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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
AMENDMENT NO. 4
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
CDKNET.COM, INC.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3586087
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
595 Stewart Avenue, Suite 710
Garden City, N.Y. 11530
(516) 222-8800
WWW.CDKNET.COM
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(Address, including zip code, telephone number, including area code,
and web address of the principal executive offices of the registrant)
Securities to be registered pursuant to Section 12(b) of the Act: NONE
Securities to be registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.0001
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TABLE OF CONTENTS
INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART 1 PAGE
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ITEM 1. DESCRIPTION OF BUSINESS AND SPECIAL RISK FACTORS................. 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ............................ 17
ITEM 3. DESCRIPTION OF PROPERTY.......................................... 22
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT........................................ 22
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS.............................................. 27
ITEM 6. EXECUTIVE COMPENSATION........................................... 31
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 34
ITEM 8. DESCRIPTION OF SECURITIES........................................ 36
PART II
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ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................ 37
ITEM 2. LEGAL PROCEEDINGS................................................ 38
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.................... 38
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.......................... 39
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS........................ 42
PART F/S
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FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.................................. F-1
PART III
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ITEM 1. INDEX TO EXHIBITS .............................................. III-1
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CAUTIONARY STATEMENT
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All statements, trends, analyses and other information contained in this Form
10-SB relative to trends in net sales, gross margin, anticipated expense levels
and liquidity and capital resources, as well as other statements, including, but
not limited to, words such as "anticipate," "believe," "predict," "plan,"
"intend," "expect," and other similar expressions constitute forward-looking
statements. These statements are not guarantees of future performance and are
subject to risks and uncertainties that are difficult to predict. Potential
risks and uncertainties include those set forth below in "Risk Factors."
Particular attention should be paid to the cautionary statements involving our
limited operating history, the unpredictability of our future revenues, the
unpredictable and evolving nature of 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 -- SPECIAL CONSIDERATIONS
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We have described several risk factors which we believe are significant and
should be given careful consideration by you when you evaluate us. We consider
each of these risks to be specific to us, although some are industry or sector
related issues which could also impact other businesses in our market sector. In
our case and in addition to the risks just referred to, there are two related
risks to which we wish to draw your attention specifically:
O Our 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 financing.
If we are unable to obtain significant additional financing or otherwise fund
our operations, we will likely have to file for bankruptcy.
We are filing this Form 10-SB, and amendments thereto, in order to comply with
the new NASD eligibility requirements to trade our stock on the Over-the-Counter
Bulletin Board. The phase-in schedule for the eligibility requirements provides
that we must have met those requirements on or before October 7, 1999, including
filing and clearing a registration statement under the Securities Exchange Act
with the Commission. We did not meet this deadline and, as a result, our stock
was deleted from the Over-the-Counter Bulletin Board on October 7, 1999. Our
stock is being traded on the National Quotation Bureau's "Pink Sheets" until we
meet the eligibility requirements for, and can be reinstated on, the
Over-the-Counter Bulletin Board.
DESCRIPTION OF BUSINESS
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We have developed a multimedia technology, called CDK(TM), which integrates
audio, video and Internet connectivity on a standard compact disc. Our
technology enables users to create their own personalized CDs simply by visiting
a Website. These custom CDs play audio and display videos on a full-screen,
using high-quality videos and digital technology. The custom CDs also include
software applications and targeted Web links.
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Our targeted industries include: (1) entertainment (music, movies and TV); (2)
travel and tourism; (3) professional sports; (4) financial services; (5)
education; (6) toys/games; (7) fashion; (8) food/cooking; (9) automotive; and,
(10) healthcare. Our primary customers and/ or strategic partners include
Peterson's, AtomicPop, Central Park Media, CollegeMusic.com, Megaforce Records
and DreamWorks Records. We believe that there are six main companies currently
offering custom audio CD development. These companies are Musicmaker.com,
Customdisc.com, CDUCTIVE, Amplified.com, K-Tel.com, and EZCD.com. However, we
believe that none of these companies offer custom, multi-session CD development.
1. ORGANIZATION WITHIN LAST FIVE YEARS
We are a holding company formed under the laws of the State of Delaware. Our
executive offices are located at 595 Stewart Avenue, Suite 710, Garden City, New
York 11530. The following is 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.
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.
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."
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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, $800,000 in advances from CDKnet, LLC to Kelly
Music were 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 receiving in exchange
363,636 and 936,727 common shares of Technology Horizons, respectively.
Following these transactions, Technology Horizons held a 22.35% direct ownership
interest in CDKnet, LLC bringing its total direct and indirect ownership to
73.85%.
On July 8, 1998, Technology Horizons entered into an agreement that was
subsequently amended to purchase Kelly Music's remaining 26.15% ownership
interest in CDKnet, LLC for $5,171,122, payable in a combination of 1,883,635
common shares of Technology Horizons and debt retirement of $600,000 in notes,
and a cash payment of $65,000 raising Technology Horizons' direct interest in
CDKnet, LLC to 48.5%. Creative Technology held the remaining 51.5%.
On December 16, 1998, Technology Horizons changed its name to CDKNET.COM, INC.
and, on December 18, 1998, began trading on the Over-the-Counter
Bulletin Board under the symbol of "CDKX".
We have not had any other material organizational changes or any additional
acquisitions or mergers since December 1998.
We currently have two wholly-owned subsidiaries, Creative Technology and CDKnet,
LLC. We directly own 100% of Creative Technology and 48.5% of CDKnet, LLC.
Creative Technology owns the remaining 51.5% ownership interest of CDKnet, LLC,
giving us an indirect 100% ownership interest of CDKnet, LLC. We conduct our
business through CDKnet, LLC. Our manufacturing, research and development is
conducted out of CDKnet, LLC's office located at 250 West 57th Street, Suite
1101, New York, New York 10019. Our offices may be contacted by telephone at
212-547-6050 or on our website at: WWW.CDKNET.COM.
We also own 87.7% of the outstanding shares of ValueFlash.com Incorporated, a
Delware corporation, created on January 13, 2000. The remaining shareholders of
ValueFlash are Alvin Pock, Michael Vasinkevich and AMRO who own 75,000, 125,000
(plus 1,312,500 options) and, 500,000 (plus 250,000 options) shares of our
common stock, respectively. . ValueFlash develops and sales our new
software-based communications module that provides a vehicle for marketers to
reach their customers using a PC desktop application. ValueFlash shares office
space with CDKnet, LLC.
2. GENERAL
Our unaudited financial statements for the period October 1, 1999 to December
31, 1999, reflect a net loss of $1,627,689 on revenues of $16,491 compared to a
net loss of $943,894 on revenues of $183,660 in the prior period ended December
31, 1998. Revenues declined $167,169 in the current period because our focus
shifted to the enhancement of our core technologies, such as the perfection of
our MixFactory(TM) technology and CDK(TM) version 2.0 and Macintosh compatible
CDK(TM) version 1.5, as well as the penetration of core
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markets. We intend to continue to establish three principal revenue streams: (1)
sale of custom CDs, (2) sale of Web links and Web advertising, and (3)
development and use fees. We are currently capable of providing services in each
of these areas.
We have received an infusion of $1,250,000 in capital since December 31, 1999.
We plan to decrease our need for substantial additional working capital by
continuing to outsource production capabilities, expand business development
efforts and implement marketing programs.
As of March 3, 2000, we had 19,576,157 shares of common stock issued and
outstanding. Of these shares, 2,228,588 shares are restricted stock owned by our
directors and key employees. The remaining 17,347,569 shares are owned by
approximately 79 shareholders, 6 of whom we believe hold more than five percent
(5%) ownership of the Company. On October 7, 1999, our stock was deleted from
the Over-the-Counter Bulletin Board. Our common stock is currently being traded
on the so-called "Pink Sheets" under the symbol "CDKX" until we are eligible for
reinstatement on the over-the-counter bulletin board.
3. INDUSTRY
A. OVERVIEW
Internet usage has increased dramatically in the last decade. As a result, many
new personal and commercial applications have been developed for Internet users
and, increasingly, consumers are conducting business through Internet
applications. We believe that web-connected multimedia CDs will be one of the
next significant applications of the Internet. Web-connected, Multimedia CDs
contain audio, video and HTML (or, HyperText Markup Language, the underlying
"code" for Web pages) all navigable by a standard web browser. Our CDK(TM)
technology forms the foundation multimedia for CD-ROM authoring, production, and
custom online compilations.
We believe there is strong market potential for CDK(TM) technology across
various industries. Target industries include:
-- Entertainment (music, movies, TV) -- Toys/Games
-- Travel & Tourism -- Fashion
-- Professional Sports -- Food/Cooking
-- Financial Services -- Automotive
-- Education -- HealthCare
The premiere companies in each of these industry categories have fully developed
Websites with significant user traffic, lending themselves as prime candidates
for the MixFactory(TM) operation. We believe that the industry will become more
competitive. Our inability to compete in the market will have a material affect
on its business operations.
B. COMPETITION
While other companies have the potential to develop web-based, audio and video,
custom CDs, we believe that none offer the economic, development or quality
advantages of our CDK(TM) and MixFactory(TM) technology. We believe that there
are six main companies currently offering custom audio CD development. These
companies are Musicmaker.com, Customdisc.com, CDUCTIVE, Amplified.com,
K-Tel.com, and EZCD.com. However, we believe that none of these companies offers
custom audio and video CD development. In an effort to further secure a strong
position in the marketplace, CDKnet, LLC has submitted patent requests for
certain aspects of our technology. Finally, we believe that other companies,
including established Internet companies, software companies and companies in
the entertainment business could enter this business and become competitors.
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4. PRODUCTS AND SERVICES
A. PRODUCTS AND SERVICES
We have developed and are marketing the following products and services:
CDK(TM) TECHNOLOGY
CDK(TM) technology combines CD digital audio (i.e., audio tracks that are
playable on both home stereo systems and personal computers) full-screen video
and integrated web links through a browser interface. A browser interface is the
main interface page that is presented when the CD is placed in a personal
computer. Our technology allows video playback at the full-screen size of the
video monitor and at full-motion (the industry standard of 30 frames per
second). The browser interface also allows easy linking to other Web sites
through the CDK interface page.
The CDK(TM) HTML authoring system -- the process for creating Web pages -- is
used by CDKnet, LLC to produce custom HTML interface pages for specific clients
in about a day. The Company has proprietary techniques for creating full-motion,
full-screen video playback from using a CD. Any user with a PC of at least
166MHZ or Macintosh G3 can order custom audio and video CDs.
CDK(TM) has been engineered to offer compatibility with the majority of CD-ROM
drives on the market. We believe that we have achieved a high level of
reliability, as evidenced by extensive testing and major CDK(TM) releases, and
we believe this reliability will provide a major competitive advantage over
other multisession (i.e., both audio and video) CDs in the market. Additionally,
the CDK(TM) system is engineered for mass-production. The integration of the
complete file structure of the CDK(TM) is automated. Audio, video and HTML
assets can be placed in the production templates created by us for a fast
turn-around time for the creation of CDKs.
MIXFACTORY(TM) CUSTOM MANUFACTURING
MixFactory(TM) is a custom, multi-session CD manufacturing system built upon
CDK(TM) technology. The entire system is automated so that little human
intervention is required for the custom manufacturing process. Based on our
review of current custom-CD operations in the marketplace, we believe that
MixFactory(TM) is a unique system.
To create a custom CD, a user visits a Website and selects a compilation of
audio, video, or other content titles. Titles are browsed and/or searched and
audio/video clips are previewed through an easy to use interface. After
selecting the compilation, the user personalizes the disc by selecting artwork
for the disc label, cover and HTML interface.
The MixFactory(TM) system allows multimedia content providers -- such as, music
labels, major sports leagues, pharmaceutical companies, travel-related
organizations as well as companies within the fashion industry -- to offer their
assets on a customized basis, either as promotional content or as full retail
products. For example, a visitor to the CollegeMusic.com Website will be
presented with a MixFactory(TM) link that will enable the user to develop a
custom CD consisting of available site content. This content will include video
and audio tracks of live music performances from major nightclubs across the
United States.
We plan to form agreements with multiple content providers. We are not looking
to license content through such agreements. Rather, we are looking to license
MixFactory technology to the content providers (owners). Therefore, we will not
be in danger of violating any intellectual property rights. For example, the
College Music Mixfactory website enables fans to create custom CDs containing
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music videos as well as audio tracks. The CD will also contain integrated Web
links to the College Music Website driving targeted traffic.
We expect to leverage the planned MixFactory.com(TM) Website to serve as a link
(or portal) to other Web sites that provide digital entertainment content.
Initially, MixFactory.com(TM) is expected to serve as a point of content
distribution for independent music artists and labels with links to other
MixFactory(TM) sites. Ultimately, we expect the site will have extensive search
and browse capability that will guide the user to a wide range of digital
entertainment Websites and content. We also plan that the portal will provide a
custom-CD recording (also called, "burning") service for users who want to
download digital content but do not have the bandwidth and equipment to download
and burn their own CD at home.
We believe some of the specific benefits of the MixFactory(TM) model to the
content provider include:
O a new marketing platform for goods and services that drives Web traffic and
provides valuable customer information from both buyers and non-buyers;
O the opportunity to leverage marketable inventory that was previously
"dormant";
O attractive operating efficiencies (e.g., no added inventory costs);
O targeted mailing lists;
O new advertising revenue opportunity on customized CDs;
O return hits to the content provider's Website direct from the customized
CD; and
O cross-promotion from the MixFactory.com(TM) Website
Additional possible sources of income for us from the MixFactory(TM) operation
include advertising revenues from the MixFactory.com(TM) Website and possible
revenue sharing from advertising on our partners' MixFactory(TM) sites. We also
plan to charge content providers a nominal fee for digitizing audio and video
assets above a specified level.
The MixFactory(TM) operation is designed to be a complete end-to-end E-commerce
solution, including production, payment processing and fulfillment. Once the
user confirms the content selections and completes a credit card transaction,
the selected titles are queued from storage to a Compact Disc Recordable
("CD-R") burning workstation. The customer's tracks are formatted into the
industry standard Red Book audio session along with an iso9660 (or data session
on a CD-ROM) and transferred together to the CD-R (disc). The automated
workstation transfers the complete CD-R to the CD printer where the
user-selected label is printed onto the surface of the CD-R.
In parallel with the transfer of the tracks to the CD-R, the custom packaging
materials are printed. That is, as soon as the job is queued for burning, the
printed job is also queued to the printer. Packing and shipping of the finished
product is currently the only manually operated step in the process. We are
currently investigating equipment that will automate the packing process.
MIXFACTORY.COM(TM) PORTAL SITE
We expect MixFactory.com(TM) to serve as a Web portal for digital multimedia
content, including music, movies, and game demos. We plan to design the site so
that consumers will be able to search and browse for content, select items to
include on their custom CD and purchase the CD. Once the CD is received, the
consumer will be able to view the information on the CD via his or her personal
computer and link back to related web pages through targeted links included on
the CD.
We believe the main consumer advantage derived from the MixFactory(TM) portal
site is the ability to receive high-quality, high-bandwidth digital assets
without waiting hours for the files to download. The content provider may also
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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 CD, send that
information to the MixFactory(TM) server and then have a custom CD created and
shipped is a service that, to our knowledge, does not currently exist on the
Internet.
V-FLASH
We recently introduced V-flash 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 V-flash, 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
V-flash 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 V-flash module will be achieved through multiple channels
including music industry and promotional CDs, direct download and email.
ValueFlash's strategy is the first to utilize retail music CD sales as a
distribution channel for software that will serve as a key marketing tool. For
example, music CDs featuring value added content such as videos will drive
consumers to play the CDs on their computer, thereby simultaneously loading the
V-flash 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 V-flash 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 our products and services. Between September 30, 1999 and
December 31, 1999, we expended approximately $119,251 on research and
development. We anticipate that our research and development costs will increase
during fiscal 2000.
Among our various activities, we are transitioning to a Unix-based manufacturing
system and are developing products and services which will deliver customized
and client specific information to customers. We are continuing development of
both the newly released CDK 2.0 technology as well as MixFactory(TM), our
customized multimedia CD system.
Additionally, we recently created a new subsidiary, ValueFlash.com Incorporated
to develop a new desktop feature called a "software based communication module"
that will enable marketers to send targeted electronic messages to consumers. We
will distribute the module through Web-connected multimedia CDs.
During fiscal 1999 and to date, we continued to enhance the value of its
product/service offerings through ongoing research and development efforts.
Specifically, we are engaged in the following internal projects:
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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.
5. SALES AND MARKETING
A. STRATEGY
Our business model is based on three revenue streams. The first revenue stream
is the sale of custom CDs to consumers through MixFactory.com(TM) and
MixFactory(TM) partner sites. We plan to make MixFactory(TM) technology
available to content providers enabling them to promote or sell their wares on a
customized basis. In exchange for a per disc manufacturing fee, the content
provider receives the right to utilize the Mix Factory(TM) services on their
website(s). This scenario also includes content licensed by our strategic
partners that is then sold through our Website. We expect to receive direct
revenue from the sale of custom CDs. The MixFactory agreements we currently have
in place including:
o Central Park Media (live site)
o Megaforce Records (live site)
o AtomicPop (scheduled to launch in January 2000)
o CollegeMusic.com (live site)
o Peterson's (launch TBD)
Sales will be made via the Web through client-specific MixFactory sites that
will be linked from MixFactory.com.
The second revenue stream is the sale of Web links and Web advertising on
MixFactory.com(TM) and MixFactory(TM) partner sites. Digitization fees
associated with preparation of partner content is expected to add to these
proceeds.
The third and final revenue stream is expected to be derived from development
and use fees for client-specific CDK(TM)s. Client-specific CDKs refer to our
core product, the Web-connected multimedia CD. Past clients for this product
(CDK 1.0) include Citibank, Pfizer, Montana Power Company, Sandals Resorts and
the New York Knicks. We are currently developing other business in this sector
with the new version of the product, CDK 2.0.
We believe that the combination of custom-CD sales, Web advertising revenue and
client-specific CDK(TM) development fees provides a powerful, yet diverse,
revenue engine for us.
Of the three revenue streams, two are currently generating revenue --
development and use fees for client-specific CDKs and the sale of custom CDs. We
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 only been available since August. Since that time, we have
generated revenue through client-specific CDK 2.0 discs for Maverick Records and
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WorldWest Communications. There are a number of CDK 2.0 projects that are
currently pending. Custom CD sales, which are minimal at the moment, are
expected to increase as we sign up additional content providers. The third
revenue stream, sale of Web links and Web advertising has not yet been achieved.
B. PLAN OF OPERATION
Effective August 1, 1999, we hired Tom Ross as President of the Entertainment
Group. Mr. Ross heads our planned office in Los Angeles, California which will
focus on business development within the entertainment industry. Our operational
plan for fiscal 2000 also includes: (1) moving custom, multimedia CD operations
(i.e., MixFactory(TM)) to a higher volume, lower rent production environment;
(2) forming strategic alliances with a digital video services company to meet
increasing demand for these services; and (3) signing up MixFactory(TM) partner
sites across various industries.
We plan to raise additional financing to fund our operations through sales of
our products and services as well as through private placements of equity
securities. We need to raise such financing to continue our operations. If we
are not successful, we may have to seek protection of the bankruptcy courts.
C. MATERIAL AGREEMENTS
We consider the following agreements to be material to our ability to provide
our customers with our products and services:
O Agreement between CDKnet, LLC and Peterson's, a division of
International Thomson Publishing, Inc., executed on March 19, 1999.
Under the agreement, Peterson's will promote and provide a link on its
relevant web sites, including CollegeQuest, to the Campus Video
Program. Peterson's will also provide CDKnet, LLC video content
received from participating institutions, which CDKnet, LLC will
digitize, store and make available through its Campus Video web site.
CDKnet, LLC, in turn, will: (1) provide the technology and service
necessary to digitize and store the campus tour videos, (2) process
orders, (3) set up and replicate the CDK with the videos selected by
the student, and (4) send the completed CDK to the student. Peterson's
shall be responsible for obtaining any and all rights, licenses,
clearances, releases, or other permissions necessary for the parties to
perform their respective duties under the agreement. The parties will
divide revenues from the sales pursuant to a schedule agreed upon in
the agreement.
O Agreement between CDKnet, LLC and Central Park Media Corporation dated
March 29, 1999 under which the parties will via the Internet create,
market and take orders for custom video-based CDs produced with CDK(TM)
technology. We will set up the Web site at no charge. In return,
Central Park Media will insert a MixFactory.com link on its Web sites
in order to promote, market, and advertise MixFactory.com's Japanese
animation, Amine and/or other content. We will receive a per CD fee for
all sales. Central Park Media shall obtain any and all rights,
licenses, clearances, releases, or other permissions necessary for the
parties to perform their respective duties under the agreement.
O Agreement between CDKnet, LLC and CollegeMusic, Inc. entered into in
August 1999 under which the parties will develop a CollegeMusic
MixFactory Web site. The new Web site will enable CollegeMusic fans to
create a custom CD containing music videos as well as audio tracks. The
CD will also create integrated Web links to the CollegeMusic Web site
driving targeted traffic. The cost of the Web site is free to
CollegeMusic, however we will keep all proceeds from shipping and
handling of the CDs.
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O Agreement between CDKnet, LLC and Megaforce Records dated September 1,
1999 to create a Megaforce Records Web site at no charge. The Web site
will use MixFactory technology to enable users to the site to create
customized and personalized multimedia CD. Consumers will choose from
Megaforce artist's video and audio content to create a customized CD.
We will receive the proceeds of the from shipping and handling as well
as a per CD fee.
O Agreement between CDKnet, LLC and DreamWorks Records Corporation in
October 1999 under which DreamWorks will license from CDKnet, LLC the
CDK technology, in order to produce Web-connected CDs containing
content supplied by DreamWorks. We will receive a fee per master CD.
DreamWorks shall be responsible for obtaining any and all rights,
licenses, clearances, releases, or other permissions necessary for the
parties to perform their respective duties under the agreement.
O Agreement between CDKnet, LLC and Atomic Pop LLC dated October 25, 1999
under which we will license to Atomic Pop the CDK technology in order
to produce Web-connected CDs containing content supplied by Atomic Pop.
We will receive a fee per master CD. Atomic Pop shall be responsible
for obtaining any and all rights, licenses, clearances, releases, or
other permissions necessary for the parties to perform their respective
duties under the agreement.
O Agreement dated November 16, 1999 with Asia Pioneer, Ltd., a Hong
Kong-based Internet technology company serving the Chinese-speaking
world population. The agreement grants Asia Pioneer the right to our
Web-connected multimedia CD technology as well as MixFactory(TM)
technology to offer customized multimedia CDs through Asia Pioneer's
new Web site beatasia.com. Beatasia.com is a comprehensive music
entertainment Web site and is known as "the heartbeat of Asia." Rights
extended in the agreement cover the worldwide Chinese speaking
community. In exchange for these rights, we will receive a 4.89% in
Asia Pioneer at the completion of the underlying services. The parties
also entered into a Subscription Agreement under which Asia Pioneer
will purchase 1,800,000 shares of our common stock at $.50 per share in
seven allotments expiring on May 30, 2000.
6. INTELLECTUAL PROPERTY RIGHTS
We rely on copyrights, trademarks, patents, trade secret laws and contractual
restrictions to establish and protect our proprietary rights in our services and
products. We do not have any patented technology at this time that would limit
competitors from entering our market. However, we have a patent application
pending for the basic CDK(TM) technology. The patent application covers the
format of a multisession, digital encoded recording medium navigable by an
Internet browser.
Our intellectual property counsel informed us that some claims that make up our
patent application have been allowed and the issue fee has been paid. The grant
of the patent is expected soon. The intellectual property counsel has filed a
continuation application to separate the earlier rejected claims into a new
application, which intellectual property counsel will continue to prosecute in
the U.S. Patent and Trademark Office.
No assurance can be given that a patent will issue or that if a patent does
issue that it will be broad enough to provide significant protection to us. Our
management believes that the steps taken by us to protect its intellectual
property are consistent with industry standards for online, custom CD companies
today.
We also rely on third-party software licenses, such as Microsoft Development
Network (MSDN), which provides software development tools. All employees and
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contractors are required to and have entered into confidentiality and invention
assignment agreements. Suppliers, distributors and customers are also required
to enter into confidentiality agreements.
To date, we have received no notification that our services or products infringe
the proprietary rights of third parties. Third parties could however make claims
of infringement in the future. Any future claims that do occur may have a
material adverse affect on our business.
Our licensing agreement entered into on November 16, 1999 with Asia Pioneer,
Ltd., a Hong Kong-based Internet technology company serving the Chinese-speaking
world population. The agreement grants Asia Pioneer the right to our
Web-connected multimedia CD technology as well as MixFactory(TM) technology to
offer customized multimedia CDs through Asia Pioneer's new Web site
beatasia.com. Beatasia.com is a comprehensive music entertainment Web site and
is known as "the heartbeat of Asia." Rights extended in the agreement cover the
worldwide Chinese speaking community. In exchange for these rights, we will
receive a 4.89% in Asia Pioneer at the completion of the underlying services.
The parties also entered into a Subscription Agreement under which Asia Pioneer
will purchase shares of our common stock.
We have the following pending trademarks:
-- Pending
-------
TM: CDK
Serial No. 75/426,937 - Filed February 2, 1998
Our Docket No. 55716
-- Pending
-------
TM: MIX FACTORY
Serial No.
Our Docket No. 59365
7. EMPLOYEES
As of December 31, 1999, we had 13 full-time and 1 part-time employees. While
sourcing and recruiting appropriate technical personnel is often difficult and
competitive, we expect that our need to recruit additional personnel in the
future will not negatively affect our operations. Management believes that our
employee relations are good, and none of our employees are represented by a
collective bargaining unit.
8. SPECIAL RISK FACTORS
You should carefully consider the following information which outlines special
market and other risk factors affecting us and our industry.
Our ability to continue operations is in question.
- --------------------------------------------------
Our history of operating losses raises substantial doubt about our ability to
continue operations. If we are unable to obtain significant additional financing
or otherwise obtain working capital to fund our operations, we may be obliged to
seek protection of the bankruptcy courts. In particular, our 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:
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O continued losses
O use of significant cash in operations
O lack of sufficient funds to execute our business plan
Our unaudited financial statement for the period September 30, 1999 to December
31, 1999 reflect a net loss of $1,627,689 on revenues of $16,491.
Our financial condition is highly uncertain and we need to obtain significant
- -----------------------------------------------------------------------------
additional financing to avoid bankruptcy.
- -----------------------------------------
As of the fiscal quarter ending December 31, 1999, our current assets were
significantly less than our current liabilities. Despite our continued ability
to raise capital through debt and equity financing, we need to raise significant
additional financing or otherwise obtain working capital to continue operations
through the next year. If we do not raise the necessary financing, we will
probably have to seek the protection of the bankruptcy courts and holders of our
common stock would stand to lose their entire investment.
Due to changes in our business, our historical financial information is of
- --------------------------------------------------------------------------
material relevance.
- -------------------
Our ability to generate revenue and income is unproven, and changes in our
business make an evaluation of our operating history difficult. Our Company must
be considered in light of the risks, expenses and difficulties encountered by
companies in the new and rapidly evolving market for online, custom CD
technology and related enhanced services. To address these risks, among other
things, we must (1) market our services and build our brand names effectively,
(2) provide scalable, reliable and cost-effective services, (3) continue to grow
our infrastructure to accommodate additional customers and increased use of our
products and services, (4) expand our channels of distribution, (5) continue to
respond to competitive developments, and (6) retain and motivate qualified
personnel.
Future sales may have a dilutive effect on future sales of securities.
- ----------------------------------------------------------------------
Future sales of substantial amounts of our common stock in the public market
could adversely affect the market price of our common stock and our stockholders
could experience dilution in their stock ownership and in the value of their
shares. Dilution is a reduction in the value of the holder's investment measured
by the difference between the purchase price of the shares of the common stock
and the net tangible book value of the shares after the purchase takes place. As
of March 3, 2000, we had 19,576,157 shares of common stock outstanding of which
1,610,382 are restricted or affiliate shares ("Restricted Shares"). Those
Restricted Shares will gradually be converted to free-trading shares, the sale
of which could have a material adverse effect on the future market price of our
common stock.
Our shares are traded on the so-called "Pink Sheets."
- -----------------------------------------------------
In January 1999, the National Association of Securities Dealers imposed
eligibility requirements, which were approved by the Commission, for trading on
the Over-the-Counter Bulletin Board. As a result of these new eligibility
requirements, we were required to register under the Securities Exchange Act of
1934 in order to be traded on the Over-the-Counter Bulletin Board. The phase-in
schedule for the new eligibility requirements provides that we must have met
these requirements on or before October 7, 1999, including filing and clearing a
registration statement under the Exchange Act with the Commission. We did not
meet this deadline and, as a result, were deleted from the Over-the-Counter
Bulletin Board on October 7, 1999. There continues to be a market for our stock
because we qualify for a Commission exemption that allows us to automatically be
quoted on the National Quotation Bureau's "Pink Sheets" until we meet the
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eligibility requirements for the Over-the-Counter Bulletin Board. Trading on the
"Pink Sheets" will result in a less liquid market for our stock than would exist
on the Over-the-Counter Bulletin Board.
If we do not adapt to rapid technological change, our business will be adversely
- --------------------------------------------------------------------------------
affected.
- ---------
Our success is highly dependent upon our ability to develop new and enhanced
services, and related products that meet changing customer requirements. At
present, our two main products -- CDK(TM) and MixFactory(TM)-- are both
available and for sale to the public. Nonetheless, the market for our services
is characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new and enhanced software, service and related
product introductions.
To remain successful, we must be responsive to new developments in hardware and
semiconductor technology, operating systems, programming technology, and
computer capabilities. In many instances, the new and enhanced services,
products, and technologies are in the emerging stages of development and
marketing, and are subject to the risks inherent in the development and
marketing of new software, services, and products. We may not successfully
identify new service opportunities, and develop and bring new and enhanced
services and related products to market in a timely manner; there can be no
assurance that:
o any of these services, products or technologies will develop or will be
commercially successful, or that we will benefit from these
developments, or
o services, products, or technologies developed by others will not render
our services, and related products noncompetitive or obsolete.
If we are unable, for technological or other reasons, to develop and introduce
new services and products in a timely manner in response to changing market
conditions or customer requirements, or if new or enhanced software, services,
and related products do not achieve a significant degree of market acceptance,
our business, operating results, and financial condition would be materially
adversely affected.
We face intense competition in the CD development market.
- ---------------------------------------------------------
Portions of the online, custom CD market are becoming increasingly competitive.
We expect in the coming years to face significant competition in all of our
markets. We expect new companies will emerge and compete for the same customers.
We expect competition to increase from both established and emerging companies
and that this increased competition will result in reduced costs which could
materially adversely affect our business, operating results, and financial
condition. Moreover, our current and potential competitors, some of whom have
significantly greater financial, technical, marketing, and other resources than
we do, may respond more quickly than we do to new or emerging technologies or
could expand to compete directly against us. Accordingly, it is possible that
current or potential competitors could rapidly acquire significant market share.
There can be no assurance that we will be able to compete against current or
future competitors successfully or that competitive pressures faced by us will
not have a material adverse effect on our business, operating results, and
financial condition.
Government regulation and legal uncertainties may affect our business.
- ----------------------------------------------------------------------
Only a small body of laws and regulations currently apply specifically to
content of, access to, or commerce on, the Internet. It is possible that laws
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and regulations with respect to the Internet may be adopted by governments in
any of the jurisdictions in which we can sell our products, covering issues such
as user privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. The nature of future legislation and the
manner in which it may be interpreted and enforced cannot be fully determined
and, therefore, legislation could subject us and/or our customers to potential
liability, which in turn could have a material adverse effect on our business,
results of operations and financial condition.
In addition, applicability to the Internet of existing laws governing issues
such as property ownership, copyright and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast majority
of these laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies. Changes to these laws intended to
address these issues could create uncertainty in the marketplace that could
reduce demand for our services or increase the cost of doing business as a
result of costs of litigation or increased service delivery costs, or could in
some other manner have a material adverse effect on our business, results of
operations and financial condition.
And, because our services are available over the Internet virtually worldwide,
and because we facilitate sales by our customers to end users located in
multiple provinces, states and foreign countries, these jurisdictions may claim
that we are required to qualify to do business as a foreign corporation in each
of the state/province or that we have a permanent establishment in each of the
foreign countries. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for failure to qualify and could result in the inability to enforce
contracts in these jurisdictions. Any new legislation or regulation, or the
application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could have a material adverse effect on our
business, results of operations and financial condition.
We are dependent on certain key personnel.
- ------------------------------------------
Our success depends to a significant degree upon the continued contributions of
our key management, including: (1) Steven A. Horowitz, Chairman, Chief Executive
Officer, Chief Financial Officer and Secretary of our parent company; (2)
CDKnet, LLC's officers Shai Bar-Lavi, Chief Executive Officer; Israel Hersh,
President; and Shlomo Shur, Chief Operating Officer; and (3) ValueFlash's
officers Shai Bar-Lavi, Chief Executive Officer and Director; Shlomo Shur,
President 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 of Marketing; Marcia Irwin, Senior Vice
President and Creative Director; and director 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.
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We may have difficulty in management of growth.
- -----------------------------------------------
We may experience a period of rapid growth which could place a significant
strain on its resources. Our ability to manage growth successfully will require
us to continue to improve our operational, management and financial systems and
controls as well as to expand our work force. A significant increase in our
customer base would necessitate the hiring of a significant number of additional
customer service care and technical support personnel as well as computer
software developers and technicians, qualified candidates for which, at the
present time, are in short supply. We must manage relationships with a growing
number of third parties as we seek to complement our service offerings and
increase its sales efforts. If our management is unable to manage growth
effectively, hire needed personnel, expand and adapt our computer infrastructure
or improve our operational, management, and financial systems and controls, our
business, operating results, and financial condition could be materially
adversely affected.
Product defects can adversely affect our business.
- --------------------------------------------------
The software products utilized by us could contain errors or "bugs" that could
adversely affect the performance of services or damage a user's data. In
addition, as we increase our share of the multisession, i.e., both audio and
video, CD market, software reliability and security demands will increase.
Attempts to limit our potential liability for warranty claims through
limitation-of-liability provisions in its customer agreements. There can be no
assurance that the measures taken by us will prove effective in limiting our
exposure to warranty claims. Despite the existence of various security
precautions, our computer infrastructure may be also vulnerable to viruses or
similar disruptive problems caused by our customers or third parties gaining
access to our processing system.
We have limited protection of proprietary technology and there is a risk of
- ---------------------------------------------------------------------------
third party claims.
- -------------------
We regard some of our services as proprietary and rely primarily on a
combination of patent, copyright, trademark and trade secret laws, employee and
third party non-disclosure agreements, and other intellectual property
protection methods to protect our services. Existing intellectual property laws
afford only limited protection, and it may be possible for unauthorized third
parties to copy our services and related products or to reverse engineer or
obtain and use information that we regard as proprietary. There can be no
assurance that our competitors will not independently develop services and
related products that are substantially equivalent or superior to ours.
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Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
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 herein 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 its 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.
1. General
We expect to continue to receive funds from the sale of our products and
services, including agreements, described below, including our agreement with
Asia Pioneer.
We have also funded our operations through equity financing and convertible debt
financing and have had no lines of credit or other similar credit facility
available to us. Our recent efforts to raise capital through equity financing
have been successful, providing near-term operating capital.
We intend to reduce operating expenses through: (1) reallocating resources to
the continued development of our V-Flash product, described below, (2) our
continued policy of outsourcing of production, (3) reducing marketing costs, and
(4) reducing payroll.
Additionally, we have successfully accomplished the initial stages of our fiscal
2000 operating plan with: (1) the hiring of Tom Ross to head our Entertainment
Group in Los Angeles, California, and (2) the recent completion of V-Flash, our
new software based communication module which we are distributing through our
subsidiary, ValueFlash.com, Inc. The V-Flash product was initially developed by
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<PAGE>
our subsidiary, CDKnet, LLC, which transferred the V-Flash related software to
our new subsidiary, ValueFlash.com, in January 2000 for further development and
production. V-Flash provides a real-time, direct communication vehicle for
marketers to reach their customers using a PC desktop application. ValueFlash's
strategy is the first to utilize retail music CD sales as a distribution
strategy for software that will serve as a key marketing tool. ValueFlash's
operations are funded through separate equity financings achieved through
private placements.
We also continue to rely on our ability to raise money through equity financing
to finance all of our business endeavors. To date, we have focused our funds on
the development of CDKTM products (including CDKTM 1.0, CDKTM 2.0, and
Gameplayer 2.0 and our new E-commerce facility MixFactory.comTM), as well as
V-Flash, our new desktop direct marketing application.
Our current business development efforts include both full-time employees as
well as outside consultants. Consultants are compensated on a performance basis.
We have had success at recent financing efforts although we have had a history
of operating losses which raised doubt about our ability to continue operations.
For example, we have a licensing agreement with Asia Pioneer that provides us
with $150,000 infusion of capital each month for six months until May 2000 and,
therefore, serves as a liquidity and capital resource. The parties are currently
renegotiating this agreement to extend the payments until June 30, 2000.
Additionally, the parties have entered into a technology and license agreement
which gives us a 4.89% interest in Asia Pioneer at the completion of the
underlying services in exchange for a license to use certain CDKTM technology.
Our ownership interest in Asia Pioneer can be sold in the event we need a cash
infusion. We have also successfully raised $1,400,000 in private financings
through our subsidiary, ValueFlash.com, Inc. since December 31, 1999.
However, if we are unable to obtain significant additional financing or
otherwise obtain working capital to fund our operations, we may be obliged to
seek protection of the bankruptcy courts. Our 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.
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 V-Flash desktop, direct marketing application and
communications module.
Results of Operations - October 1, 1999 to December 31, 1999
- ------------------------------------------------------------
During the quarter ending December 31, 1999, we incurred a net loss of
$1,627,689 on revenues of $16,491 compared to a net loss of $943,894 on revenues
of $ 183,660 in the prior period ended December 31, 1998. Revenues declined
$167,169 in the current period because our focus shifted to the enhancement of
our core technologies, such as the perfection of our MixFactoryTM technology and
CDKTM version 2.0 and Macintosh compatible CDKTM version 1.5, as well as the
penetration of core markets. From September 30, 1999 to December 31, 1999, we
have expended approximately $119,251 on research and development.
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Results of Operations - Three month period ended December 31, 1999 compared to
- ------------------------------------------------------------------------------
three month period ended December 31, 1998
- ------------------------------------------
During the quarter ending December 31, 1999, we incurred a net loss of
$1,627,689 on revenues of $16,491 compared to a net loss of $943,894 on revenues
of $ 183,660 in the prior period ended December 31, 1998. Revenues declined
$167,169 in the current period because our focus shifted to the enhancement of
our core technologies, such as the perfection of our MixFactoryTM technology and
CDKTM version 2.0 and Macintosh compatible CDKTM version 1.5, as well as the
penetration of core markets. From September 30, 1999 to December 31, 1999, we
have expended approximately $119,251 on research and development.
Results of Operations - Six month period ended December 31, 1999 compared to six
- --------------------------------------------------------------------------------
month period ended December 31, 1998
- ------------------------------------
During the period ended December 31, 1999, we incurred a net loss of $2,816,568
on revenues of $40,154 compared to a net loss of $2,298,082 on revenues of
$342,053 in the prior period ending December 31, 1998. Revenues declined in the
current period because our focus shifted to the enhancement of our core
technologies, such as the perfection of our MixFactoryTM technology, our
V-FlashTM technology, CDKTM version 2.0 and Macintosh compatible CDKTM version
1.5 as well as the penetration of core markets. From July 1, 1999 to December
31, 1999, we have expended approximately $227,251 on research and development.
Research and development expenses incurred during the period ended December 31,
1999 related to the continued new development and enhancement of the CDKnet
product line, the creation of the V-FlashTM technology, and making the
E-commerce veneue operate. Selling, general and administrative expenses
increased from $1,423,019 in the prior period to $1,815,081 principally because
the prior period was only nine months and because of an increase in payroll,
consulting and professional fees related to expansion of our business, research
and development activities and operating as a public company.
Depreciation and amortization expenses decreased from 1,101,167 in the prior
period to $970,755.
Other significant expenses incurred during this period arose in the form of the
fair value charges for stock options and warrants granted principally for
consulting and legal services of $401,875 include in selling, general and
administrative expenses.
Liquidity and Capital Resources
- -------------------------------
At period ending December 31, 1999 cash amounted to $147,349 and current
liabilities were $971,732 compared to cash of $231,347 and current liabilites of
$829.051 as of June 30, 1999. We do not have sufficient funds to finance
operations for the next year. We expect to finance our operaitons through
revenues from sales of our products and services and through private placements
of equity and debt securities. If we are unable to raise additional financing,
we may be unable to continue operations.
Significant events, discussed in greater detail elsewhere in this filing, which
occurred during the period from July 1, 1999 to December 31, 1999 include the
following:
o We entered into agreements with CollegeMusic, LLC, Megaforce
Records, DreamWorks Records Corporation, Atomic Pop LLC and
Asia Pioneer Limited, which we hope will prove profitable.
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During the period July 1, 1999 to December 31, 1999, we raised a total of
$1,302,000 from the following private placements of equity:
o On August 9, 1999, we raised $155,000 from Y2G.com, Inc. On
September 8, 1999, we sold Y2G an additional 116,000 shares of
common stock for $155,000.
o On November 1, 1999, we raised $500,000 from Erno and Rachel
Bodek through the issuance of 1,000,000 shares of common
stock, along with 30-month Warrants to purchase an additional
200,000 shares of common stock at $1.25 per share, and an
option to purchase another 2,000,000 shares of common stock at
$.50 per share which shall expire on December 31, 1999.
o On November 2, 1999, we raised $437,500 through the issuance
of 1,250,000 shares of common stock to four investors (The
Gross Foundation, Inc., Fox Distribution, Inc., Steven A.
Horowitz, and Michael Sonnenberg) along with two-year warrants
to these investors to purchase an additional 125,056 shares of
common stock.
o On November 16, 1999, we entered into a Subscription Agreement
with Asia Pioneer where we raised $100,000 from Asia Pioneer
through the issuance of 200,000 shares of common stock, along
with six allotments to purchase an additional 300,000 shares
of common stock per month at $150,000 per allotment. The
allotments will be fulfilled in May 2000. The parties also
entered into a Technology and License Agreement on the same
day.
The proceeds from these issues have and will be used to (i) continue our ongoing
operations, (ii) development of CDKTM, V-Flash, Gameplayer, and MixFactory.comTM
product lines and (iii) to repay our debt.
o On October 7, 1999, our common stock was deleted from the
Over-the-Counter Bulletin Board. Our common stock now trades
on the so called "Pink Sheets" under the symbol "CDKX", until
the Commission completes the review process regarding our
registration statement.
Significant events, discussed in greater detail elsewhere in this filing, which
occurred during the period from July 1, 1998 to December 31, 1998 include the
following:
o On July 8, 1998, we purchased Kelly Music's then remaining
26.15% ownership interest in CDKnet, LLC for $5,171,122,
payable in a combination of 1,883,635 common shares of our
stock and debt retirement of $600,000 in notes, as well as a
cash payment of $65,000 raising our direct interest in CDKnet,
LLC to its present level of 48.5%. Creative Technology, LLC,
our wholly owned subsidiary owns the the remaining 51.5%.
o On December 16, 1998, we changed our name from Technology
Horizons Corp. to CDKNET.COM, INC.
o On December 18, 1998, we began trading on the Over-the-Counter
Bulletin Board under the symbol of "CDKX".
o During the period September 4, 1998 through January 21, 1999,
we 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.
20
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Results of Operations - 1999 Compared to the Period Ended June 30, 1998.
- ------------------------------------------------------------------------
During the fiscal year ending June 30, 1999, we incurred a net loss of
$6,194,600 on revenues of $474,344 compared to a net loss of $1,184,475 on
revenues of $616,137 in the prior period ended June 30, 1998. Revenues resulted
from sales of products from our CDKnet product line. Revenues declined from
$616,137 in the prior period because our financial condition restricted its
ability to promote its products. Cost of revenues in fiscal 1999 were
approximately $288,762 or 61% compared to $415,769 or 67% in the prior period.
We believe this minor improvement is within normal variances and is not
material.
Research and development expenses incurred during the year ended June 30, 1999
related to the continued new development and enhancement of the CDKnet product
line, the creation of MixFactory.comTM, and making the E-commerce venue operate.
Selling, general and administrative expenses increased from $1,580,478 in the
prior period to $3,304,551 principally because the prior period was only nine
months and because of material increases in payroll, consulting and professional
fees related to expansion of our business, research and development activities
and operating as a public company.
Depreciation and amortization expenses increased from $133,776 in the prior
period to $1,981,130 principally because of amortization of goodwill related to
the purchase of minority interests of Kelly Music and Entertainment Corp. and
various shareholders of Kelly Music as well as increases due to increases in
fixed assets. Other significant expenses incurred during this period arose in
the form of the fair value charges for stock options and warrants granted
principally for consulting and legal services of $450,870, include in selling,
general and administrative expenses, and the discount on convertible debentures
and other loans of $1,038,008.
At year end June 30, 1999, cash amounted to $231,347 and current liabilities
were $829,051. We do not have sufficient funds to finance operations for the
next year. We expect to finance our operations through revenues from sales of
our products and services and through private placements of equity and debt
securities. If we are unable to raise additional financing, we may be unable to
continue operations.
In March 1999, we received approval by the United States Patent Office for
certain claims made in our patent application for CDKTM technology. Subsequent
to year ended June 30, 1999, a submission has been made to the United States
Patent Office for reconsideration of the unapproved claims and filing
publication and perfection of our claims.
We are now actively marketing and beginning to sell CDKnet products and have
launched the first of several MixFactoryTM sites.
Liquidity and Capital Resources
- -------------------------------
During fiscal 1999, we raised a total of $2.1 million from the following private
placements of debt and equity:
o Between September 4, 1998 and January 21, 1999, we raised
$600,000 through the issuance of $600,000 in 6% Subordinated
Convertible Debentures and five- year warrants to purchase
60,000 shares of common stock at $3.00 per share.
o On February 2, 1999, we raised $1,500,000 through the issuance
of $1,500,000 in 5.75% Subordinated Convertible Debentures and
four-year warrants to purchase 100,000 shares of common stock
at $1.75 per share. During fiscal 1998, we raised a total of
21
<PAGE>
$224,986 from the following private placements of debt and
equity:
o On May 21, 1998, our predecessor, International Pizza Group,
issued 2,999,985 common shares as consideration for $224,986
as part of a private placement. We issued 7,300,363 common
shares in connection with the acquisition of a combined 73.85%
of the equity interests in CDKnet, LLC.
The proceeds from these issues have and will be used to (i) continue our ongoing
operation, (ii) development of CDKTM, Gameplayer, and MixFactory.comTM 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 registration statement that are not historically containing
predictions and are made under the Safe Harbor Corporate Private Sector
Litigation Reform Act of 1995. Our actual result of operations and financial
condition have varied and may in the future vary significantly from those stated
in any predictions. Factors that may cause these differences include without
limitation the risk, uncertainties and other information discussed within this
registration statement, as well as the accuracy of our internal estimate of
revenue and operating expense levels. We face a number of risk factors which may
create circumstances beyond the control of management and adversely impact the
ability to achieve our business plan.
Year 2000 Compliance
- --------------------
We did not experience any major "Year 2000" or "Y2K" problems January 1, 2000.
Nor did we experience disruptions due to the inability of our systems to
recognize February 29, 2000. In 1999, we completed our testing and preparation
for any potential Y2K problems with our internal systems, computers and
software, and the products and systems of our critical vendors and suppliers.
The costs associated with our review was minimal, primarily because we utilized
internal personnel to complete the review, and because our systems are
relatively new.
Despite the lack of disruptions in our peripheral operating systems or with
certain non-critical vendors, it is possible that our vendors may have Y2K
problems that will not be known until one full cycle of vendor orders has been
completed.
DESCRIPTION OF PROPERTY
-----------------------
Our executive office is located at 595 Stewart Avenue, Suite 710, Garden City,
New York 11530. The office space is donated to us by the law firm of Horowitz,
Mencher, Klosowski & Nestler, P.C., of which Steven Horowitz (our Chairman,
Chief Executive Officer, Chief Financial Officer and Secretary) is managing
partner. Our executive offices may be reached at (516) 222-8800.
Our manufacturing, research and development is conducted out of CDKnet, LLC's
office located at 250 West 57th Street, New York, New York 10019. ValueFlash.com
shares office space with CDKnet, LLC. The New York City office consists of
approximately 4,825 square feet, which is subleased from Kelly Music pursuant to
a month-to-month arrangement that will expire on April 30, 2000. The annual
lease rate is approximately $135,600. This office may be contacted by telephone
at 212-547-6050. All property is insured to industry standards.
22
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN NON-MANAGEMENT BENEFICIAL OWNERS
The following are the Company's non-management, beneficial owners of more than 5
percent of the outstanding shares amount of its common stock as of March 3,
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 6.91%
595 Stewart Avenue
Garden City, New York 11530
Gary Segal 913,251 4.67%
6007 Ft. Hamilton Parkway
Brooklyn, New York 11219
Dan Roc Limited Partnership 1,047,735 5.35%
595 Stewart Avenue
Garden City, New York 11530
The Target Group Fund Ltd. (4) 3,000,000 15.32%
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
Beneficial Owners as a group (3) 9,313,532 47.58%
- ------------------------------------------
Notes to table of non-management beneficial shareholders
(1) There were 19,576,157 shares of common stock outstanding as of
March 3, 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) As set forth in this table, there are 6 individuals or entities who are
not members of our management each of whom individually owns 5% or more
of our common stock. In addition to these individuals, there is a large
group of individuals who constitute beneficial owners of our common
stock pursuant to the terms of a Stockholders Agreement dated May 7,
1998. Under the Stockholder's Agreement, its 35 signatories are
required to vote their respective shares of stock identified in the
Agreement as a class under certain circumstances. The names of the 35
signatories and their respective ownership interests are set forth in
23
<PAGE>
Exhibit 99.1 of this document. As a result, the signatories as a group
may constitute beneficial owners of our common stock although only a
few individually own more than 5% of our common stock. The voting and
certain other provisions of the Shareholders Agreement have been
rescinded by 16 of the signatories to the Shareholders Agreement. We
believe it is the position of the signatories to the Shareholders
Agreement that they do not constitute a "group" as such term is defined
under Rule 13(d)(3) promulgated under the Securities Exchange Act of
1934, as amended. The rescindment will not become effective until all
35 shareholders execute the Stockholders' Agreement.
(4) Represents shares issuable upon the conversion of preferred stock to
common stock at $.50 per share. See Note 6 of the attached June 30,
1999 Financial Statements.
B. ValueFlash.com Incorporated
- ------------------------------
Name and Address of Amount and Nature Percent of
Beneficial Stockholder of Beneficial Ownership Class (1)(2)
- ---------------------- ----------------------- ------------
AMRO 750,000(3) 12.61%
c/o CDKENT.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Alvin Pock 150,000(4) 2.6%
Beneficial Owners as a Group 900,000 14.94%
- ------------------------------------------
Notes to table of non-management beneficial shareholders
(1) There were 5,700,000 shares of ValueFlash.com common stock outstanding
as of March 3, 2000. CDKNET.com, Inc. owns 5,000,000 (87.72%) 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 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) Includes 250,000 options to purchase ValueFlash common stock at $1.50,
expiring January 28, 2005.
(4) Includes 75,000 options to purchase ValueFlash common stock at $1.50,
expiring January 28, 2005.
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 March 3, 2000:
SHARES OF COMMON STOCK OWNED BENEFICIALLY AND OF
RECORD BY MANAGEMENT
A. CDKnet.com, Inc.
- -------------------
Title of
Class of
Stock Name and Address Amount and Nature Percent of
Owned(1)(2) of Beneficial Owner of Beneficial Ownership Class
- ----------- ------------------- ----------------------- -----
Common Steven A. Horowitz 3,606,792(3) 17.09%
c/o CDKNET.COM, INC.
24
<PAGE>
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Andrew J. Schenker 73,367(4) *
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Anthony J. Bonomo 50,000(5) *
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Shai Bar-Lavi 1,250,000(6) 6%
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Shlomo Shur 500,000(11) 2.49%
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Israel Hersh 100,000(7) *
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Michael W. Jolly 143,333(8) *
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Russell A. Kern 143,333(8) *
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Tom Ross 300,000(9) 1.51%
1480 San Reno Drive
Pacific Palisades, CA 90272
All officers and directors 6,166,125(10) 26.08%
as a group (8 persons)
- ---------------------------------------
Notes to table of beneficial shareholders
*Denotes less than 1%
(1) There were 19,576,157 shares of common stock outstanding as of March 3,
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 Shareholders Agreement
dated May 7, 1998, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to the information contained in
this table and these notes. See Exhibit 4.3.
(3) This table includes options to purchase 750,000 shares of our common
stock under the Plan, and 28,571 two-year Warrants to purchase common
stock. Mr. Horowitz is our Chairman of the Board of Directors, Chief
Executive Officer, Chief Financial Officer and Secretary. This figure
does not include 150,000 warrants issued to Horowitz, Mencher,
25
<PAGE>
Klosowski & Nestler P.C., a law firm 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 our
President.
(7) This table includes options to purchase 100,000 shares of our common
stock under the Plan.
(8) This table includes options to purchase 143,333 shares of our common
stock under the Plan. Mr. Kern is our Executive Vice President and
General Manager. Mr. Jolly is our Executive Vice President,
Entertainment Group.
(9) This table includes options to purchase 300,000 shares of our common
stock pursuant to his employment agreement. Mr. Ross is President of
the Entertainment Group.
(10) Includes all stock options (3,286,666 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.
B. ValueFlash.com Incorporated
- ------------------------------
Title of 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) 11.63%
c/o CDKNET.COM, INC.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Shai Bar-Lavi 1,250,000(4) 17.99%
c/o CDKNET.com, Inc.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Shlomo Shur 750,000(5) 11.63%
c/o CDKNET.com, Inc.
595 Stewart Avenue, Suite 710
Garden City, NY 11530
Common Michael Vasinkevich 1,437,500(6) 20.49%
525 Northern Blvd.
Suite 308
Great Neck, N.Y. 11021
Common CDKNET.com, Inc. 8,500,000(7) 92.39%
595 Stewart Avenue
26
<PAGE>
Suite 710
Garden City, NY 11530
All Officers and Directors
as a group (5 persons) 12,687,500 95.66%
- -----------------------------
Notes to table of beneficial shareholders
(1) There were 5,700,000 shares of ValueFlash.com common stock outstanding
as of March 3, 2000.
(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 13, 2005.
(4) Includes 1,250,000 options to purchase ValueFlash common stock at $1.50
per share expiring on January 13, 2005.
(5) Includes 750,000 options to purchase ValueFlash common stock at $1.50
per share expiring on January 13, 2005.
(6) Includes 62,500 options to purchase ValueFlash common stock at $2.00
per share expiring on August 13, 2000 as well as 1,250,000 options to
purchase stock at $1.50 per share expiring on January 13, 2005.
(7) Includes 3,500,000 options to purchase common stock at $1.50 per share
expiring on January 13, 20005.
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
The following sets forth our directors and executive officers and key employees
as of March 3, 2000, their respective ages, the year in which each was first
elected or appointed a director, and any other office in the Company held by
each director.
A. CDKnet, LLC
- --------------
NAME OF DIRECTOR/ AGE POSITION HELD DATE ELECTED
POSITION HELD OR APPOINTED
- --------------------------------------------------------------------------------
Steven Horowitz 40 Director, Chairman, May 1998
CFO and Secretary
Shai Bar-Lavi 40 CEO August 1999
Israel Hersh 46 President February 2000
Shlomo Shur 50 COO March 2000
Michael W. Jolly 31 Consultant for October 1997
Business Development
Russell A. Kern 33 Consultant for April 1998
Marketing
27
<PAGE>
Tom Ross 51 Consultant for August 1999
Entertainment
Andrew J. Schenker 39 Director May 1998
Anthony J. Bonomo 40 Director May 1998
B. ValueFlash.com Incorporated
- ------------------------------
NAME OF DIRECTOR/ AGE POSITION HELD DATE ELECTED
POSITION HELD OR APPOINTED
- --------------------------------------------------------------------------------
Shai Bar-Lavi 40 CEO, Director February 2000
Shlomo Shur 50 President, Director February 2000
Michael W. Jolly 31 EVP, Entertainment Group February 2000
Tom Ross 51 President, Media Group February 2000
Russell A. Kern 33 EVP, Director Marketing February 2000
Marcia Irwin 49 SVP, Creative Director February 2000
Steven Horowitz 40 Director February 2000
Michael Vasinkevich 33 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, ESQ. - Chairman, Chief Financial Officer and Secretary,
CDKnet.com, Inc., and Director, ValueFlash.com Inc.
Mr. Horowitz has served as Chairman of the Board of Directors and Secretary of
the Company since May 1998, has served as Chief Financial Officer since October
1999, and has served as the managing member of Creative Technology and CDKnet,
LLC since October, 1998 and November, 1998, respectively. He is the founding
shareholder of Horowitz, Mencher, Klosowski, & Nestler, P.C., a Garden City, New
York-based law firm with offices in Huntington, New York and New York City. Mr.
Horowitz holds a degree from Hofstra University School of Law and a Master of
Business Administration degree in Accounting from Hofstra University School of
Business. Mr. Horowitz is an Adjunct Professor of Law at Hofstra University
School of Law. In 1986 and 1987, Mr. Horowitz was Director of Taxes for Symbol
Technologies, Inc., a New York Stock Exchange corporation. Mr. Horowitz is a
member of the American Bar Association and the New York State Bar Association.
ANTHONY J. BONOMO - Director, CDKnet.com, Inc.
Mr. Bonomo has served as a director of the Company since June, 1998. He has,
since 1986, served in various executive capacities at Administrators for the
Professions, Inc., the Physicians' Reciprocal Insurers, one of the largest
28
<PAGE>
medical malpractice carriers in New York States, including Executive Vice
President and Chief Operating Officer from 1993 to 1995 and President from 1995
to the present. Mr. Bonomo is a member of the Bar of the State of New York and
serves as a board member of several charitable associations and foundations.
ANDREW J. SCHENKER - Director, CDKnet.com, Inc.
Mr. Schenker became a director of the Company in May, 1998. He is the Director
of Finance for North America Sales and Services Division at Symbol Technologies,
Inc. a manufacturer and world leader in bar-code based data transaction systems
based in Holbrook, New York. Since November 1986, he has held several financial
management positions at Symbol Technologies, Inc., most recently at the position
described above. He is also the trustee for several trusts and a public
foundation, as well as an Executive Committee member of the Smithtown School
District Industry Advisory Board.
SHAI BAR-LAVI - Chief Executive Officer of CDKnet, LLC, Chief Executive Officer
and Director of ValueFlash.com Inc.
Mr. Bar Lavi joined CDKnet 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 Inc. Mr. Bar-Lavi is directing the CDKnet's
business operations and development plans. From April 1999 to July 1999, Mr.
Bar-Lavi served as a consultant to the Company. Prior to joining CDKnet, Mr.
Bar-Lavi served as Chief Operating Officer of the Hungarian Broadcasting
Corporation, a publicly traded company, from January 1998 to December 1998. From
July 1990 to December 1997, he served as President of Topline Communications.
Mr. Bar-Lavi's experience with computers goes back to the early '80s where he
ran Sagy Computer Services, a mainframe-based company providing payroll and
accounting services.
SHLOMO SHUR - President and Director, ValueFlash.com Inc. and Chief Operating
Officer, CDKnet, LLC.
Shlomo has over 20 years of software development and technology consulting
experience. He joined the Company in late 1999 as Chief Operating Officer and
has also assumed the position of President of ValueFlash.com Inc. Prior to
joining CDKnet, Shlomo was a co-founder of Executone Information Systems where
he spent 15 years as a senior technology officer. Shlomo also spent two years as
an independent technology consultant. Shlomo has a BS in Electrical Engineering
from City College, New York.
MICHAEL W. JOLLY - Executive Vice President, Sales Director, ValueFlash.com Inc.
Mr. Jolly is responsible for identifying and developing business opportunities
and strategic partnering opportunities within the entertainment industry. Mr.
Jolly joined the Company in November 1997. 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
Inc.
Mr. Kern joined CDKnet in April 1998 and is responsible for overseeing the
CDKnet's daily operations and identifying strategic alliance/business building
29
<PAGE>
opportunities. Further, Mr. Kern works with the Business Development team and
the Technical team to ensure consistent branding is maintained through all
communications and product offerings. Prior to joining CDKnet, Mr. Kern served
from November 1995 to April 1998 as Director of Strategic Planning at Poppe
Tyson (now ModemMedia.PoppeTyson), developing successful Web initiatives for a
range of clients including IBM and Minolta. From January 1994 to November 1995,
he was Marketing Director at Marketing Resources of America. He also served five
years with BBDO Advertising planning for clients such as Visa USA, Pepsi-Cola
and Campbell's. In addition, he has several years experience in direct-response
marketing, developing DRTV, print and direct-mail programs. Mr. Kern has a B.S.
in Marketing from the Wharton School at the University of Pennsylvania.
TOM ROSS - President, Entertainment Group of ValueFlash.com Inc.
Mr. Ross, joined CDKnet in August 1999 and is responsible for identifying
business opportunities within the entertainment, music and film industries and
securing partnership agreements. From December 1998 to July 1999, Mr. Ross
served as a consultant. Prior to that, Mr. Ross was a partner of Creative
Artists Agency ("CAA") from January 1984 to November 1998. As a founder,
architect and chief of the music department at CAA, Mr. Ross worked with some of
the most celebrated artists in music: Jefferson Airplane, Crosby, Stills & Nash,
Tim McGraw, Eric Clapton, Bob Dylan, Madonna, Janet Jackson, Reba McEntire,
Bette Midler and Fleetwood Mac, to name a few. Before he left CAA late last
year, many considered him the top agent in the music business. In his 30-year
career, he had the reputation of fighting on behalf of his clients' financial
interests while enabling them to present their art without compromise.
ISRAEL HERSH - President, CDKnet, LLC.
Israel Hersh has been VP, 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.
MARCIA IRWIN - Senior Vice president Creative Director, ValueFlash.com Inc.
Marsha joins ValueFlash form HGTV where she served as New Media Creative
Director. She was responsible for the design, development and maintenance of the
HGTV Web site as well as overseeing a staff of designers, writers, and producers
in three cities. Marcia was also responsible for all of HGTV's intreactive
television initiatives. Prior to joining HGTV, Marcia served four years as
Director of Broadcast Production/Associate Creative Director at Davis Newman
Payne Advertising in Knoxville, TN, working on accounts including Sea Ray Boats,
Rubbermaid Office Products, Home Federal Bank and Food City. In total, Marcia
has over 20 years of creative advertising experience and is well versed in new
media marketing. Marcia has a BA in English Literature and an MA in Mediaeval
Literature both from SUNY Buffalo. Marcia is also a member of the Women in Cable
& Telecommunications Association.
30
<PAGE>
EXECUTIVE COMPENSATION
----------------------
1. EXECUTIVE OFFICER COMPENSATION
The following table sets forth all compensation paid by us as of fiscal year
ended June 30, 1999, to all of our executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------- --------- ----------------------------------- ------------------------------------------------
Annual Compensation9 Long-Term Compensation
----------------------------------- ------------------------------------------------
Awards Payouts
------------------------- ----------------------
Securities
Other Under- All Other
Annual Restricted lying Compen-
Name And Compen- Stock Options/ LTIP sation
Principal Position Year Salary Bonus sation Award(s) SARs Payouts ($)
($) ($) ($) ($) (#) ($) (i)
(a) (b) (c) (d) (e) (f) (g) (h)
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven A. Horowitz1 FY99 7,500 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 7,500 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Robert Kelly2 FY99 95,192.38 -- 39,600(7)
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 80,769.30 -- 39,600(7)
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Ronald Leong3 FY99 147,534.98 -- 8,400(8)
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 75,000.00 -- 8,400(8)
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Michael W. Jolly4 FY99 69,615.38 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 54,250.00 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Keith A. Fredericks5 FY99 57,499.91 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 27,885.00 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
Russell A. Kern6 FY99 79,999.92 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
FY98 12,923.06 --
- --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
</TABLE>
1 Mr. Horowitz is our Chairman, Chief Executive Officer, Chief Financial
Officer, and Secretary. Mr. Horowitz is paid as one of our consultants
because he does not keep regular hours, decides his own schedule and
otherwise fits the characteristics of a consultant as promulgated under the
relevant sections of the Internal Revenue Code and Regulations and case law.
2 Mr. Kelly was formerly President of CDKnet, LLC. His tenure ended on
March 1999.
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.
31
<PAGE>
6 Mr. Kern is our Executive Vice President, General Manager.
7 This figure represents compensation for an apartment for Mr. Kelly.
8 This figure represents compensation for an automobile allowance for Mr.
Leong. Mr. Leong left the Company in March 1999.
9 In fiscal 2000, each of the named officers are to receive salary compensation
as follows:
Steven A. Horowitz $1,500 per week
Shai Bar-Lavi $6,250 bi-monthly
Michael W. Jolly $3,541.67 bi-monthly
Russell A. Kern $3,333.33 bi-monthly
Tom Ross $150,000 annually
Shlomo Shur $120,000 annually
Israel Hersh $120, 000 anually
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
- -------------------------- ------------------ --------------------- -------------------- -------------------
Percent Of
Number Of Total Options/
Securities SARs Granted
Underlying To Employees Exercise Or
Options/SARs In Fiscal Base Price
Name Granted (#) Year ($/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 $1.00 12/1/03
- -------------------------- ------------------ --------------------- -------------------- -------------------
</TABLE>
- -------------------
(1) Mr. Fredericks resigned as our Senior Vice President and Chief Technical
Officer effective December 17, 1999.
32
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
- -------------------------- -------------- -------------- ------------------- -------------------
Number Of
Securities Value Of
Underlying Unexercised
Shares Unexercised In-The-Money
Acquired Options/SARs Options/SARs
On Value At FY-End (#) At FY-End ($)
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.
(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.
33
<PAGE>
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 125,000 shares of common stock of our subsidiary, ValueFlash.com
Incorporated, to Michael Vasinkevich for $250,000 on February 7, 2000,
together with 62,500 8 month options to purchase common stock of
ValueFlash.com Incorporated, at an exercise price of $2.00 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 1,250,000 5 year options to purchase common stock of ValueFlash.com
Incorporated, 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.com Incorporated and Michael Vasinkevich.
o 1,250,000 5 year options to purchase common stock of ValueFlash.com
Incorporated, 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.com Incorporated and Shai Bar Lavi.
o 750,000 5 year options to purchase common stock of ValueFlash.com
Incorporated, 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.com, Incorporated and Steven A. Horowitz.
o 750,000 5 year options to purchase common stock of ValueFlash.com
Incorporated, at an exercise price of $2.00 per share to Shlomo Shur on
January 28, 2000, in accordance of an Employment Agreement between
ValueFlash.com, Incorporated 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.
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.
34
<PAGE>
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 (attached hereto as
Exhibit 10.13) with our president, Shai Bar-Lavi, effective as of
August 1, 1999, and a third party whereby we issued 100,000 warrants at
an exercise price of $1.00 to the third party upon execution of the
agreement and future fees for identifying financing, purchase or
venture transactions, as defined. During the year ended June 30, 1999,
we recorded an expense of $100,000 representing the fair value of the
warrants issued.
0 During fiscal 1999, Steven A. Horowitz deposited the sum of $145,000
with Fleet Bank to collateralize a Fleet Bank loan to us. We used the
loan proceeds to finance the purchase of manufacturing equipment from
Bandai America Incorporated.
O In fiscal 1999, Steven A. Horowitz loaned us an aggregate of $121,018,
at no interest, all of which has been repaid.
O During the period from March 27, 1998 to March 5, 1999, the Firm
advanced various sums to us, at no interest, totaling an aggregate of
$227,000, all of which has been repaid.
O On May 15, 1998, we granted 150,000 stock options with an exercise
price of $.60 to Eric Mencher, a partner in the Firm, for legal
services rendered. The fair value of these services was $63,000.
O During 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 by any
financing received by us.
35
<PAGE>
DESCRIPTION OF SECURITIES
-------------------------
Common Stock
- ------------
We are authorized to issue 40,000,000 shares of common stock of $0.0001 par
value, per share and 5,000,000 authorized shares of preferred stock. The
authorization to issue preferred shares were made by a resolution of the Board
of Directors and were voted upon by the shareholders. Each share of our common
stock, when fully paid for, will be validly issued and outstanding, is entitled
to one vote on all matters to be voted on by shareholders, is entitled to equal
dividends when and as declared by the Board of Directors from funds legally
available therefore, and is entitled to a pro rata share of our net assets in
the event of dissolution, liquidation or winding up of the Company.
Preferred Stock
- ---------------
Our preferred stock may be issued from time to time, by resolution or
resolutions of the Board of Directors, in one or more series. While each series
of preferred stock may be assigned different rights, conversion rights,
redemption rights, liquidation rights, voting rights and rights regarding
sinking fund or redemption or purchase accounts, all of the shares of each
series shall be identical in all respects to the other shares of such series.
Series A Preferred Stock
- ------------------------
Our Series A Preferred Stock 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.
Stockholders' Agreement
- -----------------------
We entered into a Stockholders' Agreement with a group of shareholders on
May 7, 1998 which sets forth their agreement regarding the disposition of
specified shares of our common stock. The agreement provides for a right of
first refusal, initially to the non-selling shareholders and secondarily to us
on the same terms and conditions as any bona fide third party offer and also
requires a 100% disposition of the selling shareholder's interest. Excluded from
this provision are transfers to family members or trusts for the benefit of
family members or in the event of death. Furthermore, the shareholders agreed to
sell and/or transfer their stock pursuant to the terms of any bonafide third
party offer to acquire not less than a majority of our outstanding stock or to
merge with us. The restrictions terminate upon the closing of an initial public
offering of stock by us. The shareholders agreed to vote for Steven A. Horowitz
as a director until such time as he resigned from the position. However, 16 of
the 35 signatories to the agreement have signed an amendment to the agreement
rescinding the voting and certain other provisions of the agreement and we
anticipate obtaining the remaining signatures in the near term. The recindment
will not become effective until all 35 shareholders execute the Stockholders'
Agreement. See Exhibit 4.2.
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.
36
<PAGE>
TRANSFER AGENT
--------------
Our transfer agent is Interwest Transfer Company, 1981 East 4800 South, Suite
100, Salt Lake City, UT 84117, (801) 272-9294.
AVAILABLE INFORMATION
---------------------
We are subject to the reporting requirements of the Securities Exchange Act of
1934 by virtue of the fact that on October 7, 1999 we filed a Registration
Statement on Form 10-SB -- together with all amendments and exhibits -- with the
Commission. Our Form 10-SB became effective on December 7, 1999, however, the
Commission is still reviewing it.
A copy of our filings with the Commission may be inspected by anyone without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part of our filings may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and its public reference facilities in New
York, New York and Chicago, Illinois, upon the payment of the fees prescribed by
the Commission. Our filings are also available through the Commission's Web site
at the following address: http://www.sec.gov.
PART II
-------
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
1. MARKET INFORMATION
On October 7, 1999, our common stock was deleted from the Over-the-Counter
Bulletin Board and now trades on the so called "Pink Sheets" under the symbol
"CDKX" until our registration statement has completed the Commission's review
process. As of March 3, 2000, we had 19,576,157 shares of common stock
outstanding; of this amount, 3,435,013 of these shares are nonrestricted;
16,100,382 of these shares are restricted. As of March 3, 2000, the number of
holders of record of our common stock, $0.0001 par value, was 122.
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
- -------------------------------------------------------------------------------
December 31, 1999 .350 1.00
September 30, 1999 .968 1.843
June 30, 1999 .937 3.125
March 31, 1999 .906 2.625
37
<PAGE>
December 31, 1998 .500 1.843
September 30, 1998 .500 3.625
2. DIVIDEND POLICY
To date, we have not paid a dividend to our shareholders. We are also limited in
our ability to do so under the terms of our 6% Convertible Subordinated
Debenture due September 1, 2003.
LEGAL PROCEEDINGS
-----------------
There is no litigation currently pending against us and we are not aware of any
disputes that may lead to litigation. There is, however, a disputed invoice with
OMNET Technology Corp., a supplier of CDs, for the amount of $67,323.78. The
parties are currently reviewing the matter.
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.)
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.
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.
On February 10, 2000, we engaged Radin, Glass & Co., LLP to serve as our
independent certified public accountants.
38
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------
As of March 3, 2000, there are issued and outstanding 19,576,157 shares of
common stock which were issued or sold in reliance upon the exemptions from
registration provided by the Securities Act as follows:
o During the period July 1, 1999 to present, we issued 2,947,000 shares
of common stock for cash or services of $1,502,500, issued 317,073
common shares for exercise of stock options and issued 325,056 warrants
to purchase common stock in private placements, as follows:
o 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 On February 21, 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 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 and options valued at
$60,000 pursuant to the software Agreement between us and
Energenic, LLC. 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 125,000 shares of common stock of our subsidiary, ValueFlash.com
Incorporated, to Michael Vasinkevich for $250,000 on February 7,
2000, together with 62,500 8 month options to purchase common stock
of ValueFlash.com Incorporated, at an exercise price of $2.00 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 500,000 shares of common stock of our subsidiary, ValueFlash.com
Incorporated, to Amro International for $500,000 on February 2,
2000, together with 250,000 8 month options to purchase common
stock of ValueFlash.com Incorporated, at an exercise price of $2.00
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 75,000 shares of common stock of our subsidiary, ValueFlash.com
Incorporated to Alvin Pock for $150,000 on January 31, 2000,
together with 75,000 8 month options to purchase common stock of
ValueFlash.com Incorporated, at an exercise price of $2.00 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 1,250,000 5 year options to purchase common stock of ValueFlash.com
Incorporated, at an exercise price of $2.00 per share to Michael
Vasinkevich on January 28, 2000, in accordance of a Finder's
39
<PAGE>
Agreement between ValueFlash.com Incorporated and Michael
Vasinkevich.
o 1,250,000 5 year options to purchase common stock of ValueFlash.com
Incorporated, 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.com Incorporated and Shai Bar Lavi.
o 750,000 5 year options to purchase common stock of ValueFlash.com
Incorporated, 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.com, Incorporated and Steven A. Horowitz.
o 750,000 5 year options to purchase common stock of ValueFlash.com
Incorporated, at an exercise price of $2.00 per share to Shlomo
Shur on January 28, 2000, in accordance of an Employment Agreement
between ValueFlash.com, Incorporated and Shlomo Shur.
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 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 six
allotments to purchase an additional 300,000 shares of common stock
per month at $150,000 per allotment. The allotments will be
fulfilled in May 2000. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o 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 On November 16, 1999, we entered into a Subscription Agreement with
Asia Pioneer where we raised $100,000 from Asia Pioneer through the
issuance of 200,000 share of common stock, along with six
allotments to purchase an additional 300,000 shares of common stock
per month at $150,000 per allotment. The allotments will be
fulfilled in May 2000. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o 30,000 shares to Cabaret Software, Inc. on August 10, 1999, and
10,000 shares on September 18, 1999 for services valued at $30,000.
We issued stock to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because the purchaser
40
<PAGE>
is an accredited investor who purchased the stock for investment
purposes.
o 216,000 shares to Y2G.Com, Inc. for $155,000. On September 8, 1999,
the Company sold Y2G an additional 116,000 shares of common stock
for $155,000. We issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the stock for
investment purposes.
o 150,000 shares to Lawrence Adams Ltd. through the exercise of
cashless options on September 14, 1999. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation D
and/or Section 4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 40,000 shares to Michael Sonnenberg through the exercise of
cashless options on September 14, 1999. We issued stock to the
purchaser in reliance upon the exemption provided by Regulation D
and/or Section 4(2) because the purchaser is an accredited investor
who purchased the stock for investment purposes.
o 17,073 shares to Alexander Zemel through the exercise of stock
options. We issued stock to the purchaser in reliance upon the
exemption provided by Regulation D and/or Section 4(2) because the
purchaser is an accredited investor who purchased the stock for
investment purposes.
o 110,000 shares to Steven Wildstein through the exercise of cashless
options on September 14, 1999. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor who purchased
the stock for investment purposes.
o 75,000 shares to Lawrence Adams Ltd. for services valued at
$75,000 on September 14, 1999. We issued stock to the purchaser in
reliance upon the exemption provided by Regulation D and/or Section
4(2) because the purchaser is an accredited investor who purchased
the stock for investment purposes.
o 50,000 shares to Energenic, LLC for services valued at $50,000 on
October 29, 1999, in addition to an agreement to issue 50,000
shares of common stock to Energenic upon the completion of
milestones pursuant to the Software Agreement between us and
Energenic and the issuance of an additional 50,000 one-year options
exercisable at $1.00 per share for the purchase of shares of common
stock upon the completion of the project as set forth in the
Software Agreement. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o 1,000,000 shares to Erno and Rachel Bodek for $500,000 from Erno
and Rachel Bodek on November 1, 1999 through the issuance of
1,000,000 shares of common stock, along with 30-month Warrants to
purchase an additional 200,000 shares of common stock at $1.25 per
share, and an option to purchase another 2,000,000 shares of common
stock at $.50 per share which shall expire on December 31, 1999. We
issued stock to the purchaser in reliance upon the exemption
provided by Regulation D and/or Section 4(2) because the purchaser
is an accredited investor who purchased the stock for investment
purposes.
41
<PAGE>
o 285,714 shares to Steven A. Horowitz for $100,000 on November 2,
1999 along with 28,571 two-year warrants to purchase common stock
for $.75 per share. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o 107,143 shares Fox Distribution, Inc. for $37,500 on November 2,
1999 along with 10,714 two-year warrants to purchase common stock
for $.75 per share. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o 142,857 shares Michael Sonnenberg for $50,000 on November 2, 1999
along with 14,285 two-year warrants to purchase common stock for
$.75 per share. We issued stock to the purchaser in reliance upon
the exemption provided by Regulation D and/or Section 4(2) because
the purchaser is an accredited investor who purchased the stock for
investment purposes.
o 714,286 shares The Gross Foundation for $250,000 on November 2,
1999 along with 71,486 two-year warrants to purchase common stock
for $.75 per share. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D and/or Section 4(2)
because the purchaser is an accredited investor who purchased the
stock for investment purposes.
o During the period from July 1, 1998 to June 30, 1999, we issued
2,746,558 common shares, 600,000 Convertible Class A Debentures,
1,500,000 Convertible Class B Debentures for cash of $2,100,000, net of
issuance costs of $248,150. During the year ended June 30, 1999, we also
issued 1,328,498 Warrants to purchase common shares from the following
transactions: (1) 75,000 common shares and 100,000 Warrants were issued
to Bandai Holdings USA for the purchase of equipment used in our
MixFactory.com(TM) E-Commerce facility, and (2) 1,883,635 common shares
were issued to Kelly Music for the purchase of its 26.15% interest in
CDKnet, LLC which resulted in securing for us 100% of the equity
interests of CDKnet, LLC. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D because the purchaser is an
accredited investor who purchased the stock for investment purposes.
o During the period October 1, 1997 (date of inception) to June 30, 1998,
our predecessor, International Pizza Group, issued 2,999,985 common
shares $224,986 as part of a private placement. We issued 7,300,363
common shares in connection with the acquisition of 73.85% of the equity
interests in CDKnet, LLC. We issued stock to the purchaser in reliance
upon the exemption provided by Regulation D because the purchaser is an
accredited investor who purchased the stock for investment purposes.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
Delaware law sets forth our powers to indemnify officers, directors, employees
and agents. Our Articles of Incorporation provide as follows:
"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the Delaware General corporation law, or (iv) for
42
<PAGE>
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.
43
<PAGE>
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 December 31, 1999
(unaudited) and June 30, 1999 F-26
Consolidated Statements of Operations for the three months
ended December 31, 1999 and 1998, six months ended
December 31, 1999 and 1998 (unaudited) F-27
Consolidated Statement of Stockholders' Equity for the
period July 1, 1999 to December 31, 1999 (unaudited) F-28
Consolidated Statements of Cash Flows for the six months
ended December 31, 1999 and 1998 (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>
December 31, June 30,
ASSETS 1999 1999
------------ ------------
(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 147,349 $ 231,347
Accounts receivable 27,754 19,000
Due from officer -- 11,600
Prepaid expenses and other current assets 1,594 9,907
------------ ------------
Total current assets 176,697 271,854
FURNITURE AND EQUIPMENT - at cost,
less accumulated depreciation and amortization of $217,982 and
$152,286 at December 31, 1999 and June 30, 1999, respectively 487,159 489,053
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED,
less accumulated amortization of $ 2,186,879 and $1,472,753
at December 31, 1999 and June 30, 1999, respectively 4,954,378 5,668,504
INTANGIBLE ASSETS, less accumulated amortization of $ 589,687 and
$452,467 at December 31, 1999 and June 30, 1999, respectively 782,516 919,736
OTHER ASSETS
Deferred financing costs, less accumulated amortization of $52,511
and $37,400 at December 31, 1999 and June 30, 1999, respectively 29,389 210,750
------------ ------------
$ 6,430,139 $ 7,559,897
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 67,000 $ 220,778
Accrued expenses and other current liabilities 739,376 415,334
Due to related party 102,519 125,000
Current portion of long-term debt and capitalized lease obligations 62,837 67,939
------------ ------------
Total current liabilities 971,732 829,051
LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS,
net of current portion 178,221 205,416
SUBORDINATED CONVERTIBLE DEBENTURES 275,000 1,671,000
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock - par value $.0001 per share; authorized
5,000,000 shares; (redemption value $1,500,000) 1,251,680 --
Common stock - par value $.0001, per share; authorized
40,000,000 shares; 17,360,979 and 14,046,906 shares issued and
outstanding at December 31, 1999 and June 30, 1999 1,736 1,405
Additional paid-in capital 13,947,412 12,232,100
Accumulated deficit (10,195,642) (7,379,075)
------------ ------------
5,005,186 4,854,430
------------ ------------
$ 6,430,139 $ 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 December 31, Six month ended December 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
----------(unaudited)----------
<S> <C> <C> <C> <C>
Net revenues $ 16,491 $ 183,660 $ 40,154 $ 342,053
Cost of revenues 22,647 13,127 37,605 108,943
------------ ------------ ------------ ------------
Gross profit (6,156) 170,533 2,549 233,110
Selling, general and administrative expenses 1,128,048 638,288 1,815,081 1,423,019
Depreciation and amortization 459,106 468,953 942,403 998,538
------------ ------------ ------------ ------------
Loss from operations (1,593,310) (936,708) (2,754,935) (2,188,447)
Other expense
Interest expense, including interest relating to
beneficial conversion and debt discount 34,379 7,186 61,633 109,632
NET LOSS $ (1,627,689) $ (943,894) $ (2,816,568) $ (2,298,079)
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ (.10) $ (.08) $(.19 ) $(.19 )
============ ============ ============ ============
Weighted-average shares outstanding -
basic and diluted 16,085,979 11,945,424 15,216,376 11,912,924
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-27
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended December 31, 1999
<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 -- -- 2,782,000 278
Exercise of stock options -- -- 317,073 31
Compensation related to stock option
plan and donated services -- -- -- --
Common stock and stock warrants
issued for services -- -- 215,000 22
Conversion of 5.75% debentures to
5.75% preferred stock 1,500,000 1,251,680 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1999 (unaudited) 1,500,000 $ 1,251,680 17,360,979 $ 1,736
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
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 1,301,722 -- 1,302,000
Exercise of stock options 11,737 -- 11,768
Compensation related to stock option
plan and donated services 123,875 -- 123,875
Common stock and stock warrants
issued for services 277,978 -- 278,000
Conversion of 5.75% debentures to
5.75% preferred stock -- -- 1,251,680
Net loss -- (2,816,567) (2,816,567)
------------ ------------ ------------
Balance, December 31, 1999 (unaudited) $ 13,947,412 $(10,195,642) $ 5,005,186
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-28
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>
Six months December 31,
1999 1998
-----------(unaudited)-----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,816,568) $(2,298,079)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 970,755 1,101,167
Compensation related to stock option plan and
donated services 123,875 --
Common stock and stock warrants issued for services 278,000 117,150
Changes in assets and liabilities
(Increase) decrease in accounts receivable (8,754) 30,897
Decrease (increase) in due from officer 11,600 (9,229)
(Increase) decrease in prepaid expenses and other
current assets (8,313) 20,727
Decrease in accounts payable (153,778) (128,148)
Increase (decrease) in accrued expenses and other
current liabilities 301,561 (13,246)
----------- -----------
1,514,946 1,119,318
----------- -----------
Net cash used in operating activities (1,301,622) (1,178,761)
----------- -----------
Cash flows from investing activities
Purchase of furniture and equipment (63,802) (8,068)
----------- -----------
Net cash used in investing activities (63,802) (8,068)
----------- -----------
Cash flows from financing activities
Proceeds from notes payable -- 450,000
Proceeds from subordinated convertible debentures -- 300,000
Principal payments on long-term debt and capitalized
lease obligations (32,342) --
Proceeds from issuance of common stock 1,313,768 --
----------- -----------
Net cash provided by financing activities 1,281,426 750,000
----------- -----------
NET (DECREASE) INCREASE IN CASH (83,998) (436,829)
----------- -----------
Cash at beginning of period 231,347 469,266
----------- -----------
Cash at end of period $ 147,349 $ 32,437
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
F-29
<PAGE>
CDKNET.COM, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Six months December 31,
1999 1998
---------- ----------
----------(unaudited)---------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest $ 7,602 $ 8,552
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 -- 70,000
Common stock and stock warrants issued for financing
Costs and services 105,000 10,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-30
<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 December 31, 1999 and the periods
ended December 31, 1998 are unaudited and include all adjustments which, in
the opinion of management 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 six months ended December 31, 1999 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. On August 1, 1999, the Company issued an aggregate of 1,030,000 stock
options to the subsidiary'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. 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 CDK. During the three months ended September 30, 1999, the Company
recorded a compensation expense relating to the stock options of
$65,000.
F-31
<PAGE>
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.
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. In August 1999, stock options to purchase 400,000 shares of common
stock were exercised, using cashless exercises pursuant to which
300,000 shares of common stock were issued.
g. An individual exercised options to purchase 17,073 shares of common
stock for $11,768 for the quarter ended September 30, 1999.
h. 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 extended to February 15, 2000. In January 2000, the
Company received $500,000 from the exercise of 1,000,000 of the
aforementioned options.
i. 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.
j. 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-32
<PAGE>
k. 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.
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. The
Company has raised an additional $900,000 through the sale of stock and
options in the ValueFlash subsidiary.
F-33
<PAGE>
EXHIBITS
--------
3.1* Articles of Incorporation of the Registrant.
3.2* Amendment to the Articles of Incorporation.
3.3* By-Laws of the Registrant.
3.4* Certificate of Merger of the Registrant.
3.5* Amendment to the Articles of Incorporation.
3.6* Designation of Series A Preferred Stock.
4.1* Specimen of Common Stock Certificate.
4.2* Technology Horizons Corp. Stockholders Agreement dated May 7,
1998.
5.1+ Opinion of Foley, Hoag & Eliot LLP
10.1* Technology Horizons Corp. 1998 Equity Incentive Plan.
10.2* Convertible Subordinated Debenture Due February 1, 2009.
10.2.1** Amendment No. 1 to Convertible Subordinated Debenture due
February 1, 2009
10.3* Registration Rights Agreement between Technology Horizons
Corp. and Kelly Music & Entertainment Corp. dated September 4,
1998.
10.4* Assignment Agreement between Kelly Music & Entertainment Corp.
and Technology Horizons Corp. dated September 4, 1998.
10.5* Amendment to Registration Rights Agreement between Technology
Horizons Corp. and Alvin Pock dated October 15, 1998.
10.6* Amendment to Registration Rights Agreement between Technology
Horizons Corp. and Robert L. Kelly dated October 15, 1998.
10.7* Registration Rights Agreement between Technology Horizons
Corp. and Robert L. Kelly dated June 3, 1998.
10.8* Registration Rights Agreement between Technology Horizons
Corp. and Alvin Pock dated June 3, 1998.
10.9* Assignment Agreement between Robert L. Kelly and Technology
Horizons Corp. dated June 3, 1998.
10.10* Assignment Agreement between Alvin Pock and Technology
Horizons Corp. dated June 3, 1998.
10.11* Assignment Agreement between Kelly Music & Entertainment Corp.
and CDKnet, LLC, dated June 3, 1998.
10.12* Employment Agreement, dated August 1, 1999, by and between
CDKNET.COM, INC. and Shai Bar-Lavi.
10.13**** Finder's Agreement between the Registrant and Shai Bar-Lavi
and Frederick Smithline dated June 1, 1999.
10.14** Employment Agreement dated August 1, 1999, by and between
CDKNET, LLC and Tom Ross.
10.15**** Stock Purchase Agreement between the Company and the Gross
Foundation, Inc., Steven A. Horowitz, Shai Bar-Lavi, and
Michael Sonnenberg dated November 2, 1999.
10.16 Subscription Agreement between CDKNET.COM, INC. and Asia
Pioneer Limited dated November 16, 1999.
10.17 Technology and License Agreement CDKNET.COM, INC. and Asia
Pioneer Limited dated November 16, 1999.
10.18**** Agreement dated March 19, 1999 between Peterson's and CDKnet,
LLC.
10.19**** Undated Registration Rights Agreement between Spiga Limited
and CDKNET.COM, INC.
10.20 Agreement dated October 25, 1999, between CDKnet, LLC and
Atomic Pop, LLC.
10.21**** Agreement dated March 29, 1999, between Central Park Media
Corp. and CDKnet LLC.
10.22**** Purchase Agreement dated August 9, 1999 between CDKNET.COM,
INC. and Y2G.COM.
10.23**** Convertible Subordinated Debenture Due September 1, 2003.
10.24**** Letter Agreement dated May 4, 1998, between Megaforce
Entertainment and CDKnet, LLC regarding the use of CDK
technology.
III-1
<PAGE>
10.25 Agreement dated August 5, 1999 between the Company and
DreamWorks Records.
10.26 Agreement dated September 16, 1999 between the Company and
CollegeMusic, Inc.
16# Letter from former accountant Grant Thornton LLP
16.1## Letter from former Accountant, Wagner, Zwerman & Steinberg LLP
21* Subsidiaries of the Registrant
27 Financial Data Schedule
99.1**** Chart of the signatories to the Company's Stockholder's
Agreement (and their interest in the Company).
* Incorporated by reference from our Registration
Statement filed on Form 10-SB on October 7, 1999.
** Incorporated by reference from our Registration
Statement filed on Form 10-SB Amendment No. 2 on
November 26, 1999.
*** Incorporated in the Opinion of Foley, Hoag & Eliot
LLP in Exhibit 5 hereto.
**** Incorporated by reference from our Registration
Statement filed on Form SB-2 on December 21, 1999.
+ To be filed by amendment to our Registration
Statement on Form SB-2.
# 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.
III-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 4 to its registration
statement on Form 10-SB to be signed on its behalf by the undersigned, thereunto
duly authorized, on this 6th day of March, 2000.
CDKNET.COM, INC.
A Delaware corporation
By: /s/ Steven A. Horowitz
--------------------------------------
Name: Steven A. Horowitz
Chairman, Chief Executive Officer,
Chief Financial Officer and Secretary
III-3
EXHIBIT 10.16
Dated the day of 1999
CDKNET.COM, INC.
and
ASIA PIONEER LIMITED
-----------------------------------------------------------
SUBSCRIPTION AGREEMENT
IN RELATION TO SHARES IN
ASIA PIONEER LIMITED
-----------------------------------------------------------
AGGARWAL & ASSOCIATES,
Solicitors,
Rooms 1905-7, 19th Floor,
St. George's Building,
2 Ice House Street,
Central,
Hong Kong.
Ref.: 0203-0295/99/NA/RKW
<PAGE>
THIS AGREEMENT is made the 16th day of November 1999.
BETWEEN :-
(1) CDKNET.COM, INC., a company incorporated in the state of Delaware, the
United States of America and having its registered address at 595
Stewart Avenue, Suite 710, Garden City, New York 11530, U.S.A. ("CDK");
and
(2) ASIA PIONEER LIMITED, a company incorporated in the Cayman Islands and
having its registered office at Huntlaw Building, P.O. Box 2804, George
Town, Grand Cayman, Cayman Islands ("APL").
WHEREAS :-
(A) APL is a private company limited by shares incorporated in the Cayman
Islands.
(B) CDK is a company incorporated under the laws of the State of Delaware,
U.S.A. further particulars of which as at the date of this Agreement
are set out in Schedule 1 .
(C) APL has agreed to subscribe for the Subscription Shares (as defined
below) and CDK has agreed to issue and allot the same to APL on the
terms and conditions contained in this Agreement.
(D) APL has agreed to enter into a Licencing Agreement with CDK's
subsidiary, CDKNet, LLC for the licencing of such CDK Technology(TM) by
CDKNet, LLC to APL.
NOW IT IS HEREBY AGREED as follows :-
1. DEFINITIONS AND INTERPRETATION
------------------------------
1.1 In this Agreement, unless the context otherwise requires, the following
words and expressions shall have the following meanings :-
"THIS AGREEMENT" means this agreement as amended, modified or
supplemented from time to time;
-1-
<PAGE>
"APL SHARES" means all those issued and allotted shares of APL
by APL to CDK's subsidiary CDKNet, LLC being 4,890
shares of par value US$ 0.01 each in the capital
of APL and constituting approximately [4.89%] of
the issued share capital of APL as at the date of
such allotment of such shares and one of such
shares shall be known as "APL Share".
"ARTICLES" means the articles of association of CDK for the
time being;
"BOARD" means the board of directors of CDK for the time
being;
"DIRECTOR" means a director of CDK for the time being;
"EXCHANGE ACT" means the U.S. Securities Exchange Act of 1934, as
amended;
"GROUP" means CDK and any other company which is a
Subsidiary of or a holding company of or another
Subsidiary of a holding company of CDK and
"MEMBER(S) OF THE GROUP" shall be construed
accordingly;
"HONG KONG" means the Hong Kong Special Administrative Region;
"SEC" means the U.S. Securities and Exchange Commission;
"SHARES" means shares of common stock, par value US$ 0.0001
per share, of CDK;
"SUBSCRIPTION" means the subscription for the Subscription Shares
pursuant to Clause 2 and "SUBSCRIBE" shall be
construed accordingly;
"SUBSCRIPTION means the 1,800,000 Shares to be purchased
SHARES" hereunder constituting approximately nine and
fifty-seven one hundredths per cent (9.57%) of the
issued common share capital of CDK as of 11
November 1999 as enlarged by the issue of the
Subscription Shares set out in Clause 2.2;
"SUBSCRIPTION means US$0.50 per Subscription Share;
SHARE PRICE"
-2-
<PAGE>
"SUBSIDIARY" for the purpose of this Agreement a company shall
be deemed to be a subsidiary of another company,
if :-
(a) that other company :-
(i) controls the composition of the board
of directors of the first-mentioned
company; or
(ii) controls more than half of the voting
power of the first-mentioned company;
or
(iii) holds more than half of the issued
share capital or issued common share
capital (as the case may be) of the
first-mentioned company (excluding any
part of it which carries no right to
participate beyond a specified amount
in a distribution of either profits or
capital);or
(b) the first-mentioned company is a subsidiary
of any company which is that other company's
subsidiary;
"US$" Means the lawful currency of the United States of
America;
"WARRANTIES" Means the representations, warranties and
undertakings on the part of each CDK and APL
respectively set out in Clause 4 .
1.2 References in this Agreement to ordinances and to statutory provisions
shall be construed as references to those ordinances or statutory
provisions as respectively modified (on or before the date hereof) or
re-enacted (whether before or after the date hereof) from time to time
and to any orders, regulations, instruments or subordinate legislation
made under the relevant ordinances or provisions thereof and shall
include references to any repealed ordinance or provisions thereof
which has been so re-enacted (with or without modifications).
1.3 The headings are inserted for convenience only and shall not affect the
construction of this Agreement.
1.4 Except where the context otherwise requires words denoting the singular
include the plural and vice versa; words denoting any one gender
include all genders; words denoting persons include incorporations and
firms and vice versa.
-3-
<PAGE>
1.5 References to Clauses, Sub-clauses, Paragraphs and Schedules are
(unless the context otherwise requires) to clauses, sub-clauses,
paragraphs of and schedules to this Agreement.
1.6 The Schedules form part of this Agreement.
2. SUBSCRIPTION AND COMPLETION
---------------------------
2.1 APL in reliance upon the representations warranties undertakings
agreements and covenants referred to in this Agreement hereby agrees
and undertakes to Subscribe for the Subscription Shares at the
Subscription Share Price subject to the Articles and the terms and
conditions contained in this Agreement.
2.2 The aggregate Subscription Share Price for the Subscription Shares is
US$900,000.00 and shall be satisfied by the issue and allotment by CDK
of the Subscription Shares as follows :- (The Subscription Shares shall
be allotted and issued credited as fully paid and on terms that they
will rank pari passu in all respects with the chartered rights (i.e.
memorandum and articles of association and bye-laws of CDK) with the
shares of common stock in CDK in issue as at the date hereof )
(i) Upon the signing of this Agreement the sum of US$100,000.00
shall be paid by APL to CDK ("First Payment") for the issue and
allotment by CDK of 200,000 of the Subscription Shares ("First
Allotment").
(ii) On or before 30 December 1999 the sum of US$150,000.00 shall be
paid by APL to CDK ("Second Payment") for the issue and
allotment by CDK of 300,000 of the Subscription Shares ("Second
Allotment").
(iii) On or before 28 January 2000 the sum of US$150,000.00 shall be
paid by APL to CDK ("Third Payment") for the issue and
allotment by CDK of 300,000 of the Subscription Shares ("Third
Allotment").
(iv) On or before 29 February 2000 the sum of US$150,000.00 shall be
paid by APL to CDK ("Fourth Payment") for the issue and
allotment by CDK of 300,000 of the Subscription Shares ("Fourth
Allotment").
(v) On or before 30 March 2000 the sum of US$150,000.00 shall be
paid by APL to CDK ("Fifth Payment") for the issue and
allotment by CDK of 300,000 of the Subscription Shares ("Fifth
Allotment").
(vi) On or before 28 April 2000 the sum of US$150,000.00 shall be
paid by APL to CDK ("Sixth Payment") for the issue and
allotment by CDK of 300,000 of the Subscription Shares ("Sixth
Allotment").
-4-
<PAGE>
(vii) On or before 30 May 2000 the sum of US$50,000.00 shall be paid
by APL to CDK ("Seventh Payment") for the issue and allotment
by CDK of 100,000 of the Subscription Shares ("Seventh
Allotment").
(The First Payment, Second Payment, Third Payment, Fourth Payment,
Fifth Payment, Sixth Payment and the Seventh Payment shall hereinafter
collectively be known as "Payments".)
(The First Allotment, Second Allotment, Third Allotment, Fourth
Allotment, Fifth Allotment, Sixth Allotment and the Seventh Allotment
shall hereinafter collectively be known as "Allotments".)
Prior to any of the relevant Payments being made by APL to CDK in
respect of any of the relevant Allotments described above, CDK shall
send to APL (by way of fax and overnight courier) a copy of the
relevant written instructions to the relevant transfer agent or share
registrar to issue the Subscription Shares to be allotted to APL along
with the relevant written confirmation of the transfer agent or share
registrar in respect of such issue instructions relating to the issue
of Subscription Shares to APL. Upon receipt of the fax, APL shall
deliver to CDK within one (1) business day the respective Payment by
way of a wire (or telegraphic transfer) of immediately available funds
to the CDK bank account as directed by CDK by a fax or email of wire
instructions thereof.
2.3 Completion of the First Allotment shall take place promptly upon
execution of this Agreement or at such other time and place as may be
agreed between the parties to this Agreement.
2.4 At completion of the First Allotment :-
2.4.1 CDK shall procure that :-
(a) a meeting of the Board is convened and duly held at which valid
resolutions are passed to authorize the issue and allotment of
the Subscription Shares relating to the First Allotment to APL
and the entering into and completing of this Agreement by CDK;
(b) CDK shall allot and issue credited as fully paid the Subscription
Shares relating to the First Allotment to APL and shall enter the
name of APL in the register of members of CDK as registered
holder of the Subscription Shares;
(c) CDK shall issue and deliver to APL appropriate share certificates
for the Subscription Shares duly executed by CDK.
-5-
<PAGE>
2.4.2 Upon payment of any of the respective Second Payment, Third Payment,
Fourth Payment, Fifth Payment, Sixth Payment and Seventh Payment by APL
to CDK shall procure that :-
(a) such meetings of the Board is convened and duly held at which
valid resolutions are passed to authorize the issue and allotment
of the relevant respective Second Allotment, Third Allotment,
Fourth Allotment, Fifth Allotment, Sixth Allotment and Seventh
Allotment.
(b) CDK shall allot and issue credited as fully paid the Subscription
Shares relating to the relevant and respective Second Allotment,
Third Allotment, Fourth Allotment, Fifth Allotment, Sixth
Allotment and Seventh Allotment in the register of members of CDK
as registered holder of the Subscription Shares relating to the
relevant and respective Second Allotment, Third Allotment, Fourth
Allotment, Fifth Allotment, Sixth Allotment and Seventh
Allotment.
(c) CDK shall issue and deliver to APL appropriate Share Certificates
for the Subscription Shares relating to the relevant and
respective Second Allotment, Third Allotment, Fourth Allotment,
Fifth Allotment, Sixth Allotment and Seventh Allotment.
2.4.3 APL shall procure that a meeting of the board of directors of APL is
convened and duly held at which valid resolutions are passed to
authorize the purchase in respect of the issue and allotment of the
Subscription Shares by CDK and the entering into and completing of this
Agreement by APL;
2.4.4 Upon the completion of the Seventh Allotment of Subscription Shares to
APL, CDK shall within 90 days from the date of the completion of the
Seventh Allotment of Subscription Shares register all the Subscription
Shares allotted to APL per Clause 2.2 above with the SEC.
Shall CDK fail to register all the Subscription Shares with the SEC
within 90 days from the date of the completion of the Seventh
Allotment, then CDK shall pay to APL an amount in US$ equivalent to 1%
per month of the aggregate Subscription Share Price for the
Subscription Shares (i.e. 1% per month of US$900,000.00) ("the
Subscription Interest") to APL and which Subscription Interest shall
accrue until the Subscription Shares are registered with the SEC and
shall be paid to APL upon the successful registration of the
Subscription Shares with the SEC.
-6-
<PAGE>
3. EVENTS OF DEFAULT
-----------------
3.1 In the event that :-
3.1.1 the Shares are not (i) registered with the SEC pursuant to
Section 12(g) of the Exchange Act and (ii) eligible for trading
on the National Association of Securities Dealers
Over-the-Counter Bulletin Board ("OTCBB") or any nationally
recognized stock exchange or electronic trading system (a
"National Exchange") on or before 28 February 2000 for whatever
reasons; or
3.1.2 the Shares are delisted or otherwise become ineligible for
trading on the OTCBB or on any other National Exchange on or
prior to 1 July 2000, save and except in the following
circumstances :-
(a) the Shares cease to be so listed due to CDK ceasing to have
a class of equity securities registered under the Exchange
Act ; and
(b) the termination of such listing was as a result of a
voluntary act or decision of CDK and its shareholders and
whereby such voluntary act or decision leads to a general
offer being made to all shareholders of CDK for all the
Shares being held by such shareholders; or
3.1.3 if on or before 1 July 2000 :-
(a) CDK shall be subject to any proceedings relating to
bankruptcy, winding up or insolvency in any courts of
competent jurisdiction; or
(b) CDK shall cease, or shall threaten to cease, to carry on its
business;
(c) APL shall terminate (pursuant to the terms of the licence
agreement) such licence agreement for the licence of CDK
Technology(TM) with CDK's subsidiary, CDKNet, LLC;
then without prejudice to any other rights or remedies of APL in
respect of any antecedent breach on the part of CDK under this
Agreement, APL shall be entitled to:
(i) by notice in writing to CDK within a period of [twenty-eight
(28)]
-7-
<PAGE>
days upon APL becoming aware of the happening of any of such
events (whichever is later) to forthwith terminate this
Agreement; and/or
(ii) (if applicable) to terminate such licence agreement for the
licence of CDK Technology(TM) with CDK's subsidiary, CDKNet,
LLC and in which event CDK shall procure its subsidiary
CDKNet, LLC to allow and permit such termination without any
claims, demands or legal action against APL.
3.2 In the event that either :-
3.2.1 APL fails to make any of the Payments on their respective due
dates; or
3.2.2 On or before 1 July 2000 :-
(i) APL shall be subject to any proceedings relating to
bankruptcy, winding up or insolvency in any courts of
competent jurisdiction; or
(ii) APL shall cease, or shall threaten to cease, to carry on its
business; or
(iii) CDK's subsidiary, CDKNet, LLC shall terminate (pursuant to
the terms of the licence agreement) such licence agreement
for the licence of CDK Technology(TM) with APL;
then without prejudice to any other rights or remedies of CDK in
respect of any antecedent breach on the part of APL under this
Agreement, CDK shall :-
(a) be entitled to by notice in writing to APL within a period
of [twenty eight (28) days] upon CDK becoming aware of the
happening of any such event (whichever is later) to
forthwith terminate this Agreement; and/or
(b) (if applicable) be entitled on behalf of CDK's subsidiary
CDKNet, LLC to terminate on behalf of CDKNet, LLC any
licence agreement (in respect of CDKNet, LLC's CDK
Technology(TM)) entered into between CDKNet, LLC and APL.
4. WARRANTIES
----------
4.1 Each party hereto hereby represents and warrants to the other party that :-
-8-
<PAGE>
4.1.1 it has all the necessary capacity to enter into, perform and be
bound by the terms and conditions of this Agreement;
4.1.2 it has taken or will take all steps and action and has obtained
or will obtain all consents, approvals and waivers necessary or
required for it to enter into, perform and be bound by the terms
and conditions of this Agreement;
4.1.3 the terms and conditions of this Agreement are valid and binding
on it and are enforceable against it in accordance with the terms
and conditions set out herein.
4.2 In consideration of APL agreeing to enter into this Agreement CDK
warrants and represents to APL as at the date of this Agreement that,
to the best of CDK's knowledge :-
4.2.1 (a) the particulars of CDK contained in Schedule [1] are true
and accurate in all respects;
(b) CDK has approximately 17,000,000 shares of common stock
issued and outstanding as of 11 November 1999;
4.2.2 all returns particulars resolutions and other documents required
to be filed with the relevant authorities in the U.S.A. by CDK
have been duly filed and CDK has complied with all legal
requirements in connection with its formation and with all issues
of its shares;
4.2.3 following the issue and allotment of the Subscription Shares by
CDK, APL will be the beneficial owner of approximately] nine and
fifty-seven one hundredths per cent (9.57%) of the issued common
share capital of CDK as of 11 November 1999 as enlarged by the
issue of the Subscription Shares set out in Clause 2.2;
4.2.4 the Subscription Shares shall be allotted and issued credited as
fully paid and on terms that they will rank pari passu in all
respects with the chartered rights with the shares of common
stock in CDK in issue as at the date of allotment of the
Subscription Shares ;
4.2.5 (a) CDK has complied with all necessary and applicable
regulations and laws of the SEC and other regulatory
authorities in the United States of America (including the
Exchange Act);
(b) CDK's stock was previously traded on the OTCBB but has
recently been removed from the OTCBB and instead has its
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<PAGE>
shares currently traded on the so-called "Pink Sheets";
4.2.6 (a) the audited consolidated financial statements of CDK and its
Subsidiaries as set out in Form 10-SB filed with the SEC on
7 October 1999 ("FORM 10-SB") a copy of which financial
statements is attached hereto marked "ANNEX 1" has been
prepared in accordance with the requirements of relevant
ordinances, regulations and statutes and in accordance with
generally accepted accounting principles and practices in
U.S.A. consistently applied. Such financial statements are
hereinafter called "THE ACCOUNTS OF CDK".
CDK is now preparing to file and Amendment No. 2 to the Form
10-SB in approximately one week from the date of this
Agreement with the SEC to reflect Form 10-QSB type
disclosures. CDK undertakes to send to APL a copy of the
said Amendment No. 2 immediately after filing of the same
with the SEC;
(b) the Accounts of CDK are true and accurate in all material
respects and show a true and fair view of the assets,
liabilities, capital commitments and the state of affairs of
CDK and its Subsidiaries as at 30th June 1999;
(c) since 30th June 1999 :-
(i) each of CDK and its Subsidiaries has carried on its
business in the ordinary and usual course;
(ii) no distribution of capital or income has been declared
made or paid in respect of any share capital of each of
CDK and its Subsidiaries;
(iii) each of CDK and its Subsidiaries has not assumed or
incurred any liabilities or expenditure otherwise than
in the ordinary course of carrying on its day-to-day
business;
(iv) there has been no material adverse change in the
financial position of each of CDK and its Subsidiaries;
4.2.7 the assets and equipment included in the Accounts of CDK or
acquired by each of CDK and its Subsidiaries since 30th June 1999
are the property of and owned by CDK and/or its Subsidiaries (as
the case may be) and are not subject to any debenture, mortgage,
encumbrance or charge or any other third party interest save as
for such equipment which is leased by,
-10-
<PAGE>
or used as collateral by CDK or its Subsidiaries;
4.2.8 all the technologies and products marketed as developed by each
of CDK and its Subsidiaries are the absolute property of (or for
which the appropriate rights have been granted) CDK and/or its
Subsidiaries (as the case may be) and are not subject to any
third party interest and do not infringe on any intellectual
property rights or other rights whatsoever of any other persons;
4.2.9 all debts owed to each of CDK and its Subsidiaries will be good
and collectable in the ordinary course of business and no amount
included in the Accounts of CDK owing to each of CDK and/or its
Subsidiaries (as the case may be) at 30th June 1999 has been
released for an amount less than the value at which it was
included in the Accounts of CDK;
4.2.10(a) all necessary licences consents permits and authorities have
been obtained by each of CDK and its Subsidiaries to enable
each of them to carry on its business lawfully and
effectively in the places and in the manner in which such
business is now carried on;
(b) each of CDK and its Subsidiaries has not done or omitted to
do anything in contravention or breach of any statute, order
or regulation or the like in U.S.A. or elsewhere applicable
to it or its business and giving rise to any fine, penalty,
default proceedings or other liability on its part;
(c) each of CDK and its Subsidiaries has conducted and is
conducting its business in accordance with applicable laws
and regulations in U.S.A. or elsewhere applicable to it;
4.2.11 there are no agreements or arrangements entered into by each of
CDK and its Subsidiaries otherwise than by way of bargain at
arm's length and all contracts are entered into in the normal
course of business;
4.2.12 each of CDK and its Subsidiaries is not engaged either on its
own account or vicariously in any material litigation or
arbitration or tribunal proceedings and no such litigation
arbitration or tribunal proceedings are pending or threatened by
or against each of CDK and its Subsidiaries;
4.2.13(a) save as for the directors and/or employees set out in
Schedule 2 with particulars of such contract therein, there
are not in existence any contracts of service with directors
or employees of each of CDK and its Subsidiaries which
cannot be terminated by notice without giving rise to any
claim for damages or compensation
-11-
<PAGE>
(other than under any relevant employment legislation;
(b) each of CDK and its Subsidiaries and their respective
employees are not involved in any industrial dispute;
4.2.14(a) each of CDK and its Subsidiaries has properly made all
returns and provided all other information required for the
purposes of taxation and none of such returns is disputed by
the Internal Revenue Services, U.S.A. or any other authority
concerned;
(b) all payments by each of CDK and its Subsidiaries to any
person which ought to have been made under deduction or
withholding of tax have been so made and each of CDK and its
Subsidiaries has (where required by law to do so) accounted
to the Internal Revenue Services, U.S.A. for the tax
deducted or withheld.
4.2.15 that it is not aware of any intention and shall not on or before
1 July 2000 voluntarily (through its shareholders or Directors)
cease to be listed and which act would lead to a general offer
being made to all the shareholders for such shares of CDK being
held by the said shareholders;
4.2.16 that it shall prior to any of the relevant Payments being made
by APL to CDK in respect of any of the relevant Allotments
described in Clause 2.2, it shall send to APL (by way of fax and
overnight courier) a copy of the relevant written instructions to
the relevant issue agent or share registrar to transfer the
Subscription Shares to be allotted to APL along with the relevant
written confirmation of the issue agent or share registrar in
respect of such issue instructions relating to the transfer of
Subscription Shares to APL and not revoke or change its
instructions to the transfer agent or share registrar without the
written consent of APL;
4.2.17 that it shall upon the completion of the Seventh Allotment of
Subscription Shares to APL, use its best endeavors and take all
necessary steps to cause the Subscription Shares to be registered
with the SEC within 90 days from the date of the completion of
the Seventh Allotment of Subscription Shares.
5. ANTI-DILUTIVE PROVISIONS
------------------------
5.1 Subject to Clause 5.2, CDK hereby agrees and undertakes with APL that
it will not for a period of one (1) year from the date of this
Agreement (the "RESTRICTED PERIOD") :-
5.1.1 allot and issue any shares in CDK; or
-12-
<PAGE>
5.1.2 issue securities or any instrument convertible into shares or
debentures, or share warrants or options in respect of shares in
CDK;
at a price less than the Subscription Share Price to any other persons
without the prior consent in writing of APL Provided that the
restrictions herein contained shall not apply to the issue and
allotment of shares of CDK hereto pursuant to the exercise of any
rights under the share option plan in force from time to time for the
benefits of the executives and employees of CDK.
5.2 Notwithstanding the restrictions contained in Clause 5.1, CDK shall be
entitled to do any of the matters restricted pursuant to Clause 5.1
without the prior consent in writing of APL during the Restricted
Period Provided that it shall simultaneously upon the happening of such
event issue and allot such number of additional shares in itself
(excluding fraction of a share if any) to APL as shall be necessary to
ensure that no dilution shall take place in relation to the share
ownership and in the value of its shares held by that other party
contemplated by this Agreement by reason of its doing such matters but
not otherwise.
6. GENERAL
-------
6.1 Nothing in this Agreement shall create, or be deemed to create, any
partnership or the relationship of principal and agent or employer and
employee between the parties.
6.2 This Agreement sets out the entire agreement and understanding between
the parties in relation to the transactions hereby contemplated, and
supersedes all previous agreements, arrangements and understandings
between them with regard to such transactions and neither party is
entering into this Agreement or any of the arrangements contemplated
hereby in reliance upon any representation or warranty not expressly
set out in this Agreement.
6.3 No provision of this Agreement may be amended, modified, waived,
discharged or terminated otherwise than by the express written
agreement of the parties hereto nor may any breach of any provision of
this Agreement be waived or discharged except with the express written
consent of the party not in breach.
6.4 No failure or delay by either party in exercising any right, power or
privilege under this Agreement shall operate as a waiver thereof, nor
shall any single or partial exercise by either party of any right,
power or privilege preclude any further exercise thereof or the
exercise of any other right, power or privilege.
6.5 The rights and remedies of the parties herein provided are cumulative
and not exclusive of any rights and remedies provided by law.
-13-
<PAGE>
6.6 This Agreement shall be binding and enure to the benefit of each
party's successors and permitted assigns but, except as expressly
provided herein, neither party shall assign or transfer all or any of
its rights or obligations hereunder without the prior written consent
of the other party.
6.7 Each party shall be responsible for its own costs incurred in
connection with the negotiation, preparation, execution and carrying
into effect of this Agreement.
6.8 Time shall be of the essence of this Agreement, both as regards the
dates and periods specifically mentioned and as to any dates and
periods which may be substituted by agreement in writing between or on
behalf of the parties.
6.9 In the event that any provision of this Agreement is held to be
unenforceable, illegal or invalid by any court of competent
jurisdiction, the validity, legality or enforceability of the remaining
provisions shall not be affected nor shall any subsequent application
of such provisions be affected. In lieu of any such invalid, illegal or
unenforceable provision, the parties hereto intend that there shall be
added as part of this Agreement a provision as similar in terms to such
invalid, illegal or unenforceable provision as may be possible and be
valid, legal and enforceable.
6.10 This Agreement may be executed in any number of counterparts or
duplicates each of which shall be an original but such counterparts or
duplicates shall together constitute one and the same agreement.
6.11 Each of the parties hereto shall do, execute and perform all such
further deeds, documents, acts and things as the other party may
reasonably require to put into effect the transactions contemplated by
this Agreement.
6.12 All provisions of this Agreement shall so far as they are capable of
being performed and observed continue in full force and effect
notwithstanding completion except in respect of those matters then
already performed.
7. NOTICES
- -- -------
7.1 Any notice required to be given under this Agreement shall be
sufficiently given if delivered personally or forwarded by
internationally recognized overnight couriers or sent by facsimile
transmission to the relevant party at its address or fax number set out
below (or such other address as the addressee has by five days prior
written notice specified to the other parties) :-
To CDK : 595 Stewart Avenue, Suite 710,
Garden City, New York, United States
of America 11530
-14-
<PAGE>
Fax Number : (516) 222 2665
Attention : Steven A. HOROWITZ
To APL : Shop No.3A, Ground Floor
Site 4, Whampoa Garden,
Hung Hom, Kowloon
Hong Kong
Fax Number : (852) 2335 0889
Attention : Keith T.K. WONG
7.2 Any notice delivered personally shall be deemed to have been served at
the time of delivery. Any notice sent by internationally recognized
overnight couriers shall be deemed to have been served 3 business days
after the time at which it was delivered to the courier, the tracking
receipt shall be sufficient to prove such service and notices sent by
facsimile transmission shall be deemed to have been served one business
day after transmission.
8. LAW AND JURISDICTION
--------------------
8.1 This Agreement shall be governed by and construed in all respects in
accordance with the laws of the state of New York in the United States
of America ("New York") and the parties hereby irrevocably submit to
the non-exclusive jurisdiction of the Courts of New York .
8.2 Each of the following parties hereby irrevocably appoints (subject to
substitution by way of written notice) the person set opposite its name
below as its agent to acknowledge and accept service of legal process
on behalf of such party :-
PARTIES NAMES & ADDRESSES OF AGENTS
------- ---------------------------
CDKNet.Com, Inc. Steven A. HOROWITZ
595 Stewart Avenue, Suite 710,
Garden City, New York,
United States of America 11530
Asia Pioneer Limited Keith T.K. WONG
Shop No.3A, Ground Floor
Site 4, Whampoa Garden,
Hung Hom, Kowloon
Hong Kong
Telephone : (852) 9172 5700
Fax : (852) 2335 0889
-15-
<PAGE>
AS WITNESS the parties hereto have caused this Agreement to be executed the day
and year first above written in its counterpart as an Agreement.
-16-
<PAGE>
SCHEDULE 1
----------
CDK
NAME : CDKNET.COM, INC.
PLACE OF INCORPORATION : the State of Delaware, U.S.A.
AUTHORIZED COMMON SHARE CAPITAL : US$4,000 divided into 40,000,000
shares of common stock of par value
US$0.0001 each
ISSUED COMMON SHARE CAPITAL : Approximately 17,000,000 common shares
REGISTERED ADDRESS : 595 Stewart Avenue, Suite 710, Garden
City, New York 11530, U.S.A.
DIRECTORS : Steven A. HOROWITZ
Anthony BONOMO
Andrew SCHENKER
-17-
<PAGE>
SCHEDULE 2
----------
LIST OF CONTRACTS RELATING TO CLAUSE 4.2.13( A)
Name Document
- ---- --------
Shai Bar LAVI Employment Agreement
Tom ROSS Employment Agreement
-18-
<PAGE>
EXECUTION PAGE
<PAGE>
SIGNED by )
)
for and on behalf of CDKNET.COM, INC. in )
the presence of :-Chris Hanscom-Bolton ) /s/ Steven A. Horiwitz
)--------------------------------
/s/ Chris Hanscom-Bolton
- ------------------------
SIGNED by )
)
for and on behalf of ASIA PIONEER LIMITED ) /s/ illegible
in the presence of :- )--------------------------------
Authorized Signature(s)
/s/ illegible
--------------------------------
Authorized Signature(s)
/s/ Keith A. Lee
- ------------------------------
Keith A. Lee
Solicitor
Aggarwal & Associates
Hong Kong SAR
-19-
EXHIBIT 10.17
-------------
Dated the 16th day of November 1999
CDKNET, LLC
and
ASIA PIONEER LIMITED
- --------------------------------------------------------------------------------
TECHNOLOGY AND LICENCE AGREEMENT
- --------------------------------------------------------------------------------
AGGARWAL & ASSOCIATES
Rooms 1905-7, 19th Floor
St. George's Building
2 Ice House Street
Central
Hong Kong
Ref.: 0203-0295/99/NA/RKW/KAL
<PAGE>
- ii -
CONTENTS
Page
1. Definitions.........................................................1
2. Products and Services to be provided................................5
3. Conduct of the Work.................................................5
4. Implementation Plan.................................................6
5. Location Preparation................................................6
6. Provision of Hardware...............................................6
7. Delivery of Hardware................................................9
8. Installation of Hardware............................................9
9. Delivery and Installation of the Software...........................9
10. Installation Tests.................................................10
11. Delays.............................................................11
12. Licence............................................................12
13. Duration of the Licence............................................17
14. Documentation......................................................17
15. Warranties.........................................................17
16. Other Matters giving cause for Damages and/or Termination..........18
17. Terms of Payment...................................................20
18. Training...........................................................22
19. Maintenance Services...............................................23
20. Maintenance of the Hardware........................................23
21. Maintenance of the Software........................................24
22. Title to and Risk in the System....................................25
23. Proprietary Rights.................................................26
24. Copying............................................................26
25. Confidentiality....................................................26
26. Use of Data........................................................27
27. Independent Contractor.............................................27
28. Assignment.........................................................28
29. Indemnities........................................................28
30. Publicity..........................................................30
31. Sub-contracts......................................................30
32. Termination of the Agreement.......................................30
33. Effect of Termination..............................................31
34. Severability.......................................................31
35. Other Terms, Matters, and Conditions to be Fulfillied..............31
36. Duration of the Contract...........................................33
37. Hire Equipment.....................................................33
38. Entire Agreement...................................................34
39. Law and Jurisdiction...............................................34
40. Service of Notice..................................................34
41. Waiver.............................................................35
42. Force majeure......................................................35
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<PAGE>
43. Extent of Liability................................................35
44. Provision of Other Software........................................35
45. Warranties as to APL Shares........................................36
Schedule 1 (Hardware).......................................................39
Schedule 2 (System).........................................................41
Schedule 3 (Implementation Plan)............................................43
Schedule 4 (Training Plan)..................................................44
Schedule 5 (Documentation)..................................................45
Schedule 6 (Location).......................................................46
Schedule 7 (Installation Tests).............................................48
Schedule 8 (Other Software).................................................49
Schedule 9 (Asia Pioneer Limited)...........................................50
-ii-
<PAGE>
THIS AGREEMENT is made on the day of , 1999
BETWEEN :-
(1) CDKNet, LLC, a New York limited liability company with offices at 250
West 57th Street, New York, New York 10019, United States of America
("CDKX"); and
(2) Asia Pioneer Limited, a company incorporated in the Cayman Islands
whose registered office is situate at Hurtlaw Building, P.O. Box 2804,
George Town, Grand Cayman, Cayman Islands and whose place of business
is located at Shop No. 3A, Ground Floor, Site 4, Whampoa Garden, Hung
Hom, Kowloon, Hong Kong ("APL").
WHEREAS :-
(1) APL has decided to exclusively license (on the terms and conditions set
forth below), the CDK Technology(TM) (as defined in Clause 1) for the
use, marketing and business of its website and any other business of
APL; and
(2) APL has elected to exclusively license, hire, use, obtain (as the case
may be) from CDKX and CDKX has agreed to grant the right of use of the
Hardware, the Other Software and the Software (as hereinbelow defined)
and supply all relevant services necessary for the maintenance and
operation of CDK Technology(TM) used by APL (on the terms and
conditions set forth below).
NOW IT IS HEREBY AGREED that in consideration of the payments to be made by APL
in the time and manner set out in Clause 17 of this Agreement, CDKX shall grant
the right of use of the Hardware and Software (as hereinbelow defined) and
supply all services necessary for the operation of the System in accordance with
the terms and conditions and other matter hereinafter set out.
1. Definitions
-----------
1.1 In this Agreement, unless the context otherwise requires, the following
expressions have the following meanings :-
"this Agreement" Means this agreement as amended, modified or
supplemented from time to time.
"Artistic Work" Means a graphic work, photograph, sculpture or
collage irrespective of artistic quality ("graphic
work" includes any painting, drawing, diagram,
map, chart or plan; "photograph" means a recording
of light of other radiation on any medium on which
an image is produced or from which an image may by
means be produced; "sculpture" includes a cast or
model made for the purpose of sculpture).
-1-
<PAGE>
"CDK
Technology(TM)" Means the engineering and technology specially
developed by CDKX whereby such technology and
engineering combines CD (compact disc) digital
audio, full motion, fullscreen video and web
linking through a browser interface. In
combination with such technology an HTML
authorizing system is used to produce custom HTML
interface pages for specific clients within a
certain time period. The technology includes all
the proprietary rights and techniques of CDKX
along with such technique and engineering for
creating full motion, fullscreen video playback
from CD Rom.
"Completion Date" Means the date specified in the Implementation
Plan by which CDKX is to provide the System Ready
for Use.
"Consideration Means US$ 243.80 per Consideration Share.
Share Price"
"Consideration Means 4,890 shares of par value US$ 0.01 each in
Shares" the capital of APL, constituting approximately
four and eighty-nine one hundredths per cent
(4.89%) of the issued share capital of APL as at
the date of the Share Completion. One of such
shares shall be known as "Consideration Share".
"Data" Means all information, submission, correspondence,
copyright contents on APL's website, data and
updates generated and collected on APL's website.
"Documentation" Means the operating manuals, user instructions,
technical literature and all other related
materials in human-readable form (i.e. English)
supplied to APL by CDKX for aiding the use,
application and maintenance of the System as
specified in Schedule 5.
"Exchange Act" Means the U.S. Securities Exchange Act of 1934, as
amended.
"Films" Means a recording on any media from which a moving
image may by any means be produced. The soundtrack
accompanying a film is to be treated as part of
the film.
"Hardware" Means the equipment specified in Schedule 1 and
any other additional or replacement equipment
provided by CDKX under the provisions of this
Agreement.
"Hardware Means the delivery date specified in the
Delivery Date" Implementation Plan by which CDKX is to deliver
the Hardware.
-2-
<PAGE>
"Hardware
Installation Date" Means the delivery date specified in the
Implementation Plan by which CDKX is to install
the Hardware.
"Implementation Means the time schedule and sequence of events for
Plan" the performance of this Agreement (the details of
which are set out in Schedule 3) or such other
implementation plan as may be agreed by the
parties of this Agreement.
"Installation Means the installation tests specified in Schedule
Tests" 7 and any other installation tests as may be
agreed between the parties pursuant to Clause 10.
"Licence" Means the licence granted to APL by CDKX pursuant
to Clause 12.
"Licence Fee" Means the fee for the licence as specified in
Clause 17.2.
"Licence Period" Means the period as specified in Clause 13.
"Location" Means the location at which the Hardware is to be
installed as specified in Schedule 6.
"Maintenance Means the maintenance services to be provided by
Services" CDKX pursuant to Clauses 19, 20 and 21
respectively.
"Musical Works" Means a work consisting of music exclusive of any
words or action intended to be sung, spoken or
performed with the music.
"Other Software" Means the programs specified in Schedule 8 and any
additional or replacement programs thereto.
"Price" Means the aggregate price for the System and the
Work to be carried out by CDKX hereunder as
specified in Clause 17.1.
"Ready for Use" Means fully installed and tested and successfully
completed so as to make the System both functional
and operational within the standards as agreed by
both parties but in any event as reasonably
expected by a reasonable person taking into
account CDKX's current version of the Software,
CDK Technology(TM)and existing Hardware set up to
run its business of "MixFactory(TM)".
"SEC" Means the U.S. Securities and Exchange Commission.
-3-
<PAGE>
"Shares" Means shares of common stock, par value US$0.0001
per share of CDKNet.Com, Inc
"Share Completion" Means completion of the issue and allotment of
Consideration Shares under this Agreement.
"Software" Means the application programs developed for the
System and any other additional or replacement
programs from time to time provided and developed
by CDKX under the provisions of this Agreement and
which also includes the CDK Technology(TM).
"Software Delivery means the delivery date specified in the
Date" Implementation Plan by which CDKX is to deliver
and install the CDK 2.0 Software(C).
"System" means the Hardware and Software in one combination
with the other based on the CDK Technology(TM) in
order to make functional and operational those
processes and services described in Schedule 2.
"Training Plan" means the training to be provided by CDKX for
APL's staff the details of which are set out in
Schedule 4.
"Upgrade and means those upgrades, modifications, enhancement
Enhancements" and development of the Software and Hardware by
CDKX more particularly set out in Clause 21.3.
"US$" means the lawful currency of the United States of
America.
"Work" means all works, duties and obligations to be
carried out by CDKX pursuant to the provisions of
this Agreement.
1.2 Except where the context otherwise requires, words denoting the
singular include the plural and vice versa; words denoting persons
include firms and corporations and vice versa; words denoting any
gender include all genders.
1.3 Reference to any enactment, order, regulation or other similar
instrument shall be construed as a reference, order, regulation or
instrument as amended by any subsequent enactment, order, regulation or
instrument.
1.4 The heading to the clauses of this Agreement is for ease of reference
only and shall not affect the interpretation or construction of this
Agreement.
-4-
<PAGE>
2. Products and Services to be provided
------------------------------------
CDKX hereby agrees to :-
2.1.1 grant the right to use the Hardware to APL free from
encumbrances as per Clause 29;
2.1.2 grant to APL an exclusive licence to use the software specially
developed for or used in relation to the CDK Technology(TM) as
set out in Clause 12;
2.1.3 deliver, install and maintain the System in accordance with the
terms hereof;
2.1.4 provide the System Ready for Use by the Completion Date;
2.1.5 provide training in accordance with the Training Plan and the
Documentation;
2.1.6 provide the Maintenance Services;
2.1.7 provide assistance in developing and to develop or further
develop and customize Software for additional or change of
functions of the CDK Technology(TM) in relation to the System
as from time to time agreed with APL;
2.1.8 provide any other services hereinafter described and on the
terms and conditions hereinafter contained;
2.1.9 provide the Hardware, Software and Other Software for the
System;
2.1.10 upgrade and enhance the Software and adopt new data technology
to improve the System's performance in fulfillment of the
changes in the user requirements and market needs;
2.1.11 provide free usage to APL of those products, premises,
equipment and services set out in Clause 35.
3. Conduct of the Work
-------------------
3.1 CDKX shall carry out the Work with all due and reasonable diligence and
despatch.
3.2 CDKX shall keep APL informed on all matters related to the Work within
the knowledge of CDKX and shall answer all reasonable enquiries
received from APL.
3.3 The parties shall procure that their respective representatives will
meet at the interval specified in the Implementation Plan and after
live running of the System to discuss and minute the progress of the
System's development.
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3.4 CDKX shall, if reasonably practicable, attend any other meetings (by
telephone if necessary) convened by APL and shall advise and assist APL
on all matters relating to the duties and obligations it has assumed
under this Agreement at a time reasonably convenient to both parties.
4. Implementation Plan
-------------------
CDKX shall perform its obligations under this Agreement in accordance
with the Implementation Plan and shall complete each stage by the date
specified in the Implementation Plan.
5. Location Preparation
--------------------
5.1 CDKX shall supply APL in a reasonable time before delivery such
information and assistance as may be necessary to enable APL to plan to
prepare the Location for the installation of the Hardware to be
installed at APL's premises. In the event the Location is not prepared
by APL or suitable as promised by APL then APL shall procure or find an
alternate premises which is reasonably suitable for installation of the
Hardware.
5.2 APL shall, at its own expense and in a timely manner prepare the
Location and provide such reasonable equipment and reasonable
environmental and operational conditions for the Hardware which is to
be installed as per the diagram in Schedule 1, prior to installation.
APL shall provide CDKX with a list of equipment and details of the
Location to CDKX for CDKX's approval prior to delivery of the Hardware.
CDKX shall either approve the list of APL or inform APL of any
modifications or amendments thereto. Thereafter, APL shall carry out
such modifications or provide the modifications prior to delivery of
the Hardware. Shall CDKX fail to approve or make any amendments or
modifications to APL's list, the Location shall be deemed to have been
approved by CDKX and APL shall not be liable for any damages to the
Hardware as a result of the Location (if any) even if later discovered
[CDKX shall assist APL both by maintenance and replacement of any of
the defective or damaged Hardware (if any) as a result of the
Location].
6. Provision of Hardware
---------------------
6.1 CDKX shall provide as part of provision of the required service, all
Hardware and related facilities as specified in Schedule 1 for the
operation of the System.
6.2 CDKX shall be responsible to install at the Location all Hardware and
connect them to the existing hardware or equipment provided by APL (if
any) for operation and/or connection to the System. In order for CDKX
to install the Hardware to APL's existing equipment and hardware, APL
shall provide to CDKX a list of specifications of the Location and
APL's hardware and equipment (if any) prior to delivery of the Hardware
as per Clause 5.2.
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6.3 Upon delivery and installation of all the Hardware, APL shall have the
right to use and keep such Hardware throughout the continuing period of
eight (8) months from the Completion Date or such date when the System
is Ready for Use ("Ready for Use Date") (whichever is later) without
any costs or expenses to APL. At the expiry of the eight (8) month
period from the Completion Date or the Ready for Use Date (whichever is
later), APL shall have the option to either :-
(a) purchase all the Hardware or only certain of the units
comprising the Hardware as set out in Schedule 1 ("Units") .
Shall APL wish to exercise its option to purchase all the
Hardware or Units of the Hardware then APL shall serve notice
to CDKX not less than 30 days prior to the expiration of the
eight (8) months period of its intention to purchase such of
the Hardware (which notice shall include a list of the Hardware
it shall purchase); or
(b) lease either all the Hardware or only certain of the Units
comprising one (1) Robot Station, one (1) Database System, one
(1) Printing System and one (1) Web System as set out in
Schedule 1 ("One Set Unit") or one (1) Robot Station to CDKX.
Shall APL wish to exercise its option to lease all the Hardware
or One Set Unit of the Hardware then APL shall serve written
notice to CDKX and less than 30 days prior to the expiration of
the eight (8) months period of its intention to lease such of
the Hardware (which notice shall include a list of the Hardware
(which notice shall include a list of the Hardware it shall
lease); or
(c) purchase One (1) Robot Station and lease One Set Unit of the
Hardware. Shall APL wish to exercise its option to purchase and
lease the Hardware then APL shall serve written notice of not
less than 30 days prior to the expiration of the eight (8)
months period of its intention of purchase and lease the
Hardware; or
(d) return all of the Hardware to CDKX.
Shall APL exercise its option to purchase any Units or all the Hardware
as described in Clause 6.3(a) then APL shall pay to CDKX the relevant
amount for each Units of the Hardware being purchased as set out in
Schedule 1. Payment for the Hardware being purchased shall be payable
in six equal monthly installments per relevant Units from the date of
the expiration of the eight (8) month period described above.
Shall APL exercise its option to lease One Set Unit of the Hardware as
described in Clause 6.3(b) above then APL shall pay to CDKX US$5,000.00
per month Shall APL exercise its option to lease all the Hardware as
described in Clause 6.3 (b)
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above then APL shall pay to CDKX US$10,000.00 per month. The leasing
fee payable in respect of Clause 6.3(b) shall commence and become due
and payable from the expiry of the initial eight (8) month period
described above. During the lease term, the rights of APL set out in
Clause 6.3 (a), (b) and (c) shall continue to subsist. Should APL
exercise any of its rights to lease One Set Unit of the Hardware or all
the Hardware, the lease term shall commence from the expiry date of the
initial eight month period described above and continue for a further
eight months period which period shall automatically renew for eight
month periods thereafter upon the same lease amount of US$5,000.00 or
US$10,000.00 per month (as the case may be) until either APL purchases
the relevant one (1) Robot Station and/or One Set Unit of the Hardware
being leased or serves at least 30 days prior written notice of CDKX of
its intention not to renew the lease or unless earlier terminated under
the provisions of this Agreement.
Shall APL exercise its option under Clause 6.3 (c) then APL shall :-
(i) pay US$60,000.00 to CDKX for the one (1) Robot System, which
shall be payable in six equal monthly installments from the
date of the expiration of the eight (8) month period described
above; and
(ii) pay to CDKX US$5,000.00 per month commence from the expiry of
the initial eight (8) month period described above. The lease
term shall commence from the expiry date of the initial eight
month period described above and continue for a further eight
months period which period shall automatically renew for eight
month periods thereafter upon the same lease amount of
US$5,000.00 per month (as the case may be) until APL purchases
the either the relevant one (1) Robot Station and/or One Set
Unit of the Hardware being leased or serves at least 30 days
prior written notice of CDKX of its intention not to renew the
lease or unless earlier terminated under the provisions of this
Agreement. During the lease term, the rights of APL set out in
Clause 6.3 (a), (b) and (c) shall continue to subsist
Such of the Hardware not being purchased or leased shall be returned to
CDKX in good condition (fair wear and tear save and excepted) at APL's
own costs and expenses and shall be delivered within a reasonable time
and by such means of delivery and packaging as reasonably required to
ensure the safe and timely delivery of the returned Hardware. APL shall
ensure that proper and sufficient insurance in respect of the delivery
of the returned Hardware is taken out.
Shall APL wish to replace any of the Hardware after the expiry of eight
(8) months from the Date of Completion or Ready for Use Date (whichever
is later) then the replaced type of Hardware, delivery date thereof and
all costs to be incurred or related thereto shall be mutually agreed by
both parties failing which such costs shall be that stipulated by CDKX
provided the same are reasonable and of the same market value in the
U.S.A.
6.4 CDKX shall not remove, replace or repossess any of the Hardware during
any of the eight (8) month period mentioned in Clause 6.3 and unless
purchased by APL after the said eight (8) month period or any parts
thereof for any reason unless otherwise provided for in this Agreement.
-8-
<PAGE>
6.5 APL shall not remove or relocate any of the Hardware (save where and
when purchased by APL) once the Hardware has been installed by CDKX and
APL shall not allow any other party to operate such Hardware (unless
purchased by APL) without CDKX's prior written consent.
7. Delivery of Hardware
--------------------
On the Hardware Delivery Date, CDKX shall deliver the Hardware by any
appropriate method of transport selected by CDKX and APL shall use its
best endeavours to assist CDKX in the importation of the Hardware into
Hong Kong SAR including compliance with the Customs and Excise
Department's rules and regulation and any other regulation concerning
the importation of the Hardware. Shall there be any taxes or duties
levied by the Customs and Excise Department of the Government of the
Hong Kong Special Administrative Region ("HKSAR") or any charges of the
like levied by any government authority of HKSAR (save as to such
export taxes and duties which may be imposed and payable to any
relevant government authority of the United States of America) the said
taxes, duties and charges levied by the relevant government authority
of HKSAR shall be borne and paid by APL.
8. Installation of Hardware
------------------------
8.1 On the Hardware Installation Date, CDKX shall install the Hardware and
if applicable, install the Hardware to APL's hardware and equipment at
the Location.
8.2 If in the reasonable opinion of CDKX it is necessary to remove or
otherwise disconnect any of APL's equipment at the Location in order to
carry out the installation of the Hardware, then APL shall permit and
obtain all necessary consents for such removal or disconnection and
shall give CDKX all necessary assistance.
8.3 CDKX shall install the relevant Hardware at the Location without
unreasonably interrupting the existing computer system of APL (if any).
APL shall give to CDKX all necessary assistance to enable the
installation work to be carried out.
9. Delivery and Installation of the Software
-----------------------------------------
On the Software Delivery Date, CDKX shall deliver the CDK 2.0
Software(C) to APL and shall use reasonable endeavours to install the
same on the Hardware and the hardware provided by APL as soon as
possible after the Software Delivery Date.
CDKX shall also, in accordance with the Implementation Plan deliver the
Software and Other Software to APL and shall use reasonable endeavours
to install the same on the Hardware and hardware provided by APL by and
in accordance with such dates set out in the Implementation Plan.
-9-
<PAGE>
10. Installation Tests
------------------
10.1 APL reserves the right to conduct the Installation Tests on the
Hardware, Software and the Other Software provided CDKX has supervised
the same. Shall CDKX fail to supervise APL's Installation Tests due to
wilful or unreasonable absence or refusal to attend supervision then
APL may conduct Installation Tests on its own.
10.2 CDKX shall within a reasonable time submit the specification of such
Installation Tests including its connection to the Hardware provided by
APL for the reasonable approval of APL. If such specification does not
provide reasonably sufficient detail to test all the functions and
facilities of the Hardware, Other Software and the Software, CDKX shall
make any reasonable amendments to such specifications as is necessary
to conduct proper and reasonable testing upon request. APL shall make
ready such of its Hardware at the Location for connection to the System
and shall ensure that its Hardware is operating in full and proper
working order.
10.3 CDKX shall on the date specified in the Implementation Plan, submit the
Hardware, the Software and the Other Software to the Installation Tests
to prove to APL that the Hardware, Other Software and the Software and
every part thereof are operating in full and proper working order. CDKX
shall within a reasonable time supply to APL the results of the
Installation Tests and certify in writing whether the Hardware, Other
Software and the Software have passed the same.
10.4 If the Hardware, Other Software or the Software or any part thereof
substantially fail as a whole to pass the Installation Tests within [3
weeks] from the date of its first submission to the Installation Tests
such that the System is not Ready for Use, then :-
(a) CDKX shall use its best endeavours at its own costs and
expenses to fix the System such that the System is Ready for
Use within one month from the date of failure of the
Installation Tests. If the System is not Ready for Use within
the said one month period then Sub-Clause (b) or (c) shall
apply; and
(b) APL shall have the option to fix the System using its best
endeavours (either by themselves, their agents, contractors,
etc.) at CDKX's costs and expenses which shall be reimbursed to
APL on demand. If APL is unable to fix the System such that it
is Ready for Use within one month from the date when CDKX had
failed to fix the System (as described in Sub-Clause (a) above)
then APL shall have the right to forthwith terminate this
Agreement and upon termination CDKX shall (i) forthwith refund
to APL all sums paid to CDKX under this Agreement (if any); and
(ii) pay to APL such amount of damages which APL has suffered
as a result of the failure of the System up to a total maximum
of US$100,000.00 (save as for the events of indemnity pursuant
to Clause 29); or
(c) APL shall have the right to forthwith terminate this Agreement
and upon
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termination CDKX shall forthwith refund to APL all sums paid to
CDKX under this Agreement (if any) together with interest
calculated at 8% per annum on such amounts paid by APL to CDKX
from the time such amounts were paid.
Provided always the failure of the Installation Tests are not the cause
or fault of CDKX, its agents, employees, contractors or authorized
persons. CDKX shall in no event or circumstances be liable for the
acts, faults or negligence of APL, its staff, employees, personnel or
agents.
10.5 CDKX may request for individual unit test to be performed in the
presence APL on the hardware provided by APL to prove the failure of
the Installation Tests are not caused by the Hardware, Other Software
or the Software. APL shall ensure that the hardware provided by APL
shall confirm to the specification given in Schedule 1 and be
responsible for the rectification of such hardware fault proved by CDKX
during the Installation Tests.
10.6 Within 1 week after the Ready for Use Date, APL shall if the System has
not in the meantime failed or broken down, certify in writing to CDKX
that the System is Ready for Use and satisfactorily installed upon
which certification CDKX shall not be liable for any failure of the
System's operation other than as expressly provided for in Software
Maintenance as set forth in Clause 21 below, and for training and
pass-through warranty services (if any) as set forth in Clause 20
below. At least one representative of CDKX will remain at the Location
of APL during such 1 week for training and transition purposes,
pursuant to Clause 17.3 below.
11. Delays
------
11.1 CDKX shall ensure that the System is Ready for Use on or before the
Completion Date.
11.2 If CDKX shall fail to provide the System Ready for Use by the
Completion Date then CDKX shall pay to APL as and by way of liquidated
damages for any loss or damages sustained by APL resulting from delay
during the period from the Completion Date to the date on which CDKX
provides the System Ready for Use the sum of [US$1,000.00] or 0.1% of
the aggregate payment installments of the Price set out in Clause 17
(whichever the higher) for each day or part of the day of such delay up
to a total maximum of [US$100,000.00]. Subject to the provisions of
Sub-Clause 11.3 below the payment of such sums shall be in full
satisfaction of CDKX's liability for such delay only. The payment of
liquidated damages shall not relieve CDKX from its obligation to
provide the System Ready for Use or from any other liability or
obligation under this Agreement. APL reserves the right to deduct from
any payment installments of the Price due to CDKX by APL such
liquidated damages.
11.3 If CDKX shall fail to provide the System Ready for Use within [60] days
after the Completion Date then notwithstanding anything else contained
in this Agreement APL
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shall be entitled to terminate this Agreement forthwith on giving
written notice to CDKX and to recover from CDKX the amount of all
damages and loss suffered by APL resulting from such failure up to a
total maximum of US$100,000.00. Upon such termination CDKX shall
(without prejudice to APL's right to recover the amount of such damages
and loss as aforesaid) forthwith refund to APL all moneys previously
paid to CDKX under this Agreement.
11.4 CDKX shall not be held liable for delay due to the fault of the
hardware provided by APL as described in Clause 10.5 above or the
facilities provided by APL.
12. Licence
-------
12.1 CDKX hereby grants to APL an exclusive licence to use the Software and
CDK Technology(TM) in accordance with the terms set out hereafter
throughout the duration of this Agreement.
12.2 CDKX shall grant an exclusive license to APL to use the Software and
CDK Technology(TM) for the business, operation, development, trade,
activities, marketing or promotion of APL's system and websites or
business or projects which is solely in the Chinese language including
but not limited to all forms of Chinese media, literature, audio-visual
content and all other materials and/or data that can be presented
electronically or digitally using primarily the Chinese language ("the
Chinese Content") within any place, community, territory, country, area
or venue.
12.2.1 APL'S Other Rights
12.2.1.1 Notwithstanding Clause 12.2, APL shall have the right
to use the Software and CDK Technology(TM) to provide
or allow others to provide contents in any language
other than Chinese ("Other Languages") when the
content is :-
(a) Not primarily or solely in Other Languages or
which use of Other Languages is ancillary to or
incidental to the main contents, compilation of
music, film, music artist's work or theme being
marketed, promoted or used by APL or other
parties authorized by APL; and
(b) Not considered to be in competition with CDKX's
business or activities or affect the business,
promotion, advertising or other uses of CDKX
which relate to Artistic Works or Films or
Musical Works containing or using Other Languages
(save as to Musical Works containing Other
Languages and which Other Languages being used is
incidental to or ancillary to the entire
compilation of songs or Musical Works using Other
Languages of a
-12-
<PAGE>
relevant music artist(s) or group which is
primarily in the Chinese language or of Chinese
Content).
12.2.1.2 APL shall have the right (if necessary) to use the
Software and CDK Technology(TM) to provide or allow
others to provide content in Other Languages whereby
use of Other Languages is part of an entire business
package, agreement, arrangement or deal for the
marketing, promotion or sale of a product,
merchandise or film in various different languages
and countries, venues, territories, places or areas
("Business Package") and where use of Other Languages
is only ancillary to or incidental to the entire
Business Package and where use of Other Languages is
not the primary part or objective of the entire
Business Package.
12.2.1.3 Where APL wishes to use the Software and CDK
Technology(TM)to provide or wish to allow others to
provide content in Other Languages or any content
which is not primarily of Chinese Content and where
APL is not authorized to use the Software and CDK
Technology(TM)as set out in the terms of this License
then APL may in writing request the consent of CDKX
to use the Software and CDK Technology(TM)to provide
or allow others to provide content in Other Languages
or any content which is not primarily of Chinese
Content. Should CDKX, in writing and at its sole
discretion, consent to such use or arrangement then
such use or arrangement will not be deemed as a
breach of this Agreement or License provided always
that consent shall only apply on a case by case basis
for each specific matter or request.
12.2.2 CDKX'S Reserved Rights
12.2.2.1 Save and provided always, CDKX may (if necessary) use
the Software and CDK Technology(TM) to provide or
allow others to provide Chinese Content which are:-
(a) Not primarily or solely in the Chinese language
or which use of Chinese Content is ancillary to
or incidental to the main contents compilation of
music, film, music, artist's work or theme being
marketed, promoted or used by CDKX or other
parties authorized by CDKX; and
(b) Not considered to be in competition with APL's
business or activities or affect the business,
promotion, advertising or other uses of APL which
relate to Artistic Works or Films or Musical
Works containing or using Chinese Contents (save
as to Artistic Works or Films containing
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<PAGE>
Chinese Content and which Chinese Content is
incidental to or ancillary to the Other Languages
being spoken or sung, the Artistic Work being
presented or the actions being performed.
12.2.2.2 CDKX shall have the right (if necessary) to use the
Software and CDK Technology(TM) to provide or allow
others to provide Chinese Content whereby use of
Chinese Content is part of a Business Package and
where use of Chinese Content is only ancillary to or
incidental to the entire Business Package and where
use of Chinese Content is not the primary part or
objective of the entire Business Package.
Shall Chinese Content be used in any Business Package
then it is hereby agreed that CDKX shall pay to APL a
fee equivalent to 2% of the gross revenue of CDKX
which relate to Chinese Content (i.e. derived form
and attributed to the Chinese Content only and not
the entire Business Package as a whole) and which
said sum shall be paid bi-annually at the same time
as APL is required to pay a license fee as set out in
Clause 17.2 and based on the same terms of estimation
and reconciliation of accounts as APL and as set out
in Clause 17.2 of this Agreement.
12.2.2.3 Where CDKX wish to use the Software and CDK
Technology(TM)to provide or wish to allow others to
provide Chinese Content or any content which is not
primarily Other Languages and where CDKX is not
authorized to use the Software and CDK
Technology(TM)as set out in the terms of this License
then CDKX may in writing request the consent of APL
to use the Software and CDK Technology(TM) to provide
or allow others to provide Chinese Content or any
content which is not primarily in Other Languages.
Should APL, in writing and in its sole discretion,
consent to such use or arrangement then such use or
arrangement will not be deemed as a breach of this
Agreement or License provided always that consent
shall only apply on a case by case basis for each
specific matter or request.
In considering whether a party's use of the Software
or CDK Technology(TM) to provide or authorization for
another party to provide Chinese Content or content
in Other Languages (as the case may be) is in
competition with such party's business, the type of
Chinese Contents or content in Other Languages (as
the case may be), the target recipients of the
Chinese Content or content in Other Languages (as the
case may be), the likeness or similarity in business,
the intention of such relevant party, the
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<PAGE>
effect or impact on business of the relevant party
shall among other things be taken into account and
which factors must substantially in part or whole
affect such party's business or operations.
When assessing whether or not Chinese Content or
content in Other Languages (as the case may be) is
ancillary to or incidental to the main contents being
promoted, marketed or used by either party and or
such other persons authorized, the overall contents,
the amount of Chinese Content or content in Other
Languages (as the case may be) in comparison to the
amount of the Chinese Content or content in Other
Languages (as the case may be) being used, whether or
not the Chinese Content or content in Other Languages
(as the case may be) is the primary feature, whether
or not the Chinese Content or content in Other
Languages (as the case mat be ) is being used to
target recipients interested in the contents being
used promoted or marketed due primarily to or for
such Chinese Content or content in Other Languages
(as the case may be) shall among other things be
taken into account.
In considering whether or not Chinese Content or
content in Other Languages (as the case may be) is
ancillary to or incidental to the entire Business
Package and not the primary part or objective of the
Business Package, the number of different countries
(areas, venues, territories and places included), the
number of different languages, whether the Business
Package is of one agreement or several shall among
other things be taken into account.
By way of illustration only and not by way of
limitation, if for example CDKX or such other party
authorized by CDKX market, promote or use a Compact
Disc which contents contain Chinese art work of say a
picture or photograph that happens to have Chinese
language in the background or display in a small
portion of such picture or photograph then this would
not be deemed as primarily in the Chinese language
but rather incidental to the picture or photograph.
If, however, CDKX or such other party authorized by
CDKX market, promote or use the Chinese
language/Content which for example relates to music
or movies in the Chinese language and the English
language is used as subtitles or transliterations in
conjunction with the Chinese language being used then
this would be deemed as primary use of the Chinese
language and not incidental thereto.
By way of illustration only and not by way of
limitation, if for
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example, in relation to a Business Package CDKX enter
into agreement with a third party to market promote
or sell a "Pokemon" CD and which agreement is for the
distribution of Pokemon multimedia in US, Brazil,
France, England and Hong Kong in different languages
of say French, English, Portugese, and Chinese then
CDKX will not be in breach of this agreement but
shall be authorized to use the Software and CDK
Technology(TM) to provide or authorize others to
provide such Pokemon product in the Chinese language
provided CDKX pay a fee equivalent to 2% of the gross
revenue received by CDKX (or any of its subsidiaries,
holding company, associates, affiliates, etc.) and
derived from the Pokemon product in the Chinese
language.
12.2.3 Events of Default in lieu of License
Shall either party blatantly, willfully or unreasonably intend
to use or allow others to use the Software which are deemed in
breach of clause 12.2 (save where written consent has been
given per Clauses 12.2.1.3 and 12.2.2.3) or fail to cease and
desist, prevent or remedy its acts or others acts deemed as
breach (save where written consent has been given per Clauses
12.2.1.3 and 12.2.2.3) then the non-breaching party be entitled
to terminate this Agreement forthwith on giving written notice
to defaulting party and to recover from the defaulting party
the amount of all damages and loss suffered by the
non-breaching party resulting from such breach or default. Upon
termination of this Agreement the defaulting party shall pay
the non-breaching party (without prejudice to any other rights)
such amount of damages and losses as the non-defaulting party
has incurred or suffered as a result of termination and the
breach.
APL shall not use any other technology or software which is
related to or similar to the CDK Technology(TM) or the Software
throughout the Licence Period (save as otherwise agreed in
writing by CDKX).
12.3 APL shall not transfer or distribute (whether licence, loan, rental,
sale or otherwise) all or any part of the Software or the CDK
Technology(TM) to any other person or party without CDKX's express
written consent in each case. APL shall however have the right to and
be permitted to non-exclusively licence without the consent of CDKX the
Software or any part thereof or the CDK Technology(TM) to any other
party if such license is in relation to Chinese Contents and consistent
with the License granted by CDKX to APL and in relation to :-
(a) such business or operation whereby APL is a part of such other
person's business, operation or activity and is in control,
acting jointly, has an interest, is a part of such other
party's business, activity or operation or has done so in
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the capacity of a business partner, a sponsor or a participant
and such business, activity or operation with such other person
is in connection with or incidental to the operation of APL's
business; or
(b) its holding company, subsidiary, associates, affiliates or
members of its group of companies ("APL's Group of Companies").
Provided always such other party shall not be entitled to or have the
right to sub-licence or licence the Software and/or CDK Technology(TM)
to any other person or party. APL shall promptly notify CDKX of each
such sub-licence.
13. Duration of the Licence
-----------------------
The Licence shall commence on the Completion Date or on Ready for Use
Date (whichever is later) and continue until the termination of this
Agreement, at which time the License will terminate. This Licence shall
not be terminated by either party unless in accordance with the terms
of this Agreement.
14. Documentation
-------------
On the date specified in the Implementation Plan, CDKX shall provide to
APL (at no additional costs of the Price) such copies of the
Documentation in the English language and text containing sufficient
information as mutually agreed by both parties for the proper use and
maintenance of the System as specified in Schedule 5. All
Documentation, and any summaries, analyses and/or syntheses, and any
and all copies thereof, shall be returned to CDKX at the termination of
this Agreement.
15. Warranties
----------
15.1 CDKX warrants that Software will be free from defects in design,
material, workmanship and installation during the Licence Period. CDKX
shall maintain the Software in full working order at no additional cost
of the Price to APL.
15.2 CDKX warrants that the Software will be of merchantable quality or will
be fit for the purpose for which it is intended.
15.3 CDKX warrants that the Software will after acceptance by APL conform
fully to its specification and purpose as set forth in this Agreement
and Schedules hereto, and that the Documentation will provide adequate
instructions to enable APL to make proper use of such facilities and
functions.
15.4 CDKX further warrants that the Software will conform fully to the
standards, reliability and performance as set forth in this Agreement
and the Schedules hereto.
15.5 If CDKX receives written notice from APL of any breach of the said
warranties then
-17-
<PAGE>
CDKX shall, without prejudice to any other rights or remedies APL may
have, at its own costs and expenses and as soon as possible after
receiving such notice, repair or, at its option, replace the Software
or such parts of it as are defective or otherwise remedy such defect.
16. Other Matters giving cause for Damages and/or Termination
---------------------------------------------------------
16.1 In the event that CDKX's parent or holding company CDKNet.Com, Inc., a
company incorporated in the state of Delaware, the United States of
America and whose registered office is situate at 595 Stewart Avenue,
Suite 710, Garden City, New York, New York 11530 ("CDKX Parent") :-
(a) fail to or not have the Shares (i) registered with the SEC
pursuant to Section 12(g) of the Exchange Act and (ii) eligible
for trading on the National Association of Securities Dealers
Over-the-Counter Bulletin Board ("OTCBB") or any nationally
recognized stock exchange or electronic trading system (a
"National Exchange") on or before 28 February 2000 for whatever
reasons; or
(b) (in respect of the Shares) fail to maintain a listed company
status or otherwise become ineligible for trading on the OTCBB
or on any other National Exchange on or prior to 1 July 2000,
save and except in the following circumstances :-
(i) the Shares cease to be so listed due to CDK ceasing to
have a class of equity securities registered under the
Exchange Act 1934 ; and
(ii) the termination of such listing was as a result of a
voluntary act or decision of CDK and its shareholders and
whereby such voluntary act or decision leads to a general
offer being made to all shareholders of CDK for all the
Shares being held by such shareholders; or
(c) on or before 1 July 2000 :-
(i) be subject to any proceedings relating to bankruptcy,
winding up or insolvency in any courts of competent
jurisdiction; or
(ii) shall cease, or shall threaten to cease, to carry on its
business; or
(iii) APL shall terminate the Subscription Agreement (in
accordance with the terms therein) as mentioned in Clause
16.2 below.
(Sub-Clauses 16.1 (a), (b) and (c) are collectively hereinafter
called "Events of Default")
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<PAGE>
APL shall have the following rights and option to EITHER :-
(A) terminate this Agreement forthwith on giving written notice to
CDKX and to recover from CDKX the amount of all damages and
loss suffered by APL as a result of the Events of Default by
CDKX. Upon such termination (if applicable) shall also be
entitled to by notice in writing to CDKX Parent within a period
of [twenty-eight (28)] days upon APL becoming aware of the
happening of any of such events (whichever is later) to
terminate the Subscription Agreement hereinafter mentioned in
Clause 16.2 below between APL and the CDKX Parent;
OR
(B) elect to treat this Agreement as continuing and continue to
retain and use the Hardware, the Other Software and Software
and CDK Technology(TM) of the System so long as this Agreement
is in existence or is continued. Shall APL elect to treat this
Agreement as continuing APL shall (if applicable) also be
entitled to (at its discretion) to by notice in writing to CDKX
Parent within a period of [twenty-eight (28)] days upon APL
becoming aware of the happening of any of such events
(whichever is later) to terminate the Subscription Agreement
hereinafter mentioned in Clause 16.2 below between APL and the
CDKX Parent.
16.2 Whereas APL and CDK Parent have agreed to enter into a Subscription
Agreement for the subscription by APL of 1,800,000 common shares of CDK
Parent's Shares s ("the Subscription Shares") upon the following terms
(but not limited to such other terms as may be agreed by both parties)
:-
(a) Upon the signing by APL and CDK Parent of the Subscription
Agreement, APL shall pay to CDK Parent US$100,000.00 for the
issue and allotment by CDK Parent of 200,000 common shares of
CDK Parent's Shares to APL;
(b) On or before 30 December 1999, APL shall pay to CDK Parent
US$150,000.00 for the issue and allotment of 300,000 common
shares of CDK Parent's Shares to APL;
(c) On or before 28 January 2000 APL shall pay to CDK Parent
US$150,000.00 for the issue and allotment by CDK Parent of
300,000 common shares of CDK Parent's Shares to APL;
(d) On or before 29 January 2000 APL shall pay to CDK Parent
US$150,000.00 for the issue and allotment by CDK Parent of
300,000 common shares of CDK Parent's Shares to APL;
(e) On or before 30 March 2000 APL shall pay to CDK Parent
US$150,000.00 for the issue and allotment by CDK Parent of
300,000 common shares of CDK Parent's Shares to APL;
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<PAGE>
(f) On or before 28 April 2000 APL shall pay to CDK Parent
US$150,000.00 for the issue and allotment by CDK Parent of
300,000 common shares of CDK Parent's Shares to APL;
(g) On or before 30 May 2000 APL shall pay to CDK Parent
US$50,000.00 for the issue and allotment by CDK Parent of
100,000 common shares of CDKX Parent's Shares to APL;
In the event that APL shall either (i) fail to make any of the payments
described in this Clause 16.2 above on their respective due dates or
(ii) CDKX Parent shall terminate the Subscription Agreement (in
accordance with the terms therein) on or before 1 July 2000 or (iii)
CDKX shall terminate this Agreement in accordance with the terms of
this Agreement , then (without prejudice to any other rights and
remedies of CDKX) :-
(a) CDKX shall have the right to forthwith terminate this
Agreement; and/or
(b) (if applicable) CDKX shall be entitled by notice in writing to
APL within a period of [twenty-eight (28)] days upon CDKX
becoming aware of the happening of any of such events
(whichever is later) (for and on behalf of the CDKX Parent) to
terminate the said Subscription Agreement between the CDKX
Parent and APL.
17. Terms of Payment
----------------
17.1 The costs and expenses in relation to the provision of the Maintenance
Services, supply of and installation of the Other Software, Software
and the Hardware, Training, Documentation, Upgrade and Enhancement and
other provisions within the scope of this Agreement (save as to the
Licence Fee) shall be :-
(a) US$100,000.00 payable by APL to CDKX on the 30th day of May
2000 provided the System is Ready for Use by the Ready for Use
Date and provided further that this Agreement is not terminated
by APL in the meantime; and
(b.1) APL shall issue and allot to CDKX the Consideration Shares and
credited as fully paid and on the terms that they rank pari
passu in all respects with the other shares of APL in issue as
at the date of allotment.
Share Completion shall take place on the Completion Date or on
the Ready for Use Date (whichever is later). Shall this
Agreement be terminated due to the System not being Ready for
Use as per Clause 10 then no Consideration Shares shall be
allotted and issued by APL to CDKX mentioned herein this
Clause.
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<PAGE>
At the Share Completion APL shall procure that :-
(i) APL shall allot and issue credited as fully paid the
Consideration Shares to CDKX in the register of member of
APL as registered holder of the Consideration Shares; and
(ii) APL shall issue and deliver to CDKX appropriate share
certificates for the Consideration Shares duly executed
by APL.
(b.2) Subject to Clause 17.1 (b.3), APL hereby agrees and undertakes
with CDKX that it will not for a period of one (1) year after
the Share Completion or before the shares in any members of
APL's Group of Companies shall become listed on any recognized
stock exchange (whichever is earlier) ("the Restricted
Period") :-
(i) allot and issue any shares in APL; or
(ii) issue securities or any instrument convertible into
shares or debentures, or share warrants or options in
respect of shares in APL;
at a price less than the Consideration Share Price to any
other persons without the prior consent in writing of CDKX
Provided that the restrictions herein contained shall not
apply to :-
(i) the issue and allotment of approximately [10,000] common
shares of par value US$0.01 of APL by APL to Fairyoung
Holdings Limited or any of its subsidiaries and which
number of shares were contemplated in calculating the
percentage of Consideration Shares to CDKX; or
(ii) the issue and allotment of shares in any party hereto
pursuant to the exercise of any rights under the share
option plan in force from time to time for the benefits
of the executives and employees of APL.
(b.3) Notwithstanding the restrictions contained in Clause 17.1
(b.2), APL shall be entitled to do any of the matters
restricted pursuant to Clause 17.1 (b.2) without the prior
consent in writing of CDKX during the Restricted Period
Provided that it shall simultaneously upon the happening of
such event issue and allot such number of additional shares in
itself (excluding fraction of a share if any) to CDKX as shall
be necessary to ensure that no dilution shall take place in
relation to the share ownership and in the value of its shares
held by CDKX contemplated by this Agreement by reason of its
doing such matters but not otherwise.
17.2 The consideration and fees in respect of the Licence payable by APL to
CDKX in respect of the Software shall be a sum equivalent to 2% of the
gross revenue of APL
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and APL's Group of Companies (whether or not such revenue is directly
or indirectly related to the CDK Technology(TM)) and which said sum
shall be paid bi-annually within 15 days after the end of each 6
calendar months beginning with the 6 calendar months ending 31 December
1999. Such bi-annual payments will be based on the estimated gross
revenue, which estimate will be made by APL in good faith and which
shall be reconciled annually within 45 days of the end of each of APL's
relevant financial or accounting year which is [31 March] by a
reputable auditor or accounting firms. Such reconciliation shall be in
writing and delivered to CDKX. In the event the estimated payments are
less or more than the reconciled financial statements/accounts of APL
then the relevant party shall pay the difference between the estimated
payments made and the reconciled amount that was due, which payment
along together with interest calculated 8% per annum of any under
payment (if any) (i.e. 8% per annum on the aggregate difference between
the estimated payments made and the reconciled amount due and which
have been under paid to CDKX). The amount of the difference shall be
delivered with the reconciliation or within 7 days thereafter.
17.3 It is expressly agreed that (save as provided in this Clause 17.3)
where any installation, training or maintenance is to be provided by
CDKX within this Agreement APL shall be responsible for CDKX's
accommodation and food costs and expenses incurred (but not otherwise)
due to CDKX's staff, employee, agent or contractor travel to the
Location during such period of installations, maintenance or training.
APL shall arrange for and provide reasonably acceptable accommodations
and will promptly reimburse CDKX for such food and accommodation costs
and expenses incurred by CDKX but not otherwise and provided such
accommodation, food and costs are reasonable and reasonably and
normally expected of such person in such capacity to conduct the
Training, Installation and Maintenance Services and in any event the
total cost or expense per installation, training or maintenance (as the
case may be) do not exceed [US$3,500.00] per person, per week and such
persons do not exceed two per given period or time of training,
maintenance or installation (as the case may be).
18. Training
--------
18.1 Upon request of APL, CDKX shall provide the staff of APL with the
training as specified in the Training Plan set out in Schedule 4, if
any, provided therein.
18.2 Any additional training required by APL shall be provided by the CDKX
if requested by APL. Such additional training and support (including
that of Section 18.3) shall be by way of telecommunication or other
suitable media of communication with APL and not at the Location of APL
and at a time reasonably convenient to both parties.
18.3 Upon the request of APL, CDKX agrees to provide all necessary training,
the Other Software and Software, and technical support in order to
assist APL to support its own websites, hardware and software
applications which are related to CDK enabled products and websites.
CDKX hereby agrees to make available within a reasonable time after
request by APL such training staff, hardware and software from time to
time.
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19. Maintenance Services
--------------------
CDKX shall, during the continuance of this Agreement, provide training
(if possible and within CDKX's ability to) on an ongoing basis to APL
to assist APL to (i) conduct such maintenance services and (ii) to
procure such other relevant parties to carry out such maintenance
services (as applicable) as necessary to maintain the System (except
the Hardware) in its full and proper working order and (iii) to remedy
any defaults, breakdown, or System (except the Hardware) failure within
a reasonable time, all as set forth in Clause 21 below.
20. Maintenance of the Hardware
---------------------------
20.1 Within the period of eight (8) months specified in Clause 6.3 of this
Agreement and provided APL have not purchased or returned the relevant
One Set Unit or Hardware, CDKX shall provide the following :-
Where any of the Hardware is under warranty, guarantee or service
agreement by a third party to CDKX or CDKX is able to benefit in any
way or manner from such Hardware warranty, guarantee or service
agreement (as the case may be) then CDKX shall use reasonable
commercial efforts to procure the relevant party to perform such
relevant preventative maintenance or remedial maintenance which such
party is obligated to perform in respect of the Hardware (at no
additional costs, expenses or charges to APL), provided however that
CDKX shall not be obligated to incur any costs in connection therewith.
Where the Hardware is under no such warranty, guarantee or service
agreement as above or APL have in the meantime returned or purchased
the One Set Unit or Hardware then CDKX shall provide training (if
possible and can be done by CDKX) to APL within the eight (8) months
period described in Clause 6.3 of this Agreement as to how to conduct
and perform remedial or preventative maintenance of the Hardware at no
unreasonable costs, expenses or charges to APL. Training shall be given
by CDKX and at a such appropriate times and reasonable manner and at
the request of APL. The training shall be carried out at the Location
during the period of installation of the Hardware and afterwards if
possible or through some appropriate form or media of communication
with APL ("Training").
20.2 Where applicable APL shall make the Hardware at the Location accessible
to such person CDKX is able and under obligation to procure for
maintenance at regular intervals or at scheduled times to be mutually
agreed between APL and CDKX.
20.3 Unless otherwise provided for in any of the Hardware's warranty,
guarantee or service agreement (if any) APL shall at its own expense
provide all necessary replacement parts to effect all maintenance
services including the consumable parts for the Hardware.
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<PAGE>
20.4 In the event that CDKX or such relevant person obligated under
warranty, guarantee or service agreement of the relevant Hardware
removes any part or parts of the Hardware away from the Location for
overhaul or repair, unless otherwise agreed by both parties APL shall
bear all the costs, including but not limited to packing, carriage and
insurance incurred in the dismantling, removal, overhaul, repair,
return and re-installation of the said part or parts.
20.5 Parts removed shall become the property of CDKX provided always that
APL shall be entitled to retain any part which is to be replaced if
CDKX is unable to erase all the data stored in any form in such parts
of the Hardware. CDKX shall, before removal of any such part, certify
to APL in writing that all information stored in such part has been
completely erased and shall be liable for any loss or damage caused by
the possession or use of any information remaining in any part of the
Hardware so removed.
20.6 Any of the Hardware not under a warranty, guarantee or service
agreement and which do not cover repair, parts, overhaul, etc. (as the
case may be) and which require repair, replacement, overhaul, etc. the
cost of such repair, part, replacement, etc. shall be borne by APL.
21. Maintenance of the Software
---------------------------
21.1 CDKX shall provide the following maintenance services in respect of the
Software on the terms and conditions as set out hereunder.
21.2 Error Correction
21.2.1 Upon receipt of notification from APL that there is any defect
or error in the Software that affect the operation of the
System, CDKX shall correct such defect or error as soon as
reasonably practicable at its own expenses.
21.2.2 Forthwith upon such correction being completed CDKX shall
deliver to APL appropriate amendments to the Documentation
specifying the nature of the correction and providing
instructions for the proper use of the corrected version of the
Software.
21.3 Upgrades and Enhancements
21.3.1 CDKX shall deliver to APL any improved version of the Software
when and as they become available.
21.3.2 In reasonable time prior to the delivery of a new release CDKX
shall make available to APL all amendments to the Software's
specification which shall be necessary to describe the
facilities and functions of the new release.
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<PAGE>
21.3.3 Notwithstanding anything else contained herein, APL shall not
be obliged to accept or use the new release if its use would
result in any of the facilities and functions of the System
being diminished or curtailed or if its use would unduly
interrupt the use of the Software in which event CDKX shall
continue to perform its obligations in respect of the Software.
CDKX's obligations under this Agreement with regard to the
Software shall also apply to any such new version or
replacement thereof.
21.3.4 It is an essential term of this Agreement that CDKX shall (and
CDKX hereby agrees to) make modifications, enhancements
upgrades or further development from time to time of and on the
Software at the request in writing by APL (which request must
not be unreasonable and be within the scope of current and
available technology and software on the market and relate to
CDKX's development plan). CDKX undertakes to make complete,
available and install the same on the Hardware such upgrade,
modification, enhancement and development to the Software upon
such reasonable request by APL within a reasonable time and as
soon as possible.
21.4 CDKX shall provide and perform the Software support services in a
reasonable and timely manner.
21.5 CDKX undertakes to perform its obligations with respect to the
maintenance of the Software or any new version or replacement thereof
in accordance with the terms of this Agreement for as long as its
obligations under this Agreement to maintain the Software remain in
existence.
22. Title to and Risk in the System
-------------------------------
22.1 All copyright or other proprietary rights in the Software and Other
Software and material and Hardware hired from CDKX pursuant to the
provisions of this Agreement (except those otherwise specified and
except for the relevant Hardware purchased by APL) shall vest in and
remain the property of CDKX notwithstanding that APL has acquired the
right of use of them by this Agreement. All software and hardware
purchased and owned by APL and Data (save such Data that was collected
on or through the "Com Module" or messaging system of CDKX) collected
or used, from, in or by the System pursuant to the provisions of this
Agreement shall vest in and remain the property of the APL.
22.2 APL shall be liable for the Hardware which are hired by APL from CDKX,
except to the extent of fair wear and tear in the ordinary course of
its use.
22.3 APL shall be liable for damages to the Hardware which are hired by APL
from CDKX save for damages as a result of the Hardware itself which was
defective or the Hardware's design, workmanship, material,
installation, configuration or manufacture
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<PAGE>
or caused by or as a result of CDKX's act (whether intentionally or not
or whether by CDKX's agent, employee, authorized person or contractor).
23. Proprietary Rights
------------------
The copyright and other intellectual property rights of whatever nature
in the Software (save as provided in this Agreement) are and shall
remain the property of the CDKX and CDKX reserves the right to grant a
licence to use the Software (save as provided in Clause 12 of this
Agreement) to any other party or parties.
24. Copying
-------
APL may make so many copies of the Software as are reasonably necessary
for the operational, security and use of the System and for its
reasonable course of business, all of which copies shall be returned to
CDKX upon the termination of the Licence. APL will notify CDKX in
writing of each such copy.
25. Confidentiality
---------------
25.1 APL's Confidential Information
Each party shall treat as confidential all information (hereinafter
referred to as ("the Information")) supplied by one party to the other
under this Agreement which is designated as confidential by such party
or which is by its nature clearly confidential (including without
limitation the Documentation) provided that this Clause shall not
extend to any information which was rightfully in the possession of the
relevant party prior to the commencement of the negotiations leading to
this Agreement or which is already public knowledge or becomes so at a
future date (otherwise than as a result of a breach of this Clause).
Neither party shall divulge any confidential information to any person
except to its own employees and then only to those employees who need
to know the same. Both parties shall ensure that its employees are
aware of and comply with the provisions of this Clause. The foregoing
obligations shall survive any termination of the Licence or this
Agreement.
25.2 Confidentiality of Software :-
25.2.1 APL undertakes to treat as confidential (and not use or allow
any third party to use except as set forth in this Agreement)
all information (including those related to the CDK
Technology(TM) and the Software) contained or embodied in the
Software (hereinafter collectively referred to as ("the
Information") provided that this Clause shall not extend to any
information which was rightfully in the possession of APL prior
to the commencement of the negotiations leading to this
Agreement or which is already public knowledge or becomes so at
a future date (otherwise than as a result of a breach of this
Clause).
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<PAGE>
25.2.2 Neither party shall without the prior written consent of the
other party divulge any part of the Information to any person
except :-
(a) the person is the relevant parties own employee and then
only to those employees who need to know the same;
(b) any government authorities and any other persons or
bodies having a right, duty or obligation to know the
business of the relevant party and then only in pursuant
of such right, duty or obligation; and
(c) any person for the time being appointed by the relevant
party to maintain any Hardware on which the Software is
for the time being used (in accordance with the terms of
the Licence) and then only to the extent necessary to
enable such person to properly maintain such Hardware.
25.2.3 Both parties undertake to ensure that the persons and bodies
mentioned in Sub-Clauses 25.2.2(a), (b) and (c) are made aware
prior to the disclosure of any part of the Information that the
same is confidential and that they owe a duty of confidence to
each other.
25.2.4 The foregoing obligations as to confidentiality shall remain in
full force and effect notwithstanding any termination of the
Licence or this Agreement.
26. Use of Data
-----------
26.1 The Data (save as for the Data collected through the Com Module or
messaging system of CDKX) shall remain the property of APL and CDKX
shall not distribute the Data to any person or party without the prior
written consent of APL.
26.2 CDKX shall not by any means distribute or alter the Data replicated
from APL for any purpose, unless it is authorized by APL to do so for
any reason whatsoever.
26.3 The Data must be returned (if in CDKX's possession) to APL when this
Agreement is terminated.
27. Independent Contractor
----------------------
27.1 For the purpose of the Work to be performed under the Agreement, CDKX
is an independent contractor. CDKX is not an agent, partner or employee
of APL and shall not hold out as such and it has no authority to bind
APL to any other obligations.
27.2 CDKX shall have complete control of the Work and it shall efficiently
direct and supervise the Work to the full extent of its ability and
with its full attention.
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<PAGE>
28. Assignment
----------
Neither party shall assign or otherwise transfer the Agreement or any
of its rights and obligations hereunder whether in whole or in part
without the prior written consent of the other. Provided however either
party may sell all or substantially all its assets or business
(including this Agreement) without consent in which event the other
party (i.e. non disposing party) shall have the right to terminate this
Agreement forthwith without any damages, claims, legal proceedings, or
action being taken or claimed by either party against each other.
29. Indemnities
-----------
29.1 CDKX warrants and undertakes :-
29.1.1 that it has good and sufficient title in the Hardware and
Software and in every part thereof to enable it to supply the
System and the Maintenance Services to APL as set out in this
Agreement; and
29.1.2 that where CDKX supplies a third party software to APL, it has
or shall have, prior to the delivery of the Software and Other
Software, a valid and continuing licence under which it is
entitled to sub-license without further payment and
intellectual property rights (including without limitation any
patent, copyright, registered design or trademark) to APL under
this Agreement; and
29.1.3 that the Other Software were properly and validly licensed to
CDKX and that CDKX is not in breach of any licence terms of
such Other Software.
29.2 CDKX shall indemnify APL and keep APL fully and effectively indemnified
against all costs, claims, demands, expenses and liabilities of
whatsoever nature arising out of or in connection with any claim that
the use or possession (in compliance with this Agreement) of the System
or any part thereof infringes the intellectual property rights
(including without limitation any patent, copyright, registered design
or trademark) of any third party, subject to the following conditions
:-
29.2.1 APL shall promptly notify CDKX in writing of any allegations of
infringement of which it has been notified and will not make
any admissions without CDKX's prior written consent provided
such consent is not unreasonably withheld so as to cause any
damages, liability, prosecution, claims, etc. by any person,
company, business, firms, entity, authority, government or body
whatsoever in addition to or in conjunction with any such
allegations;
29.2.2 APL, at the request and expense of CDKX, shall allow CDKX to
conduct
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<PAGE>
and/or settle all negotiations and litigation resulting from
any such claim provided APL are informed as to the terms of
settlement and/or litigation merits prior to any such
settlement negotiations and/or litigation action by CDKX and
provided also that APL is kept informed of all matters
throughout the duration and course of settlement and/or
litigation. Shall the terms of settlement and/or litigation
proceedings as proposed by CDKX affect or possibly affect APL
or APL's Group of Companies and/or its business in any way
either in conjunction with or in addition to any
allegations/claims/ demands/proceedings etc. against APL then
APL shall have the right to revoke its consent (if given) and
to conduct such litigation/settlement/ negotiations on its own
without consent from CDKX; and
29.2.3 APL shall, at the request of CDKX, afford all reasonable
assistance with such negotiations or litigation, and shall be
reimbursed by CDKX for any expenses incurred in so doing.
29.3 If APL's use or possession of the Hardware, Other Software or Software
or any part thereof is held by a court to constitute an infringement
then the CDKX shall, without prejudice to any other rights or remedies
APL may have, promptly and at its own expense :-
29.3.1 procure (so far as is commercially viable and possible within
CDKX's ability) for APL the right to continue using and
possessing the Hardware, Other Software and Software in
relation to the System; or
29.3.2 (so far as commercially viable and possible within CDKX's
ability) modify or replace the Hardware or Software or Other
Software (without detracting from its overall performance) so
as to avoid the infringement (in which event CDKX shall
compensate APL for the amount of any loss and/or damage
sustained or incurred by APL during such modification or
replacement); or
29.3.3 if neither Sub-Clause 29.3.1 nor 29.3.2 can be accomplished,
remove the infringing Hardware, Other Software and/or Software
from APL at CDKX's own costs and expenses (and without
prejudice to any rights or remedies of APL against CDKX).
29.4 APL warrants and undertakes :-
29.4.1 that it has good and sufficient title in any software,
hardware, material, content or data and in every part thereof
which is being used by APL in respect of the System and not
derived from CDKX;
29.4.2 where APL installs, stores, or uses a third party software,
data, content or material, it has or shall have prior to such
installation, storage, or usage a valid and continuing licence
under which it is entitled to install, use or store
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and has all such intellectual property rights (including
without limitation patent, copyright, registered, design or
trademark).
29.5 Any and such indemnities, rights, or actions which APL have under
Clauses 29.2 and 29.3 in respect of an undertaking or breach of
warranty by CDKX in Clause 29.1 then the same such indemnities, rights
and actions shall be afforded and given to CDKX by APL in respect of
any such undertaking or breach of warranty by APL in Clause 29.4 and
which may affect CDKX.
30. Publicity
---------
Both parties shall submit to each other all advertising or other
publicity material relating to this Agreement or any hardware or
software supplied or other work done in connection with this Agreement
wherein the name of either of the respective parties is mentioned or
language used from which a connection with each other can reasonably be
inferred or implied. Both parties shall have the right to publish or
use any such reasonable advertising or other reasonable publicity
material without the prior written consent either party provided such
advertising or publicity material does not and is not capable of
damaging either parties reputation or business.
31. Sub-contracts
-------------
31.1 CDKX may, without the prior written consent of APL, enter into any
sub-contract with any person for the performance of any part of this
Agreement provided that this provision shall not apply to the purchase
by CDKX of equipment and materials.
31.2 Neither parties shall be relieved from any of its obligations hereunder
by entering into any sub-contract for the performance of any part of
this Agreement.
32. Termination of the Agreement
----------------------------
This Agreement may be terminated under the following circumstances :-
32.1 This Agreement may be terminated forthwith by either on giving notice
in writing to the other party if the other party, being a company,
shall have a receiver or liquidator appointed or shall pass a
resolution for winding-up (otherwise than for the purpose of
amalgamation or reconstruction) or a court shall make an order to that
effect or being a partnership shall be dissolved or being an individual
shall commit any act of bankruptcy or shall die or either party
(whether a company or not) shall enter into any composition or
arrangement with its creditors or shall become insolvent.
32.2 Any termination of this Agreement under Sub-Clause 32.1 shall discharge
the parties from any liability for further performance of this
Agreement and shall entitle such notifying party to recover from the
other party the amount of any loss or damage sustained or incurred by
the notifying part as a consequence of such termination.
-30-
<PAGE>
32.3 Subject to any other express provisions of this Agreement, either party
shall have the right to terminate this Agreement if the other party
commits any fundamental breach of any material term of this Agreement
and (in the case of a breach capable of being remedied) shall have
failed, within 30 days (save in the circumstances where APL is under an
obligation to pay money to CDKX then such period shall be within 7
days) after the receipt of a request in writing from the innocent party
so to do, to remedy the breach, such request to contain a warning of
the innocent party's intention to terminate.
33. Effect of Termination
---------------------
33.1 Any termination of this Agreement (however occasioned) shall not affect
any accrued rights or liabilities of either party nor shall it affect
the coming into force or the continuance in force of any provision
hereof which is expressly or by implication intended to come into or
continue in force on or after such termination. Any termination of this
Agreement (however occasioned) shall terminate the Licence.
33.2 Upon termination of this Agreement, (howsoever occasioned) CDKX shall
forthwith deliver up to APL all copies of any information and Data
supplied to CDKX by APL for the purposes of this Agreement and shall
certify to the APL that no copies of such information or data have been
retained. The Hardware not purchased and paid for by APL shall be
returned to CDKX (fair wear and tear save and except) at APL's own
costs and expenses along with any Documentation.
33.3 Upon termination of this Agreement (howsoever occasioned) APL shall
forthwith deliver to CDKX all copies of any of the Documents Software
and Other Software (including those of the CDK Technology(TM)) and any
copies or reproductions thereof (whether in writing or in any format or
medium whatsoever and whether in whole or part), and if requested by
CDKX, shall destroy the same and certify to CDKX such destruction.
Further, APL shall not use, and is prohibited from any further use of
the Documentation, Software, Other Software or CDK Technology(TM)
thereafter. Furthermore, APL shall certify to CDKX that it has no
copies of such Software or information related thereto or information
related thereto and APL shall certify that it has no copies of such
Software or information related thereto.
34. Severability
------------
In the event that any condition or clause of the contract not being of
a fundamental nature is held to be illegal or unenforceable, the
validity or enforceability of the remainder of this Agreement shall not
be affected thereby.
35. Other Terms, Matters, and Conditions to be Fulfillied
-----------------------------------------------------
35.1 It is hereby expressly agreed by CDKX that APL shall be granted a
licence and shall have the right to use CDKX's proprietary right
including all the intellectual property
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<PAGE>
rights in the following trademarks and designs :-
(a) "MixFactory(TM)";
(b) the "MixFactory(TM)" device;
(c) "CDKnet(TM)"; and
(d) the "CDKnet(TM)" device
(collectively referred to as "CDK's Trademarks")
Provided always that the use of the above trademarks and designs by APL
only to be placed, copied, used or reproduced on CDs, brochures,
business cards or business advertisement or signboards, websites,
coverings and any other advertising, promotional or product material of
APL which is in relation to or connected to the CDK Technology(TM) in
conjunction with APL's business, APL's Group of Companies or
proprietary trademarks and designs thereon and provided further APL
shall pay a licence fee of US$10.00 per annum to CDKX payable on the
31st December of each calendar year until the termination of this
Agreement.
The licence and right to use the trademarks or designs described above
by APL shall commence on the date of the signing of this Agreement by
both parties and continue until the termination of this Agreement, at
which time such trademark licence shall terminate. The licence of CDK's
Trademarks shall not be terminated by either party unless in accordance
with the terms of this Agreement.
Upon the termination of this Agreement shall APL have any product,
merchandize, goods or material which contain any of CDK's Trademarks
and which is still in APL's possession, then APL shall have a period of
two (2) months from the date of termination to dispose of, sell or
transfer such merchandize, products, goods or material to any person or
party, whether or not for monetary gain or consideration and thereafter
APL shall cease and desist from using any of CDK's Trademarks or sell,
dispose, transfer or handle any goods, materials, products or
merchandize with CDK's Trademarks.
35.2 It is expressly agreed that CDKX shall use its best commercially
reasonable efforts to provide, procure, grant, allow and permit (as the
case may be) the following rights, products and facilities to APL
throughout the duration of this Agreement if requested by APL to :-
(a) procure or provide (as the case may be) hosting of a North
American mirror website to and for APL's System at suitable
site in the United States of America (the equipment for which
site will be purchased and maintained by APL); and
(b) allow APL to share the use of the existing "Real Player" video
streaming licence as CDKX may have or has licenced for its own
use; and
-32-
<PAGE>
(c) procure or provide (as the case may be) free usage and
accommodation of one office room or premises at such location
in the United States of America where CDKX shall maintain or
have an office for APL's employee or staff; and
(d) provide (at cost) usage and equipment of a "CDK robot system"
at the said premises described in Sub-Clause (c) above.
It is hereby agreed by CDKX that it shall procure, allow and make
available all of the above rights, products, facilities and software to
APL within 30 days from the date of execution of this Agreement by both
parties or by the Ready for Use Date (whichever is later). It is
further agreed that shall the cost and expenses to CDKX in procuring or
providing items (a), (b), (c) and/or (d) above exceed US$2,000.00 then
APL shall bear any and such of the excess amount above US$2,000.00.
35.3 It is also agreed that such of the rights APL shall have in Clause 35.2
to be procured or provided by CDKX, CDKX shall have the same rights
procured or provided by APL to CDKX save that the premises or location
shall be in Hong Kong where APL maintains an office or premises.
36. Duration of the Contract
------------------------
This Agreement shall commence from the date of this Agreement and
continue for an initial period of 5 years and after that for a further
period of 5 years unless terminated by either party or giving not less
than 3 months' prior written notice before the expiration of the
initial 5 year period (and which notice shall not be served more than 6
months prior to the expiry of the initial period) or unless terminated
in accordance with the provisions of this Agreement.
37. Hire Equipment
--------------
37.1 Risk in any hired equipment supplied by CDKX shall remain with APL
until returned to CDKX.
37.2 Upon the expiry of eight months after the Completion Date or earlier
termination of this Agreement, and unless APL have exercised its option
to lease or purchased the One Set Unit or the Hardware, APL shall
deliver the hired equipment not purchased or lease to CDKX as described
in Clause 6.3 of this Agreement.
37.3 CDKX shall accept hired equipment returned by APL in reasonable
condition with fair wear and tear expected without further payment
being required. CDKX shall provide an acknowledgement to APL of receipt
of hired equipment in accepted condition upon delivery and testing.
37.4 APL shall properly and sufficiently take out proper insurance for the
Hardware against any foreseeable damages or loss thereto save for such
events under Clause 42 and
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<PAGE>
whereby such insured amount is adequate to cover the value of the
Hardware of not less than US$94,400.00 per One Set Unit unless APL has
purchased the relevant Hardware in the meantime.
38. Entire Agreement
----------------
This Agreement supersedes all prior agreements, arrangements and
undertakings between the parties and constitutes the entire agreement
between the parties relating to the subject matter hereof. No addition
to or modification of any provision of this Agreement shall be binding
upon the parties unless made by a written instrument signed by a duly
authorized representative of each of the parties.
39. Law and Jurisdiction
--------------------
39.1 This Agreement shall be governed by and construed in all respects in
accordance with the laws of the state of New York in the United States
of America ("New York") and the parties hereby irrevocably submit to
the non-exclusive jurisdiction of the Courts of New York.
39.2 Each of the following parties hereby irrevocably appoints (subject to
written notie of substitution) the person set opposite its name below
as its agent to acknowledge and accept service of legal process on
behalf of such party in :-
PARTIES NAMES OF ADDRESSES OF AGENTS
------- ----------------------------
CDKNet, LLC Steven A. HOROWITZ
595 Stewart Avenue, Suite 710,
Garden City, New York,
United States of America 11530
Asia Pioneer Limited Keith T.K. WONG
Shop No.3A, Ground Floor
Site 4, Whampoa Garden,
Hung Hom, Kowloon,
Hong Kong
40. Service of Notice
-----------------
40.1 Any notice required to be given under this Agreement shall be
sufficiently given if delivered personally or forwarded by
internationally recognized overnight couriers or sent by facsimile
transmission to the relevant party at its address or fax number set out
below (or such other address as the addressee has by five days prior
written notice specified to the other parties) :-
To CDKX : 595 Stewart Avenue, Suite 710,
Garden City, New York,
United States of America 11530
-34-
<PAGE>
Fax Number : (516) 222 2665
Attention : Steven A. HOROWITZ
To APL : Shop No.3A, Ground Floor
Site 4, Whampoa Garden,
Hung Hom, Kowloon,
Hong Kong
Fax Number : (852) 2335 0889
Attention : Keith T.K. WONG
40.2 Any notice delivered personally shall be deemed to have been served at
the time of delivery. Any notice sent by internationally recognized
overnight couriers shall be deemed to have been served 3 business days
after the time at which it was delivered to the courier, the tracking
receipt shall be sufficient to prove such service and notices sent by
facsimile transmission shall be deemed to have been served one business
day after transmission.
41. Waiver
------
No forbearance, delay or indulgence by either party in enforcing the
provisions of this Agreement shall prejudice or restrict the rights of
that party nor shall any waiver of its rights operate as a waiver of
any subsequent breach and no right, power or remedy herein conferred
upon or reserved for either party is exclusive of any other right,
power or remedy available to that party and each such right, power or
remedy shall be cumulative.
42. Force majeure
-------------
Neither party will be liable for any delay in performing or failure to
perform any of its obligations (other than a payment obligation) under
this Agreement due to any cause outside its reasonable control. Such
delay or failure will not constitute a breach of this Agreement and the
time for performance of the affected obligation will be extended by
such period as is reasonable.
43. Extent of Liability
-------------------
Notwithstanding any other terms of this Agreement, CDKX's liability to
APL (if any) arising under or out of this Agreement (save as to the
indemnities given under Clause 29 by CDKX) shall be limited to not more
than US$100,000.00 in aggregate total.
44. Provision of Other Software
---------------------------
CDKX shall provide to APL the Other Software at no additional costs and
expenses to
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<PAGE>
APL. CDKX shall install the Other Software on the Hardware by the Ready
for Use Date.
Upon receipt of notification from APL that there is any error or defect
in the Other Software that affect the operation of the System, CDKX
shall use its best endeavours to procure such software manufacturer or
provider to correct such defect or error as soon as reasonably
practicable at its own expense and provided the Other Software is under
such warranty, guarantee or service agreement to be maintained or
replaced in such event of defect or error.
CDKX shall deliver to APL any improved or enhanced version of the Other
Software when and as they become available and which CDKX may have in
its possession at the request of APL at no additional cost.
45. Warranties as to APL Shares
---------------------------
45.1 In consideration of CDKX agreeing to enter into this Agreement APL
warrants and represents to CDKX as at the date of this Agreement that
:-
45.1.1 the particulars of APL contained in Schedule 9 are true and
accurate in all respects;
45.1.2 all returns particulars resolutions and other documents
required to be filed with the relevant authorities in the
Cayman Islands by APL have been duly filed and APL has complied
with all legal requirements in connection with its formation
and with all isues of its shares;
45.1.3 following the implementation Clause 17 in relation to the
Consideration Shares CDKX will be the beneficial owner of
approximately four and eighty-nine one hundredths per cent
(4.89%) of the equity share capital of APL as at the date of
allotment of the Consideration Shares to CDKX;
45.1.4 the Consideration Shares shall be allotted and issued credited
as fully paid and on terms that they will rank pari passu in
all respects with the [common] shares in APL in issue as at the
date of allotment of the Consideration Shares;
45.1.5 since the date of incorporation of APL :-
(a) each of APL and APL's Group of Companies has carried on
its business in the ordinary and usual course;
(b) no distribution of capital or income has been declared
made or paid in respect of any share capital of each of
APL and APL's Group of Companies;
-36-
<PAGE>
(c) each of APL and APL's Group of Companies has not assumed
or incurred any liabilities or expenditure otherwise than
in the ordinary course of carrying on its day-to-day
business;
(d) there has been no material adverse change in the
financial position of each of APL and APL's Group of
Companies;
45.1.6 the assets and equipment acquired by each of the APL and APL's
Group of Companies since the date of incorporation of APL are
the property of and owned by APL and/or APL's Group of
Companies (as the case may be) and are not subject to any
debenture, mortgage, encumbrance or charge or any other third
party interest;
45.1.7 all debts owed to each of APL and APL's Group of Companies will
be good and collectable in the ordinary course of business;
45.1.8 (a) all necessary licences consents permits and authorities
have been obtained by each of APL and APL's Group of
Companies to enable each of them to carry on its business
lawfully and effectively in the places and in the manner
in which such business is now carried on;
(b) each of APL and APL's Group of Companies has not done or
omitted to do anything in contravention or breach of any
statute order or regulation or the like in Cayman
Islands, Hong Kong or elsewhere applicable to it or its
business and giving rise to any fine, penalty, default
proceedings or other liability on its part;
(c) each of APL and APL's Group of Companies has conducted
and is conducting its business in accordance with
applicable laws and regulations in Cayman Islands, Hong
Kong or elsewhere applicable to it;
45.1.9 there are no agreements or arrangements entered into by each of
APL and APL's Group of Companies otherwise than by way of
bargain at arm's length and all contracts are entered into in
the normal course of business;
45.1.10 each of APL and APL's Group of Companies is not engaged either
on its own account or vicariously in any material litigation or
arbitration or tribunal proceedings and no litigation
arbitration or tribunal proceedings are pending or threatened
by or against each of APL and APL's Group of Companies;
45.1.11 (a) there are not in existence any contracts of service with
directors or employees of each of APL and APL's Group of
Companies which cannot be terminated by notice without
giving rise to any claim for damages or compensation
(other than under any relevant employment
-37-
<PAGE>
legislation);
(b) each of APL and APL's Group of Companies and their
respective employees are not involved in any industrial
dispute;
45.1.12 (a) each of APL and APL's Group of Companies has properly
made all returns and provided all other information
required for the purposes of taxation and none of such
returns is disputed by the Inland Revenue Department,
Hong Kong or any other authority concerned;
(b) all payments by each of APL and APL's Group of Companies
to any person which ought to have been made under
deduction or withholding of tax have been so made and
each of APL and APL's Group of Companies has (where
required by law to do so) accounted to the Inland Revenue
Department, Hong Kong for the tax deducted or withheld.
-38-
<PAGE>
SCHEDULE 1
----------
(Hardware)
CDKX shall provide the following minimum Hardware configuration to APL as set
out herein to make the System functional and operational :-
Description Quantity Value (US$)
----------- -------- -----------
1. MixFactory(TM) CD Robot Station 2 $60,000.00
- - One (1) Main robot [total 2] (each)
- - Four (4) 4X CD burners [total 8]
- - Four (4) 12X CD readers [total 8]
- - One (1) Rimage B&W printer [total 2]
- - One (1) Workstation [total 2]
2. MixFactory(TM) Database System 1 $18,500.00
- - One (1) main database server
- - Two (2) raid systems
- - One (1) gadzoox hub
3. Jewel Box Insert Printing System 1 $12,900.00
- - One (1) printing workstation
- - One (1) color printer
4. MixFactory(TM) Web System 1 $3,000.00
- - One (1) main web server
- - One (1) basic workstation (admin.)
- - One (1) real audio server* (not including license)\
NB - All of the above described equipment together comprise the Hardware.
- One (1) MixFactory(TM) Robot Station, One (1) MixFactory(TM) Database
System, One (1) Jewel Box Insert Printing System; and One (1)
MixFactory(TM) Web System together comprise One Set Unit of the
Hardware and is valued at US$94,400.00.
- Each individual item of the Hardware as listed above shall be known as
"Units" with a value as set out beside such Units.
-39-
<PAGE>
The Hardware shall be installed and have the minimum equipment and configuration
as per diagram below.
[DIAGRAM]
-40-
<PAGE>
SCHEDULE 2
----------
(System)
Background
- ----------
Whereby CDKX has developed the software and the applications necessary and known
as CDK Technology(TM) which combines CD digital audio, fullmotion, fullscreen
video and weblinking through a browser interface. And whereas the said
technology is combined with a HTML authorizing system which is currently used by
CDKX to produce custom interface pages for specific clients within a period of
time. And whereas CDKX has the proprietary techniques and rights for creating
fullmotion, fullscreen video playback from CD Rom with such relevant hardware
system requirements. The technology employed, designed and engineered by CDKX is
engineered for mass production whereby the integration of the complete file
structure of the technology used by CDKX is automated. (Audio, video and HTML
assets can be placed in the production template for processing within a
reasonably efficient and quick development turn-around time.)
Currently CDKX has a "MixFactory(TM)" which is a custom, multi-session CD
manufacturing system built upon the CDK Technology(TM). The entire system is
automated so that minimum human intervention is required for the custom
manufacturing process. In order to create a custom CD, a user visits a website
and selects a compilation of audio, video, or other content titles. Titles are
browsed and/or searched and audio/video clips are previewed through an
interface. After selecting the compilation, the user personalizes the disc by
selecting art work for the disc label, cover and HTML interface. The
MixFactory(TM) system also allows multimedia content providers to offer their
assets on a customized basis via the website.
CDKX's MixFactory(TM) operation is designed to be a complete end-to-end
e-commerce solution, including production, payment processing and fulfillment.
Once the user confirms the content selections and completes a credit card
transaction, the selected titles are queued from storage to a Compact Disc
Recordable ("CD-R") burning workstation. The customer's tracks are formatted
into a Red Book audio session along with an iso9660 session and transferred
together to the CD-R (disc). The automated workstation transfers the complete
CD-R to the CD printer where the user-selected label is printed onto the surface
of the CD-R.
In parallel with the transfer of the tracks to the CD-R, the custom packaging
materials are printed. That is, as soon as the job is queued for burning, the
printed job is also queued to the printer. Packing and shipping of the finished
product is currently the only manually operated step in the process.
APL's System and Use
- --------------------
It is APL's intention (and CDKX has hereby agreed) to employ and use the CDK
Technology(TM) and CDKX's system as described above for the development,
marketing and operation of APL's websites and other businesses which shall be
similar in nature, operation and business as CDKX's MixFactory(TM) website and
business operations save that the contents shown offered
-41-
<PAGE>
and displayed on APL's websites and other businesses shall be for the primary
usage, business, services, marketing and promotion to persons who are interested
in Chinese content including, but not limited to all forms of Chinese media,
literature, audio-visual content and all other materials and/or data that can be
presented electronically or digitally. CDKX shall provide, install and maintain
the Hardware and Software and grant the exclusive use of the CDK Technology(TM)
in order that APL may develop its websites and other businesses for the purposes
described above in addition to being able to support the following (but not
limited to) :-
(a) Chinese contents (text, sounds, images or other type of data,
information or material);
(b) digital entertainment contents;
(c) distribution for independent music artists and labels with links to
APL's websites and other businesses;
(d) support and provide the manufacturing process for the custom CDs and CD
contents to be distributed or manufactured;
(e) website services to be provided by APL such as trading, information
content, , services, communication to or by the customers with APL and
all other foreseeable website services as similar to CDKX's
MixFactory(TM) or CDKNet websites;
(f) support content providers' contents;
(g) e-commerce including production, payment processing and fullment either
by credit card or other method;
(h) a method whereby the consumer will be able to view the information on
the CD via his or her personal computer and link back to related Web
pages through targeted links included on the CD;
(i) the ability for consumers to receive high-quality, high-bandwidth
digital assets within a quick relay time without waiting hours for the
files to download;
-42-
<PAGE>
SCHEDULE 3
----------
(Implementation Plan)
- ------------------------------------------------------------------------------
Stage Description Date
- ------------------------------------------------------------------------------
Not later than
- ------------------------------------------------------------------------------
1 CDK 2.0 Software(c) & Training 6 December 1999
- ------------------------------------------------------------------------------
2 MixFactory(TM) Database System Delivery 6 December 1999
- ------------------------------------------------------------------------------
3 Documentation Delivery 6 December 1999
- ------------------------------------------------------------------------------
4 MixFactory(TM) CD Robot Systems Delivery 15 December 1999
- ------------------------------------------------------------------------------
5 MixFactory(TM) Hardware Installation & Testing 10 January 2000
- ------------------------------------------------------------------------------
6 MixFactory(TM) Hardware Training 10 January 2000
- ------------------------------------------------------------------------------
7 Pilot Run Completed 15 January 2000
- ------------------------------------------------------------------------------
8 System Live Run 20 February 2000
- ------------------------------------------------------------------------------
-43-
<PAGE>
SCHEDULE 4
----------
(Training Plan)
The following courses are provided for the staff of APL :-
Course Title Appx. Training Date Duration
- ------------ ------------------- --------
CDKMastering(TM) Software 2 December 1999 2 days
MixFactory(TM) software and hardware 10 January 2000 5 days
usage and maintenance
-44-
<PAGE>
SCHEDULE 5
----------
(Documentation)
(a) Hardware
--------
Description No. of copies
----------- -------------
"Not Applicable"
(b) Software
--------
Description No. of copies
----------- -------------
"Not Applicable"
(c) Other
-----
Description No. of copies
----------- -------------
1. System Manual One (1)
2. Operation Manual One (1)
3. Data Manual One (1)
4. User Manual One (1)
5. User Guide One (1)
-45-
<PAGE>
SCHEDULE 6
----------
(Location)
Address: Shop No.3A, Ground Floor,
Site 4, Whampoa Garden,
Hung Hom, Kowloon
Hong Kong
-46-
<PAGE>
The following is a floor plan of the above premises where the Hardware is to be
delivered and installed :-
[FLOOR PLAN]
-47-
<PAGE>
SCHEDULE 7
----------
(Installation Tests)
CDKX shall provide a test plan for the acceptance of Hardware, Software and
related facilities to be installed under this Agreement.
-48-
<PAGE>
SCHEDULE 8
----------
(Other Software)
Item Ref. No. Description Quantity Remarks
- ---- -------- ----------- -------- -------
RealPlayer G2
Windows NT Version 4.0
-49-
<PAGE>
SCHEDULE 9
----------
NAME : ASIA PIONEER LIMITED
PLACE OF INCORPORATION : Cayman Islands
COMPANY NO. : CR-93228
AUTHORIZED SHARE CAPITAL : US$50,000.00 divided into 5,000,000 [common]
shares of par value US$ 0.01each
ISSUED SHARE CAPITAL : US$1.00 comprising of one hundred (100) common
shares of par value US$0.01 as at the date of
this Agreement and to be increased to
US$1,000.00 comprising of 100,000 common shares
of par value US$0.01 at the date of the
completion of the issue and allotment of
Consideration Shares to CDKX
REGISTERED OFFICE : Huntlaw Building, P.O. Box 2804, George Town,
Grand Cayman, Cayman Islands
DIRECTORS : Keith Tak Kay WONG
Helen Shan Shan HUI
-50-
<PAGE>
AS WITNESS the parties hereto have duly executed this Agreement the day and year
first above written in its counterpart as an Agreement.
SIGNED by )
)
for and on behalf of CDKNET, LLC. )
in the presence of :- )
)
)
SIGNED by Keith T.K. Wong and )
Helen S.S. Hui )
for and on behalf of ASIA PIONEER LIMITED in the )
presence of :- )
)
/s/ Keith A. Lee
Keith A. Lee
Solicitor
Aggarwal & Associates
Hong Kong SAR
-51-
<PAGE>
AS WITNESS the parties hereto have duly executed this Agreement the day and year
first above written in its counterpart as an Agreement.
SIGNED by STEVEN A. HOROWITZ )
President of Managing Member )
for and on behalf of CDKNET, LLC. ) /s/ STEVEN A. HOROWITZ
in the presence of :- Chris Hanscom-Bolton )
)
)
SIGNED by )
)
for and on behalf of ASIA PIONEER LIMITED in the )
presence of :- )
)
-51-
EXHIBIT 10.20
This agreement (the "Agreement") is entered into between Atomic Pop LLC, a
Delaware limited liability company having its principal place of business
located at 1447 Cloverfield Blvd., Santa Monica, CA 90404 ("Atomic Pop") and
CDKnet, LLC, a New York limited liability company having its principal place of
business located at 260 West 57th Street, Suite 1101, New York, NY 10019
("CDKnet") on this 25th day of October, 1999.
WHEREAS, Atomic Pop is in the business of providing music and music-related
content through various forms of media, including via the Internet; and
WHEREAS, CDKnet has developed a process based on its CDK(TM) (patent pending)
technology (the "CDK Technology") which enables the integration of stereo audio,
full screen high quality video and seamless Internet Web browsing from a
standard audio CD, and which process allows for the mass customization of CD's
containing audio and / or video content; and
WHEREAS, Atomic Pop would like to license from CDKnet, and CDKnet would like to
license to Atomic Pop, the CDK technology, in order to provide multimedia CD
masters to Atomic Pop, and to provide CD's to consumers which CD's would contain
music and music-related content, on the terms and conditions below;
NOW, THEREFORE, in consideration of the mutual promises of the parties hereto
and of the mutual benefits to be gained by the performance thereof, and such
other good and valuable consideration, the receipt and sufficiency of which the
parties hereto hereby acknowledge, the parties hereto agree as follows:
1. CDKnet will produce Web-connected multimedia CD masters containing content as
supplied by Atomic Pop. The CD masters will include interface design, player
customization, digitization and compression. Upon execution of this Agreement,
CDKnet will produce one promotional multisession CD master for Atomic Pop at no
expense to Atomic Pop. Atomic Pop will pay CDKnet $5,000 per each multimedia
master intended for the production of CD's for commercial distribution to the
public. Such payment will be made by Atomic Pop within ten (10) days after
delivery by CDKnet of such master. Atomic Pop agrees that, during the term of
this Agreement, it will utilize CDKnet to produce the masters for all
multisession commercially distributed compact discs embodying principally
content owned or controlled by Atomic Pop.
2. CDKnet will develop for Atomic Pop an Atomic Pop-branded custom multimedia CD
mini-site including site development, media asset digitization and storage,
back-end integration, and CD fulfillment. This site will allow consumers to
create customized multimedia CDs using the CDK technology with Atomic Pop
content. The CD will also contain integrated Web links to the Atomic Pop Web
site. The concept and functionality of the site will be subject to Atomic Pop's
approval.
3. CDKnet will provide the technology and service necessary to digitize and
store the content provided by Atomic Pop, process the order request received
through the Atomic Pop custom CD site, replicate the CDK selected by the
consumer and send the completed CDK to the consumer, and provide customer
technical support and service for CDKs.
4. Users of the Atomic Pop custom CD site will pay Atomic Pop directly for each
CDK purchased. Atomic Pop will determine the retail price of such CDK's. Atomic
Pop will pay CDKnet, by the 25th business day of the following month, $4.95 per
CD (for shipping and handling) for each custom CD for which Atomic Pop has been
paid during any month during the term of this agreement.
Page 1 of 2
<PAGE>
5. The packaging and discs for any such multimedia and custom Atomic Pop CDK's
will include CDKnet's, and its licensor's, trademarks and logos. Each CDK will
incorporate track credits, copyright notices and logos as furnished by Atomic
Pop.
6. a) Atomic Pop represents that it has the rights to any and all content,
packaging, advertising and other materials (collectively, the "Content")
provided by it to CDKnet and/or utilized in connection with the Atomic Pop CDK
Program, and that such Content does not and will not (i) infringe any third
party's copyright, trademark rights, rights of privacy and publicity, moral
rights or any other proprietary or personal rights or (ii) defame or otherwise
injure the reputation of any person, organization or entity. This section
survives the expiration hereof.
b) CDKnet represents that it owns, has licensed rights to use and/or controls
the technology necessary for it to perform its obligations under this agreement.
7. Neither party shall issue any press releases for general public dissemination
without the prior written consent of the other party, which consent shall not be
unreasonably withheld or delayed.
8. This Agreement, and the license granted hereunder, will remain in effect for
three (3) years.
9. The rights and obligations of the each of the parties hereunder shall inure
to the benefit of and shall be binding upon the successors and assigns of such
party.
10. This Agreement contains the entire agreement between the parties hereof
pertaining to the subject matter hereof, and supercedes and replaces any and all
prior agreements between the parties concerning the subject matter hereof.
11. The terms and conditions hereof may be changed only by an agreement in
writing signed by the parties hereto.
12. This Agreement shall be governed by, construed and enforced under the laws
of the State of New York without giving effect to the conflicts or choice of law
provisions thereof.
13. This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
CDKnet, LLC Atomic Pop, LLC
By: /s/ Shai Bar Lavi By: /s/ illegible
---------------------------- ----------------------
Shai Bar Lavi, President
Page 2 of 2
EXHIBIT 10.25
This agreement (the "Agreement") is entered into between DreamWorks Records
Corporation, a _________ corporation having its principal place of business
located at 9268 WEST 3RD STREET, BEVERLY HILLS, CA 90210 ("DreamWorks Records")
and CDKnet, LLC, a New York limited liability company having its principal place
of business located at 250 West 57th Street, Suite 1101, New York, NY 10019
("CDKnet") on this ___ day of October, 1999.
WHEREAS, DreamWorks Records is in the business of providing music and
music-related content through various forms of media, including via the
Internet; and
WHEREAS, CDKnet has developed a process based on its CDKO (patent pending)
technology (the "CDK Technology") which enables the integration of stereo audio,
full screen high quality video and seamless Internet Web browsing from a
standard audio CD.
WHEREAS, DreamWorks Records would like to license from CDKnet, and CDKnet would
like to license to DreamWorks Records, the CDK technology, in order to provide
multimedia CD masters to DreamWorks Records, on the terms and conditions below;
NOW, THEREFORE, in consideration of the mutual promises of the parties hereto
and of the mutual benefits to be gained by the performance thereof, and such
other good and valuable consideration, the receipt and sufficiency of which the
parties hereto hereby acknowledge, the parties hereto agree as follows:
1. CDKnet will produce Web-connected multimedia CD masters containing content as
supplied by DreamWorks Records. The CD masters will include interface design,
digitization and compression. DreamWorks Records will pay CDKnet $5,000 per each
multimedia master intended for distribution to the public. In connection with
masters for Dpros to be distributed only to the trade and for promotional
purposes (1500 units maximum), DreamWorks will pay CDKnet $2,500 per master.
DreamWorks Records will make such payment within ten (10) days after delivery by
CDKnet of such master.
2. DreamWorks Records has the right to purchase up to ten (10) "for public" CDK
masters during the term of this Agreement as well as five (5) Dpro CDK masters.
3. The packaging and discs for any such multimedia and custom DreamWorks Records
CDK's will include CDKnet's, and its licensor's, trademarks and logos as well as
CDK system requirements.
4. DreamWorks Records represents that it has the rights to any and all content,
packaging, advertising and other materials (collectively, the "Content")
provided by it to CDKnet and/or utilized in connection with the DreamWorks
Records CDK Program, and that such Content does not and will not (i) infringe
any third party's copyright, trademark rights, rights of privacy and publicity,
moral rights or any other proprietary or personal rights or (ii) defame or
otherwise injure the reputation of any person, organization or entity. This
section survives the expiration hereof.
5. It is to the benefit of both parties that from time to time press releases
should be issued regarding companies and artists future projects. It is
understood that each company shall have approval of each press release before
service.
6. This Agreement, and the license granted hereunder, will remain in effect for
one year.
Page 1 of 2
<PAGE>
7. The rights and obligations of the each of the parties hereunder shall inure
to the benefit of and shall be binding upon the successors and assigns of such
party.
8. This Agreement contains the entire agreement between the parties hereof
pertaining to the subject matter hereof, and supersedes and replaces any and all
prior agreements between the parties concerning the subject matter hereof.
9. The terms and conditions hereof may be changed only by an agreement in
writing signed by the parties hereto.
10. This Agreement shall be governed by, construed and enforced under the laws
of the State of New York without giving effect to the conflicts or choice of law
provisions thereof.
11. This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
CDKnet, LLC
By: ______________________
DREAM WORKS RECORDS
By: _______________________
Page 2 of 2
EXHIBIT 10.26
COLLEGEMUSIC MIXFACTORY
1. CONCEPT
Develop a COLLEGEMUSIC MIXFACTORY Web site enabling CollegeMusic fans
to create a custom CD containing music videos as well as audio tracks.
The CD will also contain integrated Web links to the CollegeMusic Web
site driving targeted traffic.
2. CONSUMER PRICING
The cost of a CollegeMusic custom CD to consumers is an aggregate of
content cost and shipping and handling (approx. $4.95). CollegeMusic
will determine content pricing.
3. COLLEGEMUSIC, INC. PRICING
The cost of developing the CollegeMusic MixFactory Web site is free to
CollegeMusic, Inc. In exchange for providing MixFactory technology,
CDKnet will keep all net proceeds derived from shipping and handling
charges as well as a commission on all content sold through the
CollegeMusic MixFactory Web site based on the following schedule:
- individual audio and video tracks (unsigned artist) 25%
- individual audio and video tracks (signed artist) 20%
(based on a minimum track cost of $0.75)
- complete audio/video unit 30%
(based on a minimum unit cost of $1.50)
The cost to prepare content for inclusion in the CollegeMusic
MixFactory database will be priced as follows:
- Content procured through CollegeMusic's agreements with music
clubs (e.g., CBGBs, Bitter End, etc.) will be prepared for
free.
- Content procured from bands submitting content to CollegeMusic
will be charged $10 per hour
CollegeMusic, Inc. is free to pass along the content preparation costs
to artists submitting content for the program.
4. DEVELOPMENT
The COLLEGEMUSIC MIXFACTORY Web site as well as all multimedia files in
the database will reside on a CDKnet server for production purposes.
CollegeMusic will procure all source footage (including licenses) for
the music videos and audio tracks. CollegeMusic will include a link to
the COLLEGEMUSIC MIXFACTORY Web site on the CollegeMusic.com Web site.
<PAGE>
5. BENEFITS
In return for supporting development of a COLLEGEMUSIC MIXFACTORY Web
site, CollegeMusic, Inc. will receive the following:
- - database of all consumers requesting CollegeMusic custom multimedia CDs
- - revenue generated from sale of content
- - targeted traffic to the CollegeMusic Web site
- - cross-promotion of the COLLEGEMUSIC MIXFACTORY Web site through the
MixFactory.com portal site (under development)
Your signature below indicates acceptance of the general terms of this proposal.
A more detailed agreement will be executed prior to implementation.
- ---------------------------- ----------------------------
Russell Kern Andrew Fischel
VP, Director of Marketing President
CDKnet CollegeMusic, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1999 AND JUNE 30, 1999 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 6 MONTHS ENDED DECEMBER 31, 1999
AND DECEMBER 31, 1998, YEAR ENDED JUNE 30, 1999 AND PERIOD OCTOBER 1, 1997
(DATE OF INCEPTION) TO JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS YEAR 8-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999 JUN-30-1999 JUN-30-1998
<PERIOD-START> JUL-01-1999 JUL-01-1998 JUL-01-1998 OCT-01-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 JUN-30-1999 JUN-30-1998
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<RECEIVABLES> 27,754 0 19,000 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 176,697 0 271,854 0
<PP&E> 705,141 0 641,339 0
<DEPRECIATION> 217,982 0 152,286 0
<TOTAL-ASSETS> 6,430,139 0 7,559,897 0
<CURRENT-LIABILITIES> 971,732 0 829,051 0
<BONDS> 453,221 0 1,876,416 0
0 0 0 0
0 0 0 0
<COMMON> 1,736 0 1,405 0
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<TOTAL-LIABILITY-AND-EQUITY> 6,430 0 7,559,897 0
<SALES> 40,154 342,053 474,344 616,137
<TOTAL-REVENUES> 40,154 342,053 474,344 616,137
<CGS> 37,605 108,943 288,762 415,769
<TOTAL-COSTS> 37,605 108,943 288,762 415,769
<OTHER-EXPENSES> 2,757,484 2,421,557 5,100,099 1,513,886
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 61,633 109,632 1,094,501 (461)
<INCOME-PRETAX> (2,816,568) (2,298,079) (6,194,600) (1,184,475)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (2,816,568) (2,298,079) (6,194,600) (1,184,475)
<EPS-BASIC> (.19) (.19) (.47) 0
<EPS-DILUTED> (.19) (.19) (.47) 0
</TABLE>