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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
CDKNET.COM, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3586087
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
595 Stewart Avenue, Suite 710
Garden City, N.Y. 11530
(516) 222-8800
WWW.CDKNET.COM
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(Address, including zip code, telephone number, including area code,
and web address of the principal executive offices of the registrant)
Securities to be registered pursuant to Section 12(b) of the Act: NONE
Securities to be registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.0001
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TABLE OF CONTENTS
INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART 1 PAGE
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ITEM 1. DESCRIPTION OF BUSINESS AND SPECIAL RISK FACTORS................. 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ............................ 16
ITEM 3. DESCRIPTION OF PROPERTY.......................................... 20
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................ 20
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS.............................................. 24
ITEM 6. EXECUTIVE COMPENSATION........................................... 27
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 30
ITEM 8. DESCRIPTION OF SECURITIES........................................ 32
PART II
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ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................ 34
ITEM 2. LEGAL PROCEEDINGS................................................ 34
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.................... 35
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.......................... 35
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS........................ 38
PART F/S
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FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.................................. F-1
PART III
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ITEM 1. INDEX TO EXHIBITS .............................................. III-1
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CAUTIONARY STATEMENT
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All statements, trends, analyses and other information contained in this Form
10-SB relative to trends in net sales, gross margin, anticipated expense levels
and liquidity and capital resources, as well as other statements, including, but
not limited to, words such as "anticipate," "believe," "predict," "plan,"
"intend," "expect," and other similar expressions constitute forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks and uncertainties that are difficult to predict. Potential
risks and uncertainties include those set forth below in "Risk Factors."
Particular attention should be paid to the cautionary statements involving our
limited operating history, the unpredictability of our future revenues, the
unpredictable and evolving nature of its business model, the intensely
competitive online commerce industry and the risks associated with capacity
constraints, systems development, management of growth and business expansion,
as well as other factors described below.
RISK FACTORS -- SPECIAL CONSIDERATIONS
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We have described several risk factors which we believe are significant and
should be given careful consideration by you when you evaluate us. We consider
each of these risks to be specific to us, although some are industry or sector
related issues which could also impact other businesses in our market sector. In
our case and in addition to the risks just referred to, there are two related
risks to which we wish to draw your attention specifically:
O Our independent certified public accountants have added an emphasis
paragraph to their report on our consolidated financial statements as
of June 30, 1999 and for the year ended June 30, 1999, and the period
October 1, 1997 (date of inception) to June 30, 1998, relating to
factors that raise substantial doubt about our ability to continue as a
going concern.
O We need significant additional financing.
If we are unable to obtain significant additional financing or otherwise fund
our operations, we will likely have to file for bankruptcy.
We are filing this Form 10-SB, and amendments thereto, in order to comply with
the new NASD eligibility requirements to trade our stock on the Over-the-Counter
Bulletin Board. The phase-in schedule for the eligibility requirements provides
that we must have met the requirements on or before October 7, 1999, including
filing and clearing a registration statement under the Securities Exchange Act
with the Commission. We did not meet this deadline and, as a result, our stock
was deleted from the Over-the-Counter Bulletin Board on October 7, 1999. Our
stock is being traded on the National Quotation Bureau's "Pink Sheets" until we
meet the eligibility requirements for, and can be reinstated on, the
Over-the-Counter Bulletin Board.
DESCRIPTION OF BUSINESS
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We have developed a multimedia technology, called CDK(TM), which integrates
audio, video and Internet connectivity on a standard compact disc. Our
technology enables users to create their own personalized CDs simply by visiting
a Website. These custom CDs play audio and display videos on a full-screen,
using high-quality videos and digital technology. The custom CDs also include
software applications and targeted Web links.
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Our targeted industries include: (1) entertainment (music, movies and TV); (2)
travel and tourism; (3) professional sports; (4) financial services; (5)
education; (6) toys/games; (7) fashion; (8) food/cooking; (9) automotive; and,
(10) healthcare. Our primary customers and/ or strategic partners include
Peterson's, AtomicPop, Central Park Media, CollegeMusic.com, Megaforce Records
and DreamWorks Records. We believe that there are six main companies currently
offering custom audio CD development. These companies are Musicmaker.com,
Customdisc.com, CDUCTIVE, Amplified.com, K-Tel.com, and EZCD.com. However, we
believe that none of these companies offer custom multi-session CD development.
1. ORGANIZATION WITHIN LAST FIVE YEARS
We are a holding company formed under the laws of the State of Delaware. Our
executive offices are located at 595 Stewart Avenue, Suite 710, Garden City, New
York 11530. The following is our corporate history:
On August 20, 1997, Creative Technology, LLC, a limited liability company
organized under the laws of the State of New York, was formed to operate
technology related enterprises and began operations on October 1, 1997.
October 1, 1997, Technology Applications, LLC, a limited liability company
organized under the laws of the State of New York, was formed to operate
technology related enterprises.
In October 1997, Creative Technology contributed capital of approximately
$1,100,000 and subordinated loans of $400,000 in exchange for a 40% interest and
voting control in Technology Applications. The operating agreement for
Technology Application provided that Creative Technology would control the
management committee.
Kelly Music and Entertainment Corp., a Delaware Corporation, was founded in 1995
to operate technology related enterprises. CDKnet, LLC acquired all of the
intellectual property (which now forms the core of our products, and fixed
assets) of Kelly Music in exchange for issuing to Kelly Music a 40% member
interest in Technology Applications valued at $1,500,000.
Alvin Pock and Robert Kelly, both principals of Kelly Music, contributed notes
(some of which were collateralized) of Kelly Music and received ownership
interests of 12.5% and 7.5%, respectively.
On February 4, 1998, Technology Applications changed its name to CDKnet, LLC.
On May 7, 1998, Technology Horizons Corp. was formed as a Delaware corporation
to operate technology related enterprises. On that same day, Technology Horizons
purchased 100% of the ownership interests of Creative Technology in exchange for
6,000,000 shares of Technology Horizons common stock, acquiring Creative
Technology as a wholly owned subsidiary.
On May 21, 1998, Technology Horizons merged with International Pizza Group,
Inc., a Florida corporation that was inactive but had its common stock traded on
the Over-the-Counter Bulletin Board under the symbol "IPZZ." As a result of the
merger, Technology Horizons acquired the net assets of International Pizza and
began trading on the Over-the-Counter Bulletin Board on May 21, 1998, under the
symbol "THCX.".
On June 2, 1998, Creative Technology, Kelly Music, Pock, Kelly and CDKnet, LLC
agreed to covert $280,766 and $93,750 of debt which CDKnet, LLC owed to Creative
Technology and Pock into additional ownership interests of 8% and 2.5%,
respectively. Accordingly, the ownership interests of Kelly Music and Kelly were
reduced to reflect the increased ownership of Creative Technology and Pock.
Following this debt conversion, the ownership of CDKnet, LLC was as follows;
Creative Technology 48%, Pock 15%, Kelly 5.85% and Kelly Music 31.15%.
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Shortly thereafter, by Agreement dated June 3, 1998 between Creative Technology,
Kelly Music, Pock, Kelly and CDKnet, LLC, CDKnet, LLC $800,000 to Kelly Music
from CDKnet, LLC were used to reduce Kelly Music's membership interest by 5%
thereby increasing the combined ownership of Pock, Kelly and Creative Technology
by an aggregate of 5%. Following this transaction, the ownership of CDKnet, LLC
was as follows: Creative Technology 51.5%, Pock 16.1%, Kelly 6.25% and Kelly
Music 26.15%.
Additionally, by agreements dated June 3, 1998, Technology Horizons acquired
Kelly and Pock's 6.25% and 16.1% interests in CDKnet, LLC receiving in exchange
363,636 and 936,727 common shares of Technology Horizons, respectively.
Following these transactions, Technology Horizons held a 22.35% direct ownership
interest in CDKnet, LLC bringing its total direct and indirect ownership to
73.85%.
On July 8, 1998, Technology Horizons entered into an agreement that was
subsequently amended to purchase Kelly Music's remaining 26.15% ownership
interest in CDKnet, LLC for $5,171,122, payable in a combination of 1,883,635
common shares of Technology Horizons and debt retirement of $600,000 in notes,
and a cash payment of $65,000 raising Technology Horizons' direct interest in
CDKnet, LLC to 48.5%. Creative Technology held the remaining 51.5%.
On December 16, 1998, Technology Horizons changed its name to CDKNET.COM, INC.
and, on December 18, 1998, began trading on the Over-the-Counter
Bulletin Board under the symbol of "CDKX".
We have not had any other material organizational changes or any additional
acquisitions or mergers since December 1998.
We currently have two wholly-owned subsidiaries, Creative Technology and CDKnet,
LLC. We directly own 100% of Creative Technology and 48.5% of CDKnet, LLC.
Creative Technology owns the remaining 51.5% ownership interest of CDKnet, LLC,
giving us an indirect 100% ownership interest of CDKnet, LLC. We conduct our
business through CDKnet, LLC. Our manufacturing, research and development is
conducted out of CDKnet, LLC's office located at 250 West 57th Street, Suite
1101, New York, New York 10019. Our offices may be contacted by telephone at
212-547-6050 or on our website at: WWW.CDKNET.COM.
2. GENERAL
Our unaudited financial statements for the period July 1, 1999 to September 30,
1999, reflect $23,663 in net revenues. We generated $474,344 in net revenues in
the year ended June 30, 1999 relating to the CDK(TM) technology. $317,810 of
such revenues from CDK(TM) technology came from two customers, one of which
accounted for approximately $241,915. We intend to establish three principal
revenue streams: (1) sale of custom CDs, (2) sale of Web links and Web
advertising, and (3) development and use fees. We are currently capable of
providing services in each of these areas.
We have received an infusion of $1,037,500 in capital since October 1, 1999. We
plan to decrease our need for substantial additional working capital by
continuing to outsource production capabilities, expand business development
efforts and implement marketing programs.
As of December 14, 1999, we had 17,206,157 shares of common stock issued and
outstanding. Of these shares, 2,191,602 shares are restricted stock owned by our
directors and key employees. The remaining 15,014,555 shares are owned by
approximately 79 shareholders, 7 of whom we believe hold more than five percent
(5%) ownership of the Company. On October 7, 1999, our stock was deleted from
the Over-the-Counter Bulletin Board. Our common stock is currently being traded
on the so-called "Pink Sheets" under the symbol "CDKX."
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3. INDUSTRY
A. OVERVIEW
Internet usage has increased dramatically in the last decade. As a result, many
new personal and commercial applications have been developed for Internet users
and, increasingly, consumers are conducting business through Internet
applications. We believe that web-connected multimedia CDs will be one of the
next significant applications of the Internet. Web-connected, Multimedia CDs
contain audio, video and HTML (or, HyperText Markup Language, the underlying
"code" for Web pages) all navigable by a standard web browser. Our CDK(TM)
technology forms the foundation multimedia for CD-ROM authoring, production, and
custom online compilations.
We believe there is strong market potential for CDK(TM) technology across
various industries. Target industries include:
-- Entertainment (music, movies, TV) -- Toys/Games
-- Travel & Tourism -- Fashion
-- Professional Sports -- Food/Cooking
-- Financial Services -- Automotive
-- Education -- HealthCare
The premiere companies in each of these industry categories have fully developed
Websites with significant user traffic, lending themselves as prime candidates
for the MixFactory(TM) operation. We believe that the industry will become more
competitive. Our inability to compete in the market will have a material affect
on its business operations.
B. COMPETITION
While other companies have the potential to develop web-based, audio and video,
custom CDs, we believe that none offer the economic, development or quality
advantages of our CDK(TM) and MixFactory(TM) technology. We believe that there
are six main companies currently offering custom audio CD development. These
companies are Musicmaker.com, Customdisc.com, CDUCTIVE, Amplified.com,
K-Tel.com, and EZCD.com. However, we believe that none of these companies offers
custom audio and video CD development. In an effort to further secure a strong
position in the marketplace, CDKnet, LLC has submitted patent requests for
certain aspects of our technology. Finally, we believe that other companies,
including established Internet companies, software companies and companies in
the entertainment business could enter this business and become competitors.
4. PRODUCTS AND SERVICES
A. PRODUCTS AND SERVICES
We have developed and are marketing the following products and services:
CDK(TM) TECHNOLOGY
CDK(TM) technology combines CD digital audio (i.e., audio tracks that are
playable on both home stereo systems and personal computers) full-screen video
and integrated web links through a browser interface. A browser interface is the
main interface page that is presented when the CD is placed in a personal
computer. Our technology allows video playback at the full-screen size of the
video monitor and at full-motion (the industry standard of 30 frames per
second). The browser interface also allows easy linking to other Web sites
through the CDK interface page.
The CDK(TM) HTML authoring system -- the process for creating Web pages -- is
used by CDKnet, LLC to produce custom HTML interface pages for specific clients
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in about a day. The Company has proprietary techniques for creating full-motion,
full-screen video playback from using a CD. Any user with a PC of at least
166MHZ or Macintosh G3 can order custom audio and video CDs.
CDK(TM) has been engineered to offer compatibility with the majority of CD-ROM
drives on the market. We believe that we have achieved a high level of
reliability, as evidenced by extensive testing and major CDK(TM) releases, and
we believe this reliability will provide a major competitive advantage over
other multisession (i.e., both audio and video) CDs in the market. Additionally,
the CDK(TM) system is engineered for mass-production. The integration of the
complete file structure of the CDK(TM) is automated. Audio, video and HTML
assets can be placed in the production templates created by us for a fast
turn-around time for the creation of CDKs.
MIXFACTORY(TM) CUSTOM MANUFACTURING
MixFactory(TM) is a custom, multi-session CD manufacturing system built upon
CDK(TM) technology. The entire system is automated so that little human
intervention is required for the custom manufacturing process. Based on our
review of current custom-CD operations in the marketplace, we believe that
MixFactory(TM) is a unique system.
To create a custom CD, a user visits a Website and selects a compilation of
audio, video, or other content titles. Titles are browsed and/or searched and
audio/video clips are previewed through an easy to use interface. After
selecting the compilation, the user personalizes the disc by selecting artwork
for the disc label, cover and HTML interface.
The MixFactory(TM) system allows multimedia content providers -- such as, music
labels, major sports leagues, pharmaceutical companies, travel-related
organizations as well as companies within the fashion industry -- to offer their
assets on a customized basis, either as promotional content or as full retail
products. For example, a visitor to the CollegeMusic.com Website will be
presented with a MixFactory(TM) link that will enable the user to develop a
custom CD consisting of available site content. This content will include video
and audio tracks of live music performances from major nightclubs across the
United States.
We plan to form agreements with multiple content providers. We are not looking
to license content through such agreements. Rather, we are looking to license
MixFactory technology to the content providers (owners). Therefore, we will not
be in danger of violating any intellectual property rights. For example, the
College Music Mixfactory website enables fans to create custom CDs containing
music videos as well as audio tracks. The CD will also contain integrated Web
links to the College Music Website driving targeted traffic.
We expect to leverage the planned MixFactory.com(TM) Website to serve as a link
(or portal) to other Web sites that provide digital entertainment content.
Initially, MixFactory.com(TM) is expected to serve as a point of content
distribution for independent music artists and labels with links to other
MixFactory(TM) sites. Ultimately, we expect the site will have extensive search
and browse capability that will guide the user to a wide range of digital
entertainment Websites and content. We also plan that the portal will provide a
custom-CD recording (also called, "burning") service for users who want to
download digital content but do not have the bandwidth and equipment to download
and burn their own CD at home.
We believe some of the specific benefits of the MixFactory(TM) model to the
content provider include:
O a new marketing platform for goods and services that drives Web traffic and
provides valuable customer information from both buyers and non-buyers;
O the opportunity to leverage marketable inventory that was previously
"dormant";
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O attractive operating efficiencies (e.g., no added inventory costs);
O targeted mailing lists;
O new advertising revenue opportunity on customized CDs;
O return hits to the content provider's Website direct from the customized
CD; and
O cross-promotion from the MixFactory.com(TM) Website
Additional possible sources of income for us from the MixFactory(TM) operation
include advertising revenues from the MixFactory.com(TM) Website and possible
revenue sharing from advertising on our partners' MixFactory(TM) sites. We also
plan to charge content providers a nominal fee for digitizing audio and video
assets above a specified level.
The MixFactory(TM) operation is designed to be a complete end-to-end E-commerce
solution, including production, payment processing and fulfillment. Once the
user confirms the content selections and completes a credit card transaction,
the selected titles are queued from storage to a Compact Disc Recordable
("CD-R") burning workstation. The customer's tracks are formatted into the
industry standard Red Book audio session along with an iso9660 (or data session
on a CD-ROM) and transferred together to the CD-R (disc). The automated
workstation transfers the complete CD-R to the CD printer where the
user-selected label is printed onto the surface of the CD-R.
In parallel with the transfer of the tracks to the CD-R, the custom packaging
materials are printed. That is, as soon as the job is queued for burning, the
printed job is also queued to the printer. Packing and shipping of the finished
product is currently the only manually operated step in the process. We are
currently investigating equipment that will automate the packing process.
MIXFACTORY.COM(TM) PORTAL SITE
We expect MixFactory.com(TM) to serve as a Web portal for digital multimedia
content, including music, movies, and game demos. We plan to design the site so
that consumers will be able to search and browse for content, select items to
include on their custom CD and purchase the CD. Once the CD is received, the
consumer will be able to view the information on the CD via his or her personal
computer and link back to related web pages through targeted links included on
the CD.
We believe the main consumer advantage derived from the MixFactory(TM) portal
site is the ability to receive high-quality, high-bandwidth digital assets
without waiting hours for the files to download. The content provider may also
derive advantages from the MixFactory(TM) site including, possibly, a new
distribution channel, a reliable consumer database/mailing list, as well as
return hits to the content provider's website.
We believe that from a technical standpoint, the custom-burning service that
MixFactory.com(TM) plans to provide is a unique application. The ability to
select files (from various Websites) to include on a custom CD, send that
information to the MixFactory(TM) server and then have a custom CD created and
shipped is a service that, to our knowledge, does not currently exist on the
Internet.
B. RESEARCH & DEVELOPMENT
Through the fiscal year ending June 30, 1999, we expended $343,000 on research
and development of its products and services. Between July 1, 1999 and September
30, 1999, we have expended approximately $108,000 on research and development.
We anticipate that our research and development costs will increase during
fiscal 2000.
Among our various activities, we are transitioning to a Unix-based manufacturing
system and are developing products and services which will deliver customized
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and client specific information to customers. We are continuing development of
both the newly released CDK 2.0 technology as well as MixFactory(TM), our
customized multimedia CD system.
Additionally, we are currently in the process of developing a new desktop
feature called a "software based communication module" that will enabling
marketers to send targeted electronic messages to consumers. We will distribute
the module through Web-connected multimedia CDs.
During fiscal 1999 and through September 30, 1999, we continued to enhance the
value of its product/service offerings through ongoing research and development
efforts. Specifically, we are engaged in the following internal projects:
O An enhanced version of CDK(TM) (1.5) that is Macintosh compatible. This
version was released on June 10, 1999.
O Development of the next generation of CDK(TM) software. The 2.0 version
feature list includes Macintosh compatibility, a reduced installation set
as well as improved video performance. This version was released on August
9, 1999.
O Efforts are underway to integrate the new Digtial Versatile Disc (commonly
referred to as "DVD") manufacturing capability into the MixFactory(TM)
system. This effort includes DVD-R writer to the robotic manufacturing
system and the integration of DVD authoring tools into the MixFactory(TM)
system.
Recognizing that high-speed Internet access will ultimately become available to
a wider audience, we are evaluating other opportunities to take advantage of
this technology.
5. SALES AND MARKETING
A. STRATEGY
Our business model is based on three revenue streams. The first revenue stream
is the sale of custom CDs to consumers through MixFactory.com(TM) and
MixFactory(TM) partner sites. We plan to make MixFactory(TM) technology
available to content providers enabling them to promote or sell their wares on a
customized basis. In exchange for a per disc manufacturing fee, the content
provider receives the right to utilize the Mix Factory(TM) services on their
website(s). This scenario also includes content licensed by our strategic
partners that is then sold through our Website. We expect to receive direct
revenue from the sale of custom CDs. The MixFactory agreements we currently have
in place including:
o Central Park Media (live site)
o Megaforce Records (live site)
o AtomicPop (scheduled to launch in January 2000)
o CollegeMusic.com (live site)
o Peterson's (launch TBD)
Sales will be made via the Web through client-specific MixFactory sites that
will be linked from MixFactory.com.
The second revenue stream is the sale of Web links and Web advertising on
MixFactory.com(TM) and MixFactory(TM) partner sites. Digitization fees
associated with preparation of partner content is expected to add to these
proceeds.
The third and final revenue stream is expected to be derived from development
and use fees for client-specific CDK(TM)s. Client-specific CDKs refer to our
core product, the Web-connected multimedia CD. Past clients for this product
(CDK 1.0) include Citibank, Pfizer, Montana Power Company, Sandals Resorts and
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the New York Knicks. We are currently developing other business in this sector
with the new version of the product, CDK 2.0.
We believe that the combination of custom-CD sales, Web advertising revenue and
client-specific CDK(TM) development fees provides a powerful, yet diverse,
revenue engine for us.
Of the three revenue streams, two are currently generating revenue --
development and use fees for client-specific CDKs and the sale of custom CDs. We
have placed significant emphasis on research and development during the first
eight months of 1999. From January 1999 to August 1999, we completed CDK 1.0
projects for companies including Pfizer and the Montana Power Company. The new
version of our product, CDK 2.0, has only been available since August. Since
that time, we have generated revenue through client-specific CDK 2.0 discs for
Maverick Records and WorldWest Communications. There are a number of CDK 2.0
projects that are currently pending. Custom CD sales, which are minimal at the
moment, are expected to increase as we sign up additional content providers. The
third revenue stream, sale of Web links and Web advertising has not yet been
achieved.
B. PLAN OF OPERATION
Effective August 1, 1999, we hired Tom Ross as President of the Entertainment
Group. Mr. Ross heads our planned office in Los Angeles, California which will
focus on business development within the entertainment industry. Our operational
plan for fiscal 2000 also includes: (1) moving custom, multimedia CD operations
(i.e., MixFactory(TM)) to a higher volume, lower rent production environment;
(2) forming strategic alliances with a digital video services company to meet
increasing demand for these services; and (3) signing up MixFactory(TM) partner
sites across various industries.
We plan to raise additional financing to fund our operations through sales of
our products and services as well as through private placements of equity
securities. We need to raise such financing to continue our operations. If we
are not successful, we may have to seek protection of the bankruptcy courts.
C. MATERIAL AGREEMENTS
We consider the following agreements to be material to our ability to provide
our customers with our products and services:
O Agreement between CDKnet, LLC and Peterson's, a division of
International Thomson Publishing, Inc., executed on March 19, 1999.
Under the agreement, Peterson's will promote and provide a link on its
relevant web sites, including CollegeQuest, to the Campus Video
Program. Peterson's will also provide CDKnet, LLC video content
received from participating institutions, which CDKnet, LLC will
digitize, store and make available through its Campus Video web site.
CDKnet, LLC, in turn, will: (1) provide the technology and service
necessary to digitize and store the campus tour videos, (2) process
orders, (3) set up and replicate the CDK with the videos selected by
the student, and (4) send the completed CDK to the student. Peterson's
shall be responsible for obtaining any and all rights, licenses,
clearances, releases, or other permissions necessary for the parties to
perform their respective duties under the agreement. The parties will
divide revenues from the sales pursuant to a schedule agreed upon in
the agreement.
O Agreement between CDKnet, LLC and Central Park Media Corporation dated
March 29, 1999 under which the parties will via the Internet create,
market and take orders for custom video-based CDs produced with CDK(TM)
technology. We will set up the Web site at no charge. In return,
Central Park Media will insert a MixFactory.com link on its Web sites
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in order to promote, market, and advertise MixFactory.com's Japanese
animation, Amine and/or other content. We will receive a per CD fee for
all sales. Central Park Media shall obtain any and all rights,
licenses, clearances, releases, or other permissions necessary for the
parties to perform their respective duties under the agreement.
O Agreement between CDKnet, LLC and CollegeMusic, Inc. entered into in
August 1999 under which the parties will develop a CollegeMusic
MixFactory Web site. The new Web site will enable CollegeMusic fans to
create a custom CD containing music videos as well as audio tracks. The
CD will also create integrated Web links to the CollegeMusic Web site
driving targeted traffic. The cost of the Web site is free to
CollegeMusic, however we will keep all proceeds from shipping and
handling of the CDs.
O Agreement between CDKnet, LLC and Megaforce Records dated September 1,
1999 to create a Megaforce Records Web site at no charge. The Web site
will use MixFactory technology to enable users to the site to create
customized and personalized multimedia CD. Consumers will choose from
Megaforce artist's video and audio content to create a customized CD.
We will receive the proceeds of the from shipping and handling as well
as a per CD fee.
O Agreement between CDKnet, LLC and DreamWorks Records Corporation in
October 1999 under which DreamWorks will license from CDKnet, LLC the
CDK technology, in order to produce Web-connected CDs containing
content supplied by DreamWorks. We will receive a fee per master CD.
DreamWorks shall be responsible for obtaining any and all rights,
licenses, clearances, releases, or other permissions necessary for the
parties to perform their respective duties under the agreement.
O Agreement between CDKnet, LLC and Atomic Pop LLC dated October 25, 1999
under which we will license to Atomic Pop the CDK technology in order
to produce Web-connected CDs containing content supplied by Atomic Pop.
We will receive a fee per master CD. Atomic Pop shall be responsible
for obtaining any and all rights, licenses, clearances, releases, or
other permissions necessary for the parties to perform their respective
duties under the agreement.
O Agreement dated November 16, 1999 with Asia Pioneer, Ltd., a Hong
Kong-based Internet technology company serving the Chinese-speaking
world population. The agreement grants Asia Pioneer the right to our
Web-connected multimedia CD technology as well as MixFactory(TM)
technology to offer customized multimedia CDs through Asia Pioneer's
new Web site beatasia.com. Beatasia.com is a comprehensive music
entertainment Web site and is known as "the heartbeat of Asia." Rights
extended in the agreement cover the worldwide Chinese speaking
community. In exchange for these rights, we will receive a 4.89% in
Asia Pioneer at the completion of the underlying services. The parties
also entered into a Subscription Agreement under which Asia Pioneer
will purchase shares of our common stock.
6. INTELLECTUAL PROPERTY RIGHTS
We rely on copyrights, trademarks, patents, trade secret laws and contractual
restrictions to establish and protect our proprietary rights in our services and
products. We do not have any patented technology at this time that would limit
competitors from entering our market. However, we have a patent application
pending for the basic CDK(TM) technology. The patent application covers the
format of a multisession, digital encoded recording medium navigable by an
Internet browser.
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Our intellectual property counsel informed us that some claims of this patent
application have been allowed and the issue fee has been paid. Issuance of the
patent is expected soon. The intellectual property counsel has filed a
continuation application to separate the earlier rejected claims into a new
application, which intellectual property counsel will continue to prosecute in
the U.S. Patent and Trademark Office.
No assurance can be given that a patent will issue or that if a patent does
issue that it will be broad enough to provide significant protection to us. Our
management believes that the steps taken by us to protect its intellectual
property are consistent with industry standards for online, custom CD companies
today.
We also rely on third-party software licenses, such as Microsoft Development
Network (MSDN), which provides software development tools. All employees and
contractors are required to and have entered into confidentiality and invention
assignment agreements. Suppliers, distributors and customers are also required
to enter into confidentiality agreements.
To date, we have received no notification that our services or products infringe
the proprietary rights of third parties. Third parties could however make claims
of infringement in the future. Any future claims that do occur may have a
material adverse affect on our business.
Our licensing agreement entered into on November 16, 1999 with Asia Pioneer,
Ltd., a Hong Kong-based Internet technology company serving the Chinese-speaking
world population. The agreement grants Asia Pioneer the right to our
Web-connected multimedia CD technology as well as MixFactory(TM) technology to
offer customized multimedia CDs through Asia Pioneer's new Web site
beatasia.com. Beatasia.com is a comprehensive music entertainment Web site and
is known as "the heartbeat of Asia." Rights extended in the agreement cover the
worldwide Chinese speaking community. In exchange for these rights, we will
receive a 4.89% in Asia Pioneer at the completion of the underlying services.
The parties also entered into a Subscription Agreement under which Asia Pioneer
will purchase shares of our common stock.
We have the following pending trademarks:
-- Pending
-------
TM: CDK
Serial No. 75/426,937 - Filed February 2, 1998
Our Docket No. 55716
-- Pending
-------
TM: MIX FACTORY
Serial No.
Our Docket No. 59365
7. EMPLOYEES
As of September 30, 1999, we had 13 full-time and 1 part-time employees. While
sourcing and recruiting appropriate technical personnel is often difficult and
competitive, we expect that our need to recruit additional personnel in the
future will not negatively affect our operations. Management believes that our
employee relations are good, and none of our employees are represented by a
collective bargaining unit.
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8. SPECIAL RISK FACTORS
You should carefully consider the following information which outlines special
market and other risk factors affecting us and our industry.
Our ability to continue operations is in question.
- --------------------------------------------------
Our history of operating losses raises substantial doubt about our ability to
continue operations. If we are unable to obtain significant additional financing
or otherwise obtain working capital to fund our operations, we may be obliged to
seek protection of the bankruptcy courts. In particular, our independent
certified public accountants have added an emphasis paragraph to their report on
our consolidated financial statements as of June 30, 1999 and for the year ended
June 30, 1999, and for the period October 1, 1997 (date of inception) to June
30, 1998, relating to factors that raise substantial doubt about our ability to
continue as a going concern. The factors cited by them include the following:
O continued losses
O use of significant cash in operations
O lack of sufficient funds to execute our business plan
Our unaudited financial statement for the period July 1, 1999 to September 30,
1999 reflect $23,663 in net revenues.
Our financial condition is highly uncertain and we need to obtain significant
- -----------------------------------------------------------------------------
additional financing to avoid bankruptcy.
- -----------------------------------------
As of the fiscal quarter ending September 30, 1999, our current assets were
significantly less than our current liabilities. Despite our continued ability
to raise capital through debt and equity financing, we need to raise significant
additional financing or otherwise obtain working capital to continue operations
through the next year. If we do not raise the necessary financing, we will
probably have to seek the protection of the bankruptcy courts and holders of our
common stock would stand to lose their entire investment.
Due to changes in our business, our historical financial information is of
- --------------------------------------------------------------------------
material relevance.
- -------------------
Our ability to generate revenue and income is unproven, and changes in our
business make an evaluation of our operating history difficult. Our Company must
be considered in light of the risks, expenses and difficulties encountered by
companies in the new and rapidly evolving market for online, custom CD
technology and related enhanced services. To address these risks, among other
things, we must (1) market our services and build our brand names effectively,
(2) provide scalable, reliable and cost-effective services, (3) continue to grow
our infrastructure to accommodate additional customers and increased use of our
products and services, (4) expand our channels of distribution, (5) continue to
respond to competitive developments, and (6) retain and motivate qualified
personnel.
Future sales may have a dilutive effect on future sales of securities.
- ----------------------------------------------------------------------
Future sales of substantial amounts of our common stock in the public market
could adversely affect the market price of our common stock and our stockholders
could experience dilution in their stock ownership and in the value of their
shares. Dilution is a reduction in the value of the holder's investment measured
by the difference between the purchase price of the shares of the common stock
and the net tangible book value of the shares after the purchase takes place. As
of December 14, 1999, we had 17,206,157 shares of common stock outstanding of
which 13,604,333 are restricted or affiliate shares ("Restricted Shares"). Those
Restricted Shares will gradually be converted to free-trading shares, the sale
12
<PAGE>
of which could have a material adverse effect on the future market price of our
common stock.
Our shares are traded on the so-called "Pink Sheets."
- -----------------------------------------------------
In January 1999, the National Association of Securities Dealers imposed
eligibility requirements, which were approved by the Commission, for trading on
the Over-the-Counter Bulletin Board. As a result of these new eligibility
requirements, we were required to register under the Securities Exchange Act of
1934 in order to be traded on the Over-the-Counter Bulletin Board. The phase-in
schedule for the new eligibility requirements provides that we must have met
these requirements on or before October 7, 1999, including filing and clearing a
registration statement under the Exchange Act with the Commission. We did not
meet this deadline and, as a result, were deleted from the Over-the-Counter
Bulletin Board on October 7, 1999. There continues to be a market for our stock
because we qualify for a Commission exemption that allows us to automatically be
quoted on the National Quotation Bureau's "Pink Sheets" until we meet the
eligibility requirements for the Over-the-Counter Bulletin Board. Trading on the
"Pink Sheets" will result in a less liquid market for our stock than would exist
on the Over-the-Counter Bulletin Board.
If we do not adapt to rapid technological change, our business will be adversely
- --------------------------------------------------------------------------------
affected.
- ---------
Our success is highly dependent upon our ability to develop new and enhanced
services, and related products that meet changing customer requirements. At
present, our two main products -- CDK(TM) and MixFactory(TM)-- are both
available and for sale to the public. Nonetheless, the market for our services
is characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new and enhanced software, service and related
product introductions.
To remain successful, we must be responsive to new developments in hardware and
semiconductor technology, operating systems, programming technology, and
computer capabilities. In many instances, the new and enhanced services,
products, and technologies are in the emerging stages of development and
marketing, and are subject to the risks inherent in the development and
marketing of new software, services, and products. We may not successfully
identify new service opportunities, and develop and bring new and enhanced
services and related products to market in a timely manner; there can be no
assurance that:
o any of these services, products or technologies will develop or will be
commercially successful, or that we will benefit from these
developments, or
o services, products, or technologies developed by others will not render
our services, and related products noncompetitive or obsolete.
If we are unable, for technological or other reasons, to develop and introduce
new services and products in a timely manner in response to changing market
conditions or customer requirements, or if new or enhanced software, services,
and related products do not achieve a significant degree of market acceptance,
our business, operating results, and financial condition would be materially
adversely affected.
We face intense competition in the CD development market.
- ---------------------------------------------------------
Portions of the online, custom CD market are becoming increasingly competitive.
We expect in the coming years to face significant competition in all of our
markets. We expect new companies will emerge and compete for the same customers.
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<PAGE>
We expect competition to increase from both established and emerging companies
and that this increased competition will result in reduced costs which could
materially adversely affect our business, operating results, and financial
condition. Moreover, our current and potential competitors, some of whom have
significantly greater financial, technical, marketing, and other resources than
we do, may respond more quickly than we do to new or emerging technologies or
could expand to compete directly against us. Accordingly, it is possible that
current or potential competitors could rapidly acquire significant market share.
There can be no assurance that we will be able to compete against current or
future competitors successfully or that competitive pressures faced by us will
not have a material adverse effect on our business, operating results, and
financial condition.
Government regulation and legal uncertainties may affect our business.
- ----------------------------------------------------------------------
Only a small body of laws and regulations currently apply specifically to
content of, access to, or commerce on, the Internet. It is possible that laws
and regulations with respect to the Internet may be adopted by governments in
any of the jurisdictions in which we can sell our products, covering issues such
as user privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. The nature of future legislation and the
manner in which it may be interpreted and enforced cannot be fully determined
and, therefore, legislation could subject us and/or our customers to potential
liability, which in turn could have a material adverse effect on our business,
results of operations and financial condition.
In addition, applicability to the Internet of existing laws governing issues
such as property ownership, copyright and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast majority
of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies. Changes to these laws intended to
address these issues could create uncertainty in the marketplace that could
reduce demand for our services or increase the cost of doing business as a
result of costs of litigation or increased service delivery costs, or could in
some other manner have a material adverse effect on our business, results of
operations and financial condition.
And, because our services are available over the Internet virtually worldwide,
and because we facilitate sales by our customers to end users located in
multiple provinces, states and foreign countries, these jurisdictions may claim
that we are required to qualify to do business as a foreign corporation in each
of the state/province or that we have a permanent establishment in each of the
foreign countries. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for failure to qualify and could result in the inability to enforce
contracts in these jurisdictions. Any new legislation or regulation, or the
application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could have a material adverse effect on our
business, results of operations and financial condition.
We are dependent on certain key personnel.
- ------------------------------------------
Our success depends to a significant degree upon the continued contributions of
CDKnet's key management, marketing, service and related product development and
operational personnel, including its Chairman, Chief Executive Officer, Chief
Financial Officer and Secretary, Steven A. Horowitz; its President, Shai
Bar-Lavi; its Executive Vice President of Entertainment, Michael W. Jolly; its
President of the Entertainment Group, Tom Ross; and its Executive Vice President
and General Manager, Russell A. Kern. Our operations could be affected adversely
if, for any reason, any of these officers ceased to be active in our management.
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<PAGE>
Effective December 17, 1999, our Senior Vice President of Software Development
and Chief Technical Officer, Keith Fredericks, resigned to pursue other
opportunities. We are currently in contract negotiations with his replacement.
We expect to finalize an agreement with him in the near future. In the meantime,
we do not expect Mr. Fredericks' departure to have a material long-term effect
on our operations.
We maintain proprietary nondisclosure and non-compete agreements with some
employees, contractors and collaborators/partners. We do not have key person
life insurance policies on directors, executive officers or key employees.
Competition for employees in the multimedia technology industry is intense, and
there can be no assurance that we will be able to attract and retain enough
qualified employees. If our business grows, it may become increasingly difficult
to hire, train and assimilate the new employees needed. Our inability to retain
and attract key employees could have a material adverse effect on our business,
operating results, and financial condition.
We may have difficulty in management of growth.
- -----------------------------------------------
We may experience a period of rapid growth which could place a significant
strain on its resources. Our ability to manage growth successfully will require
us to continue to improve our operational, management and financial systems and
controls as well as to expand our work force. A significant increase in our
customer base would necessitate the hiring of a significant number of additional
customer service care and technical support personnel as well as computer
software developers and technicians, qualified candidates for which, at the
present time, are in short supply. We must manage relationships with a growing
number of third parties as we seek to complement our service offerings and
increase its sales efforts. If our management is unable to manage growth
effectively, hire needed personnel, expand and adapt our computer infrastructure
or improve our operational, management, and financial systems and controls, our
business, operating results, and financial condition could be materially
adversely affected.
Product defects can adversely affect our business.
- --------------------------------------------------
The software products utilized by us could contain errors or "bugs" that could
adversely affect the performance of services or damage a user's data. In
addition, as we increase our share of the multisession, i.e., both audio and
video, CD market, software reliability and security demands will increase.
Attempts to limit our potential liability for warranty claims through
limitation-of-liability provisions in its customer agreements. There can be no
assurance that the measures taken by us will prove effective in limiting our
exposure to warranty claims. Despite the existence of various security
precautions, our computer infrastructure may be also vulnerable to viruses or
similar disruptive problems caused by our customers or third parties gaining
access to our processing system.
We have limited protection of proprietary technology and there is a risk of
- ---------------------------------------------------------------------------
third party claims.
- -------------------
We regard some of our services as proprietary and rely primarily on a
combination of patent, copyright, trademark and trade secret laws, employee and
third party non-disclosure agreements, and other intellectual property
protection methods to protect our services. Existing intellectual property laws
afford only limited protection, and it may be possible for unauthorized third
parties to copy our services and related products or to reverse engineer or
obtain and use information that we regard as proprietary. There can be no
assurance that our competitors will not independently develop services and
related products that are substantially equivalent or superior to ours.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
This Form 10-SB and the documents incorporated by reference contain
forward-looking statements based on current expectation, estimates and
projections about our industry, management's beliefs and assumptions made by
management. All statements, trends, analyses and other information contained in
this report relative to trends in our financial condition and liquidity, as well
as other statements, including, but not limited to, words such as "anticipate,"
"believe," "plan," "intend," "expect," "predict," and other similar expressions
constitute those statements. These statements are not guarantees of future
performance and are subject to risks and uncertainties that are difficult to
predict. Accordingly, actual results may differ materially from those
anticipated or expressed in the statements. Potential risks and uncertainties
include, among others, those set forth below. See "Risk Factors" above.
Particular attention should be paid to the cautionary statements involving our
limited operating history, the unpredictability of its future revenues, the
unpredictable and evolving nature of its business model, the competitive online,
multimedia CD industry and the risks associated with capacity constraints,
systems development, management of growth and business expansion, as well as
other risk factors.
1. GENERAL
We expect to receive funds from the sale of our products and services, including
licensing agreements such as the deal with Asia Pioneer as well as private
financing. We have also funded our operations through equity financing and
convertible debt financing and have had no lines of credit or other similar
credit facility available to us. Our recent efforts to raise capital through
equity financing have been successful, providing near-term operating capital. We
intended to reduce operating expenses through: (1) reallocating resources to
development of the desktop, direct marketing application which is expected to
exist as a separate operating entity, (2) our continued policy of outsourcing of
production, (3) reducing marketing costs, and (4) reducing payroll.
Additionally, we have successfully accomplished the initial stages of our fiscal
2000 operating plan with the hiring of Tom Ross to head our Entertainment Group
in Los Angeles, California. Nevertheless, we continue to rely on our ability to
raise money through equity financing to finance all of our business endeavors.
To date, we have focused our funds on the development of CDK(TM) products
(including CDK(TM) 1.0, CDK(TM) 2.0, and Gameplayer 2.0) and our new E-commerce
facility MixFactory.com(TM).
Our current business development efforts include both full-time employees as
well as outside consultants. Consultants are compensated on a performance basis.
From a marketing standpoint, we continue to 1) maintain a corporate Web site
which solicits feedback from potential clients; 2) appear at relevant trade
shows and seminars; and 3) retain a public relations firm to service corporate
announcements to the press. In the near term, we will continue to focus on
generating revenue from the sale of client-specific CDKs as well as MixFactory
custom CD services. Moving forward, we expect to place increasing emphasis on
the desktop, direct marketing application and the Communications Module which is
in development.
Our history of operating losses continues to raise doubt about our ability to
continue operations although success at recent financing efforts and a new
licensing agreement with Asia Pioneer has somewhat lessened that doubt. The Asia
Pioneer agreement provides us with $150,000 infusion of capital each month for
six months until May 2000 and, therefore, serves as a liquidity and capital
resource. Additionally, the parties have entered into a technology and license
agreement which gives us a 4.89% interest in Asia Pioneer at the completion of
the underlying services in exchange for a license to use certain CDK(TM)
technology. Our ownership interest in Asia Pioneer can be sold in the event we
need a cash infusion.
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<PAGE>
However, if we are unable to obtain significant additional financing or
otherwise obtain working capital to fund our operations, we may be obliged to
seek protection of the bankruptcy courts. Our independent certified public
accountants have added an emphasis paragraph to their report on our consolidated
financial statements as of June 30, 1999 and for the year ended June 30, 1999,
and in the period October 1, 1997 (date of inception) to June 30, 1998, relating
to factors that substantial doubt about our ability to continue as a going
concern. The factors cited by them include the following:
O continued losses
O use of significant cash in operations
O lack of sufficient funds to execute our business plan
During the period July 1, 1999 to September 30, 1999, we raised a total of
$310,000 from the following private placement of equity:
O On August 9, 1999, we raised $155,000 from Y2G.com, Inc. through the
issuance of 216,000 shares of common stock. On September 8, 1999, we
sold Y2G an additional 116,000 shares of common stock for $155,000.
During the period October 1, 1999 through November 16, 1999, we raised a total
of $1,037,500 from the following placement of equity:
O On November 16, 1999, we entered into a Subscription Agreement with
Asia Pioneer where we raised $100,000 from Asia Pioneer through the
issuance of 200,000 shares of common stock, along with six allotments
to purchase an additional 300,000 shares of common stock per month at
$150,000 per allotment. The allotments will be fulfilled in May 2000.
The parties also entered into a Technology and License Agreement on the
same day.
O On November 1, 1999, we raised $500,000 from Erno and Rachel Bodek
through the issuance of 1,000,000 shares of common stock, along with
30-month Warrants to purchase an additional 200,000 shares of common
stock at $1.25 per share, and an option to purchase another 2,000,000
shares of common stock at $.50 per share which shall expire on December
31, 1999.
O On November 2, 1999, we raised $437,500 through the issuance of
1,250,000 shares of common stock to four investors (The Gross
Foundation, Inc., Fox Distribution, Inc., Steven A. Horowitz, and
Michael Sonnenberg) along with two-year warrants to these investors to
purchase an additional 125,056 shares of common stock.
During fiscal 1999, we raised a total of $2.1 million from the following private
placements of debt and equity:
O Between September 4, 1998 and January 21, 1999, we raised $600,000
through the issuance of $600,000 in 6% Subordinated Convertible
Debentures and five-year warrants to purchase 60,000 shares of common
stock at $3.00 per share.
O On February 2, 1999, we raised $1,500,000 through the issuance of
$1,500,000 in 5.75% Subordinated Convertible Debentures and four-year
warrants to purchase 100,000 shares of common stock at $1.75 per share.
During fiscal 1998, we raised a total of $224,986 from the following private
placements of debt and equity:
O On May 21, 1998, our predecessor, International Pizza Group, issued
2,999,985 common shares as consideration for $224,986 as part of a
private placement. We issued 7,300,363 common shares in connection with
the acquisition of a combined 73.85% of the equity interests in CDKnet,
LLC.
17
<PAGE>
The proceeds from these issues have and will be used to (i) continue our ongoing
operation, (ii) development of CDK(TM), Gameplayer, and MixFactory.com(TM)
product lines, and (iii) to repay our debt.
RESULTS OF OPERATIONS - JULY 1, 1999 TO SEPTEMBER 30, 1999
- ----------------------------------------------------------
During the quarter ending September 30, 1999, we incurred a net loss of
$1,176,879 on revenues of $23,663 compared to a net loss of $1,354,188 on
revenues of $158,393 in the prior period ended September 30, 1998. Revenues
declined $134,730 in the current period because our focus shifted to the
enhancement of our core technologies, such as the perfection of our
MixFactory(TM) technology and CDK(TM) version 2.0 and Macintosh compatible
CDK(TM) version 1.5, as well as the penetration of core markets. From July 1,
1999 to September 30, 1999, we have expended approximately $108,000 on research
and development.
RESULTS OF OPERATIONS - JUNE 30, 1999 COMPARED TO THE PERIOD ENDED OCTOBER 1,
- -----------------------------------------------------------------------------
1997 TO JUNE 30, 1998.
- ----------------------
During the fiscal year ending June 30, 1999, we incurred a net loss of
$6,147,600 on revenues of $474,344 compared to a net loss of $1,184,475 on
revenues of $616,137 in the prior period ended June 30, 1998. Revenues resulted
from sales of products from our CDKnet product line. Revenues declined from
$616,137 in the prior period because our financial condition restricted its
ability to promote its products. Cost of revenues in fiscal 1999 were
approximately $288,762 or 61% compared to $415,769 or 67% in the prior period.
We believe this minor improvement is within normal variances and is not
material.
Research and development expenses incurred during the year ended June 30, 1999
related to the continued new development and enhancement of the CDKnet product
line, the creation of MixFactory.com(TM), and making the E-commerce venue
operate. Selling, general and administrative expenses increased from $1,580,478
in the prior period to $3,257,551 principally because the prior period was only
nine months and because of material increases in payroll, consulting and
professional fees related to expansion of our business, research and development
activities and operating as a public company.
Depreciation and amortization expenses increased from $133,776 in the prior
period to $1,981,130 principally because of amortization of goodwill related to
the purchase of minority interests of Kelly Music and various shareholders of
Kelly Music as well as increases due to increases in fixed assets.
Other significant expenses incurred during this period arose in the form of the
fair value charges for stock options and warrants granted principally for
consulting and legal services of $450,870, include in selling, general and
administrative expenses, and the discount on convertible debentures and other
loans of $1,038,008.
At year end June 30, 1999, cash amounted to $231,347 and current liabilities
were $829,051. We do not have sufficient funds to finance operations for the
next year. We expect to finance our operations through revenues from sales of
our products and services and through private placements of equity and debt
securities. If we are unable to raise additional financing, we may be unable to
continue operations.
In March 1999, we received approval by the United States Patent Office for
certain claims made in our patent application for CDK(TM) technology. Subsequent
to year ended June 30, 1999, a submission has been made to the United States
Patent Office for reconsideration of the unapproved claims and filing
publication and perfection of our claims.
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We are now actively marketing and beginning to sell CDKnet products and have
launched the first of several MixFactory(TM) sites.
RESULTS OF OPERATIONS - OCTOBER 1, 1997 TO JUNE 30, 1998.
- ---------------------------------------------------------
From October 1, 1997 (date of inception) to June 30, 1998, we incurred a net
loss of $1,184,475 on revenues of $616,137 at year ended June 30, 1998, cash
amounted to $469,267 and current liabilities totaled $443,355.
FACTORS AFFECTING FUTURE RESULTS.
- ---------------------------------
We do not provide forward looking financial information. However, from time to
time statements are made by employees that may contain forward looking
information that involve risks and uncertainties. In particular, statements
contained in this registration statement that are not historically containing
predictions and are made under the Safe Harbor Corporate Private Sector
Litigation Reform Act of 1995. Our actual result of operations and financial
condition have varied and may in the future vary significantly from those stated
in any predictions. Factors that may cause these differences include without
limitation the risk, uncertainties and other information discussed within this
registration statement, as well as the accuracy of our internal estimate of
revenue and operating expense levels.
We face a number of risk factors which may create circumstances beyond the
control of management and adversely impact the ability to achieve our business
plan. The key risk factors are our financial condition which is discussed in
under "General" above as well as those set forth in "Item 1. Description of
Business and Special Risk Factors" above.
YEAR 2000 COMPLIANCE
- --------------------
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish 21st
Century dates from 20th Century dates. These date code fields will need to
distinguish 21st Century dates from 20th Century dates to avoid system failures
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced in order to comply with the
"Year 2000" or "Y2K" requirements.
As of April 23, 1999, we completed the process of determining whether or not our
products, our internal systems, computers and software, and the products and
systems of our critical vendors and suppliers are Year 2000 compliant. The cost
associated with this review has been minimal, primarily because we have utilized
internal personnel to complete the review, and because our systems are
relatively new. System 1.0 was tested on Windows 95 operating system and it was
found to be fully Y2K compliant. System 2.0 was specifically designed without
date dependent code and will not be affected by Y2K. The CDK(TM) 2.0 product was
tested and found to be Y2K compliant on September 15, 1999.
Given these results of its Year 2000 review, we believe that it might experience
some disruptions in some of its peripheral operating systems or with
non-critical vendors but will otherwise be unaffected. We believe that
sufficient redundancy exists in its systems and vendor relationships to minimize
any substantial detrimental effects on the Company's operations and financial
position.
Although we believe that its Year 2000 review has identified all material Year
2000 issues, there can be no absolute assurance that the Company identified and
resolved all of these issues. If we discover Year 2000 problems in the future,
it may not be able to develop, implement, or test remediation or contingency
plans in a timely or cost-effective manner.
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DESCRIPTION OF PROPERTY
-----------------------
Our executive office is located at 595 Stewart Avenue, Suite 710, Garden City,
New York 11530. The office space is donated to us by the law firm of Horowitz,
Mencher, Klosowski & Nestler, P.C., of which Steven Horowitz (our Chairman,
Chief Executive Officer, Chief Financial Officer and Secretary) is managing
partner. Our executive offices may be reached at (516) 222-8800.
Our manufacturing, research and development is conducted out of CDKnet, LLC's
office located at 250 West 57th Street, New York, New York 10019. The New York
City office consists of approximately 4,825 square feet, which is subleased from
Kelly Music pursuant to a month-to-month arrangement that will expire on April
30, 2000. The annual lease rate is approximately $135,600. This office may be
contacted by telephone at 212-547-6050. All property is insured to industry
standards.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN NON-MANAGEMENT BENEFICIAL OWNERS
The following are the Company's non-management, beneficial owners of more than 5
percent of the outstanding shares amount of its common stock as of December 14,
1999:
Name and Address of Amount and Nature Percent of
Beneficial Stockholder of Beneficial Ownership Class (1)(2)
- ---------------------- ----------------------- ------------
Kelly Music & Entertainment Corp. 1,728,745 10.05%
250 West 57th Street
New York, NY 10019
Alvin Pock 936,727 5.5%
595 Stewart Avenue
Garden City, New York 11530
Gary Segal 913,251 5.4%
6007 Ft. Hamilton Parkway
Brooklyn, New York 11219
Michael Sonnenberg (5) 1,005,020 5.84%
595 Stewart Avenue
Garden City, New York 11530
Casa di Cura Dr. Pederzoli Spa (4) 2,500,000 12.69%
c/o George Sandhu
The International Investment Group
17 State Street, 18th Floor
New York, New York 10004
Erno and Rachel Bodek (6) 3,200,000 16.49%
c/o Victoria Sales Corporation
541 West 21st Street
New York, New York 10011
Beneficial Owners as a group (3) 8,652,897 55.97%
- ------------------------------------------
Notes to table of non-management beneficial shareholders
20
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(1) There were 17,206,157 shares of common stock outstanding as of
December 14, 1999.
(2) Except as described in footnote (3) below, the persons named in the
table have sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by them, subject to the
information contained in this table and these notes.
(3) As set forth in this table, there are seven individuals or entities who
are not members of our management each of whom individually owns 5% or
more of our common stock. In addition to these individuals, there is a
large group of individuals who constitute beneficial owners of our
common stock pursuant to the terms of a Stockholders Agreement dated
May 7, 1998. Under the Stockholder's Agreement, its 35 signatories are
required to vote their respective shares of stock identified in the
Agreement as a class under certain circumstances. The names of the 35
signatories and their respective ownership interests are set forth in
Exhibit 99.1 of this document. As a result, the signatories as a group
may constitute beneficial owners of our common stock although only a
few individually own more than 5% of our common stock. The voting and
certain other provisions of the Shareholders Agreement have been
rescinded by 16 of the signatories to the Shareholders Agreement. We
believe it is the position of the signatories to the Shareholders
Agreement that they do not constitute a "group" as such term is defined
under Rule 13(d)(3) promulgated under the Securities Exchange Act of
1934, as amended. The rescindment will not become effective until all
35 shareholders execute the Stockholders' Agreement.
(4) Represents shares issuable upon the conversion of preferred stock to
common stock at $.60 per share. See Note 6 of the attached Financial
Statements.
(5) Includes 14,285 warrants to purchase our common stock at $.75 per
share.
(6) Includes 2,000,000 30-month warrants to purchase our common stock at
$1.25 per share and options to purchase 1,000,000 shares of common
stock at $.50 per share expiring on December 31, 1999.
SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
The following table sets forth information with respect to the share ownership
of our common stock by its officers and directors, both individually and as a
group, and by the record and/or beneficial owners of more than 5 percent of the
outstanding amount of such stock as of December 14, 1999:
SHARES OF COMMON STOCK OWNED BENEFICIALLY AND OF
RECORD BY MANAGEMENT
Title of
Class of
Stock Name and Address Amount and Nature Percent of
Owned(1)(2) of Beneficial Owner of Beneficial Ownership Class
- ----------- ------------------- ----------------------- -----
Common Steven A. Horowitz 2,873,792(3) 15.98%
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
21
<PAGE>
Common Andrew J. Schenker 73,367(4) *
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Anthony J. Bonomo 50,000(5) *
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Shai Bar-Lavi 750,000(6) 4.18%
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Keith A. Fredericks 10,000(7) *
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Michael W. Jolly 10,000(7) *
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Russell A. Kern 143,333(8) *
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Tom Ross 150,000(9) *
1480 San Reno Drive
Pacific Palisades, CA 90272
All officers and directors 4,060,492(10) 21.26%
as a group (8 persons)
- ---------------------------------------
Notes to table of beneficial shareholders
*Denotes less than 1%
(1) There were 17,206,157 shares of common stock outstanding as of December
14, 1999. This table does not include options to purchase 10,000 shares
of our common stock under our 1998 Equity Incentive Plan held by Mr.
Keith Fredericks, formerly our Sr. Vice President of Software
Development and Chief Technical Officer. Mr. Fredericks resigned
effective December 17, 1999.
(2) Except for the limitations set forth in the Shareholders Agreement
dated May 7, 1998, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to the information contained in
this table and these notes. See Exhibit 4.3.
(3) This table includes options to purchase 750,000 shares of the Company's
common stock under the Plan, and 28,571 two-year Warrants to purchase
common stock. Mr. Horowitz is our Chairman of the Board of Directors,
Chief Executive Officer, Chief Financial Officer and Secretary. The
total includes 750,000 stock options granted under our 1998 Equity
Incentive Plan. This figure does not include 150,000 warrants issued to
Horowitz, Mencher, Klosowski & Nestler P.C., a law firm controlled by
22
<PAGE>
Mr. Horowitz, in connection with a loan and loan extension. On November
16, 1999, Mr. Horowitz recinded, for no future consideration, 750,000
options (granted on August 1, 1999 and expiring on July 31, 2004) to
purchase shares of our common stock at $1.00 per share.
(4) This table includes options to purchase 50,000 shares of our common
stock under the Plan. Mr. Schenker is one of our directors.
(5) This table includes options to purchase 50,000 shares of our common
stock under the Plan. Mr. Bonomo is one of our directors.
(6) This table includes warrants to purchase 750,000 shares of our common
stock under the Plan. Mr. Bar-Lavi is our President.
(7) This table includes options to purchase 10,000 shares of our common
stock under the Plan. Mr. Jolly is our Executive Vice President,
Entertainment Group.
(8) This table includes options to purchase 143,333 shares of our common
stock under the Plan. Mr. Kern is our Executive Vice President and
General Manager.
(9) This table includes options to purchase $150,000 shares of our common
stock pursuant to his employment agreement. Mr. Ross is President of
the Entertainment Group.
(10) Includes all stock options (1,163,333 shares of common stock) and
1,528,571 Warrants owned by officers and directors.
23
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
The following sets forth our directors and executive officers and key employees
as of December 14, 1999, their respective ages, the year in which each was first
elected or appointed a director, and any other office in the Company held by
each director.
NAME OF DIRECTOR/ AGE POSITION HELD DATE ELECTED
POSITION HELD OR APPOINTED
- --------------------------------------------------------------------------------
Steven Horowitz 40 Director, Chairman, May 1998
CEO, CFO and Secretary
Shai Bar-Lavi 40 President August 1999
Michael W. Jolly 31 Executive Vice President, October 1997
Entertainment Group
Russell A. Kern 33 Executive Vice President, April 1998
General Manager
Tom Ross 51 President, Entertainment August 1999
Group
Andrew J. Schenker 39 Director May 1998
Anthony J. Bonomo 40 Director May 1998
FAMILY RELATIONSHIPS
--------------------
No family relationship exists between or among any of our directors, executive
officers, and significant employees, as defined below, or any person
contemplated to become such.
24
<PAGE>
BUSINESS EXPERIENCE
-------------------
STEVEN A. HOROWITZ, ESQ. - Chairman, Chief Executive Officer, Chief Financial
Officer and Secretary
Mr. Horowitz has served as Chairman of the Board of Directors, Chief Executive
Officer, and Secretary of the Company since May 1998, has served as Chief
Financial Officer since October 1999, and has served as the managing member of
Creative Technology and CDKnet since October, 1998 and November, 1998,
respectively. He is the founding shareholder of Horowitz, Mencher, Klosowski, &
Nestler, P.C., a Garden City, New York-based law firm with offices in
Huntington, New York and New York City. Mr. Horowitz holds a degree from Hofstra
University School of Law and a Master of Business Administration degree in
Accounting from Hofstra University School of Business. Mr. Horowitz is an
Adjunct Professor of Law at Hofstra University School of Law. In 1986 and 1987,
Mr. Horowitz was Director of Taxes for Symbol Technologies, Inc., a New York
Stock Exchange corporation. Mr. Horowitz is a member of the American Bar
Association and the New York State Bar Association.
ANTHONY J. BONOMO - Director
Mr. Bonomo has served as a director of the Company since June, 1998. He has,
since 1986, served in various executive capacities at Administrators for the
Professions, Inc., the Physicians' Reciprocal Insurers, one of the largest
medical malpractice carriers in New York States, including Executive Vice
President and Chief Operating Officer from 1993 to 1995 and President from 1995
to the present. Mr. Bonomo is a member of the Bar of the State of New York and
serves as a board member of several charitable associations and foundations.
ANDREW J. SCHENKER - Director
Mr. Schenker became a director of the Company in May, 1998. He is the Director
of Finance for North America Sales and Services Division at Symbol Technologies,
Inc. a manufacturer and world leader in bar-code based data transaction systems
based in Holbrook, New York. Since November 1986, he has held several financial
management positions at Symbol Technologies, Inc., most recently at the position
described above. He is also the trustee for several trusts and a public
foundation, as well as an Executive Committee member of the Smithtown School
District Industry Advisory Board.
SHAI BAR-LAVI - President
Having joined CDKnet as its President in August 1999, Mr. Bar-Lavi is directing
the CDKnet's business operations and development plans. From April 1999 to July
1999, Mr. Bar-Lavi served as a consultant to the Company. Prior to joining
CDKnet, Mr. Bar-Lavi served as Chief Operating Officer of the Hungarian
Broadcasting Corporation, a publicly traded company, from January 1998 to
December 1998. From July 1990 to December 1997, he served as President of
Topline Communications. Mr. Bar-Lavi's experience with computers goes back to
the early '80s where he ran Sagy Computer Services, a mainframe-based company
providing payroll and accounting services.
MICHAEL W. JOLLY - Executive Vice President, Entertainment Group
Mr. Jolly is responsible for identifying and developing business opportunities
and strategic partnering opportunities within the entertainment industry. Mr.
Jolly joined the Company in November 1997.
25
<PAGE>
Prior to joining CDKnet, Mr. Jolly served as Vice President of Marketing and
Secretary at Kelly Music and Entertainment Corp. (creator of CDK(TM) Technology)
from October 1995 to November 1997. There he developed music and entertainment
products and built a significant amount of music, movie and TV industry contact
relationships. From August 1991 to October 1995, Mr. Jolly held positions at
Cigna Financial Advisors in which he developed programing and packaging products
in the network programming and in-flight entertainment markets as well as
serving as a Financial Advisor where he provided financial, statistical and
strategic planning to businesses. Mr. Jolly has a B.S. in Marketing from Hofstra
University.
RUSSELL A. KERN - Executive Vice President, General Manager
Mr. Kern joined CDKnet in April 1998 and is responsible for overseeing the
CDKnet's daily operations and identifying strategic alliance/business building
opportunities. Further, Mr. Kern works with the Business Development team and
the Technical team to ensure consistent branding is maintained through all
communications and product offerings.
Prior to joining CDKnet, Mr. Kern served from November 1995 to April 1998 as
Director of Strategic Planning at Poppe Tyson (now ModemMedia.PoppeTyson),
developing successful Web initiatives for a range of clients including IBM and
Minolta. From January 1994 to November 1995, he was Marketing Director at
Marketing Resources of America. He also served five years with BBDO Advertising
planning for clients such as Visa USA, Pepsi-Cola and Campbell's. In addition,
he has several years experience in direct-response marketing, developing DRTV,
print and direct-mail programs. Mr. Kern has a B.S. in Marketing from the
Wharton School at the University of Pennsylvania.
TOM ROSS - President, Entertainment Group
Mr. Ross, joined CDKnet in August 1999 and is responsible for identifying
business opportunities within the entertainment, music and film industries and
securing partnership agreements. From December 1998 to July 1999, Mr. Ross
served as a consultant. Prior to that, Mr. Ross was a partner of Creative
Artists Agency ("CAA") from January 1984 to November 1998.
As a founder, architect and chief of the music department at CAA, Mr. Ross
worked with some of the most celebrated artists in music: Jefferson Airplane,
Crosby, Stills & Nash, Tim McGraw, Eric Clapton, Bob Dylan, Madonna, Janet
Jackson, Reba McEntire, Bette Midler and Fleetwood Mac, to name a few. Before he
left CAA late last year, many considered him the top agent in the music
business. In his 30-year career, he had the reputation of fighting on behalf of
his clients' financial interests while enabling them to present their art
without compromise.
26
<PAGE>
EXECUTIVE COMPENSATION
----------------------
1. EXECUTIVE OFFICER COMPENSATION
The following table sets forth all compensation paid by us as of fiscal year
ended June 30, 1999, to all of our executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------- --------- ----------------------------------- ------------------------------------------------
Annual Compensation9 Long-Term Compensation
----------------------------------- ------------------------------------------------
Awards Payouts
------------------------- ----------------------
Securities
Other Under- All Other
Annual Restricted lying Compen-
Name And Compen- Stock Options/ LTIP sation
Principal Position Year Salary Bonus sation Award(s) SARs Payouts ($)
($) ($) ($) ($) (#) ($) (i)
(a) (b) (c) (d) (e) (f) (g) (h)
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven A. Horowitz1 FY99 7,500 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 7,500 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Robert Kelly2 FY99 95,192.38 -- 39,600(7)
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 80,769.30 -- 39,600(7)
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Ronald Leong3 FY99 147,534.98 -- 8,400(8)
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 75,000.00 -- 8,400(8)
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Michael W. Jolly4 FY99 69,615.38 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 54,250.00 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Keith A. Fredericks5 FY99 57,499.91 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 27,885.00 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Russell A. Kern6 FY99 79,999.92 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 12,923.06 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
</TABLE>
1 Mr. Horowitz is our Chairman, Chief Executive Officer, Chief Financial
Officer, and Secretary. Mr. Horowitz is paid as one of our consultants
because he does not keep regular hours, decides his own schedule and
otherwise fits the characteristics of a consultant as promulgated under the
relevant sections of the Internal Revenue Code and Regulations and case law.
2 Mr. Kelly was formerly President of CDKnet, LLC. His tenure ended on
March 1999.
27
<PAGE>
3 Mr. Leong was our former President and his services ended on May 31, 1999.
4 Mr. Jolly is our Executive Vice President, Entertainment Group.
5 Mr. Fredericks resigned as our Senior Vice President and Chief Technical
Officer effective December 17, 1999.
6 Mr. Kern is our Executive Vice President, General Manager.
7 This figure represents compensation for an apartment for Mr. Kelly.
8 This figure represents compensation for an automobile allowance for Mr.
Leong. Mr. Leong left the Company in March 1999.
9 In fiscal 2000, each of the named officers are to receive salary compensation
as follows:
Steven A. Horowitz $1,500 per week
Shai Bar-Lavi $6,250 bi-monthly
Michael W. Jolly $3,541.67 bi-monthly
Russell A. Kern $3,333.33 bi-monthly
Tom Ross $150,000 annually
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
- -------------------------- ------------------ --------------------- -------------------- -------------------
Percent Of
Number Of Total Options/
Securities SARs Granted
Underlying To Employees Exercise Or
Options/SARs In Fiscal Base Price
Name Granted (#) Year ($/Sh) Expiration Date
(a) (b) (c) (d) (e)
- -------------------------- ------------------ --------------------- -------------------- -------------------
- -------------------------- ------------------ --------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Steven A. Horowitz 750,000 $ .60 5/20/08
------------------ --------------------- -------------------- -------------------
------------------ --------------------- -------------------- -------------------
Michael W. Jolly 10,000 $1.00 12/01/03
------------------ --------------------- -------------------- -------------------
------------------ --------------------- -------------------- -------------------
Russell A. Kern 10,000 $1.00 12/01/03
------------------ --------------------- -------------------- -------------------
------------------ --------------------- -------------------- -------------------
Ronald Leong 175,000 $ .80 6/07/01
------------------ --------------------- -------------------- -------------------
------------------ --------------------- -------------------- -------------------
Robert Kelly 0 0 --
------------------ --------------------- -------------------- -------------------
------------------ --------------------- -------------------- -------------------
Keith Fredericks (1) 10,000 $1.00 12/1/03
- -------------------------- ------------------ --------------------- -------------------- -------------------
</TABLE>
- -------------------
(1) Mr. Fredericks resigned as our Senior Vice President and Chief Technical
Officer effective December 17, 1999.
28
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
- -------------------------- -------------- -------------- ------------------- -------------------
Number Of
Securities Value Of
Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Options/SARs Options/SARs
On Value At FY-End (#) At FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- -------------------------- -------------- -------------- ------------------- -------------------
- -------------------------- -------------- -------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Steven A. Horowitz 0 0 750,000/0 0/0 (2)
-------------- -------------- ------------------- -------------------
-------------- -------------- ------------------- -------------------
Michael W. Jolly 0 0 10,000/0 0
-------------- -------------- ------------------- -------------------
-------------- -------------- ------------------- -------------------
Russell A. Kern 0 0 10,000/0 0
-------------- -------------- ------------------- -------------------
-------------- -------------- ------------------- -------------------
Ronald Leong 0 0 175,000/0 0/0 (3)
-------------- -------------- ------------------- -------------------
-------------- -------------- ------------------- -------------------
Keith Fredericks (1) 0 0 10,000 0
- -------------------------- -------------- -------------- ------------------- -------------------
</TABLE>
- -------------------
(1) Mr. Fredericks resigned as our Senior Vice President and Chief Technical
Officer effective December 17, 1999.
(2) Mr. Horowitz's options are exercisable at $.60 per share. The closing price
for our stock on December 21, 1999 was $.60 per share. Therefore, Mr.
Horowitz is not in the money and the in the money value of his options is
zero.
(3) Mr. Leong's options are exercisable at $.80 per share. The closing price
for our stock on December 21, 1999 was $.60 per share. Therefore, Mr. Leong
is not in the money and the in the money value of his options is zero.
2. COMPENSATION OF DIRECTORS
None of our directors were compensated in fiscal year 1999 for their services.
29
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
1. TRANSACTIONS WITH MANAGEMENT AND OTHERS; CERTAIN
BUSINESS RELATIONSHIPS; PROMOTERS
O On November 2, 1999, we sold 285,714 shares of common stock for
$100,000 to Steven A. Horowitz (our Chairman, Chief Executive Officer,
Chief Financial Officer, and Secretary) along with two-year warrants to
purchase 28,571 shares of common stock.
O On November 16, 1999, Steven A. Horowitz rescinded (for no future
consideration) 750,000 options (granted on August 1, 1999 and expiring
on July 31, 2004) with an exercise price of $1.00 per share) to
purchase our common stock.
O During the year ended June 30, 1999 and the period October 1, 1997 to
June 30, 1998, legal services of $168,393 and $201,039, respectively,
were provided by Horowitz, Mencher, Klosowski & Nestler, P.C.-- a law
firm in which our Chairman, Chief Executive Officer, Chief Financial
Officer, Secretary and principal stockholder is the managing partner
(the "Firm"). Further, the Firm donated office space and accounting
services for which no fees were paid by us to the Firm. The office
space and corresponding services are valued at $1,000 per month and the
accounting services are valued at $35,000 per year.
O In fiscal 1999, we into a $150,000 demand loan with the Firm at an
interest rate of 11% and issued 150,000 stock warrants at $.66
exercisable through October 1, 2003. The detachable warrants with a
fair value of $42,000 were accounted for as additional interest cost
with a credit to paid-in capital. At June 30, 1999, the outstanding
loan balance is $60,000.
O On May 15, 1998, we granted 150,000 stock options with an exercise
price of $.60 to Eric Mencher, a partner in the Firm, for legal
services rendered. The fair value of these services was $63,000.
O During fiscal 1999, some of our stockholders provided loans to us
aggregating $150,000. In connection with the loans, we granted 150,000
stock warrants with an exercise price of $.66, exercisable through
October 1, 2003. The detachable warrants with fair value of $42,057 was
accounted for as additional interest cost with a corresponding credit
to paid-in capital. The loans were partially repaid and the outstanding
balances were satisfied through the exercise of stock warrants.
O During the year ended June 30, 1999 and the period October 1, 1997 to
June 30, 1998, we provided noninterest-bearing advances to Kelly Music
against their capital account in CDKnet of $29,033 and $848,541,
respectively. These advances plus the secured notes from Kelly Music of
$712,000 (see Notes to Financials 1 and 2(c)) were extinguished as
follows: (1) $600,000 was deemed consideration in the purchase of Kelly
Music's interest in CDKnet, LLC (2) $800,000 was accounted for as a
settlement by CDKnet, LLC of a portion of Kelly Music's ownership
interest in CDKnet, LLC and (3) the remaining amounts of $29,033 in
1999 and $160,307 in 1998 were deemed uncollectible and recorded as
uncollectible advances since Kelly Music no longer held a membership
interest in CDKnet. We made the interest free advances against Kelly
Music's capital account in the original CDKnet, LLC joint venture. When
we realized that Kelly Music could not pay the loan, we converted Kelly
Music's debt to an interest in us. Kelly Music does not own a direct
interest in us. The extent of its interest in us is in its capacity as
one of our shareholders.
30
<PAGE>
O In June 1999, we entered into a Finder's Agreement (attached hereto as
Exhibit 10.13) with our president, Shai Bar-Lavi, effective as of
August 1, 1999, and a third party whereby we issued 100,000 warrants at
an exercise price of $1.00 to the third party upon execution of the
agreement and future fees for identifying financing, purchase or
venture transactions, as defined. During the year ended June 30, 1999,
we recorded an expense of $100,000 representing the fair value of the
warrants issued.
0 During fiscal 1999, Steven A. Horowitz deposited the sum of $145,000
with Fleet Bank to collateralize a Fleet Bank loan to us. We used the
loan proceeds to finance the purchase of manufacturing equipment from
Bandai America Incorporated.
O In fiscal 1999, Steven A. Horowitz loaned us an aggregate of $121,018,
at no interest, all of which has been repaid.
O During the period from March 27, 1998 to March 5, 1999, the Firm
advanced various sums to us, at no interest, totaling an aggregate of
$227,000, all of which has been repaid.
2. INDEBTEDNESS OF MANAGEMENT
No member of our management is or has been indebted to us. No director or
executive officer is personally liable for repayment of amounts advanced by any
financing received by us.
31
<PAGE>
DESCRIPTION OF SECURITIES
-------------------------
Common Stock
- ------------
We are authorized to issue 40,000,000 shares of common stock of $0.0001 par
value, per share and 5,000,000 authorized shares of preferred stock. The
authorization to issue preferred shares were made by a resolution of the Board
of Directors and were voted upon by the shareholders. Each share of our common
stock, when fully paid for, will be validly issued and outstanding, is entitled
to one vote on all matters to be voted on by shareholders, is entitled to equal
dividends when and as declared by the Board of Directors from funds legally
available therefore, and is entitled to a pro rata share of our net assets in
the event of dissolution, liquidation or winding up of the Company.
Preferred Stock
- ---------------
Our preferred stock may be issued from time to time, by resolution or
resolutions of the Board of Directors, in one or more series. While each series
of preferred stock may be assigned different rights, conversion rights,
redemption rights, liquidation rights, voting rights and rights regarding
sinking fund or redemption or purchase accounts, all of the shares of each
series shall be identical in all respects to the other shares of such series.
Series A Preferred Stock
- ------------------------
Our Series A Preferred Stock has voting rights and ranks as follows with respect
to dividend rights and rights upon liquidation, winding up and dissolution: (a)
senior to any other series of Preferred Stock (except as established by the
Board of Directors), (b) on parity with any other series of Preferred Stock
established by the Board of Directors, and (c) prior to any other of our equity
securities, including our common stock.
Stockholders' Agreement
- -----------------------
We entered into a Stockholders' Agreement with a group of shareholders on
May 7, 1998 which sets forth their agreement regarding the disposition of
specified shares of our common stock. The agreement provides for a right of
first refusal, initially to the non-selling shareholders and secondarily to us
on the same terms and conditions as any bona fide third party offer and also
requires a 100% disposition of the selling shareholder's interest. Excluded from
this provision are transfers to family members or trusts for the benefit of
family members or in the event of death. Furthermore, the shareholders agreed to
sell and/or transfer their stock pursuant to the terms of any bonafide third
party offer to acquire not less than a majority of our outstanding stock or to
merge with us. The restrictions terminate upon the closing of an initial public
offering of stock by us. The shareholders agreed to vote for Steven A. Horowitz
as a director until such time as he resigned from the position. However, 16 of
the 35 signatories to the agreement have signed an amendment to the agreement
rescinding the voting and certain other provisions of the agreement and we
anticipate obtaining the remaining signatures in the near term. The recindment
will not become effective until all 35 shareholders execute the Stockholders'
Agreement. See Exhibit 4.2.
32
<PAGE>
REPORTS TO SHAREHOLDERS
-----------------------
We intend to furnish our shareholders with annual reports of our operations,
containing financial statements. We will also file annual and quarterly reports
as required by the Securities Exchange Act of 1934, as amended.
TRANSFER AGENT
--------------
Our transfer agent is Interwest Transfer Company, 1981 East 4800 South, Suite
100, Salt Lake City, UT 84117, (801) 272-9294.
AVAILABLE INFORMATION
---------------------
We are subject to the reporting requirements of the Securities Exchange Act of
1934 by virtue of the fact that on October 7, 1999 we filed a Registration
Statement on Form 10-SB -- together with all amendments and exhibits -- with the
Commission. Our Form 10-SB became effective on December 7, 1999, however, the
Commission is still reviewing it.
A copy of our filings with the Commission may be inspected by anyone without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part of our filings may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and its public reference facilities in New
York, New York and Chicago, Illinois, upon the payment of the fees prescribed by
the Commission. Our filings are also available through the Commission's Web site
at the following address: http://www.sec.gov.
33
<PAGE>
PART II
-------
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
1. MARKET INFORMATION
On October 7, 1999, our common stock was deleted from the Over-the-Counter
Bulletin Board and now trades on the so called "Pink Sheets" under the symbol
"CDKX" until our registration statement has completed the Commission's review
process. As of December 14, 1999, we had 17,206,157 shares of common stock
outstanding; of this amount, 3,601,824 of these shares are nonrestricted;
13,604,333 of these shares are restricted. As of December 14, 1999, the number
of holders of record of our common stock, $0.0001 par value, was 81.
The following table sets forth the range of high and low sales prices for the
stock for each full quarterly period within the two most recent fiscal years and
any subsequent interim period covered by the financials. The sales represent
prices between dealers, do not include retail markup, mark down or other fees or
commissions, and do not necessarily represent actual transactions.
Calendar Quarter Bid Prices
Ended Low High
- -------------------------------------------------------------------------------
September 30, 1999 .968 1.843
June 30, 1999 .937 3.125
March 31, 1999 .906 2.625
December 31, 1998 .500 1.843
September 30, 1998 .500 3.625
2. DIVIDEND POLICY
To date, we have not paid a dividend to our shareholders. We are also limited in
our ability to do so under the terms of our 5.75% Convertible Subordinated
Debenture due February 1, 2009.
LEGAL PROCEEDINGS
-----------------
There is no litigation currently pending against us and we are not aware of any
disputes that may lead to litigation. There is, however, a disputed invoice with
OMNET Technology Corp., a supplier of CDs, for the amount of $67,323.78. The
parties are currently reviewing the matter.
34
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
We engaged Grant Thornton LLP as our auditors as of January 27, 1999, replacing
Wagner, Zwerman & Steinberg LLP who were dismissed as our auditors. There were
no disagreements with Wagner, Zwerman. Wagner, Zwerman has reviewed our
disclosure of its termination and agree in all respects with our
characterization of our switch to a new accounting firm to provide audited
financial reports. See Exhibit 16.1.
RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------
As of December 14, 1999, there are issued and outstanding 17,206,157 shares of
common stock which were issued or sold in reliance upon the exemptions from
registration provided by the Securities Act as follows:
o During the period July 1, 1999 to present, we issued 2,947,000 shares
of common stock for cash or services of $1,502,500, issued 317,073
common shares for exercise of stock options and issued 325,056 warrants
to purchase common stock in private placements, as follows:
o On November 16, 1999, we entered into a Subscription Agreement with
Asia Pioneer where we raised $100,000 from Asia Pioneer through the
issuance of 200,000 share of common stock, along with six
allotments to purchase an additional 300,000 shares of common stock
per month at $150,000 per allotment. The allotments will be
fulfilled in May 2000. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o 30,000 shares to Cabaret Software, Inc. on August 10, 1999, and
10,000 shares on September 18, 1999 for services valued at $30,000.
We issued stock to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because the purchaser
is an accredited investor who purchased the stock for investment
purposes.
o 216,000 shares to Y2G.Com, Inc. for $155,000. On September 8, 1999,
the Company sold Y2G an additional 116,000 shares of common stock
for $155,000. We issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the stock for
investment purposes.
o 150,000 shares to Lawrence Adams Ltd. through the exercise of
cashless options on September 14, 1999. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation D
and/or Section 4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 40,000 shares to Michael Sonnenberg through the exercise of
cashless options on September 14, 1999. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation D
and/or Section 4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 17,073 shares to Alexander Zemel through the exercise of stock
options. We issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because the
35
<PAGE>
purchaser is an accredited investor who purchased the stock for
investment purposes.
o 110,000 shares to Steven Wildstein through the exercise of cashless
options on September 14, 1999. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor who purchased
the stock for investment purposes.
o 75,000 shares to Lawrence Adams Ltd. for services valued at
$75,000 on September 14, 1999. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor who purchased
the stock for investment purposes.
o 50,000 shares to Energenic, LLC for services valued at $50,000 on
October 29, 1999, in addition to an agreement to issue 50,000
shares of common stock to Energenic upon the completion of
milestones pursuant to the Software Agreement between us and
Energenic and the issuance of an additional 50,000 one-year options
exercisable at $1.00 per share for the purchase of shares of common
stock upon the completion of the project as set forth in the
Software Agreement. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o 1,000,000 shares to Erno and Rachel Bodek for $500,000 from Erno
and Rachel Bodek on November 1, 1999 through the issuance of
1,000,000 shares of common stock, along with 30-month Warrants to
purchase an additional 200,000 shares of common stock at $1.25 per
share, and an option to purchase another 2,000,000 shares of common
stock at $.50 per share which shall expire on December 31, 1999. We
issued stock to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because the purchaser
is an accredited investor who purchased the stock for investment
purposes.
o 285,714 shares to Steven A. Horowitz for $100,000 on November 2,
1999 along with 28,571 two-year warrants to purchase common stock
for $.75 per share. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o 107,143 shares Fox Distribution, Inc. for $37,500 on November 2,
1999 along with 10,714 two-year warrants to purchase common stock
for $.75 per share. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o 142,857 shares Michael Sonnenberg for $50,000 on November 2, 1999
along with 14,285 two-year warrants to purchase common stock for
$.75 per share. We issued stock to the purchaser in reliance upon
the exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the stock for
investment purposes.
o 714,286 shares The Gross Foundation for $250,000 on November 2,
1999 along with 71,486 two-year warrants to purchase common stock
for $.75 per share. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
36
<PAGE>
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o During the period from July 1, 1998 to June 30, 1999, we issued
2,746,558 common shares, 600,000 Convertible Class A Debentures,
1,500,000 Convertible Class B Debentures for cash of $2,100,000, net of
issuance costs of $248,150. During the year ended June 30, 1999, we
also issued 1,328,498 Warrants to purchase common shares from the
following transactions: (1) 75,000 common shares and 100,000 Warrants
were issued to Bandai Holdings USA for the purchase of equipment used
in our MixFactory.com(TM) E-Commerce facility, and (2) 1,883,635 common
shares were issued to Kelly Music for the purchase of its 26.15%
interest in CDKnet, LLC which resulted in securing for us 100% of the
equity interests of CDKnet, LLC. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D because the
purchaser is an accredited investor who purchased the stock for
investment purposes.
o During the period October 1, 1997 (date of inception) to June 30, 1998,
our predecessor, International Pizza Group, issued 2,999,985 common
shares $224,986 as part of a private placement. We issued 7,300,363
common shares in connection with the acquisition of 73.85% of the
equity interests in CDKnet, LLC. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D because the
purchaser is an accredited investor who purchased the stock for
investment purposes.
37
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
Delaware law sets forth our powers to indemnify officers, directors, employees
and agents. Our Articles of Incorporation provide as follows:
"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the Delaware General corporation law, or (iv) for
any transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is amended after the
date of incorporation of the Corporation to authorize corporate action
further eliminating or limiting the personal liability of directors,
then the liability of a director of the Corporation shall be eliminated
or limited to the fullest extent permitted by the Delaware General
Corporation law as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall no adversely affect any right or
protection of a director of the Corporation existing at the time of the
repeal or modification.
The Corporation shall, to the fullest extent permitted by Section 145
(or any other provision) of the Delaware general corporation Law, as
the same may be amended and supplemented, or by any successor thereto,
indemnify any and all officers and directors of the corporation form
and against any and all of the expenses, liabilities or other mattes
referred to in or converted by said Section. Such right to
indemnification provided for herein shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled
under any By-law, agreement, vote of stockholders or disinterested
directors or otherwise."
Except as mentioned above, there is no charter provision, bylaw, contract,
arrangement or statute pursuant to which any director or officer is indemnified
in any manner against any liability which he may incur in his capacity as such.
We do not maintain director and officer liability policy to fund our obligations
as stated herein above.
38
<PAGE>
C O N T E N T S
<TABLE><CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-1
Financial Statements
Consolidated Balance Sheets at September 30, 1999 and June 30, 1999 F-2
Consolidated Statements of Operations for the three months ended September
30, 1999 and 1998, year ended June 30, 1999 and period
October 1, 1997 (date of inception) to June 30, 1998 F-3
Consolidated Statement of Stockholders' Equity for the period October 1,
1997 (date of inception) to June 30, 1998, year ended
June 30, 1999 and three months ended September 30, 1999 (unaudited) F-4
Consolidated Statements of Cash Flows for the three months ended September
30, 1999 and 1998, year ended June 30, 1999
and period October 1, 1997 (date of inception) to June 30, 1998 F-6
Notes to Consolidated Financial Statements F-8 - F-27
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
CDKNET.COM, INC.
We have audited the accompanying consolidated balance sheet of CDKNET.COM, INC.
and Subsidiaries (the "Company") as of June 30, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended June 30, 1999 and the period October 1, 1997 (date of inception)
to June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. As discussed in Note 11, the Company's
consolidated statements of operations, stockholders' equity and cash flows for
the period October 1, 1997 (date of inception) to June 30, 1998 were reaudited
and restated.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CDKNET.COM, INC.
and Subsidiaries as of June 30, 1999, and the consolidated results of their
operations and their consolidated cash flows for the year ended June 30, 1999
and the period October 1, 1997 (date of inception) to June 30, 1998, in
conformity with generally accepted accounting principles.
As shown in the consolidated financial statements, since inception the Company
has sustained significant losses and used substantial amounts of cash in
operations. The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The
uncertainty as to the Company's ability to raise additional financing and
sustain profitable operations, as discussed in Note 1 to the consolidated
financial statements, raises substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from this uncertainty.
/s/ GRANT THORNTON LLP
......................
GRANT THORNTON LLP
Melville, New York
September 21, 1999, except for Note 12(c) and (d), as to which
the date is October 5, 1999
F-1
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
SEPTEMBER 30, June 30,
ASSETS 1999 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $ 20,513 $ 231,347
Accounts receivable 23,662 19,000
Due from officer 11,600
Prepaid expenses and other current assets 4,940 9,907
------------ ------------
Total current assets 49,115 271,854
FURNITURE AND EQUIPMENT - at cost,
less accumulated depreciation and amortization of $184,550 and
$152,286 at September 30, 1999 and June 30, 1999, respectively 467,148 489,053
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED,
less accumulated amortization of $1,829,816 and $1,472,753
at September 30, 1999 and June 30, 1999, respectively 5,311,441 5,668,504
INTANGIBLE ASSETS, less accumulated amortization of $521,077 and
$452,467 at September 30, 1999 and June 30, 1999, respectively 851,126 919,736
OTHER ASSETS
Deferred financing costs, less accumulated amortization of $62,760
and $37,400 at September 30, 1999 and June 30, 1999, respectively 185,390 210,750
------------ ------------
$ 6,864,220 $ 7,559,897
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 74,500 $ 220,778
Accrued expenses and other current liabilities 410,796 415,334
Due to related party 118,900 125,000
Due to officer 50,000
Current portion of long-term debt and capitalized lease obligations 65,388 67,939
------------ ------------
Total current liabilities 719,584 829,051
LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS,
net of current portion 191,457 205,416
SUBORDINATED CONVERTIBLE DEBENTURES 1,673,985 1,671,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - par value $.0001 per share; authorized
5,000,000 shares; none issued -- --
Common stock - par value $.0001, per share; authorized
40,000,000 shares; 14,810,979 and 14,046,906 shares issued and
outstanding at September 30, 1999 and June 30, 1999 1,481 1,405
Additional paid-in capital 12,845,667 12,232,100
Accumulated deficit (8,567,954) (7,379,075)
------------ ------------
4,279,194 4,854,430
------------ ------------
$ 6,864,220 $ 7,559,897
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-2
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE><CAPTION>
Period
October 1, 1997
(date of
inception) to
Three months ended September 30, Year ended June 30,
---------------------------- June 30, 1998,
1999 1998 1999 as restated
------------ ------------ ------------ ------------
--------(unaudited)---------
<S> <C> <C> <C> <C>
Net revenues $ 23,663 $ 158,393 $ 474,344 $ 616,137
Cost of revenues 14,958 95,816 288,762 415,769
------------ ------------ ------------ ------------
Gross profit 8,705 62,577 185,582 200,368
Selling, general and administrative expenses 687,033 784,734 3,304,551 1,580,478
Depreciation and amortization 483,297 529,585 1,981,130 133,776
------------ ------------ ------------ ------------
Loss from operations (1,161,625) (1,251,742) (5,100,099) (1,513,886)
Other expense (income)
Interest expense (income), including
interest relating to beneficial
conversion and debt discount of $2,985,
$102,629 and $1,038,008 at September
30, 1999, September 30, 1998 and June
30, 1999, respectively, net 27,254 102,446 1,094,501 (461)
Minority interest in loss of subsidiary (328,950)
------------ ------------ ------------ ------------
NET LOSS $ (1,188,879) $ (1,354,188) $ (6,194,600) $ (1,184,475)
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ (.08) $ (.11) $ (.47)
============ ============ ============
Weighted-average shares outstanding -
basic and diluted 14,274,175 11,880,424 13,282,176
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-3
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Period October 1, 1997 (date of inception) to June 30, 1998,
year ended June 30, 1999
and three months ended September 30, 1999
<TABLE><CAPTION>
Common stock Additional Total
------------------------ Member paid-in Accumulated stockholders'
Shares Amount capital capital deficit equity
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1997
Issuance of membership interest in Creative
Technology, LLC $ 1,735,000 $ 1,735,000
Common stock issued for exchange of member
capital of Creative Technology, LLC 6,000,000 $ 600 (1,735,000) $ 1,734,400
Common stock issued in merger with
International Pizza Group, Inc. 3,999,985 400 222,788 223,188
Common stock issued for purchase of
minority interests 1,300,363 130 3,146,571 3,146,701
Compensation related to stock option plan 147,000 147,000
Net loss, as restated $(1,184,475) (1,184,475)
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1998 11,300,348 1,130 -- 5,250,759 (1,184,475) 4,067,414
Common stock and stock warrants issued for
purchase of fixed assets 75,000 8 143,742 143,750
Common stock issued for purchase of
minority interests 1,883,635 188 4,505,934 4,506,122
Debt discount 1,142,008 1,142,008
Conversion of subordinated debentures 476,358 48 324,952 325,000
Common stock and stock warrants issued for
financing costs 16,667 2 50,898 50,900
Exercise of stock options 116,084 12 69,988 70,000
Compensation related to stock option plan and
donated services 248,000 248,000
Common stock and stock warrants issued for
services 175,000 17 395,698 395,715
Common stock issued in lieu of cash interest 3,814 9,121 9,121
Stock warrants issued for termination agreement 91,000 91,000
Net loss (6,194,600) (6,194,600)
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1999 (carried forward) 14,046,906 1,405 -- 12,232,100 (7,379,075) 4,854,430
</TABLE>
F-4
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
Period October 1, 1997 (date of inception) to June 30, 1998,
year ended June 30, 1999
and three months ended September 30, 1999
<TABLE><CAPTION>
Common stock Additional Total
------------------------ Member paid-in Accumulated stockholders'
Shares Amount capital capital deficit equity
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1999 (brought forward) 14,046,906 $ 1,405 $ -- $12,232,100 $(7,379,075) $ 4,854,430
Issuance of common stock 332,000 33 309,967 310,000
Exercise of stock options 317,073 31 11,737 11,768
Compensation related to stock option plan and
donated services 123,875 123,875
Common stock and stock warrants issued for
services 115,000 12 167,988 168,000
Net loss (1,188,879) (1,188,879)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1999 (unaudited) 14,810,979 $ 1,481 $ -- $12,845,667 $(8,567,954) $ 4,279,194
========== ========== ========== ========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-5
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>
Period
October 1, 1997
(date of
inception) to
Three months ended September 30, Year ended June 30,
-------------------------- June 30, 1998,
1999 1998 1999 as restated
----------- ----------- ----------- -----------
-------(unaudited)--------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,188,879) $(1,354,188) $(6,194,600) $(1,184,475)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 483,297 529,585 1,981,130 133,776
Amortization of debt discount 2,985 102,629 1,038,008
Uncollectible advances 29,033 160,307
Compensation related to stock option plan and
donated services 123,875 248,000 147,000
Common stock and stock warrants issued for services 168,000 117,150 395,715
Common stock issued in lieu of cash interest 9,121
Stock warrants issued for termination agreement 91,000
Minority interest in loss of consolidated subsidiary (328,950)
Changes in assets and liabilities
(Increase) decrease in accounts receivable (4,662) 35,852 86,744 (105,744)
(Increase) decrease in inventory 3,883 (3,883)
(Increase) decrease in due from officer 61,600 (11,600)
(Increase) decrease in prepaid expenses and other
Current assets 4,967 15,772 16,187 (26,094)
(Decrease) increase in accounts payable (146,278) (128,148) 42,020 171,258
(Decrease) increase in accrued expenses and other
Current liabilities (4,538) (167,416) 76,328 344,696
----------- ----------- ----------- -----------
689,246 505,424 4,005,569 492,366
----------- ----------- ----------- -----------
Net cash used in operating activities (499,633) (848,764) (2,189,031) (692,109)
----------- ----------- ----------- -----------
Cash flows from investing activities
Purchase of furniture and equipment (10,359) (8,068) (212,407) (43,832)
Advances to related party (29,033) (848,541)
----------- ----------- ----------- -----------
Net cash used in investing activities (10,359) (8,068) (241,440) (892,373)
----------- ----------- ----------- -----------
Cash flows from financing activities
Proceeds from notes payable 250,000 791,938 93,750
Repayment of notes payable (6,100) (491,465)
Proceeds from subordinated convertible debentures 300,000 2,100,000
Deferred financing costs (197,250)
Principal payments on long-term debt and capitalized
lease obligations (16,510) (10,672)
Proceeds from issuance of common stock 310,000 1,959,999
Proceeds from exercise of stock warrants 11,768
----------- ----------- ----------- -----------
Net cash provided by financing activities 299,158 550,000 2,192,551 2,053,749
----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (210,834) (306,832) (237,920) 469,267
----------- ----------- ----------- -----------
Cash at beginning of period 231,347 469,267 469,267 --
----------- ----------- ----------- -----------
Cash at end of period $ 20,513 $ 162,435 $ 231,347 $ 469,267
=========== =========== =========== ===========
</TABLE>
F-6
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE><CAPTION>
Period
October 1, 1997
(date of
inception) to
Three months ended September 30, Year ended June 30,
-------------------------- June 30, 1998,
1999 1998 1999 as restated
----------- ----------- ----------- -----------
-------(unaudited)--------
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 4,040 $ 1,083 $ 36,055 --
Income taxes -- -- -- --
Noncash investing and financing transactions:
Fixed asset acquisitions financed through capitalized
lease obligations 113,553
Common stock and stock warrants issued for purchase
of fixed assets 143,750
Common stock issued for purchase of minority interest 4,506,122 4,506,122 $ 3,146,701
Debt discount 130,318 1,142,008
Issuance of stock upon conversion of subordinated
debentures 10,000 325,000
Common stock and stock warrants issued for financing
costs 50,900
Exercise of stock options for debt extinguishment 70,000
Purchase of business, net of cash acquired 1,500,000
Contribution of notes for ownership interest 805,516
Exchange of ownership interest for outstanding debt
advances (800,000)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-7
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
CDKNET.COM, INC. and Subsidiaries, formerly named Technology Horizons, Inc.
(collectively the "Company"), is a New York-based Internet company that
provides products to its worldwide customers utilizing its internally
developed multimedia technology, CDKTM. The technology provides for the
enhanced integration of audio, video and Internet connectivity on a
standard compact disc ("CD").
The Company's consolidated financial statements include the accounts of
CDKNET.COM, INC. ("CDK") and its wholly-owned subsidiaries, Creative
Technology, LLC ("Creative"), a limited liability company, and CDKnet, LLC,
formerly Technology Applications, LLC, ("CDKnet"), a limited liability
company. CDKnet became a wholly-owned subsidiary after a series of
acquisitions completed through July 1998.
Creative commenced operations on October 1, 1997 with cash capital
contributions from investors of $1,735,000. On November 11, 1997, Creative,
Kelly Music & Entertainment, Inc. ("KME"), and certain stockholders of KME
formed CDKnet, which is the operating entity. Creative acquired a 40%
capital interest and voting control in CDKnet for $1,500,000. The operating
agreement for CDKnet provided that Creative would control the management
committee which governed CDKnet. CDKnet acquired certain assets of KME in
exchange for issuing KME a 40% ownership interest in CDKnet valued at
$1,500,000 based on an independent appraisal. The assets acquired,
including fixed assets and intellectual property, represented the principal
business of KME. No liabilities were assumed in connection with this
acquisition. The purchase price was allocated based on the estimated fair
value of the fixed assets and intangible assets of approximately $127,000
and $1,373,000, respectively. In addition, key employees of KME became
employees of CDKnet. CDKnet accounted for the acquisition as a purchase and
the results of operations of KME were included in the consolidated
financial statements from date of acquisition. The fair values of the
intangible assets acquired are being amortized on a straight-line basis
over five years.
Certain stockholders of KME contributed certain collateralized notes of KME
aggregating $712,000 (see Note 2(b)) in exchange for an equivalent dollar
ownership interests in CDKnet. As substantially all of the assets of KME
consisted of membership interests in CDKnet, the notes were recorded as a
reduction of the equity of CDKnet. Such notes were later used to redeem a
portion of the membership interest of KME (see Note 9(c)). On May 7, 1998,
CDK, which was formed to be the corporate owner of Creative, and the
members of Creative exchanged their ownership interest for 6 million shares
of CDK's common stock.
F-8
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 1 (CONTINUED)
The Company has incurred net losses of $6,194,600 and $1,184,475 during the
year ended June 30, 1999 and the period October 1, 1997 (date of inception)
to June 30, 1998, respectively. Since June 30, 1999, the Company has had
limited revenues. For the year ended June 30, 1999, and the period October
1, 1997 (date of inception) to June 30, 1998, net cash used in operating
activities was $2,189,031 and $692,109, respectively. Through June 30,
1999, the Company's cash requirements were primarily financed though the
sale of subordinated convertible debentures and common stock of $2,100,000
and $1,960,000, respectively. The Company does not maintain a credit
facility with any financial institution. The Company continues to incur
expenses with respect to new product development. As a result of the
continued losses, the use of significant cash in operations and the lack of
sufficient funds to execute its business plan, among other matters, there
is substantial doubt about the Company's ability to continue as a going
concern. No adjustments have been made with respect to the consolidated
financial statements to record the results of the ultimate outcome of this
uncertainty.
Management's plans to remain a going concern require additional financing
until such time as sufficient cash flows are generated from operations.
Financings are anticipated to be in the form of additional debt and equity;
however, there can be no assurances that the Company will be able to obtain
sufficient financing to execute its business model, which is still in an
evolving stage. However, management believes that it will be able to secure
sufficient funding for operations at least for the next twelve months.
Further, management believes that operating expenses could be reduced to
fundable levels, if necessary. Subsequent to June 30, 1999, the Company
focused primarily on new product development and implemented a marketing
plan, including the hiring of marketing and sales personnel. Further, the
Company will need to build its brand name, provide scalable, reliable and
cost-effective services, continue to grow its infrastructure to accommodate
customers and increased use of its products and services, expand its
channels of distribution, and retain and motivate qualified personnel.
Subsequent to June 30, 1999, the Company issued 332,000 shares of common
stock and received net proceeds of $310,000 (see Note 12 (e)). Further, the
Company's CEO and other parties have committed to invest $200,000 (see Note
13(b)).
F-9
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 1 (CONTINUED)
In addition to the above equity financing, the Company also anticipates the
need to raise additional funds through public or private debt or equity
financing in order to take advantage of unanticipated opportunities,
including more rapid expansion or acquisitions of complementary businesses
or technologies, or to develop new or enhanced services and related
products, or otherwise respond to unanticipated competitive pressures.
There can be no assurance that additional financing will be available on
terms favorable to the Company, or at all. If adequate funds are not
available or are not available on acceptable terms, the Company may not be
able to take advantage of unanticipated opportunities, develop new or
enhanced services and related products, or otherwise respond to
unanticipated competitive pressures and the Company's business, operating
results and financial condition could be materially adversely affected.
NOTE 2 - MERGERS AND ACQUISITIONS
a. On May 21, 1998, International Pizza Group, Inc. ("IPGI"), a
nonoperating public company with net assets (principally cash) of
approximately $225,000, acquired 100% of the outstanding common stock
of CDK (the "Acquisition") and changed its name to CDK. The Acquisition
resulted in the owners and management of CDK having effective control
of the combined entity. Under generally accepted accounting principles,
the Acquisition is considered to be a capital transaction in substance,
rather than a business combination. That is, the Acquisition is
equivalent to the issuance of stock by CDK for the net monetary assets
of IPGI, accompanied by a recapitalization, and accounted for as a
change in capital structure. Accordingly, the accounting for the
Acquisition is identical to that resulting from a reverse acquisition,
except that no goodwill is recorded. Under reverse acquisition
accounting, the post-reverse-acquisition comparative historical
financial statements of the "legal acquirer," IPGI, are those of the
"accounting acquiree," CDK. Accordingly, the financial statements of
CDK for the period from October 1, 1997 (date of inception) to June 30,
1998 are the historical financial statements of CDK for the same
period.
b. On June 3, 1998, the Company acquired the minority interests of two
members of CDKnet for $3,146,701. The consideration was paid through
the issuance of 1,300,363 shares of common stock. As a result of the
acquisition, the sellers held a reduced percentage ownership interest
in the Company. The Company accounted for the acquisition as a
purchase. The Company valued the minority interest based on the shares
issued at the market price of the stock after considering a 15% market
discount for the shares that had no stated registration rights
requirement. The estimated fair value of the tangible assets acquired
of $476,566 approximated the book value of such assets. The excess of
the consideration over the estimated fair value of the net assets
acquired in the amount of $2,670,135 has been recorded as cost in
excess of fair value of net assets acquired and is being amortized on a
straight-line basis over five years.
F-10
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 2 (CONTINUED)
c. On July 8, 1998, the Company entered into an agreement, subsequently
amended (the "Agreement"), based on terms previously agreed upon with
KME, to acquire the remaining minority interest for $5,171,122. The
consideration was (1) the retirement of $600,000 of notes accounted for
as a stock subscription (2) issuance of 1,883,635 shares of the
Company's common stock and (3) a cash payment of $65,000. The amendment
provided for the waiver of previously agreed upon registration rights
on common stock in excess of 250,000 shares, terminated any and all
demand registration rights with certain stockholders of KME and
released the Company from any and all claims, liabilities, demands and
causes of action known or unknown which KME could assert in the future,
as defined.
The Company accounted for the acquisition as a purchase. The Company
valued the minority interest based on the shares issued at the market
price of the stock after considering a 15% market discount for the
shares that had no stated registration rights requirement. The
estimated fair value of the tangible assets acquired of $700,000
approximated the book value of such assets. The excess consideration
over the estimated fair value of the net assets acquired of $4,471,122
has been recorded as cost in excess of fair value of net assets
acquired and is being amortized on a straight-line basis over five
years.
The following (unaudited) pro forma information has been prepared assuming that
the acquisition of KME and the minority interests (see Notes 1, 2(b) and 2(c))
had occurred as of October 1, 1997, after giving effect to certain adjustments,
including amortization of goodwill. The (unaudited) pro forma information is
presented for informational purposes only and is not necessarily indicative of
what would have occurred if the transactions had been made as of October 1,
1997.
Net revenues ....................... $ 616,137
Net loss ........................... (1,921,645)
F-11
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Company's significant accounting
policies:
REVENUE RECOGNITION
The Company recognizes revenue for development and use fees for
client-specific CD's and custom CD's on the date the product is shipped to
the customer. Revenues from web links will be recognized in the month
earned. Revenues from web advertising will be recognized ratably over the
period in which the advertising is displayed. Revenues from barter
advertising transactions will be recognized during the period the
advertising is displayed. Barter transactions will be recorded at the fair
market value of the goods or services provided or received, whichever is
more readily determinable. To date, no revenues have occurred from the
following revenue streams; web links, web advertising and barter
transactions.
During the year ended June 30, 1999, two customers accounted for
approximately 51% and 16% of net revenues, respectively. For the period
October 1, 1997 (date of inception) to June 30, 1998, one customer
accounted for approximately 95% of the Company's net revenues.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs include expenses incurred by the Company to
develop new products and enhance the Company's existing products. Research
and development costs are expensed as incurred. During the year ended June
30, 1999 and the period October 1, 1997 (date of inception) to June 30,
1998, such costs aggregated approximately $211,000 and $132,000,
respectively.
INCOME TAXES
CDK files separate Federal, state and city corporate income tax returns.
Creative and CDKnet file separate Federal, state and city (where
applicable) partnership income tax returns. Earnings or losses from these
limited liability companies pass through directly to CDK.
The Company follows the asset and liability method of accounting for income
taxes by applying statutory tax rates in effect at the balance sheet date
to differences among the book and tax bases of assets and liabilities. The
resulting deferred tax liabilities or assets are adjusted to reflect
changes in tax laws or rates by means of charges or credits to income tax
expense. A valuation allowance is recognized to the extent a portion or all
of a deferred tax asset may not be realizable.
F-12
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 3 (CONTINUED)
USE OF ESTIMATES
The Company uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosures of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the
estimates that the Company uses.
EARNINGS (LOSS) PER COMMON SHARE
Basic loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted loss per
share is computed using the weighted average number of shares of common
stock, adjusted for the dilutive effect of potential common shares issued
or issuable pursuant to stock options and stock warrants. Loss per share
has not been shown for the period October 1, 1997 (date of inception) to
June 30, 1998, as the Company operated as a limited liability
company/partnership for substantially the entire period. All potential
common shares have been excluded from the computation of diluted loss per
share as their effect would be antidilutive and, accordingly, there is no
reconciliation of basic and diluted loss per share for each of the periods
presented. Potential common shares that were excluded from the computation
of diluted loss per share consisted of stock options and stock warrants
outstanding, aggregating 2,824,914 and 1,200,000 as of June 30, 1999 and
June 30, 1998, respectively (see Note 8).
FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the substantial doubt as to the Company's ability to continue as a
going concern, it is not practicable to estimate the fair value of the
Company's financial liabilities. Information concerning their terms is
contained in Notes 5 and 6.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost. Maintenance and repairs are
charged to expenses as incurred; major renewals and betterments are
capitalized. When items of furniture or equipment are sold or retired, the
related cost and accumulated depreciation are removed from the accounts and
any gain or loss is included in the results of operations. Furniture and
equipment are depreciated using the straight-line method over their
estimated useful lives, which range from three to seven years. Leasehold
improvements are amortized over the term of the related lease or the useful
life of the improvements, whichever is shorter.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
The cost in excess of fair value of net assets acquired ("goodwill") is
being amortized on a straight-line basis over five years.
F-13
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 3 (CONTINUED)
INTANGIBLE ASSETS
Intangible assets, principally intellectual property acquired in connection
with an acquisition, are being amortized over the estimated useful life of
five years.
On an ongoing basis, management reviews the valuation and amortization of
goodwill and intangible assets to determine the possible impairment by
considering current operating results and comparing the carrying value to
the anticipated undiscounted cash flows of the related assets.
DEFERRED FINANCING COSTS
The costs associated with completed financings are being amortized ratably
over the term of the financing.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of and for the three months
ended September 30, 1999 and the three months ended September 30, 1998 have
been prepared on the same basis as the audited financial statements and, in
the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
information set forth therein, in accordance with generally accepted
accounting principles. The results of operations for the three months ended
September 30, 1999 are not necessarily indicative of the results to be
expected for the full year.
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following at June 30, 1999:
Furniture .................................... $ 5,295
Equipment .................................... 629,751
Leasehold improvements ....................... 6,293
---------
641,339
Less accumulated depreciation and amortization 152,286
---------
$ 489,053
=========
Depreciation expense for the year ended June 30, 1999 and the period
October 1, 1997 (date of inception) to June 30, 1998 was $123,999 and
$28,287, respectively.
F-14
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 5 - LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
TERM LOAN
In June 1999, the Company entered into a term loan with a lender.
Borrowings aggregating $175,000 under the agreement, which are
collateralized by the equipment and $145,000 in cash collateral provided by
the Company's CEO, are repayable in monthly installments of approximately
$3,500 including interest at 7.86% through March 2004.
CAPITALIZED LEASE OBLIGATIONS
The Company leases certain equipment under leases accounted for as capital
leases. The obligations require the Company to make monthly payments of
approximately $3,000 through May 2002.
The following is a summary of aggregate annual maturities of long-term debt
and capitalized lease obligations as of June 30, 1999.
Year ending June 30,
2000 ....................................... $ 83,418
2001 ....................................... 78,745
2002 ....................................... 75,719
2003 ....................................... 42,440
2004 ....................................... 31,826
---------
312,148
Less amounts representing interest ......... 38,793
---------
273,355
Less current portion ....................... 67,939
---------
$ 205,416
=========
Interest paid for the year ended June 30, 1999 was approximately $2,500.
NOTE 6 - SUBORDINATED CONVERTIBLE DEBENTURES
6.00% SUBORDINATED CONVERTIBLE DEBENTURES
During the period September 4, 1998 through January 21, 1999, the Company
issued $600,000 in 6% Subordinated Convertible Debentures due September 1,
2003 with detachable five-year warrants (the "Notes") to purchase 60,000
shares of common stock of the Company at an exercise price of $3.00 per
share. The Notes are immediately convertible into common stock of the
Company at an effective
F-15
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 6 (CONTINUED)
conversion price of the lower of (i) 70% of the average current market
price of the Company's common stock during the five days preceding the date
of the original issuance, or (ii) 75% of the average current market price
during the five-day trading period ending one trading day preceding the
date the Notes are converted. The agreement contains antidilution
provisions whereby the conversion price is subject to (downward) adjustment
in certain circumstances. The Company may redeem the Notes at any time for
120% of the principal amount of the Notes plus accrued interest. The Notes
are subordinated to the claims and rights of all Senior Debt, as defined by
the underlying agreement. In addition, the agreement contains covenants
limiting the Company's ability to pay dividends, incur new debt, enter into
certain transactions and reacquire common or preferred stock of the
Company. If an event of default occurs beyond a stated cure period the
notes shall become payable at the option of the holder. An event of default
includes, among others, the Company having its common stock suspended from
an exchange or over-the-counter market (see Note 12(d)).
In connection with the agreement, the Company recorded a discount on the
Notes in the aggregate amount of $238,000 resulting from the allocation of
proceeds of $203,000 to a beneficial conversion feature and the fair value
of the underlying warrants of $35,000. Due to the immediate conversion
rights under the agreement, the discount attributed to the beneficial
conversion feature was expensed on the date of issuance. The carrying value
of the Notes is being accreted to the face value of $600,000 using the
interest method over the life of the Notes. The accretion in fiscal 1999
was $20,000.
During the period from issuance to June 30, 1999, $325,000 in debentures
plus accrued interest of $2,500 was converted into 480,172 shares of the
Company's common stock.
In connection with the sale of the Notes, the Company incurred fees of
$60,000 and issued five-year warrants to purchase 30,000 shares of the
Company's common stock at $3.00 per share. The Company computed the
approximate fair value of the warrants issued to be $19,650 using the
Black-Scholes method.
5.75% SUBORDINATED CONVERTIBLE DEBENTURE
On February 2, 1999, the Company issued a $1,500,000, 5.75% Subordinated
Convertible Debenture due February 1, 2009 with detachable four-year
warrants (the "Debenture") to purchase 100,000 shares of common stock of
the Company at an exercise price of $1.75 per share. The Debenture is
immediately convertible into common stock of the Company at an effective
conversion price of the lower of (i) $1.30, or, (ii) subsequent to November
1, 1999, 75% of the average current market price during the five-day
trading period ending one trading day preceding the date the Debenture is
converted (limited to a minimum conversion price of $.60 through July 1,
2000). The agreement contains
F-16
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 6 (CONTINUED)
antidilution provisions whereby the conversion price is subject to
(downward) adjustment in certain circumstances. The Company may redeem the
Debenture at any time for 150% of the principal amount of the Debenture
plus accrued interest. In addition, the Company, at its option, may convert
the Debenture into shares of 5.75% Convertible Preferred Stock having the
same rights as the Debenture. The Debenture is subordinated to the claims
and rights of all Senior Debt, as defined by the underlying agreement. In
addition, the agreement contains covenants limiting the Company's ability
to pay dividends, incur new debt, enter into certain transactions and
reacquire common or preferred stock of the Company. If an event of default
occurs beyond a stated cure period the notes shall become payable at the
option of the holder. An event of default includes, among others, the
Company having its common stock suspended from an exchange or
over-the-counter market (see Note 12(d)).
In connection with the agreement, the Company recorded a discount on the
Debenture in the aggregate amount of $756,000, resulting from the
allocation of proceeds of $663,000 to a beneficial conversion feature and
the fair value of the underlying warrants of $93,000. The fair value
allocated to the warrants was determined based on the estimated fair value
of the debt using an effective interest rate of 14% and the fair value of
the warrants using the Black-Scholes option-pricing model. Due to the
immediate conversion rights under the agreement, the discount attributed to
the beneficial conversion feature was expensed on the date of issuance. The
carrying value of the Debenture is being accreted to the fair value of
$1,500,000 using the interest method over the life of the Debenture. The
accretion in fiscal 1999 was $4,000.
In connection with the sale of the Debenture, the Company incurred fees of
$135,000 and issued 16,667 shares of the Company's common stock having a
market value of $31,250.
Under terms of a registration rights agreement, the Company was required to
have an effective registration statement for the shares issuable upon
conversion of the Debentures by July 25, 1999 or incur daily penalties, as
stated. Effective July 26, 1999, the Company is incurring such penalties
payable monthly with the issuance of common stock.
F-17
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 7 - INCOME TAXES
Temporary differences which give rise to deferred taxes are summarized as
follows:
<TABLE><CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss and other carryforwards $ 1,510,000 $ 377,000
----------- -----------
Net deferred tax assets before valuation allowance 1,510,000 377,000
Less valuation allowance (1,510,000) (377,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
The Company has recorded a full valuation allowance to reflect the
estimated amount of deferred tax assets which may not be realized.
The Company's effective income tax rate differs from the statutory Federal
income tax rate as a result of the following:
<TABLE><CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Tax benefit at statutory rate $(2,106,000) $ (403,000)
Nondeductible expense/nontaxable (income) - net 1,219,000 73,000
State benefit, net of Federal tax effect (246,000) (47,000)
Valuation allowance on net operating loss 1,133,000 377,000
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The provision for Federal income taxes has been determined on the basis of
a consolidated tax return. At June 30, 1999, the Company had a net
operating loss carryforward for Federal income tax reporting purposes
amounting to approximately $3,975,000, expiring from 2018 through 2019. The
Internal Revenue Code of 1986, as amended, limits the amount of taxable
income the Company may offset with net operating loss carryforwards in any
single year. No Federal taxes were paid in the year ended June 30, 1999 and
the period October 1, 1997 (date of inception) to June 30, 1998.
NOTE 8 - STOCKHOLDERS' EQUITY
On February 2, 1999, the Company's Board of Directors amended the
certificate of incorporation, increasing the number of authorized shares
from 20 million to 45 million, of which 5 million are preferred shares.
F-18
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 8 (CONTINUED)
WARRANTS
Warrant activity for the year ended June 30, 1999 is summarized as follows:
<TABLE><CAPTION>
Weighted-
average
exercise
Shares price
----------- -----------
<S> <C> <C>
Outstanding at the beginning of the year -- --
Issued 1,328,498 $ .96
Exercised (116,084) $ .66
-----------
Outstanding at the end of the year 1,212,414 $ .99
=========
Warrants exercisable at year-end 1,212,414 $ .99
=========
Weighted-average fair value of warrants
granted during the year $ .59
</TABLE>
Information, at date of issuance, regarding stock warrant grants during the
year ended June 30, 1999 is summarized as follows:
<TABLE><CAPTION>
Weighted- Weighted-
average average
exercise fair
Shares price value
----------- ----------- -----------
<S> <C> <C> <C>
Exercise price exceeds market price 90,000 $ 3.00 $ .66
Exercise price equals market price 418,498 $ .61 $ .35
Exercise price is less than market price 820,000 $ .91 $ .70
</TABLE>
F-19
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 8 (CONTINUED)
The following table summarizes information about warrants outstanding and
exercisable June 30, 1999:
Outstanding
and exercisable
-------------------------------------------
Weighted-
average Weighted-
remaining average
Number life in exercise
outstanding years price
----------- ----------- -----------
Range of exercise prices
$.60 to $.85 ............. 877,414 3.69 $ .69
$1.00 to $1.25 ........... 145,000 4.33 1.03
$1.75 .................... 100,000 4.58 1.75
$3.00 .................... 90,000 4.17 3.00
-----------
1,212,414
===========
Certain warrant agreements contain a cashless exercise provision, whereby
the warrants may be exercised solely by the surrender of the warrants, and
without the payment of the exercise price in cash, for that number of
warrant shares determined by dividing the difference of the market price of
the shares of common stock issuable upon exercise of the warrants and the
warrant exercise price by the market price of the common stock on the date
of exercise. At June 30, 1999, 677,500 warrants were outstanding with
cashless exercise provisions.
STOCK OPTION PLAN
In 1998, the Company adopted the 1998 Equity Incentive Plan (the "Plan")
for employees, officers, consultants and directors of the Company, pursuant
to which the Company may grant incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock or deferred stock. The
Plan provides for each director to be granted (a) director stock options to
acquire 20,000 shares of common stock upon the initial acceptance to serve
as a member of the Board and (b) director options to acquire additional
shares immediately following the date of each annual meeting of
shareholders ranging from 10,000 shares in year one to 50,000 shares in
year five and thereafter. The total number of shares of the Company's
common stock available for distribution under the Plan is 3,000,000. The
Plan is administered by the stock option committee of the board, whose
members are appointed by the board
F-20
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 8 (CONTINUED)
of directors, which has the authority to designate the number of shares to
be covered by each award, the vesting schedule of such award and cashless
exercise rights, among other terms. The option period during which an
option may be exercised shall not exceed ten years from the date of grant
and will be subject to such other terms and conditions of the Plan. In
addition, the Plan contains certain acceleration provisions in the event of
a "change in control," as defined by the underlying agreement. Unless the
stock option committee provides otherwise, option awards terminate when a
participant's employment or services end, except that a participant may
exercise an option to the extent that it was exercisable on the date of
termination for a period of time thereafter if the participant was
involuntarily terminated without cause.
The Plan will terminate automatically on June 30, 2008.
Incentive stock option awards are granted at prices equal to or above the
fair market value of the stock on the date of grant. Nonqualified stock
option awards and director options are granted at prices equal to 80% and
85%, respectively, of the fair market value of the stock on the date of
grant. As of June 30, 1999, 1,387,500 shares were available for granting of
options under the Plan.
The Company's stock option awards granted to employees, consultants and
directors for the year ended June 30, 1999 and the period October 1, 1997
(date of inception) to June 30, 1998 are summarized as follows:
<TABLE><CAPTION>
1999 1998
--------------------------- ---------------------------
WEIGHTED- Weighted-
AVERAGE average
EXERCISE exercise
SHARES PRICE Shares price
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,200,000 $ .60 -- --
Awards granted 412,500 $ .85 1,200,000 $ .60
----------- -----------
Outstanding at end of year 1,612,500 $ .67 1,200,000 $ .60
=========== ===========
Options exercisable at year-end 1,612,500 $ .67 1,200,000 $ .60
=========== ===========
Weighted-average fair value
of options granted during the year $ .57 $ .42
</TABLE>
F-21
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 8 (CONTINUED)
The following information applies to options outstanding and exercisable at
June 30, 1999:
Outstanding
and exercisable
-------------------------------------------
Weighted-
average Weighted-
remaining average
Number life in exercise
outstanding years price
----------- ----------- -----------
$ .60 ...................... 1,350,000 8.94 $ .60
$ 1.00 ...................... 262,500 4.42 $ 1.00
-----------
1,612,500
===========
At June 30, 1999, there were approximately 5,738,000 shares of common stock
reserved for issuance pursuant to outstanding stock warrants, the stock
option plan and subordinated convertible debentures.
The Company accounts for stock-based compensation under the guidelines of
APB Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees," as allowed by Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense was recognized concerning stock
options granted to key employees and to members of the board of directors,
as such stock options were granted to board members in their capacity as
directors. Compensation expense of $450,870 and $147,000 was recognized for
the year ended June 30, 1999 and the period October 1, 1997(date of
inception) to June 30, 1998, respectively, for stock warrants and stock
options granted to consultants.
During the year ended June 30, 1999, the Company issued 175,000 stock
warrants to CDKnet's former president in connection with a termination and
severance agreement. In addition to severance payments, the Company
recorded an expense of $91,000, representing the fair value of the stock
warrants with a credit to paid-in capital.
F-22
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 8 (CONTINUED)
If the Company had elected to recognize compensation expense based upon the
fair value at the grant date for options granted to key employees and to
members of the board of directors consistent with the "fair value"
methodology prescribed by SFAS No. 123, the Company's net loss and net loss
per share for the year ended June 30, 1999 and net loss for the period
October 1, 1997 (date of inception) to June 30, 1998 would be reduced to
the pro forma amounts indicated below:
1999 1998
----------- -----------
Net loss
As reported $(6,194,600) $(1,184,475)
Pro forma (6,230,225) (1,541,475)
Net loss per common share - basic and diluted
As reported $ (.47)
Pro forma (.47)
The fair value of each stock warrant or option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for: dividend yields of zero in 1999
and 1998; risk-free interest rates ranging from 4.30% to 5.40% in 1999 and
5.70% in 1998; expected terms of 1 to 5 years in 1999 and 5 years in 1998;
and expected stock price volatility of 85% in 1999 and 1998.
NOTE 9 - RELATED PARTY TRANSACTIONS
a. During the year ended June 30, 1999 and the period October 1, 1997
(date of inception) to June 30, 1998, legal services of $168,393 and
$201,039, respectively, were provided by a firm (the "Firm") in which
the Company's CEO and principal stockholder is the managing partner.
Further, the Firm provided office space and accounting services for
which no fees were paid. During the year ended June 30, 1999 the
Company recorded an expense of $47,000 for such donated services with a
corresponding credit to paid-in capital.
In fiscal 1999, the Company entered into a $150,000 demand loan with
the Firm at an interest rate of 11% and issued 150,000 stock warrants
at $.66 exercisable through October 1, 2003. The detachable warrants
with a fair value of $42,000 were accounted for as additional interest
cost with a credit to paid-in capital. At June 30, 1999,the outstanding
loan balance is $60,000.
F-23
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 9 (CONTINUED)
On May 15, 1998, the Company granted 150,000 stock options issued under
the Plan (see Note 8) with an exercise price of $.60 to a partner in
the aforementioned law firm for legal services rendered. The fair value
of such services was $63,000, which was computed using the
Black-Scholes option-pricing model (see Note 8).
b. During fiscal 1999, certain stockholders of the Company provided loans
to the Company aggregating $150,000. In connection with the loans, the
Company granted 150,000 stock warrants with an exercise price of $.66,
exercisable through October 1, 2003. The detachable warrants with fair
value of $42,057 was accounted for as additional interest cost with a
corresponding credit to paid-in capital. The fair value of stock
warrants was computed using the Black-Scholes option-pricing model (see
Note 8). After the partial repayment of these loans, the stockholders
used the remaining loan balances to effectuate the exercise of certain
of the aforementioned stock warrants.
c. During the year ended June 30, 1999 and the period October 1, 1997(date
of inception) to June 30, 1998, CDKnet provided noninterest-bearing
advances to KME of $29,033 and $848,541, respectively. Such advances
plus the notes from KME of $712,000 which was accounted for as a
subscription receivable (see Notes 1 and 2(c)) were extinguished as
follows: 1) $600,000 was deemed consideration in the purchase of KME's
interest in CDKnet, 2) $800,000 was accounted for as settlement by
CDKnet of a portion of KME's ownership interest in CDKnet and 3) the
remaining amounts of $29,033 in 1999 and $160,307 in 1998 were deemed
uncollectible and recorded as uncollectible advances since KME no
longer held a membership interest in CDKNet.
d. In June 1999, the Company entered into a finder's agreement with a
consultant, who became CDKnet's president effective as of August 1,
1999, and a third party whereby the Company issued 100,000 stock
warrants at an exercise price of $1.00 to the third party upon
execution of the agreement and agreed to pay both parties future fees
upon consummation of financing, purchase or venture transactions with
entities introduced by them, as defined. During the year ended June 30,
1999, the Company recorded an expense of $100,000 representing the fair
value of the stock warrants, which was computed using the Black-Scholes
option-pricing model (see Note 8).
F-24
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 10 - COMMITMENTS AND CONTINGENCIES
A. FACILITY AND EQUIPMENT
The Company occupies its New York City office space under a
month-to-month lease with KME. In addition, the Company is leasing
telephone equipment on a month-to-month lease with KME. Rent expenses
for the office space and equipment for the year ended June 30, 1999 and
the period October 1, 1997 (date of inception) to June 30, 1998 were
approximately $145,000 and $124,000, respectively.
B. LITIGATION MATTERS
The Company is involved in claims and disputes which arise in the
normal course of business. Management believes that the resolution of
these matters will not have a material adverse effect of the Company's
financial position or results of operations.
NOTE 11 - RESTATEMENT
The Company engaged Grant Thornton LLP to reaudit the consolidated
financial statements as of June 30, 1998 and for the period October 1, 1997
(date of inception) to June 30, 1998. In connection with the reaudit,
management restated such financial statements to record adjustments
relating to, among others, the accounting for: stock warrants and options
granted, merger and acquisition transactions, and minority interests. The
effect of the adjustments increased the net loss, as previously reported
from $707,527 to $1,184,475, as restated.
NOTE 12 - SUBSEQUENT EVENTS
a. On August 1, 1999, the Company issued an aggregate of 1,030,000 stock
options to the Company's CEO and an employee at an exercise price of
$1.00. The quoted market price of the Company's stock at the date of
grant ranged from $1.00 - $1.50 (see Note 13(d)).
b. On August 1, 1999, CDKnet entered into a two-year employment agreement
with its president. The agreement provides for a minimum annual salary
of $150,000 and the issuance of 750,000 stock options, expiring in five
years, with an exercise price of $1.00 vesting over the term of the
agreement or earlier if a change in control or CDKnet terminates the
agreement without cause. The quoted market value of the Company's stock
on the date of grant was $1.50. The agreement provides for six months
of severance pay. All payments under the agreement are guaranteed by
CDK. During the three months ended September 30, 1999 the Company
recorded compensation expense relating to the stock options of $46,875.
F-25
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 12 (CONTINUED)
On August 1, 1999, CDKnet entered into a two-year employment agreement
with an executive vice president. The agreement provides for a minimum
annual salary of $150,000 and the issuance of 1,000,000 stock options,
expiring in five years, with an exercise price of $1.00 vesting over
the term of the agreement or earlier if a change in control or CDKnet
terminates the agreement without cause. The quoted market value of the
Company's stock on the date of grant was $1.50. The agreement provides
for severance payments, under certain conditions, for the unexpired
term of the agreement. All payments under the agreement are guaranteed
by CDK. During the three months ended September 30, 1999, the Company
recorded a compensation expense relating to the stock options of
$65,000.
c. On October 1, 1999, the Company gave notice to the holders of the 5.75%
Subordinated Convertible Debentures (see Note 6) and exercised its
right to call the outstanding Debentures in exchange for 5.75%
Convertible Preferred Stock. Under the terms of the Debentures, the
Convertible Preferred Stock shall have: (1) liquidation preferences
equal to the principal amount of the Debenture, (2) a 5.75% cumulative
annual dividend payable quarterly, (3) rights to convert into shares of
Common Stock at the same conversion rate as the Debentures and (4) the
same redemption rights at the option of the Company.
d. On October 5, 1999, the Company obtained a sixty-day waiver from the
holders of the 6% and 5.75% Subordinated Convertible Debentures to
waive any event of default relating to the common stock of the Company
being suspended from an exchange or over-the-counter market.
e. During August and September 1999, the Company issued 332,000 shares of
common stock to an unrelated investor and received net proceeds of
$310,000. In connection with the transaction, the investor was given a
30-day option, which expired September 17, 1999, to purchase up to an
additional 2,668,000 shares of common stock for approximately
$3,410,000.
NOTE 13 - UNAUDITED INTERIM FINANCIAL INFORMATION
a. In August 1999, stock options to purchase 400,000 shares of common
stock were exercised, using cashless exercises pursuant to which
300,000 shares of common stock were issued.
b. On November 1, 1999, pursuant to a securities purchase agreement, the
Company issued 1,000,000 shares of common stock and received net
proceeds of $500,000. Further, in connection with the agreement, the
Company issued 200,000 stock warrants, expiring May 2002, with an
exercise price of $1.25 per share and granted the purchasers the option
to purchase an additional 2,000,000 shares of common stock for $.50 per
share through December 31, 1999.
F-26
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 13 (CONTINUED)
c. On November 2, 1999, the Company issued 1,250,000 shares of common
stock and received net proceeds of $437,500. In connection with the
transaction, in which the Company's CEO and other shareholders
fulfilled a commitment to invest $200,000 in the Company, the Company
issued 125,056 stock warrants, expiring November 2, 2001, at an
exercise price of $.75 per share. The warrants include provisions for
cashless exercises and adjustments to the purchase price and the number
of shares, as defined. Further, the Company and the purchasers executed
a registration rights agreement which requires mandatory registration
of the shares issued within a specified period.
d. On November 16, 1999, the Company and the CEO rescinded 750,000 options
granted on August 1, 1999 to purchase the Company's common stock for no
future consideration (see Note 12(a)).
e. On November 16, 1999, pursuant to a Subscription Agreement with a third
party, the Company issued 200,000 shares of common stock and received
net proceeds of $100,000. In connection with the agreement, the
investor agreed to purchase an additional 1.6 million shares of common
stock at $.50 per share through May 2000. In addition, the Company and
the investor entered into a Technology and Licensing Agreement which
will give the Company a 4.89% interest in the investor and additional
fees upon completion of specified services and further, grants a
license to use certain of CDK's technology.
F-27
<PAGE>
EXHIBITS
--------
3.1* Articles of Incorporation of the Registrant.
3.2* Amendment to the Articles of Incorporation.
3.3* By-Laws of the Registrant.
3.4* Certificate of Merger of the Registrant.
3.5* Amendment to the Articles of Incorporation.
3.6* Designation of Series A Preferred Stock.
4.1* Specimen of Common Stock Certificate.
4.2* Technology Horizons Corp. Stockholders Agreement dated May 7,
1998.
5.1+ Opinion of Foley, Hoag & Eliot LLP
10.1* Technology Horizons Corp. 1998 Equity Incentive Plan.
10.2* Convertible Subordinated Debenture Due February 1, 2009.
10.2.1** Amendment No. 1 to Convertible Subordinated Debenture due
February 1, 2009
10.3* Registration Rights Agreement between Technology Horizons
Corp. and Kelly Music & Entertainment Corp. dated September 4,
1998.
10.4* Assignment Agreement between Kelly Music & Entertainment Corp.
and Technology Horizons Corp. dated September 4, 1998.
10.5* Amendment to Registration Rights Agreement between Technology
Horizons Corp. and Alvin Pock dated October 15, 1998.
10.6* Amendment to Registration Rights Agreement between Technology
Horizons Corp. and Robert L. Kelly dated October 15, 1998.
10.7* Registration Rights Agreement between Technology Horizons
Corp. and Robert L. Kelly dated June 3, 1998.
10.8* Registration Rights Agreement between Technology Horizons
Corp. and Alvin Pock dated June 3, 1998.
10.9* Assignment Agreement between Robert L. Kelly and Technology
Horizons Corp. dated June 3, 1998.
10.10* Assignment Agreement between Alvin Pock and Technology
Horizons Corp. dated June 3, 1998.
10.11* Assignment Agreement between Kelly Music & Entertainment Corp.
and CDKnet, LLC, dated June 3, 1998.
10.12* Employment Agreement, dated August 1, 1999, by and between
CDKNET.COM, INC. and Shai Bar-Lavi.
10.13**** Finder's Agreement between the Registrant and Shai Bar-Lavi
and Frederick Smithline dated June 1, 1999.
10.14** Employment Agreement dated August 1, 1999, by and between
CDKNET, LLC and Tom Ross.
10.15**** Stock Purchase Agreement between the Company and the Gross
Foundation, Inc., Steven A. Horowitz, Shai Bar-Lavi, and
Michael Sonnenberg dated November 2, 1999.
10.16#**** Subscription Agreement between CDKNET.COM, INC. and Asia
Pioneer Limited dated November 16, 1999.
10.17#**** Technology and License Agreement CDKNET.COM, INC. and Asia
Pioneer Limited dated November 16, 1999.
10.18**** Agreement dated March 19, 1999 between Peterson's and CDKnet,
LLC.
10.19**** Undated Registration Rights Agreement between Spiga Limited
and CDKNET.COM, INC.
10.20#**** Agreement dated October 25, 1999, between CDKnet, LLC and
Atomic Pop, LLC.
10.21**** Agreement dated March 29, 1999, between Central Park Media
Corp. and CDKnet LLC.
10.22**** Purchase Agreement dated August 9, 1999 between CDKNET.COM,
INC. and Y2G.COM.
10.23**** Convertible Subordinated Debenture Due September 1, 2003.
10.24**** Letter Agreement dated May 4, 1998, between Megaforce
Entertainment and CDKnet, LLC regarding the use of CDK
technology.
III-1
<PAGE>
10.25#**** Agreement dated August 5, 1999 between the Company and
DreamWorks Records.
10.26#**** Agreement dated September 16, 1999 between the Company and
CollegeMusic, Inc.
16.1 Letter from former Accountant, Wagner, Zwerman & Steinberg LLP
21* Subsidiaries of the Registrant
23.1**** Consent of Grant Thornton LLP
23.2*** Consent of Foley, Hoag & Eliot LLP
27 Financial Data Schedule
99.1**** Chart of the signatories to the Company's Stockholder's
Agreement (and their interest in the Company).
* Incorporated by reference from our Registration
Statement filed on Form 10-SB on October 7, 1999.
** Incorporated by reference from our Registration
Statement filed on Form 10-SB Amendment No. 2 on
November 26, 1999.
*** Incorporated in the Opinion of Foley, Hoag & Eliot
LLP in Exhibit 5 hereto.
**** Incorporated by reference from our Registration
Statement filed on Form SB-2 on December 21, 1999.
+ To be filed by amendment to our Registration
Statement on Form SB-2.
# Portions omitted. Confidential treatment requested.
III-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 3 to its registration
statement on Form 10-SB to be signed on its behalf by the undersigned, thereunto
duly authorized, on this 27th day of December, 1999.
CDKNET.COM, INC.
A Delaware corporation
By: /s/ Steven A. Horowitz
--------------------------------------
Name: Steven A. Horowitz
Chairman, Chief Executive Officer,
Chief Financial Officer and Secretary
III-3
EXHIBIT 16.1
------------
December 16, 1999
United States Securities
and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Attn.: Carol M. McGee, Esq,
Division of Corporate Finance
Dear Ms. McGee:
We received a request from CDKNET.COM, INC. (the "Company"), to write
to your office regarding the disclosure contained in the Form 10-SB filed
October 7, 1999 concerning the Company's change of auditors.
We have reviewed the Company's disclosure and agree in all respects
with the Company's characterization of its switch to another accounting firm to
provide audited financial reports.
Do not hesitate to call me if you have any questions.
Very truly yours,
Andrew Zwerman
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 1999 AND JUNE 30, 1999 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 3 MONTHS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998, YEAR ENDED JUNE 30, 1999 AND PERIOD OCTOBER 1, 1997
(DATE OF INCEPTION) TO JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
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