As filed with the SEC on February 5, 1999 SEC Registration No.
333-70663
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SMD GROUP, INC.
(Exact name of registrant as specified in charter)
Delaware 5735 Applied for
(State or other (Primary Standard Industrial (IRS Employer
jurisdiction of Classification Code Number) Identification
incorporation or Number)
organization)
SMD Group, 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
SMD Group, 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.
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If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
(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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SMD GROUP, INC.
Cross Reference Sheet between Items of Form SB-2
and Prospectus Pursuant to Rule 501(b) of Regulation S-B
Item in Form SB-2 Location in Prospectus
1.Front of Registration Statement and
Outside Front Cover Page of the
Prospectus Cover Pages
2.Inside Front and Outside Back Cover Pages
of Prospectus Cover Pages
3.Summary Information and Risk Factors Prospectus Summary,
Risk Factors
4.Use of Proceeds Use of Proceeds
5.Determination of Offering Price Risk Factors,
Offering
6.Dilution Not Applicable
7.Selling Security Holders Not Applicable
8.Plan of Distribution Offering
9.Legal Proceedings Legal Proceedings
10.Directors, Executives Officers,
Promoters and Control Persons Management
11.Security Ownership of Certain Beneficial
Owners and Management Principal
Shareholders
12.Description of Securities to be
Registered Description of
Securities
13.Interest of Named Experts and Counsel Experts
14.Disclosure of Commission position
on Indemnification for
Securities Act Liabilities Indemnification
15.Organization Within Last 5 years Proposed Business,
Certain Transactions
16.Description of Business Proposed Business
17.Management's Discussion and Analysis
or Plan of Operation Management's Discussion and
Analysis or Plan of Operation
18.Description of Property Proposed Business
19.Certain Relationships and Related
Transactions Risk Factors,
Certain Transactions
20.Market for Common Equity and
Related Stockholder Matters Risk Factors,
Description of
Securities
21.Executive Compensation Management
22.Financial Statements Financial Statements
(The next two pages in the Prospectus are, respectively, Cover Page - - Outside
Back and Cover Page - Outside Front.)
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Subject to Completion
January 11, 1999
-----------
Subject to Completion, dated January 11, 1999. Information contained herein is
subject to completion or amendment. A registration statement relating to these
securities has been filed with the Securities and Exchange Commission. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
4,000,000 SHARES
SMD GROUP, INC.
This is an offering of up to 4,000,000 shares of Common Stock, par value
$.001 per share ("the Shares"), of SMD GROUP, INC. (the "Company"). See
"Description of Securities."
Of the 4,000,000 Common Shares offered hereby, 3,521,000 Common Shares are
being sold by the Company and 479,000 Common Shares are being sold by certain
security holders (the "Selling Security holders"). The Shares being sold by the
Selling Security holders were previously acquired by the Selling Security
holders in private placements. All of the Shares are being sold by the Company
on a no minimum/best efforts basis. See "Selling Securityholders" and
"Underwriting." The Company will not receive any of the proceeds from the sale
of the Selling Securityholders' shares. See "Selling Securityholders." See
"Selling Securityholders."
The price for the Shares offered by the company is *. There is no minimum
offering. Prior to this offering there has been no public market for the
Shares. The initial public offering price of the Shares has been arbitrarily
determined by the Company and does not bear any relationship to such
established valuation criteria as assets, book value or prospective earnings.
There can be no assurance that a regular trading market will develop for the
Shares after this offering or that, if developed, any such market will be
sustained. The Company anticipates that trading of the Shares will be conducted
through what is customarily known as the "pink sheets" and/or on the National
Association of Securities Dealers, Inc.'s Electronic Bulletin Board (the
"Bulletin Board"). Any market for the Shares which may result will likely be
less well developed than if the Shares were traded on NASDAQ or on an exchange.
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.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" at pages *.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Offering Proceeds to
Price to Public (1) Discount (2) Company (3)
Per Share $ .0 $ .0 $ .0
Maximum
4,000,000 $ .0 $ .0 $ .0
(Notes on following page.)
The date of this Prospectus is January 11, 1999
NOTES:
(1) The 4,000,000 Shares are being offered by the Company on a "best
efforts" no minimum, 4,000,000 Share maximum basis. The Company intends to
offer the Shares through its officers and directors without the use of a
professional underwriter. No commissions will be paid for sales effected
by officers and director.
(2) The Company estimates all offering costs, including filing, printing,
legal, accounting, transfer agent and escrow agent fees (collectively, the
"Offering Costs") at $100,000.
Until ______________,199__ (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution are required to deliver a prospectus. This is
in addition to the obligations of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions
This Prospectus contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward looking
statements address, among other things, growth in Internet usage and online
commerce; future music retailing opportunities on the Internet; the Company's
business strategy, including its sales and marketing plans; expectation of
future losses; competitive factors; reliance on online and traditional
advertising and strategic alliances; use of proceeds; reliance on certain
vendors; projected capital expenditures; liquidity; possible business
relationships; possible effects of changes in government regulation; dependence
on key personnel; exposure to Year 2000; increased net sales in future periods;
increased sales to international customers; and pricing policy. These statements
may be found under "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
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Operations," and "Business" as well as in the Prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including those factors discussed
below under "Risk Factors" and set forth in this Prospectus generally.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements of the
Company and the notes thereto included elsewhere in this Prospectus. Unless the
context otherwise requires, each reference to the "Company" or "SMD" refers to
SMD Group, Inc. and its subsidiaries and each reference to "CDs" refers
collectively to compact discs, cassettes and vinyl records. All share numbers
used herein reflect all stock splits that have been effected prior to the date
hereof.
THE COMPANY
SMD Group is an Internet-based music media company that will provide branded,
interactive information and programming as well as merchandise to music
enthusiasts worldwide. Cdbeat.com, the Company's flagship site on the World Wide
Web (the "Web"), will deliver real-time, in-depth and compelling music content
and programming that capitalizes on the Web's unique graphical and interactive
capabilities.
The Company's online store will offer a broad selection of music CDs, concert
tickets and other music-related products. The store will offer a high level of
customer service, competitive pricing and will be easy to use and navigate. The
CDbeat store will be open 24 hours a day, seven days a week and will offer
customers convenient and timely product fulfillment.
The Company believes that a significant opportunity exists for the retailing of
music on the Internet. According to the International Federation of the
Phonographic Industry, worldwide sales of pre-recorded music in 1997 were
approximately $38.1 billion, of which one-third was in North America. Online
music retailers currently account for a small but growing portion of total
sales. According to Jupiter Communications, Inc. ("Jupiter"), worldwide sales of
pre-recorded music over the Internet are projected to grow from approximately
$47 million in 1997 to $1.6 billion in 2002.
The Company believes that the emergence of rich multimedia capabilities, such as
streaming audio and video, has significantly enhanced the effectiveness of the
Web as a global mass communications medium. These enhanced multimedia
capabilities, combined with the unique interactive properties of the Internet,
are attracting a large and expanding audience, a growing number of advertisers
and an increasing breadth and depth of content and online commercial
applications. As the Web continues to evolve as a mass communications medium,
the Company believes that certain types of content currently delivered through
traditional media, such as radio and television, increasingly will be delivered
over the Internet. The Company believes that streaming media technology is
essential to this evolution because it provides a more compelling user
experience, allowing the Internet to compete more effectively with traditional
media for audience share.
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The Company's objective is to become the leading Internet-based music media
company and to create a global brand. To achieve this objective, the Company's
strategy will include the following key elements: (i) focus on music content,
(ii) capture and develop emerging revenue and profit opportunities (iii) build
and expand registered user base efficiently and economically (iv) utilize
leading-edge online and traditional advertising and promotion programs, (v)
develop strategic alliances, (vi) maximize customer retention, (vii) develop a
global brand name, and (viii) pursue acquisitions.
The Company expects to generate revenue from multiple sources such as (i)
advertising, (ii) compact disc sales, (iii) concert ticket sales, (iv) artist
merchandise sales, (v) general music-related product sales, and (vi) syndication
of Company programming in other media.
The Company was incorporated in Delaware in May 1998. Its principal offices are
located at 444 Bedford Street, Suite 8s, Stamford, Connecticut, 06901 and its
telephone number is (203) 602-9994.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company... 3,521,000 shares
Common Stock offered by the Selling Securityholders ... 479,000 shares
Common Stock to be outstanding after the Offering.. 7,917,847 shares (1) (2)
Use of proceeds....................... For sales and marketing expenses;
improvements to the
Company's Web site and
other capital
expenditures; working
capital; and other
general corporate
purposes.
Risk Factors...................... The securities offered hereby are
speculative and involve a high degree
of risk and immediate substantial
dilution. See "Risk Factors" and
"Dilution"
Proposed Nasdaq symbol................ CDBT
</TABLE>
(1)As of December 31, 1998 and excludes 479,347 shares of Common Stock issuable
upon the exercise of options outstanding as of December 31, 1998 under the
Company's 1998 Equity Compensation Plan (the "Equity Compensation Plan") at a
weighted average exercise price of $2.50 per share.
(2)Includes the conversion of all Class A and C Preferred Shares outstanding as
of December 31, 1998 (the "Preferred Securities").
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SUMMARY FINANCIAL AND OPERATING DATA
To Be Added
RISK FACTORS
The following risk factors, as well as the other information contained in this
Prospectus, should be considered carefully before purchasing the Common Stock
offered hereby. This Prospectus contains forward-looking statements that
address, among other things, the Company's business strategy, use of proceeds,
projected capital expenditures, liquidity, possible business relationships, and
possible effects of changes in government regulation. These statements maybe
found under "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" as well as in the Prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including those factors discussed
below and set forth in this Prospectus generally.
Limited Operating History; History of Losses and Expectation of Future Losses.
The Company was founded in May 1998 and operations in October 1998. Accordingly,
the Company has only a limited operating history on which to base an evaluation
of its business and prospects. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in new and
rapidly evolving markets such as online commerce. Such risks include, but are
not limited to, possible inability to respond promptly to changes in a rapidly
evolving and unpredictable business environment and the risk of inability to
manage growth. To address these risks, the Company must, among other things,
expand its customer base, successfully implement its business and marketing
strategies, continue to develop and upgrade its Web site and
transaction-processing systems, provide superior customer service, respond to
competitive developments, and attract and retain qualified personnel. If the
Company is not successful in addressing such risks, it will be materially
adversely affected.
Since inception, the Company has incurred significant losses, and as of December
31, 1998 had accumulated losses of $___ million. The Company intends to invest
heavily in marketing and promotion, Web site development and technology, and
development of its administrative organization. As a result, the Company
believes that it will incur substantial operating losses for the foreseeable
future, and that the rate at which such losses will be incurred will increase
significantly from current levels. Because the Company has relatively low
product gross margins, achieving profitability given planned investment levels
depends upon the Company's ability to generate and sustain substantially
increased revenue levels. There can be no assurance that the Company will be
able to generate sufficient revenues to achieve or sustain profitability in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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Dependence on Continued Growth of Online Commerce. The Company's long-term
viability is substantially dependent upon the widespread consumer acceptance and
use of the Internet as a medium of commerce. Use of the Internet as a means of
effecting retail transactions is at an early stage of development, and demand
and market acceptance for recently introduced services and products over the
Internet is very uncertain. The Company cannot predict the extent to which
consumers will be willing to shift their purchasing habits from traditional
retailers to online retailers. The Internet may not become a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure, delayed development of
enabling technologies and inadequate performance improvements. In addition, the
Internet's viability as a commercial marketplace could be adversely affected by
delays in the development of services or due to increased government regulation.
Changes in or insufficient availability of telecommunications services to
support the Internet also could result in slower response times and adversely
affect usage of the Internet generally and SMD in particular. Moreover, adverse
publicity and consumer concern about the security of transactions conducted on
the Internet and the privacy of users may also inhibit the growth of commerce on
the Internet. If the use of the Internet does not continue to grow or grows more
slowly than expected, or if the infrastructure for the Internet does not
effectively support growth that may occur, the Company would be materially
adversely affected.
Competition. The online commerce market is new, rapidly evolving and intensely
competitive, and the Company expects that competition will further intensify in
the future. Barriers to entry are minimal, and current and new competitors can
launch new sites at a relatively low cost. According to Jupiter, there were
approximately 100 online music retailers, as of June 1997. In addition, the
broader retail music industry is intensely competitive. The Company will compete
with a variety of companies, including (i) online vendors of music, music videos
and other related products, (ii) online vendors of movies, books and other
related products, (iii) online service providers which offer music products
directly or cooperation with other retailers, (iv) traditional retailers of
music products, including specialty music retailers, (v) other retailers that
offer music products, including mass merchandisers, superstores and consumer
electronic stores; and (vi) non-store retailers such as music clubs. Many of
these traditional retailers also support dedicated Websites that compete
directly with the Company.
The Company believes that the principal competitive factors in its online market
are brand recognition, selection, variety of value-added services, ease of use,
site content, quality of service, technical expertise and price. Many of the
Company's current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than the Company. The Company is aware
that certain of its competitors have and may continue to adopt aggressive
pricing or inventory availability policies and devote substantially more
resources to Web site and systems development than the Company. Increased
competition may result in reduced operating margins, loss of market share and a
diminished brand franchise.
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There can be no assurance that the Company will be able to compete successfully
against current and future competitors. New technologies and the expansion of
existing technologies may increase the competitive pressures of the Company. For
example, client-agent applications that select specific titles from a variety of
Web sites based on factors such as price may channel customers to online
retailers that compete with the Company. In addition, many companies that allow
access to transactions through network access or Web browsers promote the
Company's competitors and could charge the Company a substantial fee for
inclusion.
Risk of Inability to Manage Potential Growth. The Company has rapidly expanded
its operations. This expansion has placed, and is expected to continue to place,
a significant strain on the Company's management, operations, systems, and
financial resources. From May 8th 1998 to December 31, 1998, the Company has
grown from one to approximately 21 employees/contractors, and several members of
the Company's senior management have only recently joined the Company. SMD's
recently hired employees also include a number of key managerial, technical and
operations personnel, and the Company expects to add additional key personnel in
the near future. To manage its recent growth and any further growth of its
operations and personnel, the Company must improve existing operations and
systems and expand and integrate its employee base. If the Company is unable to
manage its growth effectively, it will be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Employees."
Need for Additional Funds. The Company anticipates that the net proceeds from
this Offering, together with other available resources, will be sufficient to
fund the Company's operations for at least the next 12 months. However, the
Company's capital requirements depend on several factors, including the rate of
market acceptance, the ability to expand the Company's customer base, the level
of expenditures for sales and marketing, the cost of Web site upgrades and other
factors. If capital requirements vary materially from those currently planned,
the Company may require additional financing sooner than anticipated. Regardless
of when needed, there can be no assurance that financing will be available in
amounts or on terms acceptable to the Company, if at all. If equity securities
are issued in connection with a financing, dilution to the Company's
shareholders may result, and if additional funds are raised through the
incurrence of debt, the Company may become subject to restrictions on its
operations and finances. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
Reliance on Certain Vendors. The Company's intends that it will have a single
provider of order fulfillment for recorded music titles ("Supplier")The Company
has no fulfillment operation or facility of its own and, accordingly, is will be
dependent upon maintaining a relationship with Supplier or establishing a new
fulfillment relationship with one of the few other fulfillment operations. There
can be no assurance that the Company will maintain its relationship with
Supplier beyond the initial term of any possible agreement with Supplier, or
that it will be able to find an alternative, comparable vendor capable of
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providing fulfillment services on terms satisfactory to the Company should its
relationship with Supplier terminate. An unanticipated termination of the
Company's relationship with Supplier, particularly during the fourth quarter of
the calendar year in which a high percentage of recorded music sales are made,
could materially adversely affect the Company's results of operations for the
quarter in which such termination occurred even if the Company was able to
establish a relationship with an alternative vendor. To the extent that Supplier
does not have sufficient capacity and is unable to satisfy on a timely basis
increasing requirements of the Company, the Company would be materially
adversely affected.
The Company will generally rely on a single vendor for order fulfillment with
respect to each product line carried by the Company. Therefore, the loss of any
one vendor could materially and adversely affect the Company's sales of that
product line. While the Company seeks to negotiate multi-year contracts with its
vendors to ensure the availability of merchandise, there can be no assurance
that the Company's currentfuture vendors willcontinue sell merchandise to the
Company on favorable terms or that the Company will be able to establish new
vendor relationships to ensure acquisition of merchandise in a timely and
efficient manner and on acceptable commercial terms. If the Company were unable
to develop and maintain relationships with vendors that would allow it to obtain
sufficient quantities of merchandise on acceptable commercial terms, it would be
materially adversely affected. See "Business--Fulfillment."
Risk of System Failure; Absence of Redundant Facilities; Capacity Constraints.
The Company's business is dependent on the efficient and uninterrupted operation
of its computer and communications hardware systems. Substantially all of the
Company's computer and communications hardware is located at a single leased
facility in Toronto, Canada. The Company's systems and operations are vulnerable
to damage or interruption from fire, flood, power loss, telecommunications
failure, break-ins, earthquake and similar events. Any system interruptions that
result in the unavailability of the Company's Web site or reduced transaction
processing performance would reduce the volume of products sold and the
attractiveness of the Company's product and service offerings and could,
therefore, materially adversely affect the Company. The Company has, from time
to time, experienced periodic systems interruptions, and anticipates that such
interruptions will occur in the future. The Company does not presently have
redundant systems or a formal disaster recovery plan and does not carry
sufficient business interruption insurance to compensate it for losses that may
occur.
Any substantial increase in the volume of traffic on the Company's Web site or
the number of orders placed by customers will require the Company to expand and
upgrade further its technology, transaction-processing systems and network
infrastructure. There can be no assurance that the Company will be able to
accurately project the rate or timing of increases, if any, in the use of its
Web site or expand and upgrade its systems and infrastructure to accommodate
such increases. The failure to appropriately upgrade its systems and
infrastructure would have a material adverse effect on the Company.
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Security Risks. A significant barrier to online commerce is concern regarding
the security of transmission of confidential information. The Company will rely
on encryption and authentication technology licensed from third parties that is
designed to facilitate the secure transmission of confidential information, such
as customer credit card numbers. Nevertheless, the Company's infrastructure is
potentially vulnerable to physical or electronic computer break-ins, viruses and
similar disruptive problems. A party who is able to circumvent the Company's
security measures could misappropriate proprietary information or cause
interruptions in the Company's operations. To the extent that activities of the
Company or third-party contractors involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
damage the Company's reputation and expose the Company to a risk of loss or
litigation and possible liability. Therefore, the Company may be required to
expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. There can be no
assurance that the Company's security measures will prevent security breaches or
that failure to prevent such security breaches will not have a material adverse
effect on the Company. See "Business--Technology."
Risk of Reliance on Internally Developed Systems. The Company will use an
internally developed system for its Web site, search engine and substantially
all aspects of its transaction processing and order management. The Company's
inability to modify this system as necessary to accommodate increased traffic on
its Web site or increased volume through its transaction processing and order
management systems may cause unanticipated system disruptions, slower response
times, impaired quality and speed of order fulfillment, degradation in customer
service, and delays in reporting accurate financial information. Any of these
events could have a material adverse effect on the Company.
Potential Fluctuation in Quarterly Operating Results. The Company expects to
experience significant fluctuations in its future quarterly operating results
due to a variety of factors, many of which are outside the Company's control.
Factors that may affect the Company's quarterly operating results include (i)
its ability to retain existing customers, attract new customers and maintain
customer satisfaction, (ii) the introduction of new or enhanced Web pages,
services, products and strategic alliances by the Company and its
competitors,(iii) price competition or higher wholesale prices, (iv) the level
of use of the Internet and consumer acceptance of the Internet for the purchase
of recorded music, (v) seasonality of recorded music sales, (vi) its ability to
upgrade and develop its systems and infrastructure and attract qualified
personnel, (vii) technical difficulties, system downtime or Internet brownouts,
(viii) the amount and timing of operating costs and capital expenditures
relating to expansion of the Company's business, operations and infrastructure,
(ix) the timing of Company promotions and sales programs, (xii) the level of
merchandise returns experienced by the Company, (xi)government regulation and
(xii) general economic conditions and economic conditions specific to the
Internet and the music industry. The Company expects that it will experience
seasonality in its business, reflecting a combination of seasonal fluctuations
in Internet usage and traditional retail seasonality patterns affecting sales of
recorded music. Sales in the traditional retail music industry are significantly
higher in the fourth calendar quarter of each year than in the preceding three
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quarters. However, to date, the Company's limited operating history and rapid
growth make it difficult to ascertain the effects of seasonality on its
business. Therefore, the Company believes that period-to- period comparisons of
the Company's historical results are not necessarily meaningful and should not
be relied upon as an indication of future results. The Company's results of
operations in future periods may not meet the expectations of securities
analysts and investors, in which case the price of the Common Stock would likely
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results and
Seasonality".
Rapid Technological Change. To remain competitive, the Company must continue to
enhance and improve the responsiveness, functionality and features of its site
and develop new features to meet customer needs. The Internet is characterized
by rapid technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions and the emergence of
new industry standards and practices that could render the Company's existing
Web site, technology and systems obsolete. The Company's success will depend, in
part, on its ability to license leading technologies useful in its business,
enhance its existing services, develop new services and technology that address
the needs of its customers, and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely basis. If the
Company is unable to use new technologies effectively or adapt its Web site,
proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards, it would be materially adversely
affected. See "Business--Technology."
No Designated Use for Substantial Portion of Net Proceeds. The Company has not
designated any specific use for a significant portion of the net proceeds from
the sale by the Company of the Common Stock offered hereby. The net proceeds of
this offering will be used by the Company to repay certain short-term
indebtedness, to fund its obligations under its strategic alliances, to finance
its sales and marketing campaign, to make improvements to and expand the
capacity of its Web site, to make certain other capital expenditures and for
working capital and other general corporate purposes. However, the Company
cannot, with precision, estimate the portion of the net proceeds to be devoted
to certain of these uses. From time to time, the Company may evaluate potential
acquisitions involving complementary businesses, content, products or
technologies. However, the Company has no present agreements with respect to any
material acquisition or investment. Accordingly, management will have
significant flexibility in applying the net proceeds of this Offering. See "Use
of Proceeds."
Trademarks and Proprietary Rights; Unlicensed Arrangements. The Company regards
its trade secrets and similar intellectual property as valuable to its business,
and will rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, partners and
others to protect its proprietary rights. There can be no assurance that the
steps taken by the Company will be adequate to prevent misappropriation or
infringement of its proprietary property.
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The Company expects that it may license in the future, certain of its
proprietary rights, such as trademarks or copyrighted material, to third
parties. While the Company will attempt to ensure that the quality of its brand
is maintained by such licensees, there can be no assurance that such licensees
will not take actions that might materially adversely affect the value of the
Company's proprietary rights or reputation, which could have a material adverse
effect on the Company.
There can be no assurance that the owners (or their licensees) of intellectual
property rights in such information will not assert infringement claims against
the provider and the Company. Moreover, the Company expects to be subject to
legal proceedings and claims from time to time in the ordinary course of its
business, including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties by the Company and its licensees.
Such claims could result in substantial costs and diversion of resources, even
if ultimately decided in favor of the Company, and could have a material adverse
effect on the Company, particularly if judgments on such claims are adverse to
the Company. If a claim is asserted alleging that the Company has infringed the
proprietary rights of a third party, the Company may be required to seek
licenses to continue to use such intellectual property. The failure to obtain
the necessary licenses or other rights at a reasonable cost could have a
material adverse effect on the Company.
Government Regulation and Legal Uncertainties. The Company is subject, both
directly and indirectly, to various laws and regulations relating to its
business, although there are few laws or regulations directly applicable to
access to the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet. Such laws and regulations may cover issues such as
user privacy, pricing, content, copyrights, distribution and characteristics and
quality of products and services. Furthermore, 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 those companies conducting
business online. The enactment of any additional laws or regulations may impede
the growth of the Internet which could, in turn, decrease the demand for the
Company's products and services and increase the Company's cost of doing
business, or otherwise have an adverse effect on the Company.
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and could expose the Company to substantial
liability. The laws of certain foreign countries provide the owner of
copyrighted products with the exclusive right to expose, through sound and video
samples, copyrighted items for sale to the public and the right to distribute
such products. Any new legislation or regulation, or the application of existing
laws and regulations to the Internet could have a material adverse effect on the
Company.
The Company believes that its use of material on its Web sites is protected
under current provisions of copyright law. However, legal rights to certain
aspects of Internet content and commerce are not clearly settled. There can be
no assurance that the Company will be able to continue to maintain rights to
information, including downloadable music samples and artist, record and other
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information. The failure to be able to offer such information could have a
material adverse effect on the Company.
In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
For example, America's Carriers Telecommunications Association has filed a
petition with the FCC for this purpose. In addition, because the growing
popularity and use of the Internet has burdened the existing telecommunications
infrastructure and many areas with high Internet use have begun to experience
interruptions in phone service, local telephone carriers, such as Pacific Bell,
have petitioned the FCC to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on such providers. If either of these petitions are granted,
or the relief sought therein is otherwise granted, the costs of communicating on
the Internet could increase substantially, potentially slowing the growth in use
of the Internet. Any such new legislation or regulation or application or
interpretation of existing laws could have a material adverse effect on the
Company's business, results of operations and financial condition.
Possible Liability for Information Retrieved from the Internet. Due to the fact
that material may be downloaded from Web sites and may be subsequently
distributed to others, there is a potential that claims will be made against the
Company for defamation, negligence, copyright or trademark infringement or other
theories based on the nature and content of such material. Such claims have been
brought, and sometimes successfully pressed, against online services in the
past. In addition, the Company could be exposed to liability with respect to the
material that may be accessible through the Company's Website. For example,
claims could be made against the Company if material deemed inappropriate for
viewing by young children could be accessed though the Company Web sites.
Although the Company will carry general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
cover all costs incurred in defense of potential claims or to indemnify the
Company for all liability that may be imposed. Any costs or imposition of
liability that is not covered by insurance or is in excess of insurance coverage
could have a material adverse effect on the Company.
Potential Liability for Sales and Other Taxes. New state tax regulations may
subject the Company to the assessment of certain sales and income taxes. Tax
authorities in a number of states are currently reviewing the appropriate tax
treatment of companies engaged in Internet and catalogue retailing and are
currently considering an agreement with certain of these companies regarding the
assessment and collection of sales taxes. The Company is not a party to any such
discussions. As the Company's service is available over the Internet in multiple
states and foreign countries, such jurisdictions may claim that the Company is
required to qualify to do business as a foreign corporation in each such state
and foreign country. The failure by the Company to qualify as a foreign
corporation in a jurisdiction where it is required to do so could subject the
Company to taxes and penalties for the failure to qualify.
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Dependence on Key Personnel; Need for Additional Personnel. The Company's
success is substantially dependent on the ability and experience of its senior
management and other key personnel, particularly Joel Arberman, its President,
Chief Executive Officer and Chairman of the Board. Moreover, to accommodate its
current size and manage its anticipated growth, the Company must maintain and
expand its employee base. Competition for personnel, particularly persons having
software development and other technical expertise, is intense, and there can be
no assurance that the Company will retain existing personnel or hire additional,
qualified personnel. The inability of the Company to retain and attract the
necessary personnel or the loss of services of any of its key personnel could
have a material adverse effect on the Company. See "Business--Employees" and
"Management."
Control of the Company. Immediately upon completion of this offering,
approximately ______% of the outstanding Common Stock will be beneficially owned
by Joel Arberman, the Company's President, Chief Executive Officer and Chairman
of the Board. As a result, such person, will have the ability to control all
matters submitted to shareholders of the Company for approval (including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of the Company's assets) and to control the management and
affairs of the Company. Such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of the Company, impede a
merger, consolidation, takeover or other business combination involving the
Company or discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of the Company, which in turn could have
an adverse effect on the market price of the Company's Common Stock. See
"Principal Shareholders" and "Certain Transactions."
No Prior Market; Possible Volatility of Stock Price. Prior to this offering,
there has been no public market for the Company's Common Stock, and there can be
no assurance that an active public market for the Common Stock will develop or
continue after this offering. The initial public offering price has been
determined arbitrarily by the Company and may not be indicative of the market
price for the Common Stock after this offering. From time to time after this
offering, there may be significant volatility in the market price of the Common
Stock. Quarterly operating results of the Company, deviations in results of
operations from estimates of securities analysts, changes in general conditions
in the economy or the Internet services industry or other developments affecting
the Company or its competitors could cause the market price of the Common Stock
to fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have often been unrelated to the
operating performance of these companies. Any such fluctuations that occur
following completion of this offering may adversely affect the market price of
the Common Stock.
Potential Adverse Market Impact of Shares Eligible for Future Sale. The shares
of Common Stock offered hereby (other than shares purchased by "affiliates" of
the Company) will be freely tradeable immediately following this offering. All
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of the remaining outstanding shares (the "Restricted Shares"), have or will
become available for sale in the public market during 1999 subject, in certain
instances, to the applicable resale limitations of Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Securities Act"). In addition, the
Company intends to file a Registration Statement on Form S-8 covering up to
*____shares issuable upon exercise of stock options under the Equity
Compensation Plan. Such shares, upon issuance, will be immediately available for
resale (in the case of holders that are affiliates of the Company, subject to
certain limitations under Rule 144). The Company's officers, directors and
certain shareholders, who hold, in the aggregate, approximately 3,900,000 shares
of Common Stock, have agreed not to sell any shares of Common Stock (excluding
shares of Common Stock offered by this Prospectus or shares purchased in the
open market) for a period of 180 days following the consummation of this
offering. Thereafter, these shares may become either freely resalable or
eligible for sale pursuant to the applicable resale limitations of Rule 144. In
addition, holders of approximately shares of Restricted Stock have demand and
piggyback registration rights with respect to those shares. Sales of substantial
amounts of Common Stock in the public market or the availability of substantial
amounts of such stock for sale subsequent to this Offering could adversely
affect the prevailing market price of the Common Stock and could impair the
Company's ability to raise capital through the sale of its equity securities.
Anti-Takeover Provisions; Possible Issuances of Preferred Stock and Classified
Board. Certain provisions of Delaware law could make it more difficult for a
third party to acquire, or could discourage a third party from attempting to
acquire control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the Common
Stock. In addition, shares of the Company's Preferred Stock, no par value (the
"Preferred Stock"), may be issued by the Board of Directors without shareholder
approval on such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. The rights of the holders
of the Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any Preferred Stock that may be issued in the future.
See "Management" and "Description of Capital Stock--Preferred Stock."
Immediate and Substantial Dilution. The purchasers of the shares of Common Stock
offered hereby will experience immediate and substantial dilution in the net
tangible book value of their shares of Common Stock in the amount of $*_____ per
share (based on an assumed offering price of $*_____ per share and after giving
effect to underwriting discounts and commissions and estimated offering
expenses). See "Dilution." In the event the Company offers additional Common
Stock in the future, including shares that may be issued upon exercise of stock
options, purchasers of Common Stock in this offering may experience further
dilution in the net tangible book value per share of the Common Stock of the
Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of *_______ shares of Common Stock
offered by the Company hereby are estimated to be $*_____ million assuming an
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offering price of $*_____ per share and after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company. The
Company will not receive any proceeds from shares of Common Stock sold by the
Selling Shareholders.
The net proceeds from the Offering, together with the Company's existing cash
and cash equivalents, will be used by the Company as follows: an aggregate
minimum of approximately $*___ million on advertising and promotion;
approximately $*___ million to make enhancements to, and expand the capacity of,
the Company's Website and other capital expenditures; and the balance for
working capital and other general corporate purposes, which may include
additional payments due under the Company's existing strategic alliances,
payments due under any new strategic alliances and future advertising and
promotion activities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The amount actually expended for each purpose will be determined at the
discretion of the Company. The Company's future capital requirements and the
allocation of the net proceeds of the Offering, will depend on many factors,
including the entrance into new strategic alliances, increases in advertising
and promotions, growth of the Company's customer base and other factors.
Accordingly, the actual amount of proceeds devoted to each purpose may vary
substantially from the amount set forth above. From time to time the Company may
evaluate potential acquisitions involving complementary businesses, content,
products or technologies. The Company has no agreement or understanding with
respect to any material acquisition.
Pending utilization of the net proceeds of the Offering, the Company intends to
invest the funds in short-term, interest-bearing, investment-grade obligations.
The Company believes that the net proceeds from the Offering, together with its
current cash and cash equivalents, will be sufficient to meet its anticipated
cash needs for working capital and capital expenditures for at least the next 12
months. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development and
growth of its business. Any future determination to pay cash dividends will be
at the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, operating results, capital requirements,
applicable contractual restrictions and such other factors as the Board of
Directors deems relevant.
CAPITALIZATION
The following table sets forth, as of December 31, 1998, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
after giving effect to the conversion of the outstanding Series A Preferred
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Stock and Series C Preferred Stock into an aggregate of shares of Common Stock
upon the consummation of this offering and (iii) the pro forma capitalization,
as adjusted to reflect the issuance and sale of the shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$*___ per share and the application of the estimated net proceeds there from.
See "Use of Proceeds." This table should be read in conjunction with the
Financial Statements and the notes thereto and the other financial information
included elsewhere in this Prospectus.
DILUTION
At December 31, 1998, the pro forma net tangible book value of the Company was
approximately $*___ million or $*__ per share of Common Stock, the conversion of
the outstanding Series A Preferred Stock and Series C Preferred Stock into an
aggregate of shares of Common Stock upon the consummation of this Offering and
the exercise of a warrant exercisable for shares of Common Stock which is
expected to occur upon the consummation of this offering. Pro forma net tangible
book value per share is equal to the Company's total tangible assets less its
total liabilities, divided by the total number of shares of Common Stock
outstanding on a pro forma basis for the period immediately prior to this
offering. After giving effect to the sale by the Company of the shares of Common
Stock offered hereby at an assumed initial public offering price of $*___ per
share and after deducting underwriting discounts and commissions and estimated
offering expenses, the pro forma net tangible book value of the Company at
December 31, 1998 would have been $*___ or approximately $*___ per share. This
represents an immediate increase in the pro forma net tangible book value of
$*___ per share to existing shareholders and immediate dilution of $ per share
to new investors purchasing shares of Common Stock in this offering. The
following table illustrates this per share dilution:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Prospectus contains certain statements of a forward-looking nature relative
to future events or the financial performance of the Company. Actual events or
results may differ materially from those indicated by such forward-looking
statements for a variety of reasons, including the matters set forth under the
caption "Risk Factors."
SMD Group is an Internet-based music media company. The Company strives to
combine the advantages of online advertising and commerce with superior customer
focus in order to be the authoritative source for music information and related
products. The Company will offer a broad selection, informative content,
easy-to-easy-to-use and search web site, a high level of customer service,
competitive pricing and personalized content. Due to the Company's dedicated
advertising focus, revenues will almost entirely be derived from the sale of
advertisements.
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The Company believes that the key factors affecting its long-term financial
success include its ability to obtain new customers at reasonable costs, retain
customers and encourage repeat web site visits and purchases. The Company seeks
to build its customer base through multiple marketing channels which include (i)
pursuing an aggressive marketing campaign using a combination of online and
traditional marketing, (ii) establishing strategic alliances with major Internet
content and service providers, (iii) entering into linking arrangements with
other Web sites, and (iv) using direct marketing techniques to target new and
existing swithcustomers with personalized communications.
Since its inception, the Company has incurred significant net losses and, as of
December 31, 1998, had accumulated losses of $*____ million. As it seeks to
expand aggressively, the Company believes that its operating expenses will
significantly increase as a result of the financial commitments related to the
development of marketing channels, future strategic relationships, and
improvements to its Web site and other capital expenditures. The Company expects
that it will continue to incur losses and generate negative cash flow from
operations for the foreseeable future as it continues to develop its business.
Since the Company has relatively low product gross margins, the ability of the
Company to generate and enhance profitability depends upon its ability to
substantially increase its net sales. To the extent that significantly higher
net sales do not result from the Company's marketing efforts, the Company will
be materially adversely affected. There can be no assurance that the Company
will be able to generate sufficient revenues from the sale of advertisements,
CDs and other music-related products to achieve or maintain profitability on a
quarterly or annual basis.
BUSINESS
INTRODUCTION
SMD Group is an Internet-based music media company that will provide branded,
interactive information and programming as well as merchandise to music
enthusiasts worldwide. CDbeat.com, the Company's flagship site on the World Wide
Web (the "Web"), will deliver real-time, in-depth and compelling music content
and programming that capitalizes on the Web's unique graphical and interactive
capabilities.
INDUSTRY OVERVIEW
The Internet is an increasingly significant global medium for communications,
information and commerce. International Data Corporation ("IDC") 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. The Company believes that the
growth in Internet usage has resulted from a number of factors, including the
large and growing installed base of PCs in the workplace and home, advances in
the performance and speed of PCs and modems, improvements in network
infrastructure, easier and cheaper access to the Internet and increased
awareness of the Internet among businesses and consumers. Jupiter Communications
("Jupiter") estimates that the number of online households (households using
e-mail, the Internet or a consumer online service) making purchases will grow
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from an estimated 15.2 million households in 1996 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.
The Company believes that a significant opportunity exists for the retailing of
music on the Internet. According to the International Federation of the
Phonographic Industry, worldwide sales of pre-recorded music and music videos in
1996 were approximately $39.8 billion, of which one-third was in North America.
Online music retailers currently account for a small but growing portion of
total sales. According to Jupiter, sales of pre-recorded music, music-related
merchandise, advertising and concert tickets over the Internet are projected to
grow on a worldwide basis from approximately $23 million in 1996 to over $2.8
billion in 2002.
A number of characteristics of online music retailing make the sale of
prerecorded music via the Internet particularly attractive relative to
traditional retail stores. The Internet offers many data management and
multimedia features which enable consumers to listen to sound samples, search
for music by genre, title or artist and access a wealth of information and
events, including reviews, related articles, music history, news and
recommendations. Internet retailers can more easily 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. In addition, 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.
While physical store-based music 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 a result, the Company
believes that a typical music store may carry up to 12,000 items and a megastore
may carry up to 50,000 items, compared to the 250,000 items carried by the
CDbeat store. According to Jupiter, approximately 80% of unit sales at
traditional retail stores come from approximately 20% of the available titles.
Online retailers can offer consumers a broader range of titles and information
and can also offer products from a wider range of music labels, including
smaller independent labels which account for an increasing percentage of new
titles. According to Soundscan, independent labels accounted for 21% of the
total music market in 1996 versus 12% in 1992. While independent labels released
66% of new titles in 1996, traditional music stores often lack the capacity to
stock or promote the vast majority of these titles.
The Company also believes that online retailers will benefit from the changing
demographic profile of music consumers. According to the Recording Industry
Association of America, domestic purchases of recorded music by persons age 30
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and over have increased from approximately 34% of total U.S. sales in 1986 to
approximately 47% of sales, or approximately $5.9 billion, in 1996. The Company
believes that the Internet represents a particularly attractive medium for
retailing to customers in this age group as they are typically less
"hits-driven" than younger age groups and are more likely to purchase a wide
variety of titles. These customers generally can afford to buy more titles at
one time, have access to computers and use the Internet, and have credit cards
with which to make electronic payments.
MARKET OPPORTUNITY
The Company targets the music and advertising market opportunities:
Music Market Opportunity. Music is among the leading pastimes of Americans as
demonstrated by the popularity of music media. People spend a lot of time and
money on music events, products and services. According to the Recording
Industry Association of America, an industry trade group, U.S. record companies
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.
Industry analysts are forecasting significant revenue growth over the Internet
for the music industry. Jupiter Communications has projected total Internet
music revenues, including pre-recorded music sales, music-related merchandise,
advertising, and concert ticketing, will rise from an estimated $71 million in
1997 to some $2.8 billion by the year 2002. Meanwhile, Forrester Research Inc.
has projected some $4 billion in music sales will be generated over the Internet
by the year 2002.
Advertising Market Opportunity. The enormous growth in the use of the Internet
combined with its unique interactive properties has led to a rapidly evolving
online advertising opportunity. According to International Data Corporation, the
market for web advertising revenues is expected to grow from $180 million in
1996 to $2.9 billion by the year 2000.
STRATEGY
The Company's objective is to become the leading Internet-based music media
company. To achieve this objective, the Company's strategy includes the
following key elements:
Focus on Music Content. The Company is dedicated to providing online music
content. By focusing on its core competency, the Company expects to be able to
offer a high quality, customer-oriented online music magazine and build a
clearly delineated brand, which the Company believes will make CDbeat.com the
web site of choice for music content. The Company believes that this focus will
enable it to better direct its sales and marketing campaigns, and form effective
relationships with Internet content and service providers.
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Obtain and Provide Exclusive Content Offerings. The Company seeks to provide the
most comprehensive music artist and industry programming on the Internet. To
this end, the Company's objective is to develop and acquire exclusive Internet
rights to content. In addition, it will also license content when available.
Capture and Develop Emerging Revenue Opportunities. The Company intends to
capture strategic revenue growth opportunities as user demand increases and
technological developments become more widely adopted. Such opportunities are
expected to include pay-per-listen/view applications, fee-based sharing of the
Company's exclusive content on other Web sites and additional electronic
commerce opportunities.
Provide Innovative and Easy-to-Use Retail Environment. The Company strives to
make its customer experience informative, efficient and intuitive by constantly
updating and improving its store format and features. The CDbeat.com store will
incorporate "point and click" options; support by technical enhancements
including easy-to-use search capabilities (by artist, album title, song title or
record label), personalized music suggestions, order tracking and confirmation.
The CDbeat.com store will promote music learning and discovery by enabling
visitors to access information on titles, music reviews, ratings, articles on
music topics and approximately sound samples. These features are designed to
make shopping at the store entertaining and informative and encourage purchases
and repeat visits. The Company is dedicated to providing its customers with a
comprehensive selection of both popular and hard-to-find CDs and will offer over
100,000 items.
Deploy Leading-Edge Technologies. The Company will stress the deployment and
rapid adoption of new market-leading technologies that will maximize
efficiencies and offer the best possible products and services to the customer.
Expand Registered User Base Through Multiple Marketing Channels. The Company
seeks to expand its customer base through multiple marketing channels. The
Company believes that this strategy enables it to reduce reliance on any one
source of customers, maximize brand awareness and lower average customer
acquisition cost.
Online and Traditional Advertising. The Company will promote its brand through
an aggressive marketing campaign using a combination of online and traditional
marketing. The Company intends to advertise on the sites of major Internet
content and service providers, such as Yahoo, Infoseek, Lycos and CNN
Interactive. As part of these arrangements, the Company may purchase the right
to display its banners and hyperlinks, often in conjunction with specified
search keywords such as "music magazine". The Company's traditional advertising
effort will include radio advertising and print advertising in music-related
publications.
Strategic Alliances with Major Content and Service Providers. The Company
believes it can enhance its new customer acquisition efforts and expand brand
recognition through strategic alliances with major Internet content and service
providers. The Company expects to enter into alliances with content and service
providers to be the premier online recorded music retailer on certain of their
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sites with the exclusive right to place music banner advertisements and
integrated links to the CDbeat.com store on certain music-related or other
specified pages. These pages will prominently feature the CDbeat.com branded
link that allows users to click through to the CDbeat.com site.
Acquire Customers Efficiently. The Company seeks to target its marketing
expenditures towards sources that most efficiently attract new customers. The
Company will utilize a database of customers to better evaluate and predict the
effectiveness of potential advertising opportunities and strategic
relationships. To enhance the possibility that its banners and other links will
be effective, the Company will work closely with Internet content and service
providers with respect to the placement of banners and other links as well as
the surrounding content. As a result, the Company believes that it can acquire
new customers and retain existing customers on a more cost-effective basis.
Maximize Customer Retention. The Company seeks to maximize customer retention
through its emphasis on customer service and personalized communications. The
Company strives to accommodate its customers by providing 24-hour-a-day,
seven-day-a-week operations and rapid order fulfillment. Products will typically
be shipped within two business days after an order is placed and confirmation
will be provided within minutes via e-mail. Customers can make separate
inquiries through e-mail or telephone access during extended business hours. The
Company strives to ensure prompt response to customer inquiries, which are
generally answered within 24 hours of receipt. The Company will also maintain
ongoing customer contact through a customized e-mail newsletter.
Pursue Strategic Relationships. The Company 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.
The Company pursues strategic relationships for a variety of purposes, such as
maximizing rapid penetration, adoption of its technologies; aiding the
development of compelling content to build consumer demand for music media over
the Internet; and expanding the range of commercial activities based on its
technology and brand name.
These agreements may provide for consideration in various forms, including
issuance of warrants to purchase Common Stock and payment of royalties, bounties
and certain other guaranteed amounts on a per member and/or a minimum dollar
amount basis over terms ranging from one to ten years. Additionally, some of
these agreements may provide for a specified percentage of advertising and
merchandising revenue to be paid to the artist or organization from whose Web
site the revenue is derived.
Pursue Acquisitions and Investments. The Company will regularly review
opportunities to expand its operations and service offerings, by way of
acquisitions and investments. The Company believes that this is an important
means of building its customer base and achieving economies of scale.
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Maximize Market Penetration and Brand Name Recognition. Since its inception, the
Company has sought to achieve rapid and broad adoption of its technologies and
strong brand recognition. This strategy has been pursued through various means,
such as offering the Company's CDbeat Player to individual users free of charge
over the Internet, bundling the Company's products with those of other major
vendors and using multiple distribution channels, including both direct sales
and indirect OEM and retail relationships.
Leverage Market Position to Expand Business Model. Management believes that the
Company's technology, market position and brand name are significant assets that
the Company can leverage to maintain and increase its market share and diversify
its revenue base. The Company intends to leverage these assets as follows:
Grow Music Media Business. The Company intends to capitalize on the growth in
demand for music media by continuing to develop, market and support
industry-leading products and services. The Company also plans to strengthen its
marketing, sales and customer support efforts as the size of its market
opportunity and customer base increases.
Expand Internet Commerce Business. The Company will open an online store for the
sale of the Company's products, third-party products and content. The Company
believes that it will be able to continue to facilitate the growth of music
media merchandise and content.
Offer Leading Music Content Aggregation. The Company is developing a Web site
that aggregates content from third-party music media programming. The Company
plans to continue building Web site traffic with these activities to increase
Web site advertising revenues, increase visibility of the Company's products,
promote the use of streaming media content on the Internet and promote the
Company's Internet commerce platform.
Develop and Market Music Media Solutions for a Variety of Platforms and
Bandwidths. The Company's rapid growth is attributable in part to the wide
acceptance of the music media solutions it has developed for PCs networked in
low-bandwidth environments. However, significant efforts are underway to make
the Internet available on a wider range of platforms, including non-PC Internet
appliances, and over higher-speed connections, including cable modems.
Accordingly, the Company seeks to design its solutions to add value in a range
of bandwidth environments and to be flexible enough to port easily to new
platforms. As a result, management believes that the Company is positioned to
capitalize on possibly significant platform and bandwidth changes.
In addition, the Company's strategy includes: (i) be market driven and
understand the customer and their requirements, (ii) focus on customer service,
(iii) think long-term and execute a consistent strategy, (iv) be prudent but
aggressive, (v) take calculated risks, (vi) learn and improve from mistakes,
(vii) differentiate from competitors, (viii) be cost competitive, (ix) rely on
existing sales, marketing and distribution infrastructures, (x) attract and
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retain a world class management team, and (xi) maintain high quality of
products, service and technology.
The Company believes that implementing these strategies will position the
Company to effectively, efficiently and economically achieve high growth and
profit.
THE CDBEAT MUSIC MAGAZINE
The Company strives to make CDbeat.com the leading online music magazine for
fans, musicians and the industry trade, offering news and information on a wide
range of artists and types of music. CDbeat.com will be designed to be intuitive
and easy to use and to enable the user to navigate the web site with minimal
effort. Individuals enter the CDbeat magazine through the its Web site,
CDbeat.com. New users may access a page specifically designed to provide a quick
understanding of the site and its many features.
The "Cover Page" of the CDbeat.com music magazine will consist of the following
sections:
Headline News. Artist Profiles. Columnists.
Special Reports. Classified Ads. Artist News.
New Artists. Interviews. Top-10 Hits
Musician Info. Music Business News. Tour Search.
Reviews. Chat Rooms. online Shopping.
The CDbeat.com music magazine will consist of hundreds of "artist pages" which
will contain the following sections:
Artist Profile. CD Reviews. Interviews. Live Chat Rooms.
Biography. Concerts and Tickets. Photo Gallery. Fan Club.
The Company believes that the CDbeat.com music magazine will have several unique
characteristics:
Easy-to-Use. CDbeat.com will be designed to make it easy for fans to find
information about their favorite artists as well as to meet other fans and
discuss similar interests in live, online chat rooms.
Live news feeds. The Company will incorporate a proprietary method of scanning
and posting incoming newswire feeds from a variety of sources and will instantly
update stories and links to ensure that the latest news is always available.
This would be more advanced than many other web sites, which are outdated, since
they manually update web pages.
Interactive. The Company will incorporate state-of-the-art technologies for live
video and sound to offer unique online events such as exclusive live interviews
and chats with artists.
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Personal Marketing. Advertisements for CD sales and other music related
merchandise will be integrated into artist pages and presented to users when
they are more likely to be receptive to the sales pitch. By tracking the buying
patterns of customers, more targeted advertisements can be developed.
THE CDBEAT ONLINE RETAIL STORE
The Company strives to make the CDbeat.com store informative and authoritative,
allowing customers to easily learn about, discover and purchase CDs and other
music-related products. The store will be designed to be intuitive and easy to
use and to enable the ordering process to be completed with a minimum of
customer effort. Customers will enter the Company's store through its Web site,
CDbeat.com, and in addition to ordering music products, can conduct targeted
searches, browse among top sellers and other featured titles, read reviews,
listen to music samples, register for personalized communications, participate
in promotions and check order status. New users may access a page specifically
designed to provide a quick understanding of the site and its many features.
Merchandising. The Company believes that its ability to offer a substantially
larger selection than traditional retail stores is a significant competitive
advantage. The Company will offer over 100,000 CDs, as well as t-shirts, music
books and CD-ROMs. To encourage purchases, the Company will feature various
promotions on a rotating basis throughout the store. The Company will adjust
pricing strategies and tactics as necessary to maintain competitiveness and
generally prices all recent releases and popular titles aggressively. The
Company seeks to encourage the purchase of multiple titles by providing more
favorable shipping terms for larger orders.
Searching. Through a search engine, customers will be able to quickly and easily
navigate the store to find CDs or other products of interest. Customers can
search for products based on artist, album title, song title, record label,
musical genre or release date for new releases. A visitor can browse among
CDbeat's database of reviews, cover art, sound samples and album notes.
Customers will also be able to browse alphabetical lists based on artists, types
of products, record labels and album cover art.
Content and Music Discovery. The Company believes that effective use of content
encourages purchases by customers who may be browsing the site without a
specific title in mind. The Company's Web site will contain sound samples,
extensive information with regard to titles, reviews, ratings, articles on music
topics and other information. To help customers browse and discover CDs, the
Company will launch music spaces organized by genre: Rock/Pop, Jazz/Blues,
Urban/Electronic, Country/Folk, World/New Age and Classical. The main page of
each space features links to genre-specific lists, articles, reviews and
contests. Within each space, customers can browse sale items, new releases,
advance orders and charts, read exclusive CDbeat.com reviews, listen to sound
samples and purchase CDs recommended by the Company.
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Purchasing. Once a CD has been selected, customers will be able to click to add
products (including, advance orders of yet-to-be released products) to their
virtual shopping carts. Customers can add and remove products from their
shopping carts as they browse, prior to making a final purchase. The shopping
cart page will display each item that has been placed in the cart, including
title, price and any applicable discount. To execute orders, customers would
click on a button and are prompted to select shipping and payment methods online
or by e-mail, facsimile or telephone. Customers can also add products that they
may wish to purchase on future visits to a special section of the shopping cart
where items may be stored over multiple visits.
Payment. In paying for orders, customers will be able to use credit cards,
personal checks or money orders. For convenience, the Company will enable
customers to store credit card information on the Company's secure server,
thereby avoiding the need to re-enter this information when making future
purchases. Customers are offered a variety of shipping options, including
overnight delivery. The Company will automatically confirm each order by e-mail
within minutes after the order is placed and subsequently confirms shipment of
each order by e-mail. The Company will offer money back returns policy.
Distribution and Fulfillment. The Company's entire inventory will be owned and
held by outside vendors and shipped directly from these vendors to customers.
The breadth of the inventory maintained by these vendors will provide the
Company with the ability to maintain high order fill rates. The Company will
update its site daily with inventory information received from its vendors,
which enables customers to check the availability of products before ordering.
The Company will electronically transmit orders to its outside vendors at least
once daily. Orders will be shipped by these vendors using a CDbeat.com label and
invoice, in most cases within a day after an order is placed with the Company. A
customer's credit card is charged once an order is shipped.
Multilingual Capabilities. The Company believes that international markets may
represent a significant portion of the Company's sales since many products and
services offered by CDbeat.com are not otherwise available in these markets.
International music sales in 1996 were estimated to be approximately twice that
of the U.S. The Company will introduce Spanish, French, German, Portuguese,
Japanese and Korean language versions of its Web site that contain translation
of account registration and ordering instructions, and supports its
international sales efforts with customer service representatives fluent in
these languages.
THE CDBEAT CD PLAYER
To aggregate a large customer base, the Company is developing the CDbeat Player
software. The user interface is visually designed to represent the familiar look
and feel of a jukebox and allows the user to play music CD's on their personal
computer. It will offer all of the basic functions such as play, stop,
fast-forward, rewind and volume adjustment.
The CDbeat Player will also be able to receive information packets transmitted
by the Company's Internet servers. This will enable the Company to present
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real-time content to each CDbeat Player. The software also enables the Company
to incorporate seamless in-stream advertising into streaming content.
The software will be easily installed and can be used by non-technical computer
users. It will run on a broad range of operating systems and hardware platforms,
enabling the Company to reach a broad audience to deliver content in
heterogeneous computing environments.
The Company has strategically chosen to offer its CDbeat Player free of charge
to promote widespread adoption. With limited conditions, the software may also
be distributed by third parties in combination with their own products.
WEB ADVERTISING
The Company's wide variety of content will offer the ability to sell advertising
packages targeted to specific audiences and demographics. Additionally, unlike
Web sites that offer only text-based banner advertisements, the Company can
offer multimedia packages incorporating custom audio and video applications such
as gateway ads with guaranteed click-thrus, channel and event sponsorships and
multimedia and traditional banner ads.
Gateway Ads with Guaranteed Click-Thrus. The Company intends to provide
advertisers the opportunity to incorporate gateway ads into their Internet
advertising packages. Gateway ads are audio or video clips that are inserted at
the lead of selected programming, lasting from 15 to 30 seconds, that play prior
to the audio or video content that has been selected by the user. A guaranteed
click-thru is a pop-down browser window that automatically launches at the
beginning of the gateway ad displaying an advertiser's Web site or other
targeted information. Gateway ads will also be available without guaranteed
click-thrus. The Company will sell these advertisements at a higher cost than
traditional banner ads because of their unique nature.
Channel and Event Sponsorships. The Company intends to offer advertisers the
ability to sponsor one or more of its programming channels or events, enabling
advertisers to brand entire sections of the Company's Web sites. A channel or
event sponsorship can involve the rotating and permanent placement of buttons,
logos and Web site links, integrated gateway ads, multimedia banner ads and
mention on the CDbeat.com home page, channel home page and email newsletter. The
Company will typically sell these packages on a channel-by-channel or
event-by-event basis.
Multimedia and Traditional Banner Ads. The Company intends to offer advertisers
the ability to integrate audio and video into their text and graphics banner
ads. The multimedia portion of the banner plays when the user clicks on the
banner. Because audio and video can increase the impact of a banner ad, these
packages are sold at a higher cost than traditional banner ads.
MARKETING AND PROMOTION
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The Company's marketing and promotion strategy is designed to broaden awareness
of the CDbeat brand, increase customer traffic to the Company's Web site and
encourage new and repeat purchases. The Company utilizes multiple channels to
market and promote its brand, including online and traditional advertising,
strategic alliances and direct marketing. The Company believes that the use of
multiple marketing channels reduces reliance on any one source of customers,
maximizes brand awareness and lowers average customer acquisition cost.
Online and Traditional Advertising. The Company will promote its brand through
an aggressive marketing campaign using a combination of online and traditional
advertising. The Company intends to advertise on the sites of major Internet
content and service providers. As part of these arrangements, the Company may
purchase banner advertisements, often in conjunction with specified search
keywords or on contextually appropriate pages that allow consumers to
immediately click through to the CDbeat site. The significant flexibility of
online advertising allows the Company to quickly adjust its advertising plans in
response to seasonal and promotional activities.
The Company believes that traditional advertising is a key ingredient in
building brand recognition and promoting the benefits of online retail shopping.
Traditional advertising can be an effective means of promoting widespread brand
awareness and attracting traditional retail consumers to the Company's Web site,
including consumers with little or no history of online purchases. The Company's
traditional advertising effort includes radio, advertising and print advertising
in music-related publications. The Company will conduct an active public
relations campaign and will regularly participate in trade shows and conferences
relating to music.
Strategic Alliances. The Company believes that the Web sites of major Internet
service and content providers can be a source of a significant number of new
customers. These sites have a high volume of user traffic, and the Company
believes that the utilization of carefully targeted links and other advertising
on the sites can be very effective in attracting potential customers.
Publicity. The Company expects to generate significant publicity using its
existing relationships with the editors and reporters in magazines, newspapers,
radio and television. These opportunities represent low-cost methods of reaching
large audiences.
Direct Marketing. The Company will use direct marketing techniques to target new
and existing customers with communications and promotions. The Company will send
a personalized e-mail newsletter to its customers that include purchase
recommendations based on demonstrated customer preferences and prior purchases.
The newsletter will also include more general information concerning new
releases and Company promotions. The Internet allows rapid and effective
experimentation and analysis, instant user feedback and efficient
personalization of the store for each customer, all of which the Company seeks
to incorporate in its marketing and merchandising activities.
CUSTOMER SERVICE
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The Company believes that a high level of customer service and support is
critical to retaining and expanding its user base. Customer service
representatives will be available from 7:30 AM to 10:00 PM Eastern Standard Time
on weekdays and 10:00 AM to 6:00 PM Eastern Standard Time on weekends to provide
assistance via e-mail, phone or fax. Inquiries are generally answered within 24
hours. The Company will hire customer service representatives when it is closer
to commercial launch. These customer service representatives will handle
questions about orders, assist customers in finding CDs and other music-related
products, and register customer's credit card information over the telephone.
The customer service representatives will be a valuable source of feedback
regarding user satisfaction.
DISTRIBUTION AND FULFILLMENT
The Company does not carry any inventory and relies exclusively on third party
vendors for distribution and fulfillment. The Company believes that this
distribution strategy allows it to offer extensive selection while avoiding the
high fixed costs and capital requirements associated with owning and warehousing
product inventory and the significant operational effort associated with
same-day shipment.
The Company anticipates it will select a distributor to ship CDs, cassettes and
vinyl records. SMD will transmit data to its distributor through a secure
network to ensure customer security and data integrity. The distributor will
pick, pack and ship customer orders and charge the Company for merchandise,
shipping and handling. In most cases, products are shipped within a day after an
order is placed with the Company. Customer billing will be performed by the
Company through a third-party credit card processor.
PRIVACY POLICY
The Company believes that issues relating to privacy and use of personal
information relating to Internet users are becoming increasingly important as
the Internet and its commercial use grow. The Company will adopt a detailed
privacy policy that outlines how it uses information concerning its users andthe
extentto access to this information. Users must acknowledge and agree to this
policy when registering for the CDbeat.com service. The Company does not sell or
rent any personally identifiable information about its users to any third party.
The Company also uses information about its 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.
TECHNOLOGY
The Company is developing technologies and implementing systems to support
distributed, reliable and scalable online retailing in a secure and easy-to-use
format. Using a combination of proprietary solutions and commercially available,
licensed technologies, the Company is deploying systems for online content
dissemination, online transaction processing, customer service, market analysis
and electronic data interchange.
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Multimedia and User Database. The Company is developing a database management
system to index, retrieve and manipulate product information, content, product
catalog, orders and transactions, and customer information. This system will
allow for rapid searching, sorting, viewing and distribution of a large volume
of content including audio samples, music reviews, track lists, cover art and
photos. The Company intends to use Oracle as the technology for database
management. The Company expects to deploy a data warehouse that will enable it
to access detailed transaction and customer interaction data and perform
sophisticated market analysis and predictive modeling.
Store Architecture. The Company's hardware and software systems will be based
upon a distributed transaction-processing model that allows applications to be
distributed among multiple parallel servers. Many of the software components,
and the pages of the Web site, will be developed using a proprietary technology
that extends HTML with product, transaction, retail, and advanced programming
constructs. This technology results in the separation of the page look and feel
from the individual data elements and their associated database lookups thus
reducing software updates for Web site changes and minimizing the engineering
required to maintain a growing amount of items and content. The Company's
technology will enable Web sites with different formats to integrate CDbeat.com
store elements.
Interfaces. The Company will develop or license technologies and tools for
managing interfaces with Internet service and content providers. A linking
interface will be made available to businesses with which the Company will
develop strategic alliances. These allow the linking of external Web sites,
banners, and promotions to items and functions contained in the CDbeat.com
store. Proprietary or licensed tools will be used by the Company's Customer
Relations department to manage strategic alliances in an efficient and scalable
manner. Similar systems and tools will be licensed or developed by the Company
for its Customer Service department. The ability to manage customer accounts and
orders will enable The Company's Customer Service department to scale
effectively and communicate efficiently, thereby responding to most inquiries
within 24 hours. These systems will automate many routine communications and
allow customers to better manage their accounts and orders.
Fault Tolerance and Scalability. The Company's hardware servers, storage
systems, Internet connections and networks will allow its online systems to
operate continuously and enable it to maintain a 24-hour-a-day, seven-day-a-week
retail store. The Company intends to runs its Oracle databases and Web Servers
on a series of Sun Enterprise servers with fault tolerant characteristics
including "hot-swappable" components. The Company will maintain dedicated T-1
connections to the Internet provided by multiple Internet service providers.
This technology, combined with the architecture of the systems, will allow the
Company to scale by adding new components or servers while maintaining
performance and cost effectiveness. Both proprietary and commercially available
tools are used to monitor and manage these systems with minimal operator
participation.
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Security. The Company will employ firewalls integrated into the architecture of
its system to keep its Internet connections secure. The Company intends to use
the Netscape SSL Commerce Server for secure electronic transactions over the
Internet and will use proprietary EDI interfaces and private networks to ensure
the security of customer order information and credit card transactions shared
with its vendors and credit card processor.
Advanced Technologies. The Company continually evaluates emerging
technologies and new developments in many areas including electronic
commerce, database management, and networking.
COMPETITION
The online commerce market is new, rapidly evolving and intensely competitive,
and the Company expects that competition will further intensify in the future.
Barriers to entry are minimal, and current and new competitors can launch new
sites at a relatively low cost. In addition, the broader retail music industry
is intensely competitive. The Company will compete with a variety of companies,
including (i) online vendors of music, music videos and other related products,
(ii) online vendors of movies, books and other related products, (iii) online
service providers which offer music products directly or in cooperation with
other retailers, (iv) traditional retailers of music products, including
specialty music retailers, (v) other retailers that offer music products,
including mass merchandisers, superstores and consumer electronic stores; and
(vi) non-store retailers such as music clubs. Many of these traditional
retailers also support dedicated Web sites that compete directly with the
Company. The Company believes that the principal competitive factors in its
online market are brand recognition, selection, variety of value-added services,
ease of use, site content, quality of service, technical expertise and price.
Many of the Company's current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than the Company. The Company
is aware that certain of its competitors have and may continue to adopt
aggressive pricing or inventory availability policies and devote substantially
more resources to Web site and systems development than the Company. Increased
competition may result in reduced operating margins, loss of market share and a
diminished brand franchise. There can be no assurance that the Company will be
able to compete successfully against current and future competitors. New
technologies and the expansion of existing technologies may increase the
competitive pressures of the Company. For example, applications that select
specific titles from a variety of Web sites based on factors such as price may
channel customers to online retailers that compete with the Company. In
addition, many companies that allow access to transactions through network
access or Web browsers promote the Company's competitors and could charge the
Company a substantial fee for inclusion.
INTELLECTUAL PROPERTY
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The Company regards its trade secrets and similar intellectual property as
valuable to its business, and will rely on trademark and copyright law, trade
secret protection and confidentiality and/or license agreements with its
employees, partners and others to protect its proprietary rights. There can be
no assurance that the steps taken by the Company will be adequate to prevent
misappropriation or infringement of its intellectual property. The Company
expects that it may license in the future, certain of its proprietary rights,
such as trademarks or copyrighted material, to third parties. While the Company
attempts to ensure that the quality of its brand is maintained by such
licensees, there can be no assurance that such licensees will not take actions
that might materially adversely affect the value of the Company's proprietary
rights or reputation, which could have a material adverse effect on the Company.
EMPLOYEES
As of January 7, 1998, the Company had 5 full-time employees and 16 independent
contractors and other temporary employees in its programming, operations and
administrative functions. None of the Company's employees is represented by a
labor union, and the Company considers its employee relations to be good.
Competition for qualified personnel in the Company's industry is intense,
particularly among software development and other technical staff. The Company
believes that its future success will depend in part on its continued ability to
attract, hire and retain qualified personnel. See "Risk Factors--Risk of
Inability to Manage Potential Growth" and "--Dependence on Key Personnel; Need
for Additional Personnel."
FACILITIES
The Company's executive offices are located in, and substantially all of its
operating activities are conducted from 400 square feet of office space located
in Stamford, Connecticut provided by the President of the Company at no charge.
The Company also has a branch office in: Tampa, Florida provided by the
Company's attorney at no charge; Albiline, Texas provided by the Company's Vice
President of Technology at no charge; and in Woodland Hills, CA provided by the
Company's Vice President of Public Relations at no charge. The Company believes
that additional space will be required as its business expands and believes that
it will be able to obtain suitable space as needed. The Company does not own any
real estate.
LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
MANAGEMENT
The following sets forth certain information regarding the executive officers
and directors of the Company:
Name Age Position
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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 mergers/acquisitions.served as President, Chief Executive
Officer and a member of the Company's 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 joinedas 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. ArbermanSwitzerland holds a B.S. degree in Business Administration with
a concentration in finance and marketing and a minor in economics from the
State University of New York, at Albany.
been 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
issoftware 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 helped 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
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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.
All directors will hold office until the next annual stockholder's meeting and
until their successors have been elected or qualified or until their death,
resignation, retirement, removal, or disqualification. Vacancies on the board
will be filled by a majority vote of the remaining directors. Officers of the
Company serve at the discretion of the Board of Directors. An external Board of
Directors, consisting of qualified business and industry professionals and
experts, assists the management team in making appropriate decisions and taking
the most effective action; however, they will not be responsible for management
decisions.
DIRECTOR COMPENSATION
The Company will reimburse its directors for out-of-pocket expenses incurred in
connection with their rendering of services as directors. The Company currently
does not intend to pay cash fees to directors for attendance at meetings.
Directors who are not currently receiving compensation as officers or employees
of the Company will be eligible to receive options under the 1998 Equity
Compensation Plan.
EXECUTIVE COMPENSATION
None of the executive officers earned total salary and bonus in excess of
$100,000. The Company has entered into two-year employment agreements with Joel
Arberman, Bryan Eggers and Larry Payne (collectively the "Agreements"). The
Agreements contain the following terms. 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,
(collectively the "Base Salary"). The Compensation Committee shall increase the
Base Salary, as it deems appropriate.
The Agreements provide that if Messrs. Arberman, Eggers and Payne are terminated
by the Company without Just Cause (as defined in the Agreements), each will be
entitled to receive the lesser of (i) his Base Salary for one year from the
termination plus the value of any benefits, or (ii) the aggregate amount of Base
Salary plus the value of any benefits during the balance of the Agreements.
The Agreements also provide that Messrs. Arberman, Eggers and Payne will not,
during the term of the Agreements or thereafter, disclose any confidential
information of the Company without prior approval of the Company. The Agreements
also provide that Messrs. Arberman, Eggers and Payne will not, during the term
of the Agreements and for a period of one year thereafter, participate in any
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business that competes with the Company or solicit any of the Company's
employees or customers or otherwise interfere with the relations of the Company.
CERTAIN CHARTER PROVISIONS
The Company's Certificate of Incorporation contains certain 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 certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. The Company's Certificate of Incorporation also contains provisions
obligating the Company to indemnify its directors and officers to the fullest
extent permitted by the General Corporation Law of Delaware. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as directors.
CERTAIN TRANSACTIONS
On October 15, 1998, Mr. Eggers and Mr. Payne sold to the Company all right,
title and interest to all intellectual property which they owned relating to
certain software, technology and ideas relating to Internet-based and
computer-based music. In exchange for such sale, the Company issued Mr.
Eggers and Mr. Payne 50,000 Preferred Shares, Class C.
The Sale of Intellectual Property Agreement executed by Mr. Eggers and Mr. Payne
to the Company defines "intellectual property" to include (i) all patents,
patent applications, patent disclosures and related documents, (ii) all
trademarks, service marks, trade dress logos and trade names, (iii) all
copyrights and registrations and applications for registration thereof, (iv) all
mask works and registrations and applications for registrations, (v) all
computer software, data and documentation, (vi) all trade secrets and
confidential business information, know how, and related business information,
(vii) all proprietary rights relating to any of the foregoing items and (viii)
all copies and tangible embodiments of any of the foregoing. In addition, Mr.
Eggers and Mr. Payne entered into Employment Agreements with the Company.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of the date of this Prospectus and as adjusted
to reflect the sale of the shares offered hereby by (i) each person known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company and (iv) all directors and executive officers of the Company as a group.
Unless otherwise indicated below, to the knowledge of the Company, all persons
listed below have sole voting and investment power with respect to their shares
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of Common Stock, except to the extent authority is shared by spouses under
applicable law.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
--------------------------------------------
NAME OF BENEFICIAL SHARES PERCENT SHARES PERCENT
OWNER
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
AND DIRECTORS
Joel Arberman(1).................. 2,900,000 66.79% 2,900,000 _____%
Bryan Eggers(2)................ 500,000 11.52 500,000 _____
Larry Payne(2)................ 500,000 11.52 500,000 _____
All executive officers and
directors as a group (3 persons) 3,900,000 89.83 3,900,000 _____
(1)Mr. Arberman has placed 1,000,000 Common Shares of the 3,900,000 Common
Shares he currently owns in escrow with the Company. The escrow agreement
provides that ten Common Shares held by Mr. Arberman shall be cancelled upon
conversion of each of the currently issued and outstanding 100,000 Preferred
Shares, Class C. The table above assumes that all 1,000,000 Common Shares
will be cancelled pursuant to the terms and conditions of the escrow
agreement.
(2)Mr. Eggers and Mr. Payne have each been issued 50,000 shares of Preferred
Stock, Class C. After attaining certain milestones, each Preferred Share,
Class C can be converted into ten shares of Common Stock of the Company. In
addition, Mr. Eggers and Mr. Payne have voluntarily placed all of their
Preferred Stock, Class C into a Voting Trust agreement that is administered
by Mr. Arberman. The Voting Trust agreement provides that Preferred Stock,
Class C shares held by Mr. Eggers and Mr. Payne shall be released from the
Voting Trust based upon certain additional corporate milestones and over a
period of three years. The table above assumes that all of the Preferred
Shares, Class C will be converted into Common Shares. It is possible that
some or all of the Preferred Shares, Class C will not be converted into
Common Shares.
(3)The escrow agreement with Mr. Arberman provides a complete and direct offset
to any subsequent conversion of Class C Preferred Shares into Common Shares
that are currently held by Mr. Eggers and Mr. Payne. Therefore, the 3,900,000
shares owned by the current group of Officers and Directors will remain
38
<PAGE>
unchanged regardless of whether or not the Class C Preferred Shares owned by
Mr. Eggers or Mr. Payne are converted into equity.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $0.001 par value (the "Common Stock"), and 10,000,000 shares of
Preferred Stock, $0.001 par value (the "Preferred Stock"). Immediately after the
sale of the 4,000,000 shares of Common Stock offered hereby, there will be
7,917,847 shares of Common Stock outstanding assuming the conversion of all
Preferred Stock outstanding. The following summary is qualified in its entirety
by reference to the Company's Amended and Restated Articles of Incorporation
(the "Articles of Incorporation"), which is included as an exhibit to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of shareholders and do not have cumulative
voting rights. The election of directors is determined by a plurality of the
votes cast and, except as otherwise required by law, all other matters are
determined by a majority of the votes cast. The holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefore, subject to any
preferential dividend rights of outstanding Preferred Stock. Upon the
liquidation, dissolution or winding up of the Company, subject to any
preferential liquidation rights of any outstanding shares of Preferred Stock,
the holders of Common Stock are entitled to receive ratably the net assets of
the Company available after the payment of all debts and other liabilities. The
holders of Common Stock have no preemptive, subscription, redemption, sinking
fund or conversion rights. The rights and preferences of holders of Common Stock
will be subject to the rights of any series of Preferred Stock which the Company
may issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitation prescribed by
law, without further stockholder approval, to issue from time to time up to
10,000,000 shares of Preferred Stock, in one or more series. Each such series of
Preferred Stock shall have such number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as
shall be determined by the Board of Directors, which may include, among others,
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences, conversion rights and preemptive rights.
The stockholders of the Company have granted the Board of Directors authority to
issue the Preferred Stock and to determine its rights and preferences in order
to eliminate delays associated with a stockholder vote on specific issuances.
The rights of the holders of Common Stock will be subject to the rights of
holders of any Preferred Stock issued in the future. The issuance of Preferred
39
<PAGE>
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, a majority of the outstanding voting stock of the
Company.
Preferred Stock Class A
There are 27.847 shares of Class A Preferred Stock authorized, all of which were
issued and outstanding before this offering. Outstanding shares of Preferred
Stock Class C may be converted into shares of Common Stock at a conversion rate
of one thousand shares of Common Stock for each share of Preferred Stock Class
C. The Preferred Stock Class C may be converted by the holders only upon certain
conditions related to (i) a public listing of the Company and (ii) the Company
receiving at least $1,000,000 of net investment capital.
The conversion rate described above is subject to proportional adjustment in the
event of a stock split, stock dividend or similar recapitalization event
effecting such shares. Holders of Preferred Stock Class C are not entitled to
any voting rights (except as may be required by law), preferential dividend
rights or redemption rights.
Preferred Stock Class C
There are 100,000 shares of Preferred Stock Class C authorized, all of
which were issued and outstanding before this offering. Outstanding shares of
Preferred Stock Class C may be converted into shares of Common Stock at a
conversion rate of ten shares of Common Stock for each share of Preferred Stock
Class C. The Preferred Stock Class C may be converted by the holders only upon
certain conditions related to (i) a public listing of the Company and (ii) the
Company receiving at least $1,000,000 of net investment capital.
The conversion rate described above is subject to proportional adjustment in the
event of a stock split, stock dividend or similar recapitalization event
effecting such shares. Holders of Preferred Stock Class C are not entitled to
any voting rights (except as may be required by law), preferential dividend
rights or redemption rights.
STOCK INCENTIVE PLAN
The Company's 1998 Stock Incentive Plan (the "Stock Incentive Plan") was
originally adopted by the Board of Directors and approved by stockholders of the
Company 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, the
Company.
Each of such incentive stock option agreements will provide that the options
become exercisable if the Company achieves its Target Stock Price (determined as
hereinafter provided) during the three-year period commencing on the date of the
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<PAGE>
grant of the option ("Grant Date"). The Company is deemed to have achieved its
Target Stock Price if, at any time during the three-year period commencing on
the Grant Date, (i) it shall have sold shares of its Common Stock at a price 50%
higher than the Offering price (subject to adjustment for stock splits, stock
dividends, combination or other similar recapitalization events) or more per
share, to a person or entity which is unaffiliated with the Company or any of
its stockholders, officers or directors, in a private placement or public
offering, or (ii) the Board of Directors of the Company determines, in good
faith, that the fair market value of a share of Common Stock of the Company is
equal to 50% above the Offering price (subject to adjustment for stock splits,
stock dividends, combination or other similar recapitalization events) or more.
DELAWARE LAW WITH RESPECT TO BUSINESS COMBINATIONS
Following the consummation of this offering, the Company will be subject to the
State of Delaware's "business combination" statute, Section 203 of the Delaware
General Corporation Law. In general, such 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 the Delaware
corporation's voting stock. The statute could prohibit or delay mergers or other
takeovers or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
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
Upon completion of this Offering, the Company will have 7,917,847 shares of
Common Stock issued and outstanding assuming all the shares offered herein are
sold. Stock offered hereby will be freely tradeable without restriction or
requirement for further registration under the Securities Act. Any sale by an
affiliate would be subject to certain volume limitations and other restrictions.
The remaining 4,396,847 outstanding shares are "restricted" shares within the
meaning of Rule 144 (the "Restricted Shares"). The Restricted Shares outstanding
were issued and sold by the Company in private transactions in reliance upon
exemptions from registration under the Securities Act and may be sold only if
they are registered under the Securities Act or unless an exemption from
registration is available. Of the restricted shares, 479,000 will be registered
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<PAGE>
in this offering. See "Selling Securityholders." The Company believes it will
establish a trading market for its Common Stock at some time in the future.
The shares of Common Stock owned by insiders, officers and directors are deemed
"restricted securities" as that term is defined under the Securities Act and in
the future may be sold under Rule 144, which provides, in essence, that a person
holding restricted securities for a period of one (1) year may sell every three
(3) months, in brokerage transactions and/or marker maker transactions, an
amount equal to the greater of (a) one percent (1%) of the Company's' issued and
outstanding Common stock or (b) the average weekly trading volume of the
Company's Common Stock during the four calendar weeks prior to such sale. Rule
144 also permits, under certain circumstances, the sale of shares without any
quantity limitation by a person who is not an "affiliate" of the Company and who
has satisfied a two (2) year holding period. Additionally, shares underlying
employee stock options granted, to the extent vested and exercised, may be
resold beginning on the ninety-first day after the Effective Date of a
Prospectus, Offering Circular or Offering Memorandum pursuant to Rule 701
promulgated under the Securities Act.
There has been no public market for the Common Stock of the Company. Although
the Company believes a public market will be established at some future time,
there can be no assurance that a public market for the Common Stock will
develop. If a public market for the Common Stock does develop at a future time,
sales of shares by shareholders of substantial amounts of Common Stock of the
Company in the public market could adversely affect the prevailing market price
and could impair the Company's future ability to raise capital through the sale
of its equity securities.
SELLING SECURITYHOLDERS
Concurrently with this offering, 479,000 shares of the Company's Common
Stock shall be registered under the Securities Act. The Company will not receive
any of the proceeds from the sale of the Selling Securityholders' shares of
Common Stock
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES SHARES TO BE SHARES BENEFICIALLY OWNED
TO BE SOLD IN THE
OWNED PRIOR TO OFFERING REGISTERED OFFERING (1) AFTER THE OFFERING
----------------------- ----------- ------------- --------------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER NUMBER PERCENT
- - --------------------------------------- --------- ------------ ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Elsa and Ernest Granz 200 * 200
198 Old Country Road
Deer Park, NY 11729
Edward Gibbons 400 * 400
25 Goldsmith Avenue
Greenlawn NY 11740
Cadnetics Inc. 151,200 3.44% 151,200
805 Robert, Brossard
Quebec J4X 1C8
Cliff Berger 20,000 * 20,000
350 East 79th Street
Apt 42A
NY, NY 10021
Timothy D. Frawley and
Mary F. Frawley 1,000 * 1,000
219 Duckpond Dr. South,
Wantagh, NY 11793
Holli Blechner 4,500 * 1,000
21 Blackheat Road
Lido Beach, NY 11561
Frank Falco and
Geralyn Falco 2,000 * 2,000
45-43 Springfield Blvd.
Bayside, NY 11361
David Rousso 6,000 * 6,000
1512 Washington Blvd.
Jersey City, NJ 07310
Thomas A. Caton 800 * 800
111 Third Avenue, #5J
NY, NY 10003
Dominick Caccippio 200 * 200
5 Susan Court
Syosset, NY 11791
Marsha Korinko and
Michael Korinki 400 * 400
425 Madison Ave. Apt. 91
New Milford, NJ 07646
Frederick Wagner 400 * 400
17-07 Hunter Place
Fair Lawn, NJ 07410
Barbara Wagner 400 * 400
17-07 Hunter Place
Fair Lawn, NJ 07410
Bonnie Wagner 800 * 800
17-07 Hunter Place
Fair Lawn, NJ 07410
JAM Capital Corp. 5,000 * 5,000
6 Chestnut Hill
Roslyn, NY 11576
<PAGE>30
Herbert Appel and
June Appel 1,000 * 1,000
48 Twin Elms Lane
New City, NY 10956
Mark A. Freeman 110,000 2.51% 110,000
35 Robin Lane
Plainview NY 11803
Marlene Cernese 200 * 200
69-10 Yellowstone Blvd.
Forrest Hills, NY 11375
Benjamin Cernese and
Sharon Cernese 1,000 * 1,000
1962 Melthew Court
Merrick, NY. 11566-4620
Kanagasabai Sri
Jayaramachandra 500 * 500
#1517 -565 Sherbourne St.
Toronto, Ontario M4X1W7
Noel Stanley Fernando 500 * 500
No. 9 Crescent Place #2515
Toronto, Ontario, M4CSL8
Ashley Roger Canagasabey 500 * 500
1050 Markham Rd, Apt 318
Scarborough, Ontario M1H 2Y7
Anil Goel 500 * 500
75-114 Broadway Ave.
Toronto, Ontario M4P1V1
Brad Jones 500 * 500
80 Kilworth Park Drive, RR#3
Komoka, Ontario, N0L10
Shanti McLelland 500 * 500
26 Parker Crescent, Ajax
Ontario L1S3R5
Roger McLelland 500 * 500
P.O. Box 235,
Ajax, Ontario, L1S3C3
Mark DeFelice 500 * 500
102 W 75th Street, Apt 22
NY NY 10023
Brian Kelley 500 * 500
42 Old Washington Road
Ridgefield, CT 06877
Robert Enslein Jr. 1,000 * 1,000
2130East 73rd PHA
NY, NY 10021
Richard Solomon 500 * 500
200 Rector Place, 4P
New York, NY, 10280
Layla Khoury 500 * 500
64-35 Yellowstone Blvd #12
Forest Hills, NY 11375
Graciela Heintz 500 * 500
8604 Hempstead Ave
Bethesda MD
Steven Hendler 500 * 500
P.O. box 31
Jericho, NY 11753
Elie Khouri 500 * 500
178 High Pond Dr.
Jericho NY 11753
James Dy 500 * 500
6909 Liverty Ave
North Bergen, NJ 07047
<PAGE>31
Hermogenes Brillantes 500 * 500
31 Lake St, N.
Haledon, NJ 07508
Lawrence Frankel 500 * 500
1030 E. Lancaster Ave., Apt 426
Rosemont PA 19010
Lauren Cooler 500 * 500
1030 E. Lancaster Ave., Apt 426
Rosemont PA 19010
Jeremy and Karen Blumenfeld 500 * 500
5309 Kingsway W.
Cincinnati OH 45215
Isabel Arberman 1,000 * 1,000
64-11 99th street
Rego Park, NY 11374
Bella and Mauricio Nemes 1,000 * 1,000
518 McLean Avenue
Yonkers NY 10705
Joshua and Renee Bialek 1,000 * 1,000
11120 SW 196th Street, #Apt 311
Miami, FL 33157
Alfred and Rachelle Arberman 150,000 3.41% 150,000
18555 NE 14th Ave Suite 611F
North Miami Beach, Fl
Maxkal Corporation 10,000 * 10,000
POVA Intl #46
P.O. Box 52-1368
Miami, Florida 33158
--------- -- ----------- ------------- ------------- ---
TOTALS.................................. 479,000 10.67% 479,000 0 0 0%
--------- -- ----------- ------------- ------------- ---
--------- -- ----------- ------------- ------------- ---
</TABLE>
- -------------------------
* Less than 1%
THE OFFERING
The Company is offering 4,000,000 shares of Common Stock at a price of * per
share. The Shares are offered by the Company on a "best efforts" no minimum,
4,000,000 Share maximum basis. The Company intends to offer the Shares through
its officers and directors without the use of a profession underwriter. No
commissions will be paid for sales effected by officers and director.
Prior to this offering, there has been no public market for the Shares.
Consequently, the initial public offering price for the Shares has been
determined solely by the Company. Among the factors considered in determining
the public offering price were the history of, and the prospects for, the
Company's business, an assessment of the Company's management, its past and
present operations, the prospects for earnings of the Company, the present
state of the Company's development, the general condition of the securities
46
<PAGE>
market at the time of the offering and the market prices of similar securities
of comparable companies at the time of the offering. Such price is subject to
change as a result of market conditions and other factors, and no assurance can
be given that a public market for the Shares will develop after the close of
the offering, or if a public market in fact develops, that such public market
will be sustained, or that the Shares can be resold at any time at the offering
or any other price. See "Risk Factors."
INDEMNIFICATION
As permitted by the Delaware General Corporation Law, the Company intends to
eliminate the personal liability of its directors for monetary damages for
breach or alleged breach of their fiduciary duties as directors, subject to
certain exceptions. In addition, the bylaws of the Company provide that the
Company is required to indemnify its officers and directors, employees and
agents under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and the Company is required to
advance expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. The bylaws provide
that the Company, among other things, will indemnify such officers and
directors, employees and agents against certain liabilities that may arise by
reason of their status or service as directors, officers, or employees (other
than liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. At present, the Company is not aware of any
pending or threatened litigation or proceeding involving a director, officer,
employee or agent of the Company in which indemnification would be required or
permitted. The Company believes that its charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
Insofar as indemnification for liabilities arising under the securities act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification against
such 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 such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of his counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a Registration Statement filed by the
Company with the Securities and Exchange Commission (the "Commission") under
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<PAGE>
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and
related exhibits and schedules for further information with respect to the
Company and the Common Stock offered hereby. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and in
each such instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. The Registration Statement and the exhibits and
schedules forming a part thereof can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549, and should also be
available for inspection and copying at the following regional offices of the
Commission: 7 World Trade Center, 14th Floor, New York, New York 10048; and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, DC
20549, at prescribed rates. The Commission maintains a Web Site (http://www.
sec. gov.) that contains reports, proxy statements and other information filed
by the Company.
LEGAL PROCEEDINGS
The Company is not a party to, nor is it aware of, any threatened litigation
of a material nature.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Williams Law Group, P.A., Tampa, Florida.
EXPERTS
To be added.
RISKS ASSOCIATED WITH THE YEAR 2000.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. The Company does not believe that it has material exposure
to the Year 2000 issue with respect to its own information systems since its
existing systems correctly define the year 2000.
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<PAGE>
The Company intends to conduct an analysis in 1999 to determine the extent to
which its major suppliers' systems (insofar as they relate to the Company's
business) are subject to the Year 2000 issue. The Company is currently unable to
predict the extent to which the Year 2000 issue will affect its suppliers, or
the extent to which it would be vulnerable to the suppliers' failure to
remediate any Year 2000 issues on a timely basis. The failure of a major
supplier subject to the Year 2000 to convert its systems on a timely basis or a
conversion that is incompatible with the Company's systems could have a material
adverse effect on the Company. In addition, most of the purchases from the
Company's store are made with credit cards via the Internet, and the Company's
operations may be materially adversely affected to the extent its customers are
unable to use their credit cards or access the Internet due to the Year 2000
issues that are not rectified by their credit card vendors or by those
organizations responsible for maintaining and providing access to the Internet.
FINANCIAL STATEMENTS
To be filed by amendment.
Part II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 22. Indemnification of Directors and Officers.
Section 145 of the General Corporate Law of the State of Delaware contains
provisions entitling directors and officers of the Company to indemnification
from judgements, fines, amounts paid in settlement reasonable expenses,
including attorney's fees, as the result of an action or proceeding in which
they may be involved by reason of being or having been a director or officer of
the Company provided said officers or directors acted in good faith.
Item 23. Other Expenses of Issuance and Distribution. *revise
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 2,000
Miscellaneous 5,000
-----
Total $44,780
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.
49
<PAGE>
On May 8, 1998, the Company 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) thereof
on the basis that the transaction did not involve a public offering.
On May 10, 1998, the Company 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 such offerings. The foregoing purchases
and sales were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof 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, the Company sold 39,000 Common Shares to 25 investors, each of
whom subscribed to purchase such Shares, at a price of $1.00 per Share, for
aggregate consideration of $39,000. No sales commissions were paid in connection
with such offerings. The foregoing purchases and sales were exempt from
registration under the Securities Act pursuant to Section 4(2) thereof 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, the Company sold 153,800 Common Shares to 19 investors, each of
whom subscribed to purchase such Shares, at a price of $2.50 per Share, for
aggregate consideration of $384,500. No sales commissions were paid in
connection with such offerings. The foregoing purchases and sales were exempt
from registration under the Securities Act pursuant to Section 4(2) thereof on
the basis that the transactions did not involve a public offering.
On October 15, 1998, the registrant issued 100,000 shares of Series C Preferred
Stock, which are convertible into 1,000,000 shares of Common Stock, to Bryan
Eggers and Larry Payne the Vice President of Public Relations and Vice President
of Technology of the registrant, for a consideration of approximately $.001 per
share of Series C Preferred Stock, or an aggregate of $1,000. The foregoing
purchases and sales were exempt from registration under the Securities Act
pursuant to Section 4 (2) thereof on the basis that the transactions did not
involve a public offering.
On December 31, 1998, the Company 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 Series B Preferred
Stock 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) thereof on the basis that the transactions did not involve a public
offering.
50
<PAGE>
On December 31, 1998, the registrant issued 27.847 shares of Series A Preferred
Stock, which are convertible into 27,847 shares of Common Stock, to consultants,
for consideration of approximately $1.00 per share of Series A Preferred Stock,
or an aggregate of $27.85. The foregoing purchases and sales were exempt from
registration under the Securities Act pursuant to Section 4 (2) thereof on the
basis that the transactions did not involve a public offering.
On December 31, 1998, the Company issued a warrant to consultants to the
Company, for a total of 17,847 shares of Common Stock. The warrants granted are
exercisable at a price of $2.50 per share.
On January 11, 1999, the Company issued to Cadnetics Inc., a software
development firm for the Registrant, 55,200 shares of Common Stock for the
conversion of 100 shares of Series B Preferred Stock..
On January 11, 1999, the Company issued to Mark Freeman, a consultant for the
Registrant, 10,000 shares of Common Stock for the conversion of 10 shares of
Series A Preferred Stock..
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 *Common Stock.
4.2 Rights and Preferences of Preferred Stock
4.3 *Form of Convertible Note
5 Opinion Regarding Legality
10.1 Form of Employment Agreement with Joel Arberman, Bryan Eggers and Larry
Payne.
10.2 Software Acquisition Agreement
10.3 Stock Option Plan
24.1*Consent of Counsel
24.2*Consent of Expert
* To be filed by amendment
All other Exhibits called for by Rule 601 of Regulation S-B are not applicable
to this filing.
Information pertaining to the Common Stock of the Company is contained in the
Articles of Incorporation and By-Laws of the Company.
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<PAGE>
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 193 3; (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 thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth 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 such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such 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 such securities at that time shall be
deemed to be the initial bona fide offering thereof. (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 such 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 its 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 such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such 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 such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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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 its behalf by the undersigned, in the City of
Stamford, State of Connecticut, on January 11, 1999.
SMD Group, Inc.
/s/ Joel Arberman,
President, Treasurer, and Director
/s/ Avi Kerbs,
Director
53
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EXHIBIT NO.
3.1
Articles of Incorporation
54
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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.
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:
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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
56
<PAGE>
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.
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
57
EXHIBIT NO.
3.2
BYLAWS
58
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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.
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,
59
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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
63
EXHIBIT NO.
4.2
Rights and Preferences of Preferred Stock
64
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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.
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.
65
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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.
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.
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.
67
EXHIBIT NO.
5.1
Opinion of WILLIAMS LAW GROUP, P.A.
68
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WILLIAMS LAW GROUP, P.A.
2503 West Gardner Court
Tampa, FL 33611
January 10, 1999
SMD GROUP, 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 SMD GROUP, 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
69
EXHIBIT NO.
10.1
Form of Employment Agreement
70
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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 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.
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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 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.
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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.
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
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<PAGE>
fair and reasonable protection of the business of Employer carried on
in the area to which the covenants are applicable and that without the
limited restrictions on Employee's activities imposed by the covenants,
the business of Employer would suffer irreparable and immeasurable
damage. The covenants on the part of Employee shall be construed as an
agreement independent of any other provision of this Agreement, and
existence of any claim or course of action whether predicated on this
Agreement or otherwise, shall not constitute a defense to the
enforcement by Employer of the covenants.
D. Employee agrees that during the term of Employee's employment and
for the period of twelve (12) months immediately following the
termination of employment (which said time period shall be increased by
any time during which Employee is in violation of this Agreement)
Employee will not, within the territory hereinafter defined, directly
or indirectly, for Employee, or on behalf of others, as an individual
on Employee's own account, or as an employee, agent, or representative
for any other person, partnership, firm or corporation:
i. Compete with the business of Employer by engaging or
participating in or furnishing aid or assistance in
competition with the business of Employer.
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
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<PAGE>
information, as defined above, which is Employer's property, used in the course
of its business. Employee will not disclose to anyone, directly or indirectly,
any of such confidential information or use such information other than in the
course of Employee's employment. All documents that Employee prepares, or
confidential information that might be given to Employee in the course of
employment, are the exclusive property of Employer and shall remain in
Employer's possession on the premises. Under no circumstances shall any such
information or documents be removed without Employer's written consent first
being obtained.
11. RETURN OF EMPLOYER'S PROPERTY. On termination of employment, regardless of
how termination is effected, or whenever requested by Employer, Employee shall
immediately return to Employer all of Employer's property used by Employee
rendering services hereunder or otherwise that is in Employee's possession or
under Employee's control.
12. VACATION. Employee shall be entitled to a vacation period of four (4) weeks
per calendar year. The vacation shall be taken by Employee at such time during
the year and for such period as reasonable. All vacations should be taken in the
year earned. No vacations may be accrued without written permission of the Board
of Directors.
13. REFERENCES. Employer agrees that, upon termination of this Agreement, it
will, upon written request of Employee, furnish references to third parties,
including prospective employers, regarding Employee. However, Employee
acknowledges that it is Employer's policy to confirm employment only and not to
release any additional information without a written release from Employee.
14. NOTICES. All notices, requests, consents, and other communications under
this Agreement shall be in writing and shall be deemed to have been delivered on
the date personally delivered or the date mailed, postage prepaid by certified
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.
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.
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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
76
EXHIBIT NO.
10.2
Software Acquisition Agreement
77
<PAGE>
md\774-012\intent.let
md\774-012\intent.let
December 29th, 1998
SMD Group Inc.
Bedford Towers
444 Bedford Street
Suite 8S
Stanford, Connecticut
USA 06901
Attention: Mr. Joel Arberman
Dear Mr. Arberman:
RE: Letter of Intent - Development of a Software
Application for
SMD Group Inc.
Our File: 774-012
Cadnetics Inc. ("Cadnetics") desires to enter into the transaction, as hereunder
described, for the purpose of developing a software application for SMD Group
Inc. ("SMD"), the whole in accordance with and subject to the terms and
conditions hereinafter set forth. This letter of intent ("Letter of Intent") is
to confirm SMD's intention to hire Cadnetics to develop the Application (as
hereinafter defined) and is to be construed as an offer which, if accepted by
both parties, shall constitute an agreement binding upon Cadnetics and SMD,
subject to the terms, conditions and covenants hereunder set forth as well as
the terms, conditions and covenants to be set forth:
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1. Offer and Closing Date
1.1 This offer shall be open for acceptance until the 29th day of
December, 1998 (the "Offer").
1.2 The transaction contemplated herein shall take place no later
than within ten (10) days following
the acceptance of the Offer by SMD (the "Closing Date").
2. Development of Application
2.1 Cadnetics hereby undertakes to develop an application, which may
be generally described as follows: an interactive web enabled
audio CD music player (the "Application"), the whole subject to
the specifications set out in the requirement document entitled
IWEACDMP-req01.doc.
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2.2 SMD hereby undertakes to assume and be responsible for any and
all costs relating to the development, progress and furtherance
of the Application.
2.3 Cadnetics shall not assume any costs relating to the purchasing
and licensing of any external technology which may be necessary
for the development of the Application. Furthermore, all costs
relating to travel and lodging which are required for the
furtherance of the Application shall be chargeable to SMD. Any
purchases or charges shall require the prior approval of SMD.
2.4 Cadnetics shall remit the Application in final form (complied
executable) to SMD on a CD-ROM capable of reproduction.
2.5 Cadnetics shall remit to SMD all relevant documentation and the
source code on an "as is" basis every month for the Application.
2.6 Cadnetics hereby undertakes to provide SMD with a monthly
update as to the development of the Application.
2.7 SMD hereby gives the mandate to Cadnetics to develop upgrades of
the Application in consideration of further development fees, to
be agreed upon by the parties negotiating in good faith, the
amount of which shall be dependent upon the extent and complexity
of the desired upgrade and improvement.
2.8 In the event of a conflict or dispute between the parties, the
parties hereby undertake to enter into good faith negotiations in
order to attempt to resolve any such conflict or dispute.
3. Consideration
3.1 Cadnetics agrees to develop the Application for SMD in
consideration of a fee consisting of the following:
3.1.1 the sum of forty-two thousand U.S. dollars (US
$42,000.00); and
3.1.2 the issuance by SMD to Cadnetics of a number of common
fully voting and fully participating shares of its share
capital having a fair market value of two hundred and
forty thousand U.S. dollars (U.S. $240,000.00) and a
number of preferred shares of its share capital having a
fair market value of one hundred and thirty-eight
thousand U.S. dollars (U.S. $138,000.00) (the common
shares and preferred shares hereinafter collectively
referred to as the "Shares").
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3.2 On the Closing Date, SMD shall remit to Cadnetics forty-two
thousand dollars (US $42,000.00) in cash as well as the share
certificate representing the Shares, the whole in accordance with
paragraph 3.1 hereof.
4. Service of Application
For a fee in the amount of one hundred and twenty dollars (US $120.00)
per man hour (the "Service Call Fee"), Cadnetics shall provide SMD with
the necessary technical support services in respect of the Application.
Such Service Call Fee shall be receivable depending on the extent and
complexity of the services required and shall be adjusted upwards to
reflect any change in the market value for similar services.
5. Representations and Warranties of SMD
SMD hereby represents and warrants to Cadnetics as follows and confirms
that Cadnetics is relying on the accuracy of such representations and
warranties in connection with the execution of its obligations hereunder:
5.1 SMD is a corporation duly incorporated and validly subsisting in
all aspects under the laws of its respective jurisdiction of
incorporation. It has good right, full corporate power and
absolute authority to authorize and consent to the transaction as
herein provided.
5.2 SMD has taken all necessary or desirable actions, steps and
corporate and other proceedings to approve or authorize, validly
and effectively, the entering into of and the execution, delivery
and performance of this transaction.
5.3 SMD has the authority to issue the Shares so that the Shares
shall have a global value equal to the consideration paid at the
time of issuance, that is, three hundred and seventy-eight
thousand U.S. dollars (U.S. $378,000.00).
5.4 The execution, delivery and performance of this Letter of Intent
and the completion of the transaction contemplated herein will
not constitute or result in a violation, breach or default under
the terms or provisions of the articles or by-laws of SMD or of
any contract to which it is bound.
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5.5 SMD further represents and warrants that should it enter into any
agreement or commitment, to issue shares, by option, warrant or
otherwise, which will have the effect of dilution upon the
shareholdings of Cadnetics, said dilution shall occur on a
proportionate basis based on the shareholding of all the
shareholders in the company.
6. Representations and Warranties of Cadnetics
Cadnetics hereby represents and warrants to SMD as follows and confirms
that SMD is relying on the accuracy of such representations and
warranties in connection with the execution of its obligations hereunder:
6.1 Cadnetics is a corporation duly incorporated and validly
subsisting in all aspects under the laws of its respective
jurisdiction of incorporation. It has good right, full corporate
power and absolute authority to authorize and consent to the
transaction as herein provided.
6.2 Cadnetics has taken all necessary or desirable actions, steps and
corporate and other proceedings to approve or authorize, validly
and effectively, the entering into of and the execution, delivery
and performance of this transaction.
6.3 The execution, delivery and performance of this Letter of Intent
and the completion of the transaction contemplated herein will
not constitute or result in a violation, breach or default under
the terms or provisions of the articles or by-laws of Cadnetics
or of any contract to which it is bound.
6.4 Cadnetics makes no representation as to the value or potential
value of the Application.
7. Sale of Shares
7.1 SMD hereby acknowledges that Cadnetics shall have an unlimited right
to sell its common shares in SMD for the purpose of funding the
development of the Application.
7.2 The parties acknowledge that Cadnetics intends to finance the
development of the Application by selling its common shares in SMD on
a monthly basis within the six (6) month period following the Closing
Date in order to raise forty thousand U.S. dollars (U.S. $40,000.00)
per month. In the event that Cadnetics is unable to sell a number of
its common shares in SMD generating proceeds of at least forty
thousand U.S. dollars (U.S. $40,000.00) in any given month during the
six (6) month period following the Closing Date, Cadnetics shall have
the right to send a notice to SMD to enter into good faith
negotiations in order to resolve such situation. Cadnetics shall have
the right to suspend any further development of the Application upon
issuance of said notice until the parties arrive at an agreement
satisfactory to both parties, without SMD having any recourse against
Cadnetics in relation thereto.
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8. Present and Future Rights
8.1 SMD hereby acknowledges that Cadnetics and its associated companies
have extensive expertise in the development of applications of this
nature and that its said expertise is the basis for Cadnetics being
selected as the primary developer for the Application.
8.2 SMD also acknowledges that Cadnetics is an independent developer and
may be involved in the development of other applications which use a
similar architecture.
8.3 SMD and Cadnetics agree that they shall not impose any restrictions
upon each other in respect of their respective development of
applications of architecture similar to the Application.
8.4 Cadnetics shall retain all rights of ownership for internal use only
in respect of the developed Application until such time that SMD has
successfully fulfilled all of its financial obligations in respect of
Cadnetics.
9. Terms of Preferred Shares
Cadnetics shall have the right to convert its preferred shares into
common shares at any time until July 30th 1999, and the conversion price
for said shares shall be the lower of: (i) the average of the high
trading price plus the low trading price for the common shares at the
date of conversion, or (ii) two dollars and fifty cents (U.S. $2.50) per
common share at the date of conversion.
10. Conditions Precedent
10.1 Notwithstanding anything herein contained, the undertakings and
obligations of Cadnetics under the terms of this Letter of Intent
are, at the option of Cadnetics, subject to and conditional upon
the performance of or compliance with the following condition
precedent:
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<PAGE>
10.1.1 SMD shall not be in default of its obligations herein created.
10.1.2 The representations and warranties of SMD shall be true
and correct and remain in full force and effect for the
benefit of Cadnetics as of the Closing Date, and shall
continue in full force and effect notwithstanding the
closing of the transaction contemplated herein.
10.2 Notwithstanding anything herein contained, the undertakings and
obligations of SMD under the terms of this Letter of Intent
are, at the option of SMD, subject to and conditional upon the
performance of or compliance with the following conditions
precedent:
10.2.1 Cadnetics shall not be in default of its obligations herein created.
10.2.2 The representations and warranties of Cadnetics shall be
true and correct and remain in full force and effect for
the benefit of SMD as of the Closing Date, and shall
continue in full force and effect notwithstanding the
closing of the transaction contemplated herein.
11. Indemnification
The parties shall mutually and reciprocally indemnify and hold each other
harmless from and against any damage, loss, cost, deficiency (including
the payment of attorneys fees) arising out of any inaccuracy in any
representation or warranty made hereunder.
12. Further Executions
The parties hereto agree and undertake in good faith to exert their best
efforts to agree upon and execute all documents and do all acts as may be
necessary or useful to conclude the transaction contemplated herein.
13. Related Costs
Each party shall assume and pay their respective costs and expenses
including legal and financial advisory fees incurred in connection with
the negotiation, agreement upon and performance of the transaction herein
contemplated.
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14. Interpretation
14.1 Entire Agreement - This Letter of Intent sets forth all of the
promises, covenants, agreements, conditions and undertakings between the
parties hereto with respect to the subject matter hereof and supersedes
all prior and contemporaneous agreements and undertakings, inducements or
conditions expressed or implied, oral or written.
14.2 Severability - It is intended by the parties hereto that the
provisions of this Letter of Intent be enforced to the fullest
extent permissible. Accordingly, if any paragraph, article or any
part thereof is adjudicated to be invalid or unenforceable, then
such paragraph or article shall be deemed amended to delete that
portion thus adjudicated to be invalid or unenforceable, such
deletion to apply only with respect to the operation of such
paragraph or article.
14.3 Waiver - No waiver by a party of a default and a performance of
any breach or series of breaches by another party hereto and
failure, refusal or neglect by a party to exercise all rights
hereunder or to insist upon strict compliance or performance of
another party hereto under this Letter of Intent shall constitute
a waiver of the provisions hereof.
14.4 Governing Laws - This Letter of Intent shall be governed and
construed in accordance with the laws of the province of Quebec.
14.5 Assignment - The present Letter of Intent may not be assigned by
a party hereto without the prior written consent of the other
parties.
14.6 Successors and Assigns - This Letter of Intent shall be binding
upon the parties hereto and their respective assigns, successors
and interests and shall not be modified or amended except by
written agreement.
14.7 Language - The parties hereto have requested that this Letter of
Intent and all documents relating hereto be drafted in the
English language. Les parties aux presentes ont exige que la
presente convention et tout document y afferent soit redige en
langue anglaise.
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If you are in agreement with the terms and conditions set forth herein, kindly
indicate your acceptance by signing and returning the enclosed copy of this
offer prior to the 29th day of December 1998.
Yours very truly,
CADNETICS INC.
Per: Raj Vadavia, Vice-President
Acknowledged and agreed this day of December 1998.
SMD GROUP INC.
Per: Joel Arberman
86
EXHIBIT NO.
10.3
Form of Stock Option Plan
87
<PAGE>
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 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.
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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,
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
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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
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 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
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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 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 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.
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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 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
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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
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 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
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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 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
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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.
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
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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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