As filed with the Securities and Exchange Commission on July 31, 2000
Registration No. _________
================================================================================
United States Securities and Exchange Commission
Washington, DC 20549
FORM SB-2
Registration Statement under the Securities Act of 1933
CDKNET.COM, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 5961 22-3586087
-------- ---------------- ----------
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
Incorporation Code Number)
or Organization)
400 Garden City Plaza
Suite 202
Garden City, New York 11530
(516) 222-8800
WWW.CDKNET.COM
WWW.VFLASH.COM
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(Address and Telephone Number of Principal Executive Offices)
250 West 57th Street
Suite 1101
New York, New York 10019
(212) 547-6050
WWW.CDKNET.COM
WWW.VFLASH.COM
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(Address of Principal Place of Business or Intended Principal
Place of Business)
Steven A. Horowitz
Moritt, Hock, Hamroff & Horowitz LLP
400 Garden City Plaza
Suite 202
Garden City, New York 11530
Phone: (516) 873-2000
Fax: (516) 873-2010
---------------------------------------------------------------
(Name, Address and Telephone Number of Agent for Service)
Approximate date of commencement of proposed sale to the public: As
soon as practicable after effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), check the following
box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Proposed Proposed
Title of Each Class Of Maximum Maximum
Securities To Be Amount To Be Offering Price Aggregate Offering Amount Of
Registered Registered(1) Per Unit(2) Price Registration Fee(3)
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Common Stock offered 780,000 $1.84 $ 1,435,200 $ 378.89
for sale, $.0001 par
value, by selling
security holders
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Common Stock issueable 760,000 $1.84 $ 1,398,400 $ 369.17
upon the exercise of
options by selling
security holders
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Common Stock offered 1,505,522 $4.33 $ 6,518,910.30 (4)
for sale, $.0001 par
value, by selling
security holders
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Common Stock issuable 3,000,000 $4.33 $12,990,000.00 (4)
upon the conversion of
Preferred Stock by
The Target Group Fund
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Common Stock issuable 1,855,056 $4.33 $ 8,032,392.50 (4)
upon the exercise of
warrants by selling
security holders
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Common Stock issueable 1,250,000 $4.33 $ 5,412,500 (4)
upon the exercise of
options by selling
security holders
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
Total Registration Fee $ 748.07
------------------------ ---------------------- ---------------------- ---------------------- ----------------------
</TABLE>
(1) Pursuant to Rule 429, includes 7,610,578 shares being carried forward from
the Registrant's Registration Statement No. 333-93277.
(2) Estimated solely for the purpose of calculating the Registration Fee
pursuant to Rule 457 (a) under the Securities Act of 1933, pursuant to the
closing price for the referenced Common Stock, $.0001 par value, on the
Over-the-Counter Bulletin Board on July 27, 2000.
(3) A filing fee of $748.07 is being paid to cover the 1,540,000 shares
covered by this Registration Statement.
(4) No filing fee is required as securities were previously registered on Form
SB-2 Registration Statement, No. 333-93277 effective March 27, 2000, which fee
relates to the 7,610,578 shares being carried forward pursuant to Rule 429 from
that registration statement which had a proposed maximum offering price per
share of $4.33.
EXPLANATORY NOTE
----------------
This Registration Statement registers up to 1,540,000 share of the Registrant's
common stock, $.0001 par value. In addition, pursuant to Rule 429 under the
Securities Act, this Registration Statement is also a post-effective amendment
to the Registrant's Registration Statement with respect to up to 7,610,578
shares of common stock on Form SB-2 (File No. 333-93277), declared effective on
March 27, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
ii
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 31, 2000
PROSPECTUS
UP TO 1,540,000 SHARES OF COMMON STOCK
CDKNET.COM, INC.
CDKNET.COM, INC., a Delaware corporation, is registering up to 1,540,000
shares of common stock:
o for sale by investors who own 690,000 shares of our common stock,
o issuable upon the exercise of 240,000 options to purchase our common
stock at $1.00 per share,
o issuable upon the exercise of 20,000 options to purchase our common
stock at $1.25 per share, and
o issuable upon the exercise of 500,000 options to purchase our common
stock at $1.69 per share
And carrying forward 7,610,578 previously registered shares of common
stock:
o for sale by investors who own 1,505,522 shares of our common stock,
o issuable upon the conversion of 1,500,000 shares of our Series A
preferred stock at $.75 per share,
o issuable upon the exercise of 125,056 warrants to purchase shares of
our common stock at $.75 per share,
o issuable upon the exercise of 100,000 warrants to purchase our common
stock at $.66 per share,
o issuable upon the exercise of 1,500,000 warrants to purchase our common
stock at $1.00 per share,
o issuable upon the exercise of 100,000 warrants to purchase our common
stock at $1.75 per share,
o issuable upon the exercise of 30,000 warrants to purchase our common
stock at $3.00 per share,
o issuable upon the exercise of 750,000 options to purchase our common
stock at $.60 per share, and
o issuable upon the exercise of 150,000 options to purchase our common
stock at $.66 per share,
o issuable upon the exercise of 350,000 options to purchase our common
stock at $.75 per share.
Our common stock, $.0001 par value, is currently traded on the
Over-the-Counter Bulletin Board under the symbol "CDKX".
Investing in common stock involves risks. See "Risk Factors -- Special
Considerations" Beginning on Page 8.
-------------------------------------------------
Neither the Securities and Exchange Commission nor any other Regulatory
Body has Approved or Disapproved of these Securities or Passed Upon the Accuracy
or Adequacy of this Prospectus. Any Representation to the Contrary is a Criminal
Offense.
THERE IS NO UNDERWRITER FOR ANY OF THE SECURITIES OFFERED. SEE "PLAN OF
DISTRIBUTION."
THE DATE OF THIS PROSPECTUS IS JULY 31, 2000.
<PAGE>
TABLE OF CONTENTS
PART 1
------
Page
----
INFORMATION REQUIRED IN PROSPECTUS
PROSPECTUS SUMMARY AND RISK FACTORS ............................ 4
USE OF PROCEEDS ................................................ 12
DETERMINATION OF OFFERING PRICE ................................ 12
SELLING SECURITY HOLDERS ....................................... 12
PLAN OF DISTRIBUTION ........................................... 14
LEGAL PROCEEDINGS .............................................. 15
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS ................................................ 15
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT .......................................... 19
DESCRIPTION OF SECURITIES ...................................... 25
LEGAL MATTERS AND EXPERTS ...................................... 27
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES ................. 27
ORGANIZATION WITHIN LAST FIVE YEARS ............................ 27
DESCRIPTION OF BUSINESS ........................................ 29
2
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Page
----
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION ........................................... 43
DESCRIPTION OF PROPERTY ........................................ 47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................. 47
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ............................................ 50
EXECUTIVE COMPENSATION ......................................... 51
FINANCIAL STATEMENTS ........................................... F-1
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ......................... II-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS ...................... II-1
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION .................... II-2
RECENT SALES OF UNREGISTERED SECURITIES ........................ II-2
EXHIBITS ....................................................... II-11
UNDERTAKINGS ................................................... II-13
3
<PAGE>
PROSPECTUS SUMMARY
------------------
OUR COMPANY
-----------
CDKnet.com, Inc. is an Internet holding company, incorporated in the State of
Delaware. We have two subsidiaries, CDKnet, LLC and ValueFlash.com Incorporated.
CDKnet, LLC provides proprietary convergence technology that links audio, video
and the Worldwide Web. ValueFlash provides Internet direct marketing technology
(which we call "VFlash(TM)") that facilitates ongoing customer relationships.
CDKnet, LLC, formed in early 1998, has developed a unique multimedia technology,
CDK(TM), integrating audio, video and Internet connectivity on a standard
compact disc (CD). Our MixFactory system, an extension of the core CDK
technology, enables users to create their own personalized multimedia CDs from a
Web site. These custom CDs include full-screen, full-motion video, Red Book
(digital standard) audio and targeted Web links. The media components are
presented through CDKnet, LLC's proprietary media players that have been
developed for ease of use and functionality.
CDKnet, LLC's targeted industries include: (1) entertainment (music, movies and
TV); (2) travel and tourism; (3) professional sports; (4) financial services;
(5) education; (6) toys/games; (7) fashion; (8) food/cooking; (9) automotive;
and,(10) healthcare. Primary CDKnet, LLC customers and/or strategic partners
include Peterson's, AtomicPop, Central Park Media, CollegeMusic.com, Megaforce
Records and DreamWorks Records.
CDKnet, LLC has three principal revenue streams: (1) sale of custom compact
discs, (2) sale of Web links and Web advertising, and (3) development and use
fees. We are currently capable of providing services in each of these areas.
The Vflash(TM) concept was initially developed by the CDKnet, LLC team to take
advantage of the distribution opportunity presented by its main product,
Web-connected multimedia CDs. To fully capitalize on the market opportunity, we
formed ValueFlash on January 13, 2000 to further develop and market the
Vflash(TM) and related products.
ValueFlash was established to take advantage of the dynamic, real-time
characteristics of the Internet and to address the need for a non-intrusive yet
highly targeted interactive direct marketing application. ValueFlash has
developed, and is now marketing, its proprietary Vflash(TM) messenger, a
computer desktop application which provides a wide variety of organizations with
a real-time method of directly marketing to, and communicating with, its
customer base.
ValueFlash's objective is to provide marketers with an unrivaled solution for
identifying customers and creating a direct rapport with these individuals,
thereby facilitating targeted communications and relevant e-commerce
opportunities. Direct communication with consumers will be facilitated by the
Vflash(TM) messenger, a computer desktop application that will serve as an
engaging Internet direct-marketing tool allowing service providers and retailers
to develop long-term customer relationships.
In addition to driving e-commerce revenue for online retailers, the Vflash(TM)
application serves as unique mechanism for promoting, and driving traffic to,
offline retailers. The ability to provide real-time targeted messages and offers
based on an interest profile as well as a demographic profile creates a
compelling offering for both "brick & mortar" and "brick & click" retailers.
Current ValueFlash clients include: (1) Atlantic Records; (2) Artemis Records
(Kittie); (3) PlanetGiving.com; and (4) Medium4.com. ValueFlash's Strategic
partners include Impiric, a wholly owned subsidiary of Young & Rubicam,
J. Walter Thompson USA, Inc. and House of Blues.
4
<PAGE>
The ValueFlash revenue model is based on three distinct revenue streams --
hosting fees, e-commerce commissions and advertising sales.
We have received an infusion of $1,250,000 in capital since January 1, 2000.
Additionally, we have raised $3,000,000 for our subsidiary ValueFlash through
private placements during the same period.
THE OFFERING
SECURITIES OFFERED:
THE BLACKMOR SHARES ....... 100,000 shares of common stock which we issued
on April 17, 2000 to The Blackmor Group in
exchange for services to be performed on an on-
going basis.
ABBEY BLATT SHARES ........ 20,000 shares of common stock which were
purchased by Abbey Blatt on March 28, 2000 at
$.75 per share.
ENERGENIC SHARES .......... 100,000 shares of common stock and up to 50,000
options to purchase our common stock at $1.00
per share expiring on February 7, 2001 owned by
Energenic, LLC and which vest as follows: (i)
4,200 on grant; and (ii) 45,800 on January 7,
2001. The shares and options were issued to
Energenic in exchange for services performed
for us.
CABARET SOFTWARE SHARES ... (1) 20,000 shares of common stock to Caberet
Software, Inc. issued on January 20, 2000 in
exchange for services valued at $20,000; (2)
10,000 and 30,000 shares of our common stock
issued on September 18, 1999 and August 10,
1999, respectively, in exchange for services
valued at $30,000.
ARCADIA SHARES............. Up to 500,000 five-year options to purchase
shares of our common stock which we issued to
Arcadia Marketing Inc. on May 4, 2000, pursuant
to a letter agreement between the parties
dated May 4, 2000. The options are exercisable
at $1.69 per share and expire on May 4, 2005.
MAGGI SHARES............... (1) 5,000 three-year options to purchase shares
of our common stock which we issued to Don
Maggi on May 25, 1999 exercisable at $1.25 per
share expiring on May 25, 2002; and (2) 25,000
five-year options to purchase shares of our
common stock which we issued to Don Maggi on
May 25, 1999 exercisable at $1.00 per share
expiring on May 25, 2002.
STERN SHARES............... Up to 15,000 one-year options to purchase
shares of our common stock which we issued to
Ava Stern on May 12, 2000. The options are
exercisable at $1.00 per share and expire on
May 12, 2001.
5
<PAGE>
TBA SHARES................. Up to 165,000 shares comprising (1) 15,000
three-year options to purchase shares of our
common stock which we issued to T.B.A.
Management Group, Inc. on May 24, 1999. The
options are exercisable at $1.25 per share and
expire on May 24, 2002, and (2) 150,000
five-year options to purchase shares of our
common stock issued on July 21, 2000 to T.B.A.
Network, Inc. pursuant to a Consulting
Agreement dated August 1, 1999. The options are
exercisable at $1.00 per share expiring on
September 30, 2004.
BODEK SHARES............... 500,000 shares of our common stock which we
issued on January 6, 2000 to Erno and Rachel
Bodek at $.50 per share.
TRADING SYMBOL ............ "CDKX" traded on the Over-the-Counter Bulletin
Board.
RISK FACTORS .............. The common stock our investors are offering
involve a high degree of risk. See "Risk
Factors" beginning on page 8.
OUR EXECUTIVE OFFICE ...... 400 Garden City Plaza
Suite 202
Garden City, N.Y. 11530
(516) 222-8800
OUR PRINCIPAL PLACE
OF BUSINESS ............... 250 West 57th Street
Suite 1101
New York, New York 10019
(212) 547-6050
6
<PAGE>
The summary financial information set forth below is derived from and should be
read in conjunction with the consolidated financial statements, including the
notes thereto, appearing elsewhere in this Prospectus. The information set forth
below should also be read in conjunction with "Management's Discussion and
Analysis of Operations." Results of operations for the periods presented are not
necessarily indicative of results of operations for future periods.
<TABLE>
<CAPTION>
NINE MONTHS PERIOD OCTOBER 1, 1997
ENDED YEAR ENDED (DATE OF INCEPTION)
MARCH 31, JUNE 30, TO JUNE 30, 1998,
2000 1999 AS RESTATED
------------ ----------- ------------
STATEMENTS OF OPERATIONS DATA (unaudited)
<S> <C> <C> <C>
Net revenues $ 83,602 $ 474,344 $ 616,137
Cost of revenues 79,369 288,762 415,769
------------ ----------- ------------
Gross profit 4,234 185,582 200,368
Operating expenses 5,363,614 5,285,681 1,714,254
Other (expenses) income, net (59,641) (1,094,501) 461
Minority interest in loss of subsidiary 197,346 -- 328,950
------------ ----------- ------------
Net Loss $ 5,221,675 $(6,194,600) $ (1,184,475)
============ =========== ============
Basic and diluted earnings (loss) per share $ (0.31) $ (0.47)
============ ===========
Weighted average shares outstanding - basic and diluted 16,821,909 13,282,176
============ ===========
MARCH 31, JUNE 30,
1999 1999
(unaudited)
------------ -----------
BALANCE SHEET DATA
Working capital (deficit) $ 1,695,468 $ (557,197)
Current Assets 2,767,635 271,854
Total Assets 8,842,250 7,559,897
Current Liabilities 1,072,167 829,051
Total Liabilities 1,472,764 2,705,467
Minority interest 352,954 --
Stockholders' equity 7,016,533 4,854,430
Common shares outstanding 21,068,771 14,046,906
</TABLE>
7
<PAGE>
CAUTIONARY STATEMENT
--------------------
All statements, trends, analyses and other information contained in this
prospectus relative to trends in net sales, gross margin, anticipated expense
levels and liquidity and capital resources, as well as other statements,
including, but not limited to, words such as "anticipate," "believe," "predict,"
"plan," "intend," "expect," and other similar expressions constitute
forward-looking statements. These statements are not guarantees of future
performance and are subject to risks and uncertainties that are difficult to
predict. Potential risks and uncertainties include those set forth below in
"Risk Factors." Particular attention should be paid to the cautionary statements
involving our limited operating history, the unpredictability of our future
revenues, the unpredictable and evolving nature of our 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
------------
We have described several risk factors which we believe are significant and
should be given careful consideration by you when you evaluate us. We consider
each of these risks to be specific to us, although some are industry or sector
related issues which could also impact other businesses in our market sector. In
our case and in addition to the risks just referred to, there are two related
risks to which we wish to draw your attention specifically:
o Our former independent certified public accountants added an emphasis
paragraph to their report on our consolidated financial statements as
of June 30, 1999 and for the year ended June 30, 1999, and the period
October 1, 1997 (date of inception) to June 30, 1998, relating to
factors that raise substantial doubt about our ability to continue as a
going concern.
o We need significant additional revenues or financing.
If we are unable to obtain significant additional financing or otherwise fund
our operations, we will likely have to file for bankruptcy.
You should carefully consider the following information which outlines special
market and other risk factors affecting us and our industry.
Our ability to continue operations is in question.
--------------------------------------------------
Our history of operating losses raises substantial doubt about our ability to
continue operations. If we are unable to obtain significant additional financing
or otherwise obtain working capital to fund our operations, we may be obligated
to seek protection of the bankruptcy courts. In particular, our former
independent certified public accountants added an emphasis paragraph to their
report on our consolidated financial statements as of June 30, 1999 and for the
year ended June 30, 1999, and for the period October 1, 1997 (date of inception)
to June 30, 1998, relating to factors that raise substantial doubt about our
ability to continue as a going concern. The factors cited by them include the
following:
o continued losses;
o use of significant cash in operations; and
o lack of sufficient funds to execute our business plan.
Our unaudited financial statement for the period July 1, 1999 to March 31, 2000
reflect a net loss of $(5,221,675) on revenues of $83,602.
8
<PAGE>
We have raised over $1,250,000 in financing since January 1, 2000, and an
additional $3,000,000 in financing for ValueFlash during the same period.
Our financial condition is highly uncertain and we need to obtain significant
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additional financing to avoid bankruptcy.
-----------------------------------------
Despite our continued ability to raise capital through debt and equity
financing, we need to increase revenues, raise significant additional financing
or otherwise obtain working capital to continue operations through the next
year. If we do not raise the necessary financing, we will probably have to seek
the protection of the bankruptcy courts and holders of our common stock would
stand to lose their entire investment.
Due to changes in our business, our historical financial information is of
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material relevance.
-------------------
Our ability to generate revenue and income is unproven, and changes in our
business make an evaluation of our operating history difficult. We must be
considered in light of the risks, expenses and difficulties encountered by
companies in the new and rapidly evolving market for online, custom compact disc
technology and related enhanced services. To address these risks, among other
things, we must (1) market our services and build our brand names effectively,
(2) provide scalable, reliable and cost-effective services, (3) continue to grow
our infrastructure to accommodate additional customers and increased use of our
products and services, (4) expand our channels of distribution, (5) continue to
respond to competitive developments, and (6) retain and motivate qualified
personnel.
Future sales may have a dilutive effect on future sales of securities.
----------------------------------------------------------------------
Future sales of substantial amounts of our common stock in the public market
could adversely affect the market price of our common stock and our stockholders
could experience dilution in their stock ownership and in the value of their
shares. Dilution is a reduction in the value of the holder's investment measured
by the difference between the purchase price of the shares of the common stock
and the net tangible book value of the shares after the purchase takes place. As
of July 28, 2000, we had 21,151,831 shares of common stock outstanding of which
15,572,629 are restricted or affiliate 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.
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 three main products -- CDK(TM), VFlash (TM) and MixFactory(TM) --
are all available and for sale to the public. Nonetheless, the market for our
services is characterized by rapidly changing technology, evolving industry
standards, emerging competition and frequent new and enhanced software, service
and related product introductions.
To remain successful, we must be responsive to new developments in hardware and
semiconductor technology, operating systems, programming technology, and
computer capabilities. In many instances, the new and enhanced services,
products, and technologies are in the emerging stages of development and
marketing, and are subject to the risks inherent in the development and
marketing of new software, services, and products. We may not successfully
identify new service opportunities, and develop and bring new and enhanced
9
<PAGE>
services and related products to market in a timely manner; there can be no
assurance that:
o any of these services, products or technologies will develop or will be
commercially successful, or that we will benefit from these
developments, or
o services, products, or technologies developed by others will not render
our services, and related products noncompetitive or obsolete.
If we are unable, for technological or other reasons, to develop and introduce
new services and products in a timely manner in response to changing market
conditions or customer requirements, or if new or enhanced software, services,
and related products do not achieve a significant degree of market acceptance,
our business, operating results, and financial condition would be materially
adversely affected.
We face intense competition in the compact disc development and the direct
--------------------------------------------------------------------------
online marketing markets.
------------------------
Portions of the online, custom compact disc and the direct online marketing
markets are becoming increasingly competitive. We expect in the coming years to
face significant competition in all of our markets. We expect new companies will
emerge and compete for the same customers.
We expect competition to increase from both established and emerging companies
and that this increased competition will result in reduced revenues which could
materially adversely affect our business, operating results, and financial
condition. Moreover, our current and potential competitors, some of whom have
significantly greater financial, technical, marketing, and other resources than
we do, may respond more quickly than we do to new or emerging technologies or
could expand to compete directly against us. Accordingly, it is possible that
current or potential competitors could rapidly acquire significant market share.
There can be no assurance that we will be able to compete against current or
future competitors successfully or that competitive pressures faced by us will
not have a material adverse effect on our business, operating results, and
financial condition.
Government regulation and legal uncertainties may affect our business.
----------------------------------------------------------------------
Only a small body of laws and regulations currently apply specifically to
content of, access to, or commerce on, the Internet. It is possible that laws
and regulations with respect to the Internet may be adopted by governments in
any of the jurisdictions in which we can sell our products, covering issues such
as user privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. The nature of future legislation and the
manner in which it may be interpreted and enforced cannot be fully determined
and, therefore, legislation could subject us and/or our customers to potential
liability, which in turn could have a material adverse effect on our business,
results of operations and financial condition.
In addition, applicability to the Internet of existing laws governing issues
such as property ownership, copyright and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast majority
of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies. Changes to these laws intended to
address these issues could create uncertainty in the marketplace that could
reduce demand for our services or increase the cost of doing business as a
result of costs of litigation or increased service delivery costs, or could in
10
<PAGE>
some other manner have a material adverse effect on our business, results of
operations and financial condition.
And, because our services are available over the Internet virtually worldwide,
and because we facilitate sales by our customers to end users located in
multiple provinces, states and foreign countries, these jurisdictions may claim
that we are required to qualify to do business as a foreign corporation in each
of the state/province or that we have a permanent establishment in each of the
foreign countries. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for failure to qualify and could result in the inability to enforce
contracts in these jurisdictions. Any new legislation or regulation, or the
application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could have a material adverse effect on our
business, results of operations and financial condition.
We are dependent on certain key personnel.
------------------------------------------
Our success depends to a significant degree upon the continued contributions of
our key management, including: (1) Steven A. Horowitz, Chairman, Chief Executive
Officer, Chief Financial Officer and Secretary of CDKnet.com, Inc.; (2) our
subsidiary, CDKnet, LLC's officers Shai Bar-Lavi, Chief Executive Officer;
Israel Hersh, President; and Shlomo Shur, Chief Operating Officer; and (3) our
subsidiary, ValueFlash's officers Shai Bar-Lavi, Chairman and Chief Executive
Officer; Shlomo Shur, President and Director; Robert Reeves, Chief Financial and
Administrative Officer, Treasurer and Director; Michael Jolly, Executive Vice
President of the Entertainment Group; Tom Ross, President of the Media Group;
Russell Kern, Executive Vice President; and Director and Secretary Steven A.
Horowitz. 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 some
employees, contractors and collaborators/partners. We do not have key person
life insurance policies on directors, executive officers or key employees.
Competition for employees in the multimedia technology industry is intense, and
there can be no assurance that we will be able to attract and retain enough
qualified employees. If our business grows, it may become increasingly difficult
to hire, train and assimilate the new employees needed. Our inability to retain
and attract key employees could have a material adverse effect on our business,
operating results, and financial condition.
We may have difficulty in management of growth.
-----------------------------------------------
We may experience a period of rapid growth which could place a significant
strain on our resources. Our ability to manage growth successfully will require
us to continue to improve our operational, management and financial systems and
controls as well as to expand our work force. A significant increase in our
customer base would necessitate the hiring of a significant number of additional
customer service care and technical support personnel as well as computer
software developers and technicians, qualified candidates for which, at the
present time, are in short supply. We must manage relationships with a growing
number of third parties as we seek to complement our service offerings and
increase our sales efforts. If we are 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.
11
<PAGE>
Product defects can adversely affect our business.
--------------------------------------------------
The software products utilized by us could contain errors or "bugs" that may
adversely affect the performance of services or damage a user's data. In
addition, as we increase our share of the multisession, i.e., both audio and
video, compact disc market, software reliability and security demands will
increase. Attempts to limit our potential liability for warranty claims through
limitation-of-liability provisions in our customer agreements. There can be no
assurance that the measures taken by us will prove effective in limiting our
exposure to warranty claims. Despite the existence of various security
precautions, our computer infrastructure may be also vulnerable to viruses or
similar disruptive problems caused by our customers or third parties gaining
access to our processing system.
We have limited protection of proprietary technology and there is a risk of
---------------------------------------------------------------------------
third party claims.
-------------------
We regard some of our services as proprietary and rely primarily on a
combination of patent, copyright, trademark and trade secret laws, employee and
third-party non-disclosure agreements, and other intellectual property
protection methods to protect our services. Existing intellectual property laws
afford only limited protection, and it may be possible for unauthorized third
parties to copy our services and related products or to reverse engineer or
obtain and use information that we regard as proprietary. There can be no
assurance that our competitors will not independently develop services and
related products that are substantially equivalent or superior to ours.
USE OF PROCEEDS
---------------
We will not realize any proceeds from the sale of the shares by the selling
security holders. We have already received and are utilizing the proceeds
received from the issuance of those shares, options and warrants in our business
and marketing.
DETERMINATION OF OFFERING PRICE
-------------------------------
All securities to be registered pursuant to this Prospectus will be sold by the
selling security holders. See "Selling Security Holders." The Shares may be
offered and sold from time to time by any selling security holder. Each selling
security holder will act independently of us in making decisions with respect to
the timing, manner, and size of each sale. The shares will be sold at market
price or in negotiated transactions.
SELLING SECURITY HOLDERS
------------------------
The following provides information with respect to:
The Blackmor Shares
-------------------
We are registering 100,000 shares of our common stock which we issued to The
Blackmor Group on April 17, 2000 in exchange for consulting services regarding
strategic management and growth of our business. The Blackmor Group has had no
other material relationship with us since our inception. The Blackmor Shares
represent less than one percent of our issued and outstanding common stock. See
"Plan of distribution."
12
<PAGE>
Abbey Blatt Shares
------------------
We are registering 20,000 shares of our common stock which we issued to Abbey
Blatt on March 28, 2000 at $.75 per share. Abbey Blatt is an individual
domiciled in the State of New York. Abbey Blatt has had no material relationship
with us since our inception. The Abbey Blatt Shares represent less than one
percent of our issued and outstanding common stock. See "Plan of Distribution."
Energenic Shares
----------------
We are registering 100,000 shares of our common stock which we issued to
Energenic, LLC on February 7, 2000, October 29, 1999, and February 7, 2000 along
with 50,000 options to purchase our common stock at $1.00 per share. 4,200 of
the options vested upon grant with 45,800 vesting on January 7, 2001. All
options expire on February 7, 2001. The shares and options were issued in
exchange for software development services provided to us. Energenic has had no
other material relationship to us. The Energenic Shares represent less than one
percent of our issued and outstanding common stock. If Energenic were to
exercise all of its options, it would own a total of 150,000 registered shares
which would be less than one percent of our issued and outstanding Common Stock.
See "Plan of Distribution."
Cabaret Software Shares
-----------------------
We are registering 60,000 shares of our common stock which we issued to Cabaret
Software, Inc. on January 20, 2000, September 18, 1999 and August 10, 1999, in
exchange for software related services valued at a total of $50,000. Cabaret
Software has had no other material relationship to us. The Cabaret Software
Shares represent less than one percent of our issued and outstanding Common
Stock. See "Plan of Distribution."
Arcadia Shares
--------------
We are registering 500,000 options granted to Arcadia Marketing, Inc. to
purchase our common stock at $1.69 per share that expire on May 4, 2005. Since
May, 2000, Arcadia has served as marketers of our technology and products.
Arcadia Marketing has had no other material relationship to us. If Arcadia
Marketing were to exercise all of its options, it would own a total of 500,000
registered shares which would represent approximately 2.31 percent of our issued
and outstanding common stock. See "Plan of Distribution."
Maggi Shares
------------
We are registering 30,000 options to purchase our common stock comprising: (1)
25,000 options at $1.00 per share and (2) 5,000 at $1.25 per share that expire
on May 24, 2002 and May 24, 2004, respectively. The options were granted to Don
Maggi on May 25, 1999. Maggi has had no other material relationship to us. If
Maggi were to exercise all of his options, he would own a total of 30,000
registered shares which would represent less than one percent of our issued and
outstanding common stock. See "Plan of Distribution."
Stern Shares
------------
We are registering up to 15,000 one-year options exercisable at $1.00 per share
to purchase our common stock that were granted to Ava Stern on May 12, 2000.
Since November, 1998, Ava Stern has provided public relations services to us
through The Financial Relations Board based in New York. Stern has had no other
13
<PAGE>
material relationship to us. If Stern were to exercise all of her options, she
would own a total of 15,000 registered shares which would represent less than
one percent of our issued and outstanding common stock. See "Plan of
Distribution."
TBA Shares
----------
We are registering up to 165,000 shares comprising: (1) 15,000 three-year
options to purchase our common stock at $1.25 per share that were granted to
T.B.A. Management Group, Inc. on May 24, 1999, and (2) 150,000 five-year options
to purchase shares of our common stock issued on July 21, 2000 exercisable at
$1.00 per share and expiring on September 30, 2004 to T.B.A. Network, Inc.
pursuant to a Consulting Agreement dated August 1, 1999. The T.B.A. entities
have provided consulting services to us since 1999. The T.B.A. entities have had
no other material relationship to us. If the T.B.A. entities were to exercise
all of their options, they would own a total of 165,000 registered shares which
would be less than one percent of our issued and outstanding common stock. See
"Plan of Distribution."
Bodek Shares
------------
We are registering 500,000 shares of our common stock which we issued to Erno
and Rachel Bodek on January 6, 2000 at $.50 per share. The Bodeks are holders of
our stock and have had no material relationship with us since our inception. The
Bodek's own an additional 2,500,000 unregistered shares of our common stock for
a total of 3,000,000 shares which represent 15.32 per cent of our issued and
outstanding common stock.. See "Plan of Distribution."
PLAN OF DISTRIBUTION
--------------------
All shares to be registered pursuant to this prospectus will be sold by the
selling security holders. See "Selling Security Holders." The shares may be
offered and sold from time-to-time by any selling security holder. The selling
security holder will act independently of us in making decisions with respect to
the timing, manner, and size of each sale. Such sale may be made on the
Over-the-Counter Bulletin Board, or otherwise, at prices and on terms then
prevailing or at prices related to the then market price, or in negotiated
transactions. In effecting sales, the selling security holders may use the
services of broker-dealers. Such broker-dealers engaged by the selling security
holder may arrange for other broker-dealers to participate. Broker-dealers may
receive commissions or discounts from the selling security holder in amounts to
be negotiated.
In offering the shares, the selling security holder and any broker-dealers who
execute sales for the selling security holder may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales, and any
profits realized by the selling security holder and the compensation of such
broker-dealer may be deemed to be underwriting discounts and commissions. We
have advised each selling security holder that during the time they are engaged
in distribution of the securities covered by this Prospectus, they must comply
with Rule 10b-5 and Regulation M under the Exchange Act and pursuant thereto:
(i) each must not engage in any stabilization activity in connection with our
securities; (ii) each must furnish each broker through which securities covered
by this Prospectus may be offered the number of copies of this Prospectus which
are required by each broker; and (iii) each must not bid for or purchase any of
our securities or attempt to induce any person to purchase any of our securities
other than as permitted under the Exchange Act Release 34-38067 (December 20,
1996). The selling security holders have been advised that they must coordinate
their sales under this Prospectus with each other and us for purposes of
Regulation M.
The shares are being offered on a continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended. This offering will terminate on the
earlier of (a) the date on which such selling security holder's shares may be
resold pursuant to Rule 144 under the Securities Act; or (b) the date on which
all shares offered have been sold by the selling security holder. There can be
no assurance that the selling security holder will sell any or all of the shares
of common stock offered.
14
<PAGE>
LEGAL PROCEEDINGS
-----------------
On March 30, 2000, our subsidiary, CDKnet, LLC, Shai Bar-Lavi (Chief Executive
Officer of CDKnet, LLC), and John Nussbaum, were sued in Superior Court in
California, County of Los Angeles, by Worldsite, Inc., the landlord of our
California office, alleging conversion, fraud and breach of oral contract. The
parties have reached an amicable settlement of this lawsuit.
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
The following sets forth our directors and executive officers and key employees
as of July 28, 2000, their respective ages, the year in which each was first
elected or appointed a director, and any other office held by each director:
CDKnet.com, Inc.
----------------
NAME OF DIRECTOR/ AGE POSITION HELD DATE ELECTED
OFFICER OR APPOINTED
--------------------------------------------------------------------------------
Steven A. Horowitz 40 Chairman, Chief Executive May 1998
Officer, Chief Financial
Officer and Secretary
Andrew J. Schenker 39 Director May 1998
Anthony J. Bonomo 40 Director May 1998
A. CDKnet, LLC
--------------
NAME OF DIRECTOR/ AGE POSITION HELD DATE ELECTED
OFFICER OR APPOINTED
--------------------------------------------------------------------------------
Steven A. Horowitz 40 Chairman, Chief Financial May 1998
Officer, and Secretary
Shai Bar-Lavi 40 Chief Executive Officer August 1999
Israel Hersh 46 President February 2000
Shlomo Shur 50 Chief Operating Officer March 2000
Michael W. Jolly 31 Consultant for October 1997
Business Development
Don Hegarty 31 Chief Technical Officer July 2000
Russell A. Kern 33 Consultant for April 1998
Marketing
Tom Ross 51 Consultant for August 1999
Entertainment
15
<PAGE>
B. ValueFlash.com Incorporated
------------------------------
NAME OF DIRECTOR/ AGE POSITION HELD DATE ELECTED
OFFICER OR APPOINTED
--------------------------------------------------------------------------------
Shai Bar-Lavi 40 Chief Executive Officer, February 2000
Chairman
Shlomo Shur 50 President, Director February 2000
Robert Reeves 49 Chief Financial and April 2000
Administrative Officer,
Treasurer and Director
Michael W. Jolly 31 Executive Vice President, February 2000
Entertainment Group
Tom Ross 51 President, Media Group February 2000
Russell A. Kern 33 Executive Vice President February 2000
Steven A. Horowitz 40 Secretary, Director February 2000
Michael Vasinkevich 32 Director February 2000
FAMILY RELATIONSHIPS
--------------------
No family relationship exists between or among any of our directors, executive
officers, and significant employees, as defined below, or any person
contemplated to become such.
BUSINESS EXPERIENCE
-------------------
STEVEN A. HOROWITZ - Chairman, Chief Executive Officer, Chief Financial Officer
and Secretary, CDKnet.com, Inc.; Chairman, Chief Financial Officer and Secretary
of CDKnet, LLC; and Secretary and Director of ValueFlash.com Incorporated.
Mr. Horowitz has served as Chairman of the Board of Directors and Secretary of
CDKnet.com since May 1998, has served as Chief Financial Officer since October
1999, and has served as the managing member of Creative Technology and CDKnet,
LLC since October, 1998 and November, 1998, respectively. Since April 1, 2000,
he has served as a partner in Moritt, Hock, Hamroff & Horowitz, LLP, a Garden
City, New York-based law firm. From October 1, 1991 to March 2000, he was the
founding principal of Horowitz, Mencher, Klosowski, & Nestler, P.C., a Garden
City, New York-based law firm. 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, CDKnet.com, Inc.
Mr. Bonomo has served as a director of CDKnet.com 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
16
<PAGE>
President and Chief Operating Officer from 1993 to 1995 and President from 1995
to the present. Mr. Bonomo is a member of the Bar of the State of New York and
serves as a board member of several charitable associations and foundations.
ANDREW J. SCHENKER - Director, CDKnet.com, Inc.
Mr. Schenker became a director of CDKnet.com 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 - Chief Executive Officer of CDKnet, LLC, and Chief Executive
Officer and Chairman of ValueFlash.com Incorporated.
Mr. Bar Lavi joined CDKnet, LLC as its President in August 1999 and has
subsequently relinquished that position and become the Chief Executive Officer
of both CDKnet, LLC and ValueFlash.com. Mr. Bar-Lavi directs CDKnet's business
operations and development plans. From April 1999 to July 1999, Mr. Bar-Lavi
served as a consultant to CDKnet, LLC. Prior to joining CDKnet, LLC, Mr.
Bar-Lavi served as Chief Operating Officer of the Hungarian Broadcasting
Corporation, a publicly-traded company, from January 1998 to December 1998. From
July 1990 to December 1997, he served as President of Topline Communications.
Mr. Bar-Lavi's experience with computers goes back to the early 1980s where he
ran Sagy Computer Services, a mainframe-based company providing payroll and
accounting services.
SHLOMO SHUR - President and Director, ValueFlash.com Incorporated and Chief
Operating Officer, CDKnet, LLC.
Mr. Shur has over 20 years of software development and technology consulting
experience. He joined CDKnet, LLC in late 1999 as Chief Operating Officer and
has also assumed the position of President of ValueFlash.com in February 2000.
Prior to joining CDKnet, Mr. Shur was a co-founder of Executone Information
Systems where he spent 15 years as a senior technology officer. Mr. Shur also
spent two years as an independent technology consultant. Mr. Shur has a Bachelor
of Sciences degree in Electrical Engineering from City College, New York.
ROBERT J. REEVES - Chief Financial and Administrative Officer, and Director of
ValueFlash.com Incorporated.
Mr. Reeves joined ValueFlash.com in April 2000. Mr. Reeves is responsible for
overseeing ValueFlash's financial and administrative operations, capital
fundraising, as well as negotiating future partnership agreements. Prior to
joining ValueFlash, Mr. Reeves was Chief Financial Officer of ABN AMRO
Incorporated, responsible for the firm's North American investment banking
business. Before joining ABN AMRO in 1997, Mr. Reeves served as ING Barings
Securities, Inc.'s Chief Financial Officer. He oversaw the investment bank's
financial operations in North, Latin and South America. Prior to ING Barings,
Mr. Reeves worked for nine years with Shearson Lehman Brothers in various
capacities, the last being Executive Vice President and Assistant Controller.
Mr. Reeves joined Shearson Lehman Brothers from Coopers & Lybrand where he spent
nine years and was a Senior Manager. Mr. Reeves is a Certified Public
Accountant.
MICHAEL W. JOLLY - Executive Vice President, Sales Director, ValueFlash.com
Incorporated, and Consultant for Business Development to CDKnet, LLC.
17
<PAGE>
Mr. Jolly is responsible for identifying and developing business opportunities
and strategic partnering opportunities within the entertainment industry. Mr.
Jolly joined CDKnet in November 1997. Prior to joining CDKnet, Mr. Jolly served
as Vice President of Marketing and Secretary at Kelly Music and Entertainment
Corp. (creator of CDK(TM) Technology) from October 1995 to November 1997. There
he developed music and entertainment products and built a significant amount of
music, movie and TV industry contact relationships. From August 1991 to October
1995, Mr. Jolly held positions at Cigna Financial Advisors in which he developed
programing and packaging products in the network programming and in-flight
entertainment markets as well as serving as a Financial Advisor where he
provided financial, statistical and strategic planning to businesses. Mr. Jolly
has a B.S. in Marketing from Hofstra University.
RUSSELL A. KERN - Executive Vice President, Marketing Director, ValueFlash.com
Incorporated, and consultant for Marketing to CDKnet, LLC.
Mr. Kern is a founding member of the ValueFlash.com team, joining the firm from
his position as General Manager at CDKnet, LLC. In his position as Marketing
Director at ValueFlash.com, Mr. Kern is responsible for 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. Mr. Kern joined
CDKnet in April 1998 where he was instrumental in developing the
second-generation multimedia CD technology along with CDKnet's custom multimedia
CD service, MixFactory. Prior to joining CDKnet, Mr. Kern served from November
1995 to April 1998 as Director of Strategic Planning at Poppe Tyson (now
ModemMedia), developing successful Web initiatives for a range of clients
including IBM and Minolta. From January 1994 to November 1995, he was Marketing
Director at Marketing Resources of America. He also served five years with BBDO
Advertising planning for clients such as Visa USA, Pepsi-Cola and Campbell's. In
addition, he has several years experience in direct-response marketing,
developing DRTV, print and direct-mail programs. Mr. Kern has a B.S. in
Marketing from the Wharton School at the University of Pennsylvania.
TOM ROSS - President, Entertainment Group of ValueFlash.com Incorporated, and
consultant for Entertainment to CDKnet, LLC.
Mr. Ross joined CDKnet in August 1999 and is responsible for identifying
business opportunities for ValueFlash within the entertainment, music and film
industries and securing partnership agreements. From December 1998 to July 1999,
Mr. Ross served as a consultant. Prior to that, Mr. Ross was a partner of
Creative Artists Agency from January 1984 to November 1998. As a founder,
architect and chief of the music department at Creative Artists, 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 Creative
Artists 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.
ISRAEL HERSH - President, CDKnet, LLC.
Israel Hersh joined CDKnet, LLC in February, 2000 as President. Prior to that,
he was Vice President, Chief Technology Officer with Executone Information
Systems since January, 1999. Mr. Hersh joined Executone as Director of Software
Development in 1984, and was promoted to Vice President of Software Engineering
in January, 1995. In June, 1996, Mr. Hersh was promoted to Vice President,
Product Development of Executone's Computer Telephony Division. Prior to his
employment with Executone Information Systems, Inc. Mr. Hersh was a manager of
the Software Development Department for T-Bar, Inc. Mr. Hersh has a B.S. in
Electrical Engineering from Tel-Aviv University and a MS in Electrical
Engineering from Bridgeport University.
18
<PAGE>
DON HEGARTY - Chief Technical Officer, CDKnet. LLC
Don Hegarty joined CDKnet in 1998. He is responsible for CDK software
development, overall website management, and the automated robotic processes
behind the Mixfactory.com websites. His duties also include maintaining the
order fulfillment system, programming new automation, and managing the customer
support staff. Prior to CDKnet he was Director of CD production at MY-CD.com, a
Bandai company. There he worked on creating one of the first customized CD sites
on the internet. Prior to that, he lead programming for Market Growth Resources,
A True North Company, on many projects including Tropicana, Duracell, and
Mastercard. Mr. Hegarty has also worked for the Library of Congress in creating
a database system to track both Braille books and books on tape for thousands of
users across the United States. Mr. Hegarty has a B.S. in Computer Science from
Manhattan College.
MICHAEL VASINKEVICH - Director, ValueFlash.com Incorporated.
Mr. Vasinkevich has specialized in private placement financing of growth
companies for the past eight years. Since July 1999, Mr. Vasinkevich is the
Managing Director of the Structured Finance Group at Ladenburg Thalmann & Co.
Inc., a full service investment bank established in 1876 and headquartered in
New York City. Prior to joining Ladenburg Thalmann, Mr. Vasinkevich was the
founder and Managing Director of Tadem Venture Partners, Ltd., a specialized
investment bank focusing on growth companies in the U.S. and Asia from July 1998
to the present. Before founding Tadem Venture Partners, from March 1997 to
December 1998, Mr. Vasinkevich was the Managing Director of the Structured
Finance Group at Jesup & Lamont Securities Corp., a New York City based
investment bank. Prior to heading the Structured Finance Group at Jesup &
Lamont, Mr. Vasinkevich acted in the same capacity at Caldwell Capital Corp. in
New York City from 1993 to 1997.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN NON-MANAGEMENT BENEFICIAL OWNERS
The following are our non-management, beneficial owners of more than 5 percent
of the outstanding shares amount of our common stock as of July 27, 2000:
A. CDKNET.com, Inc.
-------------------
Name and Address of Amount and Nature Percent of
Beneficial Stockholder of Beneficial Ownership Class (1)(2)
---------------------- ----------------------- ------------
Alvin Pock 1,352,546 6.39%
595 Stewart Avenue
Garden City, New York 11530
The Target Group Fund Ltd. (3) 3,000,000 12.42%
c/o George Sandhu
The International Investment Group
17 State Street, 18th Floor
New York, New York 10004
Erno and Rachel Bodek 3,000,000 15.32%
c/o Victoria Sales Corporation
541 West 21st Street
New York, New York 10011
19
<PAGE>
Caldwell Capital Corp. 1,500,000 6.62%
505 Northern Blvd.
Suite 308
Great Neck, New York 11021
Beneficial Owners as a group (4) 8,852,546 33.46%
--------------------------------
Notes to table of non-management beneficial shareholders
(1) There were 21,151,831 shares of common stock outstanding as of July 28,
2000.
(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) Represents shares issuable upon the conversion of 1,500,000 shares of
our Series A Preferred Stock to common stock at $.50 per share. See
Note 6 of the attached June 30, 1999 Financial Statements.
(4) As set forth in this table, there are 5 individuals or entities who are
not members of our management each of whom individually owns 5% or more
of our common stock. In addition to these individuals, there is a large
group of individuals who may constitute beneficial owners of our common
stock pursuant to the terms of a Stockholders Agreement dated May 7,
1998. Under the Stockholder's Agreement, its 35 signatories are
required to vote their respective shares of stock identified in the
Agreement as a class under certain circumstances. The names of the 35
signatories and their respective ownership interests are incorporated
by reference in Exhibit 99.1 of this document. As a result, the
signatories as a group may constitute beneficial owners of our common
stock although only a few individually owns more than 5% of our common
stock. The voting and certain other provisions of the Stockholders
Agreement have been rescinded by 16 of the signatories to the
Shareholders Agreement. We believe it is the position of the
signatories to the Stockholders Agreement that they do not constitute a
"group" as such term is defined under Rule 13(d)(3) promulgated under
the Securities Exchange Act of 1934, as amended. The rescindment will
not become effective until all 35 shareholders execute the
Stockholders' Agreement. Further, under the terms of the Agreement, it
will terminate upon our filing an effective initial public offering
with the Commission. We consider our Form 10-SB, as amended, which
became effective on December 7, 1999, to be an initial public offering.
Therefore, we believe that the Agreement terminated on its own terms on
December 7, 1999.
B. ValueFlash.com Incorporated
------------------------------
Name and Address of Amount and Nature Percent of
Beneficial Stockholder of Beneficial Ownership Class (1)(2)
---------------------- ----------------------- ------------
AMRO, International, S.A. 450,000(3) 6.77%
c/o Ultra Finanz AG
Grossmuenstsplatz 6
Zurich, CH - 8022
Switzerland
20
<PAGE>
Mabcrown, Inc. 750,000(4) 11.11%
c/o Ultra Finanz AG
Grossmuensterplatz 26
Zurich CH-8022, Switzerland
Erno and Rachel Bodek 750,000(5) 11.11%
c/o Victoria Sales Corporation
541 West 21st Street
New York, New York 10011
Beneficial Owners as a Group 1,950,000 27.27%
------------------------------------------
Notes to table of non-management beneficial shareholders
(1) There were 6,500,000 shares of ValueFlash common stock outstanding as
of July 28, 2000. CDKNET.com, Inc. owns 5,000,000 (76.92%) shares of
ValueFlash common stock in addition to 3.5 million options to purchase
common stock at $1.50 per share, expiring January 28, 2005.
(2) The individual or entities named in the table has 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) Includes 150,000 options to purchase ValueFlash common stock at $2.00,
expiring January 28, 2005.
(4) Includes 250,000 options to purchase ValueFlash common stock at $2.00,
expiring on November 22, 2000.
(5) Includes warrants to purchase up to 500,000 shares of ValueFlash common
stock at $2.00 per share, expiring on July 18, 2001.
21
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
The following table sets forth information with respect to the share ownership
of our common stock by our 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 July 28, 2000:
SHARES OF COMMON STOCK OWNED BENEFICIALLY AND OF
RECORD BY MANAGEMENT
A. CDKnet.com, Inc.
-------------------
Title and
Class of
Stock Name and Address Amount and Nature Percent of
Owned(1)(2) of Beneficial Owner of Beneficial Ownership Class
----------- ------------------- ----------------------- ----------
Common Steven A. Horowitz 2,764,347(3) 12.61%
c/o CDKNET.COM, INC.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Andrew J. Schenker 73,367(4) *
c/o CDKNET.COM, INC.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Anthony J. Bonomo 50,000(5) *
c/o CDKNET.COM, INC.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Shai Bar-Lavi 1,250,000(6) 5.58%
c/o CDKNET.COM, INC.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Shlomo Shur 500,000(11) 2.31%
c/o CDKNET.COM, INC.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Israel Hersh 25,000(7) *
c/o CDKNET.COM, INC.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Michael W. Jolly 216,667(8) 1.01%
c/o CDKNET.COM, INC.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
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Common Russell A. Kern 216,667(8) 1.01%
c/o CDKNET.COM, INC.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Tom Ross 700,000(9) 3.20%
1480 San Reno Drive
Pacific Palisades, CA 90272
Common Don Hegarty 12,500(12) *
c/o CDKNET.COM, INC.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
All officers and directors 5,808,548(10) 23.46%
as a group (10 persons)
---------------------------------------
Notes to table of beneficial shareholders
*Denotes less than 1%
(1) There were 21,151,831 shares of common stock outstanding as of July 28,
2000. This table does not include options to purchase 10,000 shares of
our common stock under our 1998 Equity Incentive Plan held by Mr. Keith
Fredericks, formerly our Sr. Vice President of Software Development and
Chief Technical Officer. Mr. Fredericks resigned effective December 17,
1999.
(2) Except for the limitations set forth in the Stockholders Agreement
dated May 7, 1998, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to the information contained in
this table and these notes. See Exhibit 4.2.
(3) This table includes 28,571 two-year Warrants to purchase common stock.
Mr. Horowitz is our Chairman of the Board of Directors, Chief Executive
Officer, Chief Financial Officer and Secretary. This figure does not
include 150,000 warrants issued to Horowitz, Mencher, Klosowski &
Nestler P.C., a law firm formerly controlled by Mr. Horowitz, in
connection with a loan and loan extension. On January 11, 2000, Mr.
Horowitz was granted 750,000 options expiring on January 10, 2010 to
purchase shares of our common stock at $1.00 per share. This table also
includes those options.
(4) This table includes options to purchase 50,000 shares of our common
stock under the Plan. Mr. Schenker is one of our directors.
(5) This table includes options to purchase 50,000 shares of our common
stock under the Plan. Mr. Bonomo is one of our directors.
(6) This table includes warrants to purchase 750,000 shares and options to
purchase 500,000 shares of our common stock under the Plan. The table
does not include 250,000 options held in escrow pending the completion
of financing transaction in excess of $1,000,000. Mr. Bar-Lavi is Chief
Executive Officer of CDKnet, LLC and Chief Executive Officer and
Director of ValueFlash.com Incorporated.
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(7) This table includes options to purchase 25,000 shares of our common
stock under the Plan.
(8) This table includes options to purchase 216,667 shares of our common
stock under the Plan. Mr. Kern is Executive Vice President and
Marketing Director of ValueFlash.com Incorporated and a consultant for
marketing to CDKnet, LLC. Mr. Jolly is Executive Vice President and
Sales Director of ValueFlash.com Incorporated and a consultant for
business development to CDKnet, LLC.
(9) This table includes options to purchase 700,000 shares of our common
stock pursuant to his employment agreement. Mr. Ross is President of
the ValueFlash's Entertainment Group and a consultant for entertainment
to CDKnet, LLC.
(10) Includes all stock options (3,020,834 shares of common stock) and
778,571 Warrants owned by officers and directors.
(11) Includes 500,000 options to purchase common stock at $1.00 per share
under the Plan.
(12) Includes 12,500 options to purchase common stock at $1.00 per share
under the Plan.
B. ValueFlash.com Incorporated
------------------------------
Title and Percent of
Class of Name and Address Amount and Nature Class
Stock of Beneficial Owner of Beneficial Ownership Owned(1)(2)
----------- ------------------- ----------------------- -----------
Common Steven A. Horowitz 750,000(3) 10.34%
c/o CDKNET.COM, INC.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Shai Bar-Lavi 1,250,000(4) 16.13%
c/o CDKNET.com, Inc.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Shlomo Shur 750,000(5) 10.34%
c/o CDKNET.com, Inc.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Michael Vasinkevich 1,437,500(6) 18.40%
525 Northern Blvd.
Suite 308
Great Neck, N.Y. 11021
Common Michael Jolly 300,000(7) 4.15%
c/o CDKnet.com, Inc.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Russell Kern 300,000(7) 4.15%
c/o CDKnet.com, Inc.
400 Garden City Plaza
Suite 202
Garden City, NY 11530
Common Tom Ross 1,000,000(8) 13.33%
1480 San Reno Drive
Pacific Palisades, CA 90272
Common CDKNET.com, Inc. 8,500,000(9) 85.0%
400 Garden City Plaza
Suite 202
Garden City, NY 11530
All Officers and Directors
as a group (5 persons) 14,287,500 91.22%
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-----------------------------
Notes to table of beneficial shareholders
(1) There were 6,500,000 shares of ValueFlash common stock outstanding as
of July 27, 2000. This table does not include CDKnet.com's ownership
interest in ValueFlash comprising 5,000,000 shares of ValueFlash common
stock and 3,500,000 options to purchase ValueFlash common stock at
$1.50 per share expiring on January 28, 2005. CDKnet.com's ownership
interest represents 76.92% of ValueFlash's issued and outstanding
stock.
(2) 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 notes.
(3) Includes 750,000 options to purchase ValueFlash common stock at $1.50
per share expiring on January 27, 2005.
(4) Includes 1,250,000 options to purchase ValueFlash common stock at $1.50
per share expiring on January 27, 2005.
(5) Includes 750,000 options to purchase ValueFlash common stock at $1.50
per share expiring on January 27, 2005.
(6) Includes 62,500 options to purchase ValueFlash common stock at $2.00
per share expiring on September 13, 2000 as well as 1,250,000 options
to purchase stock at $1.50 per share expiring on January 13, 2005.
(7) Includes 300,000 options to purchase ValueFlash common stock at $1.35
per share expiring on January 27, 2005.
(8) Includes 1,000,000 options to purchase ValueFlash common stock at $1.35
per share expiring on January 27, 2005.
(9) Includes 3,500,000 options to purchase common stock at $1.50 per share
expiring on January 13, 2005.
DESCRIPTION OF SECURITIES
-------------------------
Common Stock
------------
We are authorized to issue 40,000,000 shares of common stock of $0.0001 par
value, per share. Each share of our common stock, when fully paid for, will be
validly issued and outstanding, is entitled to one vote on all matters to be
voted on by shareholders, is entitled to equal dividends when and as declared by
the Board of Directors from funds legally available therefore, and is entitled
to a pro rata share of our net assets in the event of dissolution, liquidation
or winding up of our operations.
Preferred Stock
---------------
We are authorized to issue 5,000,000 shares of preferred stock. The
authorization to issue preferred shares were made by a resolution of the Board
of Directors and were voted upon by the shareholders. Our preferred stock may be
issued from time-to-time, by resolution or resolutions of the Board of
Directors, in one or more series. While each series of preferred stock may be
assigned different rights, conversion rights, redemption rights, liquidation
rights, voting rights and rights regarding sinking fund or redemption or
purchase accounts, all of the shares of each series shall be identical in all
respects to the other shares of such series.
Series A Preferred Stock
------------------------
Our Series A Preferred Stock is convertible into common stock. It has voting
rights and ranks as follows with respect to dividend rights and rights upon
liquidation, winding up and dissolution: (a) senior to any other series of
Preferred Stock (except as established by the Board of Directors), (b) on parity
with any other series of Preferred Stock established by the Board of Directors,
and (c) prior to any other of our equity securities, including our common stock.
There are currently 1,500,000 shares of our Series A Preferred Stock issued
and outstanding.
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Stockholders' Agreement
-----------------------
We entered into a Stockholders' Agreement with a group of shareholders on May 7,
1998 which sets forth their agreement regarding the disposition of specified
shares of our common stock. The agreement provides for a right of first refusal,
initially to the non-selling shareholders and secondarily to us on the same
terms and conditions as any bona fide third party offer and also requires a 100%
disposition of the selling shareholder's interest. Excluded from this provision
are transfers to family members or trusts for the benefit of family members or
in the event of death. Furthermore, the shareholders agreed to sell and/or
transfer their stock pursuant to the terms of any bonafide third party offer to
acquire not less than a majority of our outstanding stock or to merge with us.
The shareholders agreed to vote for Steven A. Horowitz as a director until such
time as he resigned from the position. However, 16 of the 35 signatories to the
agreement have signed an amendment to the agreement rescinding the voting and
certain other provisions of the agreement and we anticipate obtaining the
remaining signatures in the near term. The recindment will not become effective
until all 35 shareholders execute the Stockholders' Agreement. See Exhibit 4.2.
Further, under the terms of the agreement, it will terminate upon our filing an
effective initial public offering with the Commission. We consider our Form
10-SB, as amended, which became effective on December 7, 1999, to be an initial
public offering. Therefore, we believe that the Agreement terminated on its own
terms on December 7, 1999.
REPORTS TO SHAREHOLDERS
-----------------------
We intend to furnish our shareholders with annual reports of our operations,
containing financial statements. We will also file annual and quarterly reports
as required by the Securities Exchange Act of 1934, as amended.
TRANSFER AGENT
--------------
Our transfer agent is Interwest Transfer Company, 1981 East 4800 South, Suite
100, Salt Lake City, UT 84117, (801) 272-9294.
AVAILABLE INFORMATION
---------------------
We are subject to the reporting requirements of the Securities Exchange Act of
1934 by virtue of the fact that on October 7, 1999 we filed a Registration
Statement on Form 10-SB -- together with all amendments and exhibits -- with the
Commission. Our Form 10-SB became effective on December 7, 1999. This
prospectus, together with all attached amendments and exhibits, is filed under
the Securities Act of 1933, as amended, with respect to the shares of common
stock offered.
A copy of our filings with the Commission may be inspected by anyone without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part of our filings may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and its public reference facilities in New
York, New York and Chicago, Illinois, upon the payment of the fees prescribed by
the Commission. Our filings are also available through the Commission's Web site
at the following address: http://www.sec.gov.
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LEGAL MATTERS
-------------
The validity of the securities offered hereby will be passed upon for us by
Foley, Hoag & Eliot LLP, Boston, Massachusetts.
EXPERTS
-------
Our financial statements as of June 30, 1999 and for the year then ended and the
period October 1, 1997 (date of inception) to June 30, 1998, included in this
Prospectus have been included in reliance upon the report of Grant Thornton LLP,
independent certified public accountants, given on the authority of that Firm as
experts in auditing and accounting.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
----------------------------------------------------
FOR SECURITIES ACT LIABILITIES
------------------------------
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
ORGANIZATION WITHIN LAST FIVE YEARS
-----------------------------------
We are a holding company formed under the laws of the State of Delaware. Our
executive offices are located at 400 Garden City Plaza, Suite 202, Garden City,
New York 11530. The following is a chronology of our corporate history:
On August 20, 1997, Creative Technology, LLC, a limited liability company
organized under the laws of the State of New York, was formed to operate
technology related enterprises for the development and sale of computer
technology and software. Creative Technology began operations on October 1,
1997.
On or around October 1, 1997, Technology Applications, LLC, a limited liability
company organized under the laws of the State of New York, was formed to operate
technology related enterprises for the development and sale of computer
technology and software.
In October 1997, Creative Technology contributed capital of approximately
$1,100,000 and subordinated loans of $400,000 in exchange for a 40% interest and
voting control in Technology Applications. The operating agreement for
Technology Application provided that Creative Technology would control the
management committee.
Kelly Music and Entertainment Corp., a Delaware corporation, was founded in 1995
to operate technology related enterprises for the development and sale of
computer technology and software. In October 1997, Kelly Music contributed all
of its intellectual property (which forms the core of the majority of our
products and fixed assets) to Technology Applications in exchange for a 40%
ownership interest in Technology Applications valued at $1,500,000. Kelly Music
received its 40% ownership interest directly from Technology Applications in
consideration for Kelly Music's contribution of intellectual property to
Technology Applications.
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<PAGE>
In October 1997, Alvin Pock and Robert Kelly, both principals of Kelly Music,
contributed to Technology Applications notes of Kelly Music (some of which were
collateralized). In exchange, Pock and Kelly received ownership interests in
Technology Applications of 12.5% and 7.5% respectively.
On February 4, 1998, Technology Applications changed its name to CDKnet, LLC.
On May 7, 1998, Technology Horizons Corp. was formed as a Delaware corporation
to operate technology related enterprises for the development and sale of
computer technology and software. On that same day, Technology Horizons
purchased 100% of the ownership interests of Creative Technology in exchange for
6,000,000 shares of Technology Horizons common stock, acquiring Creative
Technology as a wholly owned subsidiary.
On May 21, 1998, Technology Horizons merged with International Pizza Group,
Inc., a Florida corporation that was inactive but had its common stock traded on
the Over-the-Counter Bulletin Board under the symbol "IPZZ." As a result of the
merger, Technology Horizons acquired the net assets of International Pizza and
began trading on the Over-the-Counter Bulletin Board on May 21, 1998, under the
symbol "THCX."
On June 2, 1998, Creative Technology, Kelly Music, Pock, Kelly and CDKnet, LLC
agreed to covert $280,766 and $93,750 of debt which CDKnet, LLC owed to Creative
Technology and Pock into additional ownership interests of 8% and 2.5%,
respectively. Accordingly, the ownership interests of Kelly Music and Kelly were
reduced to reflect the increased ownership of Creative Technology and Pock.
Following this debt conversion, the ownership of CDKnet, LLC was as follows:
Creative Technology 48%, Pock 15%, Kelly 5.85% and Kelly Music 31.15%.
By agreement dated June 3, 1998 Creative Technology, Kelly Music, Pock, Kelly
and CDKnet, LLC, CDKnet, LLC, agreed that $800,000 in advances from CDKnet, LLC
to Kelly Music were to be used to reduce Kelly Music's membership interest in
CDKnet, LLC by 5%, thereby increasing the combined ownership of Pock, Kelly and
Creative Technology by an aggregate of 5%. Following this transaction, the
ownership of CDKnet, LLC was as follows: Creative Technology 51.5%, Pock 16.1%,
Kelly 6.25% and Kelly Music 26.15%.
Additionally, by agreements dated June 3, 1998, Technology Horizons acquired
Kelly and Pock's 6.25% and 16.1% interests in CDKnet, LLC issuing in exchange
363,636 and 936,727 common shares of Technology Horizons, to Kelly and Pock,
respectively. Following these transactions, Technology Horizons held a 22.35%
direct ownership interest in CDKnet, LLC bringing its total direct and indirect
ownership to 73.85%.
On July 8, 1998, Technology Horizons entered into an agreement that was
subsequently amended to purchase Kelly Music's remaining 26.15% ownership
interest in CDKnet, LLC for $5,171,122, payable in a combination of 1,883,635
common shares of Technology Horizons and debt retirement of $600,000 in notes,
and a cash payment of $65,000 raising Technology Horizons' direct interest in
CDKnet, LLC to 48.5%. Creative Technology held the remaining 51.5%.
On December 16, 1998, Technology Horizons changed its name to CDKNET.COM, INC.
and, on December 18, 1998, began trading on the Over-the-Counter Bulletin Board
under the symbol of "CDKX".
On October 7, 1999, we were deleted from the Over-the-Counter Bulletin Board
until our Registration Statement on Form 10-SB, as amended, has completed the
Commission's comment process. We were re-instated on the Bulletin Board in April
2000.
On January 13, 2000, we created ValueFlash.com Incorporated, a Delaware
corporation, of which we own 76.92% of the outstanding common stock. The
remaining shareholders of ValueFlash are: Alvin Pock, 75,000 shares; Michael
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Vasinkevich, 125,000 shares and 1,312,500 options; AMRO International, S.A.,
300,000 shares and 150,000 options; Austost Anstalt Schaan, 100,000 shares and
50,000 options; Balmore Funds, S.A., 100,000 shares and 50,000 options;
Mabcrown, Inc., 500,000 shares and 250,000 options; Aizik Wolf, 50,000 shares
and 50,000 options; Erno and Rachel Bodek 250,000 shares and 500,000 options.
ValueFlash develops and sells our new software-based communications module that
provides a vehicle for marketers to reach their customers using a personal
computer desktop application.
We currently have two other wholly-owned subsidiaries, Creative Technology and
CDKnet, LLC. We directly own 100% of Creative Technology and 48.5% of CDKnet,
LLC. Creative Technology owns the remaining 51.5% ownership interest of CDKnet,
LLC, giving us an indirect 100% ownership interest of CDKnet, LLC. We conduct
our business through CDKnet, LLC. Our manufacturing, research and development is
conducted out of CDKnet, LLC's office located at 250 West 57th Street, Suite
1101, New York, New York 10019. CDKnet, LLC and ValueFlash can be reached at our
principal offices by telephone at 212-547-6050 or on our website at:
WWW.CDKNET.COM. or WWW.VFLASH.COM.
DESCRIPTION OF BUSINESS
-----------------------
We have developed a multimedia technology, called CDK(TM), which integrates
audio, video and Internet connectivity on a standard compact disc. Our
technology enables users to create their own personalized compact discs simply
by visiting a Website. These custom compact discs play audio and display videos
on a full-screen, using high-quality videos and digital technology. The custom
compact discs also include software applications and targeted Web links.
We have also developed "V-Flash(TM)", our new software based communication
module which we are distributing through our subsidiary, ValueFlash.com
Incorporated. VFlash(TM) provides a real time, direct communication vehicle for
marketers to reach their customers using a personal computer desktop
application. Our subsidiary, CDKnet, LLC, initially developed the VFlash(TM)
product. It was transferred to ValueFlash in January 2000 for further
development, production, marketing and distribution. VFlash(TM) will be
distributed primarily by multimedia CD's that will be produced by us.
In March 2000, the first VFlash(TM) messenger application was launched and
marketing alliances with Atlantic Records, Impiric (formerly Wunderman Cato
Johnson ) RCA Records and Artimis Records were announced. In May 2000,
ValueFlash.com announced a partnership with PlanetGiving.com, an online charity
auction platform for non-profit fundraising.
Our targeted industries include: (1) entertainment (music, movies and TV); (2)
travel and tourism; (3) professional sports; (4) financial services; (5)
education; (6) toys/games; (7) fashion; (8) food/cooking; (9) automotive; and,
(10) healthcare. Our primary customers and/ or strategic partners include
Peterson's, AtomicPop, Central Park Media, CollegeMusic.com, Megaforce Records
and DreamWorks Records.
We have a limited operating history. While we are currently generating revenues
primarily from development and use fees for client specific CD's and the sale of
custom CD's, most resources have been directed to developing and marketing the
VFlash(TM) product in accordance with our fiscal 2000 operating plan.
1. GENERAL
Our unaudited financial statements for the period July 1, 1999 to March 31,
2000, reflect a net loss of $5,200,000 on revenues of $83,602 compared to a net
loss of $4,200,000 on revenues of $457,237 in the prior period ended March 31,
29
<PAGE>
1999. Revenues declined $375,635 in the current period because our focus shifted
to the enhancement of our core technologies, such as the perfection of our
MixFactory(TM) technology and CDK(TM) version 2.0 and Macintosh compatible
CDK(TM) version 1.5, and VFlash, as well as the penetration of core markets. We
anticipate that VFlash(TM) will be a major factor in our future revenue and
business growth. Significant expenditures have been incurred and will continue
to be required for marketing and advertising the product and to build the
infrastructure to support it.
We have received an infusion of $1.250 million in capital since January 1, 2000.
We have raised $3 million for our subsidiary ValueFlash through private
placements since January 28, 2000.
As of July 28, 2000, we had 21,151,831 shares of common stock issued and
outstanding. Of these shares, 2,009,143 shares are restricted stock owned by our
directors and key employees. The remaining 19,142,688 shares are owned by
approximately 135 shareholders, 4 of whom we believe hold more than five percent
(5%) ownership of our common stock which is quoted on the Over-the-Counter
Bulletin Board.
2. INDUSTRY
A. OVERVIEW
Internet usage has increased dramatically in the last decade. As a result, many
new personal and commercial applications have been developed for Internet users
and, increasingly, consumers are conducting business through Internet
applications. We believe that web-connected multimedia compact discs will be one
of the next significant applications of the Internet. Web-connected, Multimedia
compact discs contain audio, video and HTML (or, HyperText Markup Language, the
underlying "code" for Web pages) all navigable by a standard web browser. Our
CDK(TM) technology forms the foundation multimedia for CD-ROM authoring,
production, and custom online compilations.
We believe there is strong market potential for CDK(TM) technology across
various industries. Target industries include:
-- Entertainment (music, movies, TV) -- Toys/Games
-- Travel & Tourism -- Fashion
-- Professional Sports -- Food/Cooking
-- Financial Services -- Automotive
-- Education -- HealthCare
The premiere companies in each of these industry categories have fully developed
Websites with significant user traffic, lending themselves as prime candidates
for the MixFactory(TM) operation. We believe that the industry will become more
competitive. Our inability to compete in the market will have a material affect
on our business operations.
The Vflash(TM) concept was initially developed by the CDKnet team to take
advantage of the distribution opportunity presented by the Company's main
product, Web-connected multimedia CDs. To fully capitalize on the market
opportunity, CDKnet.com formed the ValueFlash subsidiary on January 13, 2000.
ValueFlash was established to take advantage of the dynamic, real-time
characteristics of the Internet and to address the need for a non-intrusive yet
highly targeted interactive direct marketing application. ValueFlash has
developed, and is now marketing, its proprietary Vflash(TM) messenger, a
computer desktop application which provides a wide variety of organizations with
a real-time method of directly marketing to, and communicating with, its
customer base.
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ValueFlash's objective is to provide marketers with an unrivaled solution for
identifying customers and creating a direct rapport with these individuals,
thereby facilitating targeted communications and relevant e-commerce
opportunities. Direct communication with consumers will be facilitated by the
Vflash(TM) messenger, a computer desktop application that will serve as an
engaging Internet direct-marketing tool allowing service providers and retailers
to develop long-term customer relationships.
In addition to driving e-commerce revenue for online retailers, the Vflash(TM)
application serves as unique mechanism for promoting, and driving traffic to,
offline retailers. The ability to provide real-time targeted messages and offers
based on an interest profile as well as a demographic profile creates a
compelling offering for both "brick & mortar" and "brick & click" retailers.
Current Vflash(TM) clients include: 1) Atlantic Records; 2) Artemis Records
(Kittie); 3) PlanetGiving.com; and 4) Medium4.com. Strategic partners include
Impiric, a wholly owned subsidiary of Young & Rubicam, JWT, a subsidiary of WPP
Dotcom, and House of Blues.
The ValueFlash revenue model is based on three distinct revenue streams -
hosting fees, e-commerce commissions and advertising sales.
B. COMPETITION
While other companies have the potential to develop web-based, audio and video,
custom compact discs, we believe that none offer the economic, development or
quality advantages of our CDK(TM) and MixFactory(TM) technology. We believe that
there are six main companies currently offering custom audio compact disc
development. These companies are Musicmaker.com, Customdisc.com, CDUCTIVE,
Amplified.com, K-Tel.com, and EZCD.com. However, we believe that none of these
companies offers custom audio and video compact disc development. In an effort
to further secure a strong position in the marketplace, CDKnet, LLC has
submitted patent requests for certain aspects of our technology. Finally, we
believe that other companies, including established Internet companies, software
companies and companies in the entertainment business could enter this business
and become competitors.
The Vflash(TM) competitive set includes companies in the following groups:
1) email marketing (Digital Impact, YesMail)
2) online loyalty programs (MyPoints, Netcentives)
3) online news and info delivery (EntryPoint, Etour)
The Vflash(TM) messenger is designed to utilize some of the best attributes from
all of the above mentioned services. By residing on the user's desktop and
serving as a delivery portal, users can receive direct marketing messages,
establish loyalty program accounts and receive personalized news and information
content through one compact and highly powerful channel. ValueFlash is,
therefore, well positioned within the marketplace to establish a significant
position within a very rapidly growing industry.
As Vflash(TM) product development continues, ValueFlash expects to add
additional features including chat and other community-based functions in order
to leverage the installed base of like-minded individuals who subscribe to any
particular Vflash(TM) messenger. Facilitating communications between Vflash(TM)
users will increase their dependence on the Vflash(TM) application as an
essential Internet utility.
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3. PRODUCTS AND SERVICES
A. PRODUCTS AND SERVICES
We have developed and are marketing the following products and services:
CDK(TM) TECHNOLOGY
CDK(TM) technology combines compact disc digital audio (i.e., audio tracks that
are playable on both home stereo systems and personal computers) full-screen
video and integrated web links through a browser interface. A browser interface
is the main interface page that is presented when the compact disc is placed in
a personal computer. Our technology allows video playback at the full-screen
size of the video monitor and at full-motion (the industry standard of 30 frames
per second). The browser interface also allows easy linking to other Web sites
through the CDK interface page.
The CDK(TM) HTML authoring system -- the process for creating Web pages -- is
used by CDKnet, LLC to produce custom HTML interface pages for specific clients
in about a day. We have proprietary techniques for creating full-motion,
full-screen video playback from using a compact disc. Any user with a PC of at
least 166MHZ or Macintosh G3 can order custom audio and video compact discs.
CDK(TM) has been engineered to offer compatibility with the majority of CD-ROM
drives on the market. We believe that we have achieved a high level of
reliability, as evidenced by extensive testing and major CDK(TM) releases, and
we believe this reliability will provide a major competitive advantage over
other multisession (i.e., both audio and video) compact discs in the market.
Additionally, the CDK(TM) system is engineered for mass-production. The
integration of the complete file structure of the CDK(TM) is automated. Audio,
video and HTML assets can be placed in the production templates created by us
for a fast turn-around time for the creation of CDKs.
MIXFACTORY(TM) CUSTOM MANUFACTURING
MixFactory(TM) is a custom, multi-session compact disc manufacturing system
built upon CDK(TM) technology. The entire system is automated so that little
human intervention is required for the custom manufacturing process. Based on
our review of current custom-compact disc operations in the marketplace, we
believe that MixFactory(TM) is a unique system.
To create a custom compact disc, a user visits a Website and selects a
compilation of audio, video, or other content titles. Titles are browsed and/or
searched and audio/video clips are previewed through an easy to use interface.
After selecting the compilation, the user personalizes the disc by selecting
artwork for the disc label, cover and HTML interface.
The MixFactory(TM) system allows multimedia content providers -- such as, music
labels, major sports leagues, pharmaceutical companies, travel-related
organizations as well as companies within the fashion industry -- to offer their
assets on a customized basis, either as promotional content or as full retail
products. For example, a visitor to the CollegeMusic.com Website will be
presented with a MixFactory(TM) link that will enable the user to develop a
custom compact disc consisting of available site content. This content will
include video and audio tracks of live music performances from major nightclubs
across the United States.
We plan to form agreements with multiple content providers. We are not looking
to license content through such agreements. Rather, we are looking to license
MixFactory technology to the content providers (owners). Therefore, we will not
be in danger of violating any intellectual property rights. For example, the
College Music Mixfactory website enables fans to create custom compact discs
containing music videos as well as audio tracks. The compact disc will also
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contain integrated Web links to the College Music Website driving targeted
traffic.
We expect to leverage the planned MixFactory.com(TM) Website to serve as a link
(or portal) to other Web sites that provide digital entertainment content.
Initially, MixFactory.com(TM) is expected to serve as a point of content
distribution for independent music artists and labels with links to other
MixFactory(TM) sites. Ultimately, we expect the site will have extensive search
and browse capability that will guide the user to a wide range of digital
entertainment Websites and content. We also plan that the portal will provide a
custom-compact disc recording (also called, "burning") service for users who
want to download digital content but do not have the bandwidth and equipment to
download and burn their own compact disc at home.
We believe some of the specific benefits of the MixFactory(TM) model to the
content provider include:
o a new marketing platform for goods and services that drives Web traffic and
provides valuable customer information from both buyers and non-buyers;
o the opportunity to leverage marketable inventory that was previously
"dormant";
o attractive operating efficiencies (e.g., no added inventory costs);
o targeted mailing lists;
o new advertising revenue opportunity on customized compact discs;
o return hits to the content provider's Website direct from the customized
compact disc; and
o cross-promotion from the MixFactory.com(TM) Website
Additional possible sources of income for us from the MixFactory(TM) operation
include advertising revenues from the MixFactory.com(TM) Website and possible
revenue sharing from advertising on our partners' MixFactory(TM) sites. We also
plan to charge content providers a nominal fee for digitizing audio and video
assets above a specified level.
The MixFactory(TM) operation is designed to be a complete end-to-end E-commerce
solution, including production, payment processing and fulfillment. Once the
user confirms the content selections and completes a credit card transaction,
the selected titles are queued from storage to a Compact Disc Recordable
("CD-R") burning workstation. The customer's tracks are formatted into the
industry standard Red Book audio session along with an iso9660 (or data session
on a CD-ROM) and transferred together to the CD-R (disc). The automated
workstation transfers the complete CD-R to the compact disc printer where the
user-selected label is printed onto the surface of the CD-R.
In parallel with the transfer of the tracks to the CD-R, the custom packaging
materials are printed. That is, as soon as the job is queued for burning, the
printed job is also queued to the printer. Packing and shipping of the finished
product is currently the only manually operated step in the process. We are
currently investigating equipment that will automate the packing process.
MIXFACTORY.COM(TM) PORTAL SITE
We expect MixFactory.com(TM) to serve as a Web portal for digital multimedia
content, including music, movies, and game demos. We plan to design the site so
that consumers will be able to search and browse for content, select items to
include on their custom compact disc and purchase the compact disc. Once the
compact disc is received, the consumer will be able to view the information on
the compact disc via his or her personal computer and link back to related web
pages through targeted links included on the compact disc.
We believe the main consumer advantage derived from the MixFactory(TM) portal
site is the ability to receive high-quality, high-bandwidth digital assets
without waiting hours for the files to download. The content provider may also
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derive advantages from the MixFactory(TM) site including, possibly, a new
distribution channel, a reliable consumer database/mailing list, as well as
return hits to the content provider's website.
We believe that from a technical standpoint, the custom-burning service that
MixFactory.com(TM) plans to provide is a unique application. The ability to
select files (from various Websites) to include on a custom compact disc, send
that information to the MixFactory(TM) server and then have a custom compact
disc created and shipped is a service that, to our knowledge, does not currently
exist on the Internet.
VFLASH(TM)
We recently introduced Vflash(TM) module, our computer desktop application which
provides a wide variety of organizations with a real-time method of directly
marketing to, and communicating with, its customer base.
Through Vflash(TM), we intend to provide marketers with an unrivaled solution
for identifying customers and creating a direct rapport with these individuals,
thereby facilitating targeted communications and relevant e-commerce
opportunities. Direct communication with consumers will be facilitated by the
Vflash(TM) module, a computer desktop application that will serve as an engaging
Internet direct-marketing tool allowing service providers and retailers to
develop long-term customer relationships.
Distribution of the Vflash(TM) module will be achieved through multiple channels
including music industry and promotional compact discs, direct download and
email. ValueFlash's strategy is the first to utilize retail music compact disc
sales as a distribution channel for software that will serve as a key marketing
tool. For example, music compact discs featuring value added content such as
videos will drive consumers to play the compact discs on their computer, thereby
simultaneously loading the Vflash(TM) module and inviting them to register as a
user. This base of users will allow labels to target market an artist's back
catalogue, upcoming releases, concert tours, online events (e.g., streaming
media) and affiliated merchandise.
The Vflash(TM) module will stay active on the user's Windows taskbar at all
times and will flash to alert the user of breaking news, new product offerings
and exclusive promotions. Consumers will have single-click access to exclusive
"club" content, not available to general visitors to the same Web site,
including discounts, first-run announcements and special events.
B. RESEARCH & DEVELOPMENT
Through the fiscal year ending June 30, 1999, we expended $343,000 on research
and development of its products and services. Between July 1, 1999 and March 31,
2000, we expended approximately $484,000 on research and development. We
anticipate that our research and development costs will continue to increase
during the remainder of fiscal 2000.
Among our various activities, we are transitioning to a Unix-based manufacturing
system and are developing products and services which will deliver customized
and client specific information to customers. We are continuing development of
both the newly released CDK 2.0 technology as well as MixFactory(TM), our
customized multimedia compact disc system.
During fiscal 1999 and through March 31, 2000, we continued to enhance the
value of our product/service offerings through ongoing research and development
efforts. Specifically, we are engaged in the following internal projects:
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o An enhanced version of CDK(TM) (1.5) that is Macintosh compatible. This
version was released on June 10, 1999.
o Development of the next generation of CDK(TM) software. The 2.0 version
feature list includes Macintosh compatibility, a reduced installation set
as well as improved video performance. This version was released on August
9, 1999.
o Efforts are underway to integrate the new Digtial Versatile Disc (commonly
referred to as "DVD") manufacturing capability into the MixFactory(TM)
system. This effort includes DVD-R writer to the robotic manufacturing
system and the integration of DVD authoring tools into the MixFactory(TM)
system.
Recognizing that high-speed Internet access will ultimately become available to
a wider audience, we are evaluating other opportunities to take advantage of
this technology.
4. SALES AND MARKETING
A. STRATEGY
Our business model is based on three revenue streams. The first revenue stream
is the sale of custom compact discs to consumers through MixFactory.com(TM) and
MixFactory(TM) partner sites. We plan to make MixFactory(TM) technology
available to content providers enabling them to promote or sell their wares on a
customized basis. In exchange for a per disc manufacturing fee, the content
provider receives the right to utilize the Mix Factory(TM) services on their
website(s). This scenario also includes content licensed by us that is then sold
through our Website. We expect to receive direct revenue from the sale of custom
compact discs. The MixFactory agreements we currently have in place including:
o Central Park Media (live site)
o Megaforce Records (live site)
o AtomicPop (launched in 2,000)
o CollegeMusic.com (live site)
o Peterson's (launch TBD)
o Rolf Gibbs (January 2000)
Sales will be made via the Web through client-specific MixFactory sites that
will be linked from MixFactory.com.
The second revenue stream is the sale of Web links and Web advertising on
MixFactory.com(TM) and MixFactory(TM) partner sites. Digitization fees
associated with preparation of partner content is expected to add to these
proceeds.
The third and final revenue stream is expected to be derived from development
and use fees for client-specific CDK(TM)s. Client-specific CDKs refer to our
core product, the Web-connected multimedia compact disc. Past clients for this
product (CDK 1.0) include Citibank, Pfizer, Montana Power Company, Sandals
Resorts and the New York Knicks. We are currently developing other business in
this sector with the new version of the product, CDK 2.0.
We believe that the combination of custom-compact disc sales, Web advertising
revenue and client-specific CDK(TM) development fees provides a powerful, yet
diverse, revenue engine for us.
Of the three revenue streams, two are currently generating revenue --
development and use fees for client-specific CDKs and the sale of custom compact
discs. We placed significant emphasis on research and development throughout
1999. From January 1999 to August 1999, we completed CDK 1.0 projects for
companies including Pfizer and the Montana Power Company. The new version of our
product, CDK 2.0, has been available since August. Since that time, we have
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generated revenue through client-specific CDK 2.0 discs for Maverick Records,
WorldWest Communications, and Raval Media. There are a number of CDK 2.0
projects that are currently pending. Custom compact disc sales, which are
minimal at the moment, are expected to increase as we sign up additional content
providers. The third revenue stream, sale of Web links and Web advertising has
not yet been achieved.
B. PLAN OF OPERATION
Effective August 1, 1999, we hired Tom Ross as President of the ValueFlash
Entertainment Group. Mr. Ross will head our planned office in Los Angeles,
California which will focus on business development within the entertainment
industry. Our operational plan for fiscal 2000 included: (1) moving custom,
multimedia compact disc operations (i.e., MixFactory(TM)) to a higher volume,
lower rent production environment; (2) forming strategic alliances with a
digital video services company to meet increasing demand for these services; and
(3) signing up MixFactory(TM) partner sites across various industries. We
achieved all of the goals.
We plan to raise additional financing to fund our operations through sales of
our products and services as well as through private placements of equity
securities. We need to raise such financing to continue our operations. If we
are not successful, we may have to seek protection of the bankruptcy courts.
C. MATERIAL AGREEMENTS
We consider the following agreements to be material to our ability to provide
our customers with our products and services:
o Agreement between CDKnet, LLC and Peterson's, a division of
International Thomson Publishing, Inc., executed on March 19, 1999.
Under the two-year agreement, Peterson's will promote and provide a
link on its relevant web sites, including CollegeQuest, to the Campus
Video Program. Peterson's will also provide CDKnet, LLC video content
received from participating institutions, which CDKnet, LLC will
digitize, store and make available through its Campus Video web site.
CDKnet, LLC, in turn, will: (1) provide the technology and service
necessary to digitize and store the campus tour videos, (2) process
orders, (3) set up and replicate the CDK with the videos selected by
the student, and (4) send the completed CDK to the student. Peterson's
shall be responsible for obtaining any and all rights, licenses,
clearances, releases, or other permissions necessary for the parties to
perform their respective duties under the agreement. The parties will
divide revenues from the sales pursuant to a schedule agreed upon in
the agreement.
o Agreement between CDKnet, LLC and Central Park Media Corporation dated
March 29, 1999 under which the parties will via the Internet create,
market and take orders for custom video-based compact discs produced
with CDK(TM) technology. We will set up the Web site at no charge. In
return, Central Park Media will insert a MixFactory.com link on its Web
sites in order to promote, market, and advertise MixFactory.com's
Japanese animation, Amine and/or other content. We will receive a per
compact disc fee for all sales. Central Park Media shall obtain any and
all rights, licenses, clearances, releases, or other permissions
necessary for the parties to perform their respective duties under the
agreement. The term of this Agreement is three years.
o Agreement between CDKnet, LLC and CollegeMusic, Inc. entered into in
August 1999 under which the parties will develop a CollegeMusic
MixFactory Web site. The new Web site will enable CollegeMusic fans to
create a custom compact disc containing music videos as well as audio
tracks. The compact disc will also create integrated Web links to the
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CollegeMusic Web site driving targeted traffic. The cost of the Web
site is free to CollegeMusic, however we will keep all proceeds from
shipping and handling of the compact discs. The term of this Agreement
is indefinite.
o Agreement between CDKnet, LLC and Megaforce Records dated September 1,
1999 to create a Megaforce Records Web site at no charge. The Web site
will use MixFactory technology to enable users to the site to create
customized and personalized multimedia compact disc. Consumers will
choose from Megaforce artist's video and audio content to create a
customized compact disc. We will receive the proceeds of the from
shipping and handling as well as a per compact disc fee. The term of
this Agreement is three years.
o Agreement between CDKnet, LLC and DreamWorks Records Corporation in
October 1999 under which DreamWorks will license from CDKnet, LLC the
CDK technology, in order to produce Web-connected compact discs
containing content supplied by DreamWorks. We will receive a fee per
master compact disc. DreamWorks shall be responsible for obtaining any
and all rights, licenses, clearances, releases, or other permissions
necessary for the parties to perform their respective duties under the
agreement. The term of this Agreement is one year.
o Agreement between CDKnet, LLC and Atomic Pop LLC dated October 25, 1999
under which we will license to Atomic Pop the CDK technology in order
to produce Web-connected compact discs containing content supplied by
Atomic Pop. We will receive a fee per master compact disc. Atomic Pop
shall be responsible for obtaining any and all rights, licenses,
clearances, releases, or other permissions necessary for the parties to
perform their respective duties under the agreement. The term of this
Agreement is three years.
o Agreement dated November 16, 1999 with Asia Pioneer, Ltd., a Hong
Kong-based Internet technology company serving the Chinese-speaking
world population. The agreement grants Asia Pioneer the right to our
Web-connected multimedia compact disc technology as well as
MixFactory(TM) technology to offer customized multimedia compact discs
through Asia Pioneer's new Web site beatasia.com. Beatasia.com is a
comprehensive music entertainment Web site and is known as "the
heartbeat of Asia." Rights extended in the agreement cover the
worldwide Chinese speaking community. In exchange for these rights, we
received a 4.89% in Asia Pioneer at the completion of the underlying
services. The parties also entered into a Subscription Agreement under
which Asia Pioneer purchased 500,000 shares of our common stock at $.50
per share in two allotments.
o Agreement between ValueFlash and Richard A. Eisner & Company, an
accounting and consulting firm, dated on April 17, 2000 under which
Eisner will provide consulting services to ValueFlash in the following
areas: 1) developing a business plan, 2) determining appropriateness of
underlying presumptions in the financial statements, 3) raising
capital, 4) assisting in developing a marketing plan and 5) helping
create an organizational structure. In return ValueFlash must provide a
retainer, pay monthly consulting expenses, and 120,000 shares of
ValueFlash in the form of warrants. The warrants will vest quarterly
from the signing of the agreement until April 15, 2001. The term of
this agreement is one year.
o Agreement between ValueFlash, CDKnet, LLC, Track Marketing Partners,
Inc., and Arcadia Marketing, Inc. dated May 4, 2000 for the marketing
of ValueFlash and CDKnet technologies. Track will have exclusive rights
to market and/or sell the products to an established client list. From
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ValueFlash, Track will receive (1) a percentage of ValueFlash gross
revenues created by Track clients, (2) options from ValueFlash for
every Track client that becomes a ValueFlash client, and options based
on revenues generated by a Track Client, and (3) the right to a cash
bonus if certain revenues from Track clients are met in the first two
years of the agreement. From CDKnet, Track will receive (1) a
percentage of the net revenues from the sale to a Track Client (2)
CDKnet.com options based on gross revenues generated by Track Clients,
and (3) if Track identifies or introduces investors to CDKnet or
ValueFlash then Track will receive 2.5 percent of the investment made
by that investor. This agreement is for 24 months except as to specific
provisions identified as existing longer.
o Agreement between ValueFlash, CDKnet, LLC, and Arcadia Marketing, Inc.
dated May 4, 2000 for the marketing of ValueFlash and CDKnet
technologies. AMI will receive compensation as follows:
o From ValueFlash (1) options, (2) cash bonuses from residuals
received from and AMI/ValueFlash client, (3) a percentage of
ValueFlash residuals, (4) a cash bonus for revenues generated by
AMI/ValueFlash clients in excess of $5,000,000 in the first two
years of the agreement, (5) compensation for its services, and
(6) a percentage of the net revenues from AMI client purchases.
o From CDKnet.com (1) options based on gross revenue created by AMI
efforts or clients, and (2) 5 percent of the investment if AMI
identifies or introduces investors to CDKnet or ValueFlash.
o AMI will also receive compensation (1) options of ValueFlash per
Track Client, (2) ValueFlash residuals, (3) ValueFlash options
based on revenues, (4) cash bonus of 5 percent of ValueFlash
revenues generated by AMI clients which are in excess of
$5,000,000 in the first two years ValueFlash use, (5) 20 percent
of CDKnet net revenue when sales are related to a Track client
and one-third of net revenue when the client also uses
ValueFlash, (6) CDKnet options based on
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revenues generated, (7) CDKnet options for every 1,000,000 CD
units produced and (8) 2.5 percent of any investment in
ValueFlash or CDKnet identified by Track for ValueFlash or
CDKnet.
o AMI will also receive compensation when JMC clients are involved
of (1) ValueFlash stock options per client, (2) ValueFlash
residuals, (3) ValueFlash options based on ValueFlash revenues,
(4) 5 percent of all ValueFlash revenues generated by AMI clients
which in the aggregate are in excess of $5,000,000 in the first
two years of ValueFlash use by client, (5) one third of CDKnet
net revenue from the JMC clients, (6) CDKnet options based on
gross revenue from AMI clients, (7) CDKnet options for every
1,000,000 CD units produced with CDKnet technology if AMI clients
were cause of production, and (8) 2.5 percent of investments made
to CDKnet of ValueFlash by an investor identified by JMC.
o Agreement between ValueFlash, CDKnet, LLC, JMC Investments, LLC, and
Arcadia Marketing, Inc. dated May 4, 2000 for the marketing of
ValueFlash and CDKnet technologies. JMC will have exclusive rights to
market and/or sell the products to an established client list. JMC will
receive:
o From ValueFlash (1) a percentage of ValueFlash gross revenues
created by JMC clients, (2) ValueFlash options for every JMC
client that becomes a ValueFlash client, (3) ValueFlash options
for revenue generated by a JMC Client exercisable, (4) the right
to a 5 percent cash bonus if the aggregate revenues from JMC
clients are in the aggregate more than $5,000,000 in the first
two years of the agreement, (5) if revenue is generated from the
sale to a JMC client of a CDK technology then the net revenues
will be split among JMC, AMI, and CDKnet.
o From CDKnet.com (1) CDKnet options based on gross revenues
generated by JMC clients, (2) options for the use of the CDK
technology, and (3) if JMC identifies or introduces investors to
CDKnet or ValueFlash then JMC will receive 2.5 percent of the
investment made by that investor. This agreement is for 24 months
except as to specific provisions identified as existing longer.
o Agreement between CDKnet, ValueFlash and House of Blues dated May 12,
2000 for use of CDKnet and ValueFlash technologies to develop House of
Blues promotional activities. CDKnet will develop a promotional CD,
links to ValueFlash "Music News", and manage the replication of
2,000,000 units of the CD. ValueFlash will develop a marketing
messenger program called "Music News", assist in content update, and
provide custom animation. The term of the agreement is one year with an
option to renew.
o Agreement between CDKnet and Young and Rubicam, Inc. dated February 3,
2000 to enter into a joint venture whereby Young and Rubicam is allowed
to invest in founder's common stock in ValueFlash.com and will present
to it $15 million in revenue opportunities. If the target revenue is
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met Young and Rubicam will receive (1) further equity in the form of
warrants earned proportionately to the target revenue, (2) up to 5
percent of additional ownership will be available at $2 per share and
another 5 percent at fair market value to be determined on April 1,
2001, (3) if an IPO occurs in the first 24 months, ValueFlash may vest
unvested warrants (price to be determined in April 2001) at the IPO
price, and (4) at least observer status on the board of directors.
o Agreement between ValueFlash and ValueFlash Japan,
dated May 25, 2000 for an exclusive distributorship of ValueFlash
products in Japan by ValueFlash Japan. ValueFlash Japan will pay an
annual fee of $1,000,000 the first year and increasing by $1,000,000
every year until the fee caps at $5,000,000 for the fifth year and
thereafter. The annual fee terminates if ValueFlash Japan is listed on
a Japanese stock exchange. ValueFlash will own 20 percent of the
ValueFlash Japan shares. The term of this agreement is ten years.
o Agreement between ValueFlash and House of Blues dated June 1, 2000 for
the production of multimedia CD's by CDKnet for the House of Blues
summer promotion "Run of the House." The CD's will also include a
PlanetGiving.com public service announcement. PlanetGiving.com will
fund the sponsorship at a total cost of $370,000.
o Non-binding agreement between ValueFlash and Theglobe.com date June 26,
2000 to work together to distribute the HappyPuppy.com messengering
service. ValueFlash agrees not to promote competitors of
HappyPuppy.com. HappyPuppy.com and ValueFlash would equally share
advertising revenue after 20 percent seller's commission. Sales
commissions derived from sales of games by Chips & Bits attributed to
the HappyPuppy.com ValueFlash Messenger would be split equally. The
term of the agreement is one year.
o Non-binding agreement between CDKnet and Theglobe.com dated June 26,
2000 for the development of a web site with use of CDKnet technology.
The web site will allow HappyPuppy.com users to create custom game demo
CD's. CDKnet agrees not to enter similar agreements with HappyPuppy.com
competitors for the first three-months of this agreement.
HappyPuppy.com would maintain a link on its web site for which CDKnet
will pay $120,000 in 12 monthly installments of $10,000. Advertising
and promotional revenue would be equally shared after a 29 percent
reduction for the seller's commission. All sales revenue from Chips and
Bits attributable to the CD's will be shared equally by CDKnet and
HappyPuppy.com.
o Agreement between ValueFlash and Naviant Marketing Solutions, Inc.
dated June 13, 2000 for a promotional CD and database licensing
arrangement. Naviant will participate in the House of Blues Summer
Promotional by offering a free Club Rewards membership for people who
subscribe to Music ValueFlash service through the promotional sites.
The membership form will require personal information that Naviant will
compile and license portions of to ValueFlash. Naviant will pay a fee
per CD distributed up to $460,000 and ValueFlash will receive 1,000,000
records from the compiled database for a fee. The term of the licensing
agreement is 12 months.
o Agreement between ValueFlash and J. Walter Thompson dated June 29, 2000
forming a strategic alliance for bringing clients to ValueFlash. Each
party will have a non-exclusive limited license to use the others name
to promote the alliance. ValueFlash will use the name of JWT to develop
other clients. The contract shall remain in effect until either party
terminates by giving 60 days notice to the other party. JWT will
receive (1) a commission on revenues earned by ValueFlash
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during the first 60 months of a services agreement, (2) a warrant to
purchase ValueFlash common stock as an additional incentive to enter
the alliance WPP Dotcom Holdings an affiliate of JWT, (3) the right to
appoint two members to the ValueFlash Board so long as WPP has common
stock or warrants in ValueFlash, (4) for WPP Dotcom Holdings a 60-month
warrant for the purchase of 3 percent of the capital stock of
ValueFlash, (5) performance based warrants to WPP Dotcom for every
30,000 users registered pursuant to the alliance WPP.
5. INTELLECTUAL PROPERTY RIGHTS
We rely on copyrights, trademarks, patents, trade secret laws and contractual
restrictions to establish and protect our proprietary rights in our services and
products. U.S. Patent No. 6.047,292 issued on April 4, 2000, relating to the
basic CDK(TM) technology. The patent is directed to a multisession, digitally
encoded recording medium navigable by an Internet web browser.
Our intellectual property counsel has filed a continuation application to
separate the previously rejected claims from the issued patent into a new
application, which intellectual property counsel will continue to prosecute in
the U.S. Patent and Trademark Office.
No assurance can be given that a second patent will issue or that if a second
patent does issue that it will be broad enough to provide significant protection
to us. No assurance can be given that the issued patent is valid and enforceable
or that it provides sufficient coverage to prevent a competitor from entering
our market or adopting a version of our patented technology. Moreover, one of
our competitors may be able to design a system which operates similarly to ours,
but does not infringe the patent. Our management believes that the steps taken
by us to protect its intellectual property are consistent with industry
standards for online, custom compact disc companies today.
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We also rely on third-party software licenses, such as Microsoft Development
Network (MSDN), which provides software development tools. All employees and
contractors are required to and have entered into confidentiality and invention
assignment agreements. Suppliers, distributors and customers are also required
to enter into confidentiality agreements.
To date, we have received no notification that our services or products infringe
the proprietary rights of third parties. Third parties could however make claims
of infringement in the future. Any future claims that do occur may have a
material adverse affect on our business.
We entered into a licensing agreement on November 16, 1999 with Asia Pioneer,
Ltd., a Hong Kong-based Internet technology company serving the Chinese-speaking
world population. The agreement grants Asia Pioneer the right to our
Web-connected multimedia compact disc technology as well as MixFactory(TM)
technology to offer customized multimedia compact discs through Asia Pioneer's
new Web site beatasia.com. Beatasia.com is a comprehensive music entertainment
Web site and is known as "the heartbeat of Asia." Rights extended in the
agreement cover the worldwide Chinese speaking community. In exchange for these
rights, we received a 4.89% in Asia Pioneer. The parties also entered into a
Subscription Agreement under which Asia Pioneer purchased 500,000 shares of our
common stock.
We have the following issued and pending trademarks:
-- Issued Trademark Registrations
------------------------------
TM: CDK
Serial No. 75/426,937 - Filed February 2, 1998
Issued: 06-27-00
Reg. No. 2,361,144
-- Pending
-------
TM: MIX FACTORY
Serial No. 75/757,751
Filed: 7/22/99
6. EMPLOYEES
As of July 28, 2000, we had the following employees: 32 full-time ValueFlash
employees; and 6 full-time employees CDKnet, LLC. While sourcing and recruiting
appropriate technical personnel is often difficult and competitive, we expect
that our need to recruit additional personnel in the future will not negatively
affect our operations. Management believes that our employee relations are good,
and none of our employees are represented by a collective bargaining unit.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
This information should be read in conjunction with the unaudited financial
statements and the notes attached thereto included in Item 1 of Part I of this
Quarterly Report and the audited financial statements and notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended June 30, 1999 contained in our Form 10-SB filing, as amended.
The following contains forward-looking statements based on current expectation,
estimates and projections about our industry, management's beliefs and
assumptions made by management. All statements, trends, analyses and other
information contained in this report relative to trends in our financial
condition and liquidity, as well as other statements, including, but not limited
to, words such as "anticipate," "believe," "plan," "intend," "expect,"
"predict," and other similar expressions constitute those statements. These
statements are not guarantees of future performance and are subject to risks and
uncertainties that are difficult to predict. Accordingly, actual results may
differ materially from those anticipated or expressed in the statements.
Potential risks and uncertainties include, among others, those set forth below.
Particular attention should be paid to the cautionary statements involving our
limited operating history, the unpredictability of our future revenues, the
unpredictable and evolving nature of our business model, the competitive online,
multimedia compact disc (CD) industry and the risks associated with capacity
constraints, systems development, management of growth and business expansion,
as well as other risk factors.
Overview
--------
We have developed a multimedia technology, called CDK(TM), which integrates
audio, video and Internet connectivity on a standard compact disc. Our
technology enables users to create their own personalized compact discs simply
by visiting a Website. These custom compact discs play audio and display videos
on a full-screen, using high-quality videos and digital technology. The custom
compact discs also include software applications and targeted Web links.
We have also developed VFlash(TM), our new software based communication module
which we are distributing through our subsidiary, ValueFlash. VFlash(TM)
provides a real time, direct communication vehicle for marketers to reach their
customers using a personal computer desktop application. Our subsidiary, CDKnet,
LLC, initially developed the VFlash(TM) product. It was transferred to
ValueFlash in January 2000 for further development, production, marketing and
distribution. VFlash(TM) will be distributed primarily by multimedia CD's that
will be produced by us.
Our targeted industries include: (1) entertainment (music, movies, and TV); (2)
travel and tourism; (3) professional sports; (4) financial services; (5)
education; (6) toys/games; (7) fashion; (8) food/cooking; (9) automotive; and
(10) healthcare. Our primary customers and or strategic partners include
Peterson's, AtomicPop, Central Park Media, CollegeMusic.com, Megaforce Records
and DreamWorks Records.
We have a limited operating history. While we are currently generating revenues
primarily from development and use fees for client specific CD's and the sale of
custom CD's, most resources have been directed to developing and marketing the
VFlash(TM) product in accordance with our fiscal 2000 operating plan.
In March 2000, the first VFlash(TM) messenger application was launched and
marketing alliances with Atlantic Records, Impiric (formerly Wunderman Cato
Johnson) RCA Records and Artimis Records were announced. In May 2000, ValueFlash
announced a partnership with PlanetGiving.com, an online charity auction
platform for non-profit fundraising.
43
<PAGE>
We anticipate that VFlash(TM) will be a major factor in our future revenue and
business growth. Significant expenditures have been incurred and will continue
to be required for marketing and advertising the product and to build the
infrastructure to support it.
From a marketing standpoint, we continue to: (1) maintain a corporate Web site
which solicits feedback from potential clients; (2) appear at relevant trade
shows and seminars; and (3) retain a public relations firm to service corporate
announcements to the press. In the near term, we will continue to focus on
generating revenue from the sale of client-specific CDKs, MixFactory custom CD
services, and the VFlash desktop, direct marketing application and
communications module.
Our current business development efforts include both full-time employees as
well as outside consultants. Consultants are compensated on a performance basis.
We receive funds from product sales and services, we also continue to rely on
our ability to raise money through equity financing to fund our business
endeavors. To date, we have focused our funds on the development of CDK(TM)
products (including CDK(TM)) 1.0, CDK(TM) 2.0, and Gameplayer 2.0 and our new
e-commerce facility MixFactory.comTM), and VFlash(TM).
We have had success at recent financing efforts although we have had a history
of operating losses that raised doubt about our ability to continue operations.
For example, our licensing agreement with Asia Pioneer provided us with $400,000
infusion of capital. Additionally, the parties entered into a technology and
license agreement that gave us a 4.89% interest in Asia Pioneer in exchange for
a license to use certain CDK(TM) technology. Our ownership interest in Asia
Pioneer can be sold in the event we need a cash infusion.
We have also successfully raised $3,000,000 in private financings through our
subsidiary, ValueFlash to date.
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 former independent certified public accountants added
an emphasis paragraph to their report on our consolidated financial statements
as of June 30, 1999 and for the year ended June 30, 1999, and in the period
October 1, 1997 (date of inception) to June 30, 1998, relating to factors that
substantial doubt about our ability to continue as a going concern. The factors
cited by them include the following: (1) continued losses; (2) use of
significant cash in operations and, and (3) lack of sufficient funds to execute
our business plan.
As of July 28, 2000, we had 21,151,831 shares of common stock issued and
outstanding. In April, 2000, we were reinstated on the Over-the-Counter Bulletin
Board where our stock is traded under the symbol "CDKX."
Recent Developments
-------------------
Lease
-----
During the quarter ended March 31, 2000, we committed to a new 10-year lease for
the 250 57th Street premises beginning on May 1, 2000. The lease calls for
annual rent payments at $149,575 from 2000 to 2002, $159,225 from 2002 to 2004,
$164,050 from 2004 to 2006 and $168,875 from 2006 through 2010.
Stock Dividend
--------------
On April 12, 2000, we announced our intention to issue a stock dividend based
upon 10% of our holdings in our subsidiary, ValueFlash, subject to registration
44
<PAGE>
and underwriter approval prior to distribution. Our board of directors will meet
in the near future to decide whether to issue the dividend based upon the advice
of the underwriter and other advisors, including our independent auditors. The
Board of Directors have considered the advise of such experts and have voted to
postpone the dividend until a later date.
Results of Operations - Quarter Ended March 31, 1999 Compared to Quarter Ended
------------------------------------------------------------------------------
March 31, 2000
--------------
During the quarter ended March 31, 2000, we incurred a net loss of $2.4 million
on revenues of $45,000 compared to a net loss of $1.9 million on revenues of
$84,000 in the prior period ended March 31, 1999. Revenues declined $40,000 in
the current period due to the continued shift in focus to enhancing our core
technologies and product development.
The cost of revenues for the quarter ended March 31, 2000 was $42,000 compared
to $25,000 for quarter ended March 31, 1999.
From January 1, 2000 to March 31, 2000, we expended approximately $257,000 on
research and development compared to $50,000 during the period January 1, 1999
to March 31, 1999. Our research and development costs were higher in the third
quarter due to expenditures for the development of V-Flash, enhancements to our
core technology and product development.
For the quarter ended March 31, 2000, other operating expenses were $2.6
million, compared to $1.3 million in the quarter ended March 31, 1999 as
expenditures related to the marketing, advertising and infrastructure buildup to
support ValueFlash were incurred.
Interest expense was $9,085 for the quarter ended March 31, 2000, compared to
$670,963 in the quarter ended March 31, 1999 due to the prior period including
interest related to a beneficial conversion feature on subordinated convertible
debentures.
Results of Operations - First Nine Months of Fiscal 2000 Compared to First Nine
-------------------------------------------------------------------------------
Months of Fiscal 1999
---------------------
During the nine months ended March 31, 2000, we incurred a net loss of $5.2
million on revenues of $83,602 compared to a net loss of $4.2 million on
revenues of $457,237 in the nine months ended March 31, 1999. Revenues declined
$375,635 in the current period due to the continued shift in focus to enhancing
our core technologies and product development.
The cost of revenues for the nine months ended March 31, 2000 was $79,369
compared to $153,572 for the nine months ended March 31, 1999.
For the first nine months of fiscal 2000, we expended approximately $484,000 on
research and development compared to $141,000 during the first nine months of
Fiscal 1999. Our research and development costs were higher during the first
nine months of fiscal 2000 due to expenditures for the development of V-Flash,
enhancements to our core technology and product development.
For the first nine months of fiscal 2000, other operating expenses were $5.4
million compared to $3.7 million during the first nine months of fiscal 1999 as
expenditures related to the marketing, advertising and infrastructure buildup to
support ValueFlash were incurred.
Interest expense was $73,423 for the first nine months of fiscal 2000, compared
to $780,879 in the first nine months of fiscal 1999, as expenditures
45
<PAGE>
particularly in the third quarter of 2000 related to marketing, advertising and
infrastructure buildup to support ValueFlash were incurred.
Liquidity and Capital Resources
-------------------------------
As of March 31, 2000, we had $2.4 million in cash and cash equivalents. Our
principal commitments are $255,000 in Subordinated Convertible Debentures,
$175,000 in long-term debt and operating and capital lease obligations. We have
no material commitments for capital expenditures, nor do we anticipate any. We
anticipate that we will experience growth in advertising, marketing and
operating expenses for the foreseeable future and that such expenses will be a
material use of our cash resources.
Our cash requirements have historically been financed primarily through the sale
of debentures and common stock. In the nine months ended March 2000, $3 million
has been raised from the sale of our common stock and $2,500,000 from the sale
of ValueFlash.com, Inc. common stock to outside investors. We do not maintain
credit facilities with any financial institutions. Future financings will be
necessary to fund our operations in the form of additional debt and equity
transactions. There can be no assurances that we will be able to secure
sufficient funding to continue executing its operating plan, but management
believes that we will be able to secure sufficient financing for operations for
the next twelve months.
Net cash used by operating activities equaled $3.1 million for the nine months
ended March 31, 2000, compared to net cash used in operating activities of $1.8
million for the first nine months ended March 31, 1999. Cash used by operations
resulted from net losses partly offset by non-cash depreciation and amortization
charges, compensation charges related to stock options and services paid in
common stock and warrants.
Net cash from financing activities was $5.6 million for the nine months ended
March 31, 2000, compared to $2.3 million for the nine months ended March 31,
1999. Cash provided by financing activities resulted from $3 million in proceeds
from the sale of our common stock, $2,500,000 in proceeds from the sale of
ValueFlash.com. common stock and minority interest sale.
The proceeds from these issues have and will be used to (i) continue our ongoing
operations, (ii) development of CDK(TM), V-Flash, Gameplayer, and
MixFactory.com(TM) product lines, and (iii) to repay our debt.
Factors Affecting Future Results
--------------------------------
We do not provide forward looking financial information. However, from time to
time statements are made by employees that may contain forward looking
information that involve risks and uncertainties. In particular, statements
contained in this quarterly report that are not historically containing
predictions and are made under the Safe Harbor Corporate Private Sector
Litigation Reform Act of 1995. Our actual result of operations and financial
condition have varied and may in the future vary significantly from those stated
in any predictions. Factors that may cause these differences include without
limitation the risk, uncertainties and other information discussed within this
registration statement, as well as the accuracy of our internal estimate of
revenue and operating expense levels. We face a number of risk factors which may
create circumstances beyond the control of management and adversely impact the
ability to achieve our business plan.
46
<PAGE>
DESCRIPTION OF PROPERTY
-----------------------
Our executive office is located at 400 Garden City Plaza, Suite 202, Garden
City, New York 11530. The office space is donated to us by the law firm of
Moritt, Hock, Hamroff & Horowitz LLP, of which Steven Horowitz (our Chairman,
Chief Executive Officer, Chief Financial Officer and Secretary) is a partner.
Our executive offices may be reached at (516) 222-8800.
Our manufacturing, research and development is conducted out of CDKnet, LLC's
and ValueFlash's office located at 250 West 57th Street, New York, New York
10019. ValueFlash shares office space with CDKnet, LLC. The New York City office
consists of approximately 4,825 square feet, which is subleased from Kelly
Music. We recently committed to a new 10-year lease for this office space
beginning on May 1, 2000. The lease calls for annual rent payments at $149,575
from 2000 to 2002, $159,225 from 2002 to 2004, $164,050 from 2004 to 2006 and
$168,875 from 2006 through 2010. The annual lease rate is approximately
$135,600. This office may be contacted by telephone at 212-547-6050. All
property is insured to industry standards.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
1. TRANSACTIONS WITH MANAGEMENT AND OTHERS; CERTAIN
BUSINESS RELATIONSHIPS; PROMOTERS
During the last three years, we have issued or sold the following
securities without registering them under the Securities Act of 1933 in
reliance upon the exemptions from registration provided by the Securities
Act as follows:
o 250,000 five-year options to purchase our common stock at an exercise
price of $3.00 per share to Robert Reeves effective April 10, 2000, in
accordance with his employment Agreement with us. We issued options to
the purchaser in reliance upon the exemption provided by Regulation D
and/or Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
o 22,500 shares of common stock to Joel Schneider through the exercise of
cashless options on March 30, 2000. We issued the stock to the
purchaser in reliance upon the exemption provided by Regulation D
and/or Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 750,000 shares of our common stock to Steven Horowitz through the
exercise of options on March 28, 2000. We issued stock to the purchaser
in reliance upon the exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor who purchased the
options for investment purposes.
o 250,000 five-year options to purchase the common stock of ValueFlash
at an exercise price of $1.50 per share on April 10, 2000 to Robert
Reeves. We issued options to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the options for
investment purposes.
o 50,000 options to purchase our common stock at an exercise price of
$1.00 effective October 1, 1999 and 10,000 options to purchase the
common stock of ValueFlash at an exercise price of $1.50 per share to
Don Hegarty effective March 1, 2000, in accordance with CDKnet.com's
and ValueFlash.com's Stock Option Plan. We issued options to the
purchaser in reliance upon the exemption provided by Regulation D
and/or Section 4(2).
47
<PAGE>
o 10,000 options to purchase our common stock at an exercise price of
$2.25 and 5,000 options to purchase the common stock of ValueFlash, at
an exercise price of $1.50 per share to Nick Baciu effective May 5,
2000, in accordance with CDKnet.com's and ValueFlash.com's Stock Option
Plan. We issued options to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2).
o 18,000 options to purchase our common stock at an exercise price of
$1.00 effective October 25, 1999 and 8,000 options to purchase the
common stock of ValueFlash, at an exercise price of $1.50 per share to
Larry Shirley effective March 1, 2000, in accordance with
ValueFlash.com's Stock Option Plan. We issued options to the purchaser
in reliance upon the exemption provided by Regulation D and/or Section
4(2).
o 6,000 options to purchase the common stock of ValueFlash, at an
exercise price of $1.50 per share to Lauree Peoples effective March 1,
2000, in accordance with ValueFlash.com's Stock Option Plan. We issued
options to the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2).
o 2,000 options to purchase our common stock at an exercise price of
$2.25 and 2,000 options to purchase the common stock of ValueFlash at
an exercise price of $1.50 per share to Elan Aronov effective May 4,
2000, in accordance with CDKnet.com's and ValueFlash.com's Stock Option
Plan, respectively. We issued options to the purchaser in reliance upon
the exemption provided by Regulation D and/or Section 4(2).
o 125,000 shares of common stock of ValueFlash to Michael Vasinkevich for
$250,000 on February 7, 2000, together with 62,500 eight-month options
to purchase common stock of ValueFlash, at an exercise price of $2.00
per share. We issued stock and options to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the stock and
options for investment purposes.
o 1,250,000 five-year options to purchase common stock of ValueFlash, at
an exercise price of $2.00 per share to Michael Vasinkevich on January
28, 2000, in accordance of a Finder's Agreement between ValueFlash and
Michael Vasinkevich.
o 1,250,000 five-year options to purchase common stock of ValueFlash, at
an exercise price of $2.00 per share to Shai Bar Lavi on January 28,
2000, in accordance of an Employment Agreement between ValueFlash and
Shai Bar Lavi.
o 750,000 five-year options to purchase common stock of ValueFlash, at an
exercise price of $2.00 per share to Steven A. Horowitz on January 28,
2000, in accordance of a Finder's Agreement between ValueFlash and
Steven A. Horowitz.
o 750,000 five-year options to purchase common stock of ValueFlash, at an
exercise price of $2.00 per share to Shlomo Shur on January 28, 2000,
in accordance of an Employment Agreement between ValueFlash and Shlomo
Shur.
o On January 11, 2000, we granted to Steven A. Horowitz 750,000 warrants
expiring January 10, 2010 to purchase our common stock at an exercise
price of $1.00 per share.
48
<PAGE>
o On November 16, 1999, Steven A. Horowitz rescinded (for no future
consideration) 750,000 options (granted on August 1, 1999 and expiring
on July 31, 2004) with an exercise price of $1.00 per share to
purchase our common stock.
o On November 2, 1999, we sold 285,714 shares of common stock for
$100,000 to Steven A. Horowitz (our Chairman, Chief Executive Officer,
Chief Financial Officer, and Secretary) along with two-year warrants to
purchase 28,571 shares of common stock.
o During the year ended June 30, 1999 and the period October 1, 1997 to
June 30, 1998, legal services of $168,393 and $201,039, respectively,
were provided by Horowitz, Mencher, Klosowski & Nestler, P.C.-- a law
firm in which our Chairman, Chief Executive Officer, Chief Financial
Officer, Secretary and principal stockholder is the managing partner
(the "Firm"). Further, the Firm donated office space and accounting
services for which no fees were paid by us to the Firm. The office
space and corresponding services are valued at $1,000 per month and the
accounting services are valued at $35,000 per year.
o In fiscal 1999, we 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.
o During fiscal 1999, some of our stockholders provided loans to us
aggregating $150,000. In connection with the loans, we granted 150,000
stock warrants with an exercise price of $.66, exercisable through
October 1, 2003. The detachable warrants with fair value of $42,057 was
accounted for as additional interest cost with a corresponding credit
to paid-in capital. The loans were partially repaid and the outstanding
balances were satisfied through the exercise of stock warrants.
o In June 1999, we entered into a Finder's Agreement (incorporated by
reference as Exhibit 10.13) with our president, Shai Bar-Lavi,
effective as of August 1, 1999, and a third party whereby we issued
100,000 warrants at an exercise price of $1.00 to the third party upon
execution of the agreement and future fees for identifying financing,
purchase or venture transactions, as defined. During the year ended
June 30, 1999, we recorded an expense of $100,000 representing the fair
value of the warrants issued.
o During fiscal 1999, Steven A. Horowitz deposited the sum of $145,000
with Fleet Bank to collateralize a Fleet Bank loan to us. We used the
loan proceeds to finance the purchase of manufacturing equipment from
Bandai America Incorporated.
o In fiscal 1999, Steven A. Horowitz loaned us an aggregate of $121,018,
at no interest, all of which has been repaid.
o During the period from March 27, 1998 to March 5, 1999, the law firm of
Horowitz, Mencher, Klosowski &Nestler, P.C. (of which Steven A.
Horowitz is a former partner) advanced various sums to us, at no
interest, totaling an aggregate of $227,000, all of which has been
repaid.
o On May 15, 1998, we granted 150,000 stock options with an exercise
price of $.60 to Eric Mencher, a partner in the Firm, for legal
services rendered. The fair value of these services was $63,000.
49
<PAGE>
o During the year ended June 30, 1999 and the period October 1, 1997 to
June 30, 1998, we provided noninterest-bearing advances to Kelly Music
against their capital account in CDKnet of $29,033 and $848,541,
respectively. These advances plus the secured notes from Kelly Music of
$712,000 (see Notes to Financials 1 and 2(c)) were extinguished as
follows: (1) $600,000 was deemed consideration in the purchase of Kelly
Music's interest in CDKnet, LLC (2) $800,000 was accounted for as a
settlement by CDKnet, LLC of a portion of Kelly Music's ownership
interest in CDKnet, LLC and (3) the remaining amounts of $29,033 in
1999 and $160,307 in 1998 were deemed uncollectible and recorded as
uncollectible advances since Kelly Music no longer held a membership
interest in CDKnet. We made the interest free advances against Kelly
Music's capital account in the original CDKnet, LLC joint venture. When
we realized that Kelly Music could not pay the loan, we converted Kelly
Music's debt to an interest in us. Kelly Music does not own a direct
interest in us. The extent of its interest in us is in its capacity as
one of our shareholders.
2. INDEBTEDNESS OF MANAGEMENT
No member of our management is or has been indebted to us. No director or
executive officer is personally liable for repayment of amounts advanced any
financing received by us.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
1. MARKET INFORMATION
Our stock is quoted on the Over-the-Counter Bulletin Board. As of July 28, 2000,
we had 21,151,831 shares of common stock outstanding; of this amount, 5,604,964
of these shares are nonrestricted; 15,572,629 of these shares are restricted. As
of July 28, 2000, the number of holders of record of our common stock, $0.0001
par value, was 137.
The following table sets forth the range of high and low sales prices for the
stock for each full quarterly period within the two most recent fiscal years and
any subsequent interim period covered by the financials. The sales represent
prices between dealers, do not include retail markup, mark down or other fees or
commissions, and do not necessarily represent actual transactions.
Calendar Quarter Bid Prices
Ended Low High
-------------------------------------------------------------------------------
June 30, 2000 $1.312 $5.950
March 31, 2000 $.375 $8.200
December 31, 1999 $.350 $1.000
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 $3.625
50
<PAGE>
2. DIVIDEND POLICY
To date, we have not paid a cash dividend to our shareholders. We are also
limited in our ability to do so under the terms of our 6% convertible
subordinated debenture due September 1, 2003. On April 12, 2000, we announced
our intent to explore issuing a dividend of ValueFlash common stock to our
shareholders. After reviewing the issue with our experts, the board decided not
to issue the dividend at this time.
EXECUTIVE COMPENSATION
----------------------
1. EXECUTIVE OFFICER COMPENSATION
The following table sets forth all compensation paid by us as of fiscal year
ended June 30, 1999, to all of our executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
--------------------------- --------- ----------------------------------- ------------------------------------------------
Annual Compensation9 Long-Term Compensation
----------------------------------- ------------------------------------------------
Awards Payouts
------------------------- ----------------------
Securities
Other Under- All Other
Annual Restricted lying Compen-
Name And Compen- Stock Options/ LTIP sation
Principal Position Year Salary Bonus sation Award(s) SARs Payouts ($)
($) ($) ($) ($) (#) ($) (i)
(a) (b) (c) (d) (e) (f) (g) (h)
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven A. Horowitz1 FY99 7,500 --
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 7,500 --
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Robert Kelly2 FY99 95,192.38 -- 39,600(7)
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 80,769.30 -- 39,600(7)
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Ronald Leong3 FY99 147,534.98 -- 8,400(8)
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 75,000.00 -- 8,400(8)
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Michael W. Jolly4 FY99 69,615.38 --
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 54,250.00 --
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Keith A. Fredericks5 FY99 57,499.91 --
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 27,885.00 --
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Russell A. Kern6 FY99 79,999.92 --
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 12,923.06 --
--------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
</TABLE>
51
<PAGE>
1 Mr. Horowitz is our Chairman, Chief Executive Officer, Chief Financial
Officer, and Secretary. Mr. Horowitz is paid as one of our consultants
because he does not keep regular hours, decides his own schedule and
otherwise fits the characteristics of a consultant as promulgated under the
relevant sections of the Internal Revenue Code and Regulations and case law.
2 Mr. Kelly was formerly President of CDKnet, LLC. His tenure ended on
March 1999.
3 Mr. Leong was our former President and his services ended on May 31, 1999.
4 Mr. Jolly is our Executive Vice President, Entertainment Group.
5 Mr. Fredericks resigned as our Senior Vice President and Chief Technical
Officer effective December 17, 1999.
6 Mr. Kern was our Executive Vice President, General Manager.
7 This figure represents compensation for an apartment for Mr. Kelly.
8 This figure represents compensation for an automobile allowance for Mr.
Leong. Mr. Leong left the Company in March 1999.
9 In fiscal 2000, each of the named officers are to receive salary compensation
as follows:
Steven A. Horowitz $1,500 per week as a consultant
Shai Bar-Lavi $6,250 bi-monthly
Michael W. Jolly $3,541.67 bi-monthly
Russell A. Kern $3,333.33 bi-monthly
Tom Ross $150,000 annually
Shlomo Shur $120,000 annually
Israel Hersh $120,000 annually
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE><CAPTION>
-------------------------- ------------------ --------------------- -------------------- -------------------
Percent Of
Number Of Total Options/
Securities SARs Granted
Underlying To Employees Exercise Or
Options/SARs In Fiscal Base Price
Name Granted (#) Year ($/Sh) Expiration Date
(a) (b) (c) (d) (e)
-------------------------- ------------------ --------------------- -------------------- -------------------
-------------------------- ------------------ --------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Steven A. Horowitz 750,000 $ .60 5/20/08
------------------ --------------------- -------------------- -------------------
------------------ --------------------- -------------------- -------------------
Michael W. Jolly 10,000 $1.00 12/01/03
------------------ --------------------- -------------------- -------------------
------------------ --------------------- -------------------- -------------------
Russell A. Kern 10,000 $1.00 12/01/03
------------------ --------------------- -------------------- -------------------
------------------ --------------------- -------------------- -------------------
Ronald Leong 175,000 $ .80 6/07/01
------------------ --------------------- -------------------- -------------------
------------------ --------------------- -------------------- -------------------
Robert Kelly 0 0 --
------------------ --------------------- -------------------- -------------------
------------------ --------------------- -------------------- -------------------
Keith Fredericks (1) 10,000 $1.00 12/1/03
-------------------------- ------------------ --------------------- -------------------- -------------------
</TABLE>
-------------------
(1) Mr. Fredericks resigned as our Senior Vice President and Chief Technical
Officer effective December 17, 1999.
52
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE><CAPTION>
-------------------------- -------------- -------------- ------------------- -------------------
Number Of
Securities Value Of
Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Options/SARs Options/SARs
On Value At FY-End (#) At FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
-------------------------- -------------- -------------- ------------------- -------------------
-------------------------- -------------- -------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Steven A. Horowitz 0 0 750,000/0 $393,750/0(2)
-------------- -------------- ------------------- -------------------
-------------- -------------- ------------------- -------------------
Michael W. Jolly 0 0 10,000/0 0
-------------- -------------- ------------------- -------------------
-------------- -------------- ------------------- -------------------
Russell A. Kern 0 0 10,000/0 0
-------------- -------------- ------------------- -------------------
-------------- -------------- ------------------- -------------------
Ronald Leong 0 0 175,000/0 $ 56,875/0(3)
-------------- -------------- ------------------- -------------------
-------------- -------------- ------------------- -------------------
Keith Fredericks (1) 0 0 10,000 0
-------------------------- -------------- -------------- ------------------- -------------------
</TABLE>
-------------------
(1) Mr. Fredericks resigned as our Senior Vice President and Chief Technical
Officer effective December 17, 1999.
(2) Mr. Horowitz's options are exercisable at $.60 per share. The closing price
for our stock on June 30, 1999 was $1.125 per share. Therefore, Mr.
Horowitz is $393,750 in the money. Mr. Horowitz exercised these options
on March 28, 2000.
(3) Mr. Leong's options are exercisable at $.80 per share. The closing price
for our stock on June 30, 1999 was $1.125 per share. Therefore, Mr. Leong
is $56,875 in the money.
2. COMPENSATION OF DIRECTORS
None of our directors were compensated in fiscal year 1999 for their services.
53
<PAGE>
FINANCIAL STATEMENTS
C O N T E N T S
Page
----
Report of Independent Certified Public Accountants F-1
Financial Statements
Consolidated Balance Sheet at June 30, 1999 F-2
Consolidated Statements of Operations for the year ended
June 30, 1999 and period October 1, 1997 (date of
inception) to June 30, 1998 F-3
Consolidated Statement of Stockholders' Equity for the
period October 1, 1997 (date of inception) to June 30,
1998 and the year ended June 30, 1999 F-4
Consolidated Statements of Cash Flows for the year ended
June 30, 1999 and the period October 1, 1997 (date of
inception) to June 30, 1998 F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-25
Consolidated Balance Sheets at March 31, 2000
(unaudited) and June 30, 1999 F-26
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999, nine months ended
March 31, 2000 and 1999 (unaudited) F-27
Consolidated Statement of Stockholders' Equity for the
period July 1, 1999 to March 31, 2000 (unaudited) F-28
Consolidated Statements of Cash Flows for the nine months
ended March 31, 2000 and 1999 (unaudited) F-29
Notes to Consolidated Financial Statements F-31 - F-33
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
CDKNET.COM, INC.
We have audited the accompanying consolidated balance sheet of CDKNET.COM, INC.
and Subsidiaries (the "Company") as of June 30, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended June 30, 1999 and the period October 1, 1997 (date of inception)
to June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. As discussed in Note 11, the Company's
consolidated statements of operations, stockholders' equity and cash flows for
the period October 1, 1997 (date of inception) to June 30, 1998 were reaudited
and restated.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CDKNET.COM, INC.
and Subsidiaries as of June 30, 1999, and the consolidated results of their
operations and their consolidated cash flows for the year ended June 30, 1999
and the period October 1, 1997 (date of inception) to June 30, 1998, in
conformity with generally accepted accounting principles.
As shown in the consolidated financial statements, since inception the Company
has sustained significant losses and used substantial amounts of cash in
operations. The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The
uncertainty as to the Company's ability to raise additional financing and
sustain profitable operations, as discussed in Note 1 to the consolidated
financial statements, raises substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from this uncertainty.
/s/ Grant Thornton LLP
------------------------------
GRANT THORNTON LLP
Melville, New York
September 21, 1999, except for Note 12(c) and (d),
as to which the date is October 5, 1999
F-1
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30, 1999
<TABLE><CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 231,347
Accounts receivable 19,000
Due from officer 11,600
Prepaid expenses and other current assets 9,907
------------
Total current assets 271,854
FURNITURE AND EQUIPMENT - at cost,
less accumulated depreciation and amortization of $152,286 489,053
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED,
less accumulated amortization of $1,472,753 5,668,504
INTANGIBLE ASSETS, less accumulated amortization of $452,467 919,736
OTHER ASSETS
Deferred financing costs, less accumulated amortization of $37,400 210,750
------------
$ 7,559,897
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 220,778
Accrued expenses and other current liabilities 415,334
Due to related party 125,000
Current portion of long-term debt and capitalized lease obligations 67,939
------------
Total current liabilities 829,051
LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS,
net of current portion 205,416
SUBORDINATED CONVERTIBLE DEBENTURES 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; 14,046,906, shares issued and outstanding 1,405
Additional paid-in capital 12,232,100
Accumulated deficit (7,379,075)
------------
4,854,430
------------
$ 7,559,897
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-2
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE><CAPTION>
Period
October 1, 1997
(date of
inception) to
YEAR ENDED June 30,
JUNE 30, 1998,
1999 as restated
------------ ------------
<S> <C> <C>
Net revenues $ 474,344 $ 616,137
Cost of revenues 288,762 415,769
------------ ------------
Gross profit 185,582 200,368
Selling, general and administrative expenses 3,304,551 1,580,478
Depreciation and amortization 1,981,130 133,776
------------ ------------
Loss from operations (5,100,099) (1,513,886)
Other expense (income)
Interest expense (income) , including interest relating
to beneficial conversion and debt discount of
$1,038,008 at June 30, 1999 1,094,501 (461)
Minority interest in loss of subsidiary (328,950)
------------ ------------
NET LOSS $ (6,194,600) $ (1,184,475)
============ ============
Basic and diluted earnings (loss) per share $ (.47)
============
Weighted-average shares outstanding -
basic and diluted 13,282,176
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-3
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Period October 1, 1997 (date of inception)
to June 30, 1998 and year ended June 30, 1999
<TABLE><CAPTION>
Common stock Additional Total
------------------------ Member paid-in Accumulated stockholders'
Shares Amount capital capital deficit equity
----------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1997
Issuance of membership interest in Creative
Technology, LLC $ 1,735,000 $ 1,735,000
Common stock issued for exchange of member
capital of Creative Technology, LLC 6,000,000 $ 600 (1,735,000) $ 1,734,400
Common stock issued in merger with
International Pizza Group, Inc. 3,999,985 400 222,788 223,188
Common stock issued for purchase of
minority interests 1,300,363 130 3,146,571 3,146,701
Compensation related to stock option plan 147,000 147,000
Net loss, as restated $ (1,184,475) (1,184,475)
----------- --------- ------------ ------------ ------------ ------------
Balance, June 30, 1998 11,300,348 1,130 -- 5,250,759 (1,184,475) 4,067,414
Common stock and stock warrants issued for
purchase of fixed assets 75,000 8 143,742 143,750
Common stock issued for purchase of minority
interests 1,883,635 188 4,505,934 4,506,122
Debt discount 1,142,008 1,142,008
Conversion of subordinated debentures 476,358 48 324,952 325,000
Common stock and stock warrants issued for
financing costs 16,667 2 50,898 50,900
Exercise of stock options 116,084 12 69,988 70,000
Compensation related to stock option plan 248,000 248,000
Common stock and stock warrants issued for
services 175,000 17 395,698 395,715
Common stock issued in lieu of cash interest 3,814 9,121 9,121
Stock warrants issued for termination agreement 91,000 91,000
Net loss (6,194,600) (6,194,600)
----------- --------- ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1999 14,046,906 $ 1,405 $ -- $ 12,232,100 $ (7,379,075) $ 4,854,430
=========== ========= ============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-4
<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,
JUNE 30, 1998,
1999 as restated
----------- -----------
<S> <C> <C>
Cash flows from operating activities $(6,194,600) $(1,184,475)
Net loss
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 1,981,130 133,776
Amortization of debt discount 1,038,008
Uncollectible advances 29,033 160,307
Compensation related to stock option plan and donated services 248,000 147,000
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
Minority interest in loss of consolidated subsidiary (328,950)
Changes in assets and liabilities
(Increase) decrease in accounts receivable 86,744 (105,744)
(Increase) decrease in inventory 3,883 (3,883)
(Increase) in due from officer (11,600)
(Increase) decrease in prepaid expenses and other
current assets 16,187 (26,094)
Increase in accounts payable 42,020 171,258
Increase in accrued expenses and other
current liabilities 76,328 344,696
----------- -----------
4,005,569 492,366
----------- -----------
Net cash used in operating activities (2,189,031) (692,109)
----------- -----------
Cash flows from investing activities
Purchase of furniture and equipment (212,407) (43,832)
Advances to related party (29,033) (848,541)
----------- -----------
Net cash used in investing activities (241,440) (892,373)
----------- -----------
Cash flows from financing activities
Proceeds from notes payable 791,938 93,750
Repayment of notes payable (491,465)
Proceeds from subordinated convertible debentures 2,100,000
Deferred financing costs (197,250)
Principal payments on capitalized lease obligations (10,672)
Proceeds from issuance of common stock 1,959,999
----------- -----------
Net cash provided by financing activities 2,192,551 2,053,749
----------- -----------
NET (DECREASE) INCREASE IN CASH (237,920) 469,267
----------- -----------
Cash at beginning of period 469,267 --
----------- -----------
Cash at end of period $ 231,347 $ 469,267
=========== ===========
</TABLE>
F-5
<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,
JUNE 30, 1998,
1999 as restated
----------- -----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for Interest $ 36,055 --
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 $ 3,146,701
Debt discount 1,142,008
Issuance of stock upon conversion of subordinated debentures 325,000
Common stock and stock warrants issued for financing costs 50,900
Exercise of stock options for debt extinguishment 70,000
Purchase of business, net of cash acquired 1,500,000
Contribution of notes for ownership interest 805,516
Exchange of ownership interest for outstanding debt advances (800,000)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-6
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
CDKNET.COM, INC. and Subsidiaries, formerly named Technology Horizons, Inc.
(collectively the "Company"), is a New York-based Internet company that
provides products to its worldwide customers utilizing its internally
developed multimedia technology, CDKTM. The technology provides for the
enhanced integration of audio, video and Internet connectivity on a
standard compact disc ("CD").
The Company's consolidated financial statements include the accounts of
CDKNET.COM, INC. ("CDK") and its wholly-owned subsidiaries, Creative
Technology, LLC ("Creative"), a limited liability company, and CDKnet, LLC,
formerly Technology Applications, LLC, ("CDKnet"), a limited liability
company. CDKnet became a wholly-owned subsidiary after a series of
acquisitions completed through July 1998.
Creative commenced operations on October 1, 1997 with cash capital
contributions from investors of $1,735,000. On November 11, 1997, Creative,
Kelly Music & Entertainment, Inc. ("KME"), and certain stockholders of KME
formed CDKnet, which is the operating entity. Creative acquired a 40%
capital interest and voting control in CDKnet for $1,500,000. The operating
agreement for CDKnet provided that Creative would control the management
committee which governed CDKnet. CDKnet acquired certain assets of KME in
exchange for issuing KME a 40% ownership interest in CDKnet valued at
$1,500,000 based on independent appraisal. The assets acquired, including
fixed assets and intellectual property, represented the principal business
of KME. No liabilities were assumed in connection with this acquisition.
The purchase price was allocated based on the estimated fair value of the
fixed assets and intangible assets of approximately $127,000 and
$1,373,000, respectively. In addition, key employees of KME became
employees of CDKnet. CDKnet accounted for the acquisition as a purchase and
the results of operations of KME were included in the consolidated
financial statements from date of acquisition. The fair values of the
intangible assets acquired are being amortized on a straight-line basis
over five years.
Certain stockholders of KME contributed certain collateralized notes of KME
aggregating $712,000 (see Note 2(b)) in exchange for an equivalent dollar
ownership interests in CDKnet. As substantially all of the assets of KME
consisted of membership interests in CDKnet, the notes were recorded as a
reduction of the equity of CDKnet. Such notes were later used to redeem a
portion of the membership interest of KME (see note 9(c)). On May 7, 1998,
CDK, which was formed to be the corporate owner of Creative, and the
members of Creative exchanged their ownership interest for 6 million shares
of CDK's common stock.
F-7
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 1 (CONTINUED)
The Company has incurred net losses of $6,194,600 and $1,184,475 during the
year ended June 30, 1999 and the period October 1, 1997 (date of inception)
to June 30, 1998, respectively. Since June 30, 1999, the Company has had
limited revenues. For the year ended June 30, 1999, and the period October
1, 1997 (date of inception) to June 30, 1998, net cash used in operating
activities was $2,189,031 and $692,109, respectively. Through June 30,
1999, the Company's cash requirements were primarily financed though the
sale of subordinated convertible debentures and common stock of $2,100,000
and $1,960,000, respectively. The Company does not maintain a credit
facility with any financial institution. The Company continues to incur
expenses with respect to new product development. As a result of the
continued losses, the use of significant cash in operations and the lack of
sufficient funds to execute its business plan, among other matters, there
is substantial doubt about the Company's ability to continue as a going
concern. No adjustments have been made with respect to the consolidated
financial statements to record the results of the ultimate outcome of this
uncertainty.
Management's plans to remain a going concern require additional financing
until such time as sufficient cash flows are generated from operations.
Financings are anticipated to be in the form of additional debt and equity;
however, there can be no assurances that the Company will be able to obtain
sufficient financing to execute its business model, which is still in an
evolving stage. However, management believes that it will be able to secure
sufficient funding for operations at least for the next twelve months.
Further, management believes that operating expenses could be reduced to
fundable levels, if necessary. Subsequent to June 30, 1999, the Company
focused primarily on new product development and implemented a marketing
plan, including the hiring of marketing and sales personnel. Further, the
Company will need to build its brand name, provide scalable, reliable and
cost-effective services, continue to grow its infrastructure to accommodate
customers and increased use of its products and services, expand its
channels of distribution, and retain and motivate qualified personnel.
Subsequent to June 30, 1999, the Company issued 332,000 shares of common
stock and received net proceeds of $310,000 (see Note 12 (e)). Further, the
Company's CEO and other parties have committed to invest $200,000.
F-8
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 1 (CONTINUED)
In addition to the above equity financing, the Company also anticipates the
need to raise additional funds through public or private debt or equity
financing in order to take advantage of unanticipated opportunities,
including more rapid expansion or acquisitions of complementary businesses
or technologies, or to develop new or enhanced services and related
products, or otherwise respond to unanticipated competitive pressures.
There can be no assurance that additional financing will be available on
terms favorable to the Company, or at all. If adequate funds are not
available or are not available on acceptable terms, the Company may not be
able to take advantage of unanticipated opportunities, develop new or
enhanced services and related products, or otherwise respond to
unanticipated competitive pressures and the Company's business, operating
results and financial condition could be materially adversely affected.
NOTE 2 - MERGERS AND ACQUISITIONS
a. On May 21, 1998, International Pizza Group, Inc. ("IPGI"), a
nonoperating public company with net assets (principally cash) of
approximately $225,000, acquired 100% of the outstanding common stock
of CDK (the "Acquisition") and changed its name to CDK. The Acquisition
resulted in the owners and management of CDK having effective control
of the combined entity. Under generally accepted accounting principles,
the Acquisition is considered to be a capital transaction in substance,
rather than a business combination. That is, the Acquisition is
equivalent to the issuance of stock by CDK for the net monetary assets
of IPGI, accompanied by a recapitalization, and accounted for as a
change in capital structure. Accordingly, the accounting for the
Acquisition is identical to that resulting from a reverse acquisition,
except that no goodwill is recorded. Under reverse acquisition
accounting, the post-reverse-acquisition comparative historical
financial statements of the "legal acquirer," IPGI, are those of the
"accounting acquiree," CDK. Accordingly, the financial statements of
CDK for the period from October 1, 1997 (date of inception) to June 30,
1998 are the historical financial statements of CDK for the same
period.
b. On June 3, 1998, the Company acquired the minority interests of two
members of CDKnet for $3,146,701. The consideration was paid through
the issuance of 1,300,363 shares of common stock. As a result of the
acquisition, the sellers held a reduced percentage ownership interest
in the Company. The Company accounted for the acquisition as a
purchase. The Company valued the minority interest based on the shares
issued at the market price of the stock after considering a 15% market
discount for the shares that had no stated registration rights
requirement. The estimated fair value of the tangible assets acquired
of $476,566 approximated the book value of such assets. The excess of
the consideration over the estimated fair value of the net assets
acquired in the amount of $2,670,135 has been recorded as cost in
excess of fair value of net assets acquired and is being amortized on a
straight-line basis over five years.
F-9
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 2 (CONTINUED)
c. On July 8, 1998, the Company entered into an agreement, subsequently
amended (the "Agreement"), based on terms previously agreed upon with
KME, to acquire the remaining minority interest for $5,171,122. The
consideration was (1) the retirement of $600,000 of notes accounted for
as a stock subscription (2) issuance of 1,883,635 shares of the
Company's common stock and (3) a cash payment of $65,000. The amendment
provided for the waiver of previously agreed upon registration rights
on common stock in excess of 250,000 shares, terminated any and all
demand registration rights with certain stockholders of KME and
released the Company from any and all claims, liabilities, demands and
causes of action known or unknown which KME could assert in the future,
as defined.
The Company accounted for the acquisition as a purchase. The Company
valued the minority interest based on the shares issued at the market
price of the stock after considering a 15% market discount for the
shares that had no stated registration rights requirement. The
estimated fair value of the tangible assets acquired of $700,000
approximated the book value of such assets. The excess consideration
over the estimated fair value of the net assets acquired of $4,471,122
has been recorded as cost in excess of fair value of net assets
acquired and is being amortized on a straight-line basis over five
years.
The following (unaudited) pro forma information has been prepared assuming that
the acquisition of KME and the minority interests (see Notes 1, 2(b) and 2(c))
had occurred as of October 1, 1997, after giving effect to certain adjustments,
including amortization of goodwill. The (unaudited) pro forma information is
presented for informational purposes only and is not necessarily indicative of
what would have occurred if the transactions had been made as of October 1,
1997.
Net revenues $ 616,137
Net loss (1,921,645)
F-10
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Company's significant accounting
policies:
REVENUE RECOGNITION
The Company recognizes revenue for development and use fees for
client-specific CD's and custom CD's on the date the product is shipped to
the customer. Revenues from web links will be recognized in the month
earned. Revenues from web advertising will be recognized ratably over the
period in which the advertising is displayed. Revenues from barter
advertising transactions will be recognized during the period the
advertising is displayed. Barter transactions will be recorded at the fair
market value of the goods or services provided or received, whichever is
more readily determinable. To date, no revenues have occurred from the
following revenue streams; web links, web advertising and barter
transactions.
During the year ended June 30, 1999, two customers accounted for
approximately 51% and 16% of net revenues, respectively. For the period
October 1, 1997 (date of inception) to June 30, 1998, one customer
accounted for approximately 95% of the Company's net revenues.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs include expenses incurred by the Company to
develop new products and enhance the Company's existing products. Research
and development costs are expensed as incurred. During the year ended June
30, 1999 and the period October 1, 1997 (date of inception) to June 30,
1998, such costs aggregated approximately $211,000 and $132,000,
respectively.
INCOME TAXES
CDK files separate Federal, state and city corporate income tax returns.
Creative and CDKnet file separate Federal, state and city (where
applicable) partnership income tax returns. Earnings or losses from these
limited liability companies pass through directly to CDK.
The Company follows the asset and liability method of accounting for income
taxes by applying statutory tax rates in effect at the balance sheet date
to differences among the book and tax bases of assets and liabilities. The
resulting deferred tax liabilities or assets are adjusted to reflect
changes in tax laws or rates by means of charges or credits to income tax
expense. A valuation allowance is recognized to the extent a portion or all
of a deferred tax asset may not be realizable.
F-11
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 3 (CONTINUED)
USE OF ESTIMATES
The Company uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosures of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the
estimates that the Company uses.
EARNINGS (LOSS) PER COMMON SHARE
Basic loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted loss per
share is computed using the weighted average number of shares of common
stock, adjusted for the dilutive effect of potential common shares issued
or issuable pursuant to stock options and stock warrants. Loss per share
has not been shown for the period October 1, 1997 (date of inception) to
June 30, 1998, as the Company operated as a limited liability
company/partnership for substantially the entire period. All potential
common shares have been excluded from the computation of diluted loss per
share as their effect would be antidilutive and, accordingly, there is no
reconciliation of basic and diluted loss per share for each of the periods
presented. Potential common shares that were excluded from the computation
of diluted loss per share consisted of stock options and stock warrants
outstanding, aggregating 2,824,914 and 1,200,000 as of June 30, 1999 and
June 30, 1998, respectively (see Note 8).
FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the substantial doubt as to the Company's ability to continue as a
going concern, it is not practicable to estimate the fair value of the
Company's financial liabilities. Information concerning their terms is
contained in Notes 5 and 6.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost. Maintenance and repairs are
charged to expenses as incurred; major renewals and betterments are
capitalized. When items of furniture or equipment are sold or retired, the
related cost and accumulated depreciation are removed from the accounts and
any gain or loss is included in the results of operations. Furniture and
equipment are depreciated using the straight-line method over their
estimated useful lives, which range from three to seven years. Leasehold
improvements are amortized over the term of the related lease or the useful
life of the improvements, whichever is shorter.
F-12
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 3 (CONTINUED)
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.
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:
Furniture $ 5,295
Equipment 629,751
Leasehold improvements 6,293
---------
641,339
Less accumulated depreciation and amortization 152,286
---------
$ 489,053
=========
Depreciation expense for the year ended June 30, 1999 and the period
October 1, 1997 (date of inception) to June 30, 1998 was $123,999 and
$28,287, respectively.
F-13
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 5 - LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
TERM LOAN
In June 1999, the Company entered into a term loan with a lender.
Borrowings aggregating $175,000 under the agreement, which are
collateralized by the equipment and $145,000 in cash collateral provided by
the Company's CEO, are repayable in monthly installments of approximately
$3,500 including interest at 7.86% through March 2004.
CAPITALIZED LEASE OBLIGATIONS
The Company leases certain equipment under leases accounted for as capital
leases. The obligations require the Company to make monthly payments of
approximately $3,000 through May 2002.
The following is a summary of aggregate annual maturities of long-term debt
and capitalized lease obligations as of June 30, 1999.
Year ending June 30,
2000 $ 83,418
2001 78,745
2002 75,719
2003 42,440
2004 31,826
--------
312,148
Less amounts representing interest 38,793
--------
273,355
Less current portion 67,939
--------
$205,416
========
Interest paid for the year ended June 30, 1999 was approximately $2,500.
F-14
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
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 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.
F-15
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 6 (CONTINUED)
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 antidilution provisions whereby the
conversion price is subject to (downward) adjustment in certain
circumstances. The Company may redeem the Debenture at any time for 150% of
the principal amount of the Debenture plus accrued interest. In addition,
the Company, at its option, may convert the Debenture into shares of 5.75%
Convertible Preferred Stock having the same rights as the Debenture. The
Debenture is subordinated to the claims and rights of all Senior Debt, as
defined by the underlying agreement. In addition, the agreement contains
covenants limiting the Company's ability to pay dividends, incur new debt,
enter into certain transactions and reacquire common or preferred stock of
the Company. If an event of default occurs beyond a stated cure period the
notes shall become payable at the option of the holder. An event of default
includes, among others, the Company having its common stock suspended from
an exchange or over-the-counter market (see Note 12(d)).
In connection with the agreement, the Company recorded a discount on the
Debenture in the aggregate amount of $756,000, resulting from the
allocation of proceeds of $663,000 to a beneficial conversion feature and
the fair value of the underlying warrants of $93,000. The fair value
allocated to the warrants was determined based on the estimated fair value
of the debt using an effective interest rate of 14% and the fair value of
the warrants using the Black-Scholes option-pricing model. Due to the
immediate conversion rights under the agreement, the discount attributed to
the beneficial conversion feature was expensed on the date of issuance. The
carrying value of the Debenture is being accreted to the fair value of
$1,500,000 using the interest method over the life of the Debenture. The
accretion in fiscal 1999 was $4,000.
In connection with the sale of the Debenture, the Company incurred fees of
$135,000 and issued 16,667 shares of the Company's common stock having a
market value of $31,250.
F-16
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 6 (CONTINUED)
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.
NOTE 7 - INCOME TAXES
Temporary differences which give rise to deferred taxes are summarized as
follows:
1999 1998
---------- ----------
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 $ -- $ --
========== ==========
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:
1999 1998
---------- ----------
Tax benefit at statutory rate $(2,106,000) $ (403,000)
Nondeductible expense/nontaxable (income) - net 1,219,000 73,000
State benefit, net of Federal tax effect (246,000) (47,000)
Valuation allowance on net operating loss 1,133,000 377,000
---------- ----------
$ -- $ --
========== ==========
F-17
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 7 (CONTINUED)
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.
WARRANTS
Warrant activity for the year ended June 30, 1999 is summarized as follows:
Weighted-
average
exercise
Shares price
---------- ----------
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
F-18
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 8 (CONTINUED)
Information, at date of issuance, regarding stock warrant grants during the
year ended June 30, 1999 is summarized as follows:
Weighted- Weighted-
average average
exercise fair
Shares price value
------- ------- -------
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
The following table summarizes information about warrants outstanding and
exercisable June 30, 1999:
Outstanding
and exercisable
---------------------------------------
Weighted-
average Weighted-
remaining average
Number life in exercise
outstanding years price
----------- ----------- -----------
Range of exercise prices
$.60 to $.85 877,414 3.69 $ .69
$1.00 to $1.25 145,000 4.33 1.03
$1.75 100,000 4.58 1.75
$3.00 90,000 4.17 3.00
-----------
1,212,414
===========
Certain warrant agreements contain a cashless exercise provision, whereby
the warrants may be exercised solely by the surrender of the warrants, and
without the payment of the exercise price in cash, for that number of
warrant shares determined by dividing the difference of the market price of
the shares of common stock issuable upon exercise of the warrants and the
warrant exercise price by the market price of the common stock on the date
of exercise. At June 30, 1999, 677,500 warrants were outstanding with
cashless exercise provisions.
F-19
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 8 (CONTINUED)
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 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:
F-20
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 8 (CONTINUED)
<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>
The following information applies to options outstanding and exercisable at
June 30, 1999:
Outstanding
and exercisable
------------------------------------
Weighted-
average Weighted-
remaining average
Number life in exercise
outstanding years price
---------- ---------- ----------
$ .60 1,350,000 8.94 $ .60
$ 1.00 262,500 4.42 $ 1.00
----------
1,612,500
==========
At June 30, 1999, there were approximately 5,738,000 shares of common stock
reserved for issuance pursuant to outstanding stock warrants, the stock
option plan and subordinated convertible debentures.
The Company accounts for stock-based compensation under the guidelines of
APB Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees," as allowed by Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense was recognized concerning stock
options granted to key
F-21
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 8 (CONTINUED)
employees and to members of the board of directors, as such stock options
were granted to board members in their capacity as directors, because the
exercise price of the options equaled the fair market value at date of
grant. 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.
If the Company had elected to recognize compensation expense based upon the
fair value at the grant date for options granted to key employees and to
members of the board of directors consistent with the "fair value"
methodology prescribed by SFAS No. 123, the Company's net loss and net loss
per share for the year ended June 30, 1999 and net loss for the period
October 1, 1997 (date of inception) to June 30, 1998 would be reduced to
the pro forma amounts indicated below:
1999 1998
----------- -----------
Net loss
As reported $(6,194,600) $(1,184,475)
Pro forma (6,230,225) (1,541,475)
Net loss per common share - basic and diluted
As reported $ (.47)
Pro forma (.47)
The fair value of each stock warrant or option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for: dividend yields of zero in 1999
and 1998; risk-free interest rates ranging from 4.30% to 5.40% in 1999 and
5.70% in 1998; expected terms of 1 to 5 years in 1999 and 5 years in 1998;
and expected stock price volatility of 85% in 1999 and 1998.
F-22
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 9 - RELATED PARTY TRANSACTIONS
a. During the year ended June 30, 1999 and the period October 1, 1997
(date of inception) to June 30, 1998, legal services of $168,393 and
$201,039, respectively, were provided by a firm (the "Firm") in which
the Company's CEO and principal stockholder is the managing partner.
Further, the Firm provided office space and accounting services for
which no fees were paid. During the year ended June 30, 1999 the
Company recorded an expense of $47,000 for such donated services with a
corresponding credit to paid-in capital.
In fiscal 1999, the Company entered into a $150,000 demand loan with
the Firm at an interest rate of 11% and issued 150,000 stock warrants
at $.66 exercisable through October 1, 2003. The detachable warrants
with a fair value of $42,000 were accounted for as additional interest
cost with a credit to paid-in capital. At June 30, 1999,the outstanding
loan balance is $60,000.
On May 15, 1998, the Company granted 150,000 stock options issued under
the Plan (see Note 8) with an exercise price of $.60 to a partner in
the aforementioned law firm for legal services rendered. The fair value
of such services was $63,000, which was computed using the
Black-Scholes option-pricing model (see Note 8).
b. During fiscal 1999, certain stockholders of the Company provided loans
to the Company aggregating $150,000. In connection with the loans, the
Company granted 150,000 stock warrants with an exercise price of $.66,
exercisable through October 1, 2003. The detachable warrants with fair
value of $42,057 was accounted for as additional interest cost with a
corresponding credit to paid-in capital. The fair value of stock
warrants was computed using the Black-Scholes option-pricing model (see
Note 8). After the partial repayment of these loans, the stockholders
used the remaining loan balances to effectuate the exercise of certain
of the aforementioned stock warrants.
c. During the year ended June 30, 1999 and the period October 1, 1997(date
of inception) to June 30, 1998, CDKnet provided noninterest-bearing
advances to KME of $29,033 and $848,541, respectively. Such advances
plus the notes from KME of $712,000 which was accounted for as a
subscription receivable (see Notes 1 and 2(c)) were extinguished as
follows: 1) $600,000 was deemed consideration in the purchase of KME's
interest in CDKnet, 2) $800,000 was accounted for as settlement by
CDKnet of a portion of KME's ownership interest in CDKnet and 3) the
remaining amounts of $29,033 in 1999 and $160,307 in 1998 were deemed
uncollectible and recorded as uncollectible advances since KME no
longer held a membership interest in CDKnet.
F-23
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 9 (CONTINUED)
d. In June 1999, the Company entered into a finder's agreement with a
consultant, who became CDKnet's president effective as of August 1,
1999, and a third party whereby the Company issued 100,000 stock
warrants at an exercise price of $1.00 to the third party upon
execution of the agreement and agreed to pay both parties future fees
upon consummation of financing, purchase or venture transactions with
entities introduced by them, as defined. During the year ended June 30,
1999, the Company recorded an expense of $100,000 representing the fair
value of the stock warrants, which was computed using the Black-Scholes
option-pricing model (see Note 8).
NOTE 10 - COMMITMENTS AND CONTINGENCIES
A. FACILITY AND EQUIPMENT
The Company occupies its New York City office space under a
month-to-month lease with KME. In addition, the Company is leasing
telephone equipment on a month-to-month lease with KME. Rent expenses
for the office space and equipment for the year ended June 30, 1999 and
the period October 1, 1997 (date of inception) to June 30, 1998 were
approximately $145,000 and $124,000, respectively.
B. LITIGATION MATTERS
The Company is involved in claims and disputes which arise in the
normal course of business. Management believes that the resolution of
these matters will not have a material adverse effect of the Company's
financial position or results of operations.
NOTE 11 - RESTATEMENT
The Company engaged Grant Thornton LLP to reaudit the consolidated
financial statements as of June 30, 1998 and for the period October 1, 1997
(date of inception) to June 30, 1998. In connection with the reaudit,
management restated such financial statements to record adjustments
relating to, among others, the accounting for: stock warrants and options
granted, merger and acquisition transactions, and minority interests. The
effect of the adjustments increased the net loss, as previously reported
from $707,527 to $1,184,475, as restated.
F-24
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 1999
NOTE 12 - SUBSEQUENT EVENTS
a. On August 1, 1999, the Company issued an aggregate of 1,030,000 stock
options to the Company's CEO and an employee at an exercise price of
$1.00. The quoted market price of the Company's stock at the date of
grant ranged from $1.00 - $1.50.
b. On August 1, 1999, CDKnet entered into a two-year employment agreement
with its president. The agreement provides for a minimum annual salary
of $150,000 and the issuance of 750,000 stock options, expiring in five
years, with an exercise price of $1.00 vesting over the term of the
agreement or earlier if a change in control or CDKnet terminates the
agreement without cause. The quoted market value of the Company's stock
on the date of grant was $1.50. The agreement provides for six months
of severance pay. All payments under the agreement are guaranteed by
CDK.
On August 1, 1999, CDKnet entered into a two-year employment agreement
with an executive vice president. The agreement provides for a minimum
annual salary of $150,000 and the issuance of 1,000,000 stock options,
expiring in five years, with an exercise price of $1.00 vesting over
the term of the agreement or earlier if a change in control or CDKnet
terminates the agreement without cause. The quoted market value of the
Company's stock on the date of grant was $1.50. The agreement provides
for severance payments, under certain conditions, for the unexpired
term of the agreement. All payments under the agreement are guaranteed
by CDK.
c. On October 1, 1999, the Company gave notice to the holders of the 5.75%
Subordinated Convertible Debentures (see Note 6) and exercised its
right to call the outstanding Debentures in exchange for 5.75%
Convertible Preferred Stock. Under the terms of the Debentures, the
Convertible Preferred Stock shall have: (1) liquidation preferences
equal to the principal amount of the Debenture, (2) a 5.75% cumulative
annual dividend payable quarterly, (3) rights to convert into shares of
Common Stock at the same conversion rate as the Debentures and (4) the
same redemption rights at the option of the Company.
d. On October 5, 1999, the Company obtained a sixty-day waiver from the
holders of the 6% and 5.75% Subordinated Convertible Debentures to
waive any event of default relating to the common stock of the Company
being suspended from an exchange or over-the-counter market.
e. During August and September 1999, the Company issued 332,000 shares of
common stock to an unrelated investor and received net proceeds of
$310,000. In connection with the transaction, the investor was given a
30-day option, which expired September 17, 1999, to purchase up to an
additional 2,668,000 shares of common stock for approximately
$3,410,000.
F-25
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
March 31, June 30,
2000 1999
------------ ------------
ASSETS (unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,400,301 $ 231,347
Accounts receivable 64,194 19,000
Notes receivable 262,500 11,600
Prepaid expenses & other current assets 40,640 9,907
------------ ------------
TOTAL CURRENT ASSETS 2,767,635 271,854
FURNITURE AND EQUIPMENT - at cost less accumulated
depreciation and amortization of $260,056 and
$152,286 at March 31, 2000 and June 30, 1999,
respectively 696,019 489,053
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED,
less accumulated amortization of $2,543,942 and
$1,472,753 at March 31, 2000 and June 30, 1999,
respectively 4,597,315 5,668,504
INTANGIBLE ASSETS, less accumulated amortization of
$658,297 and $452,467 at March 31, 2000 and
June 30, 1999, respectively 713,906 919,736
OTHER ASSETS
Security deposits 45,024 --
Deferred financing costs, less accumulated amortization
of $59,549 and $37,400 at March 31, 2000 and June 30,
1999, respectively 22,351 210,750
------------ ------------
$ 8,842,250 $ 7,559,897
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 67,000 $ 220,778
Accrued expenses and other current liabilities 901,570 415,334
Due to related party -- 125,000
Current portion of long-term debt and capitalized
lease obligations 103,597 67,939
------------ ------------
TOTAL CURRENT LIABILITIES 1,072,167 829,051
LONG TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS,
net of current portion 145,597 205,416
SUBORDINATED CONVERTIBLE DEBENTURES 255,000 1,671,000
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST 352,954 --
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - par value $.0001 per share; authorized
5,000,000 shares; (redemption value $1,500,000) 1,264,863 --
Common stock - par value $.0001 per share; authorized 40,000,000
shares; 21,068,771 and 14,046,906 shares issued and outstanding
at March 31, 2000 and June 30, 1999 2,107 1,405
Additional paid-in capital 18,350,313 12,232,100
Accumulated deficit (12,600,750) (7,379,075)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 7,016,533 4,854,430
------------ ------------
$ 8,842,250 $ 7,559,897
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
F-26
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE><CAPTION>
Three months ended March 31, Nine months ended March 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 43,448 $ 115,184 $ 83,602 $ 457,237
Cost of revenues 41,764 24,630 79,369 133,572
------------ ------------ ------------ ------------
Gross profit 1,685 90,554 4,234 323,664
Selling, general and administrative expenses 2,138,383 787,978 3,953,464 2,210,998
Depreciation and amortization 467,747 504,453 1,410,150 1,502,991
------------ ------------ ------------ ------------
Loss from operations (2,604,445) (1,201,877) (5,359,380) (3,390,324)
Other income and (expense):
Interest income 11,078 4,891 13,783 5,175
Interest expense, including interest relating to
beneficial conversion and debt discount (9,085) (670,963) (73,423) (780,879)
------------ ------------ ------------ ------------
Total other income and expense 1,992 (666,072) (59,641) (775,704)
Minority interest in loss of subsidiary 197,346 -- 197,346 --
------------ ------------ ------------ ------------
NET LOSS $ (2,405,107) $ (1,867,950) $ (5,221,675) $ (4,166,029)
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ (0.13) $ (0.13) $ (0.31) $ (0.33)
Weighted-average shares outstanding -
basic and diluted 19,214,875 14,023,453 16,821,909 12,673,627
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
F-27
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Nine months ended March 31, 2000
<TABLE><CAPTION>
Preferred Stock Common Stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE - JUNE 30, 1999 -- $ -- 14,046,906 $ 1,405
Issuance of common stock -- -- 5,215,333 521
Exercise of stock options -- -- 1,462,073 146
Compensation related to stock
option plan and donated services -- -- -- --
Common stock and stock warrants
issued for services -- -- 315,000 32
Conversion of indebtedness to common stock -- -- 29,459 3
Conversion of 5.75% debentures to 5.75%
preferred stock 1,500,000 1,264,863 -- --
Preferred stock dividend - paid -- -- -- --
Equity in Value Flash -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2000 (unaudited) 1,500,000 $ 1,264,863 21,068,771 $ 2,107
============ ============ ============ ============
Additional Total
Paid in Accumulated Stockholders'
Capital Deficit Equity
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE - JUNE 30, 1999 $ 12,232,100 $ (7,379,075) $ 4,854,430
Issuance of common stock 2,278,624 -- 2,279,145
Exercise of stock options 724,123 -- 724,269
Compensation related to stock
option plan and donated services 123,875 -- 123,875
Common stock and stock warrants
issued for services 777,968 -- 778,000
Conversion of indebtedness to common stock 20,392 -- 20,395
Conversion of 5.75% debentures to 5.75%
preferred stock -- -- 1,264,863
Preferred stock dividend - paid (7,969) -- (7,969)
Equity in Value Flash 2,201,200 -- 2,201,200
Net loss -- (5,221,675) (5,221,675)
------------ ------------ ------------
BALANCE - MARCH 31, 2000 (unaudited) $ 18,350,313 $(12,600,750) $ 7,016,533
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
F-28
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>
Nine months ended March 31,
------------------------
2000 1999
---------- ----------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,221,675) $(4,166,029)
---------- ----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,410,150 1,502,991
Common stock warrants issued for debt discount expensed 663,000
Compensation related to stock option plan and donated services 123,875
Common stock and stock warrants issued for services 778,000 117,150
Minority interest in net loss (197,346)
Changes in assets and liabilities
Accounts receivable (45,194) 30,375
Notes receivable (250,900) (9,229)
Prepaid expenses and other current assets (30,733) 20,727
Accounts payable (153,778) (128,148)
Accrued expenses and other current liabilities 486,236 187,087
---------- ----------
NET CASH USED BY OPERATIONS (3,101,365) (1,782,076)
CASH FLOWS FROM INVESTING ACTIVITIES:
Other assets (45,024) --
Purchase of furniture and equipment (302,836) (288,206)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (347,860) (288,206)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from notes payable -- 450,000
Proceeds from subordinated convertible debentures -- 1,829,000
Repayment of shareholder loans (106,000)
Principal payments on long-term debt and capitalized
lease obligations (128,766) 175,000
Minority interest 550,300
Equity in Value Flash 2,201,200
Preferred dividends paid (7,969)
Proceeds from issuance of common stock 3,003,414
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,618,179 2,348,000
---------- ----------
NET DECREASE IN CASH 2,168,954 277,718
CASH, beginning of the period 231,347 469,266
---------- ----------
CASH, end of the period $2,400,301 $ 746,984
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for Interest $ 11,708 $ 12,277
Noncash investing and financing transactions:
Common stock and stock warrants issued for purchase of fixed assets 110,000 --
Common stock issued for purchase of minority interest -- 4,506,122
Debt discount -- 130,318
Issuance of stock upon conversion of subordinated debentures -- 300,000
Common stock and stock warrants issued for financing costs
and services 105,000 766,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
F-29
<PAGE>
CDKNET.COM, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The accompanying consolidated financial statements of CDKNET.COM, Inc. (the
"Company") and for the periods ended March 31, 2000 and the periods ended
March 31, 1999 are unaudited and have been prepared on the same basis as
the audited financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial information set forth therein have been
included, in accordance with generally accepted accounting principles. The
results of operations for the nine months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the annual financial statements for the year
ended June 30, 1999 on Form 10-SB12/G.
NOTE 1 - EQUITY TRANSACTIONS
a. For the nine months ended March 31, 2000, the Company issued an
aggregate of 5,982,000 stock options to certain officers and an
employees 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.
b. On August 1, 1999, the Company's wholly-owned subsidiary, CDKNET, LLC,
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 the
Company. During the three months ended September 30, 1999, the Company
recorded compensation expense relating to the stock options of $46,875.
On August 1, 1999, CDKnet entered into a two-year employment agreement
with an executive vice president. The agreement provides for a minimum
annual salary of $150,000 and the issuance of 1,000,000 stock options,
expiring in five years, with an exercise price of $1.00 vesting over
the term of the agreement or earlier if a change in control or CDKnet
terminates the agreement without cause. The quoted market value of the
Company's stock on the date of grant was $1.50. The agreement provides
for severance payments, under certain conditions, for the unexpired
term of the agreement. All payments under the agreement are guaranteed
by the Company. During the three months
F-30
<PAGE>
ended September 30, 1999, the Company recorded a compensation expense
relating to the stock options of $65,000.
c. On October 1, 1999, the Company gave notice to the holders of the
$1,500,000 5.75% Subordinated Convertible Debentures and exercised its
right to call the outstanding Debentures in exchange for $1,500,000 of
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. The Company has
paid dividends for these debenture holders in the amount of $7,969,
during the third quarter ended March 31, 2000.
d. 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.
e. In August 1999 and March 2000, stock options to purchase 450,000 shares
of common stock were exercised, using cashless exercises pursuant to
which 345,000 shares of common stock were issued.
f. Individuals exercised options to purchase 767,073 shares of common
stock for $461,768 for the nine months ended March 31, 2000.
g. 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 which were exercised in January and February 2000. In February
2000, the Company sold an additional 133,333 shares of common stock to
another individual for $100,000.
h. 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.
i. On November 16, 1999, the Company's CEO rescinded 750,000 options
granted on August 1, 1999 to purchase the Company's common stock for no
future consideration.
F-31
<PAGE>
j. On November 16, 1999, pursuant to a Subscription Agreement with a third
party, the Company issued 200,000 shares of common stock and received
net proceeds of $100,000. In connection with the agreement, the
investor agreed to purchase an additional 1.6 million shares of common
stock at $.50 per share through May 2000. In addition, the Company and
the investor entered into a Technology and Licensing Agreement which
will give the Company a 4.89% interest in the investor and additional
fees upon completion of specified services and further, grants a
license to use certain of CDK's technology. Another $150,000 has been
received for the sale of 300,000 shares of common stock through
February 3, 2000 pursuant to the aforementioned stock subscription
agreement.
k. In March 2000, $20,000 of 6% convertible debentures and $1,800 of
accrued interest was converted into 29,459 shares of common stock,
pursuant to the exercise rights of the 6% convertible debenture
holders.
l. During the nine months ended March 31, 2000, the Company recorded costs
of $272,854 as a reduction to paid in capital for the registering
certain common stock of the Company and the raising of funds during the
nine months March 31, 2000.
m. During the nine months ended March 31, 2000, 315,000 shares of common
stock were issued for services, which $110,000 was capitalized as
software development costs and $480,000 was expensed for consulting
services an additional 150,000 of stock options and warrants in the
Company at exercise prices ranging from $.75 to $1.00 were issued for
services valued at $376,500, which was expensed as consulting services.
n. On March 31, 2000, an individual and an entity exercised 350,000 stock
options with the Company holding two notes receivable totaling $262,500
in lieu of a cash payment of the common stock purchased. The notes are
due by June 15, 2000 and bear interest.
o. In April 2000, ValueFlash.com entered into an employment agreement with
its CFO, whereby the CFO is entitled to certain compensation
arrangements and 250,000 stock options to purchase the Company's common
stock at an exercise price of $3.00, which vest over time.
NOTE 2 - VALUEFLASH.COM, INC. TRANSACTIONS
a. The Company recently completed the V-Flash software, a communication
module which provides a real-time, direct communication vehicle for
marketers to reach their customers, such software is to be distributed
through a separate newly formed subsidiary ValueFlash.com, Inc.
("ValueFlash"). The Company has raised an additional $2,500,000 through
the sale of 1,250,000 shares of common stock and options in the
ValueFlash subsidiary or 20% of the entity. The Company has recorded a
$2,201,200 increase in equity due to the ValueFlash equity transactions
and recorded the intial minority interest of $550,300. The minority
interest represents an interest in ValueFlash not held by the Company.
b. The Company issued 7,533,000 stock options to its officers and
employees at an exercise price of $1.50 for a period of five years. The
Company issued an additional 250,000 stock options to a vendor for
services rendered exercisable at $2.00 per share, which has been valued
at $251,500 and expensed.
F-32
<PAGE>
NOTE 3 - SUBSEQUENT EVENTS
Lease
-----
During the quarter ended March 31, 2000, we committed to a new 10-year lease for
the 250 57th Street premises beginning on May 1, 2000. The lease calls for
annual rent payments at $149,575 from 2000 to 2002, $159,225 from 2002 to 2004,
$164,050 from 2004 to 2006 and $168,875 from 2006 through 2010.
Stock Dividend
--------------
On April 12, 2000, we announced our intention to issue a stock dividend based
upon 10% of our holdings in our subsidiary, ValueFlash.com, Incorporated,
subject to registration and underwriter approval prior to distribution. Our
board of directors will meet in the near future to decide whether to issue the
dividend based upon the advice of the underwriter and other advisors, including
our independent auditors.
F-33
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
On January 27, 1999, we replaced our auditors Wagner, Zwerman & Steinberg LLP
with Grant Thornton LLP. During the past two years, their report did not contain
an adverse opinion or disclaimer of opinion or was qualified or modified as to
uncertainty, audit scope or accounting principles. During the same two period,
and subsequent period up to January 29, 1999, there were no disagreements with
the former accountant on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement. Wagner, Zwerman reviewed our disclosure of its termination and
agreed in all respects with our characterization of our switch to a new
accounting firm to provide audited reports. (See Exhibit 16.1 to our Form
10-SB/A-3.)
On February 10, 2000, we dismissed Grant Thornton LLP, our former independent
certified public accountants. During the past two years, Grant Thornton added an
emphasis paragraph to their report on our consolidated financial statements as
of June 30, 1999 and for the year ended June 30, 1999, and in the period October
1, 1997 (date of inception) to June 30, 1998, relating to factors that
substantial doubt about our ability to continue as a going concern. The factors
cited by them included the following: (1) continued losses; (2) use of
significant cash in operations and, and (3) lack of sufficient funds to execute
our business plan. The decision to dismiss Grant Thornton as our independent
certified public accountants was approved by the Board of Directors of the
Company. During our two most recent fiscal years and subsequent period up to
February 14, 2000, there were no disagreements with the former accountant on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement.
Also, on February 10, 2000, we terminated our relationship with Grant Thornton
LLP and retained Radin, Glass & Co., LLP as our new independent accountants.
This change was disclosed in our Form 10-QSB for the quarter ending December 31,
1999.
PART II
-------
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
Delaware law sets forth our powers to indemnify officers, directors, employees
and agents. Our Articles of Incorporation provide as follows:
"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii)
II-1
<PAGE>
under Section 174 of the Delaware General corporation law, or (iv) for
any transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is amended after the
date of incorporation of the Corporation to authorize corporate action
further eliminating or limiting the personal liability of directors,
then the liability of a director of the Corporation shall be eliminated
or limited to the fullest extent permitted by the Delaware General
Corporation law as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall no adversely affect any right or
protection of a director of the Corporation existing at the time of the
repeal or modification.
The Corporation shall, to the fullest extent permitted by Section 145
(or any other provision) of the Delaware general corporation Law, as
the same may be amended and supplemented, or by any successor thereto,
indemnify any and all officers and directors of the corporation form
and against any and all of the expenses, liabilities or other mattes
referred to in or converted by said Section. Such right to
indemnification provided for herein shall not be deemed exclusive of
any other rights to which those seeking indemnification may be entitled
under any By-law, agreement, vote of stockholders or disinterested
directors or otherwise."
Except as mentioned above, there is no charter provision, bylaw, contract,
arrangement or statute pursuant to which any director or officer is indemnified
in any manner against any liability which he may incur in his capacity as such.
We do not maintain director and officer liability policy to fund our obligations
as stated herein above.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
-------------------------------------------
The following expenses in connection with the issuance and distribution of the
securities being registered will be borne by us and are estimated to be as
follows:
Filing Fee ................................................ $ 748.00
Legal Fees ................................................ $25,000.00
Transfer Agent ............................................ $ 1,000.00
Accounting Fees ........................................... $ 3,000.00
Printing Fee .............................................. $ 5,000.00
Miscellaneous ............................................. $ 2,000.00
----------
Total ............................................ $36,748.00
==========
RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------
As of July 28, 2000, there were issued and outstanding 21,151,831 shares of
common stock which were issued or sold in reliance upon the exemptions from
registration provided by the Securities Act as follows:
During the last three years, we have issued or sold the following securities
without registering them under the Securities Act of 1933 in reliance upon the
exemptions from registration provided by the Securities Act as follows:
o 250,000 five-year options to purchase our stock to T.B.A.
Network, Inc. exercisable at $1.00 per share expiring on
September 30, 2004 issued in connection with a Consulting
Agreement between the parties dated October 1, 1999. 100,000
options were granted on July 21, 2000 with another 50,000
vesting on August 1, 2000, February 1, 2001, and August 1, 2001.
We issued options to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the
options for investment purposes.
o 250,000 shares of ValueFlash common stock at $2.00 per share on
July 18, 2000 and 500,000 warrants to purchase ValueFlash common
stock at an exercise price of $ 2.00 per share expiring on July
18, 2001 to Erno and Rachel Bodek. We issued the stock and
warrants to the purchasers in reliance upon the exemption
provided by Regulation D and/or Section 4(2) they are accredited
investors who purchased the stock and warrants for investment
purposes.
o 750,000 five-year options to Michael Vasinkevich on June 7, 2000
representing the release of options held in escrow pursuant to
an Agreement dated January 14, 2000. The options are exercisable
at $1.00 per share. We issued options to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
o 1,000,000 options exercisable at $4.00 per share and 500,000
warrants exercisable at $3.00 per share to Valo Limited on June
6, 2000 pursuant to a Consulting Agreement between CDKnet.com
and Valo Limited. The options and warrants expire on June __,
2000. We issued options to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the
options for investment purposes.
o 50,000 five-year options to Robyn Wolf exercisable at $0.75 per
share expiring on May 29, 2005 pursuant to a Consulting
Agreement dated May 30, 2000. We issued options to the purchaser
in reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
o 500,000 options to Arcadia Marketing, Inc. exercisable at $1.69
per share expiring on May 4, 2005 issued in connection with a
Consulting Agreement between the parties dated May 4, 2000.
50,000 options were issued at signing with the remaining 450,000
options representing performance based options. We issued
options to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
o 15,000 two-year options to Ava Stern on May 12, 2000 exercisable
at $1.00 per share expiring on May 11, 2001. We issued options
to the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
o 40,000 shares of common stock to Joel Schneider through the
exercise of cashless options on May 8, 2000. We issued the stock
to the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
o 40,000 shares of common stock to Herb Sommer through the
exercise of cashless options on May 8, 2000. We issued the stock
to the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for investment
purposes.
o 3,166 shares to the Gross Foundation, Inc. on March 17, 2000 in
accordance with penalty provisions of a Registration Rights
Agreement dated November 2, 1999 which we entered into with the
Gross Foundation, Inc. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 1,254 shares to Steven A. Horowitz on March 17, 2000 in
accordance with penalty provisions of a Registration Rights
Agreement dated November 2, 1999. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the stock for investment purposes.
o 627 shares to the Dan Roc Limited Partnership on March 17, 2000
in accordance with penalty provisions of a Registration Rights
Agreement dated November 2, 1999. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the stock for investment purposes.
o 618 shares to Fox Distribution on March 17, 2000 in accordance
with penalty provisions of a Registration Rights Agreement dated
November 2, 1999. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased
the stock for investment purposes.
o 3,000 options to purchase our common stock at an exercise price
of $2.25 per share and 2,000 options to purchase the common
stock of ValueFlash at an exercise price of $1.50 per share to
Derrick Sai Lu effective May 4, 2000, in accordance with
CDKnet.com's and ValueFlash.com's Stock Option Plan,
respectively. We issued options to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2).
o 100,000 shares of common stock to The Blackmor Group on April
17, 2000 in exchange for services to be performed by the
Blackmor Group. We issued the stock to the purchaser in reliance
II-2
<PAGE>
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased
the stock for investment purposes.
o 62,550 shares of common stock to The Gross Foundation pursuant
to the exercise of cashless options on April 14, 2000. We issued
the stock to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the stock for
investment purposes.
o 250,000 five-year options to purchase our common stock at an
exercise price of $3.00 per share to Robert Reeves effective
April 10, 2000, in accordance with his employment Agreement with
us. We issued options to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the
options for investment purposes.
o 2,000 options to purchase our common stock at an exercise price
of $2.25 and 2,000 options to purchase the common stock of
ValueFlash at an exercise price of $1.50 per share to Elan
Aronov effective May 4, 2000, in accordance with CDKnet.com's
and ValueFlash.com's Stock Option Plan, respectively. We issued
options to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2).
o 22,500 shares of common stock to Joel Schneider through the
exercise of cashless options on March 30, 2000. We issued the
stock to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for investment
purposes.
o 22,500 shares of common stock to Herb Sommer through the
exercise of cashless options on March 30, 2000. We issued the
stock to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for investment
purposes.
o 250,000 shares of common stock at $.75 per share to Steve
Wildstein through the exercise of options on March 31, 2000, in
exchange for a note payable to us in the amount of $187,500. We
issued stock to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the stock for
investment purposes.
o 100,000 shares of common stock at $.75 per share to Freshstart
Capital, Inc. on March 31, 2000 in exchange for a Note payable
to us in the amount of $75,000. We issued stock to the purchaser
in reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 750,000 shares of our common stock to Steven Horowitz through
the exercise of options on March 28, 2000. We issued stock to
the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
II-3
<PAGE>
o 133,000 shares of common stock to Abbey Blatt at $.75 per share
on March 28, 2000. We issued the stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 500,000 shares of stock in ValueFlash, at $2.00 per share on
March 28, 2000 to Mabcrown, Inc., and 250,000 five-year options
to purchase the common stock of ValueFlash at an exercise price
of $2.00 per share. We issued options to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
o 250,000 five-year options to purchase the common stock of
ValueFlash, at an exercise price of $1.50 per share on April 10,
2000 to Robert Reeves. We issued options to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
o 50,000 shares of stock in ValueFlash, at $2.00 per share on
March 13, 2000 to Dr. Aizik Wolf, and 25,000 five-year options
to purchase the common stock of ValueFlash at an exercise price
of $2.00 per share. We issued options to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
o 50,000 options to purchase our common stock at an exercise price
of $1.00 effective October 1, 1999 and 10,000 options to
purchase the common stock of ValueFlash, at an exercise price of
$1.50 per share to Don Hegarty effective March 1, 2000, in
accordance with CDKnet.com's and ValueFlash.com's Stock Option
Plan. We issued options to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2).
o 10,000 options to purchase our common stock at an exercise price
of $2.25 and 5,000 options to purchase the common stock of
ValueFlash, at an exercise price of $1.50 per share to Nick
Baciu effective May 5, 2000, in accordance with CDKnet.com's and
ValueFlash.com's Stock Option Plan. We issued options to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2).
o 18,000 options to purchase our common stock at an exercise price
of $1.00 effective October 25, 1999 and 8,000 options to
purchase the common stock of ValueFlash, at an exercise price of
$1.50 per share to Larry Shirley effective March 1, 2000, in
accordance with ValueFlash.com's Stock Option Plan. We issued
options to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2).
o 6,000 options to purchase the common stock of ValueFlash, at an
exercise price of $1.50 per share to Lauree Peoples effective
March 1, 2000, in accordance with ValueFlash.com's Stock Option
Plan. We issued options to
II-4
<PAGE>
the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2).
o 16,667 five-year options to purchase the common stock of
ValueFlash, at an exercise price of $2.00 per share on April 4,
2000 to D.S. Wolf Associates, Inc. We issued options to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the options for investment purposes.
o 5,000 five-year options to purchase the common stock of
ValueFlash, at an exercise price of $2.00 per share on May, 2000
to Shraga Zaiger for each new contract with a total option pool
of 250,000 and a grant of 250,000 options to purchase ValueFlash
common stock at $2.00 per share in the event ValueFlash is sold.
We issued options to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the
options for investment purposes.
o 120,000 warrants to purchase the common stock of ValueFlash at
an exercise price of $2.00 per share on April 4, 2000 to Richard
A. Eisner & Company, LLP vesting as follows: 60,000 warrants
upon the signing of the consulting agreement between the
purchaser and us; 15,000 shares on July 15, 2000; 15,000 shares
on October 15, 2000; 15,000 shares on January 15, 2001; and
15,000 shares on April 15, 2000. We issued warrants to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the warrants for investment purposes.
o 1,000,000 shares of common stock to Erno and Rachel Bodek for
$500,000 through the exercise of options on February 21, 2000.
We issued the stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the stock
for investment purposes.
o 300,000 shares to Great Wizard Investments Limited on February
14, 2000, pursuant to a subscription agreement entered into
between us and Asia Pioneer Limited. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the stock for investment purposes.
o 50,000 shares to Energenic, LLC on February 7, 2000, together
with the issuance 50,000 one-year options exercisable at $1.00
per share for the purchase of common stock for services valued
at $60,000 pursuant to the software Agreement between us and
Energenic, LLC. We issued stock and options to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 125,000 shares of common stock of ValueFlash to Michael
Vasinkevich for $250,000 on February 7, 2000, together with
62,500 eight-month options to purchase common stock of
ValueFlash, at an exercise price of $2.00 per share. We issued
stock and options to the purchaser in reliance upon the
exemption provided by Regulation
II-5
<PAGE>
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the stock for investment purposes.
o 100,000 five-year warrants to purchase our common stock at an
exercise price of $1.00 per share to Fred Smithline on February
3, 2000, in accordance with a Finder's Agreement between Fred
Smithline, Shai Bar-Lavi and CDKnet, LLC. We issued warrants to
the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the warrants for investment
purposes.
o 500,000 shares of common stock of ValueFlash to Amro
International for $1,000,000 on February 2, 2000, together with
250,000 eight-month options to purchase common stock of
ValueFlash, at an exercise price of $2.00 per share. We issued
stock and options to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the stock
for investment purposes. Amro's stock and options were divided
among three additional entities with the distribution as
follows: AMRO International, S.A., 300,000 shares and 150,000
options; Austost Anstalt Schaan, 100,000 shares and 50,000
options; Balmore Funds, S.A., 100,000 shares and 50,000 options.
o 100,000 five-year options to purchase our common stock at an
exercise price of $1.00 per share to Israel Hersh effective
February 1, 2000, in accordance with a letter agreement dated
January 21, 2000 between Israel Hersh and us. We issued options
to the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
o 280,000 five-year options to purchase our common stock at an
exercise price of $1.00 per share to Michael Jolly effective
January 14, 2000, in accordance with by unanimous consent of
directors in lieu of a meeting. We issued options to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the options for investment purposes.
o 1,000,000 five-year options to purchase shares of common stock
in ValueFlash, at an exercise price of $1.35 per share. We
issued options to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the options
for investment purposes.
o 300,000 five-year options to purchase shares of common stock in
ValueFlash, at an exercise price of $1.35 per share on January
14, 2000 to Michael Jolly. We issued options to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
o 300,000 five-year options to purchase shares of common stock in
ValueFlash, at an exercise price of $1.35 per share on January
14, 2000 to Russell Kern. We issued options to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
II-6
<PAGE>
o 150,000 five-year options to purchase the common stock of
ValueFlash, at an exercise price of $2.00 per share to Energenic
effective January 31, 2000, in accordance with a letter
agreement between Energenic and CDKNET.com, Inc. We issued
options to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
o 50,000 five-year options to purchase the common stock of
ValueFlash, at an exercise price of $2.00 per share to Bob
Hopwood effective January 31, 2000, in accordance with a letter
agreement between Energenic and CDKNET.com, Inc. We issued
options to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
o 50,000 five-year options to purchase the common stock of
ValueFlash, at an exercise price of $2.00 per share to Energenic
effective January 31, 2000, in accordance with a letter
agreement between Energenic and CDKNET.com, Inc. We issued
options to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
o 75,000 shares of common stock of ValueFlash to Alvin Pock for
$150,000 on January 31, 2000, together with 75,000 eight-month
options to purchase common stock of ValueFlash.com Incorporated,
at an exercise price of $2.00 per share. We issued stock and
options to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for investment
purposes.
o 500,000 five-year options (and 750,000 five-year options held in
escrow) to purchase common stock of ValueFlash, at an exercise
price of $2.00 per share to Michael Vasinkevich on January 28,
2000, in accordance with a Finder's Agreement between ValueFlash
and Michael Vasinkevich. We issue options to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
o 1,250,000 five-year options to purchase common stock of
ValueFlash, at an exercise price of $2.00 per share to Shai Bar
Lavi on January 28, 2000, in accordance of an Employment
Agreement between ValueFlash and Shai Bar Lavi. We issue options
to the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
o 750,000 five-year options to purchase common stock of
ValueFlash, at an exercise price of $2.00 per share to Steven A.
Horowitz on January 28, 2000, in accordance of a Finder's
Agreement between ValueFlash and Steven A. Horowitz. We issue
options to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
II-7
<PAGE>
o 750,000 five-year options to purchase common stock of
ValueFlash, at an exercise price of $2.00 per share to Shlomo
Shur on January 28, 2000, in accordance of an Employment
Agreement between ValueFlash and Shlomo Shur. We issue options
to the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
o 20,000 shares of common stock to Cabaret Software, Inc. on
January 20, 2000 for services valued at $20,000. We issued stock
to the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for investment
purposes.
o 1,500,000 five-year options to purchase our common stock at an
exercise price of $1.00 per share to Caldwell Capital Corp. on
January 14, 2000, pursuant to a Consulting Agreement between
CDKNET.com, Inc. and Michael Vasinkevich. 750,000 options were
granted at signing and 750,000 options to be held in escrow. We
issued options to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the options
for investment purposes.
o 250,000 five-year options to purchase our common stock at an
exercise price of $1.00 per share to Shai Bar Lavi on January
14, 2000. We issued options to the purchaser in reliance upon
the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased
the options for investment purposes.
o 750,000 five-year options to purchase our common stock at an
exercise price of $1.00 per share to Shai Bar Lavi on January
14, 2000, in accordance with employment agreement. We issued
options to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the options for investment
purposes.
o 250,000 five-year options to purchase our common stock at an
exercise price of $1.00 per share to Shai Bar Lavi on January
14, 2000, in accordance with a finder's agreement between Shai
Bar-Lavi and CDKNET, LLC. We issued options to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
o 250,000 five-year options to purchase our common stock at an
exercise price of $1.00 per share to Shai Bar Lavi on January
14, 2000, in accordance with a Consulting Agreement between Shai
Bar Lavi and CDKnet, LLC. We issued options to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the options for investment purposes.
o 500,000 five-year options to purchase our common stock at an
exercise price of $1.00 per share to Shlomo Shur on January 14,
2000. We issued options to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the
options for investment purposes.
II-8
<PAGE>
o On January 6, 2000, we raised $500,000 through the exercise of
options by Erno and Rachel Bodek to purchase 1,000,000 shares of
common stock at the exercise price of $0.50 per share. We issued
stock to the purchaser in reliance upon the exemption provided
by Regulation D and/or Section 4(2) because the purchaser is an
accredited investor who purchased the stock for investment
purposes.
o On November 16, 1999, we entered into a Subscription Agreement
with Asia Pioneer where we raised $100,000 from Asia Pioneer
through the issuance of 200,000 share of common stock, along
with up to six allotments to purchase an additional 300,000
shares of common stock per month at $150,000 per allotment. We
issued stock to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the stock for
investment purposes.
o 714,286 shares The Gross Foundation for $250,000 on November 2,
1999 along with 71,486 two-year warrants to purchase common
stock for $.75 per share. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 50,000 shares to Energenic, LLC for services valued at $50,000
on October 29, 1999, in addition to an agreement to issue 50,000
shares of common stock to Energenic upon the completion of
milestones pursuant to the Software Agreement between us and
Energenic and the issuance of an additional 50,000 one-year
options exercisable at $1.00 per share for the purchase of
shares of common stock upon the completion of the project as set
forth in the Software Agreement. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the stock for investment purposes.
o 285,714 shares to Steven A. Horowitz for $100,000 on November 2,
1999 along with 28,571 two-year warrants to purchase common
stock for $.75 per share. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 107,143 shares Fox Distribution, Inc. for $37,500 on November 2,
1999 along with 10,714 two-year warrants to purchase common
stock for $.75 per share. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 142,857 shares Michael Sonnenberg for $50,000 on November 2,
1999 along with 14,285 two-year warrants to purchase common
stock for $.75 per share. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 1,000,000 shares to Erno and Rachel Bodek for $500,000 from Erno
and Rachel Bodek on November 1, 1999 through the issuance of
1,000,000 shares of common stock, along with 30-month Warrants
to purchase an additional 200,000 shares of common stock at
$1.25 per share, and an option to purchase another 2,000,000
II-9
<PAGE>
shares of common stock at $.50 per share which shall expire on
December 31, 1999. We issued stock to the purchasers in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchasers are accredited investors who purchased
the stock for investment purposes.
o 12,000 options to purchase our common stock at an exercise price
of $1.00 per share to Lauree Peoples effective October 25, 1999,
in accordance with our Stock Option Plan. We issued options to
the purchaser in reliance upon the exemption provided by
Regulation D and/or Section 4(2).
o 1,000,000 five-year options to purchase our common stock
effective August 1, 1999, to Tom Ross in accordance with an
Employment Agreement at an exercise price of $1.00 per share. We
issued options to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the options
for investment purposes.
o 30,000 shares to Cabaret Software, Inc. on August 10, 1999, and
10,000 shares on September 18, 1999 for services valued at
$30,000. We issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the stock
for investment purposes.
o 216,000 shares to Y2G.Com, Inc. for $155,000. On September 8,
1999, the Company sold Y2G an additional 116,000 shares of
common stock for $155,000. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or
Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 150,000 shares to Lawrence Adams Ltd. through the exercise of
cashless options on September 14, 1999. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the stock for investment purposes.
o 40,000 shares to Michael Sonnenberg through the exercise of
cashless options on September 14, 1999. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the stock for investment purposes.
o 110,000 shares to Steven Wildstein through the exercise of
cashless options on September 14, 1999. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation
D and/or Section 4(2) because the purchaser is an accredited
investor who purchased the stock for investment purposes.
o 75,000 shares to Lawrence Adams Ltd. for services valued at
$75,000 on September 14, 1999. We issued stock to the purchaser
in reliance upon the exemption provided by Regulation D and/or
II-10
<PAGE>
Section 4(2) because the purchaser is an accredited investor who
purchased the stock for investment purposes.
o 30,000 options to purchase our common stock (25,000 options at
$1.00 per share and 5,000 at $1.25 per share) that expire on May
24, 2002 and May 24, 2004, respectively, granted to Don Maggi on
May 25 1999. We issued the options to Maggi in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the stock
for investment purposes.
o 200,000 warrants to MSB Communications, Inc. on January 14, 1999
to purchase our common stock at an exercise price of $1.50 per
share expiring on January 13, 2002. We issued the warrants to
MSB Communications in reliance upon the exemption provided by
Regulation D/or Section 4(2) because the purchase is an
accredited investor who purchased the warrants for investment
purposes.
o During the period from July 1, 1998 to June 30, 1999, we issued
2,746,558 common shares, 600,000 Convertible Class A Debentures,
1,500,000 Convertible Class B Debentures for cash of $2,100,000,
net of issuance costs of $248,150. During the year ended June
30, 1999, we also issued 1,328,498 Warrants to purchase common
shares from the following transactions: (1) 75,000 common shares
and 100,000 Warrants were issued to Bandai Holdings USA for the
purchase of equipment used in our MixFactory.com(TM) E-Commerce
facility, and (2) 1,883,635 common shares were issued to Kelly
Music for the purchase of its 26.15% interest in CDKnet, LLC
which resulted in securing for us 100% of the equity interests
of CDKnet, LLC. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D because the
purchaser is an accredited investor who purchased the stock for
investment purposes.
o During the period October 1, 1997 (date of inception) to June
30, 1998, our predecessor, International Pizza Group, issued
2,999,985 common shares $224,986 as part of a private placement.
We issued 7,300,363 common shares in connection with the
acquisition of 73.85% of the equity interests in CDKnet, LLC. We
issued stock to the purchaser in reliance upon the exemption
provided by Regulation D because the purchaser is an accredited
investor who purchased the stock for investment purposes.
EXHIBITS
--------
3.1* Articles of Incorporation of the Registrant.
3.2* Amendment to the Articles of Incorporation.
3.3* By-Laws of the Registrant.
3.4* Certificate of Merger of the Registrant.
3.5* Amendment to the Articles of Incorporation.
3.6* Designation of Series A Preferred Stock.
4.1* Specimen of Common Stock Certificate.
4.2* Technology Horizons Corp. Stockholders Agreement dated May 7,
1998.
5.1++ Opinion of Foley, Hoag & Eliot LLP
10.1* Technology Horizons Corp. 1998 Equity Incentive Plan.
10.2* Convertible Subordinated Debenture Due February 1, 2009.
10.2.1** Amendment No. 1 to Convertible Subordinated Debenture due
February 1, 2009
10.3* Registration Rights Agreement between Technology Horizons
Corp. and Kelly Music & Entertainment Corp. dated September 4,
1998.
10.4* Assignment Agreement between Kelly Music & Entertainment Corp.
and Technology Horizons Corp. dated September 4, 1998.
II-11
<PAGE>
10.5* Amendment to Registration Rights Agreement between Technology
Horizons Corp. and Alvin Pock dated October 15, 1998.
10.6* Amendment to Registration Rights Agreement between Technology
Horizons Corp. and Robert L. Kelly dated October 15, 1998.
10.7* Registration Rights Agreement between Technology Horizons
Corp. and Robert L. Kelly dated June 3, 1998.
10.8* Registration Rights Agreement between Technology Horizons
Corp. and Alvin Pock dated June 3, 1998.
10.9* Assignment Agreement between Robert L. Kelly and Technology
Horizons Corp. dated June 3, 1998.
10.10* Assignment Agreement between Alvin Pock and Technology
Horizons Corp. dated June 3, 1998.
10.11* Assignment Agreement between Kelly Music & Entertainment Corp.
and CDKnet, LLC, dated June 3, 1998.
10.12* Employment Agreement, dated August 1, 1999, by and between
CDKNET.COM, INC. and Shai Bar-Lavi.
10.13**** Finder's Agreement between the Registrant and Shai Bar-Lavi
and Frederick Smithline dated June 1, 1999.
10.14** Employment Agreement dated August 1, 1999, by and between
CDKNET, LLC and Tom Ross.
10.15**** Stock Purchase Agreement between the Company and the Gross
Foundation, Inc., Steven A. Horowitz, Shai Bar-Lavi, and
Michael Sonnenberg dated November 2, 1999.
10.16### Subscription Agreement between CDKNET.COM, INC. and Asia
Pioneer Limited dated November 16, 1999.
10.17### Technology and License Agreement CDKNET.COM, INC. and Asia
Pioneer Limited dated November 16, 1999.
10.18**** Agreement dated March 19, 1999 between Peterson's and CDKnet,
LLC.
10.19**** Undated Registration Rights Agreement between Spiga Limited
and CDKNET.COM, INC.
10.20### Agreement dated October 25, 1999, between CDKnet, LLC and
Atomic Pop, LLC.
10.21**** Agreement dated March 29, 1999, between Central Park Media
Corp. and CDKnet LLC.
10.22**** Purchase Agreement dated August 9, 1999 between CDKNET.COM,
INC. and Y2G.COM.
10.23**** Convertible Subordinated Debenture Due September 1, 2003.
10.24**** Letter Agreement dated May 4, 1998, between Megaforce
Entertainment and CDKnet, LLC regarding the use of CDK
technology.
10.25### Agreement dated August 5, 1999 between the Company and
DreamWorks Records.
10.26### Agreement dated September 16, 1999 between the Company and
CollegeMusic, Inc.
10.27 Agreement between CDKnet, Inc. and Young & Rubicam dated
February 3, 2000.
10.28 Agreement between ValueFlash.com Incorporated and Richard A.
Eisner and Company dated April 15, 2000.
10.29 Agreement between ValueFlash.com Incorporated, CDKnet LLC,
Track Marketing and Arcadia Marketing, Inc. dated May 4, 2000.
10.30 Agreement between ValueFlash.com Incorporated, CDKnet LLC, and
Arcadia Marketing, Inc. dated May 4, 2000.
10.31 Agreement between ValueFlash.com Incorporated, CDKnet LLC, JMC
Investments, LLC and Arcadia Marketing, Inc. dated May 4,
2000.
10.32+ Development Proposal between ValueFlash.com Incorporated,
CDKnet, LLC and House of Blues dated May 12, 2000.
10.33 Agreement between ValueFlash.com Incorporated and ValueFlash
Japan Inc. dated May 25, 2000.
10.34 Agreement between ValueFlash.com Incorporated and Naviant
Marketing Solutions, Inc. dated June 12, 2000.
10.35 Agreement between ValueFlash.com Incorporated and
theglobe.com, Inc. dated June 26, 2000.
10.36 Agreement between CDKnet LLC and theglobe.com, Inc. dated June
26, 2000.
10.37 Agreement between ValueFlash.com Incorporated and J. Walter
Thompson U.S.A., Inc. dated June 29, 2000.
10.38 Warrant to Purchase Stock between ValueFlash.com Incorporated
and WPP Dotcom Holdings (Twelve) LLC dated June 29, 2000, for
5% interest in ValueFlash.com .
10.39 Warrant to Purchase Stock between ValueFlash.com Incorporated
and WPP Dotcom Holdings (Twelve) LLC dated June 29, 2000, for
5% interest in ValueFlash.com
10.40 Agreement between ValueFlash.com Incorporated and WPP Dotcom
Holdings (Twelve) LLC dated June 29, 2000.
10.41 Agreement between ValueFlash.com Incorporated and ACUSA.com
dated June 1, 2000 for services to the House of Blues.
16# Letter from former accountant Grant Thornton LLP
16.1## Letter from former Accountant, Wagner, Zwerman & Steinberg LLP
21* Subsidiaries of the Registrant
23.1 Consent of Grant Thornton LLP
23.2*** Consent of Foley, Hoag & Eliot LLP
27 Financial Data Schedule
99.1**** Chart of the signatories to the Company's Stockholder's
Agreement (and their interest in the Company).
* Incorporated by reference from our Registration
Statement filed on Form 10-SB on October 7, 1999.
** Incorporated by reference from our Registration
Statement filed on Form 10-SB Amendment No. 2 on
November 26, 1999.
*** Incorporated in the Opinion of Foley, Hoag & Eliot
LLP in Exhibit 5 hereto.
**** Incorporated by reference from our Registration
Statement filed on Form SB-2 on December 21, 1999.
# Incorporated by reference from our report on Form
10-QSB Amendment No. 1, filed on February 25, 2000.
## Incorporated by reference from our Registration
Statement on Form 10-SB Amendment No. 3 filed on
December 28, 1999.
### Incorporated by reference from our Registration
Statement filed on Form 10-SB Amendment No. 4 on
March 6, 2000.
+ The Registrant has requested confidential treatment
of certain portions of this exhibit and has omitted
such portions. A complete copy has been filed
separately with the Commission.
++ To be filed by amendment.
II-12
<PAGE>
UNDERTAKINGS
------------
(a) We undertake to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to include
any Prospectus required by Section 10 (a) (3) of the Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) may be reflected in the form of Prospectus filed with the
Commission pursuant to Rule 424 (b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement.
(b) We undertake that, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of these securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) We undertake to remove from registration by means of a post-effective
amendment any of the securities being registered, which remain unsold at the
termination of the offering.
(d) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers, and controlling persons, we
have been advised that in the opinion of the Commission this indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
in the event that a claim for indemnification against such liabilities (other
than the payment by the company of expenses incurred or paid by one of our
directors, officers or controlling persons in the successful defense of any
action suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, we will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(e) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the registrant pursuant to Rule 424 (b) (1) or (4) or 497
II-13
<PAGE>
(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(f) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered,
and the offering of these securities at that time shall be deemed to be the
initial bona fide offering.
II-14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of Garden
City, State of New York, on July 31, 2000.
CDKNET.COM, INC.
(Registrant)
By: /s/ Steven A. Horowitz
---------------------------------
Steven A. Horowitz
Chairman, Chief Executive Officer
Chief Financial Officer and
Secretary
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
<S> <C> <C>
Chairman, Chief Executive
Officer, Chief Financial
/s/ Steven A. Horowitz Officer and Secretary July 31, 2000
------------------------------------ ---------------------------------------- -------------------------
Steven A. Horowitz (Title) (Date)
/s/ Andrew J. Schenker Director July 31, 2000
------------------------------------ ---------------------------------------- -------------------------
Andrew J. Schenker (Title) (Date)
/s/ Anthony J. Bonomo Director July 31, 2000
----------------------------------- ---------------------------------------- -------------------------
Anthony J. Bonomo (Title) (Date)
</TABLE>
II-15
