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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 2
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.
(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) 222-2345
WWW.CDKNET.COM
(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
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PART 1
PAGE
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ITEM 1. DESCRIPTION OF BUSINESS AND SPECIAL RISK FACTORS.......................................... 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ..................................................... 13
ITEM 3. DESCRIPTION OF PROPERTY................................................................... 18
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................................................. 18
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS....................................................................... 22
ITEM 6. EXECUTIVE COMPENSATION.................................................................... 25
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 28
ITEM 8. DESCRIPTION OF SECURITIES................................................................. 29
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................................... 30
ITEM 2. LEGAL PROCEEDINGS......................................................................... 31
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS............................................. 31
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES................................................... 31
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS................................................. 33
PART F/S
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA........................................................... 34
PART III
ITEM 1. INDEX TO EXHIBITS .......................................................................... 35
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CAUTIONARY STATEMENT
All statements, trends, analyses and other information contained in this Form
10-SB Registration Statement 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," "plan," "intend," "expect," and other similar expressions constitute
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to certain risks and uncertainties that
are difficult to predict. Potential risks and uncertainties include those set
forth below in "Item 1. Description of Business and Special Risk Factors."
Particular attention should be paid to the cautionary statements involving the
Company's limited operating history, the unpredictability of its 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
We have described several risk factors which we believe are significant and
should be given careful consideration by you when you evaluate CDKNET.COM, INC.
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:
- 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.
- 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. (See "Special Risk
Factors -- Our ability to continue operations is in question" and "-- Our
financial condition is highly uncertain and we need to obtain significant
additional financing to avoid bankruptcy.")
ITEM 1. DESCRIPTION OF BUSINESS AND SPECIAL RISK FACTORS
1. GENERAL
CDKNET.COM, INC. ("CDK" and, collectively with its subsidiaries, the "Company")
is a New York-based Internet company that has developed a multimedia technology,
CDK-TM-, integrating audio, video and Internet connectivity on a standard
compact disc ("CD"). The Company's MixFactory-TM- system, an extension of the
core CDK-TM- technology, enables users to create their own personalized CDs from
a Website. These custom CDs include full-screen, high-quality videos, digital
audio, software applications and targeted Web links. The Company's unaudited
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financial statements for the period July 1, 1999 to September 30, 1999, reflect
$23,663 in net revenues. The Company generated $474,344 in net revenues in the
year ended June 30, 1999. $317,810 of such revenues from CDK-TM- technology came
from two customers, one of which accounted for approximately $241,915. The
Company intends 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. The Company is currently capable of providing services in each of these
areas.
The Company requires substantial additional working capital to expand production
capabilities for CDK-TM- and MixFactory-TM-, expand business development efforts
and implement marketing programs. (See "Special Risk Factors -- Our ability to
continue operations is in question" and "-- Our financial condition is highly
uncertain and we need to obtain significant additional financing to avoid
bankruptcy.")
As of November 12, 1999, the Company had 17,006,157 shares of common stock
issued and outstanding. Of these shares, 2,191,602 shares are restricted stock
owned by certain directors and key employees of the Company. The remaining
14,814,555 shares are owned by approximately 79 shareholders, 7 of whom the
Company believes holds more than five percent (5%) ownership of the Company.
(See "Item 4. Security Ownership of Certain Beneficial Owners and Management").
On October 7, 1999, the Company's stock was delisted from the National
Association of Securities Dealers ("NASD") Over-the-Counter Bulletin Board
("OTCBB"). The Company's common stock is currently being traded on the so-called
"Pink Sheets" under the symbol "CDKX." (See "Special Risk Factors -- Our shares
will be traded on the so-called Pink Sheets.")
2. COMPANY HISTORY
CDKNET.COM, INC. ("CDK" and, collectively with its subsidiaries, the "Company")
is a holding company formed under the laws of the State of Delaware with its
executive offices located at 595 Stewart Avenue, Suite 710, Garden City, New
York 11530. CDK operates its business through CDKnet, LLC, the Company's wholly
owned subsidiary, which is a New York limited liability company ("CDKnet"). The
Company's manufacturing, research and development is conducted out of CDKnet's
office located at 250 West 57th Street, Suite 1101, New York, New York 10019.
The Company's offices may be contacted by telephone at 212-547-6050 or on its
website at: WWW.CDKNET.COM.
Prior to December 16, 1998, CDK was known as Technology Horizons Corp., a
Delaware corporation ("Technology Horizons"), which was formed on May 7, 1998.
CDK began trading on the OTCBB on May 21, 1998, under the symbol "THCX." On May
21, 1998, CDK merged with International Pizza Group, Inc. ("IPGI"), a Florida
corporation that was inactive but had its common stock traded on the OTCBB under
the symbol "IPZZ." As a result of the merger, CDK acquired the net assets of
IPGI.
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Creative Technology, LLC ("Creative") is a limited liability corporation
organized under the laws of the State of New York on August 20, 1997, and in
November, 1997 acquired a 40% interest and voting control in CDKnet in exchange
for capital contributions of approximately $750,000 and subordinated loans of
$750,000. Subsequently, Creative's interest in CDKnet was increased to 51.5%
though a combination of conversion of additional loans to CDKnet and a reduction
of the interest of Kelly Music and Entertainment Corp., a Delaware Corporation
founded in 1995 ("KME"), in CDKnet resulting from the reduction of loans
receivable from KME for a reduction in their interest in CDKnet. On May 21,
1998, CDK acquired all of the membership interests in Creative in exchange for
six million shares of Technology Horizons' stock.
On November 11, 1997, KME contributed all of the intellectual property which
forms the core of the Company's products and certain other assets to CDKnet in
exchange for a 40% member interest in CDKnet. Alvin Pock and Robert Kelly, both
principals of KME, contributed certain collateralized notes of KME for an
aggregate of 20% of the membership interests in CDKnet. Subsequently, Alvin
Pock's and Robert Kelly's interests were increased to an aggregate of 22.35%
through a combination of additional contributions as well as the conversion of
addition loans to CDKnet. On June 3, 1998, CDK acquired an additional 22.35%
interest in CDKnet from Messrs. Pock and Kelly for 1,300,363 shares of CDK's
common stock, bringing its ownership in CDKnet to approximately 74%. On July 8,
1998, CDK acquired the balance of the ownership interests of CDKnet from KME in
exchange for 1,883,635 shares of CDK's common stock.
On December 16, 1998, Technology Horizons changed its name to CDKNET.COM, INC.
and, on December 18, 1998, began trading on the OTCBB under the symbol "CDKX".
No other material organizational changes occurred in the Company, nor were there
any additional acquisitions or mergers, after December 1998.
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. The Company believes 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 all navigable by a standard web browser. The
Company's CDK-TM- technology forms the foundation multimedia for CD-ROM
authoring, production, and custom online compilations.
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The Company believes 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. The Company believes that the industry will
become more competitive. The Company's 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, multi-session,
custom multimedia CDs, the Company believes that none offer the economic,
development or quality advantages of the Company's CDK-TM- and MixFactory-TM-
technology. The Company believes 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, the
Company believes that none of these companies offers custom multi-session CD
development. In an effort to further secure a strong position in the
marketplace, CDKnet has submitted patent requests for certain aspects of the
Company's technology. Finally, the Company believes 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
The Company has developed and is marketing the following products and services:
CDK-TM- TECHNOLOGY
CDK-TM- technology combines CD digital audio, full-motion, full-screen video
and web linking through a browser interface. The CDK-TM- HTML authoring
system is used by CDKnet to produce custom HTML interface pages for specific
clients in about a day. The Company has proprietary techniques for creating
fullmotion, fullscreen video playback from CD-ROM with low-PC minimum system
requirements (PC-Side: Pentium 166 mmx, MAC-Side: Macintosh G3).
CDK-TM- has been engineered to offer compatibility with the majority of CD-ROM
drives on the market. The Company believes that it has achieved a high level of
reliability, as evidenced by
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extensive testing and major CDK-TM- releases, and the Company believes this
reliability will provide a major competitive advantage over other multisession
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
template for quick development turn-around time.
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 the
Company's review of current custom-CD operations in the marketplace, the Company
believes 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 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.
The Company plans to form agreements with multiple content providers. The
Company expects to leverage the planned MixFactory.com-TM- Website to serve
as a portal to 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, the
Company expects the site will have extensive search and browse capability
that will guide the user to a wide range of digital entertainment Websites
and content. The Company also plans that the portal will provide a custom-CD
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.
The Company believes some of the specific benefits of the MixFactory-TM- model
to the content provider include:
- a new marketing platform for goods and services that drives Web
traffic and provides valuable customer information from both buyers
and non-buyers
- the opportunity to leverage marketable inventory that was previously
"dormant"
- attractive operating efficiencies (e.g., no added inventory costs)
- targeted mailing lists
- new advertising revenue opportunity on customized CDs
- return hits to the content provider's Website direct from the
customized CD
- cross-promotion from the MixFactory.com-TM- Website
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Additional possible sources of income for the Company from the MixFactory-TM-
operation include advertising revenues from the MixFactory.com-TM- Website
and possible revenue sharing from advertising on the Company's partners'
MixFactory-TM- sites. The Company also plans 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 a Red
Book audio session along with an iso9660 session 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. The Company
is currently investigating equipment that will automate the packing process.
MIXFACTORY.COM-TM- PORTAL SITE
The Company expects MixFactory.com-TM- to serve as a Web portal for digital
multimedia content, including music, movies, and game demos. The Company plans
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.
The Company believes 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.
The Company believes 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 the Company's knowledge, does not currently
exist on the Internet.
B. RESEARCH & DEVELOPMENT
Through the fiscal year ending June 30, 1999, the Company expended $343,000 on
research and development of its products and services. Since July 1, 1999, the
Company has expended approximately
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$108,000 on research and development. The Company anticipates that its
research and development costs will increase during fiscal 2000.
Among the Company's various activities, it is transitioning to a Unix-based
manufacturing system and is developing products and services which will deliver
customized and client specific information to customers. The Company is
continuing development of both the newly released CDK 2.0 technology as well as
MixFactory-TM-, the Company's customized multimedia CD system.
Additionally, CDKnet is currently in the process of developing a software based
communication module enabling marketers to develop true one-to-one relationships
with consumers. The Company will distribute the module through Web-connected
multimedia CDs.
During fiscal 1999 and through September 30, 1999, the Company continued to
enhance the value of its product/service offerings through ongoing research and
development efforts. Specifically, the Company is engaged in the following
internal projects:
- An enhanced version of CDK-TM- (1.5) that is Macintosh compatible.
This version was released on June 10, 1999.
- 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.
- Efforts are underway to integrate 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, the Company is evaluating other opportunities to take
advantage of this technology.
5. SALES AND MARKETING
A. STRATEGY
The Company's 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. The Company plans 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
Company-licensed content that is then sold through a Company-owned Website.
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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. Companies using the technology for
promotional purposes are charged a per-disc fee based on the total quantity
replicated.
The Company believes 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 the Company.
B. PLAN OF OPERATION
Effective August 1, 1999, the Company hired Tom Ross as President of the
Entertainment Group. Mr. Ross will head the Company's planned office in Los
Angeles, California which will focus on business development within the
entertainment industry. The Company's 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.
The Company plans to raise additional financing to fund its operations through
private placements of equity securities. The Company needs to raise such
financing to continue its operations. If the Company is not successful, the
Company may have to seek protection of the bankruptcy courts. (See "Special Risk
Factors -- Our ability to continue operations is in question" and "-- Our
financial condition is highly uncertain and we need to obtain significant
additional financing to avoid bankruptcy.")
6. INTELLECTUAL PROPERTY RIGHTS
The Company relies on copyrights, trademarks, trade secret laws and contractual
restrictions to establish and protect its proprietary rights in its services and
products. The Company does not have any patented technology at this time that
would limit competitors from entering the Company's market. However, the Company
has a patent 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.
The Company's intellectual property counsel informed the Company that this
patent application should be allowed soon. The intellectual property counsel has
filed a continuation application to separate the earlier rejected claims into a
new application, leaving the new claims in the parent application. A notice of
allowance from the examiner is expected soon.
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 the
Company. Management of the Company
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believes that the steps taken by the Company to protect its intellectual
property are consistent with industry standards for online, custom CD companies
today.
The Company also relies 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 certain
customers are also required to enter into confidentiality agreements.
To date, the Company has received no notification that its services or products
infringe the proprietary rights of third parties. Third parties could however
make such claims of infringement in the future. Any future claims that do occur
may have a material adverse affect on the Company and its business.
7. EMPLOYEES
As of September 30, 1999, the Company had 13 full-time and 1 part-time
employees. While sourcing and recruiting appropriate technical personnel is
often difficult and competitive, the Company expects that its need to recruit
additional personnel in the future will not negatively affect its operations.
Management believes that its employee relations are good, and none of the
Company's employees are represented by a collective bargaining unit.
8. SPECIAL RISK FACTORS
Investors should carefully consider the following information which outlines
special market and other risk factors affecting the industry and the Company.
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:
- continued losses
- use of significant cash in operations
- lack of sufficient funds to execute our business plan
The Company's unaudited financial statement for the period July 1, 1999 to
September 30, 1999 reflect $23,663 in net revenues.
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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 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
continue to 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. The ability of the Company 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 market our services and
build our brand names effectively, provide scalable, reliable and cost-effective
services, continue to grow our infrastructure to accommodate additional
customers and increased use of our products and services, expand its channels of
distribution, continue to respond to competitive developments and retain and
motivate qualified personnel.
WE NEED ADDITIONAL FINANCING IN ORDER TO CONTINUE OPERATIONS. The Company
currently plans to meet its capital requirements primarily through the issuance
of equity securities and, in the longer term, revenue from operations.
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 the 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
November 12, 1999, there were 17,006,157 shares of common stock outstanding of
which 13,404,333 are restricted or affiliate shares ("Restricted Shares"). Those
Restricted Shares will gradually be converted to free-trading shares, the sale
of which could have a material adverse effect on the future market price of our
common stock.
OUR SHARES WILL BE TRADED ON THE SO-CALLED "PINK SHEETS." Recently, the NASD
imposed eligibility requirements, which were approved by the U.S. Securities and
Exchange Commission ("SEC"), for listing on the OTCBB. As a result of these new
eligibility requirements, we were required to register under the Securities
Exchange Act of 1934 (the "Exchange Act") in order to maintain a listing on the
OTCBB. The current 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 SEC. We did not meet this deadline and, as a result, were delisted on
October 7, 1999. There continues to be a market for the Company's stock because
the Company qualifies for an SEC exemption that allows it to automatically be
quoted on the National Quotation Bureau's "Pink Sheets" until such
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time as the eligibility requirement for the OTCBB is met. Trading on the "Pink
Sheets" will result in a less liquid market for our stock than would exist on
the OTCBB.
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 being sold 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. In addition, the software market is subject
to rapid and substantial technological change. 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 any such services, products or
technologies will develop or will be commercially successful, that we will
benefit from such developments or that 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 its customer markets.
Although companies have focused their efforts as multi-session CD development,
we expect new companies will emerge and compete for the same customers. We
expect competition to increase from both established and emerging companies and
that such 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
the Company, 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
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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 such 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 such 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.
In addition, 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, such jurisdictions may
claim that we are required to qualify to do business as a foreign corporation in
each such state/province or that we have a permanent establishment in each such
foreign country. 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 such 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 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 Senior Vice President of Software
Development and Chief Technical Officer, Keith A. Fredericks; 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. We maintain
proprietary nondisclosure and non-compete agreements with certain 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
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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 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 its customers or third parties gaining
access to the Company's 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Form 10-SB and the documents incorporated herein by reference contain
forward-looking statements based on current expectation, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by management. All statements, trends, analyses and other
information contained in this report relative to trends in the Company's
financial condition and liquidity, as well as other statements, including, but
not limited to, words such as "anticipate," "believe," "plan," "intend,"
"expect," and other similar expressions constitute forward-looking statements.
These forward-looking statements are not guarantees of future performance and
are subject to certain risks and uncertainties that are difficult to predict.
Accordingly, actual results may differ materially from those anticipated or
expressed in such statements. Potential risks and uncertainties include, among
others, those set forth below. (See "Special Risk Factors" above.) Particular
attention should be paid to the cautionary statements involving the Company's
limited operating history, the unpredictability of its future revenues, the
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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
To date, we have 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. The Company's recent efforts to raise capital through equity
financing have been successful, providing near-term operating capital.
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.
The majority of funds have been allocated to 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 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 Limited has somewhat lessened that doubt.
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, expressing substantial
doubt about our ability to continue as a going concern. The reasons cited by
them include the following:
- continued losses
- use of significant cash in operations
- lack of sufficient funds to execute our business plan
During the period July 1, 1999 to September 30, 1999, the Company has raised a
total of $310,000 from the following private placement of equity:
--On August 9, 1999, the Company raised $155,000 from Y2G.com,
Inc. through the issuance of 216,000 shares of common stock.
On September 8, 1999, the Company sold Y2G an additional
116,000 shares of common stock for $155,000.
During the period November 1, 1999 through November 22, 1999, the Company raised
a total of $1,037,000 from the following placement of equity:
-- On November 1, 1999, the Company 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.
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-- On November 2, 1999, the Company 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 such investors to purchase an additional 125,056 shares of
common stock.
During fiscal 1999, the Company raised a total of $2.1 million from the
following private placements of debt and equity:
- Between September 4, 1998 and January 21, 1999, the
Company 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.
- On February 2, 1999, the Company 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, the Company raised a total of $224,986 from the following
private placements of debt and equity:
- On May 21, 1998, the Company's predecessor, IPGI,
issued 2,999,985 common shares as consideration for
$224,986 as part of a private placement. The Company
issued 7,300,363 common shares in connection with the
acquisition of a combined 73.85% of the equity
interests in CDKnet, LLC.
The proceeds from these issues have and will be used to (i) continue the ongoing
operation of the Company, (ii) development of CDK-TM-, Gameplayer, and
MixFactory.com-TM- product lines and (iii) to repay the Company's debt.
RESULTS OF OPERATIONS - JULY 1, 1999 TO SEPTEMBER 30, 1999
During the quarter ending September 30, 1999, the Company 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 the Company's focus shifted
to the enhancement of its core technologies, such as the perfection of its
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 the present, the Company has expended approximately $108,000 on
research and development.
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RESULTS OF OPERATIONS - 1999 COMPARED TO THE PERIOD ENDED JUNE 30, 1998.
During the fiscal year ending June 30, 1999, the Company 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 its CDKnet product line. Revenues
declined from $616,137 in the prior period because the Company's 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. The Company believes this minor improvement is within
normal variances and is not material.
The majority of the expenses incurred during the year ended June 30, 1999 were
research and development expenses 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 eight months and because of material increases
in payroll, consulting and professional fees related to expansion of the
Company's 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 certain minority interests of KME and various shareholders of
KME 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, including in selling, general and
administrative expenses, and the discount on certain convertible debentures and
other loans of $1,038,008.
At year end, cash amounted to $231,347 and current liabilities were $829,051.
The Company does not have sufficient funds to finance operations for the next
year. The Company expects to finance its operations through revenues from sales
of its products and services and through private placements of equity and debt
securities. If the Company is unable to raise additional financing, it may be
unable to continue operations. (See "Item 1. Description of Business and Special
Risk Factors" above.)
In March of 1999, the Company received approval by the United States Patent
Office of a variety of claims made in its 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 the Company's claims.
The Company is now actively marketing and beginning to sell CDKnet products and
has launched the first of several MixFactory-TM- sites.
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RESULTS OF OPERATIONS - OCTOBER 1, 1997 TO JUNE 30, 1998.
From October 1, 1997 (date of inception) to June 30, 1998, the Company 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.
The Company does 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 Form 10-SB that are not historically containing
forward looking statements and are made under the Safe Harbor Corporate Private
Sector Litigation Reform Act of 1995. The Company's actual result of operations
and financial condition have varied and may in the future vary significantly
from those stated in any forward looking statement. Factors that may cause such
differences include without limitation the risk, uncertainties and other
information discussed within this Form 10-SB, as well as the accuracy of the
Company's internal estimate of revenue and operating expense levels.
The Company faces a number of risk factors which may create circumstances beyond
the control of management and adversely impact the ability to achieve its
business plan. The key risk factors are the Company's 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
such "Year 2000" or "Y2K" requirements.
As of April 23, 1999, the Company completed the process of determining whether
or not its products, its internal systems, computers and software, and the
products and systems of its critical vendors and suppliers are Year 2000
compliant. The cost associated with this review has been minimal, primarily
because the Company has utilized internal personnel to complete the review, and
because the Company's 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.
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Given these results of its Year 2000 review, the Company believes that it might
experience some disruptions in certain of its peripheral operating systems or
with certain non-critical vendors but will otherwise be unaffected. The Company
believes 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 the Company believes 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 such issues. If the Company discovers 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.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's manufacturing, research and development is conducted out of
CDKnet'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 and Entertainment Corp. pursuant to a month-to-month
arrangement that will expire on April 30, 2000. The annual lease rate is
approximately $135,600. The Company offices may be contacted by telephone at
212-547-6050. All property is insured to industry standards.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
1. 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 November 12,
1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
BENEFICIAL STOCKHOLDER OF BENEFICIAL OWN CLASS (1)(2)
- ---------------------- ----------------- ------------
<S> <C> <C>
Kelly Music & Entertainment Corp. 1,798,745 10.6%
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
</TABLE>
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<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
BENEFICIAL STOCKHOLDER OF BENEFICIAL OWN CLASS (1)(2)
- ---------------------- ----------------- ------------
<S> <C> <C>
Michael Sonnenberg 990,735 5.8%
595 Stewart Avenue
Garden City, New York 11530
Casa di Cura Dr. Pederzoli Spa(4) 1,153,896 6.8%
c/o George Sandhu
The International Investment Group
17 State Street, 18th Floor
New York, New York 10004
Erno and Rachel Bodek 1,000,000 5.8%
c/o Victoria Sales Corporation
541 West 21st Street
New York, New York 10011
Beneficial Owners as a group (3) 6,793,354 39.9 %
</TABLE>
- ------------------------
Notes to table of non-management beneficial shareholders
(1) There were 17,006,157 shares of common stock outstanding as of November 12,
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 the Company's management each of whom individually owns 5%
or more of the Company's common stock. In addition to these individuals,
there is a large group of individuals who constitute beneficial owners of
the Company's common stock pursuant to the terms of the Company's
Stockholders Agreement dated May 7, 1998. Under the Stockholder's
Agreement, its 35 signatories are required to vote as a class under certain
circumstances. As a result, the signatories as a group may constitute
beneficial owners of the Company's common stock although each individually
owns less than 5% of the Company's common stock. The voting and certain
other provisions of the Shareholders Agreement have been rescinded by 16 of
the signatories to the Shareholders Agreement. The Company believes 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.
(4) Consists solely of shares which may be obtained upon the conversions of
1,500,000 Series A Preferred Stock after November 1, 1999. The Series A
Preferred Shares may be converted into shares of common stock in accordance
with a formula which permits the holders to convert the shares into common
stock at a conversion price which is to be 75% of the average market price
of the Company's common stock during the 5 day period ending 1 day prior to
the date of conversion. The holders of the Series A Preferred Shares are
also entitled to an additional number of common shares based upon the date
a Registration Statement is filed, which permits them to sell the shares
issuable upon the conversion.
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2. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the share ownership
of the Company's 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 November 12, 1999:
SHARES OF COMMON STOCK OWNED BENEFICIALLY AND OF
RECORD BY MANAGEMENT
<TABLE>
<CAPTION>
TITLE OF PERCENT OF
CLASS OF NAME AND ADDRESS AMOUNT AND NATURE CLASS
STOCK OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OWNED(1)(2)
- -------- ------------------- ------------------------ -----------
<S> <C> <C> <C>
Common Steven A. Horowitz 2,908,952(3) 17%
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
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) 4.4%
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
</TABLE>
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<TABLE>
<CAPTION>
TITLE OF PERCENT OF
CLASS OF NAME AND ADDRESS AMOUNT AND NATURE CLASS
STOCK OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OWNED(1)(2)
- -------- ------------------- ----------------------- -----------
<S> <C> <C> <C>
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 4,095,652(10) 24%
as a group (8 persons)
</TABLE>
- ----------------------------
Notes to table of beneficial shareholders
*Denotes less than 1%
(1) There were 17,006,157 shares of common stock outstanding as of November 12,
1999.
(2) Except for the limitations set forth in the Shareholders Agreement dated
May 7, 1998 (attached hereto as Exhibit 4.3), 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) Mr. Horowitz also has 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 the Chairman of the Board of Directors, CEO,
CFO and Secretary of the Company. The total includes 750,000 stock options
granted under the Company's 1998 Equity Incentive Plan (the "Plan"). This
figure does not include 150,000 warrants issued to Horowitz, Mencher,
Klosoloski & Nestler P.C., a law firm controlled by Mr. Horowitz, in
connection with a loan and loan extension. On November 16, 1999, Mr.
Horowitz renounced, for no future consideration, 750,000 options (granted
on August 1, 1999 and expiring on July 31, 2004) to purchase shares of the
Company's common stock at $1.00 per share.
(4) Mr. Schenker also has options to purchase 50,000 shares of the Company's
common stock under the Plan. Mr. Schenker is a director of the Company.
(5) Mr. Bonomo has options to purchase 50,000 shares of the Company's common
stock under the Plan.
(6) Mr. Bar-Lavi has warrants to purchase 750,000 shares of the Company's
common stock under the Plan.
(7) Mr. Fredericks and Mr. Jolly each have options to purchase 10,000 shares of
the Company's common stock under the Plan.
(8) Mr. Kern has options to purchase 143,333 shares of the Company's common
stock under the Plan.
(9) Mr. Ross has options to purchase $150,000 shares of the Company's common
stock pursuant to his employment agreement.
(10) Includes all stock options (1,163,333 shares of common stock) and 1,528,571
Warrants owned by officers and directors.
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3. CHANGE IN CONTROL
There are no arrangements known to the Company the operation of which may result
in a change of control of the Company.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS
1. DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth the directors and executive officers and key employees
of the Company as of November 12, 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.
<TABLE>
<CAPTION>
NAME OF DIRECTOR/ DATE ELECTED
POSITION HELD AGE POSITION HELD OR APPOINTED
- ----------------- --- ------------- ------------
<S> <C> <C> <C>
Steven Horowitz 40 Director, Chairman, May 1998
CEO, CFO and Secretary
Shai Bar-Lavi 40 President August 1999
Keith A. Fredericks 43 SR. Vice President of October 1998
Software Development and
Chief Technical Officer
Michael W. Jolly 31 Executive Vice President, October 1997
Entertainment Group
Russell A. Kern 32 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
</TABLE>
2. FAMILY RELATIONSHIPS
No family relationship exists between or among any of the directors, executive
officers, and significant employees, as defined below, of the Company or any
person contemplated to become such.
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3. BUSINESS EXPERIENCE
STEVEN A. HOROWITZ, ESQ. - Chairman, CEO, CFO and Secretary
Mr. Horowitz has served as Chairman of the Board of Directors, CEO, and
Secretary of the Company since May 1998, has served as CFO 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, & 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 COO 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. Prior to joining CDKnet,
Mr. Bar-Lavi served as Chief Operating Officer of the Hungarian Broadcasting
Corporation, a publicly traded company. 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.
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<PAGE>
KEITH A. FREDERICKS - SVP, Chief Technical Officer
Mr. Fredericks leads the project planning, project management, design,
implementation and testing of all products. Mr. Fredericks joined the Company
in 1998. Additionally, he works with the marketing team to shape the
Company's long term business objectives and strategies. Prior to CDKnet, Mr.
Fredericks served as CTO of Kelly Music and Entertainment where he led the
development of CDK-TM-. Before this, Mr. Fredericks was a key member of the
Networking and Communications group at Cray Research for 8 years.
MICHAEL W. JOLLY - EVP, Entertainment Group
Mr. Jolly is responsible for identifying and developing business opportunities
and strategic partnering opportunities within the entertainment industry.
Prior to joining CDKnet, Mr. Jolly served as Vice President of Marketing,
Secretary at Kelly Music and Entertainment Corp. (creator of CDK-TM-
Technology), where he developed music and entertainment products and built a
significant amount of music, movie and TV industry contact relationships.
Before that, Mr. Jolly held positions 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 - EVP, General Manager
Mr. Kern 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 three years as Director of Strategic
Planning at Poppe Tyson (now ModemMedia.PoppeTyson), developing successful Web
initiatives for a range of clients including IBM and Minolta. 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, former partner of Creative Artists Agency (CAA), is responsible for
identifying business opportunities within the entertainment, music and film
industries and securing partnership agreements.
-24-
<PAGE>
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.
4. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
None of the directors or executive officers of the Company have been involved in
any legal proceedings during the past five (5) years that are material to an
evaluation of their ability or integrity as a director or executive officer of
the Company.
ITEM 6. EXECUTIVE COMPENSATION
1. EXECUTIVE OFFICER COMPENSATION
The following table sets forth all compensation paid by the Company as of fiscal
year ended June 30, 1999, to all executive officers of the Company:
-25-
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION(9) LONG-TERM COMPENSATION
---------------------------------------------------------------------------------------------
AWARDS PAYOUTS
-------------------------------------------------
SECURITIES
OTHER UNDER-
ANNUAL RESTRICTED LYING ALL OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
($) ($) ($) ($) (#) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven A. Horowitz(1) FY99 7,500 --
- -----------------------------------------------------------------------------------------------------------------------------------
FY98 7,500 --
- -----------------------------------------------------------------------------------------------------------------------------------
Robert Kelly(2) FY99 95,192.38 -- 39,600(7)
- -----------------------------------------------------------------------------------------------------------------------------------
FY98 80,769.30 -- 39,600(7)
- -----------------------------------------------------------------------------------------------------------------------------------
Ronald Leong(3) FY99 147,534.98 -- 8,400(8)
- -----------------------------------------------------------------------------------------------------------------------------------
FY98 75,000.00 -- 8,400(8)
- -----------------------------------------------------------------------------------------------------------------------------------
Michael W. Jolly(4) FY99 69,615.38 --
- -----------------------------------------------------------------------------------------------------------------------------------
FY98 54,250.00 --
- -----------------------------------------------------------------------------------------------------------------------------------
Keith A. Fredericks(5) FY99 57,499.91 --
- -----------------------------------------------------------------------------------------------------------------------------------
FY98 27,885.00 --
- -----------------------------------------------------------------------------------------------------------------------------------
Russell A. Kern(6) FY99 79,999.92 --
- -----------------------------------------------------------------------------------------------------------------------------------
FY98 12,923.06 --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------
(1) Mr. Horowitz is Chairman, CEO, CFO, and Secretary of the Company.
(2) Mr. Kelly was formerly President of CDKnet, LLC with the Company. His
tenure ended on March 1999.
(3) Mr. Leong as the former President of the Company whose services ended on
May 31, 1999.
(4) Mr. Jolly is Executive Vice President, Entertainment Group of the Company.
(5) Mr. Fredericks is Senior Vice President and Chief Technical Officer of the
Company.
(6) Mr. Kern is Executive Vice President, General Manager of the Company.
(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 as a consultant
Shai Bar-Lavi $6,250 bi-monthly
Michael W. Jolly $3,541.67 bi-monthly
-26-
<PAGE>
Keith A. Fredericks $4,791.67 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 4/18/04
----------------------------------------------------------------------------------------------
Russell A. Kern 10,000 $1.00 4/18/04
----------------------------------------------------------------------------------------------
Ronald Leong 175,000 $ .80 4/19/01
----------------------------------------------------------------------------------------------
Robert Kelly 0 0 --
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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 $300,000/0
----------------------------------------------------------------------------------
Michael W. Jolly 0 0 10,000/0 0
----------------------------------------------------------------------------------
Russell A. Kern 0 0 10,000/0 0
----------------------------------------------------------------------------------
Ronald Leong 0 0 0 $ 35,000/0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
-27-
<PAGE>
2. COMPENSATION OF DIRECTORS
None of the Company's directors were compensated in fiscal year 1999 for their
services.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1. TRANSACTIONS WITH MANAGEMENT AND OTHERS; CERTAIN
BUSINESS RELATIONSHIPS; PROMOTERS
- On November 2, 1999, the Company sold 285,714 shares of common stock
for $100,000 to Steven A. Horowitz (Chairman, CEO, CFO, and Secretary
of the Company) along with two-year warrants to purchase 28,571 shares
of common stock.
- On November 16, 1999, Steven A. Horowitz renounced (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 the Company's common stock.
- 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 a firm (the "Firm") in which the Company's Chairman,
CEO, CFO, Secretary and principal stockholder is the managing partner.
Further, the Firm provided office space and accounting services for
which no fees were paid.
- 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.
- On May 15, 1998, the Company granted 150,000 stock options with an
exercise price of $.60 to a partner in the aforesaid mentioned Firm
for legal services rendered. The fair value of such services was
$63,000.
- During fiscal 1999, certain stockholders of the Company provided loans
to the Company aggregating $200,000. In connection with the loans, the
Company granted 200,000 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.
-28-
<PAGE>
- During the year ended June 30, 1999 and the period October 1, 1997 to
June 30, 1998, CDKnet provided noninterest-bearing advances to KME of
$29,033 and $848,541, respectively. Such advances plus the secured
notes from KME of $712,000 (see Notes to Financials 2(a) and (d)) 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 repurchase 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.
- In June 1999, the Company entered into a Finder's Agreement (attached
hereto as Exhibit 10.13) with CDKnet's president, Shai Bar-Lavi,
effective as of August 1, 1999, and a third party whereby the Company
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, the Company recorded an expense of $100,000
representing the fair value of the warrants issued.
- In fiscal 1999, Steven A. Horowitz, a Director and Officer of the
Company, loaned the Company an aggregate of $121,018, at no interest,
all of which has been repaid.
- During the period from March 27, 1998 to March 5, 1999, the Firm
advanced various sums to the Company, at no interest, totaling an
aggregate of $227,000, all of which has been repaid.
- During fiscal 1999, Steven A. Horowitz deposited the sum of $145,000
with Fleet Bank to collateralize a Fleet Bank loan to the Company. The
Company used the loan proceeds to finance the purchase of
manufacturing equipment from Bandai America Incorporated.
2. INDEBTEDNESS OF MANAGEMENT
No member of management of the Company is or has been indebted to the Company in
an amount in excess of $60,000. No director or executive officer is personally
liable for repayment of amounts advanced any financing received by the Company.
ITEM 8. DESCRIPTION OF THE COMPANY'S SECURITIES
1. GENERAL
The Company is 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. Each
share of common stock of the Company, 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
-29-
<PAGE>
the board of directors from funds legally available therefor, and is entitled to
a pro rata share of the Company's net assets in the event of dissolution,
liquidation or winding up of the Company.
The Company's 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 equity securities of the Company, including the Company's common stock.
2. DIVIDEND POLICY
To date, the Company has not paid a cash dividend and is currently contractually
restricted from doing so.
3. REPORTS TO SHAREHOLDERS
The Company intends to furnish its shareholders with annual reports of its
operations, containing financial statements. The Company will also file annual
and quarterly reports as required by the Securities Exchange Act of 1934, as
amended.
4. TRANSFER AGENT
The Company's transfer agent is Interwest Transfer Company, 1981 East 4800
South, Suite 100, Salt Lake City, UT 84117, (801) 272-9294.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
1. MARKET INFORMATION
On October 7, 1999, the Company's common stock was delisted from the OTCBB and
now trades on the so called "Pink Sheets" under the symbol "CDKX" until its
registration statement has completed the SEC's review process. As of November
12, 1999, the Company had 17,006,157 shares of common stock outstanding; of this
amount, 3,601,824 of such shares are nonrestricted; 13,404,333 of such shares
are restricted. As of November 12, 1999, the number of holders of record of the
common stock, $0.0001 par value, of the Company 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.
-30-
<PAGE>
<TABLE>
<CAPTION>
CALENDAR QUARTER BID PRICES
ENDED LOW HIGH
- ------------------------------------------------------------------------------------------
<S> <C> <C>
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
</TABLE>
2. DIVIDEND POLICY
To date, the Company has not paid a cash dividend and is currently contractually
restricted from doing so.
ITEM 2. LEGAL PROCEEDINGS
There is no litigation currently pending and the Company is 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
Company and OMNET Technology Corp. are currently reviewing the matter.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There exists no disagreement between the Company and its accountants on any
matter of accounting principles or practice or financial statement disclosure.
The Company recently changed audit firms because its prior auditors were not
qualified to practice before the SEC.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
As of November 12, 1999, there are issued and outstanding 17,006,157 shares of
common stock which were issued or sold in reliance upon the exemptions from
registration provided by Regulation D Securities Act and/or Section 4(2) of the
Securities Act as follows:
- During the period July 1, 1999 to present, the Company issued
3,047,000 shares of common stock for cash or services of $415,000,
250,000 options and 325,056 warrants to purchase common stock in
private placements, as follows:
- 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;
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<PAGE>
- 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.
- 150,000 shares to Lawrence Adams Ltd. through the exercise of
cashless options on September 14, 1999;
- 40,000 shares to Michael Sonnenberg through the exercise of
cashless options on September 14, 1999;
- 110,000 shares to Steven Wildstein through the exercise of
cashless options on September 14, 1999;
- 75,000 shares to Lawrence Adams Ltd. for services valued at
$75,000 on September 14, 1999;
- 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
certain milestones pursuant to the Software Agreement between the
Company 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;
- 1,000,000 shares to Erno and Rachel Bodek for $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.
- 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;
- 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;
- 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;
- 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.
- During the period from July 1, 1998 to June 30, 1999, the Company
issued 3,205,000 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, and 1,553,498 Warrants
to purchase common shares during the year ended June 30, 1999 for cash
proceeds of $2,100,000, net of issues costs of $212,581, where 100,000
common shares and 100,000 Warrants were issued to Bandai Holdings USA
for the purchase of equipment used in the Company's
MixFactory.com-TM- E-Commerce facility, 1,883,635 common shares
were issued
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<PAGE>
to Kelly Music and Entertainment, Inc. for the purchase of its 26.15%
interest in CDKnet thereby securing for the Company 100% of the equity
interests of CDKnet.
- During the period October 1, 1997 (date of inception) to June 30,
1998, the Company's predecessor, IPGI, issued 2,999,985 common shares
$224,986 as part of a private placement. The Company issued 7,300,363
common shares in connection with the acquisition of 73.85% of the
equity interests in CDKnet.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware law sets forth the powers of the Company to indemnify officers,
directors, employees and agents. The Articles of Incorporation for the Company
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
such 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 to the extent herein above set forth, there is no charter provision,
bylaw, contract, arrangement or statute pursuant to which any director or
officer of the Company is indemnified in any manner against any liability which
he may incur in his capacity as such. The Company does not maintain director and
officer liability policy to fund the Company's obligations as stated herein
above.
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<PAGE>
PART F/S
- --------
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements of the Company can be found on pages 38-64 herein.
-34-
<PAGE>
PART III
- --------
<TABLE>
<CAPTION>
ITEM 1. INDEX TO EXHIBITS
EXHIBIT PAGE
- ------- ----
<S> <C>
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.
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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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, LLC 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.
21* Subsidiaries of the Registrant
</TABLE>
* Incorporated by reference from the Registrant's Registration Statement filed
on Form 10-SB on October 7, 1999.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 2 to its registration
statement on Form 10-SB to be signed on its behalf by the undersigned, thereunto
duly authorized, on this 23rd day of November, 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
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<PAGE>
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants 39
Financial Statements
Consolidated Balance Sheets at September 30, 1999 and June 30, 1999 40
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 41
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 42 - 43
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 44 - 45
Notes to Consolidated Financial Statements 46 - 64
</TABLE>
38
<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
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<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, June 30,
ASSETS 1999 1999
-------------- ----------
(UNAUDITED)
CURRENT ASSETS
<S> <C> <C>
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 12,786,667 12,185,100
Accumulated deficit (8,508,954) (7,332,075)
----------- ------------
4,279,194 4,854,430
----------- ------------
$ 6,864,220 $ 7,559,897
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
-40-
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period
October 1, 1997
(date of
inception) to
Year ended June 30,
THREE MONTHS ENDED SEPTEMBER 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 675,033 784,734 3,257,551 1,580,478
Depreciation and amortization 483,297 529,585 1,981,130 133,776
------------ ----------- ---------- -----------
Loss from operations (1,149,625) (1,251,742) (5,053,099) (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 $(1,176,879) $(1,354,188) $(6,147,600) $(1,184,475)
========== ========== ========== ==========
Basic and diluted earnings (loss) per share $(.08) $(.11) $(.46)
==== ==== ====
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.
-41-
<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>
Additional
Common Stock Member Paid-in Accumulated
-----------------------
Shares Amount Capital Capital Deficit
----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C>
Balance, October 1, 1997
Issuance of membership interest in Creative
Technology, LLC $ 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
Common stock issued for purchase of
minority interests 1,300,363 130 3,146,571
Compensation related to stock option plan 147,000
Net loss, as restated $(1,184,475)
----------- ---------- ----------- ----------- ------------
Balance, June 30, 1998 11,300,348 1,130 - 5,250,759 (1,184,475)
Common stock and stock warrants issued for
purchase of fixed assets 75,000 8 143,742
Common stock issued for purchase of minority
interests 1,883,635 188 4,505,934
Debt discount 1,142,008
Conversion of subordinated debentures 476,358 48 324,952
Common stock and stock warrants issued for
financing costs 16,667 2 50,898
Exercise of stock options 116,084 12 69,988
Compensation related to stock option plan 201,000
Common stock and stock warrants issued for
services 175,000 17 395,698
Common stock issued in lieu of cash interest 3,814 9,121
Stock warrants issued for termination agreement 91,000
Net loss (6,147,600)
----------- ---------- ----------- ----------- ------------
Balance, June 30, 1999 (carried forward) 14,046,906 1,405 - 12,185,100 (7,332,075)
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
---------------
<S> <C>
Balance, October 1, 1997
Issuance of membership interest in Creative
Technology, LLC $ 1,735,000
Common stock issued for exchange of member
capital of Creative Technology, LLC
Common stock issued in merger with
International Pizza Group, Inc. 223,188
Common stock issued for purchase of
minority interests 3,146,701
Compensation related to stock option plan 147,000
Net loss, as restated (1,184,475)
---------------
Balance, June 30, 1998 4,067,414
Common stock and stock warrants issued for
purchase of fixed assets 143,750
Common stock issued for purchase of minority
interests 4,506,122
Debt discount 1,142,008
Conversion of subordinated debentures 325,000
Common stock and stock warrants issued for
financing costs 50,900
Exercise of stock options 70,000
Compensation related to stock option plan 201,000
Common stock and stock warrants issued for
services 395,715
Common stock issued in lieu of cash interest 9,121
Stock warrants issued for termination agreement 91,000
Net loss (6,147,600)
---------------
Balance, June 30, 1999 (carried forward) 4,854,430
</TABLE>
-42-
<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>
Additional
Common Stock Member Paid-in Accumulated
-----------------------
Shares Amount Capital Capital Deficit
----------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1999 (brought forward) 14,046,906 $1,405 $ - $12,185,100 $(7,332,075)
Issuance of common stock 332,000 33 309,967
Exercise of stock options 317,073 31 11,737
Compensation related to stock option plan 111,875
Common stock and stock warrants issued for
services 115,000 12 167,988
Net loss (1,176,879)
------------------------ ----------------------------- ----------
Balance, September 30, 1999 (unaudited) 14,810,979 $1,481 $ - $12,786,667 $(8,508,954)
========== ===== ====== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
----------------
<S> <C>
Balance, June 30, 1999 (brought forward) $ 4,854,430
Issuance of common stock 310,000
Exercise of stock options 11,768
Compensation related to stock option plan 111,875
Common stock and stock warrants issued for
services 168,000
Net loss (1,176,879)
----------
Balance, September 30, 1999 (unaudited) $ 4,279,194
==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
-43-
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period
October 1, 1997
(date of
inception) to
Year ended June 30,
THREE MONTHS ENDED SEPTEMBER 30, June 30, 1998,
-----------------------------------
1999 1998 1999 as restated
--------------- --------------- ------------- --------------
---------------(unaudited)---------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,176,879) $(1,354,188) $(6,147,600) $(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 111,875 201,000 147,000
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 (328,950)
subsidiary
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
------------- ----------- ------------- -----------
677,246 505,424 3,958,569 492,366
----------- ----------- ---------- -----------
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>
-44-
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Period
October 1, 1997
(date of
inception) to
Year ended June 30,
THREE MONTHS ENDED SEPTEMBER 30, June 30, 1998,
----------------------------------
1999 1998 1999 as restated
--------------- ---------------- -------------- ----------------
<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.
-45-
<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
("CDKnet"), a limited liability company. CDKnet became a wholly-owned
subsidiary after a series of acquisitions completed through July 1998.
Creative was formed October 1, 1997 with cash capital contributions 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. On May 21, 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.
The Company has incurred net losses of $6,147,600 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 aggregating
approximately $4,060,000. 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.
-46-
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 1 (CONTINUED)
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)).
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 November 11, 1997, CDKnet acquired certain assets of KME in exchange
for issuing to KME a 40% ownership interest in CDKnet valued at
$1,500,000. The assets acquired, including fixed assets and
intellectual property, represented the principal business of KME. No
liabilities were assumed in
-47-
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 2 (CONTINUED)
connection with this acquisition. In addition, key employees of KME
became employees of CDKnet. CDKnet accounted for the acquisition as a
purchase. Creative, which controlled CDKnet under the terms of the
operating agreement, accounted for the results of operations from the
date of acquisition. The fair values of the intangible assets acquired
are being amortized on a straight-line basis over five years.
On the above date, certain principals of KME contributed certain
collateralized notes of KME aggregating $712,000 (see Note 2(d)) 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 these individuals.
b. 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.
-48-
<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 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 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.
d. 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 (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 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 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.
<TABLE>
<S> <C>
Net revenues $ 616,137
Net loss (3,117,078)
</TABLE>
-49-
<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 on the date the product is shipped to the
customer.
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 asset 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.
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.
-50-
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 3 (CONTINUED)
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.
-51-
<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.
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following at June 30, 1999:
<TABLE>
<S> <C>
Furniture $ 5,295
Equipment 629,751
Leasehold improvements 6,293
---------
641,339
Less accumulated depreciation and amortization 152,286
---------
$489,053
=========
</TABLE>
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.
-52-
<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.
<TABLE>
<CAPTION>
Year ending June 30,
<S> <C>
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
========
</TABLE>
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
-53-
<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
-54-
<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. 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.
-55-
<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 $(2,090,000) $ (403,000)
Nondeductible expense/nontaxable (income) - net 1,203,000 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.
-56-
<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>
-57-
<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:
<TABLE>
<CAPTION>
OUTSTANDING
AND EXERCISABLE
----------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
NUMBER LIFE IN EXERCISE
OUTSTANDING YEARS PRICE
------------ ---------------- ---------
<S> <C> <C> <C>
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
-----------
-----------
</TABLE>
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.
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
-58-
<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>
-59-
<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:
<TABLE>
<CAPTION>
OUTSTANDING
AND EXERCISABLE
---------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
NUMBER LIFE IN EXERCISE
OUTSTANDING YEARS PRICE
----------- --------------- ---------
<S> <C> <C> <C>
$ .60 1,350,000 8.94 $ .60
$1.00 262,500 4.42 $1.00
----------
1,612,500
==========
</TABLE>
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.
-60-
<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:
<TABLE>
<CAPTION>
1999 1998
-------------- ------------
<S> <C> <C>
Net loss
As reported $ (6,147,600) $(1,184,475)
Pro forma (6,183,225) (1,541,475)
Net loss per common share - basic and diluted
As reported $ (.46)
Pro forma (.46)
</TABLE>
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.
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.
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.
-61-
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 9 (CONTINUED)
b. During fiscal 1999, certain stockholders of the Company provided loans
to the Company aggregating $200,000. In connection with the loans, the
Company granted 200,000 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.
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 (see Note 2(a) and (d)) 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
repurchase 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.
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 issued.
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.
-62-
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
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. Subsequent to June 30, 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. Subsequent to June 30, 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.
Subsequent to June 30, 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.
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.
-63-
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999 and
September 30, 1999 (unaudited)
NOTE 12 (CONTINUED)
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.
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's CEO renounced 750,000 options
granted on August 1, 1999 to purchase the Company's common stock for no
future consideration (see Note 12(a)).
-64-
<PAGE>
Exhibit 10.2.1
CDKNET.COM, INC.
595 Stewart Avenue
Suite 710
Garden City, New York 11530
(516) 222-8800
October 5, 1999
Via Fax
- -------
Mr. George Sandhu
The International Investment Group
17 State Street, 18th floor
New York, NY 10004
Re: Extension and Waiver
Dear George:
This letter will confirm your agreement, on behalf of the following
entities, to waive, prospectively, until December 5, 1999 an "Event of
Default", if any, (as defined in the respective Debentures) in connection
with the Debentures relating to the common stock of the company being
suspended from an exchange or over-the-counter market:
1. 6% Convertible Subordinated Debenture due September 1, 2003
- Spiga Limited
- International Investment Group Equities Fund N.V.
- New Millennium FSG Ltd.
2. 5.75% Convertible Subordinated Debenture due February 1, 2009
- Casa di Cura Dr. Podorzoli Spa
Please acknowledge your agreement with the above by signing in the space
below, then faxing and mailing the signed copy to me.
Sincerely,
/s/ Steven A. Horowitz
------------------------------
Steven A. Horowitz
AGREED AND ACKNOWLEDGED
ON BEHALF OF THE ABOVE
LISTED ENTITIES
/s/ George Sandhu
- -----------------------------
George Sandhu
<PAGE>
Exhibit 10.14
EMPLOYMENT AGREEMENT
EMPLOYEE AGREEMENT, effective as of August 1, 1999 between CDKnet, LLC, a
New York limited liability company, having a place of business at 250 West
57th Street, New York, New York 10019 ("Employer"), and Tom Ross, residing at
1480 San Remo Drive, Pacific Palisades, California 90272 ("Employee").
W I T N E S S E T H:
WHEREAS, Employer desires to employ the Employee to serve as the Executive
Vice-President and Entertainment Division Chief of Employer in accordance
with the terms of this Agreement, and the Employee desires to be so employed
by Employer;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements hereinafter set forth, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto hereby agree as follows:
1. EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts employment with Employer upon the terms and conditions set forth
herein.
2. TERM.
2.1 The term of Employee's employment hereunder (the "Term") shall
be for two years commencing effective as of August 1, 1999 (the
"Commencement Date").
2.2 Notwithstanding the foregoing, this Agreement and Employee's
employment hereunder (and the Term) shall terminate on the earliest of:
(a) the death of Employee;
(b) The disability of Employee. Disability, for the purposes of
this Section 2.2.(b), shall mean any physical or mental illness or injury as
a result of which Employee remains absent from work or cannot substantially
perform his duties hereunder for one hundred forty (140) days (whether or not
continuous) or ninety (90) consecutive days during any period of three
hundred sixty (360) consecutive days. The disability shall be deemed to have
occurred on the one hundred fortieth (140th) or ninetieth (90th), as the case
may be, day of Employee's absence or lack of substantial performance as a
result thereof;
<PAGE>
(c) Upon notice by Employer to Employee of the termination of
Employee's employment for cause. For such notice to be effective, "Cause" must
exist. "Cause" shall be limited to (i) Employee's conviction of a felony;
(ii) Employee's material breach of any of his material obligations under this
Agreement; (iii) Employee's gross negligence with respect to his material
duties or gross misfeasance or malfeasance of office; (iv) Employee's
termination of this Agreement without Good Reason (as defined below); (v)
Employee's commission of a material act of willful dishonesty related to
Employer's business or its relationships with any of its employees,
suppliers, contractors or customers; (vi) Employee's refusal or willful
failure to furnish information concerning Employer's affairs as reasonably
requested by or under the authority of the Management Committee, or
Employee's willful and material falsification of such information; (vii)
whatever material acts or material omissions that a court of competent
jurisdiction determines to constitute cause for the dismissal of Employee
under the circumstances; PROVIDED, HOWEVER, that in the event of subsections
(ii), (iii), (vi) or (vii) above, Employee shall be given notice of such
termination and fifteen (15) days to cure (if curable) such breach prior to
the effectiveness of such termination, provided that no such notice or time
to cure will be afforded Employee for any subsequent breach of the same
nature of a breach for which notice was given pursuant hereto;
(d) Upon notice by Employer to Employee of the termination of
Employee's employment without cause; or
(e) Upon notice by Employee to Employer of the termination of
Employee's employment for Good Reason. For such notice to be effective, "Good
Reason" must exist. "Good Reason" shall be limited to Employer's material
breach of any of its material obligations under this Agreement; PROVIDED,
HOWEVER, Employer shall be given notice of such termination and fifteen (15)
days to cure (if curable) such breach prior to the effectiveness of such
termination, provided that no such notice or time to cure will be afforded
Employer for any subsequent breach of the same nature of a breach for which
notice was given pursuant hereto.
2.3. Upon termination of this Agreement, Employer's obligations
hereunder shall cease; PROVIDED, HOWEVER, that in the event of termination
Employer shall pay to Employee or Employee's estate all accrued but unpaid
(as of the Termination Date): salary, vacation, bonus, unreimbursed expenses,
plan benefit rights, and leave and holiday benefits, if any; and in the event
of termination pursuant to Section 2.2(d) or (e) Employer shall also pay to
Employee an amount equal to Employee's monthly salary at the then current
rate multiplied by the number of months between the Termination
2
<PAGE>
Date and August 1, 2001, such amount to be paid over a three (3) month
period, plus all of the outstanding but not yet vested options shall vest
pursuant to Section 4.4(d)(iii) below and Employer shall provide for the
continuation of health benefits (or payment of monthly amount equal to the
premium therefor) through August 1, 2001. Employer shall be entitled to
enforce the terms of Sections 7 and 8 hereof notwithstanding the termination
of Employee's employment pursuant hereto. Payment by Employer to Employee
pursuant to this Section 2.3, and the vesting in options (and continuation of
Employee's rights with respect to the vested options) as and to the extent
set forth in Section 4 below subsequent to termination of Employee's
employment shall constitute satisfaction of all obligations of Employer to
Employee hereunder.
2.4. The date on which this Agreement terminates pursuant to any of the
provisions above is the Termination Date.
3. BASIC COMPENSATION.
3.1. COMPENSATION.
For all services to be rendered by Employee hereunder and in
consideration of all of the covenants set forth in this Agreement, and
subject to the performance of the material services required to be performed
by Employee hereunder, Employer shall pay to Employee throughout the Term
salary at the annual rate of One Hundred Fifty Thousand Dollars
($150,000.00), which shall be payable in accordance with the general payroll
practices of Employer, but in no event less frequently than semi-monthly. The
salary may be adjusted annually in the sole discretion of Employer's
Management Committee, but the salary shall be no less than $150,000 per year.
Employee shall also be entitled to a bonus, if any, in an amount determined
annually by Employer's Management Committee, in its sole discretion;
provided, however, that such determination shall be made in good faith
commensurate with bonuses granted to other senior management of Employer
taking into account the value of the services provided by Employee hereunder.
3.2. DEDUCTIONS.
To the extent required by law, Employer shall be entitled to deduct
applicable withholding and other payroll taxes and the like from all amounts
payable to Employee under this Agreement before remitting the same to
Employee.
3
<PAGE>
4. BENEFITS
4.1 Employee will be entitled to four (4) weeks paid vacation per
contract year, to be taken no more than two (2) week(s) at a time. Employee
also shall be entitled to participate, to the extent of his eligibility
therefor, in family health insurance coverage and all other benefit programs
generally provided by Employer to its employees and/or its senior management
(including the President). The foregoing shall not be construed to require
Employer to create or continue any such programs or prevent Employer from
modifying or terminating any such programs. Employer may from time to time
make certain awards under the terms of such benefits that are quantitatively
different between employees, or award different or additional benefits to
certain, but not all, employees in its sole discretion. To the extent
Employee is not eligible for inclusion in Employer's health plan, Employer
will provide a payment to Employee equal to the premium paid by Employer for
health coverage of one of its eligible employees.
4.2 Employer shall furnish Employee with such working facilities and
other services which Employee reasonably requires commensurate with
Employee's position, and to which Employer consents (which consent will not
be unreasonably withheld). Such facilities will include a first class office
and furnishings and an assistant.
4.3 Employer shall reimburse Employee, upon receipt of proper
vouchers or receipts therefor, for all proper business expenses incurred by
Employee in the performance of his duties hereunder; PROVIDED, HOWEVER, that
Employee shall not incur any such expenses in excess of Five Thousand Dollars
($5,000) per month without the prior written consent of Employer. It is
agreed that Employee may travel first class and stay at first class
accommodations in connection with travel in the performance of his duties
hereunder. If, during any month, prior approved travel expenses aggregate in
excess of $3,500, then, in addition to such approved expenses, Employee may
incur up to $1,500 in expenses without obtaining prior written consent.
4.4 On the Commencement Date, subject to vesting as set forth below,
Employer will grant Employee options to purchase up to 1,000,000 shares of
common stock of Employer's parent company (CDKnet.Com, Inc.) ("Parent") on
the following terms:
(a) Except as otherwise expressly provided in this Agreement, the
options will vest as follows:
4
<PAGE>
(i) 150,000 shares upon the execution hereof and 150,000 shares
at each of the six month, twelve month, eighteen month and
twenty-four month anniversary of the Commencement Date; and
(ii) 62,500 shares at the times (during the Term) Employer's Gross
Revenues (including the Gross Revenues of Parent, Parent's
affiliates and the Affiliates) reach each of the following
levels: $5 million, $10 million, $20 million and $30 million.
(b) The options may be exercised in multiples of five thousand shares.
The exercise price for the options is $1.00 per share.
(c) All of the options will vest immediately if this Agreement is
terminated without cause or upon the sale of all or substantially all of the
assets of Employer (or Parent) or 50% or more of the equity interests in
Employer (or Parent) or if any third party obtains the right to control the
Management Committee of Employer (collectively, a "Transaction").
(d) The options will terminate upon the fifth anniversary of the
Commencement Date; provided, however, that (i) if Employee's employment is
terminated for Cause, the options terminate 120 days from the date of such
termination (and all options which were not vested prior to the date of such
termination will be immediately cancelled upon such termination), (ii) if
Employee's employment with Employer terminates due to death or disability, the
options terminate one (1) year from the date of death or disability (and all
options which were not vested prior to the date of such termination will be
immediately cancelled upon such termination) and (iii) if Employer terminates
Employee's employment without cause, Employee terminates Employee's
employment for Good Reason, or Employee's employment with Employer does not
continue (for any reason other than cause) subsequent to the expiration of
this Agreement, the options terminate two (2) years from the date of such
termination or expiration (but in the case of termination without cause or
for Good Reason, 100% of the options pursuant to Section 4.4(a)(i) which were
not vested prior to the date of such termination will immediately vest on the
date of such termination).
(e) In addition to his ability to exercise any of his vested options at
any time by payment of the exercise price therefor,
5
<PAGE>
Employee may exercise up to 50% of the vested options outstanding at any time
(up to an aggregate maximum of 500,000 shares) by converting such options into
common stock of CDKnet.COM, Inc., upon notice to the Employer making specific
reference to this Section 4. Any such conversion shall be effective upon the
giving of such notice by Employee. The number of shares into which such
options shall be converted shall equal the number of shares Employee notifies
Employer that he wants to be converted by cashless exercise multiplied by a
fraction, the numerator of which is the difference between the market price
of CDKnet.COM, Inc.'s common stock on the date of conversion minus the
exercise price of the options, and the denominator of which shall equal the
market price of CDKnet.COM, Inc.'s common stock on such date.
(f) CDKnet.COM, Inc. hereby agrees to register the CDKnet.COM, Inc.
shares underlying 50% of the vested warrants held by Employee pursuant to
this Section 4.4 by March 1, 2000; and grants piggy-back registration rights
(pro rata with the other senior management of Employer and/or CDKnet.Com,
Inc., and in no event on a less favorable basis than with the President of
Employer) to Employee for the shares underlying the remaining vested
warrants, all on the terms and conditions of a formal Registration Rights
Agreement which will be subject to good faith negotiation and will be
consistent with the provisions hereof.
(g) The options will be represented by a formal option agreement to be
delivered by Employer, which agreement will be consistent with the provisions
hereof and will be subject to good faith negotiation and shall include
substantially the following: in the event that the outstanding shares of
common stock of Parent shall be increased or decreased or changed into or
exchanged for a different number or kind of shares of stock or other
securities of Parent or of another corporation through reorganization, merger
or consolidation, recapitalization, reclassification, stock split, split-up,
combination or exchange of shares, declaration of any dividends payable in
stock, or other corporate transaction, then the number of shares of common
stock of Parent (and price per share), subject to the unexercised portion of
Employee's options hereunder shall be appropriately adjusted.
5. DUTIES.
During the term of Employee's employment hereunder, Employee agrees
to serve as the Executive Vice-President/Entertainment Division Chief of
Employer and shall perform such duties and services to Employer consistent
with the position in which Employee is serving. Employee's primary duty is to
provide
6
<PAGE>
Employer with the means and contacts to engage in business dealings with
nationally-recognized artists and to obtain and/or license audio and video
material of such artists. Employee has the right to hire and fire employees
for, and to control, his division, all within his division budget as approved
by Employer. Employee shall report only to the President of Employer.
Employee agrees that in the performance of Employee's duties hereunder
Employee will act only in good faith and in the best interest of Employer.
Employee further agrees that Employer, upon the consent of Employee (which
consent will not be unreasonably withheld), may change Employee's title to
any other executive title not inconsistent with the role of an executive vice
president. Employee's duties will be principally carried out in the Los
Angeles, CA vicinity.
6. EXTENT OF SERVICES. During the period of his employment hereunder,
Employee shall serve Employer faithfully and to the best of his ability and
shall devote his reasonable efforts and business time, attention, energies
and skill to the business and affairs of Employer, its parent corporation and
subsidiaries. Employee shall be expected to work during the hours necessary
to perform his duties successfully, such hours (including the quantity and
timing thereof) to be determined in the reasonable discretion of Employee.
During the Term, Employee may conduct business other than Employer's
business, provided that such business (i) does not violate Section 8 hereof,
and (ii) does not materially interfere with the performance of Employee's
duties hereunder, and (iii) does not involve the use of any of Employer's
staff, services or facilities (other than use of Employee's office by
Employee), and (iv) does not incur any expense payable by Employer.
7. SECRECY AND NONDISCLOSURE.
7.1. Without the prior written consent of Employer to the contrary
in each instance, and in further consideration of the employment of Employee
hereunder, Employee agrees to treat as secret and confidential all of the
Trade Secrets (as hereinafter defined) of Employer, and Employee agrees
further not to disclose, use, publish, or in any other manner reveal,
directly or indirectly, at any time during or after the term of this
Agreement, any Trade Secret, except as may be necessary to perform Employee's
services hereunder or except as required by law in which case Employee shall
provide Employer with written notice of such requirement by law no less than
five days prior to any such disclosure.
7.2. "Trade Secrets", as used in this Agreement, shall mean any and
all information regarding the business of Employer and any Subsidiary or
Affiliate (as hereinafter defined) of Employer,
7
<PAGE>
including, but not limited to, information regarding operations, systems,
technology, services, know-how, supplier lists, customer lists, customer
accounts, financial information, costing data, and marketing plans, to the
extent not generally known in the computer software industry or not otherwise
disclosed by Employer to the public. Trade Secrets shall not include
information known by Employee prior to August 1, 1999 other than by
disclosure to him by Employer.
7.3 "Affiliates", as used in this Agreement, shall mean any person,
firm or entity that, directly or indirectly, is controlled by or is under
common control with Employer. In this definition, the term "control" shall
mean the ownership of 20% or more of the beneficial interest in the firm or
entity referred to. "Subsidiary" shall mean wholly as well as partly-owned
subsidiaries.
8. COVENANTS.
8.1. NON-COMPETITION.
(a) Employee agrees that during Employee's employment with
Employer, and for the twelve (12) months (nine (9) months if pursuant to
Section 2.2(d) or (e) above) immediately after the Termination Date, Employee
shall not, directly or indirectly, for his own account or as an employee,
officer, director, partner, joint venturer, shareholder, investor or
otherwise, within the United States of America, either engage in any
Technology (as defined in Section 8.4 below) activities, utilize commercially
Technology other than that of Employer, or compete with Employer in any
Technology activities in which Employer may be engaged or which it is
actively developing or had developed as of the Termination Date; PROVIDED,
HOWEVER, that nothing in this Section 8.1(a) shall be construed to prevent
the Employee from (i) making any investments in the securities of any
business enterprise whether or not engaged in competition with the Employer
or any of its Subsidiaries or Affiliates, to the extent that such securities
are actively traded on a national securities exchange or the NASDAQ system in
the United States or on any foreign exchange and represent, at the time of
acquisition, not more than three percent (3%) of the aggregate equity of such
business enterprise, or (ii) being involved in any capacity (A) during
Employee's employment with Employer, with an entity which is involved in
Technology activities (and/or utilizes commercially Technology other than
that of Employer) so long as such Technology activities comprise less than 10%
of such entity's expenses and revenues, or (B) during the applicable
restricted period immediately after the Termination Date, with an entity
which is involved in Technology activities (and/or utilizes commercially
Technology other than that of Employer), so long as such entity's primary
business is not Technology activities, and so long as, in each case, Employee
would
8
<PAGE>
not introduce Technology business to such entities and Employee would not be
directly involved in Technology activities with such entities.
(b) Employee agrees that during the period of his employment with
Employer, Employee shall not, directly or indirectly, employ or solicit the
employment or engagement by himself or others of any employees of Employer
or, if in connection with Technology activities, of any independent
contractors or suppliers servicing Employer (Employee shall not be so
restricted with respect to those suppliers or independent contractors with
whom Employee had contact prior to any introduction by or through Employer
and shall also not be so restricted with respect to those suppliers or
independent contractors to whom Employee had been introduced by Employee's
own contacts, so long as in each case such solicitation or engagement does
not interfere with such independent contractor's or supplier's performance of
services for or relationship with Employer.)
(c) Employee agrees that for a period of eighteen (18) months
immediately following the termination of his employment with Employer,
Employee shall not, directly or indirectly, employ or solicit the employment
or engagement by himself or others of any employees of Employer or of any
independent contractors or suppliers servicing Employer; PROVIDED, HOWEVER,
that this Section 8.1.(c) shall apply only with respect to such employment or
solicitation of employment or engagement in connection with Technology
activities (as defined in Section 8.4 below).
(d) The existence of any claim or cause of action by Employee against
Employer (except for claims of substantial and material breaches of this
Agreement) shall not constitute a defense to the enforcement by Employer of
the covenants contained in this section, but such claim or cause of action
shall be litigated separately.
8.2 SOLICITATION OF CUSTOMERS OF EMPLOYER.
(a) Employee agrees that during the period of his employment with
Employer, Employee shall not, directly or indirectly, for himself, or as an
agent, employee or consultant of another person, firm or corporation,
knowingly canvass or solicit business from any of Employer's customers with
whom Employee had initial contact through his employment by Employer
(Employee shall not be so restricted with respect to those customers with
whom Employee had contact prior to any introduction by or through Employer
and shall also not be so restricted with respect to those customers to whom
Employee had been introduced by Employee's own contacts, so long as in each
case such solicitation or canvassing does not interfere with such customer's
use of, or relationship with, Employer).
9
<PAGE>
(b) Employee agrees that for a period of eighteen (18) months
immediately following his employment with Employer, Employee shall not,
directly or indirectly, for himself, or as agent, employee or consultant of
another person, firm or corporation, knowingly canvass or solicit business
from any of Employer's customers; PROVIDED, HOWEVER, that this Section 8.2(b)
shall apply only with respect to such canvassing or solicitation of business
for Technology activities.
8.3 BUSINESS AND INVENTIONS.
(a) Employee shall promptly and fully disclose to the Employer, and with
all necessary detail for a complete understanding of the same, all
Technology-related developments, know-how, discoveries, inventions,
improvements, concepts, ideas, writings, formulae, processes and methods
(whether copyrightable, patentable or otherwise) made, received, conceived,
acquired or written by Employee (whether or not at the request or upon the
suggestion of the Employer) during the period of his employment with the
Employer or any of its subsidiaries, solely or jointly with others, directly
relating to any Technology activities of the Employer or any of its
subsidiaries (collectively the "Subject Matter").
(b) Employee hereby assigns and transfers, and agrees to assign and
transfer, to the Employer, all his rights, title and interest in and to the
Subject Matter, and further agrees to deliver to the Employer any and all
drawings, notes, software, code, specifications and data relating to the
Subject Matter. Employee shall assist the Employer in obtaining such
copyrights or patents during the term of this agreement, and to testify in
any prosecution or litigation involving any of the Subject Matter.
8.4 DEFINITIONS. For purposes of this Section 8, (i) "Technology" is
defined as the business of developing, producing, marketing and/or
commercializing proprietary programming technologies for the enhanced
integration of sound, video and text on a CD medium, and/or one-button push
to an Internet site on a CD medium, and/or web-based consumer-selected custom
compilation of video and/or audio content on a CD or DVD medium, and/or the
delivery on a CD or DVD of a communication icon vehicle ("Comm Module") which
will install on the user's computer desktop and allow for two-way active
communication between the content provider and the user, and (ii) Employer
shall mean Employer and any subsidiaries and affiliates of Employer.
8.5 REASONABLENESS OF RESTRICTION. Employee acknowledges that the
restrictions specified under Section 8 hereof are reasonable, in view of the
nature of the business in which Employer is engaged and Employee's special
and unique skills, reputation and knowledge of Employer's operations. Employee
further acknowledges
10
<PAGE>
that his service, if used by a competitor, could cause significant harm to
Employer.
8.5. MODIFICATION OF RESTRICTIONS. Notwithstanding anything
contained in Section 8 to the contrary, if the restrictions specified under
Section 8 hereof should be determined to be unreasonable in any judicial
proceeding, then the period of time and area of the restriction shall be
reduced so that this Agreement may be enforced in such area and during such
period of time as shall be determined to be reasonable.
9. CONSENT TO EQUITABLE RELIEF. Employee consents and agrees that if
Employee violates or threatens to violate any of the provisions contained in
Sections 7 or 8 of this Agreement, Employer shall, in addition to such other
remedies as it may have at law or in equity, be entitled to seek an
injunction to be issued by a court or arbitrator of competent jurisdiction
restraining and prohibiting Employee from committing or continuing any
violation of such provisions. If the scope of any restriction contained in
this Agreement is too broad to permit enforcement to its fullest extent, then
such restriction shall be enforced to the maximum extent permitted by law.
10. REPRESENTATIONS OF EMPLOYEE. Employee hereby represents and warrants
to Employer that he is not subject to any contract or restriction with any
person or entity that would be violated by his execution of this Agreement,
the performance of his obligations hereunder or the carrying out of his
duties hereunder.
11. NOTICE. For the purposes of this agreement, notices and all other
communications provided for in this agreement shall be in writing and shall
be deemed to have been duly given when delivered, two (2) business days after
delivery to a nationally recognized overnight courier service for next day
priority delivery or three (3) business days after having been deposited in
the mails by United States registered mail, return receipt requested, postage
prepaid, addressed as follows:
If to Employee: Tom Ross
1480 San Remo Dr.
Pacific Palisades, CA 90272
With a copy in
each case to: Gerald Edelstein, Esq.
Edelstein, Laird & Sobel, LLP
9255 Sunset Blvd.
Suite 800
Los Angeles, CA 90069
If to Employer: CDKnet, LCC
595 Stewart Avenue
11
<PAGE>
Suite 710
Garden City, New York 11530
Att: Shai Bar Lavi
With a copy
in each case to: Horowitz, Mencher, Klosowski
& Nestler, P.C.
595 Stewart Avenue, Suite 710
Garden City, New York 11530
Att: Steven A. Horowitz, Esq.
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
12. WAIVER OF BREACH. The waiver by either party of a breach of any
provision hereof shall not operate or be construed to operate as a waiver by
such party of any subsequent breach by the other party of any provision
hereof.
13. BENEFITS AND BURDENS. The rights and obligations of Employer
hereunder shall inure to the benefit of and shall be binding upon the
successors and assigns of Employer. The rights of Employee hereunder shall
inure to the benefit of his heirs and his personal representatives. Employer
cannot assign this Agreement without Employee's prior written consent (which
consent will not be unreasonably withheld or delayed) unless such assignment
is to an entity which acquires substantially all of Employer's assets.
14. ENTIRE AGREEMENT, MODIFICATION AND CONSTRUCTION.
14.1 This Agreement contains the entire Employment Agreement
between Employer and Employee, and supersedes and replaces any and all prior
agreements between the parties concerning the subject matter hereof.
14.2 The terms and conditions hereof may be changed only by an
agreement in writing signed by Employer and Employee.
14.3 This Employment Agreement shall be governed by, construed
and enforced under the laws of the State of New York without giving effect to
the conflicts or choice of law provisions thereof.
15. SEVERABILITY. If any term or provision of this Agreement or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, the remainder of this Agreement or the application
of such term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby, and
each term and
12
<PAGE>
provision of this Agreement shall be valid and enforceable to the fullest
extent permitted by law.
16. PARAGRAPH HEADINGS. The paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
17. COUNTERPARTS. This agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
18. INDEMNIFICATION. Employer hereby agrees to indemnify Employee in
connection with claims arising out of Employee's performance of his duties
hereunder; PROVIDED, HOWEVER, that such indemnification applies only to
claims arising out of actions taken by Employee in good faith and which he
reasonably believed to be in the best interests of Employer, and had no
reason to believe was illegal or unethical.
19. EMPLOYEE'S REVIEW OF THIS AGREEMENT. Employee acknowledges that
he has (i) carefully read this Agreement, (ii) had an opportunity to consult
with independent counsel with respect to this Agreement, and (iii) entered
into this Agreement of his own free will.
IN WITNESS WHEREOF, Employer and Employee have executed this Employment
Agreement as of August 1, 1999.
EMPLOYEE; EMPLOYER:
CDKNET, LLC
/s/ TOM ROSS By: /s/ SHAI BAR-LAVI
- -------------------------------- ---------------------------------
TOM ROSS Name: SHAI BAR-LAVI
--------------------------------
Title: President
THE UNDERSIGNED HEREBY GUARANTEES THE PERFORMANCE OF THE OBLIGATIONS OF
EMPLOYER PURSUANT TO THIS AGREEMENT.
CDKNET. COM, INC.
By: /s/ STEVEN A. HOROWITZ
------------------------------
CEO
13
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT 9/30/99 AND 6/30/99 AND THE CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE 3 MONTHS ENDED 9/30/99 AND 9/30/98, YEAR ENDED
6/30/99 AND PERIOD 10/1/97 (DATE OF INCEPTION) TO 6/30/98 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS YEAR 8-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999 JUN-30-1999 JUN-30-1998
<PERIOD-START> JUL-01-1999 JUL-01-1998 JUL-01-1998 OCT-01-1997
<PERIOD-END> SEP-30-1999 SEP-30-1998 JUN-30-1999 JUN-30-1998
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<RECEIVABLES> 23,662 0 19,000 0
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<CURRENT-ASSETS> 49,115 0 271,854 0
<PP&E> 651,698 0 641,339 0
<DEPRECIATION> 184,550 0 152,286 0
<TOTAL-ASSETS> 6,864,220 0 7,559,897 0
<CURRENT-LIABILITIES> 719,584 0 829,051 0
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<SALES> 23,663 158,393 474,344 616,137
<TOTAL-REVENUES> 23,663 158,393 474,344 616,137
<CGS> 14,958 95,816 288,762 415,769
<TOTAL-COSTS> 14,958 95,816 288,762 415,769
<OTHER-EXPENSES> 1,158,330 0 5,238,681 1,385,304
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 27,254 102,446 1,094,501 (461)
<INCOME-PRETAX> (1,176,879) (1,354,188) (6,147,600) (1,184,475)
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<INCOME-CONTINUING> 0 0 0 0
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<NET-INCOME> (1,176,879) (1,354,188) (6,147,600) (1,184,475)
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<EPS-DILUTED> (.08) (.11) (.46) 0
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