UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
( X ) Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.
For the quarterly period ended September 30, 1999.
( ) Transition report pursuant to Section 13 or 15(d) of the Exchange Act for
the transition period from _______________ to ____________ .
Commission File Number: 333-70663
CDBEAT.COM, INC
Formerly Known As SMD GROUP, INC.
(Exact name of registrant as specified in charter)
Delaware 06-1529524
(State of Incorporation) (I.R.S. Employer I.D. No)
444 Bedford Street, Suite 8s, Stamford, Connecticut 06901
(Address of Principal Executive Offices)
(203) 602-9994
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (1) has filed all reports required to be filed by
Section by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES ( X ) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes of
stock as of November 3, 1999.
4,495,446 Common Shares
Transitional Small Business Disclosure Format:
YES ( ) NO (X)
1
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CDBEAT.COM, INC
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets as of September 30, 1999 and December 31,
1998...............................................................3
Statements of Operations for the three and nine months ended
September 30, 1999, the three months ended September 30, 1998
and the period May 8, 1998 (date of inception) to September 30,
1998...............................................................4
Statement of Stockholders' Deficit for the nine months ended
September 30, 1999.................................................5
Statements of Cash Flows for the three and nine months ended
September 30, 1999, the three months ended September 30, 1998
and the period May 8, 1998 (date of inception) to September 30,
1998...............................................................6
Notes to Financial Statements .....................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................17
Item 2. Changes in Securities ............................................17
Item 3. Defaults Upon Senior Securities ..................................17
Item 4. Submission of Matters to a Vote of Securities Holders
..................................................................17
Item 5. Other Information ................................................17
Item 6. Exhibits and Reports on Form 8-K .................................17
Signatures
2
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CDBEAT.COM, INC.
(A Development Stage Enterprise)
BALANCE SHEETS AS OF
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
September
30, December
1999 31, 1998
(Unaudited)
------------- -----------
ASSETS
Cash and cash equivalents $ 23,834 $
309,203
Employee advance 0 4,984
Prepaid product development costs 0 420,000
Computer equipment (net of
accumulated depreciation of $1,541 and $26) 12,102 1,557
------------- -----------
TOTAL $ 35,936 $ 735,744
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Accrued expenses $ 164,005 $
32,511
Notes payable 50,000 0
Due to stockholder 25,279 279
------------ -----------
Total liabilities 239,284 32,790
------------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock - $.001 par value,
10,000,000 Shares authorized:
Class A preferred stock - 8.75 and
27.847 shares issued and
outstanding, liquidation value $0 0 0
Class B preferred stock - 0 and 100 shares
issued and outstanding, liquidation value $0 0 0
Class C preferred stock - 50,000 and 100,000 shares
issued and outstanding, liquidation value $50
and $100 50 100
Common stock - $.001 par value 20,000,000
shares authorized; 4,495,446 and 4,313,600
shares issued and outstanding 4,496 4,314
Additional paid-in capital 1,094,857 822,614
Deficit accumulated during the development stage (1,302,751) (124,074)
-------------- -----------
Total stockholders' equity (deficit) (203,348) 702,954
-------------- -----------
TOTAL $ 35,936 $ 735,744
============= ===========
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
3
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CDBEAT.COM, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
- -----------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
Period
May 8,
Three-Months Nine-Months Three-Months 1998 (date
Ended Ended Ended of
September September inception)
30, 1999 September 30,1998 to
30, 1999 September
30, 1998
-----------------------------------------------------
OPERATING EXPENSES:
Professional fees $ 8,541 $ 121,124 $ 26,100 $ 26,100
Software development costs 132,743 796,938
Payroll and related taxes 49,594 180,607
Publicity and promotion 40,000 40,000
Office and administration 6,569 40,558 279
Depreciation 1,359 1,515
----------- ------------ ---------- ------------
Total operating expenses 238,806 1,180,742 26,100 26,379
OTHER INCOME-
Interest (59) (2,065)
----------- ------------ ---------- ------------
NET LOSS $(238,747) $(1,178,677) $(26,100) $ (26,739)
=========== ============ ========== ============
NET LOSS PER SHARE:
Basic $ (0.05) $ (0.27) $ (0.01) $ (0.01)
=========== ============ ========== ============
Weighted average number of shares -basic 4,484,779 4,439,624 4,030,083 4,028,050
=========== ============ ========== ============
Diluted $ (0.02) $ (0.10) $ (0.01) $ (0.01)
============ ========== ============ ============
Weighted average number of shares-diluted 11,912,621 11,867,466 4,030,083 4,028,050
=========== ============ ========== ============
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
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CDBEAT.COM, INC.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Nine Months Ended September 30, 1999
(Unaudited)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Deficit
Accumulated
Convertible Additional During
Preferred Stock Common Stock Paid- Development
Shares Par Value Shares Par Value In Capital Stage Total
------ -------- ------- --------- ------------ --------- -----------
Balances, January 1,
1999 100,128 $ 100 4,313,199 $ 4,314 $ 822,614 $(124,074) $ 702,954
Conversion of preferred
Shares into common
Shares 128 83,047 83 (83)
Issuance of Class A
preferred shares in
exchange for consulting
services: 8.75 21,875 21,875
Cancellation of Class C
preferred shares (50,000) (50) 50
Issuance of common
stock in payment of debt 35,000 35 87,465 87,500
Proceeds from issuance of
common stock 48,200 48 122,952 123,000
Issuance of common stock for
services rendered 16,000 16 39,984 40,000
Net loss for the nine
Months ended
September 30, 1999 (1,178,677) (1,178,677)
------- ------ --------- ------- ---------- ----------- ----------
Balances, September 30,
1999 50,008 $ 50 4,495,446 $4,496 $1,094,857 (1,302,751)$ (203,348)
======= ====== ========= ======= =========== =========== =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
5
<PAGE>
CDBEAT.COM, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
Period
ended May
Three-MonthsNine-Months Three-Months 8,1998
Ended Ended Ended (date of
September September September inception)
30, 1999 30, 30, 1998 to
1999 September
30, 1998
------------ ------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (238,747) $(1,178,677) $ (26,100) $ (26,379)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 1,359 1,515
Non-cash professional fees 21,875
Non-cash publicity and promotion 40,000 40,000
Change in assets and liabilities, net:
Decrease in employee advance 4,984
Increase in accrued expenses 95,494 131,494
Decrease in prepaid product development 420,000
costs
Increase in due to stockholder 87,500 279
----------- ------------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (101,894) (471,309) (26,100) (26,100)
----------- ------------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (12,060)
----------- ------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed from the issuance of a note 50,000 50,000 0 0
Proceeds from stockholder advance 25,000 25,000
Proceeds from issuance of common stock 5,000 123,000 35,500 60,500
------------ ------------ ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 80,000 198,000 35,500 60,500
------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (21,894) (285,369) 9,400 34,100
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,728 309,203 25,000 0
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,834 $ 23,834 $ 34,400 $ 34,400
=========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 0 $ 0 $ 0 $ 0
=========== ============ =========== ===========
Taxes paid $ 0 $ 0 $ 0 $ 0
=========== ============= =========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Common stock issued for services rendered $ 40,000 $ 40,000
=========== =============
Common stock issued for repayment of
stockholder loans $ 87,000
=============
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
6
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CDBEAT.COM, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- ------------------------------------------------------------------------------
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
CDbeat.com, Inc. F/K/A SMD Group, Inc. (the "Company") was incorporated under
the laws of the state of Delaware on May 8, 1998. The Company, which is
considered to be in the development stage as defined in Financial Accounting
Standards Board Statement No. 7, intends to provide branded, interactive
information and programming as well as merchandise to music enthusiasts
worldwide. The planned principal operations of the Company have not commenced,
therefore accounting policies and procedures have not been established.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principals for interim
financial information and the instructions to Form 10-QSB and Rule 10-1 of
Regulation S-X of the Securities and Exchange Commission (the "SEC").
Accordingly, these financial statements do not include all of the footnotes
required by generally accepted accounting principals. In the opinion of
management, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months and ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. The accompanying financial statements and the notes should be
read in conjunction with the Company's audited financial statements as of
December 31, 1998 contained in its Amendment No. 4 Registration Statement on
Form SB-2.
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company generated a net loss
of $1,178,677 for the nine months ended September 30, 1999, and is anticipating
continued losses for the fiscal year ending December 31, 1999. In addition, the
Company will require a significant amount of capital to commence its planned
principal operations. Accordingly, the Company's ability to continue as a going
concern is dependent upon its ability to secure an adequate amount of capital to
finance its anticipated losses and planned principal operations. The Company's
plans include a public offering of its common stock (see Note D) and the
issuance of debt, however there is no assurance that we will be successful in
these efforts. In the event the Company receives minimal or no proceeds from the
public offering, the Company will seek alternative funding sources and may
adjust its focus and expenditures required for implementing its planned
operations. These factors, among others, may indicate that the Company will be
unable to continue as a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
7
<PAGE>
NOTE C - PREPAID PRODUCT DEVELOPMENT COSTS
On December 31, 1998, the Company engaged a software development firm (the
"Developer") to develop a software application for the Company's planned
interactive Web site (the "Application"). Pursuant to terms of the agreement,
the Developer received total consideration of $420,000 through December 31,
1998; such consideration consisted of (1) cash of $42,000; (2) 96,000 shares of
the Company's common stock having a market value of $240,000; and (3) 100 shares
of the Company's convertible Class B preferred stock having a market value of
$138,000 (these shares were converted into 55,200 of the Company's common shares
in January 1999).
In January 1999, the scope of the engagement was amended whereby additional
services will be provided by the Developer for $240,000. These costs, along with
the $420,000 of prepaid product development costs in the accompanying balance
sheet, will be expensed as the services are provided. During the nine months
ended September 30, 1999 the Company expensed $420,000 of the prepaid product
development costs.
NOTE D - NOTES PAYABLE
Secured note payable bears interest at 10%, with interest and principal due
December 28, 1999. The note is secured by a first lien on all the assets of the
Company. The Company's President also personally pledged 3,390,000 shares of
Cdbeat.com, Inc. common stock as additional collateral.
NOTE E - SHAREHOLDER'S EQUITY
Convertible Preferred Stock
The following transactions occurred during the nine months ended September 30,
1999:
a. 311.75 shares of Class A preferred stock, convertible into 311,750 shares of
the Company's common stock, were issued to certain consultants for services
related strategic consulting advice and services relating to positioning,
guidance and introductions to music and entertainment individuals and
companies. Some assistance relating to the re-writing of business plan was
also provided. The Company amended one of the agreements that provided for
the cancellation of 303 shares of Class A preferred stock. The fair market
value of the remaining 8.75 shares of $21,875 has been recorded as
professional fees.
b. 50,000 of the 100,000 shares of Class C, which were issued in 1998 to two
employees were canceled as a result of the separation from the Company of
one of its employees. The remaining 50,000 Class C shares may, under
certain conditions, convert to 500,000 shares of the Company's common stock.
The preferred shares have been placed into a voting trust that is
administered by the Company's president. Pursuant to terms of
the voting trust agreements, one thirty-sixth of the preferred shares are to
be released each month, subject to the limitation that for every share
released, the Company on a cumulative basis must have met certain software
download goals. As such, it is possible that some or all of these shares
will not be converted into common shares, and accordingly, the Company has
not recorded compensation expense to date. Rather, the Company will record
compensation expense equal to the fair market value of the common shares on
the date any such shares are earned. The agreement, which is irrevocable,
has an initial term of three years and may be renewed indefinitely.
8
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Each of the above classes consists of the following rights and preferences: (1)
no stated dividends, (2) non-voting, (3) no preferential dividends, (4) no
redemption rights, (5) liquidation preference equal to its par value and
assuming the required conditions are met, convertible into common shares at any
time prior to December 31, 2010. The conversion rates described above are
subject to proportional adjustment in the event of a stock split, stock dividend
or similar recapitalization event effecting such shares.
Common Stock
On January 11, 1999, we issued to consultants a total of 27,847 shares of common
stock for the conversion of 27.847 shares of preferred stock Class A.
On January 12, 1999, we issued to Cadnetics, Inc., a software development firm
for the Company, 55,200 shares of common stock for the conversion of 100 shares
of preferred stock class B. There are no other class b preferred shares that
have been issued.
On May 17, 1999, the Company began offering subscriptions for the sale of up to
4,000,000 shares of its common stock, including 479,000 of which are being
offered by existing shareholders, for $2.50 per share. The offering is on best
efforts, no minimum basis. As such, there will be no escrow of any of the
proceeds of the offering and the Company will have the immediate use of such
funds to finance its planned operations. Pursuant to this offering, 48,200
shares were sold in 1999 resulting in proceeds of $118,000. In addition, the
Company issued 35,000 shares to the Company's president in payment of $87,500 in
advances made to the Company during 1999.
On September 2, 1999, the Company issued to a consultant, 16,000 shares of
common stock for $40,000 of services rendered to the Company.
Warrants
During the nine months ended September 30, 1999, the Company issued 7,819,092
warrants to purchase common shares at a price of $1,000,000. These warrants were
issued to a single entity, which upon the exercise of these warrants would
change the control of the Company. The Company also issued 934,733 warrants to
purchase common shares at $2.50 per share. As of September 30, 1999, the Company
had outstanding warrants to purchase 7,819,092 shares of common stock for
$1,000,000 and to purchase 952,580 shares of common stock at a price of $2.50
per share. All but 60,000 of these warrants expire December 31, 2000. The
60,000 expire June 15, 2001.
NOTE F - INCOME TAXES
During the nine months ended September 30, 1999 and the period May 8, 1998 (date
of incorporation) to December 31, 1998, the Company recognized losses for both
financial and tax reporting purposes. Accordingly, no deferred taxes have been
provided for in the accompanying statement of operations. The significant
components of the deferred tax asset as of September 30, 1999, assuming an
effective income tax rate of 34%, are approximately as follows:
9
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Deferred Income Tax Asset:
Net operating loss carryforwards $ 442,935
--------------
Deferred income tax asset 442,935
Less valuation allowance (442,935)
--------------
Total deferred income tax asset - net $ 0
==============
The Company established a valuation allowance to fully reserve the deferred
income tax asset as of September 30, 1999 as the realization of the asset did
not meet the required asset recognition standard established by Financial
Accounting Standards Statement No. 109
"Accounting for Income Taxes."
At September 30, 1999 and December 31, 1998, the Company had net operating loss
carryforwards of approximately $1,302,000 and $124,000 for income tax purposes.
These carryforwards will be available to offset future taxable income through
the year 2019 and 2018.
NOTE G - LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128
"Earnings per Share" ("SFAS No. 128") and SEC Staff Accounting Bulletin No. 98
("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net loss per
share is computed by dividing the net loss available to common stockholders for
the period by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is computed by dividing the net loss for
the period by the number of common and common equivalent shares outstanding
during the period. Common equivalent shares, composed of incremental common
shares issuable upon the conversion of Class A convertible preferred stock, are
included in diluted net income per share to the extent such shares are dilutive.
During the nine months ended September 30, 1999, the Company's Class B preferred
stock holders converted all their shares into shares of common stock and are
included in the basic calculation. In addition, Warrants and Class C preferred
stock have been excluded from the loss per share calculations because they
currently are not dilutive. The following table sets forth the computation of
basic and diluted net loss per share:
Three-Months Nine-Months
Ended Ended
September 30, September 30,
1998 1998
--------------- ---------------
Numerator
Net loss available to common stockholders $ 238,747 $ 1,178,677
=============== ===============
Denominator
Weighted average shares 4,484,779 4,439,624
--------------- ---------------
Denominator for basic calculation 4,484,779 4,439,624
Weighted average effect of dilutive securities:
Stock Warrants 7,419,092 7,419,092
Class A Preferred Stock 8,750 8,750
--------------- -------------
Denominator for diluted calculation 11,912,621 11,867,466
=============== ==============
Net loss per share:
Basic $ 0.05 $ 0.27
============= ==============
Diluted $ 0.02 $ 0.10
============= ===============
10
<PAGE>
NOTE H - RELATED PARTY TRANSACTIONS
On August 23, 1999, the Company received a $25,000 advance from a shareholder.
The advance is unsecured, non-interest bearing and due November 18, 1999.
During the three and nine months ended September 30, 1999, the Company's
president provided a portion of his home for office space for no consideration.
The value of such office space provided is not considered significant and as
such no expenses have been recorded.
NOTE I - CONTEMPLATED ACQUISITION
On September 28, 1999, the Company entered into a letter of intent (the "Letter
of Intent") with Cakewalk LLC ("Cakewalk"), contemplating the acquisition of
Cakewalk in a transaction in which the stockholders of Cakewalk would receive
approximately 50% of the Company. The terms and conditions of the merger have
not yet been fully determined.
- --------------------------------------------------------------------------------
11
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
The following discussion and analysis should be read in conjunction with the
balance sheet as of December 31, 1998 and the financial statements as of and for
the three and six months ended June 30, 1999 included with this Form 10-QSB. We
incorporated May 8, 1998 and did not have significant operations during the
period May 8, 1998 (date of inception) to June 30, 1998 and as such this
analysis does not include any additional discussion as of and for such periods.
We are considered to be in the development stage as defined in Financial
Accounting Standards Board Statement No. 7, and we intend to provide branded,
interactive information and programming as well as merchandise to music
enthusiasts worldwide.
Readers are referred to the cautionary statement, which addresses
forward-looking statements made by the Company.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 1999 we did not generate any
operating revenues and incurred a cumulative net loss of $238,747 and $1,178,677
respectively. Our operating expenses consist of software development costs,
professional fees, payroll, publicity and promotion and office.
o Software development costs of $132,743 and $796,937 consisted principally of
the development of our software application. Of these expenses, $420,000 was
recorded as prepaid at December 31, 1998 and expensed as incurred during the
nine months ended September 30, 1999.
o Professional fees of $8,541 and $121,124 consisted principally of general
business consulting, business development, legal and accounting fees.
o Payroll expenses of $49,594 and $180,607 consisted principally of related
taxes and salaries paid to employees in administrative, public relations and
support functions.
o Office expenses of $6,569 and $40,558 consisted principally of office
supplies, photocopies, postage, telephone, fax, cellular and Internet access.
o Publicity and promotion expenses of $40,000 consisted of advertising costs
associated with promoting the services that the Company offers. The Company
issued 16,000 shares of common stock in consideration for this advertising.
The results of operations for the three and nine months ended September 30, 1999
are not necessarily indicative of the results for any future interim period or
for the year ending December 31, 1999. We expect to expand our business and user
base, which will require us to increase our personnel, develop software,
purchase equipment and license content, which will result in increasing
expenses.
12
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Liquidity and Capital Resources
Our operating and capital requirements have exceeded our cash flow from
operations as we have been building our business. Operating activities during
the nine months ended September 30, 1999 created a net use of cash of $471,309,
which have been primarily funded by cash on hand at December 31, 1998, sales of
our common stock in 1999 of $123,000 and $162,500 in borrowings, during the nine
months ended September 30, 1999, from our management. At September 30, 1999 we
had cash and cash equivalents of $23,834.
We expect to make expenditures of approximately $2,465,000 during the twelve
months following the closing of this offering. These expenditures will be used
to continue software development, expand our web site, hire additional
personnel, sales and marketing, licensing content, purchase equipment and
general working capital.
On May 17, 1999, we began offering subscription for the sale of up to 3,521,000
shares of our common stock at $2.50 per share. We need the proceeds of this
offering to expand our operations and finance our future working capital
requirements. Based upon our current plans and assumptions relating to our
business plan, we anticipate that $2,465,000 in net proceeds from this offering
will satisfy our capital requirements for at least twelve months following the
closing of this offering. If our plans change or our assumptions prove to be
inaccurate, we may need to seek additional financing sooner than currently
anticipated or curtail our operations. During the three months ended June 30,
1999, we sold 48,200 shares with proceeds of $123,000. In addition, the Company
issued 35,000 shares to the Company's president in payment of $87,500 in
advances made to the Company during 1999. During the three months ended
September 30, 1999, we issued 16,000 shares to a consultant for $40,000 of
services rendered to the Company.
On August 23, 1999, the Company received an advance of $25,000 from a
shareholder. This advance is unsecured, non-interest bearing and due November
18, 1999.
On September 28, 1999, the Company issued a note payable in the amount of
$50,000 to an entity the Company is currently negotiating a merger deal with.
The note bears an interest rate of 10% and is secured by the Company's assets
and personally guaranteed by 3,390,000 shares of Cdbeat.com, Inc. common stock,
owned by the Company's President. Principal and interest are due December 28,
1999. The funds will be used for various expenses of the Company.
In connection with the issuance of the $50,000 note, the Company issued to an
entity, 7,819,092 warrants to purchase common shares for $1,000,000, as
consideration for assistance in obtaining this financing. The Company also
issued 934,733 warrants during the nine months ended September 30, 1999. These
warrants expire December 31, 2000 except for 60,000, which expire June 15, 2001.
Other Events
As reported on Form 8-K, filed on October 8, 1999, on September 23, 1999,
Atlantis Equities, Inc., a New York corporation ("Atlantis"), entered into a
warrant agreement (the "Warrant") with CDbeat.com, Inc., a Delaware corporation
(the "Company"). The Warrant entitles Atlantis, or its registered assignee
("Holder"), to purchase from the Company, (a) 7,819,092 shares of the Common
Stock of the Company ("Common Stock"), representing 80% of the fully diluted
Common Stock of the Company after giving effect to the exercise of the Warrant,
except for options to purchase 190,516 shares of Common Stock at $2.50 per share
(the "Outstanding Options"), and (b) options exercisable for 762,064 shares of
Common Stock at $2.50 per share and expiring December 31, 2000, representing 80%
13
<PAGE>
of the shares of Common Stock underlying the Outstanding Options. The Warrant is
exercisable, in whole or in part, during the period commencing on September 23,
1999 and ending on September 29, 1999, provided, however, that if the Company
receives a $50,000 loan from Holder or a source arranged by Holder on or before
September 29, 1999 such exercise period shall be extended to October 30, 1999
and provided, further, that if the Company enters into an agreement for a merger
or acquisition (the "Acquisition") on or prior to October 30, 1999, the period
during which this Warrant may be exercised shall be extended to the earlier of
the closing or termination of the Acquisition, and provided, further, that if
the Company has not closed a merger or acquisition by October 30, 1999, the
Warrant shall expire unless the Company receives, by November 1, 1999, an
additional $50,000 loan from Holder or a source arranged by Holder. The exercise
price of the Warrant is an aggregate of $1,000,000. The $50,000 loan made by
Cakewalk LLC, as described below, met the requirement for extending the
expiration date of the Warrant to at least October 30, 1999.
Subsequent to the acquisition of the Warrant, Atlantis introduced to the
Company an entity, Cakewalk LLC ("Cakewalk"), which Atlantis proposed as a
potential acquisition candidate. On September 28, 1999, the Company entered into
a letter of intent (the "Letter of Intent") with Cakewalk contemplating the
acquisition of Cakewalk in a transaction in which the stockholders of Cakewalk
would receive approximately 50% of the Company. The Letter of Intent
contemplates certain changes to the management and capital structure of the
Company. After the contemplated acquisition, the Company will be managed by
Robert Miller as President and Chief Executive Officer, together with such other
officers, including a chief operating officer and a chief financial officer, as
shall be selected by Robert Miller with the consent of the Company's board of
directors. Joel Arberman will become the Company's Internet Officer.
Upon the closing of the contemplated acquisition the Letter of Intent
contemplates that the Company's and Cakewalk's equity owners will each own
9,773,865 shares of Common Stock, constituting 50% each of the post-acquisition
common shares. The shares owned by the Company's current equity owners assuming
the exercise by Atlantis of the Warrant, the cancellation of 2,227,450 shares
and 321,974 shares owned by Joel Arberman and Bryan Eggers, respectively, and
the conversion of all outstanding preferred stock to Common Stock, will be
substantially as follows:
CDbeat Common Shares
------ -------------
Public shareholders 561,600
Consultants 42,597
Bryan Eggers 178,026
Joel Arberman 1,172,550
Atlantis Equities, Inc. 7,819,092
---------
Total 9,773,865
=========
In addition, the Company will issue 2,932,159 management stock options, at
an exercise price per share to be agreed upon prior to closing of such
acquisition, 1,955,750 will be issued to Robert Miller, with the balance
reserved to other officers of the Company and to be awarded by the Company's
board of directors. The proposed acquisition is subject to numerous conditions
including, among other things: approval by Cakewalk's supervisory board and the
Company's board of directors; satisfactory mutual legal and financial due
diligence; all necessary approvals; completion of the acquisition on a tax-free
basis to Cakewalk's owners; and execution of definitive documentation, including
representations and warranties, covenants, conditions and other customary terms.
There can be no assurance that the contemplated acquisition will be consummated
on the terms set forth in the Letter of Intent or at all.
14
<PAGE>
In connection with the Letter of Intent, Cakewalk loaned the Company the
principal amount of $50,000. In connection with such loan, Cakewalk and the
Company entered into a note and security agreement dated September 28, 1999 (the
"Note"). The loan bears interest at 10% per annum and is due on December 28,
1999 (the "Maturity Date"); The loan is secured by substantially all assets of
the Company.
In addition, the Company and Joel Arberman, the principal stockholder of
the Company entered into an agreement dated September 28, 1999 whereby he
pledged 3,390,000 shares of Common Stock to Cakewalk to secure the Company's
obligations to Cakewalk under the Note (the "Share Pledge Agreement").
YEAR 2000 READINESS DISCLOSURE
OUR STATE OF READINESS
We have defined Year 2000 compliance as follows:
Information technology time and date data processes, including, but not limited
to, calculating, comparing and sequencing data from, into and between the 20th
and 21st centuries contained in our software and services offered through the
us, will function accurately, continuously and without degradation in
performance and without requiring intervention or modification in any manner
that will or could adversely affect the performance of such products or the
delivery of such software and services as applicable at any time.
Our internal systems include both information technology systems and
non-information technology systems. We have initiated an assessment of our
proprietary information technology systems, and expect to complete any
remediation and testing of all information technology systems during 1999. With
respect to information technology systems provided by third-party vendors, we
have sought assurances from such vendors that their technology is Year 2000
compliant. All of our material information technology system vendors have
replied to inquiry letters sent by us stating that they either are Year 2000
compliant or expect to be so in a timely manner.
We are evaluating our non-information technology systems for Year 2000
compliance. We have not, to date, discovered any material Year 2000 issues with
respect to our non-information technology systems.
We are in the process of contacting our material suppliers whose products or
services are sold through us to determine if they are Year 2000 compliant. To
date, all such suppliers have stated that they are, or expect to be, Year 2000
compliant in a timely manner. Our customers are individual Internet users, and,
therefore, we do not have any individual customers who are material to an
evaluation of Year 2000 compliance issues.
THE COSTS TO ADDRESS YEAR 2000 ISSUES
We have expensed amounts incurred in connection with Year 2000 compliance since
its formation through June 30, 1999. Such amounts have not been material. The
additional costs to make any other software or services Year 2000 compliant by
mid-1999 will be expensed as incurred, but are not expected to be material.
We are not currently aware of any material operational issues or costs
associated with preparing our systems for the Year 2000. Nonetheless, we may
experience material unexpected costs caused by undetected errors or defects in
the technology used in our systems or because of the failure of a material
supplier to be Year 2000 compliant.
15
<PAGE>
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
Notwithstanding our Year 2000 compliance efforts, the failure of a material
system or vendor used in our software and service, or the Internet generally, to
be Year 2000 compliant could harm the operation of our software and services or
prevent us from generating advertising or commerce sales through our software,
or have other unforeseen, adverse consequences to the company.
Finally, we are also subject to external Year 2000-related failures or
disruptions that might generally affect industry and commerce, such as utility
or transportation company Year 2000 compliance failures and related service
interruptions. Moreover, participating vendors in our services might experience
substantial slow-downs in business if consumers avoid products and services such
as air travel both before and after January 1, 2000 arising from concerns about
reliability and safety because of the Year 2000 issue. All of these factors
could have a material adverse effect on our business, financial condition and
results of operations.
CONTINGENCY PLANS
We are engaged in an ongoing Year 2000 assessment and the development of
contingency plans. The results of our Year 2000 simulation testing and the
responses received from third-party vendors and service providers will be taken
into account in determining the nature and extent of any contingency plans. We
have identified our worst-case scenario as the interruption of our business
resulting from Year 2000 failure of the electric company or our Internet service
providers to provide services. We have not yet completed our worst-case scenario
contingency plan. Without a worst-case scenario contingency plan we may not have
enough time to complete remedial measures and implement contingency planning for
the worst-case scenario. We do plan to complete our contingency plan in
accordance with our compliance plan and under the guidance of our consultants in
the third quarter of 1999.
CAUTIONARY STATEMENT
This Form 10-QSB, press releases and certain information provided periodically
in writing or orally by the Company's officers or its agents contain statements
which constitute forward-looking statements within the meaning of Section 27A of
the Securities Act, as amended and Section 21E of the Securities Exchange Act of
1934. The words expect, anticipate, believe, goal, plan, intend, estimate and
similar expressions and variations thereof if used are intended to specifically
identify forward-looking statements. Those statements appear in a number of
places in this Form 10-QSB and in other places, particularly, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to, among other things: (i)
the Company's liquidity and capital resources; (ii) the Company's financing
opportunities and plans and (iii) the Company's future performance and operating
results. Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) any material inability of the Company to successfully develop
and integrate its software at reasonable and anticipated costs to the Company;
(ii) any material inability of the Company to successfully internally develop
its products; (iii) any adverse effect or limitations caused by Governmental
regulations; (iv) any adverse effect on the Company's continued positive cash
flow and abilities to obtain acceptable financing in connection with its growth
plans; (v) any increased competition in business; (vi) any inability of the
Company to successfully conduct its business in new markets; and (vii) other
risks including those identified in the Company's filings with the Securities
and Exchange Commission. The Company undertakes no obligation to publicly update
or revise the forward looking statements made in this Form 10-QSB to reflect
events or circumstances after the date of this Form 10-QSB or to reflect the
occurrence of unanticipated events.
16
<PAGE>
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Securities Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
Form 8-K, Item 1, filed October 8, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
11/12/1999 /s/ Joel Arberman
Date Joel Arberman, President
17
<PAGE>
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