As filed with the SEC on March 19, 1999 SEC
Registration No. 333-70663
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMMENDMENT NO. 2
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 Applied for
(State or other (Primary Standard (IRS Employer
jurisdiction or Industrial Identification
incorporation) Classification code) Number)
Cdbeat.com, Inc.
Bedford Towers
444 Bedford Street, Suite 8s
Stamford, Connecticut 06901
Phone: (203) 602-9994
Fax: (203) 602-9995
Email: [email protected]
(Address and telephone number of registrant's principal executive
offices and principal place of business)
Joel Arberman, President
Cdbeat.com, Inc.
Bedford Towers
444 Bedford Street, Suite 8s
Stamford, Connecticut 06901
Phone: (203) 602-9994
Fax: (203) 602-9995
ICQ: 21108282
AOL: jarb25
Email: [email protected]
(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 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. [ ] ____
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the
following box. [ ]
(Continued on Next Page)
CALCULATION OF REGISTRATION FEE
Title of Each Amount Proposed Proposed Amount of
Class of Securities to be Maximum Maximum Registration
Being Registered Registered Offering Aggregate Fee
Price Offering
Per Share Price
Common Stock, par
value $.01 per
share 4,000,000 $.2.50 $ 10,000,000 $2,780
TOTAL
$ 2,780
MINIMUM FEE $100
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 the registration statement shall become
effective on such date as the Commission acting pursuant to said section 8(a),
may determine.
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THIS PRELIMINARY PROSPECTUS IS NOT YET COMPLETED. MARCH 15, 1999
INITIAL PUBLIC OFFERING PROSPECTUS
CDbeat.com, Inc.
We are selling 3,521,000 shares of our common stock. The purchase price for our
shares is $*.
Some of our stockholders are selling an additional 479,000 shares. We will not
receive any of the proceeds from the sale of the shares by our selling
stockholders.
This is a risky investment. We have described these risks under the caption
"Risk factors" beginning on page *.
No public market currently exists for our common stock. No public market may
ever develop. Even if a market develops, you may not be able to sell your
shares.
Our proposed trading symbol for the over the counter bulletin board is CDBT.
None of the Securities and Exchange Commission, any state securities commission,
or any other government agency has approved or disapproved of these securities
or determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
CDbeat.com, Inc.
Bedford Towers
444 Bedford Street, Suite 8s
Stamford, Connecticut, 06901
203-602-9994
This initial public offering prospectus is dated *.
TABLE OF CONTENTS
SUMMARY OF THE OFFERING................................................4
Plan of Operations....................................................12
Use of Proceeds.......................................................13
Dilution..............................................................13
Our Business..........................................................15
Technology............................................................27
Competition...........................................................28
Intellectual Property.................................................28
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Employees.............................................................28
Facilities............................................................29
SELLING SECURITYHOLDERS...............................................29
DESCRIPTION OF CAPITAL STOCK..........................................30
Transfer Agent and Registrar..........................................32
SHARES ELIGIBLE FOR FUTURE SALE.......................................32
MANAGEMENT............................................................33
YEAR 2000 READINESS DISCLOSURE........................................37
RELATED PARTY TRANSACTIONS............................................38
PRINCIPAL SHAREHOLDERS................................................38
THE OFFERING..........................................................39
WHERE YOU CAN FIND MORE INFORMATION?..................................40
Special Note Regarding Forward-Looking Statements.....................41
LEGAL PROCEEDINGS.....................................................41
LEGAL MATTERS.........................................................41
SUMMARY OF THE OFFERING
This summary highlights information contained elsewhere in this prospectus.
Because this is a summary, it may not contain all of the information that you
should consider before investing in the common stock. You should read this
entire prospectus carefully.
Securities offered for sale.................... 3,521,000 shares of
common stock by us. 479,000 shares of common
stock by our stockholders. For a description
of these shares, see "Description of
Securities" on page *.
Price to the public..... * per share.
Number of shares outstanding
before the offering - assuming the
conversion of all preferred shares
that have been issued. ..... Our current shareholders own * shares.
Number of shares to be
outstanding after
the offering - assuming the
conversion of all preferred shares
that have been issued. ..... Assuming all shares are sold, * shares
outstanding
Dividend policy.............. We do not intend to pay any cash dividends
in the foreseeable future.
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Use of proceeds.............. To recruit, hire and train additional
personnel, complete the development of our
software and web site, and begin our sales
and marketing efforts. We won't receive any
proceeds from the sale of shares by our
stockholders.
Risk factors................. You should read the "Risk Factors"
section beginning on page * before deciding
to invest.
RISK FACTORS
A high degree of risk is associated with an investment in the shares being
offered to you. We believe that you should carefully consider the following
risks before making an investment decision. The risks described below are not
the only ones that we face. Additional risks that are not yet known to us or
that we currently think are immaterial could also impair our business, operating
results or financial condition. The price of our common stock could decline due
to any of these risks, and you could lose all or part of your investment. You
also should refer to the other information in this prospectus, including our
combined financial statements and the related notes thereto.
We have no significant operating history and have only incurred operating
losses.
Since our formation on May 8, 1998 through December 31, 1998, we have lost
$124,074. You do not have meaningful information, including long-term historical
financial data, in assessing your decision to purchase the shares.
We are subject to numerous start-up risks, which could delay the launch of our
web site and development of our software and thus increase our losses.
We expect to launch our software and web site in May 1999. As of the date
of this prospectus, all of our start-up work on our database, web site and
related systems is not completed. If completion of this work is delayed, the
opening of our web site and our ability to generate revenues from operations
will be delayed, increasing our losses.
We have no working capital beyond the funds raised in this offering.
We believe that if we raise all the funds in this offering, we will be
able to operate our business for twelve months. We will need to obtain
additional funds for continued development of our business. We might not be able
to locate any other source of funds. And even if we locate other funding
sources, the terms of any funding might not be acceptable. We will not be able
to continue operations if we do not raise the money we need.
There is no minimum amount of funds that must be raised in this offering.
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This means that we are not required to raise any particular amount before
we can immediately start spending the proceeds of your investment.
We expect to lose money during our start-up phase, which could be as long as
three years.
We expect to spend substantial amounts of money on the development of our
software, web site, personnel, marketing and advertising to build our brand
recognition and market share. These expenditures will exceed our revenues during
the early stages of our operations.
Electronic commerce generally and the online music market is new, rapidly
changing and intensely competitive.
We will compete for online customers from a variety of sources including:
o Existing land-based retailers including Kmart Corp. and Barnes and
Noble Corp. These companies are also using the internet to grow
their businesses.
o Less established companies including CDnow Inc. and N2K Inc. These
companies are building their brands online.
o Traditional direct marketers including Columbia House Record Club.
o Television direct marketers including QVC, Inc. and Home Shopping
Network.
o Musicians who use the internet as a medium to sell directly to
customers.
o Publishing companies including Time Warner and Billboard Magazine.
We may have difficulty competing because many of our competitors and
potential competitors:
o Have longer operating histories.
o Have larger customer bases.
o Have greater brand name recognition.
o Have greater financial, marketing and other resources.
o Secure merchandise from vendors on more favorable terms.
o Devote greater resources to marketing and promotional campaigns.
o Adopt more aggressive pricing or inventory availability policies.
o Devote substantially more resources to website and systems.
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We will be heavily dependent upon our relationships with others who, if we
cannot find them or if they fail to perform, could seriously damage our
business.
We plan to use outside vendors for fulfillment, content, call center
operations, customer service and delivery. Our potential suppliers include
Valley Media, Baker & Taylor, Alliance Entertainment, Muze, Associated Press,
Reuters, SWnetworks, United Parcel Services, Federal Express and the United
States Postal Service. At this time, we do not have any established
relationships. We will also need to obtain the services of programmers and web
site designers necessary for the development and maintenance of our software and
web site. We may not be able to obtain these services at all, or only on
unsatisfactory terms. The people providing these services may not provide them
in a satisfactory manner.
We have no long-term contracts or arrangements with any suppliers or content
providers that guarantee the availability of merchandise and content or the
continuation of particular pricing practices.
Supplier and content provider relationships will be critical to our
success. We believe that our contracts with them typically will not restrict
them from selling products to other buyers. They may stop selling us products or
may only sell them on unsatisfactory terms. If we lose suppliers or content
providers, we may not be able to establish acceptable relationships with new
suppliers or providers.
We may not be successful in providing a high-quality online experience supported
by a high level of customer service that we believe is essential for
establishing, maintaining and enhancing our CDbeat brand.
We believe that our CDbeat brand will be a critical aspect of our efforts
to attract and expand our online traffic. We may have to spend a lot more money
than we currently plan to create and maintain a strong brand loyalty among
customers. And we may never successfully establish or maintain our brand.
Our revenues will depend on the number of visitors who shop at our site and the
volume of orders we will fulfill and advertisements we show. The volume of goods
sold and advertisements displayed will be hurt if we have system interruptions
that result in the unavailability of our site or reduced order filling
performance.
We may experience periodic system interruptions from time to time. This
may cause potential customers to stop visiting our site. In addition, to keep
visitors coming to our site, we may have to upgrade further our technology,
transaction-processing systems and network infrastructure if we have any
substantial increase in the volume of traffic on our site or the number of
orders placed by customers.
Our success depends upon the continued growth of online commerce.
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We know that rapid growth in the use of and interest in the web, the
internet and other online services is a recent phenomenon. Acceptance and use
may not continue to develop. A sufficiently broad base of consumers may not
adopt, or continue to use, the internet and other online services as a medium of
commerce and, in particular, online apparel commerce. Demand and market
acceptance for recently introduced services and products over the internet have
a high level of uncertainty. Few proven services and products exist. We will
rely on consumers who have historically used traditional means of commerce to
purchase merchandise. We know that these consumers must accept and utilize novel
ways of conducting business and exchanging information if our business is to
succeed.
The infrastructure for the internet and other online services may not be able to
support the demands placed upon it.
The growth of the internet may suffer from potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. Internet and other online
services continue to experience significant growth in the number of users and
their frequency of use as well as an increase in their bandwidth requirements.
Delays in the development or adoption of new standards and protocols required to
handle increased levels of service activity, or increased governmental
regulation could damage their viability. Slower response times due to changes in
or insufficient availability of telecommunications services to support them
internet or other online services also could damage our business
The system for our web site, software and substantially all aspects of our
transaction processing and order management systems are being developed
internally and not been subject to any significant testing.
If they don't function properly and we can't fix them, we could
experience:
o System disruptions.
o Slow response times.
o Impaired quality and speed of order fulfillment.
o Delays in reporting accurate financial information.
We may not be able to obtain and protect our own information.
Our intellectual property is critical to our success. We will rely on
trademark, copyright, and trade secret protection to protect our own rights. We
plan to pursue the registration of our service marks in the United States and
abroad. But we know that effective trademark, copyright and trade secret
protection may not be available in every country in which our products will be
available. Our intellectual property rights may be challenged, invalidated or
circumvented. Our rights may not provide any competitive advantage. We could
also incur substantial costs in asserting our intellectual property or our own
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rights against others or defending any infringement suits brought against us.
We plan to enter into confidentiality and invention agreements with many
of our employees and consultants. These agreements may not be honored. We may
not be able to protect rights to our unpatented trade secrets and know-how
effectively. Others may independently develop substantially equivalent our own
information and techniques or otherwise gain access to our trade secrets and
know-how. We may be required to obtain licenses to intellectual property or
other our own rights from third parties. We might not be able to obtain them.
This might result in delays in product development or the inability to sell
products requiring licenses.
We will face year 2000 computer issues. Computer malfunctions caused by this
issue could seriously hurt our business.
We have discussed these issues in the section entitled "Plan of
Operations" on page *.
We may be exposed to online commerce security risks if hackers break into our
website and, for example, steal credit card numbers.
Our visitors want to know that information they send us over the internet,
particularly credit card numbers, is protected. A computer hacker could
misappropriate our own information or cause interruptions in our operations. We
may be required to expend significant capital and other resources to protect
against security breaches or to alleviate problems caused by breaches. Potential
customers may not use the internet or visit our site because of these privacy
concerns.
There are many uncertainties and unexpected changes in music trends, economic
conditions and in our business.
Our industry historically has been subject to substantial cyclical
variations. We and other music vendors rely on the expenditure of discretionary
income for most, if not all, of our sales. Any downturn, whether real or
perceived, in economic conditions or prospects could cause consumers to spend
less on music. Music trends can change rapidly. We might not be able to
accurately anticipate shifts in music trends and adjust our merchandise mix to
appeal to changing consumer tastes. We could experience insufficient or excess
inventory levels or higher markdowns if we misjudge the market for our products
or are unsuccessful in responding to changes in music trends or in market
demand.
Our internet-based business may suffer from future government regulation.
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to online commerce. But
we know that a number of laws and regulations may be adopted with respect to the
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internet and other online services. The growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on us and may also decrease the growth of the
internet or other online services.
The legal environment for our business on the internet is uncertain.
The applicability to the internet of existing laws in various
jurisdictions governing issues including, property ownership, licensing, content
ownership, sale and other taxes, libel and personal privacy is uncertain and may
take years to resolve. For example, tax authorities in a number of states are
currently reviewing the appropriate tax treatment of companies engaged in online
commerce. Any new state tax regulations may subject us to additional state sales
and income taxes. For example, major U.S.-based online services and personnel
have been challenged by German authorities for making one type of content
accessible in Germany. We could be hurt if we were alleged to have violated
federal, state or foreign, civil or criminal law, even if we could successfully
defend those claims.
We might have to collect sales and other taxes on shipments of goods.
This could be expensive to us and cost us customers as well. The United
States Congress has enacted legislation limiting the ability of the states to
impose taxes on internet-based transactions recently. However, this legislation,
known as the internet Tax Freedom Act, imposes only a three-year moratorium
commencing October 1, 1998 and ending on October 21, 2001 on state and local
taxes on:
o Electronic commerce where taxes are discriminatory, and
o internet access unless those taxes were generally imposed and actually
enforced prior to October 1, 1998.
Currently, we do not pay any of those taxes. It is possible that the tax
moratorium could fail to be renewed prior to October 21, 2001. Failure to renew
this legislation would allow various states to impose taxes on internet-based
commerce.
We may have liability for material that appears on our web site.
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
broadcasts. Claims have been brought, and sometimes successfully pressed,
against internet content publishers and distributors. In addition, we could be
exposed to liability with respect to the content or unauthorized duplication or
broadcast of content. We can't afford to insure against this risk. We do intend
to require content providers to indemnify us for liability, but our
indemnification may be inadequate.
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In the future, we may operate outside of the U.S. and could experience losses
that we would not have suffered if we had restricted ourselves to U.S.-only
operations.
Our foreign operations would be subject to:
o Changes in regulatory requirements and tariffs.
o Difficulties in staffing and managing foreign operations.
o Longer payment cycles.
o Greater difficulty in accounts receivable collection.
o Potentially adverse tax consequences.
o Price controls or other restrictions on foreign currency.
o Difficulties in obtaining export and import licenses.
Our operations may be affected by gains and losses on the conversion of foreign
payments into U.S. dollars. Fluctuating exchange rates could cause reduced gross
revenues and/or gross margins from dollar-denominated international sales. All
of these factors could cause us to lose money that we wouldn't have lost if we
operated only in the U.S.
Our revenues will fluctuate from quarter to quarter.
We may be subject to seasonal fluctuations affecting music vendors
generally, with increased purchasing during the year-end holiday season as well
as to the slowdown of internet usage during the summer months.
We expect to pay no dividends on the common stock in the foreseeable future. You
should not acquire shares if you are depending upon dividend income from this
investment.
We will not generate sufficient net income during the initial years of
operation to permit the payment of any dividends. We may retain profits rather
than pay dividends if we become profitable. Our directors are not required to
declare dividends.
We are controlled by present management. If we lose their services, we might
not be able to replace them, which could harm our business.
Assuming all shares are sold, our management will collectively own
approximately *% of our then issued and outstanding shares. No cumulative voting
for directors is provided. Accordingly, the current management will be able to
substantially impact the election of all of our directors and our other affairs.
Our management is very important to us and might be irreplaceable. We have
described our management and our relationship with them, including the lack of
insurance on their lives, in the section entitled "Management" on page *.
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Your shares and rights related to your shares may be diluted through the
issuance of additional stock.
We have discussed this issue in the section entitled "Description of
Securities" on page *.
The market prices for stocks of internet-related and technology companies,
particularly following an initial public offering, frequently reach levels that
bear no relationship to the operating performance of those companies.
Market prices generally are not sustainable and are subject to wide
variations. If our stock trades to very high levels following this offering, it
likely will thereafter experience a material decline. In the past, securities
class action litigation has often been brought against a company following
periods of volatility in the market price of our securities. We may in the
future be the target of similar litigation. Securities litigation could result
in substantial costs and divert management's attention and resources.
We expect a limited trading market for your shares. If we trade on the over the
counter bulletin board and are considered a "penny stock," you will be subject
to additional restrictions that may make it difficult to sell your shares.
We have discussed these issues in the section entitled "The Offering" on
page *.
Plan of Operations
We are a development stage entity and have generated a net loss of $124,074
for the period May 8, 1998 (date of incorporation) to December 31, 1998. We are
also anticipating and currently experiencing losses for the fiscal year ending
December 31, 1999. In addition we will require a significant amount of capital
to commence our planned principal operations.
We anticipate, based on current plans and assumptions relating to our
operations, that the proceeds of the Initial Public Offering, together with
existing resources and cash generated from operations, should be sufficient to
satisfy our contemplated cash requirements for approximately 12 months after the
date of this prospectus. However, we might require additional financing during
the next 12 month period. We have discussed risks about the need for additional
financing in the section entitled "Risk Factors" on page *.
During the next 12 months, we intend to capitalize on our early entry into
the online music content and merchandise category by engaging in a number of
marketing initiatives designed to establish us as the definitive internet source
for music information for artists, fans and the music industry. We have
discussed these initiatives in the section entitled "Our Business" on page *.
In order to expand our customer base and establish our brand name, we
intend over the next 12 months to establish relationships with some of the major
companies that people use to enter and navigate the internet, including Yahoo,
Excite and Infoseek. In addition, we will engage in offline marketing efforts,
including print advertising campaigns and possibly radio and television
advertising campaigns. 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.
In order to expand our content and product offerings we intend over the
next 12 months to expand our relationships with suppliers of content and
merchandise. We expect that our suppliers will include wholesalers,
distributors, manufacturers, online stores, retail stores and content providers.
To achieve our goal of offering a wide selection of content, we will explore all
means to acquire and license content. We have discussed these plans in the
section entitled "Our Business" on page *.
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Use of Proceeds
The primary purposes of this offering are to obtain additional capital, create a
public market for the common stock and facilitate future access to public
markets. The net proceeds to us from the sale of the shares of common stock
offered hereby are estimated to be approximately $* million, assuming an initial
public offering price of $* per share and after deducting estimated offering
expenses of $*. We intend to use the remainder of the net proceeds, over time,
for general corporate purposes, including working capital to fund anticipated
operating losses, expenses associated with our advertising campaigns, brand-name
promotions and other marketing efforts and capital expenditures. We also could
use a portion of the net proceeds, currently intended for general corporate
purposes, to acquire or invest in businesses, technologies, products or
services, although no specific acquisitions are planned and no portion of the
net proceeds has been allocated for any acquisition.
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds to be received upon the consummation of
this offering. Accordingly, our management will have broad discretion in the
application of the net proceeds. Pending such uses, we intend to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities. We will not receive any proceeds from shares of stock sold by the
stockholders.
Dilution
At December 31, 1998, we had a net tangible book value of $*. The following
table sets forth the dilution to persons purchasing Shares in this offering
without taking into account any changes in the net tangible book value, except
the sale of * Shares at the offering price and receipt of $*, less offering
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expenses. The net tangible book value per share is determined by subtracting
total liabilities from the tangible assets divided by the total number of shares
of common stock and common stock equivalents outstanding. Common stock
equivalents are preferred shares, warrants and options.
- -------------------------------------------------------------------------------
December 31, 1998 * shares sold
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Public offering price per n/a $*
share
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Net tangible book value 0 n/a
per share of
common stock before the
offering(1)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Pro forma net tangible n/a $*
book value per share
of common stock after the
offering
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Increase to net tangible n/a at least $*
book value per
share attributable to
purchase of
common stock by new
investors
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Dilution to new investors n\a $*
- -------------------------------------------------------------------------------
(1) Our net tangible book value per share is determined by dividing the number
of shares of common stock and common stock equivalents outstanding into
the net tangible book value and is significantly less than zero prior to
this offering.
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Our Business
We plan to launch CDbeat.com and our CDbeat player software to offer interactive
and personalized music content and merchandise to computer users worldwide.
Visitors will receive specific information tailored to them based upon their
music preferences.
We believe we are targeting a significant market opportunity because:
o The music industry is very large.
o Millions of consumers have already purchased music content and
merchandise through traditional print catalogs, stores and even
television.
o Thousands of consumers have already purchased music content and
merchandise through the internet.
o There are logistical and economic benefits to conducting our business
over the internet.
According to the Recording Industry Association of America, an industry trade
group, U.S. record companies including, Universal, Sony, BMG, EMI, and Warner
Brothers, generated $12.2 billion of domestic sales in 1997, while worldwide
sales of record music exceeded $30 billion. Sales over the internet accounted
for only $40 million of that market.
In 1998, sales over the internet are estimated to have increased by more than
300% to $120 million. Industry analysts are forecasting significant revenue
growth over the internet for the music industry. Forrester Research Inc. has
projected some $4 billion in music sales will be generated over the internet by
the year 2002.
More than 5.0 million people currently listen to their favorite music while
browsing the internet and working and playing on their personal computer. Within
five years, we believe the worldwide market will grow to exceed 60 million
people.
We believe that our market is growing rapidly and this has led to substantial
opportunities within the music industry. There are two primary reasons:
o The availability of low-cost internet-enabled computers that are fully
equipped with extensive music technology including, CD players, sound
cards and speakers. Today, virtually every personal computer sold has
these features.
o The availability of low-cost CD software players that can be downloaded
off the internet.
We are designing our CDbeat Player and web site to combine the best traditional
music publishing and retailing practices, with innovative and convenience
features made possible by the internet. As an online commerce and content
provider, we intend to provide:
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o Comprehensive and high-quality content.
o A visually pleasing environment.
o A compelling and enjoyable shopping experience that includes a broad
selection of products at significant discounts to retail prices.
o An intuitive store layout.
o Friendly customer service.
o A liberal return policy.
o The convenience of shopping from home in a store that never closes.
o Sophisticated search technology features which will allow customers to
locate quickly the items which interest customers.
We plan to capitalize on our technology and the internet to develop a
direct-to-customer relationship in the music industry. We believe that our use
of state-of-the-art technology and implementation of automation systems will
permit customers, customer service employees, management, and administrative
personnel to access information and manage data in an effective and efficient
manner. Moreover, we believe that our use of technology will allow us to:
o Provide seamless and immediate content that is personalized and relevant
to each user.
o Embrace and extend the value of music CD's.
o Provide instant contact with our fulfillment providers, call centers, and
content providers.
o Reduce inefficiencies in customer service and transaction processing.
o Allow for a user-friendly site that can offer a personalized content
and shopping experience for our visitors.
To date, we are not aware of any other business that has developed similar
direct-to-customer content and personalization within the online music industry.
This could be because, until recently, no medium existed that could accommodate
both a high volume of traffic in the logistical infrastructure necessary to
provide information and target customers in an efficient and economical manner.
The direct marketing of content and merchandise requires a cost-effective medium
The internet is this kind of medium. Print catalogs, television and radio are
not well suited to this task. The paper, printing, mailing, and other production
costs of a print catalog can be significant, as are the television and radio
production costs. In addition, these mediums can not be effectively or
efficiently utilized to establish direct-to-customer relationships.
The internet is a far less expensive and in many ways, a more effective medium.
Utilizing the internet, we can display an almost limitless amount of content and
number of merchandise items to a global audience without the high cost of
printing, mailing or production. With the internet, we can easily update content
and product information as it arrives. By integrating a sophisticated database
with the power of the internet, we will be able to create a personalized viewing
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and shopping experience for our customers. Accordingly, we believe that the
internet is in medium that will permit us to market our content and products
globally in a cost-effective manner.
Industry Background
The internet
The internet is an increasingly significant global medium for communications,
information and commerce. International Data Corporation estimates that the
number of web users grew to approximately 28 million by the end of 1996 and will
grow to approximately 175 million by 2001. We believe that the growth in
internet usage has resulted from a number of factors, including:
o Development of easy-to-use web browsers.
o A large and growing installed base of PCs in the workplace and home.
o Advances in the performance and speed of PCs and modems.
o Improvements in network infrastructure.
o Easier and cheaper access to the internet.
o Increased awareness of the internet among businesses and consumers.
Jupiter Communications estimates that the number of online households, meaning
households using e-mail, the internet or a consumer online service, making
purchases will grow to 57.0 million households, representing over 50% of U.S.
households, by the year 2002. IDC estimates that the total value of services and
products purchased over the web grew from $296 million in 1995 to approximately
$2.6 billion in 1996, and will increase to approximately $123 billion by 2000.
Internet Commerce
As the number of internet users grows, it is expected that more businesses will
seek to use this medium as a vehicle for selling goods and services. One
significant factor propelling this trend is that online households have
significantly higher income levels than households without internet access.
According to Jupiter, the average income of the online household exceeds that of
the traditional remote-purchasing household by approximately 28% or $59,000 vs.
$46,000, indicating greater disposable income and spending power among the
online audience.
According to Jupiter, online sales in the United States are expected to grow to
$11.9 billion in 1999 and $41.1 billion in 2002. The success of companies like
Amazon.com, Inc., CDnow, Inc. and OnSale, Inc. indicate that individuals are
willing to purchase goods and services via the internet. We believe that the
sale of apparel and accessories will constitute a meaningful market and a
significant portion of internet sales in the future.
Advertising on the internet
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The web is an attractive advertising medium because of our interactivity,
flexibility, target ability, and accountability. The interactive nature of the
web gives our advertisers the potential to establish dialogues and one-to-one
relationships with potential customers, receive direct feedback on their
advertising and adapt their advertising to respond to feedback. The web also
provides advertisers with the opportunity to reach broad, global audiences,
since web sites 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.
Internet advertising also has the potential to offer advertisers the ability to
measure the number of times that a particular advertisement has been viewed, the
responses to the advertisement and demographic characteristics of the viewers of
the advertisement. Accordingly, we believe that web advertising has the
potential to be a cost-effective means of reaching a significant number of users
with desirable characteristics.
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.
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 revenues from direct marketing over the internet
will exceed $1.3 billion in 2002.
The flexible nature of a digital medium like the web 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
web advertising versatile. Unlike traditional advertising where advertisements
are presented to consumers who may or may not have an interest in them, web
advertisements are only delivered when a consumer calls for a piece of
information or a particular web page. Unlike more traditional media, we believe
that the web is a more accountable medium where advertisers can receive reports
on the impression levels, demographic viewership and effectiveness of their
advertisements.
The growing diversity of web advertisers is one measurement of the web's
emergence as an effective advertising medium. web advertising pioneers were
mostly technology and internet-related companies. Today, a growing percentage of
web advertisers consist of more traditional business and consumer companies.
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The Online Music Opportunity
As the web continues to evolve as a mass communications medium, content
currently delivered through traditional media, including radio and television,
increasingly will be delivered over the internet. The internet enables new
opportunities for providing interactive and customized content.
We also believe that 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.
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.
By offering comprehensive content and competitively priced products in a more
convenient format with a higher level of customer service, we intend to provide
a meaningful alternative to the consumer and revolutionize the music industry.
By offering merchandise at significant discounts, a money back guarantee, a high
level of customer service in the convenience of 24/7 shopping, we believe that
we can provide an attractive alternative for consumers to view music content and
shop for merchandise.
The CDbeat Approach
We decided to focus our attention on the online music industry taking into
account factors as:
o The significant size of the traditional music industry.
o The absence of a dominant online competitor.
o The propensity of internet shoppers to respond to bargains.
o The demand for high-quality music content.
We will offer a full range of products including:
o Music CDs.
o Tapes.
o Records.
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o Concert ticket.
o Branded merchandise including; hats, mugs, T-shirts, books and posters.
We plan to leverage technology and the internet to pioneer what we believe will
be a significant new market, the direct-to-customer market for music content and
merchandise. As an online commerce and content provider, we intend to provide a
compelling and enjoyable online shopping experience.
We are designing our online store to combine the best traditional retailing
practices with innovative and convenient features made possible by the internet.
In addition, we plan to include significant music content in an effort to become
the definitive music site on the web.
Key Components Of Our Business Strategy
- -> Focus on Compelling Music Content.
We are dedicated to providing news and information on a wide range of artists
and types of music. We will attempt to provide the most comprehensive artist and
music industry programming on the internet. So we are working to develop,
acquire and license comprehensive internet rights to content. We will offer a
wide-variety of music-relevant information at one location.
We will attract a high-quality staff to deliver relevant, informative and
entertaining content, including synopses, reviews and excerpts. In addition,
reviews by artists, other users, publishers and third-party reviewers will
provide diverse and often stimulating points of view to inform and entertain
customers while browsing and shopping. Because the internet permits a cost
effective means of combining content with commerce, we believe that we will have
a significant competitive advantage over traditional methods of retailing.
Through use of our technology, music content is presented to each individual
user based upon our knowledge of their music preferences. The content presented
will contain a wide variety of relevant information, including:
o Headline News.
o Music Business News.
o Artist News.
o Columns.
o Special Reports.
o Music Reviews.
o Artists Profiles.
o Musician Information.
o Online Shopping.
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o Top-10 Hits.
o Tour Search.
o Classified Ads.
o Music Store.
In addition, the web site will contain hundreds of specific artist pages, which
include:
o Artist Information.
o Music Reviews.
o Interviews.
o Biography.
o Fan Clubs.
o Chat Rooms.
o Concert Schedules.
o Reader & Artist Comments.
o Photo Gallery.
o Concert Schedules.
o Discography.
- -> Promote rapid adoption of the CDbeat player.
We have chosen to offer our software free of charge, making it readily
available, and to distribute it widely to promote extensive adoption. People
will find out about our software through several methods, including:
o Mass media press coverage.
o Partners.
o Online and offline advertisements.
o Personal/email recommendations from co-workers, friends and family
members.
- -> Build and Increase Revenue.
We intend to build and increase our revenues by:
o Increasing our advertising revenues through expansion of our customer
base.
o Increasing the rates we charge advertisers by continuing to improve our
ability to target advertisements to more demographically distinct
groups.
o Increasing our page views, increasing the average size and length of
our advertising contracts.
o Increasing the number of our direct sales representatives and
continuing to invest in improving ad serving and ad targeting
technology.
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o Expanding our revenue-sharing commerce relationships and our
relationships with third-party content providers that pay us for access
to our site.
o Expanding the number and scope of our fee-based premium membership
services.
- -> Create Customer Loyalty.
Our goal is to maintain a relentless customer focus. We strive to offer our
customers compelling value through
o Comprehensive and high-quality content.
o Innovative use of technology.
o Broad selection, high-quality content.
o A high level of customer service.
o Competitive pricing.
o Personalized services.
In addition, we offer our customers a high-quality shopping experience through
informative and entertaining editorial content, as well as simple and efficient
navigation and search capabilities.
- -> Build Strong Brand Recognition.
We will promote, advertise and increase our brand value and visibility through
excellent service and a variety of marketing and promotional techniques,
including advertising on leading web sites and other media, conducting an
ongoing public relations campaign and developing business alliances and
partnerships.
- -> Significant Discounts
We offer customers discounts of between 10% and 50% off comparable retail
prices. We believe that our ability to offer these discounts is due to the
smaller overhead costs necessary to operate either a retail store or traditional
print catalog. We believe that our discount prices coupled with a wide selection
of quality merchandise will create compelling reasons for customers to shop at
our web site.
- -> Exploit advantages offered by being an internet-based retailer.
We have an economic advantage relative to traditional media and retail companies
because we are not burdened by the costs of a physical store, distribution
network and related personnel. We can offer a broad selection of content and
products to a highly targeted user base, with little inventory risk or expense.
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While traditional retailers must make significant investments in inventory, real
estate and personnel for each store location, online retailers incur a fraction
of these costs, generally use centralized distribution, and have virtually
unlimited merchandising space. Traditional retailers are compelled to limit the
amount of inventory they carry at each store and focus on a smaller selection of
faster-selling hit releases. As an example, we believe that a typical music
store may carry up to 12,000 items and a superstore may carry up to 50,000
items, compared to the more than 100,000 items that we will carry.
- -> Customer Convenience.
Without the constraints imposed by a physical location, an online store may be
the most convenient way for consumers to shop. Our customers will be able to
shop at any time from the privacy and comfort of their own home or office. By
eliminating the need for customers to travel to a physical location, we believe
that we can provide a significant service to many shoppers, including those who
spend a long time driving to get to a store. By remaining open for business 24
hours a day, 365 days a year, we service the needs of today's time-constrained
customers as well as foreign customers shopping from different time zones.
- -> A Personalized Shopping Experience.
We believe that today's consumers prefer to shop in a store that is tailored to
their needs. We will develop our software to allow customers to personalize and
create their own shopping environment.
We plan to offer customers a variety of other personalized services and
features, including special occasion notification and narrowcasted content and
commerce, meaning content and commerce directed specifically to customers
interests. The special occasion notification will remind the customers by e-mail
of any birthdays, anniversaries or other dates of interest. We intend to build a
complex database, that will offer narrowcasted content, promotions and product
displays based on customer preferences, purchasing history, site behavior and
seasonal considerations.
A key consideration behind our personalization programs is the desire to build
customer loyalty. In addition, we intend to build site features, mine customer
data and develop affinity and other marketing programs designed to encourage
repeat purchases and customer loyalty. By encouraging feedback from our
shoppers, we plan to improve our customers' shopping experience and the
efficiency of our operations. We will offer e-mail, phone and fax options for
customer comments, complaints and suggestions.
We will offer free e-mail notification services and an information filtering
service for our customers concerning things like new album releases and
promotions. These services will allow customers to specify an artist, title or
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subject area and receive notice automatically when new music is published that
matches their criteria. Typically, a few weeks prior to the release date of a
matching new music CD, our notification service software sends the customer an
e-mail message containing pre-release information.
- -> Create an Online Community.
By creating an online community, we hope to provide customers with an inviting
and familiar experience that will encourage them to return frequently to the
site and to interact with other users, and that will promote loyalty and repeat
purchase. We invite readers, artists and publishers to post reviews, sponsors
review competitions and provides a forum for author interviews. Reviewers and
artists are encouraged to provide their e-mail addresses to facilitate
interaction with other readers.
- -> Visually Pleasing Interface and Fast Loading Pages.
We believe that our site will include a visually pleasing shopping environment
that is designed to download quickly in spite of today's relatively limited
bandwidth and slow data transmission technology.
- -> Quick Order Filling.
We will enter into agreements with third parties to provide order filling and
call center customer service. The third parties will be selected for their
technological sophistication, online commerce experience, and ability to have
their operations fit with our information systems. We expect that all customer
orders will be shipped within one to two business days of receipt, and that all
customer service calls will be handled quickly and efficiently. We intend to
provide quality customer service in an effort to distinguish us further from our
on-line and off-line competitors and establish us as the premier online source
for music content and merchandise.
- -> Changing Product Inventory.
Our own product information database is being designed to maintain an up to the
second count of all inventories available for sale. This database is intended to
eliminate the problem of back orders, which many catalog companies face, because
customers will only be able to view and purchase in stock items. The system is
also being designed to allow us to change product pricing quickly, thereby
permitting us to run timed promotional sales and facilitate dynamic pricing to
address specific market or competitive factors.
- -> Build Strong Publisher and Distributor Relationships.
We view our publishers and distributors as customers and work to build strong
relationships with them. Because we will centralize distribution and order most
products based on actual customer demand, we believe that our returns of music
and merchandise to publishers and wholesalers will be significantly below
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industry norms. We believe our market approach may increase sales of many
second- and third-tier titles that are not typically stocked in physical music
stores. In addition, the demographic and purchasing data accumulated by us will
enable us to help publishers target customers for particular product offerings.
Through targeted marketing and virtually unlimited online shelf space, we can
offer publishers enhanced promotional opportunities for new authors, new titles
and second- and third-tier titles.
- -> Maximize value for advertisers.
We intend to continually develop innovative approaches for our advertisers
through advancements in targeting particular sets of consumers and consumer
tracking and measurement technologies. We will try to obtain the largest
possible web audience in order to give advertisers the most efficient and
effective advertising placements. We will continue to develop services that
encourage consumers to provide demographic and interest information that we can
use to more effectively target advertising. We also believe we can build a
strong web advertising sales organization, who educate, guide and advise
advertisers on making the most of their web advertising purchases.
- -> Pursue Relationships.
We will enter into various licensing, royalty and consulting agreements with
content providers, vendors, and organizations, including software and hardware
vendors, entertainment companies, content publishers and broadcast media
companies. We pursue these relationships for a variety of purposes, including:
o Maximizing rapid penetration.
o Adoption of our technologies.
o Achieving economies of scale and critical mass.
o Aiding the development of compelling content to build consumer demand
for music media over the internet.
o Expanding the range of commercial activities based on our technology
and brand name.
- -> Attract and Retain Exceptional Employees.
We believe that versatile and experienced employees, management and directors
provide significant advantages in the rapidly evolving market in which we
compete. We will devote substantial efforts to building a talented employee base
and to attracting an experienced management team with a track record in large
and fast-growing organizations.
Marketing
We intend to promote our brand name and drive traffic to our site by combining
traditional non-internet marketing strategies, including public relations, print
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and radio advertising, with online marketing vehicles including banner
advertising and partnerships with relevant web sites and web entry sites.
Initially, we plan to devote a significant portion of our marketing dollars to
developing relationships with portal, or web entry site, companies. According to
Jupiter, in 1997 an estimated $673 million, or 26% of the total online shopping
revenues, resulted from tenancy deals with portal, or web entry site, companies.
Jupiter expects that this figure will increase to $1.7 billion in 1998 and $20.3
billion, or a little over half of all shopping revenue, by 2002.
We intend to negotiate distribution arrangements with some of the other major
internet companies build our brand recognition and acquire customers. Although
we believe that establishing relationships with portal, or web entry site,
companies will accelerate the growth of our business in the near term, we expect
that the importance of maintaining a presence on these sites will diminish as
more customers gain web-navigation experience and we establish our brand.
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
and our commercial use grow. We have adopted a detailed privacy policy to assure
and protect our users from the abuse of their information. CDbeat's privacy
cornerstone is that we will never sell information that identifies an
individual. Users must acknowledge and agree to this policy when registering for
the CDbeat player software. We do not sell or rent any personally identifiable
information about our users to any third party. We do use information about our
users for internal purposes only in order to improve marketing and promotional
efforts, to analyze site usage statistically, and to improve content, product
offerings and site layout.
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 also avoid the significant operational effort associated with same-day
shipment.
We will source product from a network of established distributors and
publishers. We carry minimal inventory and rely to a large extent on rapid
fulfillment from major distributors and wholesalers that carry a broad selection
of titles. We intend to purchase a substantial majority of our CD products from
Valley Media, Alliance Entertainment or Baker & Taylor, three of the largest
fulfillment firms in the industry.
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Customer orders are transmitted automatically to the order-filling center by a
secure, electronic connection, and processed immediately upon receipt. Based on
our anticipated arrangements with our suppliers, electronically ordered
merchandise is often shipped by the distributor within hours of receipt of an
order from CDbeat. The suppliers pick, pack and ship customer orders and charges
us for merchandise, shipping and handling. In most cases, products are shipped
within a day after an order is placed with us.
If a customer is uncomfortable ordering online or cannot establish a secure
connection with our site, he or she is given the option of completing his or her
order by calling our toll free customer service number.
We will offer the customer a choice of shipping options, including overnight,
two-day and standard delivery within the United States. In addition, to
capitalize on the global reach of the internet, we intend to provide shipping to
over 200 countries. Upon receipt of an order, we expect that our site will send
an e-mail to the customer confirming the receipt of the order. Another e-mail
will follow when the shipment is made. In addition, our site will offer an
order-tracking feature that allows customers to track the status of their order.
Technology
We intend to implement a broad array of state-of-the-art technology that will
facilitate web site management, complex database search functionality, customer
interaction and personalization, transaction processing, order filling and
customer service functionality. Our technology will include a combination of our
own technology and commercially available, licensed technology. We believe that
our site will comprise a suite of applications that will permit customers,
customer service employees, management, and administrative personnel to access
and manage the database in an effective and efficient manner.
To address the critical issues of privacy and security on the internet, we will
incorporate, for transmission of confidential personal information between
customers and our web server, secure socket layer technology so that all data is
transmitted via a fully encrypted session. In the event that a customer's
browser does not support this technology, our site will instruct the customer to
call our customer service center to provide his credit card information over the
phone. Transmission of credit card and other personal information between web
server and our fulfillment center will also be encrypted in a similar manner.
We will enter into an agreement with a major internet service provider to host
our site and provide specified hardware and software as well as year round 24
hour systems support. The server and network architecture must be designed to
provide high speed, reliable access 24 hours a day, 365 days a year, accommodate
several thousand simultaneous visitors, and allow for rapid scaling of hardware
and bandwidth to accommodate sudden increases in site traffic.
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Competition
Electronic commerce generally, and, in particular, the online music content and
merchandise market, is a new, dynamic, high growth market.
The direct marketing of music content and merchandise requires using a method
that is not too costly and that is capable of displaying a large number of pages
and products. Print catalogs are not well suited to this task. The paper,
printing, mailing, and other production costs of a print catalog can be
significant. To support these costs, a traditional cataloger requires products
that are available in a full range of sizes and substantial quantities.
Similarly, television is a costly medium that requires substantial quantities of
products that are available in a full size scale in order for it to be an
economical medium.
The internet, however, is a far less expensive and, in many ways, more effective
method. Utilizing the internet, we can display an almost limitless number of
content and items without the high costs of printing and mailing. With the
internet, we can easily update content and product images as new products arrive
and other items sellout. By integrating a sophisticated database with the power
of the internet, we will be able to create a personalized shopping environment
and allow our customers to search for the products that interest them.
Accordingly, we believe that the internet is a medium that will permit us to
market our content and products in a cost-effective manner.
Our competition for online customers comes from a variety of sources including,
existing We believe that our ability to compete favorably is enhanced by our
software/web site integration as well as our presentation of comprehensive and
high-quality content.
For a discussion of risk factors related to our competition, please turn to the
section entitled "Risk Factors - Competition" on page *.
Intellectual Property
We intend to develop trademarks, designs and our own systems and trade secrets
to create competitive advantages. As a result, we will on a combination of
trademark, service mark, copyright and trade secret laws, as well as
confidentiality agreements and technical measures to protect our own rights. We
are pursuing the registration of our service marks in the United States and
abroad and are considering the possibility of patenting on some of our own
technology.
Employees
As of February 15, 1999, we employed 5 full-time employees and 16 contractors.
Our employees are not represented by a labor union, and we have never
experienced a work stoppage. We believe our relationship with our employees is
satisfactory.
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Facilities
We have our corporate headquarters at 444 Bedford Street, Suite 8s in the
downtown area of Fairfield County, Connecticut. The telephone number is
203-602-9994. 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; Albiline, Texas provided by our Vice President of Technology 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.
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. We will not receive any
of the proceeds of their sales.
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
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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
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
--------------------------------------------------------------------------
Authorized Capital Stock Under Shares Of Capital Stock
Our Articles Of Incorporation Outstanding After offering
--------------------------------------------------------------------------
20,000,000 shares of common stock *
shares of common stock -
assuming all shares are
sold
--------------------------------------------------------------------------
10,000,000 shares of preferred stock * shares of preferred stock
--------------------------------------------------------------------------
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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
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, if after a merger. This investment may be inappropriate for you if
you need dividend income from an investment in shares.
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
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
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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.
We have preferred stock class A. There are * shares of 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. There are 100,000 shares of preferred stock
class C which 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.
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 * 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,
32
<PAGE>
there are * warrants and options outstanding. 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 * 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.
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 49 Vice President of Public Relations
Larry Payne 50 Vice President of Technology
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 1998, Mr. Arberman served as an
internet Analyst of Yorkton Securities, Inc., an investment banking firm.
From November 1994 until August 1998, 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
33
<PAGE>
in finance and marketing and a minor in and 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. Payne has served as Vice President of Technology since December 1998. From
January 1995 until November 1998, Mr. Payne served as a software and hardware
engineer for MediaGarden Inc., a developer of tools and products for educational
markets. From December 1993 until December 1994, Mr. Payne served as a software
development consultant. From September 1993 until November 1993, Mr. Payne
served as a software engineer for Now On-Line, Inc., an internet service
provider. From December 1992 until August 1993, Mr. Payne served as a software
development consultant. During his career, Mr. Payne has developed numerous
software applications including text editors, setup and installation utilities,
CD-ROM driver and management utilities, CD music players, communications
programs, compilers, data compression utilities, and games.
Mr. Kerbs has served as a Director since December 1998. For the past few 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, CPA's 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. Mr. Kerbs has more than 20 years of experience in high
technology systems and a long record of pioneering management activities in
Israel, Europe and the United States. 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
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.
34
<PAGE>
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
---------- --------- Options (#)
Joel Arberman, President None None None
We have entered into two-year employment agreements with Joel Arberman, Bryan
Eggers and Larry Payne. Mr. Arberman and Mr. Eggers will be compensated for
their services at the rate of $70,000 per year and Mr. Payne will be
compensated for his services at the rate of $75,000 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
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.
35
<PAGE>
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 fullest extent permitted by applicable law, to indemnify all
our officers and directors. The SEC believes that this indemnification may not
be given for violations of the Securities Act of 1933 that governs the
distribution of our securities.
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 issuances
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.
36
<PAGE>
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 products 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 services as applicable at any time hereafter.
Our internal systems include both its information technology systems and
non-information technology systems. We have initiated an assessment of its
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 its non-information technology systems for Year 2000
compliance. It has not, to date, discovered any material Year 2000 issues with
respect to its non-information technology systems.
We are in the process of contacting its material seller participants whose
products or services are sold through us to determine if they are Year 2000
compliant. To date, all such seller participants 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 products 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 its systems for the Year 2000. Nonetheless, we may
experience material unexpected costs caused by undetected errors or defects in
37
<PAGE>
the technology used in its systems or because of the failure of a material
seller participant 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, including a vendor participant in our service, or the Internet
generally, to be Year 2000 compliant could harm the operation of our services or
prevent certain products and services being offered through our services, 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
reliabilty 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.
CONTINGENCY PLANS
We have not yet developed a contingency plan to address situations that may
result if it is unable to achieve Year 2000 compliance. The cost of developing
and implementing such a plan, if necessary, could be material.
RELATED PARTY TRANSACTIONS
On October 15, 1998, Mr. Eggers and Mr. Payne sold us all rights, title and
interest to all intellectual property that they owned relating to certain
software, technology and ideas relating to Internet-based and computer-based
music. In exchange for such sale, we issued Mr. Eggers and Mr. Payne 50,000
Preferred Shares, Class C. In addition, both Mr. Eggers and Mr. Payne were
hired as our Vice President of Public Relations and Vice President of
Technology.
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. Unless otherwise indicated below, 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 authority is
shared by spouses under applicable law.
38
<PAGE>
- -------------------------------------------------------------------------------
Beneficial Ownership
of common stock
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares Owned Percentage of Class
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Before offering After offering
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Joel Arberman 3,900,000 (1) *% *%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Bryan Eggers 500,000 (1) *% *%
Larry Payne 500,000 (1) *% *%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- --------- -------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
All directors and 3,900,000 (1) *% *%
officers as a group
- -
4 persons
- -------------------------------------------------------------------------------
(1)Mr. Arberman has placed 1,000,000 of his 3,900,000 common shares in escrow
with the board of directors. The shares in escrow will be cancelled pro-rata
as the preferred stock class C convert into common shares. Mr. Eggers and Mr.
Payne currently own preferred stock class C. After we achieve specified
milestones, they can convert some or all of their preferred shares into
common shares. The table assumes that all of the milestones are achieved and
that they receive the maximum number of common shares. For every share they
receive, one share currently owned by Mr. Arberman shall be cancelled.
Therefore, regardless of whether or not Mr. Eggers and Mr. Payne receive
common shares, the total number of shares owned by all current directors and
officers will remain unchanged at 3,900,000.
THE OFFERING
We are offering up to a maximum of 3,521,000 Shares at a price of $*
per share to be sold by us.
Our stockholders are offering 479,000 shares without the use of a
professional underwriter. They will not pay commissions on stock sales. We won't
receive any of the proceeds of sale of their shares.
The offering will remain open for a period in our sole discretion, unless
the maximum proceeds are earlier received or we determine, in our sole
discretion, to cease selling efforts. Our officers, directors and stockholders
and their affiliates may purchase Shares in this offering.
39
<PAGE>
We won't 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 have no agreement with a market maker to make quotations of our common
stock on the over the counter bulletin board. 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. Market makers are not
required to maintain a continuous two-sided market and are free to withdraw firm
quotations at any time.
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 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.
Any trading in the our stock will be conducted in the over the counter
market in the so-called "pink sheets" or the NASDAQ's over the counter bulletin
board. As a consequence, you could find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, your stock.
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. We think that even
after the merger, our common stock will fall within the definitional scope of a
penny stock
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,
40
<PAGE>
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'd 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 *. 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. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of any
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus.
LEGAL PROCEEDINGS
We 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
41
<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
<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.
/s/ Beard Nertney Kingery Crouse & Hohl, P.A.
February 16, 1999
F-2
<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
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
<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
<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
Other issuances of preferred stock:
Class A 28 0 28 28
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
<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
<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 they
will be successful in these efforts. 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.
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.
F-7
<PAGE>
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 prepaid product development costs in the accompanying balance sheet, will be
expensed as they are incurred.
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 $
------
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
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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 as
consideration for capital raised 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 consulants, the fair market value of the shares 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 sales 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 indefinately.
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
<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
<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 best efforts, 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, its Vice President of Technology and its Vice President of
Publicity which require aggregate annual compensation of $215,000 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
<PAGE>
NOTE K - 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
<PAGE>
Part II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 22. Indemnification of Directors and Officers.
The information required by this Item is incorporated by reference to
"Indemnification" in the prospectus herein.
Item 23. 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 24. 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 no consideration. 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
42
<PAGE>
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
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 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 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 27.847 shares of preferred stock class A, which
are convertible into 27,847 shares of common stock, to consultants, for
consideration of approximately $1.00 per share of preferred stock class A, or an
aggregate of $27.85. 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 consultants for a total of 17,847
shares of common stock. The warrants granted are exercisable at a price of $2.50
per share.
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 various individuals. The
warrants were issued for no consideration. 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 consultants for the Registrant, 27,847 shares
of common stock for the conversion of 27.847 shares of preferred stock class A.
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, we issued 303,000 warrants to purchase
common shares a price of $2.50 per share to L&R Holdings, Inc. for no
43
<PAGE>
consideration. 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 a consultant for the Registrant, 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, we issued 31,500 warrants to
purchase common shares a price of $2.50 per share for no consideration. 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.
Item 25. Exhibits.
The following exhibits are filed with this Registration Statement:
Number Exhibit Name
3.1 Articles of Incorporation
3.2 By-Laws
4.1 Rights and Preferences of preferred stock
5 Opinion Regarding Legality
10.1 Form of Employment Agreement with Joel Arberman, Bryan Eggers and Larry
Payne.
10.2 Stock Option Plan
23.1Consent of Expert
24.1Consent of Counsel
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.
Item 26. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offer or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section I 0(a)(3) of the
Securities Act of 1933;
44
<PAGE>
(ii) 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;
(iii) 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.
45
<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 March 19, 1999.
CDbeat.com, Inc.
/s/ Joel Arberman
President, Treasurer, and Director
/s/ Avi Kerbs
Director
46
<PAGE>
As filed with the SEC on March 19, 1999 SEC
Registration No. 333-70663
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
AMENDMENT NO. 2
REGISTRATION STATEMENT
ON FORM SB-2
UNDER
THE SECURITIES ACT OF 1933
CDbeat.com, Inc.
(Consecutively numbered pages through of this Registration
Statement)
47
<PAGE>
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
EXHIBIT NO. SEC REFERENCE TITLE OF DOCUMENT LOCATION
NUMBER
- --------------------------------------------------------------------------------
1 3.1 Articles of Incorporation This Filing
Page
- --------------------------------------------------------------------------------
2 3.2 Bylaws This Filing
Page
- --------------------------------------------------------------------------------
Rights and Preferences of
3 4.1 Preferred Stock This Filing
Page
- --------------------------------------------------------------------------------
4 5 Consent of WILLIAMS LAW This Filing
GROUP, P.A. Page
- --------------------------------------------------------------------------------
Form of Employment Agreements
5 10.1 This Filing
Page
- --------------------------------------------------------------------------------
6 10.2 Stock Option Plan This Filing
Page
- --------------------------------------------------------------------------------
7 23 Consent of Beard, Nertney, This Filing
Kingery, Crouse & Hohl, P.A. Page
- --------------------------------------------------------------------------------
8 24 Consent of WILLIAMS LAW This Filing
GROUP, P.A., (See Exhibit 2) Page
- --------------------------------------------------------------------------------
48
<PAGE>
EXHIBIT 1
ARTICLES OF INCORPORATION
49
<PAGE>
ARTICLES OF INCORPORATION
ARTICLES OF INCORPORATION OF SMD Group Inc.
The undersigned, for the purpose of forming a corporation under the laws of the
State of Delaware do hereby adopt the following articles of incorporation:
ARTICLE ONE
The name of the corporation is SMD Group Inc.
ARTICLE TWO
CORPORATE DURATION
The duration of the corporation is perpetual.
ARTICLE THREE
PURPOSE OR PURPOSES
The general purposes for which the corporation is organized are:
1. To engage in the business of sales, marketing and distribution of
leading-edge products, services and technologies.
2. To engage in any other trade or business that can, in the opinion of the
board of directors of the corporation, be advantageously carried on in
connection with or auxiliary to the foregoing business.
3. To do such other things as are incidental to the foregoing or necessary or
desirable in order to accomplish the foregoing.
ARTICLE FOUR
CAPITALIZATION
The aggregate number of shares which the corporation is authorized to issue is
20,000,000. Such shares shall be of a single class, and shall have a par value
of $0.001 per share.
50
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ARTICLE FIVE
REGISTERED OFFICE AND AGENT
The street address of the initial registered office of the corporation is 15
Fast North Street in the City of Dover, County of Kent, Delaware, and the name
of its initial registered agent at such address, is Incorporating Services Inc.
ARTICLE SIX
DIRECTORS
The number of directors constituting the initial board of directors of the
corporation is one. The name and address of each person who is to serve as a
member of the initial board of directors is:
Joel Arberman 444 Bedford Street, Suite 8s. Stamford, Connecticut 06901
ARTICLE SEVEN
INCORPORATORS
The name and address of each incorporator is:
Joel Arberman 444 Bedford Street, Suite 8s, Stamford, Connecticut, 06901
Executed by the undersigned on May 8th 1998
STATE OF Delaware
COUNTY of Kent.
- ---------------------
Joel Arberman
51
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State of Delaware
Certificate of Amendment of
Certificate of Incorporation
First: That at a meeting of the Board of Directors of SMD Group, Inc.
resolutions were duly adopted setting forth a proposed amendment of the
Certificate of Incorporation of said corporation, declaring said amendment to be
advisable and calling a meeting of the stockholders of said corporation for
consideration thereof. The resolution setting forth the proposed amendment as
follows:
RESOLVED, that the Certificate of Incorporation of this corporation be amended
by changing the Article thereof numbered "First" so that, as amended, said
Article shall be and read as follows:
"The mane of the corporation is Cdbeat.com, Inc."
RESOLVED, that the Certificate of Incorporation of this corporation be amended
by changing the Article thereof numbered "Fourth" so that, as amended, said
Article shall be and read as follows:
"The corporation shall be authorized to issue 20,000,000 Shares at .001 Par
Value and 10,000,000 Preferred Shares at .001 Par Value."
Second: That thereafter, pursuant to resolution of its Board of Directors, a
special meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
Third: That said amendment was duly adopted in accordance with the provisions
of Section 242 of the General
Corporation Law of the State of Delaware.
Fourth: That the capital of said corporation shall not be reduced under or by
reason of said amendment.
52
<PAGE>
In Witness Whereof, said President and CEO has caused this certificate to be
signed by Joel Arberman, an Authorized Officer, this 4th day of January, A.D.
1999.
By:_____________________
(Authorized Officer)
Name: Joel Arberman
53
<PAGE>
EXHIBIT 2
BYLAWS
54
<PAGE>
BYLAWS
OF
SMD Group, Inc.
BYLAWS OF SMD Group Inc.
ARTICLE 1. MEETING
Section 1. Annual Meeting. The annual meeting of the Shareholders of this
Corporation shall be held on May 8th of each year or at such other time and
place designated by the Board of Directors of the Corporation. Business
transacted at the annual meeting shall include the election of Directors of the
Corporation. If the designated day shall fall on a Sunday or legal holiday, then
the meeting shall be held on the first business day thereafter. Section 2.
Special Meetings. Special meetings of the Shareholders shall be held when
directed by the President or the Board of Directors, or when requested in
writing by the holders of not less than a majority of all the shares entitled to
vote at the meeting. A meeting requested by Shareholders shall be called for a
date not less than ten (10) nor more than sixty (60) days after request is made,
unless the Shareholders requesting the meeting designate a later date. The call
for the meeting shall be issued by the Secretary, the President, a majority of
Shareholders, the Board of Directors, or such other person as designated by any
of the same. Section 3. Place. Meetings of Shareholders shall be held at the
principal place of business of the Corporation, the law office representing the
Corporation or at such other place as may be designated by the Board of
Directors.
Section 4. Notice. Written notice stating the place, day and hour of the
meeting and, in the case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
delivered not less than ten (1O) nor
more than sixty (60) days before the meeting, either personally or by first
class mail, by or at the direction
of the President, the Secretary or the officer or persons calling the
meeting, to each Shareholder of
record entitled to vote at such meeting. If mailed such notice shall be
deemed to be delivered when deposited
in the United States mail, prepaid and addressed to the Shareholder at his
address as it appears on the stock
transfer books of the Corporation.
55
<PAGE>
Section 5. Notice of Adjourned Meeting. When a meeting is adjourned to another
time or place, it shall not be necessary to give any notice of the adjourned
meeting if the time and place to which the meeting is adjourned are announced at
the meeting at which the adjournment is taken. At the adjourned meeting, any
business may be transacted that might have been transacted on the original date
of the meeting. However, if after the adjournment the Board of Directors fixes a
new record date for the adjournment meeting, a notice of the adjourned meeting
shall be given as provided in this Article to each Shareholder of record.
Section 6. Shareholder Quorum and Voting. A majority of the shares entitled to
vote, represented in person or by proxy, shall constitute a quorum at a meeting
of Shareholders. If a quorum is present, the affirnative vote of a majority of
the shares represented at the meeting and entitled to vote on the subject matter
shall be the act of the Shareholders, unless otherwise provided by law. Section
7. Voting of Shares. Each outstanding share shall be entitled to one vote on
each matter submitted to a vote at a meeting of Shareholders. Section 8.
Proxies. A Shareholder may vote either in person or by proxy executed in writing
by the Shareholder or his duly authorized attorney-in-fact. No proxy shall be
valid eleven (11) months from the date thereof unless otherwise provided in the
proxy. Section 9. Action by Shareholders Without a Meeting. Any action required
by law, these Bylaws, or the Articles of Incorporation of the Corporation to be
taken at any annual or special meeting of Shareholders, or any action which may
be taken at any annual or special meeting of Shareholders, may be taken without
a meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken,
56
<PAGE>
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted, as is provided by law. ARTICLE 11. DIRECTORS Section 1. Function. The
Board of Directors shall exercise its power and authority to manage the business
and affairs of the Corporation. Section 2. Qualification. Directors need not be
residents of this state and Shareholders of this Corporation. Section 3.
Compensation. The Board of Directors shall have authority to fix the
compensation of Directors. Section 4. Presumption of Assent. A Director of the
Corporation who is present at a meeting of the Board of Directors at which
action on any corporate matter is taken shall be presumed to have assented to
the action taken unless he votes against such action or abstains from voting in
respect thereto because of an asserted conflict of interest. Section S. Number.
This Corporation shall have Five Director(s). Section 6. Election and Term Each
person named in the Articles of Incorporation as a member of the initial Board
of Directors shall hold office until the First Annual Meeting of Shareholders,
and until his successor shall have been elected and qualified or until his
earlier resignation, removal from office or death. At the First Annual Meeting
of Shareholders and at each annual meeting thereafter, the Shareholders shall
elect Directors to hold office until the next succeeding annual meeting. Each
Director shall hold office for a term for which he is elected and until his
successor shall have been elected and qualified or until his earlier
resignation, removal from office or death. Section 7. Vacancies. Any vacancy
occurring in the Board of Directors, including any vacancy created by reason of
an increase in the number of Directors, may be filled by the affirmative vote of
a majority of the remaining Directors though less than a quorum of the Board of
Directors. A Director elected to fill a vacancy shall hold office only until the
next election of Directors by the Shareholders. Section 8. Removal of Directors.
At a meeting of Shareholders called expressly for that purpose, any Director or
the entire Board of Directors may be removed, with or without cause, by a vote
of the holders of a majority of the shares then entitled to vote at an election
of Directors. Section 9. Quorum and Voting. A majority of the number of
Directors fixed by these Bylaws shall constitute a quorum for the transaction of
business. The act of voting by the Directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors. Section 1O.
Executive and Other Committees. The Board of Directors, by resolution adopted by
a majority of the full Board of Directors, may designate from among its members
and executive committee and one or more other committees each of which, to the
extent provided in such resolution such have and may exercise all the authority
of the Board of Directors, except as is provided by law. Section 11. Place of
Meeting. Regular and special meetings of the Board of Directors shall be held at
the principal office of the Corporation. Section 12. Time, Notice and Call of
Meetings. Regular meetings of the Board of Directors shall be held without
notice on May 8th of each year. Written notice of the time and place of special
meetings of the Board of Directors shall be given to each Director by either
personal delivery, telegram or cablegram at least three (3) days before the
meeting or by notice mailed to the Director at least three (3) days before the
meeting.
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Notice of a meeting of the Board of Directors need not be given to any Director
who signs a Waiver of Notice either before or after a meeting. Attendance of a
Director at a meeting shall constitute a Waiver of Notice of such meeting and
waiver of any and all objections to the place of the meeting, the time of the
meeting, or the manner in which it has been called or convened, except when a
Director states, at the beginning of the meeting, any objections to the
transaction of business because the meeting is not lawfully called or convened.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board of Directors need be specified in the Notice or
Waiver of Notice of such meeting. A majority of the Directors present, whether
or not a quorum exists, may adjourn any meeting of the Board of Directors to
another time and place. Notice of any such adjourned meeting shall be given to
the Directors who were not present at the time of the adjournment and, unless
the time and place of the adjourned meeting are announced at the time of the
adjournment, to the other Directors. Meetings of the Board of Directors may be
called by the Chairman of the Board, by the President of the Corporation, or by
any two Directors. Members of the Board of Directors may participate in a
meeting of such Board by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time. Participation by such means shall
constitute presence in person at a meeting.
Section 13. Action Without a Meeting. Any action required to be taken at a
meeting of the Board of Directors,
or any action which may be taken at a meeting of the Board of Directors or
a committee thereof, may be taken
without a meeting if a consent in writing, setting forth the action so to
be taken, signed by all
the Directors, or all the members of the committee, as the case may be, is
filed in the Minutes of the
proceedings of the Board or of the committee. Such consent shall have the
same effect as a unanimous vote.
ARTICLE III. OFFICERS
Section 1. Officers. The Officers of this Corporation shall consist of a
President, Vice President, Secretary and a Treasurer, each of whom shall be
elected by the Board of Directors. Such other Officers and assistant Officers
and Agents as may be deemed necessary may be elected or appointed by the Board
of Directors from time to time. Any two or more offices may be held by the same
person. Section 2. Duties. The Officers of this Corporation shall have the
following duties: (1) The President shall be the chief executive officer of the
Corporation, shall have the general and active management of the business and
affairs of the Corporation subject to the directions of the Board of Directors,
and shall preside at all meetings of the Shareholders and Board of Directors.
(2) The Vice President(s), in the order designated by the Board of Directors, or
lacking such a designation by the President, shall, in the absence of the
President, perform the duties and exercise the powers of the President and shall
perform such other duties as may be prescribed by the Board of Directors or the
President. (3) The Secretary shall have custody of and maintain all of the
corporate records except the financial records and shall, as requested, record
the minutes of all meetings of the Shareholders and Board of Directors, send all
notices of all meetings and perform such other duties as may be prescribed by
the Board of Directors or the President. (4) The Treasurer shall have the
custody of all corporate funds and financial records, shall keep full and
accurate accounts of receipts and disbursements and render accounts thereof at
the annual meetings of 9
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Shareholders, and whenever else required by the Board of Directors or the
President, and shall perform such other duties as may be prescribed by the Board
of Directors or the President. Section 3. Removal of Officers. An officer or
agent elected or appointed by the Board of Directors may be removed by the Board
whenever, in its judgment, the best interests of the Corporation will be served
thereby. Any vacancy in any office may be filled by the Board of Directors.
ARTICLE IV. STOCK CERTIFICATES Section 1. Issuance. Every holder of shares in
this Corporation shall be entitled to have a Certificate representing all shares
to which he is entitled. No Certificate shall be issued for any share until such
share is fully paid. Section 2. Form. Certificates representing shares in this
Corporation shall be signed by the President and the Secretary or an Assistant
Secretary and may be sealed with the Seal of this Corporation or a facsimile
thereof. Section 3. Transfer of Stock. The Corporation shall register a Stock
Certificate presented to it for transfer if the Certificate is properly endorsed
by the holder of record or by his duly authorized attorney. Section 4. Lost,
Stolen or Destroyed Certificates. If the shareholder shall claim to have lost or
destroyed a Certificate of shares issued, upon the making of an affidavit of the
fact by the person claiming the Certificate of stock to be lost, stolen or
destroyed, and, at the discretion of the Board of Directors, upon the deposit of
a bond or other indemnity in such amount and with such sureties, if any, as the
Board may reasonably require, the Board of Directors may direct a new
Certificate or Certificates to be issued in place of any Certificate or
Certificates theretofore issued by the Corporation. ARTICLE V. BOOKS AND RECORDS
Section 1. Books and Records. This Corporation shall keep correct and complete
books and records of account and shall keep minutes of the proceedings of its
Shareholders, Board of Directors and committees of Directors. This Corporation
shall keep at its registered office or principal place of business, a record of
its Shareholders, giving the names and addresses of all Shareholders and the
number of shares held by each. Any books, records and minutes may be in written
form or in any other form Capable of being converted into written form within a
reasonable time. Section 2. Shareholders' Inspection Rights. Any person who
shall have been a holder of record of shares, or of voting trust certificates
therefor, at least six (6) months immediately preceding his demand, or the
holder of record of voting trust certificates for at least five percent (5%) of
the outstanding shares of the Corporation, upon written demand stating the
purpose thereof, shall have the right to examine, in person or by agent or
attorney, at any reasonable time or times, for any proper purpose, its relevant
books and records of accounts, minutes and records of shareholders and to make
extracts therefrom. Section 3. Financial Information. Not later than four (4)
months after the close of each fiscal year, this Corporation shall prepare a
balance sheet showing in reasonable detail the financial condition of the
Corporation as of the close of its fiscal year, and a Profit and Loss Statement
showing the results of the operations of the Corporation during its fiscal year.
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Upon the written request of any Shareholder or holder of voting trust
certificates for shares of the Corporation, the Corporation shall mail to each
shareholder, or holder of voting certificates a copy of the most recent Balance
Sheet and Profit and Loss Statement.
Balance Sheets and Profit and Loss Statements shall be kept in the registered
office of the Corporation in this state for at least five (5) years, and shall
be subject to inspection during business hours by any Shareholder or holder of
voting trust certificates, in person or by agent.
ARTICLE VI. DIVIDENDS
The Board of Directors of the Corporation may from time to time, divide and the
Corporation may pay, dividends on its shares in cash, property or its own
shares, except when the Corporation is involved or when the payment thereof
would render the Corporation insolvent, subject to the provisions of Delaware
statutes.
ARTICLE VII. CORPORATE SEAL
The Board of Directors shall provide a corporate seal, which shall be in
circular form.
The foregoing Bylaws were adopted by a majority of the Shareholders of the
Corporation at its principal Shareholders meeting held on May 10th, 1998.
- -------------------------
Joel Arbeman
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EXHIBIT 3
Rights and Preferences of Preferred Stock
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Certificate of Designation of Rights and
Preferences
SMD Group Inc., a Delaware corporation, whose address is 15 East North
Street, Dover, DE 19901 ("Corporation") hereby designates the following rights
and Preferences for its Convertible Preferred Stock, Class
A ("Convertible Preferred Stock").
1. Conversion and Issuance of Convertible Preferred Stock. The Holder shall have
the right (the "Right") in its sole and absolute discretion to convert 17.847
shares of Convertible Preferred Stock - Series A issued by the Corporation (the
"Share") into 17,847 common shares of Corporation (the "Equity") as payment to
Holder pursuant to the terms of the October 5 , 1998 Consulting Agreement
between Holder and Corporation.
2. Time of Conversion. The Share shall be convertible at any time, in whole or
in part, at any time for period commencing on the date hereof and ending on
December 31, 2010. No additional consideration is payable upon conversion.
3. Method of Conversion. The conversion shall be effected by a written note
signed by an authorized representative of Holder or its assigns which shall (a)
state Holder's election to exercise the Right; (b) the person in whose name the
common share certificate is to be registered, its address and social security
number; (c) be delivered in person or by certified mail to Corporation.
4. Assignability of Share; Forfeiture; Liquidation Preference. The Share may be
assigned by Holder at any time by providing to Corporation a written notice of
assignment. The Right shall not be exercisable until the Corporation completes a
Transaction defined herein as a (i) private placement of not less than a
cumulative $1,000,000, and (ii) a public listing of its common shares. The Share
shall be forfeited to Corporation for no consideration if a Transaction is not
completed within two years of the date of issuance of this Share. The Share
shall have a preference over holders of Common Stock of the Corporation upon
liquidation equal to its par value.
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5. Representations and Warranties of Corporation. Upon exercise of the Right,
the Equity interest in Corporation shall be free and clear of all liens, claims,
charges and encumbrances. The amount of Equity subject to the Right shall be
adjusted for splits, dividend, recapitalization, or similar events just as if it
had been converted into common shares. Corporation agrees to indemnify and hold
harmless Holder in connection with any claim, loss, damage or expense, including
attorneys' fees, trial and appellate levels, in connection with any breach of
the foregoing.
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Certificate of Designation of Rights and
Preferences
SMD Group Inc., a Delaware corporation, whose address is 15 East North
Street, Dover, DE 19901 ("Corporation") hereby designates the following rights
and Preferences for its Convertible Preferred Stock, Class
B ("Convertible Preferred Stock").
1. Conversion and Issuance of Convertible Preferred Stock. The Holder shall have
the right (the "Right") in its sole and absolute discretion to convert 100
shares of Convertible Preferred Stock - Series B issued by the Corporation (the
"Share") with a face value of $138,000 into common shares of Corporation (the
"Equity") at a conversion price for said shares at 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 (US$2.50) per common
share at the date of conversion.. The Convertible Preferred Stock is for payment
to Holder pursuant to the terms of the December 31, 1998 Development Agreement
between Holder and Corporation.
2. Time of Conversion. The Share shall be convertible at any time, in whole or
in part, at any time for period commencing on the date hereof and ending on July
30, 1999. No additional consideration is payable upon conversion.
3. Method of Conversion. The conversion shall be effected by a written note
signed by an authorized representative of Holder or its assigns which shall (a)
state Holder's election to exercise the Right; (b) the person in whose name the
common share certificate is to be registered, its address and social security
number; (c) be delivered in person or by certified mail to Corporation.
4. Assignability of Share; Forfeiture; Liquidation Preference. The Share may be
assigned by Holder at any time by providing to Corporation a written notice of
assignment. The Right shall not be exercisable until the Corporation completes a
Transaction defined herein as a (i) private placement of not less than a
cumulative $2,000,000, or (ii) a public listing of its common shares. The Share
shall be forfeited to Corporation for no consideration if a Transaction is not
completed within two years of the date of issuance of this Share. The Share
shall have a preference over holders of Common Stock of the Corporation upon
liquidation equal to its par value.
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5. Representations and Warranties of Corporation. Upon exercise of the Right,
the Equity interest in Corporation shall be free and clear of all liens, claims,
charges and encumbrances. The amount of Equity subject to the Right shall be
adjusted for splits, dividend, recapitalization, or similar events just as if it
had been converted into common shares. Corporation agrees to indemnify and hold
harmless Holder in connection with any claim, loss, damage or expense, including
attorneys' fees, trial and appellate levels, in connection with any breach of
the foregoing.
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Certificate of Designation of Rights and
Preferences
SMD Group Inc., a Delaware corporation, whose address is 15 East North
Street, Dover, DE 19901 ("Corporation") hereby designates the following rights
and Preferences for its Convertible Preferred Stock, Class
C ("Convertible Preferred Stock").
1. Conversion and Issuance of Convertible Preferred Stock. The Holder shall have
the right (the "Right") in its sole and absolute discretion to convert 50,000
shares of Convertible Preferred Stock - Series C issued by the Corporation (the
"Share") into 500,000 common shares of Corporation (the "Equity") as payment to
Holder pursuant to the terms of the October 15 , 1998 Agreement of Purchase and
Sale between Holder and Corporation.
2. Time of Conversion. The Share shall be convertible at any time, in whole or
in part, at any time for period commencing on the date hereof and ending on
December 31, 2010. No additional consideration is payable upon conversion.
3. Method of Conversion. The conversion shall be effected by a written note
signed by an authorized representative of Holder or its assigns which shall (a)
state Holder's election to exercise the Right; (b) the person in whose name the
common share certificate is to be registered, its address and social security
number; (c) be delivered in person or by certified mail to Corporation.
4. Assignability of Share; Forfeiture; Liquidation Preference. The Share may be
assigned by Holder at any time by providing to Corporation a written notice of
assignment. The Right shall not be exercisable until the Corporation completes a
Transaction defined herein as a (i) private placement of not less than a
cumulative $1,000,000, and (ii) a public listing of its common shares. The Share
shall be forfeited to Corporation for no consideration if a Transaction is not
completed within two years of the date of issuance of this Share. The Share
shall have a preference over holders of Common Stock of the Corporation upon
liquidation equal to its par value.
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5. Representations and Warranties of Corporation. Upon exercise of the Right,
the Equity interest in Corporation shall be free and clear of all liens, claims,
charges and encumbrances. The amount of Equity subject to the Right shall be
adjusted for splits, dividend, recapitalization, or similar events just as if it
had been converted into common shares. Corporation agrees to indemnify and hold
harmless Holder in connection with any claim, loss, damage or expense, including
attorneys' fees, trial and appellate levels, in connection with any breach of
the foregoing.
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EXHIBIT 4
OPINION OF WILLIAMS LAW GROUP, P.A.
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WILLIAMS LAW GROUP, P.A.
2503 West Gardner Court
Tampa, FL 33611
March 17, 1999
CDbeat.com, Inc.
RE: Registration Statement on Form SB-2
Gentlemen:
I have acted as your counsel in the preparation on a Registration Statement
on Form SB-2 (the "Registration Statement") filed by you with the Securities and
Exchange Commission covering shares of Common Stock of CDbeat.com, Inc. (the
"Stock").
In so acting, I have examined and relied upon such records, documents and
other instruments as in our judgment are necessary or appropriate in order to
express the opinion hereinafter set forth and have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us
certified or photostatic copies.
Based on the foregoing, I am of the opinion that:
The Stock, when issued and delivered in the manner and/or the terms
described in the Registration Statement (after it is declared effective), will
duly and validly issued, fully paid and nonassessable;
I hereby consent to the reference to my name in the Registration Statement
under the caption "Legal Matters" and to the use of this opinion as an exhibit
to the Registration Statement. In giving this consent, I do not hereby admit
that I come within the category of a person whose consent is required under
Section7 of the Act, or the general rules and regulations thereunder.
Very truly yours,
/S/Michael T. Williams
- - -----------------------------------
Michael T. Williams
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EXHIBIT 5
Form of Employment Agreement
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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
____________ ("Employee").
WITNESSETH:
WHEREAS, Employer desires to employ Employee and Employee desires to be
employed by Employer as ____________________________ 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
_____________________ 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
$500,000 of gross investment capital.
2. COMPENSATION. Employer agrees to employ Employee at the base rate of
compensation of ______________ thousand and No/Dollars ($__,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
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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
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
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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
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.
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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
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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.
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.
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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
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: _______________
=========================
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.
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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.
By: ___________________
Joel Arberman
Title: President and CEO
Employee
- ----------------
Employee Name
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EXHIBIT 6
Form of Stock Option Plan
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1998 STOCK OPTION PLAN
1. PURPOSE The purpose of the SMD Group, Inc. 1998 Stock Option Plan
(the "Plan") is to enhance the long-term stockholder value
of SMD Group, Inc., a Delaware corporation (the "Company"), by
offering opportunities to employees, directors, officers,
consultants, agents, advisors and independent contractors of the
Company and its Subsidiaries (as defined in Section 2) to
participate in the Company's growth and success, and to
encourage them to remain in the service of the Company and its
Subsidiaries and to acquire and maintain stock ownership in the Company.
2. DEFINITIONS For purposes of the Plan, the following terms shall be
defined as set forth below:
2.1 BOARD "Board" means the Board of Directors of the Company.
2.2 CAUSE "Cause" means dishonesty, fraud, misconduct, unauthorized
use or disclosure of confidential information or trade
secrets, or conviction or confession of a crime punishable by law
(except minor violations), in each case as determined by
the Plan Administrator, and its determination shall be conclusive
and binding.
2.3 CODE "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
2.4 COMMON STOCK "Common Stock" means the common stock, par value $.001
per share, of the Company.
2.5 CORPORATE TRANSACTION "Corporate Transaction" means any of the
following events: (a) Consummation of any merger or
consolidation of the Company in which the Company is not the
continuing or surviving corporation, or pursuant to which
shares of the Common Stock are converted into cash, securities
or other property (other than a merger of the Company in
which the holders of Common Stock immediately prior to the merger
have the same proportionate ownership of capital stock of
the surviving corporation immediately after the merger); (b)
Consummation of any sale, lease, exchange or other transfer in
one transaction or a series of related transactions of all or
substantially all of the Company's assets other than a
transfer of the Company's assets to a majority-owned subsidiary
corporation (as the term "subsidiary corporation" is defined
in Section 8.3) of the Company; or (c) Approval by the
holders of the Common Stock of any plan or proposal for the
liquidation or dissolution of the Company. Ownership of
voting securities shall take into account and shall include
ownership as determined by applying Rule 13d-3(d)(1)(i) (as
in effect on the date of adoption of the Plan) under the
Exchange Act.
2.6 DISABILITY "Disability" means "disability" as that term is defined for
purposes of Section 22(e)(3) of the Code. 2.7 EARLY RETIREMENT "Early
Retirement" means early retirement as that term is defined by the Plan
Administrator from time to
time for purposes of the Plan.
2.8 EXCHANGE ACT "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.9 FAIR MARKET VALUE The "Fair Market Value" shall be as established
in good faith by the Plan Administrator or (a) if the
Common Stock is listed on the Nasdaq National Market, the average of
the high and low per share sales prices for the Common
Stock as reported by the Nasdaq National Market for a single
trading day or (b) if the Common Stock is listed on the New
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York Stock Exchange or the American Stock Exchange, the average of the
high and low per share sales prices for the Common
Stock as such price is officially quoted in the composite tape of
transactions on such exchange for a single trading day. If
there is no such reported price for the Common Stock for the date in
question, then such price on the last preceding date
for which such price exists shall be determinative of the Fair
Market Value.
2.10 GRANT DATE "Grant Date" means the date the Plan Administrator
adopted the granting resolution. If, however, the Plan
Administrator designates in a resolution a later date as the date an
Option is to be granted, then such later date shall be
the "Grant Date."
2.11 INCENTIVE STOCK OPTION "Incentive Stock Option" means an Option to purchase
Common Stock granted under Section 7 with the
intention that it qualify as an "incentive stock option" as that term
is defined in Section 422 of the Code. 2.12 NONQUALIFIED STOCK OPTION
"Nonqualified Stock Option" means an Option to purchase Common Stock granted
under Section 7
other than an Incentive Stock Option.
2.13 OPTION "Option" means the right to purchase Common Stock granted
under Section 7.
2.14 OPTIONEE "Optionee" means (i) the person to whom an Option is
granted; (ii) for an Optionee who has died, the personal
representative of the Optionee's estate, the person(s) to whom the
Optionee's rights under the Option have passed by will or
by the applicable laws of descent and distribution, or the
beneficiary designated in accordance with Section 9; or (iii)
person(s) to whom an Option has been transferred in accordance with
Section 9.
2.15 PLAN ADMINISTRATOR "Plan Administrator" means the Board or any
committee of the Board designated to administer the Plan
under Section 3.1.
2.16 RETIREMENT "Retirement" means retirement as of the individual's normal
retirement date as that term is defined by the Plan
Administrator from time to time for purposes of the Plan.
2.17 SECURITIES ACT "Securities Act" means the Securities Act of 1933,
as amended.
2.18 SUBSIDIARY "Subsidiary," except as provided in Section 8.3 in
connection with Incentive Stock Options, means any entity
that is directly or indirectly controlled by the Company or in
which the Company has a significant ownership interest, as
determined by the Plan Administrator, and any entity that maybecome a
direct or indirect parent of the Company.
3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR The Plan shall be administered by the Board or a
committee or committees(which term includes
subcommittees) appointed by, and consisting of two or more
members of, the Board. If and so long as the Common Stock is
registered under Section 12(b) or 12(g) of the Exchange Act, the
Board shall consider in selecting the Plan Administrator
and the membership of any committee acting as Plan
Administrator, with respect to any persons subject or likely to become
subject to Section 16 of the Exchange Act, the provisions
regarding (a) "outside directors" as contemplated by Section
162(m) of the Code and (b) "non employee directors" as
contemplated by Rule 16b-3 under the Exchange Act. The Board may
delegate the responsibility for administering the Plan with
respect to designated classes of eligible persons to different
committees consisting of one or more members of the Board, subject to
such limitations as the Board deems appropriate.
Committee members shall serve for such term as the Board maydetermine,
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subject to removal by the Board at any time. 3.2 ADMINISTRATION AND
INTERPRETATION BY THE PLAN ADMINISTRATOR Except for the terms and conditions
explicitly set forth in the
Plan, the Plan Administrator shall have exclusive authority, in its
discretion, to determine all matters relating to Options
under the Plan, including the selection of individuals to be
granted Options, the type of Options, the number of shares of
Common Stock subject to an Option, all terms, conditions,
restrictions and limitations, if any, of an Option and the terms
of any instrument that evidences the Option. The Plan
Administrator shall also have exclusive authority to interpret the
Plan and may from time to time adopt, and change, rules
and regulations of general application for the Plan's
administration. The Plan Administrator's interpretation of the
Plan and its rules and regulations, and all actions taken and
determinations made by the Plan Administrator pursuant to the
Plan, shall be conclusive and binding on all parties involved
or affected. The Plan Administrator may delegate
administrativeduties to such of the Company's officers as it so determines.
4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES Subject to adjustment from time to time as
provided in Section 10.1, a maximum of 1 million
shares of Common Stock shall be available for issuance under the Plan,
except that any shares of Common Stock that, as of
the date the Plan is approved by the Company's stockholders, are
available for issuance under the Company's Amended and
Restated 1994 Stock Option Plan (or that thereafter become available
for issuance under that Plan in accordance with its
terms as in effect on such date) and that are not issued under that
Plan shall be added to the aggregate number of shares
available for issuance under the Plan. Shares issued under the
Plan shall be drawn from authorized and unissued shares or
shares now held or subsequently acquired by the Company as treasury
shares.
4.2 LIMITATIONS Subject to adjustment from time to time as provided
in Section 10.1, not more than 250,000 shares of Common
Stock may be made subject to Options under the Plan to any
individual in the aggregate in any one fiscal year of the
Company, except that the Company may make additional one-time grants of
up to 1 million shares to newly hired individuals,
such limitation to be applied in a manner consistent with the
requirements of, and only to the extent required for
compliance with, the exclusion from the limitation on deductibility of
compensation under Section 162(m) of the Code. 4.3 REUSE OF SHARES Any shares of
Common Stock that have been made subject to an Option that cease to be subject
to the Option
(other than by reason of exercise of the Option to the extent it
is exercised for shares) and/or shares of Common Stock
subject to repurchase which are subsequently repurchased by the
Company, shall again be available for issuance in connection
with future grants of Options under the Plan; provided, however, that
for purposes of Section 4.2, any such shares shall be
counted in accordance with the requirements of Section 162(m) of the
Code.
5. ELIGIBILITY Options may be granted under the Plan to those
officers, directors and employees of the Company and its
Subsidiaries as the Plan Administrator from time to time selects.
Options may also be granted to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
6. AWARDS
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6.1 FORM AND GRANT OF OPTIONS The Plan Administrator shall have the authority,
in its sole discretion, to determine the type or
types of awards to be made under the Plan. Such awards may consist
of Incentive Stock Options and/or Nonqualified Stock
Options. Options may be granted singly or in combination.
6.2 ACQUIRED COMPANY OPTION AWARDS Notwithstanding anything in the
Plan to the contrary, the Plan Administrator may grant
Options under the Plan in substitution for awards issued under other
plans, or assume under the Plan awards issued under
other plans, if the other plans are or were plans of other
acquired entities ("Acquired Entities") (or the parent of an
Acquired Entity) and the new Option is substituted, or the old
award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or
liquidation (the "Acquisition Transaction"). In the event that a
written agreement pursuant to which the Acquisition Transaction
is completed is approved by the Board and said agreement
sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said
terms and conditions shall be deemed to be the action of the
Plan Administrator without any further action by the Plan
Administrator, except as may be required for compliance with Rule 16b-3
underthe Exchange Act, and the persons holding such
awards shall be deemed to be Optionees.
7. TERMS AND CONDITIONS OF OPTIONS
7.1 GRANT OF OPTIONS The Plan Administrator is authorized under the Plan, in its
sole discretion, to issue Options as Incentive
Stock Options or as Nonqualified Stock Options, which shall be
appropriately designated. 7.2 OPTION EXERCISE PRICE The exercise price for
shares purchased under an Option shall be as determined by the Plan
Administrator, but shall not be less than 100% of the Fair Market Value
of the Common Stock on the Grant Date with respect
to Incentive Stock Options.
7.3 TERM OF OPTIONS The term of each Option shall be as established by the Plan
Administrator or, if not so established, shall
be 10 years from the Grant Date.
7.4 EXERCISE AND VESTING OF OPTIONS The Plan Administrator shall establish and
set forth in each instrument that evidences an
Option the time at which or the installments in which the Option shall
vest and become exercisable, which provisions may be
waived or modified by the Plan Administrator at any time. If not so
established in the instrument evidencing the Option, the
Option will be immediately exercisable and the shares subject to the
Option will vest according to the following schedule,
which may be waived or modified by the Plan Administrator at any
time: Period of Optionee's Continuous Employment or Service
With the Company or Its Subsidiaries Percent of Total Option
From the Grant Date That Is Vested After 1 year 20% After 2 years 40% Each
three-month period completed thereafter An additional 5% After 5 years 100 Any
unvested shares acquired upon exercise of an
Option shall be subject to repurchase by the Company upon
termination of the Optionee's employment or services in
accordance with the provisions of Section 13.1. To the extent that
the right to purchase shares has accrued thereunder, an Option
may be exercised from time to time by written notice to the
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Company, in accordance with procedures established by the
Plan Administrator, setting forth the number of shares with respect to which
the Option is being exercised and accompanied
by payment in full as described in Section 7.5. The Plan
Administrator may determine at any time that an Option may not
be exercised as to less than 100 shares at any one time for
vested shares and any number in its discretion for unvested shares
(or the lesser number of remaining shares covered by the
Option). To the extent required by the Plan Administrator, as a
condition to exercise by the Optionee of an Option, the
Optionee shall execute and deliver to the Company a Shareholders
Agreement in substantially the form in use at the time of
exercise, unless either (i) the Optionee has previously executed
and delivered such Shareholder Agreement and it is in
effect at the time the Optionee exercises the Option or (ii) such
Shareholders Agreement is no longer in effect with respect to other holders of
Common Stock.
7.5 PAYMENT OF EXERCISE PRICE The exercise price for shares purchased under an
Option shall be paid in full to the Company by
delivery of consideration equal to the product of the Option
exercise price and the number of shares purchased. Such
consideration must be paid in cash or by check or, unless the
Plan Administrator in its sole discretion determines
otherwise, either at the time the Option is granted or at any time
before it is exercised, a combination of cash and/or
check (if any) and one or both of the following alternative forms:
(a) tendering (either actually or, if and so long as the
Common Stock is registered under Section 12(b) or 12(g) of the Exchange
Act, by attestation) Common Stock already owned by
the Optionee for at least six months (or any shorter period
necessary to avoid a charge to the Company's earnings for
financial reporting purposes) having a Fair Market Value on the
day prior to the exercise date equal to the aggregate Option
exercise price or (b) if and so long as the Common Stock is
registered under Section 12(b) or 12(g) of the Exchange Act,
delivery of a properly executed exercise notice, together with
irrevocable instructions, to (i) a brokerage firm designated
by the Company to deliver promptly to the Company the aggregate
amount of sale or loan proceeds to pay the Option exercise
price and any withholding tax obligations that may arise in
connection with the exercise and(ii) the Company to deliver the
certificates for such purchased shares directly to such
brokerage firm, all in accordance with the regulations of the
Federal Reserve Board. In addition, the exercise price for shares
purchased under an Option may be paid, either singly or in
combination with one or more of the alternative forms of payment
authorized by this Section 7.5, by (y) a promissory note
delivered pursuant to Section 12 or (z) such other consideration as
the Plan Administrator may permit.
7.6 POST-TERMINATION EXERCISES The Plan Administrator shall establish
and set forth in each instrument that evidences an Option
whether the Option will continue to be exercisable, and the terms
and conditions of such exercise, if an Optionee ceases to
be employed by, or to provide services to, the Company or its
Subsidiaries, which provisions may be waived or modified by
the Plan Administrator at any time. If not so established in
the instrument evidencing the Option, the Option will be
exercisable according to the following terms and conditions,
which may be waived or modified by the Plan Administrator at
any time. In case of termination of the Optionee's employment or
services other than by reason of death or Cause, the Option
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shall be exercisable, to the extent of the number of shares
vested at the date of such termination, only (a) within one
year if the termination of the Optionee's employment or services
is coincident with Retirement, Early Retirement at the
Company's request or Disability or (b)within three months after the
date the Optionee ceases to be an employee, director,
officer, consultant, agent, advisor or independent contractor
of the Company or a Subsidiary if termination of the
Optionee's employment or services is for any reason other than
Retirement, Early Retirement at the Company's request or
Disability, but in no event later than the remaining term of
the Option. Any Option exercisable at the time of the
Optionee's death may be exercised, to the extent of the number of
shares vested at the date of the Optionee's death, by the
personal representative of the Optionee's estate, the person(s)
to whom the Optionee's rights under the Option have passed
by will or the applicable laws of descent and distribution or the
beneficiary designated pursuant to Section 9 at any time
or from time to time within one year after thedate of death, but in no
event later than the remaining term of the Option.
Any portion of an Option that is not vested on the date of
termination of the Optionee's employment or services shall
terminate on such date, unless the Plan Administrator
determines otherwise. In case of termination of the Optionee's
employment or services for Cause, the Option shall automatically
terminate upon first notification to the Optionee of such
termination, unless the Plan Administrator determines otherwise.
If an Optionee's employment or services with the Company
are suspended pending an investigation of whether the Optionee
shall be terminated for Cause, all the Optionee's rights
under any Option likewise shall be suspended during the period of
investigation. With respect to employees, unless the Plan
Administrator at any time determines otherwise, "termination of
the Optionee's employment or services" for purposes of the
Plan (including without limitation this Section 7 and Section 13 shall
mean any reduction in the Optionee's regular hours of
employment to less than thirty (30) hours per week. A transfer of
employment or services between or among the Company and
its Subsidiaries shall not be considered a termination of employment
or services. The effect of a Company-approved leave of
absence on the terms and conditions of an Option shall be determined
by the Plan Administrator, in its sole discretion.
8. INCENTIVE STOCK OPTION LIMITATIONS To the extent required by
Section 422 of the Code, Incentive Stock Options shall be
subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION To the extent the aggregate Fair Market
Value (determined as of the Grant Date) of Common Stock with
respect to which Incentive Stock Options are exercisable for the
first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion
in excess of $100,000 shall be subject to delayed
exercisability or treated as a Nonqualified Stock Option as
set forth by the Plan Administrator in the agreement(s)
evidencing the Option. In the event the Optionee holds two or more
such Options that become exercisable for the first time
in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options are granted. 8.2 10% STOCKHOLDERS If an
individual owns more than 10% of the total voting power of all classes of the
Company's stock, then
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the exercise price per share of an Incentive Stock Option shall not be
less than 110% of the Fair Market Value of the Common
Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in
accordance with Section 422 of the Code.
8.3 ELIGIBLE EMPLOYEES Individuals who are not employees of the Company or one
of its parent corporations or subsidiary
corporations may not be granted Incentive Stock Options. For
purposes of this Section 8.3, "parent corporation" and
"subsidiary corporation" shall have the meanings attributed to those
terms for purposes of Section 422 of the Code.
8.4 TERM The term of an Incentive Stock Option shall not exceed 10 years.
8.5 EXERCISABILITY To qualify for Incentive Stock Option tax
treatment, an Option designated as an Incentive Stock Option must
be exercised within three months after termination of employment for
reasons other than death, except that, in the case of
termination of employment due to total disability, such Option must be
exercised within one year after such termination.
Employment shall not be deemed to continue beyond the first 90 days of
a leave of absence unless the Optionee's reemployment
rights are guaranteed by statute or contract. For purposes of this
Section 8.5, "total disability" shall mean a mental or
physical impairment of the Optionee that is expected to result
in death or that has lasted or is expected to last for a
continuous period of 12 months or more and that causes the Optionee
to be unable, in the opinion of the Company, to perform
his or her duties for the Company and to be engaged in any
substantial gainful activity. Total disability shall be deemed to
have occurred on the first day after the Company has furnished its
opinion of total disability to the Plan Administrator. 8.6 TAXATION OF INCENTIVE
STOCK OPTIONS In order to obtain certain tax benefits afforded to Incentive
Stock Options under
Section 422 of the Code, the Optionee must hold the shares issued upon
the exercise of an Incentive Stock Option for two
years after the Grant Date of the Incentive Stock Option and one
year from the date of exercise. An Optionee may be subject
to the alternative minimum tax at the time of exercise of an
Incentive Stock Option. The Plan Administrator may require an
Optionee to give the Company prompt notice of any disposition of
shares acquired by the exercise of an Incentive Stock
Option prior to the expiration of such holding periods 8.7 PROMISSORY
NOTES The amount of any promissory note delivered pursuant to Section 12 in
connection with an Incentive Stock
Option shall bear interest at a rate specified by the Plan
Administrator but in no case less than the rate required to avoid
imputation of interest (taking into account any exceptions to
theimputed interest rules) for federal income tax purposes.
9. ASSIGNABILITY No Option granted under the Plan may be assigned,
pledged or transferred by the Optionee other than by will or
by the applicable laws of descent and distribution, and, during the
Optionee's lifetime, such Option may be exercised only by the
Optionee or a permitted assignee or transferee of the Optionee (as
provided below). Notwithstanding the foregoing, and to the
extent permitted by Section 422 of the Code, the Plan Administrator, in
its sole discretion, may permit such assignment, transfer
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and exercisability and may permit an Optionee to designate a
beneficiary who may exercise the Option after the Optionee's death;
provided, however, that any Option so assigned or transferred shall be
subject to all the same terms and conditions contained in
the instrument evidencing the Option.
10. ADJUSTMENTS
10.1 ADJUSTMENT OF SHARES In the event that, at any time or from time to time, a
stock dividend, stock split, spin-off,
combination or exchange of shares, recapitalization, merger,
consolidation, distribution to stockholders other than a normal
cash dividend, or other change in the Company's corporate or
capital structure results in (a) the outstanding shares, or any
securities exchanged therefor or received in their place, being
exchanged for a different number or class of securities of
the Company or of any other corporation or (b) new, different
or additional securities of the Company or of any other
corporation being received by the holders of shares of Common Stock
of the Company, then the Plan Administrator shall make
proportional adjustments in (i) the maximum number and kind of
securities subject to the Plan as set forth in Section 4.1,
(ii) the maximum number and kind of securities that may be made subject
to Options to any individual as set forth in Section
4.2, and (iii) the number and kind of securities that are subject to
any outstanding Option and the per share price of such
securities, without any change in the aggregate price to be paid
therefore. The determination by the Plan Administrator as
to the terms of any of the foregoing adjustments shall be conclusive
and binding.
10.2 CORPORATE TRANSACTION Except as otherwise provided in the
instrument that evidences the Option,in the event of a Corporate
Transaction, the Plan Administrator shall determine whether provision
will be made in connection with the Corporate
Transaction for an appropriate assumption of the Options
theretofore granted under the Plan (which assumption may be
effected by means of a payment to each Optionee (by the Company
or any other person or entity involved in the Corporate
Transaction), in exchange for the cancellation of the Options held
by such Optionee, of the difference between the then Fair
Market Value of the aggregate number of shares of Common Stock then
subject to such Options and the aggregate exercise price
that would have to be paid to acquire such shares) or for
substitution of appropriate new options covering stock of a
successor corporation to the Company or stock of an affiliate of
such successor corporation. If the Plan Administrator
determines that such an assumption or substitution will be
made, the Plan Administrator shall give notice of such
determination to the Optionees, and the provisions of such
assumption or substitution, and any adjustments made (i) to the
number and kind of shares subject to the outstanding Options (or
to the options in substitution therefor), (ii) to the
exercise prices, and/or (iii)to the terms and conditions of the
stock options, shall be binding on the Optionees. Any such
determination shall be made in the sole discretion of the Plan
Administrator and shall be final, conclusive and binding on
all Optionees. If the Plan Administrator, in its sole discretion,
determines that no such assumption or substitution will be
made, the Plan Administrator shall give notice of such
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determination to the Optionees, and each Option that is at the time
outstanding shall automatically accelerate so that each such Option
shall, immediately prior to the specified effective date
for the Corporate Transaction, become 100% vested and
exercisable, except that such acceleration will not occur if, in the
opinion of the Company's outside accountants, it would render
unavailable "pooling of interest" accounting for a Corporate
Transaction that would otherwise qualify for such accounting
treatment. All such Options shallterminate and cease to remain
outstanding immediately following the consummation of the
Corporate Transaction, except to the extent assumed by the
successor corporation or an affiliate thereof.
10.3 FURTHER ADJUSTMENT OF OPTIONS Subject to Section 10.2, the Plan
Administrator shall have the discretion, exercisable at any
time before a sale, merger, consolidation, reorganization,
liquidation or change in control of the Company, as defined by
the Plan Administrator, to take such further action as it
determines to be necessary or advisable, and fair and equitable to
Optionees, with respect to Options. Such authorized action may
include (but shall not be limited to) establishing, amending
or waiving the type, terms, conditions or duration of, or
restrictions on, Options so as to provide for earlier, later,
extended or additional time for exercise and other
modifications, and the Plan Administrator may take such actions with
respect to all Optionees, to certain categories of Optionees or
only to individual Optionees. The Plan Administrator may
take such action before or after granting Options to which the action
relates and before or after any public announcement
with respect to such sale, merger, consolidation,
reorganization, liquidation or change in control that is the reason for
such action.
10.4 LIMITATIONS The grant of Options will in no way affect the Company's right
to adjust, reclassify, reorganize or otherwise
change its capital or business structure orto merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of
its business or assets. S
11. WITHHOLDING The Company may require the Optionee to pay to the Company the
amount of any withholding taxes that the Company
is required to withhold with respect to the grant or exercise of any
Option. Subject to the Plan and applicable law, the Plan
Administrator may, in its sole discretion, permit the Optionee to satisfy
withholding obligations, in whole or in part, by paying
cash, by electing to have the Company withhold shares of Common Stock
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or by transferring shares of Common Stock to the Company,
in such amounts as are equivalent to the Fair Market Value of the
withholding obligation. The Company shall have the right to
withhold from any shares of Common Stock issuable pursuant to an
Option or from any cash amounts otherwise due or to become due
from the Company to the Optionee an amount equal to such taxes. The
Company may also deduct from any Option anyother amounts due
from the Optionee to the Company or a Subsidiary.
12. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES To assist an
Optionee (including an Optionee who is an officer or a director
of the Company) in acquiring shares of Common Stock pursuant to an
Option granted under the Plan, the Plan Administrator, in its
sole discretion, may authorize, either at the Grant Date or at any
time before the acquisition of Common Stock pursuant to the
Option, (a) the extension of a loan to the Optionee by the Company,
(b) the payment by the Optionee of the purchase price, if
any, of the Common Stock in installments, or (c) the guarantee by the
Company of a loan obtained by the Optionee from a third
party. The terms of any loans, installment payments or loan guarantees,
including the interest rate and terms of repayment, will
be subject to the Plan Administrator's discretion. Loans, installment
payments and loan guarantees may be granted with or without
security. The maximum credit available is the purchase price, if any,
of the Common Stock acquired, plus the maximum federal and
state income and employment tax liability that may be incurred in
connection with the acquisition.
13. REPURCHASE RIGHTS; ESCROW
13.1 REPURCHASE RIGHTS The Plan Administrator shall have the discretion to
authorize the issuance of unvested shares of Common
Stock pursuant to the exercise of an Option. In the event of
termination of the Optionee's employment or services, all
shares of Common Stock issued upon exercise of an Option which
are unvested at the time of cessation of employment or
services shall be subject to repurchase at the exercise price paid
for such shares. The terms and conditions upon which such
repurchase right shall be exercisable (including the period and
procedure for exercise) shall be established by the Plan
Administrator and set forth in the agreement evidencing such right.
All of the Company's outstanding repurchase rights under
this Section 13.1 are assignable by the Company at any time
and shall remain in full force and effect in the event of a
Corporate Transaction; provided that if the vesting of Options
is accelerated pursuant to Section 10.2, the repurchase
rights under this Section 13.1 shall terminate and all shares subject
to such terminated rights shall immediately vest in
full. The Plan Administrator shall have the discretionary
authority, exercisable either before or after the Optionee's
cessation of employment or services, to cancel the Company's
outstanding repurchase rights with respect to one or more
shares purchased or purchasable by the Optionee under an Option
and thereby accelerate the vesting of such shares in whole
or in part at any time.
13.2 ESCROW To ensure that shares of Common Stock acquired upon exercise of an
Option that are subject to any repurchase right,
stockholders agreement and/or security for any promissory note will
be available for repurchase, the Plan Administrator may
require the Optionee to deposit the certificate or certificates
evidencing such shares with an agent designated by the Plan
Administrator under the terms and conditions of escrow and
security agreements approved by the Plan Administrator. If the
Plan Administrator does not require such deposit as a condition of
exercise of an Option, the Plan Administrator reserves
the right at any time to require the Optionee to so deposit the
certificate or certificates in escrow. The Company shall
bear the expenses of the escrow. As soon as practicable after
the expiration of any repurchase rights or stockholders
agreement, and after full repayment of any promissory note
secured by the shares in escrow, the agent shall deliver to the
Optionee the shares no longer subject to such restrictions and no
longer security for any promissory note. In the event
shares held in escrow are subject to the Company's exercise of a
repurchase option or stockholders agreement, the notices
required to be given to the Optionee shall be given to the agent
and any payment required to be given to the Optionee shall
be given to the agent. Within 30 days after payment by the
Company, the agent shall deliver the shares which the Company has
purchased to the Company and shall deliver the payment received
from the Company to the Optionee. In the event of any stock
dividend, stock split or consolidation of shares or any like
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capital adjustment of any of the outstanding securities of the
Company, any and all new, substituted or additional securities or
other property to which the Optionee is entitled by reason
of ownership of shares acquired upon exercise of an Option
shall be subject to any repurchase rights, stockholders
agreement, and/or security for any promissory note with the same
force and effect as the shares subject to such repurchase
rights, stockholders agreement and/or security interest immediately
before such event.
14. MARKET STANDOFF In connection with any underwritten public
offering by the Company of its equity securities pursuant to an
effective registration statement filed under the Securities Act, including
the Company's initial public offering, a person shall
not sell, or make any short sale of, loan, hypothecate, pledge,
grant any option for the purchase of, or otherwise dispose or
transfer for value or otherwise agree to engage in any of the foregoing
transactions with respect to, any shares issued pursuant
to an Option granted under the Plan without the prior written consent of
the Company or its underwriters. Such limitations shall
be in effect only if and to the extent and for such period of time as
may be requested by the Company or such underwriters and
agreed to by the Company's officers and directors; provided, however,
that in no event shall the weighted average number of days
in such period exceed 180 days. The limitations of this paragraph
shall in all events terminate two years after the effective
date of the Company's initial public offering. In the event of any stock
split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the Company's
outstanding Common Stock effected as a class without the
Company's receipt of consideration, then any new, substituted or additional
securities distributed with respect to the purchased
shares shall be immediately subject tothe provisions of this Section 14, to
the same extent the purchased shares are at such time
covered by s uch provisions. In order to enforce the limitations of
this Section 14, the Company may impose stop-transfer
instructions with respect to the purchased shares and any new,
substituted or additional securities distributed with respect to
the purchased shares until the end of the applicable standoff period.
15. AMENDMENT AND TERMINATION OF PLAN
15.1 AMENDMENT OF PLAN The Plan may be amended only by the Board in
such respects as it shall deem advisable; however, to the
extent required for compliance with Section 422 of the Code or any
applicable law or regulation, stockholder approval will
be required for any amendment that will (a) increase the total
number of shares as to which Options may be granted under the
Plan, (b) modify the class of persons eligible to receive Options, or
(c) otherwise require stockholder approval under any
applicable law or regulation.
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15.2 TERMINATION OF PLAN The Board may suspend or terminate the Plan at any
time. The Plan will have no fixed expiration date;
provided, however, that no Incentive Stock Options may be granted more
than 10 years after the earlier of the Plan's
adoption by the Board and approval by the stockholders.
15.3 CONSENT OF OPTIONEE The amendment or termination of the Plan
shall not, without the consent of the Optionee, impair or
diminish any rights or obligations under any Option theretofore
granted under the Plan. Any change or adjustment to an
outstanding Incentive Stock Option shall not, without the consent
of the Optionee, be made in a manner so as to constitute a
"modification" that would cause such Incentive Stock Option to fail to
continue to qualify as an Incentive Stock Option.
16. GENERAL
16.1 OPTION AGREEMENTS Options granted under the Plan shall be evidenced by a
written agreement that shall contain such terms,
conditions, limitations and restrictions as the Plan
Administrator shall deem advisable and that are not inconsistent with
the Plan.
16.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN OPTIONS None of the Plan,
participation in the Plan or any action of the Plan
Administrator taken under the Plan shall be construed as giving
any person any right to be retained in the employ of the
Company or limit the Company's right to terminate the employment or
services of any person.
16.3 REGISTRATION The Company shall be under no obligation to any
Optionee to register for offering or resale or to qualify for
exemption under the Securities Act, or to register or qualify
under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or
created by, the Plan, or to continue in effect any such
registrations or qualifications if made. The Company may issue
certificates for shares with such legends and subject to such
restrictions on transfer and stop-transfer instructions as
counsel for the Company deems necessary or desirable for
compliance by the Company with federal and state securities laws.
Inability of the Company to obtain, from any regulatory
body having jurisdiction, the authority deemed by the Company's
counsel to be necessary for the lawful issuance and sale of
any shares hereunder or the unavailability of an exemption
from registration for the issuance and sale of any shares
hereunder shall relieve the Company of any liability in respect
of the non issuance or sale of such shares as to which such
requisite authority shall not have been obtained. As a condition
to the exercise of an Option, the Company may require the
Optionee to represent and warrant at the time of any such exercise or
receipt that such shares are being purchased or
received only for the Optionee's own account and without any
present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required
by any relevant provision of the aforementioned laws.
At the option of the Company, a stop-transfer order against any such
shares may be placed on the official stock books and
records of the Company, and a legend indicating that such shares
may not be pledged, sold or otherwise transferred, unless
an opinion of counsel is provided (concurred in by counsel for the
Company) stating that such transfer is not in violation
of any applicable law or regulation, may be stamped on stock
certificates to ensure exemption from registration. The Plan
Administrator may also require such other action or agreement by the
Optionee as may from time to time be necessary to
comply with the federal and state securities laws.
16.4 NO RIGHTS AS A STOCKHOLDER No Option shall entitle the Optionee
to any dividend, voting or other right of a stockholder
unless and until the date of issuance under the Plan of the
shares that are the subject of such Option, free of all
applicable restrictions.
16.5 COMPLIANCE WITH LAWS AND REGULATIONS Notwithstanding anything
in the Plan to the contrary, the Board, in its sole
discretion, may bifurcate the Plan so as to restrict, limit or
condition the use of any provision of the Plan to Optionees
who are officers or directors subject to Section 16 of the Exchange
Act without so restricting, limiting or conditioning the
Plan with respect to other Optionees. Additionally, in
interpreting and applying the provisions of the Plan, any Option
granted as an Incentive Stock Option pursuant to the Plan
shall, to the extent permitted by law, be construed as an
"incentive stock option" within the meaning of Section 422 of the
Code.
16.6 NO TRUST OR FUND The Plan is intended to constitute an "unfunded"
plan. Nothing contained herein shall require the Company
to segregate any monies or other property, or shares of Common
Stock, or to create any trusts, or to make any special
deposits for any immediate or deferred amounts payable to any
Optionee, and no Optionee shall have any rights that are
greater than those of a general unsecured creditor of the Company.
16.7 SEVERABILITY If any provision of the Plan or any Option is
determined to be invalid, illegal or unenforceable in any
jurisdiction, or as to any person, or would disqualify the Plan
or any Option under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed
amended to conform to applicable laws, or, if it cannot be so
construed or deemed amended without, in the Plan Administrator's
determination, materially altering the intent of the Plan
or the Option, such provision shall be stricken as to such
jurisdiction, person or Option, and the remainder of the Plan and
any such Option shall remain in full force and effect. 17. EFFECTIVE
DATE The Plan's effective date is the date on which it is adopted by the Board,
so long as it is approved by the Company's stockholders at any time within 12
months of such adoption. Adopted by the Board on October 15, 1998 and approved
by the Company's stockholders on October 15, 1998.
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EXHIBIT 7
CONSENT OF BEARD, NERTNEY, KINGERY, CROUSE & HOHL, P.A.
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[Letterhead of Beard Nertney Kingery Crouse & Hohl P.A.]
March 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.
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EXHIBIT 8
CONSENT OF WILLIAMS LAW GROUP, P.A., (SEE EXHIBIT 2)
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