-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Af21G+RaDqnJpRM62KFr7/IX2IFTAmdVO8dYNjWsoPmm7PxIBbGHxDgbqX34+tM1 SxuiNrdsMqH5K6YphSgwCg== 0001070876-99-000012.txt : 19990323 0001070876-99-000012.hdr.sgml : 19990323 ACCESSION NUMBER: 0001070876-99-000012 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMD GROUP INC CENTRAL INDEX KEY: 0001076682 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-70663 FILM NUMBER: 99570067 BUSINESS ADDRESS: STREET 1: BEDFORD TOWERS STREET 2: 444 BEDFORD STREET SUITE 8 CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2036029994 MAIL ADDRESS: STREET 1: BEDFORD TOWERS STREET 2: 444 BEDFORD STREET SUITE 8 CITY: STAMFORD STATE: CT ZIP: 06901 SB-2/A 1 AMENDMENT NO. 2 SMD GROUP, INC. As filed with the SEC on March 19, 1999 SEC Registration No. 333-70663 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMMENDMENT NO. 2 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Cdbeat.com, Inc. Formerly Known As SMD GROUP, INC. (Exact name of registrant as specified in charter) Delaware 5735 Applied for (State or other (Primary Standard (IRS Employer jurisdiction or Industrial Identification incorporation) Classification code) Number) Cdbeat.com, Inc. Bedford Towers 444 Bedford Street, Suite 8s Stamford, Connecticut 06901 Phone: (203) 602-9994 Fax: (203) 602-9995 Email: jarberman@ibm.net (Address and telephone number of registrant's principal executive offices and principal place of business) Joel Arberman, President Cdbeat.com, Inc. Bedford Towers 444 Bedford Street, Suite 8s Stamford, Connecticut 06901 Phone: (203) 602-9994 Fax: (203) 602-9995 ICQ: 21108282 AOL: jarb25 Email: jarberman@ibm.net (Name, address, and telephone number of agent for service) Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____ 1 If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] (Continued on Next Page) CALCULATION OF REGISTRATION FEE Title of Each Amount Proposed Proposed Amount of Class of Securities to be Maximum Maximum Registration Being Registered Registered Offering Aggregate Fee Price Offering Per Share Price Common Stock, par value $.01 per share 4,000,000 $.2.50 $ 10,000,000 $2,780 TOTAL $ 2,780 MINIMUM FEE $100 The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine. 2 THIS PRELIMINARY PROSPECTUS IS NOT YET COMPLETED. MARCH 15, 1999 INITIAL PUBLIC OFFERING PROSPECTUS CDbeat.com, Inc. We are selling 3,521,000 shares of our common stock. The purchase price for our shares is $*. Some of our stockholders are selling an additional 479,000 shares. We will not receive any of the proceeds from the sale of the shares by our selling stockholders. This is a risky investment. We have described these risks under the caption "Risk factors" beginning on page *. No public market currently exists for our common stock. No public market may ever develop. Even if a market develops, you may not be able to sell your shares. Our proposed trading symbol for the over the counter bulletin board is CDBT. None of the Securities and Exchange Commission, any state securities commission, or any other government agency has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CDbeat.com, Inc. Bedford Towers 444 Bedford Street, Suite 8s Stamford, Connecticut, 06901 203-602-9994 This initial public offering prospectus is dated *. TABLE OF CONTENTS SUMMARY OF THE OFFERING................................................4 Plan of Operations....................................................12 Use of Proceeds.......................................................13 Dilution..............................................................13 Our Business..........................................................15 Technology............................................................27 Competition...........................................................28 Intellectual Property.................................................28 3 Employees.............................................................28 Facilities............................................................29 SELLING SECURITYHOLDERS...............................................29 DESCRIPTION OF CAPITAL STOCK..........................................30 Transfer Agent and Registrar..........................................32 SHARES ELIGIBLE FOR FUTURE SALE.......................................32 MANAGEMENT............................................................33 YEAR 2000 READINESS DISCLOSURE........................................37 RELATED PARTY TRANSACTIONS............................................38 PRINCIPAL SHAREHOLDERS................................................38 THE OFFERING..........................................................39 WHERE YOU CAN FIND MORE INFORMATION?..................................40 Special Note Regarding Forward-Looking Statements.....................41 LEGAL PROCEEDINGS.....................................................41 LEGAL MATTERS.........................................................41 SUMMARY OF THE OFFERING This summary highlights information contained elsewhere in this prospectus. Because this is a summary, it may not contain all of the information that you should consider before investing in the common stock. You should read this entire prospectus carefully. Securities offered for sale.................... 3,521,000 shares of common stock by us. 479,000 shares of common stock by our stockholders. For a description of these shares, see "Description of Securities" on page *. Price to the public..... * per share. Number of shares outstanding before the offering - assuming the conversion of all preferred shares that have been issued. ..... Our current shareholders own * shares. Number of shares to be outstanding after the offering - assuming the conversion of all preferred shares that have been issued. ..... Assuming all shares are sold, * shares outstanding Dividend policy.............. We do not intend to pay any cash dividends in the foreseeable future. 4 Use of proceeds.............. To recruit, hire and train additional personnel, complete the development of our software and web site, and begin our sales and marketing efforts. We won't receive any proceeds from the sale of shares by our stockholders. Risk factors................. You should read the "Risk Factors" section beginning on page * before deciding to invest. RISK FACTORS A high degree of risk is associated with an investment in the shares being offered to you. We believe that you should carefully consider the following risks before making an investment decision. The risks described below are not the only ones that we face. Additional risks that are not yet known to us or that we currently think are immaterial could also impair our business, operating results or financial condition. The price of our common stock could decline due to any of these risks, and you could lose all or part of your investment. You also should refer to the other information in this prospectus, including our combined financial statements and the related notes thereto. We have no significant operating history and have only incurred operating losses. Since our formation on May 8, 1998 through December 31, 1998, we have lost $124,074. You do not have meaningful information, including long-term historical financial data, in assessing your decision to purchase the shares. We are subject to numerous start-up risks, which could delay the launch of our web site and development of our software and thus increase our losses. We expect to launch our software and web site in May 1999. As of the date of this prospectus, all of our start-up work on our database, web site and related systems is not completed. If completion of this work is delayed, the opening of our web site and our ability to generate revenues from operations will be delayed, increasing our losses. We have no working capital beyond the funds raised in this offering. We believe that if we raise all the funds in this offering, we will be able to operate our business for twelve months. We will need to obtain additional funds for continued development of our business. We might not be able to locate any other source of funds. And even if we locate other funding sources, the terms of any funding might not be acceptable. We will not be able to continue operations if we do not raise the money we need. There is no minimum amount of funds that must be raised in this offering. 5 This means that we are not required to raise any particular amount before we can immediately start spending the proceeds of your investment. We expect to lose money during our start-up phase, which could be as long as three years. We expect to spend substantial amounts of money on the development of our software, web site, personnel, marketing and advertising to build our brand recognition and market share. These expenditures will exceed our revenues during the early stages of our operations. Electronic commerce generally and the online music market is new, rapidly changing and intensely competitive. We will compete for online customers from a variety of sources including: o Existing land-based retailers including Kmart Corp. and Barnes and Noble Corp. These companies are also using the internet to grow their businesses. o Less established companies including CDnow Inc. and N2K Inc. These companies are building their brands online. o Traditional direct marketers including Columbia House Record Club. o Television direct marketers including QVC, Inc. and Home Shopping Network. o Musicians who use the internet as a medium to sell directly to customers. o Publishing companies including Time Warner and Billboard Magazine. We may have difficulty competing because many of our competitors and potential competitors: o Have longer operating histories. o Have larger customer bases. o Have greater brand name recognition. o Have greater financial, marketing and other resources. o Secure merchandise from vendors on more favorable terms. o Devote greater resources to marketing and promotional campaigns. o Adopt more aggressive pricing or inventory availability policies. o Devote substantially more resources to website and systems. 6 We will be heavily dependent upon our relationships with others who, if we cannot find them or if they fail to perform, could seriously damage our business. We plan to use outside vendors for fulfillment, content, call center operations, customer service and delivery. Our potential suppliers include Valley Media, Baker & Taylor, Alliance Entertainment, Muze, Associated Press, Reuters, SWnetworks, United Parcel Services, Federal Express and the United States Postal Service. At this time, we do not have any established relationships. We will also need to obtain the services of programmers and web site designers necessary for the development and maintenance of our software and web site. We may not be able to obtain these services at all, or only on unsatisfactory terms. The people providing these services may not provide them in a satisfactory manner. We have no long-term contracts or arrangements with any suppliers or content providers that guarantee the availability of merchandise and content or the continuation of particular pricing practices. Supplier and content provider relationships will be critical to our success. We believe that our contracts with them typically will not restrict them from selling products to other buyers. They may stop selling us products or may only sell them on unsatisfactory terms. If we lose suppliers or content providers, we may not be able to establish acceptable relationships with new suppliers or providers. We may not be successful in providing a high-quality online experience supported by a high level of customer service that we believe is essential for establishing, maintaining and enhancing our CDbeat brand. We believe that our CDbeat brand will be a critical aspect of our efforts to attract and expand our online traffic. We may have to spend a lot more money than we currently plan to create and maintain a strong brand loyalty among customers. And we may never successfully establish or maintain our brand. Our revenues will depend on the number of visitors who shop at our site and the volume of orders we will fulfill and advertisements we show. The volume of goods sold and advertisements displayed will be hurt if we have system interruptions that result in the unavailability of our site or reduced order filling performance. We may experience periodic system interruptions from time to time. This may cause potential customers to stop visiting our site. In addition, to keep visitors coming to our site, we may have to upgrade further our technology, transaction-processing systems and network infrastructure if we have any substantial increase in the volume of traffic on our site or the number of orders placed by customers. Our success depends upon the continued growth of online commerce. 7 We know that rapid growth in the use of and interest in the web, the internet and other online services is a recent phenomenon. Acceptance and use may not continue to develop. A sufficiently broad base of consumers may not adopt, or continue to use, the internet and other online services as a medium of commerce and, in particular, online apparel commerce. Demand and market acceptance for recently introduced services and products over the internet have a high level of uncertainty. Few proven services and products exist. We will rely on consumers who have historically used traditional means of commerce to purchase merchandise. We know that these consumers must accept and utilize novel ways of conducting business and exchanging information if our business is to succeed. The infrastructure for the internet and other online services may not be able to support the demands placed upon it. The growth of the internet may suffer from potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. Internet and other online services continue to experience significant growth in the number of users and their frequency of use as well as an increase in their bandwidth requirements. Delays in the development or adoption of new standards and protocols required to handle increased levels of service activity, or increased governmental regulation could damage their viability. Slower response times due to changes in or insufficient availability of telecommunications services to support them internet or other online services also could damage our business The system for our web site, software and substantially all aspects of our transaction processing and order management systems are being developed internally and not been subject to any significant testing. If they don't function properly and we can't fix them, we could experience: o System disruptions. o Slow response times. o Impaired quality and speed of order fulfillment. o Delays in reporting accurate financial information. We may not be able to obtain and protect our own information. Our intellectual property is critical to our success. We will rely on trademark, copyright, and trade secret protection to protect our own rights. We plan to pursue the registration of our service marks in the United States and abroad. But we know that effective trademark, copyright and trade secret protection may not be available in every country in which our products will be available. Our intellectual property rights may be challenged, invalidated or circumvented. Our rights may not provide any competitive advantage. We could also incur substantial costs in asserting our intellectual property or our own 8 rights against others or defending any infringement suits brought against us. We plan to enter into confidentiality and invention agreements with many of our employees and consultants. These agreements may not be honored. We may not be able to protect rights to our unpatented trade secrets and know-how effectively. Others may independently develop substantially equivalent our own information and techniques or otherwise gain access to our trade secrets and know-how. We may be required to obtain licenses to intellectual property or other our own rights from third parties. We might not be able to obtain them. This might result in delays in product development or the inability to sell products requiring licenses. We will face year 2000 computer issues. Computer malfunctions caused by this issue could seriously hurt our business. We have discussed these issues in the section entitled "Plan of Operations" on page *. We may be exposed to online commerce security risks if hackers break into our website and, for example, steal credit card numbers. Our visitors want to know that information they send us over the internet, particularly credit card numbers, is protected. A computer hacker could misappropriate our own information or cause interruptions in our operations. We may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by breaches. Potential customers may not use the internet or visit our site because of these privacy concerns. There are many uncertainties and unexpected changes in music trends, economic conditions and in our business. Our industry historically has been subject to substantial cyclical variations. We and other music vendors rely on the expenditure of discretionary income for most, if not all, of our sales. Any downturn, whether real or perceived, in economic conditions or prospects could cause consumers to spend less on music. Music trends can change rapidly. We might not be able to accurately anticipate shifts in music trends and adjust our merchandise mix to appeal to changing consumer tastes. We could experience insufficient or excess inventory levels or higher markdowns if we misjudge the market for our products or are unsuccessful in responding to changes in music trends or in market demand. Our internet-based business may suffer from future government regulation. We are not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally, and laws or regulations directly applicable to online commerce. But we know that a number of laws and regulations may be adopted with respect to the 9 internet and other online services. The growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on us and may also decrease the growth of the internet or other online services. The legal environment for our business on the internet is uncertain. The applicability to the internet of existing laws in various jurisdictions governing issues including, property ownership, licensing, content ownership, sale and other taxes, libel and personal privacy is uncertain and may take years to resolve. For example, tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in online commerce. Any new state tax regulations may subject us to additional state sales and income taxes. For example, major U.S.-based online services and personnel have been challenged by German authorities for making one type of content accessible in Germany. We could be hurt if we were alleged to have violated federal, state or foreign, civil or criminal law, even if we could successfully defend those claims. We might have to collect sales and other taxes on shipments of goods. This could be expensive to us and cost us customers as well. The United States Congress has enacted legislation limiting the ability of the states to impose taxes on internet-based transactions recently. However, this legislation, known as the internet Tax Freedom Act, imposes only a three-year moratorium commencing October 1, 1998 and ending on October 21, 2001 on state and local taxes on: o Electronic commerce where taxes are discriminatory, and o internet access unless those taxes were generally imposed and actually enforced prior to October 1, 1998. Currently, we do not pay any of those taxes. It is possible that the tax moratorium could fail to be renewed prior to October 21, 2001. Failure to renew this legislation would allow various states to impose taxes on internet-based commerce. We may have liability for material that appears on our web site. As a publisher and distributor of internet content, we face potential liability for negligence, copyright, patent, trademark, defamation, indecency and other claims based on the nature and content of the materials that we broadcasts. Claims have been brought, and sometimes successfully pressed, against internet content publishers and distributors. In addition, we could be exposed to liability with respect to the content or unauthorized duplication or broadcast of content. We can't afford to insure against this risk. We do intend to require content providers to indemnify us for liability, but our indemnification may be inadequate. 10 In the future, we may operate outside of the U.S. and could experience losses that we would not have suffered if we had restricted ourselves to U.S.-only operations. Our foreign operations would be subject to: o Changes in regulatory requirements and tariffs. o Difficulties in staffing and managing foreign operations. o Longer payment cycles. o Greater difficulty in accounts receivable collection. o Potentially adverse tax consequences. o Price controls or other restrictions on foreign currency. o Difficulties in obtaining export and import licenses. Our operations may be affected by gains and losses on the conversion of foreign payments into U.S. dollars. Fluctuating exchange rates could cause reduced gross revenues and/or gross margins from dollar-denominated international sales. All of these factors could cause us to lose money that we wouldn't have lost if we operated only in the U.S. Our revenues will fluctuate from quarter to quarter. We may be subject to seasonal fluctuations affecting music vendors generally, with increased purchasing during the year-end holiday season as well as to the slowdown of internet usage during the summer months. We expect to pay no dividends on the common stock in the foreseeable future. You should not acquire shares if you are depending upon dividend income from this investment. We will not generate sufficient net income during the initial years of operation to permit the payment of any dividends. We may retain profits rather than pay dividends if we become profitable. Our directors are not required to declare dividends. We are controlled by present management. If we lose their services, we might not be able to replace them, which could harm our business. Assuming all shares are sold, our management will collectively own approximately *% of our then issued and outstanding shares. No cumulative voting for directors is provided. Accordingly, the current management will be able to substantially impact the election of all of our directors and our other affairs. Our management is very important to us and might be irreplaceable. We have described our management and our relationship with them, including the lack of insurance on their lives, in the section entitled "Management" on page *. 11 Your shares and rights related to your shares may be diluted through the issuance of additional stock. We have discussed this issue in the section entitled "Description of Securities" on page *. The market prices for stocks of internet-related and technology companies, particularly following an initial public offering, frequently reach levels that bear no relationship to the operating performance of those companies. Market prices generally are not sustainable and are subject to wide variations. If our stock trades to very high levels following this offering, it likely will thereafter experience a material decline. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of our securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. We expect a limited trading market for your shares. If we trade on the over the counter bulletin board and are considered a "penny stock," you will be subject to additional restrictions that may make it difficult to sell your shares. We have discussed these issues in the section entitled "The Offering" on page *. Plan of Operations We are a development stage entity and have generated a net loss of $124,074 for the period May 8, 1998 (date of incorporation) to December 31, 1998. We are also anticipating and currently experiencing losses for the fiscal year ending December 31, 1999. In addition we will require a significant amount of capital to commence our planned principal operations. We anticipate, based on current plans and assumptions relating to our operations, that the proceeds of the Initial Public Offering, together with existing resources and cash generated from operations, should be sufficient to satisfy our contemplated cash requirements for approximately 12 months after the date of this prospectus. However, we might require additional financing during the next 12 month period. We have discussed risks about the need for additional financing in the section entitled "Risk Factors" on page *. During the next 12 months, we intend to capitalize on our early entry into the online music content and merchandise category by engaging in a number of marketing initiatives designed to establish us as the definitive internet source for music information for artists, fans and the music industry. We have discussed these initiatives in the section entitled "Our Business" on page *. In order to expand our customer base and establish our brand name, we intend over the next 12 months to establish relationships with some of the major companies that people use to enter and navigate the internet, including Yahoo, Excite and Infoseek. In addition, we will engage in offline marketing efforts, including print advertising campaigns and possibly radio and television advertising campaigns. Our marketing budget is subject to a number of factors, including our results of operations and ability to raise additional capital. In the event that we are successful in raising additional capital or our results of operations exceed our expectations, our marketing budget for the next 12-month period will increase significantly. In order to expand our content and product offerings we intend over the next 12 months to expand our relationships with suppliers of content and merchandise. We expect that our suppliers will include wholesalers, distributors, manufacturers, online stores, retail stores and content providers. To achieve our goal of offering a wide selection of content, we will explore all means to acquire and license content. We have discussed these plans in the section entitled "Our Business" on page *. 12 Use of Proceeds The primary purposes of this offering are to obtain additional capital, create a public market for the common stock and facilitate future access to public markets. The net proceeds to us from the sale of the shares of common stock offered hereby are estimated to be approximately $* million, assuming an initial public offering price of $* per share and after deducting estimated offering expenses of $*. We intend to use the remainder of the net proceeds, over time, for general corporate purposes, including working capital to fund anticipated operating losses, expenses associated with our advertising campaigns, brand-name promotions and other marketing efforts and capital expenditures. We also could use a portion of the net proceeds, currently intended for general corporate purposes, to acquire or invest in businesses, technologies, products or services, although no specific acquisitions are planned and no portion of the net proceeds has been allocated for any acquisition. As of the date of this prospectus, we cannot specify with certainty the particular uses for the net proceeds to be received upon the consummation of this offering. Accordingly, our management will have broad discretion in the application of the net proceeds. Pending such uses, we intend to invest the net proceeds from this offering in short-term, interest-bearing, investment-grade securities. We will not receive any proceeds from shares of stock sold by the stockholders. Dilution At December 31, 1998, we had a net tangible book value of $*. The following table sets forth the dilution to persons purchasing Shares in this offering without taking into account any changes in the net tangible book value, except the sale of * Shares at the offering price and receipt of $*, less offering 13 expenses. The net tangible book value per share is determined by subtracting total liabilities from the tangible assets divided by the total number of shares of common stock and common stock equivalents outstanding. Common stock equivalents are preferred shares, warrants and options. - ------------------------------------------------------------------------------- December 31, 1998 * shares sold - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Public offering price per n/a $* share - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Net tangible book value 0 n/a per share of common stock before the offering(1) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Pro forma net tangible n/a $* book value per share of common stock after the offering - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Increase to net tangible n/a at least $* book value per share attributable to purchase of common stock by new investors - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Dilution to new investors n\a $* - ------------------------------------------------------------------------------- (1) Our net tangible book value per share is determined by dividing the number of shares of common stock and common stock equivalents outstanding into the net tangible book value and is significantly less than zero prior to this offering. 14 Our Business We plan to launch CDbeat.com and our CDbeat player software to offer interactive and personalized music content and merchandise to computer users worldwide. Visitors will receive specific information tailored to them based upon their music preferences. We believe we are targeting a significant market opportunity because: o The music industry is very large. o Millions of consumers have already purchased music content and merchandise through traditional print catalogs, stores and even television. o Thousands of consumers have already purchased music content and merchandise through the internet. o There are logistical and economic benefits to conducting our business over the internet. According to the Recording Industry Association of America, an industry trade group, U.S. record companies including, Universal, Sony, BMG, EMI, and Warner Brothers, generated $12.2 billion of domestic sales in 1997, while worldwide sales of record music exceeded $30 billion. Sales over the internet accounted for only $40 million of that market. In 1998, sales over the internet are estimated to have increased by more than 300% to $120 million. Industry analysts are forecasting significant revenue growth over the internet for the music industry. Forrester Research Inc. has projected some $4 billion in music sales will be generated over the internet by the year 2002. More than 5.0 million people currently listen to their favorite music while browsing the internet and working and playing on their personal computer. Within five years, we believe the worldwide market will grow to exceed 60 million people. We believe that our market is growing rapidly and this has led to substantial opportunities within the music industry. There are two primary reasons: o The availability of low-cost internet-enabled computers that are fully equipped with extensive music technology including, CD players, sound cards and speakers. Today, virtually every personal computer sold has these features. o The availability of low-cost CD software players that can be downloaded off the internet. We are designing our CDbeat Player and web site to combine the best traditional music publishing and retailing practices, with innovative and convenience features made possible by the internet. As an online commerce and content provider, we intend to provide: 15 o Comprehensive and high-quality content. o A visually pleasing environment. o A compelling and enjoyable shopping experience that includes a broad selection of products at significant discounts to retail prices. o An intuitive store layout. o Friendly customer service. o A liberal return policy. o The convenience of shopping from home in a store that never closes. o Sophisticated search technology features which will allow customers to locate quickly the items which interest customers. We plan to capitalize on our technology and the internet to develop a direct-to-customer relationship in the music industry. We believe that our use of state-of-the-art technology and implementation of automation systems will permit customers, customer service employees, management, and administrative personnel to access information and manage data in an effective and efficient manner. Moreover, we believe that our use of technology will allow us to: o Provide seamless and immediate content that is personalized and relevant to each user. o Embrace and extend the value of music CD's. o Provide instant contact with our fulfillment providers, call centers, and content providers. o Reduce inefficiencies in customer service and transaction processing. o Allow for a user-friendly site that can offer a personalized content and shopping experience for our visitors. To date, we are not aware of any other business that has developed similar direct-to-customer content and personalization within the online music industry. This could be because, until recently, no medium existed that could accommodate both a high volume of traffic in the logistical infrastructure necessary to provide information and target customers in an efficient and economical manner. The direct marketing of content and merchandise requires a cost-effective medium The internet is this kind of medium. Print catalogs, television and radio are not well suited to this task. The paper, printing, mailing, and other production costs of a print catalog can be significant, as are the television and radio production costs. In addition, these mediums can not be effectively or efficiently utilized to establish direct-to-customer relationships. The internet is a far less expensive and in many ways, a more effective medium. Utilizing the internet, we can display an almost limitless amount of content and number of merchandise items to a global audience without the high cost of printing, mailing or production. With the internet, we can easily update content and product information as it arrives. By integrating a sophisticated database with the power of the internet, we will be able to create a personalized viewing 16 and shopping experience for our customers. Accordingly, we believe that the internet is in medium that will permit us to market our content and products globally in a cost-effective manner. Industry Background The internet The internet is an increasingly significant global medium for communications, information and commerce. International Data Corporation estimates that the number of web users grew to approximately 28 million by the end of 1996 and will grow to approximately 175 million by 2001. We believe that the growth in internet usage has resulted from a number of factors, including: o Development of easy-to-use web browsers. o A large and growing installed base of PCs in the workplace and home. o Advances in the performance and speed of PCs and modems. o Improvements in network infrastructure. o Easier and cheaper access to the internet. o Increased awareness of the internet among businesses and consumers. Jupiter Communications estimates that the number of online households, meaning households using e-mail, the internet or a consumer online service, making purchases will grow to 57.0 million households, representing over 50% of U.S. households, by the year 2002. IDC estimates that the total value of services and products purchased over the web grew from $296 million in 1995 to approximately $2.6 billion in 1996, and will increase to approximately $123 billion by 2000. Internet Commerce As the number of internet users grows, it is expected that more businesses will seek to use this medium as a vehicle for selling goods and services. One significant factor propelling this trend is that online households have significantly higher income levels than households without internet access. According to Jupiter, the average income of the online household exceeds that of the traditional remote-purchasing household by approximately 28% or $59,000 vs. $46,000, indicating greater disposable income and spending power among the online audience. According to Jupiter, online sales in the United States are expected to grow to $11.9 billion in 1999 and $41.1 billion in 2002. The success of companies like Amazon.com, Inc., CDnow, Inc. and OnSale, Inc. indicate that individuals are willing to purchase goods and services via the internet. We believe that the sale of apparel and accessories will constitute a meaningful market and a significant portion of internet sales in the future. Advertising on the internet 17 The web is an attractive advertising medium because of our interactivity, flexibility, target ability, and accountability. The interactive nature of the web gives our advertisers the potential to establish dialogues and one-to-one relationships with potential customers, receive direct feedback on their advertising and adapt their advertising to respond to feedback. The web also provides advertisers with the opportunity to reach broad, global audiences, since web sites can be accessed from anywhere in the world, and to target their advertising to populations within specific regions or countries, to users with desirable demographic characteristics and to people with specific interests. Internet advertising also has the potential to offer advertisers the ability to measure the number of times that a particular advertisement has been viewed, the responses to the advertisement and demographic characteristics of the viewers of the advertisement. Accordingly, we believe that web advertising has the potential to be a cost-effective means of reaching a significant number of users with desirable characteristics. We believe that the internet also represents an attractive new medium for direct marketing to users with specific characteristics and interests, which has traditionally been conducted through direct mail and telemarketing. Unlike many of the traditional methods of direct marketing, the internet provides direct marketers with the opportunity to contact consumers at the point-of-sale, their personal computers. The success of a direct marketing campaign is generally based on a direct marketer's return on investment, which is measured by the response rates, measured by the number of leads or sales, and cost-per-response. According to the Direct Marketing Association, in 1997, an estimated $153 billion was spent on direct marketing in the United States. Jupiter Communications estimates that revenues from direct marketing over the internet will exceed $1.3 billion in 2002. The flexible nature of a digital medium like the web enables advertisers to change their messages on a daily basis in response to real world events and consumer feedback. The ability to target advertisements to broad audiences, specific regional populations, and affinity groups or select individuals makes web advertising versatile. Unlike traditional advertising where advertisements are presented to consumers who may or may not have an interest in them, web advertisements are only delivered when a consumer calls for a piece of information or a particular web page. Unlike more traditional media, we believe that the web is a more accountable medium where advertisers can receive reports on the impression levels, demographic viewership and effectiveness of their advertisements. The growing diversity of web advertisers is one measurement of the web's emergence as an effective advertising medium. web advertising pioneers were mostly technology and internet-related companies. Today, a growing percentage of web advertisers consist of more traditional business and consumer companies. 18 The Online Music Opportunity As the web continues to evolve as a mass communications medium, content currently delivered through traditional media, including radio and television, increasingly will be delivered over the internet. The internet enables new opportunities for providing interactive and customized content. We also believe that a number of characteristics of online music retailing make the sale of music merchandise via the internet particularly attractive compared to traditional retail stores because: o The internet offers many data management and multimedia features which enable consumers to listen to sound samples or search for music by genre, title or artist o Users can access a wealth of information and events, including reviews, related articles, music history, news and recommendations. o internet retailers can obtain extensive demographic and behavioral data about their customers, providing them with greater direct marketing opportunities and the ability to offer a more personalized shopping experience. o internet retailers can also offer consumers significantly broader product selection, the convenience of home shopping and 24-hour-a-day, seven-day-a-week operations, available to any location, foreign or domestic, that has access to the internet. By offering comprehensive content and competitively priced products in a more convenient format with a higher level of customer service, we intend to provide a meaningful alternative to the consumer and revolutionize the music industry. By offering merchandise at significant discounts, a money back guarantee, a high level of customer service in the convenience of 24/7 shopping, we believe that we can provide an attractive alternative for consumers to view music content and shop for merchandise. The CDbeat Approach We decided to focus our attention on the online music industry taking into account factors as: o The significant size of the traditional music industry. o The absence of a dominant online competitor. o The propensity of internet shoppers to respond to bargains. o The demand for high-quality music content. We will offer a full range of products including: o Music CDs. o Tapes. o Records. 19 o Concert ticket. o Branded merchandise including; hats, mugs, T-shirts, books and posters. We plan to leverage technology and the internet to pioneer what we believe will be a significant new market, the direct-to-customer market for music content and merchandise. As an online commerce and content provider, we intend to provide a compelling and enjoyable online shopping experience. We are designing our online store to combine the best traditional retailing practices with innovative and convenient features made possible by the internet. In addition, we plan to include significant music content in an effort to become the definitive music site on the web. Key Components Of Our Business Strategy - -> Focus on Compelling Music Content. We are dedicated to providing news and information on a wide range of artists and types of music. We will attempt to provide the most comprehensive artist and music industry programming on the internet. So we are working to develop, acquire and license comprehensive internet rights to content. We will offer a wide-variety of music-relevant information at one location. We will attract a high-quality staff to deliver relevant, informative and entertaining content, including synopses, reviews and excerpts. In addition, reviews by artists, other users, publishers and third-party reviewers will provide diverse and often stimulating points of view to inform and entertain customers while browsing and shopping. Because the internet permits a cost effective means of combining content with commerce, we believe that we will have a significant competitive advantage over traditional methods of retailing. Through use of our technology, music content is presented to each individual user based upon our knowledge of their music preferences. The content presented will contain a wide variety of relevant information, including: o Headline News. o Music Business News. o Artist News. o Columns. o Special Reports. o Music Reviews. o Artists Profiles. o Musician Information. o Online Shopping. 20 o Top-10 Hits. o Tour Search. o Classified Ads. o Music Store. In addition, the web site will contain hundreds of specific artist pages, which include: o Artist Information. o Music Reviews. o Interviews. o Biography. o Fan Clubs. o Chat Rooms. o Concert Schedules. o Reader & Artist Comments. o Photo Gallery. o Concert Schedules. o Discography. - -> Promote rapid adoption of the CDbeat player. We have chosen to offer our software free of charge, making it readily available, and to distribute it widely to promote extensive adoption. People will find out about our software through several methods, including: o Mass media press coverage. o Partners. o Online and offline advertisements. o Personal/email recommendations from co-workers, friends and family members. - -> Build and Increase Revenue. We intend to build and increase our revenues by: o Increasing our advertising revenues through expansion of our customer base. o Increasing the rates we charge advertisers by continuing to improve our ability to target advertisements to more demographically distinct groups. o Increasing our page views, increasing the average size and length of our advertising contracts. o Increasing the number of our direct sales representatives and continuing to invest in improving ad serving and ad targeting technology. 21 o Expanding our revenue-sharing commerce relationships and our relationships with third-party content providers that pay us for access to our site. o Expanding the number and scope of our fee-based premium membership services. - -> Create Customer Loyalty. Our goal is to maintain a relentless customer focus. We strive to offer our customers compelling value through o Comprehensive and high-quality content. o Innovative use of technology. o Broad selection, high-quality content. o A high level of customer service. o Competitive pricing. o Personalized services. In addition, we offer our customers a high-quality shopping experience through informative and entertaining editorial content, as well as simple and efficient navigation and search capabilities. - -> Build Strong Brand Recognition. We will promote, advertise and increase our brand value and visibility through excellent service and a variety of marketing and promotional techniques, including advertising on leading web sites and other media, conducting an ongoing public relations campaign and developing business alliances and partnerships. - -> Significant Discounts We offer customers discounts of between 10% and 50% off comparable retail prices. We believe that our ability to offer these discounts is due to the smaller overhead costs necessary to operate either a retail store or traditional print catalog. We believe that our discount prices coupled with a wide selection of quality merchandise will create compelling reasons for customers to shop at our web site. - -> Exploit advantages offered by being an internet-based retailer. We have an economic advantage relative to traditional media and retail companies because we are not burdened by the costs of a physical store, distribution network and related personnel. We can offer a broad selection of content and products to a highly targeted user base, with little inventory risk or expense. 22 While traditional retailers must make significant investments in inventory, real estate and personnel for each store location, online retailers incur a fraction of these costs, generally use centralized distribution, and have virtually unlimited merchandising space. Traditional retailers are compelled to limit the amount of inventory they carry at each store and focus on a smaller selection of faster-selling hit releases. As an example, we believe that a typical music store may carry up to 12,000 items and a superstore may carry up to 50,000 items, compared to the more than 100,000 items that we will carry. - -> Customer Convenience. Without the constraints imposed by a physical location, an online store may be the most convenient way for consumers to shop. Our customers will be able to shop at any time from the privacy and comfort of their own home or office. By eliminating the need for customers to travel to a physical location, we believe that we can provide a significant service to many shoppers, including those who spend a long time driving to get to a store. By remaining open for business 24 hours a day, 365 days a year, we service the needs of today's time-constrained customers as well as foreign customers shopping from different time zones. - -> A Personalized Shopping Experience. We believe that today's consumers prefer to shop in a store that is tailored to their needs. We will develop our software to allow customers to personalize and create their own shopping environment. We plan to offer customers a variety of other personalized services and features, including special occasion notification and narrowcasted content and commerce, meaning content and commerce directed specifically to customers interests. The special occasion notification will remind the customers by e-mail of any birthdays, anniversaries or other dates of interest. We intend to build a complex database, that will offer narrowcasted content, promotions and product displays based on customer preferences, purchasing history, site behavior and seasonal considerations. A key consideration behind our personalization programs is the desire to build customer loyalty. In addition, we intend to build site features, mine customer data and develop affinity and other marketing programs designed to encourage repeat purchases and customer loyalty. By encouraging feedback from our shoppers, we plan to improve our customers' shopping experience and the efficiency of our operations. We will offer e-mail, phone and fax options for customer comments, complaints and suggestions. We will offer free e-mail notification services and an information filtering service for our customers concerning things like new album releases and promotions. These services will allow customers to specify an artist, title or 23 subject area and receive notice automatically when new music is published that matches their criteria. Typically, a few weeks prior to the release date of a matching new music CD, our notification service software sends the customer an e-mail message containing pre-release information. - -> Create an Online Community. By creating an online community, we hope to provide customers with an inviting and familiar experience that will encourage them to return frequently to the site and to interact with other users, and that will promote loyalty and repeat purchase. We invite readers, artists and publishers to post reviews, sponsors review competitions and provides a forum for author interviews. Reviewers and artists are encouraged to provide their e-mail addresses to facilitate interaction with other readers. - -> Visually Pleasing Interface and Fast Loading Pages. We believe that our site will include a visually pleasing shopping environment that is designed to download quickly in spite of today's relatively limited bandwidth and slow data transmission technology. - -> Quick Order Filling. We will enter into agreements with third parties to provide order filling and call center customer service. The third parties will be selected for their technological sophistication, online commerce experience, and ability to have their operations fit with our information systems. We expect that all customer orders will be shipped within one to two business days of receipt, and that all customer service calls will be handled quickly and efficiently. We intend to provide quality customer service in an effort to distinguish us further from our on-line and off-line competitors and establish us as the premier online source for music content and merchandise. - -> Changing Product Inventory. Our own product information database is being designed to maintain an up to the second count of all inventories available for sale. This database is intended to eliminate the problem of back orders, which many catalog companies face, because customers will only be able to view and purchase in stock items. The system is also being designed to allow us to change product pricing quickly, thereby permitting us to run timed promotional sales and facilitate dynamic pricing to address specific market or competitive factors. - -> Build Strong Publisher and Distributor Relationships. We view our publishers and distributors as customers and work to build strong relationships with them. Because we will centralize distribution and order most products based on actual customer demand, we believe that our returns of music and merchandise to publishers and wholesalers will be significantly below 24 industry norms. We believe our market approach may increase sales of many second- and third-tier titles that are not typically stocked in physical music stores. In addition, the demographic and purchasing data accumulated by us will enable us to help publishers target customers for particular product offerings. Through targeted marketing and virtually unlimited online shelf space, we can offer publishers enhanced promotional opportunities for new authors, new titles and second- and third-tier titles. - -> Maximize value for advertisers. We intend to continually develop innovative approaches for our advertisers through advancements in targeting particular sets of consumers and consumer tracking and measurement technologies. We will try to obtain the largest possible web audience in order to give advertisers the most efficient and effective advertising placements. We will continue to develop services that encourage consumers to provide demographic and interest information that we can use to more effectively target advertising. We also believe we can build a strong web advertising sales organization, who educate, guide and advise advertisers on making the most of their web advertising purchases. - -> Pursue Relationships. We will enter into various licensing, royalty and consulting agreements with content providers, vendors, and organizations, including software and hardware vendors, entertainment companies, content publishers and broadcast media companies. We pursue these relationships for a variety of purposes, including: o Maximizing rapid penetration. o Adoption of our technologies. o Achieving economies of scale and critical mass. o Aiding the development of compelling content to build consumer demand for music media over the internet. o Expanding the range of commercial activities based on our technology and brand name. - -> Attract and Retain Exceptional Employees. We believe that versatile and experienced employees, management and directors provide significant advantages in the rapidly evolving market in which we compete. We will devote substantial efforts to building a talented employee base and to attracting an experienced management team with a track record in large and fast-growing organizations. Marketing We intend to promote our brand name and drive traffic to our site by combining traditional non-internet marketing strategies, including public relations, print 25 and radio advertising, with online marketing vehicles including banner advertising and partnerships with relevant web sites and web entry sites. Initially, we plan to devote a significant portion of our marketing dollars to developing relationships with portal, or web entry site, companies. According to Jupiter, in 1997 an estimated $673 million, or 26% of the total online shopping revenues, resulted from tenancy deals with portal, or web entry site, companies. Jupiter expects that this figure will increase to $1.7 billion in 1998 and $20.3 billion, or a little over half of all shopping revenue, by 2002. We intend to negotiate distribution arrangements with some of the other major internet companies build our brand recognition and acquire customers. Although we believe that establishing relationships with portal, or web entry site, companies will accelerate the growth of our business in the near term, we expect that the importance of maintaining a presence on these sites will diminish as more customers gain web-navigation experience and we establish our brand. Privacy Policy We believe that issues relating to privacy and use of personal information relating to internet users are becoming increasingly important as the internet and our commercial use grow. We have adopted a detailed privacy policy to assure and protect our users from the abuse of their information. CDbeat's privacy cornerstone is that we will never sell information that identifies an individual. Users must acknowledge and agree to this policy when registering for the CDbeat player software. We do not sell or rent any personally identifiable information about our users to any third party. We do use information about our users for internal purposes only in order to improve marketing and promotional efforts, to analyze site usage statistically, and to improve content, product offerings and site layout. Supply Management and Automated Order Filling Process We do not carry any inventory and will rely exclusively on third party vendors for distribution and fulfillment. We believe that this distribution strategy allows us to offer extensive selection while avoiding the high fixed costs and capital requirements associated with owning and warehousing product inventory. We also avoid the significant operational effort associated with same-day shipment. We will source product from a network of established distributors and publishers. We carry minimal inventory and rely to a large extent on rapid fulfillment from major distributors and wholesalers that carry a broad selection of titles. We intend to purchase a substantial majority of our CD products from Valley Media, Alliance Entertainment or Baker & Taylor, three of the largest fulfillment firms in the industry. 26 Customer orders are transmitted automatically to the order-filling center by a secure, electronic connection, and processed immediately upon receipt. Based on our anticipated arrangements with our suppliers, electronically ordered merchandise is often shipped by the distributor within hours of receipt of an order from CDbeat. The suppliers pick, pack and ship customer orders and charges us for merchandise, shipping and handling. In most cases, products are shipped within a day after an order is placed with us. If a customer is uncomfortable ordering online or cannot establish a secure connection with our site, he or she is given the option of completing his or her order by calling our toll free customer service number. We will offer the customer a choice of shipping options, including overnight, two-day and standard delivery within the United States. In addition, to capitalize on the global reach of the internet, we intend to provide shipping to over 200 countries. Upon receipt of an order, we expect that our site will send an e-mail to the customer confirming the receipt of the order. Another e-mail will follow when the shipment is made. In addition, our site will offer an order-tracking feature that allows customers to track the status of their order. Technology We intend to implement a broad array of state-of-the-art technology that will facilitate web site management, complex database search functionality, customer interaction and personalization, transaction processing, order filling and customer service functionality. Our technology will include a combination of our own technology and commercially available, licensed technology. We believe that our site will comprise a suite of applications that will permit customers, customer service employees, management, and administrative personnel to access and manage the database in an effective and efficient manner. To address the critical issues of privacy and security on the internet, we will incorporate, for transmission of confidential personal information between customers and our web server, secure socket layer technology so that all data is transmitted via a fully encrypted session. In the event that a customer's browser does not support this technology, our site will instruct the customer to call our customer service center to provide his credit card information over the phone. Transmission of credit card and other personal information between web server and our fulfillment center will also be encrypted in a similar manner. We will enter into an agreement with a major internet service provider to host our site and provide specified hardware and software as well as year round 24 hour systems support. The server and network architecture must be designed to provide high speed, reliable access 24 hours a day, 365 days a year, accommodate several thousand simultaneous visitors, and allow for rapid scaling of hardware and bandwidth to accommodate sudden increases in site traffic. 27 Competition Electronic commerce generally, and, in particular, the online music content and merchandise market, is a new, dynamic, high growth market. The direct marketing of music content and merchandise requires using a method that is not too costly and that is capable of displaying a large number of pages and products. Print catalogs are not well suited to this task. The paper, printing, mailing, and other production costs of a print catalog can be significant. To support these costs, a traditional cataloger requires products that are available in a full range of sizes and substantial quantities. Similarly, television is a costly medium that requires substantial quantities of products that are available in a full size scale in order for it to be an economical medium. The internet, however, is a far less expensive and, in many ways, more effective method. Utilizing the internet, we can display an almost limitless number of content and items without the high costs of printing and mailing. With the internet, we can easily update content and product images as new products arrive and other items sellout. By integrating a sophisticated database with the power of the internet, we will be able to create a personalized shopping environment and allow our customers to search for the products that interest them. Accordingly, we believe that the internet is a medium that will permit us to market our content and products in a cost-effective manner. Our competition for online customers comes from a variety of sources including, existing We believe that our ability to compete favorably is enhanced by our software/web site integration as well as our presentation of comprehensive and high-quality content. For a discussion of risk factors related to our competition, please turn to the section entitled "Risk Factors - Competition" on page *. Intellectual Property We intend to develop trademarks, designs and our own systems and trade secrets to create competitive advantages. As a result, we will on a combination of trademark, service mark, copyright and trade secret laws, as well as confidentiality agreements and technical measures to protect our own rights. We are pursuing the registration of our service marks in the United States and abroad and are considering the possibility of patenting on some of our own technology. Employees As of February 15, 1999, we employed 5 full-time employees and 16 contractors. Our employees are not represented by a labor union, and we have never experienced a work stoppage. We believe our relationship with our employees is satisfactory. 28 Facilities We have our corporate headquarters at 444 Bedford Street, Suite 8s in the downtown area of Fairfield County, Connecticut. The telephone number is 203-602-9994. Substantially all of our operating activities are conducted from 400 square feet of office space provided by our President at no charge. We also have a branch offices in: Tampa, Florida provided by our attorney at no charge; Albiline, Texas provided by our Vice President of Technology at no charge; and in Woodland Hills, CA provided by our Vice President of Public Relations at no charge. We believe that additional space will be required as our business expands and believe that we can obtain suitable space as needed. We do not own any real estate. SELLING SECURITYHOLDERS We have agreed to register shares of our current stockholders for resale at the same time we are selling our own shares in this offering and to pay all offering expenses. Our shareholders are selling 479,000 shares. We will not receive any of the proceeds of their sales. The following table sets forth the name of each selling shareholder and the number of share owned prior to sale. None of the shareholders has ever held any position or office with us. NAME Number of Shares - -------- - ----------------------- Elsa and Ernest Granz 200 Edward Gibbons 400 Cadnetics Inc. 151,200 Cliff Berger 20,000 Timothy D. Frawley and Mary F. Frawley 1,000 Holli Blechner 4,500 Frank Falco and Geralyn Falco 2,000 David Rousso 6,000 Thomas A. Caton 800 Dominick Caccippio 200 Marsha Korinko and Michael Korinki 400 Frederick Wagner 400 Barbara Wagner 400 Bonnie Wagner 800 JAM Capital Corp. 5,000 Herbert Appel and June Appel 1,000 Mark A. Freeman 110,000 29 Marlene Cernese 200 Benjamin Cernese and Sharon Cernese 1,000 Kanagasabai Sri Jayaramachandra 500 Noel Stanley Fernando 500 Ashley Roger Canagasabey 500 Anil Goel 500 Brad Jones 500 Shanti McLelland 500 Roger McLelland 500 Mark DeFelice 500 Brian Kelley 500 Robert Enslein Jr. 1,000 Richard Solomon 500 Layla Khoury 500 Graciela Heintz 500 Steven Hendler 500 Elie Khouri 500 James Dy 500 Hermogenes Brillantes 500 Lawrence Frankel 500 Lauren Cooler 500 Jeremy and Karen Blumenfeld 500 Isabel Arberman 1,000 Bella and Mauricio Nemes 1,000 Joshua and Renee Bialek 1,000 Alfred and Rachelle Arberman 150,000 Maxkal Corporation 10,000 ------------------- TOTAL 479,000 DESCRIPTION OF CAPITAL STOCK -------------------------------------------------------------------------- Authorized Capital Stock Under Shares Of Capital Stock Our Articles Of Incorporation Outstanding After offering -------------------------------------------------------------------------- 20,000,000 shares of common stock * shares of common stock - assuming all shares are sold -------------------------------------------------------------------------- 10,000,000 shares of preferred stock * shares of preferred stock -------------------------------------------------------------------------- 30 All material provisions of our capital stock are summarized in this prospectus. However, the following description isn't complete and is subject to applicable Delaware law and to the provisions of our articles of incorporation and bylaws. We have filed copies of these documents as exhibits to the registration statement related to this prospectus. Common Stock You have the voting rights for your shares. You and all other common stockholders have identical rights and preferences. You and they may cast one vote for each share held of record on all matters submitted to a vote. You have no cumulative voting rights in the election of directors. You have dividend rights for your shares. You and all other common stockholders are entitled to receive dividends and other distributions when declared by our board of directors out of the assets and funds legally available, based upon the percentage of our common stock you own. We will not pay dividends. You should not expect to receive any dividends on shares in the near future, if after a merger. This investment may be inappropriate for you if you need dividend income from an investment in shares. You have rights if we are liquidated. Upon our liquidation, dissolution or winding up of affairs, you and all other common stockholders will be entitled to share in the distribution of assets remaining after payment or provision for payment of all debts, liabilities and expenses, and any liquidation preference to which preferred stockholders, if any, may then be entitled. Our directors, at their discretion, may borrow funds without your prior approval, which potentially further reduces the liquidation value of your shares. You have no right to acquire shares of stock based upon the percentage of our common stock you own when we sell more shares of our stock to other people. This is because we do not provide our stockholders with preemptive rights to subscribe for or to purchase any additional shares offered by us in the future. The absence of these rights could, upon our sale of additional shares of common stock, result in a dilution of our percentage ownership that you hold. Preferred Stock Our board of directors can issue preferred stock at any time with any rights and preferences without your approval. Our authorized preferred stock may be issued from time to time in one or more designated series or classes. Our board of directors, without your approval, is authorized to establish the voting, dividend, redemption, conversion, liquidation and other relative provisions as may be provided in a particular series or class. The issuance of preferred stock, while providing flexibility for possible acquisitions and other 31 corporate purposes, could, among other things, adversely affect your voting power. Under some circumstances a third party may find it more difficult to acquire, or be discouraged from acquiring, a majority of our outstanding voting stock because we issue preferred stock. We have preferred stock class A. There are * shares of preferred stock class A. This entitles persons to convert each preferred stock into 1,000 shares of our common stock upon specified conditions related to the public listing of our shares and our receiving at least $5,000,000 of net investment capital. The conversion rate will be adjusted in the event we change our stock structure, for example by a stock split or stock dividend. These preferred stockholders are not entitled to any voting rights, except as may be required by law; preferential dividend rights; or rights to be repurchased by us. We have preferred stock class C. There are 100,000 shares of preferred stock class C which entitles the owners to convert each preferred stock into ten shares of our common stock upon specified conditions related to the public listing of our shares, our receiving at least $1,000,000 of net investment capital and specific corporate milestones. The conversion rate will be adjusted in the event we change our stock structure, for example by a stock split or stock dividend. These preferred stockholders are not entitled to any voting rights, except as may be required by law; preferential dividend rights; or rights to be repurchased by us. We have warrants and options. There are * warrants and options which entitles the owners to purchase and equivalent number of shares of our common stock at $2.50 per common share. These warrants expire on December 31, 1999. The conversion rate will be adjusted in the event we change our stock structure, for example by a stock split or stock dividend. These warrant and option holders are not entitled to any voting rights, except as may be required by law; preferential dividend rights; or rights to be repurchased by us. Transfer Agent and Registrar The Transfer Agent and Registrar with respect to the common stock is Florida Atlantic Stock Transfer, Inc., Tamarac, Florida. SHARES ELIGIBLE FOR FUTURE SALE Of the shares outstanding after the offering, the 4,000,000 shares sold in this offering, including the 479,000 shares sold by our stockholders, will have been registered with the SEC under the Securities Act of 1933 and will be eligible for resale without registration under the Securities Act except if they were acquired by our directors, executive officers or other affiliates. In addition, 32 there are * warrants and options outstanding. Our directors, executive officers, and persons or entities that they control will be able to sell shares of stock without violating the limitations of Rule 144 under the Securities Act. The remaining * outstanding shares may only be sold under Rule 144. The shares underlying the warrants and options can only be sold under Rule 144 unless we register those shares. Under Rule 144, directors, executive officers, and persons or entities that they control or who control them may sell shares of common stock in any three-month period in an amount limited to the greater of 1% of our outstanding shares of common stock or the average weekly trading volume in our common stock during the four calendar weeks preceding a sale. Sales under Rule 144 also must be made without violating the manner-of-sale provisions, notice requirements and the availability of current public information about us. Before the offering, no public trading market for our common stock existed. We cannot predict what effect, if any, that sales of shares or the availability of shares for sale will have on the prevailing market price of our common stock after completion of the offering. Nevertheless, sales of substantial amounts of common stock in the public market could have an adverse effect on prevailing market prices. MANAGEMENT The following table and subsequent discussion sets forth information concerning our directors and executive officers, each of whom will serve in the same capacity with us upon completion of the offering. Each director and executive officer was elected to his position in 1998. Name Age Title - ------------------------------------------------------------------------ Joel Arberman 26 President, CEO, and Director Bryan Eggers 49 Vice President of Public Relations Larry Payne 50 Vice President of Technology Avi Kerbs 52 Director Mr. Arberman has served as President, Chief Executive Officer and a member of our Board of Directors since May 1998. From January 1997 until May 1998, Mr. Arberman served as an independent corporate finance and business development consultant. From August 1995 until January 1998, Mr. Arberman served as an internet Analyst of Yorkton Securities, Inc., an investment banking firm. From November 1994 until August 1998, Mr. Arberman served as an Equity Analyst at SunAmerica Asset Management Company, an asset management company. From July 1993 until November 1994, Mr. Arberman served as a Junior Analyst at First Investors Management Corporation, an asset management company. Mr. Arberman holds a B.S. degree in Business Administration with a concentration 33 in finance and marketing and a minor in and economics from the State University of New York, at Albany. Mr. Eggers has served as Vice President of Public Relations since December 1998. From August 1998 until December 1998, Mr. Eggers served as an independent public relations consultant. From May 1996 until August 1998, Mr. Eggers served as the Marketing Communications Manager of Luckman Interactive, an internet software development company. From April 1994 until May 1996, Mr. Eggers served as a Public Relations Specialist for the Dataproducts Division of Hitachi, a computer printer manufacturer. From May 1993 until April 1994, Mr. Eggers served as a consultant for public relations and marketing for Now-Online, Inc., an internet service provider. Mr. Payne has served as Vice President of Technology since December 1998. From January 1995 until November 1998, Mr. Payne served as a software and hardware engineer for MediaGarden Inc., a developer of tools and products for educational markets. From December 1993 until December 1994, Mr. Payne served as a software development consultant. From September 1993 until November 1993, Mr. Payne served as a software engineer for Now On-Line, Inc., an internet service provider. From December 1992 until August 1993, Mr. Payne served as a software development consultant. During his career, Mr. Payne has developed numerous software applications including text editors, setup and installation utilities, CD-ROM driver and management utilities, CD music players, communications programs, compilers, data compression utilities, and games. Mr. Kerbs has served as a Director since December 1998. For the past few years, Mr. Kerbs has served as the President and Chief Executive Officer of Teuza Management and Development based in Haifa Israel. Teuza is a venture capital fund invested in the communications, semiconductor equipment and software, healthcare and biotechnology fields. Mr. Kerbs provides the overall direction of PhD's, Engineers, CPA's and Legal consultants, engaged in the identification of high technology investment opportunities and in the completion of due diligence studies to venture capital investments on the part of the Teuza Fund. He serves as a Director of many development stage companies and is the Chairman of the Board of NESS and Rotlex. Mr. Kerbs has more than 20 years of experience in high technology systems and a long record of pioneering management activities in Israel, Europe and the United States. He holds a Bachelor of Science Degree in Industrial Engineering and Management from the Technion and a Master of Science Degree in Management from the Technion. Our directors all hold office until the next annual meeting of shareholders and the election and qualification of their successors. Directors receive no compensation for serving on the board of directors other than reimbursement of reasonable expenses incurred in attending meetings. Officers are appointed by the board of directors and serve at the discretion of the board. 34 Executive Compensation The following table sets forth all compensation awarded to, earned by, or paid for services rendered to us in all capacities during the fiscal year ended December 31, 1998, by our other executive officers whose salary and bonus for fiscal year 1998 exceeded $100,000. Summary Compensation Table Long-Term Compensation Awards Name and Principal Annual Compensation - 1998 - ------------------- -------------------------- Position Salary ($) Bonus ($) Number of Shares ---------- --------- Options (#) Joel Arberman, President None None None We have entered into two-year employment agreements with Joel Arberman, Bryan Eggers and Larry Payne. Mr. Arberman and Mr. Eggers will be compensated for their services at the rate of $70,000 per year and Mr. Payne will be compensated for his services at the rate of $75,000 per year. Delaware Law on Indemnification Our Certificate of Incorporation contains provisions permitted under the General Corporation Law of Delaware relating to the liability of Directors. The provisions eliminate a director's liability to stockholders for monetary damages for a breach of fiduciary duty, except in circumstances involving wrongful acts, including the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. Our Certificate of Incorporation also contains provisions obligating us to indemnify our directors and officers to the fullest extent permitted by the General Corporation Law of Delaware. We believe that these provisions will assist us in attracting and retaining qualified individuals to serve as directors. Following the close of this offering, we will be subject to the State of Delaware's business combination statute. In general, the statute prohibits a publicly held Delaware corporation from engaging in a business combination with a person who is an interested stockholder for a period of three years after the date of the transaction in which that person became an interested stockholder, unless the business combination is approved in a prescribed manner. A business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates, owns, or, within three years prior to the proposed business combination, did own 15% or more of our voting stock. The statute could prohibit or delay mergers or other takeovers or change in control attempts and accordingly, may discourage attempts to acquire us. 35 As permitted by Delaware law, we intend to eliminate the personal liability of our directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, subject to exceptions. In addition, our bylaws provide that we are required to indemnify our officers and directors, employees and agents under circumstances, including those circumstances in which indemnification would otherwise be discretionary, and we would be required to advance expenses to our officers and directors as incurred in proceedings against them for which they may be indemnified. The bylaws provide that we, among other things, will indemnify officers and directors, employees and agents against liabilities that may arise by reason of their status or service as directors, officers, or employees, other than liabilities arising from willful misconduct, and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. At present, we are not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of ours in which indemnification would be required or permitted. We believe that our charter provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We have agreed, to fullest extent permitted by applicable law, to indemnify all our officers and directors. The SEC believes that this indemnification may not be given for violations of the Securities Act of 1933 that governs the distribution of our securities. Stock Incentive Plan Our 1998 stock incentive plan was originally adopted by our board of directors and approved by stockholders on October 15, 1998. The stock incentive plan provides for the grant of stock options for up to a total of 10% of the shares of common stock to employees, officers and directors of, and consultants or advisors to us. Each of the incentive stock option agreements will provide that the options become exercisable if we achieve a specific stock price during the three-year period commencing on the date of the grant of the options. We are deemed to have achieved our stock price target if, at any time during the three-year period commencing on the day we issue the options: o We shall have sold shares common stock at a price 50% higher than the offering price, subject to adjustment for additional share issuances including stock splits or stock dividends, or more per share, to a person or entity which is unaffiliated with us or any of our stockholders, officers or directors, in a private placement or public offering, or o Our board of directors determines, in good faith, that the fair market value of a share of our common stock is equal to 50% above the offering price or more, subject to similar adjustment. 36 YEAR 2000 READINESS DISCLOSURE OUR STATE OF READINESS We have defined Year 2000 compliance as follows: Information technology time and date data processes, including, but not limited to, calculating, comparing and sequencing data from, into and between the 20th and 21st centuries contained in our products and services offered through the us, will function accurately, continuously and without degradation in performance and without requiring intervention or modification in any manner that will or could adversely affect the performance of such products or the delivery of such services as applicable at any time hereafter. Our internal systems include both its information technology systems and non-information technology systems. We have initiated an assessment of its proprietary information technology systems, and expect to complete any remediation and testing of all information technology systems during 1999. With respect to information technology systems provided by third-party vendors, we have sought assurances from such vendors that their technology is Year 2000 compliant. All of our material information technology system vendors have replied to inquiry letters sent by us stating that they either are Year 2000 compliant or expect to be so in a timely manner. We are evaluating its non-information technology systems for Year 2000 compliance. It has not, to date, discovered any material Year 2000 issues with respect to its non-information technology systems. We are in the process of contacting its material seller participants whose products or services are sold through us to determine if they are Year 2000 compliant. To date, all such seller participants have stated that they are, or expect to be, Year 2000 compliant in a timely manner. Our customers are individual Internet users, and, therefore, we do not have any individual customers who are material to an evaluation of Year 2000 compliance issues. THE COSTS TO ADDRESS YEAR 2000 ISSUES We have expensed amounts incurred in connection with Year 2000 compliance since its formation through December 31, 1998. Such amounts have not been material. The additional costs to make any other products or services Year 2000 compliant by mid-1999 will be expensed as incurred, but are not expected to be material. We are not currently aware of any material operational issues or costs associated with preparing its systems for the Year 2000. Nonetheless, we may experience material unexpected costs caused by undetected errors or defects in 37 the technology used in its systems or because of the failure of a material seller participant to be Year 2000 compliant. RISKS ASSOCIATED WITH YEAR 2000 ISSUES Notwithstanding our Year 2000 compliance efforts, the failure of a material system or vendor, including a vendor participant in our service, or the Internet generally, to be Year 2000 compliant could harm the operation of our services or prevent certain products and services being offered through our services, or have other unforeseen, adverse consequences to the company. Finally, we are also subject to external Year 2000-related failures or disruptions that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions. Moreover, participating vendors in our services might experience substantial slow-downs in business if consumers avoid products and services such as air travel both before and after January 1, 2000 arising from concerns about reliabilty and safety because of the Year 2000 issue. All of these factors could have a material adverse effect on our business, financial condition and results of operations. CONTINGENCY PLANS We have not yet developed a contingency plan to address situations that may result if it is unable to achieve Year 2000 compliance. The cost of developing and implementing such a plan, if necessary, could be material. RELATED PARTY TRANSACTIONS On October 15, 1998, Mr. Eggers and Mr. Payne sold us all rights, title and interest to all intellectual property that they owned relating to certain software, technology and ideas relating to Internet-based and computer-based music. In exchange for such sale, we issued Mr. Eggers and Mr. Payne 50,000 Preferred Shares, Class C. In addition, both Mr. Eggers and Mr. Payne were hired as our Vice President of Public Relations and Vice President of Technology. PRINCIPAL SHAREHOLDERS The following table sets forth information about our current shareholders assuming the sale of the maximum number of shares of common stock offered and conversion of all issued preferred shares. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. 38 - ------------------------------------------------------------------------------- Beneficial Ownership of common stock - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Shares Owned Percentage of Class - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Before offering After offering - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Joel Arberman 3,900,000 (1) *% *% - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Bryan Eggers 500,000 (1) *% *% Larry Payne 500,000 (1) *% *% - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - --------- ------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- All directors and 3,900,000 (1) *% *% officers as a group - - 4 persons - ------------------------------------------------------------------------------- (1)Mr. Arberman has placed 1,000,000 of his 3,900,000 common shares in escrow with the board of directors. The shares in escrow will be cancelled pro-rata as the preferred stock class C convert into common shares. Mr. Eggers and Mr. Payne currently own preferred stock class C. After we achieve specified milestones, they can convert some or all of their preferred shares into common shares. The table assumes that all of the milestones are achieved and that they receive the maximum number of common shares. For every share they receive, one share currently owned by Mr. Arberman shall be cancelled. Therefore, regardless of whether or not Mr. Eggers and Mr. Payne receive common shares, the total number of shares owned by all current directors and officers will remain unchanged at 3,900,000. THE OFFERING We are offering up to a maximum of 3,521,000 Shares at a price of $* per share to be sold by us. Our stockholders are offering 479,000 shares without the use of a professional underwriter. They will not pay commissions on stock sales. We won't receive any of the proceeds of sale of their shares. The offering will remain open for a period in our sole discretion, unless the maximum proceeds are earlier received or we determine, in our sole discretion, to cease selling efforts. Our officers, directors and stockholders and their affiliates may purchase Shares in this offering. 39 We won't escrow of any of the proceeds of this offering. Accordingly, we will have use of your funds once we accept your subscription and funds have cleared. Your subscription is non-refundable. No public trading market for the common stock exists, and one may never exist. We have no agreement with a market maker to make quotations of our common stock on the over the counter bulletin board. The development of a public trading market depends upon the existence of willing buyers and sellers which is not within our control or that of any market maker. Market makers are not required to maintain a continuous two-sided market and are free to withdraw firm quotations at any time. Even with a market maker, the nature of this offering, the possible lack of earnings history and the absence of dividends in the foreseeable future for the business we acquire may impede the development of an active and liquid market for common stock. You should carefully consider the limited liquidity of your investment in the shares. Any trading in the our stock will be conducted in the over the counter market in the so-called "pink sheets" or the NASDAQ's over the counter bulletin board. As a consequence, you could find it more difficult to dispose of, or to obtain accurate quotations as to the price of, your stock. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure for trades in any stock defined as a penny stock. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to exceptions. Under this rule, broker/dealers who recommend these securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction before sale. We think that even after the merger, our common stock will fall within the definitional scope of a penny stock WHERE YOU CAN FIND MORE INFORMATION? We have not previously been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. We have filed with the SEC a registration statement on Form SB-2 to register the offer and sale of the shares. This prospectus is part of that registration statement, and, as permitted by the SEC's rules, does not contain all of the information in the registration statement. For further information with respect to us and the shares offered under this prospectus, you may refer to the registration statement and to the exhibits and schedules filed as a part of the registration statement. You can review the registration statement and our exhibits and schedules at the public reference facility maintained by the SEC at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, 40 Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The registration statement is also available electronically on the World Wide web at http://www.sec.gov. You can also call or write us at any time with any questions you may have. We'd be pleased to speak with you about any aspect of this offering. Special Note Regarding Forward-Looking Statements This prospectus contains forward-looking statements that reflect our views about future events and financial performance. Our actual results, performance or achievements could differ materially from those expressed or implied in these forward-looking statements for various reasons, including those in the "risk factors" section beginning on page *. Therefore, you should not place undue reliance upon these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus. LEGAL PROCEEDINGS We not a party to or aware of any threatened litigation of a material nature. LEGAL MATTERS The validity of the shares offered under this prospectus is being passed upon for us by Williams Law Group, P.A., Tampa FL. FINANCIAL STATEMENTS 41 CDBEAT. COM, INC. (A Development Stage Enterprise) TABLE OF CONTENTS - ------------------------------------------------------------------------ Independent Auditors' Report F-2 Balance Sheet as of December 31, 1998 F-3 Statement of Operations for the period May 8, 1998 (date of incorporation) to December 31, 1998 F-4 Statement of Stockholders' Equity for the period May 8, 1998 (date of incorporation) to December 31, 1998 F-5 Statement of Cash Flows for the period May 8, 1998 (date of incorporation) to December 31, 1998 F-6 Notes to the Financial Statements F-7 - ------------------------------------------------------------------------ F-1 [Letterhead of Beard Nertney Kingery Crouse & Hohl, P.A.] INDEPENDENT AUDITORS' REPORT To the Board of Directors of CDbeat.com, Inc.: We have audited the accompanying balance sheet of CDbeat.com, Inc. (the "Company"), a development stage enterprise, as of December 31, 1998, and the related statements of operations, stockholders' equity and cash flows for the period May 8, 1998 (date of incorporation) to December 31, 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 audit. We conducted our audit 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 the disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1998, and the results of its operations and its cash flows for the period May 8, 1998 (date of incorporation) to December 31, 1998 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B to the financial statements, the Company has generated a net loss of $124,074 for the period May 8, 1998 (date of incorporation) to December 31, 1998, and is anticipating a net loss for the fiscal year ended December 31, 1999. In addition, the Company will require a significant amount of capital to commence its planned principal operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Beard Nertney Kingery Crouse & Hohl, P.A. February 16, 1999 F-2 CDBEAT.COM, INC. (A Development Stage Enterprise) BALANCE SHEET AS OF DECEMBER 31, 1998 ------------------------------------------------ ASSETS Cash and cash equivalents $309,203 Employee advance 4,984 Prepaid product development costs 420,000 Computer equipment (net of accumulated depreciation of $26) 1,557 --------- TOTAL $735,744 ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accrued expenses $32,511 Due to stockholder 279 --------- Total liabilities 32,790 --------- STOCKHOLDERS' EQUITY: Convertible preferred stock - $.001 par value, 10,000,000 shares authorized: Class A preferred stock - 27.847 shares issued and outstanding, liquidation value $0 0 Class B preferred stock - 100 shares issued and outstanding, liquidation value $0 0 Class C preferred stock - 100,000 shares issued and outstanding, liquidation value $100 100 Common stock - $.001 par value 20,000,000 shares authorized; 4,313,600 shares issued and outstanding 4,314 Additional paid-in capital 822,614 Deficit accumulated during the development stage (124,074) --------- Total stockholders' equity 702,954 --------- TOTAL $735,744 ========= SEE NOTES TO FINANCIAL STATEMENTS. F-3 CDBEAT.COM, INC. (A Development Stage Enterprise) STATEMENT OF OPERATIONS for the period May 8, 1998 (date of incorporation) to December 31, 1998 EXPENSES: Professional fees $ 87,775 Payroll and related taxes 28,933 Office and administration 2,461 Marketing and travel 5,618 Depreciation 26 --------- Total expenses 124,813 OTHER INCOME- Interest (739) --------- NET LOSS $124,074 ========= NET LOSS PER SHARE: Basic $ 0.03 ========= Weighted average number of shares - basic 4,114,825 ========= Diluted $ 0.03 ========= Weighted average number of shares-diluted 4,128,982 ========= SEE NOTES TO FINANCIAL STATEMENTS. F-4 CDBEAT.COM, INC. (A Development Stage Enterprise) STATEMENT OF STOCKHOLDERS' EQUITY for the period May 8, 1998 (date of incorporation) to December 31, 1998
Deficit Accumulated Additional During the Convertible Preferred CommonkStock Paid- Development Shares Par Value Shares Par Value in Capital Stage Total ------ -------- ---------- --------- ---------- ----------- --------- Balances, May 8, 1998 (date of incorporation) 0 $ 0 0 $ 0 $ 0 $ 0 $ 0 Proceeds from issuance of common stock 4,217,600 4,218 443,782 448,000 Issuance of stock in exchange for product development costs: Class B Preferred 100 0 138,000 138,000 Common 96,000 96 239,904 240,000 Other issuances of preferred stock: Class A 28 0 28 28 Class C 100,000 100 900 1,000 Net loss for the period, May 8, 1998 ( date of incorporation) to December 31, 1998 (124,074) (124,074) ------- -------- ---------- ------- --------- --------- -------- Balances, December 31, 100,128 $ 100 4,313,600 $ 4,314 $ 822,614 $(124,074) $702,954 ======= ======== ========== ======= ========= ========= ========
SEE NOTES TO FINANCIAL STATEMENTS. F-5 CDBEAT.COM, INC. (A Development Stage Enterprise) STATEMENT OF CASH FLOWS for the period May 8, 1998 (date of incorporation) to December 31, 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(124,074) Adjustments to reconcile net loss to net cash used in operating activities: Issuance of preferred stock for professional services 1,028 Depreciation 26 Change in assets and liabilities, net: Increase in accrued expenses 32,511 Increase in employee advance (4,984) Increase in prepaid product development costs (42,000) Increase in due to stockholder 279 ------- NET CASH USED IN OPERATING ACTIVITIES (137,214) ------- CASH FLOWS USED IN INVESTING ACTIVITIES- Purchase of equipment (1,583) --------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES-Proceeds from the issuance of common stock 448,000 --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 309,203 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 0 -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $309,203 ========= Interest paid $ 0 ========= Taxes paid $ 0 ========= SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for prepaid product development costs $(240,000) Preferred stock issued for prepaid product development costs (138,000) --------- $(378,000) ========= SEE NOTES TO FINANCIAL STATEMENTS. F-6 CDBEAT.COM, INC. (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ NOTE A - FORMATION AND OPERATIONS OF THE COMPANY CDbeat.com, Inc. F/K/A SMD Group, Inc. (the "Company") was incorporated under the laws of the state of Delaware on May 8, 1998. The Company, which is considered to be in the development stage as defined in Financial Accounting Standards Board Statement No. 7, intends to provide branded, interactive information and programming as well as merchandise to music enthusiasts worldwide. The planned principal operations of the Company have not commenced, therefore accounting policies and procedures have not been established. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B - GOING CONCERN The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company generated a net loss of $124,074 for the period May 8, 1998 (date of incorporation) to December 31, 1998, and is anticipating a net loss for the fiscal year ending December 31, 1999. In addition, the Company will require a significant amount of capital to commence its planned principal operations. Accordingly, the Company's ability to continue as a going concern is dependent upon its ability to secure an adequate amount of capital to finance its anticipated losses and planned principal operations. The Company's plans include a public offering of its common stock (see Note I) and the issuance of debt, however there is no assurance that they will be successful in these efforts. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. NOTE C - CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains all of its cash and cash equivalents at one FDIC insured institution, which has a maximum insurance limit of $100,000. F-7 Accordingly, as of December 31, 1998, approximately $209,000 of cash and cash equivalents were not covered by FDIC insurance. NOTE D - PREPAID PRODUCT DEVELOPMENT COSTS On December 31, 1998, the Company engaged a software development firm (the "Developer") to develop a software application for the Company's planned interactive Web site (the "Application"). Pursuant to terms of the agreement, the Developer received total consideration of $420,000 through December 31, 1998; such consideration consisted of (1) cash of $42,000; (2) 96,000 shares of the Company's common stock having a market value of $240,000; and (3) 100 shares of the Company's convertible Class B preferred stock having a market value of $138,000 (these shares were converted into 55,200 of the Company's common shares in January 1999). In January 1999, the scope of the engagement was amended whereby additional services will be provided by the Developer for $240,000. These costs, along with the prepaid product development costs in the accompanying balance sheet, will be expensed as they are incurred. NOTE E - INCOME TAXES During the period May 8, 1998 (date of incorporation) to December 31, 1998, the Company recognized losses for both financial and tax reporting purposes. Accordingly, no deferred taxes have been provided for in the accompanying statement of operations. The significant components of the deferred tax asset as of December 31, 1998, assuming an effective income tax rate of 34%, are approximately as follows: Deferred Income Tax Asset: Net operating loss carryforwards $ ------ Deferred income tax asset 42,200 Less valuation allowance (42,200) ------- Total deferred income tax asset - net $ 0 ======= The Company established a valuation allowance to fully reserve the deferred income tax asset as of December 31, 1998 as the realization of the asset did not meet the required asset recognition standard established by Financial Accounting Standards Statement No. 109 "Accounting for Income Taxes." At December 31, 1998, the Company had net operating loss carryforwards of approximately $124,000 for income tax purposes. These carryforwards will be available to offset future taxable income through the year 2018. F-8 NOTE F - PREFERRED AND COMMON STOCK Convertible Preferred Stock In addition to the preferred shares discussed at Note D, the Company has issued preferred shares as follows: a. 27.847 shares of Class A, which were issued to certain consultants as consideration for capital raised through the Company's private placements. In January 1999, all of these shares were converted into 27,847 shares of common stock. Because of the nature of the services provided by the consulants, the fair market value of the shares has been recorded as a reduction of additional paid-in capital. b. 100,000 shares of Class C, which were issued to two individuals in connection with the purchase of certain intangibles, and which may under certain conditions be converted to 1,000,000 shares of the Company's common stock. The employees have agreed to place the preferred shares into a voting trust that is administered by the Company's president. Pursuant to terms of the voting trust agreements, one thirty-sixth of the preferred shares are to be released each month, subject to the limitation that for every share released, the Company on a cumulative basis must have met certain sales goals. As such, it is possible that some or all of these shares will not be converted into common shares, and accordingly, the Company has not recorded compensation expense during the period May 8, 1998 (date of incorporation) to December 31, 1998. Rather, the Company will record compensation expense equal to the fair market value of the common shares on the date any such shares are earned. The agreements, which are irrevocable, have an initial term of three years and may be renewed indefinately. Each of the above classes consists of the following rights and preferences: (1) no stated dividends, (2) non-voting, (3) no preferential dividends, (4) no redemption rights, (5) liquidation preference equal to its par value and assuming the required conditions are met, convertible into common shares at any time prior to December 31, 2010. The conversion rates described above are subject to proportional adjustment in the event of a stock split, stock dividend or similar recapitalization event effecting such shares. Common Stock In addition to the common shares discussed in Note D above, the Company has issued common shares as follows: F-9 a. Upon its incorporation, 4,025,000 shares for cash of $25,000 (3,900,000 of these shares were issued to the Company's president). b. Pursuant to a private placement of securities effected between August and September 1998, 39,000 shares were sold to twenty-five investors at a price of $1.00 per share. c. Pursuant to a private placement of securities effected between October 1998 and December 1998, 153,600 shares were sold to nineteen investors at a price of $2.50 per share. In connection with the issuance of Class C preferred stock, the Company's president has placed 1,000,000 of his common shares in escrow with the Company under an irrevocable trust agreement. Ten of these shares will be canceled upon conversion of each of the currently issued and outstanding Class C preferred shares to common stock. Shares not canceled under this trust agreement by October 14, 2001 will be released to the Company's president (unless the term of the agreement is extended). Warrants As of December 31, 1998, the Company had issued warrants entitling certain consultants to purchase 17,847 shares of common stock for a price of $2.50 per share (which, based on recent sales, the Board of Directors believes is the fair market value of the stock). NOTE G - STOCK OPTION PLAN The Company's 1998 Stock Option (the "Plan") was adopted by the Board of Directors and approved by the Company's stockholders on October 15, 1998. The Plan provides that a maximum of 1,000,000 shares of common stock shall be initially available for issuance, and allows the Board of Directors to make additional one-time grants of up to 1,000,000 shares for newly hired personnel. As of December 31, 1998, no such options had been granted. NOTE H - LOSS PER SHARE The Company computes net loss per share in accordance with SFAS No. 128 "Earnings per Share" ("SFAS No. 128") and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the number of common and common equivalent shares outstanding during the period. Common equivalent shares, composed of incremental common shares issuable upon the conversion of Class A and B convertible preferred stock, are included in diluted net income per share to the extent such shares are dilutive. F-10 Warrants and Class C preferred stock have been excluded from the loss per share calculations because they currently are not dilutive. The following table sets forth the computation of basic and diluted net loss per share: Numerator Net loss available to common stockholders $ 124,074 ========== Denominator Weighted average shares 4,114,825 ---------- Denominator for basic calculation 4,114,825 Weighted average effect of dilutive securities: Class A Preferred Stock 12,800 Class B Preferred Stock 1,357 ========== Denominator for diluted calculation 4,128,982 ========== Net loss per share: Basic $ 0.03 ========== Diluted $ 0.03 ========== NOTE I - PROPOSED COMMON STOCK OFFERING On January 15, 1999, the Company filed a registration statement with the Securities and Exchange Commission for the sale of up to 4,000,000 shares of its common stock, including 479,000 of which are being offered by existing shareholders, for $2.50 per share. The offering is on a best efforts, no minimum basis. As such, there will be no escrow of any of the proceeds of the offering and the Company will have the immediate use of such funds to finance its planned operations. NOTE J - COMMITMENTS Effective December 1, 1998, the Company executed two year employment agreements with its President, its Vice President of Technology and its Vice President of Publicity which require aggregate annual compensation of $215,000 per annum, plus certain bonuses and fringe benefits (as defined in the employment agreements). The employment agreements contain clauses which allow the Company to terminate the officers' employment for various reasons. If the Company elects to exercise such rights without reasonable cause (as defined in the employment agreements), the respective officer(s) will be entitled to their salary and benefits for a period equal to the lesser of (1) twelve months or (2) the remaining term of the employment agreement. F-11 NOTE K - SUBSEQUENT EVENTS The following significant events have occurred subsequent to December 31, 1999: a. On January 12, 1999, the Company engaged a financial consulting firm (the "Firm") to provide various consulting services for a fee of $75,000. The Firm is also entitled to receive as additional consideration 303 Class A Convertible Preferred Shares convertible into 303,000 shares of common stock at a fair market value of $757,500 and a warrant entitling them to purchase 303,000 shares of the Company's common stock at a price of $2.50 per share. Certain milestones must be met before conversion or exercise. b. The Company's president and majority stockholder has advanced $26,500 to the Company; such advances bear interest at 6%, are unsecured and due on demand. c. In January 1999, warrants were granted to various employees and individuals to purchase 110,500 shares of the Company's common stock at a price of $2.50 per share. None of the warrants have been exercised. - ------------------------------------------------------------------------------ F-12 Part II - INFORMATION NOT REQUIRED IN PROSPECTUS Item 22. Indemnification of Directors and Officers. The information required by this Item is incorporated by reference to "Indemnification" in the prospectus herein. Item 23. Other Expenses of Issuance and Distribution. SEC Registration Fee $2,780 Blue Sky Fees and Expenses 10,000 Legal Fees and Expenses 5,000 Printing and Engraving Expenses 20,000 Accountants' Fees and Expenses 6,000 Miscellaneous 5,000 Total $48,780 The foregoing expenses, except for the SEC fees, are estimated. Item 24. Recent Sales of Unregistered Securities. The following sets forth information relating to all previous sales of Common Stock by the Registrant which sales were not registered under the Securities Act of 1933. On May 8, 1998, we issued 3,900,000 shares of common stock to Joel Arberman, President and CEO of the Registrant for no consideration. The foregoing purchase and sale were exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) on the basis that the transaction did not involve a public offering. On May 10, 1998, we issued 125,000 shares of common stock to Alfred and Rachelle Arberman, for an aggregate consideration of $25,000. No sales commissions were paid in connection with the offering. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) on the basis that the transactions did not involve a public offering. Pursuant to a private placement of securities effected between August 1998 and September 1998, we sold 39,000 common stock to 25 investors, each of whom subscribed to purchase the shares, at a price of $1.00 per share, for aggregate consideration of $39,000. No sales commissions were paid in connection with the offering. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) on the basis that the transactions did not involve a public offering. Pursuant to a private placement of securities effected between October 1998 and December 1998, we sold 153,800 common shares to 19 investors, each of whom 42 subscribed to purchase the shares, at a price of $2.50 per share, for aggregate consideration of $384,500. No sales commissions were paid in connection with the offering. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) on the basis that the transactions did not involve a public offering. On October 15, 1998, we bought from Mr. Eggers and Mr. Payne, the current Vice President of Public Relations and Vice President of Technology, all right, title and interest to all intellectual property they owned relating to specific software, technology and ideas relating to internet-based and computer-based music. In exchange for the sale, we issued to each of Mr. Eggers and Mr. Payne 50,000 preferred shares class C for a consideration of approximately $.001 per share of preferred stock class C, or an aggregate of $1,000. The preferred shares class C are convertible into 1,000,000 shares of common stock following the achievement of specified milestones. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4 (2) on the basis that the transactions did not involve a public offering. On December 31, 1998, we issued to Cadnetics Inc., a software development firm for the Registrant, 96,000 shares of common stock for consideration of $240,000 of services, plus 100 shares of preferred stock class B for consideration of $138,000 of services. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) on the basis that the transactions did not involve a public offering. On December 31, 1998, we issued 27.847 shares of preferred stock class A, which are convertible into 27,847 shares of common stock, to consultants, for consideration of approximately $1.00 per share of preferred stock class A, or an aggregate of $27.85. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) on the basis that the transactions did not involve a public offering. On December 31, 1998, we issued a warrant to consultants for a total of 17,847 shares of common stock. The warrants granted are exercisable at a price of $2.50 per share. Between January 1, 1999 and January 9, 1999, we issued 79,030 warrants to purchase common shares a price of $2.50 per share, to various individuals. The warrants were issued for no consideration. No sales commissions were paid in connection with the offering. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) on the basis that the transactions did not involve a public offering. On January 11, 1999, we issued to consultants for the Registrant, 27,847 shares of common stock for the conversion of 27.847 shares of preferred stock class A. On January 12, 1999, we issued to L&R Holdings Inc., a consulting firm for the Registrant, 303 preferred stock class A, which are convertible into 303,000 shares of common stock, for consideration of approximately $1,000 per share, or an aggregate of $303,000. In addition, we issued 303,000 warrants to purchase common shares a price of $2.50 per share to L&R Holdings, Inc. for no 43 consideration. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) on the basis that the transactions did not involve a public offering. On January 12, 1999, we issued to a consultant for the Registrant, 8.75 preferred stock class A, which are convertible into 8,750 shares of common stock, for consideration of approximately $1000 per share of preferred stock class A, or an aggregate of $8,750. In addition, we issued 31,500 warrants to purchase common shares a price of $2.50 per share for no consideration. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) on the basis that the transactions did not involve a public offering. On January 12, 1999, we issued to Cadnetics Inc., a software development firm for the Registrant, 55,200 shares of common stock for the conversion of 100 shares of preferred stock class B. Item 25. Exhibits. The following exhibits are filed with this Registration Statement: Number Exhibit Name 3.1 Articles of Incorporation 3.2 By-Laws 4.1 Rights and Preferences of preferred stock 5 Opinion Regarding Legality 10.1 Form of Employment Agreement with Joel Arberman, Bryan Eggers and Larry Payne. 10.2 Stock Option Plan 23.1Consent of Expert 24.1Consent of Counsel All other Exhibits called for by Rule 601 of Regulation S-B are not applicable to this filing. Information pertaining to our Common Stock is contained in our Articles of Incorporation and By-Laws. Item 26. Undertakings. The undersigned registrant hereby undertakes: (1) To file, during any period in which offer or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section I 0(a)(3) of the Securities Act of 1933; 44 (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to the information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of securities at that time shall be deemed to be the initial bona fide offering. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission any supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred to that section. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to our Certificate of Incorporation or provisions of Florida law, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission the indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. If a claim for indemnification against liabilities (other than the payment by the Registrant) of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit, or proceeding is asserted by a director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether the indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of the issue. 45 SIGNATURES Pursuant to the requirements of the Securities Act of 1933,the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this registration statement to be signed on our behalf by the undersigned, in the City of Stamford, State of Connecticut, on March 19, 1999. CDbeat.com, Inc. /s/ Joel Arberman President, Treasurer, and Director /s/ Avi Kerbs Director 46 As filed with the SEC on March 19, 1999 SEC Registration No. 333-70663 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS TO AMENDMENT NO. 2 REGISTRATION STATEMENT ON FORM SB-2 UNDER THE SECURITIES ACT OF 1933 CDbeat.com, Inc. (Consecutively numbered pages through of this Registration Statement) 47 INDEX TO EXHIBITS - -------------------------------------------------------------------------------- EXHIBIT NO. SEC REFERENCE TITLE OF DOCUMENT LOCATION NUMBER - -------------------------------------------------------------------------------- 1 3.1 Articles of Incorporation This Filing Page - -------------------------------------------------------------------------------- 2 3.2 Bylaws This Filing Page - -------------------------------------------------------------------------------- Rights and Preferences of 3 4.1 Preferred Stock This Filing Page - -------------------------------------------------------------------------------- 4 5 Consent of WILLIAMS LAW This Filing GROUP, P.A. Page - -------------------------------------------------------------------------------- Form of Employment Agreements 5 10.1 This Filing Page - -------------------------------------------------------------------------------- 6 10.2 Stock Option Plan This Filing Page - -------------------------------------------------------------------------------- 7 23 Consent of Beard, Nertney, This Filing Kingery, Crouse & Hohl, P.A. Page - -------------------------------------------------------------------------------- 8 24 Consent of WILLIAMS LAW This Filing GROUP, P.A., (See Exhibit 2) Page - -------------------------------------------------------------------------------- 48 EX-3.(I) 2 ARTICLES EXHIBIT 1 ARTICLES OF INCORPORATION 49 ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION OF SMD Group Inc. The undersigned, for the purpose of forming a corporation under the laws of the State of Delaware do hereby adopt the following articles of incorporation: ARTICLE ONE The name of the corporation is SMD Group Inc. ARTICLE TWO CORPORATE DURATION The duration of the corporation is perpetual. ARTICLE THREE PURPOSE OR PURPOSES The general purposes for which the corporation is organized are: 1. To engage in the business of sales, marketing and distribution of leading-edge products, services and technologies. 2. To engage in any other trade or business that can, in the opinion of the board of directors of the corporation, be advantageously carried on in connection with or auxiliary to the foregoing business. 3. To do such other things as are incidental to the foregoing or necessary or desirable in order to accomplish the foregoing. ARTICLE FOUR CAPITALIZATION The aggregate number of shares which the corporation is authorized to issue is 20,000,000. Such shares shall be of a single class, and shall have a par value of $0.001 per share. 50 ARTICLE FIVE REGISTERED OFFICE AND AGENT The street address of the initial registered office of the corporation is 15 Fast North Street in the City of Dover, County of Kent, Delaware, and the name of its initial registered agent at such address, is Incorporating Services Inc. ARTICLE SIX DIRECTORS The number of directors constituting the initial board of directors of the corporation is one. The name and address of each person who is to serve as a member of the initial board of directors is: Joel Arberman 444 Bedford Street, Suite 8s. Stamford, Connecticut 06901 ARTICLE SEVEN INCORPORATORS The name and address of each incorporator is: Joel Arberman 444 Bedford Street, Suite 8s, Stamford, Connecticut, 06901 Executed by the undersigned on May 8th 1998 STATE OF Delaware COUNTY of Kent. - --------------------- Joel Arberman 51 State of Delaware Certificate of Amendment of Certificate of Incorporation First: That at a meeting of the Board of Directors of SMD Group, Inc. resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered "First" so that, as amended, said Article shall be and read as follows: "The mane of the corporation is Cdbeat.com, Inc." RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered "Fourth" so that, as amended, said Article shall be and read as follows: "The corporation shall be authorized to issue 20,000,000 Shares at .001 Par Value and 10,000,000 Preferred Shares at .001 Par Value." Second: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. Third: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. Fourth: That the capital of said corporation shall not be reduced under or by reason of said amendment. 52 In Witness Whereof, said President and CEO has caused this certificate to be signed by Joel Arberman, an Authorized Officer, this 4th day of January, A.D. 1999. By:_____________________ (Authorized Officer) Name: Joel Arberman 53 EX-3.(II) 3 BYLAWS EXHIBIT 2 BYLAWS 54 BYLAWS OF SMD Group, Inc. BYLAWS OF SMD Group Inc. ARTICLE 1. MEETING Section 1. Annual Meeting. The annual meeting of the Shareholders of this Corporation shall be held on May 8th of each year or at such other time and place designated by the Board of Directors of the Corporation. Business transacted at the annual meeting shall include the election of Directors of the Corporation. If the designated day shall fall on a Sunday or legal holiday, then the meeting shall be held on the first business day thereafter. Section 2. Special Meetings. Special meetings of the Shareholders shall be held when directed by the President or the Board of Directors, or when requested in writing by the holders of not less than a majority of all the shares entitled to vote at the meeting. A meeting requested by Shareholders shall be called for a date not less than ten (10) nor more than sixty (60) days after request is made, unless the Shareholders requesting the meeting designate a later date. The call for the meeting shall be issued by the Secretary, the President, a majority of Shareholders, the Board of Directors, or such other person as designated by any of the same. Section 3. Place. Meetings of Shareholders shall be held at the principal place of business of the Corporation, the law office representing the Corporation or at such other place as may be designated by the Board of Directors. Section 4. Notice. Written notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (1O) nor more than sixty (60) days before the meeting, either personally or by first class mail, by or at the direction of the President, the Secretary or the officer or persons calling the meeting, to each Shareholder of record entitled to vote at such meeting. If mailed such notice shall be deemed to be delivered when deposited in the United States mail, prepaid and addressed to the Shareholder at his address as it appears on the stock transfer books of the Corporation. 55 Section 5. Notice of Adjourned Meeting. When a meeting is adjourned to another time or place, it shall not be necessary to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. At the adjourned meeting, any business may be transacted that might have been transacted on the original date of the meeting. However, if after the adjournment the Board of Directors fixes a new record date for the adjournment meeting, a notice of the adjourned meeting shall be given as provided in this Article to each Shareholder of record. Section 6. Shareholder Quorum and Voting. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of Shareholders. If a quorum is present, the affirnative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the Shareholders, unless otherwise provided by law. Section 7. Voting of Shares. Each outstanding share shall be entitled to one vote on each matter submitted to a vote at a meeting of Shareholders. Section 8. Proxies. A Shareholder may vote either in person or by proxy executed in writing by the Shareholder or his duly authorized attorney-in-fact. No proxy shall be valid eleven (11) months from the date thereof unless otherwise provided in the proxy. Section 9. Action by Shareholders Without a Meeting. Any action required by law, these Bylaws, or the Articles of Incorporation of the Corporation to be taken at any annual or special meeting of Shareholders, or any action which may be taken at any annual or special meeting of Shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, 56 shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, as is provided by law. ARTICLE 11. DIRECTORS Section 1. Function. The Board of Directors shall exercise its power and authority to manage the business and affairs of the Corporation. Section 2. Qualification. Directors need not be residents of this state and Shareholders of this Corporation. Section 3. Compensation. The Board of Directors shall have authority to fix the compensation of Directors. Section 4. Presumption of Assent. A Director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless he votes against such action or abstains from voting in respect thereto because of an asserted conflict of interest. Section S. Number. This Corporation shall have Five Director(s). Section 6. Election and Term Each person named in the Articles of Incorporation as a member of the initial Board of Directors shall hold office until the First Annual Meeting of Shareholders, and until his successor shall have been elected and qualified or until his earlier resignation, removal from office or death. At the First Annual Meeting of Shareholders and at each annual meeting thereafter, the Shareholders shall elect Directors to hold office until the next succeeding annual meeting. Each Director shall hold office for a term for which he is elected and until his successor shall have been elected and qualified or until his earlier resignation, removal from office or death. Section 7. Vacancies. Any vacancy occurring in the Board of Directors, including any vacancy created by reason of an increase in the number of Directors, may be filled by the affirmative vote of a majority of the remaining Directors though less than a quorum of the Board of Directors. A Director elected to fill a vacancy shall hold office only until the next election of Directors by the Shareholders. Section 8. Removal of Directors. At a meeting of Shareholders called expressly for that purpose, any Director or the entire Board of Directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of Directors. Section 9. Quorum and Voting. A majority of the number of Directors fixed by these Bylaws shall constitute a quorum for the transaction of business. The act of voting by the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 1O. Executive and Other Committees. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members and executive committee and one or more other committees each of which, to the extent provided in such resolution such have and may exercise all the authority of the Board of Directors, except as is provided by law. Section 11. Place of Meeting. Regular and special meetings of the Board of Directors shall be held at the principal office of the Corporation. Section 12. Time, Notice and Call of Meetings. Regular meetings of the Board of Directors shall be held without notice on May 8th of each year. Written notice of the time and place of special meetings of the Board of Directors shall be given to each Director by either personal delivery, telegram or cablegram at least three (3) days before the meeting or by notice mailed to the Director at least three (3) days before the meeting. 57 Notice of a meeting of the Board of Directors need not be given to any Director who signs a Waiver of Notice either before or after a meeting. Attendance of a Director at a meeting shall constitute a Waiver of Notice of such meeting and waiver of any and all objections to the place of the meeting, the time of the meeting, or the manner in which it has been called or convened, except when a Director states, at the beginning of the meeting, any objections to the transaction of business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the Notice or Waiver of Notice of such meeting. A majority of the Directors present, whether or not a quorum exists, may adjourn any meeting of the Board of Directors to another time and place. Notice of any such adjourned meeting shall be given to the Directors who were not present at the time of the adjournment and, unless the time and place of the adjourned meeting are announced at the time of the adjournment, to the other Directors. Meetings of the Board of Directors may be called by the Chairman of the Board, by the President of the Corporation, or by any two Directors. Members of the Board of Directors may participate in a meeting of such Board by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 13. Action Without a Meeting. Any action required to be taken at a meeting of the Board of Directors, or any action which may be taken at a meeting of the Board of Directors or a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so to be taken, signed by all the Directors, or all the members of the committee, as the case may be, is filed in the Minutes of the proceedings of the Board or of the committee. Such consent shall have the same effect as a unanimous vote. ARTICLE III. OFFICERS Section 1. Officers. The Officers of this Corporation shall consist of a President, Vice President, Secretary and a Treasurer, each of whom shall be elected by the Board of Directors. Such other Officers and assistant Officers and Agents as may be deemed necessary may be elected or appointed by the Board of Directors from time to time. Any two or more offices may be held by the same person. Section 2. Duties. The Officers of this Corporation shall have the following duties: (1) The President shall be the chief executive officer of the Corporation, shall have the general and active management of the business and affairs of the Corporation subject to the directions of the Board of Directors, and shall preside at all meetings of the Shareholders and Board of Directors. (2) The Vice President(s), in the order designated by the Board of Directors, or lacking such a designation by the President, shall, in the absence of the President, perform the duties and exercise the powers of the President and shall perform such other duties as may be prescribed by the Board of Directors or the President. (3) The Secretary shall have custody of and maintain all of the corporate records except the financial records and shall, as requested, record the minutes of all meetings of the Shareholders and Board of Directors, send all notices of all meetings and perform such other duties as may be prescribed by the Board of Directors or the President. (4) The Treasurer shall have the custody of all corporate funds and financial records, shall keep full and accurate accounts of receipts and disbursements and render accounts thereof at the annual meetings of 9 58 Shareholders, and whenever else required by the Board of Directors or the President, and shall perform such other duties as may be prescribed by the Board of Directors or the President. Section 3. Removal of Officers. An officer or agent elected or appointed by the Board of Directors may be removed by the Board whenever, in its judgment, the best interests of the Corporation will be served thereby. Any vacancy in any office may be filled by the Board of Directors. ARTICLE IV. STOCK CERTIFICATES Section 1. Issuance. Every holder of shares in this Corporation shall be entitled to have a Certificate representing all shares to which he is entitled. No Certificate shall be issued for any share until such share is fully paid. Section 2. Form. Certificates representing shares in this Corporation shall be signed by the President and the Secretary or an Assistant Secretary and may be sealed with the Seal of this Corporation or a facsimile thereof. Section 3. Transfer of Stock. The Corporation shall register a Stock Certificate presented to it for transfer if the Certificate is properly endorsed by the holder of record or by his duly authorized attorney. Section 4. Lost, Stolen or Destroyed Certificates. If the shareholder shall claim to have lost or destroyed a Certificate of shares issued, upon the making of an affidavit of the fact by the person claiming the Certificate of stock to be lost, stolen or destroyed, and, at the discretion of the Board of Directors, upon the deposit of a bond or other indemnity in such amount and with such sureties, if any, as the Board may reasonably require, the Board of Directors may direct a new Certificate or Certificates to be issued in place of any Certificate or Certificates theretofore issued by the Corporation. ARTICLE V. BOOKS AND RECORDS Section 1. Books and Records. This Corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its Shareholders, Board of Directors and committees of Directors. This Corporation shall keep at its registered office or principal place of business, a record of its Shareholders, giving the names and addresses of all Shareholders and the number of shares held by each. Any books, records and minutes may be in written form or in any other form Capable of being converted into written form within a reasonable time. Section 2. Shareholders' Inspection Rights. Any person who shall have been a holder of record of shares, or of voting trust certificates therefor, at least six (6) months immediately preceding his demand, or the holder of record of voting trust certificates for at least five percent (5%) of the outstanding shares of the Corporation, upon written demand stating the purpose thereof, shall have the right to examine, in person or by agent or attorney, at any reasonable time or times, for any proper purpose, its relevant books and records of accounts, minutes and records of shareholders and to make extracts therefrom. Section 3. Financial Information. Not later than four (4) months after the close of each fiscal year, this Corporation shall prepare a balance sheet showing in reasonable detail the financial condition of the Corporation as of the close of its fiscal year, and a Profit and Loss Statement showing the results of the operations of the Corporation during its fiscal year. 59 Upon the written request of any Shareholder or holder of voting trust certificates for shares of the Corporation, the Corporation shall mail to each shareholder, or holder of voting certificates a copy of the most recent Balance Sheet and Profit and Loss Statement. Balance Sheets and Profit and Loss Statements shall be kept in the registered office of the Corporation in this state for at least five (5) years, and shall be subject to inspection during business hours by any Shareholder or holder of voting trust certificates, in person or by agent. ARTICLE VI. DIVIDENDS The Board of Directors of the Corporation may from time to time, divide and the Corporation may pay, dividends on its shares in cash, property or its own shares, except when the Corporation is involved or when the payment thereof would render the Corporation insolvent, subject to the provisions of Delaware statutes. ARTICLE VII. CORPORATE SEAL The Board of Directors shall provide a corporate seal, which shall be in circular form. The foregoing Bylaws were adopted by a majority of the Shareholders of the Corporation at its principal Shareholders meeting held on May 10th, 1998. - ------------------------- Joel Arbeman 63 EX-4 4 RIGHTS AND PREFERRENCES EXHIBIT 3 Rights and Preferences of Preferred Stock 64 Certificate of Designation of Rights and Preferences SMD Group Inc., a Delaware corporation, whose address is 15 East North Street, Dover, DE 19901 ("Corporation") hereby designates the following rights and Preferences for its Convertible Preferred Stock, Class A ("Convertible Preferred Stock"). 1. Conversion and Issuance of Convertible Preferred Stock. The Holder shall have the right (the "Right") in its sole and absolute discretion to convert 17.847 shares of Convertible Preferred Stock - Series A issued by the Corporation (the "Share") into 17,847 common shares of Corporation (the "Equity") as payment to Holder pursuant to the terms of the October 5 , 1998 Consulting Agreement between Holder and Corporation. 2. Time of Conversion. The Share shall be convertible at any time, in whole or in part, at any time for period commencing on the date hereof and ending on December 31, 2010. No additional consideration is payable upon conversion. 3. Method of Conversion. The conversion shall be effected by a written note signed by an authorized representative of Holder or its assigns which shall (a) state Holder's election to exercise the Right; (b) the person in whose name the common share certificate is to be registered, its address and social security number; (c) be delivered in person or by certified mail to Corporation. 4. Assignability of Share; Forfeiture; Liquidation Preference. The Share may be assigned by Holder at any time by providing to Corporation a written notice of assignment. The Right shall not be exercisable until the Corporation completes a Transaction defined herein as a (i) private placement of not less than a cumulative $1,000,000, and (ii) a public listing of its common shares. The Share shall be forfeited to Corporation for no consideration if a Transaction is not completed within two years of the date of issuance of this Share. The Share shall have a preference over holders of Common Stock of the Corporation upon liquidation equal to its par value. 65 5. Representations and Warranties of Corporation. Upon exercise of the Right, the Equity interest in Corporation shall be free and clear of all liens, claims, charges and encumbrances. The amount of Equity subject to the Right shall be adjusted for splits, dividend, recapitalization, or similar events just as if it had been converted into common shares. Corporation agrees to indemnify and hold harmless Holder in connection with any claim, loss, damage or expense, including attorneys' fees, trial and appellate levels, in connection with any breach of the foregoing. 66 Certificate of Designation of Rights and Preferences SMD Group Inc., a Delaware corporation, whose address is 15 East North Street, Dover, DE 19901 ("Corporation") hereby designates the following rights and Preferences for its Convertible Preferred Stock, Class B ("Convertible Preferred Stock"). 1. Conversion and Issuance of Convertible Preferred Stock. The Holder shall have the right (the "Right") in its sole and absolute discretion to convert 100 shares of Convertible Preferred Stock - Series B issued by the Corporation (the "Share") with a face value of $138,000 into common shares of Corporation (the "Equity") at a conversion price for said shares at the lower of (i) the average of the high trading price plus the low trading price for the common shares at the date of conversion, or (ii) two dollars and fifty cents (US$2.50) per common share at the date of conversion.. The Convertible Preferred Stock is for payment to Holder pursuant to the terms of the December 31, 1998 Development Agreement between Holder and Corporation. 2. Time of Conversion. The Share shall be convertible at any time, in whole or in part, at any time for period commencing on the date hereof and ending on July 30, 1999. No additional consideration is payable upon conversion. 3. Method of Conversion. The conversion shall be effected by a written note signed by an authorized representative of Holder or its assigns which shall (a) state Holder's election to exercise the Right; (b) the person in whose name the common share certificate is to be registered, its address and social security number; (c) be delivered in person or by certified mail to Corporation. 4. Assignability of Share; Forfeiture; Liquidation Preference. The Share may be assigned by Holder at any time by providing to Corporation a written notice of assignment. The Right shall not be exercisable until the Corporation completes a Transaction defined herein as a (i) private placement of not less than a cumulative $2,000,000, or (ii) a public listing of its common shares. The Share shall be forfeited to Corporation for no consideration if a Transaction is not completed within two years of the date of issuance of this Share. The Share shall have a preference over holders of Common Stock of the Corporation upon liquidation equal to its par value. 67 5. Representations and Warranties of Corporation. Upon exercise of the Right, the Equity interest in Corporation shall be free and clear of all liens, claims, charges and encumbrances. The amount of Equity subject to the Right shall be adjusted for splits, dividend, recapitalization, or similar events just as if it had been converted into common shares. Corporation agrees to indemnify and hold harmless Holder in connection with any claim, loss, damage or expense, including attorneys' fees, trial and appellate levels, in connection with any breach of the foregoing. 68 Certificate of Designation of Rights and Preferences SMD Group Inc., a Delaware corporation, whose address is 15 East North Street, Dover, DE 19901 ("Corporation") hereby designates the following rights and Preferences for its Convertible Preferred Stock, Class C ("Convertible Preferred Stock"). 1. Conversion and Issuance of Convertible Preferred Stock. The Holder shall have the right (the "Right") in its sole and absolute discretion to convert 50,000 shares of Convertible Preferred Stock - Series C issued by the Corporation (the "Share") into 500,000 common shares of Corporation (the "Equity") as payment to Holder pursuant to the terms of the October 15 , 1998 Agreement of Purchase and Sale between Holder and Corporation. 2. Time of Conversion. The Share shall be convertible at any time, in whole or in part, at any time for period commencing on the date hereof and ending on December 31, 2010. No additional consideration is payable upon conversion. 3. Method of Conversion. The conversion shall be effected by a written note signed by an authorized representative of Holder or its assigns which shall (a) state Holder's election to exercise the Right; (b) the person in whose name the common share certificate is to be registered, its address and social security number; (c) be delivered in person or by certified mail to Corporation. 4. Assignability of Share; Forfeiture; Liquidation Preference. The Share may be assigned by Holder at any time by providing to Corporation a written notice of assignment. The Right shall not be exercisable until the Corporation completes a Transaction defined herein as a (i) private placement of not less than a cumulative $1,000,000, and (ii) a public listing of its common shares. The Share shall be forfeited to Corporation for no consideration if a Transaction is not completed within two years of the date of issuance of this Share. The Share shall have a preference over holders of Common Stock of the Corporation upon liquidation equal to its par value. 69 5. Representations and Warranties of Corporation. Upon exercise of the Right, the Equity interest in Corporation shall be free and clear of all liens, claims, charges and encumbrances. The amount of Equity subject to the Right shall be adjusted for splits, dividend, recapitalization, or similar events just as if it had been converted into common shares. Corporation agrees to indemnify and hold harmless Holder in connection with any claim, loss, damage or expense, including attorneys' fees, trial and appellate levels, in connection with any breach of the foregoing. 70 EX-5 5 OPINION OF COUNSEL EXHIBIT 4 OPINION OF WILLIAMS LAW GROUP, P.A. 71 WILLIAMS LAW GROUP, P.A. 2503 West Gardner Court Tampa, FL 33611 March 17, 1999 CDbeat.com, Inc. RE: Registration Statement on Form SB-2 Gentlemen: I have acted as your counsel in the preparation on a Registration Statement on Form SB-2 (the "Registration Statement") filed by you with the Securities and Exchange Commission covering shares of Common Stock of CDbeat.com, Inc. (the "Stock"). In so acting, I have examined and relied upon such records, documents and other instruments as in our judgment are necessary or appropriate in order to express the opinion hereinafter set forth and have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us certified or photostatic copies. Based on the foregoing, I am of the opinion that: The Stock, when issued and delivered in the manner and/or the terms described in the Registration Statement (after it is declared effective), will duly and validly issued, fully paid and nonassessable; I hereby consent to the reference to my name in the Registration Statement under the caption "Legal Matters" and to the use of this opinion as an exhibit to the Registration Statement. In giving this consent, I do not hereby admit that I come within the category of a person whose consent is required under Section7 of the Act, or the general rules and regulations thereunder. Very truly yours, /S/Michael T. Williams - - ----------------------------------- Michael T. Williams 72 EX-10 6 FORM OF EMPLOYMENT AGREEMENT EXHIBIT 5 Form of Employment Agreement 73 EMPLOYMENT AGREEMENT THIS AGREEMENT made as of this 15th day of October, 1998 (the "Agreement"), by and between SMD Group Inc., a Delaware corporation ("Employer"), and ____________ ("Employee"). WITNESSETH: WHEREAS, Employer desires to employ Employee and Employee desires to be employed by Employer as ____________________________ of Employer; and WHEREAS, Employer recognizes the need of the knowledge, talents and assistance of Employee and desires to enter into this Agreement to secure the foregoing. NOW, THEREFORE, in consideration of the promises herein contained, the parties covenant and agree as follows: 1. EMPLOYMENT. Employer agrees to employ Employee and Employee agrees to be employed by Employer and to perform work as determined by Employer, as _____________________ of Employer, on the terms and conditions set forth in this Agreement. This Agreement shall be effective as of the date mutually agreed to in writing by both parties (the "Effective Date") but in no event shall it be more than two weeks following the date on which the Employer receives more than $500,000 of gross investment capital. 2. COMPENSATION. Employer agrees to employ Employee at the base rate of compensation of ______________ thousand and No/Dollars ($__,000.00) per year. Compensation is to be paid twice per month. Compensation is to be reviewed by the Compensation Committee on an annual basis. In addition to the base compensation, Employer agrees to pay or provide Employee with the following: A. Expenses. Reimbursement for reasonable expenses actually incurred by Employee in the furtherance of Employer's business, including, but not limited to, telephone calls (including business related calls on Employee's cellular phone and business related long distance calls), entertainment, attendance at conferences, conventions and institutes, provided proper itemization of said expenses is furnished to Employer by Employee. All such expenditures shall be subject to the reasonable control of Employer. B. Medical and Disability Benefits. Employee and his spouse shall be entitled to participate in Employer's medical program, Employer-paid disability and other benefit programs as other executives of Employer are entitled to participate in, as is in place from time to time. If Employee desires to include any family members other than his spouse in the medical plan, Employee shall be responsible for all additional costs. C. Additional Benefits. Employee shall be entitled to participate in and receive such additional benefits as Employer shall 74 from time to time make available to its executive employees including, without limitation, profit sharing, stock purchase, stock option and other incentive plans. D. Preferred Stock, Class C. Pursuant to the "Agreement of Purchase and Sale" dated October 15, 1998, employee shall be entitled to receive 50,000 Preferred Stock, Class C which may, under certain conditions (to be detailed within the "Certificate of Designation of Rights and Preferences" and "Irrevocable Voting Trust" agreements), be converted into 500,000 shares of Common Stock. E. Bonus. Employee shall be entitled to receive cash or stock option bonuses for exceeding pre-tax profit targets set by the business plan of October 1998. The amount of bonus shall be determined by the Compensation Committee. 3. DUTIES. Employee agrees to perform work as determined by the Board of Directors, subject to the direction of Employer and agrees to subject himself at all times during the Term (as hereinafter defined) to the direction and control of Employer in respect to the work to be performed. Employee shall devote his full business time and attention to the furtherance of Employer's best interests. In that regard, and as further consideration for this Agreement, Employee agrees to comply with, and abide by, such rules and directives of Employer as may be reasonably established from time to time, and recognizes the right of Employer, in its reasonable discretion, to change, modify or adopt new policies and practices affecting the employment relationship, not inconsistent with this Agreement, as deemed appropriate by Employer. During the term of Employee's employment, Employee will not undertake any new business ventures, partnerships, consulting arrangements or other enterprise or business other than those on behalf of Employer, without Employer's prior written consent. 4. WORKING FACILITIES. Employee shall be furnished with office space, secretarial services, and such other facilities and services suitable to Employee's position and adequate for the performance of Employee's duties. 5. AGENCY. Employee shall have no authority to enter into any contracts binding upon Employer, except as authorized in writing, in advance, by Employer. 6. TERM OF EMPLOYMENT; SEVERANCE. A. Employee's employment hereunder shall commence as of the Effective Date hereof and continue for a period of two (2) years thereafter (the "Term"). B. Anything herein to the contrary notwithstanding, Employee's employment hereunder may be terminated at any time and for any reason by either party upon not less than one hundred twenty (120) days' prior written notice to the other party. It is understood and acknowledged that Employer shall have the right to effectuate such termination at will, with or without 75 Reasonable Cause (as hereinafter defined). Any such termination shall be effective as of the end of such one hundred twenty (120) day period (the "Final Date"). C. If Employee's employment hereunder shall be terminated by Employer without Reasonable Cause pursuant to paragraph 6.B. or because of Employee's disability, as determined by Employer in good faith, then Employee shall be entitled to (i) severance compensation equal to Employee's then-current base salary and benefits (which for purposes hereof shall include all compensation payable hereunder, of any type) for a period equal to the Severance Period (as defined below). Such severance compensation payments consisting of cash shall be paid in a lump sum plus any outstanding benefits and allocated bonuses on or before the Final Date. The severance compensation are intended to be in lieu of all other payments to which Employee might otherwise be entitled in respect of termination of Employee's employment without Reasonable Cause or in respect of any action by Employer constituting Good Reason for voluntary termination. D. If Employee's employment hereunder shall be terminated for Reasonable Cause pursuant to paragraph 6.C., or if Employee voluntarily terminates Employee's employment without Good Reason, Employee shall be entitled to receive Employee's base salary as accrued through the effective date of such termination, but shall not be entitled to any Severance Benefits or other amounts in respect of such termination. E. "Reasonable Cause," as used herein, shall mean Employee's involvement in any action or inaction involving fraud resulting in a personal benefit in excess of any payments to which Employee is entitled hereunder, dishonesty, or material violation of Corporation policy and procedures. Employee shall vacate the offices of Employer on such effective date. F. "Good Reason," as used herein, means the occurrence of any of the following events without Employee's consent: i. a material diminution in Employee's duties and responsibilities; ii. a reduction in Employee's base salary; iii. a forced relocation; or iv. a Change of Control (as defined below) if Successor Employer (as defined in paragraph H below) fails to assume this Agreement in its entirety. G. "Severance Period," as used herein, means the lesser of (i) twelve months (12) months or (ii) the remaining time of the Term. H. "Change of Control" means a sale outside the ordinary course of business of more than fifty percent (50%) of the assets of or equity interests in Employer to any person or entity. 76 7. COMPLIANCE WITH LAWS. Employee will comply with all federal and state laws, rules and regulations relating to any of Employee's responsibilities and duties with Employer and will not violate any such laws, rules and regulations. 8. COVENANT NOT TO COMPETE. Employee agrees to conform to the following concerning non-competition. A. Employer undertakes to train Employee and to give Employee confidential information and knowledge about Employer's business policies, accounts procedures and methods. For the purposes of this Agreement, the term "confidential information" shall include but is not limited to any list of suppliers, customers, investors, stockholders, including their names, addresses, phone numbers, amount of investments and similar information. In addition, any operational information of Employer, including but not limited to information on Employer's methods of conducting business, profits and/or losses of Employer, marketing material and any information that would reasonably be considered proprietary or confidential in nature. Employer has established a valuable and extensive trade in its products and services, which business has been developed at a considerable expense to Employer. The nature of the business is such that the relationship of its customers with Employer must be maintained through the close personal contact of its employees. B. Employee desires to enter into or continue in the employ of Employer and by virtue of such employment by Employer, Employee will become familiar with the manner, methods, secrets and confidential information pertaining to such business. During the Term, Employee will continue to receive additional confidential information of the same kind. Through representatives of Employer, Employee will become personally acquainted with the business of Employer and its methods of operation. C. In consideration of the employment or continued employment of Employee as herein provided, the training of Employee by Employer, and the disclosure by Employer to employee of the knowledge and confidential information described above, Employer requests and Employee makes the covenants hereinafter set forth. Employee understands and acknowledges that such covenants are required for the fair and reasonable protection of the business of Employer carried on in the area to which the covenants are applicable and that without the limited restrictions on Employee's activities imposed by the covenants, the business of Employer would suffer irreparable and immeasurable damage. The covenants on the part of Employee shall be construed as an agreement independent of any other provision of this Agreement, and existence of any claim or course of action whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants. D. Employee agrees that during the term of Employee's employment and for the period of twelve (12) months immediately following the termination of employment (which said time period shall be increased by any time during which Employee is in 77 violation of this Agreement) Employee will not, within the territory hereinafter defined, directly or indirectly, for Employee, or on behalf of others, as an individual on Employee's own account, or as an employee, agent, or representative for any other person, partnership, firm or corporation: i. Compete with the business of Employer by engaging or participating in or furnishing aid or assistance in competition with the business of Employer. ii. Engage, in any capacity, directly or indirectly, in or be employed by any business similar to the kind or nature of business conducted by Employer during the employment. iii. For the purposes of this paragraph 8, the business of Employer shall be limited to the (1) Internet based music magazine business, (2) CD player software business, (3) and (3) any business that the Employer enters into during the Term. E. The territory referred to in this paragraph 8 shall be the entire World. F. Each restrictive covenant is separate and distinct from any other covenant set forth in this paragraph. In the event of the invalidity of any covenant, the remaining obligation shall be deemed independent and divisible. The parties agree that the territory set forth is reasonable and necessary for the protection of Employer. In the event any term or condition is deemed to be too broad or unenforceable, said provision shall be deemed reduced in scope to the extent necessary to make said provision enforceable and binding. G. The provisions of this paragraph 8 shall not apply if Employee's employment is terminated by Employer without Reasonable Cause or by Employee for Good Reason. 9. INDUCING EMPLOYEE OF EMPLOYER TO LEAVE. Any attempt on the part of Employee to induce others to leave Employer's employ or any efforts by Employee to interfere with Employer's relationship with other employees would be harmful and damaging to Employer. Employee expressly agrees that during the term of Employee's employment and for a period of twelve (12) months thereafter (provided said time period shall be increased by any time during which Employee is in violation of this Agreement), Employee will not in any way directly or indirectly: A. Induce or attempt to induce an employee to sever his or her employment with Employer; B. Interfere with or disrupt Employer's relationship with other employees; and C. Solicit, entice, take away or employ any person employed with Employer, excluding people Employee brings to Employer. 10. CONFIDENTIAL INFORMATION. It is understood between the parties hereto that during the term of employment, Employee will be dealing with confidential information, as defined above, which is Employer's property, used in the course of its business. Employee will not disclose to anyone, directly or indirectly, any of such confidential information or use such information other than in the course of Employee's employment. All documents that Employee prepares, or confidential information that might be given to Employee in the course of employment, are the exclusive property of Employer and shall remain in Employer's possession on the premises. Under no circumstances shall any such information or documents be removed without Employer's written consent first being obtained. 78 11. RETURN OF EMPLOYER'S PROPERTY. On termination of employment, regardless of how termination is effected, or whenever requested by Employer, Employee shall immediately return to Employer all of Employer's property used by Employee rendering services hereunder or otherwise that is in Employee's possession or under Employee's control. 12. VACATION. Employee shall be entitled to a vacation period of four (4) weeks per calendar year. The vacation shall be taken by Employee at such time during the year and for such period as reasonable. All vacations should be taken in the year earned. No vacations may be accrued without written permission of the Board of Directors. 13. REFERENCES. Employer agrees that, upon termination of this Agreement, it will, upon written request of Employee, furnish references to third parties, including prospective employers, regarding Employee. However, Employee acknowledges that it is Employer's policy to confirm employment only and not to release any additional information without a written release from Employee. 14. NOTICES. All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or the date mailed, postage prepaid by certified mail, return receipt requested, or faxed and confirmed, if addressed to the respective parties as follows: If to Employer: SMD Group, Inc. Bedford Towers 444 Bedford Street, Suite 8s Stamford, Connecticut 06901 Attention: Board of Directors If to Employee: _______________ ========================= Either party may change its address for the purpose of receiving notices, demands, and other communications by giving written notice to the other party of the change. 15. VOLUNTARY AGREEMENT. Employee represents that he has not been pressured, misled or induced to enter this Agreement based upon any representation by Employer not contained herein. 16. PROVISIONS TO SURVIVE. The parties hereto acknowledge that many of the terms and conditions of this Agreement are intended to survive the employment relationship. Therefore, any terms and conditions that are intended by the nature of the promises or representations to survive the termination of employment shall survive the term of employment regardless of whether such provision is expressly stated as so surviving. 79 17. MERGER. This Agreement represents the entire Agreement between the parties and shall not be subject to modification or amendment by any oral representation, or any written statement by either party, except for a dated written amendment to this Agreement signed by Employee and an authorized officer of Employer. 18. VENUE AND APPLICABLE LAW. This Agreement shall be enforced and construed in accordance with the laws of the State of Delaware, and venue for any action or arbitration under this Agreement shall be Kent County, Delaware. 19. SUBSIDIARIES AND AFFILIATED ENTITIES. Employee acknowledges and agrees that Employer has or may have various subsidiaries and affiliated entities. In rendering services to Employer, Employee will have considerable contact with such subsidiaries and affiliates. Therefore, Employee agrees that all provisions of paragraphs 7, 8, 9 and 10 shall apply to all such subsidiaries and affiliates. 20. PERSONNEL INFORMATION. Employee shall not divulge or discuss personnel information such as salaries, bonuses, commissions and benefits relating to Employee or other employees of Employer or any of its subsidiaries with any other person except the Executive Committee and the Board of Directors of Employer. 21. ASSIGNMENT. This Agreement shall not be assignable by either party without the written consent of the other party; provided, however, that this Agreement shall be assignable to any corporation or entity which purchases the assets of or succeeds to the business of Employer (a "Successor Employer"). Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Employer SMD Group, Inc. By: ___________________ Joel Arberman Title: President and CEO Employee - ---------------- Employee Name 80 EX-10 7 STOCK OPTION PLAN EXHIBIT 6 Form of Stock Option Plan 81 1998 STOCK OPTION PLAN 1. PURPOSE The purpose of the SMD Group, Inc. 1998 Stock Option Plan (the "Plan") is to enhance the long-term stockholder value of SMD Group, Inc., a Delaware corporation (the "Company"), by offering opportunities to employees, directors, officers, consultants, agents, advisors and independent contractors of the Company and its Subsidiaries (as defined in Section 2) to participate in the Company's growth and success, and to encourage them to remain in the service of the Company and its Subsidiaries and to acquire and maintain stock ownership in the Company. 2. DEFINITIONS For purposes of the Plan, the following terms shall be defined as set forth below: 2.1 BOARD "Board" means the Board of Directors of the Company. 2.2 CAUSE "Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure of confidential information or trade secrets, or conviction or confession of a crime punishable by law (except minor violations), in each case as determined by the Plan Administrator, and its determination shall be conclusive and binding. 2.3 CODE "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.4 COMMON STOCK "Common Stock" means the common stock, par value $.001 per share, of the Company. 2.5 CORPORATE TRANSACTION "Corporate Transaction" means any of the following events: (a) Consummation of any merger or consolidation of the Company in which the Company is not the continuing or surviving corporation, or pursuant to which shares of the Common Stock are converted into cash, securities or other property (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of capital stock of the surviving corporation immediately after the merger); (b) Consummation of any sale, lease, exchange or other transfer in one transaction or a series of related transactions of all or substantially all of the Company's assets other than a transfer of the Company's assets to a majority-owned subsidiary corporation (as the term "subsidiary corporation" is defined in Section 8.3) of the Company; or (c) Approval by the holders of the Common Stock of any plan or proposal for the liquidation or dissolution of the Company. Ownership of voting securities shall take into account and shall include ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on the date of adoption of the Plan) under the Exchange Act. 2.6 DISABILITY "Disability" means "disability" as that term is defined for purposes of Section 22(e)(3) of the Code. 2.7 EARLY RETIREMENT "Early Retirement" means early retirement as that term is defined by the Plan Administrator from time to time for purposes of the Plan. 2.8 EXCHANGE ACT "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.9 FAIR MARKET VALUE The "Fair Market Value" shall be as established in good faith by the Plan Administrator or (a) if the Common Stock is listed on the Nasdaq National Market, the average of the high and low per share sales prices for the Common Stock as reported by the Nasdaq National Market for a single trading day or (b) if the Common Stock is listed on the New 82 York Stock Exchange or the American Stock Exchange, the average of the high and low per share sales prices for the Common Stock as such price is officially quoted in the composite tape of transactions on such exchange for a single trading day. If there is no such reported price for the Common Stock for the date in question, then such price on the last preceding date for which such price exists shall be determinative of the Fair Market Value. 2.10 GRANT DATE "Grant Date" means the date the Plan Administrator adopted the granting resolution. If, however, the Plan Administrator designates in a resolution a later date as the date an Option is to be granted, then such later date shall be the "Grant Date." 2.11 INCENTIVE STOCK OPTION "Incentive Stock Option" means an Option to purchase Common Stock granted under Section 7 with the intention that it qualify as an "incentive stock option" as that term is defined in Section 422 of the Code. 2.12 NONQUALIFIED STOCK OPTION "Nonqualified Stock Option" means an Option to purchase Common Stock granted under Section 7 other than an Incentive Stock Option. 2.13 OPTION "Option" means the right to purchase Common Stock granted under Section 7. 2.14 OPTIONEE "Optionee" means (i) the person to whom an Option is granted; (ii) for an Optionee who has died, the personal representative of the Optionee's estate, the person(s) to whom the Optionee's rights under the Option have passed by will or by the applicable laws of descent and distribution, or the beneficiary designated in accordance with Section 9; or (iii) person(s) to whom an Option has been transferred in accordance with Section 9. 2.15 PLAN ADMINISTRATOR "Plan Administrator" means the Board or any committee of the Board designated to administer the Plan under Section 3.1. 2.16 RETIREMENT "Retirement" means retirement as of the individual's normal retirement date as that term is defined by the Plan Administrator from time to time for purposes of the Plan. 2.17 SECURITIES ACT "Securities Act" means the Securities Act of 1933, as amended. 2.18 SUBSIDIARY "Subsidiary," except as provided in Section 8.3 in connection with Incentive Stock Options, means any entity that is directly or indirectly controlled by the Company or in which the Company has a significant ownership interest, as determined by the Plan Administrator, and any entity that maybecome a direct or indirect parent of the Company. 3. ADMINISTRATION 3.1 PLAN ADMINISTRATOR The Plan shall be administered by the Board or a committee or committees(which term includes subcommittees) appointed by, and consisting of two or more members of, the Board. If and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, the Board shall consider in selecting the Plan Administrator and the membership of any committee acting as Plan Administrator, with respect to any persons subject or likely to become subject to Section 16 of the Exchange Act, the provisions regarding (a) "outside directors" as contemplated by Section 162(m) of the Code and (b) "non employee directors" as contemplated by Rule 16b-3 under the Exchange Act. The Board may delegate the responsibility for administering the Plan with respect to designated classes of eligible persons to different committees consisting of one or more members of the Board, subject to such limitations as the Board deems appropriate. Committee members shall serve for such term as the Board maydetermine, 83 subject to removal by the Board at any time. 3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR Except for the terms and conditions explicitly set forth in the Plan, the Plan Administrator shall have exclusive authority, in its discretion, to determine all matters relating to Options under the Plan, including the selection of individuals to be granted Options, the type of Options, the number of shares of Common Stock subject to an Option, all terms, conditions, restrictions and limitations, if any, of an Option and the terms of any instrument that evidences the Option. The Plan Administrator shall also have exclusive authority to interpret the Plan and may from time to time adopt, and change, rules and regulations of general application for the Plan's administration. The Plan Administrator's interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Plan Administrator pursuant to the Plan, shall be conclusive and binding on all parties involved or affected. The Plan Administrator may delegate administrativeduties to such of the Company's officers as it so determines. 4. STOCK SUBJECT TO THE PLAN 4.1 AUTHORIZED NUMBER OF SHARES Subject to adjustment from time to time as provided in Section 10.1, a maximum of 1 million shares of Common Stock shall be available for issuance under the Plan, except that any shares of Common Stock that, as of the date the Plan is approved by the Company's stockholders, are available for issuance under the Company's Amended and Restated 1994 Stock Option Plan (or that thereafter become available for issuance under that Plan in accordance with its terms as in effect on such date) and that are not issued under that Plan shall be added to the aggregate number of shares available for issuance under the Plan. Shares issued under the Plan shall be drawn from authorized and unissued shares or shares now held or subsequently acquired by the Company as treasury shares. 4.2 LIMITATIONS Subject to adjustment from time to time as provided in Section 10.1, not more than 250,000 shares of Common Stock may be made subject to Options under the Plan to any individual in the aggregate in any one fiscal year of the Company, except that the Company may make additional one-time grants of up to 1 million shares to newly hired individuals, such limitation to be applied in a manner consistent with the requirements of, and only to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code. 4.3 REUSE OF SHARES Any shares of Common Stock that have been made subject to an Option that cease to be subject to the Option (other than by reason of exercise of the Option to the extent it is exercised for shares) and/or shares of Common Stock subject to repurchase which are subsequently repurchased by the Company, shall again be available for issuance in connection with future grants of Options under the Plan; provided, however, that for purposes of Section 4.2, any such shares shall be counted in accordance with the requirements of Section 162(m) of the Code. 5. ELIGIBILITY Options may be granted under the Plan to those officers, directors and employees of the Company and its Subsidiaries as the Plan Administrator from time to time selects. Options may also be granted to consultants, agents, advisors and independent contractors who provide services to the Company and its Subsidiaries. 6. AWARDS 84 6.1 FORM AND GRANT OF OPTIONS The Plan Administrator shall have the authority, in its sole discretion, to determine the type or types of awards to be made under the Plan. Such awards may consist of Incentive Stock Options and/or Nonqualified Stock Options. Options may be granted singly or in combination. 6.2 ACQUIRED COMPANY OPTION AWARDS Notwithstanding anything in the Plan to the contrary, the Plan Administrator may grant Options under the Plan in substitution for awards issued under other plans, or assume under the Plan awards issued under other plans, if the other plans are or were plans of other acquired entities ("Acquired Entities") (or the parent of an Acquired Entity) and the new Option is substituted, or the old award is assumed, by reason of a merger, consolidation, acquisition of property or of stock, reorganization or liquidation (the "Acquisition Transaction"). In the event that a written agreement pursuant to which the Acquisition Transaction is completed is approved by the Board and said agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the Acquired Entity, said terms and conditions shall be deemed to be the action of the Plan Administrator without any further action by the Plan Administrator, except as may be required for compliance with Rule 16b-3 underthe Exchange Act, and the persons holding such awards shall be deemed to be Optionees. 7. TERMS AND CONDITIONS OF OPTIONS 7.1 GRANT OF OPTIONS The Plan Administrator is authorized under the Plan, in its sole discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock Options, which shall be appropriately designated. 7.2 OPTION EXERCISE PRICE The exercise price for shares purchased under an Option shall be as determined by the Plan Administrator, but shall not be less than 100% of the Fair Market Value of the Common Stock on the Grant Date with respect to Incentive Stock Options. 7.3 TERM OF OPTIONS The term of each Option shall be as established by the Plan Administrator or, if not so established, shall be 10 years from the Grant Date. 7.4 EXERCISE AND VESTING OF OPTIONS The Plan Administrator shall establish and set forth in each instrument that evidences an Option the time at which or the installments in which the Option shall vest and become exercisable, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option will be immediately exercisable and the shares subject to the Option will vest according to the following schedule, which may be waived or modified by the Plan Administrator at any time: Period of Optionee's Continuous Employment or Service With the Company or Its Subsidiaries Percent of Total Option From the Grant Date That Is Vested After 1 year 20% After 2 years 40% Each three-month period completed thereafter An additional 5% After 5 years 100 Any unvested shares acquired upon exercise of an Option shall be subject to repurchase by the Company upon termination of the Optionee's employment or services in accordance with the provisions of Section 13.1. To the extent that the right to purchase shares has accrued thereunder, an Option may be exercised from time to time by written notice to the 85 Company, in accordance with procedures established by the Plan Administrator, setting forth the number of shares with respect to which the Option is being exercised and accompanied by payment in full as described in Section 7.5. The Plan Administrator may determine at any time that an Option may not be exercised as to less than 100 shares at any one time for vested shares and any number in its discretion for unvested shares (or the lesser number of remaining shares covered by the Option). To the extent required by the Plan Administrator, as a condition to exercise by the Optionee of an Option, the Optionee shall execute and deliver to the Company a Shareholders Agreement in substantially the form in use at the time of exercise, unless either (i) the Optionee has previously executed and delivered such Shareholder Agreement and it is in effect at the time the Optionee exercises the Option or (ii) such Shareholders Agreement is no longer in effect with respect to other holders of Common Stock. 7.5 PAYMENT OF EXERCISE PRICE The exercise price for shares purchased under an Option shall be paid in full to the Company by delivery of consideration equal to the product of the Option exercise price and the number of shares purchased. Such consideration must be paid in cash or by check or, unless the Plan Administrator in its sole discretion determines otherwise, either at the time the Option is granted or at any time before it is exercised, a combination of cash and/or check (if any) and one or both of the following alternative forms: (a) tendering (either actually or, if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, by attestation) Common Stock already owned by the Optionee for at least six months (or any shorter period necessary to avoid a charge to the Company's earnings for financial reporting purposes) having a Fair Market Value on the day prior to the exercise date equal to the aggregate Option exercise price or (b) if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed exercise notice, together with irrevocable instructions, to (i) a brokerage firm designated by the Company to deliver promptly to the Company the aggregate amount of sale or loan proceeds to pay the Option exercise price and any withholding tax obligations that may arise in connection with the exercise and(ii) the Company to deliver the certificates for such purchased shares directly to such brokerage firm, all in accordance with the regulations of the Federal Reserve Board. In addition, the exercise price for shares purchased under an Option may be paid, either singly or in combination with one or more of the alternative forms of payment authorized by this Section 7.5, by (y) a promissory note delivered pursuant to Section 12 or (z) such other consideration as the Plan Administrator may permit. 7.6 POST-TERMINATION EXERCISES The Plan Administrator shall establish and set forth in each instrument that evidences an Option whether the Option will continue to be exercisable, and the terms and conditions of such exercise, if an Optionee ceases to be employed by, or to provide services to, the Company or its Subsidiaries, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option will be exercisable according to the following terms and conditions, which may be waived or modified by the Plan Administrator at any time. In case of termination of the Optionee's employment or services other than by reason of death or Cause, the Option 86 shall be exercisable, to the extent of the number of shares vested at the date of such termination, only (a) within one year if the termination of the Optionee's employment or services is coincident with Retirement, Early Retirement at the Company's request or Disability or (b)within three months after the date the Optionee ceases to be an employee, director, officer, consultant, agent, advisor or independent contractor of the Company or a Subsidiary if termination of the Optionee's employment or services is for any reason other than Retirement, Early Retirement at the Company's request or Disability, but in no event later than the remaining term of the Option. Any Option exercisable at the time of the Optionee's death may be exercised, to the extent of the number of shares vested at the date of the Optionee's death, by the personal representative of the Optionee's estate, the person(s) to whom the Optionee's rights under the Option have passed by will or the applicable laws of descent and distribution or the beneficiary designated pursuant to Section 9 at any time or from time to time within one year after thedate of death, but in no event later than the remaining term of the Option. Any portion of an Option that is not vested on the date of termination of the Optionee's employment or services shall terminate on such date, unless the Plan Administrator determines otherwise. In case of termination of the Optionee's employment or services for Cause, the Option shall automatically terminate upon first notification to the Optionee of such termination, unless the Plan Administrator determines otherwise. If an Optionee's employment or services with the Company are suspended pending an investigation of whether the Optionee shall be terminated for Cause, all the Optionee's rights under any Option likewise shall be suspended during the period of investigation. With respect to employees, unless the Plan Administrator at any time determines otherwise, "termination of the Optionee's employment or services" for purposes of the Plan (including without limitation this Section 7 and Section 13 shall mean any reduction in the Optionee's regular hours of employment to less than thirty (30) hours per week. A transfer of employment or services between or among the Company and its Subsidiaries shall not be considered a termination of employment or services. The effect of a Company-approved leave of absence on the terms and conditions of an Option shall be determined by the Plan Administrator, in its sole discretion. 8. INCENTIVE STOCK OPTION LIMITATIONS To the extent required by Section 422 of the Code, Incentive Stock Options shall be subject to the following additional terms and conditions: 8.1 DOLLAR LIMITATION To the extent the aggregate Fair Market Value (determined as of the Grant Date) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time during any calendar year (under the Plan and all other stock option plans of the Company) exceeds $100,000, such portion in excess of $100,000 shall be subject to delayed exercisability or treated as a Nonqualified Stock Option as set forth by the Plan Administrator in the agreement(s) evidencing the Option. In the event the Optionee holds two or more such Options that become exercisable for the first time in the same calendar year, such limitation shall be applied on the basis of the order in which such Options are granted. 8.2 10% STOCKHOLDERS If an individual owns more than 10% of the total voting power of all classes of the Company's stock, then 87 the exercise price per share of an Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the Grant Date and the Option term shall not exceed five years. The determination of 10% ownership shall be made in accordance with Section 422 of the Code. 8.3 ELIGIBLE EMPLOYEES Individuals who are not employees of the Company or one of its parent corporations or subsidiary corporations may not be granted Incentive Stock Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary corporation" shall have the meanings attributed to those terms for purposes of Section 422 of the Code. 8.4 TERM The term of an Incentive Stock Option shall not exceed 10 years. 8.5 EXERCISABILITY To qualify for Incentive Stock Option tax treatment, an Option designated as an Incentive Stock Option must be exercised within three months after termination of employment for reasons other than death, except that, in the case of termination of employment due to total disability, such Option must be exercised within one year after such termination. Employment shall not be deemed to continue beyond the first 90 days of a leave of absence unless the Optionee's reemployment rights are guaranteed by statute or contract. For purposes of this Section 8.5, "total disability" shall mean a mental or physical impairment of the Optionee that is expected to result in death or that has lasted or is expected to last for a continuous period of 12 months or more and that causes the Optionee to be unable, in the opinion of the Company, to perform his or her duties for the Company and to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the Company has furnished its opinion of total disability to the Plan Administrator. 8.6 TAXATION OF INCENTIVE STOCK OPTIONS In order to obtain certain tax benefits afforded to Incentive Stock Options under Section 422 of the Code, the Optionee must hold the shares issued upon the exercise of an Incentive Stock Option for two years after the Grant Date of the Incentive Stock Option and one year from the date of exercise. An Optionee may be subject to the alternative minimum tax at the time of exercise of an Incentive Stock Option. The Plan Administrator may require an Optionee to give the Company prompt notice of any disposition of shares acquired by the exercise of an Incentive Stock Option prior to the expiration of such holding periods 8.7 PROMISSORY NOTES The amount of any promissory note delivered pursuant to Section 12 in connection with an Incentive Stock Option shall bear interest at a rate specified by the Plan Administrator but in no case less than the rate required to avoid imputation of interest (taking into account any exceptions to theimputed interest rules) for federal income tax purposes. 9. ASSIGNABILITY No Option granted under the Plan may be assigned, pledged or transferred by the Optionee other than by will or by the applicable laws of descent and distribution, and, during the Optionee's lifetime, such Option may be exercised only by the Optionee or a permitted assignee or transferee of the Optionee (as provided below). Notwithstanding the foregoing, and to the extent permitted by Section 422 of the Code, the Plan Administrator, in its sole discretion, may permit such assignment, transfer 88 and exercisability and may permit an Optionee to designate a beneficiary who may exercise the Option after the Optionee's death; provided, however, that any Option so assigned or transferred shall be subject to all the same terms and conditions contained in the instrument evidencing the Option. 10. ADJUSTMENTS 10.1 ADJUSTMENT OF SHARES In the event that, at any time or from time to time, a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to stockholders other than a normal cash dividend, or other change in the Company's corporate or capital structure results in (a) the outstanding shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of securities of the Company or of any other corporation or (b) new, different or additional securities of the Company or of any other corporation being received by the holders of shares of Common Stock of the Company, then the Plan Administrator shall make proportional adjustments in (i) the maximum number and kind of securities subject to the Plan as set forth in Section 4.1, (ii) the maximum number and kind of securities that may be made subject to Options to any individual as set forth in Section 4.2, and (iii) the number and kind of securities that are subject to any outstanding Option and the per share price of such securities, without any change in the aggregate price to be paid therefore. The determination by the Plan Administrator as to the terms of any of the foregoing adjustments shall be conclusive and binding. 10.2 CORPORATE TRANSACTION Except as otherwise provided in the instrument that evidences the Option,in the event of a Corporate Transaction, the Plan Administrator shall determine whether provision will be made in connection with the Corporate Transaction for an appropriate assumption of the Options theretofore granted under the Plan (which assumption may be effected by means of a payment to each Optionee (by the Company or any other person or entity involved in the Corporate Transaction), in exchange for the cancellation of the Options held by such Optionee, of the difference between the then Fair Market Value of the aggregate number of shares of Common Stock then subject to such Options and the aggregate exercise price that would have to be paid to acquire such shares) or for substitution of appropriate new options covering stock of a successor corporation to the Company or stock of an affiliate of such successor corporation. If the Plan Administrator determines that such an assumption or substitution will be made, the Plan Administrator shall give notice of such determination to the Optionees, and the provisions of such assumption or substitution, and any adjustments made (i) to the number and kind of shares subject to the outstanding Options (or to the options in substitution therefor), (ii) to the exercise prices, and/or (iii)to the terms and conditions of the stock options, shall be binding on the Optionees. Any such determination shall be made in the sole discretion of the Plan Administrator and shall be final, conclusive and binding on all Optionees. If the Plan Administrator, in its sole discretion, determines that no such assumption or substitution will be made, the Plan Administrator shall give notice of such 89 determination to the Optionees, and each Option that is at the time outstanding shall automatically accelerate so that each such Option shall, immediately prior to the specified effective date for the Corporate Transaction, become 100% vested and exercisable, except that such acceleration will not occur if, in the opinion of the Company's outside accountants, it would render unavailable "pooling of interest" accounting for a Corporate Transaction that would otherwise qualify for such accounting treatment. All such Options shallterminate and cease to remain outstanding immediately following the consummation of the Corporate Transaction, except to the extent assumed by the successor corporation or an affiliate thereof. 10.3 FURTHER ADJUSTMENT OF OPTIONS Subject to Section 10.2, the Plan Administrator shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation or change in control of the Company, as defined by the Plan Administrator, to take such further action as it determines to be necessary or advisable, and fair and equitable to Optionees, with respect to Options. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Options so as to provide for earlier, later, extended or additional time for exercise and other modifications, and the Plan Administrator may take such actions with respect to all Optionees, to certain categories of Optionees or only to individual Optionees. The Plan Administrator may take such action before or after granting Options to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation, reorganization, liquidation or change in control that is the reason for such action. 10.4 LIMITATIONS The grant of Options will in no way affect the Company's right to adjust, reclassify, reorganize or otherwise change its capital or business structure orto merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. S 11. WITHHOLDING The Company may require the Optionee to pay to the Company the amount of any withholding taxes that the Company is required to withhold with respect to the grant or exercise of any Option. Subject to the Plan and applicable law, the Plan Administrator may, in its sole discretion, permit the Optionee to satisfy withholding obligations, in whole or in part, by paying cash, by electing to have the Company withhold shares of Common Stock 90 or by transferring shares of Common Stock to the Company, in such amounts as are equivalent to the Fair Market Value of the withholding obligation. The Company shall have the right to withhold from any shares of Common Stock issuable pursuant to an Option or from any cash amounts otherwise due or to become due from the Company to the Optionee an amount equal to such taxes. The Company may also deduct from any Option anyother amounts due from the Optionee to the Company or a Subsidiary. 12. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES To assist an Optionee (including an Optionee who is an officer or a director of the Company) in acquiring shares of Common Stock pursuant to an Option granted under the Plan, the Plan Administrator, in its sole discretion, may authorize, either at the Grant Date or at any time before the acquisition of Common Stock pursuant to the Option, (a) the extension of a loan to the Optionee by the Company, (b) the payment by the Optionee of the purchase price, if any, of the Common Stock in installments, or (c) the guarantee by the Company of a loan obtained by the Optionee from a third party. The terms of any loans, installment payments or loan guarantees, including the interest rate and terms of repayment, will be subject to the Plan Administrator's discretion. Loans, installment payments and loan guarantees may be granted with or without security. The maximum credit available is the purchase price, if any, of the Common Stock acquired, plus the maximum federal and state income and employment tax liability that may be incurred in connection with the acquisition. 13. REPURCHASE RIGHTS; ESCROW 13.1 REPURCHASE RIGHTS The Plan Administrator shall have the discretion to authorize the issuance of unvested shares of Common Stock pursuant to the exercise of an Option. In the event of termination of the Optionee's employment or services, all shares of Common Stock issued upon exercise of an Option which are unvested at the time of cessation of employment or services shall be subject to repurchase at the exercise price paid for such shares. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise) shall be established by the Plan Administrator and set forth in the agreement evidencing such right. All of the Company's outstanding repurchase rights under this Section 13.1 are assignable by the Company at any time and shall remain in full force and effect in the event of a Corporate Transaction; provided that if the vesting of Options is accelerated pursuant to Section 10.2, the repurchase rights under this Section 13.1 shall terminate and all shares subject to such terminated rights shall immediately vest in full. The Plan Administrator shall have the discretionary authority, exercisable either before or after the Optionee's cessation of employment or services, to cancel the Company's outstanding repurchase rights with respect to one or more shares purchased or purchasable by the Optionee under an Option and thereby accelerate the vesting of such shares in whole or in part at any time. 13.2 ESCROW To ensure that shares of Common Stock acquired upon exercise of an Option that are subject to any repurchase right, stockholders agreement and/or security for any promissory note will be available for repurchase, the Plan Administrator may require the Optionee to deposit the certificate or certificates evidencing such shares with an agent designated by the Plan Administrator under the terms and conditions of escrow and security agreements approved by the Plan Administrator. If the Plan Administrator does not require such deposit as a condition of exercise of an Option, the Plan Administrator reserves the right at any time to require the Optionee to so deposit the certificate or certificates in escrow. The Company shall bear the expenses of the escrow. As soon as practicable after the expiration of any repurchase rights or stockholders agreement, and after full repayment of any promissory note secured by the shares in escrow, the agent shall deliver to the Optionee the shares no longer subject to such restrictions and no longer security for any promissory note. In the event shares held in escrow are subject to the Company's exercise of a repurchase option or stockholders agreement, the notices required to be given to the Optionee shall be given to the agent and any payment required to be given to the Optionee shall be given to the agent. Within 30 days after payment by the Company, the agent shall deliver the shares which the Company has purchased to the Company and shall deliver the payment received from the Company to the Optionee. In the event of any stock dividend, stock split or consolidation of shares or any like 91 capital adjustment of any of the outstanding securities of the Company, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of ownership of shares acquired upon exercise of an Option shall be subject to any repurchase rights, stockholders agreement, and/or security for any promissory note with the same force and effect as the shares subject to such repurchase rights, stockholders agreement and/or security interest immediately before such event. 14. MARKET STANDOFF In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, a person shall not sell, or make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any shares issued pursuant to an Option granted under the Plan without the prior written consent of the Company or its underwriters. Such limitations shall be in effect only if and to the extent and for such period of time as may be requested by the Company or such underwriters and agreed to by the Company's officers and directors; provided, however, that in no event shall the weighted average number of days in such period exceed 180 days. The limitations of this paragraph shall in all events terminate two years after the effective date of the Company's initial public offering. In the event of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Company's outstanding Common Stock effected as a class without the Company's receipt of consideration, then any new, substituted or additional securities distributed with respect to the purchased shares shall be immediately subject tothe provisions of this Section 14, to the same extent the purchased shares are at such time covered by s uch provisions. In order to enforce the limitations of this Section 14, the Company may impose stop-transfer instructions with respect to the purchased shares and any new, substituted or additional securities distributed with respect to the purchased shares until the end of the applicable standoff period. 15. AMENDMENT AND TERMINATION OF PLAN 15.1 AMENDMENT OF PLAN The Plan may be amended only by the Board in such respects as it shall deem advisable; however, to the extent required for compliance with Section 422 of the Code or any applicable law or regulation, stockholder approval will be required for any amendment that will (a) increase the total number of shares as to which Options may be granted under the Plan, (b) modify the class of persons eligible to receive Options, or (c) otherwise require stockholder approval under any applicable law or regulation. 92 15.2 TERMINATION OF PLAN The Board may suspend or terminate the Plan at any time. The Plan will have no fixed expiration date; provided, however, that no Incentive Stock Options may be granted more than 10 years after the earlier of the Plan's adoption by the Board and approval by the stockholders. 15.3 CONSENT OF OPTIONEE The amendment or termination of the Plan shall not, without the consent of the Optionee, impair or diminish any rights or obligations under any Option theretofore granted under the Plan. Any change or adjustment to an outstanding Incentive Stock Option shall not, without the consent of the Optionee, be made in a manner so as to constitute a "modification" that would cause such Incentive Stock Option to fail to continue to qualify as an Incentive Stock Option. 16. GENERAL 16.1 OPTION AGREEMENTS Options granted under the Plan shall be evidenced by a written agreement that shall contain such terms, conditions, limitations and restrictions as the Plan Administrator shall deem advisable and that are not inconsistent with the Plan. 16.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN OPTIONS None of the Plan, participation in the Plan or any action of the Plan Administrator taken under the Plan shall be construed as giving any person any right to be retained in the employ of the Company or limit the Company's right to terminate the employment or services of any person. 16.3 REGISTRATION The Company shall be under no obligation to any Optionee to register for offering or resale or to qualify for exemption under the Securities Act, or to register or qualify under state securities laws, any shares of Common Stock, security or interest in a security paid or issued under, or created by, the Plan, or to continue in effect any such registrations or qualifications if made. The Company may issue certificates for shares with such legends and subject to such restrictions on transfer and stop-transfer instructions as counsel for the Company deems necessary or desirable for compliance by the Company with federal and state securities laws. Inability of the Company to obtain, from any regulatory body having jurisdiction, the authority deemed by the Company's counsel to be necessary for the lawful issuance and sale of any shares hereunder or the unavailability of an exemption from registration for the issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the non issuance or sale of such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of an Option, the Company may require the Optionee to represent and warrant at the time of any such exercise or receipt that such shares are being purchased or received only for the Optionee's own account and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any relevant provision of the aforementioned laws. At the option of the Company, a stop-transfer order against any such shares may be placed on the official stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred, unless an opinion of counsel is provided (concurred in by counsel for the Company) stating that such transfer is not in violation of any applicable law or regulation, may be stamped on stock certificates to ensure exemption from registration. The Plan Administrator may also require such other action or agreement by the Optionee as may from time to time be necessary to comply with the federal and state securities laws. 16.4 NO RIGHTS AS A STOCKHOLDER No Option shall entitle the Optionee to any dividend, voting or other right of a stockholder unless and until the date of issuance under the Plan of the shares that are the subject of such Option, free of all applicable restrictions. 16.5 COMPLIANCE WITH LAWS AND REGULATIONS Notwithstanding anything in the Plan to the contrary, the Board, in its sole discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Optionees who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Optionees. Additionally, in interpreting and applying the provisions of the Plan, any Option granted as an Incentive Stock Option pursuant to the Plan shall, to the extent permitted by law, be construed as an "incentive stock option" within the meaning of Section 422 of the Code. 16.6 NO TRUST OR FUND The Plan is intended to constitute an "unfunded" plan. Nothing contained herein shall require the Company to segregate any monies or other property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Optionee, and no Optionee shall have any rights that are greater than those of a general unsecured creditor of the Company. 16.7 SEVERABILITY If any provision of the Plan or any Option is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or any Option under any law deemed applicable by the Plan Administrator, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Plan Administrator's determination, materially altering the intent of the Plan or the Option, such provision shall be stricken as to such jurisdiction, person or Option, and the remainder of the Plan and any such Option shall remain in full force and effect. 17. EFFECTIVE DATE The Plan's effective date is the date on which it is adopted by the Board, so long as it is approved by the Company's stockholders at any time within 12 months of such adoption. Adopted by the Board on October 15, 1998 and approved by the Company's stockholders on October 15, 1998. 93 EX-23 8 ACCOUNTANTS CONSENT EXHIBIT 7 CONSENT OF BEARD, NERTNEY, KINGERY, CROUSE & HOHL, P.A. 94 [Letterhead of Beard Nertney Kingery Crouse & Hohl P.A.] March 17, 1999 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use in the prospectus constituting part of this Registration Statement on Form SB-2 (No. 333-70663) of our report dated February 16, 1999, with respect to the financial statements of CDbeat.com, Inc., as of and for the period May 8, 1998 (date of incorporation) to December 31, 1998, filed with the Securities and Exchange Commission. /s/ BEARD, NERTNEY, KINGERY, CROUSE & HOHL, P.A. 95 EX-23 9 CONSENT OF COUNSEL EXHIBIT 8 CONSENT OF WILLIAMS LAW GROUP, P.A., (SEE EXHIBIT 2) 96 -----END PRIVACY-ENHANCED MESSAGE-----