accordance with United States generally accepted accounting principles.
The financial statements as at January 31, 1999 and for the year then ended,
prior to the adjustment for the restatement of prior year financial statements
as described in note 14, were audited by other auditors who expressed an opinion
without reservation on those statements in their report dated March 30, 1999
(except for notes 16(b) and 17 for which the date is August 9, 1999). We have
audited the adjustments to the January 31, 1999 financial statements described
in note 14 and in our opinion, such adjustments, in all material respects, are
appropriate and have been properly applied.
KPMG LLP
Chartered Accountants
Toronto, Canada
March 3, 2000
F-1
<PAGE>
musicmusicmusic inc.
Balance Sheet
(Stated in US dollars)
January 31, 2000, with comparative figures for 1999
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------
(Restated
note 14)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 11,427,720 $ 212,364
Accounts receivable, less allowance for doubtful
accounts - $2,290; 1999 - $5,603 240,508 178,872
Sales taxes recoverable 90,591 24,461
Inventory 118,231 61,737
Prepaid expenses and other assets 37,940 74,143
----------------------------------------------------------------------------------------------
11,914,990 551,577
Fixed assets (note 2) 608,642 55,689
Intellectual property (note 3) 886,225 348,118
Deposit (note 15) 15,385 -
---------------------------------------------------------------------------------------------------
$ 13,425,242 $ 955,384
===================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 257,684 $ 103,202
Accrued liabilities (note 4) 211,546 59,792
Demand loan (note 5) - 264,725
Mortgage payable (note 6) 77,338 -
----------------------------------------------------------------------------------------------
546,568 427,719
Shareholders' equity:
Capital stock (note 8) 781 346
Additional paid-up capital 16,604,982 1,016,055
Deficit (3,987,550) (454,185)
Accumulated other comprehensive income (loss) 260,461 (34,551)
----------------------------------------------------------------------------------------------
12,878,674 527,665
Commitments (note 13)
Subsequent events (note 15)
---------------------------------------------------------------------------------------------------
$ 13,425,242 $ 955,384
===================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
musicmusicmusic inc.
Statement of Operations
(Stated in US dollars)
Year ended January 31, 2000, with comparative figures for 1999
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------
(Restated
note 14)
<S> <C> <C>
Revenue $ 959,341 $ 1,373,802
Cost of sales 810,598 1,093,563
------------------------------------------------------------------------------
Gross profit 148,743 280,239
Operating expenses:
Salaries, wages and subcontractors 1,019,507 247,905
General and administrative 984,893 235,926
Foreign exchange loss 764,324 -
Advertising and promotion 750,471 51,888
Amortization 245,865 84,400
-------------------------------------------------------------------------
3,765,060 620,119
------------------------------------------------------------------------------
Loss before interest income (3,616,317) (339,880)
Interest income 165,597 -
------------------------------------------------------------------------------
Loss for the year $ (3,450,720) $ (339,880)
==============================================================================
Basic loss per share (note 9) $ (0.60) $ (0.11)
==============================================================================
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
musicmusicmusic inc.
Statement of Shareholders' Equity and Comprehensive Loss
(Stated in US dollars)
Year ended January 31, 2000, with comparative figures for 1999
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Accumulated
Additional other Total
Capital paid-up comprehensive shareholders'
stock capital Deficit income (loss) equity
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 31, 1998,
as originally stated $ 252 $ 621,401 $ (120,890) $ (19,643) $ 481,120
Restatement of accounting for certain
transactions with the founding shareholder
(note 12) - (65,856) 6,585 2,326 (56,945)
----------------------------------------------------------------------------------------------------------------------
Balances as restated 252 555,545 (114,305) (17,317) 424,175
Issuance of common shares in connection with:
580,798 shares through private placements,
net of $50,335 share issue costs 58 420,278 - - 420,336
240,000 shares in exchange for certain
assets 24 (24) - - -
120,000 shares in exchange for services
rendered 12 40,256 - - 40,268
Comprehensive loss:
Loss for the year - - (339,880) - (339,880)
Foreign currency translation adjustment - - - (17,234) (17,234)
------------
Total comprehensive loss (357,114)
----------------------------------------------------------------------------------------------------------------------
Balances at January 31, 1999 346 1,016,055 (454,185) (34,551) 527,665
Issuance of common shares in connection with:
1,767,241 shares through private
placements, net of $351,195 share issue
costs 176 2,543,001 - - 2,543,177
1,500,000 shares through restricted
securities offering, net of $2,117,745
share issue costs 150 12,469,373 - - 12,469,523
631,000 shares on exercise of stock options 63 369,792 - - 369,855
666,666 shares on conversion of demand loan 67 269,003 - - 269,070
212,000 shares purchased for cancellation (21) (62,242) (82,645) - (144,908)
Comprehensive loss:
Loss for the year - - (3,450,720) - (3,450,720)
Foreign currency translation adjustment - - - 295,012 295,012
------------
Total comprehensive loss (3,155,708)
----------------------------------------------------------------------------------------------------------------------
Balances at January 31, 2000 $ 781 $ 16,604,982 $ (3,987,550) $ 260,461 $ 12,878,674
======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
musicmusicmusic inc.
Statement of Cash Flows
(Stated in US dollars)
Year ended January 31, 2000, with comparative figures for 1999
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by (used in):
Operations:
Loss for the year $ (3,450,720) $ (339,880)
Items not involving cash:
Amortization of fixed assets 94,808 22,985
Amortization of intellectual property 151,057 61,415
Unrealized foreign exchange loss (gain) 752,434 (15,149)
Change in non-cash operating working capital:
Accounts receivable (52,308) (181,393)
Subscriptions receivable - 79,262
Sales taxes recoverable (63,521) (24,806)
Inventory (52,460) (54,315)
Prepaid expenses and other assets 38,644 (54,349)
Accounts payable 146,352 87,383
Accrued liabilities 145,605 60,634
---------------------------------------------------------------------------------------------------------
(2,290,109) (358,213)
Financing:
Increase in demand loan - 268,456
Increase in mortgage payable 77,338 -
Proceeds from issuance of common shares 15,382,555 460,604
Purchase for cancellation of common shares (144,908) -
---------------------------------------------------------------------------------------------------------
15,314,985 729,060
Investments:
Additions to fixed assets (632,519) (7,668)
Additions to intellectual property (661,341) (237,502)
Increase in deposit (15,385) -
---------------------------------------------------------------------------------------------------------
(1,309,245) (245,170)
Effect of foreign exchange on cash balances held in
foreign currency (500,275) 10,395
--------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 11,215,356 136,072
Cash and cash equivalents, beginning of year 212,364 76,292
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 11,427,720 $ 212,364
==============================================================================================================
Supplemental cash flow information:
Cash paid for interest $ - $ -
Cash paid for income taxes - -
==============================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
1. Significant accounting policies:
(a) Description of business:
musicmusicmusic inc. (the "Company") is an Internet music company
incorporated in Delaware, US with its production office located in
Toronto, Canada. The Company provides streaming music products over
the Internet and related services. During 2000 and 1999, virtually
all of the Company's revenue was generated from the sale of hardware
and related support services to third parties. Other revenue was
generated from banner advertising on its interactive entertainment
webcasting site.
The Company is investing to expand its music database and enhance
its future revenue generating opportunities in the areas of in-store
listening systems, turn-key solutions for the music database needs
of radio stations and broadcast groups and providing custom music
programs to businesses over the Internet.
(b) Cash equivalents:
The Company considers all highly liquid debt instruments with
original maturities of three months or less at the date of
acquisition to be cash equivalents.
(c) Inventory:
Inventory consists of computer equipment and parts and is stated at
the lower of cost and net realizable value. Cost is determined using
the first-in, first-out method.
(d) Fixed assets:
Fixed assets are stated at cost. Amortization is provided over the
estimated useful lives of the assets using the following bases and
annual rates:
-------------------------------------------------------------
Asset Basis Rate
-------------------------------------------------------------
Computer equipment Declining balance 30%
Furniture Declining balance 20%
Condominium Straight line 4%
F-6
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(e) Intellectual property:
Intellectual property represents direct wages, subcontractors' fees
and other direct costs incurred in relation to the development of
the Internet website music database. Intellectual property is being
amortized on a straight-line basis over 5 years.
(f) Revenue recognition:
Revenue related to hardware sales is recognized when the goods are
delivered. Revenue related to service contracts and banner
advertising is recognized as earned.
(g) Foreign currency translation:
The Canadian dollar is considered to be the functional currency of
the Company's operations as most activities are conducted in
Canadian dollars. Monetary assets and liabilities denominated in
foreign currency are translated at the rate in effect on the balance
sheet date. Revenue and expenses denominated in foreign currency are
translated at the rate in effect on the transaction date.
The reporting currency is the US dollar. The Canadian dollar
financial statements are translated into the reporting currency at
the year end rate of exchange for the balance sheet and the average
rate of exchange for the year for the statement of operations.
Exchange gains or losses on conversion into the reporting currency
are included as a separate component of shareholders' equity and
comprehensive loss.
(h) Income taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. Deferred tax assets are recognized to the
extent that recovery is more likely than not. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
income in the year that includes the enactment date.
F-7
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(i) Stock option plan:
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations, in accounting for its fixed plan stock options
granted to employees. As such, compensation expense would be
recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. SFAS No. 123,
Accounting for Stock-Based Compensation, established accounting and
disclosure requirements using a fair value-based method of
accounting for stock-based compensation plans. As allowed by SFAS
No. 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above for employee
options and has adopted the disclosure requirements of SFAS No. 123.
For non-employee options, the fair market method of accounting
prescribed in SFAS No. 123 has been followed.
(j) Use of estimates:
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted
accounting principles in the United States. Actual results could
differ from those estimates.
(k) Impairment of long-lived assets:
The Company accounts for long-lived assets (including fixed assets
and intellectual property) in accordance with the provisions of SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
F-8
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
1. Significant accounting policies (continued):
(l) Comprehensive income (loss):
The Company accounts for comprehensive income (loss) in accordance
with the provisions of SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income (loss) and its components in a full set of
financial statements. Comprehensive income consists of net income
(loss) and the foreign currency translation adjustment and is
presented in the statements of shareholders' equity and
comprehensive loss. The Statement only requires additional
disclosures in the financial statements, it does not affect the
Company's financial position or results of operations.
(m) Comparative figures:
Certain comparative figures have been reclassified and restated to
conform with the financial statement presentation and accounting
policies adopted in the current year.
2. Fixed assets:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------
Accumulated Net book Net book
Cost amortization value value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Computer equipment $ 567,530 $ 129,773 $ 437,757 $ 51,485
Furniture 79,564 9,657 69,907 4,204
Condominium 103,039 2,061 100,978 -
-----------------------------------------------------------------------
$ 750,133 $ 141,491 $ 608,642 $ 55,689
=======================================================================
</TABLE>
The condominium was sold subsequent to the year end for net proceeds in
excess of the net book value.
F-9
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
3. Intellectual property:
----------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------
Cost $ 1,124,420 $ 428,066
Less accumulated amortization 238,195 79,948
----------------------------------------------------------------------
$ 886,225 $ 348,118
======================================================================
4. Accrued liabilities:
----------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------
Payroll and related benefits $ 106,670 $ -
Sales taxes payable 77,206 24,054
Other 27,670 35,738
----------------------------------------------------------------------
$ 211,546 $ 59,792
======================================================================
5. Demand loan:
The demand loan is denominated in Canadian dollars. At January 31, 1999,
the balance was $264,725 (Cdn $400,000). The demand loan bears no
interest and was converted into 666,666 common shares under the terms of
the loan agreement.
6. Mortgage payable:
The mortgage payable is denominated in Canadian dollars. At January 31,
2000, the balance was $77,338 (Cdn $111,800). The mortgage payable bears
interest at 6.85% per annum, is repayable in blended monthly payments of
$589 (Cdn $851) and is secured by the condominium. The amount will be
repaid in full from sale proceeds on closing of the condominium.
F-10
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
7. Fair value of financial instruments:
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at January 31, 2000 and
1999. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $11,427,720 $11,427,720 $ 212,364 $ 212,364
Accounts receivable 240,508 240,508 178,872 178,872
Financial liabilities:
Accounts payable 257,684 257,684 103,202 103,202
Accrued liabilities 211,546 211,546 59,792 59,792
Demand loan - - 264,725 264,725
Mortgage payable 77,338 77,338 - -
</TABLE>
-------------------------------------------------------------------------
The carrying amounts shown in the table are included in the balance sheet
under the indicated captions.
The carrying amounts approximate their fair values due to the relatively
short periods to maturity of these instruments.
F-11
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
8. Capital stock:
(a) Authorized:
30,000,000 common shares, par value $0.0001 per share
1,000,000 preferred shares, par value $0.0001 per share
Issued and fully paid common shares:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Additional
Number of Par paid-up
shares value capital
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances at January 31, 1998 2,520,000 $ 252 $ 555,545
Issuance of common shares in connection with:
Private placements, net of $50,335
share issue costs 580,798 58 420,278
Exchange for certain assets 240,000 24 (24)
Exchange for services rendered 120,000 12 40,256
--------------------------------------------------------------------------------------------------
Balances at January 31, 1999 3,460,798 346 1,016,055
Issuance of common shares in connection with:
Private placements, net of $351,195
share issue costs 1,767,241 176 2,543,001
Restricted securities offering, net of
$2,117,745 share issue costs 1,500,000 150 12,469,373
Exercise of stock options 631,000 63 369,792
Conversion of demand loan 666,666 67 269,003
Shares purchased for cancellation (212,000) (21) (62,242)
--------------------------------------------------------------------------------------------------
Balances at January 31, 2000 7,813,705 $ 781 $ 16,604,982
==================================================================================================
</TABLE>
During the year ended January 31, 1999, the Company issued 580,798
common shares in a series of private placements for gross cash
consideration of $470,671. The Company also issued 240,000 common
shares to its controlling shareholder for receipt of certain assets
owned by the controlling shareholder with a nil carrying value (note
12). In addition, 120,000 common shares were issued to employees for
their services rendered with an ascribed fair value of $40,268.
F-12
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
8. Capital stock (continued):
During the year ended January 31, 2000, there was a two-for-one
stock split. All prior year share and per share amounts have been
restated to reflect the split. The Company issued 1,767,241 common
shares in a series of private placements for gross cash
consideration of $2,894,372. The Company issued an additional
1,500,000 common shares for gross cash proceeds of $14,319,268 (ECU
13,500,000), net of share issue costs of $2,117,745, including
$268,000 representing the fair market value of options granted to
underwriters and legal counsel in connection with the Company's
offering of restricted securities made under Regulation S of the
Securities Act of 1933 as amended which are traded on the Neuer
Market of the Frankfurt Stock Exchange in Germany. In addition, the
Company issued 631,000 common shares for cash consideration of
$369,855 in connection with the exercising of stock options. The
Company converted the demand loan of $269,070 into 666,666 common
shares. Finally, the Company purchased for cancellation 212,000
common shares with a carrying value of $21. The $144,908 paid for
the shares exceeded the stated capital by $144,887 of which $62,242
has been charged against additional paid-up capital and $82,645
against the deficit.
(b) During fiscal 1999, the Board of Directors of the Company, through
special resolution, authorized the grant of stock options to key
management personnel, certain directors, consultants and agents to
purchase common shares. The resolution authorizes grants of options
to purchase up to 350,000 common shares of authorized but unissued
common stock. Stock options are granted with an exercise price equal
to the stock's fair market value at the date of grant. The majority
of options vest immediately and all others vest within two years of
the date of grant and have terms ranging from one to five years. No
compensation expense has been recorded in connection with stock
options issued to employees and directors as the exercise price at
the date of grant was equal to the stock's fair market value.
Options to purchase 202,000 common shares granted to the
underwriters and legal counsel in connection with the restricted
securities offering with a fair market value of approximately
$268,000 have been reflected as part of the share issue costs.
F-13
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
8. Capital stock (continued):
A summary of the stock options issued pursuant to Board of Directors
resolution as at January 31, 2000 and January 31, 1999, and changes
during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Number of price per Number of price per
shares share shares share
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 531,000 $ 0.50 - $ -
Granted 212,000 0.99 531,000 0.50
Exercised (631,000) 0.59 - -
---------------------------------------------------------------------------------------------------
Outstanding at year end 112,000 $ 1.40 531,000 $ 0.50
===================================================================================================
Options exercisable at year end 100,000 $ 1.00 531,000 $ 0.50
===================================================================================================
</TABLE>
The details of the stock options issued pursuant to Board of
Directors resolution outstanding at January 31, 2000 are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Exercise
Year price per
Outstanding Exercisable of grant share Expiry date
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
100,000 100,000 2000 $ 1.00 September 30, 2000
2,000 - 2000 2.50 July 30, 2004
10,000 - 2000 5.20 April 1, 2005
</TABLE>
F-14
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
8. Capital stock (continued):
(c) During fiscal 2000, the Company adopted an Equity Incentive Plan (the
"Plan") for directors, officers, key employees and consultants
reserving a total of 440,000 common shares for issuance thereunder.
As at January 31, 2000, options for 2,000 common shares at an
exercise price of $2.50, expiring July 4, 2000 have been granted to a
director under the Plan. The option price was the stock's fair market
value on the grant date and accordingly, no compensation expense was
recorded. As at January 31, 2000, 438,000 common shares remain
reserved and available for issuance thereunder. As at September 14,
1999, the Board of Directors has determined that the Company shall
not grant any options or other securities under the Plan until six
months following the date of admission of the common shares to the
Frankfurt Stock Exchange in Germany.
(d) Had the Company accounted for its employee and director stock options
issued pursuant to Board of Directors resolution and under the Plan
using the fair value method presented in SFAS No. 123, pro forma loss
for the year ended January 31, 2000 would have been $3,504,974 (1999
- $363,630) and pro forma basic loss per share for the year ended
January 31, 2000 would have been $0.61 (1999 - $0.12).
The fair value of the options on the date of grant, has been
estimated using a Black-Scholes option pricing model with the
following assumptions for 2000 and 1999, respectively: risk-free
interest rates of 5% and 5%; volatility factors of the expected
market price of the Company's common shares of 100% and 100%; and an
expected life of the options ranging from one to five years. The
weighted average grant date fair value of options issued in 2000 and
1999 was $1.51 and $0.24, respectively.
9. Basic loss per share:
Basic loss per share has been calculated using the weighted average
number of shares outstanding of 5,755,495 and 3,013,223 during 2000 and
1999, respectively.
Diluted loss per share is not presented as the impact of the outstanding
options is anti-dilutive.
F-15
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
10. Segmented reporting, geographic information and major customers:
The Company has adopted the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic
areas and major customers. The method for determining what information to
report is based on the way that management organizes the operating
segments within the Company for making operating decisions and assessing
financial performance. The Company's chief operating decision maker is
considered to be its executive staff, consisting of the Chief Executive
Officer and Chief Financial Officer.
The Company operates in one operating segment being the Internet music
streaming business. The chief operating decision maker does not
disaggregate financial information other than to distinguish sources of
revenue.
The Company generated revenue from the following activities:
2000 1999
------------------------------------------------------------------
Hardware sales $ 851,433 $ 1,336,623
Service contracts 85,281 14,577
Advertising 13,833 14,101
Other 8,794 8,501
------------------------------------------------------------------
$ 959,341 $ 1,373,802
==================================================================
The Company has operations in two geographic regions:
------------------------------------------------------------------
Fixed assets and
intellectual
Revenue property
------------------------------------------------------------------
Canada $ 952,787 $ 1,481,026
United States 6,554 13,841
------------------------------------------------------------------
$ 959,341 $ 1,494,867
==================================================================
Revenue has been allocated geographically based on where the order for
the product or service was accepted.
F-16
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
10. Segmented reporting, geographic information and major customers
(continued):
A summary of the percentage of net sales to major customers that exceed
10% of total net sales during each of the years in the two-year period
ended January 31, 2000, and the amount due from these customers as at
January 31, 2000 is as follows:
--------------------------------------------------------------------
Accounts
2000 1999 receivable
--------------------------------------------------------------------
Customer 1 24% 57% $ 95,214
Customer 2 22% 13% 2,485
====================================================================
11. Income taxes:
On May 4, 1999, the Company was continued into the United States as a
Delaware corporation. This resulted in a deemed disposition of all assets
and liabilities at fair market value for Canadian income tax purposes.
Management of the Company is of the opinion that the fair market value of
the net assets at May 4, 1999 approximates net book value. As a result,
the Company would not be liable for Canadian income taxes on this deemed
disposition.
The sources of loss before provisions for income taxes comprise the
following:
------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------
Canada $ 3,427,145 $ 339,880
United States 23,575 -
------------------------------------------------------------------------
$ 3,450,720 $ 339,880
F-17
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
11. Income taxes (continued):
Income taxes recoverable attributable to loss from continuing operations
differed from the amounts computed by applying the US federal income tax
rate of 34% to pretax loss as a result of the following:
------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------
Computed "expected" tax recovery $ 1,173,200 $ 115,600
Losses not tax benefited (1,173,200) (115,600)
------------------------------------------------------------------------
$ - $ -
------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at January 31, 2000 and 1999 are
presented below:
------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------
Deferred tax assets:
Fixed assets, due to tax depreciation being
less than accounting depreciation $ 3,900 $ -
Unrealized foreign exchange loss 255,800 -
Net operating loss carryforwards 1,058,000 139,700
Other 6,800 -
------------------------------------------------------------------------
Total gross deferred tax assets 1,324,500 139,700
Valuation allowance (1,324,500) (132,700)
------------------------------------------------------------------------
Net deferred tax assets - 7,000
Deferred tax liabilities:
Fixed assets, due to tax depreciation
exceeding accounting depreciation - (7,000)
------------------------------------------------------------------------
Net deferred taxes $ - $ -
========================================================================
F-18
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
11. Income taxes (continued):
The valuation allowance for deferred tax assets as at January 31, 2000
and 1999 was $1,324,500 and $132,700, respectively. The net change in the
total valuation allowance for the years ended January 31, 2000 and 1999
was an increase of $1,191,800 and $109,800, respectively. In assessing
the realizability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
Management projected future taxable income, the scheduled reversal of
deferred income tax liabilities and tax planning strategies in making
this assessment. In order to fully realize the deferred tax assets, the
Company will need to generate future taxable income of approximately
$2,910,000 prior to the expiration of the net operating loss
carryforwards in 2015. Based on the absence of historical taxable income
and the difficulty of making reliable projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not the Company will not
realize the benefits of these deductible differences and has accordingly
provided a valuation allowance.
Losses carried forward:
As at January 31, 2000, the Company has net operating loss carryforwards
for Canadian income tax purposes that were incurred prior to May 4, 1999
of approximately $683,000 (approximately Cdn $988,000) to carry forward
to apply against future years' Canadian taxable income. The tax effect of
these losses has not been recorded in the accounts and expire as follows:
-------------------------------------------------------------------------
Cdn US
-------------------------------------------------------------------------
2005 $ 100,000 $ 69,000
2006 888,000 614,000
-------------------------------------------------------------------------
$ 988,000 $ 683,000
-------------------------------------------------------------------------
As at January 31, 2000, the Company has net operating loss carryforwards
for US income tax purposes that were incurred subsequent to May 4, 1999
of approximately $2,227,000 to carry forward and apply against future
years' US taxable income, if any, through 2015.
F-19
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
11. Income taxes (continued):
Scientific research and experimental development investment tax credits:
The Company is filing for Canadian scientific research and experimental
development investment tax credits at both the Federal and Provincial
levels. The final amount of credits will be subject to governmental
approvals. No credits have been recognized in the accounts as at January
31, 2000.
12. Transactions with the founding shareholder:
(a) During the year ended January 31, 1999, the founding shareholder
contributed certain assets with a nil predecessor carrying value and
a fair value of $79,418 to the Company for share consideration. This
transaction had previously been accounted for during the year ended
January 31, 1999 at fair value.
As the founding shareholder controlled both entities at the time of
the transaction, the transaction should have been recorded at the
predecessor carrying value.
(b) During the year ended January 31, 1998, the founding shareholder
contributed a music library with a predecessor carrying value of
$61,423 and a fair value of $127,279 to the Company for share
consideration. This transaction had previously been accounted for
during the year ended January 31, 1999 at fair value.
As the founding shareholder controlled both entities at the time of
the transaction, the transaction should have been recorded at the
predecessor carrying value.
F-20
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
13. Commitments:
(a) The Company has operating lease agreements for the rental of
premises, vehicles and equipment with minimum aggregate annual rents
payable as follows:
---------------------------------------------------------------------
2001 $ 107,000
2002 22,000
2003 11,000
2004 2,000
---------------------------------------------------------------------
$ 142,000
---------------------------------------------------------------------
The annual rental payments set out above are exclusive of operating
costs, maintenance and property tax payments.
(b) In fiscal 2000, the Company entered into a contract whereby they are
to provide music streaming web services to a third party in exchange
for radio media advertising. The contract expires January 31, 2001.
Since the fair value of this transaction is not determinable, it has
been excluded from the financial statements.
(c) In fiscal 1999, the Company signed a contract which expires December
31, 2000 with the Recording Industry Association of America
("RIAA"). The Company has agreed to pay RIAA a royalty of
approximately 17% of the greater of gross revenue or expenses it
derives through webcast music for the right to publicly perform
sound recordings and make multiple records by digital transmission.
F-21
<PAGE>
musicmusicmusic inc.
Notes to Financial Statements (continued)
(Stated in US dollars)
Year ended January 31, 2000
--------------------------------------------------------------------------------
14. Restatement of prior year financial statements:
The financial statements have been restated to reflect the transactions
described in notes 12(a) and (b) at predecessor carrying values, the
reclassification of the music library from fixed assets to intellectual
property and the presentation of capital stock at par value, as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
As originally
------------------------------------------------------------------------------------------
As at and for the year ended January 31, 1999 reported As restated
------------------------------------------------------------------------------------------
<S> <C> <C>
Balance sheet:
Fixed assets $ 141,994 $ 55,689
Intellectual property 305,534 348,118
Goodwill 63,534 -
Capital stock 1,162,794 346
Additional paid-up capital - 1,016,055
Deficit (488,171) (454,185)
Accumulated other comprehensive income (loss) (39,703) (34,551)
Statement of operations:
Amortization 111,801 84,400
Loss for the year (367,281) (339,880)
Basic loss per share (0.12) (0.11)
------------------------------------------------------------------------------------------
</TABLE>
15. Subsequent events:
On March 1, 2000, the Company purchased the assets of a leading Canadian
music trade publication, The Record, for $187,613 in cash consideration.
At January 31, 2000, a deposit of $15,385 for this purchase had been
made.
Subsequent to year end, the Company advanced approximately $155,000 (ECU
153,000) to a shareholder of the Company. The loan bears interest at 8%,
is secured by the shares held in the Company by the shareholder and is
due March 31, 2000.
F-22
