Document/Exhibit Description Pages Size
1: 10KSB Annual Report -- Small Business 38 212K
6: EX-10.10 Material Contract 7 34K
7: EX-10.11 Material Contract 69 237K
8: EX-10.12 Material Contract 26 97K
9: EX-10.13 Material Contract 55 176K
10: EX-10.14 Material Contract 17 65K
2: EX-10.6 Material Contract 4 14K
3: EX-10.7 Material Contract 2 10K
4: EX-10.8 Material Contract 5 18K
5: EX-10.9 Material Contract 9 44K
11: EX-21.1 Subsidiaries of the Registrant 1 6K
12: EX-27.1 Financial Data Schedule (Pre-XBRL) 2 7K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 333-70663
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CDBEAT.COM, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 06-1529524
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
29 WEST 57TH STREET, (212) 583-0300 10019
9TH FLOOR NEW YORK,
NEW YORK
(Address of Issuer's (Issuer's telephone
principal executive number, including (Zip Code)
offices) area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No __
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
The issuer's revenues for the year ended December 31, 1999 were $0.
The aggregate market value of the registrant's voting common equity (I.E.,
the Common Stock) held by non-affiliates as of March 31, 2000 was $30,477,394,
using the closing sale price of $3.50 per share on such date, as reported by the
Nasdaq OTC Bulletin Board.
The number of outstanding shares of the registrant's Common Stock as of
March 31, 2000 was 18,081,650.
Transitional Small Business Disclosure Format.
Yes __ No X
DOCUMENTS INCORPORATED BY REFERENCE
None.
A list of Exhibits to this Annual Report on Form 10-KSB begins on Page 21.
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[Enlarge/Download Table]
TABLE OF CONTENTS
PART I PAGE
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Item 1. Description of Business ............................................................. 1
Item 2. Description of Property ............................................................. 7
Item 3. Legal Proceedings ............................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders..................................... 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters................................ 7
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations... 8
Item 7. Financial Statements ............................................................. 10
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.... 10
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons........................... 11
Item 10. Executive Compensation ............................................................. 16
Item 11. Security Ownership of Certain Beneficial Owners and Management......................... 19
Item 12. Certain Relationships and Related Transactions......................................... 23
Item 13 Exhibits and Reports on Form 8-K....................................................... 24
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The Company's principal executive offices are located at 29 West 57th
Street, 9th Floor, New York, New York 10019, and the telephone number is (212)
583-0300.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB includes forward-looking statements,
including statements regarding, among other things, the Company's:
- anticipated growth strategies, and
- its intention to introduce new products.
The Company has based these forward-looking statements largely on its
expectations. Forward-looking statements are subject to a number of risks and
uncertainties, certain of which are beyond its control. Actual results could
differ materially from those anticipated as a result of numerous factors,
including among other things: (1) economic, business and competitive conditions
in the online music and media industry and the economy in general; (2) the
enactment of new laws and regulations, and the amendment of existing laws and
regulations which could affect the Company's business; (3) changes in the
Company's business strategy or development plan; (4) the Company's ability to
obtain financing on acceptable terms when needed; and (5) the Company's ability
to identify appropriate acquisition candidates, complete such acquisitions and
successfully integrate acquired businesses.
The Company does not undertake any obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. Because of the risks and uncertainties, the forward-looking
events and circumstances discussed in this Annual Report on Form 10-KSB might
not occur.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
CDbeat.com, Inc. ("CDBEAT" or the "COMPANY") is a B2B online marketing
company. The Company's software, currently in Beta development, is intended to
recognize the content, subject, data or artist contained on any hard medium
(i.e., music CD, DVD or CD-ROM) that is played in a computer, and then offer the
user - at that moment - the ability to connect online with the provider of that
hard medium, or with various related Internet sites that have been pre-selected
by the provider. The Company's executive offices are located in New York, New
York. The Company's common stock is traded on the OTC Bulletin Board under the
symbol CDBT.
32 Records LLC ("32 Records"), a wholly owned subsidiary of the Company, is
an independent record company that specializes in the catalog, or reissue,
segment of the record business through the acquisition of existing master
recordings by established artists, that are nevertheless underperforming,
underutilized or have never before been released commercially. 32 Records
recompiles, repackages, remarkets and sells its music products into traditional
markets such as domestic and foreign music stores as well as nontraditional
markets such as price clubs, catalogs, and various non-music retail stores. On
March 30, 2000, the Company decided that it will exit the record business
conducted by 32 Records by March 2001 and recharacterized 32 Records as a
discontinued operation for financial reporting purposes. 32 Records intends
to continue its operations until it can either (i) sell the business or assets
in an orderly fashion, or (ii) close or surrender the business to EFI (as
defined herein).
HISTORY
The Company was incorporated in Delaware on May 8, 1998 under the name "SMD
Group, Inc." In January 1999, the Company changed its name to "CDbeat.com, Inc."
Effective as of April 19, 2000, the Company's name will be changed to
"Spinrocket.com, Inc." The Company decided to change its name in order to better
reflect the broader scope of its software business.
In November 1999, 32 Records acquired substantially all of the assets and
liabilities relating to the business of Cakewalk LLC ("Cakewalk") in exchange
for 8,307,785 shares of the Common Stock of the Company, which number of shares
equaled approximately 46% of the then issued and outstanding Common Stock of the
Company (the "Cakewalk Transaction"). As a result of the Cakewalk Transaction,
the business formerly operated by Cakewalk is now being operated by 32 Records.
In addition to the Cakewalk Transaction described above, a certain Stock
Purchase Warrant held by Atlantis Equities, Inc. ("Atlantis"), dated as of
September 23, 1999 (the "Atlantis Warrant"), was amended pursuant to a certain
Warrant Amendment Agreement, dated as of November 16, 1999, among the Company,
Atlantis and Dylan LLC, an affiliate of Atlantis ("Dylan") (the "Warrant
Amendment Agreement"). The Atlantis Warrant gave Atlantis the right to purchase
eighty (80%) percent of the issued and outstanding Common Stock of the Company
and options to purchase 762,064 shares of the Company's Common Stock. Pursuant
to the Warrant Amendment Agreement, the Atlantis Warrant was split into two
warrants, one of which was assigned to Dylan (the "Dylan Warrant"), and the
other of which was retained by Atlantis (the "Revised Atlantis Warrant").
Concurrently with the closing of the Cakewalk Transaction, (i) Dylan exercised
the Dylan Warrant and paid the Company $900,000 for 7,037,183 shares of Common
Stock issuable upon exercise of such warrant (the "Dylan Stock"), and (ii)
Atlantis exercised the Revised Atlantis Warrant and paid the Company $100,000
for 781,909 shares of Company Stock issuable upon exercise of the Revised
Atlantis Warrant (the "Atlantis Stock") and received 762,064 options from the
Company which are exercisable at $2.50 each until December 31, 2000 (the
"Options")(collectively, the "Atlantis Transaction"). Together, the Dylan Stock
and the Atlantis Stock equaled approximately 43% of the then issued and
outstanding Common Stock of the Company (after giving effect to the Cakewalk
Transaction and the Atlantis Transaction). In light of the transfer of
approximately 89% of the issued and
outstanding Common Stock of the Company, collectively, to Cakewalk, Dylan and
Atlantis pursuant to the Cakewalk Transaction and the Atlantis Transaction, a
change in control in the Company occurred.
INDUSTRY OVERVIEW
EMERGENCE OF THE INTERNET AND THE WORLD WIDE WEB
The Internet has become an important medium for communications, content and
commerce. According to International Data Corporation, the number of Web users
worldwide will grow from 97 million at the end of 1998 to 320 million by the
year 2002. Industry analysts believe the Internet represents the fastest growing
form of media in history. The dramatic growth in Internet usage has been fueled
by a number of key factors, including: technological, functional and
infrastructure advances in computing and communications; lower costs associated
with publishing content on the Internet as compared to traditional media;
increased quantity and improved quality of information and services offered on
the Web; and increased affordability of, access to and resulting proliferation
of, multimedia computers.
EMERGENCE OF ELECTRONIC AND ONLINE COMMERCE
Internet and online services have provided organizations and individuals
with innovative ways of conducting business. With the emergence of the Internet
as a globally accessible, fully interactive and individually addressable
communications and computing medium, companies that have traditionally conducted
business in person, through the mail or over the telephone are increasingly
utilizing electronic communications and commerce.
Consumers have shown a strong preference for transacting various types of
business electronically, such as paying bills, buying insurance, booking airline
tickets and trading securities, rather than in person or over the telephone.
These transactions are being streamlined through online commerce and can now be
performed directly by individuals virtually anywhere at any time. Consumers have
accepted and even welcomed self-directed online transactions because these
transactions can be faster, less expensive and more convenient than transactions
conducted through a human intermediary.
GROWTH OF ONLINE ADVERTISING AND DIRECT MARKETING
The Internet is an attractive advertising medium because of its
interactivity, flexibility, target ability, and accountability. It provides
advertisers with the opportunity to reach broad, global audiences, since the
Internet 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. The
interactive nature of the Internet gives advertisers the potential to: analyze
demographic characteristics of the viewers of the advertisement; measure the
number of times that a particular advertisement has been viewed; receive direct
feedback on their advertising; establish dialogues and one-to-one relationships
with potential customers; and adapt advertising to respond to feedback.
The flexible nature of a digital medium like the Internet 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 Internet advertising versatile. Unlike traditional advertising
where advertisements are presented to consumers who may or may not have an
interest in them, Internet advertisements can be delivered when a consumer calls
for a piece of information or a particular web page. Unlike more traditional
media, the Company believes that the Internet is a more accountable medium where
advertisers can receive reports on the impression levels, demographic viewership
and effectiveness of their advertisements. Jupiter Communications, an
independent research firm, estimates that total online advertising revenue in
the U.S. will increase from $1.9 billion in 1998 to $7.7 billion by 2002.
The Company believes 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
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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,
the number of leads or sales, and cost-per-response. According to the Direct
Marketing Association, an estimated $153 billion was spent on direct marketing
in the United States in 1997.
GROWTH IN NUMBER OF PEOPLE UTILIZING THEIR PERSONAL COMPUTERS TO PLAY HARD MEDIA
Today, virtually every personal computer sold is a low-cost, Internet-ready
machine equipped with extensive technology that enables these machines to play
music CDs, DVDs and CD-ROMs. The Company believes this and other factors are
contributing to a substantial increase in the number of people who are playing
various hard media in their personal computer. In effect, the computer is
competing with other electronic devices such as stereo systems, DVD players and
videocassette players as a popular means of listening to music and viewing other
content. For example, various research estimates have concluded that there are
more than 5 million people who listen to their favorite music while browsing the
Internet and working and playing on their personal computer. Within five years,
this number is anticipated to grow to more than 60 million people.
USE OF THE WEB TO TRANSMIT OTHER FORMS OF CONTENT
In addition to music content, which has driven a large portion of Web
content to date, the Company anticipates that innumerable other forms of content
will shortly be transmitted to consumers via the Web, including feature films,
books, and periodicals, as bandwidth increases and compression technologies
become more sophisticated. Among other things, the Company hopes to capitalize
upon this trend with its software.
PRODUCTS AND SERVICES
As noted above, the Company characterizes itself as a B2B online
marketing company. The Company's software, currently in Beta development, is
intended to recognize the content, subject, data or artist contained on any
hard medium (i.e., music CD, DVD or CD-ROM) that is played in a computer, and
then offer the user - at that moment - the ability to connect online with the
provider of that hard medium, or with various related Internet sites that
have been pre-selected by the provider. Thus, the Company's software is
intended to facilitate the online connection, on a highly targeted basis, of
hard media users and providers. Utilization of the Company's software will,
therefore, permit a content provider to identify users of their existing hard
media, to connect with them online on a highly targeted demographic basis,
and to further market to them.
The Company's software is intended to work with the millions of ordinary
CDs, DVDs and CD-ROMs already in existence, with new hard media, such as
enhanced CDs, and also with MP3 and other new downloaded digital files. The
Company's software thus will not require that any links be embedded or
programmed into the hard media.
The Company believes that its software is suited to various industries that
presently utilize, to one degree or another, hard media, including online games,
healthcare, the music business, the movie industry and education. Each of these
industries is believed to have millions of hard media currently in circulation,
and therefore represents a large potential market for the Company's software
product. The creators or providers of those hard media, for the most part, have
a limited relationship with the users of the hard media, since ordinary commerce
methods preclude identification of buyers and therefore limit continued
marketing to them. However, the Company's software is designed to facilitate the
online connection between such users and providers.
The Company's revenue model contemplates receiving a fee for facilitating
the online connection between each targeted user and the related content
providers, on a cost-per-thousand basis, as well as a percentage of all
e-commerce revenues generated from the referred connection. Further, the Company
anticipates being able to provide advertisers with individualized and targeted
opportunities. The Company
3
also contemplates licensing its software technology to other application
developers who wish to facilitate the connection between users and marketers of
appropriate content.
It should be noted that the Company's software is still in the
developmental stage, and is therefore subject to continuing changes and/or
modifications.
ACQUISITION OPPORTUNITIES
The Company believes that a number of merger, acquisition and/or investment
opportunities exist that have the potential to meaningfully increase the
Company's shareholder value. The Company is seeing many potential merger or
acquisition candidates that have excellent business plans, experienced and
successful management, and either have created or have the ability to create
significant value. Some of these companies would benefit from being part of a
larger public company with greater resources. The Company believes that there
are a number of opportunities (both control and non-control) where the Company
would benefit from having an equity position. All of these potential targets are
in the Internet and/or technology sectors, and many of them would be synergistic
with and/or complementary to the Company's business. Further, the Company
believes that selective transactions with one or more of these potential
companies would offer diversification and reduce the Company's risk profile. The
Company believes that it will be able to enter into these transactions primarily
for Company stock, although some cash may be needed for working capital
purposes. Except as set forth below, the Company has not yet entered into any
negotiations relating to any potential transaction.
The Company has signed a letter of intent with Arthur Treacher's, Inc.
("ATCH"), under which the Company would sell to ATCH: (a) 390,625 shares of the
Company's Series D Convertible Preferred Stock at a price of $1.28 per share,
and (b) 869,565 shares of the Company's Series D Convertible Preferred Stock at
a price of $1.15 per share, in exchange for (i) $500,000 in cash and (ii)
1,000,000 shares of ATCH's common stock, par value $.01 per share (the "ATCH
STOCK"). In the event the Company has authorized a sufficient number of shares
of its Common Stock, ATCH shall receive shares of Common Stock in lieu of Series
D Convertible Preferred Stock. The Company expects to receive registration
rights with respect to the ATCH Stock which are the same as those granted to
Investors in the Offering. The ATCH Stock is traded on the OTC Bulletin Board
(Symbol:ATCH). The closing price for ATCH Stock on April 12, 2000 was $2.0625.
Although a letter of intent has been signed between the parties, no binding
agreement or commitment has yet been executed between the Company and ATCH. Any
such agreement or commitment that is reached may be on terms that substantially
differ from those set forth above. Consummation of any such agreement or
commitment with ATCH would be subject to the satisfaction of various conditions
and there can be no assurance that any transaction will occur.
ATCH recently announced the formation of a new subsidiary, Digital Creative
Development Corporation ("DC2"), that will provide web design, web consulting
and content creation services. DC2 will seek to acquire, invest and form joint
ventures with web design, web consulting and digital content companies, and has
assembled a team of technology professionals to explore specific strategic
initiatives for DC2. ATCH also owns, operates and franchises quick service
seafood restaurants.
COMPETITION
Although the Company is not aware of any direct competitor, many potential
competitors of the Company have well-established reputations and have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
Competition could have a negative result on the business, financial condition
and operating results of the Company. Barriers to entry are minimal and current
and new competitors can launch new sites and applications at a relatively low
cost. The market for online software and services is intensely competitive and
rapidly changing. The Company competes with other firms that focus on providing
4
online software and services as well as traditional companies. The Company
cannot assure that it will be able to compete successfully against current and
future competitors.
CURRENT AND POTENTIAL GOVERNMENT REGULATION
PRIVACY ISSUES. The Federal Trade Commission, or FTC, adopted regulations
effective April 21, 2000, regarding the collection and use of personal
identifying information obtained from individuals when accessing Web sites, with
particular emphasis on access by children under the age of 13. These regulations
include requirements that companies establish certain procedures in connection
with the collection and use of such information prior to April 21, 2000, that
among other things: give adequate notice to consumers regarding information
collection and disclosure practices; provide consumers with the ability to have
personal identifying information deleted from a company's database; provide
consumers with access to their personal information and with the ability to
rectify inaccurate information; clearly identify affiliations or a lack of
affiliations with third parties that may collect information or sponsor
activities for a services membership; and obtain express parental consent prior
to collecting and using personal identifying information obtained from children
under 13 years of age. These regulations also include enforcement and redress
provisions. The Company intends to comply with these regulations as it develops
its software.
The FTC has also begun investigations into the privacy practices of
companies that collect information on the Internet. One investigation resulted
in a consent decree pursuant to which an Internet company agreed to establish
programs to fully disclose to consumers its use of such personal information and
implement the principles noted above. The Company intends that any data
collection activity it may engage in will be only on an opt-in basis, thus
manifesting the consent of the user. Nonetheless, the FTC's regulatory and
enforcement efforts in this area may limit or adversely affect the Company's
ability to collect demographic and personal information from users. This, in
turn, could have an adverse effect on the Company's ability to provide highly
targeted opportunities for advertisers and electronic commerce marketers.
The European Union, or EU, has adopted a directive that imposes
restrictions on the collection and use of personal data. Under the directive, EU
citizens are guaranteed rights to access their data, to know where the data
originated, to have inaccurate data corrected, to recourse in the event of
unlawful processing and to withhold permission to use their data for direct
marketing. The directive could, among other things, affect U.S. companies that
collect information over the Internet from individuals in EU member countries,
and may impose restrictions that are more stringent than current Internet
privacy standards in the United States. In particular, companies with offices
located in EU countries will not be allowed to send personal information to
countries that do not maintain adequate standards of privacy. The directive does
not, however, define what standards of privacy are adequate. As a result, the
directive may adversely affect the activities of entities like the Company that
engage in data collection from users in EU member countries.
INTERNET TAXATION. There are currently pending a number of legislative proposals
at the federal, state and local level, and by certain foreign governments, that
would impose additional taxes on the sale of goods and services over the
Internet and certain states already have taken measures to tax Internet-related
activities. Although Congress recently placed a three-year moratorium on state
and local taxes on Internet access or on discriminatory taxes on e-commerce,
existing state or local laws were expressly excepted from this moratorium.
Further, once this moratorium is lifted, one or more federal and/or state taxes
may be imposed upon Internet commerce. This legislation, or other attempts at
regulating commerce over the Internet, may substantially impede the growth of
commerce on the Internet and, therefore, may adversely affect the Company's
opportunity to derive financial benefit from those activities.
JURISDICTIONS. Due to the global nature of the Internet, it is possible that the
governments of other states and foreign countries might attempt to regulate
transmissions or prosecute for violations of their laws. Violations
5
of local laws may be alleged or charged by state or foreign governments, and the
Company may unintentionally violate local laws and local laws may be modified,
or new laws enacted, in the future. Any of the foregoing developments could have
a material adverse effect on the Company's business, results of operations and
financial condition.
EMPLOYEES
As of April 12, 2000, the Company had six full-time employees, four of whom
are executive officers, and 32 Records, the Company's wholly owned subsidiary,
employed six people on a full-time basis. From time to time, the Company has
retained, and may retain, independent contractors to support its software
development and technical requirements. The Company believes its relations with
its employees are generally good and it has no collective bargaining agreements
with any labor unions.
INTELLECTUAL PROPERTY
The Company's success depends in part on its ability to protect its
software and other intellectual property. To protect the Company's rights, the
Company intends to generally rely on patent, copyright, trademark and trade
secret laws, confidentiality agreements with employees and third parties, and
license agreements with consultants, vendors and customers, although the Company
has not signed such agreements in every case.
The Company currently does not have any patents issued to it. In December
1999, the Company filed a Provisional Patent Application with the United States
Patent office, seeking protection for its software. The Company intends shortly
to file a formal patent application with the patent office to the same effect
and to seek protection overseas, if available. The Company cannot be certain
that any patent applications will be granted, that any patent granted will not
be challenged, invalidated or circumvented, or that the rights granted under any
patent that may be issued will provide competitive advantages to it. Many of the
Company's current and potential competitors dedicate substantially greater
resources than the Company does to protection and enforcement of intellectual
property rights, especially patents.
Third parties may copy or obtain and use the Company's technologies, ideas,
know-how and other information without authorization or independently develop
technologies similar or superior to the Company's technologies. Competitors may
obtain patents or other rights that would prevent, or limit or interfere with
the Company's ability to make, use or sell the Company's software or services.
If the Company is found to infringe on the rights of others it may be required
to incur substantial costs to defend any litigation, cease offering its
products, obtain a license from the holder of the infringed intellectual
property right or redesign its software and services.
Legal standards relating to the validity, enforceability and scope of
protection of certain rights in Internet-related businesses are uncertain and
still evolving. The Company cannot assure the future viability or value of any
of its rights or of similar rights of other companies within this market. The
Company cannot be certain that the steps taken by it will prevent
misappropriation or infringement of its information.
Any litigation might result in substantial costs and diversion of resources
and management attention and could have a material adverse effect on the
Company's business, results of operations and financial condition.
RECENT DEVELOPMENT AT 32 RECORDS
In March 2000 the Label Manager and Creative Director of 32 Records
resigned their positions. The resignation of the Creative Director constitutes a
default under the Management Agreement among 32
6
Records LLC, Cakewalk BRE LLC ("Cakewalk BRE") and Entertainment Finance
International, Inc. ("EFI"). As a result of this default, and other covenant
defaults, EFI, as the holder of $5,500,000 principal amount of indebtedness
issued by Cakewalk BRE, has the right to accelerate the maturity date of such
indebtedness and exercise other remedies. EFI has been notified of these
defaults and, as of the date hereof, has neither taken any such action nor
indicated an intention to do so. At the time the loan was granted in June 1999
the lender required the establishment of a new subsidiary, Cakewalk BRE, a
Bankrupt Remote Entity, into which the assets and liabilities of 32 Records were
transferred as security for the lender. Accordingly, the lender in the event of
a declaration of default may seek to take over the business of 32 Records, but
it does not have recourse to the Company's assets not included in Cakewalk BRE.
On March 30, 2000, the Company decided that it will exit the record
business conducted by 32 Records by March 2001 and recharacterized 32 Records as
a discontinued operation for financial reporting purposes. 32 Records intends to
continue its operations until it can either (i) sell the business or assets in
an orderly fashion, or (ii) close or surrender the business to EFI.
ITEM 2. DESCRIPTION OF PROPERTY
The Company subleases approximately 1,875 square feet of office space in
New York, New York for use as its corporate headquarters. The initial sublease
expires on November 29, 2003. The Company believes that additional executive
office space will be required as its business expands and believes that it can
obtain suitable space as needed. The Company does not own any real estate.
ITEM 3. LEGAL PROCEEDINGS
As of April 12, 2000, the Company is not a party to any legal proceeding.
Counsel to the Company has recently received letters from attorneys representing
the former Creative Director of 32 Records and a third party which allege that
such parties may be entitled to additional shares of the Company's Common Stock.
Neither the Company nor Mr. Miller believes that the allegations set forth in
these letters have any merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the year ended December 31, 1999, no matters
were submitted by the Company to a vote of its stockholders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION. The Company's common stock is currently listed on the
OTC Bulletin Board under the trading symbol "CDBT." The Company first listed its
common stock on the OTC Bulletin Board in August 1999. The following table sets
forth the high and low closing prices of its common stock as reported on the OTC
Bulletin Board for each calendar quarter commencing in August 1999 through March
31, 2000.
[Download Table]
CLOSING PRICES
YEAR PERIOD HIGH LOW
1999 Third Quarter.............................. $3.125 $1.25
Fourth Quarter............................. 2.75 1.1875
2000 First Quarter (through March 31, 2000)..... 4.375 2.4375
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As of March 31, 2000, the closing sale price of the Company's common stock
on the OTC Bulletin Board was $3.50 per share.
HOLDERS
As of March 31, 2000, there were approximately 66 holders of record of the
Company's common stock.
DIVIDENDS
The Company has never declared nor paid any cash dividends on its common
stock and does not anticipate paying dividends in respect of its common stock in
the foreseeable future. Any payment of cash dividends in the future will be at
the discretion of the Company's Board of Directors and will depend upon, among
other things, its earnings (if any), financial condition, cash flows, capital
requirements and other relevant considerations, including applicable contractual
restrictions and governmental regulations with respect to the payment of
dividends.
RECENT SALES OF UNREGISTERED SECURITIES
PRIVATE PLACEMENT
As of April 12, 2000, the Company has raised approximately $3 million (net
of Placement Agent fees) through the private placement of the Company's Series D
Convertible Preferred Stock (the "Series D Preferred Stock") at a price of $1.28
per share (the "Private Placement"). The Company has engaged a Placement Agent
to assist in these efforts. As of April 19, 2000, when the Company's
authorization of additional shares of Common Stock becomes effective, the Series
D Preferred Stock will be automatically converted into shares of Common Stock at
a ratio of 1 share of Series D Preferred Stock for one Share of Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes related thereto
contained elsewhere in this Annual Report on Form 10-KSB.
MERGER
The Company was incorporated in Delaware on May 8, 1998 under the name "SMD
Group, Inc." In January 1999, the Company changed its name to "CDbeat.com, Inc."
Effective as of April 19, 2000, the Company's name will be changed to
"Spinrocket.com, Inc."
On November 16, 1999 CDBeat ("CDBeat" or the "Company"), through its
wholly-owned subsidiary, 32 Records LLC ("32 Records") entered into a business
combination transaction with Cakewalk LLC ("Cakewalk") in a transaction
accounted for by the purchase method wherein Cakewalk LLC was deemed to be the
acquiror and CDBeat the acquiree (the "Merger").
As part of the Merger: (1) Cakewalk contributed and assigned to 32 Records
substantially all of the assets and liabilities relating to the business of
Cakewalk in exchange for 8,307,785 shares of the
8
Company's Common Stock, (2) Dylan LLC exercised a warrant and paid the Company
$900,000 for 7,037,183 shares of Common Stock, (3) Atlantis Equities, Inc.
exercised a warrant and paid the Company $100,000 for 781,909 shares of Common
Stock, (4) 3,049,424 shares of Common Stock held by management of the Company
were surrendered and (5) 50,000 shares of Class C Preferred Stock were converted
into 500,000 shares of Common Stock. A portion of the purchase price has been
allocated to assets acquired and liabilities assumed based on the estimated fair
market value at the date of acquisition and the balance of $3,909,546 was
recorded as cost of acquired software and is being amortized using the
straight-line method over the estimated useful life of five years. The
allocation of the $3,909,546 to acquired software is preliminary and subject to
the completion of a valuation analysis.
RESULTS OF OPERATIONS
Year ended December 31, 1999.
As discussed in Liquidity and Capital Resources, 32 Records' operations have
been recorded as discontinued operations in the consolidated financial
statements.
The company had no revenues in 1999.
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1999 1998
---- ----
Loss from continuing operations $ 1,588,577 $ -
Loss from discontinued operations 1,475,301 1,780,062
---------- ---------
Net loss $ 3,063,878 $ 1,780,062
============ ===========
Basic and diluted loss per share:
Loss from continuing operations $ 0.28 $ -
Loss from discontinued operations 0.26 0.47
----- ----
$ 0.54 $ 0.47
Net loss ======= ======
General and administrative expenses includes $.6 million of CDBeat's expenses of
which approximately $.5 million was for professional and consulting fees and
software development. Also included is compensation expense of $1.4 million
associated with stock options granted to consultants, employees and directors.
Depreciation and amortization expense includes approximately $130,000
amortization expense associated with the cost of software acquired in the
business combination.
LIQUIDITY AND CAPITAL RESOURCES
PRIVATE PLACEMENT
As of March 31, 2000 the Company was seeking to raise a minimum of
$3,000,000 and a maximum of $9,000,000 (with an over allotment option of
$1,000,000) through the private placement of the Company's Series D Convertible
Preferred Stock (the "Series D Preferred Stock") at a price of $1.28 per share
(the "Private Placement"). As of April 19, 2000, when the Company's
authorization of additional shares of Common Stock becomes effective, the Series
D Preferred Stock will be automatically converted into shares of Common Stock at
a ratio of 1 share of Series D Preferred Stock for one Share of Common Stock.
The Company has engaged a Placement Agent to assist in these efforts. At the
first closing on March
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31, 2000, the Company received approximately $3 million (net of Placement Agent
fees) and expects that additional funds will be raised on or before April 30,
2000.
CHANGE IN MANAGEMENT AND LOAN DEFAULT
In March 2000 the Label Manager and Creative Director of 32 Records
resigned their positions. The resignation of the Creative Director constitutes a
default under the Management Agreement among 32 Records LLC, Cakewalk BRE LLC
and Entertainment Finance International, Inc. (EFI). As a result of this
default, and other covenant defaults, EFI, as the holder of $5,500,000 principal
amount of indebtedness issued by Cakewalk BRE, has the right to accelerate the
maturity date of such indebtedness and exercise other remedies. EFI has been
notified of these defaults and, as of the date hereof, has neither taken any
such action nor indicated an intention to do so. At the time the loan was
granted in June 1999 the lender required the establishment of a new subsidiary,
Cakewalk BRE LLC, a Bankrupt Remote Entity, into which the assets and
liabilities of 32 Records was transferred as security for the lender.
Accordingly, the lender in the event of a declaration of default may seek to
take over the business of 32 Records, but it does not have recourse to the
Company's assets not included in the BRE.
Management anticipates a probable inability to meet the obligations under
the terms of the loan. Hence, 32 Records' ability to continue as a going concern
is dependent on its ability to renegotiate the loan agreement and/or secure
additional financing.
On March 30, 2000, the Company decided that it will exit the record
business conducted by 32 Records by March 2001 and recharacterized 32 Records as
a discontinued operation for financial reporting purposes. 32 Records intends to
continue its operations until it can either (i) sell the business or assets in
an orderly fashion, or (ii) close or surrender the business to EFI.
ITEM 7. FINANCIAL STATEMENTS
The Company's audited consolidated financial statements for the years ended
December 31, 1999 and 1998, respectively, are set forth at the end of this
Annual Report on Form 10-KSB and begin on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Kingery, Crouse & Hohl, P.A. ("KCH") had served as the Company's
independent accountants from inception through January 31, 2000, when KCH was
dismissed by the Company. Prior to the date of dismissal, the Company did not
have any disagreements with KCH on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure. The
Board of Directors selected Arthur Andersen LLP as its new independent
accountant with respect to the fiscal year ended December 31, 1999 and
thereafter.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information, as of April 12, 2000,
concerning the Company's directors and executive officers:
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NAME AGE POSITIONS WITH OUR COMPANY
Robert Miller............................ 48 President, Chief Executive Officer and Director
Elliot Goldman........................... 64 Chief Operating Officer
Alan L. Schaffer......................... 57 Chief Financial Officer
Marty Marion............................. 47 Chief Strategic Officer
The business experience of each of the persons listed above for at least
the last five years is as follows:
ROBERT MILLER (PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR ). From 1977
through 1995, Mr. Miller practiced law, specializing in corporate restructurings
and bankruptcies. He played a leading role in many of the most prominent
corporate restructurings of this period, including Macy's, Trump Taj Mahal, Days
Inns of America, A.H. Robins and Continental Airlines. From 1995 until November
1999, Mr. Miller was the President and CEO of Cakewalk LLC (now 32 Records LLC).
From 1995 to 1998, Mr. Miller was of counsel to Rosenman & Colin LLP. Since
1999, Mr. Miller has been of counsel to Baer Marks & Upham LLP and has served as
a consultant to Shenkman Capital Management, Inc. Mr. Miller is Chairman of the
Board of Crown Books Corp.
ELLIOT GOLDMAN (CHIEF OPERATING OFFICER). Prior to joining the Company in
April 2000, Mr. Goldman was President of The Elliot Goldman Group, Ltd., a
consulting firm specializing in the music industry from 1988 to 2000.
ALAN L. SCHAFFER (CHIEF FINANCIAL OFFICER). Prior to joining the Company in
November, 1999, Mr. Schaffer, a CPA, was employed by Ampal-American Israel
Corp., a publicly traded investment holding company from 1983 to 1998, including
eight years as Vice President-Finance.
MARTY MARION (CHIEF STRATEGIC OFFICER). Prior to joining the Company in
April 2000, Mr. Marion served since 1999 as the President of Paradigm Shift
Universal, Inc., a leading Web consulting firm specializing in strategic and
marketing matters. Prior thereto, Mr. Marion served from 1995 to 1998 as the
Director of Marketing for CyberAction, Inc., a producer of interactive
digital trading cards and digital collectibles.
In addition to serving as the Company's Chief Strategic Officer, Mr. Marion
will serve as President of Spin&Marty Marketing, Ltd., a newly formed
wholly-owned subsidiary of the Company that will provide strategic advice to the
Company and its portfolio companies as well as to outside Internet companies.
All directors of the Company serve until the next annual meeting of
stockholders or until their successors are duly elected and qualified. All
officers of the Company serve at the discretion of the Board of Directors,
subject to rights, if any, under contracts of employment with the Company. See
"Executive Compensation - Employment Agreements." There are no family
relationships among the directors and executive officers.
MANAGEMENT CHANGES
As of March 20, 2000, Joel Arberman resigned as director and Internet
Officer of the Company.
CERTAIN CORPORATE ACTIONS
Shareholders representing 58.32% of the outstanding shares of the Company's
Common Stock as of March 29, 2000 have taken action to (i) increase the size of
the Board of Directors to four members and elect three new directors (each a
"New Director") and one nonvoting observer ("Observer") to the Board of
Directors, and (ii) amend the Company's charter in order to (A) change the name
of the
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Company from "CDbeat.com, Inc." to "Spinrocket.com, Inc.," (B) increase the
number of shares the Company is authorized to issue from Twenty Million to Fifty
Million, and (C) authorize the Company for a period of up to one year following
the Effective Date (as defined below) to effect a reverse split of the issued
and outstanding shares of the Common Stock, on up to a one-for-three basis.
Subject to the satisfaction of certain legal requirements, all of the
aforementioned corporate changes shall take effect on April 19, 2000(the
"Effective Date"). On or about March 29, 2000, the Company mailed an Information
Statement ("Information Statement") to the holders of record of the Company's
Common Stock setting forth the foregoing.
NEW DIRECTORS
Set forth below are the name, business address, age, present principal
occupation or employment and five-year employment history of each of the new
Directors and the independent observer. The new Directors will each take office
on April 19, 2000.
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PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AND BUSINESS ADDRESS AGE AND FIVE-YEAR EMPLOYMENT HISTORY
Robert Ellin 34 Mr. Ellin has, for in excess of five years, been a
750 Lexington Avenue, 23rd Floor principal of Atlantis Equities, Inc., a private merchant
New York, NY 10022 banking and advisory firm specializing in equity and debt
finance, and Trinad Partners, a leveraged buyout firm.
Ivan Berkowitz 54 Since 1989, Mr. Berkowitz has been the President of Great
1790 Broadway Court Holdings Corporation and, since 1993, he has served
Suite 1500 as the Managing General Partner of Steib & Company. From
New York, New York 10023 1995 to 1997, Mr. Berkowitz served as the Chief Executive
Officer of PolyVision Corporation , where he continues to
serve as a board member. Mr. Berkowitz is also a member
of the Board of Directors of the following public
companies: Migdalei Shekel (Tel Aviv), Propierre (Paris),
HMG WorldWide and IAT Resources. Mr. Berkowitz is also
the Chairman of the Advisory Board of THCG Inc.
David Goddard 44 Mr. Goddard is Senior Managing Director in the Equity
c/o Bear Stearns & Co., Inc. Capital Markets Department of Bear Stearns & Co., Inc.,
245 Park Avenue an international investment banking firm. Mr. Goddard
New York, NY 10167 has been with Bear Stearns since November 1998. From
1996 to 1998, Mr. Goddard served as a Managing Director
Associate Director Private Capital Group at BancBoston
Robertson Stephens, Inc. Prior to that, Mr. Goddard was
Managing Director - Private Placement Group at Chase
Securities, Inc. from 1994-1996.
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Thomas Cyrana (Observer) 42 Mr. Cyrana is Managing Director of Rascoff/Zysblat
110 West 57th Street Organization ("RZO"), a division of American Express Tax
New York, NY 10019 and Business Services. Mr. Cyrana has been with RZO
since 1995. Mr. Cyrana also serves as a principal of the
managing member of Entertainment Finance International
LLC, a venture with The Structured Finance High Yield
Fund, LLC, which is managed by Prudential Investments.
The Company has agreed to grant Ivan Berkowitz an option to
purchase all or any part of 100,000 shares of the Company's Common
Stock at an exercise price equal to the market price at the time of
grant, of which 50,000 shares shall become exercisable on the
Effective Date, 25,000 will be exercisable on the first anniversary of
the Effective Date, and 25,000 will be exercisable on the second
anniversary of the Effective Date. Mr. Berkowitz's options will
terminate on April 19, 2005. It is likewise anticipated that David
Goddard will likewise receive options as compensation for being a
director. Other than such stock options described above, no
compensation or other arrangements have been entered into between the
Company and any of the new Directors.
ADVISORY BOARD
The Company has formed an Advisory Board to the Board of
Directors and has appointed three persons to such Advisory Board,
Joshua Grode, Marty Marion and Ralph Sorrentino.
Mr. Grode is the President and Chief Operating Officer of Digital
Boardwalk, a leading Web design firm, and a Co-Manager of Digital
Boardwalk, LLC. Prior to Joining Digital Boardwalk, Mr. Grode was most
recently President and co-founder of J-Squared, an interactive
strategy, development and investment company. Previously, Mr. Grode
was Senior Vice-President and group manager of Siegel & Gale, a
communications, business and brand consultancy division of the
advertising agency Saatchi & Saatchi. Prior thereto, Mr. Grode
practiced entertainment and corporate law with Christensen, Miller,
Fink, Jacobs & Glaser and later with the entertainment law firm of
Bloom, Dekom & Hergott. Mr. Grode received his degree from UCLA, where
he graduated with honors.
Mr. Marion has served since 1999 as the President of Paradigm
Shift Universal, Inc, a leading Web consulting firm specializing in
strategic and marketing matters, and joined the Company in April 2000
as its Chief Strategic Officer. Mr. Marion's background includes
senior level positions with Grey Direct (a division of Grey
Advertising) and DMB&B/Medicus, the world's largest healthcare
advertising and marketing agency, as well as strategic engagements
with the New York Stock Exchange, Merck Pharmaceuticals, Smithkline
Beecham, Caesar's Palace, G. E. Capital and Westinghouse
Telecommunications. Mr. Marion's Internet engagements have included
Records.com, eTherapy.com, Cyberaction.com, RentPort.com and
Crownbooks.com.
Mr. Sorrentino served from May 1998 until April 2000, as CFO of
Liberty Digital and its predecessor, TCI Music. In this capacity, Mr.
Sorrentino helped to craft the merger of TCI Music with the Internet
and interactive assets of Liberty Media Group, thus creating Liberty
Digital, a leader in the emerging interactive television industry.
Prior to the Liberty Digital transaction, Mr. Sorrentino oversaw the
operations of the former TCI Music's four music divisions, spanning
cable, Internet, digital programming and record labels, directing the
executive management of each of these businesses. Mr. Sorrentino began
his career in the advertising industry with The Interpublic Group of
Companies, Inc. and the former Lowe Marschalk, Inc. Mr. Sorrentino
then became President and Chief Operating Officer of Bohbot
Entertainment & Media, Inc., an independent syndication company.
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All members of the Advisory Board will receive options to
purchase Common Stock of the Company.
AMENDMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION, AS AMENDED, TO INCREASE
THE AUTHORIZED NUMBER OF SHARES OF STOCK
General
The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), authorizes the issuance of 20,000,000 shares of Common Stock,
par value $.001 per share, and 10,000,000 shares of Preferred Stock, par value
$.001 per share. The Board of Directors of the Company and stockholders
representing 58.32% of the issued and outstanding shares of the Common Stock of
the Company as of March 31, 2000 approved an amendment to the Certificate of
Incorporation to increase the authorized number of shares of Common Stock from
20,000,000 to 40,000,000 shares. The authorized number of shares of Preferred
Stock shall remain 10,000,000 shares. The amendment will not take effect until
it is filed in the State of Delaware, which will occur on April 19, 2000.
Purpose and Effect of the Amendment
The general purpose and effect of the amendment to the Company's
Certificate of Incorporation will be to authorize 20,000,000 additional shares
of Common Stock. The Board of Directors believes it is prudent to have the
additional shares of Common Stock and Preferred Stock available for proper
general corporate purposes approved by the Board of Directors, including payment
of stock dividends, stock splits or other recapitalizations, acquisitions,
equity financings, and grants of stock options as well as to provide for a
sufficient number of authorized shares of Common Stock upon the conversion of
the Series D Preferred Stock to be issued pursuant to the Private Placement.
The increase in the authorized number of shares of Common Stock could have
an anti-takeover effect, although that is not its intention. If the Company's
Board of Directors desired to issue additional shares in the future, such
issuance could dilute the voting power of a person seeking control of the
Company, thereby deterring or rendering more difficult a merger, tender offer,
proxy contest or an extraordinary corporate transaction opposed by the Company.
The Board of Directors is not aware of any attempt, or contemplated attempt, to
acquire control of the Company, and this amendment is not being effectuated with
the intent that it be utilized as a type of anti-takeover device.
REVERSE SPLIT
General
The Board of Directors of the Company and stockholders representing 58.32%
of the issued and outstanding shares of the Common Stock of the Company have
approved an amendment to the Certificate of Incorporation to authorize the
Company, for a period of up to one year following the Effective Date, to effect
a reverse split (the "Reverse Split") that will cause all issued and outstanding
Common Stock to be split, on a reverse basis, up to one-for-three. The Reverse
Split, as and when it is approved, will not affect the number of authorized
shares of the Company's Common Stock. Any such Reverse Split will effectively
increase the number of available authorized shares of Common Stock. As described
below, the primary objective of the Board of Directors if it were to effect a
Reverse Split would be to increase the per share market price of the Common
Stock.
The Board of Directors believes that a Reverse Split can provide
flexibility for the Company in meeting its possible needs by enabling the Board
to raise additional capital through the issuance of Common Stock or securities
convertible into or exercisable for Common Stock, to make additional stock
14
awards under the Company's employee benefit plans and/or to employ Common
Stock as a form of consideration for acquisitions. Other than in connection
with the Company's employee benefit plan, the Company does not presently
intend to issue any additional shares for any specific purpose.
EFFECTS OF REVERSE SPLIT
GENERAL EFFECTS. The principal effect of a Reverse Split would be to
decrease the number of outstanding shares of Common Stock. As of the date of the
Information Statement, the Company has not yet determined to effect a Reverse
Split. However, assuming a Reverse Split on a one-for-three basis, the
18,081,650 shares of Common Stock issued and outstanding as of the date of the
Information Statement would, together with 4,917,625 shares of Common Stock upon
and assuming the exercise of all outstanding warrants and options, be converted
into approximately 7,666,425 shares of Common Stock. Because the number of
shares of Common Stock authorized for issuance by the Certificate of
Incorporation, as amended, following a one-for-three Reverse Split would remain
at 40,000,000 shares, such a Reverse Split would result in approximately
15,332,850 additional (or post-split) shares of Common Stock available for
issuance by the Company ("New Shares"). In lieu of issuing any fractional shares
as a result of a Reverse Split, the Company will round the number of shares each
shareholder is entitled to receive as a result of the Reverse Split to the
nearest whole number of shares.
EFFECT ON MARKET FOR COMMON STOCK. On March 31, 2000, the last reported
closing price of the Common Stock on the OTC Bulletin Board was $3.50 per share.
By decreasing the number of shares of Common Stock otherwise outstanding without
altering the aggregate economic interest in the Company represented by such
shares, the Board of Directors believes that the trading price for the Common
Stock will be increased.
EFFECT ON THE COMPANY'S DERIVATIVE AND CONVERTIBLE SECURITIES. The total
number of shares of Common Stock issuable upon the exercise of options and
warrants to acquire such shares, and the exercise price thereof shall be
proportionally adjusted to reflect any Reverse Split.
CHANGES IN STOCKHOLDERS' EQUITY. As an additional result of a Reverse
Split, the Company's stated capital, which consists of the par value per share
of the Common Stock and Preferred Stock multiplied, respectively, by the number
of shares outstanding, would be reduced. Although the par value of the Common
Stock will remain at $.001 per share following a Reverse Split, stated capital
will be decreased because the number of shares outstanding will be reduced.
Correspondingly, the Company's additional paid-in capital, which consists of the
difference between the Company's stated capital and the aggregate amount paid to
the Company upon the issuance by the Company of all then outstanding shares of
Common Stock and Preferred Stock, would be increased.
CHANGE OF THE COMPANY'S NAME
The Board of Directors of the Company and stockholders representing 58.32%
of the issued and outstanding shares of the Common Stock of the Company as of
March 31, 2000 approved an amendment to the Certificate of Incorporation that
will effect a change in the Company's name effective as of April 19, 2000. The
new name of the Company will be SPINROCKET.COM, INC. The Company believes that
while the Company's technology is still applicable to the music business, it
also has applications beyond the music business, including such industries as
gaming, education and health care, and that the new name more accurately
reflects the expanded scope of the Company's business.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and persons who own more than ten
percent of a registered class of the
15
Company's equity securities to file certain reports regarding ownership of, and
transactions in, the Company's securities with the Securities and Exchange
Commission (the "SEC"). These officers, directors and stockholders are also
required by SEC rules to furnish the Company with copies of all Section 16(a)
reports that are filed with the SEC. Based solely on a review of copies of such
forms received by the Company, and written representations received by the
Company from certain reporting persons, the Company believes that for the year
ended December 31, 1999 all Section 16(a) reports required to be filed by the
Company's executive officers, directors and 10% stockholders were filed on a
timely basis, except as hereinafter set forth. Mr. Schaffer failed to timely
file a Form 3 upon becoming an officer of the Company, and BankBoston Ventures
failed to timely file a Form 3 upon becoming a 10% stockholder of the Company.
ITEM 10. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid to, or earned by, the Chief Executive Officer and the other
most highly compensated executive officer for the year ended December 31, 1999
whose total annual salary and bonus exceeded $100,000 for 1999 (collectively the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
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LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------ ---------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS/SARS(#)
--------------------------- ---- ---------- --------- ---------------- ---------------
Robert Miller (1)..................... 1999 $34,615
President
Executive Officer -- -- --
Alan L. Schaffer (2).................. 1999 $14,019 -- -- --
Chief Financial Officer
-----------
(1) Mr. Miller was appointed President, Chief Executive Officer and Director of
the Company in November 1999. He was and is currently being paid an annual
salary of $200,000, subject to such increases or bonuses as the Board of
Directors shall authorize. See "Executive Compensation - Employment
Agreements."
(2) Mr. Schaffer was appointed Chief Financial Officer of the Company in
November 1999. He was and is currently being paid an annual salary of
$135,000 plus a minimum annual bonus of $10,000. See "Executive
Compensation - Employment Agreements."
OPTION GRANTS IN 1999
The following table sets forth certain information concerning the grant of
stock options in 1999 to each of the Named Executive Officers.
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NUMBER OF PERCENTAGE TO TOTAL
SECURITIES UNDERLYING OPTIONS GRANTED TO EXERCISE PRICE
NAME OPTIONS GRANTED EMPLOYEES IN 1999 ($/SHARE) EXPIRATION DATE
---- --------------- ----------------- --------- ---------------
Robert Miller........... 651,917 88.67% (1) (1)
Alan L. Schaffer........ 83,333 11.33% (2) (2)
--------------------------
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(1) Pursuant to his employment agreement with the Company, the Company has
granted to Mr. Miller an option to purchase all or any part of an aggregate of
1,955,750 shares of the Company's Common Stock (the "OPTION SHARES"), at the
following exercise prices: 50% of the Option Shares at $1.30 per share, 25% at
$1.50 per share; and 25% at $1.70 per share. Such Option Shares vest as follows:
(a) 651,917 Option Shares on November 16, 1999; (b) the second one-third (1/3)
of the Option Shares on November 16, 2000; and (c) the remaining one-third (1/3)
of the Option Shares on November 16, 2001. All unvested shares shall vest
automatically under certain circumstances. Mr. Miller's option shall terminate
upon the later to occur of (a) the expiration of the term of Mr. Miller's
employment agreement with the Company, or (b) November 16, 2004.
(2) Pursuant to his memorandum agreement with the Company, the Company has
granted Mr. Schaffer an option to purchase all or any part of an aggregate of
250,000 shares of the Company's Common Stock at an exercise price per share
equal to $1.28 per share, of which 83,333 shares are immediately exercisable,
one-third will be exercisable after one year of service and the final one-third
will be exercisable after two years of service. Mr. Schaffer's options will
terminate upon the later to occur of (a) the expiration of the term of Mr.
Schaffer's memorandum agreement with the Company, or (b) November 22, 2004.
AGGREGATE OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES
The following table sets forth certain information concerning the Named
Executive Officers with respect to the number of shares covered by exercisable
and unexercisable stock options at December 31, 1999 and the aggregate value of
exercisable and unexercisable "in-the-money" options at December 31, 1999. No
options were exercised by the Named Executive Officers in 1999.
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NAME NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
-------------------------- --------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
-------------------------- --------------------------
Robert Miller............................................ 651,917/1,303,833 $211,873/$167,054
Alan L. Schaffer......................................... 83,333/166,667 $28,750/$57,500
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(1) The value of unexercised "in-the-money" options is equal to the
difference between the closing bid price of the common stock on the OTC Bulletin
Board as of December 31, 1999 ($1.625) and the option exercise price per share,
multiplied by the number of shares subject to options.
DIRECTOR COMPENSATION
The Company's directors do not receive compensation for their services as
directors, but are reimbursed for all reasonable out-of-pocket expenses incurred
in connection with each Board of Directors meeting attended.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment contract with Robert Miller for
an initial term of three years (the "INITIAL TERM"). The Initial Term shall
automatically be extended by one additional year at the end of the Initial Term
and each subsequent anniversary thereafter (each, a "RENEWAL DATE"), unless, at
least one hundred twenty (120) days prior to any such renewal date either Mr.
Miller or the Company shall deliver written notice to the other that the term
will not be further extended. Pursuant to the Employment Agreement, Mr. Miller
serves as President, Chief Executive Officer and as a Director of the Company at
an initial annual salary of $200,000, subject to such increases or bonuses as
the Board of Directors of the Company shall authorize. The Company also granted
to Mr. Miller an option (the "Option") to purchase all
17
or any part of an aggregate of 1,955,750 shares of the Common Stock of the
Company (the "OPTION SHARES"), at the following exercise prices: 50% of the
Option Shares at $1.30 per share, 25% at $1.50 per share; and 25% at $1.70
per share, such Option Shares to vest as follows: (a) up to one-third (1/3)
of the Option Shares on November 16, 1999; (b) the second one-third (1/3) of
the Option Shares on November 16, 2000; and (c) the remaining one-third (1/3)
of the Option Shares on November 16, 2001. All unvested shares shall vest
automatically under certain circumstances. The Option shall terminate upon
the later to occur of (a) the expiration of the term of Miller's employment
agreement with the Company, or (b) five years from the original date of grant
of the Option.
The Company has entered into a memorandum agreement with Alan L. Schaffer
pursuant to which Mr. Schaffer will, for an initial term of three years, serve
as the Company's Chief Financial Officer at an initial annual salary of $135,000
plus a minimum annual bonus of $10,000. The Company also granted to Mr. Schaffer
the option to acquire 250,000 shares of the Company's Common Stock at an
exercise price per share equal to $1.28 per share, of which one-third of such
shares will be immediately exercisable, one-third will be exercisable after one
year of service and the final one-third will be exercisable after two years of
service.
The Company has entered into an employment agreement with Elliot Goldman
pursuant to which Mr. Goldman will, for an initial term of three years, serve as
the Company's Chief Operating Officer at an initial annual salary of $200,000,
subject to such bonuses as the Board of Directors of the Company shall
authorize. The Company also granted to Mr. Goldman the option to acquire 500,000
shares of the Company's Common Stock at an exercise price per share equal to
$1.28 per share, of which one-quarter of such shares will be immediately
exercisable, one-quarter will be exercisable after one year of service,
one-quarter will be exercisable after two years of service and the final
one-quarter will be exercisable after three years of service.
The Company has entered into a memorandum agreement with Marty Marion
pursuant to which Mr. Marion will, for an initial term of three years, serve as
the Company's Chief Strategic Officer at an initial annual salary of $200,000,
subject to such increases or bonuses as the Board of Directors of the Company
shall authorize. The Company also granted to Mr. Marion the option to acquire
500,000 shares of the Company's Common Stock at an exercise price per share
equal to $1.28 per share, of which one-quarter of such shares will be
immediately exercisable, one-quarter will be exercisable after one year of
service, one-quarter will be exercisable after two years of service and the
final one-quarter will be exercisable after three years of service.
1998 EMPLOYEE STOCK OPTION PLAN
The Company's 1998 stock incentive plan (the "STOCK INCENTIVE PLAN") was
originally adopted by the Board of Directors and approved by the stockholders on
October 15, 1998. The Stock Incentive Plan provides for the grant of stock
options for up to a total of 1,000,000 shares of the Company's Common Stock to
the Company's employees, officers, directors, consultants and advisors.
18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of April 12, 2000 with
respect to the beneficial ownership of (i) any person known to the Company to be
the beneficial owner of more than 5% of any class of its voting securities, (ii)
the sole director, (iii) each of the Named Executive Officers (I.E., those
officers named in the Summary Compensation Table of this Annual Report under the
heading "Management-Executive Compensation") and the newly appointed Chief
Operating Officer and Chief Strategic Officer and (iv) all of the Company's
directors and executive officers as a group (3 persons).
[Enlarge/Download Table]
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER OF PERCENT OF
SHARES(2) CLASS
Atlantis Equities, Inc./Dylan LLC (3) 8,581,156 45.54
BankBoston Ventures 2,134,499 11.80
Robert Miller (4) 2,206,648 11.78
Entertainment Finance International, LLC (5) 1,466,080 7.50
Joel Arberman 1,172,550 6.48
Alan L. Schaffer (6) 83,333 *
Elliot Goldman (7) 125,000 *
Marty Marion (8) 125,000 *
All directors and executive officers as a group (4 persons) (9) 2,539,981 12.31
* less than 1%
----------------------------
(1) Except as indicated in these notes and subject to community property laws
where applicable, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.
(2) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. As used in this
table, a beneficial owner of a security includes any person who, directly or
indirectly, through contract, arrangement, understanding, relationship or
otherwise has or shares (i) the power to vote, or direct the voting of, such
security or (ii) investing power which includes the power to dispose, or to
direct the disposition of, such security. In addition, a person is deemed to
be the beneficial owner of a security if that person has the right to acquire
beneficial ownership of such security within 60 days of the date shown above.
(3) Includes 762,064 shares issuable upon exercise of options granted to
Atlantis Equities, Inc. having an exercise price of $2.50 per share and
expiring on December 31, 2000.
(4) Includes 651,917 immediately exercisable options that have been granted
to Mr. Miller pursuant to his employment agreement with the Company, but does
not include 1,303,833 options that have been granted to Mr. Miller pursuant
to his employment agreement with the Company that are not yet exercisable.
(5) Consists of warrants issued to Entertainment Finance Ltd., a lender to
Cakewalk BRE LLC, an indirect wholly owned subsidiary of the Company, having
an exercise price of $.01 per share and expiring June 29, 2004.
(6) Includes 83,333 immediately exercisable options that have been granted to
Mr. Schaffer pursuant to his memorandum agreement with the Company, but does
not include 166,667 options that have been granted to Mr. Schaffer pursuant
to his memorandum agreement with the Company that are not yet exercisable.
(7) Includes 125,000 immediately exercisable options that have been granted
to Mr. Goldman pursuant to his employment agreement with the Company, but
does not include 375,000 options that have been granted to Mr. Goldman
pursuant to his employment agreement with the Company that are not yet
exercisable.
19
(8) Includes 125,000 immediately exercisable options that have been granted
to Mr. Marion pursuant to his memorandum agreement with the Company, but does
not include 375,000 options that have been granted to Mr. Marion pursuant to
his memorandum agreement with the Company that are not yet exercisable.
(9) Includes (i) 651,917 immediately exercisable options that have been
granted to Mr. Miller pursuant to his employment agreement with the Company,
but does not include 1,303,833 options that have been granted to Mr. Miller
pursuant to his employment agreement with the Company that are not yet
exercisable, (ii) 83,333 immediately exercisable options that have been
granted to Mr. Schaffer pursuant to his memorandum agreement with the
Company, but does not include 166,667 options that have been granted to Mr.
Schaffer pursuant to his memorandum agreement with the Company that are not
yet exercisable; (iii) 125,000 immediately exercisable options that have been
granted to Mr. Marion pursuant to his memorandum agreement with the Company,
but does not include 375,000 options that have been granted to Mr. Marion
pursuant to his memorandum agreement with the Company that are not yet
exercisable; and (iv) 125,000 immediately exercisable options that have been
granted to Mr. Goldman pursuant to his employment agreement with the Company,
but does not include 375,000 options that have been granted to Mr. Goldman
pursuant to his employment agreement with the Company that are not yet
exercisable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
VOTING AGREEMENT. Pursuant to a Voting Agreement, dated as of November 16,
1999, between Dylan LLC and Robert Miller, in the event that the Board of
Directors of the Company is expanded to seven members, Dylan shall have the
right to designate two representatives out of seven to the Board of Directors of
the Company. Dylan has also agreed to vote all shares of the Common Stock of the
Company owned by it in favor of the election to the Board of Directors of the
Company of Miller or any designee of Miller, while Miller has agreed to vote all
of the shares of the Common Stock of the Company owned by him in favor of the
election to the Board of Directors of the Company of the Dylan designees. Robert
Ellin, a principal of Dylan, shall serve as one of the two Dylan designees to
the Board and, upon his appointment, Mr. Ellin shall become the Chairman of the
Company. Dylan still retains the right to designate one more representative to
the Board of Directors.
CONSULTING AGREEMENT. The Company has retained the services of Atlantis
Equities, Inc. ("ATLANTIS"), a private merchant banking and advisory firm that
primarily assists emerging growth companies, to act as its financial advisor
pursuant to an Engagement Letter dated October 29, 1999 (the "ENGAGEMENT
LETTER"). Robert Ellin, who will become the Chairman of the Company upon the
contemplated expansion of the Board of Directors, is a principal of Atlantis. In
consideration for the services provided by Atlantis under the Engagement Letter,
Atlantis is paid a monthly fee of $12,500 (plus reimbursement of reasonable and
actual out-of-pocket expenses). The term of the Engagement Letter is three
years, and shall automatically renew for successive one year terms (subject to
the right of any party to terminate the engagement upon 90 days' written notice
before the end of any such term). The Company has issued a warrant to Atlantis
that allows Atlantis to acquire up to 762,064 shares of the Company's Common
Stock at an exercise price of $2.50 per share which expires on December 31,
2000. Dylan LLC, an affiliate of Atlantis ("DYLAN"), is the beneficial owner of
7,037,183 shares of the Company's Common Stock. In addition, in accordance with
the terms of a Voting Agreement dated as of November 16, 1999 between Robert
Miller and Dylan, Dylan has the right to designate two representatives to the
Board of Directors of the Company. Dylan has designated Robert Ellin to be one
of its representatives to the Board of Directors, but has not yet indicated who
its other designee shall be. Dylan and Mr. Miller have also agreed to vote all
shares owned by them in favor of the election of the other party's designees to
the Board of Directors.
The Company is also a party to certain employment arrangements with its
executive officers. See "Executive Compensation."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Unless otherwise indicated, the following is a list of Exhibits filed
as a part of this Annual Report on Form 10-KSB:
20
[Enlarge/Download Table]
EXHIBIT DESCRIPTION OF DOCUMENT
NUMBER
2.1 Contribution Agreement, dated as of October 29, 1999 between
CDbeat.com, Inc. and Cakewalk LLC (C)
2.2 Amendment Agreement, dated as of November 16, 1999 by and among (C)
Atlantis Equities, Inc., Dylan LLC, CDbeat.com, Inc., Cakewalk LLC
and 32 Records LLC
3.1 Articles of Incorporation and By-laws (A)
10.1 Warrant Agreement, dated September 23, 1999 between the Company and
Atlantis Equities, Inc. (B)
10.2 Employment Agreement, dated as of November 16, 1999 between
CDBeat.com, Inc. and Robert Miller (C)
10.3 Stock Option Plan (A)
10.4 Consulting Agreement, dated as of January 12, 1999, between the
Company and L&R Holdings, Inc. (A)
10.5 Database License Agreement, dated as of April 7, 1999 between the
Company and AEC One Stop Group, Inc. (A)
10.6 Engagement Letter, dated October 29, 1999 between Atlantis Equities,
Inc. and the Company *
10.7 Warrant Amendment Agreement, dated as of November 16, 1999 by and
among Atlantis Equities, Inc. Dylan LLC and the Company *
10.8 Cadnetics Agreement *
10.12 Employment Agreement, dated as of April 11, 2000 between CDbeat.com,
Inc. and Elliot Goldman
*10.13 Stock Option Agreement, dated as of April 11, 2000 between CDbeat.com,
Inc. and Elliot Goldman 10.14 Indenture, dated as of June 29, 1999 by
and among Cakewalk BRE LLC, Entertainment Finance International, LLC *
and RZ0 Corporate Administration, Inc.
10.15 Servicing Agreement, dated as of June 29, 1999 by and among Cakewalk
BRE, Entertainment Finance International, LLC and RZ0 Corporate *
Administration, Inc.
10.16 Management Agreement, dated as of June 29, 1999 by and among Cakewalk
LLC, Cakewalk BRE LLC and * Entertainment Finance International, LLC
10.17 Capital Contribution Agreement, dated as of June 29, 1999 between
Cakewalk LLC and Cakewalk BRE LLC *
23.1 Consent of Arthur Andersen LLP (E)
23.2 Consent of Kingery, Crouse & Hohl, P.A. (E)
21.1 Subsidiaries of the Company *
27.1 Financial Data Schedule *
99 Voting Agreement, dated as of November 16, 1999 between Robert Miller
at Dylan LLC (C)
(A) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File No. 333-70663)
(B) Incorporated by reference to the Company's Report on Form 8-K filed
with the Commission on October 8, 1999
(C) Incorporated by reference to the Company's Report on Form 8-K filed
with the Commission on December 1, 1999
(D) Incorporated by reference to the Company's Report on Form 8-K filed
with the Commission on January 31, 2000
(E) Incorporated by reference to the Company's Report on Form 8-K/A filed
with the Commission on January 31, 2000
* Filed herewith.
(b) During the fourth quarter of 1999, the Company filed with the
Securities and Exchange Commission a Form 8-K on October 8, 1999 and a Form 8-K
on December 1, 1999. During the first quarter of 2000, on January 31, 2000, the
Company filed a Form 8-K as well as a Form 8-K/A to its Form 8-K filed on
December 1, 1999. Such report on Form 8-K/A related to the filing of certain pro
forma financial information related to the Company's business combination with
Cakewalk LLC on November 16, 1999.
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on April 14, 2000.
CDBEAT.COM, INC.
By: /s/ Robert Miller
------------------------------------
Robert Miller
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities indicated.
[Download Table]
SIGNATURE TITLE DATE
/S/ ROBERT MILLER President, Director and Chief April 14, 2000
-----------------
Robert Miller Executive Officer
(Principal Executive Officer)
/S/ ALAN L. SCHAFFER Chief Financial Officer April 14, 2000
--------------------
Alan L. Schaffer (Principal Financial and Accounting
Officer)
23
EXHIBIT INDEX
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
10.6 Engagement Letter, dated October 29, 1999 between Atlantis Equities,
Inc. and the Company
10.7 Warrant Amendment Agreement, dated as of November 16, 1999 by and
among Atlantis Equities, Inc., Dylan LLC and the Company
10.8 Cadnetics Agreement
10.9 Employment Agreement, dated as of April 11, 2000 between CDbeat.com,
Inc. and Elliot Goldman
10.10 Stock Option Agreement, dated as of April 11, 2000 between
CDbeat.com, Inc. and Elliot Goldman
10.11 Indenture, dated as of June 29, 1999 by and among Cakewalk BRE LLC,
Entertainment Finance International, LLC and R20 Corporate
Administration, Inc.
10.12 Servicing Agreement, dated as of June 29, 1999 by and among Cakewalk
BRE, Entertainment Finance International, LLC and R20 Corporate
Administration, Inc.
10.13 Management Agreement, dated as of June 29, 1999 by and among Cakewalk
LLC, Cakewalk BRE LLC and Entertainment Finance International, LLC
10.14 Capital Contribution Agreement, dated as of June 29, 1999 between
Cakewalk LLC and Cakewalk BRE LLC
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
24
[Download Table]
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors F-2
Consolidated Statements of Operations F-3
Consolidated Balance Sheet F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CDBeat.com, Inc.:
We have audited the accompanying consolidated balance sheet of
CDBeat.com, Inc. as of December 31, 1999, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
the years ended December 31, 1999 and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
CDBeat.com, Inc. as December 31, 1999 and the results of its operations and
its cash flows for the years ended December 31, 1999 and 1998, in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
New York, New York
March 31, 2000
F-2
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CDBEAT.COM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----- ----
General and administrative expenses ($2,171,577) $ -
------------ ------------
Loss from continuing operations before provision
for income taxes (2,171,577) -
Benefit for income taxes (583,000) -
------------ ------------
Loss from continuing operations (1,588,577) -
Loss from discontinued operations (Note 6) after
income taxes ($0) (1,475,301) (1,780,062)
------------- ------------
Net Loss $ (3,063,878) $(1,780,062)
============= ============
Net (Loss) per common share - basic and diluted (Note 1)
Loss from continuing operations $ (0.28) $ -
Loss from discontinued operations (0.26) (0.47)
------------ ------------
Net (Loss) per common share - basic and diluted $ (0.54) $ (0.47)
============ ============
Weighted average shares outstanding basic and diluted 5,664,617 3,759,478
============ ============
The accompanying notes are an integral part of these
consolidated statements.
F-3
CDBEAT.COM, INC.
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 1999
[Enlarge/Download Table]
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 556,799
PROPERTY AND EQUIPMENT:
Equipment, net of accumulated depreciation of $2,222 18,072
OTHER ASSETS:
Cost of acquired software net of accumulated amortization
of $130,318 3,779,228
Other assets 38,750
Assets of discontinued operations (Note 6) 7,616,940
Goodwill (Note 3) 583,000
------------
Total other assets 12,017,918
----------
Total assets $12,592,789
------------
------------
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 291,318
Liabilities of discontinued operations (Note 6) 6,229,969
------------
Total Liabilities 6,521,287
------------
COMMITMENTS (Note 5)
SHAREHOLDERS' EQUITY:
Common Stock, $.001 par value
20,000 shares authorized, 18081,650 issued and outstanding 18,082
Paid in capital 13,572,426
Deferred compensation (583,539)
Accumulated deficit (6,935,467)
-----------
Total Shareholder's Equity 6,071,502
-----------
Total Liabilities and Shareholders Equity $12,592,789
===========
The accompanying notes are an integral part of this consolidated balance sheet.
F-4
CDBEAT.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
[Enlarge/Download Table]
Members'
Contributed Class A Class B Warrant Common Paid in Deferred Accumulated
Capital Units Units Valuations Stock Capital Compensation Deficit
----------- ------- ------- ---------- ------ ------- ------------ -----------
BALANCE, December 31, 1997 $2,602,000 $ - $ - $ - $ - $ $(2,091,527)
Conversion of shareholder's
loan to capital contribution 52,898
Conversion of members'
contributed capital to Class A
Units (2,654,898) 2,654,898
Issuance of Class A Units for
acquisition of affiliate
entities 325,000
Issuance of Class A Units in
repayment of loan due to
shareholder 100,000
Issuance of Class B Units, net
of issuance costs 2,208,853
Redemption of Class A Units (470,220)
Discount on subordinated debt
based on imputed interest rate
of 15% 67,925
Net loss - - - - - - (1,780,062)
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
BALANCE, December 31, 1998 $ - $2,609,678 (2,208,853) 67,925 - - (3,871,589)
Issuance of warrants in
conjunction with long-term
debt, at fair value 1,851,473
Conversion of Cakewalk LLC
Capital Accounts (2,609,678) (2,208,853) (1,919,398) 16,737,929
Acquisition of CDBeat common
stock 1,955 1,097,448
Acquisition of CDBeat
accumulated deficit (1,148,428)
Acquisition of CDBeat software 8,308 3,901,238
Issuance of options for 911,093
consulting services
Recognition of deferred
compensation 1,080,965 (1,080,965)
Amortization of deferred
compensation 497,246
Issuance of common stock to
Atlantis Equities/Dylan Inc. 7,819 992,181 (3,063,878)
Net loss - - - - - - (4,063,878)
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
BALANCE, December 31, 1999 $ $ $ $ $ 18,082 $13,572,426 $ (583,539) (6,935,467)
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
The accompanying notes are an integral part of this consolidated statement.
[Download Table]
Total
Shareholders'
Equity
-------------
BALANCE, December 31, 1997 $ 510,473
Conversion of shareholder's
loan to capital contribution 52,898
Conversion of members'
contributed capital to Class A
Units
Issuance of Class A Units for
acquisition of affiliate
entities 325,000
Issuance of Class A Units in
repayment of loan due to
shareholder 100,000
Issuance of Class B Units, net
of issuance costs 2,208,853
Redemption of Class A Units (470,220)
Discount on subordinated debt
based on imputed interest rate
of 15% 67,925
Net loss (1,780,062)
----------
BALANCE, December 31, 1998 1,014,867
Issuance of warrants in
conjunction with long-term
debt, at fair value 1,851,473
Conversion of Cakewalk LLC -
Capital Accounts
Acquisition of CDBeat common
stock 1,099,403
Acquisition of CDBeat
accumulated deficit (1,148,428)
Acquisition of CDBeat software 3,909,546
Issuance of options for
consulting services
Recognition of deferred
compensation -
Amortization of deferred
compensation 497,246
Issuance of common stock to
Atlantis Equities/Dylan Inc. 1,000,000
Net loss (3,063,878)
----------
BALANCE, December 31, 1999 $6,071,502
----------
F-5
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CDBEAT.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,063,878) $(1,780,062)
Adjustments to reconcile net loss to net
cash and cash equivalents used in operating activities:
Loss from discontinued operations 1,475,301 1,780,062
Depreciation and amortization 130,772
Compensation cost associated with issuance of common stock 497,426
Consulting expenses associated with issuance of common
stock 911,093
Increase in noncurrent assets (38,750)
Increase in payables and other current liabilities (239,284)
--------------- -------------
Net cash (used in continuing operations) (327,320) $ -
=============
Net Cash provided by discontinued operations 194,338
-------
Net Cash (used in) operations (132,982)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (12,102)
Net cash acquired through acquisition 23,834
----------------
Net cash provided by continuing operations 11,732
Net cash (used in) discontinued operations (2,888)
----------------
Net cash provided by investing activities 8,844
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,000,000
----------------
Net cash provided by continuing operations 1,000,000
Net cash (used in) discontinued operations (319,063)
----------------
Net cash provided by financing activities 680,937
----------------
Net increase in cash and cash equivalents 556,799
CASH AND CASH EQUIVALENTS, beginning of year -
----------------
CASH AND CASH EQUIVALENTS, end of year $556,799
================
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Fair value of equity issued $(4,241,530)
Details of acquisition:
Fair value of assets acquired $ 3,921,648
Liabilities assumed (239,284)
Fair value of equity issued (4,241,530)
Goodwill 583,000
-----------
Net cash acquired through acquisition $ 23,834
===========
The accompanying notes are an integral part of these
consolidated statements
F-6
CDBEAT. COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
CDBeat.com, Inc. ("CDBeat") was incorporated on May 8, 1998 under the laws
of the state of Delaware. On November 16, 1999 CDBeat ("CDBeat" or the
"Company"), through its wholly-owned subsidiary,32 Records LLC, (32 Records)
merged with Cakewalk LLC ("Cakewalk") in a transaction accounted for by the
purchase method wherein Cakewalk LLC was deemed to be the acquiror and CDBeat
the acquiree, (the "Merger") CDBeat offers businesses a unique online database
marketing opportunity to reach interested consumers. The company is developing
software that will have the ability to recognize content that is played in a
computer, and then simultaneously to connect the user to various related
Internet sites that have been pre-selected by the company's business customers.
In essence, therefore, CDBeat's software functions like an efficient search
engine - searching the directory of sites supplied by the company's business
customers, and directing users to these sites on a targeted demographic basis.
The company thus offers its business customers a unique and compelling marketing
opportunity that matches buyers with sellers, while capturing and delivering a
database in the process.
CDBeat's revenue model contemplates that, in exchange for directing users
to customer-determined sites, and supplying customers with data on the
consumers' buying habits and interests (with full disclosure to the consumers),
CDBeat will receive referral fees from its customers plus a percentage of the
referred e-commerce revenue. The company has not yet generated revenues.
32 Records is an independent record company which specializes in the
catalog, or reissue, segment of the record business through the acquisition of
existing, classic, timeless master recordings by established, world-class
artists, that are nevertheless underperforming, underutilized or have never
before been released commercially. 32 Records recompiles, repackages, remarkets
and sells its music products into traditional markets such as domestic and
foreign music stores as well as nontraditional markets such as price clubs,
catalogs, and various non-music retail stores.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated balance sheet includes the accounts of CDBeat and 32 Records.
The consolidated statements of operations, cash flows and changes in members'
equity and stockholders' equity includes the results of operations of Cakewalk
for the years ended December 31, 1999 and 1998 and the results of operations of
CDBeat since the date of the Merger.
F-7
UNAUDITED PRO FORMA NET LOSS PER COMMON SHARE
The Company's historical capital structure is not indicative of its
prospective structure due to the conversion of the Class A Units and Class B
Units (collectively, the "Cakewalk Units") of Cakewalk into common stock of the
Company concurrent with the consummation of the Merger. (See Note 6)
Pro forma basic loss per share is computed by dividing the net loss
available to common stockholders for the year by the pro forma basic weighted
average number of shares outstanding during the year. Pro forma diluted loss per
share is computed by dividing the net loss for the year by the pro forma diluted
weighted average number of shares outstanding during the year, which includes
the effect of dilutive common stock equivalents.
The unaudited pro forma basic net loss per common share data presented on
the consolidated statement of operations is computed using the weighted average
number of shares outstanding assuming conversion of the Cakewalk Units into
common stock as of the date of issuance of the Cakewalk Units. The unaudited pro
forma diluted net loss per common share is the same as the unaudited pro forma
basic net loss per common share, as the effect of all common stock equivalents
is antidilutive.
PRO FORMA FINANCIAL DATA
As a result of the merger, (1) Cakewalk contributed and assigned to 32
Records substantially all of the assets and liabilities relating to the business
of Cakewalk in exchange for 8,307,785 shares of the Company's Common Stock, (2)
Dylan LLC exercised a warrant and paid the Company $900,000 for 7,037,183 shares
of Common Stock, (3) Atlantis Equities, Inc. exercised a warrant and paid the
Company $100,000 for 781,909 shares of Common Stock, (4) 3,049,424 shares of
Common Stock held by management of the Company were surrendered and (5) 50,000
shares of Class C Preferred Stock were converted into 500,000 shares of Common
Stock. A portion of the purchase price has been allocated to assets acquired and
liabilities assumed based on the estimated fair market value at the date of
acquisition and the balance of $3,909,546 was recorded as cost of acquired
software and is being amortized over a five-year period on a straight-line
basis. The allocation of the $3,909,546 to acquired software is preliminary and
subject to the completion of a valuation analysis.
The table below reflects unaudited pro forma income statement data for the
year ended December 31, 1999 as if the merger had occurred at the beginning of
the year.
[Download Table]
Loss from continuing operations $(3,418,844)
Loss from discontinued operations (1,475,301)
-----------
Net loss $(4,894,145)
============
basic and diluted loss per share-
from continuing operations $(0.19)
from discontinued operations (0.08)
------
Net loss $(0.27)
======
F-8
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents.
EQUIPMENT AND ACCUMULATED DEPRECIATION
Equipment is carried at cost, less accumulated depreciation. Depreciation
is recognized using the straight-line method over the estimated useful lives of
the assets, which approximates five years.
SOFTWARE DEVELOPMENT COSTS
Software development costs represents the estimated value of the software
owned by CDBeat at the time of the business combination with 32 Records. These
costs are being amortized using the straight-line method over the estimated
useful life of five years.
INCOME TAXES
Until November 16, 1999 32 Records, as a limited liability company, was
taxed as a partnership for federal and state income tax purposes, and, as a
result, its earnings were taxable directly to its members. Since the business
combination the Company has been taxed as a corporation and recognized losses
for both financial and tax reporting purposes.
LONG-LIVED ASSETS
The Company's policy is to record long-lived assets at cost, amortizing
these costs over the expected useful lives of the related assets. In accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of," these assets are reviewed on a periodic
basis for impairment whenever events or changes in circumstances indicate the
carrying amounts of the assets may not be realizable. Furthermore, the assets
are evaluated for continuing value and proper useful lives by comparison to
expected future cash flows. For the year ended December 31, 1999, there was no
material impairment of the long-lived assets of the Company.
F-9
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's current financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses are
carried at cost, which approximates their fair value due to the short-term
maturity of these instruments.
STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No.123, "Accounting for Stock-Based
Compensation." This statement establishes a fair market value based method of
accounting for an employee stock option but allows companies to continue to
measure compensation cost for those plans using the intrinsic value based method
prescribed by APB Opinion No. 25 "Accounting for Stock Issued to Employees."
Companies electing to continue using the accounting under APB Opinion No. 25
must, however, make pro forma disclosure of net income and earnings per share as
if the fair value based method of accounting in SFAS No. 123 had been applied.
The Company has elected to continue to account for its stock-based compensation
awards to employees and directors under the accounting prescribed by APB Opinion
No. 25, and to provide the necessary pro forma disclosures as if the fair value
method had been applied.
NOTE 2: EQUIPMENT
Equipment as of December 31, 1999, is comprised of the following:
[Download Table]
1999
-------
Equipment $20,294
Less- Accumulated depreciation 2,222
-------
Equipment, net $18,072
=======
For the year ended December 31, 1999, depreciation expense amounted to $454.
NOTE 3: INCOME TAXES
Until November 16, 1999, Cakewalk, a limited liability company, was taxed as a
partnership for federal and state income tax purposes, and, as a result, its
earnings were taxable directly to its members. Since the business combination
the Company has been taxed as a corporation and recognized losses for both
financial and tax reporting purposes. The significant components of the deferred
tax asset as of December 31, 1999, assuming an effective income tax rate of 40%,
are as follows:
[Download Table]
Net operating loss $993,046
Intangibles 591,741
Non-cash compensation expense 563,408
F-10
[Download Table]
Other 398,125
-----------
Total deferred tax asset 2,546,320
Liabilities (1,511,691)
-----------
Net deferred tax asset 1,034,629
Less valulation allowance (1,034,629)
-----------
Total deferred income tax asset-net $ --
===========
The Company established a valuation allowance to fully offset the deferred
income tax asset as of December 31, 1999 as the realization of the asset did not
meet the required asset recognition standard of SFAS No. 109 "Accounting for
income Taxes."
Subsequent to the merger, the Company utilized $583,000 of deferred tax asset
to offset a pre-acquisition deferred tax liability.
At December 31, 1999 the Company had a net operating loss carryforward of
approximately $2,483,000 for income tax purposes. This carryforward expires
through the year 2019 and may be subject to limitations due to the ownership
change.
NOTE 4: STOCK OPTIONS
During 1999 the Company granted options and warrants to purchase 5,010,828
shares of Common stock which were outstanding as of December 31, 1999. These
options and warrants were granted to employees, consultants and others at
exercise prices ranging from $.01 to $2.50 per share; and are exercisable from
December 31, 1999 to 2010. As of December 31, 1999 3,497,125 options and
warrants were exercisable at a weighted average exercise price of $ .99 per
share.
In 1999, the Company recorded compensation expense in the amount of $1,408,519
under the requirement of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Had compensation cost been determined in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" the
Company would have reported additional losses as follows:
[Download Table]
Year Ended December 31, 1999
Loss from continuing operations As reported $ (1,588,577)
Pro forma (2,696,690)
Loss from discontinued operations As reported (1,475,301)
Pro forma (1,475,301)
Net loss As reported (3,063,878)
Pro forma (4,171,991)
Basic and diluted loss per share:
From continuing operations As reported $ (0.28)
Pro forma (0.48)
Loss from discontinued operations As reported (0.26)
Pro forma (0.26)
Net loss As reported (0.54)
Pro forma (0.74)
F-11
Under SFAS No. 123, the fair value of each option is estimated on the date of
grant using Black-Scholes option-pricing model with the following
weighted-average share assumptions used for grants in 1999: (1) expected life of
the option 5 years; (2) no dividend yield; (3) expected volatility 209%; (4)
risk free interest rate 6%.
The following summarizes stock options activity for 1999:
[Download Table]
Weighted Average
SHARES Exercise Price
-----------------------------------------------------------------------------------
Outstanding at December 31, 1998 -
Granted during 1999 2,782,683 $1.38
----------------------------------------------------------------------------------
Outstanding at December 31, 1999 2,782,683 $1.38
--------------------------
Number of shares exercisable at December 31, 1999 1,268,981 $1.22
----------------------------------------------------------------------------------
Weighted average fair value of options granted during period $1.90
=====
NOTE 5: LEASE COMMITMENTS
The Company leases office space under an operating lease which expires in 2003.
Rental expense under the lease was $ 9,688 in 1999. The future minimum lease
payments due under the non-cancelable lease at December 31, 1999 are:
[Download Table]
2000 $ 63,281
2001 75,000
2002 75,000
2003 68,750
------
Total $282,031
========
NOTE 6: SUBSEQUENT EVENTS
PRIVATE PLACEMENT
As of March 31, 2000 the Company was seeking to raise a minimum of
$3,000,000 and a maximum of $9,000,000 (with an over allotment option of
$1,000,000) through the private placement of the Company's Series D Convertible
Preferred Stock (the "Series D Preferred Stock") at a price of $1.28 per share
(the "Private Placement"). As soon as the Company has authorized additional
shares of Common Stock, the Series D Preferred Stock will be automatically
converted into shares of Common Stock at a ratio of 1 share of Series D
Preferred Stock for one Share of Common Stock. The Company has engaged a
Placement Agent to assist in these efforts. At the first closing on March 31,
2000, the Company received approximately $3 million (net of Placement Agent
fees) and expects that additional funds will be raised on or before April 30,
2000.
CHANGE IN MANAGEMENT AND LOAN DEFAULT
In March 2000 the Label Manager and Creative Director of 32 Records resigned
their positions. The resignation of the Creative Director constitutes a default
under the Management Agreement among 32 Records LLC, Cakewalk BRE LLC and
Entertainment Finance International, Inc. (EFI). As a result of this default,
and other covenant defaults, EFI, as the holder of $5,500,000 principal
F-12
amount of indebtedness issued by Cakewalk BRE, has the right to accelerate the
maturity date of such indebtedness and exercise other remedies. EFI has been
notified of these defaults and, as of the date hereof, has neither taken any
such action nor indicated an intention to do so. At the time the loan was
granted in June 1999 the lender required the establishment of a new subsidiary,
Cakewalk BRE LLC, a Bankrupt Remote Entity, into which the assets and
liabilities of 32 Records was transferred as security for the lender.
Accordingly, the lender in the event of a declaration of default may seek to
take over the business of 32 Records, but it does not have recourse to the
Company's assets not included in the BRE.
Management anticipates a probable inability to meet the obligations under
the terms of the loan. Hence, 32 Records' ability to continue as a going concern
is dependent on its ability to renegotiate the loan agreement and/or secure
additional financing.
On March 30, 2000, the Company decided that it will exit the record
business conducted by 32 Records by March 2001 and recharacterized 32 Records
as a discontinued operation for financial reporting purposes. 32 Records
intends to continue its operations until it can either (i) sell the business
or assets in an orderly fashion, or (ii) close or surrender the business to
EFI.
The accompanying financial statements have been restated to report
separately the assets, liabilities, operating results and net cash flows of
these discontinued operations.
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.
F-13
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10KSB’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 4/19/05 | | 15 |
| | 11/22/04 | | 19 |
| | 11/16/04 | | 19 |
| | 6/29/04 | | 21 |
| | 11/29/03 | | 9 |
| | 11/16/01 | | 19 | | 20 |
| | 12/31/00 | | 3 | | 22 | | | 10KSB, NT 10-K |
| | 11/16/00 | | 19 | | 20 |
| | 4/30/00 | | 12 | | 37 |
| | 4/21/00 | | 7 |
| | 4/19/00 | | 3 | | 17 |
| | 4/17/00 |
| Filed on: | | 4/14/00 | | 24 |
| | 4/12/00 | | 6 | | 21 |
| | 4/11/00 | | 23 | | 25 |
| | 3/31/00 | | 1 | | 37 | | | 10QSB, DEF 14C, NT 10-K, NT 10-Q |
| | 3/30/00 | | 3 | | 38 | | | DEF 14C, NT 10-K |
| | 3/29/00 | | 13 | | 14 |
| | 3/20/00 | | 13 |
| | 1/31/00 | | 12 | | 23 | | | 8-K, 8-K/A |
| For Period End: | | 12/31/99 | | 1 | | 37 | | | NT 10-K |
| | 12/1/99 | | 23 | | | | | 8-K |
| | 11/16/99 | | 3 | | 35 | | | 3, 8-K, 8-K/A |
| | 10/29/99 | | 22 | | 25 |
| | 10/8/99 | | 23 | | | | | 3, 8-K, SC 13D |
| | 9/23/99 | | 3 | | 23 | | | 3, 8-K |
| | 6/29/99 | | 23 | | 25 |
| | 4/7/99 | | 23 |
| | 1/12/99 | | 23 |
| | 12/31/98 | | 12 | | 37 |
| | 10/15/98 | | 20 |
| | 5/8/98 | | 3 | | 32 |
| | 12/31/97 | | 30 |
| List all Filings |
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