-----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, TCyTgdVGLuFrl9K8NnamSlDWV8XUSSsrrkq+TyvHw7NjWt8/Lqad7JidhLuSqfoM Zwfs8Wja1TECVI791OOZBA== 0001072613-03-000837.txt : 20030515 0001072613-03-000837.hdr.sgml : 20030515 20030515162716 ACCESSION NUMBER: 0001072613-03-000837 CONFORMED SUBMISSION TYPE: PRE 14C PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030627 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN POWER & EQUIPMENT CORP CENTRAL INDEX KEY: 0000939729 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-CONSTRUCTION & MINING (NO PETRO) MACHINERY & EQUIP [5082] IRS NUMBER: 911688446 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: PRE 14C SEC ACT: 1934 Act SEC FILE NUMBER: 000-26230 FILM NUMBER: 03705005 BUSINESS ADDRESS: STREET 1: 4601 N E 77TH AVE STREET 2: STE 200 CITY: VANCOUVER STATE: WA ZIP: 98662 BUSINESS PHONE: 2062532346 PRE 14C 1 pre-14c_11958.txt WESTERN POWER & EQUIPMENT CORP. PRE 14C ================================================================================ SCHEDULE 14C (RULE 14C-101) Information Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934 Check the appropriate box: [X] Preliminary Information Statement [_] Definitive Information Statement [_] Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2)) WESTERN POWER & EQUIPMENT CORP. (Name of Registrant As Specified In Its Charter) PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX): [X] No fee required [_] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which the transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ____________________________________________________________________ (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [_] Fee paid previously with preliminary materials [_] check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount previously paid:___________________________________________ (2) Form, Schedule or Registration Statement No.:_____________________ (3) Filing Party:_____________________________________________________ (4) Date Filed:_______________________________________________________ ================================================================================ WESTERN POWER & EQUIPMENT CORP. PRELIMINARY INFORMATION STATEMENT PURSUANT TO SECTION 14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND REGULATION 14C AND SCHEDULE 14C THEREUNDER WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY INTRODUCTION This Information Statement has been filed with the Securities and Exchange Commission and is being mailed or otherwise furnished to the registered stockholders of Western Power & Equipment Corp., a Delaware corporation (the "Company") in connection with the prior approval by the board of directors of the Company, and the receipt by the board of approval by written consent of the holders of a majority of the Company's outstanding shares of common stock, of a resolution to approve the Stock Purchase and Exchange Agreement dated May 6, 2003, as amended (the "Agreement") between the Company, the Company's wholly-owned subsidiary, Western Power & Equipment Corp., an Oregon corporation ("Western Sub") and CDKnet.com, Inc.("CDK"). The Company will, pursuant to the Agreement, exchange all shares of the capital stock of Western Sub for 9.4 million shares of CDK's common stock, subject to adjustment as described below. The Agreement is annexed to this Information Statement as Exhibit A. The stockholders of CDK previously approved a one-for-fifty reverse split of CDK's outstanding common stock which is not effective. The reverse split will be effective immediately prior to the closing of the transactions contemplated by the Agreement. References to numbers of shares of CDK common stock, including the 9.4 million shares which will be exchange for the capital stock of Western Sub, give effect to the reverse split. The Company has obtained all necessary corporate approvals in connection with the foregoing actions and your consent is not required and is not being solicited in connection with the approval of the foregoing action. Section 228 of the Delaware General Corporation Law and the By-laws of the Company provide that any action required or permitted to be taken at a meeting of the stockholders may be taken without a meeting if stockholders holding at least a majority of the voting power sign a written consent approving the action. On May ___, 2003, stockholders of the Company that own 5,761,424 shares of the Company's common stock, which constitutes 61.3% of the outstanding shares entitled to vote, executed written consents to approve the Agreement. We are sending this Information Statement to the Company's stockholders of record who owned common stock of the Company as of ________, 2003 (the "Record Date"). As of the Record Date, the Company had 9,400,000 shares of common stock issued and outstanding, and each share of Common Stock is entitled to one vote. The actions will not become effective until: (i) 21 days from the date this Information Statement is first mailed to stockholders, or (ii) such later date as approved by the board of directors, in its sole discretion. This Information Statement is dated May __, 2003 and is first being mailed to stockholders on or about May _, 2003. All expenses incurred in connection with the preparation and mailing of this Information Statement will be borne by the Company. This Information Statement is prepared and distributed by the Company. THIS IS NOT A NOTICE OF A MEETING OF STOCKHOLDERS AND NO STOCKHOLDERS' MEETING WILL BE HELD TO CONSIDER ANY MATTER DESCRIBED HEREIN. INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON As a condition precedent to CDK's obligations under the Agreement, Western Sub has agreed to enter into employment agreements with each of C. Dean McLain, the Company's President, Mark Wright, the Company's Chief Financial Officer and Robert M. Rubin, the Company's Chairman. Mr. McLain's employment agreement provides that he will be paid $397,800 per year and the term of the agreement is for a period of seven years. Mr. Wright's employment agreement provides that he will be paid $178,500 per year and the term of the agreement is for a period of four years. Mr. Rubin's employment agreement provides that he will be paid $200,000 per year and the term of the agreement is for a period of five years. Other than the above no director, executive officer, nominee for election as a director, associate of any director, executive officer or nominee or any other person has any substantial interest, direct or indirect, by security holdings or otherwise, resulting from the actions set forth herein, which is not shared by all other stockholders pro-rata, and in accordance with their respective interests. CERTAIN QUESTIONS AND ANSWERS Q: WHAT AM I BEING ASKED TO APPROVE? A: You are not being asked to approve anything. This Information Statement is being provided to you solely for your information. Stockholders holding a majority of the outstanding voting common stock of the Company have already agreed to approve the Agreement between the Company and CDK with respect to the sale of the Company's wholly-owned subsidiary Western Sub. Q: WHY HAS THE BOARD OF DIRECTORS AGREED TO APPROVE THESE ACTIONS? A: All of these actions are necessary to accomplish the terms of the Agreement. Q: WHAT ARE THE BASIC TERMS OF THE TRANSACTION WITH CDK? A: The Company will sell all of its shares of common stock of Western Sub to CDK in exchange for 9,400,000 shares of common stock of CDK, subject to adjustment described below. You will retain all of your present stockholdings in the Company and are not required to do anything. Q: WILL I RECOGNIZE A GAIN OR LOSS IN CONNECTION WITH THE TRANSACTION WITH CDK? A: No. Q: DO I HAVE APPRAISAL RIGHTS? A: No. You are not entitled to appraisal rights under Delaware Law. Q: ARE THERE ANY CONDITIONS TO THE TRANSACTIONS WITH CDK? A: Yes. There are several conditions, listed under the section entitled "Sale of Western Sub". Q: WHAT BUSINESS IS CONDUCTED BY CDK? A: CDK, incorporated in the state of Delaware, does not currently have an existing business and upon completion of the sale of Western Sub to CDK, CDK's only business will be that of Western Sub. Q: ARE THERE RISKS INVOLVED IN THE TRANSACTION WITH CDK? A: Yes. After the transaction is completed, our success will be totally dependent on the success of CDK. CDK will have control over Western Sub and all of its operations, and therefore the management of CDK will affect the value of CDK's common stock, which will be the Company's only asset upon completion of the sale of Western Sub. There are no assurances that CDK will be able to operate profitably after the closing of the transaction (which we refer to as the "Closing"). Q: WHEN DO YOU EXPECT TO COMPLETE THE TRANSACTION WITH CDK? A: The Transaction will be consummated and become effective no sooner than 21 days after this Information Statement has been delivered to our shareholders. The Company and CDK anticipate that the Transaction will be completed as soon as possible after all of the conditions to the Transaction contained in the Agreement are satisfied, or where permissible, waived, or such later time as mutually. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of the date hereof, with respect to the beneficial ownership of the common stock by each beneficial owner of more than 5% of the outstanding shares thereof, by: (i) any holder of more than five percent (5%) of the outstanding shares; (ii) the Company's officers and directors; and (iii) the Company's officers and directors as a group. As of the date hereof the Company had 9,400,000 shares of its common stock outstanding. Pursuant to the rules and regulations of the Securities and Exchange Commission, shares of common stock that an individual or group has a right to acquire within 60 days pursuant to the exercise of options or warrants are deemed to be outstanding for the purposes of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person shown in the table.
NUMBER OF SHARES PERCENTAGE OF OF COMMON STOCK OUTSTANDING COMMON NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) STOCK BENEFICIALLY OWNED - ------------------------------------ ---------------------- ------------------------ C. Dean McLain (2)(7)(8) 2,769,419 33.0% Robert M. Rubin (3)(4)(8) 2,769,419 33.0% Rubin Family Irrevocable Stock Trust(4) 600,000 6.4% Mark J. Wright(5) 100,000 * Steven Moscowitz -0- -0- Michael Metter(6) -0- -0- American United Global, Inc. (AUGI) 1,222,586 13.0% 2489 152nd Avenue NE Richmond, WA 98052 JSC LLC(7) 588,000 6.2% 38207 NE Gerber Rd. Yacolt, WA 98675] All Executive Officers and Directors as a Group (5 persons)(2)-(7) 6,638,838 63.2%
* less than one percent (1) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within 60 days from the date on which beneficial ownership is to be determined, upon the exercise of options, warrants or convertible securities. Each beneficial owner's percentage ownership is determined by assuming that options, warrants and convertible securities that are held by such person (but not those held by any other person) and which are exercisable within such 60 day period, have been exercised. (2) Includes Mr. McLain's direct beneficial ownership of exercisable options to acquire 500,000 shares of Company Common Stock. Excludes Mr. McLain's indirect ownership in the Company through his beneficial ownership of options to purchase 162,000 shares of AUGI common stock. Mr. McLain's beneficial ownership of AUGI common stock represents 8.1 percent of AUGI voting stock as of April 24, 2003. (3) Includes Mr. Rubin's direct beneficial ownership of exercisable options to acquire 500,000 shares of Company Common Stock. Excludes Mr. Rubin's indirect ownership in the Company through his beneficial ownership to purchase 33,600 shares of AUGI common stock. Mr. Rubin's beneficial ownership of AUGI common stock represents 77.8 percent of AUGI voting stock as of April 24, 2003. (4) Mr. Rubin, a grantor of the Rubin Family Irrevocable Stock Trust (the "Trust"), does not have sole of shared voting or dispositive power over the shares of Company common stock held by the Trust, and disclaims any beneficial ownership of the shares of Company common stock held by the Trust. (5) Includes options to purchase 100,000 shares of Company common stock. (6) Excludes Mr. Metter's indirect ownership in the Company through his beneficial ownership of 110,000 shares of AUGI common stock. (7) A trust in which Mr. McLain is a grantor owns a portion of JSC LLC. Mr. McLain does not have sole or shared power to dispose of or vote any of the shares of Company common stock held by JSC LLC. (8) On May 1, 2003, Mr. McLain and Mr. Rubin agreed to convert the principal amount of a loan made to the Company in the amount of $147,000 into an aggregate of 5,538,838 shares of the Company's common stock. In connection therewith Mr. McLain received 2,769,419 shares of the Company's common stock and Mr. Rubin received 2,769,419 shares of the Company's common stock. SALE OF WESTERN SUB General - ------- The Company has entered into the Agreement, which sets forth the terms and conditions of a sale of all of its shares of common stock in Western Sub, its wholly-owned subsidiary, to CDK. Pursuant to the Agreement, CDK will issue 9.4 million shares of its common stock to the Company in exchange for 1,000 shares of common stock of Western Sub, which constitutes all of the issued and outstanding shares of Western Sub (the "Transaction"). The 9.4 million shares of CDK common stock, assuming a one-for-fifty reverse split approved by all necessary corporate action of CDK which is expected to be effective immediately preceding the closing of the Transaction, will constitute ___% of the outstanding voting securities of CDK. It is currently anticipated that the consummation of the Transaction will occur no sooner than twenty-one (21) days after the date this Information Statement is first mailed to the Company's stockholders of record on May __, 2003. CDK, incorporated in the state of Delaware, intends to continue to operate the business of Western Sub and to raise additional funds in the form of debt, equity or a combination thereof, in order to have sufficient capital to grow its business. There can be no assurance that CDK will be successful in its efforts to raise capital, or that such capital will be available to CDK on terms which would be beneficial to its business or the business of Western Sub. CDK's common stock currently trades on the OTC Bulletin Board under the symbol "CDKX" and its closing price on May 1, 2003 was $0.02. CDK has not declared any cash dividends on its common equity for the previous two fiscal years. There is nothing restricting CDK from issuing dividends. CDK currently has no employees outside of management. The principal executive offices of CDK are located at _________________, and its telephone number is ________________. Consent Required - ---------------- Approval of the Agreement requires the consent of the holders of a majority of the outstanding shares of our common stock entitled to vote at a meeting of stockholders. A majority of the outstanding shares of our common stock as of the Record Date has given its consent to approve the Agreement and the transactions contemplated thereby and accordingly, the requisite stockholder approval was obtained by the execution of the written consent in favor of the Agreement. Reasons for Approval - -------------------- The Board of Directors has given careful consideration to the Transaction, the existing business operations of CDK and Western Sub, the future potential and plans of CDK, the interest of our stockholders, and the risks of the Transaction to our existing stockholders. Based on the foregoing considerations, the Board of Directors, together with the holders of a majority of the outstanding shares of our common stock, believe the transactions contemplated by the Agreement are fair and in the best interests of the Company and its stockholders. Fairness Opinion - ---------------- The Board of Directors has received a fairness opinion from Vertical Capital Partners, Inc., New York, New York, to the effect that the terms of the Agreement and the Transaction are fair to the Company's stockholders from a financial point of view. A copy of the opinion is annexed hereto as Exhibit B. Terms of the Agreement - ---------------------- The following describes the material terms of the Agreement. This summary is qualified in its entirety by reference to the full text of the Agreement, which is attached hereto as Exhibit A and such Agreement is incorporated into this Information Statement by reference. You are urged to read the entire Agreement. Completion of the Transaction - ----------------------------- The Transaction will be consummated and become effective no sooner than twenty-one (21) days after this Information Statement has been delivered to our shareholders. The Company and CDK anticipate that the Transaction will be completed as soon as possible after all of the conditions to the Transaction contained in the Agreement are satisfied, or where permissible, waived, or such later time as mutually agreed. Representations and Warranties - ------------------------------ Representations of the Company ------------------------------ The Agreement contains representations and warranties of the Company regarding, among other matters: * the corporate organization and existence of the Company, including that it has been duly organized, is validly existing and in good standing with the corporate power and authority to own, operate and lease its assets, to perform its obligations under certain material agreements and to carry on its businesses as currently conducted and to carry out the transactions contemplated by the Agreement; * the corporate power and authority of the Company to execute and deliver the Agreement and related documents and to consummate the other contemplated transactions; * the adoption by the Company's board of directors of a resolution adopting the Agreement and the Transaction; * the filing and accuracy of the Company's tax returns, the lack of pending or threatened proceedings, deficiencies or audits with respect to taxes, and certain related tax matters; * the stockholder consent required to approve the Agreement and the Transaction. Representations of Western Sub ------------------------------ The Agreement contains representations and warranties of Western Sub regarding, among other matters: * the corporate organization and existence of Western Sub, including that it has been duly organized, is validly existing and in good standing with the corporate power and authority to own, operate and lease its assets, to perform its obligations under certain material agreements and to carry on its businesses as currently conducted; * the filing and accuracy of Western Sub's tax returns, the lack of pending or threatened proceedings, deficiencies or audits with respect to taxes, and certain related tax matters; * the absence of material claims, actions, suits, proceedings and specified judgments, decrees and injunctions. Representations of CDK ---------------------- The Agreement contains representations and warranties of CDK regarding, among other matters: * the corporate organization and existence of CDK, including that it has been duly organized, is validly existing and in good standing with the corporate power and authority to own, operate and lease its assets, to perform its obligations under certain material agreements and to carry on its businesses as currently conducted and to carry out the transactions contemplated by the Agreement; * the capitalization of CDK, including the number of shares of capital stock authorized, the number of shares and rights to acquire shares outstanding, and the number of shares reserved for issuance; * CDK has filed in a timely manner all documents that CDK was required to file under the Securities Exchange Act of 1934, as amended, during the 12 months preceding the date of this Agreement; * the absence of material misstatements or omissions in the information provided by CDK in its filings with the SEC and the accuracy and compliance of CDK financial statements contained therein. * the absence of material claims, actions, suits, proceedings and specified judgments, decrees and injunctions. Conduct of Western Sub's Business Before the Completion of the Transaction - -------------------------------------------------------------------------- The Agreement contemplates that, until the effective time of the Transaction (the "Effective Time"), Western Sub will operate its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay the debts and taxes when due, pay or perform other obligations when due, and, to the extent consistent with such business, use its commercially reasonable efforts consistent with past practice and policies to preserve intact Western Sub's present business organization, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, all with the goal of preserving unimpaired Western Sub's goodwill and ongoing business. Conduct of CDK Before Completion of the Transaction - --------------------------------------------------- The Agreement contemplates that, until the Effective Time, CDK will carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay its debts and taxes when due, to pay or perform other obligations when due, and, to the extent consistent with such business, use its commercially reasonable efforts consistent with past practice and policies to preserve intact the present business organizations, all with the goal of minimizing any liabilities. Reasonable Efforts to Complete the Transaction - ---------------------------------------------- The Company and CDK are required to use reasonable efforts to make all filings required and to use reasonable efforts to take all further actions necessary or desirable to effect the transactions contemplated by the Agreement. Conditions to the Transaction - ----------------------------- The obligations of the Company and CDK to complete the Transaction are subject to the satisfaction or waiver of the following conditions, among others, all as more fully described in the Agreement: Conditions to Obligations of the Company - ---------------------------------------- The obligations of the Company to consummate the Transaction shall be subject to the satisfaction, at or prior to the Effective Time, of each of the following conditions, any of which may be waived, in writing, exclusively by the Company: Representations and Warranties True as of the Closing Date. The representations and warranties of CDK contained in the Agreement or in any list, certificate or document delivered by CDK to the Company pursuant to the provisions hereof shall have been true in all material respects on the date hereof and shall be true in all material respects on the date of the Closing (the "Closing Date") with the same effect as though such representations and warranties were made as of such date. Compliance with this Agreement. CDK shall have performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing. Revolving Credit Facility. Deutsche Financial Services Corporation ("DFSC"), or another lending institution, as lender and as representative of several institutional lenders shall have funded a revolving credit facility in an amount not less than $20 million, which is substantially similar to the credit facility pursuant to an agreement between Western Sub and DFSC dated June 30, 1999, as last amended on March 22, 2001. Fairness Opinion. The Company's Board of Directors shall have received an opinion from Vertical Capital Partners, Inc., New York, New York, to the effect that the terms of the Agreement are fair to the Company's stockholders from a financial point of view. Balance Sheet. CDK shall have a minimum of $2,000,000 in cash on its balance sheet on the Closing Date. Conditions to the Obligations of CDK - ------------------------------------ The obligations of CDK to consummate the Transaction shall be subject to the satisfaction, at or prior to the Effective Time, of each of the following conditions, any of which may be waived, in writing, exclusively by the CDK: Representations and Warranties True as of the Closing Date. The representations and warranties of the Company contained in the Agreement or in any schedule, certificate or document delivered by the Company to CDK pursuant to the provisions hereof shall have been true in all material respects on the date hereof without regard to any schedule updates furnished by the Company after the date hereof and shall be true in all material respects on the Closing Date with the same effect as though such representations and warranties were made as of such date. Compliance with this Agreement. Each of the Company and Western Sub shall have performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by them prior to or at the Closing. Material Adverse Changes. The assets or the operations of Western Sub's business, taken as a whole, shall not have been and shall not be threatened to be materially, adversely affected in any way as a result of any event or occurrence (except as a result of general economic conditions). Revolving Credit Facility. Deutsche Financial Services Corporation ("DFSC"), or another lending institution, as lender and as representative of several institutional lenders shall have funded a revolving credit facility in an amount not less than $20 million, which is substantially similar to the credit facility pursuant to an agreement between Western Sub and DFSC dated June 30, 1999, as last amended on March 22, 2001, in addition to approximately $5 million inventory financing to be provided by Case. Change in Business. CDK having no reasonable basis to believe that either: (i) the net sales of Western Sub's business was less than $60,000,000 for the nine months ended April 30, 2003; or (ii) the sum of PP&E being less than $1,000,000 as of April 30, 2003. Escrow of CDK Common Stock. - --------------------------- In connection with this Transaction, 1,000,000 shares of the 9,400,000 shares of CDK common stock being issued to the Company ("Purchase Price") shall be held in escrow and subject to adjustment as follows: (i) The number of shares constituting the full Purchase Price shall be reduced (but not increased) by a whole number determined by rounding the result of multiplying 1,000,000 by the fraction determined by dividing the difference between the Adjusted Net Earnings (as defined in the Stock Purchase and Exchange Agreement attached as Exhibit A of Western Sub for its fiscal year ending July 31, 2003 by $1,000,000. For example, if the Adjusted Net Earnings of Western Sub for Fiscal 2003 is $750,000, the number of shares by which the Purchase Price shall be reduced is ($750,000/$1,000,000) x 1,000,000 = 750,000. In the event the Adjusted Net Earnings of Western Sub is less than $0, the number of shares to be released under this clause shall be zero. (ii) Of the shares held in escrow after consideration of (i) above, the number of shares constituting the full Purchase Price shall be further reduced (but not increased) by a whole number determined by rounding the result of multiplying 2,000,000 by the fraction determined by dividing the difference between the Adjusted Net Earnings (defined below) of Western Sub for its fiscal year ending July 31, 2004 by $2,000,000. For example, if the Net Earnings of Western Sub for Fiscal 2004 is $1,500,000 the number of shares by which the Purchase Price shall be reduced is ($1,500,000/$2,000,000) x 2,000,000 = 750,000. In the event the Adjusted Net Earnings of Western Sub is less than $0, the number of shares to be released under this clause shall be zero. (iii) In no event shall the aggregate amount of the adjustment set forth in paragraphs (i) and (ii) above exceed 1,000,000 shares. Termination of the Agreement - ---------------------------- The Agreement is subject to termination prior to the Effective Time: * by mutual consent; * by the Company if it does not obtain the requisite stockholder approval; * by either party if, without fault of the terminating party, the Transaction is not consummated on or before June 27, 2003; and * by either party if the other party fails to obtain approval of the Transaction; Dissenters' Rights of Appraisal - ------------------------------- There are no dissenters' rights of appraisal applicable to the Agreement or the closing of the Transaction. Tax Aspects of the Transaction - ------------------------------ The proposed Transaction is intended to qualify as a tax-free reorganization under the Internal Revenue Code of 1986. If the Transaction qualifies as a tax-free reorganization, no gain or loss will be recognized for income tax purposes by either party as a result of the Transaction. There will not be any material tax effects on any party's existing stockholders as a result of the Transaction. However, neither the Company nor CDK has requested a tax ruling from the Internal Revenue Service with respect to the Transaction. Accordingly, no assurance can be given that the Transaction will qualify as a tax-free reorganization. If the Transaction does not qualify for tax free treatment, the Company will be deemed to have sold its shares for CDK common stock and be taxed on the difference between its basis in Western Sub common stock and the value of the CDK common stock. The Company's stockholders should have no tax effect since they are not receiving any new shares. Restricted Nature of Securities. - -------------------------------- The shares of CDK's common stock to be issued to the Company in connection with the Transaction will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and will be deemed "restricted securities" as that term is defined in Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act. Accordingly, such shares will be issued in reliance on the exemption from such registration requirements provided by the Securities Act. Such shares will be "restricted securities," and the certificate will bear legends restricting their subsequent resale in the absence of registration under the Securities Act or the availability of an exemption therefrom. INFORMATION ABOUT THE PARTIES TO THE TRANSACTION WESTERN POWER & EQUIPMENT CORP. Incorporated herein by reference is the Company's Form 10-K/A filed with the Securities and Exchange Commission on November 29, 2002 and the Company's Form 10-Q filed with the Securities and Exchange Commission on March 17, 2003, which describes the Company's business and financial condition.. CDKNET.COM, INC. For a detailed description of CDK's business and financial condition please see CDK's Form 10-KSB for the year ended June 30, 2002 and Form 10-QSB for the six months ended December 31, 2002, attached hereto as Exhibits C and D, respectively. PROFORMA FINANCIAL INFORMATION Attached hereto as Exhibit E, are the unaudited pro forma financial statements for the six-months ended January 31, 2003, which give effect to the Transaction as if the Transaction had occurred on January 31, 2003. The unaudited pro forma financial statements should be read in conjunction with the historical financial statements and notes thereto of CDK attached as Exhibits C and D and with the Company's financial statements that have been incorporated herein by reference. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the future financial position or future results of operations of CDK after completion of the Transaction. ADDITIONAL INFORMATION Additional information concerning the Company, including annual and quarterly reports for the past twelve months which have been filed with the Securities and Exchange Commission, may be accessed through the Securities and Exchange Commission's EDGAR archives at www.sec.gov. By Order of the Board of Directors ____________________________ Vancouver, Washington May __, 2003 EX-99.A 3 exh-a_11958.txt STOCK PURCHASE AND EXCHANGE AGREEMENT EXHIBIT A --------- STOCK PURCHASE AND EXCHANGE AGREEMENT AGREEMENT, dated May 5, 2003, between CDKnet.com, Inc. ("Buyer"), Western Power & Equipment Corp, a Delaware corporation ("Seller" or "WP") and Western Power & Equipment Corp., an Oregon corporation and wholly-owned subsidiary of Seller ("WP Sub"). WHEREAS, WP Sub is a wholly owned subsidiary of Seller; WHEREAS, WP Sub conducts certain business operations involving the sale, rental and servicing of construction, and industrial equipment and parts; WHEREAS, Buyer desires to purchase from Seller all of the issued and outstanding shares of common stock of WP Sub in exchange for shares of common stock of Buyer; WHEREAS, Seller wishes to sell all of the issued and authorized shares of capital stock of WP Sub to Buyer, all upon the terms and subject to the conditions hereinafter set forth; and WHEREAS, the parties intend that the transaction qualify as a reorganization within the meaning of Section 368(B) of the Internal Revenue Code of 1986, as amended (the "Code"), and the parties intend this Agreement to qualify as a "plan of reorganization" within the meaning of the Treasury Regulations Sections 1.368-2(g) and 1.368-3(a). NOW, THEREFORE, in consideration of the premises and the mutual covenants, representations, warranties and agreements contained herein, the parties hereby agree as follows: 1. PURCHASE AND SALE. 1.1 Purchase and Sale of the Common Stock. On the terms and subject to the conditions herein set forth, at the Closing (as defined in Section 2.3 hereof), Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, all of the issued and outstanding shares of capital stock of WP Sub (the "WP Sub Capital Stock") for the Purchase Price defined in Section 1.2, below. 1.2 Method of Conveyance. (a) The sale, transfer, conveyance, assignment and delivery by Seller of the WP Sub Capital Stock to Buyer in accordance with Section 1.1 hereof shall be effected on the Closing Date by Seller's execution and delivery of certificates representing all issued and outstanding shares of WP Sub Capital Stock to Buyer, together with duly executed stock powers with Medallion guaranty of signature sufficient to transfer all shares of WP Sub Capital Stock to Buyer. (b) At the Closing Seller shall transfer, convey, assign and deliver to Buyer the WP Sub Capital Stock certificates free and clear of any and all liens, encumbrances, claims, rights of Seller or any third party rights and other restrictions of any kind or nature whatsoever (collectively, "Liens"). 2. PURCHASE PRICE AND CLOSING. 2.1 Purchase Price. (a) In full consideration for the transfer, conveyance, assignment and delivery of the WP Sub Capital Stock to Buyer, Buyer will issue to Seller 9,400,000 shares of fully paid and non-assessable common stock after giving effect to a one-for-fifty reverse stock split of outstanding shares of Buyer's common stock approved December 4, 2002 which will be effective simultaneously with the Closing ("Buyers Common Stock"). The 9,400,000 shares of Buyers Common Stock shall, as adjusted pursuant to paragraph 2.1(b), below; constitute the "Purchase Price." (b) The number of shares of Buyer's Common Stock shall be subject to adjustment as follows: (i) The number of shares constituting the full Purchase Price shall be reduced (but not increased) by a whole number determined by rounding the result of multiplying 1,000,000 by the fraction determined by dividing the difference between the Adjusted Net Earnings (defined below) of WP Sub for its fiscal year ending July 31, 2003 by $1,000,000. For example, if the Adjusted Net Earnings of WP Sub for Fiscal 2003 is $750,000, the number of shares by which the Purchase Price shall be reduced is ($750,000/$1,000,000) x 1,000,000 = 750,000. In the event the Adjusted Net Earnings of WP Sub is less than $0, the number of shares to be released under this clause shall be zero. (ii) Of the shares held in escrow after consideration of 2.1(b)(i) above, the number of shares constituting the full Purchase Price shall be further reduced (but not increased) by a whole number determined by rounding the result of multiplying 2,000,000 by the fraction determined by dividing the difference between the Adjusted Net Earnings (defined below) of WP Sub for its fiscal year ending July 31, 2004 by $2,000,000. For example, if the Net Earnings of WP Sub for Fiscal 2004 is $1,500,000 the number of shares by which the Purchase Price shall be reduced is ($1,500,000/$2,000,000) x 2,000,000 = 750,000. In the event the Adjusted Net Earnings of WP Sub is less than $0, the number of shares to be released under this clause shall be zero. (iii) In no event shall the aggregate amount of the adjustment set forth in paragraphs 2.1(b) (i) and (ii) exceed 1,000,000 shares. (c) The adjusted consolidated net earnings ("Adjusted Net Earnings") of WP Sub and its subsidiaries, for the purpose of computing the adjustments under the provisions of paragraph 2(b) above, shall be determined, in accordance with generally accepted accounting principles, within ninety (90) days after the end of each fiscal year by the independent accounting firm employed by WP Sub as its auditors. The computation by such accounting firm of the Adjusted Net Earnings, made in the manner herein provided, shall be in all respects final and binding upon Buyer and Seller. For the purpose of computing the adjustments, the Adjusted Net Earnings of WP Sub and its subsidiaries for the above mentioned periods shall be the consolidated net earnings of the Company and its subsidiaries for such period, as audited and reported upon, for the purposes of Buyer's annual report to stockholders for such period, by Buyer's independent auditors, plus all amounts charged against and minus such credits applied to such consolidated net earnings in respect of the following: (i) Taxes of the United States and foreign governments (including, but without limitation, excess profits taxes) based upon or measured, in whole or in part, by income of WP Sub or its subsidiaries but exclusive of sate and territorial taxes and taxes imposed by political subdivisions thereof; (ii) Contingent compensation, if any, which may be payable by WP Sub under any plan or agreement, other than a profit-sharing plan qualified under Section 401 of the Internal Revenue Code or any statutory provision that may hereafter be enacted to replace such section; (iii) All items of non-recurring loss or other extraordinary charge which, by reason of 2 size, character, or other factors did not, in the sole and uncontrolled judgment of the Buyer's Board of Directors including the affirmative vote of a nominee of Buyer's shareholder pursuant to the Shareholder Voting Agreement described below, arise in the ordinary and usual course of the business of WP Sub and its subsidiaries, including expenses properly attributable to such loss or charge. (d) Certificates representing 1,000,000 shares of the Purchase Price, together with the two stock powers duly endorsed in blank by Seller in escrow pursuant to an escrow agreement in the form annexed hereto as Exhibit A (the "Escrow Agreement"). 2.2 Payment of Purchase Price. On the Closing Date, the Buyer shall issue to Seller the Buyer's Common Stock. 2.3 Closing. The closing of the transactions provided for in this Agreement (the "Closing") shall take place at the offices of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP within three business days of the satisfaction of all conditions set forth in Article 6 hereof, but no later than 10:00 a.m., New York time on June 27, 2003 to be effective as of June 30, 2003. The date on which the Closing is to be effective is herein referred to as the "Closing Date." The Closing shall be deemed to have occurred at 11:59 P.M. on the Closing Date. 2.4 Closing Financial Statements. Not later than 30 days after the Closing Date, WP Sub shall prepare a balance sheet of its business at the Closing Date ("Closing Balance Sheet") in accordance with generally accepted accounting principles. Such balance sheet shall specifically identify all assets and all liabilities reflected thereon. Seller and WP Sub shall cause Grassi & Co., CPA's, P.C., its independent accountants ("Seller's Auditors"), to issue, as soon as practicable but in any event not later than 45 days after the Closing Date, its report to Seller and Buyer to the effect that such balance sheet presents fairly the financial position of WP Sub's business as of the Closing Date, in conformity with generally accepted accounting principles. References in this Agreement to the Closing Balance Sheet shall mean the balance sheet of WP Sub's business at the Closing Date, prepared and reported upon as described in this Section 2.5. 3. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents and warrants to Buyer as follows: 3.1 Corporate Organization. (a) WP Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Oregon. WP Sub has all requisite corporate power and authority to carry on the business as the same is now being conducted and to own, lease and operate it's properties and assets in the places where such business is now conducted and where such properties and assets are now owned, leased or operated. (b) WP Sub is duly qualified or licensed to do business as a foreign corporation in good standing only in the jurisdictions set forth in Section 3.1(b) of the Disclosure Schedule. There are no jurisdictions where WP Sub is not qualified to do business where the failure to so qualify would have a material adverse effect on its business. 3 (c) Except as set forth in Section 3.1(c) of the Disclosure Schedule, WP Sub neither owns nor leases any property, and does not employ any person or maintain any agent, with respect to its business, outside of the jurisdictions set forth in Section 3.1(b) of the Disclosure Schedule. 3.2 Authorization. (a) Seller has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and to carry out the transactions contemplated hereby; (b) Seller has taken all necessary corporate action required by law or otherwise to be taken by Seller to authorize Seller's execution and delivery of this Agreement and the consummation by Seller of the transactions contemplated hereby; and (c) this Agreement has been duly and validly executed and delivered by Seller and constitutes a valid and binding agreement of and upon Seller enforceable against Seller in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity. (b) Seller is the lawful owner of the WP Capital Stock and owns all of the outstanding shares of such stock, free and clear of all preemptive or similar rights, liens, encumbrances, restrictions and claims of every kind and the delivery to Buyer pursuant to the terms of this Agreement will transfer to Buyer valid title thereto, free and clear of all liens, encumbrances, restrictions and claims of every kind. 3.3 Capitalization (a) The authorized capital stock of WP Sub consists of 500,000 shares of common stock and -0- shares of preferred stock. As of the date hereof and the Closing Date, WP Sub had 1,000 shares of common stock outstanding and -0- shares of preferred stock outstanding, all of which are held by Seller. WP Sub has no options, warrants or other securities convertible into WP Sub capital stock outstanding as of the date hereof or as of the Closing Date. All such outstanding shares have been duly authorized and validly issued and are fully paid and non-assessable. (b) There are no outstanding options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements, commitments or arrangements of any character providing for the purchase, subscription, issuance or sale of any shares of the Capital Stock of SP Sub. 3.4 No Violation. Except for the required consents of third parties identified in Sections 3.12 and 3.15 of the Disclosure Schedule, and except as set forth in Section 3.4 of the Disclosure Schedule, neither the execution and delivery of this Agreement by WP Sub nor the consummation by WP Sub of the transactions contemplated hereby will violate any provision of the Certificate of Incorporation or the by-laws of WP Sub. For purposes of this Agreement, "to Seller's knowledge," "to the best of Seller's knowledge," "to WP Sub's knowledge, "to the best of WP Sub's knowledge," or any similar formulation thereof shall mean to the actual knowledge of any of the current: (i) quality assurance and/or quality control directors of Seller or WP Sub, (ii) hazardous material directors of Seller or WP Sub, or (iii) officers and directors of Seller, each of whom are identified on Schedules 3.12 and 3.15. 3.5 Brokers and Finders. No person has been authorized by Seller or WP Sub, or by anyone acting on behalf of Seller or WP Sub or any of their officers, directors, employees or trustees, to act as a broker, finder or in any other similar capacity in connection with the transactions contemplated by this Agreement in such manner as to give rise to any valid claim against Buyer or Seller for any broker's or finder's fee or commission or similar type of compensation. 3.6 Financial Statements. 4 (a) Section 3.6(a) of the Disclosure Schedule sets forth the following financial information (the "Financial Information"): (i) Audited balance sheet of WP Sub as of July 31, 2002 and audited statements of operations and cash flows of WP Sub for each of the two years ended July 31, 2002 on a historical basis; (ii) internal, unaudited balance sheets of WP Sub as of January 31, 2003 (the "January Balance Sheet"); and (iii) internal, unaudited statements of operations and cash flows (prepared in a format previously agreed to by the parties hereto), of WP Sub for the fiscal quarters ended January 31, 2003 and 2002 on a historical basis. (b) The unaudited Financial Information was compiled from Seller's internal management reports in the ordinary course of Seller's business, which is not consistent in all circumstances with generally accepted accounting principles. (c) Since July 31, 2002, WP Sub has kept its financial records in a manner consistent with its practices at the time and during the periods reflected in clauses (ii) and (iii) of paragraph (a) above without change, in any material respect, of policy or procedure, as to nature of item, amount or otherwise. (d) The aggregate dollar amount of the net property, plant and equipment included in the Financial Information does not exceed the cost of such property, plant and equipment to WP Sub, less any previous write-downs and less depreciation, and the value thereof has not been written up. 3.7 Records and Books of Account; Accounting Practices. The records and books of account of WP Sub have been regularly kept and maintained in reasonable detail and accurately and fairly reflect the transactions and asset dispositions of the WP Sub. WP Sub also maintains an adequate system of internal controls. 3.8 No Undisclosed Liabilities. (a) As of January 31, 2003, except as set forth in Section 3.8 of the Disclosure Schedule, WP Sub did not have any material liabilities or obligations of any nature (absolute, accrued, contingent or otherwise) which were not fully disclosed or reserved against in the January Balance Sheet, and the reserves reflected in the January Balance Sheet were adequate, appropriate, and reasonable as to both nature of items and amounts. (b) Except as set forth in Section 3.8 of the Disclosure Schedule, since January 31, 2003, WP Sub has not incurred any material liabilities (contingent or otherwise) except in the ordinary and usual course of business and consistent with past practices. 3.9 Inventory. Except as set forth in Section 3.9 of the Disclosure Schedule, (a) all material items of the Inventory have been acquired in the ordinary and usual course of business; (b) all material items of the Inventory are of a quality and quantity usable in the ordinary and usual course of business; and (c) the quantities of each type of Inventory are not materially excessive, but are reasonable, adequate and appropriate. 5 3.10 Interim Operations. Except as set forth in Section 3.10 of the Disclosure Schedule, since July 31, 2002 WP Sub has conducted its business only in the ordinary and usual course consistent with past practices. Without limiting the generality of the foregoing, except as set forth in Section 3.10 of the Disclosure Schedule, WP Sub has not with respect to its business, since July 31, 2002: (a) suffered any material adverse change in its assets, or suffered any material damage, destruction or loss, whether or not covered by insurance, in either case materially affecting the business, assets or properties of the WP Sub; (b) agreed to, or incurred, assumed or become subject to, any liabilities or obligations for returns or allowances, other than in the ordinary and usual course of business and materially consistent in nature of item and amount with past practice, or increased, or experienced any change in any assumption underlying, or methods of calculating, any bad debt, contingency or other reserve (except for any such reserve expressly set forth in the January Balance Sheet); (c) paid, discharged or satisfied any material claim, liability or obligation (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction of liabilities and obligations reflected or reserved against in the January Balance Sheet, or incurred in the ordinary and usual course of business consistent with past practices; (d) prepaid any obligation having a fixed maturity of more than 90 (ninety) days from the date such obligation was issued or incurred, or not paid, within 60 days of when due, any account payable, or sought the extension of the payment date of any material account payable, other than any account payable which was (until paid) or is being contested in good faith; (e) subjected any of its assets or, to the best of Seller's knowledge, permitted or allowed any of its assets to be subjected, to any mortgage, pledge, lien, security interest, encumbrance, restriction or charge of any kind, except for liens for current taxes not yet due; (f) waived any claims or rights of substantial value under any of its contracts or otherwise in connection with any of its assets; (g) sold, transferred, licensed or otherwise disposed of any of its material properties or assets (real, personal or mixed, tangible or intangible) that, but for such sale, transfer or other disposition, would have been included as part of its assets, except in a bona fide transaction to an unaffiliated third party for fair value and in the ordinary and usual course of business and consistent with past practice (the exceptions hereto listed in Section 3.10 of the Disclosure Schedule show date of disposition, identity of transferee, amount received and book value); (h) disposed of, licensed or permitted to lapse any rights to the use of any patent, trademark, trade name or copyright used in the conduct of its business or, to WP Sub's knowledge, disposed of or disclosed, or permitted to be disclosed (except as necessary in the conduct of its business), to any person other than representatives or agents of Buyer, any trade secret, formula, process, know-how or similar information not theretofore a matter of public knowledge; (i) granted or committed to make any material increase in any compensation, bonus, pension, profit-sharing or other benefit plan or commitment of any employee of WP Sub; (j) since January 31, 2003, made any capital expenditures or binding commitments to be assumed by Buyer or to which any of WP Sub's assets may be or become subject, in excess of $5,000 in any one case or $50,000 in the aggregate, for repairs or additions to property, plant, equipment or tangible assets; 6 (k) paid, loaned or advanced any amount to, or sold, transferred or leased property or asset (real, personal, mixed, tangible or intangible) to, or entered into any agreement or arrangement with, any of WP Sub's or Seller's officers, employees, directors, stockholders or any "affiliate" or "associate" (as such terms are defined in Rule 405 under the Securities Act of 1933, as amended) or any immediate or extended family member (up to and including first cousins) of any of such persons (collectively, the "Significant Persons" and, individually, a ("Significant Person"), except for compensation to such persons expressly disclosed in Section 3.28 of the Disclosure Schedule, except for purchase orders and working capital advances from Seller; (l) made any change in any method of accounting; (m) changed any of the banking or safe deposit arrangements comprising part of its assets; (n) failed to maintain the books, accounts and records of the WP Sub in the usual, regular and ordinary manner; or (o) agreed, whether in writing or otherwise, to take any action described in this Section 3.10. 3.11 Title to Assets; Encumbrances. (a) Section 3.11(a) of the Disclosure Schedule contains an accurate and complete list (the "Equipment List") of all of the Equipment and interests therein owned by WP Sub on the date hereof and such list includes all of the equipment owned by WP Sub reflected in the January Balance Sheet or acquired after January 31, 2003 (except to the extent disposed of to an unaffiliated third party in a bona fide transaction, for fair value, in the ordinary and usual course of business and consistent with past practice) having an original cost in excess of $500.00. Section 3.11(a) of the Disclosure Schedule also contains a list of all property in the possession of WP Sub on the date hereof which is owned by any government agency or other third party. (b) Except as set forth in Section 3.11(b) of the Disclosure Schedule, WP Sub has good and valid title to all of its assets. WP Sub's assets comprise all of the business, properties, assets (however, employees, to the extent that they could be considered assets, are not included as assets in this Section) and goodwill employed by WP Sub and its affiliates in connection with its business. (c) Except as set forth in Section 3.11(c) of the Disclosure Schedule, all assets (excluding assets that are described in Section 3.12(b) or Section 3.11(a) of the Disclosure Schedule as leased assets or assets owned by third parties) are owned by WP Sub free and clear of all title defects or objections, liens, claims, charges, rights of others, security interests or other encumbrances of any nature whatsoever, including without limitation, any leases, escrows, options, security or other deposits, rights of redemption, chattel mortgages, conditional sales contracts, liens, collateral security arrangements and other title or interest retention arrangements, except for liens for current taxes not yet due. (d) Except as set forth in Section 3.11(d) of the Disclosure Schedule, WP Sub's assets include all rights, properties and other assets (however, employees, to the extent that they could be considered assets, are not included as assets in this Section) necessary to conduct and to continue to conduct WP Sub's business after the Closing (assuming Buyer conducts its business in the same manner as WP Sub) in the same manner as the business has since July 31, 2002 been and is now being conducted. (e) Except as set forth in Section 3.11(e) of the Disclosure Schedule, WP Sub does not, own, lease or use in its business any machinery and equipment which is not located at Real Property described in Section 3.12. 7 3.12 Real Property. (a) Real Property Defined. All real property (including, without limitation, all interests in and rights to real property) and improvements located thereon which are owned or leased by WP Sub and used in connection with WP Sub's business or included in WP Sub's assets are listed in Section 3.12(a) or Section 3.12(b) of the Disclosure Schedule (the "Real Property"). (b) Leased Real Property. With respect to the Real Property that is leased by WP Sub, all of which property is identified in Section 3.12(b) of the Disclosure Schedule (the "Leased Property"): (i) WP Sub has delivered to Buyer a true and complete copy of every lease and sublease to which WP Sub is a tenant or subtenant (the "Leases"), and has described each Lease in Section 3.12(b) of the Disclosure Schedule by listing the name of the landlord or sublandlord, the address of the leased premises, the commencement and expiration dates of the current term, the security deposited by WP Sub with the landlord or sublandlord, if any, and the monthly rental (including base and all additional rents); (ii) each Lease is, and at Closing shall be, in full force and effect and has not been assigned, modified, supplemented or amended except as listed on the Disclosure Schedule, and neither WP Sub nor, to WP Sub's knowledge, the landlord or sublandlord under any Lease is in default under any of the Leases, and to WP Sub's knowledge, no circumstances or state of facts presently exists which, with the giving of notice or passage of time, or both, would permit the landlord or sublandlord under any Lease to terminate any Lease; and (iii) subject to Section 1.3(d) above, at WP Sub's Closing Seller and WP Sub shall assign to the Buyer all right, title and interest of Seller in and to all Leases (and shall deliver to Buyer original copies of all consents required for such assignments) and all security deposits made by Seller and WP Sub pursuant to any of the Leases, including, but not limited to, the security deposits listed on the Disclosure Schedule, together with all interest earned on such deposits. (c) Utility Services. With respect to the Leased Property, the water, electric, gas and sewer utility services and the septic tank and storm drainage facilities currently available are adequate for the present use of the Real Property by Seller and WP Sub in conducting WP Sub's business, Seller and WP Sub have not experienced any material shortage in any such service in the last three years, are not being appropriated by Seller or WP Sub but rather are being supplied to Seller and WP Sub by utility companies or municipalities pursuant to valid and enforceable contracts, and there is no condition which will result in the termination of the present access from the Real Property to such utility services and other facilities. To the knowledge of Seller and WP Sub, without having made any independent investigation, no curtailment of any such utility services is proposed by any provider of any of such services. (d) Access. With respect to the Leased Property, Seller and WP Sub have obtained all Authorizations and rights-of-way, including proof-of-dedication, which are necessary to ensure vehicular and pedestrian ingress and egress to and from the Real Property; and there are no restrictions on entrance to or exit from the Real Property to adjacent public streets and to WP Sub's and Seller's knowledge no conditions which will result in the termination of the present access from the Real Property to existing highways and roads. (e) Assessments or Hazards. Seller and WP Sub have received no written notices, nor, to WP Sub's or Seller's knowledge, any oral notice, from any governmental body, that the assessed value of the Leased Property has been determined to be greater than that upon which county, township or 8 school tax was paid for the current tax year applicable to each such tax, or from any insurance carrier of WP Sub of fire hazards with respect to the Real Property. (f) Eminent Domain. Seller and WP Sub have received no written notices, nor, to WP Sub's nor Seller's knowledge, any oral notice, and has no actual knowledge, that any governmental body having the power of eminent domain over the Real Property has commenced or intends to exercise the power of eminent domain or a similar power with respect to all or any part of the Real Property. (g) No Violations. The Real Property and the present uses thereof comply with all Regulations of all governmental bodies having jurisdiction over WP Sub and to Seller's knowledge, the Leased Properties, and WP Sub and Seller have received no written notices, nor, to WP Sub's or Seller's knowledge, any oral notice, from any governmental body, and have no actual knowledge, that the Real Property or any improvements erected or situate thereon, or the uses conducted thereon or therein, violate any Regulations of any governmental body having jurisdiction over the Real Property. (h) Improvements. The improvements located on the Real Property are in good condition and are, to WP Sub's and Seller's knowledge, structurally sound, and all mechanical and other systems located therein are in good operating condition, subject to normal wear, and no condition exists requiring material repairs, alterations or corrections. (i) No Encumbrances. Between the date of this Agreement and the Closing Date, WP Sub and Seller shall not sell, mortgage or encumber the Real Property, or do or permit any act which diminishes title to or value of the Real Property. (j) Public Improvements. No work for municipal improvements that would have a material adverse effect on the WP Sub's business has been commenced on or in connection with the Real Property or any street adjacent thereto. No assessment for public improvements has been made, to WP Sub or Seller's knowledge, against the Leased Properties which remains unpaid. No notice from any county, township or other governmental body has been served upon the Real Property or received by WP Sub or Seller since August 1, 1999 requiring or calling attention to the need for any work, repair, construction, alteration or installation on or in connection with the Real Property which has not been complied with. (k) Executory Contracts. Set forth in Section 3.12(k) of the Disclosure Schedule is a list of all executory contracts currently in effect made by or on behalf of WP Sub, or by which WP Sub is bound, with respect to the Real Property ("Executory Contracts") including, without limitation, operation, management, maintenance, utility, and construction contracts. At Closing WP Sub shall deliver to the Buyer a true and complete copy (the original execution copy, if available) of each of the Executory Contracts. 3.13 Equipment; Waste Handling. (a) Except as set forth in Section 3.13 of the Disclosure Schedule, (i) the equipment included in WP Sub's assets is, to WP Sub or Seller's knowledge, structurally sound and with no material defects (for purposes of this Section 3.13(a) "material" shall mean defects that would cost in excess of $2,500 to remedy in any one instance) and (ii) all material items and pieces of equipment are on the date hereof used in the ordinary course of WP Sub's business, are suitable for the uses to which they are put by WP Sub, and are adequate in the aggregate to conduct WP Sub's business as presently conducted, subject to normal maintenance requirements and reasonable wear and tear. (b) Except as set forth in Section 3.13 of the Disclosure Schedule, there are no outstanding requirements or recommendations which have been communicated to WP Sub in writing during the past two years and WP Sub has no knowledge of any insurance company which has issued a 9 policy covering any part of any of the properties, plants, structures or equipment included in WP Sub's assets, or by any board of fire underwriters or other body exercising similar functions, requiring or recommending that any repairs or work be done on any part of such properties, plants, structures or equipment. (c) Except as set forth in Section 3.12 of the Disclosure Schedule, all material obligations to contractors, subcontractors and suppliers of labor and materials to WP Sub in connection with any construction or renovation of any structures or improvements thereon have been paid in full, and there are no known pending disputes with any such contractors, subcontractors or suppliers. 3.14 Patents, Copyrights, Trademarks, Trade Names and Licenses. (a) Except as set forth in Section 3.14(a) of the Disclosure Schedule, there are no (i) patents held or used by WP Sub, or reissues, divisions, continuations, and extensions thereof, or pending patent applications by WP Sub which are or were, within the past three (3) years, for or intended to be for WP Sub's benefit; (ii) registered or unregistered trademarks or service marks of or used by WP Sub or pending applications for registration of trademarks which are or were, within the past three (3) years, intended to be used by or for the benefit of WP Sub; or (iii) registered copyrights of or used by WP Sub, or applications for registration of copyrights that are or were, within the past three (3) years, intended to be used by or for the benefit of WP Sub ("Intellectual Property"). (b) Except as set forth in Section 3.14(b) of the Disclosure Schedule, there are no licenses (whether as licensor, licensee or otherwise) or other contracts or commitments to which WP Sub is a party or to which it or any of its assets is otherwise subject relating to any of the Intellectual Property. (c) Except as set forth in Section 3.14(c) of the Disclosure Schedule: (i) during the past three (3) years no claims have been asserted by any person against or otherwise in respect of the use by WP Sub of any of the Intellectual Property, or challenging or questioning the validity or effectiveness of any license or agreement referred to in this Section 3.13, and, to the knowledge of WP Sub, there is no valid basis for any such claim; (ii) during the past three (3) years WP Sub has not received notice of any allegation that it has infringed upon any patent, trademark, service mark, trade name or copyright or misappropriated or misused any invention, trade secret or other proprietary information of any other person entitled to legal protection; (iii) during the past three (3) years WP Sub has not asserted any claim of such infringement, misappropriation or misuse against any person; (iv) WP Sub has good and valid title to, or otherwise possesses adequate rights to use all patents, trademarks, service marks, trade names, copyrights, inventions, trade secrets and other proprietary information necessary to conduct its business in the same manner as its business has been conducted since August 1, 1999; and (v) no shareholder, officer, director or employee of WP Sub or affiliates of any of the foregoing owns or has any interest in any of the Intellectual Property. 3.15 Personal Property Leases. (a) Section 3.15 of the Disclosure Schedule sets forth a complete and accurate list of all personal property leases, subleases, concessions, licenses, conditional sales agreements or other title retention agreements (collectively, the "Personal Property Leases" and individually a "Personal Property Lease") to which WP Sub is a party, as lessor, lessee, licensor or licensee. (b) Except as set forth in Section 3.15 of the Disclosure Schedule, (i) each of the Personal Property Leases is valid, binding and enforceable in accordance with its terms, and is in full force and effect; (ii) there are no existing defaults on the part of WP Sub and, to the best knowledge of the WP Sub, any other party, under any Personal Property Lease and to WP Sub's knowledge, no event of default under any such Personal Property Lease has occurred and is continuing which (whether with or without the giving of notice, lapse of time or both, or the happening of any other event) would constitute a default under such Personal Property Lease; (iii) each such Personal 10 Property Lease will, subject to obtaining any consent listed in Section 3.15 of the Disclosure Schedule, continue to be in full force and effect on the same terms and conditions immediately after the Closing without the need for any action on the part of Buyer; (iv) each such Personal Property Lease reflects the complete understanding among the parties thereto in connection with the subject matter thereof; and (v) accurate and complete copies of each such Personal Property Lease including all amendments thereto, have been delivered or will be delivered to Buyer at or prior to the Closing. (c) Except as set forth in Section 3.15 of the Disclosure Schedule, WP Sub's interest in each of the Personal Property Leases (i) is free and clear of all Liens (other than any created by Buyer) and (ii) are not, in the case of real property, except as set forth in Section 3.15 of the Disclosure Schedule or in the Personal Property Leases, subject to any rights of way, building use restrictions, exceptions, variances, easements (recorded or unrecorded), rights of redemption, reservations or limitations of any nature whatsoever of which WP Sub has knowledge which may materially and adversely interfere with Buyer's use thereof in a manner substantially consistent with WP Sub's use thereof prior to Closing. 3.16 Taxes. (a) For any and all periods still open or subject to audit, Seller, WP Sub or its predecessors have duly filed all tax reports and returns (including information returns) required to be filed by it or any of its predecessors relating to or covering its business and each of such reports and returns were true, correct and complete. (b) For any and all periods still open or subject to audit, Seller and WP Sub have duly paid all taxes and other charges due or claimed to be due or shown on any return or declaration to be due from it to any federal, state, local or foreign taxing authority (including, without limitation, those due in respect of properties, income, franchises, licenses, sales and payrolls); and there are no tax liens upon any of its assets except liens for current taxes not yet due. (c) For any and all periods still open or subject to audit, all taxes and other assessments and levies required to be withheld by Seller or WP Sub from customers with respect to the provision of services, or from or on behalf of employees for income, social security, unemployment insurance and any other taxes or similar charges have been collected or withheld and either paid to the appropriate government agency or properly set aside and held in accounts for such purpose. 3.17 Contracts and Commitments. Except as set forth in Section 3.17 of the Disclosure Schedule: (a) WP Sub is not a party to or bound by any written or binding agreements, contracts or commitments, which are material to its business operations or prospects (for purposes of this Section 3.17(a), an agreement, contract or binding commitment shall be deemed to be material if it (i) shall call for the expenditure of $1,000 or more in any 12-month period, or (ii) shall not be terminable according to its terms without liability on not more than 30 days' notice); (b) no purchase contract, contract for the performance of services or other written or binding bid or commitment of WP Sub (i) continues for a period of more than three (3) months from the date hereof and is not terminable by WP Sub according to its terms without liability on not more than 30 days' notice; (ii) is in excess of the normal, ordinary and usual requirements of its business; (iii) is with any Affiliate of WP Sub (as defined under Section 3.31 hereof); (iv) has been prepaid in whole or part; and/or (v) has had any delivery thereunder requested to be delayed to a date past the Closing Date; 11 (c) WP Sub is not a party to or bound by any contracts, agreement or arrangements: (i) with any federal, state, local or foreign government, or any governmental or quasi-governmental agency, board, bureau, authority or commission, or any utility company except for customer contracts entered into in the ordinary course of business, (ii) with any charitable organization, (iii) with any officer or director of the WP Sub or any Affiliate of WP Sub or members of the immediate family of the foregoing (a "Related Person") or (iv) providing for the payment of any bonus or commission, whether based on sales or earnings or otherwise; (d) WP Sub is not a party to or otherwise bound by any written or binding (i) employment agreements, (ii) non-competition agreements or (iii) any other agreements, practices or understandings that contain or will impose on Buyer any severance or termination pay liabilities or obligations; (e) WP Sub is not a party to or bound by any (i) collective bargaining or union contracts or agreements or (ii) material practices or understandings with any of employees which will be binding on Buyer and are not embodied in a written collective bargaining or union contract or other written agreement listed in Section 3.17 of the Disclosure Schedule; (f) WP Sub is not in default, nor to WP Sub's knowledge is there any basis for any valid claim of default against WP Sub, and to the best of WP Sub's knowledge no other party is in default, under any contract, agreement, commitment or restriction and no event of default has occurred which (whether with or without the giving of notice, lapse of time, or both, or the happening or occurrence of any other event) would constitute a default thereunder; (g) WP Sub is not a party to or bound by any consulting agreement; (h) Except pursuant to the Agreement dated May 12, 1997, by and between WP Sub and Case Corporation, WP Sub is not restricted by any agreement from carrying on its business anywhere in the world; (i) WP Sub is not a party to or bound by any outstanding powers of attorney (except for powers of attorney issued to customs brokers in the ordinary and usual course of business) or any other outstanding obligations or liabilities (whether absolute, accrued, contingent or otherwise), as guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the obligation of any other person, corporation, partnership, joint venture, association, organization or other entity; (j) WP Sub is not a party to or bound by any partnership or joint venture agreement, or any written or binding oral royalty, distribution, agency, territorial or license agreement; (k) There are no credit cards issued to any of WP Subs employees or for which WP Sub is directly liable and for which any liability will be sought to be imposed on Buyer; (l) WP Sub is not a party to or bound by any barter or counter trade agreement; (m) WP Sub is not a party to or bound by any cooperative advertising agreement or arrangement; (n) WP Sub has no debt obligation for borrowed money; (o) WP Sub has no outstanding loans to any person; and (p) There are no outstanding sales contracts, commitments or bids of WP Sub which (i) continue for a period of more than six (6) months from the date hereof, (ii) were entered into more than six (6) months prior to the date hereof, or (iii) have been prepaid in whole or part; 12 (q) all contracts, agreements, and leases, referred to in Section 3.17 of the Disclosure Schedule (i) are valid and in full force and effect, (ii) will, except for the obtaining of any consents listed in Section 3.24 of the Disclosure Schedule that shall not have been obtained by the Closing, continue to be so on the same terms and conditions immediately after the Closing without the need for any action on the part of Buyer, where specifically and expressly set forth in Section 3.8 of the Disclosure Schedule, and, (iii) reflect the complete understanding among the parties thereto in connection with the subject matter thereof; true and complete copies of each thereof, including all amendments thereto, have been delivered to Buyer at or prior to the date hereof (regarding material contracts) and will be delivered by Closing (for all others). 3.18 Customers and Suppliers; Trade Programs. (a) Section 3.18 of the Disclosure Schedule sets forth: (i) an accurate and complete list of the ten (10) largest customers of WP Sub in terms of revenues in each case during (x) the twelve month period ended July 31, 2002, and (y) the six months ended January 31, 2003, showing the approximate total revenues in dollars received by WP Sub from each such customer during each such period; and (ii) an accurate and complete list of the ten (10) largest suppliers of WP Sub in terms of purchases during (x) the twelve month period ended July 31, 2002, and (y) the six months ended January 31, 2003 showing the approximate total purchases in dollars by WP Sub from each such supplier during each such period. (b) Except to the extent set forth in Section 3.18 of the Disclosure Schedule, since July 31, 2002, there has not been any material adverse change, and WP Sub has no knowledge that any material adverse change is reasonably likely, in the business relationship, or volume of business, of WP Sub's business with any customer or supplier named in Section 3.18 of the Disclosure Schedule. (c) Except for the customers and suppliers named in Section 3.18 of the Disclosure Schedule, WP Sub has not had any customer which accounted for more than 5% of WP Sub's revenues during the six months ended January 31, 2003, or any supplier from which WP Sub purchased more than 5% of the goods and services which it purchased during (i) WP Sub's fiscal year ended July 31, 2002, or (ii) the six months ended January 31, 2003. (d) All trade programs of WP Sub if any, instituted since August 1, 1999, whether or not in the ordinary and usual course of business or consistent with past practice, which may result in claims against Buyer for money, credit or goods, including but not limited to bonuses, billbacks, in-house programs, accruals, other sales or commission incentives or allowances, discounts, returns, credits, allowances and contests, are disclosed in Section 3.18 of the Disclosure Schedule. 3.19 Sales Practices; Warranties. (a) Since July 31, 2002, except as set forth in Section 3.19 to the Disclosure Schedule, WP Sub has not received any written notice, nor, to its knowledge, any oral notice, of any claim (actual or threatened) of any consumer or customer based on any warranty other than claims in the ordinary course of business and not in excess of $5,000. (b) Since July 31, 2002, WP Sub has not accelerated its sales of services except, and has made sales of services only, in the ordinary course of the business consistent with WP Sub's past practices. (c) Section 3.19 of the Disclosure Schedule also sets forth, as at January 31, 2003, each material pending claim against WP Sub in connection with provision or services. 13 3.20 Insurance. (a) Section 3.20 of the Disclosure Schedule contains an accurate and complete list of all policies of fire, liability, keyman life insurance, workers' compensation, products liability, and other forms of insurance owned or held by or beneficially for WP Sub. All such policies are in full force and effect and will not be canceled or modified by WP Sub prior to Closing without the express written consent of Buyer (except to extend the maturity dates thereof), all premiums with respect thereto covering all periods up to and including the Closing Date have been or will be paid by WP Sub, and no written, or to WP Sub's knowledge oral, notice of cancellation or termination has been received by WP Sub with respect to any such policy. (b) The aforesaid policies are sufficient for WP Sub's compliance with, to WP Sub's knowledge, all requirements of law and of all material agreements to which WP Sub is a party; are valid, outstanding and enforceable policies; are, in the opinion of management of WP Sub, in amounts customarily deemed to be adequate and cover all risks customarily insured against in the type of business conducted by WP Sub in the locality where WP Sub operates its business; have been issued by reputable insurance companies which are in good standing, adequately capitalized and actively engaged in the insurance business; and in the judgment of WP Sub provide adequate insurance coverage for its assets and operations. (c) Section 3.20 of the Disclosure Schedule also identifies (i) all risks for which WP Sub is self-insured and (ii) the workers' compensation and if possible unemployment insurance ratings of WP Sub (or, if applicable, Seller). (d) Except as set forth in Section 3.20 of the Disclosure Schedule, in connection with its operations, (i) WP Sub has not, since August 1, 2001, been unable to obtain any insurance coverage in the amounts desired by WP Sub; (ii) since August 1, 1999, neither the amount nor scope of any insurance referred to in Section 3.20 of the Disclosure Schedule or premiums therefor has been materially changed; and (iii) WP Sub has not been notified of any material adverse change or proposed material adverse change in the workers' compensation or unemployment insurance ratings or insurance rates for WP Sub. 3.21 Labor Difficulties. Except to the extent set forth in Section 3.21 of the Disclosure Schedule: (a) there is no labor strike, formal dispute, formal grievance, arbitration proceeding, general slowdown or stoppage, or charge of unfair labor practice actually pending before a court, regulatory body or arbitration tribunal, or to the best of WP Sub's knowledge threatened against or affecting WP Sub; (b) no union representation campaign is pending or, to WP Sub's knowledge, threatened respecting any employees of WP Sub; (c) WP Sub has not experienced any material work stoppage by its work force or other material labor difficulty since August 1, 1999; (d) to WP Sub's knowledge, there are no charges or complaints of discrimination pending before the United States Equal Employment Opportunity Commission or any state, local or foreign agency against WP Sub; (e) to the best of WP Sub's knowledge, WP Sub, does not presently employ, and at no time during the past year did it employ, any illegal alien; 14 (f) (i) to WP Sub's knowledge, WP Sub is not engaged in any unfair labor practice, and (ii) at no time during the past three (3) years has any unfair labor practice, complaint, charge or similar claim against WP Sub been filed with, or to WP Sub's knowledge, threatened to be filed by any employee with, the National Labor Relations Board, Equal Employment Opportunity Commission, Department of Labor or any similar state, local or foreign agency; and (g) no collective bargaining agreement which is binding on WP Sub will be binding on Buyer or restricts the owner of the WP Sub's business from relocating or closing any of the WP Sub's business's facilities or operations. 3.22 Litigation, Judgments and Decrees. (a) Except as set forth in Section 3.22 of the Disclosure Schedule, and except for workers compensation claims, there has not been in the three (3) years prior to the date hereof, nor is there currently, any action, suit or proceeding of any nature whatsoever, at law or in equity or both, by or before any domestic or foreign court, or to the best of WP Sub's knowledge any proceeding or claim pending or threatened before any government or other regulatory or administrative agency, arbitration tribunal, board, bureau, authority or commission or involving WP Sub, in any such case which would have a material adverse effect on WP Sub's business or which questions or challenges the validity of this Agreement or any action taken or to be taken by WP Sub pursuant to this Agreement or in connection with the transactions contemplated hereby. (b) Except as set forth in Section 3.22 of the Disclosure Schedule, WP Sub is not subject to any judgment, order, award or decree of any domestic or, foreign court or government or other regulatory or administrative agency, arbitration tribunal, board, bureau, authority or commission (i) which has or, to WP Sub's knowledge, may have a material adverse effect on WP Sub's practices in WP Sub's Business or on its ability to acquire any property or conduct its Business in any area, (ii) which is or will be binding on Buyer, or (iii) with respect to which WP Sub is in default. 3.23 No Condemnation or Expropriation. Neither the whole nor any portion of WP Sub's assets is subject to any government decree or order to be sold or is being condemned, expropriated or otherwise taken by any domestic or foreign public authority with or without payment of compensation thereof, nor, to WP Sub's knowledge, has any such condemnation, expropriation or taking been proposed in writing within the past two years. 3.24 Consents and Approvals of Government Authorities and Others. Except as set forth in Section 3.24 of the Disclosure Schedule, no consent, approval or authorization of, or declaration, filing or registration with, or the giving of notice to, any domestic or, to WP Sub's knowledge, foreign government or regulatory authority or any other person or entity is required of WP Sub in connection with the execution, delivery and performance by WP Sub of this Agreement or the consummation by WP Sub of the transactions contemplated hereby. Accurate and complete copies of each of the forgoing which have been obtained or made have been delivered to Buyer at or prior to the date hereto. 3.25 ERISA; Employee Benefit Plans. (a) As used in this Section 3.25, the term "Plan" means any bonus, deferred compensation, pension, profit-sharing, retirement, stock purchase, stock option, phantom stock, medical or any other benefit plan, arrangement or practice, whether written or unwritten including but not limited to any such plan, arrangement or practice which constitutes an "employee welfare benefit plan" within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended and the regulations thereunder ("ERISA") or an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA, covering any employee of WP Sub. Section 3.25 of the Disclosure Schedule sets forth a complete list of all Plans maintained by WP Sub. WP Sub has no 15 legally binding commitment, whether formal or informal, to create any additional such plan or arrangement. (b) To WP Sub's knowledge, except as set forth in Section 3.25(b) of the Disclosure Statement, all of WP Sub's Plans are in all material respects in compliance in operation and in form with the currently prescribed requirements prescribed by any and all statutes, orders or governmental rules or regulations currently in effect with respect to such Plans, including, but not limited to ERISA and the Code, and there are no pending or, to the WP Sub's knowledge, threatened claims, lawsuits or arbitrations (other than routine claims for benefits) which have been asserted or instituted against the WP Sub, any Plan or the assets of any trust for any Plan. (c) WP Sub has complied in all material respects with the requirements of Section 4980B of the Code and applicable regulations. WP Sub has not contributed to, nor has it been obligated to contribute to, any multi-employer plan (as defined in Section 3(37) of ERISA), or any other plan subject to Title IV of ERISA within the preceding three calendar years. 3.26 Absence of Questionable Payments. Since August 1, 1999, neither WP Sub nor any of its officers, agents, employees or any other person, entity or corporation acting on behalf of any of them, has, to WP Sub's knowledge, accepted, received or made any unlawful contributions, payments, gifts, or expenditures in respect of WP Sub's business. 3.27 Distinct Entity. Except as set forth in Section 3.27 of the Disclosure Schedule, WP Sub does not share any assets with any related or unrelated third party. 3.28 Personnel. (a) Section 3.28 of the Disclosure Schedule sets forth an accurate and complete list as of January 31, 2003 of: (i) the names and current salaries of WP Sub's salaried employees; (ii) the wage rates for WP Sub's non-salaried employees; (iii) the customary increases on a periodic basis in the compensation of each of the foregoing or any increases required by any agreement or understanding with each of the foregoing; (iv) a description of any informal understanding generally concerning employees' rights to continue to receive compensation during any periods during which such employees are not performing any services for WP Sub other than with respect to vacation, disability and sick time; and (v) any increase granted or committed to for any period subsequent to November 1, 2002 in the compensation of any employee including, without limitation, any change in any bonus, pension, profit-sharing or other benefit plan or commitment except for obligations imposed on WP Sub by the Code, ERISA or ADEA. (b) The vacation period for employees of WP Sub occurs normally during the periods described in Section 3.28 of the Disclosure Schedule. Except as set forth in Section 3.28 of the Disclosure Schedule, as at the Closing Date there will be no bonuses, profit sharing, incentives, commissions or other compensation of any kind due to or expected by present or former employees of WP Sub which have not been fully paid prior to such date. 16 (c) Except to the extent set forth in Section 3.28 of the Disclosure Schedule, all employees of WP Sub are at-will employees. (d) Except to the extent set forth in Section 3.28 of the Disclosure Schedule, WP Sub has no knowledge that any material adverse change in the relationship of WP Sub's business with its employees is reasonably likely. 3.29 Compliance with Law; Necessary Authorizations. (a) In conducting WP Sub's business, WP Sub has, except as set forth in Section 3.29 of the Disclosure Schedule, since August 1, 1999, in all material respects duly complied and is presently in all material respects duly complying with all applicable laws (whether statutory or otherwise), rules, regulations, orders, building and other codes, zoning and other ordinances, permits, licenses, authorizations, judgments and decrees of all federal, state, local or, to WP Sub's knowledge, foreign governmental authorities, including, but not limited to, the Federal Occupational Safety and Health Act, ERISA, National Labor Relations Act, Worker Adjustment and Retraining Notification Act, Civil Rights Act, Immigration Reform and Control Act of 1986, Age Discrimination in Employment Act, the Water Pollution Control Act and all applicable domestic and foreign laws, rules and regulations relating to the safe conduct of business, employment discrimination, wages and hours, employment of illegal aliens, collective bargaining, the payment of withholding and social security taxes, product labeling, antitrust, consumer protection, occupational safety and health, consumer product safety, the importation of goods, product liability, currency exchange, securities and trading-with-the-enemy matters, except where the failure to so comply would not have a material adverse effect on WP Sub's business. (b) Except as set forth in Section 3.29 of the Disclosure Schedule, since August 1, 1999, (i) WP Sub has obtained and adhered to all necessary permits and other approvals, including interim status under the Federal Solid Waste Disposal Act, necessary to store, dispose of and otherwise handle hazardous wastes, if any, and has reported, to the extent required by all federal, state, local and, to WP Sub's knowledge, foreign statutes, laws, ordinances, regulations, rules, permits, judgments, orders and decrees (accurate and complete copies of all such permits, judgments, orders and decrees received by WP Sub or in WP Sub's possession being included in Section 3.28 of the Disclosure Schedule), all past and present sites, if any, owned and/or operated by WP Sub where hazardous wastes have been treated, stored or disposed of; (ii) there has been no spill, discharge, leak, emission, injection, escape, dumping or any other release of any kind onto any property of or used by WP Sub or into the environment surrounding any such property of any toxic or hazardous waste or substance, as such terms are defined under any applicable law, ordinance, regulation or rule; and (iii) there is no on-site or to WP Sub's knowledge off-site location to which WP Sub has transported hazardous wastes or arranged for the transportation of hazardous wastes, which site is the subject of any federal, state, local or foreign enforcement action or any other investigation which could lead to any claim against WP Sub or Buyer for any clean-up cost, remedial work, damage to natural resources or personal injury, including, but not limited to, claims under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. (c) Except as set forth in Section 3.29 of the Disclosure Schedule, WP Sub (i) has no knowledge and (ii) has not received any written notification from any third party (including but not limited to employees and government agencies) of any present or, within the past three years, past failure so to comply or has knowledge of any present condition, activity, incident, action or plan which may interfere with or prevent continued compliance with any laws, rules or regulations or which may give rise to any common law or statutory liability, or otherwise form the basis of any material claim, action, suit, proceeding, hearing or investigation which would have a material adverse effect on WP Sub's business. (d) WP Sub has duly obtained all permits, concessions, grants, franchises, licenses and other government authorizations and approvals necessary for the conduct of its business except where 17 such failure would not have a material adverse effect on its business; each of the foregoing is set forth in Section 3.29 of the Disclosure Schedule and is in full force and effect; to the best of WP Sub's knowledge, there are no proceedings pending or threatened which may result in the revocation, cancellation, suspension or modification of any thereof. 3.30 Disclosure. No representation or warranty by WP Sub in this Agreement and no statement contained in the Disclosure Schedule contains any untrue statement of any material fact or omits to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements made herein or therein not misleading. 3.31 Insider Interests. Except as set forth in Section 3.31 of the Disclosure Schedule, to WP Sub's knowledge, no person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with (an "Affiliate"), the WP Sub, and no Significant Person (as defined in Section 3.10(k)) has an interest in any contract or agreement pertaining to the business of WP Sub wherein more than $5,000 in any twelve month period is involved. 4. REPRESENTATIONS AND WARRANTIES OF THE BUYER. Buyer represents and warrants to WP Sub and Seller as follows: 4.1 Corporate Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of its State of Incorporation. Buyer has full corporate power and authority to carry on its businesses as they are now being conducted and to carry on WP Sub's business being acquired hereunder and to own, lease and operate its properties and assets as and in the places where such businesses are now conducted and where such properties and assets are now owned, leased or operated. Buyer is, or will be at the time of the Closing, duly qualified or licensed to do business as a foreign corporation in all jurisdictions where the failure to so qualify would have a material adverse effect on the business, financial condition, properties or operations of Buyer, after taking into consideration the purchase of the WP Sub Capital Stock hereunder. 4.2 Authorization. Buyer has full corporate power and authority to execute, deliver and perform its obligations under this Agreement and to carry out the transactions contemplated hereby. Buyer has taken all action (except the filing of a certificate of amendment to reflect an authorized one-for-fifty reverse stock split) required by law or otherwise to be taken by Buyer, to authorize Buyer's, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Buyer and constitutes a valid and binding agreement of and upon the Buyer enforceable against the Buyer in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights and (ii) general principles of equity. 4.3 No Violation. Neither the execution and delivery of this Agreement by the Buyer nor the consummation by the Buyer of the transactions contemplated hereby will violate any provision of the Certificate of Incorporation or by-laws of the Buyer, or be in conflict with, or constitute a material default (or an event which, with or without notice, lapse of time or both, would constitute a material default) under, or result in the termination or invalidity of, or accelerate the performance required by, or cause the acceleration of the maturity of any obligations or liabilities of Buyer or result in the creation or imposition of any security interest, lien or other encumbrance upon any of its assets or properties under any agreement or commitment to which Buyer is a party or by which it is bound or to which any of its assets are subject, or violate any statute or law or any judgment, decree, order, regulation or rule of any domestic or foreign court or governmental 18 authority applicable to the Buyer. For purposes of this Agreement, "to Buyer's knowledge" "to the best of Buyer's knowledge" or any similar formulation thereof shall mean to the actual knowledge of any of the current: (i) quality assurance and/or quality control directors of Buyer, (ii) hazardous material directors of Buyer, or (iii) officers and directors of Buyer. 4.4 Brokers and Finders. No person has been authorized by the Buyer, or by anyone acting on any of its behalf or by any of its officers, directors, employees or trustees, to act as a broker, finder or in any other similar capacity in connection with the transactions contemplated by this Agreement in such manner as to give rise to any valid claim against Buyer or WP Sub or Seller for any broker's or finder's fee or commission or similar type of compensation. 4.5 Litigation. There is no action, suit or proceeding or any claim or investigation of any nature whatsoever (including, but not limited to, products liability), at law or in equity or both, by or before any domestic or foreign court or government or other regulatory or administrative agency, arbitration tribunal, board, bureau, authority or commission pending or, to the Buyer's knowledge, which questions or challenges the validity of this Agreement or any action taken or to be taken by the Buyer pursuant to this Agreement or in connection with the transactions contemplated hereby; and to the best of their knowledge, there is no valid basis for any such action, suit, inquiry proceeding or investigation. 4.6 Capitalization. The authorized capital stock of the Buyer consists of 40,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of the date hereof and on the Closing Date there were 36,196,267 shares of common stock outstanding and 1,529,000 shares of preferred stock outstanding. All such issued and outstanding capital stock has been duly authorized, validly issued, and is fully paid and nonassessable. As of the date hereof and on the Closing Date, there are ____ shares of common stock reserved for issuance in connection with outstanding warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Buyer, or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any capital stock of Buyer, any such convertible or exchangeable securities or any such rights, warrants or options. 4.7 Consents. No consent, approval, authorization or other order of, or registration, qualification or filing with, any regulatory body, administrative agency, or any other person or entity is required of Buyer in connection with the execution, delivery and performance of this Agreement or the consummation by Buyer of the transactions contemplated hereby which consent, approval, etc. has not been obtained or will not be obtained on or prior to the Closing Date. Accurate and complete copies of each of the foregoing which have been obtained or made have been delivered to Seller at or prior to the date hereof. 4.8 Financial Statements. The financial statements of Buyer and the related notes contained in Buyer Form 10-KSB for the year ended June 30, 2002 present fairly the financial position of Buyer as of the dates indicated, and the results of its operations and cash flows for the periods therein specified. Such financial statements (including the related notes) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods therein specified. 4.9 No Material Adverse Change. Except as set forth on Schedule 4.9, subsequent to June 30, 2002, Buyer and its subsidiaries, taken as a whole, have not incurred any material liabilities or obligations, direct or contingent, other than in the ordinary course of business, and there has not been any material adverse change in their consolidated condition (in each case, financial or other), results of operations, business, prospects, key personnel or capitalization. 19 4.10 Additional Information. Except as set forth on Schedule 4.10, Buyer has filed in a timely manner all documents that Buyer was required to file under the Securities Exchange Act of 1934, as amended (the "Exchange Act") during the 12 months preceding the date of this Agreement. The following documents complied in all material respects with the requirements of the Exchange Act as of their respective filing dates, and the information contained therein as of the date thereof did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading: (a) Buyer's Annual Report on Form 10-KSB, as amended, for the fiscal year ended June 30, 2002; (b) Buyer's Quarterly Reports on Form 10-QSB for the periods ended September 30, 2002 and December 31, 2002; and (c) all other documents, if any, filed by Buyer with the Securities and Exchange Commission since November 15, 2002 pursuant to the reporting requirements of the Exchange Act. 5. AGREEMENTS PENDING CLOSING. 5.1 Agreements of Seller and WP Sub Pending the Closing. Seller and WP Sub covenant and agree that, pending the Closing and except as otherwise agreed to in writing by Buyer: (a) Business in the Ordinary Course. WP Sub's business shall be conducted solely in the ordinary course consistent with past practice. (b) Existing Condition. Seller and WP Sub shall not cause nor permit to occur any of the events or occurrences described in Section 3.9 hereof. (c) Maintenance of Physical Assets. Seller and WP Sub shall continue to maintain and service the physical assets used in the conduct of WP Sub's business in the same manner as has been its consistent past practice. (d) Employees and Business Relations. WP Sub shall use its reasonable best efforts to keep available the services of the present employees and agents of WP Sub's business and to maintain the relations and goodwill with the suppliers, customers, distributors and any others having business relations with WP Sub's business. (e) Maintenance of Insurance. Seller and WP Sub shall notify Buyer of any changes in the terms of the insurance policies and binders referred to on Schedule 3.19 of the Disclosure Schedule. (f) Compliance with Laws. etc. WP Sub shall comply with all laws, ordinances, rules, regulations and orders applicable to WP Sub's business, or WP Sub's operations, assets or properties in respect thereof the noncompliance with which might materially affect WP Sub's business. (g) Update Schedules. Seller and WP Sub shall promptly disclose to Buyer any information contained in its representations and warranties or the Schedules which, because of an event occurring after the date hereof, is incomplete or is no longer correct in any material respect as of all times after the date hereof until the Closing Date; provided, however, that none of such disclosures shall be deemed to modify, amend or supplement the representations and warranties of Seller and WP Sub or the schedules hereto for the purposes of Article 6 hereof, unless Buyer shall have consented thereto in writing. (h) Conduct of Business. WP Sub shall conduct its business in such a manner that on the Closing Date the representations and warranties of Seller and WP Sub contained in this Agreement shall be 20 true, in all material respects, except as specifically contemplated by this Section 5, as though such representations and warranties were made on and as of such date. Furthermore, Seller and WP Sub shall cooperate with Buyer and use its reasonable best efforts to cause all of the conditions to the obligations of Buyer under this Agreement to be satisfied on or prior to the Closing Date. (i) Sale of Assets; Negotiations. Seller and WP Sub shall not, directly or indirectly, sell or encumber all or any part of WP Sub's assets, other than in the ordinary course of WP Sub's business consistent with past practice, or initiate or participate in any discussions or negotiations or enter into any agreement to do any of the foregoing. Seller and WP Sub shall not provide any confidential information concerning WP Sub's business or its properties or assets to any third party other than in the ordinary course of business. (j) Access. Upon reasonable notice to Seller and WP Sub, Seller and WP Sub shall give to Buyer's officers, employees, counsel, accountants and other representatives all reasonable opportunity and access to and the right to inspect, during normal business hours, all of the premises, properties, assets, records, contracts and other documents relating to WP Sub's business and shall permit them to consult with the officers, employees, accountants, counsel and agents of Seller and WP Sub for the purpose of making such investigation of WP Sub's business and in furtherance of the transaction proposed herein, including without limitation the financial information set forth in paragraph 3.6(a) above as Buyer shall desire to make, provided that such investigation shall not unreasonably interfere with WP Sub's business operations, Furthermore, Seller shall furnish to Buyer all such documents and copies of documents and records and information with respect to the affairs of WP Sub's business and copies of any working papers relating thereto as Buyer shall from time to time reasonably request and shall permit Buyer and its agents to make such inspections of WP Sub's assets as Buyer may request from time to time. (k) Press Releases. Except as required by applicable law, neither Seller nor WP Sub shall give notice to third parties or otherwise make any public statement or releases concerning this Agreement or the transactions contemplated hereby except for such written information as shall have been approved in writing as to form and content by Buyer; provided that WP Sub may continue such communications with employees, customers, suppliers, shareholders, lenders, franchisers, lessors and other particular groups as may be legally required or necessary or appropriate and not inconsistent with the best interests of Buyer or the Closing under this Agreement. (l) No Default. Seller and WP Sub shall not do any act or omit to do any act, or permit any act or omission to act, which will cause a breach of any material contract or commitment of Seller. 5.2 Agreements of Buyer Pending the Closing. Buyer covenants and agrees that, pending the Closing and except as otherwise agreed to in writing by Seller: (a) Actions of Buyer. Buyer will not knowingly take any action which would result in a breach of any of its representations and warranties hereunder. Furthermore, Buyer shall cooperate with Seller and use its reasonable best efforts to cause all of the conditions to the obligations of Buyer and Seller under this Agreement to be satisfied on or prior to the Closing Date. (b) Press Releases. Except as required by applicable law, Buyer will not give notice to third parties or otherwise make any public statement or releases concerning this Agreement or the transactions contemplated hereby except for such written information as shall have been approved in writing as to form and content by Seller, which approval shall not be unreasonably withheld; provided that Buyer may continue such communications with employees, customers, suppliers, shareholders, lenders, franchisers, lessors and other particular groups as may be legally required or necessary or appropriate and not inconsistent with the best interests of Seller or the Closing under this Agreement. In addition, Buyer will provide Seller with information concerning press releases and filings relating to these transactions not less than two days prior to proposed release. 21 6. CONDITIONS PRECEDENT TO THE CLOSING. 6.1 Conditions Precedent to Buyer's Obligations. All obligations of Buyer under this Agreement are subject to the fulfillment or satisfaction, prior to or at the Closing, of each of the following conditions precedent: (a) Representations and Warranties True as of the Closing Date. The representations and warranties of Seller and WP Sub contained in this Agreement or in any schedule, certificate or document delivered by Seller or WP Sub to Buyer pursuant to the provisions hereof shall have been true in all material respects on the date hereof without regard to any schedule updates furnished by Seller or WP Sub after the date hereof and shall be true in all material respects on the Closing Date with the same effect as though such representations and warranties were made as of such date. (b) Compliance with this Agreement. Each of Seller and WP Sub shall have performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing. (c) Closing Certificate. Buyer shall have received a certificate from each of Seller and WP Sub dated the Closing Date, certifying that the conditions specified in Sections 6.1(a) and 6.1(b) hereof have been fulfilled and certifying that Seller and WP Sub has obtained all consents and approvals required with respect to it or WP Sub's business by Section 6.1(f) hereof. (d) Opinions of Counsel for Seller. Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, counsel for Seller, shall have delivered to Buyer a written opinion, dated the Closing Date, in the form of Exhibit D hereto with only such changes as shall be in form and substance reasonably satisfactory to the Buyer and its counsel. (e) No Threatened or Pending Litigation. On the Closing Date, no suit, action or other proceeding, or injunction or final judgment relating thereto, shall be threatened or be pending before any court or governmental or regulatory official, body or authority in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby, and no investigation that might result in any such suit, action or proceeding shall be pending or threatened. (f) Consents and Approvals. Except for consents required by the terms of the contracts, commitments, agreements listed in Section 6.1(f) of the Disclosure Statement, and subject to the provisions of Sections 1.3(d) above, the holders of any indebtedness of WP Sub, the lessors or lessees of any real or personal property or assets leased by WP Sub, the parties (other than WP Sub) to any contract, commitment or agreement to which WP Sub is a party or subject, any governmental or regulatory official, body or authority or any other person, and any governmental, judicial or regulatory official, body or authority having jurisdiction over WP Sub or Buyer or their respective affiliates to the extent that their consent or approval is required or necessary under the pertinent debt, lease, contract, commitment or agreement or other document or instrument or under applicable orders, laws, rules or regulations, for the consummation of the transactions contemplated hereby in the manner herein provided, shall have granted such consent or approval, provided such debt, lease, contract, etc. is material to WP Sub's business. (g) Material Adverse Changes. The assets or the operations of WP Sub's business taken as a whole, shall not have been and shall not be threatened to be materially adversely affected in any way as a result of any event or occurrence (except as a result of general economic conditions). (h) Shareholder Approval. The shareholders of Seller shall have approved, by requisite vote or consent under the Seller's organizational documents and following receipt of disclosure required by Section 14(a) or 14(c) of the Securities Exchange Act of 1934, as amended, the sale of the capital stock of WP Sub to Buyer. 22 (i) Revolving Credit Facility. Deutsche Financial Services Corporation ("DFSC"), or another lending institution, as lender and as representative of several institutional lenders shall have funded a revolving credit facility in an amount not less than $20 million, which is substantially similar to the credit facility pursuant to an agreement between WP Sub and DFSC dated June 30, 1999, as last amended on March 22, 2001, in addition to approximately $5 million inventory financing to be provided by Case. (j) Environmental Audit. The completion of a Phase One environmental audit at WP Sub's expense of the Real Property used by the business result in a report reasonably satisfactory to WP Sub. (k) Change in Business. Buyer having no reasonable basis to believe that either: (i) the net sales of WP Sub's business was less than $60,000,000 for the nine fiscal months ending April 30, 2003; or (ii) the sum of PP&E being less than $1,000,000 as of April 30, 2003 (l) Capital Structure. The Buyer shall have the approximate shares of common stock and equivalents outstanding as set forth on Schedule 6.1(l). (m) Approval of Counsel; Corporate Matters. All actions, proceedings, resolutions, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall have been approved on the Closing Date by Sommer & Schneider LLP, counsel for Buyer, in the exercise of their reasonable judgment. Seller and WP Sub shall also have delivered to Buyer such other documents, instruments, certifications and further assurances as such counsel may reasonably require. (n) Registration Rights. The Buyer shall have entered into the Registration Rights Agreement with the holders of shares of the Seller's Common Stock substantially in the form annexed hereto as Exhibit H. (o) Shareholders' and Voting Agreement. The Seller shall have executed and delivered the Shareholders' and Voting Agreement substantially in the form annexed hereto as Exhibit I. (p) Intercompany Debt. Seller shall have forgiven all intercompany debt due from WP Sub and paid all intercompany debt due to WP Sub. 6.2 Conditions Precedent to the Obligations of Seller. All obligations of Seller under this Agreement are subject to the fulfillment or satisfaction, prior to or at the Closing, of each of the following conditions precedent: (a) Representations and Warranties True as of the Closing Date. The representations and warranties of Buyer contained in this Agreement or in any list, certificate or document delivered by Buyer to Seller pursuant to the provisions hereof shall have been true in all material respects on the date hereof and shall be true in all material respects on the Closing Date with the same effect as though such representations and warranties were made as of such date. (b) Compliance with this Agreement. Buyer shall have performed and complied in all material respects with all agreements and conditions required by this Agreement to be performed or complied with by them prior to or at the Closing. (c) Closing Certificates. Seller shall have received a certificate from Buyer dated the Closing Date certifying that the conditions specified in Sections 6.2(a) and 6.2(b) hereof have been fulfilled. (d) Opinion of Counsel for Buyer. Sommer & Schneider LLP, counsel to Buyer, shall have delivered to Seller a written opinion, dated the Closing Date, in the form of Exhibit E hereto with only such changes as shall be in form and substance reasonably satisfactory to Seller and its counsel. 23 (e) No Threatened or Pending Litigation. On the Closing Date, no suit, action or other proceeding, or injunction or final judgment relating thereto, shall be threatened or be pending before any court or governmental or regulatory official, body or authority in which it is sought to restrain or prohibit or to obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby, and no investigation that might result in any such suit, action or proceeding shall be pending or threatened. (f) Fairness Opinion. The Seller's Board of Directors shall have received an opinion from Vertical Capital Partners, Inc., New York, New York, to the effect that the terms of this Agreement are fair to the Seller's stockholders from a financial point of view. (g) Buyer. Buyer having not less than $2,000,000 in cash and a $550,000 secured note related to the sale of certain assets at Closing. (h) Approval of Counsel; Corporate Matters. All actions, proceedings, resolutions, instruments and documents required to carry out this Agreement or incidental hereto and all other related legal matters shall have been approved on the Closing Date by Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, counsel for Seller, in the exercise of their reasonable judgment. Buyer shall also have delivered to Seller such other documents, instruments, certifications and further assurances as such counsel for Seller may reasonably require. (i) Employment Agreements. Simultaneously with the Closing of the Transaction, Buyer shall have entered into the employment agreements with each of C. Dean Mclain, Mark Wright and Robert M. Rubin, in the forms annexed hereto as exhibits I(1)(2) and (3). 6.3 Termination. (a) Methods of Termination. Anything in this Agreement to the contrary notwithstanding, the transactions contemplated hereby may be terminated and abandoned at any time prior to the Closing: (i) by mutual consent of the Buyer and Seller; or (ii) by Seller if, as of the Closing Date, any of the conditions set forth in Section 6.2 shall not have been met; (iii) by Seller if, it does not obtain shareholder approval of the transactions contemplated by this Agreement (iv) by Buyer if, as of the Closing Date, any of the conditions set forth in Section 6.1 shall not have been met; (v) by Buyer if the net sales of WP Sub's business was less than $60,000,000 for the nine fiscal months ended April 30, 2003; (vi) by Buyer if the sum of net property, plant and equipment included in WP Sub's assets was less than $1,000,000 as of April 30, 2003; or (vii) by either party if, without fault of the terminating party, the Closing shall not have occurred on or prior to June 27, 2003. (b) Procedure Upon Termination. In the event of termination and abandonment pursuant to Section 6.3(a) hereof, written notice thereof shall forthwith be given to the other party hereto and this Agreement shall terminate and the transactions contemplated hereby shall be abandoned without further action by the Buyer or the Seller. 24 (c) Effect of Termination. In the event of termination of this Agreement as expressly provided in Section 6.3(a) above, this Agreement shall forthwith become void and neither Buyer, on the one hand, nor Seller and WP Sub on the other, shall have any liability to the other, except for either party's breach of any of its obligations which breach shall be existing at the time of such termination. 7. RESERVED. 8. CERTAIN COVENANTS, AGREEMENTS AND CLOSING DOCUMENTS. 8.1 Non-Competition of Seller. (a) Except as set forth on Schedule 8.1, neither Seller nor any subsidiary or affiliate of Seller, except for Robert Rubin and C. Dean McLain, in which Seller owns or has the right, directly or indirectly, to vote 50.1% or more of the voting stock of such entity (collectively the "Western Group") shall, without the written consent of Buyer, for a period of five years from the Closing Date, operate, directly a construction equipment sales, leasing or maintenance business in the States of California or Nevada. (b) Notwithstanding the provisions of this Section 8.1: (i) nothing herein shall prevent members of the Western Group from investing in the securities of any company listed on a national securities exchange or quoted on the NASDAQ quotation system, which investment, but for this Section 8.1(b), would be a violation of Section 8.1(a), provided Seller's and Western Group's ownership is not more than 5% of any class of securities of any such company and Seller's and Western Group's involvement with any such company is solely that of a passive stockholder, (ii) nothing herein shall prevent an acquisition by or of Seller or members of Western Group involving, peripherally equipment sales, leasing or maintenance business in California or Nevada provided such business is disposed of or divested within 90 days following such transaction; and (iii) if any provision of this Section 8.1 is determined to be unenforceable because of the duration of such provision or the area covered thereby, the court making such determination shall have the power to and shall reduce the scope of such provision with respect to such duration and/or area, and/or to delete ("blue-pencil") specific words or phrases, and in its reduced or blue-penciled form such provision shall be enforceable and shall be enforced. (c) Seller agrees that it will not, directly or indirectly, for a period of 24 months after the Closing, for its own account or for the account of any other person, interfere with Buyer's relationships with any of its suppliers or customers or directly solicit Buyer's employees in the States of California and Nevada. (d) At or prior to Closing, Seller and WP Sub will: (i) assign to Buyer all confidentiality agreements signed by parties from whom Seller or WP Sub had communications in connection with a possible purchase of WP Sub's assets, business or any interest or part thereof (collectively the "Offerees") on behalf of Buyer; (ii) provide Buyer with a list of such Offerees; and (iii) request from such Offerees a return of all such confidential information. (e) Seller expressly agrees and understands that Buyer's remedy at law for any breach of Section 8.1(a), (b), (c), or (d) will likely be inadequate if it were Buyer's exclusive remedy and that the damages flowing from any such breach are not readily susceptible to being measured solely in monetary terms. Accordingly, it is acknowledged that upon adequate proof of Seller's violation or threatened violation of any legally enforceable provisions of any of the above enumerated Subsections of Section 8.1, and Buyer's satisfaction of any applicable legal or judicial requirements to support its claim for equitable relief, Buyer will be entitled to specific performance of the above enumerated Subsections of Section 8.1, including but not limited to, immediate injunctive relief, a temporary order restraining any threatened or further breach and 25 such other equitable relief as may be appropriate. Nothing in this Section 8.1 shall be deemed to limit Buyer's remedies at law or in equity for any breach by Seller of any of the provisions of this Agreement, including but not limited to the above enumerated Subsections of Section 8.1, which may be pursued or availed of by Buyer. Seller has carefully considered the nature and extent of the restrictions upon it and the rights and remedies conferred upon Buyer under this Section 8.1 and hereby acknowledges and agrees that the same are reasonable, are fully required to protect the legitimate interests of Buyer and do not confer a benefit upon Buyer disproportionate to the detriment of Seller. (g) The provisions of this Section 8.1 shall be terminated upon the occurrence of an Event of Default subject to applicable grace periods under the Note. 8.2 [Intentionally left blank.] 8.3 Consummation of Transactions; Further Assurances. (a) Each of the parties agrees to use its reasonable best efforts to bring about the satisfaction of the conditions required to be performed, fulfilled or complied with by it hereunder and to take or cause to be taken, all action, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as expeditiously as practicable. (b) In case at any time after the Closing any further action is reasonably necessary or desirable to carry out the purposes of this Agreement, the appropriate party will take all such necessary action, including without limitation, the execution and delivery of such further instruments and documents as may be reasonably requested by the other party or parties for such purposes or otherwise to complete or perfect the transactions contemplated hereby. After the Closing, Buyer and Seller shall cooperate fully with the other and shall make available to the other and to any taxing authority all information, records or documents in its possession which are reasonably requested in connection with the preparation of any tax returns or in connection with any tax liability of Seller for any period prior to the Closing, and otherwise shall cooperate in connection with all matters, such as but not limited to litigations and personnel matters, involved in the sale from Seller to Buyer. 8.4 Risk of Loss. Prior to the Closing Date, the risk of loss or damage to, or destruction of, any or all of WP Sub's business and any or all of WP Sub's assets shall remain with Seller. 8.5 Payment of Taxes. Seller shall file when due, giving effect to all applicable extension provisions, all federal, state, local and foreign tax returns required to be filed by it (including but not limited to income, sales, use and payroll taxes) for all periods to the Closing Date and shall pay all taxes, interest or penalties (i) shown on, or which are otherwise due and payable pursuant to, such returns, (ii) which shall become due with respect to any such period pursuant to any deficiency notice or similar notice or (iii) which otherwise shall become due with respect to any such period. 8.6 Best Efforts to Obtain Consents. Each of Seller and Buyer shall use its reasonable best efforts to obtain promptly all the consents and authorizations of third parties for which it is responsible to obtain, and to cooperate with the other as the other may reasonably request, to make all filings, if any, and to give all notices to third parties which may be required in order to effect the transactions contemplated by this Agreement. 8.7 Other Government Filings. 26 Buyer and Seller agree to cooperate with each other in filing any necessary applications, reports or other documents with any federal or state authorities having jurisdiction with respect to the transactions contemplated by this Agreement and in seeking necessary consultation with and favorable action by any such agencies, authorities or bodies. 8.8 [Intentionally left blank.] 8.9 Retention of Records. Seller shall deliver to Buyer all files and records directly pertaining to the operation of WP Sub's business (and not delivered to Buyer at Closing) 8.10 [Intentionally left blank.] 8.11 Accountants' Consents. During the period beginning on the Closing Date and ending the last date for which such statements would be required to be included in a filing made by Buyer with the Securities and Exchange Commission ("SEC"), Seller will, at its expense, procure and deliver to Buyer, the consent of Grassi & Co., CPA's, P.C. to include and incorporate their reports on the Closing Balance Sheet and the information described in Section 3.6(a)(i) in Buyer's filings with the SEC. 9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION. 9.1 Survival of Representations. All representations and warranties contained in this Agreement shall survive the Closing for a period (the "Survival Period") of three years after the Closing Date, except for those related to the representations set forth in Sections 3.15 and 3.24 hereof which shall continue through the applicable statute of limitations and those related to third party claims in connection with Excluded Obligations which shall survive the Closing for a period of five years. 9.2 Indemnification by Buyer. Buyer agrees to indemnify, protect, defend and hold harmless Seller and any Affiliate thereof and each of its shareholders, any parent, subsidiary or affiliate thereof and all directors, officers, employees, attorneys, and agents of any of the foregoing (the "Seller Group"), at any time after the Closing and during the appropriate Survival Period (except that such indemnification obligations shall continue beyond the Survival Period if a Notice of Claim for indemnification shall be delivered to Buyer prior thereto, in which case such indemnification obligations shall continue until the claim as to which such notice has been given is resolved and any applicable indemnification obligations have been satisfied), from and against all demands, claims, actions or causes of action, assessments, deficiencies, taxes, losses, damages, liabilities, costs and expenses, including without limitation, interest, penalties and reasonable attorneys' fees and expenses (collectively "Losses"), asserted against, resulting from, imposed upon or incurred by the Seller Group, directly or indirectly, arising out of or in connection with (a) the breach or inaccuracy of any of the representations or warranties of Buyer made in or pursuant to this Agreement; (b) any breach of any covenant or agreement of Buyer contained in this Agreement; or (c) any and all obligations, liabilities, debts or commitments in connection with the operation of WP Sub's business arising after the Closing to the extent that they arise after the Closing and only in respect of such time period. 9.3 Indemnification by Seller. Seller agrees to indemnify, protect, defend and hold harmless Buyer and each of its shareholders, any parent, subsidiary or affiliate thereof and all directors, officers, employees, attorneys and agents of any of the foregoing (the "Buyer Group"), at any time after the Closing and during the appropriate Survival Period (except that such indemnification obligations shall continue beyond the Survival Period if a Notice of Claim for indemnification 27 shall be delivered to Seller prior thereto, in which case such indemnification obligations shall continue until the claim as to which such notice has been given is resolved and any applicable indemnification obligations have been satisfied), from and against all Losses asserted against, resulting from, imposed upon or incurred by the Buyer Group or any member thereof, directly or indirectly, arising out of or in connection with (a) the breach or inaccuracy or alleged breach or inaccuracy of any of the representations or warranties of Seller made in or pursuant to this Agreement; or (b) any breach of any covenant or agreement of Seller contained in this Agreement. 9.4 Third Party Claims. (a) If any demand, claim, action or cause of action, suit, proceeding or investigation (collectively, the "Claim") is brought against an Indemnified Party for which the Indemnified Party intends to seek indemnity from the other party hereto (the "Indemnifying Party"), then the Indemnified Party within twenty-one (21) days after such Indemnified Party's receipt of the Claim, shall notify the Indemnifying Party pursuant to Article "10.4" of this Agreement which notice shall contain a reasonably thorough description of the nature and amount of the Claim (the "Claim Notice"). The Indemnifying Party shall have the option to undertake, conduct and control the defense of such claim or demand. Such option to undertake, conduct and control the defense of such claim or demand shall be exercised by notifying the Indemnified Party within twenty (20) days after receipt of the Claim Notice pursuant to Article "9.4" of this Agreement (such notice to control the defense is hereinafter referred to as the "Defense Notice"). The failure of the Indemnified Party to notify the Indemnifying Party of the Claim shall not relieve the Indemnifying Party from any liability which the Indemnifying Party may have pursuant to this Article "9" of this Agreement except to the extent that such failure to notify the Indemnifying Party prejudices the Indemnifying Party. The Indemnified Party shall use all reasonable efforts to assist the Indemnifying Party in the vigorous defense of the Claim. All costs and expenses incurred by the Indemnified Party in defending the Claim shall be paid by the Indemnifying Party. If, however, the Indemnified Party desires to participate in any such defense or settlement, it may do so at its sole cost and expense (it being understood that the Indemnifying Party shall be entitled to control the defense). The Indemnified Party shall not settle the Claim. If the Indemnifying Party does not elect to control the defense of the Claim, within the aforesaid twenty (20) day period by proper notice pursuant to Article "9.4" of this Agreement, then the Indemnified Party shall be entitled to undertake, conduct and control the defense of the Claim (a failure by the Indemnifying Party to send the Defense Notice to the Indemnified Party within the aforesaid twenty (20) day period by proper notice pursuant to Article "9.4" of this Agreement shall be deemed to be an election by the Indemnifying Party not to control the defense of the Claim); provided, however, that the Indemnifying Party shall be entitled, if it so desires, to participate therein (it being understood that in such circumstances, the Indemnified Party shall be entitled to control the defense). Regardless of which party has undertaken to defend any claim, the Indemnifying Party may, without the prior written consent of the Indemnified Party, settle, compromise or offer to settle or compromise any such claim or demand; provided however, that if any settlement would result in the imposition of a consent order, injunction or decree which would restrict the future activity or conduct of the Indemnified Party, the consent of the Indemnified Party shall be a condition to any such settlement. Whether the Indemnifying Party shall control and assume the defense of the Claim or only participate in the defense or settlement of the Claim, the Indemnified Party shall give the Indemnifying Party and its counsel access, during normal business hours, to all relevant business records and other documents, and shall permit them to consult with its employees and counsel. (b) The amount of any Losses for which indemnification is available shall be computed without regard to the tax effect of any such loss or indemnification. (c) In the event of payment by an Indemnifying Party to the Indemnified Party as contemplated in this Section 9, the Indemnifying Party shall be subrogated to and shall stand in the place of the Indemnified Party as to any events or circumstances in respect of which the Indemnified Party may have any right or claim against any third party relating to such event giving rise to the claim for which the Indemnifying Party shall have made payment to the Indemnified Party. The 28 Indemnified Party shall cooperate with the Indemnifying Party in any reasonable manner in prosecuting any such subrogated right or claim. 9.5 Limitations on Indemnification. (a) No claim may be made against an Indemnifying Party pursuant to its indemnification obligations set forth in Section 9.2 or 9.3 hereof unless the aggregate amount of all matters for which such party would (but for this provision) be liable (and of which matters the Indemnified Party followed the provisions of Section 8.4 above) exceeds $50,000 (the "Threshold Amount") and the Indemnified Party's right to indemnification hereunder shall only be with respect to such amounts in excess of the Threshold Amount. For purposes of determining the Threshold Amount and Maximum Amount hereunder, the Indemnifying Party's obligations shall be with respect to the Seller Group as a whole and the Buyer Group as a whole. (b) The Indemnifying Party shall not be obligated for any indirect, special or consequential damages or lost profits incurred by the Indemnified Party. (c) Neither Buyer on the one hand, nor Seller, on the other hand, will be liable in the aggregate to the other for indemnification pursuant hereto in excess of the amount of $17,000,000, (the "Maximum Amount"). 9.6 Successors. The merger, consolidation, liquidation, dissolution or winding up of, or any similar transaction with respect to, the Indemnifying Party shall not affect in any manner the obligations of the Indemnifying Party pursuant to this Section or any other term or provision of this Agreement, and the Indemnifying Party covenants and agrees to make adequate provision for its liabilities and obligations hereunder in the event of any such transaction. 9.7 Time Action Must be Brought. No action may be brought under this Section 9 unless brought three years from the date of Closing except actions related to the representation set forth in Section 3.16 and 3.25 which shall be brought by the expiration of the applicable statute of limitation plus one week. 9.8 Reasonable Costs, Etc. The indemnification, which is set forth in this Article "9" of this Agreement shall be deemed to include not only the specific liabilities or obligation with respect to which such indemnity is provided, but also all counsel fees, reasonable costs, expenses and expenses of settlement relating thereto, whether or not any such liability or obligation shall have been reduced to judgment. 10. MISCELLANEOUS PROVISIONS. 10.1 Amendment. This Agreement may be amended, modified or supplemented by the parties hereto only by a written instrument duly signed by or on behalf of the party to be charged therewith. 10.2 Waiver of Compliance. Any failure of Seller, on the one hand, or Buyer, on the other hand, to comply with any obligation, covenant, agreement or condition herein may be expressly waived in writing by an authorized officer of Buyer or Seller, respectively, but such waiver or failure to insist upon strict compliance with any such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. 29 10.3 Expenses. (a) Except as set forth in paragraph 10.3(b), whether or not the transactions contemplated by this Agreement are consummated, each of the parties hereto shall pay the fees and expenses of their respective counsel, accountants and other experts, and shall pay all other expenses incurred by it incident to the negotiation, preparation, execution and consummation of this Agreement. (b) WP Sub shall bear the cost of fees and expenses charged by WP Sub's Auditors in connection with the preparation of and report described in Section 8.12. In addition, Buyer and WP Sub shall bear equally the fees and expenses: (i) WP Sub's Auditors up to a maximum of $7,500 in connection with performing the procedures set forth in Schedule 2.5; and (ii) Buyer's Auditors up to a maximum of $7,500 in connection with their supervision of the foregoing. (c) The provisions of Section 10.3 shall survive any termination of this Agreement. 10.4 Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given (i) four business days subsequent to mailing if mailed by express, certified or registered mail, with postage prepaid, in the continental United States; (ii) two business days subsequent to pick up by such courier if sent by a nationally or internationally recognized overnight courier service that regularly maintains records of items picked up and delivered; or (iii) when transmitted if sent by telecopier, provided that a written acknowledgment of receipt signed by or on behalf of the recipient of the telecopy is transmitted back to the sender by the recipient, as follows: If to Seller/or WP Sub: Western Power & Equipment Corp. 6407-B N.E. 117th Avenue Vancouver, WA 98662 Telecopier No.: (360) 892-7927 with a copy to: Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP 101 East 52nd Street New York, NY 10022 Attention: Jay M. Kaplowitz, Esq. Telecopier No.: (212) 980-5192 or to such other person or address as Seller shall furnish to Buyer in writing. If to Buyer: CDKnet.Com, Inc. 150 Broad Hollow Road, Suite 103 Melville, NY 11747 Telecopier No.: (631) 385-4055 with a copy to: Sommer & Schneider LLP 595 Stewart Avenue, Suite 710 Garden City, NY 11530 Attention: Herbert H. Sommer, Esq. Telecopier No.: (516) 228-8211 or to such other person or address as Buyer shall furnish to Seller in writing. 30 10.5 Binding Effect; Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective administrators, legal representatives, successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned or assignable by any of the parties hereto without the prior written consent of the other party, except (i) by operation of law, (ii) that Buyer may freely assign this Agreement or all or any rights or obligations it may have hereunder to a direct or indirect wholly-owned subsidiary of Buyer, and (iii) that Buyer may assign all of its rights but not its obligations under this Agreement to any institution providing financing or re-financing for the transactions contemplated by this Agreement. 10.6 Remedies. Except that the indemnification provision of Section 9 above is the exclusive remedy for breaches of representations, warranties and covenants as provided therein, the parties acknowledge and agree that each party hereto may seek any remedies in equity or law that may be available to it. Nothing herein shall prevent the Parties from impleading or interpleading the other party at any time in an action brought by a third party relating to what would otherwise have been an indemnifiable claim. 10.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to its principles of conflict or choice of law. 10.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute the same instrument. 10.9 Headings. The headings of the sections of this Agreement are inserted for convenience only and shall not constitute a part or affect in any way the meaning or interpretation of this Agreement. 10.10 Entire Agreement. (a) This Agreement sets forth the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein, and supersedes all prior agreements, promises, letters of intent, covenants, arrangements, communications, representations or warranties, whether oral or written, by any party hereto or by any Related Person of any party hereto. (b) All Exhibits attached hereto, the Disclosure Schedule, any exhibits thereto and all certificates, documents and other instruments delivered or to be delivered pursuant to the terms hereof are hereby expressly made a part of this Agreement as fully as though set forth herein, and all references herein to the terms "this Agreement," "hereunder," "herein," "hereby" or "hereto" shall be deemed to refer to this Agreement and to all such writings. 10.11 Third Parties. Except as specifically set forth or referred to herein, nothing in this Agreement, express or implied, is intended or shall be construed to confer upon or give to any person (including but not limited to Seller's employees), 31 firm, partnership or corporation other than the parties hereto and their successors or permitted assigns, any rights or remedies under or by reason of this Agreement. 10.12 Severability. The invalidity of any one or more of the words, phrases, sentences, clauses, sections or subsections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part hereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses, sections or subsections contained in this Agreement shall be declared invalid by a court of competent jurisdiction, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, section or sections, or subsection or subsections had not been inserted. 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. WESTERN POWER & EQUIPMENT CORP. (Delaware) By: /s/ Dean McLain ----------------------------- Name: Dean McLain Title: President/CEO CDKNET.COM, INC. By: /s/ Andrew J. Schenker ----------------------------- Name: Andrew J. Schenker Title: President 33 EX-99.B 4 exh-b_11958.txt OPINION OF VERTICAL CAPITAL PARTNERS, INC. EXHIBIT B --------- VERTICAL CAPITAL PARTNERS, INC. Member NASD, SIPC and MSBR 488Madison Avenue New York, New York 10022 (212) 446-0006 May 7, 2003 Western Power & Equipment Corp. Attention: Board of Directors 6407-B N.E. 117th Avenue Vancouver, WA 98662 Gentlemen: You have requested that Vertical Capital Partners, Inc. ("Vertical") provide you with its opinion as to the fairness, from a financial point of view, of the consideration paid to Western Power & Equipment Corp., a Delaware corporation ("Parent") for all the outstanding shares of WP Delaware Power & Equipment Corp., an Oregon corporation ("WP SUB") a wholly-owned subsidiary of WP Delaware, pursuant to the Stock Purchase and Exchange Agreement [thereafter "the Agreement"] dated as of May 5, 2003- between WP Delaware and CDKnet.com . ( the "Valuation Date").WP Sub is engaged in the business of selling, renting and servicing of light, medium-sized, and heavy construction, agricultural, and industrial equipment, parts, and related products which are manufactured by Case Corporation ("Case") and certain other manufacturers (hereafter "the Business"). Under the Agreement, WP Delaware shall sell all of its interest in WP sub to CDKnet.com and CDKnet.com shall issue shares of its common stock to WP Delaware in a tax free exchange of shares, (the "Transaction"). Vertical has not been asked to render a tax opinion and has accepted representations by Company's counsel that the Transaction is tax free. In arriving at the opinion set forth below, Vertical Capital Partners, Inc. has completed the following tasks: 1. Reviewed the audited financial statements of WP Delaware, "the financial statements of WP Delaware are only representative of the wholly owned subsidiary". for the years ended July 31, 2001, and July 31 2002, and the unaudited three month financial statements for the periods ended October 31, 2002 and January 31, 2003, as well as the financial statements (quarterly and annual reports) for CDKnet.com, and certain industry comparisons of unrelated entities engaged in businesses similar to the Business and various closing documents, accounting and other records as of the closing date. 2. Reviewed certain information, relating to the Business, including financial forecasts, earnings, cash flows and assets of the Business, furnished to us by or on behalf of WP Sub. 3. Conducted discussions with members of the management of WP Delaware, WP Delaware Power & Equipment Corp., and CDKnet.com concerning the Business and prospects of the Business; discussions were also conducted with other unrelated industry participants. 4. Compared the results of operations of the Business with that of certain unrelated companies which we deemed relevant. 5. Conducted a financial review of the financial condition of WP Delaware Power & Equipment Corp and its subsidiary WP Delaware. with respect to its liquidity and capital position as of the Valuation Date, as well as considered the lending relationship with and demands by Deutsche Financial Services, WP Delaware's senior lender. 6. Considered liquidation scenarios and compared them with the financial fairness of the Transaction. 7. Compared the financial terms of the purchase with the financial terms of certain other mergers and acquisitions which we deemed relevant. 8. Reviewed the Transaction Agreement and ancillary agreements thereto. 9. Reviewed interests of certain Board of Directors and management of WP Delaware who have additional interests in the merger in addition to their interests as shareholders of WP Delaware. Vertical Capital Partners, Inc. has been told by the Board of Directors of WP Delaware that the Board was aware of these interests and the Board considered them, among other matters, in unanimously approving the Agreements and the transactions contemplated thereby. Vertical also considered demands placed upon WP subsidiary and CDKnet.com by vendors as to certain control, management and shareholder interest that these vendors (Case being the main vendor/supplier) insist on to maintain distribution rights of the Business. 10. Performed such other analyses and reviewed and analyzed such other information as Vertical Capital Partners, Inc. deemed appropriate. In rendering this opinion, Vertical Capital Partners, Inc. did not assume responsibility for independently verifying, and did not independently verify, any financial or other information concerning WP Delaware Power & Equipment Corp., and WP subsidiary or the publicly available information regarding other companies. Vertical Capital Partners, Inc. has assumed that all such financial and other information is accurate and complete. Vertical Capital Partners, Inc. has further relied on the assurances of WP Delaware Power & Equipment Corp.'s WP subsidiary's management and CDKnet.com that they are not aware of any facts that would make such financial or other information inaccurate, incomplete or misleading. With respect to liquidation scenarios, forecasts and financial projections of WP Delaware, provided by management, Vertical Capital Partners, Inc. has assumed, for the purpose of this opinion, that the liquidation scenarios and forecasts have been reasonably prepared on bases reflecting the best available estimates and judgments of management at the time of their preparation as to the future performance of the Business. Vertical Capital Partners, Inc. has further assumed, with your consent, that any material liabilities (contingent or otherwise, known or unknown) of the Business are as set forth in the financial statements. Vertical Capital has also heavily considered the real demands put upon WP Delaware by its senior lender and the effects those demands could have on WP Delaware's shareholders if certain actions are not taken by WP Delaware to mitigate any adverse actions. Vertical has relied upon management's and board members' representations of the consequences of any adverse action taken by the senior lender and has considered those consequences carefully while forming its opinion opined to herein. We have not been engaged to make, nor have we made, an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of the Business nor have we been furnished with any such evaluation or appraisals except for the financials provided by the WP Delaware and its WP subsidiary as well as liquidation scenarios. Our opinion is based upon regulatory, economic, market and monetary conditions existing on the date hereof. In addition it should be duly noted that certain shareholders of Vertical Capital Partners, Inc have on going business relations with Robert Rubin the CEO of WP Delaware. Its should also be noted that none of the shareholders of Vertical own any stock in WP Delaware or CDKnet.com and as such have no economic benefit from the transaction. This opinion has been prepared for your information in connection with the Transaction Agreement and shall not be reproduced, summarized, described or referred to or provided to any person or otherwise made public without the prior consent of Vertical Capital Partners, Inc. It is understood, however, that the combined entities are public and that you may reference the existence of this opinion provided that any reference language shall be subject to prior approval by Vertical Capital Partners, Inc. Said approval shall not be unreasonably withheld. On the basis of, and subject to the foregoing, we are of the opinion that the consideration paid (shares exchanged by CDKnet.com) is fair from a financial point of view to the shareholders of WP Delaware. Yours very truly, Kenneth Greenbaum VERTICAL CAPITAL PARTNERS, INC. Cc: Ronald Heineman, President Gary Schonwald, General Counsel EX-99.C 5 exh-c_11958.txt CDKNET.COM, INC. FORM 10-K FOR JUNE 30, 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended June 30, 2002 ------------- [_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number: 0-27587 ------- CDKNET.COM, INC. ---------------------------------------------- (Name of small business issuer in its charter) Delaware 22-3586087 ---------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 150 Broadhollow Road, Suite 103 Melville, New York 11747 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (631) 385-6200 -------------- Securities registered under Section 12(b) of the Exchange Act: None ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.0001 par value ------------------------------ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for its most recent fiscal year. $209,767 -------- The aggregate market value of the Company's common stock held by non-affiliates of the Company as of November 11, 2002 was approximately $829,006 based upon the closing price of the Company's common stock on November 11, 2002 (see footnote (1) below). As of November 11, 2002, there were 36,196,267 shares of common stock, $.0001 par value, outstanding. Transitional Small Business Disclosure Format (check one): [_] Yes [X] No - ------------ (1) The information provided shall in no way be construed as an admission that any person whose holdings are excluded from the figure is not an affiliate or that any person whose holdings are included is an affiliate and any such admission is hereby disclaimed. The information provided is included solely for record keeping purposes of the Securities and Exchange Commission. ================================================================================ PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT -------------------------------------------------------------- All statements in this annual report on Form 10-KSB that are not historical are forward-looking statements within the meaning of Section 21e of the Securities Exchange Act, including statements regarding our "expectations," "beliefs," "hopes," "intentions," "strategies," or the like. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. We caution investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the risk factors discussed in this Annual Report on Form 10-KSB. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based. PART I ITEM 1. DESCRIPTION OF BUSINESS. Our Company - ----------- CDKnet.com, Inc. is a holding company incorporated in the State of Delaware. Prior to June 2001, our business was conducted through our subsidiaries: CDKnet, LLC and CDK Financial Corp. (formerly Valueflash Incorporated). CDKnet, LLC provides propietary convergence technology that links audio, video and the worldwide web on standard compact disks. CDK Financial Corp., developed and marketed a non-intrusive, highly targeting e-messaging service. In June, 2001 we completed the sale of substantially all of the asses and business of CDK Financial Corp. to Elbit Limited for $3.5 million, the forgiveness of indebtedness and the assumption of liabilities. On August 2, 2001, we formed Diversified Capital Holdings, LLC (f/k/a Azure Capital Holdings LLC)("Diversified"). We initially owned 60% of the outstanding ownership interest of Diversified. On December 14, 2001 we purchased the remaining 40% of Diversified from George Sandhu and own 100% of Diversified. On December 19, 2001, we changed the name from Azure Capital Holdings, LLC to Diversified Capital Holdings, LLC. George Sandhu serves as an advisor to Spiga Limited and Target Growth Ltd., investment funds that own, as of October 31, 2002, the majority of the outstanding shares of our Series A Preferred Stock. On October 22, 2002 we entered into an agreement to sell certain assets including the business of Diversified, CDK Financial and CDKNet, LLC to Universal Media Holdings, Inc. ("Universal"). At the time of the transaction, James W. Zimbler served as President and a Director of Universal and also served as Secretary and Executive Vice President of CDKNet.Com. On the same day, Steven A. Horowitz, our CEO and Andrew Schenker, our COO were appointed President, CEO and CFO respectively, of Universal. Certain of the assets comprising the consulting business of Diversified and investments we made were transferred to Universal. CDKNet, LLC has not been transferred to Universal pending our obtaining requisite consents. As a result, we remain in the business of producing custom compact disks. In addition to our interests in CDK Financial Corp. and Diversified Capital Holdings, we currently have two wholly-owned subsidiaries: Creative Technology and CDKnet, LLC. We directly own 100% of Creative Technology and 48.5% of CDKnet, LLC. Creative Technology owns the remaining 51.5% ownership interest of CDKnet, LLC, giving us an indirect 100% ownership interest of CDKnet, LLC. We conduct our business through CDKnet, LLC. Our executive office as well as our manufacturing is are conducted out of our office located at 150 Broadhollow Road, Suite 103, Melville, New York 11747. We can be reached at our principal offices by telephone at (631) 385-6200. Our audited financial statements for the period July 1, 2001 to June 30, 2002, reflect a net loss of $1,325,013 to common stockholders on net revenues of $209,767 compared to a net loss of $7,372,000 on revenues of $5,874,000 in the fiscal year ended June 30, 2001. Revenue generated from ValueFlash in fiscal 2001 was $5,419,000. Since the sale of the assets of ValueFlash, we have had lower production costs and lower overhead which we hope will provide us with the means to be profitable in our remaining technology business while seeking a prospective business acquisition. 1 CDKnet, LLC ----------- Our subsidiary CDKnet, LLC, a New York limited liability company, formed in October 1997, developed a unique multimedia technology, CDK(TM), integrating audio, video and Internet connectivity on a standard compact disc. These custom compact discs include full-screen, full-motion video, Red Book (digital standard) audio and targeted web links. The media components are presented through CDKnet, LLC's proprietary media players that have been developed for ease of use and functionality. While other companies have the potential to develop web-based, audio and video, custom compact discs, we believe that none offer the economic, development or quality advantages of our CDK(TM) technology. We believe that there are three main companies currently offering custom audio compact disc development. These companies are Customdisc.com, Amplified.com, and K-Tel.com. However, we believe that none of these companies offer custom audio and video compact disc development. In an effort to further secure a strong position in the marketplace, CDKnet, LLC has submitted patent requests for certain aspects of our technology. Finally, we believe that other companies, including established Internet companies, software companies and companies in the entertainment business could enter this business and become competitors. Internet usage has increased dramatically in the last decade. As a result, many new personal and commercial applications have been developed for Internet users and, increasingly, consumers are conducting business through Internet applications. We believe that web-connected multimedia compact discs can be one of the significant means available to businesses to provide information and content to consumers via the Internet. Web-connected, multimedia compact discs contain audio, video and HTML (or, HyperText Markup Language, the underlying "code" for web pages) all navigable by a standard web browser. Our CDK(TM) technology forms the foundation multimedia for CD-ROM authoring, production, and custom online compilations. Further, our CDK(TM) technology provides an outstanding platform for the dissemination of Elbit's Vflash(TM) messenger. We believe there is strong market potential for CDK(TM) technology across various industries. Target industries include: o Entertainment (music, movies, TV) - Toys/Games o Travel & Tourism - Fashion o Professional Sports - Food/Cooking o Financial Services - Automotive o Education - HealthCare We believe that the industry will become more competitive. Our inability to compete in the market could have a material effect on our business operations. CDK(TM) technology combines the following products and services through a browser interface: o compact disc digital audio (i.e., audio tracks that are playable on both home stereo systems and personal computers); o full-screen video; and o integrated web links. A browser interface is the main interface page that is presented when the compact disc is placed in a personal computer. Our technology allows video playback at the full-screen size of the video monitor and at full-motion which is the industry standard of 30 frames per second. The browser interface also allows easy linking to other web sites through the CDK(TM) interface page. 2 The CDK(TM) HTML authoring system -- the process for creating web pages -- is used by CDKnet, LLC to produce custom HTML interface pages for specific clients in about a day. We have proprietary techniques for creating full-motion, full-screen video playback from using a compact disc. Any user with a personal computer of at least 166MHZ or Macintosh G3 should be able to play our custom audio and video compact discs. CDK(TM) has been engineered to offer compatibility with the majority of CD-ROM drives on the market. We believe that we have achieved a high level of reliability, as evidenced by extensive testing and major CDK(TM) releases, and we believe this reliability will provide a major competitive advantage over other multisession (i.e., both audio and video) compact discs in the market. Additionally, the CDK(TM) system is engineered for mass-production. The integration of the complete file structure of the CDK(TM) is automated. Audio, video and HTML assets can be placed in the production templates created by us for a fast turn-around time for the creation of CDKs. The CDKnet, LLC business model has been revised and is now based on single revenue stream from development and use fees for client-specific CDKs(TM). During most of fiscal year 2002, we leveraged the marketing opportunity offered by the Vflash(TM) technology by presenting CDK 2.0(TM) client specific compact discs (CDK's) as the logical distribution method for the Vflash messenger in the form of commercially sold or promotionally distributed compact discs. On June 13, 2001, however, we sold substantially all of the business and assets of ValueFlash to Elbit. Pursuant to the sale, we entered into a Technology and License Agreement with Elbit, whereby we agreed to provide CDKs(TM) to Elbit in return for royalty fees and per disc production fees. Following the sale of substantially all of the assets of Valueflash.com, Inc. to Elbit Ltd. in June 2001, we have produced custom compact disks solely for Elbit pursuant to our technology and licensing agreement with them. CDK Financial Corp. and Diversified Capital Holdings, LLC --------------------------------------------------------- The following discussion of the history of CDK Financial Corp. and Diversified Capital Holdings, LLC is for historical purposes. In October 2002, we agreed to sell certain assets of these entities to Universal Media Holdings, Inc. On January 13, 2000, we organized ValueFlash.com Incorporated, a Delaware corporation. On June 13, 2001, we sold substantially all of the assets and business of ValueFlash to Elbit Limited (NASDAQ: ELBT), a corporation organized under the laws of Israel, and its subsidiaries (collectively, "Elbit") for $3.5 million plus the assumption of liabilities and forgiveness of indebtedness. Pursuant to the terms of the sale, on July 13, 2001, we changed the name of ValueFlash.com Incorporated to CDK Financial Corp. We continue to maintain a business relationship with Elbit (the owner of the VFlash technology) pursuant to a Technology and License Agreement between Elbit and us that provides for the distribution by Elbit of CDKnet, LLC's multimedia compact discs. Currently, our ownership in CDK Financial Corp. consists of 8,500,000 shares, or 80.76%, of the outstanding common stock and 2,500,000 options. The remaining shareholders of CDK Financial Corp. are: Alvin Pock, 75,000 shares; AMRO International, S.A., 425,000; Austost Anstalt Schaan, 100,000 shares; Balmore Funds, S.A., 100,000 shares; Mabcrown, Inc., 500,000 shares; Aizik Wolf, 50,000 shares; Incentive Management, Inc., 175,000 shares; ValueFlash Corporation PTE Ltd., 500,000 shares; David Wolf, 100,000 shares; and Steven A. Horowitz, 800,000 options On August 2, 2001, we formed a subsidiary, Diversified Capital Holdings, LLC, (f/k/a Azure Capital Holdings, LLC) ("Diversifed Capital"), to perform corporate management consulting services. Diversified Capital is a limited liability company organized under the laws of Delaware. We initially owned 60% of the outstanding membership units of Diversified Capital. On December 14, 2001, we purchased the remaining 40% of Diversified Capital from George Sandhu. We now own 100% of Diversified Capital. On December 19, 2001, we changed the name of Azure to Diversified Capital Holdings LLC. 3 Through Diversified and CDK Financial, we endeavored to develop a management advisory consulting line of business for the small and micro-capitalized sized corporate markets. Our target clients included both privately held and micro-capitalized publicly held development stage companies. In addition to day to day management and administrative consulting services, our services included advice regarding the identification and evaluation of equity financing through the purchase or sale of equity, debt and or convertible securities. As noted above, we agreed to sell this business and many of its investments to Universal Media Holdings on October 22, 2002. On May 22, 2002, Diversified acquired a 100% ownership interest in Crossover Advisors LLC, a New York limited liability company. Additionally, on June 11, 2002, Diversified acquired 100% ownership interests in Comprehensive Resource Advisors, Inc. and NBM Information Technology, Inc, each a New York corporation. The ownership of each of these companies was transferred to Diversified, however a portion of the consideration due to their respective sellingshareholders, shares of our Series A Preferred Stock, have not been delivered. We are in arrears in the payment of accrued cumulative dividends on outstanding shares of Series A Preferred Stock and cannot issue additional Series A shares until we obtain the consent of the holders to the outstanding shares. We have reached an agreement to issue additional shares of Series A Preferred Stock to the holders in lieu of accrued and upaid dividends and to modify the conversion terms of the Series A Preferred Stock in order to obtain this consent. Research & Development - ---------------------- With the sale of our Vflash technology to Elbit, our technology research and development requirements have been curtailed considerably. During the fiscal year ending June 30, 2002, we have not engaged in significant technological research or development. During the fiscal year ending June 30, 2001, we expended approximately $225,000 on research and development. 4 Sales and Marketing - ------------------- The primary marketing objective for CDKnet, LLC is to establish CDK(TM) technology as the standard for integrating digital audio, full-screen/full-motion video and Web links on a standard compact disc. CDK(TM) technology provides clients with the ability to distribute information and multimedia content to their existing and potential customer base. Additionally, our client-specific CDKs(TM) are ideally suited to distribute Elbit's Vflash(TM) messenger. CDKnet, LLC will continue to capitalize on the market opportunity presented by Elbit's VFlash(TM) messenger by providing Elbit's clients with Web-connected multimedia compact discs (CDKs) that serve as an efficient distribution mechanism for the Vflash(TM) application. Following the sale of substantially all of the assets of Valueflash.com, Inc. to Elbit Ltd. in June, 2001, we have depended upon Elbit's marketing efforts for their Vflash messenger to provide indirect marketing for our CDK(TM)technology. Additionally, CDKnet, LLC will continue to provide multimedia compact disc production to clients who are interested in developing compact disc-based marketing programs but who may not be candidates for a full-fledged Vflash program. Intellectual Property Rights - ---------------------------- We rely on copyrights, trademarks, patents, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our CDK related services and products. We were issued U.S. Patent No. 6,047,292 on April 4, 2000, relating to the basic CDK(TM) technology. The patent is directed to a multi-session, digitally encoded recording medium navigable by an Internet web browser. Our intellectual property counsel has filed a continuation application to separate the previously rejected claims from the issued patent into a new application, which intellectual property counsel will continue to prosecute in the U.S. Patent and Trademark Office. No assurance can be given that a second patent will issue or that if a second patent does issue that it will be broad enough to provide significant protection to us. No assurance can be given that the issued patent is valid and enforceable or that it provides sufficient coverage to prevent a competitor from entering our market or adopting a version of our patented technology. Moreover, one of our competitors may be able to design a system which operates similarly to ours, but does not infringe the patent. Our management believes that the steps taken by us to protect its intellectual property are consistent with industry standards for online, custom compact disc companies today. On June 13, 2001, we entered into a 3-year Technology and License Agreement along with Elbit Limited and Elbit Vflash Inc. Pursuant to the Agreement, the Licensees are entitled to make such improvements, derivatives and applications from our CDK(TM) technology as they may provided that they are used solely in the developing, manufacturing and selling of merchandise for desk-top messaging. The Licensees shall also have the right to protect such improvements to, derivatives from, or applications to, our CDK(TM) technology by registering the same through patent, copyright, trademark applications or the like. Should we decide to sell all or portions of our ownership of the CDK(TM) technology, the Licensees shall have the option, for seven days from receipt of notice of the terms of the sale, to purchase such ownership interest on identical terms and conditions. 5 Additionally, on June 6, 2000, we filed a patent application (No. 09/588,768) for a system and method for disseminating information over a communication network according to predefined consumer profiles, for our Vflash(TM) product. On June 13, 2001, we assigned our patent application and intellectual property rights in VFlash(TM) to Elbit. We also rely on third-party software licenses, such as Microsoft Development Network (MSDN), which provides software development tools. All employees and contractors are required to and have entered into confidentiality and invention assignment agreements. Suppliers, distributors and customers are also required to enter into confidentiality agreements. To date, we have received no notification that our services or products infringe the proprietary rights of third parties. Third parties could however make claims of infringement in the future. Any future claims that do occur may have a material adverse effect on our business. We have the following issued and pending trademarks: o Issued Trademark Registrations ------------------------------ TM: CDK Serial No. 75/426,937 - Filed February 2, 1998 Issued: 06-27-00 Reg. No. 2,361,144 o Pending: ------- TM: MIX FACTORY Serial No. 75/757,751 Filed: 7/22/99 Regulation - ---------- Through Diversified and CDK Financial we have made minority investments in several entities. See Part II, Item 6 Managements Discussion and Analysis of Financial Condition and Results of Operations. We continue to operate our custom compact disk business, but there is a risk that the Investment Company Act of 1940 (Investment Act) may apply to our operations. The Investment Act defines an investment company as an issuer which is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading of securities. We did not and do not intend to engage primarily in the activities of purchasing, trading or selling securities and intends to conduct its activities so as to avoid being classified as an investment company under the Investment Act. We could be expected to incur significant registration and compliance costs if we are required to register under the Investment Act, and the regulations promulgated thereunder. Section 3(a) of the Investment Act provides exclusions from its application for companies which are not primarily engaged in the business of investing, reinvesting or trading in investment securities. We intend to implement our business plan in a manner which will result in the availability of this exception from the definition of investment company. Accordingly, we will continue to review our activities from time to time with a view toward reducing the likelihood that we could be classified as an investment company. Our plan to acquire a business may involve changes in our capital structure, management, control, and business. Each of these areas are regulated by the Investment Act, which regulations have the purported purpose of protecting purchasers of investment company securities. Since we do not plan to register as an investment company, our shareholders will not be afforded these protections. Even if we restrict our activities as described above, it is possible that we may be classified as an inadvertent investment company. This would be most likely to occur if significant delays are experienced in locating a business opportunity. We intend to vigorously resist classification as an investment company and to take advantage of any exemptions or exceptions from application of the Investment Act, including an exception which allows an entity a one-time option during any three (3) year period to claim an exemption as a transient investment company. The necessity of asserting any such contention, or making any other claim of exemption, could be time consuming, costly or even prohibitive. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Securities and Exchange Commission has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on Nasdaq and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith. Employees - --------- As of October 31, 2002, we had four part-time employees. ITEM 2. DESCRIPTION OF PROPERTY. ----------------------- Our executive offices are located at 150 Broadhollow Road, Suite 103, Melville, New York 11747. This office may be reached at (631) 385-6200. The office consists of approximately 1,800 square feet, leased under the terms of one lease. We have a 3-year lease for this office space through 2005. The future minimum lease commitments are as follows: June 30, 2003 $32,712 June 30, 2004 $34,020 June 30, 2005 $26,271 All property is insured to industry standards. ITEM 3. LEGAL PROCEEDINGS. ----------------- NONE 6 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. -------------------------------------------------------- 1. Market Information ------------------ Our stock is quoted on the Over-the-Counter Bulletin Board under the symbol "CDKX." As of November 11, 2002, we had 36,196,267 shares of common stock outstanding. Of this amount, 21,341,615 of those shares are nonrestricted and 14,854,652 of those shares are restricted. As of November 11, 2002, the number of holders of record of our common stock, $0.0001 par value, was 125. The following table sets forth the range of high and low sales prices for the stock for each full quarterly period within the two most recent fiscal years and any subsequent interim period covered by the financials. The sales represent prices between dealers, do not include retail markup, mark down or other fees or commissions, and do not necessarily represent actual transactions. Calendar Quarter Ended Bid Prices - ---------------- ------------------------------ Low High ----- ------ FISCAL YEAR 2000 - ---------------- September 30, 1999 $.968 $1.843 December 31, 1999 $.350 $1.000 March 31, 2000 $.375 $8.200 June 30, 2000 $1.312 $5.950 FISCAL YEAR 2001 - ---------------- September 30, 2000 $.687 $3.937 December 31, 2000 $.145 $1.000 March 31, 2001 $.1510 $.2604 June 30, 2001 $.086 $.193 FISCAL YEAR 2002 - ---------------- September 30, 2001 $.06 $.11 December 31, 2001 $.20 $.06 March 31, 2002 $.16 $.06 June 30, 2002 $.09 $.03 FISCAL YEAR 2003 - ---------------- September 30, 2002 $.07 $.03 We understand that, in 2003, subject to approval of the Securities and Exchange Commission, The NASDAQ Stock Market intends to phase out the OTC Bulletin Board, and replace it with the BBX. As proposed, the BBX will include an electronic trading system to allow order negotiation and automatic execution. The NASDAQ Stock Market has indicated its belief that the BBX will bring increased speed and reliability to trade execution, as well as improve the overall transparency of the marketplace. Specific criteria for listing on the BBX have not yet been announced, and the BBX may provide for listing criteria which we may not meet. If the OTC Bulletin Board is phased out and we do not meet the criteria established by the BBX, there may be no transparent market on which our securities may be included. In that event, investors may have difficulty buying and selling our securities and the market for our securities may be adversely affected thereby. 2. Dividend Policy --------------- To date, we have not paid a cash dividend to our common shareholders. We are also limited in our ability to do so under the terms of our 6% convertible subordinated debentures due September 1, 2003, as well as the terms of designation creating our Series Series A Preferred Stock. 7 3. Recent Sales Of Unregistered Securities; Use Of Proceeds From ------------------------------------------------------------- Registered Securities --------------------- NONE ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- The following contains forward-looking statements based on current expectations, estimates and projections about our industry, management's beliefs, and assumptions made by management. All statements, trends, analyses and other information contained in this report relative to trends in our financial condition and liquidity, as well as other statements, including, but not limited to, words such as "anticipate," "believe," "plan," "intend," "expect," "predict," and other similar expressions constitute those statements. These statements are not guarantees of future performance and are subject to risks and uncertainties that are difficult to predict. Accordingly, actual results may differ materially from those anticipated or expressed in the statements. Potential risks and uncertainties include, among others, those set forth below. Particular attention should be paid to the cautionary statements involving our limited operating history, the unpredictability of our future revenues, the unpredictable and evolving nature of our business model, the competitive multimedia CD and financial services industries and the risks associated with capacity constraints, systems development, management of growth and business expansion, as well as other risk factors. Overview - -------- We are a holding company incorporated in the State of Delaware. We have two subsidiaries through which we conduct our business: (1) CDKnet, LLC, a New York limited liability company, and (2) Diversified Capital Holdings, LLC, a Delaware limited liability company. We have developed a multimedia technology, called CDK(TM), which integrates audio, video and Internet connectivity on a standard compact disc. Our technology enables users to create their own personalized compact discs simply by visiting a Website. These custom compact discs play audio and display videos on a full-screen, using high-quality videos and digital technology. The custom compact discs also include software applications and targeted Web links. As described below, the CDK(TM) product is used by Elbit Ltd. as a distribution platform for their Vflash messenger in accordance with a technology and licensing agreement which we have with them. Potential target industries include: (1) entertainment (music, movies, and TV); (2) travel and tourism; (3) professional sports; (4) financial services; (5) education; (6) toys/games; (7) fashion; (8) food/cooking; (9) automotive; and (10) healthcare. In June 2001, we sold substantially all of the assets of our subsidiary (consisting of the Valueflash messenger), CDK Financial Corp. to Elbit Limited for $3.5 million in cash plus the assumption of liabilities and forgiveness of indebtedness. In connection with the sale of ValueFlash, we entered into a Technology and License Agreement with Elbit whereby the parties agreed that for an initial 3-year period, we shall provide CDKs(TM) for Elbit in return for disc mastering fees and per disc production fees. We have a limited operating history. While historically we have generated revenues primarily from development and use fees for client specific CD's and the sale of custom CD's, in fiscal 2002, most of our resources were directed to developing our corporate management consulting services in accordance with our fiscal 2002 operating plan, which we abandoned in October, 2002. 8 In fiscal 2002, our most significant expenditures were incurred for through our efforts to develop our corporate management consulting services business, due, in part, to the expense of retaining appropriate executive management and consultants to oversee and assist our Diversified Capital subsidiary and is making investments. On October 22, 2002, we entered into an agreement to sell certain assets including the business of Diversified, CDK Financial and CDKNet LLC to Universal. The consulting business and investments of Diversified, CDK Financial and CDKNet LLC were transferred to Universal and the transfer of assets relating to the production of compact disks will be transferred to Universal when requisite consents are received. The total consideration for the sale of assets is $550,000 in the form of a secured note due in equal monthly installments with interest at the rate of 5% per annum for a period of three years. We are actively seeking appropriate candidates for merger or acquisition. On August 21, 2002, we signed a letter of intent for a reverse merger with Global Leisure Corp., a privately held U.S. Company. The letter of intent has expired, and the parties have agreed not to pursue this transaction. In the near term, we will continue to focus on generating revenue from our licensing agreement with Elbit, Ltd. We receive funds from product sales and services. To date, we have primarily focused our funds on the development of our CDK(TM), ValueFlash and MixFactory products (discontinued) and during fiscal 2002 to expended funds on the development of our corporate management consulting services business which has been sold. While we have not raised money from private sales of our common stock since June 2001, however, we may continue to explore various financings including private placements and debt financings during fiscal 2003. Activities Related to Diversified - --------------------------------- On August 14, 2001, we completed our first private equity investment in Eascent, LLC, a New York limited liability corporation, engaged in the import, export, and distribution of new products and technologies between the United States and Eastern and Central Europe. The investment consists of a convertible bridge financing of $100,000 and provides us with (1) the opportunity to convert our loan into a 10% equity stake in Eascent and (2) warrants to purchase up to an additional 5% of the equity of Eascent at current funding value for a period of two years. Our investment in Eascent was part of the implementation of our new business strategy. Steven A. Horowitz, our Chairman, Chief Executive Officer and Secretary is a principal owner and officer of Eascent. In September 2001, we loaned $500,000 to DBS Industries under a convertible note receivable. This note bears interest at 6% per annum and is convertible at the lower of $0.98 (the Fixed Conversion Price) or a variable conversion price depending upon certain events. However, the conversion price shall in no event be lower than $0.21 per share (the Minimum Conversion Price). By June 30, 2002, we had converted the note into 2,354,205 shares of DBS Industries common stock. In July 2002, we sold the DBS shares to Target Growth Fund Ltd. for a $450,000 8% note due July 18, 2003. 9 On October 4, 2001, we completed our second private equity investment in Optical Systems, LLC, a New York limited liability corporation, engaged in the design and development of optoelectronic devices for the marine safety marketplace. Effective October 19, 2001, Optical Systems LLC merged with Optical Systems Inc., a Delaware corporation formed for such purpose. The investment, which was repaid by Optical in April, 2002, consisted of a convertible bridge financing of $100,000 and provided us with (1) the opportunity to convert our loan into a 10% equity stake in Optical Systems and (2) warrants to purchase up to an additional 5% of the equity of Optical Systems at a fifty percent premium to current funding value for a period of two years. Steven A. Horowitz, our Chairman, Chief Executive Officer and Secretary is a principal owner of Optical Systems, Inc. The note was repaid April 11, 2002. On December 14, 2001 we loaned $50,000 to International Fuel, Inc., under a note. On February 12, 2002, Diversified Capital (formerly "Azure") loaned $30,000 to Augrid of Nevada, Inc., a Nevada corporation, under a convertible debenture. This debenture bears interest at 6% per annum and is convertible at the lower of $0.015 (the Fixed Conversion Price) or a variable conversion price depending upon certain events. Pursuant to this transaction, we also received 600,000 2-year warrants to purchase the common stock of Aurgid of Nevada, Inc. at $0.015 per share. In August of 2001, Steven A. Horowitz made a personal loan in the amount of $250,000 to Spiga Limited, a shareholder of our Series A Preferred Stock, in exchange for a promissory note. On February 12, 2002, Mr. Horowitz received $25,000 and approximately 250,000 shares of the Company's Series A Convertible Preferred Stock in complete satisfaction of the Note. On February 19, 2002, we made a one year loan in the principal amount of $17,000, at 7% interest to Panama Industries, Inc., a Delaware corporation, which loan was secured by Panama's assets. As part of the transaction, we also received two year warrants to purchase up to 100,000 shares of common stock of Panama Industries, Inc., which warrants were granted certain registration rights. On March 8, 2002, we made an additional one year loan in the principal amount of $18,000, at 7% interest to Panama Industries, Inc. As part of the transaction, the security agreement we previously entered into with Panama regarding our initial loan was amended to include the second loan. On March 5, 2002, Diversified Capital Holdings, LLC loaned $10,000 to Universal Media Holdings, Inc., a Delaware corporation, under a six month convertible note. This note bears interest at 12% per annum and the outstanding principal and interest is convertible at 30% of the closing price of the common stock of Universal Media Holdings, Inc. on the day of conversion. 10 On March 5, 2002, Diversified Capital Holdings, LLC loaned $10,000 to Transventures Industries, Inc. (a/k/a Humana Trans Services Group, Ltd.), a New York corporation, under a six month convertible note. This note bears interest at 12% per annum. James W. Zimbler, our former Secretary and Executive Vice-President and the President of Diversified is also a principal shareholder, officer and director of Humana. On March 15, 2002, we appointed James W. Zimbler as our Secretary and Executive Vice President. We also appointed Mr. Zimbler to be the President of our wholly owned subsidiary, Diversified Capital Holdings, LLC. He resigned effective October 22, 2002. On April 11, 2002, our wholly owned subsidiary, Diversified Capital Holdings, LLC, entered into a 12 month, renewable Management Consulting Agreement with Panama Industries, Inc., a Delaware corporation. Pursuant to the agreement, Diversified will receive a monthly fee of $2,500 in return for consulting services beginning June 1, 2002 and a 22% equity interest, on a fully diluted basis, in Panama and James W. Zimbler, our former Secretary and Executive Vice-President as well as Diversified's President, was appointed to Panama's Board of Directors. As an inducement for Panama to enter into the agreement, we agreed to (i) forgive the outstanding principal and interest of the $17,000 February 19, 2002 Note; (ii) forgive the outstanding principal and interest of the $18,000 March 8, 2002 Note; (iii) pay Panama Industries an additional $20,000; and (iv) surrender our two year warrants to purchase up to 100,000 shares of common stock of Panama. On April 26, 2002, Diversified entered into a settlement agreement with Dominix, Inc., regarding the failure of Domminix to timely file and cause to be effective a certain registration statement which was to have registered the shares of common stock of Dominix issuable upon the conversion of Diversified's $100,000 6% debenture as well as the 2 year warrants to purchase up to 2,000,000 shares of common stock of Dominix. In settlement of said default, Dominix granted Diversified the right to convert up to the entire $100,000 principal balance the 6% debentures into up to 1,333,333 shares of Dominix's Series A Preferred Stock, which the Board of Dominix authorized and designated, each share of which is convertible, in the sole discretion of the Holder, into 100 shares of common stock of Dominix. Additionally, as part of the settlement agreement, the officers and directors of Dominix resigned their positions with Dominix and appointed Andrew J. Schenker our President and Chief Operating Officer as well as a one of our Directors as Dominix's new Chairman and Chief Executive Officer and James W. Zimbler our former Secretary and Executive Vice-President as a Director and the President of Dominix. 11 In April 2002, we transferred $500,000 to Euroba Management Limited. Euroba is an affiliate of Spiga Limited, an investment fund that owns shares of our Series A Preferred Stock. As of November 12, 2002, $400,000 of these funds have been returned to us. On May 22, 2002, Diversified acquired a 100% ownership interest in Crossover Advisors, Inc., a Delaware corporation, for an aggregate purchase price of $99,500, consisting of 69,500 shares of our Series A Preferred Stock valued at $1.00 per share and two non-interest bearing notes payable in the aggregate principal amount $30,000. Pursuant to the Stock Purchase Agreement (i) we retained James W. Zimbler, a principal of JWZ Holdings, Inc., one of the Sellers, as our Executive Vice President and Secretary and (ii) Diversified entered into a renewable 12 month management consulting agreement with Adelphia Holdings, LLC, one of the Sellers, providing Adelphia with a monthly $3,000 consulting fee as well as a 1/7 interest in a revenue sharing plan, the terms and conditions of which have not been determined. Pursuant to the terms of the proposed acquisition, we entered into a two year employment agreement with James W. Zimbler and Diversified entered into a one year renewable consulting agreement with Adelphia Holdings, LLC. Mr. Zimbler is the principal shareholder in JWZ Holdings, Inc. which holds a one-half ownership interest in Crossover Advisors, LLC. Adelphia Holdings, LLC holds the remaining one-half interest in Crossover. Mr. Zimbler resigned effective October 22, 2002 and the employment agreement terminated. On June 11, 2002, Diversified acquired 100% ownership interests in Comprehensive Resource Advisors, Inc. ("Comprehensive") and NBM Information Technology, Inc. ("NBM"), both New York corporations for an aggregate purchase price of $99,500, consisting of 69,500 shares of our Series A Preferred Stock valued at $1.00 per share. Pursuant to the Stock Purchase Agreement Diversified entered into a renewable 12 month management consulting agreement with Lee Rubinstein, a principal of both NBM and Comprehensive, providing Mr. Rubinstein with a monthly $5,000 consulting fee as well as a 1/7 interest in a revenue sharing plan, the terms and conditions of which have not been determined. 12 Results of Operations - Year ended June 30, 2002 compared to year ended - ----------------------------------------------------------------------- June 30, 2001 - ------------- As a result of the sale of substantially all of the business and the assets of our Valueflash subsidiary in June 2001, we concentrated our resources on developing our CDK operations and financial services business. During the year ended June 30, 2002, we incurred a net loss of $1,218,128 on revenues of $209,767 compared to a net loss of $7,287,000 on revenues of $5,874,000 for the year ended June 30, 2001. The decrease in revenues is directly attributable to our more limited operations following the sale of the assets of the Valueflash subsidiary in June 2001. The revenues generated for the year ended June 30, 2002 were substantially from our CDK operations The cost of revenues for the year ended June 30, 2002 was $139,560 compared to $2,234,000 for the year ended June 30, 2001. This decrease was directly attrituble to the sale of the assets of the Valueflash subsidiary in June 2001. For the year ended June 30, 2002, other operating expenses were $1,264,857 compared to $12,602,000 for the year ended June 30, 2001. This decrease reflects the sale of the assets of our Valueflash subsidiary in June 2001 and the resultant reduction in expenditures related to marketing and other overhead expenses to support the Valueflash operations. The Companies expenses for the year ended June 30, 2001 consisted primarily of salaries, consultants and professional fees. In October 2002, we agreed to sell the business operations of CDKnet, LLC and Diversified Capital and, accordingly, have determined to discontinue those operations as of that date. The transfer of CDK, LLC is pending our obtaining requisite consents. The Company is actively seeking appropriate candidates for merger and or acquisition. Liquidity and Capital Resources - ------------------------------- As of June 30, 2002, we had $435,944 in cash and cash equivalents. Our principal commitments are $165,000 in Subordinated Convertible Debentures, $103,000 in short term debt and $304,730 in accounts payable and accrued expenses. We do not have any material commitments for capital expenditures nor do we anticipate any. In addition, we do not anticipate any material use of our cash resources for marketing and advertising expenses. We anticipate that our existing cash resources will be used to fund operating expenses and for investments in debt and equity instruments. To date, as a result of losses from operations, our cash requirements have historically been financed primarily through the sale of debentures and common stock, although we have not sold our common stock in a private placement since June 2001, as well as from the sale of substantially all of the assets of Valueflash.com, Inc. to Elbit, Ltd. in June 2002. Net cash used by operating activities was $1,443,047 for the year ended June 30, 2002, compared to net cash used in operating activities of $2,393,000 for the year ended June 30, 2001. Cash used by operations resulted from net losses and reductions in accounts payable and accrued expenses partly offset by depreciation, amortization and impairment charges and services paid in common stock. Net cash used in investing activities was $368,503 for the year ended June 30, 2002 compared to net cash used in financing activities of $1,329,000 for the year ended June 30, 2001. Cash used in financing activities during the year ended June 30, 2002 resulted primarily from investments and debt/equity offerings offset, in part, by the receipt of $750,000 of previousily escrowed cash related to the sale of Valueflash assets. Cash used in financing activities during the year ended June 30, 2001 resulted from investments in joint ventures, purchases of furniture and equipment and the establishment of the cash escrow related to the sale of the Valueflash assets. 13 Net cash used by financing activities was $9,456 for the year ended June 30, 2002 compared to net cash provided by financing activities of $4,944,000 for the year ended June 30, 2001. Net cash used by financing activities during the year ended June 30, 2002 resulted from $30,000 of debt issued and acquired in acquisition offset by $39,456 of repayments of notes payable. Cash provided in financing activities during the year ended June 30, 2001 resulted in proceeds of $1.4 million from the sale of common stock, $606,000 in proceeds from the sale of Valueflash assets and minority interest sale. We anticipate using funds in fiscal year 2003 to (i) continue ongoing operations (ii) seek an acquisition and (iii) repay debt. In October 2002, we agreed to sell substantially all of the assets of our custom CD business, corporate consulting services business and certain debt and equity investments for $550,000 in the form of a three year note receivable. Factors Affecting Future Results - -------------------------------- We do not provide forward-looking financial information. However, from time to time statements are made by employees that may contain forward looking information that involve risks and uncertainties. In particular, statements contained in this annual report that do not historically contain predictions are made under the Safe Harbor Corporate Private Sector Litigation Reform Act of 1995. Our actual result of operations and financial condition have varied and may in the future vary significantly from those stated in any predictions. Factors that may cause these differences include without limitation the risk, uncertainties and other information discussed within this report, as well as the accuracy of our internal estimate of revenue and operating expense levels. We face a number of risk factors which may create circumstances beyond the control of management and adversely impact the ability to achieve our business plan. ITEM 7. FINANCIAL STATEMENTS. -------------------- Our financial statements are filed under this Item 7, beginning on page F-1 of this report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE. -------------------- NONE. 14 PART III -------- ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; ------------------------------------------------------------- COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT ------------------------------------------------- The following sets forth our directors and executive officers and key employees as of October 31, 2002, their respective ages, the year in which each was first elected or appointed a director, and any other office held by each director: CDKnet.com, Inc. - ---------------- NAME OF DIRECTOR/ AGE POSITION HELD DATE ELECTED OFFICER OR APPOINTED - -------------------------------------------------------------------------------- Steven A. Horowitz 43 Chairman, Chief May 1998 Executive Officer, and Secretary Andrew J. Schenker 42 Director, President May 1998, and Chief Operating January 2002, Officer and March 2002 Anthony J. Bonomo 43 Director May 1998 Timothy J. Mayette 42 Chief Financial September 2001 Officer CDKnet, LLC - ----------------- NAME OF DIRECTOR/ AGE POSITION HELD DATE ELECTED OFFICER OR APPOINTED - -------------------------------------------------------------------------------- Steven A. Horowitz 43 Chairman, Chief Financial May 1998 Officer, and Secretary Diversified Capital Holdings, LLC - --------------------------------- NAME OF DIRECTOR/ AGE POSITION HELD DATE ELECTED OFFICER OR APPOINTED - -------------------------------------------------------------------------------- Andrew J. Schenker 42 Chief Executive Officer February 2002 James W. Zimbler 38 President February 2002 FAMILY RELATIONSHIPS - -------------------- No family relationship exists between or among any of our directors, executive officers, and significant employees, as defined below, or any person contemplated to become such. 15 BUSINESS EXPERIENCE - ------------------- STEVEN A. HOROWITZ - Chairman, Chief Executive Officer and Secretary of CDKnet.com, Inc.; and Chairman, Chief Financial Officer and Secretary of CDKnet, LLC. Mr. Horowitz has served as Chairman of the Board of Directors and Chief Executive Officer since May 1998. Mr. Horowitz served as our Secretary from May 1998 to May, 2002 and became Secretary in October, 2002. He served as our Chief Financial Officer from October 1999 until 2001. Additionally, Mr. Horowitz has served as the managing member of Creative Technology and CDKnet, LLC since October, 1998 and November, 1998, respectively. Mr. Horowitz holds various titles in companies in which Diversified has invested in including, CEO of Eascent and CEO of Optical. On October 22, 2002 he became President, CEO and Chairman of the Board of Universal Media Holdings, Inc. Since April 1, 2000, he has served as a partner in Moritt, Hock, Hamroff & Horowitz, LLP, a Garden City, New York-based law firm. From October 1, 1991 to March 2000, he was the founding principal of Horowitz, Mencher, Klosowski, & Nestler, P.C., a Garden City, New York-based law firm. Mr. Horowitz holds a degree from Hofstra University School of Law and a Master of Business Administration degree in Accounting from Hofstra University School of Business. Mr. Horowitz is an Adjunct Professor of Law at Hofstra University School of Law. In 1986 and 1987, Mr. Horowitz was Director of Taxes for Symbol Technologies, Inc., a New York Stock Exchange corporation. Mr. Horowitz is a member of the American Bar Association and the New York State Bar Association. ANTHONY J. BONOMO - Director, CDKnet.com, Inc. Mr. Bonomo has served as a director of CDKnet.com since June, 1998. He has, since 1986, served in various executive capacities at Administrators for the Professions, Inc., the Physicians' Reciprocal Insurers, one of the largest medical malpractice carriers in New York State, including Executive Vice President and Chief Operating Officer from 1993 to 1995 and President from 1995 to the present. Mr. Bonomo is a member of the New York State Bar and serves as a board member of several charitable associations and foundations. TIMOTHY J. MAYETTE - Chief Financial Officer of CDKnet.com, Inc. Mr. Mayette has served as Chief Financial Officer on a part time basis since September 2001. From July 1999 through December 2001, he was Chief Financial Officer of the northeast division of USI Administrators, a third party administrator of health insurance claims. From October 1997 through June 2001, he was Chief Financial Officer of PMCC Financial Corp., a mortgage banking company. ANDREW J. SCHENKER - Director, President and Chief Operating Officer, CDKnet.com, Inc., Chief Executive Officer, Diversified Mr. Schenker became has served as a director of CDKnet.com since May, 1998. He became our President ion January, 2002 and was appointed as our Chief Operating Officer in April 2002. Mr. Schenker recently stepped down from his position as the Director of Finance for North America Sales and Services Division at Symbol Technologies, Inc. a manufacturer and world leader in bar-code based data transaction systems based in Holbrook, New York to concentrate on entreprenuerial opportunities. Since November 1986, he has held several financial management positions at Symbol Technologies, Inc., most recently at the position described above. He is also the trustee for several trusts and a public foundation, as well as an executive committee member of the Smithtown School District Industry Advisory Board. Mr. Schenker also holds the following positions in entities in which we have invested: Company Title Since - ------- ----- ----- Dominix, Inc. Chairman, CEO April 30, 2002 Humana Trans Services Group, Ltd. Director May, 2002 Universal Media Holdings, Inc. CFO, Director October 22, 2002 16 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ------------------------------------------------------- Under Section 16(a) of the Securities Exchange Act of 1934, as amended, our directors, executive officers, and any persons holding more than ten percent of our common stock are required to report to the SEC their initial ownership of our stock and any subsequent changes in that ownership. Based on a review of Forms 3, 4 and 5 under the Exchange Act furnished to us, we believe that during the fiscal year ended June 30, 2002, our officers, directors and holders of more than 10 percent of our common stock filed all Section 16(a) reports on a timely basis. ITEM 10. EXECUTIVE COMPENSATION ---------------------- The following sets forth all compensation paid by us of fiscal year ended June 30, 2002, to all of the executive officers of our subsidiaries, CDKnet, LLC and CDK Financial Corp. 17 1. EXECUTIVE OFFICER COMPENSATION CDKnet, LLC - ---------------- The following table sets forth all compensation paid by us as of fiscal year ended June 30, 2002, to all of our executive officers: SUMMARY COMPENSATION TABLE
- --------------------------- --------- ----------------------------------- ------------------------------------------------ Annual Compensation(1)(2) Long-Term Compensation ----------------------------------- ------------------------------------------------ Awards Payouts ------------------------- ---------------------- Other Securities All Other Annual Restricted Underlying Compen- Name And Compen- Stock Options/ LTIP sation Principal Position Year Salary Bonus sation Award(s) SARs Payouts ($) ($) ($) ($) ($) (#) ($) (i) (a) (b) (c) (d) (e) (f) (g) (h) - --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- ----------- Steven A. Horowitz(1) FY01 0 -- 0 -- 1,550,000 -- -- FY02 0 -- 0 -- 0 -- -- - --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- ----------- Andrew J. Schenker FY01 0 -- 0 -- 100,000 -- -- FY02 0 -- 0 -- 0 -- -- - --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- ----------- James W. Zimbler(2) FY01 0 -- 0 -- 0 -- -- FY02 122,000 -- 0 -- 0 -- -- - --------------------------- --------- ------------- --------- ----------- ------------ ------------ ---------- -----------
(1) Mr. Horowitz is our Chairman, Chief Executive Officer and Secretary. In fiscal 2002, Mr. Horowitz was considered a consultant because he did not keep regular hours, decided his own schedule and otherwise fit the characteristics of a consultant as promulgated under the relevant sections of the Internal Revenue Code and Regulations and case law. During fiscal 2000, we accrued $78,000 for such consulting services for Mr. Horowitz, none of which has been paid. Commencing July 1, 2000, Mr. Horowitz became an employee of CDKnet.com, Inc. (2) Resigned effective October 22, 2002. OPTION/SAR GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS) -------------------
- -------------------------- ------------------ --------------------- -------------------- ------------------- Percent Of Number Of Total Options/ Securities SARs Granted Underlying To Employees Exercise Or Options/SARs In Fiscal Base Price Name Granted (#) Year ($/Sh) Expiration Date (a) (b) (c) (d) (e) - -------------------------- ------------------ --------------------- -------------------- ------------------- Steven A. Horowitz FY02 0 0% $0 FY01 750,000 15.79% $.20 1/9/01 800,000 16.84% $.50 1/31/03 ------------------ --------------------- -------------------- ------------------- Andrew J. Schenker (1) FY02 0 0% $0 FY01 100,000 2.11% $.20 1/8/06 - -------------------------- ------------------ --------------------- -------------------- -------------------
- ------------------- (1) At the time the options above were granted, Mr. Schenker's was one of our Directors and held no other position. Mr. Schenker also currently serves as our President and Chief Operating Officer, effective January, 2002 and March, 2002, respectively. 18 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES -----------------
- -------------------------- -------------- -------------- ------------------- ------------------- Number Of Securities Value Of Underlying Unexercised Shares Unexercised In-The-Money Acquired Options/SARs Options/SARs On Value At FY-End (#) At FY-End ($) Exercise Realized Exercisable/ Exercisable/ Name (#) ($) Unexercisable Unexercisable (a) (b) (c) (d) (e) - -------------------------- -------------- -------------- ------------------- ------------------- - -------------------------- -------------- -------------- ------------------- ------------------- Steven A. Horowitz FY02 0 0 1,500,000/0 $0 -------------- -------------- ------------------- ------------------- Andrew J. Schenker FY02 0 0 100,000/0 $0 -------------- -------------- ------------------- ------------------- - -------------------------- -------------- -------------- ------------------- -------------------
- ------------------- 19 2. COMPENSATION OF DIRECTORS Effective January 9, 2001, our directors agreed to be compensated for their services at the rate of $2,000 per year, retroactive to their respective dates of engagement. 3. EMPLOYMENT AGREEMENTS On March 15, 2002, we entered into an employment agreement with James W. Zimbler to serve as our Executive Vice President and Secretary. The agreement provides that Mr. Zimbler shall receive: (A) an annual salary of $132,000; (B) up to $500 per month paid to an auto leasing company on his behalf; and (C) a 1/7 interest in a revenue sharing plan of Diversified, the terms of which have not been established. The agreement provides for a two year term and may be terminated upon notice with or without "cause" (as defined). If terminated without cause, Mr. Zimbler is entitled to six months salary as severance. Mr. Zimbler resigned effective October 22, 2002 and accordingly, our obligations under the contract ceased. 20 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The following table sets forth information with respect to the share ownership of our common stock, $.001 par value, by our officers and directors, both individually and as a group, and by the record and/or beneficial owners of more than 5 percent of the outstanding amount of such stock as of November 11, 2002: SHARES OF COMMON STOCK OWNED BENEFICIALLY AND OF RECORD BY MANAGEMENT Name and Address Amount and Nature Percent of of Beneficial Owner of Beneficial Ownership Class(1)(2) - ------------------ ----------------------- ----------- Steven A. Horowitz 3,342,887(3) 9% c/o 150 Broadhollow Road Suite 103 Melville, New York 11747 Andrew J. Schenker 393,122(4) 1% c/o 150 Broadhollow Road Suite 103 Melville, New York 11747 Anthony J. Bonomo 350,000(5) * c/o 150 Broadhollow Road Suite 103 Melville, New York 11747 Timothy J. Mayette 0 * c/o 150 Broadhollow Road Suite 103 Melville, New York 11747 Masaki Hashimoto 7,368,421 20% 2-3-35 Nighizaka Tsushima Okayama City, Okayama Japan Erno and Rachel Bodek 3,000,000 8% c/o Victoria Sales Corporation 541 West 21st Street New York, New York 10011 All officers and directors 4,086,009(6) 11% as a group (4 persons) - --------------- Notes to table of beneficial shareholders *Denotes less than 1% (1) There were 36,196,267 shares of common stock outstanding as of November 11, 2001. (2) Except for the limitations set forth in the Stockholders Agreement dated May 7, 1998, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to the information contained in this table and these notes. See Exhibit 4.2. (3) Mr. Horowitz is our Chairman of the Board of Directors, Chief Executive Officer, and Secretary. This figure does not include 150,000 warrants issued to Horowitz, Mencher, Klosowski & Nestler P.C., a law firm formerly controlled by Mr. Horowitz, in connection with a loan and loan extension. Of the 3,342,887 shares attributed to Mr. Horowitz in the table, 30,000 shares are owned by his wife, Katherine Horowitz, 10,000 are held by Mr. Horowitz c/f Daniel Horowitz UGMA NY and 10,000 are held by Mr. Horowitz c/f Joshua D. Horowitz UGMA NY. This table also includes 750,000 two-year warrants to purchase common stock at the exercise price of $0.20 per share and 800,000 two-year options to purchase common stock at the exercise price of $0.50 per share. Does not include up to 21,000,200 additional shares of common stock which may be obtained upon conversion of 250,000 shares of Series A Preferred Stock. Mr. Horowitz agreed to acquire the shares of Series A Preferred Stock, but there is not a sufficient number of authorized but unissued shares of common stock to permit conversion. (4) This table includes options to purchase 50,000 shares of our common stock under the Plan and options to purchase 100,000 shares of common at $0.20 per share outside of the plan. Mr. Schenker is one of our directors and serves as our President and Chief Operating Officer as well as the Chief Executive Officer of our Diversified subsidiary. (5) This table includes options to purchase 50,000 shares of our common stock under the Plan and options to purchase 100,000 shares of common at $0.20 per share outside of the plan. Mr. Bonomo is one of our directors. (6) Includes all stock options to purchase 1,150,000 shares of common stock and 750,000 warrants owned by officers and directors. Does not include shares of common stock which may be obtained by officers and directors upon the conversion of shares of Series A Preferred stock. See Note (3) above. 21 2. INDEBTEDNESS OF MANAGEMENT No member of our management is or has been indebted to us. No director or executive officer is personally liable for repayment of amounts advanced any financing received by us. 3. PROMOTERS None. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- 1. TRANSACTIONS WITH MANAGEMENT AND OTHERS; CERTAIN BUSINESS RELATIONSHIPS; PROMOTERS On August 14, 2001, we completed our first private equity investment in Eascent, LLC, a New York limited liability corporation, engaged in the import, export, and distribution of new products and technologies between the United States and Eastern and Central Europe. The investment consists of a convertible bridge financing of $100,000 and provides us with (1) the opportunity to convert our loan into a 10% equity stake in Eascent and (2) warrants to purchase up to an additional 5% of the equity of Eascent at current funding value for a period of two years. Our investment in Eascent was part of the implementation of our new business strategy. Steven A. Horowitz, our Chairman and Chief Executive Officer is a principal owner and officer of Eascent. In September 2001, we loaned $500,000 to DBS Industries under a convertible note receivable. This note bears interest at 6% per annum and is convertible at the lower of $0.98 (the Fixed Conversion Price) or a variable conversion price depending upon certain events. However, the conversion price shall in no event be lower than $0.21 per share (the Minimum Conversion Price). By June 30, 2002, we had converted the note into 2,354,205 shares of DBS Industries common stock. In July 2002, we sold the DBS shares to Target Growth Fund Ltd. for a $450,000 8% note due July 18, 2003. Target Growth is the holder of shares of our Series A Preferred Stock. On October 4, 2001, we completed our second private equity investment in Optical Systems, LLC, a New York limited liability corporation, engaged in the design and development of optoelectronic devices for the marine safety marketplace. Effective October 19, 2001, Optical Systems LLC merged with Optical Systems Inc., a Delaware corporation formed for such purpose. The investment, which was repaid by Optical in April, 2002, consisted of a convertible bridge financing of $100,000 and provided us with (1) the opportunity to convert our loan into a 10% equity stake in Optical Systems and (2) warrants to purchase up to an additional 5% of the equity of Optical Systems at a fifty percent premium to current funding value for a period of two years. Steven A. Horowitz, our Chairman, Chief Executive Officer and Secretary is a principal owner of Optical Systems, Inc. The note was repaid April 11, 2002. 22 In August of 2001, Steven A. Horowitz made a personal loan in the amount of $250,000 to Spiga Limited, a shareholder of our Series A Preferred Stock, in exchange for a promissory note. On February 12, 2002, Mr. Horowitz received $25,000 and approximately 250,000 shares of the Company's Series A Convertible Preferred Stock in complete satisfaction of the Note. On February 19, 2002, we made a one year loan in the principal amount of $17,000, at 7% interest to Panama Industries, Inc., a Delaware corporation, which loan was secured by Panama's assets. As part of the transaction, we also received two year warrants to purchase up to 100,000 shares of common stock of Panama Industries, Inc., which warrants were granted certain registration rights. On March 8, 2002, we made an additional one year loan in the principal amount of $18,000, at 7% interest to Panama Industries, Inc., a Delaware corporation. As part of the transaction, the security agreement we previously entered into with Panama regarding our initial loan was amended to include the second loan. On March 5, 2002, Diversified Capital Holdings, LLC loaned $10,000 to Universal Media Holdings, Inc., a Delaware corporation, under a six month convertible note. This note bears interest at 12% per annum and the outstanding principal and interest is convertible at 30% of the closing price of the common stock of Universal Media Holdings, Inc. on the day of conversion. 23 On March 5, 2002, Diversified Capital Holdings, LLC loaned $10,000 to Transventures Industries, Inc. (a/k/a Humana Trans Services Group, Ltd.), a New York corporation, under a six month convertible note. This note bears interest at 12% per annum. James W. Zimbler, our former Secretary and Executive Vice-President and the President of Diversified is also a principal shareholder, officer and director of Humana. On March 15, 2002, we appointed James W. Zimbler as our Secretary and Executive Vice President. We also appointed Mr. Zimbler to be the President of our wholly owned subsidiary, Diversified Capital Holdings, LLC. He resigned effective October 22, 2002. On April 11, 2002, our wholly owned subsidiary, Diversified Capital Holdings, LLC, entered into a 12 month, renewable Management Consulting Agreement with Panama Industries, Inc., a Delaware corporation. Pursuant to the agreement, Diversified will receive a monthly fee of $2,500 in return for consulting services beginning June 1, 2002 and a 22% equity interest, on a fully diluted basis, in Panama and James W. Zimbler, our former Secretary and Executive Vice-President as well as Diversified's President, was appointed to Panama's Board of Directors. As an inducement for Panama to enter into the agreement, we agreed to (i) forgive the outstanding principal and interest of the $17,000 February 19, 2002 Note; (ii) forgive the outstanding principal and interest of the $18,000 March 8, 2002 Note; (iii) pay Panama Industries an additional $20,000; and (iv) surrender our two year warrants to purchase up to 100,000 shares of common stock of Panama. On April 26, 2002, Diversified entered into a settlement agreement with Dominix, Inc., regarding the failure of Domminix to timely file and cause to be effective a certain registration statement which was to have registered the shares of common stock of Dominix issuable upon the conversion of Diversified's $100,000 6% debenture as well as the 2 year warrants to purchase up to 2,000,000 shares of common stock of Dominix. In settlement of said default, Dominix granted Diversified the right to convert up to the entire $100,000 principal balance the 6% debentures into up to 1,333,333 shares of Dominix's Series A Preferred Stock, which the Board of Dominix authorized and designated, each share of which is convertible, in the sole discretion of the Holder, into 100 shares of common stock of Dominix. Additionally, as part of the settlement agreement, the officers and directors of Dominix resigned their positions with Dominix and appointed Andrew J. Schenker our President and Chief Operating Officer as well as a one of our Directors as Dominix's new Chairman and Chief Executive Officer and James W. Zimbler our former Secretary and Executive Vice-President as a Director and the President of Dominix. In April 2002, we transferred $500,000 to Euroba Management Limited. Euroba is an affiliate of Spiga Limited, an investment fund that owns shares of our Series A Preferred Stock. As of November 12, 2002, $400,000 of these funds have been returned to us. 24 On May 22, 2002, Diversified acquired a 100% ownership interest in Crossover Advisors, Inc., a Delaware corporation, for an aggregate purchase price of $99,500, consisting of 69,500 shares of our Series A Preferred Stock valued at $1.00 per share and two non-interest bearing notes payable in the aggregate principal amount $30,000. Pursuant to the Stock Purchase Agreement (i) we retained James W. Zimbler, a principal of JWZ Holdings, Inc., one of the Sellers, as our Executive Vice President and Secretary and (ii) Diversified entered into a renewable 12 month management consulting agreement with Adelphia Holdings, LLC, one of the Sellers, providing Adelphia with a monthly $3,000 consulting fee as well as a 1/7 interest in a revenue sharing plan, the terms and conditions of which have not been determined. Pursuant to the terms of the proposed acquisition, we agreed to enter into a two year employment agreement with James W. Zimbler and Diversified agreed to enter into a one year renewable consulting agreement with Adelphia Holdings, LLC. Mr. Zimbler is the principal shareholder in JWZ Holdings, Inc. which holds a one-half ownership interest in Crossover Advisors, LLC. Adelphia Holdings, LLC holds the remaining one-half interest in Crossover. Mr. Zimbler resigned effective October 22, 2002 and the employment agreement terminated. On June 11, 2002, Diversified acquired 100% ownership interests in Comprehensive Resource Advisors, Inc. ("Comprehensive") and NBM Information Technology, Inc. ("NBM"), both New York corporations for an aggregate purchase price of $99,500, consisting of 69,500 shares of our Series A Preferred Stock valued at $1.00 per share. Pursuant to the Stock Purchase Agreement Diversified entered into a renewable 12 month management consulting agreement with Lee Rubinstein, a principal of both NBM and Comprehensive, providing Mr. Rubinstein with a monthly $5,000 consulting fee as well as a 1/7 interest in a revenue sharing plan, the terms and conditions of which have not been determined. On October 15, 2002, we entered into an agreement with the holders of our Series A Preferred Stock to settle claims related to our failure to reserve an adequate number of shares of common stock to cover our obligation to convert shares of Series A into shares of common stock at a floating rate. The agreement also calls for the settlement of $139,959 of accrued cumulative dividend by our issuance of 139,959 Series A shares, pro rata to the holders, amending the Series A designation to fix the conversion rate at 100 shares of common stock per Series A share, give the holders voting rights on an "as if converted" basis and eliminating any contractual restrictions on the amount of shares of common stock the holders of Series A shares may obtain upon conversion. These changes will be effective upon the filing of an amendment to the Series A designation. On October 22, 2002 we entered into an agreement to sell certain assets including the business of Diversified, CDK Financial and CDKNet, LLC to Universal Media Holdings, Inc. ("Universal") at the time of the transaction, James W. Zimbler served as President and a Director of Universal and also served as Secretary and Executive Vice President of CDKNet.Com. On the same day, Steven A. Horowitz, our CEO and Andrew Schenker, our COO were appointed President, CEO and CFO respectively, of Universal. Certain of the assets comprising the consulting business of Diversified and investments we made were transferred to Universal. CDKNet, LLC has not been transferred to Universal pending our obtaining requisite consents. 25 During the years ended June 30, 2002 and 2001 legal services of $27,000 and $170,000, respectively, were provided by firms (the "Firms") in which Steven Horowitz, our CEO and principal stockholder, is a partner. Further, the Firms provided office space and accounting services for which no fees were paid during the year ended June 30, 2001 and we recorded an expense of $47,000 for such services. 2. INDEBTEDNESS OF MANAGEMENT No member of our management is or has been indebted to us. No director or executive officer is personally liable for repayment of amounts advanced from any financing received by us. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. -------------------------------- (a) The exhibits to this Form 10-KSB are listed in subsection (d) of this Item 13. (b) We did not file any Form 8-K reports in the last quarter of the fiscal year ended June 30, 2002. (c) Our financial statements are set forth beginning on page F-1 of this report. (d) Exhibits. EXHIBIT INDEX ------------- 3.1 Articles of Incorporation of the Registrant. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 3.2 Amendment to the Articles of Incorporation. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 3.3 By-Laws of the Registrant. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 3.4 Certificate of Merger of the Registrant. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 3.5 Amendment to the Articles of Incorporation. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 3.6 Designation of Series A Preferred Stock. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 4.1 Specimen of Common Stock Certificate. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 4.2 Technology Horizons Corp. Stockholders Agreement dated May 7, 1998. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 4.3 Subscription Agreement, between CDKnet.com, Inc. and Mr. Masaki Hashimoto dated December 15, 2000. (Incorporated by reference from our Report on Form 8-K filed on January 17, 2001 (File No. 0-27587)). 10.1 Technology Horizons Corp. 1998 Equity Incentive Plan. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 26 10.2 Convertible Subordinated Debenture Due February 1, 2009. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 10.2.1 Amendment No. 1 to Convertible Subordinated Debenture due February 1, 2009. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 10.3 Registration Rights Agreement between Technology Horizons Corp. and Kelly Music & Entertainment Corp. dated September 4, 1998. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 10.4 Assignment Agreement between Kelly Music & Entertainment Corp. and Technology Horizons Corp. dated September 4, 1998. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 10.5 Amendment to Registration Rights Agreement between Technology Horizons Corp. and Alvin Pock dated October 15, 1998. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 10.6 Amendment to Registration Rights Agreement between Technology Horizons Corp. and Robert L. Kelly dated October 15, 1998. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 10.7 Registration Rights Agreement between Technology Horizons Corp. and Robert L. Kelly dated June 3, 1998. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 10.8 Registration Rights Agreement between Technology Horizons Corp. and Alvin Pock dated June 3, 1998. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 10.9 Assignment Agreement between Robert L. Kelly and Technology Horizons Corp. dated June 3, 1998. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 10.10 Assignment Agreement between Alvin Pock and Technology Horizons Corp. dated June 3, 1998. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 10.11 Assignment Agreement between Kelly Music & Entertainment Corp. and CDKnet, LLC, dated June 3, 1998. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 10.12 Employment Agreement, dated August 1, 1999, by and between CDKNET.COM, INC. and Shai Bar-Lavi. (Incorporated by reference from our Registration Statement filed on Form 10-SB on October 7, 1999 (File No. 0-27587).) 27 10.13 Finder's Agreement between the Registrant and Shai Bar-Lavi and Frederick Smithline dated June 1, 1999. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 10.14 Employment Agreement dated August 1, 1999, by and between CDK, LLC and Tom Ross. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 10.15 Stock Purchase Agreement between CDKnet.com, Inc. and the Gross Foundation, Inc., Steven A. Horowitz, Shai Bar-Lavi, and Michael Sonnenberg dated November 2, 1999. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 10.16 Subscription Agreement between CDK and Asia Pioneer Limited dated November 16, 1999. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 4 on March 6, 2000 (File No. 0-27587).) 10.17 Technology and License Agreement CDK and Asia Pioneer Limited dated November 16, 1999. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 4 on March 6, 2000 (File No. 0-27587).) 10.18 Agreement dated March 19, 1999 between Peterson's and CDKnet, LLC. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 10.19 Undated Registration Rights Agreement between Spiga Limited and CDK INC. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 10.20 Agreement dated October 25, 1999, between CDKnet, LLC and Atomic Pop, LLC. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 4 on March 6, 2000 (File No. 0-27587).) 10.21 Agreement dated March 29, 1999, between Central Park Media Corp. and CDKnet, LLC. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 10.22 Purchase Agreement dated August 9, 1999 between CDK and Y2G. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 10.23 Convertible Subordinated Debenture Due September 1, 2003. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 10.24 Letter Agreement dated May 4, 1998, between Megaforce Entertainment and CDKnet, LLC regarding the use of CDK technology. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 2 on November 26, 1999 (File No. 0-27587).) 28 10.25 Agreement dated August 5, 1999 between the Company and DreamWorks Records. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 4 on March 6, 2000 (File No. 0-27587).) 10.26 Agreement dated September 16, 1999 between the Company and CollegeMusic, Inc. (Incorporated by reference from our Registration Statement filed on Form 10-SB Amendment No. 4 on March 6, 2000 (File No. 0-27587).) 10.27 Agreement between CDKnet, Inc. and Young & Rubicam dated February 3, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.28 Agreement between ValueFlash.com Incorporated and Richard A. Eisner and Company dated April 15, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.29 Agreement between ValueFlash.com Incorporated, CDKnet, LLC, Track Marketing and Arcadia Marketing, Inc. dated May 4, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.30 Agreement between ValueFlash.com Incorporated, CDKnet, LLC, and Arcadia Marketing, Inc. dated May 4, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.31 Agreement between ValueFlash.com Incorporated, CDKnet, LLC, JMC Investments, LLC and Arcadia Marketing, Inc. dated May 4, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.32 Development Proposal between ValueFlash.com Incorporated, CDKnet, LLC and House of Blues dated May 12, 2000. (The Registrant has requested confidential treatment of certain portions of this exhibit and has omitted such portions. A complete copy has been filed separately with the Commission.) 10.33 Agreement between ValueFlash.com Incorporated and ValueFlash Japan Inc. dated May 25, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.34 Agreement between ValueFlash.com Incorporated and Naviant Marketing Solutions, Inc. dated June 12, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.35 Agreement between ValueFlash.com Incorporated and theglobe.com, Inc. dated June 26, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.36 Agreement between CDKnet, LLC and the globe.com, Inc. dated June 26, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 29 10.37 Agreement between ValueFlash.com Incorporated and J. Walter Thompson U.S.A., Inc. dated June 29, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.38 Warrant to Purchase Stock between ValueFlash.com Incorporated and WPP Dotcom Holdings (Twelve) LLC dated June 29, 2000, for 5% interest in ValueFlash.com. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.39 Warrant to Purchase Stock between ValueFlash.com Incorporated and WPP Dotcom Holdings (Twelve) LLC dated June 29, 2000, for 5% interest in ValueFlash.com. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.40 Agreement between ValueFlash.com Incorporated and WPP Dotcom Holdings (Twelve) LLC dated June 29, 2000. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.41 Agreement between ValueFlash.com Incorporated and ACUSA.com dated June 1, 2000 for services to the House of Blues. (Incorporated by reference from our Registration Statement on Form SB-2 dated August 1, 2000 (File No. 333-42696).) 10.42 Agreement between ValueFlash (Asia) Limited, Sprouts Online Pte Ltd. and Prodigy Alliances Pte Ltd. dated September 15, 2000. 10.43 Collateral Assignment of Patents and Trademarks and Security Agreement between CDKnet.com, Inc., CDKnet, LLC and Steven A. Horowitz dated November 14, 2000. (Incorporated by reference from our Report on Form 8-K on January 17, 2001 (File No. 0-27587)). 10.44 Collateral Assignment of Patents and Trademarks and Security Agreement between ValueFlash.com, Incorporated, CDKnet.com, Inc., Steven A. Horowitz and Dan Roc Limited Partnership dated November 14, 2000. (Incorporated by reference from our Report on Form 8-K on January 17, 2001 (File No. 0-27587)). 10.45 10% - $100,000 Secured Promissory Note between CDKnet.com, Inc. and Steven A. Horowitz October 31, 2000. (Incorporated by reference from our Report on Form 8-K on January 17, 2001 (File No. 0-27587)). 10.46 10% - $100,000 Secured Promissory Note between ValueFlash.com, Incorporated and CDKnet.com, Inc. dated October 31, 2000. (Incorporated by reference from our Report on Form 8-K on January 17, 2001 (File No. 0-27587)). 10.47 10% - $250,000 Secured Promissory Note between ValueFlash.com, Incorporated and Dan Roc Limited Partnership dated October 10, 2000. (Incorporated by reference from our Report on Form 8-K on January 17, 2001 (File No. 0-27587)). 10.48 10% - $100,000 Secured Promissory Note between ValueFlash.com, Incorporated and Steven A. Horowitz dated November 14, 2000. (Incorporated by reference from our Report on Form 8-K on January 17, 2001 (File No. 0-27587)). 10.49 10% - $250,000 Secured Promissory Note between ValueFlash.com, Incorporated and Steven A. Horowitz dated December 14, 2000. (Incorporated by reference from our Report on Form 8-K on January 17, 2001 (File No. 0-27587)). 30 10.50 Security Agreement between CDKnet.com, Inc. and Steven A. Horowitz dated November 14, 2000. (Incorporated by reference from our Report on Form 8-K on January 17, 2001 (File No. 0-27587)). 10.51 Security Agreement between CDKnet.com, Inc., Steven A. Horowitz and Dan Roc Limited Partnership dated November 14, 2000. (Incorporated by reference from our Report on Form 8-K on January 17, 2001 (File No. 0-27587)). 10.52 Assignment of ValueFlash.com, Incorporated options by CDKnet.com, Inc. to Steven A. Horowitz and Dan Roc Limited Partnership dated November 14, 2000. (Incorporated by reference from our Report on Form 8-K on January 17, 2001 (File No. 0-27587)). 10.53 Asset Purchase Agreement between CDKnet.com, Inc., ValueFlash.com Incorporated, and Elbit Limited dated June 13, 2001. (Incorporated by reference to our Report on Form 10-KSB for the year ended June 30, 2001.) 10.54 Technology License Agreement between CDKnet.com, Inc., ValueFlash.com Incorporated, and Elbit Limited dated June 13, 2001. (Incorporated by reference to our Report on Form 10-KSB for the year ended June 30, 2001.) 10.55 Letter Agreement between CDKNet.Com, Inc. and the holders of shares of Series A Preferred Stock dated October 15, 2002 10.56 Agreement of Sale dated October 22, 2002 between CDKNet.Com, Inc. and Universal Media Holdings, Inc. relating to the sale of certain assets. 10.57 Form of 3 year, 5% Note payable from Universal Media Holdings, Inc. to CDKNet.Com, Inc. dated October 22, 2002 10.58 Security Agreement dated October 22, 2002 between Universal Media Holdings, Inc. and CDKNet.Com, Inc. 16 Letter from former accountant Grant Thornton LLP. (Incorporated by reference from our report on Form 10-QSB Amendment No. 1, filed on February 25, 2000.) 16.1 Letter from former Accountant, Wagner, Zwerman & Steinberg LLP. (Incorporated by reference from our Registration Statement on Form 10-SB Amendment No. 3 filed on December 28, 1999 (File No. 000-27587).) 21 Subsidiaries of the Registrant. 99.1 Chart of the signatories to the Company's Stockholder's Agreement (and their interest in the Company). (Incorporated by reference from our Registration Statement filed on Form SB-2 on December 22, 1999, as amended (File No. 333-93277).) 99.2 Certification pursuant to 18 U.S.C. Section 1350. 99.3 Certification pursuant to 18 U.S.C. Section 1350. 31 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report on form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized. CDKnet.com, Inc. (Registrant) By: /s/ Steven A. Horowitz ------------------------------------- Chairman, Chief Executive Officer, Chief Financial Officer and Secretary By: /s/ Timothy J. Mayette ------------------------------------- Chief Financial Officer (Principal Financial and Accounting Officer Date: November 15, 2002 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Chairman, Chief Executive Officer, Chief Financial /s/ Steven A. Horowitz Officer and Secretary November 15, 2002 - ---------------------- --------------------- ----------------- Steven A. Horowitz Title Date Director - ---------------------- -------- ----------------- Andrew J. Schenker Title Date /s/ Anthony J. Bonomo Director November 15, 2002 - ---------------------- -------- ----------------- Anthony J. Bonomo Title Date 32 CERTIFICATION I, Steven A. Horowitz, certify that: 1. I have reviewed this report on Form 10-KSB of CDKNet.Com, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respect the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. November 15, 2002 /s/ Steven A. Horowitz ---------------------------------- Steven A. Horowitz, CEO 33 CERTIFICATION I, Timothy J. Mayette, certify that: 1. I have reviewed this report on Form 10-KSB of CDKNet.Com, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respect the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. November 15, 2002 /s/ Timothy J. Mayette ---------------------------------- Timothy J. Mayette, CFO 34 FINANCIAL STATEMENTS TABLE OF CONTENTS Page ---- Report of Independent Certified Public Accountant F-1 Financial Statements: Consolidated Balance Sheet at June 30, 2002 F-2 Consolidated Statements of Operations for the years ended June 30, 2002 and June 30, 2001 F-3 Consolidated Statement of Stockholders' Equity for the years ended June 30, 2002 and June 30, 2001 F-4 Consolidated Statements of Cash Flows for the years ended June 30, 2002 and June 30, 2001 F-5 - F-6 Notes to Consolidated Financial Statements F-7 - F-22 35 INDEPENDENT AUDITOR'S REPORT Board of Directors and Stockholders CDKNET.COM, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of CDKNET.COM, Inc. as of June 30, 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the each of the years ended June 30, 2002 and 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2002, and the results of its operations and cash flows for each of the years then ended June 30, 2002 and 2001 in conformity with accounting principles generally accepted in the United States. /s/ RADIN, GLASS & CO, LLP Certified Public Accountants New York, New York November 11, 2002 F-1 CDKNET.COM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
JUNE 30, 2002 ------------ ASSETS CURRENT ASSETS Cash & cash equivalents $ 435,994 Cash escrow 500,000 Assets held for sale, net 306,939 Investments available for sale 941,933 Prepaid expenses and other current assets 105,339 ------------ Total current assets 2,290,205 NOTES RECEIVABLE 22,000 FURNITURE AND EQUIPMENT - at cost, less accumulated depreciation and amortization of $456,808 15,183 OTHER ASSETS 15,360 ------------ $ 2,342,748 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expense $ 304,730 Due to related parties 38,000 Other notes payable 103,251 ------------ Total current liabilities 445,981 SUBORDINATED CONVERTIBLE DEBENTURES 165,000 MINORITY INTEREST 133,664 COMMITMENTS and CONTINGENCIES STOCKHOLDERS' EQUITY Series A 5.75% Convertible Preferred stock - par value $.0001 per share; authorized 5,000,000 shares; 1,529,000 shares outstanding (liquidation value $1,529,000) 1,363,567 Common stock - par value $.0001, per share; authorized, 40,000,000 shares; 36,196,267; shares issued and outstanding 3,620 Additional paid in capital 23,219,839 Accumulated deficit (22,972,923) Trerasury stock (400,000 shares) (16,000) ------------ 1,598,103 ------------ $ 2,342,748 ============
The accompanying notes are an integral part of this statement F-2 CDKNET.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED YEAR ENDED JUNE 30 JUNE 30 2002 2001 ------------ ------------ Net revenues $ 209,767 $ 5,874,000 Cost of revenues 139,560 2,234,000 ------------ ------------ Gross profit (loss) 70,207 3,640,000 Selling, general and administrative expenses 944,556 8,436,000 Equity based compensation 230,230 2,418,000 Depreciation and amortization 90,071 1,748,000 ------------ ------------ Loss from operations (1,194,650) (8,962,000) Other income and (expense): Interest income 71,393 10,000 Interest expense, (23,207) (129,000) Impairment of long lived assets (577,000) (3,610,000) Reversal of accruals 460,000 0 Gain on sale of assets 0 5,411,000 Minority interest in loss of subsidiary 45,336 (7,000) ------------ ------------ NET LOSS ($1,218,128) ($7,287,000) ============ ============ Preferred Dividend 106,885 85,000 ------------ ------------ Net Loss to common Stockholders' ($1,325,013) ($7,372,000) ============ ============ Basic and diluted earnings (loss) per share ($0.04) ($0.33) ============ ============ Weighted-average shares outstanding- basic and diluted 36,004,618 22,255,847 ============ ============ The accompanying notes are an integral part of this statement. F-3 CDKNET.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the years ended June 30, 2002 and 2001
SERIES A 5.75% CONVERTIBLE PREFERRED ADDITIONAL UNEARNED TOTAL STOCK COMMON PAID-IN ACCUMULATED COMPENSATION TREASURY STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EXPENSE STOCK EQUITY ---------- ---------- ---------- ------- ----------- ------------ ------------ --------- ----------- Balance June 30, 2000 1,500,000 $1,265,000 21,236,986 $ 2,000 $19,258,000 ($14,434,000) ($750,000) $ 0 $ 5,341,000 Common stock and common stock warrants sold for cash, net of expenses 7,368,421 1,000 1,399,000 1,400,000 Conversion of preferred shares to common shares, net (50,000) (50,000) 79,605 50,000 0 Conversion of 6% subordinated debentures to common shares, net 681,384 100,000 100,000 Common stock and options issued for services 950,000 1,794,000 (1,437,000) 357,000 Amortization of unearned compensation 2,061,000 2,061,000 Equity in issuance of subsidiary stock 491,000 491,000 Preferred stock accretion 34,000 (34,000) 0 Net loss (7,287,000) (7,287,000) ---------- ---------- ---------- ------- ----------- ------------ ------------ --------- ----------- Balance June 30, 2001 1,450,000 1,249,000 30,316,396 3,000 23,092,000 (21,755,000) (126,000) 0 2,463,000 Conversion of preferred shares to common shares, net (60,000) (50,598) 1,154,679 115 50,483 0 Rounding (67) 32 (407) 205 (237) Amortization of unearned compensation 126,000 126,000 Common stock issued for services 1,650,000 165 103,995 104,160 Preferred stock dividend 3,075,192 308 308 Preferred stock accretion 26,232 (26,232) 0 Issued preferred shares 139,000 139,000 139,000 Acquire treasury stock (16,000) (16,000) Net loss (1,218,128) (1,218,128) ---------- ---------- ---------- ------- ----------- ------------ ------------ --------- ----------- Balance June 30, 2002 1,529,000 $1,363,567 36,196,267 $ 3,620 $23,219,839 ($22,972,923) $ 0 ($ 16,000) $ 1,598,103 ========== ========== ========== ======= =========== ============ ============ ========= ===========
F-4 CDKNET.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED 30-JUN 30-JUN 2002 2001 ------------ ------------ Cash flows from operating activities Net loss ($ 1,218,128) ($ 7,287,000) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 90,071 1,754,000 Bad debt expense 255,000 Gain on sale of assets (2,511,000) Reversal of accruals (460,000) Impairment of long lived assets 577,000 3,610,000 Common stock issued for services 230,230 2,418,000 Equity share of affiliated company's loss 400,000 Minority interest in loss of consolidated subsidiary (45,336) 7,000 Changes in assets and liabilities Accounts receivable (645,000) Inventory 330,000 Cash Escrow (750,000) Prepaid expenses and other current assets (56,614) (4,000) Accounts payable and accrued expense (560,270) 745,000 Due to related party 32,000 Deferred revenue (747,000) ------------ ------------ Net cash used in operating activities (1,443,047) (2,393,000) ------------ ------------ Cash flows from investing activities Purchase of furniture and equipment (16,882) (180,000) Cash escrow 750,000 (500,000) Software development (156,000) Other liabilities (23,000) Preferred stock issued for acquisitions 139,000 Assets held for sale, net (183,688) Treasury stock acquired (16,000) Investment in notes receivable (22,000) Investments available for sale (1,018,933) Investment in joint ventures (470,000) ------------ ------------ Net cash used in investing activities (368,503) (1,329,000) ------------ ------------ Cash flows from financing activities Principal payments on capitalized lease of obligations (36,000) Proceeds from notes payable 3,834,000 Repayment of notes payable (39,456) (860,000) Proceeds from issuance of common stock 1,400,000 Minority interest 115,000 Equity in ValueFlash 491,000 Debt issued in acquisiton 30,000 ------------ ------------ Net cash (used by) provided by financing activities (9,456) 4,944,000 ------------ ------------ NET (DECREASE) INCREASE IN CASH (1,821,006) 1,222,000 Cash at beginning of period 2,257,000 1,035,000 ------------ ------------ Cash at end of period 435,994 2,257,000 ============ ============
F-5 CDKNET.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED YEAR ENDED 30-JUN 30-JUN 2002 2001 ------------ ------------ Supplemental disclosures of cash flow information: Cash paid during the period for Interest 23,206 28,000 Noncash investing and financing transactions: Stock issued upon conversion of subordinated debentures 0 100,000 Conversion of preferred stock to common stock 50,598 50,000 Common stock issued for purchase of investment 125,000 Stock and stock warrants issued for financing costs 47,000
The accompanying notes are an integral part of this statement. F-6 CDKNET.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended June 30, 2002 and 2001 NOTE 1 - NATURE OF OPERATIONS CDKNET.COM, INC. and Subsidiaries, (collectively the "Company"), is a New York-based company that during the year ended June 30, 2002, provided corporate management advisory consulting services, private equity and debt investments and client specific compact discs (CDK'S) and certain related licensing fees. In June 2001, the Company sold its assets and certain liabilities related its ValueFlash.com subsidiary and licensed its technology for resale purposes to the purchaser of the ValueFlash.com assets. ValueFlash.com provided proprietary, non-intrusive, highly targeted e-messaging that enabled customers to communicate on a real time basis. During fiscal 2002, the Company continued to promote audio and video technology via CD's through a subsidiary and with the purchaser of the ValueFlash.com assets. The Company has generated limited revenues from the sale of custom CDs and from management advisory fees. During the year ended June 30, 2002, most resources had been directed to developing corporate management advisory services and making investments in various debt/equity securities. In October 2002, the Company sold substantially all of the assets of its custom CD business, its corporate management advisory service business and certain debt and equity investments. See "Subsequent Events" for additional details. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of CDKNET.COM, INC. (the "Parent"), its wholly owned subsidiaries., and its majority owned subsidiary ValueFlash.com, Inc. ("ValueFlash"), up to June 13, 2001, Intercompany accounts and transactions have been eliminated in consolidation. Certain amounts for prior years have been reclassified to conform to the current presentation. USE OF ESTIMATES The Company uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that the Company uses. F-7 REVENUE RECOGNITION AND DEFERRED REVENUE The Company recognizes revenue for custom CD's on the date the product is shipped to the customer. Revenues from corporate management advisory are recognized pursuant to the underlying consulting agreement. ACCOUNTING FOR LONG-LIVED ASSETS The Company reviews long-lived assets, certain identifiable assets and any goodwill related to those assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. For the year ended June 30, 2002, the company recorded a write down of $577,000 related to the carrying values of certain investments and notes receivable. For the year ended June 30, 2001, the Company recorded a write down of goodwill of $ 3,169,000 and a write down of capitalized patent costs of $441,000. These write downs are a result of the sale of ValueFlash assets. CASH AND CASH EQUIVALENTS All liquid investments having an original maturity not exceeding three months are treated as cash equivalents. Included in cash and cash equivalents at June 30, 2002 is $ 80,000 of restricted cash as collateral for a term loan. See Note 6. INVESTMENTS The Company determines the appropriate classifications of investments at the time of acquisition and re-evaluates the classifications at each balance sheet date. Investments may be classified as held-for-trading, held-to-maturity, or, when neither of those classifications is appropriate, as available-for-sale. The Company's investments in fixed maturity and equity securities are primarily classified as held-to-maturity. Held-to-maturity investments are carried at amortized cost, reflecting the Company's intent and ability to hold the securities to maturity. Available-for-sale securities are stated at fair value with net unrealized gains or losses reported as a separate component in shareholders' equity. Realized gains and losses, which arise when available for sale securities are sold (as determined on a specific identification basis) or other-than-temporarily impaired are included in the consolidated statements of earnings. FURNITURE AND EQUIPMENT Furniture and equipment are recorded at cost. Maintenance and repairs are charged to expenses as incurred; major renewals and betterments are capitalized. Furniture and equipment are depreciated using the straight-line method over their estimated useful lives, which range from three to seven years. Leasehold improvements are amortized over the term of the related lease or the useful life of the improvements, whichever is shorter. F-8 COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED Cost in excess of fair value of net assets acquired ("goodwill") is being amortized on a straight-line basis over five years. On an ongoing basis, management reviews the valuation and amortization of goodwill to determine possible impairment by considering current operating results and comparing the carrying value to the anticipated undiscounted cash flows of the related assets DEFERRED FINANCING COSTS The costs associated with completed financings are being amortized ratably over the term of the financing. RESEARCH AND DEVELOPMENT COSTS Research and development costs include expenses incurred by the Company to develop new products and enhance the Company's existing products. Research and development costs are expensed as incurred. During the years ended June 30, 2002, and 2001 such costs aggregated $0 and $225,000, respectively. SOFTWARE DEVELOPMENT COST The Company capitalized software development costs in accordance with SFAS No. 86 and SOP 98-1. The Company had capitalized $343,000 of such software development costs during the year ended June 30, 2000. These costs were sold as part of the ValueFlash asset sale. STOCK BASED COMPENSATION The Company accounts for employee stock options in accordance with APB Opinion No. 25, "Accounting For Stock Issued to Employees" and has adopted the disclosure-only option under SFAS No. 123 for compensation to employees and directors. The Company accounts for non-employee stock transactions in accordance with SFAS NO. 123 and ETIF 96-18. INCOME TAXES The Company files consolidated income tax returns. The Company follows the asset and liability method of accounting for income taxes by applying statutory tax rates in effect at the balance sheet date to differences among the book and tax bases F-9 of assets and liabilities. The resulting deferred tax liabilities or assets are adjusted to reflect changes in tax laws or rates by means of charges or credits to income tax expense. A valuation allowance is recognized to the extent a portion or all of a deferred tax asset may not be realizable. LOSS PER COMMON SHARE Basic loss per share is computed using the weighted average number of shares of common stock outstanding during the period. All potential common shares have been excluded from the computation of diluted loss per share as their effect would be antidilutive and, accordingly, there is no reconciliation of basic and diluted loss per share for each of the periods presented. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair values on the short-term maturity of these instruments. CONCENTRATION OF CREDIT RISK Included in cash escrow is a $500,000 installment due in December 2002 from the sale of the ValueFlash assets. Periodically, the Company holds cash in the bank in excess of $100,000, which exceeds the FDIC insurance limits and is therefore uninsured. Included in investments held for sale is $500,000 in a offshore investment fund. In November 2002, the Company received back this $500,000. investment. NEW ACCOUNTING DEVELOPMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combination", SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 143, "Accounting for Asset Retirement Obligations",. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. It also requires that the Company recognize acquired intangible assets apart from goodwill. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost, which will be effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company has adopted SFAS No. 141, SFAS No. 142 and SFAS No. 143. Such adoption did not have a material effect on the Company's financial position, results of operations and cash flows. F-10 In June 2002 the FASB issued SFAS No. 146 on "Accounting for Costs Associated with Exit or Disposal Activities." The Company is reviewing the requirements and implications of adopting such standard by December 31, 2002. This Statement addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The Company currently does note believe adopting such standard will have a material effect on the presentation of its financial statements. NOTE 3 - SALE OF VALUEFLASH ASSETS On June 13, 2001, the Company sold predominately all of the assets of ValueFlash majority owned subsidiary plus the assumption of certain liabilities for $3,500,000 in cash. Pursuant to the terms of the sale agreement, $1,250,000 was placed in escrow awaiting the resolution of certain contingencies. Should the respective contingencies be resolved timely, the escrow cash from closing is to be released as follows; $500,000 nine months from closing, $250,000 twelve months from closing and $500,000 eighteen months from closing. As of June 30, 2002, the Company has received the first two installments totaling $750,000. In addition to the sale of the ValueFlash assets, the Company licensed the patented technology of ValueFlash to the purchaser for a term of three years, which automatically renews unless terminated by either party within 90 days of the renewal date. The license agreement requires certain reseller fees to be paid for CD's replicated or shipped, hosting fees or a " mastering fee". The license agreement provides for a first right of refusal upon the sale of such patent for the technology. The sales attributed to the ValueFlash assets sold for fiscal 2001 was $5,419,000. NOTE 4 - ACQUISITION AND PURCHASE OF ASSETS On July 8, 1998, the Company entered into an agreement, subsequently amended (the "Agreement"), based on terms previously agreed upon with Kelly Music & Entertainment, Inc. ("KME"), to acquire the minority interest of CDK LLC for $5,171,000. The consideration was (1) the retirement of $600,000 of notes accounted for as a stock subscription (2) issuance of 1,883,635 shares of the Company's common stock and (3) a cash payment of $65,000. The amendment provided for the waiver of previously agreed upon registration rights on common stock in excess of 250,000 shares, terminated any and all demand registration rights with certain stockholders of KME and released the Company from any and all claims, liabilities, demands and causes of action known or unknown that KME could assert in the future, as defined. The Company accounted for the acquisition as a purchase. The Company valued the minority interest based on the shares issued at the market price of the stock after considering a 15% market discount for the shares that had no stated registration rights requirement. The estimated fair value of the tangible assets acquired of $700,000 approximated the book value of such assets. The excess consideration over the estimated fair value of the net assets acquired of $4,471,000 was been recorded as cost in excess of fair value of net assets acquired and is being amortized on a straight-line basis over five years. The remaining unamortized balance of $3,169,000 was written down during the year ended June 30, 2001. F-11 On May 22, 2002, a subsidiary of the Company acquired 100% of Crossover Advisors for $99,500 consisting of 69,500 shares of Series A 5.75% Convertible Preferred Stock and the issuance of notes in the amount of $30,000. These notes bear interest at 6% and are due November 22, 2002. Crosover is engaged in the management advisory business. The Company acquired assets, consisting primarily of investments in common stock, valued at $73,056. In October 2002, the Company sold this business. On June 11, 2002, a subsidiary of the Company acquired 100% of Comprehensive Resource Advisors, Inc and NBM Information Technology, Inc. for $69,500 consisting of 69,500 shares of Series A 5.75% Convertible Preferred Stock. The Company acquired net assets of $7,349. In October 2002, the Company sold this business. NOTE 5 - INVESTMENTS Data with respect to investments in securities with fixed maturities are as follows at June 30, 2002: Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- Notes and Convertible Notes $22,.000 0 0 $22,000 Contractual maturity dates are as follows: Data with respect to investments in equity securities are as follows at June 30, 2002: Realized Fair Cost (Loss) Value ---- ------ ----- Common Stock $518,933 $(77,000) $441,933 Investment Fund $500,000 $ 0 $500,000 The investment fund is managed by a representative of the Preferred Stockholders of the Company. Through November 11, 2002, the Investment Fund had returned $400,000. of the Company's investment. The Common Stock was sold in July 2002 to Target Growth Fund Ltd. subject to a one year note receivable in the amount of $450,000 with interest at 8% annually. Target Growth Fund Ltd. is a preferred stockholder of the Company. F-12 NOTE 5 - FURNITURE AND EQUIPMENT Furniture and equipment consist of the following at June 30, 2002: Furniture $ 17,293 Equipment 446,240 Leasehold improvements 8,458 ----------- 471,991 Less: accumulated depreciation and amortization 456,808 ----------- $ 15,183 =========== Depreciation expense for the years ended June 30, 2002 and 2001 was $83,699 and $211,000 respectively. As part of the October 2002, sale of assets, the Company sold a piece of equipment with a net book value of $142,000. Accordingly, this asset is carried as part of assets held for sale at June 30, 2002. NOTE 6 - LONG-TERM DEBT TERM LOAN In June 1999, the Company entered into a term loan with a lender. Borrowings aggregating $175,000 under the agreement, which are collateralized by the equipment and cash collateral provided by the Company's CEO, are repayable in monthly installments of approximately $3,500, including interest at 7.86% through March 2004. As of June 30, 2002 and 2001 the loan balance and cash collateral are approximately $73,251 and $112,000, respectively. The term loan was repaid in November 2002. NOTE 7 - SUBORDINATED CONVERTIBLE DEBENTURES 6.00% SUBORDINATED CONVERTIBLE DEBENTURES During the period September 4, 1998 through January 21, 1999, the Company issued $600,000 in 6% Subordinated Convertible Debentures due September 1, 2003 with detachable five-year warrants (the "Notes") to purchase 60,000 shares of common stock of the Company at an exercise price of $3.00 per share. The Notes are immediately convertible into common stock of the Company at an effective conversion price of the lower of (i) 70% of the average current market price of the Company's common stock during the five days preceding the date of the original issuance, or (ii) 75% of the average current market price during the five-day trading period ending one trading day preceding the date the Notes are converted. The agreement contains antidilution provisions whereby the conversion price is subject to (downward) adjustment in certain circumstances. The Company may redeem the Notes at any time for 120% of the principal amount of the Notes plus accrued interest. The Notes are subordinated to the claims and rights of all Senior Debt, as defined by the underlying agreement. In addition, the agreement contains covenants limiting the Company's ability to pay dividends, incur new debt, enter into certain transactions and reacquire common or preferred stock of the Company. If an event of default occurs beyond a stated cure period the notes shall become payable at the option of the holder. F-13 In connection with the agreement, the Company recorded a discount on the Notes in the aggregate amount of $238,000 resulting from the allocation of proceeds of $203,000 to a beneficial conversion feature and the fair value of the underlying warrants of $35,000. Due to the immediate conversion rights under the agreement, the discount attributed to the beneficial conversion feature was expensed on the date of issuance. In connection with the sale of the Notes, the Company incurred fees of $60,000 and issued five-year warrants to purchase 30,000 shares of the Company's common stock at $3.00 per share. The Company computed the approximate fair value of the warrants issued to be $19,650 using the Black-Scholes method. During fiscal 2001, $90,000 in debentures plus accrued interest was converted into 681,384 shares of the Company's common stock. There were no conversions of debentures into Company common stock during the year ended June 30, 2002. At June 30, 2002 there was $165,000 outstanding and unconverted. NOTE 8 - INCOME TAXES Temporary differences which give rise to deferred taxes are summarized as follows: 2002 2001 ----------- ----------- Deferred tax assets: Net operating loss and other carryforwards $ 3,895,000 $ 3,909,000 Less valuation allowance (3,895,000) (3,909,000) Net deferred tax asset $ -- $ -- The Company has recorded a full valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized. The Company's effective income tax rate differs from the statutory Federal income tax rate as a result of the following: 2002 2001 ----------- ----------- Tax benefit at statutory rate $ (475,000) $(2,840,000) Nondeductible expense/nontaxable (income)-net 49,000 2,250,000 Temporary timing differences 440,000 (409,000) State benefit, net of federal tax effect (50,000) Valuation allowance on net operating loss 1,049,000 Utilization of net operating loss (14,000) -- $ -- $ -- The provision for Federal income taxes has been determined on the basis of a consolidated tax return. At June 30, 2002, the Company had a net operating loss carry forward for Federal income tax reporting purposes amounting to approximately $9,980,000, expiring from 2018 through 2020. The Internal Revenue Code of 1986, as amended, limits the amount of taxable income the Company may offset with net operating loss carry forwards in any single year. No Federal taxes were paid in the years ended June 30, 2002 and 2001. F-14 NOTE 9 - STOCKHOLDERS' EQUITY SERIES A 5.75% CONVERTIBLE PREFERRED STOCK On October 1, 1999, the Company gave notice to the holders of the $1,500,000 5.75% Subordinated Convertible Debentures and exercised its right to call the outstanding Debentures in exchange for $1,500,000 of Series A 5.75% Convertible Preferred Stock. Under the terms of the Debentures, the Convertible Preferred Stock shall have: (1) liquidation preferences equal to the principal amount of the Debenture, (2) a 5.75% cumulative annual dividend payable quarterly, (3) rights to convert into shares of Common Stock at the same conversion rate as the Debentures and (4) the same redemption rights at the option of the Company. During the year ended June 30, 2001, 50,000 shares of preferred stock was converted into 79,605 shares of common stock. During the year ended June 30, 2002, 60,000 shares of preferred stock was converted into 1,154,679 shares of common stock. In December 2002, the Company issued 3,075,192 shares of common stock in connection with the conversion of accrued dividends on the Company's preferred stock. In the fourth quarter of fiscal 2002, the Company issued 139,500 shares of preferred stock in connection with the acquisition of two companies. See Note 4. COMMON STOCK During the year ended June 30, 2001, the Company executed the following summarized equity transactions: o The Company sold 7,368,421 shares of common stock for $1,400,000, after several modifications to the existing sale agreement for a potential equity raise during the year of $2,800,000. o The ValueFlash subsidiary sold 275,000 shares of common stock during the year for $491,000 net of costs to raise such funds. o Debenture holders converted $101,000 of debentures and accrued interest into 681,384 shares of common stock. o During the year the ValueFlash subsidiary issued 120,000 warrants for services and 2,500,000 performanced based options at an exercise price of $1.50 per warrant or option. o The Company assigned 800,000 and 200,000 options to the CEO of the Company and an unrelated entity in ValueFlash respectivley for loans made to Company. These options previously held by the Company have an exercise price of $1.50 for the purchase of each ValueFlash share of common stock. F-15 o The Company issued 950,000 shares of common stock and 5,000,000 options to employees and consultants at prices ranging from $.16 to $.50. The Company recorded $1,794,000 expense for the issuance of such shares and options to consultants. During the year ended June 30, 2002, the Company executed the following summarized equity transactions: o In September 2001, the Company issued 500,000 and 250,000 shares of common stock to Steve WIldstein and Mike Muzio, respectively, pursuant to consulting contracts. The Company valued these shares at the closing market price on the date of issuance and accordingly, expensed $40,500 in the second quarter. o In November 2001, the Company issued 600,000 shares of common stock in connection with a six month consulting agreement. The Company valued these shares at the closing market price on the date of issuance and expensed the value of this contract over its term. o In December 2001, we issued 100,000 shares of common stock each to Andrew Schenker, President, Chief Operating Officer and a Director of the Company, and Anthony Bonomo, a director of the Company, in recognition of their service on behalf of the Company. These shares were valued at the closing market price on the date of issuance and accordingly, $16,000 was expensed in the second quarter. WARRANTS Warrant activity for each of the two years ended June 30, 2002and 2001is summarized as follows: Weighted Average Shares Exercise Price -------------- -------------- Outstanding at June 30, 2000 2,353,554 $ 1.04 Granted Exercised Expired or cancelled (285,714) .82 -------------- -------------- Outstanding at June 30, 2000 2,067,840 1.06 Granted Exercised Expired or cancelled (159,342) .85 -------------- -------------- Outstanding at June 30, 2002 1,908,498 $ 1.07 ============== ============== The Company did not issue any stock warrants during the years ended June 30, 2002 and 2001. F-16 The following table summarizes information about warrants outstanding and exercisable at June 30, 2002 Outstanding ------------ ----------------- --------------- Weighted- Weighted- Average average Remaining exercise Shares life in years price ------------ ----------------- --------------- Range of exercise prices $.60 to $.85 568,498 1.56 0.63 $1.00 to $1.25 950,000 2.00 1.00 $1.50 to $1.75 300,000 1.38 1.58 $2.00 to $3.00 90,000 1.17 3.00 ------------ 1,908,498 ============ All of the above warrants are exercisable. Certain warrant agreements contain a cashless exercise provision whereby the warrants may be exercised solely by the surrender of the warrants, and without the payment of the exercise price in cash, for that number of warrant shares determined by dividing the difference of the market price of the shares of common stock issuable upon exercise of the warrants and the warrant exercise price by the market price of the common stock on the date of exercise. STOCK OPTION PLANS In 1998, the Company adopted the 1998 Equity Incentive Plan (the "Plan") for employees, officers, consultants and directors of the Company, pursuant to which the Company may grant incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock or deferred stock. The total number of shares of the Company's common stock available for distribution under the Plan is 3,000,000. The option period during which an option may be exercised shall not exceed ten years from the date of the grant and will be subject to such other terms and conditions of the Plan. The Plan will terminate automatically on June 30, 2008. The Company accounts for its stock option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees", under which no compensation expense is recognized. The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation', for disclosure purposes; accordingly, no compensation expense is recognized in the results of operations for options granted at fair market value as required by APB Opinion No. 25. F-17 Stock option activity for each of the two years ended June 30, 2002and 2001 for both qualified and unqualified options is summarized as follows: Weighted Average Shares Exercise Price ------------- -------------- Outstanding at June 30, 2000 5,638,000 $ 1.14 Granted 6,400,000 .12 Exercised - - Expired or cancelled (65,000) 1.16 ------------- -------------- Outstanding at June 30, 2001 11,973,000 .78 Granted - Exercised - Expired or cancelled (5,623,000) .70 ------------- -------------- Outstanding at June 30, 2002 6,350,000 $ .85 ============= ============== The Company did note issue any stock option grants during the year ended June 30, 2002. No options were exercised during the year ended June 30, 2002. Information, at date of issuance, regarding stock option grants during the two years ended June 30, 2002 and 2001 Weighted- Weighted- Average Average Exercise Fair Shares Price Value ---------- ---------- ---------- Year ended June 30, 2001 Exercise price exceeds market price 1,250,000 .60 .50 Exercise price equals market price 5,150,000 .25 .21 Exercise price is less than market price $ - $ - The following table summarizes information about warrants outstanding and exercisable at June 30, 2002:
Outstanding and exercisable ------------------------------------------------------- Weighted- Weighted- Average Average Number remaining Exercise Number Outstanding life in years Price Exercisable ----------- ------------- ----------- ----------- Range of exercise prices: $.16 to $.75 3,800,000 2.86 $ .40 3,800,000 $1.00 2,050,000 2.44 1.00 2,050,000 $1.69 500,000 2.84 1.69 500,000 ----------- ----------- 6,350,000 6,350,000 =========== ===========
F-18 For disclosure purposes in accordance with SFAS No. 123, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for stock options granted during the years ended June 30, 2002 and 2001annual dividends of $0.00, expected volatility of 97% for the Company's options and .1% volatility for the ValueFlash options for 2001 and 97% for 2000, risk-free interest rate of 4.3% in 2001and expected life of five years for all grants. If the Company recognized compensation cost for the vested portion of the employee stock option plan in accordance with SFAS No. 123, the Company's pro-forma net loss and loss per share would have been as follows for the years ended June 30, 2002 and 2001: 2002 2001 ------------ ------------ Net loss As reported $ (1,325,013) $ (7,372,000) Pro-forma (1,325,013) (8,927,000) Net loss per common share As reported $ (0.04) $ (0.33) Pro-forma (0.04) (0.40) The compensation expense attributed to the issuance of the non-employee stock options will be recognized as they are earned. These stock options are exercisable for five years from the grant date. The employee stock option plan stock options are exercisable for five years from the grant date and vest over various terms from the grant date to five years. STOCK OPTIONS - VALUEFLASH The Company has also issued stock options in its majority owned subsidiary ValueFlash. The SFAS No. 123 disclosure for the pro-forma loss has been included in Note (c) above with the pro-forma loss for options issued by the Company. F-19 The following tables summarize the changes in options outstanding and the related price ranges for shares in the subsidiary ValueFlash common stock: Employee Stock Option Plan: Weighted Average Shares Exercise Price ------------ -------------- Outstanding at June 30, 2000 6,838,000 $ 1.46 Granted 250,000 1.50 Exercised - - Expired or cancelled (113,000) 1.50 ------------ -------------- Outstanding at June 30, 2001 6,975,000 1.43 Granted - - Exercised - - Expired or cancelled (625,000) 1.50 ------------ -------------- Outstanding at June 30, 2002 6,350,000 $ 1.46 ============ ============== Non-Employee Stock Option: Weighted Average Shares Exercise Price ------------ -------------- Outstanding at June 30, 2000 12,331,000 $ 1.91 Granted 3,120,000 1.58 Exercised - - Expired or cancelled (918,000) 2.00 ------------ -------------- Outstanding at June 30, 2000 14,533,000 1.85 Granted Exercised Expired or cancelled (3,000,000) 2.83 ------------ -------------- Outstanding at June 30, 2002 11,533,000 $ 1.57 ============ ============== The Company did not issue and options pursuant to this plan during the years ended June 30, 2002 and 2001. The following table summarizes information about warrants outstanding and exercisable at June 30, 2002
Outstanding and exercisable ------------------------------------------------------- Weighted- Weighted- Average Average Number remaining Exercise Number Outstanding life in years Price Exercisable ----------- ------------- ----------- ----------- Range of exercise prices: $1.00 to $1.50 15,840,000 2.51 1.48 11,340,000 $2.00 2,043,334 1.70 2.00 2,043,334 ----------- ----------- 17,883,334 13,383,334 =========== ===========
The non-employee stock options outstanding of 7,033,000 are fully vested. The remaining 4,500,000 of stock options are performance based and are unearned as of June 30, 2002. The compensation expense attributed to the issuance of these stock options will be recognized as they are earned. These stock options are exercisable for five years from the grant date. F-20 The employee stock option plan stock options are exercisable for five years from the grant date and vest over various terms from the grant date to five years. Approximately 5,000,000 empolyee stock options were cancelled as result of the sale of Vflash assets on June 13, 2001. As of June 30, 2001, 1,829,000 of these stock options were vested. NOTE 10 - RELATED PARTY TRANSACTIONS a. During the years ended June 30, 2002 and 2001 legal services of $ 27,000 and $170,000 respectively, were provided by firms (the "Firms") in which the Company's CEO and principal stockholder is the managing partner b. During the year ended June 30, 2001, the Company assigned 800,000 options to the CEO of the Company held by the Company to purchase ValueFlash common stock for $1.50 per share as consideration for loaning the Company funds periodically during the year. c. During the year ended June 30, 2002, the Company invested $500,000. with a fund manager. The investment advisor for this fund manager is a representative certain of the 5.75% Preferred Stockholders of the Company. d. In July 2002, the Company sold an investment to Target Growth Fund Ltd., a preferred stockholder of the Company, e. In December 2001 we acquired the 40% of Diversified Capital Holdings, LLC (f/k/a/ Azure Capital Holdings, LLC) that we did not originally own from George Sandhu, a representative of our 5.75% Preferred Stockholders. NOTE 11 - COMMITMENTS AND CONTINGENCIES FACILITIES Rent expense for the years ended June 30, 2002 and 2001 was $60,174 and $19,000, respectively. The Company leases office space pursuant to a lease agreement which expires on March 31, 2005 (with an option to extend to March 31, 2007). Future minimum lease commitments are $32,712 for the year ended June 30, 2003, $34,020 for the year ended June 30, 2004 and $26,271 for the year ended June 31, 2005. LITIGATION MATTERS The Company is involved in claims and disputes which arise in the normal course of business. Management believes that the resolution of these matters will not have a material adverse effect of the Company's financial position or results of operations. NOTE 12 - FOURTH QUARTER EVENTS During the fourth quarter ending June 30, 2001, the Company sold prodominately all of its assets and liabilities which resulted some large transactions being recorded in the fourth quarter. These transactions are detailed as follows; o The Company sold its predominately all of its assets in a subsidiary ValureFlash resulting in a $5,411,000 gain on such sale. F-21 o The Company recorded the writeoff of goodwill and patent costs of $3,610,000 due to the lack of sufficient cash flow to support the recoverability of such assets, since the ValueFlash assets were sold. The business continues to utilize the patented technology, but does not generate sufficient cash flow to support the values recorded. o Due to the sale of the ValueFlash assets, which included employee contracts and other business contracts, the unamortized compensation costs were accelerated and written off in the fourth quarter in the amount of $1,022,000. NOTE 13 - SUBSEQUENT EVENTS On October 22, 2002, the Company entered into an Agreement of Sale whereby Universal Media Holdings, Inc (Universal) agreed to purchase from the Company the business entity known as Diversified Capital Holdings, LLC including all of its assets except cash and the business entitly known as CDKNet, LLC. As of June 30, 2002, the net book value of the assets and liabilities sold was approximately $403,000. In consideration for the sale of these assets, Universal agreed to pay the sum of $550,000. payable pursuant to a promissory note secured by a security agreement and UCC financing statements. This note is payable in monthly installments over a three year period with interest at 5% per annum. At June 30, 2002, the Company has classified the net assets sold to Universal as "Assets held for Sale." Subsequent to the sale as assets discussed above, Universal commenced a number of activities including a management change, a reverse split of its common stock, a name change, to National Management Consulting, Inc. (National) and the acquisition the assets of another company. As part of the management change, Steven A. Horowitz, Chairman and CEO of the Company, was appointed Chairman, President and CEO of Universal/National. In addition, Andrew Schenker, President of the Company, was appointed Chief Financial Officer of Universal/ National. In addition, after the re-organization activities discussed above, Steven A Horowitz owned approximately 25% of Universal/National and Andrew Schenker owned approximately 4% of Universal/ National. F-22 EX-99.D 6 exh-d_11958.txt CDKNET.COM, INC. FORM 10-Q FOR DECEMBER 31, 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2002. [ ] Transition Report under Section 13 or 15(d) of the Exchange Act for the transition period from _________________ to _________________. Commission file number 0-27587 CDKNET.COM, INC. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 22-3586087 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 Broadhollow Road Suite 103 Melville, New York 11747 (631) 385-6200 WWW.CDKNET.COM ------------------------------------------------------------------ (Address, including zip code, telephone number, including area code, and web address of the principal executive offices of the registrant) N/A ------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Applicable Only to Corporate Issuers: State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: February 14, 2013 36,196,267 ---------- Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] ================================================================================ PART I-- FINANCIAL INFORMATION Item 1. Financial Statements. -------------------- Page ---- FINANCIAL STATEMENTS Consolidated Balance Sheet at December 31, 2002 (unaudited) F-1 Consolidated Statements of Operations for the three and six months ended December 31, 2002 and 2001 (unaudited) F-2 Consolidated Statements of Cash Flows for the six months ended December 31, 2002 and 2001 (unaudited) F-3 Notes to Consolidated Financial Statements F-4 Management's Discussion and Analysis 1 PART II - OTHER INFORMATION Item 1. Legal Proceedings II-1 Item 2. Changes in Securities II-1 Item 3. Defaults Upon Senior Securities II-1 Item 4. Submission of Matters to a Vote of Security Holders II-2 Item 5. Other Information II-2 Item 6. Exhibits and Reports on Form 8-K II-2 CDKNET.COM, INC. and Subsidiaries CONSOLIDATED BALANCE SHEET (Unaudited)
December 31, 2002 ------------ ASSETS CURRENT ASSETS Cash & cash equivalents $ 761,017 Assets held for sale, net 147,085 Investments available for sale 100,000 Prepaid expenses and other current assets 70,839 ------------ Total current assets 1,078,941 NOTES RECEIVABLE 559,500 FURNITURE AND EQUIPMENT - at cost, less accumulated depreciation and amortization of $506,808 107,183 OTHER ASSETS 11,774 ------------ $ 1,757,398 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expense $ 252,183 Due to related parties 38,000 Other notes payable 28,500 ------------ Total current liabilities 318,683 SUBORDINATED CONVERTIBLE DEBENTURES 165,000 MINORITY INTEREST 91,448 COMMITMENTS and CONTINGENCIES STOCKHOLDERS' EQUITY Series A 5.75% Convertible Preferred stock - par value $.0001 per share; authorized 2,250,000 shares; 1,632,459 shares outstanding , liquidation value $1,632,459 1,480,142 Common stock - par value $.0001, per share; authorized, 40,000,000 shares; 36,196,267; shares issued and outstanding 3,620 Additional paid in capital 23,069,762 Accumulated deficit (23,355,257) Trerasury stock (400,000 shares), at cost (16,000) ------------ 1,182,267 ------------ $ 1,757,398 ============
The accompanying notes are an integral part of this statement. F-1 CDKNET.COM, INC. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months Three months Six months Six months ended ended ended ended December 31 December 31 December 31 December 31 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net revenues $ 170,813 $ 170,813 Cost of revenues 139,560 139,560 ------------ ------------ ------------ ------------ Gross profit (loss) 31,253 31,253 Selling, general and administrative expenses $ 218,633 262,161 $ 433,069 530,902 Depreciation and amortization 26,593 25,561 53,186 47,936 ------------ ------------ ------------ ------------ Loss from operations (245,226) (256,469) (486,255) (547,585) Other income and (expense) Interest income 12,217 7,996 20,440 24,153 Interest expense, (5,340) (2,600) (9,302) (5,708) Loss on sale of assets (68,933) Other income 2,500 2,500 Minority interest in loss of subsidiary 2,943 42,216 ------------ ------------ ------------ ------------ NET LOSS $ (232,906) $ (251,073) $ (499,334) $ (529,140) ============ ============ ============ ============ Preferred Dividend 28,538 26,539 57,075 53,807 ------------ ------------ ------------ ------------ Net Loss to common Stockholders' $ (261,444) $ (277,612) $ (556,409) $ (582,947) ============ ============ ============ ============ Basic and diluted earnings (loss) per share $ (0.01) $ (0.01) $ (0.02) $ (0.02) ============ ============ ============ ============ Weighted-average shares outstanding- basic and diluted 36,196,267 32,848,036 36,196,267 31,718,267 ============ ============ ============ ============
The accompanying notes are an integral part of this statement. F-2 CDKNET.COM, INC. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended Six months ended December 31, December 31, 2002 2001 ----------- ----------- Cash flows from operating activities Net loss $ (499,334) $ (529,140) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 53,186 47,936 Stock based compensation 166,500 Common stock and stock warrants issued for services 28,000 Loss on sale of assets 68,933 Minority interest in loss of consolidated subsidiary (42,216) Changes in assets and liabilities Prepaid expenses and other current assets (34,100) 8,647 Accounts payable and accrued expense (52,547) (259,303) Due to related party Deferred revenue ----------- ----------- Net cash used in operating activities (437,878) (537,360) ----------- ----------- Cash flows from investing activities Investment in notes receivable (53,848) (1,025,000) Purchase of equipment (4,738) Cash escrow 500,000 Investments held for sale 400,000 ----------- ----------- Net cash used in investing activities 846,152 (1,029,738) ----------- ----------- Cash flows from financing activities Repayment of notes payable (83,251) (15,000) Proceeds from notes payable 50,000 Principal payments on capital lease obligations (21,133) ----------- ----------- Net cash provided by financing activities (83,251) 13,867 ----------- ----------- NET INCREASE (DECREASE) IN CASH 325,023 (1,553,231) Cash at beginning of period 435,994 2,257,000 ----------- ----------- Cash at end of period $ 761,017 $ 703,769 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for Interest 4,352 5,708 Noncash investing and financing transactions: Stock issued upon conversion of preferred stock 50,598
The accompanying notes are an integral part of this statement. F-3 NOTE 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of CDKNET.com, Inc. ( the "Company") included herein have been prepared in accordance with generally accepted accounting principles for interim period reporting in conjunction with the instructions to Form 10-QSB. Accordingly, these statements do not include all of the information required by generally accepted accounting principles for annual financial statements, and are subject to year-end adjustments. In the opinion of management, all known adjustments (consisting of normal recurring accruals and reserves) necessary to present fairly the financial position, results of operations and cash flows for the three and six month periods ended December 31, 2002 and 2001 have been included. The interim statements should be read in conjunction with the financial statements and related notes included in the Company's June 30, 2002 Form 10-KSB. The operating results for the three and six months ended December 31, 2002 are not necessarily indicative of the results to be expected for the full year. NOTE 2. REVERSE STOCK SPLIT APPROVAL On November 22, 2002, the Board of Directors and a majority of common shareholders (67%) approved a one for fifty reverse stock split and, also, increased the amount of authorized common shares to 100 million. Both the reverse stock split and increase in authorized shares may be effected at the discretion of the Board up to November 21, 2003. See Item 4. NOTE 3. SALES OF ASSETS In July 2002, we sold an investment in common stock to Target Growth Fund Ltd. subject to a one year note receivable in the amount of $450,000. With interest at 8% annually. The Company's carrying value in this investment was $518,933. Accordingly, the Company recorded a loss of $68,933 on the sale of this investment during the six months ended September 30, 2002. Target Growth Fund Ltd. is a preferred stockholder of the Company. On October 22, 2002 we entered into an agreement to sell certain assets including the business of Diversified Capital Holdings, LLC (Diversified), CDK Financial Corp. and CDKNet, LLC to National Management Consultants, Inc. (National), formerly Universal Media Holdings, Inc. At the time of the transaction, James W. Zimbler served as President and a Director of National and also served as Secretary and Executive Vice President of CDKNet.com. On the same day, Steven A. Horowitz, our CEO and Andrew Schenker, our COO were appointed President, CEO and CFO respectively, of National. Certain of the assets comprising the consulting business of Diversified Capital Holdings, LLC and investments we made were transferred to National. CDKNet, LLC has not been transferred to National pending receipt of requisite approvals. It was subsequently determined that certain intangible assets of CDKNet, LLC will not be transferred and therefore the transaction sale of assets to National has been modified. On January 5, 2003, we entered into a Revised Asset Purchase Agreement pursuant to which we will sell certain assets of Diversified to National. The revised sale price of the assets is a revised promissory note in the amount of $339,000. plus interest at the rate of five percent (5%), payable monthly until February 2006. The note will be secured by a security agreement on all the assets of National. NOTE 4. SUBSEQUENT EVENTS In January 2003, the Board of Directors of the Company authorized the issuance of an aggregate of 72,000 Series A preferred shares to the minority shareholders of our Valueflash subsidiary in exchange for their common shares of Valueflash. After this transaction is completed, Valueflash will be a wholly-owned subsidiary. In Janaury 2003, the Board of Directors approved an adjustment in the conversion rate of the $165,000 of subordinated convertible debentures. The new conversion rate will be $.01 per common share. F-4 In January 2003, the Board of Directors authorized the issuance of 17,500 shares of series A preferred stock to Andrew Schenker for services rendered to the Company. In January 2003, the Board of Directors authorized the issuance of 470,000 shares of Series B preferred stock to Robert M. Rubin and C. Dean McLain pursuant to a consulting agreement. On February 7, 2003, we announced that we entered into an agreement with Western Power & Equipment Corp. (Western) to acquire a portion of Western's business in California and Nevada. Western sells, leases, rents and services construction and industrial equipment for Case Corporation and 30 other manufacturers. CDK will acquire approximately $15 million of tangible assets and operations, which reported nearly $50 million of total revenue for the year ended July 31, 2002, in exchange for the assumption or replacement of existing debt, a cash payment of $500,000. and a five-year promissory note of $500,000. Certain members of Western's management will receive approximately 60% of the post transaction combined entity. The completion of the transaction remains subject to several conditions including the approval of both companies board's, financing transactions including an institutional revolving credit facility and other financing for the purchase, receipt of other third party approvals, delivery of audited financial statements of the business to be acquired, additional due diligence and compliance with applicable regulatory requirements. F-5 Item 2. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations ------------------------- RESULTS OF OPERATIONS - --------------------- The following contains forward-looking statements based on current expectations, estimates and projections about our industry, management's beliefs, and assumptions made by management. All statements, trends, analyses and other information contained in this report relative to trends in our financial condition and liquidity, as well as other statements, including, but not limited to, words such as "anticipate," "believe," "plan," "intend," "expect," "predict," and other similar expressions constitute those statements. These statements are not guarantees of future performance and are subject to risks and uncertainties that are difficult to predict. Accordingly, actual results may differ materially from those anticipated or expressed in the statements. Potential risks and uncertainties include, among others, those set forth below. Particular attention should be paid to the cautionary statements involving our limited operating history, the unpredictability of our future revenues, the unpredictable and evolving nature of our business model, the competitive multimedia compact discs and financial services industries and the risks associated with capacity constraints, systems development, management of growth and business expansion, as well as other risk factors. Overview - -------- We are a holding company incorporated in the State of Delaware. We have two subsidiaries through which we conduct our business: (1) CDKnet, LLC, a New York limited liability company, and (2) Diversified Capital Holdings, LLC, a Delaware limited liability company. On October 22, 2002 we entered into an agreement to sell certain assets including the business of Diversified, CDK Financial Corp. and CDKNet, LLC to National Management Consultants, Inc. (National), formerly Universal Media Holdings, Inc. Certain of the assets comprising the consulting business of Diversified and investments we made were transferred to National. CDKNet, LLC has not been transferred to National. As a result, we remain in the business of producing custom compact disks. We have developed a multimedia technology, called CDK(TM), which integrates audio, video and Internet connectivity on a standard compact disc. Our technology enables users to create their own personalized compact discs simply by visiting a Website. These custom compact discs play audio and display videos on a full-screen, using high-quality videos and digital technology. The custom compact discs also include software applications and targeted Web links. The CDK(TM) product is targeted at the following industries: (1) entertainment (music, movies, and TV); (2) travel and tourism; (3) professional sports; (4) financial services; (5) education; (6) toys/games; (7) fashion; (8) food/cooking; (9) automotive; and (10) healthcare. Its primary customers and/or strategic partners include Central Park Media, CollegeMusic.com, Megaforce Records, HappyPuppy.com, theglobe.com and SugarBeats.com. In June 2001, we sold the assets of our subsidiary, ValueFlash to Elbit Limited for $3.5 million in cash plus the assumption of liabilities and forgiveness of indebtedness. In connection with the sale of ValueFlash, we entered into a Technology and License Agreement with Elbit whereby the parties agreed that for an initial 3-year period, we shall provide CDKs(TM) for Elbit in return for disc mastering fees and per disc production fees. We have a limited operating history. While historically we have generated revenues primarily from development and use fees for client specific compact discs and the sale of custom compact discs, in fiscal 2002, most of our resources were directed to developing our corporate management consulting services in accordance with our fiscal 2002 operating plan, which we abandoned in October, 2002. 1 As of February 14, 2003, we had 36,196,267 shares of common stock issued and outstanding. Our stock is traded on the Over-the-Counter Bulletin Board under the symbol "CDKX." Stock Dividend - -------------- We have not issued a common stock dividend to date. Recent Developments - ------------------- In July 2002, we sold an investment in common stock to Target Growth Fund Ltd. subject to a one year note receivable in the amount of $450,000. With interest at 8% annually the Company's carrying value in this investment was $518,937. Accordingly, the Company recorded a loss of $68,933 on the sale of this investment during the six months ended September 30, 2002. Target Growth Fund Ltd. is a preferred stockholder of the Company. On October 22, 2002 we entered into an agreement to sell certain assets including the business of Diversified, CDK Financial and CDKNet, LLC to National Management Consultants, Inc. (National), formerly Universal Media Holdings, Inc. At the time of the transaction, James W. Zimbler served as President and a Director of National and also served as Secretary and Executive Vice President of CDKNet.com. On the same day, Steven A. Horowitz, our CEO and Andrew Schenker, our COO were appointed President, CEO and CFO respectively, of National. Certain of the assets comprising the consulting business of Diversified and investments we made were transferred to National. CDKNet, LLC has not been transferred to National. As a result, we remain in the business of producing custom compact disks. It was subsequently determined that certain intangible assets of CDKNet, LLC will not be transferred and therefore the transaction sale of assets to National, Inc has been modified. On January 5, 2003, we entered into a Revised Asset Purchase Agreement pursuant to which we will sell certain assets of Diversified to National. The revised sale price of the assets is a revised promissory note in the amount of $339,000. plus interest at the rate of five percent (5%), payable monthly until February 2006. The note will be secured by a security agreement on all the assets of National. In January 2003, the Board of Directors of the Company authorized the issuance of an aggregate of 72,000 Series A preferred shares to the minority shareholders of our Valueflash subsidiary in exchange for their common shares of Valueflash. After this transaction is completed, Valueflash will be a wholly-owned subsidiary. In Janaury 2003, the Board of Directors approved an adjustment in the conversion rate of the $165,000 of subordinated convertible debentures. The new conversion rate will be $.01 per common share. In January 2003, the Board of Directors authorized the issuance of 17,500 shares of series A preferred stock to Andrew Schenker for services rendered to the Company. In January 2003, the Board of Directors authorized the issuance of 470,000 shares of Series B preferred sstock to Robert M. Rubin and C. Dean McLain pursuant to a consulting agreement. On February 7, 2003, we announced that we entered into an agreement with Western Power & Equipment Corp. (Western) to acquire a portion of Western's business in California and Nevada. Western sells, leases, rents and services construction and industrial equipment for Case Corporation and 30 other manufacturers. CDK will acquire approximately $15 million of tangible assets and operations, which 2 reported nearly $50 million of total revenue for the year ended July 31, 2002, in exchange for the assumption or replacement of existing debt, a cash payment of $500,000. and a five-year promissory note of $500,000. Certain members of Western's management will receive approximately 60% of the post transaction combined entity. The completion of the transaction remains subject to several conditions including the approval of both companies board's, financing transactions including an institutional revolving credit facility and other financing for the purchase, receipt of other third party approvals, delivery of audited financial statements of the business to be acquired, additional due diligence and compliance with applicable regulatory requirements. Results of Operations - Three months ended December 31, 2002 compared to three months ended December 31, 2001 - ------------------------------------------------------------------------------ As a result of the sale of the assets of our Valueflash subsidiary in June 2001, we concentrated our resources on developing our financial services business. We did not have revenues or costs of goods sold for the three or six months ended December 31, 2002. During the three months ended December 31, 2002, we incurred a net loss of $232,906 on revenues of $0 compared to a net loss of $251,073 on revenues of $170,813 for the three months ended December 31, 2001. We did not generate any revenues from our CDK operations during the three months ended December 31, 2002 or from the financial services consulting business. For the three months ended December 31, 2002, other operating expenses were $245,226 compared to $287,722 for the three months ended December 31, 2001. Operating expenses consist of primarily consulting and other professional fees including $50,000 in consulting fees paid to George Sandhu, a representative of the preferred stockholders. Results of Operations - Six months ended December 31, 2002 compared to six months ended December 31, 2001 - ------------------------------------------------------------------------------ As a result of the sale of the assets of our Valueflash subsidiary in June 2001, we concentrated our resources on developing our financial services business. We did not have revenues or costs of goods sold for the three or six months ended December 31, 2002. During the six months ended December 31, 2002, we incurred a net loss of $499,334 on revenues of $0 compared to a net loss of $529,140 on revenues of $170,813 for the six months ended December 31, 2001. We did not generate any revenues from our CDK operations during the six months ended December 31, 2002 or from the financial services consulting business. For the six months ended December 31, 2002, other operating expenses were $486,225 compared to $578,838 for the six months ended December 31, 2001. Operating expenses consist of primarily consulting and other professional fees including $50,000 in consulting fees paid to George Sandhu, a representative of the preferred stockholders. Liquidity and Capital Resources - ------------------------------- As of December 31, 2002, we had $761,017 in cash and cash equivalents. Our principal commitments are $165,00 in subordinated convertible debentures and $28,500 in notes payable and $252,183 in accounts payable and accrued expenses. In October and November 2002, $400,000 cash was returned from one of the Company's investments. In December 2002, the Company received $500,000 of previously escrowed cash. Net cash used in operating activities was $437,878 for the six months ended December 31, 2002 compared to net cash used in operating activities of $537,360 for the six months ended December 31, 2001. Cash used by operations primarily resulted from net losses offset by non-cash depreciation and amortization. 3 Net cash provided in investing activities was $846,152 for the six months ended December 31, 2002 compared to cash used of $1,029,738 for the three months ended December 31, 2001. For the six months ended December 31, 2002, we received $400,000 cash from the maturity of certain investments and $500,000 of previously escrowed cash. In December 2002, we entered into a series of settlement agreements related to our purchase of certain companies during fiscal 2002. Certain aspects of the related stock purchase agreements had not been fully performed and the parties desired to settle their respective obligations. Accordingly, the Company has adjusted the purchase price and consideration issued downward to reflect the terms of the settlement agreements. The Company has reduced the amount of series A preferred stock issued and reduced the amount of goodwill initially recorded for these acquisitions. Net cash used by financing activities was $83,251 for the six months ended December 31, 2002 compared to cash provided of $13,867 for the six months ended December 31, 2001. We used cash for the six months ended December 31, 2002 to make principle payments on a note payable. Factors Affecting Future Results - -------------------------------- We do not provide forward looking financial information. However, from time to time statements are made by employees that may contain forward looking information that involve risks and uncertainties. In particular, statements contained in this quarterly report that do not historically contain predictions are made under the Safe Harbor Corporate Private Sector Litigation Reform Act of 1995. Our actual result of operations and financial condition have varied and may in the future vary significantly from those stated in any predictions. Factors that may cause these differences include without limitation the risk, uncertainties and other information discussed within this registration statement, as well as the accuracy of its internal estimate of revenue and operating expense levels. We will face a number of risk factors which may create circumstances beyond the control of management and adversely impact the ability to achieve our business plan. ITEM 3. CONTROLS AND PROCEDURES. ----------------------- Within the 90 days prior to the date of this report, the company carried out an evaluation, under the supervision and with the participation of the company's management, including the company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in the company's periodic SEC filings. 4 PART II-- OTHER INFORMATION Item 1. Legal Proceedings ----------------- None. Item 2. Changes in Securities --------------------- (a) Not applicable (b) On November 18, 2002, the Company's Board of Directors, with Mr. Steven Horowitz abstaining due to his previously disclosed interest in the transaction, adopted an amendment to the designation setting forth the rights of holders of Series A Preferred Stock. The amendment, and related agreement with the holders of Series A shares, eliminated the variable rate at which Series A shares could be converted into shares of the Company's Common Stock, fixed the conversion rate at $.01 per share (subject to adjustment in the event one or more stock splits or combinations), gave the Series A holders the right to vote on an "as converted basis," cured the existing accumulated and unpaid dividend arrearage by the issuance of 136,959 additional shares of Series A Preferred, and eliminated the cumulative dividend going forward. The changes were made, in part, to release the Company from any claims on the part of the Series A holders for the Company's failure to maintain a sufficient number of shares of common stock issuable upon conversion of the Series A shares. In January 2003, the Board authorized the designation of 470,000 Series B Convertible Shares of Preferred Stock each having a liquidation preference of $2.50 per share. The Series B shares are convertible into shares of the Company's common stock at $.0025 per share (subject to adjustment in the event of one or more common stock splits or combinations), do not have any dividend rights, or voting rights (except as provided by law), and are redeemable at the Company's option for $.0001 per share, if certain conditions relating to a consulting agreement have not been achieved. The Series B Shares are to be issued as compensation for certain consulting services. (c) On November 21, 2002, the Company issued 136,959 shares of Series A Preferred Stock as a dividend. The issuance of the shares is claimed to be exempt from registration under the Securities Act of 1933, pursuant to the interpretation of the General Counsel of the SEC (Sec. Act Release 929, 1936) that the issuance of a stock dividend does not involve a sale. On January 14, 2003, the Company issued 95,500 shares of Series A Preferred Stock to three person, in satisfaction of various claims made by such persons in connection with acquisitions made by the Company in May 2002. Of the shares issued, 35,500 may be cancelled in certain events. The shares were issued in reliance on Section 4(2) or 4(6) of the Securities Act, for private offerings not involving a public offering or for offers solely to accredited investors. On January 29, 2003, the Company set aside 72,000 Series A Shares to acquire the remaining interests of CDK Financial Corp., a more than 90% owned subsidiary. The shares will be issued in reliance upon an exemption from registration set forth in Section 4(2) or 4(6) of the Securities Act for offerings not involving a public offering or solely to accredited investors. On January 29, 2003, the company issued 17,500 shares of Series A Preferred Stock to Andrew Schenker, a director and Chief Operating Officer of the Company, relying upon Section 4(2) or 4(6) of the Securities Act for offerings not involving a public offering or solely to accredited investors. See Item 4, below. (d) Not applicable. Item 3. Defaults Upon Senior Securities ------------------------------- Not applicable. II-1 Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- On November 22, 2002, holders of 67% of the Company's voting stock, consisting of common stock and Series A Preferred Stock consented to the an amendment to the Company's certificate of incorporation to reverse split the common stock 50-for-one and increasing the number of authorized common shares from 40,000,000 to 100,000,000, after the reverse split. Both the reverse split and increase in authorizes shares may be effected by the board of directors any time until November 21, 2003. In addition the consenting stockholders re-elected Steven A. Horowitz, Anthony J. Bonomo and Andrew J. Schenker directors. An information statement concerning these actions was mailed to holders of common stock on December 6, 2002. Item 5. Other Information. ----------------- Not applicable. Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits -------- 2.1 Asset and Business Purchase Agreement between CDKnet.com, Inc., GCS Western Power & Equipment Corp., and Western Power & Equipment Corp. 2.2 Letter Amendment to Asset and Business Purchase Agreement between CDKnet.com, Inc., GCS Western Power & Equipment Corp., and Western Power & Equipment Corp. 3.1 Amended and Restated Series A Designation 3.2 Series B Designation 4.1 Amendment to 6% Convertible Debenture due September 1, 2003, dated January 29, 2003 between CDKnet.com, Inc. and International Investment Group Equities Fund N.V. 4.2 Amendment to 6% Convertible Debenture due September 1, 2003, dated January 29, 2003 between CDKnet.com, Inc. and New Millennium FSG Ltd. 10.1 Revised Asset Purchase Agreement between CDKnet.com, Inc. and National Management Consultants, Inc. (formerly Universal Media Holdings, Inc.) dated January 2003 10.2 Consulting Agreement between CDKnet.com, Inc., Robert M. Rubin and C. Dean McClain dated January 22, 2003 10.3 Settlement Agreement between CDKnet.com, Inc., Diversified Capital Holdings, LLC, JWZ Holdings, Inc. and Adelphia Holdings LLC dated December 31, 2002 10.4 Settlement Agreement between CDKnet.com, Inc., Diversified Capital Holdings, LLC, JWZ Holdings, Inc. and Lee Rubinstein dated December 31, 2002 10.5 Settlement Agreement between CDKnet.com, Inc., Diversified Capital Holdings, LLC and Adelphia Holdings, LLC dated December 31, 2002 10.6 Settlement Agreement between CDKnet.com, Inc., Diversified Capital Holdings, LLC and Lee Rubinstein dated December 31, 2002 10.7 Separation and Release Agreement between CDKnet.com, Inc. and James W. Zimbler dated January 13, 2003, effective October 22, 2002 II-2 10.8 Letter agreement dated October 15, 2002 between CDKnet.com, Inc. and the holders of Series A Preferred Stock 99.1 Certification pursuant to 18 U.S.C. 1350. 99.2 Certification pursuant to 18 U.S.C. 1350. (b) Forms 8-K --------- None. II-3 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CDKNET.COM, INC. Date: February 14, 2003 /s/ Steven A. Horowitz ----------------------- Chairman, Chief Executive Officer and Secretary Date: February 14, 2003 /s/ Timothy J. Mayette ----------------------- Chief Financial Officer II-4 CERTIFICATION I, Steven A. Horowitz, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of CDKNet.Com, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respect the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, is made known to me by others, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. February 14, 2003 /s/ Steven A. Horowitz ------------------------------------ Steven A. Horowitz, Chairman and CEO CERTIFICATION I, Timothy J. Mayette, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of CDKNet.Com, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respect the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, is made known to me by others, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. February 14, 2002 /s/ Timothy J. Mayette -------------------------- Timothy J. Mayette, CFO EX-99.E 7 exh-e_11958.txt UNAUDITED PRO-FORMA FINANCIAL STATEMENTS Western Power & Equipment Corp. Unaudited Pro-forma Financial Statements ($000, except per share amounts) STATEMENT OF OPERATIONS 6-Months
Pro-forma After WPEC CDK Pro-forma Completion 01/31/03 12/31/02 Adjustments of Merger ------- ------- ------- ------- Total Revenues 48,757 -- 48,757 Total Cost of Sales 41,866 -- 41,866 ------- ------- ------- ------- Total Gross Margin 6,891 -- -- 6,891 Operating Expenses 4,664 486 5,150 ------- ------- ------- ------- Operating Income 2,227 (486) -- 1,741 Interest Expense (1,796) (9) (1,805) Other Income (Expense) 95 (61)(1) 34 ------- ------- ------- ------- Total Interest/Other (1,701) (70) -- (1,771) Income (Loss) Before Taxes 526 (556) -- (30) Income Tax Provision 25 -- 25 ------- ------- ------- ------- Net Income (Loss) 501 (556) -- (55) ======= ======= ======= ======= Weighted Average Common 4,003 36,196 26,796(2) 9,400 Shares Outstanding Net Income (Loss) per Share $ 0.13 $ (0.02) $ (0.01) ======= ======= =======
(1) Includes preferred stock dividend of $57 (2) Reflects reverse stock split at time of merger Western Power & Equipment Corp. Unaudited Pro-forma Financial Statements ($000, except per share amounts) STATEMENT OF OPERATIONS 6-Months
Pro-forma After WPEC CDK Pro-forma Completion 01/31/02 12/31/01 Adjustments of Merger ------- ------- ------- ------- Total Revenues 54,729 171 54,900 Total Cost of Sales 47,762 140 47,902 ------- ------- ------- ------- Total Gross Margin 6,967 31 -- 6,998 Operating Expenses 5,121 579 5,700 ------- ------- ------- ------- Operating Income 1,846 (548) -- 1,298 Interest Expense (2,284) (6) (2,290) Other Income (Expense) 54 (29)(1) 25 ------- ------- ------- ------- Total Interest/Other (2,230) (35) -- (2,265) Income (Loss) Before Taxes (384) (583) -- (967) Income Tax Provision 24 -- 24 ------- ------- ------- ------- Net Income (Loss) (408) (583) -- (991) ======= ======= ======= ======= Weighted Average Common 3,403 31,718 22,318(2) 9,400 Shares Outstanding Net Income (Loss) per Share $ (0.12) $ (0.02) $ (0.11) ======= ======= =======
(1) Includes preferred stock dividend of $53 (2) Reflects reverse stock split at time of merger Western Power & Equipment Corp. Unaudited Pro-forma Financial Statements ($000, except per share amounts) BALANCE SHEET
Pro-forma After WPEC CDK Pro-forma Completion 01/31/03 12/31/02 Adjustments of Merger ------- ------- ------- ------- Current Assets: Cash 5 761 2,000 2,766 Accounts Receivable (Net) 6,974 6,974 Inventory (Net) 23,126 147 23,273 Prepaid Expenses 129 71 200 Other -- 100 100 ------- ------- ------- ------- Total Current Assets 30,234 1,079 2,000 33,313 Long-term Assets: Property, Plant, & Equipment (Net) 3,138 107 3,245 Rental Equipment (Net) 15,052 -- 15,052 Note Receivable -- 559 559 Other 152 12 164 ------- ------- ------- Total Long-term Assets 18,342 678 -- 19,020 ------- ------- ------- ------- Total Assets 48,576 1,757 2,000 52,333 ======= ======= ======= =======
Western Power & Equipment Corp. Unaudited Pro-forma Financial Statements ($000, except per share amounts) BALANCE SHEET
Pro-forma After WPEC CDK Pro-forma Completion 01/31/03 12/31/02 Adjustments of Merger ------- ------- ------- ------- Current Liabilities: Accounts Payable and Accrued Expenses 8,828 252 9,080 Short-term Borrowings 34,178 29 34,207 Term Debt 140 140 Accrued Payroll and Vacation 506 506 Capital Lease Obligation 6 6 Borrowing under Floor Plan Financing 6,625 6,625 Other -- 38 38 ------- ------- ------- ------- Total Current Liabilities 50,283 319 -- 50,602 Long-term Liablilities: Capital Lease Obligation 928 -- 928 Other -- 256 256 ------- ------- ------- ------- Total Long-term Liabilities 928 256 -- 1,184 Total Liabilities 51,211 575 -- 51,786 Stockholders' Equity: Common Stock 4 3 (3)(1) 4 Preferred Stock -- 1,480 -- 1,480 Additional Paid-in Capital 16,025 23,070 (22,196)(1)(2) 16,899 Treasury Stock (844) (16) 844(2) (16) Accumulated Deficit (17,820) (23,355) 23,355(2) (17,820) ------- ------- ------- ------- Total Stockholders' Equity (2,635) 1,182 2,000 547 ------- ------- ------- ------- Total Liabilities & Equity 48,576 1,757 2,000 52,333 ======= ======= ======= =======
(1) Reflects account receivable for certain asset sales at time of closing merger transaction (2) Consolidation elimination entry -----END PRIVACY-ENHANCED MESSAGE-----