As filed with the SEC on May 17, 1999 SEC Registration No. 333-70663
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CDBEAT.COM, INC
Formerly Known As SMD GROUP, INC.
(Exact name of registrant as specified in charter)
Delaware 5735 06-1529524
(State or other jurisdiction (Primary StandardIndustrial (IRS Employer
of incorporation or organization) Classification Code Number) Identification
Number)
444 Bedford Street, Suite 8s
Stamford, Connecticut 06901
(203) 602-9994
(Address and telephone number of registrant's
principal executive offices and principal place of business)
Joel Arberman
President
CDBEAT.COM, INC.
444 Bedford Street, Suite 8s
Stamford, Connecticut 06901
(203) 602-9994
(Name, address, and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ x ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [__]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [__]
If delivery of the prospectus is expected to be made pursuant to Rule 434,please
check the following box. [__]
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CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
Title of class of Proposed maximum Amount of
securities to be aggregate offering Registration Fee
registered price (1)
- -------------------------------------------------------------------------------
Common Stock,
Par value $0.001
per share $10,000,000 $2,780
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457 (o) under the Securities Act.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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SUBJECT TO COMPLETION, DATED MAY 14, 1999
CDBEAT.COM, INC.
4,000,000 shares of common stock
The purchase price for our shares is $2.50.
We are selling 3,521,000 shares of our common stock. Some of our stockholders
are selling an additional 479,000 shares concurrently, which represents 11.98%
of the shares being offered. We have fixed the price of the stock we are selling
in this offering, however, our selling stockholders may offer their shares at a
lower price.
We will sell the shares ourselves and do not plan to use underwriters or pay
any commissions. We will be selling our shares in a direct participation
offering and no one has agreed to buy any of our shares. There is no minimum
amount of shares we must sell and no money raised from the sale of our stock
will go into escrow, trust or another similar arrangement. The offering will
remain open until June 30, 2000, unless we decide to cease selling efforts
prior to this date.
This is our public offering, and no public market exists for our shares. We
hope to have prices for our shares quoted on the bulletin board maintained by
the National Association of Securities Dealers, Inc. after we complete our
offering.
Our proposed trading symbol for the over the counter bulletin board is CDBT.
This is a risky investment. We have described these risks under the caption
"Risk factors" beginning on page 6.
Per Share Total
--------- -----
Public Offering Price $2.50 $8,802,500
Underwriting Discounts and Commissions None None
Proceeds to us $2.50 $8,802,500
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is May 17, 1999
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TABLE OF CONTENTS
Our Company....................................................................5
SUMMARY........................................................................5
RISK FACTORS...................................................................7
MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......................15
YEAR 2000 READINESS DISCLOSURE................................................16
Use of Proceeds...............................................................18
Dilution......................................................................20
Business......................................................................20
SELLING SECURITYHOLDERS.......................................................35
DESCRIPTION OF CAPITAL STOCK..................................................37
SHARES ELIGIBLE FOR FUTURE SALE...............................................39
MANAGEMENT....................................................................40
RELATED PARTY TRANSACTIONS....................................................43
PRINCIPAL SHAREHOLDERS........................................................43
THE OFFERING..................................................................43
Special Note Regarding Forward-Looking Statements.............................45
LEGAL PROCEEDINGS.............................................................45
LEGAL MATTERS.................................................................45
FINANCIAL STATEMENTS..........................................................45
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Our Company
CDbeat.com develops software to provide people connected to the Internet
with real-time music content while they listen to music CDs. The software and
service offers a high level of interaction with our users, which provides us
with the ability to seamlessly customize content for them.
The interactivity we offer is expected to attract many people to use our
software and retain them for long periods of time.
The CDbeat.com software and service is offered for free to Internet users
who register with us. On June 15, 1999, we intend to launch our software and
service from our web site located at www.cdbeat.com.
SUMMARY
We are selling 3,521,000 shares of our common stock. Some of our stockholders
are selling an additional 479,000 shares concurrently, which represents 11.98%
of the shares being offered. We have fixed the price of the stock we are selling
in this offering, however, our selling stockholders may offer their shares at a
lower price.
Our principal executive offices are located 444 Bedford Street, Stamford,
Connecticut 06901. Our telephone number at that location is (203) 602-9994.
Information contained on our web site at http://www.CDbeat.com does not
constitute part of this prospectus.
Unless otherwise indicated, the information in this prospectus, irrespective of
the date referenced, assumes:
o no conversion of outstanding shares of preferred stock;
o no exercise of outstanding options or warrants to purchase additional
shares.
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The Offering
Common stock offered for sale. Up to a maximum of
3,521,000 shares of common stock by us and
479,000 shares of common stock by our
stockholders.
Price to the public. 2.50 per share
Number of shares outstanding
before the offering. 4,396,846 shares
Number of shares to be
outstanding after the offering,
assuming all shares are sold. 7,917,846 shares
Terms of the offering. There is no minimum offering.
Accordingly, as shares are sold, we will use the
money raised for our activities. The offering
will remain open until June 30, 2000, unless we
decide to cease selling efforts prior to this
date.
Use of proceeds. We intend to use the net proceeds of this
offering primarily for:
-> hiring additional personnel,
-> development of our technology and web site,
-> sales and marketing efforts;
-> promotion of user growth and usage; and
-> general corporate purposes.
Plan of distribution. This is a direct participation and no minimum
offering, with no commitment by anyone to
purchase any shares. The shares will be offered
and sold by our principal executive officers and
directors, although we may retain the services
of one or more NASD registered broker-dealers as
selling agent(s) to effect offers and sales on
our behalf. None have been retained as of this
date.
The common stock to be outstanding after the offering is based on the number of
shares outstanding as of April 30, 1998. This number excludes:
o 311,750 shares issuable upon conversion of class a preferred shares;
o 500,000 shares issuable upon conversion of class c preferred shares. However,
the conversion does not change the number of common shares outstanding
because an equivalent number of shares owned by Mr. Arberman would be
canceled;
o 431,396 shares subject to outstanding options and warrants as of April 30,
1999 at a weighted average exercise price of $2.50 per share.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision in our company. In addition, you should keep in mind that
the risks described below are not the only risks that we face.
---------------------
We are selling shares at the same time as our selling stockholders and that may
reduce the value of your shares.
We will be selling our shares at the same time as the selling shareholders are
selling their shares. Our stockholders are offering 479,000 shares, which
represents 11.98% of the shares being offered. We have fixed the price of the
stock we are selling in this offering, however, our selling stockholders may
offer their shares at a lower price. Sales by selling stockholders at prices
lower than ours could hurt our ability to sell our stock. This may result in our
receiving less proceeds than if there was no concurrent offering, which could
reduce the value of your shares.
Our selling stockholders are selling their shares without the use of a
professional underwriter and may sell their shares on the stock market through
the use of a broker or in private transactions. We will not receive any of the
proceeds from the sale of their shares. Our selling shareholders are not under a
lock-up or any other agreement restricting the sale of their shares. They can
sell their shares at any time, in any amount and at any price. The shares we are
selling do not have priority over the shares being sold by our selling
shareholders.
Because we have experienced losses and expect our expenses to increase, we may
not be able to achieve profitability.
We cannot assure you that we will ever become or remain profitable. Our
future profitability will depend on our ability to increase our revenues while
controlling costs. Since our inception, we have incurred losses. As of December
31, 1998 we had an accumulated deficit of $124,074. We expect to continue to
incur losses until we are able to significantly increase our advertising and
commerce revenues. Our operating expenses are expected to continue to increase
significantly in connection with our proposed expanded activities, especially in
the areas of software development, content licensing, sales and marketing. To a
large extent these expenses are fixed. We cannot be certain that we will be able
to accurately predict our revenues, particularly in light of the general
uncertainty and intense competition for the sale of Internet-related
advertisements, online commerce and our limited operating history.
We need to raise at least $2,465,000 million in proceeds of this offering or we
will not be able to continue as a going concern, in which case you may lose your
entire investment.
Our independent certified public accountants have pointed out that we have
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an accumulated deficit and negative working capital such that our ability to
continue as a going concern is dependent upon obtaining additional capital and
financing for our planned operations. If we do not raise at least $2,465,000
from this offering, then you may lose your entire investment.
We will depend on short-term advertising contracts that may not be renewed,
which would reduce our revenues.
If customers cancel or defer existing advertising contracts or if we fail to
obtain new contracts in any quarter, our business, results of operations and
financial condition for that quarter and future periods will be adversely
affected. Our advertising customers could cease advertising quickly and without
penalty. We anticipate that we will derive a significant portion of our revenues
from the sale of advertising. We will depend heavily on advertising revenues
from contracts entered into within the quarter and on our ability to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
We need to achieve and maintain high usage of our software and services to be
attractive to advertisers or we will not be able to secure and retain
advertising contracts, which would reduce our revenues.
In the event that we fail to deliver the minimum number of advertisements,
we could lose our advertisers, be required to provide credit for additional
advertisements and we may have to reduce advertising rates in order to attract
new advertisers. We anticipate that substantially all of our advertising
contracts will require us to guarantee a minimum number of people viewing their
advertisements.
We may not be able to compete successfully because the number of competitors is
increasing, some of our competitors are better known, have broader distribution,
stronger sales and marketing abilities, more technical expertise and have
greater resources.
We are subject to competition that is expected to intensify in the future. We
cannot assure you that we will be able to compete successfully. Competitive
factors could materially adversely affect our business, financial condition and
operating results. The market for online music software and services is
intensely competitive and rapidly changing. We compete directly with other firms
that focus on providing online music software and services as well as
traditional companies offering music content on the radio, television and
magazines. We also face competition from retail stores and mail order
catalogues. Many of our competitors have well-established reputations for
providing music software, content and services and have longer operating
histories and significantly greater financial, technical, marketing, personnel
and other resources than we have.
We need to expand our network infrastructure and customer support capabilities
or we will not be able to service our growing user base, which would reduce our
revenues.
Failure to properly expand our network infrastructure or customer service
capabilities would materially hurt our business and operations. We will need to
expand our network infrastructure and customer support capabilities in
anticipation of an expanded user base. Expansion will require us to make
significant up-front expenditures for software, servers, routers and computer
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equipment, to increase bandwidth for Internet connectivity and to hire and train
additional customer service personnel. Expansion must be completed without
system disruptions.
If our content agreement with Alliance Entertainment were terminated, our
operations would be interrupted and this would inconvenience our users and
reduce our revenues.
Termination or material interruptions of services provided by Alliance
Entertainment would lead to reduced usage of our software and services and this
would hurt our operating results. We are dependent on the content we have
licensed from them. Our agreement with them provides us with the majority of the
content we provide through our software and services. The agreement is
short-term in nature and can be canceled within 60 days written notice.
If we cannot obtain access to sufficient commercial content, use of our
software and services may decline and this would hurt our revenues.
If we fail to aggregate and deliver compelling content to our users, usage of
our software might decline and, as a result, advertising and commerce revenue
might decrease. We do not create our own content so we rely on third-party
content providers, such as publishing companies, freelance journalists and music
companies. Our ability to obtain compelling content may be adversely impacted by
a number of factors, including the following:
o third-parties may increase the price of the content they provide;
o many third-party content providers may compete with us for members and
advertising and may decide not to provide us with content;
o we anticipate that our contracts with third-party content providers will
usually be short-term and may be canceled if we do not fulfill our
obligations; and
o our competitors and many third-party content providers may provide content
that is similar or the same as our content and may do so at a lower cost.
Our management has significant control over stockholder matters, which may
impact the ability of minority stockholders to influence our activities.
Our officers and directors and their families control the outcome of all
matters submitted to a vote of the holders of common stock, including the
election of directors, amendments to our certificate of incorporation and
approval of significant corporate transactions. After the closing of this
offering, these persons will beneficially own, in the aggregate, approximately
88.70% of our outstanding common stock. This consolidation of voting power could
also have the effect of delaying, deterring or preventing a change in control of
CDbeat.com that might be beneficial to other stockholders.
The evolving nature of the online music industry makes the ultimate demand for
our software and services uncertain, which may affect our anticipated revenues.
If our market does not develop as we expect, our business, financial condition
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and operating results will be materially adversely affected. Customers of
traditional music web sites, music stores and music magazines may be reluctant
or slow to convert to use our Internet based music software and services. Our
offering of music software and services over the Internet involves a relatively
new approach to the delivery and presentation of content. The level of demand
for online music software and services is uncertain because the market is
rapidly evolving. Moreover, security and privacy concerns of existing and
potential users of our software and services may deter potential clients from
using our music software and services.
Since our software and services are new and not extensively tested, we may find
defects that may require us to incur substantial product liability and
significant redesign costs.
Defects or errors in our products could result in the loss of advertisers,
loss of users, reduced revenues and higher software development costs, which
would seriously harm our business and operating results. Complex software
products like ours often contain errors or defects, including errors relating to
security, particularly when first introduced or when new versions or
enhancements are released. We do not have product liability insurance coverage
at this time.
If we are unable to prevent unauthorized access to our user transactions and
other information we could lose many users and reduce our revenues.
Although we intend to implement industry-standard security measures, we cannot
be certain that measures implemented by us will not be circumvented in the
future. Any significant compromise of our systems' security could materially
hurt our business, financial condition and operating results. Advances in
computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in a compromise of the software or
technologies used by us to protect user transactions and other information. The
secure transmission of confidential information over public networks is a
critical element of our operations. A party who is able to circumvent security
measures could misappropriate proprietary information or cause interruptions in
our operations. We may be required to expend significant capital or other
resources to protect against the threat of security breaches or to alleviate
problems caused by breaches.
System failures or service interruptions caused by high levels of user traffic,
failures of third-party systems or other acts beyond our control would lead to
substantial inconvenience for our users, hurt our reputation and reduce our
revenues.
If system failures were sustained or repeated, our advertising revenues,
commerce partners, reputation and the attractiveness of our brand name could be
impaired. Our software and services are heavily dependent on the integrity of
the software and hardware systems supporting it. Heavy stress placed on our
systems could cause our systems to operate at unacceptably low speed or fail.
Failure of our systems could also be caused by online service providers, record
keeping and data processing functions performed by others and third-party
software such as Internet browsers, databases and load balancing software.
Additionally, a natural disaster, power or telecommunications failure or act of
war may cause extended systems failure. Computer viruses or unauthorized access
to or sabotage of our network by a third-party could also result in system
failures or service interruptions.
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If the Internet infrastructure does not evolve to enable a commercial
marketplace, use of our software and services may be adversely affected and
reduce our revenues
Critical issues concerning the commercial use of the Internet, including
security, reliability, cost, ease of use, accessibility and quality of service,
remain unresolved. These issues may negatively affect the growth of Internet use
or the attractiveness of commerce and communications on the Internet, which
would impede our ability to grow. Widespread acceptance of our software and
services will partially depend upon the adoption of the Internet as a widely
used medium for content and commerce. The Internet may not continue to develop
as a commercial marketplace because of:
o inadequate development of the necessary infrastructure, such as a reliable
network backbone;
o lack of timely development of complementary services and products, such as
high speed modems and high speed communication lines;
o delays in the development or adoption of new standards and protocols to
handle increased levels of Internet activity;
o increased governmental regulation.
Third-party telecommunications, Internet, software and hardware companies, with
whom we have no control over, may fail to be year 2000 compliant. This could
reduce the access that our users have to our software and services, which could
decrease usage and hurt our revenues.
We would be harmed if there were any systems failures or interruptions in
service resulting from the inability of Internet systems, our computing system
or any third-party systems to recognize the year 2000. Our users are highly
dependent upon telecommunications suppliers, Internet access providers, computer
software and hardware companies to access our service. These third-parties have
generally publicly advised that their review of their systems indicate that they
are or will be year 2000 compliant. However, since we cannot assure you that
they are or will be, this could present a material risk to our operations.
Rapid technological change could cause our software and services to become less
attractive to potential users which could lead us to incur high costs to
redesign, lower usage and could hurt our revenues
If we are unable to respond to rapid technological changes, our software and
services may become less attractive to potential users. Our success will depend
upon our ability to develop competitive technologies to enhance our software and
services and to develop and introduce new software and services in a timely and
cost-effective manner. Online software and services are characterized by rapidly
changing technology, developing legal issues, changing user requirements,
frequent new product and service introductions and enhancements and evolving
industry standards in computer hardware, operating systems, database technology
and information delivery systems. We cannot assure you that we will be able to
respond quickly, cost-effectively or sufficiently to these developments. Our
business, financial condition and operating results may be adversely affected if
we are unable to anticipate or respond quickly and economically to any
developments.
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Third parties could obtain access to our proprietary information
because of the limited protection for our intellectual property, which could
lead to additional competition, reduced usage and hurt our revenues.
Third parties may copy or obtain and use our proprietary technologies,
ideas, know-how and other proprietary information without authorization. To
protect our intellectual property rights, we intend to rely upon copyright,
trademark, patent and trade secret laws, as well as confidentiality agreements
with our employees, distributors and consultants. However, this may not provide
meaningful protection of our proprietary technologies or other intellectual
property. Policing unauthorized use of our technologies and other intellectual
property is difficult, particularly because the global nature of the Internet
makes it difficult to control the ultimate destination or security of software
or other data transmitted. Furthermore, the laws of other jurisdictions may
afford little or no effective protection of our intellectual property rights.
Our business, financial condition and operating results could be adversely
affected if we are unable to protect our intellectual property rights.
Third parties could independently develop similar technologies because of the
limited protection for our intellectual property, which could lead to additional
competition, reduced usage and hurt our revenues.
Third parties may independently develop technologies similar or superior
to our technologies. If they do, this may reduce the attractiveness of our
software and services, increase our competition, reduce usage of our software
and services and hurt our advertising and commerce revenues. Our business,
financial condition and operating results could be adversely affected if others
develop similar technologies.
We may be found to infringe on the proprietary rights of others and may be
required to incur substantial costs to defend any litigation, cease offering our
products, obtain a license from the holder of the infringed intellectual
property right or redesign our software and services.
We face potential liability for negligence, copyright, patent, trademark,
defamation, indecency and other claims based on the nature and content of the
materials that we broadcast. In addition, our competitors may obtain patents or
other proprietary rights that would prevent, limit or interfere with our ability
to make, use or sell our software or services. We may be found to infringe on
the proprietary rights of others. Our business, financial condition and
operating results could be adversely affected if we are found to infringe on the
proprietary rights of others.
Since this is a direct participation and no minimum offering, we can start using
your funds as we receive them although we may not be able to raise sufficient
funds to operate our business and this would reduce the value of your shares.
A direct participation means that we are selling the shares ourselves. A
no minimum offering means that we do not have to raise a minimum amount of
money. Nobody has committed to invest in our offering and we can immediately use
your investment for our operations. In the event we fail to raise sufficient
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proceeds from this offering, we may not be able to fulfill our business plan and
that could reduce the value of your shares. No assurances can be given that the
investment proceeds we may receive will be sufficient to sustain our operations
until we generate a profit.
Since we are selling the shares in this offering ourselves and without an
investment banker, we determined the offering price, we may not be able to sell
shares quickly and we may not be able to sell as many shares, which may reduce
the value of your shares.
No investment banker, appraiser or other independent, third party has been
consulted concerning this offering or the fairness of the offering price of the
shares. We have arbitrarily determined the offering price and other terms
relative to the shares offered. The offering price does not bear any
relationship to assets, earnings, book value or any other objective criteria of
value. In addition, since we do not have a professional underwriter, we may not
be able to sell shares as quickly and we may not be able to sell as many shares.
We may use a portion of the proceeds of this offering to repay some debt and
those proceeds will not be available for other corporate purposes.
We have allocated approximately $85,175, or 0.97%, of the net proceeds of
this offering to repay amounts owed to Joel Arberman, our President and Chief
Executive Officer. Accordingly, these proceeds will not be available for other
corporate purposes. The repayment of debt does not have priority over the use of
proceeds.
Our management has broad discretion in the use of the proceeds from this
offering, which may increase the risk that they will not be used effectively.
We have allocated approximately $1,162,500, or 13.21%, of the estimated net
proceeds of this offering to working capital and general corporate purposes. Our
management will have broad discretion as to the application of these proceeds
without having to seek your approval.
The price of our stock may fall if our insiders sell a large number of their
shares.
We have 4,396,846 shares of common stock outstanding. Of these shares,
3,917,846 shares are restricted, which means that they may only be sold under
certain conditions. Our officers, directors and consultants currently hold all
of these shares. If a large number of their shares are sold, it may reduce the
value of your shares.
You may not be able to resell your shares since there has been no prior market
for our common stock.
Since there has been no prior market for our shares, we can not assure you
that a market will develop or that one will be maintained. We intend to apply to
have our shares quoted on the bulletin board maintained by the National
Association of Securities Dealers, Inc. but we can not assure you that we will
succeed. Even with a market maker, the nature of this offering, the possible
lack of earnings history and the absence of dividends in the foreseeable future
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for the business we acquire may impede the development of an active and liquid
market for common stock. You should carefully consider the limited liquidity of
your investment in the shares. As a consequence, you could find it more
difficult to dispose of, or to obtain accurate quotations as to the price of
your shares.
The price of our common stock will be volatile so you may not be able to sell
your shares for more than you pay.
We expect our stock price to be volatile so you may not be able to sell your
shares for more than you pay. The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which are beyond our
control, including:
o quarterly variations in operating results;
o changes in financial estimates by securities analysts;
o changes in market valuation of software and Internet companies;
o announcements by us of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
o loss of a major customer or failure to complete significant transactions;
o additions or departures of key personnel;
o any shortfall in revenue or net income or any increase in losses from
levels expected by analysts;
o future sales of common stock; and
o stock market price and volume fluctuations, which are particularly
common among highly volatile securities of Internet and software
companies.
Our stock may be subject to penny stock regulation, which would make it more
difficult for investors to resell shares they purchase.
Our shares will likely be subject to penny stock rules so investors in
this offering may find it more difficult to sell their shares in any secondary
market. Penny stock rules relate to stocks with a price of less than $5.00.
Prior to a transaction in a penny stock, broker-dealers are required to:
o deliver risk disclosure documents that provides information about penny
stocks and the risks in the penny stock market; and
o provide the customer with current bid and offer quotations for the penny
stock; and
o explain the compensation of the broker-dealer and its salesperson in the
transaction; and
o provide monthly account statements showing the market value of each penny
stock held in the customer's account.
o make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction.
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MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
We have experienced substantial changes to, and expansion of, our
business and operations since we began our operations in May 1998. We expect to
continue to expand our business and user base, which will require us to increase
our personnel, develop software, purchase equipment and license content, which
will result in increasing expenses.
Results of Operations
For the period from inception in May 1998 to December 31, 1998 we did
not generate any revenues and incurred a cumulative net loss of $124,074. Our
operating expenses consist of professional fees, payroll, office, and marketing.
o Professional fees of $87,775 consisted principally of general business
consulting, business development, legal and accounting fees.
o Payroll expenses of $28,933 consisted principally of related taxes and
salaries paid to employees in administrative, public relations and support
functions.
o Office expenses of $2,461 consisted principally of office supplies,
photocopies, postage, telephone, fax, cellular and Internet access.
o Marketing expenses of $5,618 consisted principally of advertising and
promotional materials, public relations costs and travel.
The results of operations for the period ended December 31, 1998 are not
necessarily indicative of the results for any future interim period or for the
year ending December 30, 1999. We expect that our expenses will continue to
increase as we try to further expand our user base.
Liquidity and Capital Resources
Our capital requirements have exceeded our cash flow from operations as
we have been building our business. At December 31, 1998, we had a working
capital deficit of $124,074. As a result, we have depended upon sales of our
common stock and borrowings from our management to finance our working capital
requirements.
During the period from inception to April 30, 1999, we raised gross
proceeds of approximately $688,500 from the sale of equity securities to
investors and friends and family of our management. We used all of those
proceeds to finance the cost of our operations to date. In addition, we have
borrowed $85,175 bearing interest at an annual rate of 6% from Joel Arberman,
our president and CEO. The loans are payable upon demand.
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Operating activities during the year ended December 31, 1998 created a
net use of cash of $124,074. We had cash and cash equivalents of $309,203 as of
December 31, 1998.
We expect to make expenditures of approximately $2,465,000 during the
twelve months following the closing of this offering. These expenditures will be
used to continue software development, expand our web site, hire additional
personnel, sales and marketing, licensing content, purchase equipment and
general working capital.
We need the proceeds of this offering to expand our operations and finance
our future working capital requirements. Based upon our current plans and
assumptions relating to our business plan, we anticipate that $2,465,000 in net
proceeds from this offering will satisfy our capital requirements for at least
twelve months following the closing of this offering. If our plans change or our
assumptions prove to be inaccurate, we may need to seek additional financing
sooner than currently anticipated or curtail our operations.
Material Agreements
In December 1998, we entered into two-year employment agreements with Joel
Arberman and Bryan Eggers. Mr. Arberman and Mr. Eggers will be compensated for
their services at the rate of $70,000 per year.
In January 1999, we entered into a software development agreement with
Cadnetics, Inc. The terms of the agreement included cash payments totaling
$282,000 plus 151,200 shares valued at $378,000. As of April 30, 1999 the
balance of payments due to Cadnetics was $80,000.
In April 1999, we entered into an agreement with Alliance Entertainment for
the fulfillment of music CDs sold by us and for licensing the All Music Guide,
an extensive music database.
YEAR 2000 READINESS DISCLOSURE
OUR STATE OF READINESS
We have defined Year 2000 compliance as follows:
Information technology time and date data processes, including, but not limited
to, calculating, comparing and sequencing data from, into and between the 20th
and 21st centuries contained in our software and services offered through the
us, will function accurately, continuously and without degradation in
performance and without requiring intervention or modification in any manner
that will or could adversely affect the performance of such products or the
delivery of such software and services as applicable at any time.
Our internal systems include both information technology systems and
non-information technology systems. We have initiated an assessment of our
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proprietary information technology systems, and expect to complete any
remediation and testing of all information technology systems during 1999. With
respect to information technology systems provided by third-party vendors, we
have sought assurances from such vendors that their technology is Year 2000
compliant. All of our material information technology system vendors have
replied to inquiry letters sent by us stating that they either are Year 2000
compliant or expect to be so in a timely manner.
We are evaluating our non-information technology systems for Year 2000
compliance. We have not, to date, discovered any material Year 2000 issues with
respect to our non-information technology systems.
We are in the process of contacting our material suppliers whose products or
services are sold through us to determine if they are Year 2000 compliant. To
date, all such suppliers have stated that they are, or expect to be, Year 2000
compliant in a timely manner. Our customers are individual Internet users, and,
therefore, we do not have any individual customers who are material to an
evaluation of Year 2000 compliance issues.
THE COSTS TO ADDRESS YEAR 2000 ISSUES
We have expensed amounts incurred in connection with Year 2000 compliance since
its formation through December 31, 1998. Such amounts have not been material.
The additional costs to make any other software or services Year 2000 compliant
by mid-1999 will be expensed as incurred, but are not expected to be material.
We are not currently aware of any material operational issues or costs
associated with preparing our systems for the Year 2000. Nonetheless, we may
experience material unexpected costs caused by undetected errors or defects in
the technology used in our systems or because of the failure of a material
supplier to be Year 2000 compliant.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
Notwithstanding our Year 2000 compliance efforts, the failure of a material
system or vendor used in our software and service, or the Internet generally, to
be Year 2000 compliant could harm the operation of our software and services or
prevent us from generating advertising or commerce sales through our software,
or have other unforeseen, adverse consequences to the company.
Finally, we are also subject to external Year 2000-related failures or
disruptions that might generally affect industry and commerce, such as utility
or transportation company Year 2000 compliance failures and related service
interruptions. Moreover, participating vendors in our services might experience
substantial slow-downs in business if consumers avoid products and services such
as air travel both before and after January 1, 2000 arising from concerns about
reliability and safety because of the Year 2000 issue. All of these factors
could have a material adverse effect on our business, financial condition and
results of operations.
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CONTINGENCY PLANS
We are engaged in an ongoing Year 2000 assessment and the development of
contingency plans. The results of our Year 2000 simulation testing and the
responses received from third-party vendors and service providers will be taken
into account in determining the nature and extent of any contingency plans. We
have identified our worst-case scenario as the interruption of our business
resulting from Year 2000 failure of the electric company or our Internet service
providers to provide services. We have not yet completed our worst-case scenario
contingency plan. Without a worst-case scenario contingency plan we may not have
enough time to complete remedial measures and implement contingency planning for
the worst-case scenario. We do plan to complete our contingency plan in
accordance with our compliance plan and under the guidance of our consultants in
the third quarter of 1999.
Use of Proceeds
Our success is entirely dependent on our ability to sell the shares in this
offering. None of the items listed below can be fully completed unless we raise
a minimum of $2,465,000 from this offering. We may not be able to raise all or
part of the funds we need to operate our business. If we are unable to raise
these funds we will not remain as a viable going concern and investors may lose
their entire investment. If we receive net proceeds in an amount less than
$2,465,000, our business operations will be curtailed to an extent not presently
determinable by management.
The maximum net proceeds from this offering may be as high as $8,802,500
if we sell all of the shares offered. If we are unable to sell all of the shares
offered, the net proceeds would be lower.
In the table below, we have detailed the minimum amount of capital required
for us to operate our business as currently planned. In addition, we have
outlined the manner in which we intend to use the funds raised, assuming that we
sell all of the shares offered.
Application of Minimum Amount Maximum Amount
Net Proceeds Required of Net Proceeds
- --------------------- --------------- ------------------
Technology $ 685,000 $ 2,100,000
Content 350,000 1,150,000
Sales and marketing 350,000 3,600,000
Customer support 130,000 300,000
International 0 250,000
Repay indebtedness 87,500 87,500
Offering costs 50,000 50,000
Working capital and 362,500 1,162,500
General corporate purposes -------------- ---------------
Total $2,465,000 $8,802,500
=========== ===========
Technology. We intend to expand our software and web site development
efforts, increase our network infrastructure, purchase computing and networking
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equipment, build an electronic commerce software system and purchase an
advertising server. We also expect to hire four additional people to engage in
these activities.
Content. We intend to license content from third parties that we have not
yet identified, and expect to hire eight additional people to engage in these
activities.
Sales and Marketing. We intend to produce, create and place Internet, print
and radio commercials. We also intend to produce, create and manage promotions
and publicity to encourage usage of our software and services. We expect to hire
five additional people to engage in these activities.
Customer Support. We intend to purchase software, hardware and systems to
handle our customer support requirements. We expect to hire three people to
engage in these activities.
Offering Costs. We intend to pay for the costs of this offering.
Repayment of Indebtedness. We intend to repay the $85,175 principal amount,
bearing interest at an annual rate of 6% held by Joel Arberman, our president
and CEO. We already used the proceeds of these loans for working capital and
general corporate purposes.
Working Capital and General Corporate Purposes. We may use a portion of the
proceeds allocated to working capital and general corporate purposes to pay a
portion of trade payables incurred from time to time, if cash flow from
operations is insufficient for these purposes. We also expect to hire five
additional people to engage in general and administrative activities.
The foregoing represents our best estimate of the allocation of the net
proceeds of this offering based upon the current status of our business. We
based this estimate on assumptions, including expected expansion of our user
base, usage of our services, increases in revenues and assumed that our proposed
software and services can be completed and introduced without unanticipated
delays or costs. If any of these factors change, we may find it necessary to
reallocate a portion of the proceeds within the above-described categories or
use portions of the proceeds for other purposes. Our estimates may prove to be
inaccurate or new programs or activities may be undertaken which will require
considerable additional expenditures or unforeseen expenses may occur.
If our plans change or our assumptions prove to be inaccurate, we may need
to seek additional financing sooner than currently anticipated or curtail our
operations. We may need to raise additional funds in the future in order to fund
more aggressive brand promotions and more rapid expansion, to develop newer or
enhanced products or services, to fund acquisitions, to respond to competitive
pressures, or to acquire complementary businesses, technologies or services. The
proceeds of this offering may not be sufficient to fund our proposed expansion
and additional financing may not become available if needed.
Because we anticipate selling the shares through the efforts of our officers
and directors, the numbers above do not include any deductions for selling
commissions. If broker/dealers are used in the sale of the shares, up to 10% of
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any gross proceeds raised in this offering will probably be payable to one or
more NASD registered broker-dealers. In such event, net proceeds to us will be
decreased and the use of proceeds may be proportionately reallocated in
management's sole discretion. There are no current agreements, arrangements or
other understandings in connection with any of the foregoing.
We will invest proceeds not immediately required for the purposes described
above principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest bearing
investments.
Dilution
The difference between the initial public offering price per share and the net
tangible book value per share of common stock after this offering constitutes
the dilution to investors in this offering. Net tangible book value per share is
determined by dividing total tangible assets less total liabilities by the
number of outstanding shares of common stock.
At December 31, 1998, we had a net tangible book value of $282,954 or $0.07 per
share. After giving effect to the sale of the 3,521,000 shares of common stock
being offered, after deducting expenses of this offering, our adjusted net
tangible book value at December 31, 1998 would have been $9,035,454 or $1.15 per
share, representing an immediate increase in net tangible book value of $1.08
per share to the existing stockholders and an immediate dilution of $1.35, or
54%, per share to new investors. If we receive a minimal amount of proceeds from
this offering, the effects of dilution will be much greater.
December 31, 1998 3,521,000 shares sold
Public offering price per share n/a $2.50
Net tangible book value $0.07 n/a
per share of common stock
before the offering
Pro forma net tangible n/a $1.15
book value per share
of common stock after the offering
Increase to net tangible n/a $1.08
book value per share
attributable to purchase of
common stock by new investors
Dilution to new investor n\a $1.35
Business
We develop software to provide people connected to the Internet with
real-time music content while they listen to music CDs. The software and service
offers a high level of interaction with our users, which provides us with the
ability to seamlessly customize content for them. Our proprietary technology
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uniquely integrates third party content such as artist profiles, pictures,
biographies, discography's, artist interviews, song reviews, and the latest
news. We intend to launch our software and service on June 15, 1999. CDbeat.com,
Inc. was incorporated in May 1998 under the laws of the State of Delaware.
Industry Overview
The music industry has recently experienced a series of changes, led by
electronic and online commerce, which has created market opportunities for us
and other similarly situated online music companies. These favorable market
trends include:
The emergence of the Internet and the world wide web
The Internet has become an important medium for communications, content and
commerce. According to International Data Corporation, the number of Web users
worldwide will grow from 97 million at the end of 1998 to 320 million by the
year 2002. Industry analysts believe the Internet represents the fastest growing
form of media in history. The dramatic growth in Internet usage has been fueled
by a number of key factors, including:
o technological, functional and infrastructure advances in computing and
communications;
o lower costs associated with publishing content on the Internet as compared
to traditional media;
o increased quantity and improved quality of information and services
offered on the Web; and
o increased affordability of, access to and resulting proliferation of
multimedia computers.
The emergence of electronic and online commerce.
Internet and online services have provided organizations and individuals
with innovative ways of conducting business. With the emergence of the Internet
as a globally accessible, fully interactive and individually addressable
communications and computing medium, companies that have traditionally conducted
business in person, through the mail or over the telephone are increasingly
utilizing electronic commerce.
Consumers have shown a strong preference for transacting various types of
business electronically, such as paying bills, buying insurance, booking airline
tickets and trading securities, rather than in person or over the telephone.
These transactions are being streamlined through online commerce and can now be
performed directly by individuals virtually anywhere at any time. Consumers have
accepted and even welcomed self-directed online transactions because these
transactions can be faster, less expensive and more convenient than transactions
conducted through a human intermediary.
Growth of advertising on the Internet
The Internet is an attractive advertising medium because of its
interactivity, flexibility, target ability, and accountability. It provides
advertisers with the opportunity to reach broad, global audiences, since the
Internet can be accessed from anywhere in the world, and to target their
advertising to populations within specific regions or countries, to users with
desirable demographic characteristics and to people with specific interests. The
interactive nature of the Internet gives advertisers the potential to:
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o analyze demographic characteristics of the viewers of the advertisement;
o measure the number of times that a particular advertisement has been viewed;
o receive direct feedback on their advertising;
o establish dialogues and one-to-one relationships with potential customers; and
o adapt advertising to respond to feedback.
We believe that the Internet also represents an attractive new medium for
direct marketing to users with specific characteristics and interests, which has
traditionally been conducted through direct mail and telemarketing. Unlike many
of the traditional methods of direct marketing, the Internet provides direct
marketers with the opportunity to contact consumers at the point-of-sale, their
personal computers. The success of a direct marketing campaign is generally
based on a direct marketer's return on investment, which is measured by the
response rates, measured by the number of leads or sales, and cost-per-response.
The flexible nature of a digital medium like the Internet enables
advertisers to change their messages on a daily basis in response to real world
events and consumer feedback. The ability to target advertisements to broad
audiences, specific regional populations, and affinity groups or select
individuals makes Internet advertising versatile. Unlike traditional advertising
where advertisements are presented to consumers who may or may not have an
interest in them, Internet advertisements can be delivered when a consumer calls
for a piece of information or a particular web page. Unlike more traditional
media, we believe that the Internet is a more accountable medium where
advertisers can receive reports on the impression levels, demographic viewership
and effectiveness of their advertisements.
According to the Direct Marketing Association, in 1997, an estimated $153
billion was spent on direct marketing in the United States. Jupiter
Communications estimates that total online advertising revenue in the U.S. will
increase from $1.9 billion in 1998 to $7.7 billion by 2002.
The development of online music retailing
According to independent research firm Jupiter Communications, total
online sales of pre-recorded music are projected to increase from $37.0 million
in 1997 to $1.4 billion in 2002. We believe that while the Internet provides a
price competitive distribution channel for pre-recorded music, the potential
also exists to use the Internet as a value-added method of distribution.
A number of characteristics of online music retailing make the sale of
music merchandise via the Internet particularly attractive compared to
traditional retail stores because:
o The Internet offers many data management and multimedia features, which
enable consumers to listen to sound samples or search for music by genre,
title or artist.
o Users can access a wealth of information and events, including reviews,
related articles, music history, news and recommendations.
o Internet retailers can obtain extensive demographic and behavioral data about
their customers, providing them with greater direct marketing opportunities
and the ability to offer a more personalized shopping experience.
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o Internet retailers can also offer consumers significantly broader product
selection, the convenience of home shopping and 24-hour-a-day,
seven-day-a-week operations, available to any location, foreign or domestic,
that has access to the Internet.
Growth in the number of people listening to music on their personal computers
Today, virtually every personal computer sold is low-cost, Internet-enabled
and fully equipped with extensive music technology including, CD players, sound
cards and speakers. We believe this and other factors are contributing to a
substantial increase in the number of people listening to music on their
personal computer. Based on our calculations and industry experience, we
estimate that there are more than 5 million people that listen to their favorite
music while browsing the Internet and working and playing on their personal
computer. Within five years, we believe that number will grow to more than 60
million people.
Strategy
Our strategy is to capitalize on perceived opportunities arising from
the expanding online music industry by:
Focusing on providing compelling content. We are dedicated to providing
comprehensive content that is demographically targeted. We intend to license
proprietary content from writers, musicians, publishing companies, news
services, music labels and others.
Targeting music fans and others that listen to music on the Internet. We believe
the market for these users is rapidly evolving and that our software and
services are positioned to provide significant value.
Create online user communities. We intend to create online communities for our
users. We seek to encourage user interaction in chat rooms and on message
boards. We invite users, artists and publishers to post reviews and develop a
forum for fan and musician interaction. By creating an online community, we hope
to provide customers with an inviting and familiar experience that will
encourage them to return frequently to CDbeat.com and to interact with others.
We believe this will promote loyalty and lead to repeat purchases.
Expanding our marketing efforts for our software and service. We intend to
aggressively market CDbeat.com software and services through online, print and
other advertisements. Our advertising efforts are expected to include
advertisements in music publications and various other regional and national
publications that have a demographic similar to our target market. We also
intend to advertise through Internet banner advertisements.
Continuing development of our software and services. We intend to expand our
research and development efforts to create better software and services with
more features, functions and benefits for our current and future users. We also
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intend to build a more scalable, flexible and modular software system that will
enable us to service a higher number of simultaneous users.
Leverage advantages of being an online retailer. We believe we have several
advantages relative to offline companies because we are not burdened by the
costs of a physical store, warehouse, inventory, distribution network and
related personnel. We can offer a broad selection of products and services, with
little merchandising space, inventory risk or expense.
Maximize value for advertisers. We seek to maximize the value we can offer to
advertisers by providing an attractive, growing and targeted audience, as well
as by delivering innovative advertising products and campaign management
techniques.
Aggressively pursue strategic relationships. We intend to aggressively pursue
relationships with companies to facilitate adoption of our software and
services, maximize our market penetration, build brand recognition, accelerate
product development, maximize revenues, and provide us with compelling content.
We may pursue relationships with content providers, musicians, software
developers, hardware vendors, entertainment companies, broadcasting and
publishing companies, and other companies.
Offering our software and services in foreign markets. We intend to customize
our software and services for foreign users through international sales and
marketing partners.
CDbeat.com
Since our software is a client-server application and is based on standard
Internet protocols we believe we have significant flexibility in its ongoing
design and development. For example, new Internet technologies for streaming
audio or video can be integrated with greater ease than if our systems were not
based on standard protocols.
The CDbeat.com software and service is offered for free to Internet users
who register with us. On June 15, 1999, we intend to launch our software and
service from our web site located at www.cdbeat.com.
Online retailing.
We intend to open an online store in July 1999 that could be accessed
through our software. We are designing the store to be intuitive, easy to use
and to enable the ordering process to be completed with minimal customer effort.
Our customers will be able to conveniently shop at any time from the privacy and
comfort of their own home or office.
We have entered into an agreement with Alliance Entertainment to provide
us with fulfillment services for the sale of music CDs through our online store.
When we open our store we will have more than 175,000 CDs to sell, without
inventory risk or expense. We believe that our selection offers customers a
greater selection than the typical music stores that carry up to 12,000 items
and superstores that carry up to 50,000 items.
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Our contract with Alliance Entertainment terminates on April 7, 2002. It may
be extended for an additional two years by mutual consent. The contract can be
terminated by us upon ten days notice if Alliance fails to perform as required
and can be terminated by Alliance if we fail to perform as required or fail to
achieve average sales levels of $25,000 per month. In the event that the
contract with Alliance is terminated or not renewed, we have identified
additional sources for music CD fulfillment services and an additional source
for music database content.
We intend to offer customers aggressive discounts of between 10% and 50%
off traditional retail store prices. Since we are not burdened by the costs of a
physical store, warehouse, inventory, distribution network and related
personnel, we can offer our merchandise at lower prices than traditional stores.
We intend to adjust pricing strategies and tactics as necessary to maintain our
competitiveness.
In the future, we intend to:
o offer customers a variety of personalized services and features, including
e-mail notifications of new album releases, promotions, reminders of
birthdays, anniversaries or other dates of interest, which may lead to
impulse gift buying;
o build or buy software to personalize promotions and product displays based on
customer preferences, purchasing history, site traffic patterns and seasonal
considerations;
o seek a broader selection of products to offer our users. We are exploring
opportunities to sell concert tickets, artist merchandise, general
merchandise and branded products;
o build a customer support center to offer e-mail, phone and fax options for
customer purchases, comments, complaints and suggestions;
o hire personnel to assist in implementing these activities.
Online advertising.
We seek to maximize the value we can offer to advertisers by providing an
attractive, growing and targeted audience, as well as by delivering innovative
advertising products and campaign management techniques. By collecting
information about our users, we are able to target demographic user groups,
which provides advertisers and sponsors with access to highly defined audiences.
This segmentation will enable advertisers and sponsors to customize their
messages through banner advertisements, event and program sponsorships.
We believe the combination of our online user communities, highly specific
and desirable user demographics, and long usage times, provides a favorable
platform for targeted and cost-effective online advertising. We have not sought
after or secured any advertisers yet but intend to seek advertisers following
our commercial launch.
We intend to provide our advertisers and sponsors with quantitative
feedback on the effectiveness of their programs. In addition, we intend to
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provide third party audit reports showing data to enable advertisers to verify
the number and type of people viewing their advertisements and to monitor their
advertisements' effectiveness.
Advertising revenue will be derived principally from short-term
advertising contracts on a per view basis. Our advertising rates will generally
range from $10.00 to $50.00 per thousand people viewing them, depending upon
location of the advertisement and the extent to which it is targeted for a
particular audience. Discounts from standard rates may be provided for higher
volume, longer-term advertising contracts.
In the future, we intend to:
o offer advertisers a variety of services, including TV-style full-screen ads,
pop-up log-on box ads, e-mail newsletter ads, chat room ads, banner ads, and
sponsorship of lobbies, channels and events;
o develop, build or license technologies that will enable us to maximize the
interaction between advertisers and users;
o open an advertising sales office in New York City;
o develop strategic relationships with large advertising firms to market our
advertising services;
o hire an in-house sales staff and use consultants to develop and implement our
advertising strategies.
Technology for CDbeat software and services
We are developing a proprietary client-server technology platform for
creating a broad range of advertising and merchandising applications on the
Internet. Since 1998, we have invested heavily in developing our software and
related technologies, incurring over $225,000 of research and development
expenses. Our technology includes a combination of our own technology and
commercially available, licensed technology. It is being designed to provide our
service simultaneously to millions of users.
Client software is software that is on an individual user's personal
computer and makes it possible for that person to seamlessly communicate with
other computers located across the Internet. This enables a person to interact
with us and with other users of our software.
Our proprietary client software remedies several difficult problems
including, automatically configuring to a user's computer, digitally
fingerprinting ordinary music CDs inserted into an individual's computer,
transparently communicating with our Internet servers, integrating our
application with browser technologies, presenting visual content and providing
navigation options to users.
Server software is software that is on our computers. It makes it possible
for our users to seamlessly communicate with us and enables us to present
dynamic content to them. Our software is being designed to run over a
distributed infrastructure, which is a network of large computers that run our
services and are located at various locations across the country and are
connected through the Internet. We have designed our server software to
automatically deal with scaling and load balancing.
To address the critical issues of privacy and security on the Internet, we
intend to incorporate standard security protocols for transmission of
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confidential information between customers and our servers so that all data is
transmitted via a fully encrypted session.
To date, all of our research and development has been developed by
Cadnetics, Inc. a third-party software-development firm. Sixteen people working
for them are engaged in the development of our software and systems. We engaged
them for a period of six months, which began in January 1999 and ends on June
30, 1999. We are currently negotiating to extend their contract but no agreement
has been reached. We intend to hire our own technical staff if the agreement
with Cadnetics is not renewed.
In the future, we intend to develop, license or purchase a broad array of
state-of-the-art technology that will facilitate:
o software management;
o complex database functionality;
o customer interaction and personalization;
o advertising tracking and rotation;
o transaction processing;
o order filling;
o billing; and
o customer service functionality.
In addition, we intend to bring some or all of our technology development
in-house.
Strategic Relationships
We have entered into the following strategic relationships:
o Cadnetics, Inc., for the research and development of our software and
systems;
o Alliance Entertainment for the fulfillment of music CDs sold by us and for
licensing the All Music Guide, an extensive music database. This provides
us with thousands of files of information on artists, albums, tracks
and reviews.
We have also entered into a relationship with L&R Holdings, Inc. to provide
us with management consulting and strategic advice specifically relating to the
entertainment industry and in identifying and evaluating merger and acquisition
opportunities. We have paid L&R a retainer of $75,000, warrants to purchase
303,000 common shares at $2.50 and 303 preferred shares class a, which are
convertible into 303,000 common shares. The agreement expires on January 12,
2000 but can be extended by mutual consent. Our relationship with L&R Holdings
is in good standing. In the event that the agreement is terminated or not
renewed, we do not believe that would have a material impact on our business. We
believe that we could identify and retain additional consultants to assist us in
the activities described.
In the future, we intend to aggressively pursue relationships with companies
to:
o facilitate adoption of our software and services;
o maximize our market penetration;
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o build brand recognition;
o accelerate product development;
o maximize revenues; and
o provide us with compelling content.
We may pursue relationships with content providers, musicians, software
developers, hardware vendors, entertainment companies, broadcasting and
publishing companies, and other companies.
In the future, we intend to seek to expand our operations by acquiring
companies in businesses that we believe will complement or enhance our business.
We may not be able to ultimately effect any acquisition, successfully integrate
any acquired business in our operations or otherwise successfully expand our
operations. We have not established any minimum criteria for any acquisition and
our management has complete discretion in determining the terms of any
acquisition. Consequently, there is no basis for you to evaluate the specific
merits or risks of any potential acquisition that we may undertake.
Customer Support
We intend to place customer support and technical support, among our
highest priorities. Based on our experience in the industry and user feedback,
we believe that providing an effective customer support team to handle user
needs is critical to our success. Our customer support organization will help
users download and install our software, handle software and service inquiries
and address all technical questions.
In the future, we intend to:
o provide live customer support from 9 AM to 5 PM EST Monday through Friday; o
provide a separate technical team to help users and strategic partners with
particularly serious or persistent technical issues;
o establish a special chat room for customer support and technical assistance; o
purchase customer support management software, databases and systems.
We currently do not have a customer support team in place and are
relying on Cadnetics, Inc. for our technical support. We intend to have a
customer support and in-house technical support operation to handle the areas
listed above by the end of June 1999.
We believe that providing highly personalized and professional customer
support will further differentiate our products and services from those of our
competitors.
Marketing and sales
Our marketing strategy will emphasize two key objectives. The first is to
provide consumers with online communities in which they can socialize, create
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their own experiences, engage in activities and events, and listen to music. The
second is to provide online advertisers with opportunities to reach this
attractive, targeted audience with innovative advertising products.
We believe people will find out about our software through several methods,
including:
o public relations campaign to drive mass media press coverage. Our public
relations activity will be focused on consumer publications such as Internet,
music, news and entertainment magazines and newspapers;
o affiliate programs where web sites owned and operated by third-parties can
generate income by generating downloads and revenues for us;
o strategic partnerships;
o online and offline advertisements;
o special event driven promotions;
o personal/e-mail recommendations from co-workers, friends and family members.
We have strategically chosen to offer our software free of charge, make it
readily available, and to distribute it widely to promote extensive adoption.
In the future, we intend to:
o develop specialized sales and marketing programs to promote our software and
services;
o engage a marketing agency to assist us with our commercial launch and
promotion;
o engage an advertising agency to assist us with the design and implementation
of our strategies;
o develop relationships with some of the major companies that people use to
enter and navigate the Internet, such as Yahoo, Excite and Infoseek;
o hire an in-house sales staff and use consultants to develop and implement our
sales and marketing strategies.
Our marketing budget is subject to a number of factors, including our results of
operations and ability to raise additional capital. In the event that we are
successful in raising additional capital or our results of operations exceed our
expectations, our marketing budget for the next 12-month period will increase
significantly.
Customers
Until we launch our software and services, we will have no customers.
However, we do have a number of people using our software to assist us with our
feature, function and compatibility testing. We intend to launch our software
and services to the public on June 15, 1999. We will not be able to generate any
advertising or commerce revenues until we launch our software and services.
Operations and Infrastructure
Substantially all of our computer, telecommunications and Internet
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operations are in Brossard, Quebec. Our consultants at Cadnetics are managing
them for us. All systems are managed from 9 AM to 5 PM EST Monday through
Friday. Technical personnel are on call at all other times.
Our services utilize one IBM compatible server containing a Microsoft SQL
7.0 database, a proprietary decision making program, chat software, a user
database and a content database. We currently do not have any redundant systems
that would perform our web site or server functions in the event of a system
failure. Nor do we have an off-site backup of our music database.
In the event of a catastrophic loss at our Brossard facility resulting in
damage to, or destruction of, our computer, telecommunications and Internet
systems, we would have a material interruption in our business operations.
In the future, we intend to:
o engage a larger Internet service provider to provide high speed bandwidth to
accommodate sudden increases in site traffic;
o purchase hardware and systems to accommodate several thousand simultaneous
visitors;
o expand our infrastructure as necessary to meet the usage demands for our
service;
o expand our operations department to 24 hours a day, 365 days a year;
o bring our operations department in-house;
o hire an in-house sales staff and use consultants to develop and implement
our strategies.
Supply Management and Automated Order Filling Process
We do not carry any inventory and will rely exclusively on third party vendors
for distribution and fulfillment. We believe that this distribution strategy
allows us to offer extensive selection while avoiding the high fixed costs and
capital requirements associated with owning and warehousing product inventory.
We have entered into an agreement with Alliance Entertainment, one of the
largest firms in the industry, to provide us with fulfillment services for music
CDs we sell. When we open our store we will have more than 175,000 CDs to sell,
without inventory risk or expense.
Based on our current arrangement with our supplier, the distributor will usually
ship merchandise within hours of receiving an electronic order from us. The
supplier picks, packs and ships customer orders and charges us for merchandise,
shipping and handling.
In the future, we intend to:
o transmit customer orders automatically to our order-filling center by a
secure, electronic connection, and processed immediately upon receipt;
o identify additional suppliers of products and services that we can offer;
o offer customers a choice of shipping options, including overnight, two-day
and standard delivery within the United States and expand our shipping
options to provide shipping to over 200 countries;
o develop order-tracking features that allows customers to track the status of
their order;
o hire an in-house sales staff and use consultants to develop and implement our
strategies.
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Competition
The market for online Internet users and advertisers is intensely
competitive and rapidly changing. Our most visible competitors currently include
CDnow, Inc., Amazon.com, Inc., Columbia House, Billboard Magazine, MTV, UBL and
WinAmp. We are subject to competition that is expected to intensify in the
future.
We compete for users with many Internet content providers and Internet
service providers, including Web directories, search engines, shareware
archives, content sites, commercial online services and sites maintained by
Internet service providers, as well as thousands of Internet sites operated by
individuals. These competitors include free information, search and content
sites or services, such as America Online, CNET, CNN/Time Warner, Excite,
Infoseek, Lycos, Microsoft, Netscape and Yahoo!.
We also compete with traditional forms of media such as newspapers,
magazines, radio and television, for advertisers and advertising revenues. We
believe that the principal competitive factors in attracting advertisers include
the amount of usage through our software, brand recognition, customer service,
the demographics of our members and viewers, our ability to offer targeted
audiences and the overall cost-effectiveness of the advertising medium we offer.
We believe that the number of Internet companies relying on Internet-based
advertising revenue will increase substantially in the future. Accordingly, we
will likely face increased competition, resulting in increased pricing pressures
on our advertising rates which could in turn have a material adverse effect on
our business, results of operations and financial condition. Advertisers may
perceive Internet content providers and Internet service providers, including
Web directories, search engines, shareware archives, sites that offer
professional editorial content, commercial online services and sites maintained
by Internet service providers as more desirable web sites for placement of
advertisements.
We also face competition from traditional music retail chains and
megastores, mass merchandisers, consumer electronics stores, music clubs, and a
number of small start-up companies. We could also face competition from record
companies, multimedia companies and entertainment companies that seek to offer
recorded music either directly to the public or through strategic ventures and
partnerships.
We also face significant competition in the growing market for MP3,
which is a special computer file format utilized to digitally transmit music.
This could reduce the attractiveness of music CDs, which could affect the market
acceptance and usage of our software and services. Digitally downloaded music
can currently be found on the web sites of existing online music retailers,
artists and record labels as well as catalogs of songs provided by Internet
portals such as Lycos. We expect the popularity of MP3 to intensify with further
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entry by additional record labels, artists and portals, including those with
greater resources and music content than us. We expect additional market trials
and alliances by technology and music industry participants to continue as the
music industry attempts to integrate emerging technology into its existing
distribution methods.
In addition, our competition includes traditional media companies, a
number of which, including CBS, Sony, Universal, Columbia, BMG, Warner Brothers,
Disney and NBC, have recently invested in and acquired Internet companies. Our
competitors and potential competitors may develop superior software or services
that achieve greater market acceptance than ours.
Many of our existing and potential competitors, including web directories
and search engines and large traditional media companies, have longer operating
histories in the web market, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we have.
Our competitors may be able to undertake more extensive marketing campaigns for
their brands and services, adopt more aggressive advertising pricing policies
and make more attractive offers to potential employees, distribution partners,
commerce companies, advertisers and third-party content providers.
Proprietary Rights
Our success depends in part on our ability to protect our proprietary
software and other intellectual property. To protect our proprietary rights, we
will generally rely on patent, copyright, trademark and trade secret laws,
confidentiality agreements with employees and third parties, and license
agreements with consultants, vendors and customers, although we have not signed
such agreements in every case.
We currently do not have any patents issued to us. We intend to file for
patents as necessary upon completion of this offering. We cannot be certain that
any future patent applications will be granted, that any future patent will not
be challenged, invalidated or circumvented, or that the rights granted under any
patent that may be issued will provide competitive advantages to us. Many of our
current and potential competitors dedicate substantially greater resources than
we do to protection and enforcement of intellectual property rights, especially
patents. We also intend to pursue the registration of certain of our trademarks
and service marks in the U.S. and in certain other countries.
Third parties may copy or obtain and use our proprietary technologies,
ideas, know-how and other proprietary information without authorization or
independently develop technologies similar or superior to our technologies. Our
competitors may obtain patents or other proprietary rights that would prevent,
or limit or interfere with our ability to make, use or sell our software or
services. If we are found to infringe on the proprietary rights of others and
may be required to incur substantial costs to defend any litigation, cease
offering our products, obtain a license from the holder of the infringed
intellectual property right or redesign our software and services.
As a publisher and distributor of Internet content, we face potential
liability for negligence, copyright, patent, trademark, defamation, indecency
and other claims based on the nature and content of the materials that we
broadcast. As a result, we may be found to infringe on the proprietary rights of
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others. Our business, financial condition and operating results could be
adversely affected if we are found to infringe on the proprietary rights of
others.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving. We can not be sure of the future viability or
value of any of our proprietary rights or of similar rights of other companies
within this market. We cannot be certain that the steps taken by us will prevent
misappropriation or infringement of our proprietary information.
Any litigation might result in substantial costs and diversion of
resources and management attention and could have a material adverse effect on
our business, results of operations and financial condition.
CDbeat.com is not obligated to directly pay royalties to artists when it
sells music CDs because the royalty payments are covered in payments we make to
the suppliers to acquire our merchandise. Because of this, we are not obligated
to obtain authorization to sell a particular music CD.
Regulation of our business
We are not currently subject to direct regulation by any governmental
agency, other than laws and regulations generally applicable to businesses,
although rules pertaining to the use of encryption may apply to our software.
Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted in the U.S. and abroad with
particular applicability to the Internet. It is possible that governments will
enact legislation that may be applicable to us in areas such as content, network
security, encryption and the use of key escrow, data and privacy protection,
electronic authentication or "digital" signatures, illegal and harmful content,
access charges and retransmission activities. Moreover, the applicability to the
Internet of existing laws governing issues such as property ownership, content,
taxation, defamation and personal privacy is uncertain.
The majority of laws that currently regulate the Internet were adopted
before the widespread use and commercialization of the Internet and, as a
result, do not contemplate or address the unique issues of the Internet and
related technologies. Any export or import restrictions, new legislation or
regulation or governmental enforcement of existing regulations may limit the
growth of the Internet, increase our cost of doing business or increase our
legal exposure. Any of these factors could have a material adverse effect on our
business, financial condition and results of operations.
Legislation over content distributed over the Internet could damage the
growth of the Internet generally and decrease the demand for our products and
services. Although two recently enacted federal laws regulating the content
distributed over the Internet have either been partially struck down or
enjoined, similar laws may be proposed and adopted.
In addition, the Federal Trade Commission is considering the adoption of
regulations regarding the collection and use of personal identifying information
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obtained from individuals, including children, when accessing web sites. These
developments could have an adverse effect on our ability to target product
offerings and attract advertisers and would have a material adverse effect on
our business, results of operations and financial condition.
These regulations may include a requirement that companies establish
procedures to:
o give adequate notice to consumers regarding information collection and
disclosure practices;
o provide consumers with the ability to have personal identifying information
deleted from a company's database;
o clearly identify affiliations or a lack of affiliations with third parties
which may collect information or sponsor activities on a company's Web site;
and
o obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
While we intend to implement programs designed to enhance the protection
of the privacy of our members, including children, we cannot be certain that
such programs will conform with any regulation adopted by the FTC. Moreover,
even in the absence of regulation, the FTC has begun investigations into the
privacy practices of companies that collect information on the Internet. One
investigation by the FTC has resulted in a consent decree in which the Internet
company has agreed to establish programs to implement the four principles noted
above. We may become subject to an investigation by the FTC, and the FTC's
regulatory and enforcement efforts may adversely affect our ability to collect
demographic and personal information from members.
In addition, at the international level, the European Union has adopted a
directive that will impose restrictions on the collection and use of personal
data. Such directive could affect U.S. companies that collect information over
the Internet from individuals in European Union member countries, and may impose
restrictions that are more stringent than current Internet privacy standards in
the United States. We cannot be certain that this directive will not adversely
affect the activities of entities such as us that engage in data collection from
users in European Union member countries.
Due to the global nature of the Internet, it is possible that, the
governments of other states and foreign countries might attempt to regulate our
transmissions or prosecute us for violations of their laws even though
transmissions by us over the Internet currently originate primarily in Brossard,
Quebec. Violations of local laws may be alleged or charged by state or foreign
governments, and we may unintentionally violate local laws and local laws may be
modified, or new laws enacted, in the future. Any of the foregoing developments
could have a material adverse effect on our business, results of operations and
financial condition.
Privacy Policy
We believe that issues relating to privacy and use of personal information
relating to Internet users are becoming increasingly important as the Internet
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and its commercial use grow. We have adopted a detailed privacy policy to assure
and protect our users from the abuse of their information. Our privacy
cornerstone is that we will never sell information that identifies an
individual. We do use information about our users for internal purposes only in
order to improve our marketing and promotional efforts, to analyze site usage
statistically, and to improve content, product offerings and site layout. Users
must acknowledge and agree to this policy when registering for our software and
services.
Personnel
As of May 30, 1999, we employed a total of four full-time persons. One is
engaged in executive management and three in sales and marketing. We also retain
a software development firm that employs sixteen people for our research and
development. From time to time, we employ additional independent contractors to
support our engineering, market, sales and support and administrative
organizations. We believe our relations with our employees are generally good
and we have no collective bargaining agreements with any labor unions.
Our success will depend on our ability to hire and retain additional
qualified marketing, sales, technical and other personnel. Qualified personnel
are in high demand. We face considerable competition from other Internet
software and service firms for these personnel, many of which have significantly
greater resources than we have.
Facilities
We have our corporate headquarters at 444 Bedford Street, Suite 8s in the
downtown area of Stamford, Connecticut. Substantially all of our operating
activities are conducted from 400 square feet of office space provided by our
president at no charge.
We also have a branch offices in: Tampa, Florida provided by our attorney
at no charge and in Woodland Hills, CA provided by our vice president of public
relations at no charge. We believe that additional space will be required as our
business expands and believe that we can obtain suitable space as needed. We do
not own any real estate.
Legal Proceedings
We are not currently involved in any legal or regulatory proceedings or,
arbitration. However, our business involves substantial risks of liability,
including possible exposure to liability under federal, state and international
laws in connection with the gathering and use of information about our users,
infringing the proprietary rights of others and possible liability for product
defects, errors or malfunctions.
SELLING SECURITYHOLDERS
We have agreed to register shares of our current stockholders for resale at the
same time we are selling our own shares in this offering and to pay all offering
expenses. Our shareholders are selling 479,000 shares.
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We will not receive any of the proceeds of their sales.
Rajesh Vadavia is the president of Cadnetics, Howard Tanney is the president of
JAM Capital Corp. and Warran Spiess and Genei Spiess are the beneficiaries of
MaxKal Corporation.
Although we have fixed the price of our stock, selling stockholders are free to
sell at any price they desire. Sales by selling stockholders at price lower than
ours could adversely impact our ability to sell our stock and result in our
receiving less proceeds that if there were not such a concurrent offering.
The following table sets forth the name of each selling shareholder and the
number of share owned prior to sale. None of the shareholders has ever held any
position or office with us.
NAME Number of Shares
- ---------- -----------------------
Elsa and Ernest Granz 200
Edward Gibbons 400
Cadnetics Inc. 151,200
Cliff Berger 20,000
Timothy D. Frawley and Mary F. Frawley 1,000
Holli Blechner 4,500
Frank Falco and Geralyn Falco 2,000
David Rousso 6,000
Thomas A. Caton 800
Dominick Caccippio 200
Marsha Korinko and Michael Korinki 400
Frederick Wagner 400
Barbara Wagner 400
Bonnie Wagner 800
JAM Capital Corp. 5,000
Herbert Appel and June Appel 1,000
Mark A. Freeman 110,000
Marlene Cernese 200
Benjamin Cernese and Sharon Cernese 1,000
Kanagasabai Sri Jayaramachandra 500
Noel Stanley Fernando 500
Ashley Roger Canagasabey 500
Anil Goel 500
Brad Jones 500
Shanti McLelland 500
Roger McLelland 500
Mark DeFelice 500
Brian Kelley 500
Robert Enslein Jr. 1,000
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Richard Solomon 500
Layla Khoury 500
Graciela Heintz 500
Steven Hendler 500
Elie Khouri 500
James Dy 500
Hermogenes Brillantes 500
Lawrence Frankel 500
Lauren Cooler 500
Jeremy and Karen Blumenfeld 500
Isabel Arberman 1,000
Bella and Mauricio Nemes 1,000
Joshua and Renee Bialek 1,000
Alfred and Rachelle Arberman 150,000
Maxkal Corporation 10,000
-------------------
TOTAL 479,000
DESCRIPTION OF CAPITAL STOCK
All material provisions of our capital stock are summarized in this
prospectus. However, the following description isn't complete and is subject to
applicable Delaware law and to the provisions of our articles of incorporation
and bylaws. We have filed copies of these documents as exhibits to the
registration statement related to this prospectus.
Common Stock
As of April 30, 1999, there were 4,396,846 shares of common stock outstanding
held of record by 47 stockholders, and options to purchase an aggregate of
431,396 shares of common stock were also outstanding.
You have the voting rights for your shares. You and all other common
stockholders have identical rights and preferences. You and they may cast one
vote for each share held of record on all matters submitted to a vote. You have
no cumulative voting rights in the election of directors.
You have dividend rights for your shares. You and all other common
stockholders are entitled to receive dividends and other distributions when
declared by our board of directors out of the assets and funds legally
available, based upon the percentage of our common stock you own. We will not
pay dividends. You should not expect to receive any dividends on shares in the
near future. This investment may be inappropriate for you if you need dividend
income from an investment in shares.
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You have rights if we are liquidated. Upon our liquidation, dissolution or
winding up of affairs, you and all other common stockholders will be entitled to
share in the distribution of assets remaining after payment or provision for
payment of all debts, liabilities and expenses, and any liquidation preference
to which preferred stockholders, if any, may then be entitled. Our directors, at
their discretion, may borrow funds without your prior approval, which
potentially further reduces the liquidation value of your shares.
You have no right to acquire shares of stock based upon the percentage of
our common stock you own when we sell more shares of our stock to other people.
This is because we do not provide our stockholders with preemptive rights to
subscribe for or to purchase any additional shares offered by us in the future.
The absence of these rights could, upon our sale of additional shares of common
stock, result in a dilution of our percentage ownership that you hold.
Preferred Stock
As of April 30, 1999, there were 311.75 shares of preferred stock class a
outstanding held of record by 2 stockholders, and 50,000 shares of preferred
stock class c outstanding held of record by 1 stockholder. None of these
preferred shares are being converted prior to or at the time of the initial
public offering. All preferred stock class b has been converted into common
stock and none remain issued.
Our board of directors can issue preferred stock at any time with any
rights and preferences without your approval. Our authorized preferred stock may
be issued from time to time in one or more designated series or classes. Our
board of directors, without your approval, is authorized to establish the
voting, dividend, redemption, conversion, liquidation and other relative
provisions as may be provided in a particular series or class. The issuance of
preferred stock, while providing flexibility for possible acquisitions and other
corporate purposes, could, among other things, adversely affect your voting
power. Under some circumstances a third party may find it more difficult to
acquire, or be discouraged from acquiring, a majority of our outstanding voting
stock because we issue preferred stock.
If we are liquidated or dissolved, preferred stock would be entitled to our
assets, to the exclusion of the common stockholders, to the full extent of the
preferred stockholders' interest in us.
We have preferred stock class a. This entitles persons to convert each
preferred stock into 1,000 shares of our common stock upon specified conditions
related to the public listing of our shares and our receiving at least
$5,000,000 of net investment capital.
The conversion rate will be adjusted in the event we change our stock
structure, for example by a stock split or stock dividend. These preferred
stockholders are not entitled to any voting rights, except as may be required by
law; preferential dividend rights; or rights to be repurchased by us.
We have preferred stock class c. This entitles the owners to convert each
preferred stock into ten shares of our common stock upon specified conditions
related to the public listing of our shares, our receiving at least $1,000,000
of net investment capital and specific corporate milestones. Preferred stock,
class c shares are converted based on two milestones (i) time - released in
equal amounts over 3 years and (ii) released pro-rata as the company records one
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million software downloads. As of April 30, 1999 none of the preferred shares,
class c have qualified to be converted into common shares.
The conversion rate will be adjusted in the event we change our stock
structure, for example by a stock split or stock dividend. These preferred
stockholders are not entitled to any voting rights, except as may be required by
law; preferential dividend rights; or rights to be repurchased by us.
We have warrants and options. There are 431,396 warrants and options which
entitles the owners to purchase and equivalent number of shares of our common
stock at $2.50 per common share. These warrants expire on December 31, 1999.
The conversion rate will be adjusted in the event we change our stock
structure, for example by a stock split or stock dividend. These warrant and
option holders are not entitled to any voting rights, except as may be required
by law; preferential dividend rights; or rights to be repurchased by us.
Transfer Agent and Registrar
The Transfer Agent and Registrar with respect to the common stock is
Florida Atlantic Stock Transfer, Inc., Tamarac, Florida.
SHARES ELIGIBLE FOR FUTURE SALE
Of the shares outstanding after the offering, the 4,000,000 shares sold in
this offering, including the 479,000 shares sold by our stockholders, will have
been registered with the SEC under the Securities Act of 1933 and will be
eligible for resale without registration under the Securities Act except if they
were acquired by our directors, executive officers or other affiliates. In
addition, there are 431,396 warrants and options outstanding and preferred
shares that are convertible into an additional 311,750 common shares. Our
directors, executive officers, and persons or entities that they control will be
able to sell shares of stock without violating the limitations of Rule 144 under
the Securities Act. The remaining 3,917,846 outstanding shares may only be sold
under Rule 144. The shares underlying the warrants and options can only be sold
under Rule 144 unless we register those shares.
Under Rule 144, directors, executive officers, and
persons or entities that they control or who control them may sell shares of
common stock in any three-month period in an amount limited to the greater of 1%
of our outstanding shares of common stock or the average weekly trading volume
in our common stock during the four calendar weeks preceding a sale. Sales under
Rule 144 also must be made without violating the manner-of-sale provisions,
notice requirements and the availability of current public information about us.
Before the offering, no public trading market for
our common stock existed. We cannot predict what effect, if any, that sales of
shares or the availability of shares for sale will have on the prevailing market
price of our common stock after completion of the offering. Nevertheless, sales
of substantial amounts of common stock in the public market could have an
adverse effect on prevailing market prices.
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MANAGEMENT
The following table and subsequent discussion sets forth information concerning
our directors and executive officers, each of whom will serve in the same
capacity with us upon completion of the offering. Each director and executive
officer was elected to his position in 1998.
Name Age Title
Joel Arberman 26 President, CEO, and Director
Bryan Eggers 50 Vice President of Public Relations
Avi Kerbs 52 Director
Mr. Arberman has served as president, chief executive officer and a member of
our board of directors since May 1998. From January 1997 until May 1998, Mr.
Arberman served as an independent corporate finance and business development
consultant. From August 1995 until January 1997, Mr. Arberman served as an
Internet Analyst of Yorkton Securities, Inc., an investment banking firm. From
November 1994 until August 1995, Mr. Arberman served as an Equity Analyst at
SunAmerica Asset Management Company, an asset management company. From July 1993
until November 1994, Mr. Arberman served as a Junior Analyst at First Investors
Management Corporation, an asset management company. Mr. Arberman holds a B.S.
degree in Business Administration with a concentration in finance and marketing
and a minor in economics from the State University of New York, at Albany.
Mr. Eggers has served as vice president of public relations since December 1998.
From August 1998 until December 1998, Mr. Eggers served as an independent public
relations consultant. From May 1996 until August 1998, Mr. Eggers served as the
Marketing Communications Manager of Luckman Interactive, an Internet software
development company. From April 1994 until May 1996, Mr. Eggers served as a
Public Relations Specialist for the Dataproducts Division of Hitachi, a computer
printer manufacturer. From May 1993 until April 1994, Mr. Eggers served as a
consultant for public relations and marketing for Now-Online, Inc., an Internet
service provider.
Mr. Kerbs has served as a Director since December 1998. For the past five years,
Mr. Kerbs has served as the president and chief executive officer of Teuza
Management and Development based in Haifa Israel. Teuza is a venture capital
fund invested in the communications, semiconductor equipment and software,
healthcare and biotechnology fields. Mr. Kerbs provides the overall direction of
PhD's, engineers, accountants and legal consultants, engaged in the
identification of high technology investment opportunities and in the completion
of due diligence studies to venture capital investments on the part of the Teuza
Fund. He serves as a Director of many development stage companies and is the
Chairman of the Board of NESS and Rotlex. He holds a Bachelor of Science degree
in Industrial Engineering and Management from the Technion and a Master of
Science degree in Management from the Technion.
Our directors all hold office until the next annual meeting of shareholders and
the election and qualification of their successors. Directors receive no
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compensation for serving on the board of directors other than reimbursement of
reasonable expenses incurred in attending meetings. Officers are appointed by
the board of directors and serve at the discretion of the board.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
Executive Compensation
The following table sets forth all compensation awarded to, earned by, or paid
for services rendered to us in all capacities during the fiscal year ended
December 31, 1998, by our other executive officers whose salary and bonus for
fiscal year 1998 exceeded $100,000.
Summary Compensation Table
Long-Term Compensation Awards
Name and Principal Annual Compensation - 1998
Position
Salary ($) Bonus ($) Number of Shares
---------- --------- Underlying Options (#)
---------------------
Joel Arberman, president None None None
We have entered into two-year employment agreements with Joel Arberman and Bryan
Eggers. Mr. Arberman and Mr. Eggers will be compensated for their services at
the rate of $70,000 per year.
Delaware Law on Indemnification
Our certificate of incorporation contains provisions permitted under the General
Corporation Law of Delaware relating to the liability of directors. The
provisions eliminate a director's liability to stockholders for monetary damages
for a breach of fiduciary duty, except in circumstances involving wrongful acts,
including the breach of a director's duty of loyalty or acts or omissions which
involve intentional misconduct or a knowing violation of law. Our certificate of
incorporation also contains provisions obligating us to indemnify our directors
and officers to the fullest extent permitted by the General Corporation Law of
Delaware. We believe that these provisions will assist us in attracting and
retaining qualified individuals to serve as directors.
Following the close of this offering, we will be subject to the State of
Delaware's business combination statute. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a business combination with
a person who is an interested stockholder for a period of three years after the
date of the transaction in which that person became an interested stockholder,
unless the business combination is approved in a prescribed manner. A business
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combination includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder. An interested stockholder is a
person who, together with affiliates, owns, or, within three years prior to the
proposed business combination, did own 15% or more of our voting stock. The
statute could prohibit or delay mergers or other takeovers or change in control
attempts and accordingly, may discourage attempts to acquire us.
As permitted by Delaware law, we intend to eliminate the personal liability of
our directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors, subject to exceptions. In addition, our bylaws
provide that we are required to indemnify our officers and directors, employees
and agents under circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and we would be required to
advance expenses to our officers and directors as incurred in proceedings
against them for which they may be indemnified. The bylaws provide that we,
among other things, will indemnify officers and directors, employees and agents
against liabilities that may arise by reason of their status or service as
directors, officers, or employees, other than liabilities arising from willful
misconduct, and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. At present, we are not aware
of any pending or threatened litigation or proceeding involving a director,
officer, employee or agent of ours in which indemnification would be required or
permitted. We believe that our charter provisions and indemnification agreements
are necessary to attract and retain qualified persons as directors and officers.
We have agreed to the fullest extent permitted by applicable law, to indemnify
all our officers and directors.
Stock Incentive Plan
Our 1998 stock incentive plan was originally adopted by our board of directors
and approved by stockholders on October 15, 1998. The stock incentive plan
provides for the grant of stock options for up to a total of 10% of the shares
of common stock to employees, officers and directors of, and consultants or
advisors to us.
Each of the incentive stock option agreements will provide that the options
become exercisable if we achieve a specific stock price during the three-year
period commencing on the date of the grant of the options. We are deemed to have
achieved our stock price target if, at any time during the three-year period
commencing on the day we issue the options:
o We shall have sold shares common stock at a price 50% higher than the
offering price, subject to adjustment for additional share issuance's
including stock splits or stock dividends, or more per share, to a person or
entity which is unaffiliated with us or any of our stockholders, officers or
directors, in a private placement or public offering, or
o Our board of directors determines, in good faith, that the fair market value
of a share of our common stock is equal to 50% above the offering price or
more, subject to similar adjustment.
42
<PAGE>
RELATED PARTY TRANSACTIONS
As of April 30, 1999, we borrowed from Mr. Arberman, our president and chief
executive officer a total of $85,175 at a 6% interest rate, payable upon demand.
PRINCIPAL SHAREHOLDERS
The following table sets forth information about our current shareholders
assuming the sale of the maximum number of shares of common stock offered and
conversion of all issued preferred shares. In addition, Mr. Arberman has placed
500,000 of his 3,900,000 common shares in escrow with the board of directors.
The escrow agreement contains the provision that ten common shares shall be
cancelled pro-rata as each preferred share class c held by Mr. Eggers is
converted.
Mr. Arberman directs all voting rights of the preferred shares class c owned by
Mr. Eggers. The terms of the escrow agreements specify that one thirty-sixth of
the preferred shares are to be released each month, subject to the limitation
that for every share released, on a cumulative basis we must have met certain
software download goals. It is possible that some or all of the preferred class
c shares will not be converted into common shares. The agreements are
irrevocable and have an initial term of three years and may be renewed
indefinitely.
Unless otherwise indicated, to our knowledge, all persons listed below have sole
voting and investment power with respect to their shares of common stock, except
to the extent that authority is shared by spouses under applicable law.
Beneficial Ownership of common
stock
Shares Owned Percentage of Class
Before offering After offering
Joel Arberman 3,400,000 77.33% 42.94%
Bryan Eggers 500,000 11.37% 6.31%
--------- -------
All directors and 3,900,000 88.70% 49.26%
officers as a group-
3 persons
43
<PAGE>
THE OFFERING
We are selling 3,521,000 shares of our common stock. Some of our stockholders
are selling an additional 479,000 shares concurrently, which represents 11.98%
of the shares being offered.
We will be selling our shares at the same time as the selling shareholders are
selling their shares. Our stockholders are offering 479,000 shares, which
represents 11.98% of the shares being offered. We have fixed the price of the
stock we are selling in this offering, however, our selling stockholders may
offer their shares at a lower price. Sales by selling stockholders at prices
lower than ours could hurt our ability to sell our stock. This may result in our
receiving less proceeds than if there was no concurrent offering, which could
reduce the value of your shares.
Our selling stockholders are selling their shares without the use of a
professional underwriter and may sell their shares on the stock market through
the use of a broker or in private transactions. We will not receive any of the
proceeds from the sale of their shares. Our selling shareholders are not under a
lock-up or any other agreement restricting the sale of their shares. They can
sell their shares at any time, in any amount and at any price. The shares we are
selling do not have priority over the shares being sold by our selling
shareholders.
Messrs. Arberman and Eggers will sell our shares directly to potential
purchasers and we do not plan to use underwriters or pay any commissions. We
will be selling our shares in a direct participation offering and no one has
agreed to buy any of our shares. There is no minimum amount of shares we must
sell and no money raised from the sale of our stock will go into escrow, trust
or another similar arrangement. The offering will remain open until June 30,
2000, unless we decide to cease selling efforts prior to this date.
We will not escrow of any of the proceeds of this offering. Accordingly, we
will have use of your funds once we accept your subscription and funds have
cleared. Your subscription is non-refundable.
No public trading market for the common stock exists, and one may never
exist. We hope to have our common stock prices listed on the bulletin board
maintained by the National Association of Securities Dealers. The development of
a public trading market depends upon the existence of willing buyers and
sellers, which is not within our control or that of any market maker. We do not
currently have a market maker. Market makers are not required to maintain a
continuous two-sided market and are free to withdraw firm quotations at any
time.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure for trades in any stock defined as a penny stock. The SEC
has adopted regulations that generally define a penny stock to be any equity
security that has a market price of less than $5.00 per share, subject to
exceptions. Under this rule, broker/dealers who recommend these securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction before sale.
44
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION?
We have not previously been subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended. We have filed with the SEC a
registration statement on Form SB-2 to register the offer and sale of the
shares. This prospectus is part of that registration statement, and, as
permitted by the SEC's rules, does not contain all of the information in the
registration statement. For further information with respect to us and the
shares offered under this prospectus, you may refer to the registration
statement and to the exhibits and schedules filed as a part of the registration
statement. You can review the registration statement and our exhibits and
schedules at the public reference facility maintained by the SEC at Judiciary
Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC at 7 World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference room. The registration statement is also available
electronically on the World Wide Web at http://www.sec.gov.
You can also call or write us at any time with any questions you may have.
We would be pleased to speak with you about any aspect of this offering.
Special Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements that reflect our views about
future events and financial performance. Our actual results, performance or
achievements could differ materially from those expressed or implied in these
forward-looking statements for various reasons, including those in the "risk
factors" section beginning on page 6. Therefore, you should not place undue
reliance upon these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements.
LEGAL PROCEEDINGS
We are not a party to or aware of any threatened litigation of a material
nature.
LEGAL MATTERS
The validity of the shares offered under this prospectus is being passed
upon for us by Williams Law Group, P.A., Tampa FL.
FINANCIAL STATEMENTS
45
<PAGE>
CDBEAT. COM, INC.
(A Development Stage Enterprise)
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Independent Auditors' Report F-2
Balance Sheet as of December 31, 1998 F-3
Statement of Operations for the period May 8, 1998
(date of incorporation) to December 31, 1998 F-4
Statement of Stockholders' Equity for the period May 8, 1998
(date of incorporation) to December 31, 1998 F-5
Statement of Cash Flows for the period May 8, 1998
(date of incorporation) to December 31, 1998 F-6
Notes to the Financial Statements F-7
- -------------------------------------------------------------------------------
F-1
46
<PAGE>
[Letterhead of Beard Nertney Kingery Crouse & Hohl, P.A.]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of CDbeat.com, Inc.:
We have audited the accompanying balance sheet of CDbeat.com, Inc. (the
"Company"), a development stage enterprise, as of December 31, 1998, and the
related statements of operations, stockholders' equity and cash flows for the
period May 8, 1998 (date of incorporation) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and the significant estimates
made by management, as well as the overall financial statement presentation. We
believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1998, and the results of its operations and its cash flows for the period May 8,
1998 (date of incorporation) to December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has generated a net loss of $124,074 for the
period May 8, 1998 (date of incorporation) to December 31, 1998, and is
anticipating a net loss for the fiscal year ended December 31, 1999. In
addition, the Company will require a significant amount of capital to commence
its planned principal operations. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note B. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Beard Nertney Kingery Crouse & Hohl, P.A.
February 16, 1999 (except for Note J as to which the
Date is May 1, 1999)
Tampa, FL
F-2
47
<PAGE>
CDBEAT.COM, INC.
(A Development Stage Enterprise)
BALANCE SHEET AS OF DECEMBER 31, 1998
- -------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents 309,203
$
Employee advance 4,984
Prepaid product development costs 420,000
Computer equipment (net of
accumulated depreciation of $26) 1,557
------------
TOTAL $ 735,744
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accrued expenses $ 32,511
Due to stockholder 279
------------
Total liabilities 32,790
------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock - $.001 par value, 10,000,000 shares authorized:
Class A preferred stock - 27.847 shares issued and
outstanding, liquidation value $0 0
Class B preferred stock - 100 shares issued and
outstanding, liquidation value $0 0
Class C preferred stock - 100,000 shares issued and
outstanding, liquidation value $100 100
value $100
Common stock - $.001 par value 20,000,000 shares
authorized; 4,313,600 shares issued and outstanding 4,314
Additional paid-in capital 822,614
Deficit accumulated during the development stage (124,074)
------------
Total stockholders' equity 702,954
------------
TOTAL $ 735,744
============
- -------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
48
<PAGE>
CDBEAT.COM, INC.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
for the period May 8, 1998 (date of incorporation)
to December 31, 1998
- ------------------------------------------------------------------------------
EXPENSES:
Professional fees $ 87,775
Payroll and related taxes 28,933
Office and administration 2,461
Marketing and travel 5,618
Depreciation 26
-------------
Total expenses 124,813
OTHER INCOME-
Interest (739)
-------------
NET LOSS $ 124,074
=============
NET LOSS PER SHARE:
Basic $ 0.03
=============
Weighted average number of shares - basic 4,114,825
=============
Diluted $ 0.03
=============
Weighted average number of shares - diluted 4,128,982
=============
- ------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
49
<PAGE>
CDBEAT.COM, INC.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
for the period May 8, 1998 (date of incorporation)
to December 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Convertible Preferred CommonkStock Paid- Development
Shares Par Value Shares Par Value in Capital Stage Total
------ -------- ---------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, May 8, 1998
(date of incorporation) 0 $ 0 0 $ 0 $ 0 $ 0 $ 0
Proceeds from issuance of
common stock 4,217,600 4,218 443,782 448,000
Issuance of stock in exchange
for product development costs:
Class B Preferred 100 0 138,000 138,000
Common 96,000 96 239,904 240,000
Issuance of preferred stock
in exchange for capital
raising services:
Class A 28 0 28 28
Issuance of preferred stock
as part of employment
agreement and in exchange for
expenses:
Class C 100,000 100 900 1,000
Net loss for the period, May
8, 1998 ( date of incorporation)
to December 31, 1998 (124,074) (124,074)
------- -------- ---------- ------- --------- --------- --------
Balances, December 31, 100,128 $ 100 4,313,600 $ 4,314 $ 822,614 $(124,074) $702,954
======= ======== ========== ======= ========= ========= ========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS. F-5
50
<PAGE>
CDBEAT.COM, INC.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
for the period May 8, 1998 (date of incorporation)
to December 31, 1998
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (124,074)
Adjustments to reconcile net loss to net
cash used in operating activities:
Issuance of preferred stock
for professional services 1,028
Depreciation 26
Change in assets and liabilities, net:
Increase in accrued expenses 32,511
Increase in employee advance (4,984)
Increase in prepaid product development costs (42,000)
Increase in due to stockholder 279
------------
NET CASH USED IN OPERATING ACTIVITIES (137,214)
------------
CASH FLOWS USED IN INVESTING ACTIVITIES-
Purchase of equipment (1,583)
------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES-
Proceeds from the issuance of common stock 448,000
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 309,203
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 0
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 309,203
============
Interest paid $ 0
============
Taxes paid $ 0
============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued for prepaid product development costs $ (240,000)
Preferred stock issued for prepaid product development costs (138,000)
------------
$ (378,000)
============
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
51
<PAGE>
CDBEAT.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
CDbeat.com, Inc. F/K/A SMD Group, Inc. (the "Company") was incorporated under
the laws of the state of Delaware on May 8, 1998. The Company, which is
considered to be in the development stage as defined in Financial Accounting
Standards Board Statement No. 7, intends to provide branded, interactive
information and programming as well as merchandise to music enthusiasts
worldwide. The planned principal operations of the Company have not commenced,
therefore accounting policies and procedures have not been established.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company generated a net loss
of $124,074 for the period May 8, 1998 (date of incorporation) to December 31,
1998, and is anticipating a net loss for the fiscal year ending December 31,
1999. In addition, the Company will require a significant amount of capital to
commence its planned principal operations. Accordingly, the Company's ability to
continue as a going concern is dependent upon its ability to secure an adequate
amount of capital to finance its anticipated losses and planned principal
operations. The Company's plans include a public offering of its common stock
(see Note I) and the issuance of debt, however there is no assurance that we
will be successful in these efforts. In the event the Company receives minimal
or no proceeds from the public offering, the Company will seek alternative
funding sources and may adjust its focus and expenditures required for
implementing its planned operations. These factors, among others, may indicate
that the Company will be unable to continue as a going concern for a reasonable
period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
F-7
52
<PAGE>
NOTE C - CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents. The Company
maintains all of its cash and cash equivalents at one FDIC insured institution,
which has a maximum insurance limit of $100,000.
Accordingly, as of December 31, 1998, approximately $209,000 of cash and cash
equivalents were not covered by FDIC insurance.
NOTE D - PREPAID PRODUCT DEVELOPMENT COSTS
On December 31, 1998, the Company engaged a software development firm (the
"Developer") to develop a software application for the Company's planned
interactive Web site (the "Application"). Pursuant to terms of the agreement,
the Developer received total consideration of $420,000 through December 31,
1998; such consideration consisted of (1) cash of $42,000; (2) 96,000 shares of
the Company's common stock having a market value of $240,000; and (3) 100 shares
of the Company's convertible Class B preferred stock having a market value of
$138,000 (these shares were converted into 55,200 of the Company's common shares
in January 1999).
In January 1999, the scope of the engagement was amended whereby additional
services will be provided by the Developer for $240,000. These costs, along with
the $420,000 of prepaid product development costs in the accompanying balance
sheet, will be expensed as the services are provided. No amounts were expensed
during 1998.
NOTE E - INCOME TAXES
During the period May 8, 1998 (date of incorporation) to December 31, 1998, the
Company recognized losses for both financial and tax reporting purposes.
Accordingly, no deferred taxes have been provided for in the accompanying
statement of operations. The significant components of the deferred tax asset as
of December 31, 1998, assuming an effective income tax rate of 34%, are
approximately as follows:
Deferred Income Tax Asset:
Net operating loss carryforwards $ 42,200
-------------
Deferred income tax asset 42,200
Less valuation allowance ( 42,200)
-------------
Total deferred income tax asset - net $ 0
=============
The Company established a valuation allowance to fully reserve the deferred
income tax asset as of December 31, 1998 as the realization of the asset did not
meet the required asset recognition standard established by Financial Accounting
Standards Statement No. 109 "Accounting for Income Taxes."
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $124,000 for income tax purposes. These carryforwards will be
available to offset future taxable income through the year 2018.
F-8
53
<PAGE>
NOTE F - PREFERRED AND COMMON STOCK
Convertible Preferred Stock
In addition to the preferred shares discussed at Note D, the Company has issued
preferred shares as follows:
a. 27.847 shares of Class A, which were issued to certain consultants for
services related to capital raising activities through the Company's
private placements. In January 1999, all of these shares were converted
into 27,847 shares of common stock. Because of the nature of the
services provided by the consultants, the fair market value of the
shares of $69,618 has been recorded as a reduction of additional
paid-in capital.
b. 100,000 shares of Class C, which were issued to two individuals in
connection with the purchase of certain intangibles, and which may
under certain conditions be converted to 1,000,000 shares of the
Company's common stock. The employees have agreed to place the
preferred shares into a voting trust that is administered by the
Company's president. Pursuant to terms of the voting trust agreements,
one thirty-sixth of the preferred shares are to be released each month,
subject to the limitation that for every share released, the Company on
a cumulative basis must have met certain software download goals. As
such, it is possible that some or all of these shares will not be
converted into common shares, and accordingly, the Company has not
recorded compensation expense during the period May 8, 1998
(date of incorporation) to December 31, 1998. Rather, the Company
will record compensation expense equal to the fair market value of the
common shares on the date any such shares are earned. The agreements,
which are irrevocable, have an initial term of three years and may be
renewed indefinitely.
Each of the above classes consists of the following rights and preferences: (1)
no stated dividends, (2) non-voting, (3) no preferential dividends, (4) no
redemption rights, (5) liquidation preference equal to its par value and
assuming the required conditions are met, convertible into common shares at any
time prior to December 31, 2010. The conversion rates described above are
subject to proportional adjustment in the event of a stock split, stock dividend
or similar recapitalization event effecting such shares.
Common Stock
In addition to the common shares discussed in Note D above, the Company has
issued common shares as follows:
F-9
54
<PAGE>
a. Upon its incorporation, 4,025,000 shares for cash of $25,000 (3,900,000
of these shares were issued to the Company's president).
b. Pursuant to a private placement of securities effected between August
and September 1998, 39,000 shares were sold to twenty-five investors at
a price of $1.00 per share.
c. Pursuant to a private placement of securities effected between October
1998 and December 1998, 153,600 shares were sold to nineteen investors
at a price of $2.50 per share.
In connection with the issuance of Class C preferred stock, the Company's
president has placed 1,000,000 of his common shares in escrow with the Company
under an irrevocable trust agreement. Ten of these shares will be canceled upon
conversion of each of the currently issued and outstanding Class C preferred
shares to common stock. Shares not canceled under this trust agreement by
October 14, 2001 will be released to the Company's president (unless the term of
the agreement is extended).
Warrants
As of December 31, 1998, the Company had issued warrants entitling certain
consultants to purchase 17,847 shares of common stock for a price of $2.50 per
share (which, based on recent sales, the Board of Directors believes is the fair
market value of the stock).
NOTE G - STOCK OPTION PLAN
The Company's 1998 Stock Option (the "Plan") was adopted by the Board of
Directors and approved by the Company's stockholders on October 15, 1998. The
Plan provides that a maximum of 1,000,000 shares of common stock shall be
initially available for issuance, and allows the Board of Directors to make
additional one-time grants of up to 1,000,000 shares for newly hired personnel.
As of December 31, 1998, no such options had been granted.
NOTE H - LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128
"Earnings per Share" ("SFAS No. 128") and SEC Staff Accounting Bulletin No. 98
("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net loss per
share is computed by dividing the net loss available to common stockholders for
the period by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing the net loss for
the period by the number of common and common equivalent shares outstanding
during the period. Common equivalent shares, composed of incremental common
shares issuable upon the conversion of Class A and B convertible preferred
stock, are included in diluted net income per share to the extent such shares
are dilutive.
F-10
55
<PAGE>
Warrants and Class C preferred stock have been excluded from the loss per share
calculations because they currently are not dilutive. The following table sets
forth the computation of basic and diluted net loss per share:
Numerator
Net loss available to common stockholders $
124,074
==========
Denominator
Weighted average shares 4,114,825
----------
Denominator for basic calculation 4,114,825
Weighted average effect of dilutive securities:
Class A Preferred Stock 12,800
Class B Preferred Stock 1,357
==========
Denominator for diluted calculation 4,128,982
==========
Net loss per share:
Basic $ 0.03
==========
Diluted $ 0.03
==========
NOTE I - PROPOSED COMMON STOCK OFFERING
On January 15, 1999, the Company filed a registration statement with the
Securities and Exchange Commission for the sale of up to 4,000,000 shares of its
common stock, including 479,000 of which are being offered by existing
shareholders, for $2.50 per share. The offering is on a direct participation, no
minimum basis. As such, there will be no escrow of any of the proceeds of the
offering and the Company will have the immediate use of such funds to finance
its planned operations.
NOTE J - COMMITMENTS
Effective December 1, 1998, the Company executed two year employment agreements
with its President and its Vice President of Publicity which require aggregate
annual compensation of $140,000 per annum, plus certain bonuses and fringe
benefits (as defined in the employment agreements). The employment agreements
contain clauses, which allow the Company to terminate the officers' employment
for various reasons. If the Company elects to exercise such rights without
reasonable cause (as defined in the employment agreements), the respective
officer(s) will be entitled to their salary and benefits for a period equal to
the lesser of (1) twelve months or (2) the remaining term of the employment
agreement.
F-11
56
<PAGE>
NOTE K - RELATED PARTY TRANSACTIONS
During the period May 8, 1998 (date of incorporation) to December 1, 1998, the
Company's president provided start-up services and a portion of his home for
office space for no consideration. The value of such services and office space
provided are not considered material and as such no expenses have been recorded.
NOTE L - SUBSEQUENT EVENTS
The following significant events have occurred subsequent to December 31, 1999:
a. On January 12, 1999, the Company engaged a financial consulting firm
(the "Firm") to provide various consulting services for a fee of $75,000. The
Firm is also entitled to receive as additional consideration 303 Class A
Convertible Preferred Shares convertible into 303,000 shares of common stock at
a fair market value of $757,500 and a warrant entitling them to purchase 303,000
shares of the Company's common stock at a price of $2.50 per share. Certain
milestones must be met before conversion or exercise.
b. The Company's president and majority stockholder has advanced $26,500
to the Company; such advances bear interest at 6%, are unsecured and due on
demand.
c. In January 1999, warrants were granted to various employees and
individuals to purchase 110,500 shares of the Company's common stock at a price
of $2.50 per share. None of the warrants have been exercised.
------------------------------------------------------------------------------
F-12
57
<PAGE>
Part II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of directors and officers.
The information required by this Item is incorporated by reference to
"indemnification" in the prospectus herein.
Item 25. Other Expenses of Issuance and Distribution.
SEC Registration Fee $2,780
Blue Sky Fees and Expenses 10,000
Legal Fees and Expenses 5,000
Printing and Engraving Expenses 20,000
Accountants' Fees and Expenses 6,000
Miscellaneous 5,000
Total $48,780
The foregoing expenses, except for the SEC fees, are estimated.
Item 26. Recent sales of unregistered securities.
The following sets forth information relating to all previous sales of common
stock by the Registrant which sales were not registered under the Securities Act
of 1933.
On May 8, 1998, we issued 3,900,000 shares of common stock to Joel Arberman,
president and CEO of the Registrant for immaterial organizational services
provided for us. The foregoing purchase and sale were exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) on the basis that the transaction did not involve a public
offering.
On May 10, 1998, we issued 125,000 shares of common stock to Alfred and Rachelle
Arberman, for an aggregate consideration of $25,000. No sales commissions were
paid in connection with the offering. The foregoing purchases and sales were
exempt from registration under the Securities Act pursuant to Section 4(2) on
the basis that the transactions did not involve a public offering.
Pursuant to a private placement of securities effected between August 1998 and
September 1998, we sold 39,000 common stock to 25 investors, each of whom
subscribed to purchase the shares, at a price of $1.00 per share, for aggregate
consideration of $39,000. No sales commissions were paid in connection with the
offering. The foregoing purchases and sales were exempt from registration under
the Securities Act pursuant to Section 4(2) on the basis that the transactions
did not involve a public offering.
Pursuant to a private placement of securities effected between October 1998 and
December 1998, we sold 153,800 common shares to 19 investors, each of whom
subscribed to purchase the shares, at a price of $2.50 per share, for aggregate
consideration of $384,500. No sales commissions were paid in connection with the
offering. The foregoing purchases and sales were exempt from registration under
58
<PAGE>
the Securities Act pursuant to Section 4(2) on the basis that the transactions
did not involve a public offering.
On October 15, 1998, we bought from Mr. Eggers and Mr. Payne, the current vice
president of public relations and former vice president of technology, all
right, title and interest to all intellectual property they owned relating to
specific software, technology and ideas relating to Internet-based and
computer-based music. In exchange for the sale, we issued to each of Mr. Eggers
and Mr. Payne 50,000 preferred shares class c for a consideration of
approximately $.001 per share of preferred stock class c, or an aggregate of
$1,000. The preferred shares class c are convertible into 1,000,000 shares of
common stock following the achievement of specified milestones. The foregoing
purchases and sales were exempt from registration under the Securities Act
pursuant to Section 4 (2) on the basis that the transactions did not involve a
public offering.
On December 31, 1998, we issued to Cadnetics Inc., a software development firm
for the Registrant, 96,000 shares of common stock for consideration of $240,000
of computer software design and development services, plus 100 shares of
preferred stock class b for consideration of $138,000 of services. The foregoing
purchases and sales were exempt from registration under the Securities Act
pursuant to Section 4(2) on the basis that the transactions did not involve a
public offering.
On December 31, 1998, we issued a total of 27.847 shares of preferred stock
class a, which are convertible into 27,847 shares of common stock, to Larry
Kirsch and Scott Eliasoph, for consideration of approximately $1.00 per share of
preferred stock class a, or an aggregate of $27.85. These shares were issued for
business plan writing and evaluation services provided to us. The foregoing
purchases and sales were exempt from registration under the Securities Act
pursuant to Section 4(2) on the basis that the transactions did not involve a
public offering.
On December 31, 1998, we issued a warrant to Larry Kirsch and Scott Eliasoph,
for nominal services provided to us, for a total of 17,847 shares of common
stock. The warrants granted are exercisable at a price of $2.50 per share. The
warrants were issued for general corporate advice including on corporate
presentations and business plan reviews and guidance. The foregoing purchases
and sales were exempt from registration under the Securities Act pursuant to
Section 4(2) on the basis that the transactions did not involve a public
offering.
Between January 1, 1999 and January 9, 1999, we issued 79,030 warrants to
purchase common shares a price of $2.50 per share, to ten individuals for
nominal amount of services provided to us. The warrants were issued for general
corporate advice and guidance on corporate strategies and plans. No sales
commissions were paid in connection with the offering. The foregoing purchases
and sales were exempt from registration under the Securities Act pursuant to
Section 4(2) on the basis that the transactions did not involve a public
offering.
On January 11, 1999, we issued to Larry Kirsch and Scott Eliasoph, consultants
to us, a total of 27,847 shares of common stock for the conversion of 27.847
shares of preferred stock class a. The foregoing purchases and sales were exempt
from registration under the Securities Act pursuant to Section 4(2) on the basis
that the transactions did not involve a public offering.
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<PAGE>
On January 12, 1999, we issued to L&R Holdings Inc., a consulting firm for the
Registrant, 303 preferred stock class a, which are convertible into 303,000
shares of common stock, for consideration of approximately $1,000 per share, or
an aggregate of $303,000. In addition, for nominal services provided to us, we
issued 303,000 warrants to purchase common shares a price of $2.50 per share to
L&R Holdings, Inc. The warrants were issued for strategic consulting advice and
services relating to positioning, guidance and introductions to music and
entertainment individuals and companies. Some assistance relating to the
re-writing of business plan was also provided. The foregoing purchases and sales
were exempt from registration under the Securities Act pursuant to Section 4(2)
on the basis that the transactions did not involve a public offering.
On January 12, 1999, we issued to Fred Sager, a consultant to us, 8.75 preferred
stock class a, which are convertible into 8,750 shares of common stock, for
consideration of approximately $1000 per share of preferred stock class a, or an
aggregate of $8,750. In addition, for business consulting and strategic partner
introductions provided to us, we issued 31,500 warrants to purchase common
shares a price of $2.50. The foregoing purchases and sales were exempt from
registration under the Securities Act pursuant to Section 4(2) on the basis that
the transactions did not involve a public offering.
On January 12, 1999, we issued to Cadnetics, Inc., a software development firm
for the Registrant, 55,200 shares of common stock for the conversion of 100
shares of preferred stock class B. There are no other class b preferred shares
that have been issued.
All investors had the opportunity to ask questions and receive answers from all
of our officers, directors and employees. In addition, they had access to review
all of our corporate records and material contracts and agreements.
May 8, 1998
Joel Arberman accredited
May 10, 1998
Alfred and Rachelle Arberman accredited (participated in two offerings as
noted)
between August 1998 and September 1998
Kanagasabai Sri Jayaramachandra sophisticated
Noel Stanley Fernando sophisticated
Ashley Roger Canagasabey sophisticated
Anil Goel sophisticated
Brad Jones sophisticated
Shanti McLelland sophisticated
Roger McLelland sophisticated
Alfred and Rachelle Arberman accredited (participated in two offerings as
noted)
Mark DeFelice accredited
Brian Kelley accredited
Robert Enslein Jr. accredited
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Richard Solomon accredited
Hermogenes Brillantes accredited
Jeremy and Karen Blumenfeld sophisticated
Isabel Arberman sophisticated
Bella and Mauricio Nemes sophisticated
Joshua and Renee Bialek sophisticated
Lawrence Frankel sophisticated
Lauren Cooler sophisticated
Elie Khouri sophisticated
James Dy sophisticated
Holli Blechner sophisticated (participated in two offerings
as noted)
Layla Khoury sophisticated
Graciela Heintz sophisticated
Steven Hendler sophisticated
between October 1998 and December 1998
David Rousso accredited
Cliff Berger accredited
Mark A. Freeman accredited
JAM Capital Corp. accredited
Thomas A. Caton sophisticated
Holli Blechner sophisticated (participated in two offerings
as noted)
Maxkal Corporation sophisticated
Elsa and Ernest Granz sophisticated
Edward Gibbons sophisticated
Timothy D. Frawley and
Mary F. Frawley sophisticated
Frank Falco and Geralyn Falco sophisticated
Dominick Caccippio sophisticated
Marsha Korinko and Michael Korinki sophisticated
Frederick Wagner sophisticated
Barbara Wagner sophisticated
Bonnie Wagner sophisticated
Herbert Appel and June Appel sophisticated
Marlene Cernese sophisticated
Benjamin Cernese and Sharon Cernese sophisticated
December 31, 1998
Cadnetics, Inc. sophisticated
Scott Eliasoph sophisticated
Larry Kirsch sophisticated
61
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Options issued between January 1, 1999 and January 9, 1999
Avi Kerbs Accredited
Sefany Jones Sophisticated
Hillary Braderman Sophisticated
Fred Sager Accredited
Dave Rosenfeld Accredited
George Chajes Sophisticated
Ronald Kassover Accredited
Kerry Kassover Sophisticated
Mordechai Dugatz Accredited
Harvey Jacobson Accredited
Shares issued on January 12, 1999
Fred Sager Accredited
Item 27. Exhibits.
The exhibits marked with an "*" have already been filed. The remaining exhibits
are filed with this Registration Statement:
Number Exhibit Name
1.1 Subscription Agreement
*3.1 Articles of Incorporation
*3.2 By-Laws
*4.1 Rights and Preferences of preferred stock
*5.0 Opinion Regarding Legality
*10. Form of Employment Agreement with Joel Arberman, Bryan Eggers and Larry
Payne.
*10.2 Stock Option Plan
*10.3 Alliance Entertainment Agreement
*10.4 Voting Trust Agreement for Bryan Eggers.
*10.5 Voting Trust Agreement for Joel Arberman
*10.6 L&R Holdings Consulting Agreement
10.7 Cadnetics
10.8 Eggers Employment Agreement
10.9 Arberman Employment Agreement
23.1 Consent of Expert
*24.1 Consent of Counsel
*Previously filed
All other Exhibits called for by Rule 601 of Regulation S-B are not applicable
to this filing. Information pertaining to our common stock is contained in our
Articles of Incorporation and By-Laws.
62
<PAGE>
Item 28. Undertakings.
The undersigned registrant undertakes:
(1) To file, during any period in which offer or sales are being made, a
post-effective amendment to this registration statement:
To include any prospectus required by section I 0(a)(3) of the Securities Act
of 1933;
To reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective
amendment) which, individually or in the aggregate, represent a
fundamental change in the information in the registration statement;
To include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to the information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of securities at that time shall be deemed to be the
initial bona fide offering.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission any supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred to that section.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to our certificate of incorporation or provisions of Florida
law, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission the indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. If a claim for
indemnification against liabilities (other than the payment by the Registrant)
of expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit, or proceeding is
asserted by a director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether the indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of the issue.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on our behalf by the undersigned, in the City of
Stamford, State of Connecticut, on May 17, 1999.
CDbeat.com, Inc.
/s/ Joel Arberman
President, Treasurer, and Director
/s/ Joel Arberman
Chief Accounting Officer
/s/ Avi Kerbs
Director
64
<PAGE>
As filed with the SEC on May 17, 1999 SEC Registration No. 333-70663
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
AMENDMENT NO. 4
REGISTRATION STATEMENT
ON FORM SB-2
UNDER
THE SECURITIES ACT OF 1933
CDbeat.com, Inc.
(Consecutively numbered pages through of this Registration Statement)
65
<PAGE>
INDEX TO EXHIBITS
- -----------------------------------------------------------------------
EXHIBITS
SEC REFERENCE TITLE OF DOCUMENT LOCATION
NUMBER
- -----------------------------------------------------------------------
1.1 Subscription Agreement This filing
page
- -----------------------------------------------------------------------
3.1 Articles of Incorporation Previously Filed
- -----------------------------------------------------------------------
3.2 Bylaws Previously Filed
- -----------------------------------------------------------------------
Rights and Preferences of
4.1 Preferred Stock Previously
Filed
- -----------------------------------------------------------------------
5 Consent of WILLIAMS LAW GROUP, Previously Filed
P.A.
- -----------------------------------------------------------------------
Form of Employment Agreements
10.1 Previously Filed
- -----------------------------------------------------------------------
Previously Filed
10.2 Stock Option Plan
- -----------------------------------------------------------------------
10.3 Alliance Entertainment Previously Filed
Database license and consumer
direct fulfillment services
agreement
- -----------------------------------------------------------------------
Previously Filed
10.4 Voting Trust Agreement -
Eggers
- -----------------------------------------------------------------------
10.5 Previously Filed
Voting Trust Agreement -
Arberman
- -----------------------------------------------------------------------
Previously Filed
10.6 L&R Holdings Consulting
Agreement
- -----------------------------------------------------------------------
This Filing
10.7 Cadnetics Agreement Page
- -----------------------------------------------------------------------
10.8 Eggers Employment Agreement This Filing
Page
- -----------------------------------------------------------------------
10.9 Arberman Employment Agreement This Filing
Page
- -----------------------------------------------------------------------
23 Consent of Beard, Nertney, This Filing
Kingery, Crouse & Hohl, P.A. Page
- -----------------------------------------------------------------------
24 Consent of WILLIAMS LAW GROUP, Previously Filed P.A.,
(See Exhibit 2)
- -----------------------------------------------------------------------
66
<PAGE>
Exhibit 1.1
SUBSCRIPTION AGREEMENT
67
<PAGE>
CDBEAT.COM, INC.
SUBSCRIPTION AGREEMENT - COMMON SHARES
Gentlemen: The Investor named below, by payment of the purchase price for such
Common Shares, by the delivery of a check payable to CDBEAT.COM, INC., hereby
subscribes for the purchase of the number of Common Shares indicated below
(minimum of one hundred) of CDBEAT.COM, INC., at a purchase of $2.50 per Share
as set forth in the Prospectus. By such payment, the named Investor further
acknowledges receipt of the Prospectus and any Supplement and the Subscription
Agreement, the terms of which govern the investment in the Common Shares being
subscribed for hereby.
A. INVESTMENT: (1) Number of Shares ___________
(2) Total Contribution ($2.50/Share) $_______________
(3) Initial Purchase [ ] Additional Purchase [ ]
Date of Investor's check___________________
B. REGISTRATION:
(4) Registered owner:_____________________________
Co-Owner: ____________________________
(5) Mailing address: _____________________________
City, State & zip: ____________________________
(6) Residence Address (if different from above):
__________________________________________________
__________________________________________________
(7) Birth Date: ___________/___________/____________
(8) Employee or Affiliate: Yes__________No___________
(9) Please indicate Citizenship Status: _________________
(10) Social Security:
#:_____________/_____________/_______________
U.S. Citizen [ ] Other [ ]
Co-Owner Social Security:
#:_________________/_____________/_______________
(11) Telephone (H) ( ) ______________________
Corporate or Custodial: ____________/___________/____________
Taxpayer ID #: ______-______________/______________
C OWNERSHIP [ ] Individual Ownership [ ] IRA or Keogh
[ ] Joint Tenants with Rights of Survivorship
[ ] Trust/Date Trust Established_______________
[ ] Pension/Trust (S.E.P.) [ ]Tenants in Common
[ ] Tenants by the Entirety [ ] Corporate Ownership
[ ] Partnership [ ]Other_____________________
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D. SIGNATURES: By signing below, I/we represent that I/we meet the suitability
standards set forth in the Prospectus under "Suitability Standards." Signatures
- - Registered
Owner:_______________________________________
Co-Owner:____________________________________
Print Name of Custodian or Trustee:______________________________________
Authorized Signature:___________________________
Date:_____________________ Witness _______
Signature_____________________________________
E. PAYMENT SHOULD BE SENT TO (IF DIFFERENT THAN REGISTERED OWNER):
Name:____________________________________________________
c/o_______________________________________________________
Address:__________________________________________________
Account Number:___________________________________________
City, State & Zip:____________________________________________
Telephone Number:_________________________________________
F: BENEFICIAL OWNER(S): All reports and financial statements will normally be
sent to the registered owner at the address in Section B. If reports and
financial statements are to be sent to the Beneficial Owner of an IRA or Keogh,
insert name of the Beneficial Owner.
Name of Beneficial Owner Only:_______________________________
Telephone Number:_________________________________________
Address:_________________________________________________
City, State & Zip:___________________________________________
G. BROKER-DEALER/REGISTERED REPRESENTATIVE DATA: ALL LINES MUST BE COMPLETED,
ANY MISSING SIGNATURES MAY DELAY PROCESSING OF THIS ORDER.
Broker-Dealer NASD Firm Name:________________________________
Date:_______________ Telephone Number:_______________________________
Main Office Address:______________________________________
City, State &Zip:________________________________________________
Print or Type Name of Broker-Dealer, Principal or other Authorized
Signatory:______________________________________________________
Authorized Signature:_____________________________________________
Print or Type Name of Registered Representative or other Authorized
Signatory:________________________________________________________
69
<PAGE>
Signature:________________________________________________________
Branch Office Address:_____________________________________
City, State & Zip:________________________________________
MAIL TO: CDbeat.com, Inc., 444 Bedford Street, Suite 8s, Stamford, Connecticut
06901 telephone 203/602-9994, facsimile 203/602-9995.
OFFICE USE ONLY:
Date Received:__________________________________
Date Accepted/Rejected_________________________________________
Subscriber's Check Amount:_______________________
Check No.___________________ Date Check ________________
Deposited________________________________
MR #________________
70
<PAGE>
REFERENCE 10.7
CADNETICS AGREEMENT
71
<PAGE>
January 13th, 1998
SMD Group Inc.
Bedford Towers
444 Bedford Street
Suite 8S
Stanford, Connecticut
USA 06901
Attention: Mr. Joel Arberman
Dear Mr. Arberman:
RE: Letter of Intent - Development of a Software Application for
SMD Group Inc.
Our File: 774-012
Cadnetics Inc. ("Cadnetics") desires to enter into the transaction, as hereunder
described, for the purpose of developing a software application for SMD Group
Inc. ("SMD"), the whole in accordance with and subject to the terms and
conditions hereinafter set forth. This letter of intent ("Letter of Intent") is
to confirm SMD's intention to hire Cadnetics to develop the Application (as
hereinafter defined) and is to be construed as an offer which, if accepted by
both parties, shall constitute an agreement binding upon Cadnetics and SMD,
subject to the terms, conditions and covenants hereunder set forth as well as
the terms, conditions and covenants to be set forth:
1. Offer and Closing Date
1.1 This offer shall be open for acceptance until the 14th day of January,
1999 (the "Offer").
1.2 The transaction contemplated herein shall take place no later than
within ten (10) days following the acceptance of the Offer by SMD (the
"Closing Date").
2. Development of Application
2.1 Cadnetics hereby undertakes to develop an application, which may be
generally described as follows: an interactive web enabled audio CD
music player (the "Application"), the whole subject to the
specifications set out in the requirement document entitled
IWEACDMP-req01.doc.
2.2 SMD hereby undertakes to assume and be responsible for any and all
costs relating to the development, progress and furtherance of the
Application.
2.4 Cadnetics shall not assume any costs relating to the purchasing and
licensing of any external technology which may be necessary for the
development of the Application. Furthermore, all costs relating to
travel and lodging which are required for the furtherance of the
Application shall be chargeable to SMD. Any purchases or charges shall
require the prior approval of SMD.
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<PAGE>
2.5 Cadnetics shall remit the Application in final form (complied
executable) to SMD on a CD-ROM capable of reproduction.
2.6 Cadnetics shall remit to SMD all relevant documentation and the source
code on an "as is" basis every month for the Application.
2.7 Cadnetics hereby undertakes to provide SMD with a monthly update as to
the development of the Application.
2.8 SMD hereby gives the mandate to Cadnetics to develop upgrades of the
Application in consideration of further development fees, to be agreed
upon by the parties negotiating in good faith, the amount of which shall
be dependent upon the extent and complexity of the desired upgrade and
improvement.
2.9 In the event of a conflict or dispute between the parties, the parties
hereby undertake to enter into good faith negotiations in order to
attempt to resolve any such conflict or dispute.
3. Consideration
3.1 Cadnetics agrees to develop the Application for SMD in consideration
of a fee consisting of the following:
3.1.1 On the Closing Date, SMD shall remit to Cadnetics forty-two
thousand dollars (US $42,000.00) in cash as well as the share
certificate representing the Shares, the whole in accordance with
paragraph 3.19 hereof, and
3.1.2 On January 15, SMD shall remit to Cadnetics twenty-thousand
dollars (US$20,000) in cash.
3.13 On February 15, SMD shall remit to Cadnetics thirty-five
thousand dollars (US$35,000) in cash.
3.14 On March 1, SMD shall remit to Cadnetics thirty thousand
dollars (US$30,000) in cash.
3.15 On March 19, SMD shall remit to Cadnetics thirty-three thousand
dollars (US$35,000) in cash.
3.16 On April 15, SMD shall remit to Cadnetics fourty thousand
dollars (US$40,000) in cash.
3.17 On May 15, SMD shall remit to Cadnetics fourty thousand dollars
(US$40,000) in cash.
3.18 On June 15, SMD shall remit to Cadnetics fourty thousand
dollars (US$40,000) in cash.
3.19 the issuance by SMD to Cadnetics of a number of common fully
voting and fully participating shares of its share capital
having a fair market value of two hundred and forty thousand
U.S. dollars (U.S. $240,000.00) and a number of preferred
shares of its share capital having a fair market value of one
hundred and thirty-eight thousand U.S. dollars (U.S.
$138,000.00) (the common shares and preferred shares
hereinafter collectively referred to as the "Shares").
4. Service of Application
For a fee in the amount of one hundred and twenty dollars (US $120.00) per
man hour (the "Service Call Fee"), Cadnetics shall provide SMD with the
necessary technical support services in respect of the Application. Such
Service Call Fee shall be receivable depending on the extent and complexity
of the services required and shall be adjusted upwards to reflect any
change in the market value for similar services.
5. Representations and Warranties of SMD
SMD hereby represents and warrants to Cadnetics as follows and confirms
that Cadnetics is relying on the accuracy of such representations and
warranties in connection with the execution of its obligations hereunder:
73
<PAGE>
5.1 SMD is a corporation duly incorporated and validly subsisting in all
aspects under the laws of its respective jurisdiction of
incorporation. It has good right, full corporate power and absolute
authority to authorize and consent to the transaction as herein
provided.
5.2 SMD has taken all necessary or desirable actions, steps and corporate
and other proceedings to approve or authorize, validly and
effectively, the entering into of and the execution, delivery and
performance of this transaction.
5.3 SMD has the authority to issue the Shares so that the Shares shall
have a global value equal to the consideration paid at the time of
issuance, that is, three hundred and seventy-eight thousand U.S.
dollars (U.S.
$378,000.00).
5.4 The execution, delivery and performance of this Letter of Intent and
the completion of the transaction contemplated herein will not
constitute or result in a violation, breach or default under the terms
or provisions of the articles or by-laws of SMD or of any contract to
which it is bound.
5.5 SMD further represents and warrants that should it enter into any
agreement or commitment, to issue shares, by option, warrant or
otherwise, which will have the effect of dilution upon the
shareholdings of Cadnetics, said dilution shall occur on a
proportionate basis based on the shareholding of all the shareholders
in the company.
6. Representations and Warranties of Cadnetics
Cadnetics hereby represents and warrants to SMD as follows and confirms
that SMD is relying on the accuracy of such representations and warranties
in connection with the execution of its obligations hereunder:
6.1 Cadnetics is a corporation duly incorporated and validly subsisting in
all aspects under the laws of its respective jurisdiction of
incorporation. It has good right, full corporate power and absolute
authority to authorize and consent to the transaction as herein
provided.
6.2 Cadnetics has taken all necessary or desirable actions, steps and
corporate and other proceedings to approve or authorize, validly and
effectively, the entering into of and the execution, delivery and
performance of this transaction.
6.3 The execution, delivery and performance of this Letter of Intent and
the completion of the transaction contemplated herein will not
constitute or result in a violation, breach or default under the terms
or provisions of the articles or by-laws of Cadnetics or of any
contract to which it is bound.
6.4 Cadnetics makes no representation as to the value or potential value
of the Application.
7. Present and Future Rights
7.1 SMD hereby acknowledges that Cadnetics and its associated companies have
extensive expertise in the development of applications of this nature
and that its said expertise is the basis for Cadnetics being selected as
the primary developer for the Application.
7.2 SMD also acknowledges that Cadnetics is an independent developer and may
be involved in the development of other applications which use a similar
architecture.
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7.3 SMD and Cadnetics agree that they shall not impose any restrictions upon
each other in respect of their respective development of applications of
architecture similar to the Application.
7.4 Cadnetics shall retain all rights of ownership for internal use only in
respect of the developed Application until such time that SMD has
successfully fulfilled all of its financial obligations in respect of
Cadnetics.
8. Terms of Preferred Shares
Cadnetics shall have the right to convert its preferred shares into common
shares at any time until July 30th 1999, and the conversion price for said
shares shall be the lower of: (i) the average of the high trading price
plus the low trading price for the common shares at the date of conversion,
or (ii) two dollars and fifty cents (U.S. $2.50) per common share at the
date of conversion.
8.1 On January 13, 1999, Cadnetics agrees to convert its preferred shares
into common shares at a price of US$2.50 per common share.
9. Conditions Precedent
9.1 Notwithstanding anything herein contained, the undertakings and
obligations of Cadnetics under the terms of this Letter of Intent are,
at the option of Cadnetics, subject to and conditional upon the
performance of or compliance with the following condition precedent:
9.1.1 SMD shall not be in default of its obligations herein created.
9.1.2 The representations and warranties of SMD shall be true and
correct and remain in full force and effect for the benefit of
Cadnetics as of the Closing Date, and shall continue in full
force and effect notwithstanding the closing of the transaction
contemplated herein.
9.2 Notwithstanding anything herein contained, the undertakings and
obligations of SMD under the terms of this Letter of Intent are, at the
option of SMD, subject to and conditional upon the performance of or
compliance with the following conditions precedent:
9.2.1 Cadnetics shall not be in default of its obligations herein created.
9.2.2 The representations and warranties of Cadnetics shall be true
and correct and remain in full force and effect for the benefit
of SMD as of the Closing Date, and shall continue in full force
and effect notwithstanding the closing of the transaction
contemplated herein.
10. Indemnification
The parties shall mutually and reciprocally indemnify and hold each other
harmless from and against any damage, loss, cost, deficiency (including the
payment of attorneys fees) arising out of any inaccuracy in any
representation or warranty made hereunder.
11. Further Executions
The parties hereto agree and undertake in good faith to exert their best
efforts to agree upon and execute all documents and do all acts as may be
necessary or useful to conclude the transaction contemplated herein.
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12. Related Costs
Each party shall assume and pay their respective costs and expenses
including legal and financial advisory fees incurred in connection with the
negotiation, agreement upon and performance of the transaction herein
contemplated.
13. Interpretation
13.1 Entire Agreement - This Letter of Intent sets forth all of the
promises, covenants, agreements, conditions and undertakings between the
parties hereto with respect to the subject matter hereof and supersedes all
prior and contemporaneous agreements and undertakings, inducements or
conditions expressed or implied, oral or written.
13.2 Severability - It is intended by the parties hereto that the
provisions of this Letter of Intent be enforced to the fullest extent
permissible. Accordingly, if any paragraph, article or any part
thereof is adjudicated to be invalid or unenforceable, then such
paragraph or article shall be deemed amended to delete that portion
thus adjudicated to be invalid or unenforceable, such deletion to
apply only with respect to the operation of such paragraph or article.
13.3 Waiver - No waiver by a party of a default and a performance of any
breach or series of breaches by another party hereto and failure,
refusal or neglect by a party to exercise all rights hereunder or to
insist upon strict compliance or performance of another party hereto
under this Letter of Intent shall constitute a waiver of the
provisions hereof.
13.4 Governing Laws - This Letter of Intent shall be governed and construed
in accordance with the laws of the province of Quebec.
13.5 Assignment - The present Letter of Intent may not be assigned by a
party hereto without the prior written consent of the other parties.
13.6 Successors and Assigns - This Letter of Intent shall be binding upon
the parties hereto and their respective assigns, successors and
interests and shall not be modified or amended except by written
agreement.
13.7 Language - The parties hereto have requested that this Letter of
Intent and all documents relating hereto be drafted in the English
language. Les parties aux presentes ont exige que la presente
convention et tout document y afferent soit redige en langue anglaise.
If you are in agreement with the terms and conditions set forth herein, kindly
indicate your acceptance by signing and returning the enclosed copy of this
offer prior to the 29th day of December 1998.
Yours very truly,
CADNETICS INC.
/s/ Raj Vadavia, Vice-President
Acknowledged and agreed this 13th day of January 1999.
SMD GROUP INC.
/s/ Joel Arberman
76
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REFERENCE 10.8
EGGERS EMPLOYMENT AGREEMENT
77
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of this 15th day of October, 1998 (the "Agreement"), by
and between SMD Group Inc., a Delaware corporation ("Employer"), and Bryan
Eggers ("Employee").
WITNESSETH:
WHEREAS, Employer desires to employ Employee and Employee desires to be employed
by Employer as Vice President of Publicity of Employer; and
WHEREAS, Employer recognizes the need of the knowledge, talents and assistance
of Employee and desires to enter into this Agreement to secure the foregoing.
NOW, THEREFORE, in consideration of the promises herein contained, the parties
covenant and agree as follows:
1. EMPLOYMENT. Employer agrees to employ Employee and Employee agrees to be
employed by Employer and to perform work as determined by Employer, as Vice
President of Publicity of Employer, on the terms and conditions set forth in
this Agreement. This Agreement shall be effective as of the date mutually agreed
to in writing by both parties (the "Effective Date") but in no event shall it be
more than two weeks following the date on which the Employer receives more than
$500,000 of gross investment capital.
2. COMPENSATION. Employer agrees to employ Employee at the base rate of
compensation of seventy thousand and No/Dollars ($70,000.00) per year.
Compensation is to be paid twice per month. Compensation is to be reviewed by
the Compensation Committee on an annual basis.
In addition to the base compensation, Employer agrees to pay or provide Employee
with the following:
A. Expenses. Reimbursement for reasonable expenses actually incurred by
Employee in the furtherance of Employer's business, including, but not
limited to, telephone calls (including business related calls on
Employee's cellular phone and business related long distance calls),
entertainment, attendance at conferences, conventions and institutes,
provided proper itemization of said expenses is furnished to Employer by
Employee. All such expenditures shall be subject to the reasonable control
of Employer.
B. Medical and Disability Benefits. Employee and his spouse shall be entitled
to participate in Employer's medical program, Employer-paid disability and
other benefit programs as other executives of Employer are entitled to
participate in, as is in place from time to time. If Employee desires to
include any family members other than his spouse in the medical plan,
Employee shall be responsible for all additional costs.
C. Additional Benefits. Employee shall be entitled to participate in and
receive such additional benefits as Employer shall from time to time make
available to its executive employees including, without limitation, profit
sharing, stock purchase, stock option and other incentive plans.
D. Preferred Stock, Class C. Pursuant to the "Agreement of Purchase and Sale"
dated October 15, 1998, employee shall be entitled to receive 50,000
Preferred Stock, Class C which may, under certain conditions (to be
detailed within the "Certificate of Designation of Rights and Preferences"
and "Irrevocable Voting Trust" agreements), be converted into 500,000
shares of Common Stock.
E. Bonus. Employee shall be entitled to receive cash or stock option bonuses
for exceeding pre-tax profit targets set by the business plan of October
1998. The amount of bonus shall be determined by the Compensation
Committee.
3. DUTIES. Employee agrees to perform work as determined by the Board of
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Directors, subject to the direction of Employer and agrees to subject himself at
all times during the Term (as hereinafter defined) to the direction and control
of Employer in respect to the work to be performed. Employee shall devote his
full business time and attention to the furtherance of Employer's best
interests. In that regard, and as further consideration for this Agreement,
Employee agrees to comply with, and abide by, such rules and directives of
Employer as may be reasonably established from time to time, and recognizes the
right of Employer, in its reasonable discretion, to change, modify or adopt new
policies and practices affecting the employment relationship, not inconsistent
with this Agreement, as deemed appropriate by Employer. During the term of
Employee's employment, Employee will not undertake any new business ventures,
partnerships, consulting arrangements or other enterprise or business other than
those on behalf of Employer, without Employer's prior written consent.
4. WORKING FACILITIES. Employee shall be furnished with office space,
secretarial services, and such other facilities and services suitable to
Employee's position and adequate for the performance of Employee's duties.
5. AGENCY. Employee shall have no authority to enter into any contracts binding
upon Employer, except as authorized in writing, in advance, by Employer.
6. TERM OF EMPLOYMENT; SEVERANCE.
A. Employee's employment hereunder shall commence as of the Effective Date
hereof and continue for a period of two (2) years thereafter (the "Term").
B. Anything herein to the contrary notwithstanding, Employee's employment
hereunder may be terminated at any time and for any reason by either party
upon not less than one hundred twenty (120) days' prior written notice to
the other party. It is understood and acknowledged that Employer shall
have the right to effectuate such termination at will, with or without
Reasonable Cause (as hereinafter defined). Any such termination shall be
effective as of the end of such one hundred twenty (120) day period (the
"Final Date").
C. If Employee's employment hereunder shall be terminated by Employer
without Reasonable Cause pursuant to paragraph 6.B. or because of
Employee's disability, as determined by Employer in good faith, then
Employee shall be entitled to (i) severance compensation equal to
Employee's then-current base salary and benefits (which for purposes
hereof shall include all compensation payable hereunder, of any type) for
a period equal to the Severance Period (as defined below). Such severance
compensation payments consisting of cash shall be paid in a lump sum plus
any outstanding benefits and allocated bonuses on or before the Final
Date. The severance compensation are intended to be in lieu of all other
payments to which Employee might otherwise be entitled in respect of
termination of Employee's employment without Reasonable Cause or in
respect of any action by Employer constituting Good Reason for voluntary
termination.
D. If Employee's employment hereunder shall be terminated for Reasonable
Cause pursuant to paragraph 6.C., or if Employee voluntarily terminates
Employee's employment without Good Reason, Employee shall be entitled to
receive Employee's base salary as accrued through the effective date of
such termination, but shall not be entitled to any Severance Benefits or
other amounts in respect of such termination.
E. "Reasonable Cause," as used herein, shall mean Employee's involvement
in any action or inaction involving fraud resulting in a personal benefit
in excess of any payments to which Employee is entitled hereunder,
dishonesty, or material violation of Corporation policy and procedures.
Employee shall vacate the offices of Employer on such effective date.
F."Good Reason," as used herein, means the occurrence of any of the
following events without Employee's consent:
i. a material diminution in Employee's duties and
responsibilities;
ii. a reduction in Employee's base salary;
iii. a forced relocation; or
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<PAGE>
iv. a Change of Control (as defined below) if Successor Employer (as
defined in paragraph H below) fails to assume this Agreement in its
entirety.
G."Severance Period," as used herein, means the lesser of (i) twelve
months (12) months or (ii) the remaining time of the Term.
H. "Change of Control" means a sale outside the ordinary course of
business of more than fifty percent (50%) of the assets of or equity
interests in Employer to any person or entity.
7. COMPLIANCE WITH LAWS. Employee will comply with all federal and state laws,
rules and regulations relating to any of Employee's responsibilities and duties
with Employer and will not violate any such laws, rules and regulations.
8.COVENANT NOT TO COMPETE. Employee agrees to conform to the following
concerning non-competition.
A. Employer undertakes to train Employee and to give Employee confidential
information and knowledge about Employer's business policies, accounts
procedures and methods. For the purposes of this Agreement, the term
"confidential information" shall include but is not limited to any list of
suppliers, customers, investors, stockholders, including their names,
addresses, phone numbers, amount of investments and similar information.
In addition, any operational information of Employer, including but not
limited to information on Employer's methods of conducting business,
profits and/or losses of Employer, marketing material and any information
that would reasonably be considered proprietary or confidential in nature.
Employer has established a valuable and extensive trade in its products
and services, which business has been developed at a considerable expense
to Employer. The nature of the business is such that the relationship of
its customers with Employer must be maintained through the close personal
contact of its employees.
B. Employee desires to enter into or continue in the employ of Employer
and by virtue of such employment by Employer, Employee will become
familiar with the manner, methods, secrets and confidential information
pertaining to such business. During the Term, Employee will continue to
receive additional confidential information of the same kind. Through
representatives of Employer, Employee will become personally acquainted
with the business of Employer and its methods of operation.
C. In consideration of the employment or continued employment of Employee
as herein provided, the training of Employee by Employer, and the
disclosure by Employer to employee of the knowledge and confidential
information described above, Employer requests and Employee makes the
covenants hereinafter set forth. Employee understands and acknowledges
that such covenants are required for the fair and reasonable protection of
the business of Employer carried on in the area to which the covenants are
applicable and that without the limited restrictions on Employee's
activities imposed by the covenants, the business of Employer would suffer
irreparable and immeasurable damage. The covenants on the part of Employee
shall be construed as an agreement independent of any other provision of
this Agreement, and existence of any claim or course of action whether
predicated on this Agreement or otherwise, shall not constitute a defense
to the enforcement by Employer of the covenants.
D. Employee agrees that during the term of Employee's employment and for
the period of twelve (12) months immediately following the termination of
employment (which said time period shall be increased by any time during
which Employee is in violation of this Agreement) Employee will not,
within the territory hereinafter defined, directly or indirectly, for
Employee, or on behalf of others, as an individual on Employee's own
account, or as an employee, agent, or representative for any other person,
partnership, firm or corporation:
i. Compete with the business of Employer by engaging or
participating in or furnishing aid or assistance in competition with
the business of Employer.
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ii. Engage, in any capacity, directly or indirectly, in or be
employed by any business similar to the kind or nature of business
conducted by Employer during the employment.
iii. For the purposes of this paragraph 8, the business of Employer
shall be limited to the (1) Internet based music magazine business,
(2) CD player software business, (3) and (3) any business that the
Employer enters into during the Term.
E. The territory referred to in this paragraph 8 shall be the entire
World.
F. Each restrictive covenant is separate and distinct from any other
covenant set forth in this paragraph. In the event of the invalidity of
any covenant, the remaining obligation shall be deemed independent and
divisible. The parties agree that the territory set forth is reasonable
and necessary for the protection of Employer. In the event any term or
condition is deemed to be too broad or unenforceable, said provision shall
be deemed reduced in scope to the extent necessary to make said provision
enforceable and binding.
G. The provisions of this paragraph 8 shall not apply if Employee's
employment is terminated by Employer without Reasonable Cause or by
Employee for Good Reason.
9. INDUCING EMPLOYEE OF EMPLOYER TO LEAVE. Any attempt on the part of Employee
to induce others to leave Employer's employ or any efforts by Employee to
interfere with Employer's relationship with other employees would be harmful and
damaging to Employer. Employee expressly agrees that during the term of
Employee's employment and for a period of twelve (12) months thereafter
(provided said time period shall be increased by any time during which Employee
is in violation of this Agreement), Employee will not in any way directly or
indirectly:
A. Induce or attempt to induce an employee to sever his or her employment
with Employer; B. Interfere with or disrupt Employer's relationship with
other employees; and C. Solicit, entice, take away or employ any person
employed with Employer,
excluding people Employee brings to Employer.
10. CONFIDENTIAL INFORMATION. It is understood between the parties hereto that
during the term of employment, Employee will be dealing with confidential
information, as defined above, which is Employer's property, used in the course
of its business. Employee will not disclose to anyone, directly or indirectly,
any of such confidential information or use such information other than in the
course of Employee's employment. All documents that Employee prepares, or
confidential information that might be given to Employee in the course of
employment, are the exclusive property of Employer and shall remain in
Employer's possession on the premises. Under no circumstances shall any such
information or documents be removed without Employer's written consent first
being obtained.
11. RETURN OF EMPLOYER'S PROPERTY. On termination of employment, regardless of
how termination is effected, or whenever requested by Employer, Employee shall
immediately return to Employer all of Employer's property used by Employee
rendering services hereunder or otherwise that is in Employee's possession or
under Employee's control.
12. VACATION. Employee shall be entitled to a vacation period of four (4) weeks
per calendar year. The vacation shall be taken by Employee at such time during
the year and for such period as reasonable. All vacations should be taken in the
year earned. No vacations may be accrued without written permission of the Board
of Directors.
13. REFERENCES. Employer agrees that, upon termination of this Agreement, it
will, upon written request of Employee, furnish references to third parties,
including prospective employers, regarding Employee. However, Employee
acknowledges that it is Employer's policy to confirm employment only and not to
release any additional information without a written release from Employee.
14. NOTICES. All notices, requests, consents, and other communications under
this Agreement shall be in writing and shall be deemed to have been delivered on
the date personally delivered or the date mailed, postage prepaid by certified
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mail, return receipt requested, or faxed and confirmed, if addressed to the
respective parties as follows:
If to Employer: SMD Group, Inc.
Bedford Towers
444 Bedford Street, Suite 8s
Stamford, Connecticut 06901
Attention: Board of Directors
If to Employee: Bryan Eggers
6041 Pomegranate Lane
Woodland Hills, CA 91367
Either party may change its address for the purpose of receiving notices,
demands, and other communications by giving written notice to the other party of
the change.
15. VOLUNTARY AGREEMENT. Employee represents that he has not been pressured,
misled or induced to enter this Agreement based upon any representation by
Employer not contained herein.
16. PROVISIONS TO SURVIVE. The parties hereto acknowledge that many of the terms
and conditions of this Agreement are intended to survive the employment
relationship. Therefore, any terms and conditions that are intended by the
nature of the promises or representations to survive the termination of
employment shall survive the term of employment regardless of whether such
provision is expressly stated as so surviving.
17. MERGER. This Agreement represents the entire Agreement between the parties
and shall not be subject to modification or amendment by any oral
representation, or any written statement by either party, except for a dated
written amendment to this Agreement signed by Employee and an authorized officer
of Employer.
18. VENUE AND APPLICABLE LAW. This Agreement shall be enforced and construed in
accordance with the laws of the State of Delaware, and venue for any action or
arbitration under this Agreement shall be Kent County, Delaware.
19. SUBSIDIARIES AND AFFILIATED ENTITIES. Employee acknowledges and agrees that
Employer has or may have various subsidiaries and affiliated entities. In
rendering services to Employer, Employee will have considerable contact with
such subsidiaries and affiliates. Therefore, Employee agrees that all provisions
of paragraphs 7, 8, 9 and 10 shall apply to all such subsidiaries and
affiliates.
20. PERSONNEL INFORMATION. Employee shall not divulge or discuss personnel
information such as salaries, bonuses, commissions and benefits relating to
Employee or other employees of Employer or any of its subsidiaries with any
other person except the Executive Committee and the Board of Directors of
Employer.
21. ASSIGNMENT. This Agreement shall not be assignable by either party without
the written consent of the other party; provided, however, that this Agreement
shall be assignable to any corporation or entity which purchases the assets of
or succeeds to the business of Employer (a "Successor Employer"). Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, personal representatives, successors
and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Employer
SMD Group, Inc.
/s/ Joel Arberman
Title: President and CEO
Employee
/s/ Bryan Eggers
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REFERENCE 10.9
ARBERMAN EMPLOYMENT AGREEMENT
83
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of this 15th day of October, 1998 (the "Agreement"), by
and between SMD Group Inc., a Delaware corporation ("Employer"), and Joel
Arberman ("Employee").
WITNESSETH:
WHEREAS, Employer desires to employ Employee and Employee desires to be employed
by Employer as President and Chief Executive Officer of Employer; and
WHEREAS, Employer recognizes the need of the knowledge, talents and assistance
of Employee and desires to enter into this Agreement to secure the foregoing.
NOW, THEREFORE, in consideration of the promises herein contained, the parties
covenant and agree as follows:
1. EMPLOYMENT. Employer agrees to employ Employee and Employee agrees to be
employed by Employer and to perform work as determined by Employer, as President
and Chief Executive Officer of Employer, on the terms and conditions set forth
in this Agreement. This Agreement shall be effective as of the date mutually
agreed to in writing by both parties (the "Effective Date") but in no event
shall it be more than two weeks following the date on which the Employer
receives more than $500,000 of gross investment capital.
2. COMPENSATION. Employer agrees to employ Employee at the base rate of
compensation of seventy thousand and No/Dollars ($70,000.00) per year.
Compensation is to be paid twice per month. Compensation is to be reviewed by
the Compensation Committee on an annual basis.
In addition to the base compensation, Employer agrees to pay or provide Employee
with the following:
C. Expenses. Reimbursement for reasonable expenses actually incurred by
Employee in the furtherance of Employer's business, including, but not
limited to, telephone calls (including business related calls on
Employee's cellular phone and business related long distance calls),
entertainment, attendance at conferences, conventions and institutes,
provided proper itemization of said expenses is furnished to Employer by
Employee. All such expenditures shall be subject to the reasonable control
of Employer.
D. Medical and Disability Benefits. Employee and his spouse shall be entitled
to participate in Employer's medical program, Employer-paid disability and
other benefit programs as other executives of Employer are entitled to
participate in, as is in place from time to time. If Employee desires to
include any family members other than his spouse in the medical plan,
Employee shall be responsible for all additional costs.
F. Additional Benefits. Employee shall be entitled to participate in and
receive such additional benefits as Employer shall from time to time make
available to its executive employees including, without limitation, profit
sharing, stock purchase, stock option and other incentive plans.
G. Preferred Stock, Class C. Pursuant to the "Agreement of Purchase and Sale"
dated October 15, 1998, employee shall be entitled to receive 50,000
Preferred Stock, Class C which may, under certain conditions (to be
detailed within the "Certificate of Designation of Rights and Preferences"
and "Irrevocable Voting Trust" agreements), be converted into 500,000
shares of Common Stock.
H. Bonus. Employee shall be entitled to receive cash or stock option bonuses
for exceeding pre-tax profit targets set by the business plan of October
1998. The amount of bonus shall be determined by the Compensation
Committee.
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<PAGE>
3. DUTIES. Employee agrees to perform work as determined by the Board of
Directors, subject to the direction of Employer and agrees to subject himself at
all times during the Term (as hereinafter defined) to the direction and control
of Employer in respect to the work to be performed. Employee shall devote his
full business time and attention to the furtherance of Employer's best
interests. In that regard, and as further consideration for this Agreement,
Employee agrees to comply with, and abide by, such rules and directives of
Employer as may be reasonably established from time to time, and recognizes the
right of Employer, in its reasonable discretion, to change, modify or adopt new
policies and practices affecting the employment relationship, not inconsistent
with this Agreement, as deemed appropriate by Employer. During the term of
Employee's employment, Employee will not undertake any new business ventures,
partnerships, consulting arrangements or other enterprise or business other than
those on behalf of Employer, without Employer's prior written consent.
4. WORKING FACILITIES. Employee shall be furnished with office space,
secretarial services, and such other facilities and services suitable to
Employee's position and adequate for the performance of Employee's duties.
5. AGENCY. Employee shall have no authority to enter into any contracts binding
upon Employer, except as authorized in writing, in advance, by Employer.
6. TERM OF EMPLOYMENT; SEVERANCE.
A. Employee's employment hereunder shall commence as of the Effective Date
hereof and continue for a period of two (2) years thereafter (the "Term").
B. Anything herein to the contrary notwithstanding, Employee's employment
hereunder may be terminated at any time and for any reason by either party
upon not less than one hundred twenty (120) days' prior written notice to
the other party. It is understood and acknowledged that Employer shall
have the right to effectuate such termination at will, with or without
Reasonable Cause (as hereinafter defined). Any such termination shall be
effective as of the end of such one hundred twenty (120) day period (the
"Final Date").
C. If Employee's employment hereunder shall be terminated by Employer
without Reasonable Cause pursuant to paragraph 6.B. or because of
Employee's disability, as determined by Employer in good faith, then
Employee shall be entitled to (i) severance compensation equal to
Employee's then-current base salary and benefits (which for purposes
hereof shall include all compensation payable hereunder, of any type) for
a period equal to the Severance Period (as defined below). Such severance
compensation payments consisting of cash shall be paid in a lump sum plus
any outstanding benefits and allocated bonuses on or before the Final
Date. The severance compensation are intended to be in lieu of all other
payments to which Employee might otherwise be entitled in respect of
termination of Employee's employment without Reasonable Cause or in
respect of any action by Employer constituting Good Reason for voluntary
termination.
D. If Employee's employment hereunder shall be terminated for Reasonable
Cause pursuant to paragraph 6.C., or if Employee voluntarily terminates
Employee's employment without Good Reason, Employee shall be entitled to
receive Employee's base salary as accrued through the effective date of
such termination, but shall not be entitled to any Severance Benefits or
other amounts in respect of such termination.
E. "Reasonable Cause," as used herein, shall mean Employee's involvement
in any action or inaction involving fraud resulting in a personal benefit
in excess of any payments to which Employee is entitled hereunder,
dishonesty, or material violation of Corporation policy and procedures.
Employee shall vacate the offices of Employer on such effective date.
F."Good Reason," as used herein, means the occurrence of any of the
following events without Employee's consent:
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<PAGE>
i. a material diminution in Employee's duties and
responsibilities;
ii. a reduction in Employee's base salary;
iii. a forced relocation; or
iv. a Change of Control (as defined below) if Successor Employer
(as defined in paragraph H below) fails to assume this
Agreement in its entirety.
G."Severance Period," as used herein, means the lesser of (i) twelve
months (12) months or (ii) the remaining time of the Term.
H. "Change of Control" means a sale outside the ordinary course of
business of more than fifty percent (50%) of the assets of or equity
interests in Employer to any person or entity.
7. COMPLIANCE WITH LAWS. Employee will comply with all federal and state laws,
rules and regulations relating to any of Employee's responsibilities and duties
with Employer and will not violate any such laws, rules and regulations.
8.COVENANT NOT TO COMPETE. Employee agrees to conform to the following
concerning non-competition.
A. Employer undertakes to train Employee and to give Employee confidential
information and knowledge about Employer's business policies, accounts
procedures and methods. For the purposes of this Agreement, the term
"confidential information" shall include but is not limited to any list of
suppliers, customers, investors, stockholders, including their names,
addresses, phone numbers, amount of investments and similar information.
In addition, any operational information of Employer, including but not
limited to information on Employer's methods of conducting business,
profits and/or losses of Employer, marketing material and any information
that would reasonably be considered proprietary or confidential in nature.
Employer has established a valuable and extensive trade in its products
and services, which business has been developed at a considerable expense
to Employer. The nature of the business is such that the relationship of
its customers with Employer must be maintained through the close personal
contact of its employees.
B. Employee desires to enter into or continue in the employ of Employer
and by virtue of such employment by Employer, Employee will become
familiar with the manner, methods, secrets and confidential information
pertaining to such business. During the Term, Employee will continue to
receive additional confidential information of the same kind. Through
representatives of Employer, Employee will become personally acquainted
with the business of Employer and its methods of operation.
C. In consideration of the employment or continued employment of Employee
as herein provided, the training of Employee by Employer, and the
disclosure by Employer to employee of the knowledge and confidential
information described above, Employer requests and Employee makes the
covenants hereinafter set forth. Employee understands and acknowledges
that such covenants are required for the fair and reasonable protection of
the business of Employer carried on in the area to which the covenants are
applicable and that without the limited restrictions on Employee's
activities imposed by the covenants, the business of Employer would suffer
irreparable and immeasurable damage. The covenants on the part of Employee
shall be construed as an agreement independent of any other provision of
this Agreement, and existence of any claim or course of action whether
predicated on this Agreement or otherwise, shall not constitute a defense
to the enforcement by Employer of the covenants.
D. Employee agrees that during the term of Employee's employment and for
the period of twelve (12) months immediately following the termination of
employment (which said time period shall be increased by any time during
which Employee is in violation of this Agreement) Employee will not,
within the territory hereinafter defined, directly or indirectly, for
Employee, or on behalf of others, as an individual on Employee's own
account, or as an employee, agent, or representative for any other person,
partnership, firm or corporation:
i. Compete with the business of Employer by engaging or
participating in or furnishing aid or assistance in competition with
the business of Employer.
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<PAGE>
ii. Engage, in any capacity, directly or indirectly, in or be
employed by any business similar to the kind or nature of business
conducted by Employer during the employment.
iii. For the purposes of this paragraph 8, the business of Employer
shall be limited to the (1) Internet based music magazine business,
(2) CD player software business, (3) and (3) any business that the
Employer enters into during the Term.
E. The territory referred to in this paragraph 8 shall be the entire
World.
F. Each restrictive covenant is separate and distinct from any other
covenant set forth in this paragraph. In the event of the invalidity of
any covenant, the remaining obligation shall be deemed independent and
divisible. The parties agree that the territory set forth is reasonable
and necessary for the protection of Employer. In the event any term or
condition is deemed to be too broad or unenforceable, said provision shall
be deemed reduced in scope to the extent necessary to make said provision
enforceable and binding.
G. The provisions of this paragraph 8 shall not apply if Employee's
employment is terminated by Employer without Reasonable Cause or by
Employee for Good Reason.
9. INDUCING EMPLOYEE OF EMPLOYER TO LEAVE. Any attempt on the part of Employee
to induce others to leave Employer's employ or any efforts by Employee to
interfere with Employer's relationship with other employees would be harmful and
damaging to Employer. Employee expressly agrees that during the term of
Employee's employment and for a period of twelve (12) months thereafter
(provided said time period shall be increased by any time during which Employee
is in violation of this Agreement), Employee will not in any way directly or
indirectly:
A. Induce or attempt to induce an employee to sever his or her employment
with Employer; B. Interfere with or disrupt Employer's relationship with
other employees; and C. Solicit, entice, take away or employ any person
employed with Employer,
excluding people Employee brings to Employer.
10. CONFIDENTIAL INFORMATION. It is understood between the parties hereto that
during the term of employment, Employee will be dealing with confidential
information, as defined above, which is Employer's property, used in the course
of its business. Employee will not disclose to anyone, directly or indirectly,
any of such confidential information or use such information other than in the
course of Employee's employment. All documents that Employee prepares, or
confidential information that might be given to Employee in the course of
employment, are the exclusive property of Employer and shall remain in
Employer's possession on the premises. Under no circumstances shall any such
information or documents be removed without Employer's written consent first
being obtained.
11. RETURN OF EMPLOYER'S PROPERTY. On termination of employment, regardless of
how termination is effected, or whenever requested by Employer, Employee shall
immediately return to Employer all of Employer's property used by Employee
rendering services hereunder or otherwise that is in Employee's possession or
under Employee's control.
12. VACATION. Employee shall be entitled to a vacation period of four (4) weeks
per calendar year. The vacation shall be taken by Employee at such time during
the year and for such period as reasonable. All vacations should be taken in the
year earned. No vacations may be accrued without written permission of the Board
of Directors.
13. REFERENCES. Employer agrees that, upon termination of this Agreement, it
will, upon written request of Employee, furnish references to third parties,
including prospective employers, regarding Employee. However, Employee
acknowledges that it is Employer's policy to confirm employment only and not to
release any additional information without a written release from Employee.
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<PAGE>
14. NOTICES. All notices, requests, consents, and other communications under
this Agreement shall be in writing and shall be deemed to have been delivered on
the date personally delivered or the date mailed, postage prepaid by certified
mail, return receipt requested, or faxed and confirmed, if addressed to the
respective parties as follows:
If to Employer: SMD Group, Inc.
Bedford Towers
444 Bedford Street, Suite 8s
Stamford, Connecticut 06901
Attention: Board of Directors
If to Employee: Joel Arberman
444 Bedford Street, Suite 8s
Stamford, Connecticut 06901
Either party may change its address for the purpose of receiving notices,
demands, and other communications by giving written notice to the other party of
the change.
15. VOLUNTARY AGREEMENT. Employee represents that he has not been pressured,
misled or induced to enter this Agreement based upon any representation by
Employer not contained herein.
16. PROVISIONS TO SURVIVE. The parties hereto acknowledge that many of the terms
and conditions of this Agreement are intended to survive the employment
relationship. Therefore, any terms and conditions that are intended by the
nature of the promises or representations to survive the termination of
employment shall survive the term of employment regardless of whether such
provision is expressly stated as so surviving.
17. MERGER. This Agreement represents the entire Agreement between the parties
and shall not be subject to modification or amendment by any oral
representation, or any written statement by either party, except for a dated
written amendment to this Agreement signed by Employee and an authorized officer
of Employer.
18. VENUE AND APPLICABLE LAW. This Agreement shall be enforced and construed in
accordance with the laws of the State of Delaware, and venue for any action or
arbitration under this Agreement shall be Kent County, Delaware.
19. SUBSIDIARIES AND AFFILIATED ENTITIES. Employee acknowledges and agrees that
Employer has or may have various subsidiaries and affiliated entities. In
rendering services to Employer, Employee will have considerable contact with
such subsidiaries and affiliates. Therefore, Employee agrees that all provisions
of paragraphs 7, 8, 9 and 10 shall apply to all such subsidiaries and
affiliates.
20. PERSONNEL INFORMATION. Employee shall not divulge or discuss personnel
information such as salaries, bonuses, commissions and benefits relating to
Employee or other employees of Employer or any of its subsidiaries with any
other person except the Executive Committee and the Board of Directors of
Employer.
21. ASSIGNMENT. This Agreement shall not be assignable by either party without
the written consent of the other party; provided, however, that this Agreement
shall be assignable to any corporation or entity which purchases the assets of
or succeeds to the business of Employer (a "Successor Employer"). Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, personal representatives, successors
and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Employer
SMD Group, Inc.
/s/ Joel Arberman
Title: President and CEO
Employee
/s/ Joel Arberman
88
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REFERENCE 23
CONSENT OF BEARD, NERTNEY, KINGERY, CROUSE & HOHL, P.A.
89
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[Letterhead of Beard Nertney Kingery Crouse & Hohl P.A.]
May 17, 1999
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form SB-2 (No. 333-70663) of our report dated February
16, 1999, with respect to the financial statements of CDbeat.com, Inc., as of
and for the period May 8, 1998 (date of incorporation) to December 31, 1998,
filed with the Securities and Exchange Commission.
/s/ BEARD, NERTNEY, KINGERY, CROUSE & HOHL, P.A.
90
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