-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HuEC14HG9wNV1OjIUTKpxSXlgdlRjvw09n71UWheZG0B80bVY70fvDNg+ymbn0J5 L/AQa5JJuIax/aSHWtCsMQ== 0001070876-99-000007.txt : 19990209 0001070876-99-000007.hdr.sgml : 19990209 ACCESSION NUMBER: 0001070876-99-000007 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19990208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMD GROUP INC CENTRAL INDEX KEY: 0001076682 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL- COMPUTER & PRERECORDED TAPE STORES [5735] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-70663 FILM NUMBER: 99523438 BUSINESS ADDRESS: STREET 1: BEDFORD TOWERS STREET 2: 444 BEDFORD STREET SUITE 8 CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2036029994 MAIL ADDRESS: STREET 1: BEDFORD TOWERS STREET 2: 444 BEDFORD STREET SUITE 8 CITY: STAMFORD STATE: CT ZIP: 06901 SB-2/A 1 AMENDMENT NO. 1 SMD GROUP, INC. As filed with the SEC on February 5, 1999 SEC Registration No. 333-70663 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 SMD GROUP, INC. (Exact name of registrant as specified in charter) Delaware 5735 Applied for (State or other (Primary Standard Industrial (IRS Employer jurisdiction of Classification Code Number) Identification incorporation or Number) organization) SMD Group, Inc. Bedford Towers 444 Bedford Street, Suite 8s Stamford, Connecticut 06901 Phone: (203) 602-9994 Fax: (203) 602-9995 Email: jarberman@ibm.net (Address and telephone number of registrant's principal executive offices and principal place of business) Joel Arberman, President SMD Group, Inc. Bedford Towers 444 Bedford Street, Suite 8s Stamford, Connecticut 06901 Phone: (203) 602-9994 Fax: (203) 602-9995 ICQ: 21108282 AOL: jarb25 Email: jarberman@ibm.net (Name, address, and telephone number of agent for service) Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. 1 If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] (Continued on Next Page) CALCULATION OF REGISTRATION FEE Title of Each Amount Proposed Proposed Amount of Class of Securities to be Maximum Maximum Registration Being Registered Registered Offering Aggregate Fee Price Offering Per Share Price Common Stock, par value $.01 per share 4,000,000 $.2.50 $ 10,000,000 $2,780 TOTAL $ 2,780 MINIMUM FEE $100 The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine. 2 SMD GROUP, INC. Cross Reference Sheet between Items of Form SB-2 and Prospectus Pursuant to Rule 501(b) of Regulation S-B Item in Form SB-2 Location in Prospectus 1.Front of Registration Statement and Outside Front Cover Page of the Prospectus Cover Pages 2.Inside Front and Outside Back Cover Pages of Prospectus Cover Pages 3.Summary Information and Risk Factors Prospectus Summary, Risk Factors 4.Use of Proceeds Use of Proceeds 5.Determination of Offering Price Risk Factors, Offering 6.Dilution Not Applicable 7.Selling Security Holders Not Applicable 8.Plan of Distribution Offering 9.Legal Proceedings Legal Proceedings 10.Directors, Executives Officers, Promoters and Control Persons Management 11.Security Ownership of Certain Beneficial Owners and Management Principal Shareholders 12.Description of Securities to be Registered Description of Securities 13.Interest of Named Experts and Counsel Experts 14.Disclosure of Commission position on Indemnification for Securities Act Liabilities Indemnification 15.Organization Within Last 5 years Proposed Business, Certain Transactions 16.Description of Business Proposed Business 17.Management's Discussion and Analysis or Plan of Operation Management's Discussion and Analysis or Plan of Operation 18.Description of Property Proposed Business 19.Certain Relationships and Related Transactions Risk Factors, Certain Transactions 20.Market for Common Equity and Related Stockholder Matters Risk Factors, Description of Securities 21.Executive Compensation Management 22.Financial Statements Financial Statements (The next two pages in the Prospectus are, respectively, Cover Page - - Outside Back and Cover Page - Outside Front.) 3 Subject to Completion January 11, 1999 ----------- Subject to Completion, dated January 11, 1999. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. 4,000,000 SHARES SMD GROUP, INC. This is an offering of up to 4,000,000 shares of Common Stock, par value $.001 per share ("the Shares"), of SMD GROUP, INC. (the "Company"). See "Description of Securities." Of the 4,000,000 Common Shares offered hereby, 3,521,000 Common Shares are being sold by the Company and 479,000 Common Shares are being sold by certain security holders (the "Selling Security holders"). The Shares being sold by the Selling Security holders were previously acquired by the Selling Security holders in private placements. All of the Shares are being sold by the Company on a no minimum/best efforts basis. See "Selling Securityholders" and "Underwriting." The Company will not receive any of the proceeds from the sale of the Selling Securityholders' shares. See "Selling Securityholders." See "Selling Securityholders." The price for the Shares offered by the company is *. There is no minimum offering. Prior to this offering there has been no public market for the Shares. The initial public offering price of the Shares has been arbitrarily determined by the Company and does not bear any relationship to such established valuation criteria as assets, book value or prospective earnings. There can be no assurance that a regular trading market will develop for the Shares after this offering or that, if developed, any such market will be sustained. The Company anticipates that trading of the Shares will be conducted through what is customarily known as the "pink sheets" and/or on the National Association of Securities Dealers, Inc.'s Electronic Bulletin Board (the "Bulletin Board"). Any market for the Shares which may result will likely be less well developed than if the Shares were traded on NASDAQ or on an exchange. 4 . THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" at pages *. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Offering Proceeds to Price to Public (1) Discount (2) Company (3) Per Share $ .0 $ .0 $ .0 Maximum 4,000,000 $ .0 $ .0 $ .0 (Notes on following page.) The date of this Prospectus is January 11, 1999 NOTES: (1) The 4,000,000 Shares are being offered by the Company on a "best efforts" no minimum, 4,000,000 Share maximum basis. The Company intends to offer the Shares through its officers and directors without the use of a professional underwriter. No commissions will be paid for sales effected by officers and director. (2) The Company estimates all offering costs, including filing, printing, legal, accounting, transfer agent and escrow agent fees (collectively, the "Offering Costs") at $100,000. Until ______________,199__ (90 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution are required to deliver a prospectus. This is in addition to the obligations of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions This Prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements address, among other things, growth in Internet usage and online commerce; future music retailing opportunities on the Internet; the Company's business strategy, including its sales and marketing plans; expectation of future losses; competitive factors; reliance on online and traditional advertising and strategic alliances; use of proceeds; reliance on certain vendors; projected capital expenditures; liquidity; possible business relationships; possible effects of changes in government regulation; dependence on key personnel; exposure to Year 2000; increased net sales in future periods; increased sales to international customers; and pricing policy. These statements may be found under "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of 5 Operations," and "Business" as well as in the Prospectus generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including those factors discussed below under "Risk Factors" and set forth in this Prospectus generally. PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements of the Company and the notes thereto included elsewhere in this Prospectus. Unless the context otherwise requires, each reference to the "Company" or "SMD" refers to SMD Group, Inc. and its subsidiaries and each reference to "CDs" refers collectively to compact discs, cassettes and vinyl records. All share numbers used herein reflect all stock splits that have been effected prior to the date hereof. THE COMPANY SMD Group is an Internet-based music media company that will provide branded, interactive information and programming as well as merchandise to music enthusiasts worldwide. Cdbeat.com, the Company's flagship site on the World Wide Web (the "Web"), will deliver real-time, in-depth and compelling music content and programming that capitalizes on the Web's unique graphical and interactive capabilities. The Company's online store will offer a broad selection of music CDs, concert tickets and other music-related products. The store will offer a high level of customer service, competitive pricing and will be easy to use and navigate. The CDbeat store will be open 24 hours a day, seven days a week and will offer customers convenient and timely product fulfillment. The Company believes that a significant opportunity exists for the retailing of music on the Internet. According to the International Federation of the Phonographic Industry, worldwide sales of pre-recorded music in 1997 were approximately $38.1 billion, of which one-third was in North America. Online music retailers currently account for a small but growing portion of total sales. According to Jupiter Communications, Inc. ("Jupiter"), worldwide sales of pre-recorded music over the Internet are projected to grow from approximately $47 million in 1997 to $1.6 billion in 2002. The Company believes that the emergence of rich multimedia capabilities, such as streaming audio and video, has significantly enhanced the effectiveness of the Web as a global mass communications medium. These enhanced multimedia capabilities, combined with the unique interactive properties of the Internet, are attracting a large and expanding audience, a growing number of advertisers and an increasing breadth and depth of content and online commercial applications. As the Web continues to evolve as a mass communications medium, the Company believes that certain types of content currently delivered through traditional media, such as radio and television, increasingly will be delivered over the Internet. The Company believes that streaming media technology is essential to this evolution because it provides a more compelling user experience, allowing the Internet to compete more effectively with traditional media for audience share. 6 The Company's objective is to become the leading Internet-based music media company and to create a global brand. To achieve this objective, the Company's strategy will include the following key elements: (i) focus on music content, (ii) capture and develop emerging revenue and profit opportunities (iii) build and expand registered user base efficiently and economically (iv) utilize leading-edge online and traditional advertising and promotion programs, (v) develop strategic alliances, (vi) maximize customer retention, (vii) develop a global brand name, and (viii) pursue acquisitions. The Company expects to generate revenue from multiple sources such as (i) advertising, (ii) compact disc sales, (iii) concert ticket sales, (iv) artist merchandise sales, (v) general music-related product sales, and (vi) syndication of Company programming in other media. The Company was incorporated in Delaware in May 1998. Its principal offices are located at 444 Bedford Street, Suite 8s, Stamford, Connecticut, 06901 and its telephone number is (203) 602-9994. THE OFFERING Common Stock offered by the Company... 3,521,000 shares Common Stock offered by the Selling Securityholders ... 479,000 shares Common Stock to be outstanding after the Offering.. 7,917,847 shares (1) (2) Use of proceeds....................... For sales and marketing expenses; improvements to the Company's Web site and other capital expenditures; working capital; and other general corporate purposes. Risk Factors...................... The securities offered hereby are speculative and involve a high degree of risk and immediate substantial dilution. See "Risk Factors" and "Dilution" Proposed Nasdaq symbol................ CDBT
(1)As of December 31, 1998 and excludes 479,347 shares of Common Stock issuable upon the exercise of options outstanding as of December 31, 1998 under the Company's 1998 Equity Compensation Plan (the "Equity Compensation Plan") at a weighted average exercise price of $2.50 per share. (2)Includes the conversion of all Class A and C Preferred Shares outstanding as of December 31, 1998 (the "Preferred Securities"). 7 SUMMARY FINANCIAL AND OPERATING DATA To Be Added RISK FACTORS The following risk factors, as well as the other information contained in this Prospectus, should be considered carefully before purchasing the Common Stock offered hereby. This Prospectus contains forward-looking statements that address, among other things, the Company's business strategy, use of proceeds, projected capital expenditures, liquidity, possible business relationships, and possible effects of changes in government regulation. These statements maybe found under "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business" as well as in the Prospectus generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including those factors discussed below and set forth in this Prospectus generally. Limited Operating History; History of Losses and Expectation of Future Losses. The Company was founded in May 1998 and operations in October 1998. Accordingly, the Company has only a limited operating history on which to base an evaluation of its business and prospects. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as online commerce. Such risks include, but are not limited to, possible inability to respond promptly to changes in a rapidly evolving and unpredictable business environment and the risk of inability to manage growth. To address these risks, the Company must, among other things, expand its customer base, successfully implement its business and marketing strategies, continue to develop and upgrade its Web site and transaction-processing systems, provide superior customer service, respond to competitive developments, and attract and retain qualified personnel. If the Company is not successful in addressing such risks, it will be materially adversely affected. Since inception, the Company has incurred significant losses, and as of December 31, 1998 had accumulated losses of $___ million. The Company intends to invest heavily in marketing and promotion, Web site development and technology, and development of its administrative organization. As a result, the Company believes that it will incur substantial operating losses for the foreseeable future, and that the rate at which such losses will be incurred will increase significantly from current levels. Because the Company has relatively low product gross margins, achieving profitability given planned investment levels depends upon the Company's ability to generate and sustain substantially increased revenue levels. There can be no assurance that the Company will be able to generate sufficient revenues to achieve or sustain profitability in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 8 Dependence on Continued Growth of Online Commerce. The Company's long-term viability is substantially dependent upon the widespread consumer acceptance and use of the Internet as a medium of commerce. Use of the Internet as a means of effecting retail transactions is at an early stage of development, and demand and market acceptance for recently introduced services and products over the Internet is very uncertain. The Company cannot predict the extent to which consumers will be willing to shift their purchasing habits from traditional retailers to online retailers. The Internet may not become a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure, delayed development of enabling technologies and inadequate performance improvements. In addition, the Internet's viability as a commercial marketplace could be adversely affected by delays in the development of services or due to increased government regulation. Changes in or insufficient availability of telecommunications services to support the Internet also could result in slower response times and adversely affect usage of the Internet generally and SMD in particular. Moreover, adverse publicity and consumer concern about the security of transactions conducted on the Internet and the privacy of users may also inhibit the growth of commerce on the Internet. If the use of the Internet does not continue to grow or grows more slowly than expected, or if the infrastructure for the Internet does not effectively support growth that may occur, the Company would be materially adversely affected. Competition. The online commerce market is new, rapidly evolving and intensely competitive, and the Company expects that competition will further intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new sites at a relatively low cost. According to Jupiter, there were approximately 100 online music retailers, as of June 1997. In addition, the broader retail music industry is intensely competitive. The Company will compete with a variety of companies, including (i) online vendors of music, music videos and other related products, (ii) online vendors of movies, books and other related products, (iii) online service providers which offer music products directly or cooperation with other retailers, (iv) traditional retailers of music products, including specialty music retailers, (v) other retailers that offer music products, including mass merchandisers, superstores and consumer electronic stores; and (vi) non-store retailers such as music clubs. Many of these traditional retailers also support dedicated Websites that compete directly with the Company. The Company believes that the principal competitive factors in its online market are brand recognition, selection, variety of value-added services, ease of use, site content, quality of service, technical expertise and price. Many of the Company's current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than the Company. The Company is aware that certain of its competitors have and may continue to adopt aggressive pricing or inventory availability policies and devote substantially more resources to Web site and systems development than the Company. Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. 9 There can be no assurance that the Company will be able to compete successfully against current and future competitors. New technologies and the expansion of existing technologies may increase the competitive pressures of the Company. For example, client-agent applications that select specific titles from a variety of Web sites based on factors such as price may channel customers to online retailers that compete with the Company. In addition, many companies that allow access to transactions through network access or Web browsers promote the Company's competitors and could charge the Company a substantial fee for inclusion. Risk of Inability to Manage Potential Growth. The Company has rapidly expanded its operations. This expansion has placed, and is expected to continue to place, a significant strain on the Company's management, operations, systems, and financial resources. From May 8th 1998 to December 31, 1998, the Company has grown from one to approximately 21 employees/contractors, and several members of the Company's senior management have only recently joined the Company. SMD's recently hired employees also include a number of key managerial, technical and operations personnel, and the Company expects to add additional key personnel in the near future. To manage its recent growth and any further growth of its operations and personnel, the Company must improve existing operations and systems and expand and integrate its employee base. If the Company is unable to manage its growth effectively, it will be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Employees." Need for Additional Funds. The Company anticipates that the net proceeds from this Offering, together with other available resources, will be sufficient to fund the Company's operations for at least the next 12 months. However, the Company's capital requirements depend on several factors, including the rate of market acceptance, the ability to expand the Company's customer base, the level of expenditures for sales and marketing, the cost of Web site upgrades and other factors. If capital requirements vary materially from those currently planned, the Company may require additional financing sooner than anticipated. Regardless of when needed, there can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. If equity securities are issued in connection with a financing, dilution to the Company's shareholders may result, and if additional funds are raised through the incurrence of debt, the Company may become subject to restrictions on its operations and finances. See "Management's Discussion and Analysis of Financial Condition and Results of Operation." Reliance on Certain Vendors. The Company's intends that it will have a single provider of order fulfillment for recorded music titles ("Supplier")The Company has no fulfillment operation or facility of its own and, accordingly, is will be dependent upon maintaining a relationship with Supplier or establishing a new fulfillment relationship with one of the few other fulfillment operations. There can be no assurance that the Company will maintain its relationship with Supplier beyond the initial term of any possible agreement with Supplier, or that it will be able to find an alternative, comparable vendor capable of 10 providing fulfillment services on terms satisfactory to the Company should its relationship with Supplier terminate. An unanticipated termination of the Company's relationship with Supplier, particularly during the fourth quarter of the calendar year in which a high percentage of recorded music sales are made, could materially adversely affect the Company's results of operations for the quarter in which such termination occurred even if the Company was able to establish a relationship with an alternative vendor. To the extent that Supplier does not have sufficient capacity and is unable to satisfy on a timely basis increasing requirements of the Company, the Company would be materially adversely affected. The Company will generally rely on a single vendor for order fulfillment with respect to each product line carried by the Company. Therefore, the loss of any one vendor could materially and adversely affect the Company's sales of that product line. While the Company seeks to negotiate multi-year contracts with its vendors to ensure the availability of merchandise, there can be no assurance that the Company's currentfuture vendors willcontinue sell merchandise to the Company on favorable terms or that the Company will be able to establish new vendor relationships to ensure acquisition of merchandise in a timely and efficient manner and on acceptable commercial terms. If the Company were unable to develop and maintain relationships with vendors that would allow it to obtain sufficient quantities of merchandise on acceptable commercial terms, it would be materially adversely affected. See "Business--Fulfillment." Risk of System Failure; Absence of Redundant Facilities; Capacity Constraints. The Company's business is dependent on the efficient and uninterrupted operation of its computer and communications hardware systems. Substantially all of the Company's computer and communications hardware is located at a single leased facility in Toronto, Canada. The Company's systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. Any system interruptions that result in the unavailability of the Company's Web site or reduced transaction processing performance would reduce the volume of products sold and the attractiveness of the Company's product and service offerings and could, therefore, materially adversely affect the Company. The Company has, from time to time, experienced periodic systems interruptions, and anticipates that such interruptions will occur in the future. The Company does not presently have redundant systems or a formal disaster recovery plan and does not carry sufficient business interruption insurance to compensate it for losses that may occur. Any substantial increase in the volume of traffic on the Company's Web site or the number of orders placed by customers will require the Company to expand and upgrade further its technology, transaction-processing systems and network infrastructure. There can be no assurance that the Company will be able to accurately project the rate or timing of increases, if any, in the use of its Web site or expand and upgrade its systems and infrastructure to accommodate such increases. The failure to appropriately upgrade its systems and infrastructure would have a material adverse effect on the Company. 11 Security Risks. A significant barrier to online commerce is concern regarding the security of transmission of confidential information. The Company will rely on encryption and authentication technology licensed from third parties that is designed to facilitate the secure transmission of confidential information, such as customer credit card numbers. Nevertheless, the Company's infrastructure is potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems. A party who is able to circumvent the Company's security measures could misappropriate proprietary information or cause interruptions in the Company's operations. To the extent that activities of the Company or third-party contractors involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could damage the Company's reputation and expose the Company to a risk of loss or litigation and possible liability. Therefore, the Company may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. There can be no assurance that the Company's security measures will prevent security breaches or that failure to prevent such security breaches will not have a material adverse effect on the Company. See "Business--Technology." Risk of Reliance on Internally Developed Systems. The Company will use an internally developed system for its Web site, search engine and substantially all aspects of its transaction processing and order management. The Company's inability to modify this system as necessary to accommodate increased traffic on its Web site or increased volume through its transaction processing and order management systems may cause unanticipated system disruptions, slower response times, impaired quality and speed of order fulfillment, degradation in customer service, and delays in reporting accurate financial information. Any of these events could have a material adverse effect on the Company. Potential Fluctuation in Quarterly Operating Results. The Company expects to experience significant fluctuations in its future quarterly operating results due to a variety of factors, many of which are outside the Company's control. Factors that may affect the Company's quarterly operating results include (i) its ability to retain existing customers, attract new customers and maintain customer satisfaction, (ii) the introduction of new or enhanced Web pages, services, products and strategic alliances by the Company and its competitors,(iii) price competition or higher wholesale prices, (iv) the level of use of the Internet and consumer acceptance of the Internet for the purchase of recorded music, (v) seasonality of recorded music sales, (vi) its ability to upgrade and develop its systems and infrastructure and attract qualified personnel, (vii) technical difficulties, system downtime or Internet brownouts, (viii) the amount and timing of operating costs and capital expenditures relating to expansion of the Company's business, operations and infrastructure, (ix) the timing of Company promotions and sales programs, (xii) the level of merchandise returns experienced by the Company, (xi)government regulation and (xii) general economic conditions and economic conditions specific to the Internet and the music industry. The Company expects that it will experience seasonality in its business, reflecting a combination of seasonal fluctuations in Internet usage and traditional retail seasonality patterns affecting sales of recorded music. Sales in the traditional retail music industry are significantly higher in the fourth calendar quarter of each year than in the preceding three 12 quarters. However, to date, the Company's limited operating history and rapid growth make it difficult to ascertain the effects of seasonality on its business. Therefore, the Company believes that period-to- period comparisons of the Company's historical results are not necessarily meaningful and should not be relied upon as an indication of future results. The Company's results of operations in future periods may not meet the expectations of securities analysts and investors, in which case the price of the Common Stock would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quarterly Results and Seasonality". Rapid Technological Change. To remain competitive, the Company must continue to enhance and improve the responsiveness, functionality and features of its site and develop new features to meet customer needs. The Internet is characterized by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions and the emergence of new industry standards and practices that could render the Company's existing Web site, technology and systems obsolete. The Company's success will depend, in part, on its ability to license leading technologies useful in its business, enhance its existing services, develop new services and technology that address the needs of its customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. If the Company is unable to use new technologies effectively or adapt its Web site, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards, it would be materially adversely affected. See "Business--Technology." No Designated Use for Substantial Portion of Net Proceeds. The Company has not designated any specific use for a significant portion of the net proceeds from the sale by the Company of the Common Stock offered hereby. The net proceeds of this offering will be used by the Company to repay certain short-term indebtedness, to fund its obligations under its strategic alliances, to finance its sales and marketing campaign, to make improvements to and expand the capacity of its Web site, to make certain other capital expenditures and for working capital and other general corporate purposes. However, the Company cannot, with precision, estimate the portion of the net proceeds to be devoted to certain of these uses. From time to time, the Company may evaluate potential acquisitions involving complementary businesses, content, products or technologies. However, the Company has no present agreements with respect to any material acquisition or investment. Accordingly, management will have significant flexibility in applying the net proceeds of this Offering. See "Use of Proceeds." Trademarks and Proprietary Rights; Unlicensed Arrangements. The Company regards its trade secrets and similar intellectual property as valuable to its business, and will rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with its employees, partners and others to protect its proprietary rights. There can be no assurance that the steps taken by the Company will be adequate to prevent misappropriation or infringement of its proprietary property. 13 The Company expects that it may license in the future, certain of its proprietary rights, such as trademarks or copyrighted material, to third parties. While the Company will attempt to ensure that the quality of its brand is maintained by such licensees, there can be no assurance that such licensees will not take actions that might materially adversely affect the value of the Company's proprietary rights or reputation, which could have a material adverse effect on the Company. There can be no assurance that the owners (or their licensees) of intellectual property rights in such information will not assert infringement claims against the provider and the Company. Moreover, the Company expects to be subject to legal proceedings and claims from time to time in the ordinary course of its business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by the Company and its licensees. Such claims could result in substantial costs and diversion of resources, even if ultimately decided in favor of the Company, and could have a material adverse effect on the Company, particularly if judgments on such claims are adverse to the Company. If a claim is asserted alleging that the Company has infringed the proprietary rights of a third party, the Company may be required to seek licenses to continue to use such intellectual property. The failure to obtain the necessary licenses or other rights at a reasonable cost could have a material adverse effect on the Company. Government Regulation and Legal Uncertainties. The Company is subject, both directly and indirectly, to various laws and regulations relating to its business, although there are few laws or regulations directly applicable to access to the Internet. However, due to the increasing popularity and use of the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet. Such laws and regulations may cover issues such as user privacy, pricing, content, copyrights, distribution and characteristics and quality of products and services. Furthermore, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The enactment of any additional laws or regulations may impede the growth of the Internet which could, in turn, decrease the demand for the Company's products and services and increase the Company's cost of doing business, or otherwise have an adverse effect on the Company. The applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and could expose the Company to substantial liability. The laws of certain foreign countries provide the owner of copyrighted products with the exclusive right to expose, through sound and video samples, copyrighted items for sale to the public and the right to distribute such products. Any new legislation or regulation, or the application of existing laws and regulations to the Internet could have a material adverse effect on the Company. The Company believes that its use of material on its Web sites is protected under current provisions of copyright law. However, legal rights to certain aspects of Internet content and commerce are not clearly settled. There can be no assurance that the Company will be able to continue to maintain rights to information, including downloadable music samples and artist, record and other 14 information. The failure to be able to offer such information could have a material adverse effect on the Company. In addition, several telecommunications carriers are seeking to have telecommunications over the Internet regulated by the Federal Communications Commission (the "FCC") in the same manner as other telecommunications services. For example, America's Carriers Telecommunications Association has filed a petition with the FCC for this purpose. In addition, because the growing popularity and use of the Internet has burdened the existing telecommunications infrastructure and many areas with high Internet use have begun to experience interruptions in phone service, local telephone carriers, such as Pacific Bell, have petitioned the FCC to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees on such providers. If either of these petitions are granted, or the relief sought therein is otherwise granted, the costs of communicating on the Internet could increase substantially, potentially slowing the growth in use of the Internet. Any such new legislation or regulation or application or interpretation of existing laws could have a material adverse effect on the Company's business, results of operations and financial condition. Possible Liability for Information Retrieved from the Internet. Due to the fact that material may be downloaded from Web sites and may be subsequently distributed to others, there is a potential that claims will be made against the Company for defamation, negligence, copyright or trademark infringement or other theories based on the nature and content of such material. Such claims have been brought, and sometimes successfully pressed, against online services in the past. In addition, the Company could be exposed to liability with respect to the material that may be accessible through the Company's Website. For example, claims could be made against the Company if material deemed inappropriate for viewing by young children could be accessed though the Company Web sites. Although the Company will carry general liability insurance, the Company's insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify the Company for all liability that may be imposed. Any costs or imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on the Company. Potential Liability for Sales and Other Taxes. New state tax regulations may subject the Company to the assessment of certain sales and income taxes. Tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in Internet and catalogue retailing and are currently considering an agreement with certain of these companies regarding the assessment and collection of sales taxes. The Company is not a party to any such discussions. As the Company's service is available over the Internet in multiple states and foreign countries, such jurisdictions may claim that the Company is required to qualify to do business as a foreign corporation in each such state and foreign country. The failure by the Company to qualify as a foreign corporation in a jurisdiction where it is required to do so could subject the Company to taxes and penalties for the failure to qualify. 15 Dependence on Key Personnel; Need for Additional Personnel. The Company's success is substantially dependent on the ability and experience of its senior management and other key personnel, particularly Joel Arberman, its President, Chief Executive Officer and Chairman of the Board. Moreover, to accommodate its current size and manage its anticipated growth, the Company must maintain and expand its employee base. Competition for personnel, particularly persons having software development and other technical expertise, is intense, and there can be no assurance that the Company will retain existing personnel or hire additional, qualified personnel. The inability of the Company to retain and attract the necessary personnel or the loss of services of any of its key personnel could have a material adverse effect on the Company. See "Business--Employees" and "Management." Control of the Company. Immediately upon completion of this offering, approximately ______% of the outstanding Common Stock will be beneficially owned by Joel Arberman, the Company's President, Chief Executive Officer and Chairman of the Board. As a result, such person, will have the ability to control all matters submitted to shareholders of the Company for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of the Company's assets) and to control the management and affairs of the Company. Such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company, impede a merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could have an adverse effect on the market price of the Company's Common Stock. See "Principal Shareholders" and "Certain Transactions." No Prior Market; Possible Volatility of Stock Price. Prior to this offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or continue after this offering. The initial public offering price has been determined arbitrarily by the Company and may not be indicative of the market price for the Common Stock after this offering. From time to time after this offering, there may be significant volatility in the market price of the Common Stock. Quarterly operating results of the Company, deviations in results of operations from estimates of securities analysts, changes in general conditions in the economy or the Internet services industry or other developments affecting the Company or its competitors could cause the market price of the Common Stock to fluctuate substantially. The equity markets have, on occasion, experienced significant price and volume fluctuations that have affected the market prices for many companies' securities and that have often been unrelated to the operating performance of these companies. Any such fluctuations that occur following completion of this offering may adversely affect the market price of the Common Stock. Potential Adverse Market Impact of Shares Eligible for Future Sale. The shares of Common Stock offered hereby (other than shares purchased by "affiliates" of the Company) will be freely tradeable immediately following this offering. All 16 of the remaining outstanding shares (the "Restricted Shares"), have or will become available for sale in the public market during 1999 subject, in certain instances, to the applicable resale limitations of Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). In addition, the Company intends to file a Registration Statement on Form S-8 covering up to *____shares issuable upon exercise of stock options under the Equity Compensation Plan. Such shares, upon issuance, will be immediately available for resale (in the case of holders that are affiliates of the Company, subject to certain limitations under Rule 144). The Company's officers, directors and certain shareholders, who hold, in the aggregate, approximately 3,900,000 shares of Common Stock, have agreed not to sell any shares of Common Stock (excluding shares of Common Stock offered by this Prospectus or shares purchased in the open market) for a period of 180 days following the consummation of this offering. Thereafter, these shares may become either freely resalable or eligible for sale pursuant to the applicable resale limitations of Rule 144. In addition, holders of approximately shares of Restricted Stock have demand and piggyback registration rights with respect to those shares. Sales of substantial amounts of Common Stock in the public market or the availability of substantial amounts of such stock for sale subsequent to this Offering could adversely affect the prevailing market price of the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. Anti-Takeover Provisions; Possible Issuances of Preferred Stock and Classified Board. Certain provisions of Delaware law could make it more difficult for a third party to acquire, or could discourage a third party from attempting to acquire control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock. In addition, shares of the Company's Preferred Stock, no par value (the "Preferred Stock"), may be issued by the Board of Directors without shareholder approval on such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of the Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. See "Management" and "Description of Capital Stock--Preferred Stock." Immediate and Substantial Dilution. The purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value of their shares of Common Stock in the amount of $*_____ per share (based on an assumed offering price of $*_____ per share and after giving effect to underwriting discounts and commissions and estimated offering expenses). See "Dilution." In the event the Company offers additional Common Stock in the future, including shares that may be issued upon exercise of stock options, purchasers of Common Stock in this offering may experience further dilution in the net tangible book value per share of the Common Stock of the Company. USE OF PROCEEDS The net proceeds to the Company from the sale of *_______ shares of Common Stock offered by the Company hereby are estimated to be $*_____ million assuming an 17 offering price of $*_____ per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company will not receive any proceeds from shares of Common Stock sold by the Selling Shareholders. The net proceeds from the Offering, together with the Company's existing cash and cash equivalents, will be used by the Company as follows: an aggregate minimum of approximately $*___ million on advertising and promotion; approximately $*___ million to make enhancements to, and expand the capacity of, the Company's Website and other capital expenditures; and the balance for working capital and other general corporate purposes, which may include additional payments due under the Company's existing strategic alliances, payments due under any new strategic alliances and future advertising and promotion activities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The amount actually expended for each purpose will be determined at the discretion of the Company. The Company's future capital requirements and the allocation of the net proceeds of the Offering, will depend on many factors, including the entrance into new strategic alliances, increases in advertising and promotions, growth of the Company's customer base and other factors. Accordingly, the actual amount of proceeds devoted to each purpose may vary substantially from the amount set forth above. From time to time the Company may evaluate potential acquisitions involving complementary businesses, content, products or technologies. The Company has no agreement or understanding with respect to any material acquisition. Pending utilization of the net proceeds of the Offering, the Company intends to invest the funds in short-term, interest-bearing, investment-grade obligations. The Company believes that the net proceeds from the Offering, together with its current cash and cash equivalents, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 12 months. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DIVIDEND POLICY The Company has not paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, operating results, capital requirements, applicable contractual restrictions and such other factors as the Board of Directors deems relevant. CAPITALIZATION The following table sets forth, as of December 31, 1998, (i) the actual capitalization of the Company, (ii) the pro forma capitalization of the Company after giving effect to the conversion of the outstanding Series A Preferred 18 Stock and Series C Preferred Stock into an aggregate of shares of Common Stock upon the consummation of this offering and (iii) the pro forma capitalization, as adjusted to reflect the issuance and sale of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $*___ per share and the application of the estimated net proceeds there from. See "Use of Proceeds." This table should be read in conjunction with the Financial Statements and the notes thereto and the other financial information included elsewhere in this Prospectus. DILUTION At December 31, 1998, the pro forma net tangible book value of the Company was approximately $*___ million or $*__ per share of Common Stock, the conversion of the outstanding Series A Preferred Stock and Series C Preferred Stock into an aggregate of shares of Common Stock upon the consummation of this Offering and the exercise of a warrant exercisable for shares of Common Stock which is expected to occur upon the consummation of this offering. Pro forma net tangible book value per share is equal to the Company's total tangible assets less its total liabilities, divided by the total number of shares of Common Stock outstanding on a pro forma basis for the period immediately prior to this offering. After giving effect to the sale by the Company of the shares of Common Stock offered hereby at an assumed initial public offering price of $*___ per share and after deducting underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value of the Company at December 31, 1998 would have been $*___ or approximately $*___ per share. This represents an immediate increase in the pro forma net tangible book value of $*___ per share to existing shareholders and immediate dilution of $ per share to new investors purchasing shares of Common Stock in this offering. The following table illustrates this per share dilution: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains certain statements of a forward-looking nature relative to future events or the financial performance of the Company. Actual events or results may differ materially from those indicated by such forward-looking statements for a variety of reasons, including the matters set forth under the caption "Risk Factors." SMD Group is an Internet-based music media company. The Company strives to combine the advantages of online advertising and commerce with superior customer focus in order to be the authoritative source for music information and related products. The Company will offer a broad selection, informative content, easy-to-easy-to-use and search web site, a high level of customer service, competitive pricing and personalized content. Due to the Company's dedicated advertising focus, revenues will almost entirely be derived from the sale of advertisements. 19 The Company believes that the key factors affecting its long-term financial success include its ability to obtain new customers at reasonable costs, retain customers and encourage repeat web site visits and purchases. The Company seeks to build its customer base through multiple marketing channels which include (i) pursuing an aggressive marketing campaign using a combination of online and traditional marketing, (ii) establishing strategic alliances with major Internet content and service providers, (iii) entering into linking arrangements with other Web sites, and (iv) using direct marketing techniques to target new and existing swithcustomers with personalized communications. Since its inception, the Company has incurred significant net losses and, as of December 31, 1998, had accumulated losses of $*____ million. As it seeks to expand aggressively, the Company believes that its operating expenses will significantly increase as a result of the financial commitments related to the development of marketing channels, future strategic relationships, and improvements to its Web site and other capital expenditures. The Company expects that it will continue to incur losses and generate negative cash flow from operations for the foreseeable future as it continues to develop its business. Since the Company has relatively low product gross margins, the ability of the Company to generate and enhance profitability depends upon its ability to substantially increase its net sales. To the extent that significantly higher net sales do not result from the Company's marketing efforts, the Company will be materially adversely affected. There can be no assurance that the Company will be able to generate sufficient revenues from the sale of advertisements, CDs and other music-related products to achieve or maintain profitability on a quarterly or annual basis. BUSINESS INTRODUCTION SMD Group is an Internet-based music media company that will provide branded, interactive information and programming as well as merchandise to music enthusiasts worldwide. CDbeat.com, the Company's flagship site on the World Wide Web (the "Web"), will deliver real-time, in-depth and compelling music content and programming that capitalizes on the Web's unique graphical and interactive capabilities. INDUSTRY OVERVIEW The Internet is an increasingly significant global medium for communications, information and commerce. International Data Corporation ("IDC") estimates that the number of Web users grew to approximately 28 million by the end of 1996 and will grow to approximately 175 million by 2001. The Company believes that the growth in Internet usage has resulted from a number of factors, including the large and growing installed base of PCs in the workplace and home, advances in the performance and speed of PCs and modems, improvements in network infrastructure, easier and cheaper access to the Internet and increased awareness of the Internet among businesses and consumers. Jupiter Communications ("Jupiter") estimates that the number of online households (households using e-mail, the Internet or a consumer online service) making purchases will grow 20 from an estimated 15.2 million households in 1996 to 57.0 million households, representing over 50% of U.S. households, by the year 2002. IDC estimates that the total value of services and products purchased over the Web grew from $296 million in 1995 to approximately $2.6 billion in 1996, and will increase to approximately $123 billion by 2000. The Company believes that a significant opportunity exists for the retailing of music on the Internet. According to the International Federation of the Phonographic Industry, worldwide sales of pre-recorded music and music videos in 1996 were approximately $39.8 billion, of which one-third was in North America. Online music retailers currently account for a small but growing portion of total sales. According to Jupiter, sales of pre-recorded music, music-related merchandise, advertising and concert tickets over the Internet are projected to grow on a worldwide basis from approximately $23 million in 1996 to over $2.8 billion in 2002. A number of characteristics of online music retailing make the sale of prerecorded music via the Internet particularly attractive relative to traditional retail stores. The Internet offers many data management and multimedia features which enable consumers to listen to sound samples, search for music by genre, title or artist and access a wealth of information and events, including reviews, related articles, music history, news and recommendations. Internet retailers can more easily obtain extensive demographic and behavioral data about their customers, providing them with greater direct marketing opportunities and the ability to offer a more personalized shopping experience. In addition, Internet retailers can also offer consumers significantly broader product selection, the convenience of home shopping and 24-hour-a-day, seven-day-a-week operations, available to any location, foreign or domestic, that has access to the Internet. While physical store-based music retailers must make significant investments in inventory, real estate and personnel for each store location, online retailers incur a fraction of these costs, generally use centralized distribution, and have virtually unlimited merchandising space. Traditional retailers are compelled to limit the amount of inventory they carry at each store and focus on a smaller selection of faster-selling hit releases. As a result, the Company believes that a typical music store may carry up to 12,000 items and a megastore may carry up to 50,000 items, compared to the 250,000 items carried by the CDbeat store. According to Jupiter, approximately 80% of unit sales at traditional retail stores come from approximately 20% of the available titles. Online retailers can offer consumers a broader range of titles and information and can also offer products from a wider range of music labels, including smaller independent labels which account for an increasing percentage of new titles. According to Soundscan, independent labels accounted for 21% of the total music market in 1996 versus 12% in 1992. While independent labels released 66% of new titles in 1996, traditional music stores often lack the capacity to stock or promote the vast majority of these titles. The Company also believes that online retailers will benefit from the changing demographic profile of music consumers. According to the Recording Industry Association of America, domestic purchases of recorded music by persons age 30 21 and over have increased from approximately 34% of total U.S. sales in 1986 to approximately 47% of sales, or approximately $5.9 billion, in 1996. The Company believes that the Internet represents a particularly attractive medium for retailing to customers in this age group as they are typically less "hits-driven" than younger age groups and are more likely to purchase a wide variety of titles. These customers generally can afford to buy more titles at one time, have access to computers and use the Internet, and have credit cards with which to make electronic payments. MARKET OPPORTUNITY The Company targets the music and advertising market opportunities: Music Market Opportunity. Music is among the leading pastimes of Americans as demonstrated by the popularity of music media. People spend a lot of time and money on music events, products and services. According to the Recording Industry Association of America, an industry trade group, U.S. record companies generated $12.2 billion of domestic sales in 1997, while worldwide sales of record music exceeded $30 billion. Sales over the Internet accounted for only $40 million of that market. Industry analysts are forecasting significant revenue growth over the Internet for the music industry. Jupiter Communications has projected total Internet music revenues, including pre-recorded music sales, music-related merchandise, advertising, and concert ticketing, will rise from an estimated $71 million in 1997 to some $2.8 billion by the year 2002. Meanwhile, Forrester Research Inc. has projected some $4 billion in music sales will be generated over the Internet by the year 2002. Advertising Market Opportunity. The enormous growth in the use of the Internet combined with its unique interactive properties has led to a rapidly evolving online advertising opportunity. According to International Data Corporation, the market for web advertising revenues is expected to grow from $180 million in 1996 to $2.9 billion by the year 2000. STRATEGY The Company's objective is to become the leading Internet-based music media company. To achieve this objective, the Company's strategy includes the following key elements: Focus on Music Content. The Company is dedicated to providing online music content. By focusing on its core competency, the Company expects to be able to offer a high quality, customer-oriented online music magazine and build a clearly delineated brand, which the Company believes will make CDbeat.com the web site of choice for music content. The Company believes that this focus will enable it to better direct its sales and marketing campaigns, and form effective relationships with Internet content and service providers. 22 Obtain and Provide Exclusive Content Offerings. The Company seeks to provide the most comprehensive music artist and industry programming on the Internet. To this end, the Company's objective is to develop and acquire exclusive Internet rights to content. In addition, it will also license content when available. Capture and Develop Emerging Revenue Opportunities. The Company intends to capture strategic revenue growth opportunities as user demand increases and technological developments become more widely adopted. Such opportunities are expected to include pay-per-listen/view applications, fee-based sharing of the Company's exclusive content on other Web sites and additional electronic commerce opportunities. Provide Innovative and Easy-to-Use Retail Environment. The Company strives to make its customer experience informative, efficient and intuitive by constantly updating and improving its store format and features. The CDbeat.com store will incorporate "point and click" options; support by technical enhancements including easy-to-use search capabilities (by artist, album title, song title or record label), personalized music suggestions, order tracking and confirmation. The CDbeat.com store will promote music learning and discovery by enabling visitors to access information on titles, music reviews, ratings, articles on music topics and approximately sound samples. These features are designed to make shopping at the store entertaining and informative and encourage purchases and repeat visits. The Company is dedicated to providing its customers with a comprehensive selection of both popular and hard-to-find CDs and will offer over 100,000 items. Deploy Leading-Edge Technologies. The Company will stress the deployment and rapid adoption of new market-leading technologies that will maximize efficiencies and offer the best possible products and services to the customer. Expand Registered User Base Through Multiple Marketing Channels. The Company seeks to expand its customer base through multiple marketing channels. The Company believes that this strategy enables it to reduce reliance on any one source of customers, maximize brand awareness and lower average customer acquisition cost. Online and Traditional Advertising. The Company will promote its brand through an aggressive marketing campaign using a combination of online and traditional marketing. The Company intends to advertise on the sites of major Internet content and service providers, such as Yahoo, Infoseek, Lycos and CNN Interactive. As part of these arrangements, the Company may purchase the right to display its banners and hyperlinks, often in conjunction with specified search keywords such as "music magazine". The Company's traditional advertising effort will include radio advertising and print advertising in music-related publications. Strategic Alliances with Major Content and Service Providers. The Company believes it can enhance its new customer acquisition efforts and expand brand recognition through strategic alliances with major Internet content and service providers. The Company expects to enter into alliances with content and service providers to be the premier online recorded music retailer on certain of their 23 sites with the exclusive right to place music banner advertisements and integrated links to the CDbeat.com store on certain music-related or other specified pages. These pages will prominently feature the CDbeat.com branded link that allows users to click through to the CDbeat.com site. Acquire Customers Efficiently. The Company seeks to target its marketing expenditures towards sources that most efficiently attract new customers. The Company will utilize a database of customers to better evaluate and predict the effectiveness of potential advertising opportunities and strategic relationships. To enhance the possibility that its banners and other links will be effective, the Company will work closely with Internet content and service providers with respect to the placement of banners and other links as well as the surrounding content. As a result, the Company believes that it can acquire new customers and retain existing customers on a more cost-effective basis. Maximize Customer Retention. The Company seeks to maximize customer retention through its emphasis on customer service and personalized communications. The Company strives to accommodate its customers by providing 24-hour-a-day, seven-day-a-week operations and rapid order fulfillment. Products will typically be shipped within two business days after an order is placed and confirmation will be provided within minutes via e-mail. Customers can make separate inquiries through e-mail or telephone access during extended business hours. The Company strives to ensure prompt response to customer inquiries, which are generally answered within 24 hours of receipt. The Company will also maintain ongoing customer contact through a customized e-mail newsletter. Pursue Strategic Relationships. The Company will enter into various licensing, royalty and consulting agreements with content providers, vendors, and organizations, including software and hardware vendors, entertainment companies, content publishers and broadcast media companies. The Company pursues strategic relationships for a variety of purposes, such as maximizing rapid penetration, adoption of its technologies; aiding the development of compelling content to build consumer demand for music media over the Internet; and expanding the range of commercial activities based on its technology and brand name. These agreements may provide for consideration in various forms, including issuance of warrants to purchase Common Stock and payment of royalties, bounties and certain other guaranteed amounts on a per member and/or a minimum dollar amount basis over terms ranging from one to ten years. Additionally, some of these agreements may provide for a specified percentage of advertising and merchandising revenue to be paid to the artist or organization from whose Web site the revenue is derived. Pursue Acquisitions and Investments. The Company will regularly review opportunities to expand its operations and service offerings, by way of acquisitions and investments. The Company believes that this is an important means of building its customer base and achieving economies of scale. 24 Maximize Market Penetration and Brand Name Recognition. Since its inception, the Company has sought to achieve rapid and broad adoption of its technologies and strong brand recognition. This strategy has been pursued through various means, such as offering the Company's CDbeat Player to individual users free of charge over the Internet, bundling the Company's products with those of other major vendors and using multiple distribution channels, including both direct sales and indirect OEM and retail relationships. Leverage Market Position to Expand Business Model. Management believes that the Company's technology, market position and brand name are significant assets that the Company can leverage to maintain and increase its market share and diversify its revenue base. The Company intends to leverage these assets as follows: Grow Music Media Business. The Company intends to capitalize on the growth in demand for music media by continuing to develop, market and support industry-leading products and services. The Company also plans to strengthen its marketing, sales and customer support efforts as the size of its market opportunity and customer base increases. Expand Internet Commerce Business. The Company will open an online store for the sale of the Company's products, third-party products and content. The Company believes that it will be able to continue to facilitate the growth of music media merchandise and content. Offer Leading Music Content Aggregation. The Company is developing a Web site that aggregates content from third-party music media programming. The Company plans to continue building Web site traffic with these activities to increase Web site advertising revenues, increase visibility of the Company's products, promote the use of streaming media content on the Internet and promote the Company's Internet commerce platform. Develop and Market Music Media Solutions for a Variety of Platforms and Bandwidths. The Company's rapid growth is attributable in part to the wide acceptance of the music media solutions it has developed for PCs networked in low-bandwidth environments. However, significant efforts are underway to make the Internet available on a wider range of platforms, including non-PC Internet appliances, and over higher-speed connections, including cable modems. Accordingly, the Company seeks to design its solutions to add value in a range of bandwidth environments and to be flexible enough to port easily to new platforms. As a result, management believes that the Company is positioned to capitalize on possibly significant platform and bandwidth changes. In addition, the Company's strategy includes: (i) be market driven and understand the customer and their requirements, (ii) focus on customer service, (iii) think long-term and execute a consistent strategy, (iv) be prudent but aggressive, (v) take calculated risks, (vi) learn and improve from mistakes, (vii) differentiate from competitors, (viii) be cost competitive, (ix) rely on existing sales, marketing and distribution infrastructures, (x) attract and 25 retain a world class management team, and (xi) maintain high quality of products, service and technology. The Company believes that implementing these strategies will position the Company to effectively, efficiently and economically achieve high growth and profit. THE CDBEAT MUSIC MAGAZINE The Company strives to make CDbeat.com the leading online music magazine for fans, musicians and the industry trade, offering news and information on a wide range of artists and types of music. CDbeat.com will be designed to be intuitive and easy to use and to enable the user to navigate the web site with minimal effort. Individuals enter the CDbeat magazine through the its Web site, CDbeat.com. New users may access a page specifically designed to provide a quick understanding of the site and its many features. The "Cover Page" of the CDbeat.com music magazine will consist of the following sections: Headline News. Artist Profiles. Columnists. Special Reports. Classified Ads. Artist News. New Artists. Interviews. Top-10 Hits Musician Info. Music Business News. Tour Search. Reviews. Chat Rooms. online Shopping. The CDbeat.com music magazine will consist of hundreds of "artist pages" which will contain the following sections: Artist Profile. CD Reviews. Interviews. Live Chat Rooms. Biography. Concerts and Tickets. Photo Gallery. Fan Club. The Company believes that the CDbeat.com music magazine will have several unique characteristics: Easy-to-Use. CDbeat.com will be designed to make it easy for fans to find information about their favorite artists as well as to meet other fans and discuss similar interests in live, online chat rooms. Live news feeds. The Company will incorporate a proprietary method of scanning and posting incoming newswire feeds from a variety of sources and will instantly update stories and links to ensure that the latest news is always available. This would be more advanced than many other web sites, which are outdated, since they manually update web pages. Interactive. The Company will incorporate state-of-the-art technologies for live video and sound to offer unique online events such as exclusive live interviews and chats with artists. 26 Personal Marketing. Advertisements for CD sales and other music related merchandise will be integrated into artist pages and presented to users when they are more likely to be receptive to the sales pitch. By tracking the buying patterns of customers, more targeted advertisements can be developed. THE CDBEAT ONLINE RETAIL STORE The Company strives to make the CDbeat.com store informative and authoritative, allowing customers to easily learn about, discover and purchase CDs and other music-related products. The store will be designed to be intuitive and easy to use and to enable the ordering process to be completed with a minimum of customer effort. Customers will enter the Company's store through its Web site, CDbeat.com, and in addition to ordering music products, can conduct targeted searches, browse among top sellers and other featured titles, read reviews, listen to music samples, register for personalized communications, participate in promotions and check order status. New users may access a page specifically designed to provide a quick understanding of the site and its many features. Merchandising. The Company believes that its ability to offer a substantially larger selection than traditional retail stores is a significant competitive advantage. The Company will offer over 100,000 CDs, as well as t-shirts, music books and CD-ROMs. To encourage purchases, the Company will feature various promotions on a rotating basis throughout the store. The Company will adjust pricing strategies and tactics as necessary to maintain competitiveness and generally prices all recent releases and popular titles aggressively. The Company seeks to encourage the purchase of multiple titles by providing more favorable shipping terms for larger orders. Searching. Through a search engine, customers will be able to quickly and easily navigate the store to find CDs or other products of interest. Customers can search for products based on artist, album title, song title, record label, musical genre or release date for new releases. A visitor can browse among CDbeat's database of reviews, cover art, sound samples and album notes. Customers will also be able to browse alphabetical lists based on artists, types of products, record labels and album cover art. Content and Music Discovery. The Company believes that effective use of content encourages purchases by customers who may be browsing the site without a specific title in mind. The Company's Web site will contain sound samples, extensive information with regard to titles, reviews, ratings, articles on music topics and other information. To help customers browse and discover CDs, the Company will launch music spaces organized by genre: Rock/Pop, Jazz/Blues, Urban/Electronic, Country/Folk, World/New Age and Classical. The main page of each space features links to genre-specific lists, articles, reviews and contests. Within each space, customers can browse sale items, new releases, advance orders and charts, read exclusive CDbeat.com reviews, listen to sound samples and purchase CDs recommended by the Company. 27 Purchasing. Once a CD has been selected, customers will be able to click to add products (including, advance orders of yet-to-be released products) to their virtual shopping carts. Customers can add and remove products from their shopping carts as they browse, prior to making a final purchase. The shopping cart page will display each item that has been placed in the cart, including title, price and any applicable discount. To execute orders, customers would click on a button and are prompted to select shipping and payment methods online or by e-mail, facsimile or telephone. Customers can also add products that they may wish to purchase on future visits to a special section of the shopping cart where items may be stored over multiple visits. Payment. In paying for orders, customers will be able to use credit cards, personal checks or money orders. For convenience, the Company will enable customers to store credit card information on the Company's secure server, thereby avoiding the need to re-enter this information when making future purchases. Customers are offered a variety of shipping options, including overnight delivery. The Company will automatically confirm each order by e-mail within minutes after the order is placed and subsequently confirms shipment of each order by e-mail. The Company will offer money back returns policy. Distribution and Fulfillment. The Company's entire inventory will be owned and held by outside vendors and shipped directly from these vendors to customers. The breadth of the inventory maintained by these vendors will provide the Company with the ability to maintain high order fill rates. The Company will update its site daily with inventory information received from its vendors, which enables customers to check the availability of products before ordering. The Company will electronically transmit orders to its outside vendors at least once daily. Orders will be shipped by these vendors using a CDbeat.com label and invoice, in most cases within a day after an order is placed with the Company. A customer's credit card is charged once an order is shipped. Multilingual Capabilities. The Company believes that international markets may represent a significant portion of the Company's sales since many products and services offered by CDbeat.com are not otherwise available in these markets. International music sales in 1996 were estimated to be approximately twice that of the U.S. The Company will introduce Spanish, French, German, Portuguese, Japanese and Korean language versions of its Web site that contain translation of account registration and ordering instructions, and supports its international sales efforts with customer service representatives fluent in these languages. THE CDBEAT CD PLAYER To aggregate a large customer base, the Company is developing the CDbeat Player software. The user interface is visually designed to represent the familiar look and feel of a jukebox and allows the user to play music CD's on their personal computer. It will offer all of the basic functions such as play, stop, fast-forward, rewind and volume adjustment. The CDbeat Player will also be able to receive information packets transmitted by the Company's Internet servers. This will enable the Company to present 28 real-time content to each CDbeat Player. The software also enables the Company to incorporate seamless in-stream advertising into streaming content. The software will be easily installed and can be used by non-technical computer users. It will run on a broad range of operating systems and hardware platforms, enabling the Company to reach a broad audience to deliver content in heterogeneous computing environments. The Company has strategically chosen to offer its CDbeat Player free of charge to promote widespread adoption. With limited conditions, the software may also be distributed by third parties in combination with their own products. WEB ADVERTISING The Company's wide variety of content will offer the ability to sell advertising packages targeted to specific audiences and demographics. Additionally, unlike Web sites that offer only text-based banner advertisements, the Company can offer multimedia packages incorporating custom audio and video applications such as gateway ads with guaranteed click-thrus, channel and event sponsorships and multimedia and traditional banner ads. Gateway Ads with Guaranteed Click-Thrus. The Company intends to provide advertisers the opportunity to incorporate gateway ads into their Internet advertising packages. Gateway ads are audio or video clips that are inserted at the lead of selected programming, lasting from 15 to 30 seconds, that play prior to the audio or video content that has been selected by the user. A guaranteed click-thru is a pop-down browser window that automatically launches at the beginning of the gateway ad displaying an advertiser's Web site or other targeted information. Gateway ads will also be available without guaranteed click-thrus. The Company will sell these advertisements at a higher cost than traditional banner ads because of their unique nature. Channel and Event Sponsorships. The Company intends to offer advertisers the ability to sponsor one or more of its programming channels or events, enabling advertisers to brand entire sections of the Company's Web sites. A channel or event sponsorship can involve the rotating and permanent placement of buttons, logos and Web site links, integrated gateway ads, multimedia banner ads and mention on the CDbeat.com home page, channel home page and email newsletter. The Company will typically sell these packages on a channel-by-channel or event-by-event basis. Multimedia and Traditional Banner Ads. The Company intends to offer advertisers the ability to integrate audio and video into their text and graphics banner ads. The multimedia portion of the banner plays when the user clicks on the banner. Because audio and video can increase the impact of a banner ad, these packages are sold at a higher cost than traditional banner ads. MARKETING AND PROMOTION 29 The Company's marketing and promotion strategy is designed to broaden awareness of the CDbeat brand, increase customer traffic to the Company's Web site and encourage new and repeat purchases. The Company utilizes multiple channels to market and promote its brand, including online and traditional advertising, strategic alliances and direct marketing. The Company believes that the use of multiple marketing channels reduces reliance on any one source of customers, maximizes brand awareness and lowers average customer acquisition cost. Online and Traditional Advertising. The Company will promote its brand through an aggressive marketing campaign using a combination of online and traditional advertising. The Company intends to advertise on the sites of major Internet content and service providers. As part of these arrangements, the Company may purchase banner advertisements, often in conjunction with specified search keywords or on contextually appropriate pages that allow consumers to immediately click through to the CDbeat site. The significant flexibility of online advertising allows the Company to quickly adjust its advertising plans in response to seasonal and promotional activities. The Company believes that traditional advertising is a key ingredient in building brand recognition and promoting the benefits of online retail shopping. Traditional advertising can be an effective means of promoting widespread brand awareness and attracting traditional retail consumers to the Company's Web site, including consumers with little or no history of online purchases. The Company's traditional advertising effort includes radio, advertising and print advertising in music-related publications. The Company will conduct an active public relations campaign and will regularly participate in trade shows and conferences relating to music. Strategic Alliances. The Company believes that the Web sites of major Internet service and content providers can be a source of a significant number of new customers. These sites have a high volume of user traffic, and the Company believes that the utilization of carefully targeted links and other advertising on the sites can be very effective in attracting potential customers. Publicity. The Company expects to generate significant publicity using its existing relationships with the editors and reporters in magazines, newspapers, radio and television. These opportunities represent low-cost methods of reaching large audiences. Direct Marketing. The Company will use direct marketing techniques to target new and existing customers with communications and promotions. The Company will send a personalized e-mail newsletter to its customers that include purchase recommendations based on demonstrated customer preferences and prior purchases. The newsletter will also include more general information concerning new releases and Company promotions. The Internet allows rapid and effective experimentation and analysis, instant user feedback and efficient personalization of the store for each customer, all of which the Company seeks to incorporate in its marketing and merchandising activities. CUSTOMER SERVICE 30 The Company believes that a high level of customer service and support is critical to retaining and expanding its user base. Customer service representatives will be available from 7:30 AM to 10:00 PM Eastern Standard Time on weekdays and 10:00 AM to 6:00 PM Eastern Standard Time on weekends to provide assistance via e-mail, phone or fax. Inquiries are generally answered within 24 hours. The Company will hire customer service representatives when it is closer to commercial launch. These customer service representatives will handle questions about orders, assist customers in finding CDs and other music-related products, and register customer's credit card information over the telephone. The customer service representatives will be a valuable source of feedback regarding user satisfaction. DISTRIBUTION AND FULFILLMENT The Company does not carry any inventory and relies exclusively on third party vendors for distribution and fulfillment. The Company believes that this distribution strategy allows it to offer extensive selection while avoiding the high fixed costs and capital requirements associated with owning and warehousing product inventory and the significant operational effort associated with same-day shipment. The Company anticipates it will select a distributor to ship CDs, cassettes and vinyl records. SMD will transmit data to its distributor through a secure network to ensure customer security and data integrity. The distributor will pick, pack and ship customer orders and charge the Company for merchandise, shipping and handling. In most cases, products are shipped within a day after an order is placed with the Company. Customer billing will be performed by the Company through a third-party credit card processor. PRIVACY POLICY The Company believes that issues relating to privacy and use of personal information relating to Internet users are becoming increasingly important as the Internet and its commercial use grow. The Company will adopt a detailed privacy policy that outlines how it uses information concerning its users andthe extentto access to this information. Users must acknowledge and agree to this policy when registering for the CDbeat.com service. The Company does not sell or rent any personally identifiable information about its users to any third party. The Company also uses information about its users for internal purposes only in order to improve marketing and promotional efforts, to analyze site usage statistically, and to improve content, product offerings and site layout. TECHNOLOGY The Company is developing technologies and implementing systems to support distributed, reliable and scalable online retailing in a secure and easy-to-use format. Using a combination of proprietary solutions and commercially available, licensed technologies, the Company is deploying systems for online content dissemination, online transaction processing, customer service, market analysis and electronic data interchange. 31 Multimedia and User Database. The Company is developing a database management system to index, retrieve and manipulate product information, content, product catalog, orders and transactions, and customer information. This system will allow for rapid searching, sorting, viewing and distribution of a large volume of content including audio samples, music reviews, track lists, cover art and photos. The Company intends to use Oracle as the technology for database management. The Company expects to deploy a data warehouse that will enable it to access detailed transaction and customer interaction data and perform sophisticated market analysis and predictive modeling. Store Architecture. The Company's hardware and software systems will be based upon a distributed transaction-processing model that allows applications to be distributed among multiple parallel servers. Many of the software components, and the pages of the Web site, will be developed using a proprietary technology that extends HTML with product, transaction, retail, and advanced programming constructs. This technology results in the separation of the page look and feel from the individual data elements and their associated database lookups thus reducing software updates for Web site changes and minimizing the engineering required to maintain a growing amount of items and content. The Company's technology will enable Web sites with different formats to integrate CDbeat.com store elements. Interfaces. The Company will develop or license technologies and tools for managing interfaces with Internet service and content providers. A linking interface will be made available to businesses with which the Company will develop strategic alliances. These allow the linking of external Web sites, banners, and promotions to items and functions contained in the CDbeat.com store. Proprietary or licensed tools will be used by the Company's Customer Relations department to manage strategic alliances in an efficient and scalable manner. Similar systems and tools will be licensed or developed by the Company for its Customer Service department. The ability to manage customer accounts and orders will enable The Company's Customer Service department to scale effectively and communicate efficiently, thereby responding to most inquiries within 24 hours. These systems will automate many routine communications and allow customers to better manage their accounts and orders. Fault Tolerance and Scalability. The Company's hardware servers, storage systems, Internet connections and networks will allow its online systems to operate continuously and enable it to maintain a 24-hour-a-day, seven-day-a-week retail store. The Company intends to runs its Oracle databases and Web Servers on a series of Sun Enterprise servers with fault tolerant characteristics including "hot-swappable" components. The Company will maintain dedicated T-1 connections to the Internet provided by multiple Internet service providers. This technology, combined with the architecture of the systems, will allow the Company to scale by adding new components or servers while maintaining performance and cost effectiveness. Both proprietary and commercially available tools are used to monitor and manage these systems with minimal operator participation. 32 Security. The Company will employ firewalls integrated into the architecture of its system to keep its Internet connections secure. The Company intends to use the Netscape SSL Commerce Server for secure electronic transactions over the Internet and will use proprietary EDI interfaces and private networks to ensure the security of customer order information and credit card transactions shared with its vendors and credit card processor. Advanced Technologies. The Company continually evaluates emerging technologies and new developments in many areas including electronic commerce, database management, and networking. COMPETITION The online commerce market is new, rapidly evolving and intensely competitive, and the Company expects that competition will further intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new sites at a relatively low cost. In addition, the broader retail music industry is intensely competitive. The Company will compete with a variety of companies, including (i) online vendors of music, music videos and other related products, (ii) online vendors of movies, books and other related products, (iii) online service providers which offer music products directly or in cooperation with other retailers, (iv) traditional retailers of music products, including specialty music retailers, (v) other retailers that offer music products, including mass merchandisers, superstores and consumer electronic stores; and (vi) non-store retailers such as music clubs. Many of these traditional retailers also support dedicated Web sites that compete directly with the Company. The Company believes that the principal competitive factors in its online market are brand recognition, selection, variety of value-added services, ease of use, site content, quality of service, technical expertise and price. Many of the Company's current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than the Company. The Company is aware that certain of its competitors have and may continue to adopt aggressive pricing or inventory availability policies and devote substantially more resources to Web site and systems development than the Company. Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. There can be no assurance that the Company will be able to compete successfully against current and future competitors. New technologies and the expansion of existing technologies may increase the competitive pressures of the Company. For example, applications that select specific titles from a variety of Web sites based on factors such as price may channel customers to online retailers that compete with the Company. In addition, many companies that allow access to transactions through network access or Web browsers promote the Company's competitors and could charge the Company a substantial fee for inclusion. INTELLECTUAL PROPERTY 33 The Company regards its trade secrets and similar intellectual property as valuable to its business, and will rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with its employees, partners and others to protect its proprietary rights. There can be no assurance that the steps taken by the Company will be adequate to prevent misappropriation or infringement of its intellectual property. The Company expects that it may license in the future, certain of its proprietary rights, such as trademarks or copyrighted material, to third parties. While the Company attempts to ensure that the quality of its brand is maintained by such licensees, there can be no assurance that such licensees will not take actions that might materially adversely affect the value of the Company's proprietary rights or reputation, which could have a material adverse effect on the Company. EMPLOYEES As of January 7, 1998, the Company had 5 full-time employees and 16 independent contractors and other temporary employees in its programming, operations and administrative functions. None of the Company's employees is represented by a labor union, and the Company considers its employee relations to be good. Competition for qualified personnel in the Company's industry is intense, particularly among software development and other technical staff. The Company believes that its future success will depend in part on its continued ability to attract, hire and retain qualified personnel. See "Risk Factors--Risk of Inability to Manage Potential Growth" and "--Dependence on Key Personnel; Need for Additional Personnel." FACILITIES The Company's executive offices are located in, and substantially all of its operating activities are conducted from 400 square feet of office space located in Stamford, Connecticut provided by the President of the Company at no charge. The Company also has a branch office in: Tampa, Florida provided by the Company's attorney at no charge; Albiline, Texas provided by the Company's Vice President of Technology at no charge; and in Woodland Hills, CA provided by the Company's Vice President of Public Relations at no charge. The Company believes that additional space will be required as its business expands and believes that it will be able to obtain suitable space as needed. The Company does not own any real estate. LEGAL PROCEEDINGS The Company is not involved in any legal proceedings. MANAGEMENT The following sets forth certain information regarding the executive officers and directors of the Company: Name Age Position 34 Joel Arberman 26 President, CEO, and Director Bryan Eggers 49 Vice President of Public Relations Larry Payne 50 Vice President of Technology Avi Kerbs 52 Director Mr. Arberman has mergers/acquisitions.served as President, Chief Executive Officer and a member of the Company's Board of Directors since May 1998. From January 1997 until May 1998, Mr. Arberman served as an independent corporate finance and business development consultant. From August 1995 until January 1998, Mr. Arberman served joinedas an Internet Analyst of Yorkton Securities, Inc., an investment banking firm. From November 1994 until August 1998, Mr. Arberman served as an Equity Analyst at SunAmerica Asset Management Company, an asset management company. From July 1993 until November 1994, Mr. Arberman served as a Junior Analyst at First Investors Management Corporation, an asset management Company. Mr. ArbermanSwitzerland holds a B.S. degree in Business Administration with a concentration in finance and marketing and a minor in economics from the State University of New York, at Albany. been Mr.Eggers has served as Vice President of Public Relations since December 1998. From August 1998 until December 1998, Mr. Eggers served as an independent public relations consultant. From May 1996 until August 1998, Mr. Eggers served as the Marketing Communications Manager of Luckman Interactive, an Internet software development company. From April 1994 until May 1996, Mr. Eggers served as a Public Relations Specialist for the Dataproducts Division of Hitachi, a computer printer manufacturer. From May 1993 until April 1994, Mr. Eggers served as a consultant for public relations and marketing for Now-Online, Inc., an Internet service provider. Mr. Payne has served as Vice President of Technology since December 1998. From January 1995 until November 1998, Mr. Payne served as a software and hardware engineer for MediaGarden Inc., a developer of tools and products for educational markets. From December 1993 until December 1994, Mr. Payne served as a issoftware development consultant. From September 1993 until November 1993, Mr. Payne served as a software engineer for Now On-Line, Inc., an Internet service provider. From December 1992 until August 1993, Mr. Payne served as a software development consultant. During his career, Mr. Payne helped has developed numerous software applications including text editors, setup and installation utilities, CD-ROM driver and management utilities, CD music players, communications programs, compilers, data compression utilities, and games. Mr. Kerbs has served as a Director since December 1998. For the past few years, Mr. Kerbs has served as the President and Chief Executive Officer of Teuza Management and Development based in Haifa Israel. Teuza is a venture capital fund invested in the communications, semiconductor equipment and software, healthcare and biotechnology fields. Mr. Kerbs provides the overall direction of PhD's, Engineers, CPA's and Legal consultants, engaged in the identification of high technology investment opportunities and in the completion of due diligence 35 studies to venture capital investments on the part of the Teuza Fund. He serves as a Director of many development stage companies and is the Chairman of the Board of NESS and Rotlex. Mr. Kerbs has more than 20 years of experience in high technology systems and a long record of pioneering management activities in Israel, Europe and the United States. He holds a Bachelor of Science Degree in Industrial Engineering and Management from the Technion and a Master of Science Degree in Management from the Technion. All directors will hold office until the next annual stockholder's meeting and until their successors have been elected or qualified or until their death, resignation, retirement, removal, or disqualification. Vacancies on the board will be filled by a majority vote of the remaining directors. Officers of the Company serve at the discretion of the Board of Directors. An external Board of Directors, consisting of qualified business and industry professionals and experts, assists the management team in making appropriate decisions and taking the most effective action; however, they will not be responsible for management decisions. DIRECTOR COMPENSATION The Company will reimburse its directors for out-of-pocket expenses incurred in connection with their rendering of services as directors. The Company currently does not intend to pay cash fees to directors for attendance at meetings. Directors who are not currently receiving compensation as officers or employees of the Company will be eligible to receive options under the 1998 Equity Compensation Plan. EXECUTIVE COMPENSATION None of the executive officers earned total salary and bonus in excess of $100,000. The Company has entered into two-year employment agreements with Joel Arberman, Bryan Eggers and Larry Payne (collectively the "Agreements"). The Agreements contain the following terms. Mr. Arberman and Mr. Eggers will be compensated for their services at the rate of $70,000 per year and Mr. Payne will be compensated for his services at the rate of $75,000 per year, (collectively the "Base Salary"). The Compensation Committee shall increase the Base Salary, as it deems appropriate. The Agreements provide that if Messrs. Arberman, Eggers and Payne are terminated by the Company without Just Cause (as defined in the Agreements), each will be entitled to receive the lesser of (i) his Base Salary for one year from the termination plus the value of any benefits, or (ii) the aggregate amount of Base Salary plus the value of any benefits during the balance of the Agreements. The Agreements also provide that Messrs. Arberman, Eggers and Payne will not, during the term of the Agreements or thereafter, disclose any confidential information of the Company without prior approval of the Company. The Agreements also provide that Messrs. Arberman, Eggers and Payne will not, during the term of the Agreements and for a period of one year thereafter, participate in any 36 business that competes with the Company or solicit any of the Company's employees or customers or otherwise interfere with the relations of the Company. CERTAIN CHARTER PROVISIONS The Company's Certificate of Incorporation contains certain provisions permitted under the General Corporation Law of Delaware relating to the liability of Directors. The provisions eliminate a director's liability to stockholders for monetary damages for a breach of fiduciary duty, except in certain circumstances involving wrongful acts, such as the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. The Company's Certificate of Incorporation also contains provisions obligating the Company to indemnify its directors and officers to the fullest extent permitted by the General Corporation Law of Delaware. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors. CERTAIN TRANSACTIONS On October 15, 1998, Mr. Eggers and Mr. Payne sold to the Company all right, title and interest to all intellectual property which they owned relating to certain software, technology and ideas relating to Internet-based and computer-based music. In exchange for such sale, the Company issued Mr. Eggers and Mr. Payne 50,000 Preferred Shares, Class C. The Sale of Intellectual Property Agreement executed by Mr. Eggers and Mr. Payne to the Company defines "intellectual property" to include (i) all patents, patent applications, patent disclosures and related documents, (ii) all trademarks, service marks, trade dress logos and trade names, (iii) all copyrights and registrations and applications for registration thereof, (iv) all mask works and registrations and applications for registrations, (v) all computer software, data and documentation, (vi) all trade secrets and confidential business information, know how, and related business information, (vii) all proprietary rights relating to any of the foregoing items and (viii) all copies and tangible embodiments of any of the foregoing. In addition, Mr. Eggers and Mr. Payne entered into Employment Agreements with the Company. PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the Common Stock as of the date of this Prospectus and as adjusted to reflect the sale of the shares offered hereby by (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares 37 of Common Stock, except to the extent authority is shared by spouses under applicable law. BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING -------------------------------------------- NAME OF BENEFICIAL SHARES PERCENT SHARES PERCENT OWNER - -------------------------------------------------------------------------------- EXECUTIVE OFFICERS AND DIRECTORS Joel Arberman(1).................. 2,900,000 66.79% 2,900,000 _____% Bryan Eggers(2)................ 500,000 11.52 500,000 _____ Larry Payne(2)................ 500,000 11.52 500,000 _____ All executive officers and directors as a group (3 persons) 3,900,000 89.83 3,900,000 _____ (1)Mr. Arberman has placed 1,000,000 Common Shares of the 3,900,000 Common Shares he currently owns in escrow with the Company. The escrow agreement provides that ten Common Shares held by Mr. Arberman shall be cancelled upon conversion of each of the currently issued and outstanding 100,000 Preferred Shares, Class C. The table above assumes that all 1,000,000 Common Shares will be cancelled pursuant to the terms and conditions of the escrow agreement. (2)Mr. Eggers and Mr. Payne have each been issued 50,000 shares of Preferred Stock, Class C. After attaining certain milestones, each Preferred Share, Class C can be converted into ten shares of Common Stock of the Company. In addition, Mr. Eggers and Mr. Payne have voluntarily placed all of their Preferred Stock, Class C into a Voting Trust agreement that is administered by Mr. Arberman. The Voting Trust agreement provides that Preferred Stock, Class C shares held by Mr. Eggers and Mr. Payne shall be released from the Voting Trust based upon certain additional corporate milestones and over a period of three years. The table above assumes that all of the Preferred Shares, Class C will be converted into Common Shares. It is possible that some or all of the Preferred Shares, Class C will not be converted into Common Shares. (3)The escrow agreement with Mr. Arberman provides a complete and direct offset to any subsequent conversion of Class C Preferred Shares into Common Shares that are currently held by Mr. Eggers and Mr. Payne. Therefore, the 3,900,000 shares owned by the current group of Officers and Directors will remain 38 unchanged regardless of whether or not the Class C Preferred Shares owned by Mr. Eggers or Mr. Payne are converted into equity. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, $0.001 par value (the "Common Stock"), and 10,000,000 shares of Preferred Stock, $0.001 par value (the "Preferred Stock"). Immediately after the sale of the 4,000,000 shares of Common Stock offered hereby, there will be 7,917,847 shares of Common Stock outstanding assuming the conversion of all Preferred Stock outstanding. The following summary is qualified in its entirety by reference to the Company's Amended and Restated Articles of Incorporation (the "Articles of Incorporation"), which is included as an exhibit to the Registration Statement of which this Prospectus is a part. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders and do not have cumulative voting rights. The election of directors is determined by a plurality of the votes cast and, except as otherwise required by law, all other matters are determined by a majority of the votes cast. The holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefore, subject to any preferential dividend rights of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of the Company, subject to any preferential liquidation rights of any outstanding shares of Preferred Stock, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities. The holders of Common Stock have no preemptive, subscription, redemption, sinking fund or conversion rights. The rights and preferences of holders of Common Stock will be subject to the rights of any series of Preferred Stock which the Company may issue in the future. PREFERRED STOCK The Board of Directors is authorized, subject to any limitation prescribed by law, without further stockholder approval, to issue from time to time up to 10,000,000 shares of Preferred Stock, in one or more series. Each such series of Preferred Stock shall have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by the Board of Directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights. The stockholders of the Company have granted the Board of Directors authority to issue the Preferred Stock and to determine its rights and preferences in order to eliminate delays associated with a stockholder vote on specific issuances. The rights of the holders of Common Stock will be subject to the rights of holders of any Preferred Stock issued in the future. The issuance of Preferred 39 Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of the outstanding voting stock of the Company. Preferred Stock Class A There are 27.847 shares of Class A Preferred Stock authorized, all of which were issued and outstanding before this offering. Outstanding shares of Preferred Stock Class C may be converted into shares of Common Stock at a conversion rate of one thousand shares of Common Stock for each share of Preferred Stock Class C. The Preferred Stock Class C may be converted by the holders only upon certain conditions related to (i) a public listing of the Company and (ii) the Company receiving at least $1,000,000 of net investment capital. The conversion rate described above is subject to proportional adjustment in the event of a stock split, stock dividend or similar recapitalization event effecting such shares. Holders of Preferred Stock Class C are not entitled to any voting rights (except as may be required by law), preferential dividend rights or redemption rights. Preferred Stock Class C There are 100,000 shares of Preferred Stock Class C authorized, all of which were issued and outstanding before this offering. Outstanding shares of Preferred Stock Class C may be converted into shares of Common Stock at a conversion rate of ten shares of Common Stock for each share of Preferred Stock Class C. The Preferred Stock Class C may be converted by the holders only upon certain conditions related to (i) a public listing of the Company and (ii) the Company receiving at least $1,000,000 of net investment capital. The conversion rate described above is subject to proportional adjustment in the event of a stock split, stock dividend or similar recapitalization event effecting such shares. Holders of Preferred Stock Class C are not entitled to any voting rights (except as may be required by law), preferential dividend rights or redemption rights. STOCK INCENTIVE PLAN The Company's 1998 Stock Incentive Plan (the "Stock Incentive Plan") was originally adopted by the Board of Directors and approved by stockholders of the Company on October 15, 1998. The Stock Incentive Plan provides for the grant of stock options for up to a total of 10% of the shares of Common Stock to employees, officers and directors of, and consultants or advisors to, the Company. Each of such incentive stock option agreements will provide that the options become exercisable if the Company achieves its Target Stock Price (determined as hereinafter provided) during the three-year period commencing on the date of the 40 grant of the option ("Grant Date"). The Company is deemed to have achieved its Target Stock Price if, at any time during the three-year period commencing on the Grant Date, (i) it shall have sold shares of its Common Stock at a price 50% higher than the Offering price (subject to adjustment for stock splits, stock dividends, combination or other similar recapitalization events) or more per share, to a person or entity which is unaffiliated with the Company or any of its stockholders, officers or directors, in a private placement or public offering, or (ii) the Board of Directors of the Company determines, in good faith, that the fair market value of a share of Common Stock of the Company is equal to 50% above the Offering price (subject to adjustment for stock splits, stock dividends, combination or other similar recapitalization events) or more. DELAWARE LAW WITH RESPECT TO BUSINESS COMBINATIONS Following the consummation of this offering, the Company will be subject to the State of Delaware's "business combination" statute, Section 203 of the Delaware General Corporation Law. In general, such statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with a person who is an "interested stockholder" for a period of three years after the date of the transaction in which that person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates, owns (or, within three years prior to the proposed business combination, did own) 15% or more of the Delaware corporation's voting stock. The statute could prohibit or delay mergers or other takeovers or change in control attempts with respect to the Company and, accordingly, may discourage attempts to acquire the Company. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar with respect to the Common Stock is Florida Atlantic Stock Transfer, Inc., Tamarac, Florida. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 7,917,847 shares of Common Stock issued and outstanding assuming all the shares offered herein are sold. Stock offered hereby will be freely tradeable without restriction or requirement for further registration under the Securities Act. Any sale by an affiliate would be subject to certain volume limitations and other restrictions. The remaining 4,396,847 outstanding shares are "restricted" shares within the meaning of Rule 144 (the "Restricted Shares"). The Restricted Shares outstanding were issued and sold by the Company in private transactions in reliance upon exemptions from registration under the Securities Act and may be sold only if they are registered under the Securities Act or unless an exemption from registration is available. Of the restricted shares, 479,000 will be registered 41 in this offering. See "Selling Securityholders." The Company believes it will establish a trading market for its Common Stock at some time in the future. The shares of Common Stock owned by insiders, officers and directors are deemed "restricted securities" as that term is defined under the Securities Act and in the future may be sold under Rule 144, which provides, in essence, that a person holding restricted securities for a period of one (1) year may sell every three (3) months, in brokerage transactions and/or marker maker transactions, an amount equal to the greater of (a) one percent (1%) of the Company's' issued and outstanding Common stock or (b) the average weekly trading volume of the Company's Common Stock during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of shares without any quantity limitation by a person who is not an "affiliate" of the Company and who has satisfied a two (2) year holding period. Additionally, shares underlying employee stock options granted, to the extent vested and exercised, may be resold beginning on the ninety-first day after the Effective Date of a Prospectus, Offering Circular or Offering Memorandum pursuant to Rule 701 promulgated under the Securities Act. There has been no public market for the Common Stock of the Company. Although the Company believes a public market will be established at some future time, there can be no assurance that a public market for the Common Stock will develop. If a public market for the Common Stock does develop at a future time, sales of shares by shareholders of substantial amounts of Common Stock of the Company in the public market could adversely affect the prevailing market price and could impair the Company's future ability to raise capital through the sale of its equity securities. SELLING SECURITYHOLDERS Concurrently with this offering, 479,000 shares of the Company's Common Stock shall be registered under the Securities Act. The Company will not receive any of the proceeds from the sale of the Selling Securityholders' shares of Common Stock
SHARES BENEFICIALLY SHARES SHARES TO BE SHARES BENEFICIALLY OWNED TO BE SOLD IN THE OWNED PRIOR TO OFFERING REGISTERED OFFERING (1) AFTER THE OFFERING ----------------------- ----------- ------------- -------------------------- BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER NUMBER PERCENT - - --------------------------------------- --------- ------------ ----------- ------------- ------------- ----------- Elsa and Ernest Granz 200 * 200 198 Old Country Road Deer Park, NY 11729 Edward Gibbons 400 * 400 25 Goldsmith Avenue Greenlawn NY 11740 Cadnetics Inc. 151,200 3.44% 151,200 805 Robert, Brossard Quebec J4X 1C8 Cliff Berger 20,000 * 20,000 350 East 79th Street Apt 42A NY, NY 10021 Timothy D. Frawley and Mary F. Frawley 1,000 * 1,000 219 Duckpond Dr. South, Wantagh, NY 11793 Holli Blechner 4,500 * 1,000 21 Blackheat Road Lido Beach, NY 11561 Frank Falco and Geralyn Falco 2,000 * 2,000 45-43 Springfield Blvd. Bayside, NY 11361 David Rousso 6,000 * 6,000 1512 Washington Blvd. Jersey City, NJ 07310 Thomas A. Caton 800 * 800 111 Third Avenue, #5J NY, NY 10003 Dominick Caccippio 200 * 200 5 Susan Court Syosset, NY 11791 Marsha Korinko and Michael Korinki 400 * 400 425 Madison Ave. Apt. 91 New Milford, NJ 07646 Frederick Wagner 400 * 400 17-07 Hunter Place Fair Lawn, NJ 07410 Barbara Wagner 400 * 400 17-07 Hunter Place Fair Lawn, NJ 07410 Bonnie Wagner 800 * 800 17-07 Hunter Place Fair Lawn, NJ 07410 JAM Capital Corp. 5,000 * 5,000 6 Chestnut Hill Roslyn, NY 11576 30 Herbert Appel and June Appel 1,000 * 1,000 48 Twin Elms Lane New City, NY 10956 Mark A. Freeman 110,000 2.51% 110,000 35 Robin Lane Plainview NY 11803 Marlene Cernese 200 * 200 69-10 Yellowstone Blvd. Forrest Hills, NY 11375 Benjamin Cernese and Sharon Cernese 1,000 * 1,000 1962 Melthew Court Merrick, NY. 11566-4620 Kanagasabai Sri Jayaramachandra 500 * 500 #1517 -565 Sherbourne St. Toronto, Ontario M4X1W7 Noel Stanley Fernando 500 * 500 No. 9 Crescent Place #2515 Toronto, Ontario, M4CSL8 Ashley Roger Canagasabey 500 * 500 1050 Markham Rd, Apt 318 Scarborough, Ontario M1H 2Y7 Anil Goel 500 * 500 75-114 Broadway Ave. Toronto, Ontario M4P1V1 Brad Jones 500 * 500 80 Kilworth Park Drive, RR#3 Komoka, Ontario, N0L10 Shanti McLelland 500 * 500 26 Parker Crescent, Ajax Ontario L1S3R5 Roger McLelland 500 * 500 P.O. Box 235, Ajax, Ontario, L1S3C3 Mark DeFelice 500 * 500 102 W 75th Street, Apt 22 NY NY 10023 Brian Kelley 500 * 500 42 Old Washington Road Ridgefield, CT 06877 Robert Enslein Jr. 1,000 * 1,000 2130East 73rd PHA NY, NY 10021 Richard Solomon 500 * 500 200 Rector Place, 4P New York, NY, 10280 Layla Khoury 500 * 500 64-35 Yellowstone Blvd #12 Forest Hills, NY 11375 Graciela Heintz 500 * 500 8604 Hempstead Ave Bethesda MD Steven Hendler 500 * 500 P.O. box 31 Jericho, NY 11753 Elie Khouri 500 * 500 178 High Pond Dr. Jericho NY 11753 James Dy 500 * 500 6909 Liverty Ave North Bergen, NJ 07047 31 Hermogenes Brillantes 500 * 500 31 Lake St, N. Haledon, NJ 07508 Lawrence Frankel 500 * 500 1030 E. Lancaster Ave., Apt 426 Rosemont PA 19010 Lauren Cooler 500 * 500 1030 E. Lancaster Ave., Apt 426 Rosemont PA 19010 Jeremy and Karen Blumenfeld 500 * 500 5309 Kingsway W. Cincinnati OH 45215 Isabel Arberman 1,000 * 1,000 64-11 99th street Rego Park, NY 11374 Bella and Mauricio Nemes 1,000 * 1,000 518 McLean Avenue Yonkers NY 10705 Joshua and Renee Bialek 1,000 * 1,000 11120 SW 196th Street, #Apt 311 Miami, FL 33157 Alfred and Rachelle Arberman 150,000 3.41% 150,000 18555 NE 14th Ave Suite 611F North Miami Beach, Fl Maxkal Corporation 10,000 * 10,000 POVA Intl #46 P.O. Box 52-1368 Miami, Florida 33158 --------- -- ----------- ------------- ------------- --- TOTALS.................................. 479,000 10.67% 479,000 0 0 0% --------- -- ----------- ------------- ------------- --- --------- -- ----------- ------------- ------------- ---
- ------------------------- * Less than 1% THE OFFERING The Company is offering 4,000,000 shares of Common Stock at a price of * per share. The Shares are offered by the Company on a "best efforts" no minimum, 4,000,000 Share maximum basis. The Company intends to offer the Shares through its officers and directors without the use of a profession underwriter. No commissions will be paid for sales effected by officers and director. Prior to this offering, there has been no public market for the Shares. Consequently, the initial public offering price for the Shares has been determined solely by the Company. Among the factors considered in determining the public offering price were the history of, and the prospects for, the Company's business, an assessment of the Company's management, its past and present operations, the prospects for earnings of the Company, the present state of the Company's development, the general condition of the securities 46 market at the time of the offering and the market prices of similar securities of comparable companies at the time of the offering. Such price is subject to change as a result of market conditions and other factors, and no assurance can be given that a public market for the Shares will develop after the close of the offering, or if a public market in fact develops, that such public market will be sustained, or that the Shares can be resold at any time at the offering or any other price. See "Risk Factors." INDEMNIFICATION As permitted by the Delaware General Corporation Law, the Company intends to eliminate the personal liability of its directors for monetary damages for breach or alleged breach of their fiduciary duties as directors, subject to certain exceptions. In addition, the bylaws of the Company provide that the Company is required to indemnify its officers and directors, employees and agents under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The bylaws provide that the Company, among other things, will indemnify such officers and directors, employees and agents against certain liabilities that may arise by reason of their status or service as directors, officers, or employees (other than liabilities arising from willful misconduct of a culpable nature), and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. At present, the Company is not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of the Company in which indemnification would be required or permitted. The Company believes that its charter provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. Insofar as indemnification for liabilities arising under the securities act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of his counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. AVAILABLE INFORMATION This Prospectus constitutes a part of a Registration Statement filed by the Company with the Securities and Exchange Commission (the "Commission") under 47 the Securities Act with respect to the Common Stock offered hereby. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and related exhibits and schedules for further information with respect to the Company and the Common Stock offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and in each such instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such statement is qualified in its entirety by such reference. The Registration Statement and the exhibits and schedules forming a part thereof can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, and should also be available for inspection and copying at the following regional offices of the Commission: 7 World Trade Center, 14th Floor, New York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates. The Commission maintains a Web Site (http://www. sec. gov.) that contains reports, proxy statements and other information filed by the Company. LEGAL PROCEEDINGS The Company is not a party to, nor is it aware of, any threatened litigation of a material nature. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Williams Law Group, P.A., Tampa, Florida. EXPERTS To be added. RISKS ASSOCIATED WITH THE YEAR 2000. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. In other words, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among others, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company does not believe that it has material exposure to the Year 2000 issue with respect to its own information systems since its existing systems correctly define the year 2000. 48 The Company intends to conduct an analysis in 1999 to determine the extent to which its major suppliers' systems (insofar as they relate to the Company's business) are subject to the Year 2000 issue. The Company is currently unable to predict the extent to which the Year 2000 issue will affect its suppliers, or the extent to which it would be vulnerable to the suppliers' failure to remediate any Year 2000 issues on a timely basis. The failure of a major supplier subject to the Year 2000 to convert its systems on a timely basis or a conversion that is incompatible with the Company's systems could have a material adverse effect on the Company. In addition, most of the purchases from the Company's store are made with credit cards via the Internet, and the Company's operations may be materially adversely affected to the extent its customers are unable to use their credit cards or access the Internet due to the Year 2000 issues that are not rectified by their credit card vendors or by those organizations responsible for maintaining and providing access to the Internet. FINANCIAL STATEMENTS To be filed by amendment. Part II - INFORMATION NOT REQUIRED IN PROSPECTUS Item 22. Indemnification of Directors and Officers. Section 145 of the General Corporate Law of the State of Delaware contains provisions entitling directors and officers of the Company to indemnification from judgements, fines, amounts paid in settlement reasonable expenses, including attorney's fees, as the result of an action or proceeding in which they may be involved by reason of being or having been a director or officer of the Company provided said officers or directors acted in good faith. Item 23. Other Expenses of Issuance and Distribution. *revise SEC Registration Fee $2,780 Blue Sky Fees and Expenses 10,000 Legal Fees and Expenses 5,000 Printing and Engraving Expenses 20,000 Accountants' Fees and Expenses 2,000 Miscellaneous 5,000 ----- Total $44,780 The foregoing expenses, except for the SEC fees, are estimated. Item 24. Recent Sales of Unregistered Securities. The following sets forth information relating to all previous sales of Common Stock by the Registrant which sales were not registered under the Securities Act of 1933. 49 On May 8, 1998, the Company issued 3,900,000 shares of Common Stock to Joel Arberman, President and CEO of the Registrant for no consideration. The foregoing purchase and sale were exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof on the basis that the transaction did not involve a public offering. On May 10, 1998, the Company issued 125,000 shares of Common Stock to Alfred and Rachelle Arberman, for an aggregate consideration of $25,000. No sales commissions were paid in connection with such offerings. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) thereof on the basis that the transactions did not involve a public offering. Pursuant to a private placement of securities effected between August 1998 and September 1998, the Company sold 39,000 Common Shares to 25 investors, each of whom subscribed to purchase such Shares, at a price of $1.00 per Share, for aggregate consideration of $39,000. No sales commissions were paid in connection with such offerings. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) thereof on the basis that the transactions did not involve a public offering. Pursuant to a private placement of securities effected between October 1998 and December 1998, the Company sold 153,800 Common Shares to 19 investors, each of whom subscribed to purchase such Shares, at a price of $2.50 per Share, for aggregate consideration of $384,500. No sales commissions were paid in connection with such offerings. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) thereof on the basis that the transactions did not involve a public offering. On October 15, 1998, the registrant issued 100,000 shares of Series C Preferred Stock, which are convertible into 1,000,000 shares of Common Stock, to Bryan Eggers and Larry Payne the Vice President of Public Relations and Vice President of Technology of the registrant, for a consideration of approximately $.001 per share of Series C Preferred Stock, or an aggregate of $1,000. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4 (2) thereof on the basis that the transactions did not involve a public offering. On December 31, 1998, the Company issued to Cadnetics Inc., a software development firm for the Registrant, 96,000 shares of Common Stock for consideration of $240,000 of services, plus 100 shares of Series B Preferred Stock for consideration of $138,000 of services. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4(2) thereof on the basis that the transactions did not involve a public offering. 50 On December 31, 1998, the registrant issued 27.847 shares of Series A Preferred Stock, which are convertible into 27,847 shares of Common Stock, to consultants, for consideration of approximately $1.00 per share of Series A Preferred Stock, or an aggregate of $27.85. The foregoing purchases and sales were exempt from registration under the Securities Act pursuant to Section 4 (2) thereof on the basis that the transactions did not involve a public offering. On December 31, 1998, the Company issued a warrant to consultants to the Company, for a total of 17,847 shares of Common Stock. The warrants granted are exercisable at a price of $2.50 per share. On January 11, 1999, the Company issued to Cadnetics Inc., a software development firm for the Registrant, 55,200 shares of Common Stock for the conversion of 100 shares of Series B Preferred Stock.. On January 11, 1999, the Company issued to Mark Freeman, a consultant for the Registrant, 10,000 shares of Common Stock for the conversion of 10 shares of Series A Preferred Stock.. Item 25. Exhibits. The following exhibits are filed with this Registration Statement: Number Exhibit Name 3.1 Articles of Incorporation 3.2 By-Laws 4.1 *Common Stock. 4.2 Rights and Preferences of Preferred Stock 4.3 *Form of Convertible Note 5 Opinion Regarding Legality 10.1 Form of Employment Agreement with Joel Arberman, Bryan Eggers and Larry Payne. 10.2 Software Acquisition Agreement 10.3 Stock Option Plan 24.1*Consent of Counsel 24.2*Consent of Expert * To be filed by amendment All other Exhibits called for by Rule 601 of Regulation S-B are not applicable to this filing. Information pertaining to the Common Stock of the Company is contained in the Articles of Incorporation and By-Laws of the Company. 51 Item 26. Undertakings. The undersigned registrant hereby undertakes: (1) To file, during any period in which offer or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section I 0(a)(3) of the Securities Act of 193 3; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the Offering. Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred to that section. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Registrant pursuant to its Certificate of Incorporation or provisions of Florida law, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 52 SIGNATURES Pursuant to the requirements of the Securities Act of 1933,the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, in the City of Stamford, State of Connecticut, on January 11, 1999. SMD Group, Inc. /s/ Joel Arberman, President, Treasurer, and Director /s/ Avi Kerbs, Director 53 EX-3.(I) 2 ARTICLES OF INCORPORATION EXHIBIT NO. 3.1 Articles of Incorporation 54 ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION OF SMD Group Inc. The undersigned, for the purpose of forming a corporation under the laws of the State of Delaware do hereby adopt the following articles of incorporation: ARTICLE ONE The name of the corporation is SMD Group Inc. ARTICLE TWO CORPORATE DURATION The duration of the corporation is perpetual. ARTICLE THREE PURPOSE OR PURPOSES The general purposes for which the corporation is organized are: 1. To engage in the business of sales, marketing and distribution of leading-edge products, services and technologies. 2. To engage in any other trade or business that can, in the opinion of the board of directors of the corporation, be advantageously carried on in connection with or auxiliary to the foregoing business. 3. To do such other things as are incidental to the foregoing or necessary or desirable in order to accomplish the foregoing. ARTICLE FOUR CAPITALIZATION The aggregate number of shares which the corporation is authorized to issue is 20,000,000. Such shares shall be of a single class, and shall have a par value of $0.001 per share. ARTICLE FIVE REGISTERED OFFICE AND AGENT The street address of the initial registered office of the corporation is 15 Fast North Street in the City of Dover, County of Kent, Delaware, and the name of its initial registered agent at such address, is Incorporating Services Inc. ARTICLE SIX DIRECTORS The number of directors constituting the initial board of directors of the corporation is one. The name and address of each person who is to serve as a member of the initial board of directors is: 55 Joel Arberman 444 Bedford Street, Suite 8s. Stamford, Connecticut 06901 ARTICLE SEVEN INCORPORATORS The name and address of each incorporator is: Joel Arberman 444 Bedford Street, Suite 8s, Stamford, Connecticut, 06901 Executed by the undersigned on May 8th 1998 STATE OF Delaware COUNTY of Kent. - --------------------- Joel Arberman 56 State of Delaware Certificate of Amendment of Certificate of Incorporation First: That at a meeting of the Board of Directors of SMD Group, Inc. resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered "First" so that, as amended, said Article shall be and read as follows: "The mane of the corporation is Cdbeat.com, Inc." RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered "Fourth" so that, as amended, said Article shall be and read as follows: "The corporation shall be authorized to issue 20,000,000 Shares at .001 Par Value and 10,000,000 Preferred Shares at .001 Par Value." Second: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. Third: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. Fourth: That the capital of said corporation shall not be reduced under or by reason of said amendment. In Witness Whereof, said President and CEO has caused this certificate to be signed by Joel Arberman, an Authorized Officer, this 4th day of January, A.D. 1999. By:_____________________ (Authorized Officer) Name: Joel Arberman 57 EX-3.(II) 3 BYLAWS EXHIBIT NO. 3.2 BYLAWS 58 BYLAWS OF SMD Group, Inc. BYLAWS OF SMD Group Inc. ARTICLE 1. MEETING Section 1. Annual Meeting. The annual meeting of the Shareholders of this Corporation shall be held on May 8th of each year or at such other time and place designated by the Board of Directors of the Corporation. Business transacted at the annual meeting shall include the election of Directors of the Corporation. If the designated day shall fall on a Sunday or legal holiday, then the meeting shall be held on the first business day thereafter. Section 2. Special Meetings. Special meetings of the Shareholders shall be held when directed by the President or the Board of Directors, or when requested in writing by the holders of not less than a majority of all the shares entitled to vote at the meeting. A meeting requested by Shareholders shall be called for a date not less than ten (10) nor more than sixty (60) days after request is made, unless the Shareholders requesting the meeting designate a later date. The call for the meeting shall be issued by the Secretary, the President, a majority of Shareholders, the Board of Directors, or such other person as designated by any of the same. Section 3. Place. Meetings of Shareholders shall be held at the principal place of business of the Corporation, the law office representing the Corporation or at such other place as may be designated by the Board of Directors. Section 4. Notice. Written notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (1O) nor more than sixty (60) days before the meeting, either personally or by first class mail, by or at the direction of the President, the Secretary or the officer or persons calling the meeting, to each Shareholder of record entitled to vote at such meeting. If mailed such notice shall be deemed to be delivered when deposited in the United States mail, prepaid and addressed to the Shareholder at his address as it appears on the stock transfer books of the Corporation. Section 5. Notice of Adjourned Meeting. When a meeting is adjourned to another time or place, it shall not be necessary to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. At the adjourned meeting, any business may be transacted that might have been transacted on the original date of the meeting. However, if after the adjournment the Board of Directors fixes a new record date for the adjournment meeting, a notice of the adjourned meeting shall be given as provided in this Article to each Shareholder of record. Section 6. Shareholder Quorum and Voting. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of Shareholders. If a quorum is present, the affirnative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the Shareholders, unless otherwise provided by law. Section 7. Voting of Shares. Each outstanding share shall be entitled to one vote on each matter submitted to a vote at a meeting of Shareholders. Section 8. Proxies. A Shareholder may vote either in person or by proxy executed in writing by the Shareholder or his duly authorized attorney-in-fact. No proxy shall be valid eleven (11) months from the date thereof unless otherwise provided in the proxy. Section 9. Action by Shareholders Without a Meeting. Any action required by law, these Bylaws, or the Articles of Incorporation of the Corporation to be taken at any annual or special meeting of Shareholders, or any action which may be taken at any annual or special meeting of Shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, 59 shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, as is provided by law. ARTICLE 11. DIRECTORS Section 1. Function. The Board of Directors shall exercise its power and authority to manage the business and affairs of the Corporation. Section 2. Qualification. Directors need not be residents of this state and Shareholders of this Corporation. Section 3. Compensation. The Board of Directors shall have authority to fix the compensation of Directors. Section 4. Presumption of Assent. A Director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless he votes against such action or abstains from voting in respect thereto because of an asserted conflict of interest. Section S. Number. This Corporation shall have Five Director(s). Section 6. Election and Term Each person named in the Articles of Incorporation as a member of the initial Board of Directors shall hold office until the First Annual Meeting of Shareholders, and until his successor shall have been elected and qualified or until his earlier resignation, removal from office or death. At the First Annual Meeting of Shareholders and at each annual meeting thereafter, the Shareholders shall elect Directors to hold office until the next succeeding annual meeting. Each Director shall hold office for a term for which he is elected and until his successor shall have been elected and qualified or until his earlier resignation, removal from office or death. Section 7. Vacancies. Any vacancy occurring in the Board of Directors, including any vacancy created by reason of an increase in the number of Directors, may be filled by the affirmative vote of a majority of the remaining Directors though less than a quorum of the Board of Directors. A Director elected to fill a vacancy shall hold office only until the next election of Directors by the Shareholders. Section 8. Removal of Directors. At a meeting of Shareholders called expressly for that purpose, any Director or the entire Board of Directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of Directors. Section 9. Quorum and Voting. A majority of the number of Directors fixed by these Bylaws shall constitute a quorum for the transaction of business. The act of voting by the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 1O. Executive and Other Committees. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members and executive committee and one or more other committees each of which, to the extent provided in such resolution such have and may exercise all the authority of the Board of Directors, except as is provided by law. Section 11. Place of Meeting. Regular and special meetings of the Board of Directors shall be held at the principal office of the Corporation. Section 12. Time, Notice and Call of Meetings. Regular meetings of the Board of Directors shall be held without notice on May 8th of each year. Written notice of the time and place of special meetings of the Board of Directors shall be given to each Director by either personal delivery, telegram or cablegram at least three (3) days before the meeting or by notice mailed to the Director at least three (3) days before the meeting. 60 Notice of a meeting of the Board of Directors need not be given to any Director who signs a Waiver of Notice either before or after a meeting. Attendance of a Director at a meeting shall constitute a Waiver of Notice of such meeting and waiver of any and all objections to the place of the meeting, the time of the meeting, or the manner in which it has been called or convened, except when a Director states, at the beginning of the meeting, any objections to the transaction of business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the Notice or Waiver of Notice of such meeting. A majority of the Directors present, whether or not a quorum exists, may adjourn any meeting of the Board of Directors to another time and place. Notice of any such adjourned meeting shall be given to the Directors who were not present at the time of the adjournment and, unless the time and place of the adjourned meeting are announced at the time of the adjournment, to the other Directors. Meetings of the Board of Directors may be called by the Chairman of the Board, by the President of the Corporation, or by any two Directors. Members of the Board of Directors may participate in a meeting of such Board by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Section 13. Action Without a Meeting. Any action required to be taken at a meeting of the Board of Directors, or any action which may be taken at a meeting of the Board of Directors or a committee thereof, may be taken without a meeting if a consent in writing, setting forth the action so to be taken, signed by all the Directors, or all the members of the committee, as the case may be, is filed in the Minutes of the proceedings of the Board or of the committee. Such consent shall have the same effect as a unanimous vote. ARTICLE III. OFFICERS Section 1. Officers. The Officers of this Corporation shall consist of a President, Vice President, Secretary and a Treasurer, each of whom shall be elected by the Board of Directors. Such other Officers and assistant Officers and Agents as may be deemed necessary may be elected or appointed by the Board of Directors from time to time. Any two or more offices may be held by the same person. Section 2. Duties. The Officers of this Corporation shall have the following duties: (1) The President shall be the chief executive officer of the Corporation, shall have the general and active management of the business and affairs of the Corporation subject to the directions of the Board of Directors, and shall preside at all meetings of the Shareholders and Board of Directors. (2) The Vice President(s), in the order designated by the Board of Directors, or lacking such a designation by the President, shall, in the absence of the President, perform the duties and exercise the powers of the President and shall perform such other duties as may be prescribed by the Board of Directors or the President. (3) The Secretary shall have custody of and maintain all of the corporate records except the financial records and shall, as requested, record the minutes of all meetings of the Shareholders and Board of Directors, send all notices of all meetings and perform such other duties as may be prescribed by the Board of Directors or the President. (4) The Treasurer shall have the custody of all corporate funds and financial records, shall keep full and accurate accounts of receipts and disbursements and render accounts thereof at the annual meetings of 9 61 Shareholders, and whenever else required by the Board of Directors or the President, and shall perform such other duties as may be prescribed by the Board of Directors or the President. Section 3. Removal of Officers. An officer or agent elected or appointed by the Board of Directors may be removed by the Board whenever, in its judgment, the best interests of the Corporation will be served thereby. Any vacancy in any office may be filled by the Board of Directors. ARTICLE IV. STOCK CERTIFICATES Section 1. Issuance. Every holder of shares in this Corporation shall be entitled to have a Certificate representing all shares to which he is entitled. No Certificate shall be issued for any share until such share is fully paid. Section 2. Form. Certificates representing shares in this Corporation shall be signed by the President and the Secretary or an Assistant Secretary and may be sealed with the Seal of this Corporation or a facsimile thereof. Section 3. Transfer of Stock. The Corporation shall register a Stock Certificate presented to it for transfer if the Certificate is properly endorsed by the holder of record or by his duly authorized attorney. Section 4. Lost, Stolen or Destroyed Certificates. If the shareholder shall claim to have lost or destroyed a Certificate of shares issued, upon the making of an affidavit of the fact by the person claiming the Certificate of stock to be lost, stolen or destroyed, and, at the discretion of the Board of Directors, upon the deposit of a bond or other indemnity in such amount and with such sureties, if any, as the Board may reasonably require, the Board of Directors may direct a new Certificate or Certificates to be issued in place of any Certificate or Certificates theretofore issued by the Corporation. ARTICLE V. BOOKS AND RECORDS Section 1. Books and Records. This Corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its Shareholders, Board of Directors and committees of Directors. This Corporation shall keep at its registered office or principal place of business, a record of its Shareholders, giving the names and addresses of all Shareholders and the number of shares held by each. Any books, records and minutes may be in written form or in any other form Capable of being converted into written form within a reasonable time. Section 2. Shareholders' Inspection Rights. Any person who shall have been a holder of record of shares, or of voting trust certificates therefor, at least six (6) months immediately preceding his demand, or the holder of record of voting trust certificates for at least five percent (5%) of the outstanding shares of the Corporation, upon written demand stating the purpose thereof, shall have the right to examine, in person or by agent or attorney, at any reasonable time or times, for any proper purpose, its relevant books and records of accounts, minutes and records of shareholders and to make extracts therefrom. Section 3. Financial Information. Not later than four (4) months after the close of each fiscal year, this Corporation shall prepare a balance sheet showing in reasonable detail the financial condition of the Corporation as of the close of its fiscal year, and a Profit and Loss Statement showing the results of the operations of the Corporation during its fiscal year. 62 Upon the written request of any Shareholder or holder of voting trust certificates for shares of the Corporation, the Corporation shall mail to each shareholder, or holder of voting certificates a copy of the most recent Balance Sheet and Profit and Loss Statement. Balance Sheets and Profit and Loss Statements shall be kept in the registered office of the Corporation in this state for at least five (5) years, and shall be subject to inspection during business hours by any Shareholder or holder of voting trust certificates, in person or by agent. ARTICLE VI. DIVIDENDS The Board of Directors of the Corporation may from time to time, divide and the Corporation may pay, dividends on its shares in cash, property or its own shares, except when the Corporation is involved or when the payment thereof would render the Corporation insolvent, subject to the provisions of Delaware statutes. ARTICLE VII. CORPORATE SEAL The Board of Directors shall provide a corporate seal, which shall be in circular form. The foregoing Bylaws were adopted by a majority of the Shareholders of the Corporation at its principal Shareholders meeting held on May 10th, 1998. - ------------------------- Joel Arbeman 63 EX-4.2 4 RIGHTS AND PREFERENCES OF PREFERRED STOCK EXHIBIT NO. 4.2 Rights and Preferences of Preferred Stock 64 Certificate of Designation of Rights and Preferences SMD Group Inc., a Delaware corporation, whose address is 15 East North Street, Dover, DE 19901 ("Corporation") hereby designates the following rights and Preferences for its Convertible Preferred Stock, Class A ("Convertible Preferred Stock"). 1. Conversion and Issuance of Convertible Preferred Stock. The Holder shall have the right (the "Right") in its sole and absolute discretion to convert 17.847 shares of Convertible Preferred Stock - Series A issued by the Corporation (the "Share") into 17,847 common shares of Corporation (the "Equity") as payment to Holder pursuant to the terms of the October 5 , 1998 Consulting Agreement between Holder and Corporation. 2. Time of Conversion. The Share shall be convertible at any time, in whole or in part, at any time for period commencing on the date hereof and ending on December 31, 2010. No additional consideration is payable upon conversion. 3. Method of Conversion. The conversion shall be effected by a written note signed by an authorized representative of Holder or its assigns which shall (a) state Holder's election to exercise the Right; (b) the person in whose name the common share certificate is to be registered, its address and social security number; (c) be delivered in person or by certified mail to Corporation. 4. Assignability of Share; Forfeiture; Liquidation Preference. The Share may be assigned by Holder at any time by providing to Corporation a written notice of assignment. The Right shall not be exercisable until the Corporation completes a Transaction defined herein as a (i) private placement of not less than a cumulative $1,000,000, and (ii) a public listing of its common shares. The Share shall be forfeited to Corporation for no consideration if a Transaction is not completed within two years of the date of issuance of this Share. The Share shall have a preference over holders of Common Stock of the Corporation upon liquidation equal to its par value. 5. Representations and Warranties of Corporation. Upon exercise of the Right, the Equity interest in Corporation shall be free and clear of all liens, claims, charges and encumbrances. The amount of Equity subject to the Right shall be adjusted for splits, dividend, recapitalization, or similar events just as if it had been converted into common shares. Corporation agrees to indemnify and hold harmless Holder in connection with any claim, loss, damage or expense, including attorneys' fees, trial and appellate levels, in connection with any breach of the foregoing. 65 Certificate of Designation of Rights and Preferences SMD Group Inc., a Delaware corporation, whose address is 15 East North Street, Dover, DE 19901 ("Corporation") hereby designates the following rights and Preferences for its Convertible Preferred Stock, Class B ("Convertible Preferred Stock"). 1. Conversion and Issuance of Convertible Preferred Stock. The Holder shall have the right (the "Right") in its sole and absolute discretion to convert 100 shares of Convertible Preferred Stock - Series B issued by the Corporation (the "Share") with a face value of $138,000 into common shares of Corporation (the "Equity") at a conversion price for said shares at the lower of (i) the average of the high trading price plus the low trading price for the common shares at the date of conversion, or (ii) two dollars and fifty cents (US$2.50) per common share at the date of conversion.. The Convertible Preferred Stock is for payment to Holder pursuant to the terms of the December 31, 1998 Development Agreement between Holder and Corporation. 2. Time of Conversion. The Share shall be convertible at any time, in whole or in part, at any time for period commencing on the date hereof and ending on July 30, 1999. No additional consideration is payable upon conversion. 3. Method of Conversion. The conversion shall be effected by a written note signed by an authorized representative of Holder or its assigns which shall (a) state Holder's election to exercise the Right; (b) the person in whose name the common share certificate is to be registered, its address and social security number; (c) be delivered in person or by certified mail to Corporation. 4. Assignability of Share; Forfeiture; Liquidation Preference. The Share may be assigned by Holder at any time by providing to Corporation a written notice of assignment. The Right shall not be exercisable until the Corporation completes a Transaction defined herein as a (i) private placement of not less than a cumulative $2,000,000, or (ii) a public listing of its common shares. The Share shall be forfeited to Corporation for no consideration if a Transaction is not completed within two years of the date of issuance of this Share. The Share shall have a preference over holders of Common Stock of the Corporation upon liquidation equal to its par value. 5. Representations and Warranties of Corporation. Upon exercise of the Right, the Equity interest in Corporation shall be free and clear of all liens, claims, charges and encumbrances. The amount of Equity subject to the Right shall be adjusted for splits, dividend, recapitalization, or similar events just as if it had been converted into common shares. Corporation agrees to indemnify and hold harmless Holder in connection with any claim, loss, damage or expense, including attorneys' fees, trial and appellate levels, in connection with any breach of the foregoing. 66 Certificate of Designation of Rights and Preferences SMD Group Inc., a Delaware corporation, whose address is 15 East North Street, Dover, DE 19901 ("Corporation") hereby designates the following rights and Preferences for its Convertible Preferred Stock, Class C ("Convertible Preferred Stock"). 1. Conversion and Issuance of Convertible Preferred Stock. The Holder shall have the right (the "Right") in its sole and absolute discretion to convert 50,000 shares of Convertible Preferred Stock - Series C issued by the Corporation (the "Share") into 500,000 common shares of Corporation (the "Equity") as payment to Holder pursuant to the terms of the October 15 , 1998 Agreement of Purchase and Sale between Holder and Corporation. 2. Time of Conversion. The Share shall be convertible at any time, in whole or in part, at any time for period commencing on the date hereof and ending on December 31, 2010. No additional consideration is payable upon conversion. 3. Method of Conversion. The conversion shall be effected by a written note signed by an authorized representative of Holder or its assigns which shall (a) state Holder's election to exercise the Right; (b) the person in whose name the common share certificate is to be registered, its address and social security number; (c) be delivered in person or by certified mail to Corporation. 4. Assignability of Share; Forfeiture; Liquidation Preference. The Share may be assigned by Holder at any time by providing to Corporation a written notice of assignment. The Right shall not be exercisable until the Corporation completes a Transaction defined herein as a (i) private placement of not less than a cumulative $1,000,000, and (ii) a public listing of its common shares. The Share shall be forfeited to Corporation for no consideration if a Transaction is not completed within two years of the date of issuance of this Share. The Share shall have a preference over holders of Common Stock of the Corporation upon liquidation equal to its par value. 5. Representations and Warranties of Corporation. Upon exercise of the Right, the Equity interest in Corporation shall be free and clear of all liens, claims, charges and encumbrances. The amount of Equity subject to the Right shall be adjusted for splits, dividend, recapitalization, or similar events just as if it had been converted into common shares. Corporation agrees to indemnify and hold harmless Holder in connection with any claim, loss, damage or expense, including attorneys' fees, trial and appellate levels, in connection with any breach of the foregoing. 67 EX-5.1 5 OPINION OF WILLIAMS LAW GROUP, P.A. EXHIBIT NO. 5.1 Opinion of WILLIAMS LAW GROUP, P.A. 68 WILLIAMS LAW GROUP, P.A. 2503 West Gardner Court Tampa, FL 33611 January 10, 1999 SMD GROUP, INC. RE: Registration Statement on Form SB-2 Gentlemen: I have acted as your counsel in the preparation on a Registration Statement on Form SB-2 (the "Registration Statement") filed by you with the Securities and Exchange Commission covering shares of Common Stock of SMD GROUP, Inc. (the "Stock"). In so acting, I have examined and relied upon such records, documents and other instruments as in our judgment are necessary or appropriate in order to express the opinion hereinafter set forth and have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us certified or photostatic copies. Based on the foregoing, I am of the opinion that: The Stock, when issued and delivered in the manner and/or the terms described in the Registration Statement (after it is declared effective), will duly and validly issued, fully paid and nonassessable; I hereby consent to the reference to my name in the Registration Statement under the caption "Legal Matters" and to the use of this opinion as an exhibit to the Registration Statement. In giving this consent, I do not hereby admit that I come within the category of a person whose consent is required under Section7 of the Act, or the general rules and regulations thereunder. Very truly yours, /S/Michael T. Williams - - ----------------------------------- Michael T. Williams 69 EX-10.1 6 FORM OF EMPLOYEMENT AGREEMENT EXHIBIT NO. 10.1 Form of Employment Agreement 70 EMPLOYMENT AGREEMENT THIS AGREEMENT made as of this 15th day of October, 1998 (the "Agreement"), by and between SMD Group Inc., a Delaware corporation ("Employer"), and ____________ ("Employee"). WITNESSETH: WHEREAS, Employer desires to employ Employee and Employee desires to be employed by Employer as ____________________________ of Employer; and WHEREAS, Employer recognizes the need of the knowledge, talents and assistance of Employee and desires to enter into this Agreement to secure the foregoing. NOW, THEREFORE, in consideration of the promises herein contained, the parties covenant and agree as follows: 1. EMPLOYMENT. Employer agrees to employ Employee and Employee agrees to be employed by Employer and to perform work as determined by Employer, as _____________________ of Employer, on the terms and conditions set forth in this Agreement. This Agreement shall be effective as of the date mutually agreed to in writing by both parties (the "Effective Date") but in no event shall it be more than two weeks following the date on which the Employer receives more than $500,000 of gross investment capital. 2. COMPENSATION. Employer agrees to employ Employee at the base rate of compensation of ______________ thousand and No/Dollars ($__,000.00) per year. Compensation is to be paid twice per month. Compensation is to be reviewed by the Compensation Committee on an annual basis. In addition to the base compensation, Employer agrees to pay or provide Employee with the following: A. Expenses. Reimbursement for reasonable expenses actually incurred by Employee in the furtherance of Employer's business, including, but not limited to, telephone calls (including business related calls on Employee's cellular phone and business related long distance calls), entertainment, attendance at conferences, conventions and institutes, provided proper itemization of said expenses is furnished to Employer by Employee. All such expenditures shall be subject to the reasonable control of Employer. B. Medical and Disability Benefits. Employee and his spouse shall be entitled to participate in Employer's medical program, Employer-paid disability and other benefit programs as other executives of Employer are entitled to participate in, as is in place from time to time. If Employee desires to include any family members other than his spouse in the medical plan, Employee shall be responsible for all additional costs. C. Additional Benefits. Employee shall be entitled to participate in and receive such additional benefits as Employer shall from time to time make available to its executive employees including, without limitation, profit sharing, stock purchase, stock option and other incentive plans. D. Preferred Stock, Class C. Pursuant to the "Agreement of Purchase and Sale" dated October 15, 1998, employee shall be entitled to receive 50,000 Preferred Stock, Class C which may, under certain conditions (to be detailed within the "Certificate of Designation of Rights and Preferences" and "Irrevocable Voting Trust" agreements), be converted into 500,000 shares of Common Stock. 71 E. Bonus. Employee shall be entitled to receive cash or stock option bonuses for exceeding pre-tax profit targets set by the business plan of October 1998. The amount of bonus shall be determined by the Compensation Committee. 3. DUTIES. Employee agrees to perform work as determined by the Board of Directors, subject to the direction of Employer and agrees to subject himself at all times during the Term (as hereinafter defined) to the direction and control of Employer in respect to the work to be performed. Employee shall devote his full business time and attention to the furtherance of Employer's best interests. In that regard, and as further consideration for this Agreement, Employee agrees to comply with, and abide by, such rules and directives of Employer as may be reasonably established from time to time, and recognizes the right of Employer, in its reasonable discretion, to change, modify or adopt new policies and practices affecting the employment relationship, not inconsistent with this Agreement, as deemed appropriate by Employer. During the term of Employee's employment, Employee will not undertake any new business ventures, partnerships, consulting arrangements or other enterprise or business other than those on behalf of Employer, without Employer's prior written consent. 4. WORKING FACILITIES. Employee shall be furnished with office space, secretarial services, and such other facilities and services suitable to Employee's position and adequate for the performance of Employee's duties. 5. AGENCY. Employee shall have no authority to enter into any contracts binding upon Employer, except as authorized in writing, in advance, by Employer. 6. TERM OF EMPLOYMENT; SEVERANCE. A. Employee's employment hereunder shall commence as of the Effective Date hereof and continue for a period of two (2) years thereafter (the "Term"). B. Anything herein to the contrary notwithstanding, Employee's employment hereunder may be terminated at any time and for any reason by either party upon not less than one hundred twenty (120) days' prior written notice to the other party. It is understood and acknowledged that Employer shall have the right to effectuate such termination at will, with or without Reasonable Cause (as hereinafter defined). Any such termination shall be effective as of the end of such one hundred twenty (120) day period (the "Final Date"). C. If Employee's employment hereunder shall be terminated by Employer without Reasonable Cause pursuant to paragraph 6.B. or because of Employee's disability, as determined by Employer in good faith, then Employee shall be entitled to (i) severance compensation equal to Employee's then-current base salary and benefits (which for purposes hereof shall include all compensation payable hereunder, of any type) for a period equal to the Severance Period (as defined below). Such severance compensation payments consisting of cash shall be paid in a lump sum plus any outstanding benefits and allocated bonuses on or before the Final Date. The severance compensation are intended to be in lieu of all other payments to which Employee might otherwise be entitled in respect of termination of Employee's employment without Reasonable Cause or in respect of any action by Employer constituting Good Reason for voluntary termination. D. If Employee's employment hereunder shall be terminated for Reasonable Cause pursuant to paragraph 6.C., or if Employee voluntarily terminates Employee's employment without Good Reason, Employee shall be entitled to receive Employee's base salary as accrued through the effective date of such termination, but shall not be entitled to any Severance Benefits or other amounts in respect of such termination. 72 E. "Reasonable Cause," as used herein, shall mean Employee's involvement in any action or inaction involving fraud resulting in a personal benefit in excess of any payments to which Employee is entitled hereunder, dishonesty, or material violation of Corporation policy and procedures. Employee shall vacate the offices of Employer on such effective date. F. "Good Reason," as used herein, means the occurrence of any of the following events without Employee's consent: i. a material diminution in Employee's duties and responsibilities; ii. a reduction in Employee's base salary; iii. a forced relocation; or iv. a Change of Control (as defined below) if Successor Employer (as defined in paragraph H below) fails to assume this Agreement in its entirety. G. "Severance Period," as used herein, means the lesser of (i) twelve months (12) months or (ii) the remaining time of the Term. H. "Change of Control" means a sale outside the ordinary course of business of more than fifty percent (50%) of the assets of or equity interests in Employer to any person or entity. 7. COMPLIANCE WITH LAWS. Employee will comply with all federal and state laws, rules and regulations relating to any of Employee's responsibilities and duties with Employer and will not violate any such laws, rules and regulations. 8. COVENANT NOT TO COMPETE. Employee agrees to conform to the following concerning non-competition. A. Employer undertakes to train Employee and to give Employee confidential information and knowledge about Employer's business policies, accounts procedures and methods. For the purposes of this Agreement, the term "confidential information" shall include but is not limited to any list of suppliers, customers, investors, stockholders, including their names, addresses, phone numbers, amount of investments and similar information. In addition, any operational information of Employer, including but not limited to information on Employer's methods of conducting business, profits and/or losses of Employer, marketing material and any information that would reasonably be considered proprietary or confidential in nature. Employer has established a valuable and extensive trade in its products and services, which business has been developed at a considerable expense to Employer. The nature of the business is such that the relationship of its customers with Employer must be maintained through the close personal contact of its employees. B. Employee desires to enter into or continue in the employ of Employer and by virtue of such employment by Employer, Employee will become familiar with the manner, methods, secrets and confidential information pertaining to such business. During the Term, Employee will continue to receive additional confidential information of the same kind. Through representatives of Employer, Employee will become personally acquainted with the business of Employer and its methods of operation. C. In consideration of the employment or continued employment of Employee as herein provided, the training of Employee by Employer, and the disclosure by Employer to employee of the knowledge and confidential information described above, Employer requests and Employee makes the covenants hereinafter set forth. Employee understands and acknowledges that such covenants are required for the 73 fair and reasonable protection of the business of Employer carried on in the area to which the covenants are applicable and that without the limited restrictions on Employee's activities imposed by the covenants, the business of Employer would suffer irreparable and immeasurable damage. The covenants on the part of Employee shall be construed as an agreement independent of any other provision of this Agreement, and existence of any claim or course of action whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants. D. Employee agrees that during the term of Employee's employment and for the period of twelve (12) months immediately following the termination of employment (which said time period shall be increased by any time during which Employee is in violation of this Agreement) Employee will not, within the territory hereinafter defined, directly or indirectly, for Employee, or on behalf of others, as an individual on Employee's own account, or as an employee, agent, or representative for any other person, partnership, firm or corporation: i. Compete with the business of Employer by engaging or participating in or furnishing aid or assistance in competition with the business of Employer. ii. Engage, in any capacity, directly or indirectly, in or be employed by any business similar to the kind or nature of business conducted by Employer during the employment. iii. For the purposes of this paragraph 8, the business of Employer shall be limited to the (1) Internet based music magazine business, (2) CD player software business, (3) and (3) any business that the Employer enters into during the Term. E. The territory referred to in this paragraph 8 shall be the entire World. F. Each restrictive covenant is separate and distinct from any other covenant set forth in this paragraph. In the event of the invalidity of any covenant, the remaining obligation shall be deemed independent and divisible. The parties agree that the territory set forth is reasonable and necessary for the protection of Employer. In the event any term or condition is deemed to be too broad or unenforceable, said provision shall be deemed reduced in scope to the extent necessary to make said provision enforceable and binding. G. The provisions of this paragraph 8 shall not apply if Employee's employment is terminated by Employer without Reasonable Cause or by Employee for Good Reason. 9. INDUCING EMPLOYEE OF EMPLOYER TO LEAVE. Any attempt on the part of Employee to induce others to leave Employer's employ or any efforts by Employee to interfere with Employer's relationship with other employees would be harmful and damaging to Employer. Employee expressly agrees that during the term of Employee's employment and for a period of twelve (12) months thereafter (provided said time period shall be increased by any time during which Employee is in violation of this Agreement), Employee will not in any way directly or indirectly: A. Induce or attempt to induce an employee to sever his or her employment with Employer; B. Interfere with or disrupt Employer's relationship with other employees; and C. Solicit, entice, take away or employ any person employed with Employer, excluding people Employee brings to Employer. 10. CONFIDENTIAL INFORMATION. It is understood between the parties hereto that during the term of employment, Employee will be dealing with confidential 74 information, as defined above, which is Employer's property, used in the course of its business. Employee will not disclose to anyone, directly or indirectly, any of such confidential information or use such information other than in the course of Employee's employment. All documents that Employee prepares, or confidential information that might be given to Employee in the course of employment, are the exclusive property of Employer and shall remain in Employer's possession on the premises. Under no circumstances shall any such information or documents be removed without Employer's written consent first being obtained. 11. RETURN OF EMPLOYER'S PROPERTY. On termination of employment, regardless of how termination is effected, or whenever requested by Employer, Employee shall immediately return to Employer all of Employer's property used by Employee rendering services hereunder or otherwise that is in Employee's possession or under Employee's control. 12. VACATION. Employee shall be entitled to a vacation period of four (4) weeks per calendar year. The vacation shall be taken by Employee at such time during the year and for such period as reasonable. All vacations should be taken in the year earned. No vacations may be accrued without written permission of the Board of Directors. 13. REFERENCES. Employer agrees that, upon termination of this Agreement, it will, upon written request of Employee, furnish references to third parties, including prospective employers, regarding Employee. However, Employee acknowledges that it is Employer's policy to confirm employment only and not to release any additional information without a written release from Employee. 14. NOTICES. All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or the date mailed, postage prepaid by certified mail, return receipt requested, or faxed and confirmed, if addressed to the respective parties as follows: If to Employer: SMD Group, Inc. Bedford Towers 444 Bedford Street, Suite 8s Stamford, Connecticut 06901 Attention: Board of Directors If to Employee: _______________ ========================= Either party may change its address for the purpose of receiving notices, demands, and other communications by giving written notice to the other party of the change. 15. VOLUNTARY AGREEMENT. Employee represents that he has not been pressured, misled or induced to enter this Agreement based upon any representation by Employer not contained herein. 16. PROVISIONS TO SURVIVE. The parties hereto acknowledge that many of the terms and conditions of this Agreement are intended to survive the employment relationship. Therefore, any terms and conditions that are intended by the nature of the promises or representations to survive the termination of employment shall survive the term of employment regardless of whether such provision is expressly stated as so surviving. 17. MERGER. This Agreement represents the entire Agreement between the parties and shall not be subject to modification or amendment by any oral representation, or any written statement by either party, except for a dated written amendment to this Agreement signed by Employee and an authorized officer of Employer. 75 18. VENUE AND APPLICABLE LAW. This Agreement shall be enforced and construed in accordance with the laws of the State of Delaware, and venue for any action or arbitration under this Agreement shall be Kent County, Delaware. 19. SUBSIDIARIES AND AFFILIATED ENTITIES. Employee acknowledges and agrees that Employer has or may have various subsidiaries and affiliated entities. In rendering services to Employer, Employee will have considerable contact with such subsidiaries and affiliates. Therefore, Employee agrees that all provisions of paragraphs 7, 8, 9 and 10 shall apply to all such subsidiaries and affiliates. 20. PERSONNEL INFORMATION. Employee shall not divulge or discuss personnel information such as salaries, bonuses, commissions and benefits relating to Employee or other employees of Employer or any of its subsidiaries with any other person except the Executive Committee and the Board of Directors of Employer. 21. ASSIGNMENT. This Agreement shall not be assignable by either party without the written consent of the other party; provided, however, that this Agreement shall be assignable to any corporation or entity which purchases the assets of or succeeds to the business of Employer (a "Successor Employer"). Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. Employer SMD Group, Inc. By: ___________________ Joel Arberman Title: President and CEO Employee - ---------------- Employee Name 76 EX-10.2 7 SOFTWARE ACQUISITION AGREEMENT EXHIBIT NO. 10.2 Software Acquisition Agreement 77 md\774-012\intent.let md\774-012\intent.let December 29th, 1998 SMD Group Inc. Bedford Towers 444 Bedford Street Suite 8S Stanford, Connecticut USA 06901 Attention: Mr. Joel Arberman Dear Mr. Arberman: RE: Letter of Intent - Development of a Software Application for SMD Group Inc. Our File: 774-012 Cadnetics Inc. ("Cadnetics") desires to enter into the transaction, as hereunder described, for the purpose of developing a software application for SMD Group Inc. ("SMD"), the whole in accordance with and subject to the terms and conditions hereinafter set forth. This letter of intent ("Letter of Intent") is to confirm SMD's intention to hire Cadnetics to develop the Application (as hereinafter defined) and is to be construed as an offer which, if accepted by both parties, shall constitute an agreement binding upon Cadnetics and SMD, subject to the terms, conditions and covenants hereunder set forth as well as the terms, conditions and covenants to be set forth: 78 1. Offer and Closing Date 1.1 This offer shall be open for acceptance until the 29th day of December, 1998 (the "Offer"). 1.2 The transaction contemplated herein shall take place no later than within ten (10) days following the acceptance of the Offer by SMD (the "Closing Date"). 2. Development of Application 2.1 Cadnetics hereby undertakes to develop an application, which may be generally described as follows: an interactive web enabled audio CD music player (the "Application"), the whole subject to the specifications set out in the requirement document entitled IWEACDMP-req01.doc. 79 2.2 SMD hereby undertakes to assume and be responsible for any and all costs relating to the development, progress and furtherance of the Application. 2.3 Cadnetics shall not assume any costs relating to the purchasing and licensing of any external technology which may be necessary for the development of the Application. Furthermore, all costs relating to travel and lodging which are required for the furtherance of the Application shall be chargeable to SMD. Any purchases or charges shall require the prior approval of SMD. 2.4 Cadnetics shall remit the Application in final form (complied executable) to SMD on a CD-ROM capable of reproduction. 2.5 Cadnetics shall remit to SMD all relevant documentation and the source code on an "as is" basis every month for the Application. 2.6 Cadnetics hereby undertakes to provide SMD with a monthly update as to the development of the Application. 2.7 SMD hereby gives the mandate to Cadnetics to develop upgrades of the Application in consideration of further development fees, to be agreed upon by the parties negotiating in good faith, the amount of which shall be dependent upon the extent and complexity of the desired upgrade and improvement. 2.8 In the event of a conflict or dispute between the parties, the parties hereby undertake to enter into good faith negotiations in order to attempt to resolve any such conflict or dispute. 3. Consideration 3.1 Cadnetics agrees to develop the Application for SMD in consideration of a fee consisting of the following: 3.1.1 the sum of forty-two thousand U.S. dollars (US $42,000.00); and 3.1.2 the issuance by SMD to Cadnetics of a number of common fully voting and fully participating shares of its share capital having a fair market value of two hundred and forty thousand U.S. dollars (U.S. $240,000.00) and a number of preferred shares of its share capital having a fair market value of one hundred and thirty-eight thousand U.S. dollars (U.S. $138,000.00) (the common shares and preferred shares hereinafter collectively referred to as the "Shares"). 80 3.2 On the Closing Date, SMD shall remit to Cadnetics forty-two thousand dollars (US $42,000.00) in cash as well as the share certificate representing the Shares, the whole in accordance with paragraph 3.1 hereof. 4. Service of Application For a fee in the amount of one hundred and twenty dollars (US $120.00) per man hour (the "Service Call Fee"), Cadnetics shall provide SMD with the necessary technical support services in respect of the Application. Such Service Call Fee shall be receivable depending on the extent and complexity of the services required and shall be adjusted upwards to reflect any change in the market value for similar services. 5. Representations and Warranties of SMD SMD hereby represents and warrants to Cadnetics as follows and confirms that Cadnetics is relying on the accuracy of such representations and warranties in connection with the execution of its obligations hereunder: 5.1 SMD is a corporation duly incorporated and validly subsisting in all aspects under the laws of its respective jurisdiction of incorporation. It has good right, full corporate power and absolute authority to authorize and consent to the transaction as herein provided. 5.2 SMD has taken all necessary or desirable actions, steps and corporate and other proceedings to approve or authorize, validly and effectively, the entering into of and the execution, delivery and performance of this transaction. 5.3 SMD has the authority to issue the Shares so that the Shares shall have a global value equal to the consideration paid at the time of issuance, that is, three hundred and seventy-eight thousand U.S. dollars (U.S. $378,000.00). 5.4 The execution, delivery and performance of this Letter of Intent and the completion of the transaction contemplated herein will not constitute or result in a violation, breach or default under the terms or provisions of the articles or by-laws of SMD or of any contract to which it is bound. 81 5.5 SMD further represents and warrants that should it enter into any agreement or commitment, to issue shares, by option, warrant or otherwise, which will have the effect of dilution upon the shareholdings of Cadnetics, said dilution shall occur on a proportionate basis based on the shareholding of all the shareholders in the company. 6. Representations and Warranties of Cadnetics Cadnetics hereby represents and warrants to SMD as follows and confirms that SMD is relying on the accuracy of such representations and warranties in connection with the execution of its obligations hereunder: 6.1 Cadnetics is a corporation duly incorporated and validly subsisting in all aspects under the laws of its respective jurisdiction of incorporation. It has good right, full corporate power and absolute authority to authorize and consent to the transaction as herein provided. 6.2 Cadnetics has taken all necessary or desirable actions, steps and corporate and other proceedings to approve or authorize, validly and effectively, the entering into of and the execution, delivery and performance of this transaction. 6.3 The execution, delivery and performance of this Letter of Intent and the completion of the transaction contemplated herein will not constitute or result in a violation, breach or default under the terms or provisions of the articles or by-laws of Cadnetics or of any contract to which it is bound. 6.4 Cadnetics makes no representation as to the value or potential value of the Application. 7. Sale of Shares 7.1 SMD hereby acknowledges that Cadnetics shall have an unlimited right to sell its common shares in SMD for the purpose of funding the development of the Application. 7.2 The parties acknowledge that Cadnetics intends to finance the development of the Application by selling its common shares in SMD on a monthly basis within the six (6) month period following the Closing Date in order to raise forty thousand U.S. dollars (U.S. $40,000.00) per month. In the event that Cadnetics is unable to sell a number of its common shares in SMD generating proceeds of at least forty thousand U.S. dollars (U.S. $40,000.00) in any given month during the six (6) month period following the Closing Date, Cadnetics shall have the right to send a notice to SMD to enter into good faith negotiations in order to resolve such situation. Cadnetics shall have the right to suspend any further development of the Application upon issuance of said notice until the parties arrive at an agreement satisfactory to both parties, without SMD having any recourse against Cadnetics in relation thereto. 82 8. Present and Future Rights 8.1 SMD hereby acknowledges that Cadnetics and its associated companies have extensive expertise in the development of applications of this nature and that its said expertise is the basis for Cadnetics being selected as the primary developer for the Application. 8.2 SMD also acknowledges that Cadnetics is an independent developer and may be involved in the development of other applications which use a similar architecture. 8.3 SMD and Cadnetics agree that they shall not impose any restrictions upon each other in respect of their respective development of applications of architecture similar to the Application. 8.4 Cadnetics shall retain all rights of ownership for internal use only in respect of the developed Application until such time that SMD has successfully fulfilled all of its financial obligations in respect of Cadnetics. 9. Terms of Preferred Shares Cadnetics shall have the right to convert its preferred shares into common shares at any time until July 30th 1999, and the conversion price for said shares shall be the lower of: (i) the average of the high trading price plus the low trading price for the common shares at the date of conversion, or (ii) two dollars and fifty cents (U.S. $2.50) per common share at the date of conversion. 10. Conditions Precedent 10.1 Notwithstanding anything herein contained, the undertakings and obligations of Cadnetics under the terms of this Letter of Intent are, at the option of Cadnetics, subject to and conditional upon the performance of or compliance with the following condition precedent: 83 10.1.1 SMD shall not be in default of its obligations herein created. 10.1.2 The representations and warranties of SMD shall be true and correct and remain in full force and effect for the benefit of Cadnetics as of the Closing Date, and shall continue in full force and effect notwithstanding the closing of the transaction contemplated herein. 10.2 Notwithstanding anything herein contained, the undertakings and obligations of SMD under the terms of this Letter of Intent are, at the option of SMD, subject to and conditional upon the performance of or compliance with the following conditions precedent: 10.2.1 Cadnetics shall not be in default of its obligations herein created. 10.2.2 The representations and warranties of Cadnetics shall be true and correct and remain in full force and effect for the benefit of SMD as of the Closing Date, and shall continue in full force and effect notwithstanding the closing of the transaction contemplated herein. 11. Indemnification The parties shall mutually and reciprocally indemnify and hold each other harmless from and against any damage, loss, cost, deficiency (including the payment of attorneys fees) arising out of any inaccuracy in any representation or warranty made hereunder. 12. Further Executions The parties hereto agree and undertake in good faith to exert their best efforts to agree upon and execute all documents and do all acts as may be necessary or useful to conclude the transaction contemplated herein. 13. Related Costs Each party shall assume and pay their respective costs and expenses including legal and financial advisory fees incurred in connection with the negotiation, agreement upon and performance of the transaction herein contemplated. 84 14. Interpretation 14.1 Entire Agreement - This Letter of Intent sets forth all of the promises, covenants, agreements, conditions and undertakings between the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements and undertakings, inducements or conditions expressed or implied, oral or written. 14.2 Severability - It is intended by the parties hereto that the provisions of this Letter of Intent be enforced to the fullest extent permissible. Accordingly, if any paragraph, article or any part thereof is adjudicated to be invalid or unenforceable, then such paragraph or article shall be deemed amended to delete that portion thus adjudicated to be invalid or unenforceable, such deletion to apply only with respect to the operation of such paragraph or article. 14.3 Waiver - No waiver by a party of a default and a performance of any breach or series of breaches by another party hereto and failure, refusal or neglect by a party to exercise all rights hereunder or to insist upon strict compliance or performance of another party hereto under this Letter of Intent shall constitute a waiver of the provisions hereof. 14.4 Governing Laws - This Letter of Intent shall be governed and construed in accordance with the laws of the province of Quebec. 14.5 Assignment - The present Letter of Intent may not be assigned by a party hereto without the prior written consent of the other parties. 14.6 Successors and Assigns - This Letter of Intent shall be binding upon the parties hereto and their respective assigns, successors and interests and shall not be modified or amended except by written agreement. 14.7 Language - The parties hereto have requested that this Letter of Intent and all documents relating hereto be drafted in the English language. Les parties aux presentes ont exige que la presente convention et tout document y afferent soit redige en langue anglaise. 85 If you are in agreement with the terms and conditions set forth herein, kindly indicate your acceptance by signing and returning the enclosed copy of this offer prior to the 29th day of December 1998. Yours very truly, CADNETICS INC. Per: Raj Vadavia, Vice-President Acknowledged and agreed this day of December 1998. SMD GROUP INC. Per: Joel Arberman 86 EX-10.3 8 FORM OF STOCK OPTION PLAN EXHIBIT NO. 10.3 Form of Stock Option Plan 87 1998 STOCK OPTION PLAN 1. PURPOSE The purpose of the SMD Group, Inc. 1998 Stock Option Plan (the "Plan") is to enhance the long-term stockholder value of SMD Group, Inc., a Delaware corporation (the "Company"), by offering opportunities to employees, directors, officers, consultants, agents, advisors and independent contractors of the Company and its Subsidiaries (as defined in Section 2) to participate in the Company's growth and success, and to encourage them to remain in the service of the Company and its Subsidiaries and to acquire and maintain stock ownership in the Company. 2. DEFINITIONS For purposes of the Plan, the following terms shall be defined as set forth below: 2.1 BOARD "Board" means the Board of Directors of the Company. 2.2 CAUSE "Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure of confidential information or trade secrets, or conviction or confession of a crime punishable by law (except minor violations), in each case as determined by the Plan Administrator, and its determination shall be conclusive and binding. 2.3 CODE "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.4 COMMON STOCK "Common Stock" means the common stock, par value $.001 per share, of the Company. 2.5 CORPORATE TRANSACTION "Corporate Transaction" means any of the following events: (a) Consummation of any merger or consolidation of the Company in which the Company is not the continuing or surviving corporation, or pursuant to which shares of the Common Stock are converted into cash, securities or other property (other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of capital stock of the surviving corporation immediately after the merger); (b) Consummation of any sale, lease, exchange or other transfer in one transaction or a series of related transactions of all or substantially all of the Company's assets other than a transfer of the Company's assets to a majority-owned subsidiary corporation (as the term "subsidiary corporation" is defined in Section 8.3) of the Company; or (c) Approval by the holders of the Common Stock of any plan or proposal for the liquidation or dissolution of the Company. Ownership of voting securities shall take into account and shall include ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on the date of adoption of the Plan) under the Exchange Act. 2.6 DISABILITY "Disability" means "disability" as that term is defined for purposes of Section 22(e)(3) of the Code. 2.7 EARLY RETIREMENT "Early Retirement" means early retirement as that term is defined by the Plan Administrator from time to time for purposes of the Plan. 2.8 EXCHANGE ACT "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.9 FAIR MARKET VALUE The "Fair Market Value" shall be as established in good faith by the Plan Administrator or (a) if the Common Stock is listed on the Nasdaq National Market, the average of the high and low per share sales prices for the Common Stock as reported by the Nasdaq National Market for a single trading day or (b) if the Common Stock is listed on the New York Stock Exchange or the American Stock Exchange, the average of the high and low per share sales prices for the Common Stock as such price is officially quoted in the composite tape of transactions on such exchange for a single trading day. If there is no such reported price for the Common Stock for the date in question, then such price on the last preceding date for which such price exists shall be determinative of the Fair Market Value. 2.10 GRANT DATE "Grant Date" means the date the Plan Administrator adopted the granting resolution. If, however, the Plan Administrator designates in a resolution a later date as the date an Option is to be granted, then such later date shall be the "Grant Date." 2.11 INCENTIVE STOCK OPTION "Incentive Stock Option" means an Option to purchase Common Stock granted under Section 7 with the intention that it qualify as an "incentive stock option" as that term is defined in Section 422 of the Code. 2.12 NONQUALIFIED STOCK OPTION "Nonqualified Stock Option" means an Option to purchase Common Stock granted under Section 7 other than an Incentive Stock Option. 2.13 OPTION "Option" means the right to purchase Common Stock granted under Section 7. 2.14 OPTIONEE "Optionee" means (i) the person to whom an Option is granted; (ii) for an Optionee who has died, the personal representative of the Optionee's estate, the person(s) to whom the Optionee's rights under the Option have passed by will or by the applicable laws of descent and distribution, or the beneficiary designated in accordance with Section 9; or (iii) person(s) to whom an Option has been transferred in accordance with Section 9. 88 2.15 PLAN ADMINISTRATOR "Plan Administrator" means the Board or any committee of the Board designated to administer the Plan under Section 3.1. 2.16 RETIREMENT "Retirement" means retirement as of the individual's normal retirement date as that term is defined by the Plan Administrator from time to time for purposes of the Plan. 2.17 SECURITIES ACT "Securities Act" means the Securities Act of 1933, as amended. 2.18 SUBSIDIARY "Subsidiary," except as provided in Section 8.3 in connection with Incentive Stock Options, means any entity that is directly or indirectly controlled by the Company or in which the Company has a significant ownership interest, as determined by the Plan Administrator, and any entity that maybecome a direct or indirect parent of the Company. 3. ADMINISTRATION 3.1 PLAN ADMINISTRATOR The Plan shall be administered by the Board or a committee or committees(which term includes subcommittees) appointed by, and consisting of two or more members of, the Board. If and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, the Board shall consider in selecting the Plan Administrator and the membership of any committee acting as Plan Administrator, with respect to any persons subject or likely to become subject to Section 16 of the Exchange Act, the provisions regarding (a) "outside directors" as contemplated by Section 162(m) of the Code and (b) "non employee directors" as contemplated by Rule 16b-3 under the Exchange Act. The Board may delegate the responsibility for administering the Plan with respect to designated classes of eligible persons to different committees consisting of one or more members of the Board, subject to such limitations as the Board deems appropriate. Committee members shall serve for such term as the Board maydetermine, subject to removal by the Board at any time. 3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR Except for the terms and conditions explicitly set forth in the Plan, the Plan Administrator shall have exclusive authority, in its discretion, to determine all matters relating to Options under the Plan, including the selection of individuals to be granted Options, the type of Options, the number of shares of Common Stock subject to an Option, all terms, conditions, restrictions and limitations, if any, of an Option and the terms of any instrument that evidences the Option. The Plan Administrator shall also have exclusive authority to interpret the Plan and may from time to time adopt, and change, rules and regulations of general application for the Plan's administration. The Plan Administrator's interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Plan Administrator pursuant to the Plan, shall be conclusive and binding on all parties involved or affected. The Plan Administrator may delegate administrativeduties to such of the Company's officers as it so determines. 4. STOCK SUBJECT TO THE PLAN 4.1 AUTHORIZED NUMBER OF SHARES Subject to adjustment from time to time as provided in Section 10.1, a maximum of 1 million shares of Common Stock shall be available for issuance under the Plan, except that any shares of Common Stock that, as of the date the Plan is approved by the Company's stockholders, are available for issuance under the Company's Amended and Restated 1994 Stock Option Plan (or that thereafter become available for issuance under that Plan in accordance with its terms as in effect on such date) and that are not issued under that Plan shall be added to the aggregate number of shares available for issuance under the Plan. Shares issued under the Plan shall be drawn from authorized and unissued shares or shares now held or subsequently acquired by the Company as treasury shares. 4.2 LIMITATIONS Subject to adjustment from time to time as provided in Section 10.1, not more than 250,000 shares of Common Stock may be made subject to Options under the Plan to any individual in the aggregate in any one fiscal year of the Company, except that the Company may make additional one-time grants of up to 1 million shares to newly hired individuals, such limitation to be applied in a manner consistent with the requirements of, and only to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code. 4.3 REUSE OF SHARES Any shares of Common Stock that have been made subject to an Option that cease to be subject to the Option (other than by reason of exercise of the Option to the extent it is exercised for shares) and/or shares of Common Stock subject to repurchase which are subsequently repurchased by the Company, shall again be available for issuance in connection with future grants of Options under the Plan; provided, however, that for purposes of Section 4.2, any such shares shall be counted in accordance with the requirements of Section 162(m) of the Code. 5. ELIGIBILITY Options may be granted under the Plan to those officers, directors and employees of the Company and its Subsidiaries as the Plan 89 Administrator from time to time selects. Options may also be granted to consultants, agents, advisors and independent contractors who provide services to the Company and its Subsidiaries. 6. AWARDS 6.1 FORM AND GRANT OF OPTIONS The Plan Administrator shall have the authority, in its sole discretion, to determine the type or types of awards to be made under the Plan. Such awards may consist of Incentive Stock Options and/or Nonqualified Stock Options. Options may be granted singly or in combination. 6.2 ACQUIRED COMPANY OPTION AWARDS Notwithstanding anything in the Plan to the contrary, the Plan Administrator may grant Options under the Plan in substitution for awards issued under other plans, or assume under the Plan awards issued under other plans, if the other plans are or were plans of other acquired entities ("Acquired Entities") (or the parent of an Acquired Entity) and the new Option is substituted, or the old award is assumed, by reason of a merger, consolidation, acquisition of property or of stock, reorganization or liquidation (the "Acquisition Transaction"). In the event that a written agreement pursuant to which the Acquisition Transaction is completed is approved by the Board and said agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the Acquired Entity, said terms and conditions shall be deemed to be the action of the Plan Administrator without any further action by the Plan Administrator, except as may be required for compliance with Rule 16b-3 underthe Exchange Act, and the persons holding such awards shall be deemed to be Optionees. 7. TERMS AND CONDITIONS OF OPTIONS 7.1 GRANT OF OPTIONS The Plan Administrator is authorized under the Plan, in its sole discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock Options, which shall be appropriately designated. 7.2 OPTION EXERCISE PRICE The exercise price for shares purchased under an Option shall be as determined by the Plan Administrator, but shall not be less than 100% of the Fair Market Value of the Common Stock on the Grant Date with respect to Incentive Stock Options. 7.3 TERM OF OPTIONS The term of each Option shall be as established by the Plan Administrator or, if not so established, shall be 10 years from the Grant Date. 7.4 EXERCISE AND VESTING OF OPTIONS The Plan Administrator shall establish and set forth in each instrument that evidences an Option the time at which or the installments in which the Option shall vest and become exercisable, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option will be immediately exercisable and the shares subject to the Option will vest according to the following schedule, which may be waived or modified by the Plan Administrator at any time: Period of Optionee's Continuous Employment or Service With the Company or Its Subsidiaries Percent of Total Option From the Grant Date That Is Vested ------------------- -------------- After 1 year 20% After 2 years 40% Each three-month period completed thereafter An additional 5% After 5 years 100 Any unvested shares acquired upon exercise of an Option shall be subject to repurchase by the Company upon termination of the Optionee's employment or services in accordance with the provisions of Section 13.1. To the extent that the right to purchase shares has accrued thereunder, an Option may be exercised from time to time by written notice to the Company, in accordance with procedures established by the Plan Administrator, setting forth the number of shares with respect to which the Option is being exercised and accompanied by payment in full as described in Section 7.5. The Plan Administrator may determine at any time that an Option may not be exercised as to less than 100 shares at any one time for vested shares and any number in its discretion for unvested shares (or the lesser number of remaining shares covered by the Option). To the extent required by the Plan Administrator, as a condition to exercise by the Optionee of an Option, the Optionee shall execute and deliver to the Company a Shareholders Agreement in substantially the form in use at the time of exercise, unless either (i) the Optionee has previously executed and delivered such Shareholder Agreement and it is in effect at the time the Optionee exercises the Option or (ii) such Shareholders Agreement is no longer in effect with respect to other holders of Common Stock. 7.5 PAYMENT OF EXERCISE PRICE The exercise price for shares purchased under an Option shall be paid in full to the Company by delivery of consideration equal to the product of the Option exercise price and the number of shares purchased. Such consideration must be paid in cash or by check or, unless the Plan Administrator in its sole discretion determines otherwise, either at the time the Option is granted or at any time before it is exercised, a combination of cash and/or check (if 90 any) and one or both of the following alternative forms: (a) tendering (either actually or, if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, by attestation) Common Stock already owned by the Optionee for at least six months (or any shorter period necessary to avoid a charge to the Company's earnings for financial reporting purposes) having a Fair Market Value on the day prior to the exercise date equal to the aggregate Option exercise price or (b) if and so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed exercise notice, together with irrevocable instructions, to (i) a brokerage firm designated by the Company to deliver promptly to the Company the aggregate amount of sale or loan proceeds to pay the Option exercise price and any withholding tax obligations that may arise in connection with the exercise and(ii) the Company to deliver the certificates for such purchased shares directly to such brokerage firm, all in accordance with the regulations of the Federal Reserve Board. In addition, the exercise price for shares purchased under an Option may be paid, either singly or in combination with one or more of the alternative forms of payment authorized by this Section 7.5, by (y) a promissory note delivered pursuant to Section 12 or (z) such other consideration as the Plan Administrator may permit. 7.6 POST-TERMINATION EXERCISES The Plan Administrator shall establish and set forth in each instrument that evidences an Option whether the Option will continue to be exercisable, and the terms and conditions of such exercise, if an Optionee ceases to be employed by, or to provide services to, the Company or its Subsidiaries, which provisions may be waived or modified by the Plan Administrator at any time. If not so established in the instrument evidencing the Option, the Option will be exercisable according to the following terms and conditions, which may be waived or modified by the Plan Administrator at any time. In case of termination of the Optionee's employment or services other than by reason of death or Cause, the Option shall be exercisable, to the extent of the number of shares vested at the date of such termination, only (a) within one year if the termination of the Optionee's employment or services is coincident with Retirement, Early Retirement at the Company's request or Disability or (b)within three months after the date the Optionee ceases to be an employee, director, officer, consultant, agent, advisor or independent contractor of the Company or a Subsidiary if termination of the Optionee's employment or services is for any reason other than Retirement, Early Retirement at the Company's request or Disability, but in no event later than the remaining term of the Option. Any Option exercisable at the time of the Optionee's death may be exercised, to the extent of the number of shares vested at the date of the Optionee's death, by the personal representative of the Optionee's estate, the person(s) to whom the Optionee's rights under the Option have passed by will or the applicable laws of descent and distribution or the beneficiary designated pursuant to Section 9 at any time or from time to time within one year after thedate of death, but in no event later than the remaining term of the Option. Any portion of an Option that is not vested on the date of termination of the Optionee's employment or services shall terminate on such date, unless the Plan Administrator determines otherwise. In case of termination of the Optionee's employment or services for Cause, the Option shall automatically terminate upon first notification to the Optionee of such termination, unless the Plan Administrator determines otherwise. If an Optionee's employment or services with the Company are suspended pending an investigation of whether the Optionee shall be terminated for Cause, all the Optionee's rights under any Option likewise shall be suspended during the period of investigation. With respect to employees, unless the Plan Administrator at any time determines otherwise, "termination of the Optionee's employment or services" for purposes of the Plan (including without limitation this Section 7 and Section 13 shall mean any reduction in the Optionee's regular hours of employment to less than thirty (30) hours per week. A transfer of employment or services between or among the Company and its Subsidiaries shall not be considered a termination of employment or services. The effect of a Company-approved leave of absence on the terms and conditions of an Option shall be determined by the Plan Administrator, in its sole discretion. 8. INCENTIVE STOCK OPTION LIMITATIONS To the extent required by Section 422 of the Code, Incentive Stock Options shall be subject to the following additional terms and conditions: 8.1 DOLLAR LIMITATION To the extent the aggregate Fair Market Value (determined as of the Grant Date) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time during any calendar year (under the Plan and all other stock option plans of the Company) exceeds $100,000, such portion in excess of $100,000 shall be subject to delayed exercisability or treated as a Nonqualified Stock Option as set forth by the Plan Administrator in the agreement(s) evidencing the Option. In the event the Optionee holds two or more such Options that become exercisable for the first time in the same calendar year, such limitation shall be applied on the basis of the order in which such Options are granted. 8.2 10% STOCKHOLDERS If an individual owns more than 10% of the total voting power of all classes of the Company's stock, then the exercise price per share of an Incentive Stock Option shall not be less than 110% of the Fair Market Value of the Common Stock on the Grant Date and the Option term shall not exceed five years. The determination of 10% ownership shall be made in accordance with Section 422 of the Code. 8.3 ELIGIBLE EMPLOYEES Individuals who are not employees of the Company or one of its parent corporations or subsidiary corporations may not be granted Incentive Stock Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary corporation" shall have the meanings attributed to those terms for purposes of Section 422 of the Code. 91 8.4 TERM The term of an Incentive Stock Option shall not exceed 10 years. 8.5 EXERCISABILITY To qualify for Incentive Stock Option tax treatment, an Option designated as an Incentive Stock Option must be exercised within three months after termination of employment for reasons other than death, except that, in the case of termination of employment due to total disability, such Option must be exercised within one year after such termination. Employment shall not be deemed to continue beyond the first 90 days of a leave of absence unless the Optionee's reemployment rights are guaranteed by statute or contract. For purposes of this Section 8.5, "total disability" shall mean a mental or physical impairment of the Optionee that is expected to result in death or that has lasted or is expected to last for a continuous period of 12 months or more and that causes the Optionee to be unable, in the opinion of the Company, to perform his or her duties for the Company and to be engaged in any substantial gainful activity. Total disability shall be deemed to have occurred on the first day after the Company has furnished its opinion of total disability to the Plan Administrator. 8.6 TAXATION OF INCENTIVE STOCK OPTIONS In order to obtain certain tax benefits afforded to Incentive Stock Options under Section 422 of the Code, the Optionee must hold the shares issued upon the exercise of an Incentive Stock Option for two years after the Grant Date of the Incentive Stock Option and one year from the date of exercise. An Optionee may be subject to the alternative minimum tax at the time of exercise of an Incentive Stock Option. The Plan Administrator may require an Optionee to give the Company prompt notice of any disposition of shares acquired by the exercise of an Incentive Stock Option prior to the expiration of such holding periods 8.7 PROMISSORY NOTES The amount of any promissory note delivered pursuant to Section 12 in connection with an Incentive Stock Option shall bear interest at a rate specified by the Plan Administrator but in no case less than the rate required to avoid imputation of interest (taking into account any exceptions to theimputed interest rules) for federal income tax purposes. 9. ASSIGNABILITY No Option granted under the Plan may be assigned, pledged or transferred by the Optionee other than by will or by the applicable laws of descent and distribution, and, during the Optionee's lifetime, such Option may be exercised only by the Optionee or a permitted assignee or transferee of the Optionee (as provided below). Notwithstanding the foregoing, and to the extent permitted by Section 422 of the Code, the Plan Administrator, in its sole discretion, may permit such assignment, transfer and exercisability and may permit an Optionee to designate a beneficiary who may exercise the Option after the Optionee's death; provided, however, that any Option so assigned or transferred shall be subject to all the same terms and conditions contained in the instrument evidencing the Option. 10. ADJUSTMENTS 10.1 ADJUSTMENT OF SHARES In the event that, at any time or from time to time, a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to stockholders other than a normal cash dividend, or other change in the Company's corporate or capital structure results in (a) the outstanding shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of securities of the Company or of any other corporation or (b) new, different or additional securities of the Company or of any other corporation being received by the holders of shares of Common Stock of the Company, then the Plan Administrator shall make proportional adjustments in (i) the maximum number and kind of securities subject to the Plan as set forth in Section 4.1, (ii) the maximum number and kind of securities that may be made subject to Options to any individual as set forth in Section 4.2, and (iii) the number and kind of securities that are subject to any outstanding Option and the per share price of such securities, without any change in the aggregate price to be paid therefore. The determination by the Plan Administrator as to the terms of any of the foregoing adjustments shall be conclusive and binding. 10.2 CORPORATE TRANSACTION Except as otherwise provided in the instrument that evidences the Option,in the event of a Corporate Transaction, the Plan Administrator shall determine whether provision will be made in connection with the Corporate Transaction for an appropriate assumption of the Options theretofore granted under the Plan (which assumption may be effected by means of a payment to each Optionee (by the Company or any other person or entity involved in the Corporate Transaction), in 92 exchange for the cancellation of the Options held by such Optionee, of the difference between the then Fair Market Value of the aggregate number of shares of Common Stock then subject to such Options and the aggregate exercise price that would have to be paid to acquire such shares) or for substitution of appropriate new options covering stock of a successor corporation to the Company or stock of an affiliate of such successor corporation. If the Plan Administrator determines that such an assumption or substitution will be made, the Plan Administrator shall give notice of such determination to the Optionees, and the provisions of such assumption or substitution, and any adjustments made (i) to the number and kind of shares subject to the outstanding Options (or to the options in substitution therefor), (ii) to the exercise prices, and/or (iii)to the terms and conditions of the stock options, shall be binding on the Optionees. Any such determination shall be made in the sole discretion of the Plan Administrator and shall be final, conclusive and binding on all Optionees. If the Plan Administrator, in its sole discretion, determines that no such assumption or substitution will be made, the Plan Administrator shall give notice of such determination to the Optionees, and each Option that is at the time outstanding shall automatically accelerate so that each such Option shall, immediately prior to the specified effective date for the Corporate Transaction, become 100% vested and exercisable, except that such acceleration will not occur if, in the opinion of the Company's outside accountants, it would render unavailable "pooling of interest" accounting for a Corporate Transaction that would otherwise qualify for such accounting treatment. All such Options shallterminate and cease to remain outstanding immediately following the consummation of the Corporate Transaction, except to the extent assumed by the successor corporation or an affiliate thereof. 10.3 FURTHER ADJUSTMENT OF OPTIONS Subject to Section 10.2, the Plan Administrator shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation or change in control of the Company, as defined by the Plan Administrator, to take such further action as it determines to be necessary or advisable, and fair and equitable to Optionees, with respect to Options. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Options so as to provide for earlier, later, extended or additional time for exercise and other modifications, and the Plan Administrator may take such actions with respect to all Optionees, to certain categories of Optionees or only to individual Optionees. The Plan Administrator may take such action before or after granting Options to which the action relates and before or after any public announcement with respect to such sale, merger, consolidation, reorganization, liquidation or change in control that is the reason for such action. 10.4 LIMITATIONS The grant of Options will in no way affect the Company's right to adjust, reclassify, reorganize or otherwise change its capital or business structure orto merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. S 11. WITHHOLDING The Company may require the Optionee to pay to the Company the amount of any withholding taxes that the Company is required to withhold with respect to the grant or exercise of any Option. Subject to the Plan and applicable law, the Plan Administrator may, in its sole discretion, permit the Optionee to satisfy withholding obligations, in whole or in part, by paying cash, by electing to have the Company withhold shares of Common Stock or by transferring shares of Common Stock to the Company, in such amounts as are equivalent to the Fair Market Value of the withholding obligation. The Company shall have the right to withhold from any shares of Common Stock issuable pursuant to an Option or from any cash amounts otherwise due or to become due from the Company to the Optionee an amount equal to such taxes. The Company may also deduct from any Option anyother amounts due from the Optionee to the Company or a Subsidiary. 12. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES To assist an Optionee (including an Optionee who is an officer or a director of the Company) in acquiring shares of Common Stock pursuant to an Option granted under the Plan, the Plan Administrator, in its sole discretion, may authorize, either at the Grant Date or at any time before the acquisition of Common Stock pursuant to the Option, (a) the extension of a loan to the Optionee by the Company, (b) the payment by the Optionee of the purchase price, if any, of the Common Stock in installments, or (c) the guarantee by the Company of a loan obtained by the Optionee from a third party. The terms of any loans, installment payments or loan guarantees, including the interest rate and terms of repayment, will be subject to the Plan Administrator's discretion. Loans, installment payments and loan guarantees may be granted with or without security. The maximum credit available is the purchase price, if any, of the Common Stock acquired, plus the maximum federal and state income and employment tax liability that may be incurred in connection with the acquisition. 13. REPURCHASE RIGHTS; ESCROW 13.1 REPURCHASE RIGHTS The Plan Administrator shall have the discretion to authorize the issuance of unvested shares of Common Stock pursuant to the exercise of an Option. In the event of termination of the 93 Optionee's employment or services, all shares of Common Stock issued upon exercise of an Option which are unvested at the time of cessation of employment or services shall be subject to repurchase at the exercise price paid for such shares. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise) shall be established by the Plan Administrator and set forth in the agreement evidencing such right. All of the Company's outstanding repurchase rights under this Section 13.1 are assignable by the Company at any time and shall remain in full force and effect in the event of a Corporate Transaction; provided that if the vesting of Options is accelerated pursuant to Section 10.2, the repurchase rights under this Section 13.1 shall terminate and all shares subject to such terminated rights shall immediately vest in full. The Plan Administrator shall have the discretionary authority, exercisable either before or after the Optionee's cessation of employment or services, to cancel the Company's outstanding repurchase rights with respect to one or more shares purchased or purchasable by the Optionee under an Option and thereby accelerate the vesting of such shares in whole or in part at any time. 13.2 ESCROW To ensure that shares of Common Stock acquired upon exercise of an Option that are subject to any repurchase right, stockholders agreement and/or security for any promissory note will be available for repurchase, the Plan Administrator may require the Optionee to deposit the certificate or certificates evidencing such shares with an agent designated by the Plan Administrator under the terms and conditions of escrow and security agreements approved by the Plan Administrator. If the Plan Administrator does not require such deposit as a condition of exercise of an Option, the Plan Administrator reserves the right at any time to require the Optionee to so deposit the certificate or certificates in escrow. The Company shall bear the expenses of the escrow. As soon as practicable after the expiration of any repurchase rights or stockholders agreement, and after full repayment of any promissory note secured by the shares in escrow, the agent shall deliver to the Optionee the shares no longer subject to such restrictions and no longer security for any promissory note. In the event shares held in escrow are subject to the Company's exercise of a repurchase option or stockholders agreement, the notices required to be given to the Optionee shall be given to the agent and any payment required to be given to the Optionee shall be given to the agent. Within 30 days after payment by the Company, the agent shall deliver the shares which the Company has purchased to the Company and shall deliver the payment received from the Company to the Optionee. In the event of any stock dividend, stock split or consolidation of shares or any like capital adjustment of any of the outstanding securities of the Company, any and all new, substituted or additional securities or other property to which the Optionee is entitled by reason of ownership of shares acquired upon exercise of an Option shall be subject to any repurchase rights, stockholders agreement, and/or security for any promissory note with the same force and effect as the shares subject to such repurchase rights, stockholders agreement and/or security interest immediately before such event. 14. MARKET STANDOFF In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, a person shall not sell, or make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any shares issued pursuant to an Option granted under the Plan without the prior written consent of the Company or its underwriters. Such limitations shall be in effect only if and to the extent and for such period of time as may be requested by the Company or such underwriters and agreed to by the Company's officers and directors; provided, however, that in no event shall the weighted average number of days in such period exceed 180 days. The limitations of this paragraph shall in all events terminate two years after the effective date of the Company's initial public offering. In the event of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Company's outstanding Common Stock effected as a class without the Company's receipt of consideration, then any new, substituted or additional securities distributed with respect to the purchased shares shall be immediately subject tothe provisions of this Section 14, to the same extent the purchased shares are at such time covered by s uch provisions. In order to enforce the limitations of this Section 14, the Company may impose stop-transfer instructions with respect to the purchased shares and any new, substituted or additional securities distributed with respect to the purchased shares until the end of the applicable standoff period. 15. AMENDMENT AND TERMINATION OF PLAN 15.1 AMENDMENT OF PLAN The Plan may be amended only by the Board in such respects as it shall deem advisable; however, to the extent required for compliance with Section 422 of the Code or any applicable law or regulation, stockholder approval will be required for any amendment 94 that will (a) increase the total number of shares as to which Options may be granted under the Plan, (b) modify the class of persons eligible to receive Options, or (c) otherwise require stockholder approval under any applicable law or regulation. 15.2 TERMINATION OF PLAN The Board may suspend or terminate the Plan at any time. The Plan will have no fixed expiration date; provided, however, that no Incentive Stock Options may be granted more than 10 years after the earlier of the Plan's adoption by the Board and approval by the stockholders. 15.3 CONSENT OF OPTIONEE The amendment or termination of the Plan shall not, without the consent of the Optionee, impair or diminish any rights or obligations under any Option theretofore granted under the Plan. Any change or adjustment to an outstanding Incentive Stock Option shall not, without the consent of the Optionee, be made in a manner so as to constitute a "modification" that would cause such Incentive Stock Option to fail to continue to qualify as an Incentive Stock Option. 16. GENERAL 16.1 OPTION AGREEMENTS Options granted under the Plan shall be evidenced by a written agreement that shall contain such terms, conditions, limitations and restrictions as the Plan Administrator shall deem advisable and that are not inconsistent with the Plan. 16.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN OPTIONS None of the Plan, participation in the Plan or any action of the Plan Administrator taken under the Plan shall be construed as giving any person any right to be retained in the employ of the Company or limit the Company's right to terminate the employment or services of any person. 16.3 REGISTRATION The Company shall be under no obligation to any Optionee to register for offering or resale or to qualify for exemption under the Securities Act, or to register or qualify under state securities laws, any shares of Common Stock, security or interest in a security paid or issued under, or created by, the Plan, or to continue in effect any such registrations or qualifications if made. The Company may issue certificates for shares with such legends and subject to such restrictions on transfer and stop-transfer instructions as counsel for the Company deems necessary or desirable for compliance by the Company with federal and state securities laws. Inability of the Company to obtain, from any regulatory body having jurisdiction, the authority deemed by the Company's counsel to be necessary for the lawful issuance and sale of any shares hereunder or the unavailability of an exemption from registration for the issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the non issuance or sale of such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of an Option, the Company may require the Optionee to represent and warrant at the time of any such exercise or receipt that such shares are being purchased or received only for the Optionee's own account and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any relevant provision of the aforementioned laws. At the option of the Company, a stop-transfer order against any such shares may be placed on the official stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred, unless an opinion of counsel is provided (concurred in by counsel for the Company) stating that such transfer is not in violation of any applicable law or regulation, may be stamped on stock certificates to ensure exemption from registration. The Plan Administrator may also require such other action or agreement by the Optionee as may from time to time be necessary to comply with the federal and state securities laws. 16.4 NO RIGHTS AS A STOCKHOLDER No Option shall entitle the Optionee to any dividend, voting or other right of a stockholder unless and until the date of issuance under the Plan of the shares that are the subject of such Option, free of all applicable restrictions. 16.5 COMPLIANCE WITH LAWS AND REGULATIONS Notwithstanding anything in the Plan to the contrary, the Board, in its sole discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Optionees who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Optionees. Additionally, in interpreting and applying the provisions of the Plan, any Option granted as an Incentive Stock Option pursuant to the Plan shall, to the extent permitted by law, be construed as an "incentive stock option" within the meaning of Section 422 of the Code. 16.6 NO TRUST OR FUND The Plan is intended to constitute an "unfunded" plan. Nothing contained herein shall require the Company to segregate any monies or other property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Optionee, and no Optionee shall have any rights that are greater than those of a general unsecured creditor of the Company. 16.7 SEVERABILITY If any provision of the Plan or any Option is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to 95 any person, or would disqualify the Plan or any Option under any law deemed applicable by the Plan Administrator, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Plan Administrator's determination, materially altering the intent of the Plan or the Option, such provision shall be stricken as to such jurisdiction, person or Option, and the remainder of the Plan and any such Option shall remain in full force and effect. 17. EFFECTIVE DATE The Plan's effective date is the date on which it is adopted by the Board, so long as it is approved by the Company's stockholders at any time within 12 months of such adoption. Adopted by the Board on October 15, 1998 and approved by the Company's stockholders on October 15, 1998. 96 -----END PRIVACY-ENHANCED MESSAGE-----