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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported):
July 12, 1999
TIME WARNER INC.
(Exact Name of Registrant Specified in Charter)
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Delaware 1-12259 13-3527249
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(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification No.)
Incorporation)
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75 Rockefeller Plaza, New York, NY 10019
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(Address of Principal Executive Office) (Zip Code)
(212) 484-8000
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(Registrant's telephone number)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS
AGREEMENT OF MERGER AND CONTRIBUTION. On July 12, 1999, Time Warner Inc.
entered into an Agreement of Merger and Contribution with CDnow, Inc. and Sony
Corporation of America to combine the businesses of CDnow and Columbia House,
the leading club-based retailer of music and videos. Columbia House is owned
equally by subsidiaries of Time Warner and Sony. The parties to the Merger
Agreement will create a new Delaware holding company which will be owned 26% by
CDnow's shareholders immediately before the merger, 37% by Time Warner and 37%
by Sony. The new company will be organized to include two separate divisions: an
online/retail division and a club division. A copy of the Agreement of Merger
and Contribution is attached as Exhibit 2.1 and is incorporated by reference.
Under the Merger Agreement, CDnow will be merged with a subsidiary of the
new holding company. Upon consummation of the merger, CDnow shareholders will
receive one share of Class A common stock of the new company for each share of
CDnow common stock they own. The Class A common stock will be publicly traded.
The Merger Agreement also provides that, simultaneously with the merger, Time
Warner and Sony will cause their relevant subsidiaries to contribute their
interests in Columbia House (and Columbia House's Mexican business) to the new
company in exchange for shares of Class B common stock of the new company which,
together with interests in the new company received in the Canadian transaction
described below, will represent 74% ownership and control of the new company.
The Class B common stock will not be publicly traded, but will be convertible
into Class A common stock on a 1-for-1 share basis. Time Warner, Sony and the
new company will enter into a Registration Rights Agreement relating to the
shares of Class A common stock issuable upon conversion of the outstanding Class
B common stock. A copy of the form of Registration Rights Agreement is attached
as Exhibit 10.8 and is incorporated by reference.
After the closing, CDnow and Columbia House will become wholly-owned
subsidiaries of the new company.
The parties intend the transaction to be tax-free to CDnow shareholders.
The parties expect to account for the transaction under the purchase method of
accounting.
In connection with a Master Canadian Transaction Agreement, entered into
on July 12, 1999, assets and liabilities of Columbia House Canada are to be
transferred to a wholly-owned Canadian subsidiary of the new holding company in
exchange for shares of Class B common stock and exchangeable shares of the
Canadian subsidiary, which are exchangeable into shares of common stock of the
new holding company. A copy of this agreement is attached as Exhibit 10.3 and is
incorporated by reference.
STRATEGIC COMMITMENTS. At the closing, Time Warner and Sony will enter
into a Strategic Commitments Letter with a five year term that provides for
strategic commitments to the new company. Time Warner and Sony will each make
the new company their primary vehicle to pursue the packaged music e-commerce
business, provided that neither Time Warner nor Sony will be limited in selling
music or other products to other on-line retailers. The web sites controlled by
the recorded music businesses of Time Warner and Sony in the U.S. and Canada
will contain Abuy now@ links to the new company's on-line retail web site. Sony
and Time Warner will each provide the new company with opportunities to purchase
$25 million annually of promotion and advertising which may include standard
advertising, online advertising, contextual marketing, product ride-along
marketing and commercially reasonable efforts to provide access to certain
databases, as well as certain musical artist content, music videos and various
other materials for promotional purposes. The commitments of Sony and Time
Warner are subject to a number of caveats and qualifications as set forth in the
Strategic Commitments Letter. A copy of the form of Strategic Commitments Letter
is attached as Exhibit 10.5 and is incorporated by reference.
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POST-CLOSING FINANCING COMMITMENTS. Under the Merger Agreement, Time
Warner and affiliates of Sony will each unconditionally guarantee for three
years one-half of a new credit facility to be entered into by the new holding
company upon the closing of the merger. This guarantee will cover a credit
facility in the following amount:
net debt of Columbia House at closing, which, based on March
31, 1999 balances, would have been approximately $300
million, and
$150 million, minus new financing by CDnow between the
signing and closing of the transaction, as permitted under
the Merger Agreement.
CORPORATE GOVERNANCE. At closing, Time Warner and Sony will enter
into a Governance Agreement that provides for post-closing governance
matters with respect to the new holding company. The new holding company
board will initially consist of 12 directors: (1) four designees from Time
Warner, (2) four designees from Sony, (3) Jason Olim, who is currently
CDnow's president and chief executive officer, (4) two independent
directors, and (5) the chief executive officer of the new company. The
Restated Certificate of Incorporation provides that each share of Class B
common stock may be converted into a share of Class A common stock at any
time at the option of the holder. The Restated Certificate of
Incorporation also provides for mandatory conversion of any share of Class
B common stock transferred to a third party and mandatory conversion of
all shares of Class B common stock if the Class B stockholders
collectively own less than one-third of the Class B common stock issued to
them in the transaction. The Governance Agreement contains a standstill
provision which, for a period of three years, limits Time Warner and Sony,
subject to exceptions described in the agreement, from acquiring
additional voting stock in the new holding company if Time Warner and Sony
would collectively own more than 85% of the voting stock of the new
holding company. Additionally, the Governance Agreement prohibits Time
Warner and Sony from transferring any shares of Class B common stock for a
period of three years, subject to exceptions identified in the Governance
Agreement. The disinterested stockholders and/or independent directors
must also approve a list of activities specified in the Governance
Agreement. The Class A common stock and Class B common stock will have the
right to vote together on most matters, except that the Class B common
stock will initially have the right to vote as a class to elect eight
directors. This number decreases if Time Warner or Sony decreases its
Class B common stock ownership, under a schedule described in the Restated
Certificate of Incorporation, with such number of directors being
allocated between Time Warner and Sony as described in the Governance
Agreement. Additionally, numerous fundamental actions by the new holding
company require the approval of Time Warner and Sony so long as they
individually own at least two-thirds of the Class B common stock they
received in the transaction.
A copy of the form of Governance Agreement is attached as Exhibit
10.6 and is incorporated by reference. A copy of the form of the new
company's Restated Certificate of Incorporation is attached as Exhibit
10.7 and is incorporated by reference.
CLOSING. The parties expect the transaction to close by the end of
1999. The closing of the transaction is conditioned upon, among other
things, shareholder approval by CDnow and other customary terms and
conditions, including clearance by U.S. and Canadian antitrust
authorities. CDnow will solicit its shareholders by means of a proxy
statement, which may be reviewed by the Securities and Exchange Commission
prior to its mailing.
NO SOLICITATION. The Merger Agreement contains detailed provisions
prohibiting CDnow from seeking an alternative transaction. These
provisions prevent CDnow, its subsidiaries, and their officers, directors,
employees, advisors or representatives from directly or indirectly through
another person soliciting, initiating, knowingly encouraging
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(including by furnishing information), or knowingly taking any action
designed to facilitate, any inquiries or the making of a proposal which
constitutes, or may be reasonably expected to lead to, any CDnow Takeover
Proposal, as defined in the Merger Agreement, or participating in
discussions or negotiations regarding any CDnow Takeover Proposal.
At any time during the 30 day period following the date of the Merger
Agreement, in response to a Superior CDnow Proposal, as defined in the
Merger Agreement, that is unsolicited and does not result from a breach of
the no-solicitation provisions of the Merger Agreement and subject to
providing written notice to Time Warner and Sony, CDnow may furnish
information under a confidentiality agreement no less restrictive than the
confidentiality agreement with Time Warner and Sony and participate in
discussions or negotiations regarding the Superior CDnow Proposal. During
the 30-day period only, CDnow may terminate the Merger Agreement following
receipt of a Superior CDnow Proposal that is unsolicited and does not
result from a breach of the no-solicitation provisions of the Merger
Agreement and may enter into an agreement with respect to the Superior
CDnow Proposal, but only after the third business day following receipt by
Time Warner and Sony of written notice from CDnow to that effect and only
if a termination fee of $31 million is paid as described below. In
addition, there are other situations in which a termination fee is
payable, as described below.
STOCK OPTION AGREEMENT. Upon the signing of the Merger Agreement,
CDnow entered into a Stock Option Agreement granting Time Warner and Sony
an irrevocable option to purchase 4,531,721 shares of CDnow common stock
at an exercise price of $17.9689 per share. Time Warner and Sony may only
exercise the option under the circumstances where they are entitled to
receive a termination fee under the Merger Agreement, as described below.
If the option becomes exercisable, Time Warner and Sony may elect to
exercise a cash-out right and receive an amount in cash per option share
equal to (x) the average closing price per share for the ten trading days
commencing on the 12th trading day immediately preceding the date Time
Warner and Sony notify CDnow of their intention to exercise their cash-out
rights minus (y) $17.9689. If prior to the time the cash-out right is
exercised, Time Warner and Sony received a termination fee, then the
amount of the cash-out may be limited as described in the Stock Option
Agreement. However, to the extent the cash-out right is so limited, Time
Warner and Sony will continue to be entitled to purchase for cash the
shares for which the cash-out right may not be exercised.
A copy of the Stock Option Agreement is attached as Exhibit 10.1
hereto and is incorporated by reference.
TERMINATION FEE. The Merger Agreement requires CDnow to pay a
termination fee to Time Warner and Sony in the circumstances summarized
below:
(i) a $19 million termination fee if (A) and (B) below occur:
(A) following the making of a CDnow Takeover Proposal,
or the announcement of the intention to make such a proposal:
(1) CDnow, on the one hand, or Time Warner and Sony,
on the other hand, terminate the Merger Agreement
because the transaction has not closed by March 13,
2000, or
(2) CDnow, on the one hand, or Time Warner and Sony,
on the other hand, terminate the Merger
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Agreement if CDnow shareholder approval has not been
obtained at the CDnow shareholder meeting called for
that purpose, or
(3) Time Warner and Sony terminate the Merger
Agreement as a result of CDnow's breach or failure to
perform in any material respect a representation,
warranty or covenant which is not cured within 20
business days, and
(B) within 12 months after termination CDnow enters into any
alternative agreement with respect to, or approves, recommends or
consummates, or a tender or exchange offer is consummated which
constitutes, a CDnow Takeover Transaction, which is defined in the
Merger Agreement.
(ii) a $31 million termination fee if (A) or (B) below occurs:
(A) Time Warner and Sony terminate the Merger Agreement because
CDnow (or any of its directors or officers) breaches the
nonsolicitation provisions described above and within 18
months after termination enters into an alternative
agreement with respect to, or approves, recommends or
consummates, or a tender or exchange offer is consummated
which constitutes, a CDnow Takeover Transaction, or
(B) during the 30-day period following the date of the Merger
Agreement CDnow terminates the Merger Agreement because it
receives and enters into an agreement with respect to the
Superior CDnow Proposal as described above; or
(C) Time Warner and Sony terminate because (i) CDnow or the
CDnow Board of Directors withdraws or modifies or proposes
to withdraw or modify its recommendation of the merger or
enters into an agreement related to, or approves or
recommends or proposes to approve or recommend a CDnow
Takeover Transaction, (ii) CDnow or any of its directors or
officers makes any disclosure that has the effect of
withdrawing, modifying or changing the approval of the
Merger Agreement, approving or recommending a CDnow Takeover
Transaction or approving or recommending a tender or
exchange offer that is a CDnow Takeover Proposal or (iii) a
tender offer or exchange offer constituting a CDnow Takeover
Transaction is consummated.
The maximum aggregate amount of termination fees, together with any
value received by Time Warner and Sony under the cash-out right under the
Stock Option Agreement, is:
$25 million in the case of the events giving rise to the $19
million termination fee described above; or
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$31 million in the case of the events giving rise to the $31
million termination fee described above.
However, to the extent the cash-out right is so limited, Time Warner
and Sony will continue to be entitled to purchase for cash the shares for
which the cash-out right may not be exercised.
SHAREHOLDER AGREEMENT. Upon the signing of the Merger Agreement,
Jason Olim, Jonathan Diamond, Matthew Olim, Robert David Grusin and James
Coane, each a director and a shareholder of CDnow, entered into a
Shareholder Agreement with Time Warner and Sony. The Shareholder Agreement
requires the shareholders to vote their shares of CDnow common stock in
favor of the adoption of the Merger Agreement and against any Acquisition
Agreement or CDnow Takeover Proposal, which are defined in the Merger
Agreement, and against any amendments to CDnow's charter documents which
would impede the pending transactions or change the voting rights of CDnow
capital stock. The Shareholder Agreement also provides that the
shareholders will not sell or otherwise voluntarily dispose of any of
their shares of CDnow common stock except into an all cash tender offer
constituting a Superior CDnow Proposal, within three days of the tender
offer's expiration date, or as otherwise contemplated by the terms of the
Shareholder Agreement. As of July 12, 1999, the shareholders who signed
the Shareholder Agreement owned collectively approximately 24% of the
outstanding shares of CDnow common stock. The Shareholder Agreement
terminates upon termination of the Merger Agreement.
A copy of the Shareholder Agreement is attached as Exhibit 10.2 and
is incorporated by reference.
INTERIM FINANCING AVAILABILITY. Upon the signing of the Merger
Agreement, Time Warner and Sony entered into a Convertible Loan Agreement
to provide CDnow with a $30 million secured credit line beginning December
16, 1999. This financing is available to CDnow whether or not the Merger
Agreement is still in effect, unless the Merger Agreement is terminated
due to material breaches by CDnow, CDnow entering into an acquisition
agreement with another party or violating the nonsolicitation provisions,
a tender offer for CDnow or unless CDnow terminates the Merger Agreement
for any reason other than because the transaction has not closed by March
13, 2000 or because of a material breach by Time Warner or Sony. The loan
is convertible into CDnow common stock based on a conversion price
described in the loan agreement only if the Merger Agreement is
terminated.
A copy of the Convertible Loan Agreement is attached as Exhibit 10.4
and is incorporated by reference.
A copy of the joint press release, dated July 13, 1999 issued by
CDnow, Time Warner and Sony to announce the transaction is attached as
Exhibit 99.1 and is incorporated by reference.
The descriptions above are summaries and are qualified in their
entirety by the attached exhibits.
Caution Concerning Forward-Looking Statements
This report includes certain Aforward-looking statements@ within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on management's current expectations and are
naturally subject to uncertainty and changes in circumstances. Actual
results may vary materially from the expectations contained herein
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due to changes in economic, business, competitive and/or regulatory
factors, as well as difficulty of integrating the organizations,
operations and personnel of CDnow and Columbia House, the potential for
impairment of relationships with employees or customers and the
uncertainty inherent in the execution of a new business plan for the
combined company. More detailed cautionary information is set forth in the
most recent quarterly report and other filings with the Securities and
Exchange Commission made by the companies named herein. None of the
companies named herein are under any obligation to (and expressly disclaim
any such obligation to) update their forward-looking statements whether as
a result of new information, future events or otherwise.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(c) Exhibits
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Exhibit Number Description
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2.1 Agreement of Merger and Contribution, dated as of July 12, 1999, by
and among Time Warner Inc., Sony Corporation of America, CDnow, Inc.,
Delaware Holdco Corporation, Pennsylvania Subsidiary, Inc., Delaware
Sub I L.L.C. and Delaware Sub II L.L.C.
10.1 Stock Option Agreement, dated as of July 12, 1999, among CDnow, Inc.,
Time Warner Inc., and Sony Corporation of America.
10.2 Shareholder Agreement, dated as of July 12, 1999, among Time Warner
Inc., Sony Corporation of America, Jason Olim, Jonathan Diamond,
Matthew Olim, Robert David Grusin and James Coane.
10.3 Master Canadian Transaction Agreement, dated as of July 12, 1999,
among Warner Music Canada Ltd., Sony Music Entertainment (Canada)
Inc., The Columbia House Company (Canada), 3030809 Nova Scotia ULC
and Delaware Holdco Corporation.
10.4 Convertible Loan Agreement, dated July 12, 1999, between CDnow, Inc.,
as borrower, and Sony Music Entertainment Inc. and Time Warner Inc.,
as lenders.
10.5 Form of Strategic Commitments Letter among Time Warner Inc., Sony
Corporation of America and Delaware Holdco Corporation.
10.6 Form of Governance Agreement among Delaware Holdco Corporation, Sony
Corporation of America, Sony Music Entertainment (Canada), Inc., Time
Warner Inc. and Warner Music Canada Ltd.
10.7 Form of Restated Certificate of Incorporation of Delaware Holdco
Corporation.
10.8 Form of Registration Rights Agreement, among Time Warner Inc., Sony
Corporation of America and Delaware Holdco Corporation.
99.1 Joint Press Release, dated July 13, 1999, issued by CDnow, Inc., Time
Warner Inc. and Sony Corporation of America.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
Date: July 14, 1999
TIME WARNER INC.
by
/s/ SPENCER B. HAYS
_______________________________
Name: Spencer B. Hays
Title: Vice President and
Deputy General Counsel
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EXHIBIT INDEX
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Exhibit Number Description
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2.1 Agreement of Merger and Contribution, dated as of July
12, 1999, by and among Time Warner Inc., Sony
Corporation of America, CDnow, Inc., Delaware Holdco
Corporation, Pennsylvania Subsidiary, Inc., Delaware
Sub I L.L.C. and Delaware Sub II L.L.C.
10.1 Stock Option Agreement, dated as of July 12, 1999, among CDnow,
Inc., Time Warner Inc., and Sony Corporation of America.
10.2 Shareholder Agreement, dated as of July 12, 1999,
among Time Warner Inc., Sony Corporation of America,
Jason Olim, Jonathan Diamond, Matthew Olim, Robert
David Grusin and James Coane.
10.3 Master Canadian Transaction Agreement, dated as of July 12, 1999,
among Warner Music Canada Ltd., Sony Music Entertainment
(Canada) Inc., The Columbia House Company (Canada), 3030809
Nova Scotia ULC and Delaware Holdco Corporation.
10.4 Convertible Loan Agreement, dated July 12, 1999, between CDnow,
Inc., as borrower, and Sony Music Entertainment Inc. and Time
Warner Inc., as lenders.
10.5 Form of Strategic Commitments Letter among Time Warner Inc.,
Sony Corporation of America and Delaware Holdco Corporation.
10.6 Form of Governance Agreement among Delaware Holdco
Corporation, Sony Corporation of America, Sony Music
Entertainment (Canada), Inc., Time Warner Inc. and Warner Music
Canada Ltd.
10.7 Form of Restated Certificate of Incorporation of Delaware Holdco
Corporation.
10.8 Form of Registration Rights Agreement, among Time Warner Inc.,
Sony Corporation of America and Delaware Holdco Corporation.
99.1 Joint Press Release, dated July 13, 1999, issued by CDnow, Inc.,
Time Warner Inc. and Sony Corporation of America.
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STATEMENT OF DIFFERENCES
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The section symbol shall be expressed as...................................'SS'
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================================================================================
AGREEMENT OF MERGER AND CONTRIBUTION
Among
TIME WARNER INC.
SONY CORPORATION OF AMERICA
CDNOW, INC.
DELAWARE HOLDCO CORPORATION
PENNSYLVANIA SUBSIDIARY, INC.
DELAWARE SUB I L.L.C.
And
DELAWARE SUB II L.L.C.
Dated as of July 12, 1999
================================================================================
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Index of Defined Terms in the
Agreement of Merger and Contribution
Defined in
Term Section
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Acquisition Agreement............................................7.02(b)
affiliate..........................................................11.03
Arbitration................................................11.10(b)(iii)
Arbitration
Decision.............................................11.10(b)(iii)(G)
Arbitration
Hearing..............................................11.10(b)(iii)(D)
Arbitrators.............................................11.10(b)(iii)(B)
ARC..............................................................3.05(b)
Articles of Merger..................................................1.04
Audio License
Agreements....................................................Recitals
Canadian Competition
Act...........................................................3.05(b)
Canadian Competition Act
Approval......................................................3.05(b)
Canadian Sub....................................................Recitals
Canadian Sub Common
Shares.......................................................Recitals
Canadian Sub Exchange
Shares.......................................................Recitals
Canadian Transaction
Agreements...................................................Recitals
Canadian Transactions...........................................Recitals
CDnow...........................................................Preamble
CDnow Benefit Plans.................................................3.10
CDnow Board......................................................3.04(b)
CDnow By-laws.......................................................3.01
CDnow Capital Stock.................................................3.03
CDnow Charter.......................................................3.01
CDnow Common Stock ........................................Recitals
CDnow Disclosure
Letter........................................................3.02(a)
CDnow Employee Stock
Option........................................................8.04(d)
CDnow ERISA Affiliate...............................................3.10
CDnow Financing............................................7.01(a)(x)(A)
CDnow Financing
Warrants......................................................8.14(b)
CDnow Form S-4 Date.................................................3.06
CDnow Material Adverse
Effect...........................................................3.01
CDnow Online........................................................3.06
CDnow Pension Plans..............................................3.11(a)
CDnow SEC Documents.................................................3.06
CDnow Shareholder
Agreement....................................................Recitals
Cdnow Shareholder
Approval......................................................3.04(c)
CDnow Shareholders
Meeting.......................................................8.01(d)
CDnow Stock Plans................................................8.04(d)
CDnow Subsidiaries..................................................3.01
CDnow Takeover
Proposal..................................................7.02(e)(ii)
CDnow Takeover
Transaction...................................................7.02(b)
CDnow Warrants......................................................3.03
CDnow Working Capital
Facility......................................................8.14(b)
Certificates.....................................................2.02(b)
Closing.............................................................1.03
Closing Date........................................................1.03
Columbia House..................................................Recitals
Columbia House and Columbia
House Canada Balance
Sheet............................................................4.06
Columbia House and Columbia
House Canada Financial
Statements.......................................................4.06
Columbia House Balance
Sheet............................................................4.05
Columbia House Canada...........................................Recitals
Columbia House Closing
Date Balance Sheet............................................8.14(a)
Columbia House Credit
Agreement....................................................Recitals
Columbia House Entities.............................................4.01
Columbia House Entities
Benefit Plans....................................................4.10
Columbia House Entities
Canadian Plan.................................................4.11(g)
Columbia House Entities
Disclosure Letter.............................................4.02(a)
Columbia House Entities
Financial Statements.............................................4.06
Columbia House Entities
Foreign Plan..................................................4.11(g)
Columbia House Entities
Material Adverse Effect..........................................4.01
Columbia House Entities
Pension Plans.................................................4.11(a)
Columbia House ERISA
Affiliate........................................................4.10
Columbia House Mexico...........................................Recitals
Columbia House Mexico
Balance Sheet....................................................4.06
Columbia House Mexico
Financial Statements.............................................4.06
Columbia House Subsidiaries.........................................4.01
Code............................................................Recitals
Confidentiality Agreement........................................7.02(b)
Consent..........................................................3.05(b)
Contract.........................................................3.05(a)
Contribution Transactions........................................1.02(b)
Control-Shifting CDnow
Takeover Transaction..........................................8.07(b)
D&O Insurance....................................................8.06(a)
Delaware Sub I..................................................Preamble
Delaware Sub II.................................................Preamble
Designated CDnow SEC
Documents........................................................3.06
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Defined in
Term Section
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Dissent Shares...................................................2.01(d)
Effective Time......................................................1.04
Environmental Laws..................................................3.17
ERISA............................................................3.11(a)
Exchange Act.....................................................3.05(b)
Exchange Agent...................................................2.02(a)
Exchange Fund....................................................2.02(a)
Exchangeable Shares.............................................Recitals
Filed CDnow SEC Documents...........................................3.08
Form S-4............................................................3.07
GAAP................................................................3.06
Governance Agreement............................................Recitals
Governmental Entity..............................................3.05(b)
Guaranteed Facility..............................................8.14(a)
Hazardous Substances................................................3.17
Holdco..........................................................Preamble
Holdco Class A Common
Stock.........................................................Recitals
Holdco Class B Common
Stock.........................................................Recitals
Holdco Common Stock.............................................Recitals
Holdco Employee Stock
Option........................................................8.04(d)
HSR Act..........................................................3.05(b)
Indemnity Agreement.............................................Recitals
Initial Agreements..............................................Recitals
Initial Period...................................................7.02(a)
Intellectual Property
Rights...........................................................3.20
Interim Loan Documents..........................................Recitals
Jason Olim Employment
Agreement....................................................Recitals
Judgment.........................................................3.05(a)
Law..............................................................3.05(a)
Lenders.........................................................Recitals
Liens............................................................3.02(a)
Losses...........................................................8.06(e)
Master Canadian Transaction
Agreement....................................................Recitals
material adverse effect............................................11.03
Maximum Premium..................................................8.06(a)
MCo.............................................................Recitals
Mediation...................................................11.10(b)(ii)
Mediator.................................................11.10(b)(ii)(A)
Merger..........................................................Recitals
Merger Consideration.........................................2.01(c)(ii)
Merger Share Issuance............................................1.01(a)
Merger Transactions..............................................1.01(a)
Multiemployer Plan...............................................3.11(c)
Music Video License
Agreements ..................................................Preamble
Nasdaq..............................................................8.11
N2K..............................................................7.02(a)
Outside Date.................................................10.01(b)(i)
PBCL.............................................................1.01(a)
Pennsylvania Sub................................................Preamble
Permitted Tax
Distributions...............................................7.01(b)(i)
person.............................................................11.03
Primary Cdnow
Executives....................................................3.11(e)
Principal CDnow
Shareholders.................................................Recitals
Proxy Statement..................................................3.05(b)
qualified stock
options....................................................8.04(a)(i)
Registration Rights
Agreement....................................................Recitals
Release.............................................................3.17
SEC..............................................................3.05(b)
Securities Act......................................................3.06
Share Issuances..................................................1.02(b)
SMEI............................................................Recitals
Sony............................................................Preamble
Sony Audio License
Agreements....................................................Recitals
Sony Canada.....................................................Recitals
Sony Capital
Corporation..................................................Recitals
Sony Columbia House
Mexico Shares....................................................4.03
Sony Contribution................................................1.02(b)
Sony Contribution Share
Issuance......................................................1.02(b)
Sony Contribution
Transactions..................................................1.02(b)
Sony Corporation................................................Recitals
Sony Designees......................................................8.15
Sony Disclosure Letter...........................................6.02(a)
Sony Manufacturing
Agreements...................................................Recitals
Sony MCo Partnership
Interest......................................................1.02(b)
Sony Mexico.....................................................Recitals
Sony Mexico Shares...............................................1.02(b)
Sony Music Video License
Agreements...................................................Preamble
Sony Partnership
Interests.....................................................1.02(b)
Sony U.S. Contribution...........................................1.02(b)
Stock Option Agreement..........................................Recitals
Strategic Commitments
Dispute....................................................11.10(b)(i)
Strategic Commitments
Letter.......................................................Recitals
Subchapter D.....................................................2.01(d)
subsidiary.........................................................11.03
Superior CDnow
Proposal...................................................7.02(e)(i)
Supplemental Agreements.........................................Recitals
Supplemental Canadian
Agreements....................................................Recitals
Surviving Corporation............................................1.01(a)
Tax Return.......................................................3.09(k)
Taxes............................................................3.09(k)
Termination Fee..................................................8.07(b)
Time Warner.....................................................Preamble
Time Warner Audio License
Agreements...................................................Recitals
Time Warner Canada..............................................Recitals
Time Warner Columbia House
Mexcio Shares....................................................4.03
ii
<PAGE>
Defined in
Term Section
- ---- -------
Time Warner Contribution.........................................1.02(a)
Time Warner Contribution
Share Issuance................................................1.02(a)
Time Warner Contribution
Transactions..................................................1.02(a)
Time Warner Designees...............................................8.15
Time Warner Disclosure
Letter........................................................5.02(a)
Time Warner Inc.................................................Recitals
Time Warner Manufacturing
Agreements....................................................Recitals
Time Warner MCo Partnership
Interest......................................................1.02(a)
Time Warner Mexico..............................................Recitals
Time Warner Mexico Shares........................................1.02(a)
Time Warner Music Video
License Agreements...........................................Preamble
Time Warner Partnership
Interests.....................................................1.02(a)
Time Warner Sub.................................................Recitals
Time Warner U.S.
Contribution..................................................1.02(a)
Trademark License
Agreements....................................................Recitals
Transaction Agreements..........................................Recitals
Transactions.....................................................1.02(b)
Transfer Taxes......................................................8.09
TWI.............................................................Recitals
Vco.............................................................Recitals
Voting Columbia House
Entities Debt....................................................4.03
Voting CDnow Debt...................................................3.03
Voting Preferred
Share........................................................Recitals
Warner Music Group..............................................Recitals
Year 2000 Compliant..............................................3.16(b)
iii
<PAGE>
TABLE OF CONTENTS
Page
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ARTICLE I
The Merger and the Contributions
SECTION 1.01. The Merger......................................................7
SECTION 1.02. The Contributions...............................................8
SECTION 1.03. Closing........................................................10
SECTION 1.04. Effective Time.................................................10
ARTICLE II
Effect of Merger on the Capital Stock of the
Constituent Corporations in the Merger;
Exchange of Certificates in the Merger
SECTION 2.01. Effect on Capital Stock........................................11
SECTION 2.02. Exchange of Certificates.......................................12
ARTICLE III
Representations and Warranties of CDnow
SECTION 3.01. Organization, Standing and Power...............................16
SECTION 3.02. CDnow Subsidiaries; Equity Interests...........................17
SECTION 3.03. Capital Structure..............................................17
SECTION 3.04. Authority; Execution and Delivery;
Enforceability...............................................19
SECTION 3.05. No Conflicts; Consents.........................................20
SECTION 3.06. SEC Documents; Undisclosed Liabilities.........................22
SECTION 3.07. Information Supplied...........................................23
SECTION 3.08. Absence of Certain Changes or Events...........................23
SECTION 3.09. Taxes..........................................................26
SECTION 3.10. Absence of Changes in Benefit Plans............................28
SECTION 3.11. ERISA Compliance; Excess Parachute
Payments.....................................................29
SECTION 3.12. Litigation.....................................................31
SECTION 3.13. Compliance with Applicable Laws................................31
SECTION 3.14. Brokers; Schedule of Fees and Expenses.........................31
SECTION 3.15. Opinion of Financial Advisor...................................32
SECTION 3.16. Year 2000 Compliance...........................................32
SECTION 3.17. Environmental Matters..........................................33
SECTION 3.18. Contracts......................................................34
SECTION 3.19. Title to Properties............................................35
SECTION 3.20. Intellectual Property..........................................36
<PAGE>
Page
----
SECTION 3.21. Labor Matters..................................................36
SECTION 3.22. Insurance......................................................37
ARTICLE IV
Representations and Warranties of Time Warner
and Sony as to the Columbia House Entities
SECTION 4.01. Organization, Standing and Power...............................37
SECTION 4.02. Columbia House Subsidiaries;
Equity Interests.............................................38
SECTION 4.03. Capital Structure..............................................39
SECTION 4.04. Authority; Execution and Delivery;
Enforceability...............................................40
SECTION 4.05. No Conflicts; Consents.........................................40
SECTION 4.06. Financial Statements; Undisclosed
Liabilities..................................................41
SECTION 4.07. Information Supplied...........................................42
SECTION 4.08. Absence of Certain Changes or Events...........................43
SECTION 4.09. Taxes..........................................................45
SECTION 4.10. Absence of Changes in Benefit Plans............................46
SECTION 4.11. ERISA Compliance; Excess Parachute
Payments.....................................................47
SECTION 4.12. Litigation.....................................................50
SECTION 4.13. Compliance with Applicable Laws................................50
SECTION 4.14. Brokers; Schedule of Fees and Expenses.........................51
SECTION 4.15. Year 2000 Compliance...........................................51
SECTION 4.16. Environmental Matters..........................................51
SECTION 4.17. Contracts......................................................52
SECTION 4.18. Title to Properties............................................53
SECTION 4.19. Intellectual Property..........................................54
SECTION 4.20. Labor Matters..................................................55
SECTION 4.21. Insurance......................................................55
ARTICLE V
Representations and Warranties of Time Warner
SECTION 5.01. Authority; Execution and Delivery;
Enforceability...............................................55
SECTION 5.02. No Conflicts; Consents.........................................56
SECTION 5.03. Time Warner Interests..........................................57
<PAGE>
Page
----
ARTICLE VI
Representations and Warranties of Sony
SECTION 6.01. Authority; Execution and Delivery;
Enforceability...............................................58
SECTION 6.02. No Conflicts; Consents.........................................58
SECTION 6.03. Sony Interests.................................................59
ARTICLE VII
Covenants Relating to Conduct of Business
SECTION 7.01. Conduct of Business............................................60
SECTION 7.02. No Solicitation................................................68
ARTICLE VIII
Additional Agreements
SECTION 8.01. Preparation of the Form S-4 and
the Proxy Statement; Shareholders
Meeting......................................................71
SECTION 8.02. Access to Information; Confidentiality.........................73
SECTION 8.03. Reasonable Efforts; Notification...............................74
SECTION 8.04. CDnow Employee Stock Options...................................75
SECTION 8.05. Benefit Plans..................................................78
SECTION 8.06. Indemnification................................................79
SECTION 8.07. Fees and Expenses..............................................80
SECTION 8.08. Public Announcements...........................................82
SECTION 8.09. Transfer Taxes.................................................82
SECTION 8.10. Affiliates.....................................................83
SECTION 8.11. Stock Exchange Listing.........................................83
SECTION 8.12. Tax Treatment..................................................83
SECTION 8.13. Shareholder Litigation.........................................83
SECTION 8.14. Certain Financing Arrangements and
Contributions................................................83
SECTION 8.15. Initial Independent Directors of Holdco........................85
SECTION 8.16. Transition Services............................................85
ARTICLE IX
Conditions Precedent
SECTION 9.01. Conditions to Each Party's Obligation
To Effect the Transactions...................................85
<PAGE>
Page
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SECTION 9.02. Conditions to Obligations of
Time Warner and Sony........................................86
SECTION 9.03. Conditions to Obligations of CDnow............................89
ARTICLE X
Termination, Amendment and Waiver
SECTION 10.01. Termination...................................................91
SECTION 10.02. Effect of Termination.........................................93
SECTION 10.03. Amendment.....................................................93
SECTION 10.04. Extension; Waiver.............................................93
SECTION 10.05. Procedure for Termination, Amendment,
Extension or Waiver.........................................94
ARTICLE XI
General Provisions
SECTION 11.01. Nonsurvival of Representations and
Warranties..................................................94
SECTION 11.02. Notices.......................................................94
SECTION 11.03. Definitions...................................................96
SECTION 11.04. Interpretation; Disclosure Letters............................96
SECTION 11.05. Severability..................................................96
SECTION 11.06. Counterparts..................................................97
SECTION 11.07. Entire Agreement; No Third-Party
Beneficiaries...............................................97
SECTION 11.08. Governing Law.................................................97
SECTION 11.09. Assignment....................................................97
SECTION 11.10. Enforcement...................................................98
<PAGE>
Page
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EXHIBIT A Form of Master Canadian Transaction Agreement
EXHIBIT B Form of CDnow Shareholder Agreement
EXHIBIT C Form of Stock Option Agreement
EXHIBIT D Form of Financing Agreements
EXHIBIT E Form of Strategic Commitments Letter
EXHIBIT F Form of Jason Olim Employment Agreement
EXHIBIT G Form of Governance Agreement
EXHIBIT H Form of Registration Rights Agreement
EXHIBIT I Form of Indemnity Agreement
EXHIBIT J Form of Amended and Restated Articles of
Incorporation of the Surviving Corporation
EXHIBIT K Form of Certificate of Incorporation
of Holdco
EXHIBIT L Form of By-laws of Holdco
EXHIBIT M Form of Joint Venture Agreement for MCo EXHIBIT N Form of Joint
Venture Agreement of VCo EXHIBIT O Form of Joint Venture Agreement
of Columbia House
EXHIBIT P Members of Joint Transition Planning Team
EXHIBIT Q Form of Joint Press Release
EXHIBIT R Form of Affiliate Letter
<PAGE>
AGREEMENT OF MERGER AND CONTRIBUTION dated as of July
12, 1999, among TIME WARNER INC., a Delaware corporation
("Time Warner"), SONY CORPORATION OF AMERICA, a New York
corporation ("Sony"), CDNOW, INC., a Pennsylvania corporation
("CDnow"), DELAWARE HOLDCO CORPORATION, a Delaware corporation
and a direct wholly owned subsidiary of CDnow ("Holdco"),
PENNSYLVANIA SUBSIDIARY, INC., a Pennsylvania corporation and
a direct wholly owned subsidiary of Holdco ("Pennsylvania
Sub"), DELAWARE SUB I L.L.C., a Delaware limited liability
company and a direct wholly owned subsidiary of Holdco
("Delaware Sub I"), and DELAWARE SUB II L.L.C., a Delaware
limited liability company and a direct wholly owned subsidiary
of Holdco ("Delaware Sub II").
WHEREAS the respective Boards of Directors of CDnow, Holdco and
Pennsylvania Sub have approved the merger (the "Merger") of Pennsylvania Sub
into CDnow on the terms and subject to the conditions set forth in this
Agreement, whereby each issued share of common stock, without par value, of
CDnow (the "CDnow Common Stock") not owned directly or indirectly by CDnow or
Pennsylvania Sub shall be converted into the right to receive one share of Class
A common stock, par value $0.01 per share, of Holdco (the "Holdco Class A Common
Stock");
WHEREAS, simultaneously with the Merger, Time Warner desires (i) to
cause WCI Record Club Inc., a Delaware corporation and an indirect wholly owned
subsidiary of Time Warner ("Time Warner Sub"), to contribute on the terms and
subject to the conditions set forth in this Agreement all of the right, title
and interest in, to and under, and all of the liabilities, obligations and
commitments of Time Warner Sub and Time Warner that relate to, or arise out of,
the general partnership interests in each of The CH-Music Company, a New York
general partnership ("MCo"), the general partners of which are Time Warner Sub
and Sony Music Entertainment Inc., a Delaware coporation ("SMEI"), and The
CH-Video Company, a New York general partnership ("VCo"), the general partners
of which are Time Warner Sub and SMEI, held by Time Warner Sub, to Holdco or, if
Holdco shall so direct, Delaware Sub I and (ii) to cause Warner Music Group
Inc., a Delaware corporation and an indirect wholly owned subsidiary of Time
Warner ("Warner Music Group"), to contribute on the terms and subject to the
conditions set forth in this Agreement all of the right, title and interest
<PAGE>
2
in, to and under the shares of capital stock of Warner Music Columbia House
(Mexico) Inc., a Delaware corporation and an indirect subsidiary of Time Warner
("Time Warner Mexico"), and all of the liabilities, obligations and commitments
of Warner Music Group and Time Warner that relate to, or arise out of, the
shares of capital stock of Columbia House (Mexico) y Compania, S. en N. de C.V.,
an unlimited collective commercial company organized under the laws of Mexico
("Columbia House Mexico"), held by Warner Music Group, to Holdco, in each case
in exchange for shares of Class B common stock, par value $0.01 per share, of
Holdco (the "Holdco Class B Common Stock" and, together with the Holdco Class A
Common Stock, the "Holdco Common Stock") and the assumption of the foregoing
liabilities, obligations and commitments;
WHEREAS, simultaneously with the Merger, Sony desires (i) to cause
SMEI to contribute on the terms and subject to the conditions set forth in this
Agreement all of the right, title and interest in, to and under, and all of the
liabilities, obligations and commitments of SMEI that relate to, or arise out
of, the general partnership interests in each of MCo and VCo, held by SMEI, to
Holdco or, if Holdco shall so direct, Delaware Sub II, and (ii) to cause SMEI to
contribute on the terms and subject to the conditions set forth in this
Agreement all of the right, title and interest in, to and under the shares of
capital stock of Sony Music Entertainment Mexico, S.A., a Delaware corporation
and a direct wholly owned subsidiary of SMEI ("Sony Mexico"), and all of the
liabilities, obligations and commitments of SMEI and Sony that relate to, or
arise out of, the shares of capital stock of Columbia House Mexico, held by Sony
Mexico, to Holdco, in each case in exchange for shares of Holdco Class B Common
Stock and the assumption of the foregoing liabilities, obligations and
commitments;
WHEREAS, simultaneously with the execution and delivery of this
Agreement, Warner Music Canada Ltd., a corporation organized under the laws of
Ontario ("Time Warner Canada"), Sony Music Entertainment (Canada) Inc., a
corporation organized under the laws of Canada ("Sony Canada"), The Columbia
House Company (Canada), a general partnership organized under the laws of
Ontario ("Columbia House Canada"), the general partners of which are Time Warner
Canada and Sony Canada, 3030809 Nova Scotia ULC, an unlimited liability company
organized under the laws of Nova Scotia and a direct wholly owned subsidiary of
Columbia House Canada ("Canadian Sub"), and Holdco are entering into a master
Canadian transaction agreement in the form of Exhibit A attached hereto (the
"Master Canadian Transaction Agreement" and, together with all other agreements
attached
<PAGE>
3
as schedules thereto (the "Supplemental Canadian Agreements"), the "Canadian
Transaction Agreements"), pursuant to which, simultaneously with the Merger and
on the terms and subject to the conditions set forth in the Master Canadian
Transaction Agreement, (i) Columbia House Canada will transfer all of the right,
title and interest in, to and under all the assets of Columbia House Canada
other than cash, and cash in the amount of Cdn$500,000, and all of the
liabilities, debts and obligations of Columbia House Canada, to Canadian Sub in
exchange for common shares in the capital of Canadian Sub (the "Canadian Sub
Common Shares") and special shares in the capital of Canadian Sub (the "Canadian
Sub Exchange Shares"), (ii) Columbia House Canada will transfer all of the
right, title and interest in, to and under the Canadian Sub Common Shares
received from Canadian Sub to Holdco in exchange for shares of Holdco Class B
Common Stock, (iii) all Canadian Sub Exchange Shares held by Columbia House
Canada will be transferred to Canadian Sub in exchange for shares of Canadian
Sub that are exchangeable for shares of Holdco Common Stock (the "Exchangeable
Shares") and the Canadian Sub Exchange Shares will be canceled, (iv) Holdco will
issue one share of voting preferred stock, par value $0.01 per share (the
"Voting Preferred Share") of Holdco to the Voting Trustee for the holders of the
Exchangeable Shares, (v) Columbia House Canada will distribute all of the right,
title and interest in, to and under all shares of Holdco Class B Common Stock
and other property (other than the Exchangeable Shares and cash) held by
Columbia House Canada to Time Warner Canada and Sony Canada in accordance with
their respective interests therein and (vi) Columbia House Canada will, pursuant
to a liquidating distribution, distribute all of the right, title and interest
in, to and under all of the remaining assets, including cash and Exchangeable
Shares, held by Columbia House Canada to Time Warner Canada and Sony Canada in
accordance with the partnership agreement and applicable law (collectively, the
"Canadian Transactions");
WHEREAS, simultaneously with the execution and delivery of this Agreement,
Time Warner, Sony and certain shareholders of CDnow (the "Principal CDnow
Shareholders") are entering into an agreement in the form of Exhibit B attached
hereto (the "CDnow Shareholder Agreement"), pursuant to which the Principal
CDnow Shareholders will agree to take specified actions in furtherance of the
Merger;
WHEREAS, simultaneously with the execution and delivery of this
Agreement, Time Warner, Sony and CDnow are entering into a stock option
agreement in the form of Exhibit C attached hereto (the "Stock Option
Agreement"),
<PAGE>
4
pursuant to which CDnow is granting to Time Warner and Sony the option to
purchase shares of CDnow Common Stock on the terms and subject to the conditions
set forth therein;
WHEREAS, simultaneously with the execution and delivery of this
Agreement, Time Warner, SMEI and CDnow are entering into agreements in the form
of Exhibit D attached hereto (the "Interim Loan Documents", and, together with
this Agreement, the Master Canadian Transaction Agreement, the CDnow Shareholder
Agreement and the Stock Option Agreement, the "Initial Agreements"), pursuant to
which Time Warner and SMEI will agree to make available to CDnow a credit
facility for working capital purposes in the event that the Merger, the
Contribution Transactions (as defined in Section 1.02(b)) and the Canadian
Transactions shall not have been consummated prior to December 15, 1999;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, certain strategic commitments, which
commitments are described in a letter substantially in the form of Exhibit E
attached hereto (the "Strategic Commitments Letter"), of each of Time Warner,
Sony and Holdco will become effective;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, the business of Holdco is to be
organized so as to include an "online/retail division" and a "club division";
WHEREAS, simultaneously with the execution and delivery of this
Agreement, Holdco is entering into an employment agreement in the form of
Exhibit F attached hereto with Jason Olim (the "Jason Olim Employment
Agreement"), to become effective upon consummation of the Merger, the
Contribution Transactions and the Canadian Transactions, pursuant to which Jason
Olim will serve as the Division Chief Executive Officer of the Online/Retail
Division of Holdco, an Executive Vice President of Holdco, Chairman of the
Technology Steering Committee of Holdco and a member of the Board of Directors
of Holdco on the terms and subject to the conditions set forth therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, Warner Music Group, Time Warner
Canada, SMEI, Sony Canada and Holdco desire to enter into a governance agreement
substantially in the form of Exhibit G attached hereto (the "Governance
Agreement"), relating to, among other things, the governance of Holdco and the
acquisition and divestiture of shares of Holdco Common Stock;
<PAGE>
5
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, Time Warner, Sony and Holdco desire
to enter into a registration rights agreement substantially in the form of
Exhibit H attached hereto (the "Registration Rights Agreement"), pursuant to
which each of Time Warner, Sony and certain of their respective affiliates will
be granted certain rights to registration of shares of Holdco Common Stock held
by Time Warner, Sony or such affiliate, as the case may be, on the terms and
subject to the conditions set forth therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, Holdco, CDnow, Time Warner, SMEI and
Sony Capital Corporation, a Delaware corporation ("Sony Capital Corporation")
that is an affiliate of Sony, desire to enter into an indemnity agreement
substantially in the form of Exhibit I attached hereto (the "Indemnity
Agreement"), pursuant to which each of Holdco and CDnow will, under certain
circumstances, jointly and severally indemnify, defend and hold harmless each of
Time Warner, Sony and Sony Capital for all liabilities, obligations and
commitments, and all costs and expenses, and any damages or losses, that relate
to, or arise out of, the guarantee of borrowings under the Credit Agreement
dated as of March 18, 1993 (as amended, supplemented or otherwise modified from
time to time, the "Columbia House Credit Agreement"), among The Columbia House
Company, a New York general partnership ("Columbia House"), Columbia House
Canada, the financial institutions party from time to time thereto as lenders
(the "Lenders"), The Chase Manhattan Bank, formerly known as Chemical Bank, as
administrative agent for the Lenders, and Morgan Guaranty Trust Company of New
York, as co-agent for the Lenders, provided by such guarantor on the terms and
subject to the conditions set forth therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, (i) Columbia House desires, and Time
Warner desires to cause Warner Music Group to, enter into certain amended and
restated license agreements substantially in the form previously agreed to by
the parties hereto (collectively, the "Time Warner Audio License Agreements"),
pursuant to which Warner Music Group will license to Columbia House certain
rights to the audio repertoire of the majority owned record labels of Time
Warner and (ii) Columbia House and SMEI desire to enter into certain amended and
restated license agreements substantially in the form previously agreed to by
the parties hereto (the "Sony Audio License Agreements", and, together with the
Time Warner Audio
<PAGE>
6
License Agreements, the "Audio License Agreements"), pursuant to which SMEI will
license to Columbia House certain rights to the audio repertoire of the majority
owned record labels of SMEI, in each case on the terms and subject to the
conditions therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, (i) Columbia House desires, and Time
Warner desires to cause Warner Communications Inc. to, enter into certain
amended and restated license agreements substantially in the form previously
agreed to by the parties hereto (collectively, the "Time Warner Music Video
License Agreements"), pursuant to which Warner Communications Inc. will license
to Columbia House certain rights to the music video repertoire of the majority
owned record labels of Time Warner and (ii) Columbia House and SMEI desire to
enter into certain amended and restated license agreements substantially in the
form previously agreed to by the parties hereto (collectively, the "Sony Music
Video License Agreements", and, together with the Time Warner Video License
Agreements, the "Music Video License Agreements"), pursuant to which SMEI will
license to Columbia House certain rights to the music video repertoire of the
majority owned record labels of SMEI, in each case on the terms and subject to
the conditions therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, Holdco and SMEI desire to enter into
certain amended and restated license agreements substantially in the form
previously agreed to by the parties hereto (the "Trademark License Agreements"),
pursuant to which SMEI will license to Holdco certain rights to specified
trademarks, in each case on the terms and subject to the conditions set forth
therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, (i) Holdco and Time Warner desire
to, and Time Warner desires to cause certain of its affiliates to, enter into
certain manufacturing agreements substantially in the form previously agreed to
by the parties hereto (collectively, the "Time Warner Manufacturing
Agreements"), pursuant to which Time Warner and such affiliates will
manufacture, for the benefit of Holdco, records and (ii) Holdco and SMEI desire
to enter into certain manufacturing agreements substantially in the form
previously agreed to by the parties hereto (the "Sony Manufacturing
Agreements"), pursuant to which SMEI will manufacture, for the benefit of
Holdco, records, in each case on the terms and subject to
<PAGE>
7
the conditions set forth therein; the Sony Manufacturing Agreements, together
with the Jason Olim Employment Agreement, the Governance Agreement, the
Registration Rights Agreement, the Indemnity Agreement, the Audio License
Agreements, the Music Video License Agreements, the Trademark License
Agreements, the Time Warner Manufacturing Agreements and the Supplemental
Canadian Agreements are referred to herein as the "Supplemental Agreements"; the
Supplemental Agreements together with the Initial Agreements are referred to
herein as the "Transaction Agreements";
WHEREAS for Federal income tax purposes it is intended that the
Merger, the Contribution Transactions and the transfer to Holdco for Holdco
Class B Common Stock and Exchangeable Shares pursuant to the Canadian
Transactions qualify as exchanges under Section 351 of the Internal Revenue Code
of 1986, as amended (the "Code"); and
WHEREAS Time Warner, Sony, CDnow, Holdco, Pennsylvania Sub, Delaware
Sub I and Delaware Sub II desire to make certain representations, warranties,
covenants and agreements in connection with the Merger and the related
contribution transactions and also to prescribe various conditions to the Merger
and the related contribution transactions.
NOW, THEREFORE, the parties hereto intending to be legally bound
hereby agree as follows:
ARTICLE I
The Merger and the Contributions
SECTION 1.01. The Merger. (a) On the terms and subject to the
conditions set forth in this Agreement, and in accordance with the Pennsylvania
Business Corporation Law (the "PBCL"), Pennsylvania Sub shall be merged with and
into CDnow at the Effective Time (as defined in Section 1.04). At the Effective
Time, the separate corporate existence of Pennsylvania Sub shall cease and CDnow
shall continue as the surviving corporation (the "Surviving Corporation"). The
Merger and the issuance by Holdco of Holdco Common Stock in connection with the
Merger (the "Merger Share Issuance") are referred to in this Agreement
collectively as the "Merger Transactions".
(b) The Merger shall have the effects set forth in Section 1929 of
the PBCL. Without limiting the generality of the foregoing, and subject thereto,
at the
<PAGE>
8
Effective Time, all properties, rights, privileges, powers and franchises of
Pennsylvania Sub shall vest in the Surviving Corporation, and all debts,
labilities and duties of Pennsylvania Sub shall become the debts, liabilities
and duties of the Surviving Corporation.
(c) The Articles of Incorporation of the Surviving Corporation shall
be amended and restated at the Effective Time to read in the form of Exhibit J
attached hereto and, as so amended, such Articles of Incorporation shall be the
Articles of Incorporation of the Surviving Corporation until thereafter changed
or amended as provided therein or by applicable Law (as defined in Section
3.05(a)).
(d) The By-laws of Pennsylvania Sub as in effect immediately prior
to the Effective Time shall be the By-laws of the Surviving Corporation, until
thereafter changed or amended as provided therein or by applicable Law.
(e) The directors of Pennsylvania Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be, in each case in accordance with
the Articles of Incorporation and By-laws of the Surviving Corporation.
(f) The officers of CDnow immediately prior to the Effective Time
shall be the officers of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly elected or
appointed and qualified, as the case may be, in each case in accordance with the
Articles of Incorporation and By-laws of the Surviving Corporation.
SECTION 1.02. The Contributions. (a) On the terms and subject to the
conditions set forth in this Agreement, at the Effective Time, Time Warner shall
(i) cause Time Warner Sub to contribute, assign, transfer, convey and deliver to
Holdco or, if Holdco shall so direct, Delaware Sub I (the "Time Warner U.S.
Contribution"), and Holdco, or, if Holdco shall so direct, Delaware Sub I shall
accept from Time Warner Sub, all the right, title and interest of Time Warner
Sub in, to and under (A) the general partnership interest in MCo held by Time
Warner Sub (the "Time Warner MCo Partnership Interest") and (B) the general
partnership interest in VCo held by Time Warner Sub (together with the Time
Warner MCo Partnership Interest, the "Time Warner Partnership Interests"), in
exchange for (x) the delivery to Time Warner Sub of 41,881,793 shares of
<PAGE>
9
Holdco Class B Common Stock and (y) the assumption by Holdco or, if Holdco shall
so direct, Delaware Sub I of all of the liabilities, obligations and commitments
of Time Warner Sub and Time Warner that relate to, or arise out of, the Time
Warner Partnership Interests and (ii) cause Warner Music Group to contribute,
assign, transfer, convey and deliver to Holdco, and Holdco shall accept from
Warner Music Group, all the right, title and interest of Warner Music Group in,
to and under the shares of capital stock of Time Warner Mexico (together with
the Time Warner U.S. Contribution, the "Time Warner Contribution"), held by
Warner Music Group (the "Time Warner Mexico Shares"), in exchange for (x) the
delivery to Warner Music Group of 205,011 shares of Holdco Class B Common Stock
and (y) the assumption by Holdco of all of the liabilities, obligations and
commitments of Warner Music Group and Time Warner that relate to, or arise out
of, the Time Warner Mexico Shares. The Time Warner Contribution, the related
assumption of liabilities by Holdco or Delaware Sub I and Holdco and the
issuance by Holdco of Holdco Class B Common Stock in connection therewith (the
"Time Warner Contribution Share Issuance") are referred to in this Agreement
collectively as the "Time Warner Contribution Transactions".
(b) On the terms and subject to the conditions set forth in this
Agreement, at the Effective Time, Sony shall (i) cause SMEI to contribute,
assign, transfer, convey and deliver to Holdco or, if Holdco shall so direct,
Delaware Sub II (the "Sony U.S. Contribution"), and Holdco or, if Holdco shall
so direct, Delaware Sub II shall accept from SMEI, all the right, title and
interest of SMEI in, to and under (A) the general partnership interest in MCo
held by SMEI (the "Sony MCo Partnership Interest") and (B) the general
partnership interest in VCo held by SMEI (together with the Sony MCo Partnership
Interest, the "Sony Partnership Interests"), in exchange for (x) the delivery to
SMEI of 41,881,793 shares of Holdco Class B Common Stock and (y) the assumption
by Holdco or, if Holdco shall so direct, Delaware Sub II of all of the
liabilities, obligations and commitments of SMEI and Sony that relate to, or
arise out of, the Sony Partnership Interests and (ii) cause SMEI to contribute,
assign, transfer, convey and deliver to Holdco, and Holdco shall accept from
SMEI, all the right, title and interest of SMEI in, to and under the shares of
capital stock of Sony Mexico (together with the Sony U.S. Contribution, the
"Sony Contribution"); the Time Warner Contribution and the Sony Contribution are
collectively referred to herein as the "Contributions"), held by SMEI (the "Sony
Mexico Shares"), in exchange for (x) the delivery to SMEI of 205,011 shares of
Holdco Class B Common Stock and (y) the assumption by Holdco of all of the
liabilities,
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10
obligations and commitments of SMEI and Sony that relate to, or arise out of,
the Sony Mexico Shares. The Sony Contribution, the related assumption of
liabilities by Holdco or Delaware Sub II and Holdco and the issuance by Holdco
of Holdco Class B Common Stock in connection therewith (the "Sony Contribution
Share Issuance") are referred to in this Agreement collectively as the "Sony
Contribution Transactions"; the Time Warner Contribution Transactions and the
Sony Contribution Transactions are referred to in this Agreement collectively as
the "Contribution Transactions"; the Sony Contribution Share Issuance, together
with the Merger Share Issuance and the Time Warner Contribution Share Issuance,
are referred to in this Agreement collectively as the "Share Issuances". The
Merger Transactions, the Contribution Transactions and the Canadian
Transactions, together with the other transactions contemplated by this
Agreement, are referred to in this Agreement collectively as the "Transactions".
SECTION 1.03. Closing. The closing (the "Closing") of the
Transactions shall take place at the offices of Cravath, Swaine & Moore, 825
Eighth Avenue, New York, New York 10019 at 10:00 a.m., New York City time, on
the second business day following the satisfaction (or, to the extent permitted
by Law, waiver by all parties) of the conditions set forth in Section 9.01, or,
if on such day any condition set forth in Section 9.02 or 9.03 has not been
satisfied (or, to the extent permitted by Law, waived by the party or parties
entitled to the benefits thereof), as soon as practicable after all the
conditions set forth in Article IX (other than those conditions that by their
nature are to be satisfied at the Closing, but subject to the satisfaction or,
to the extent permitted by Law, waiver by the parties entitled to the benefits
of such conditions) have been satisfied (or, to the extent permitted by Law,
waived by the parties entitled to the benefits thereof), or at such other place,
time and date as shall be agreed in writing by the parties to this Agreement.
The date on which the Closing occurs is referred to in this Agreement as the
"Closing Date".
SECTION 1.04. Effective Time. Prior to the Closing, Time Warner and
Sony shall jointly prepare, and on the Closing Date CDnow shall file with the
Department of State of the Commonwealth of Pennsylvania, articles of merger or
other appropriate documents (in any such case, the "Articles of Merger")
executed in accordance with the relevant provisions of the PBCL and CDnow shall
make all other filings or recordings required under the PBCL. The Merger shall
become effective at such time as the Articles of Merger are duly filed with such
Department of State, or
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11
at such later time as the parties to this Agreement shall agree and specify in
the Articles of Merger, and each of the Contribution Transactions and the
Canadian Transactions shall be effective as of the time at which the Merger
becomes effective (the time of the effectiveness of the Merger, the Contribution
Transactions and the Canadian Transactions being the "Effective Time"). At the
Effective Time, the provisions of each of the Supplemental Agreements and the
Strategic Commitments Letter shall become effective.
ARTICLE II
Effect of Merger on the Capital Stock of the
Constituent Corporations in the Merger;
Exchange of Certificates in the Merger
SECTION 2.01. Effect on Capital Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of CDnow Common Stock or any shares of capital stock of Pennsylvania Sub:
(a) Capital Stock of Pennsylvania Sub. Each issued and outstanding
share of capital stock of Pennsylvania Sub shall be converted into and become
one fully paid and nonassessable share of common stock, par value $0.01 per
share, of the Surviving Corporation.
(b) Cancelation of Treasury Stock and Certain Other Stock. Each
share of CDnow Common Stock that is owned by CDnow or Pennsylvania Sub shall no
longer be outstanding and shall automatically be canceled and retired and shall
cease to exist, and no Holdco Common Stock or other consideration shall be
delivered or deliverable in exchange therefor.
(c) Conversion of CDnow Common Stock. (i) Subject to Sections
2.01(b) and 2.01(d), each issued share of CDnow Common Stock shall be converted
into the right to receive one fully paid and nonassessable share of Holdco Class
A Common Stock.
(ii) The shares of Holdco Class A Common Stock to be issued upon the
conversion of shares of CDnow Common Stock pursuant to this Section 2.01(c) are
referred to collectively as "Merger Consideration". As of the Effective Time,
all such shares of CDnow Common Stock shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each holder
of a certificate representing any such shares of CDnow Common
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12
Stock shall cease to have any rights with respect thereto, except the right to
receive Merger Consideration upon surrender of such certificate in accordance
with Section 2.02, without interest.
(d) Dissenters Rights. Notwithstanding anything in this Agreement to
the contrary, shares ("Dissent Shares") of CDnow Common Stock that are
outstanding immediately prior to the Effective Time and that are held by any
person who is entitled to demand and properly demands payment of the fair value
of such Dissent Shares pursuant to, and who complies in all respects with,
Subchapter D of Chapter 15 of the PBCL ("Subchapter D") shall not be converted
into Merger Consideration as provided in Section 2.01(c), but rather the holders
of Dissent Shares shall be entitled to payment of the fair value of such Dissent
Shares in accordance with Subchapter D; provided, however, that if any such
holder shall fail to perfect or otherwise shall waive, withdraw or lose the
right to receive payment of fair value under Subchapter D, then the right of
such holder to be paid the fair value of such holder's Dissent Shares shall
cease and such Dissent Shares shall be deemed to have been converted as of the
Effective Time into, and to have become exchangeable solely for the right to
receive, Merger Consideration as provided in Section 2.01(c). CDnow shall serve
prompt notice to Time Warner and Sony of any demands received by CDnow for
appraisal of any shares of CDnow Common Stock, and Time Warner and Sony shall
have the right to participate in and direct all negotiations and proceedings
with respect to such demands. Prior to the Effective Time, CDnow shall not,
without the prior written consent of Time Warner and Sony, make any payment with
respect to, or settle or offer to settle, any such demands, or agree to do any
of the foregoing.
SECTION 2.02. Exchange of Certificates. (a) Exchange Agent. Promptly
following the Effective Time, Holdco shall deposit with StockTrans, Inc.,
Ardmore, Pennsylvania, or such other bank or trust company as may be designated
by Holdco, Time Warner and Sony (the "Exchange Agent"), for the benefit of the
holders of shares of CDnow Common Stock, for exchange in accordance with this
Article II, through the Exchange Agent, certificates representing the shares of
Holdco Class A Common Stock issuable pursuant to Section 2.01 in exchange for
outstanding shares of CDnow Common Stock (such shares of Holdco Class A Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall,
pursuant to irrevocable instructions, deliver the Holdco Class A Common Stock
contemplated to be issued
<PAGE>
13
pursuant to Section 2.01 out of the Exchange Fund. The Exchange Fund shall not
be used for any other purpose.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates (the "Certificates") that immediately prior to the
Effective Time represented outstanding shares of CDnow Common Stock whose shares
were converted into the right to receive Merger Consideration pursuant to
Section 2.01 (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Holdco may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for Merger Consideration. Upon surrender of a Certificate for
cancelation to the Exchange Agent, together with such letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole shares of
Holdco Class A Common Stock that such holder has the right to receive pursuant
to the provisions of this Article II, and the Certificate so surrendered shall
forthwith be canceled. Until such time as a certificate representing Holdco
Class A Common Stock is issued to or at the direction of the holder of a
surrendered Certificate, such Holdco Class A Common Stock shall be deemed not
outstanding and shall not be entitled to vote on any matter. In the event of a
transfer of ownership of CDnow Common Stock that is not registered in the
transfer records of CDnow, a certificate representing the appropriate number of
shares of Holdco Common Stock may be issued to a person other than the person in
whose name the Certificate so surrendered is registered, if such Certificate
shall be properly endorsed or otherwise be in proper form for transfer and the
person requesting such payment shall pay any transfer or other taxes required by
reason of the issuance of shares of Holdco Class A Common Stock to a person
other than the registered holder of such Certificate or establish to the
satisfaction of Holdco that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.02, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender Merger Consideration as contemplated by this Section
2.02. No interest shall be paid or accrue on any cash payable upon surrender of
any Certificate.
<PAGE>
14
(c) Distributions with Respect to Unexchanged Shares. No dividends
or other distributions with respect to Holdco Class A Common Stock with a record
date after the Effective Time shall be paid to the holder of any Certificate
with respect to the shares of Holdco Class A Common Stock issuable upon
surrender thereof until the surrender of such Certificate in accordance with
this Article II. Subject to applicable Law, following surrender of any
Certificate, there shall be paid to the holder the certificate representing
whole shares of Holdco Class A Common Stock issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of Holdco Class A Common Stock and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to such surrender and a payment
date subsequent to such surrender payable with respect to such whole shares of
Holdco Class A Common Stock.
(d) No Further Ownership Rights in CDnow Common Stock. The Merger
Consideration issued (and paid) in accordance with the terms of this Article II
upon conversion of any shares of CDnow Common Stock shall be deemed to have been
issued (and paid) in full satisfaction of all rights pertaining to such shares
of CDnow Common Stock; subject, however, to the Surviving Corporation's
obligation to pay any dividends or make any other distributions with a record
date prior to the Effective Time that may have been declared or made by CDnow on
such shares of CDnow Common Stock in accordance with the terms of this Agreement
or prior to the date of this Agreement and which remain unpaid at the Effective
Time, and after the Effective Time there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of shares of
CDnow Common Stock that were outstanding immediately prior to the Effective
Time. If, after the Effective Time, any Certificates are presented to the
Surviving Corporation or the Exchange Agent for any reason, they shall be
canceled and exchanged as provided in this Article II.
(e) Termination of Exchange Fund. Any portion of the Exchange Fund
that remains undistributed to the holders of CDnow Common Stock for six months
after the Effective Time shall be delivered to Holdco, upon demand, and any
holder of CDnow Common Stock who has not theretofore complied with this Article
II shall thereafter look only to Holdco for payment of its claim for Merger
Consideration and any dividends or distributions with respect to Holdco Common
Stock as contemplated by Section 2.02(c).
<PAGE>
15
(f) No Liability. None of Time Warner, Sony, CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I, Delaware Sub II or the Exchange Agent shall be
liable to any person in respect of any shares of Holdco Common Stock (or
dividends or distributions with respect thereto) or cash from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar Law. If any Certificate has not been surrendered prior to
five years after the Effective Time (or immediately prior to such earlier date
on which Merger Consideration or any dividends or distributions with respect to
Holdco Common Stock as contemplated by Section 2.02(c)(i) in respect of such
Certificate would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 3.05(b)), any such shares, cash,
dividends or distributions in respect of such Certificate shall, to the extent
permitted by applicable Law, become the property of the Surviving Corporation,
free and clear of all claims or interest of any person previously entitled
thereto.
(g) Investment of Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund, as directed by Holdco, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
Holdco.
(h) Withholding Rights. Holdco shall be entitled to deduct and
withhold from the consideration otherwise payable to any holder of CDnow Common
Stock pursuant to this Agreement such amounts as may be required to be deducted
and withheld with respect to the making of such payment under the Code, or under
any provision of state, local or foreign tax Law. To the extent that amounts are
so withheld and paid over to the appropriate taxing authority, Holdco will be
treated as though it withheld an appropriate amount of the type of consideration
otherwise payable pursuant to this Agreement to any holder of CDnow Common
Stock, sold such consideration for an amount of cash equal to the fair market
value of such consideration at the time of such deemed sale and paid such cash
proceeds to the appropriate taxing authority.
<PAGE>
16
ARTICLE III
Representations and Warranties of CDnow
CDnow represents and warrants to each of Time Warner and Sony as
follows:
SECTION 3.01. Organization, Standing and Power. Each of CDnow,
Holdco, Pennsylvania Sub, Delaware Sub I and Delaware Sub II and each of the
other subsidiaries of CDnow (Holdco, Pennsylvania Sub, Delaware Sub I, Delaware
Sub II and each other subsidiary of CDnow being collectively referred to in this
Agreement as the "CDnow Subsidiaries") is duly organized, validly existing and
in good standing under the Laws of the jurisdiction in which it is organized and
has full power and authority and possesses all governmental franchises,
licenses, permits, authorizations and approvals necessary to enable it to own,
lease or otherwise hold its properties and assets and to conduct its businesses
as presently conducted, other than such franchises, licenses, permits,
authorizations and approvals the lack of which, individually and in the
aggregate, has not had and could not reasonably be expected to have a material
adverse effect (as defined in Section 11.03) on CDnow and the CDnow
Subsidiaries, taken as a whole, or a material adverse effect on the ability of
CDnow or any of the CDnow Subsidiaries to perform its obligations under any of
the Transaction Agreements to which it is a party or to consummate the
Transactions, except to the extent such effect is the result of (i) actions
taken by Time Warner or Sony (other than actions required by any Transaction
Agreement) or economic factors affecting the economy as a whole or the industry
in which CDnow competes or (ii) payment of legal fees incurred in the defense of
any litigation by stockholders of CDnow challenging the Transactions (a "CDnow
Material Adverse Effect"). CDnow and each CDnow Subsidiary is duly qualified to
do business in each jurisdiction where the nature of its business or the
ownership or leasing of its properties makes such qualification necessary,
except where the failure to so qualify has not had and could not reasonably be
expected to have a CDnow Material Adverse Effect. CDnow has delivered to each of
Time Warner and Sony true and complete copies of the articles of incorporation
of CDnow, as amended to the date of this Agreement (as so amended, the "CDnow
Charter"), and the by-laws of CDnow, as amended to the date of this Agreement
(as so amended, the "CDnow By-laws"), and the comparable organizational
documents of each CDnow Subsidiary, in each case as amended to the date of this
Agreement. As of the Effective Time, the Certificate of Incorporation of Holdco
will be substantially in the form of
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17
Exhibit K attached hereto and the By-laws of Holdco will be substantially in the
form of Exhibit L attached hereto.
SECTION 3.02. CDnow Subsidiaries; Equity Interests. (a) The letter,
dated as of the date of this Agreement, from CDnow to Time Warner and Sony (the
"CDnow Disclosure Letter") lists each CDnow Subsidiary and its jurisdiction of
organization. All the outstanding shares of capital stock of each CDnow
Subsidiary have been validly issued and are fully paid and nonassessable and,
except as set forth in the CDnow Disclosure Letter, are owned by CDnow, by a
wholly owned CDnow Subsidiary or by CDnow and a wholly owned CDnow Subsidiary,
free and clear of all pledges, liens, charges, mortgages, encumbrances and
security interests of any kind or nature whatsoever (collectively, "Liens").
(b) Except for its interests in the CDnow Subsidiaries and except
for the ownership interests set forth in the CDnow Disclosure Letter, CDnow does
not own, directly or indirectly, any capital stock, membership interest,
partnership interest, joint venture interest or other equity interest in any
person.
(c) Each of Holdco, Pennsylvania Sub, Delaware Sub I and Delaware
Sub II was formed solely for the purpose of engaging in the Transactions. None
of Holdco, Pennsylvania Sub, Delaware Sub I or Delaware Sub II has carried on
any business or conducted any operations since the date of its incorporation
other than the execution of this Agreement and the other Transaction Agreements
to which any of them are parties, the performance of their obligations hereunder
and thereunder and matters ancillary thereto.
SECTION 3.03. Capital Structure. The authorized capital stock of
CDnow consists of 200,000,000 shares of CDnow Common Stock, without par value,
and 50,000,000 shares of preferred stock, without par value (together with the
CDnow Common Stock, the "CDnow Capital Stock"). At the close of business on July
9, 1999, (i) 30,211,473 shares of CDnow Common Stock were issued and
outstanding, (ii) no shares of CDnow Common Stock were held by CDnow in its
treasury and (iii) 1,511,934 additional shares of CDnow Common Stock were
reserved for issuance pursuant to the CDnow Stock Plans (as defined in Section
8.04(d)). The CDnow Disclosure Letter sets forth a complete list of all CDnow
Employee Stock Options (as defined in Section 8.04) outstanding at the close of
business on July 12, 1999, together with the number of shares of CDnow Common
Stock subject to each such CDnow Employee Stock Option and the
<PAGE>
18
exercise price thereof. The CDnow Disclosure Letter sets forth a complete list
of all warrants to acquire shares of CDnow Common Stock (the "CDnow Warrants")
outstanding at the close of business on July 12, 1999 together with the number
of shares of CDnow Common Stock subject to each such warrant and the exercise
price thereof. Except as set forth above or in the CDnow Disclosure Letter, at
the close of business on July 12, 1999, no shares of capital stock or other
voting securities of CDnow were issued, reserved for issuance or outstanding.
There are no outstanding CDnow stock appreciation rights. All outstanding shares
of CDnow Capital Stock are, and all such shares that may be issued prior to the
Effective Time will be when issued, duly authorized, validly issued, fully paid
and nonassessable and not subject to or issued in violation of any purchase
option, call option, right of first refusal, preemptive right, subscription
right or any similar right under any provision of the PBCL, the CDnow Charter,
the CDnow By-laws or any Contract (as defined in Section 3.05) to which CDnow is
a party or otherwise bound. There are not any bonds, debentures, notes or other
indebtedness of CDnow having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
holders of CDnow Common Stock may vote ("Voting CDnow Debt"). Except as set
forth above or in the CDnow Disclosure Letter, there are not any options,
warrants, rights, convertible or exchangeable securities, "phantom" stock
rights, stock appreciation rights, stock-based performance units, commitments,
Contracts, arrangements or undertakings of any kind to which CDnow or any CDnow
Subsidiary is a party or by which any of them is bound (i) obligating CDnow or
any CDnow Subsidiary to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or other equity interests in, or any
security convertible or exercisable for or exchangeable into any capital stock
of or other equity interest in, CDnow or any CDnow Subsidiary or any Voting
CDnow Debt, (ii) obligating CDnow or any CDnow Subsidiary to issue, grant,
extend or enter into any such option, warrant, call, right, security,
commitment, Contract, arrangement or undertaking or (iii) that give any person
the right to receive any economic benefit or right similar to or derived from
the economic benefits and rights accruing to holders of CDnow Capital Stock.
There are not any outstanding contractual obligations of CDnow or any CDnow
Subsidiary to repurchase, redeem or otherwise acquire any shares of capital
stock of CDnow or any CDnow Subsidiary. As of the Effective Time, each CDnow
Warrant will, by its terms, provide the holder thereof with the right to receive
the amount of Merger Consideration such holder would have received in the Merger
had such CDnow Warrant been exercised
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19
immediately prior to the Effective Time (and no other consideration) upon
exercise thereof.
SECTION 3.04. Authority; Execution and Delivery; Enforceability. (a)
Each of CDnow, Holdco, Pennsylvania Sub, Delaware Sub I and Delaware Sub II has
all requisite power and authority to execute and deliver the Transaction
Agreements to which it is a party and to consummate the Transactions. The
execution and delivery by each of CDnow, Holdco, Pennsylvania Sub, Delaware Sub
I and Delaware Sub II of each Transaction Agreement to which it is a party and
the consummation by each of CDnow, Holdco, Pennsylvania Sub, Delaware Sub I and
Delaware Sub II of the Transactions have been duly authorized by all necessary
action on the part of CDnow, Holdco, Pennsylvania Sub, Delaware Sub I and
Delaware Sub II, subject, in the case of the Merger, to receipt of the CDnow
Shareholder Approval (as defined in Section 3.04(c)). Each of CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I and Delaware Sub II has duly executed and
delivered each Initial Agreement to which it is a party, and, assuming the due
authorization, execution and delivery by each person other than CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I and Delaware Sub II party thereto, each Initial
Agreement to which it is a party constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms. On or prior to
the Closing Date, each of CDnow, Holdco, Pennsylvania Sub, Delaware Sub I and
Delaware Sub II shall have duly executed and delivered each Supplemental
Agreement to which it is a party, and, when so executed and delivered, and duly
authorized, executed and delivered by each person other than CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I and Delaware Sub II party thereto, each
Supplemental Agreement to which it is a party will constitute its legal, valid
and binding obligation, enforceable against it in accordance with its terms.
(b) The Board of Directors of CDnow (the "CDnow Board"), at a
meeting duly called and held prior to the date of this Agreement, duly and
unanimously (i) approved this Agreement, the other Transaction Agreements, the
Merger and the other Transactions, (ii) determined that the terms of the Merger
and the other Transactions are fair to and in the best interests of CDnow and
its shareholders and (iii) recommended that CDnow's shareholders approve and
adopt this Agreement. Such resolutions are sufficient to render inapplicable to
CDnow, Holdco, Pennsylvania Sub, Time Warner and Sony, and this Agreement, the
other Transaction Agreements, the Merger and the other Transactions, the
provisions of Subchapters D (Section 2538) and F of Section 25 of the PBCL to
the extent, if any, such
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20
subchapters would otherwise be applicable to CDnow, Holdco, Pennsylvania Sub,
Time Warner, Sony, this Agreement, the other Transaction Agreements, the Merger
or the other Transactions. No other state takeover statute or similar statute or
regulation applies or purports to apply to CDnow, Holdco or Pennsylvania Sub
with respect to this Agreement, the other Transaction Agreements, the Merger or
any other Transaction.
(c) The only vote of holders of any class or series of CDnow Capital
Stock necessary to approve and adopt this Agreement and the Merger is the
adoption of this Agreement by the affirmative vote of a majority of the votes
cast by all holders of CDnow Common Stock entitled to vote thereon (the "CDnow
Shareholder Approval"). The affirmative vote of the holders of CDnow Capital
Stock, or any of them, is not necessary to approve any Transaction Agreement
other than this Agreement or to consummate any Transaction other than the
Merger.
SECTION 3.05. No Conflicts; Consents. (a) Except as set forth in the
CDnow Disclosure Letter, the execution and delivery by each of CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I and Delaware Sub II of this Agreement and each
other Transaction Agreement to which it is a party do not, and the consummation
of the Transactions and compliance with the terms hereof and thereof will not,
conflict with, or result in any violation of or default (with or without notice
or lapse of time, or both) under, or give rise to a right of termination,
cancelation or acceleration of any obligation or to loss of a material benefit
under, or to increased, additional, accelerated or guaranteed rights or
entitlements of any person under, or result in the creation of any Lien upon any
of the properties or assets of CDnow, Holdco, Pennsylvania Sub, Delaware Sub I,
Delaware Sub II or any other CDnow Subsidiary under, any provision of (i) the
CDnow Charter, the CDnow By-laws or the comparable organizational documents of
Holdco, Pennsylvania Sub, Delaware Sub I, Delaware Sub II or any other CDnow
Subsidiary, (ii) any contract, lease, license, indenture, note, bond, agreement,
permit, concession, franchise or other instrument (a "Contract") to which CDnow,
Holdco, Pennsylvania Sub, Delaware Sub I, Delaware Sub II or any other CDnow
Subsidiary is a party or by which any of its properties or assets is bound or
(iii) subject to the filings and other matters referred to in Section 3.05(b),
any judgment, order or decree ("Judgment") or statute, law (including common
law), ordinance, rule or regulation ("Law") applicable to CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I, Delaware Sub II or any other CDnow Subsidiary
or their respective properties or
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21
assets, other than, in the case of clauses (ii) and (iii), any such items that,
individually and in the aggregate, have not had and could not reasonably be
expected to have a CDnow Material Adverse Effect.
(b) No consent, approval, license, permit, order or authorization
("Consent") of, or registration, declaration or filing with, or permit from, any
Federal, state, local or foreign government or any court of competent
jurisdiction, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign (a "Governmental Entity") is
required to be obtained or made by or with respect to CDnow or any other CDnow
Subsidiary in connection with the execution, delivery and performance of any
Transaction Agreement to which it is a party or the consummation of the
Transactions, other than (i) compliance with and filings under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and Competition Act (Canada) (the "Canadian Competition Act") and receipt
of the Canadian Competition Act Approval (as defined below), (ii) the filing
with the Securities and Exchange Commission (the "SEC") of (A) a proxy or
information statement relating to the adoption of this Agreement by CDnow's
shareholders (the "Proxy Statement") and (B) such reports under Sections 13 and
16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
may be required in connection with this Agreement, the other Transaction
Agreements and the Transactions, (iii) the filing of the Articles of Merger with
the Department of State of the Commonwealth of Pennsylvania and appropriate
documents with the relevant authorities of the other jurisdictions in which
CDnow is qualified to do business, (iv) such Consents, registrations or filings
as may be required under applicable state securities laws or the laws of any
foreign country, (v) compliance with and such filings as may be required under
applicable Environmental Laws (as defined in Section 3.17), (vi) such filings as
may be required in connection with the Taxes (as defined in Section 3.09(k))
described in Section 8.09 and (vii) such other items as are set forth in the
CDnow Disclosure Letter. "Canadian Competition Act Approval" means the relevant
waiting period under Section 123 of the Canadian Competition Act shall have
expired and (a) an advance ruling certificate (an "ARC") pursuant to Section 102
of the Canadian Competition Act shall have been issued by the Commissioner, (b)
a "no action letter" indicating that the Commissioner has determined not to make
an application for an order under Section 92 of the Canadian Competition Act
shall have been received from the Commissioner, and any terms and conditions
attached to any such letter shall be reasonably acceptable to each party or
<PAGE>
22
(c) in the event that neither an ARC nor a "no action letter" is issued, there
shall be no threatened or actual application by the Commissioner for an order
under Sections 92 or 100 of the Canadian Competition Act.
SECTION 3.06. SEC Documents; Undisclosed Liabilities. All reports,
schedules, forms, statements and other documents required to be filed with the
SEC (i) by CDnow since March 17, 1999 and (ii) by CDnow Online, Inc. (formerly
known as CDnow, Inc.), a Pennsylvania corporation and a wholly owned CDnow
Subsidiary ("CDnow Online"), since February 9, 1998 (such reports, schedules,
forms, statements and other documents, the "CDnow SEC Documents") have been duly
filed by such parties. As of its date, each CDnow SEC Document complied as to
form in all material respects with the requirements of the Exchange Act or the
Securities Act of 1933, as amended (the "Securities Act"), as the case may be,
and the rules and regulations of the SEC promulgated thereunder applicable to
such CDnow SEC Document, and did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. Except to the extent that information
contained in (i) the Registration Statement on Form S-4 filed with the SEC by
CDnow on February 16, 1999 (the "CDnow Form S-4 Date"), (ii) all reports,
schedules, forms, statements and documents filed with the SEC by CDnow pursuant
to the Exchange Act and the rules and regulations of the SEC promulgated
thereunder since the CDnow Form S-4 Date and (iii) the Annual Report on Form
10-K of CDnow Online for the year ended December 31, 1998 (collectively, the
"Designated CDnow SEC Documents") has been revised or superseded by a subsequent
report, schedule, form, statement or other document filed with the SEC by CDnow,
which subsequent report, schedule, form, statement or other document is publicly
available prior to the date of this Agreement, none of the Designated CDnow SEC
Documents contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements included in the CDnow SEC Documents
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto in effect as of their respective filing dates, were prepared in
accordance with generally accepted accounting principles ("GAAP") (except, in
the case of unaudited interim statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto)
<PAGE>
23
and fairly presented the financial position of the entities purported to be
covered thereby as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited interim statements, to normal year-end audit adjustments). Except as
disclosed in the Filed CDnow SEC Documents (as defined in Section 3.08), and
except for liabilities and obligations incurred since December 31, 1998 in the
ordinary course of business consistent with past practice or as set forth in the
CDnow Disclosure Letter, neither CDnow nor any CDnow Subsidiary has any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) required by GAAP to be set forth on a consolidated balance sheet
or in the notes thereto, except those liabilities or obligations that,
individually and in the aggregate, have not had and could not reasonably be
expected to have a CDnow Material Adverse Effect.
SECTION 3.07. Information Supplied. None of the information supplied
or to be supplied by CDnow for inclusion or incorporation by reference in (i)
the registration statement on Form S-4 to be filed with the SEC by Holdco in
connection with the Share Issuances (the "Form S-4") will, at the time the Form
S-4 is filed with the SEC, at any time it is amended or supplemented or at the
time it becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or (ii) the
Proxy Statement will, at the date it is first mailed to CDnow's shareholders or
at the time of the CDnow Shareholders Meeting (as defined in Section 8.01(d)),
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations
thereunder, except that no representation is made by CDnow with respect to
statements made or incorporated by reference therein based on information
supplied by Time Warner or Sony in writing for inclusion or incorporation by
reference in the Proxy Statement.
SECTION 3.08. Absence of Certain Changes or Events. Except as
disclosed in the CDnow SEC Documents filed and publicly available prior to the
date of this Agreement (the "Filed CDnow SEC Documents") or set forth in
<PAGE>
24
the CDnow Disclosure Letter, each of CDnow and each CDnow Subsidiary has
conducted its business only in the ordinary course, and there has not been:
(i) since March 18, 1999, any event, change, effect or development
that, individually or in the aggregate, has had or could reasonably be
expected to have a CDnow Material Adverse Effect;
(ii) since March 18, 1999, any declaration, setting aside or payment
of any dividend or other distribution (whether in cash, stock or property)
with respect to any CDnow Capital Stock or any repurchase for value by
CDnow of any CDnow Capital Stock;
(iii) since March 18, 1999, any split, combination or
reclassification of any CDnow Capital Stock or any issuance or the
authorization of any issuance of any other securities in respect of, in
lieu of, or in substitution for shares of, CDnow Capital Stock;
(iv) since March 18, 1999, (A) any granting by CDnow or any CDnow
Subsidiary to any director or executive officer of, or consultant (who
performs services comparable to an employee) to, CDnow or any CDnow
Subsidiary of any increase in compensation, except for customary increases
in cash compensation in the ordinary course of business consistent with
prior practice or as was required under employment agreements or plans in
effect as of March 18, 1999, (B) any granting by CDnow or any CDnow
Subsidiary to any such director, executive officer or consultant of any
increase in severance or termination pay, except as was required under any
employment, severance or termination agreements or plans in effect as of
March 18, 1999, (C) except as permitted by Section 7.01(a)(viii) after the
date of this Agreement, any entry by CDnow or any CDnow Subsidiary into,
or any amendment of, any employment, consulting, deferred compensation,
indemnification, severance or termination agreement with any such
director, executive officer or consultant or (D) any acceleration of the
vesting of any CDnow Employee Stock Options or other equity-based
compensation;
(v) since December 31, 1998, any change in accounting methods,
principles or practices by CDnow or any CDnow Subsidiary materially
affecting the consolidated assets, liabilities or results of operations of
CDnow or such CDnow Subsidiary, except insofar as may have been required
by a change in GAAP
<PAGE>
25
or by SEC interpretations with respect to filings therewith;
(vi) since December 31, 1998, any material elections or changes in
accounting methods with respect to Taxes by CDnow or any CDnow Subsidiary
or settlement or compromise by CDnow or any CDnow Subsidiary of any
material Tax liability or refund;
(vii) since March 18, 1999, any acquisition by CDnow or any CDnow
Subsidiary (A) by merging or consolidating with, or by purchasing assets
of, or by any other manner, any equity interest in or portion of any
business of any corporation, partnership, company, limited liability
company, joint venture, association or other business organization or
division thereof or (B) of any assets that, individually, are in excess of
$1 million or, in the aggregate, are in excess of $2.5 million, except
purchases of inventory for resale and renewals of licenses, in each case
in the ordinary course of business consistent with prior practice;
(viii) since March 18, 1999, any sale, lease, assignment, transfer,
conveyance, delivery or other disposition, or any divestiture, by CDnow or
any CDnow Subsidiary of any properties or assets of CDnow or such CDnow
Subsidiary, other than sales of inventory and renewals of licenses, in
each case in the ordinary course of business consistent with prior
practice and sale/leaseback transactions in respect of equipment
financings not to exceed $1 million in the aggregate; or
(ix) since March 18, 1999, any entry by CDnow or any CDnow
Subsidiary into, or any amendment or modification of, any agreement (A) in
respect of the licensing of any material Intellectual Property Rights (as
defined in Section 3.20) on an exclusive basis or for a term in excess of
two years or involving the cash payment, equivalent equity outlay or
provision of services in an amount greater than (I) $100,000 per annum or
(II) $500,000 over the term of the agreement, (B) with any "portal",
"internet service provider" or "internet search engine" that provides for
the cash payment, equivalent equity outlay or provision of services in an
amount greater than (I) $100,000 per annum or (II) $500,000 over the term
of the agreement or (C) with any record company or label or affiliate
thereof that provides for the cash payment, equivalent equity outlay or
provision of services in an amount
<PAGE>
26
greater than (I) $100,000 per annum or (II) $500,000 over the term of the
agreement.
SECTION 3.09. Taxes. (a) Each of CDnow and each CDnow Subsidiary has
timely filed, or has had or caused to be timely filed on its behalf, all Tax
Returns (as defined in Section 3.09(k)) required to be filed by it, and all such
Tax Returns are true, complete and accurate, except to the extent any failure to
file or any inaccuracies in any filed Tax Returns, individually and in the
aggregate, have not had and could not reasonably be expected to have a CDnow
Material Adverse Effect. All Taxes shown to be due on such Tax Returns, or
otherwise owed, have been timely paid, except to the extent that any failure to
pay, individually and in the aggregate, has not had and could not reasonably be
expected to have a CDnow Material Adverse Effect. Each of CDnow and each CDnow
Subsidiary has withheld or collected and has paid over to the appropriate taxing
authority (or is properly holding for payment to such taxing authority) all
Taxes required by law to be withheld or collected, except for amounts that would
not, individually and in the aggregate, have a CDnow Material Adverse Effect.
(b) The pro forma financial statements contained in the Filed CDnow
SEC Documents reflect an adequate reserve for all Taxes payable by CDnow and the
CDnow Subsidiaries for all Taxable periods and portions thereof through the date
of such financial statements. No deficiency with respect to any Taxes has been
proposed, asserted or assessed or, to the knowledge of CDnow, threatened against
CDnow or any CDnow Subsidiary, no waivers of the time to assess any such Taxes
are outstanding and no requests for any waivers are pending, except for any such
deficiency, waiver or request for waiver, that individually and in the
aggregate, has not had and could not reasonably be expected to have a CDnow
Material Adverse Effect.
(c) Except as set forth in the CDnow Disclosure Letter, none of the
Tax Returns of CDnow or any CDnow Subsidiary has been examined by any taxing
authority or is currently being examined by any taxing authority or is the
subject of a pending examination. All assessments for Taxes due with respect to
any completed or settled examinations or any concluded litigation have been
fully paid. Except as set forth in the CDnow Disclosure Letter, neither CDnow
nor any CDnow Subsidiary has entered into a closing agreement with any taxing
authority with respect to Taxes.
(d) There are no material Liens for Taxes (other than for current
Taxes not yet due and payable or that are being contested in good faith in
appropriate proceedings) on
<PAGE>
27
the assets of CDnow or any CDnow Subsidiary. Neither CDnow nor any CDnow
Subsidiary (i) is bound by any agreement with any affiliate with respect to
Taxes or (ii) otherwise is bound by any tax sharing, allocation or similar
agreement or any indemnification or reimbursement agreement with respect to
Taxes.
(e) Neither CDnow nor any CDnow Subsidiary has made an election
under Section 341(f) of the Code or otherwise, except for any elections that
would not, individually and in the aggregate, have a CDnow Material Adverse
Effect. Neither CDnow nor any CDnow Subsidiary (i) has agreed to or is required
to make any adjustments pursuant to Section 481 of the Code; (ii) has knowledge
that the Internal Revenue Service has proposed any such adjustment or a change
in accounting method with respect to such entity; or (iii) has an application
pending with the Internal Revenue Service or any other taxing authority
requesting permission for any change in accounting method.
(f) Neither CDnow nor any CDnow Subsidiary was, at any time during
the period specified in Section 897(c)(1)(A)(ii) of the Code, a United States
real property holding corporation within the meaning of Section 897(c)(2) of the
Code.
(g) Except as set forth in the CDnow Disclosure Letter, neither
CDnow nor any CDnow Subsidiary has been a member of a group filing combined,
consolidated or unitary Tax Returns other than a group of which CDnow is the
common parent, and neither CDnow nor any CDnow Subsidiary has any liability for
Taxes of any other person under Treasury Regulations Section 1.1502-6 (or
comparable provisions of foreign, state or local law), as a transferee or
successor, by contract or otherwise.
(h) CDnow has no reason to believe that any conditions exist that
could reasonably be expected to prevent the Merger and the Contributions from
qualifying as exchanges under Section 351 of the Code.
(i) No notice of a claim or pending investigation has been received,
or to the knowledge of CDnow or any CDnow Subsidiary, has been threatened, by
any state, local or other jurisdiction with which CDnow or any CDnow Subsidiary
does not currently file Tax Returns, alleging that CDnow or such CDnow
Subsidiary has a duty to file Tax Returns and pay Taxes or is otherwise subject
to the taxing authority of such jurisdiction, nor has CDnow or any CDnow
Subsidiary received any notice or questionnaire from any such jurisdiction that
suggests or asserts that CDnow or such
<PAGE>
28
CDnow Subsidiary may have a duty to file such Tax Returns and pay such Taxes, or
otherwise is subject to the taxing authority of such jurisdiction.
(j) Except as set forth in the CDnow Disclosure Letter, the CDnow
Stock Plans and any awards or grants thereunder have been designed so that the
disallowance of a deduction under Section 162(m) of the Code for employee
remuneration will not apply to any amount paid or payable by CDnow or any of its
subsidiaries under any such plan, award or grant and, to the knowledge of CDnow,
no fact or circumstance exists that would cause such disallowance to apply to
any such amount.
(k) For purposes of this Agreement:
"Taxes" includes all forms of taxation, whenever created or imposed,
and whether of the United States or elsewhere, and whether imposed by a local,
municipal, state, foreign, Federal or other Governmental Entity, or in
connection with any agreement with respect to Taxes, including all interest,
penalties and additions imposed with respect to such amounts.
"Tax Return" means all Federal, state, local, provincial and foreign
Tax returns, declarations, statements, reports, schedules, forms and information
returns and any amended Tax return relating to Taxes.
SECTION 3.10. Absence of Changes in Benefit Plans. Except as
disclosed in the Filed CDnow SEC Documents or set forth in the CDnow Disclosure
Letter, as of the date of this Agreement, since March 18, 1999, there has not
been any adoption or amendment in any material respect by CDnow or any CDnow
Subsidiary or any CDnow ERISA Affiliate (as defined below) of any collective
bargaining agreement or any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, medical or other plan, arrangement or understanding
(whether or not legally binding) providing benefits to any current or former
employee, officer or director of CDnow or any CDnow Subsidiary or any entity
that, with CDnow or any CDnow Subsidiary, formed or forms a "Controlled Group"
within the meaning of Section 412(n)(6) of the Code (each, a "CDnow ERISA
Affiliate") (collectively, "CDnow Benefit Plans"). Except as disclosed in the
Filed CDnow SEC Documents or set forth in the CDnow Disclosure Letter, as of the
date of this Agreement, there are no employment, consulting, indemnification,
severance or termination agreements or
<PAGE>
29
arrangements between CDnow or any CDnow Subsidiary and any current or former
employee, executive officer or director of CDnow or any CDnow Subsidiary. Except
as set forth in the CDnow Disclosure Letter, neither CDnow nor any CDnow
Subsidiary has any general severance plan or policy.
SECTION 3.11. ERISA Compliance; Excess Parachute Payments. (a) The
CDnow Disclosure Letter contains a list of all "employee pension benefit plans"
(as defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), whether or not subject thereto) (sometimes referred
to herein as "CDnow Pension Plans"), "employee welfare benefit plans" (as
defined in Section 3(1) of ERISA) and all other CDnow Benefit Plans maintained,
or contributed to, by CDnow or any CDnow Subsidiary for the benefit of any
current or former employees, officers or directors of CDnow or any CDnow
Subsidiary. CDnow has delivered to each of Time Warner and Sony true, complete
and correct copies of (i) each CDnow Benefit Plan (or, in the case of any
unwritten CDnow Benefit Plan, a description thereof), (ii) the most recent
annual report on Form 5500 filed with the Internal Revenue Service with respect
to each CDnow Benefit Plan (if any such report was required), (iii) the most
recent summary plan description for each CDnow Benefit Plan for which such
summary plan description is required and (iv) each trust agreement and group
annuity contract relating to any CDnow Benefit Plan.
(b) Except as set forth in the CDnow Disclosure Letter, each CDnow
Pension Plan that is intended to be qualified under Section 401(a) of the Code
has been the subject of a determination letter from the Internal Revenue Service
to the effect that such CDnow Pension Plan is qualified and exempt from Federal
income taxes under Sections 401(a) and 501(a), respectively, of the Code, and no
such determination letter has been revoked nor, to the knowledge of CDnow, has
revocation been threatened, nor has any such CDnow Pension Plan been amended
since the date of its most recent determination letter or application therefor
in any respect that would adversely affect its qualification or materially
increase its costs.
(c) No CDnow Pension Plan is a defined benefit plan subject to Title
IV of ERISA, and no CDnow Pension Plan is a multiemployer plan within the
meaning of Section 4001(a)(3) of ERISA (a "Multiemployer Plan"). None of CDnow,
any CDnow Subsidiary, any CDnow ERISA Affiliate, any officer of CDnow, any CDnow
Subsidiary or any CDnow ERISA Affiliate or any of the CDnow Benefit Plans which
are subject to ERISA, including the CDnow Pension Plans, any
<PAGE>
30
trusts created thereunder or any trustee or administrator thereof, has engaged
in a "prohibited transaction" (as such term is defined in Section 406 of ERISA
or Section 4975 of the Code) or any other breach of fiduciary responsibility
that could subject CDnow, any CDnow Subsidiary, any CDnow ERISA Affiliate or any
officer of CDnow, any CDnow Subsidiary or any CDnow ERISA Affiliate to the tax
or penalty on prohibited transactions imposed by such Section 4975 or to any
liability under Section 502(i) or 502(1) of ERISA. None of such CDnow Benefit
Plans and trusts has been terminated, nor has there been any "reportable event"
(as that term is defined in Section 4043 of ERISA) with respect to any CDnow
Benefit Plan during the last five years. None of CDnow, any CDnow Subsidiary or
any CDnow ERISA Affiliate has incurred a "complete withdrawal" or a "partial
withdrawal" (as such terms are defined in Sections 4203 and 4205, respectively,
of ERISA) since the effective date of such Sections 4203 and 4205 with respect
to any Multiemployer Plan.
(d) With respect to any CDnow Benefit Plan that is an employee
welfare benefit plan, except as set forth in the CDnow Disclosure Letter, (i) no
such CDnow Benefit Plan is funded through a "welfare benefits fund" (as such
term is defined in Section 419(e) of the Code), (ii) each such CDnow Benefit
Plan that is a "group health plan" (as such term is defined in Section
5000(b)(1) of the Code) complies in all material respects with the applicable
requirements of Section 4980B(f) of the Code and (iii) each such CDnow Benefit
Plan (including any such plan covering retirees or other former employees) may
be amended or terminated without material liability to CDnow or any CDnow
Subsidiary on or at any time after the Effective Time.
(e) Other than payments that may be made to the persons listed in
the CDnow Disclosure Letter (the "Primary CDnow Executives") as set forth in the
CDnow Disclosure Letter, any amount that could be received (whether in cash or
property or the vesting of property) as a result of the Transactions by any
employee, officer or director of CDnow or any of its affiliates who is a
"disqualified individual" (as such term is defined in proposed Treasury
Regulation Section 1.280G-1) under any employment, severance or termination
agreement, other compensation arrangement or CDnow Benefit Plan currently in
effect would not be characterized as an "excess parachute payment" (as defined
in Section 280G(b)(1) of the Code).
(f) Each CDnow Benefit Plan has been maintained in all material
respects in accordance with its terms and
<PAGE>
31
with all applicable provisions of the Code, ERISA and other applicable laws.
SECTION 3.12. Litigation. Except as set forth in the CDnow
Disclosure Letter, there is no suit, action or proceeding pending or, to the
knowledge of CDnow, threatened against or affecting CDnow or any CDnow
Subsidiary (and CDnow is not aware of any basis for any such suit, action or
proceeding) that, individually or in the aggregate, has had or could reasonably
be expected to have a CDnow Material Adverse Effect, nor is there any Judgment
outstanding against, or, to the knowledge of CDnow, investigation by any
Governmental Entity involving, CDnow or any CDnow Subsidiary that, individually
or in the aggregate, has had or could reasonably be expected to have a CDnow
Material Adverse Effect.
SECTION 3.13. Compliance with Applicable Laws. CDnow and each of the
CDnow Subsidiaries are in compliance with all Laws applicable to CDnow or such
CDnow Subsidiary, except for instances of possible noncompliance that,
individually and in the aggregate, have not had and could not reasonably be
expected to have a CDnow Material Adverse Effect. As of the date of this
Agreement, except as set forth in the CDnow Disclosure Letter, CDnow has not
received, and no CDnow Subsidiary has received during the past two years, from a
Governmental Entity, any written communication that alleges that CDnow or any
CDnow Subsidiary is not in compliance in any material respect with any
applicable Law. This Section 3.13 does not relate to matters with respect to
Taxes, which are the subject of Section 3.09, compliance with ERISA, which is
the subject of Section 3.11, or Environmental Matters, which are the subject of
Section 3.17.
SECTION 3.14. Brokers; Schedule of Fees and Expenses. No broker,
investment banker, financial advisor or other person, other than Allen &
Company, Incorporated and Deutsche Bank Alex. Brown Incorporated, the fees and
expenses of which will be paid by CDnow, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with the
Transactions based upon arrangements made by or on behalf of CDnow or any CDnow
Subsidiary. A copy of the engagement letter relating to the services to be
provided by Allen & Company, which letter sets forth all fees and expenses to be
paid to Allen & Company by CDnow and the CDnow Subsidiaries, has been delivered
to Time Warner and Sony; such letter is the only document related to the
services to be provided by Allen & Company to CDnow and the CDnow Subsidiaries
in connection with the Transactions and such letter is in full force and
<PAGE>
32
effect. A copy of the engagement letter relating to the services to be provided
by Deutsche Bank Alex. Brown Incorporated, which letter sets forth all fees and
expenses to be paid to Deutsche Bank Alex. Brown Incorporated by CDnow and the
CDnow Subsidiaries, has been delivered to Time Warner and Sony; such letter is
the only document related to the services to be provided by Deutsche Bank Alex.
Brown Incorporated to CDnow and the CDnow Subsidiaries in connection with the
Transactions and such letter is in full force and effect. The CDnow Disclosure
Letter sets forth an estimate of all legal and accounting fees and expenses
incurred as of the date of this Agreement by CDnow and the CDnow Subsidiaries in
connection with the Transactions.
SECTION 3.15. Opinion of Financial Advisor. CDnow has received the
opinion of Allen & Company, Incorporated and Deutsche Bank Alex. Brown
Incorporated, each dated the date of this Agreement, to the effect that, as of
such date, the consideration to be received in the Merger by the holders of
CDnow Common Stock is fair to such holders from a financial point of view, a
signed copy of which opinion has been or will promptly be delivered to each of
Time Warner and Sony.
SECTION 3.16. Year 2000 Compliance. (a) Except as set forth in the
CDnow Disclosure Letter, the computer systems and software programs of CDnow and
the CDnow Subsidiaries are Year 2000 Compliant (as defined below). The best
current estimates of CDnow of capital expenditures to be Year 2000 Compliant are
set forth in the CDnow Disclosure Letter.
(b) The term "Year 2000 Compliant", with respect to a computer
system or software program, means that such computer system or program: (i) is
capable of recognizing, processing, managing, representing, interpreting and
manipulating correctly date-related data for dates earlier and later than
January 1, 2000; (ii) has the ability to provide date recognition for any data
element without limitation; (iii) has the ability to function automatically into
and beyond the year 2000 without human intervention and without any change in
operations associated with the advent of the year 2000; (iv) has the ability to
interpret data, dates and time correctly into and beyond the year 2000; (v) has
the ability not to produce noncompliance in existing data, nor otherwise corrupt
such data, into and beyond the year 2000; (vi) has the ability to process
correctly after January 1, 2000, data containing dates before that date; and
(vii) has the ability to recognize all "leap year" dates, including February 29,
2000.
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33
SECTION 3.17. Environmental Matters. Except as disclosed in the
Filed CDnow SEC Documents or set forth on the CDnow Disclosure Letter, and
except as would not, individually and in the aggregate, be reasonably likely to
have a CDnow Material Adverse Effect, (i) CDnow and each of the CDnow
Subsidiaries are in compliance with all applicable Environmental Laws, (ii)
CDnow and each of the CDnow Subsidiaries have all permits, authorizations,
licenses, consents and approvals required under applicable Environmental Laws
and are in compliance with their respective requirements, (iii) there are no
pending, or to the knowledge of CDnow, threatened, claims, proceedings or
investigations against CDnow or any CDnow Subsidiary alleging a violation of
Environmental Law, (iv) neither CDnow nor any CDnow Subsidiary has received
written notice alleging that CDnow or any CDnow Subsidiary is potentially liable
for the costs of investigating or remediating Hazardous Substances at any
property; (v) to the knowledge of CDnow and each of the CDnow Subsidiaries,
there have been no Releases of Hazardous Substances in, on, under or at any
properties currently owned or leased by CDnow or any of the CDnow Subsidiaries;
(vi) to the knowledge of CDnow and each of the CDnow Subsidiaries, there are no
underground storage tanks at any properties currently owned or leased by CDnow
or any of the CDnow Subsidiaries; and (vii) to the knowledge of CDnow and the
CDnow Subsidiaries, CDnow and the CDnow Subsidiaries have made available for
review by Time Warner and Sony all material environmental reports, studies and
related correspondence, as of the date hereof, relating to properties currently
owned or leased by CDnow or any of the CDnow Subsidiaries. For purposes of this
Agreement, the term "Environmental Laws" shall mean any applicable foreign,
Federal, state or local statutes, laws, regulations, ordinances, rules or codes
in effect as of the Closing Date relating to protection of the environment or
human health, or to the use, management or disposal of Hazardous Substances. For
purposes of this Agreement, the term "Hazardous Substances" shall mean any
explosive or radioactive substances or materials, any toxic or hazardous
substances or materials, including asbestos or asbestoscontaining materials,
polychlorinated biphenyls, petroleum and petroleum products, and any other
substances or materials defined as, or included in the definition of, "hazardous
substances", "hazardous wastes", "hazardous materials" or "toxic substances"
under any Environmental Law. For purposes of this Agreement, the term "Release"
shall mean any spilling, leaking, pumping, pouring, discharging, emitting,
emptying, leaching, injecting, dumping or disposing into the environment.
<PAGE>
34
SECTION 3.18. Contracts. Except as filed as an exhibit to the Filed
CDnow SEC Documents or set forth the CDnow Disclosure Letter, there are no
Contracts in effect as of the date of this Agreement that are material to the
business, properties, assets, condition (financial or otherwise) or results of
operations of CDnow and the CDnow Subsidiaries, taken as a whole. Except as set
forth in the CDnow Disclosure Letter and except for Contracts entered into after
the date of this Agreement not in violation of any other provision of this
Agreement, neither CDnow nor any CDnow Subsidiary is party to any:
(i) Contract with any labor union;
(ii) employment agreement, or consulting agreement or other contract
for services, pursuant to which an individual performs services comparable
to an employee, with annual financial obligations of CDnow or any CDnow
Subsidiary in excess of $100,000;
(iii) loan agreement or instrument relating to indebtedness for
borrowed money;
(iv) Contract with any agent, dealer or distributor acting on behalf
of CDnow or any CDnow Subsidiary;
(v) stand-by letters of credit, guarantees or performance bonds
involving amounts in excess of $100,000 in the aggregate;
(vi) Contract with any affiliate of CDnow;
(vii) Contract that provides for the cash payment, equivalent equity
outlay or provision of services (A) in an amount greater than $150,000 per
annum or (B) $500,000 over the term of the Contract;
(viii) Contract that establishes any form of exclusivity restriction
on CDnow or any CDnow Subsidiary, any exclusive or preferred vendor
relationship restricting CDnow or any CDnow Subsidiary in any material
respect, any covenant not to compete restricting CDnow or any CDnow
Subsidiary or any covenant restricting in any material respect the
development, marketing or distribution by CDnow or any CDnow Subsidiary of
any of its products, content or services, in each case that is binding on
CDnow or any CDnow Subsidiary for the calendar year 1999 or thereafter; or
<PAGE>
35
(ix) Contract (A) in respect of the licensing of any Intellectual
Property Rights held by CDnow or any CDnow Subsidiary on an exclusive
basis or for a term in excess of one year or involving the cash payment,
equivalent equity outlay or provision of services in an amount greater
than (I) $100,000 per annum or (II) $500,000 over the term of the
agreement, (B) with a "portal", "internet service provider" or "internet
search engine" that provides for the cash payment, equivalent equity
outlay or provision of services in an amount greater than (i) $100,000 per
annum or (ii) $500,000 over the term of the agreement or (C) with any
record company or label or affiliate thereof that provides for the cash
payment, equivalent equity outlay or provision of services in an amount
greater than (I) $100,000 per annum or (II) $500,000 over the term of the
Contract.
Neither CDnow nor any CDnow Subsidiary is in violation of or in default under
(nor does there exist any condition which upon the passage of time or the giving
of notice would cause such a violation of or default under) any Contract to
which it is a party or by which it or any of its properties or assets is bound,
nor, to the knowledge of CDnow, is any other party to any such Contract in
violation of or in default under such Contract, except for violations or
defaults that, individually and in the aggregate, have not had and could not
reasonably be expected to have a CDnow Material Adverse Effect.
SECTION 3.19. Title to Properties. (a) Each of CDnow and each CDnow
Subsidiary has (i) good and marketable title to, or valid leasehold interests
in, all its real properties and (ii) good and valid title to, or valid leasehold
interests in, all its personal properties and assets, in each case except for
such as are no longer used or useful in the conduct of its businesses or as have
been disposed of in the ordinary course of business and except for defects in
title, easements, restrictive covenants and similar encumbrances or impediments
that, in the aggregate, do not and will not materially interfere with its
ability to conduct its business as currently conducted. All such assets and
properties, other than assets and properties in which CDnow or any CDnow
Subsidiary has leasehold interests, are free and clear of all Liens other than
those disclosed in the CDnow Disclosure Letter and except for Liens that, in the
aggregate, do not and will not materially interfere with the ability of CDnow
and the CDnow Subsidiaries to conduct business as currently conducted.
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36
(b) Except as disclosed in the Filed CDnow SEC Documents or set
forth in the CDnow Disclosure Letter, each of CDnow and each CDnow Subsidiary
has complied in all material respects with the terms of all leases to which it
is a party and under which it is in occupancy, and all such leases are in full
force and effect. Each of CDnow and each CDnow Subsidiary enjoys peaceful and
undisturbed possession under all such leases.
SECTION 3.20. Intellectual Property. Except as set forth in the
CDnow Disclosure Letter, CDnow and the CDnow Subsidiaries own, or are validly
licensed or otherwise have the right to use, all patents, patent rights,
trademarks, trademark rights, trade names, trade name rights, service marks,
service mark rights, copyrights and other proprietary intellectual property
rights and computer programs (collectively, "Intellectual Property Rights")
which are material to the conduct of the business as currently conducted of
CDnow and the CDnow Subsidiaries, taken as a whole. The CDnow Disclosure Letter
includes a description of all Intellectual Property Rights which are material to
the conduct of the business of CDnow and the CDnow Subsidiaries, taken as a
whole. Except as set forth in the CDnow Disclosure Letter, no claims are pending
or, to the knowledge of CDnow, threatened that CDnow or any CDnow Subsidiary is
infringing or otherwise adversely affecting the rights of any person with regard
to any Intellectual Property Right, except in each case for any such claims
that, individually and in the aggregate, have not had and could not reasonably
be expected to have a CDnow Material Adverse Effect. To the knowledge of CDnow,
as of the date of this Agreement, except as set forth in the CDnow Disclosure
Letter, no person is infringing the rights of CDnow or any CDnow Subsidiary with
respect to any Intellectual Property Right. Except as set forth in the CDnow
Disclosure Letter, neither CDnow nor any of the CDnow Subsidiaries has licensed,
or otherwise granted, to any party (other than CDnow or any CDnow Subsidiary)
any rights in or to any Intellectual Property Rights (i) on an exclusive basis,
(ii) involving the cash payment, equivalent equity outlay or provision of
services in an amount greater than (x) $100,000 per annum or (y) $500,000 over
the term of the license or (iii) for a term in excess of one year.
SECTION 3.21. Labor Matters. Except as disclosed in the Filed CDnow
SEC Documents or set forth in the CDnow Disclosure Letter, (i) there are no
collective bargaining or other labor union agreements to which CDnow or any
CDnow Subsidiary is a party or by which any of them is bound and (ii) to the
knowledge of CDnow, during the past five years neither CDnow nor any CDnow
Subsidiary has encountered any
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37
labor union organizing activity, or had any actual or threatened employee
strikes, work stoppages, slowdowns or lockouts.
SECTION 3.22. Insurance. CDnow and each of the CDnow Subsidiaries
have insurance covering their respective properties, operations and businesses,
which insurance is in amounts and insures against such losses and risks as are
adequate, in the opinion of CDnow, to protect CDnow and its business and each of
the CDnow Subsidiaries and its business. The CDnow "key man" insurance policy
covering Jason Olim and any of its other principal executive officers, is in the
amount set forth in the CDnow Disclosure Letter and insures against such losses
and risks as are adequate, in the opinion of CDnow, to protect CDnow and its
business.
ARTICLE IV
Representations and Warranties of Time Warner
and Sony as to the Columbia House Entities
Time Warner and Sony, jointly and severally, represent and warrant
to CDnow as follows:
SECTION 4.01. Organization, Standing and Power. Each of Columbia
House, MCo, VCo, Columbia House Mexico, Sony Mexico, Time Warner Mexico and
Columbia House Canada (collectively, the "Columbia House Entities") and each of
the subsidiaries of Columbia House and Columbia House Canada (the "Columbia
House Subsidiaries") is duly formed and validly existing under the Laws of the
jurisdiction in which it is formed and has full power and authority and
possesses all governmental franchises, licenses, permits, authorizations and
approvals necessary to enable it to own, lease or otherwise hold its properties
and assets and to conduct its businesses as presently conducted, other than such
franchises, licenses, permits, authorizations and approvals the lack of which,
individually and in the aggregate, has not had and could not reasonably be
expected to have a material adverse effect on the Columbia House Entities and
the Columbia House Subsidiaries, taken as a whole, or a material adverse effect
on the ability of any of the Columbia House Entities, the Columbia House
Subsidiaries, Time Warner Canada or Sony Canada to perform its obligations under
any of the Transaction Agreements to which it is a party or to consummate the
Transactions, except to the extent such effect is the result of (i) actions
taken by CDnow (other than actions required by any Transaction Agreement) or
economic factors affecting the
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38
economy as a whole or the industry in which the Columbia House Entities compete
or (ii) payment of legal fees incurred in the defense of any litigation by
stockholders of CDnow challenging the Transactions (a "Columbia House Entities
Material Adverse Effect"). Each of the Columbia House Entities and each Columbia
House Subsidiary is duly qualified to do business in each jurisdiction where the
nature of its business or the ownership or leasing of its properties makes such
qualification necessary, except where the failure to so qualify has not had and
could not reasonably be expected to have a Columbia House Entities Material
Adverse Effect. Time Warner or Sony has delivered to CDnow true and complete
copies of the joint venture agreements in respect of each of MCo, VCo and
Columbia House, the organizational documents of Time Warner Mexico, Sony Mexico,
Columbia House Mexico and Columbia House Canada and the organizational documents
of each Columbia House Subsidiary, in each case as amended to the date of this
Agreement. As of the Effective Time, the joint venture agreement in respect of
MCo will be substantially in the form of Exhibit M attached hereto, the joint
venture agreement in respect of VCo will be substantially in the form of Exhibit
N attached hereto and the joint venture agreement in respect of Columbia House
will be substantially in the form of Exhibit O attached hereto.
SECTION 4.02. Columbia House Subsidiaries; Equity Interests. (a) The
letter, dated as of the date of this Agreement, from the Columbia House Entities
to CDnow (the "Columbia House Entities Disclosure Letter") lists each Columbia
House Subsidiary and its jurisdiction of organization. All the outstanding
shares of capital stock of each Columbia House Subsidiary have been validly
issued and are fully paid and nonassessable and, except as set forth in the
Columbia House Entities Disclosure Letter, are owned by a Columbia House Entity
or a wholly owned Columbia House Subsidiary or by a Columbia House Entity and a
wholly owned Columbia House Subsidiary, free and clear of all Liens. As of the
date of this Agreement, neither MCo nor VCo has any subsidiaries other than
Columbia House. As of the date of this Agreement, Time Warner Mexico and Sony
Mexico do not have any subsidiaries other than Columbia House Mexico. As of the
date of this Agreement, Columbia House Canada does not have any subsidiaries
other than Canadian Sub.
(b) Except for the interests in the Columbia House Subsidiaries and
the interests of Time Warner Mexico and Sony Mexico in Columbia House Mexico,
and except for the ownership interests set forth in the Columbia House Entities
Disclosure Letter, none of the Columbia House Entities owns,
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39
directly or indirectly, any capital stock, membership interest, partnership
interest, joint venture interest or other equity interest in any person.
(c) Canadian Sub was formed solely for the purpose of engaging in
the Transactions. Canadian Sub has not carried on any business or conducted any
operations since the date of its incorporation other than the execution of the
Master Canadian Transaction Agreement and the other Transaction Agreements to
which it is a party, the performance of its obligations hereunder and thereunder
and matters ancillary thereto.
SECTION 4.03. Capital Structure. All of the general partnership
interests of Columbia House are held by MCo and VCo. MCo and VCo own 55% and
45%, respectively, of the general partnership interests in Columbia House, and
MCo and VCo have good and valid title to such general partnership interests,
free and clear of any Liens. All of the issued and outstanding shares of capital
stock of Columbia House Mexico are held by Time Warner Mexico (the "Time Warner
Columbia House Mexico Shares") and Sony Mexico (the "Sony Columbia House Mexico
Shares"). Time Warner Mexico and Sony Mexico each own 50% of the issued and
outstanding shares of capital stock of Columbia House Mexico. All of the general
partnership interests of Columbia House Canada are held by Time Warner Canada
and Sony Canada. Time Warner Canada and Sony Canada each own 50% of the general
partnership interests in Columbia House Canada. There are not any bonds,
debentures, notes or other indebtedness of any of the Columbia House Entities
having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which holders of equity interests in
such Columbia House Entity may vote ("Voting Columbia House Entities Debt").
There are not any options, warrants, rights, convertible or exchangeable
securities, "phantom" stock rights, stock appreciation rights, stock-based
performance units, commitments, Contracts, arrangements or undertakings of any
kind to which any of the Columbia House Entities or any Columbia House
Subsidiary is a party or by which any of them is bound (i) obligating any
Columbia House Entity or any Columbia House Subsidiary to issue, deliver or
sell, or cause to be issued, delivered or sold, additional equity interests in,
or any security convertible or exercisable for or exchangeable into any equity
interest in, any Columbia House Entity or any Columbia House Subsidiary or any
Voting Columbia House Entities Debt, (ii) obligating any Columbia House Entity
or any Columbia House Subsidiary to issue, grant, extend or enter into any such
option, warrant, call, right, security, commitment, Contract, arrangement or
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40
undertaking or (iii) that give any person the right to receive any economic
benefit or right similar to or derived from the economic benefits and rights
accruing to holders of equity interests in any of the Columbia House Entities or
any Columbia House Subsidiary. There are not any outstanding contractual
obligations of any Columbia House Entity or any Columbia House Subsidiary to
repurchase, redeem or otherwise acquire any equity interests in any Columbia
House Entity or any Columbia House Subsidiary.
SECTION 4.04. Authority; Execution and Delivery; Enforceability. (a)
Each Columbia House Entity and Columbia House Subsidiary has all requisite power
and authority to execute and deliver the Transaction Agreements to which it is a
party and to consummate the Transactions. The execution and delivery by each
Columbia House Entity and Columbia House Subsidiary of each Transaction
Agreement to which it is a party and the consummation by each Columbia House
Entity and Columbia House Subsidiary of the Transactions have been duly
authorized by all necessary action on the part of such Columbia House Entity and
Columbia House Subsidiary, as applicable. Each Columbia House Entity and
Columbia House Subsidiary has duly executed and delivered each Initial Agreement
to which it is a party, and, assuming the due authorization, execution and
delivery by each person other than the Columbia House Entities and Columbia
House Subsidiaries, each Initial Agreement to which it is a party constitutes
its legal, valid and binding obligation, enforceable against it in accordance
with its terms. On or prior to the Closing Date, each Columbia House Entity and
Columbia House Subsidiary shall have duly executed and delivered each
Supplemental Agreement to which it is a party, and, when so executed and
delivered, and duly authorized, executed and delivered by each person other than
the Columbia House Entities and Columbia House Subsidiaries party thereto, each
Supplemental Agreement to which it is a party will constitute its legal, valid
and binding obligation, enforceable against it in accordance with its terms.
SECTION 4.05. No Conflicts; Consents. (a) Except as set forth in the
Columbia House Entities Disclosure Letter, the consummation of the Transactions
will not conflict with, or result in any violation of or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancelation or acceleration of any obligation or to loss of a
material benefit under, or to increased, additional, accelerated or guaranteed
rights or entitlements of any person under, or result in the creation of any
Lien upon any of the properties or assets of any of the Columbia House Entities
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41
or any Columbia House Subsidiary under, any provision of (i) the organizational
documents of any of the Columbia House Entities or any Columbia House
Subsidiary, (ii) any Contract to which any Columbia House Entity or any Columbia
House Subsidiary is a party or by which any of its properties or assets is bound
or (iii) subject to the filings and other matters referred to in Section
4.05(b), any Judgment or Law applicable to any of the Columbia House Entities or
any Columbia House Subsidiary, other than, in the case of clauses (ii) and
(iii), any such items that, individually and in the aggregate, have not had and
could not reasonably be expected to have a Columbia House Entities Material
Adverse Effect.
(b) No Consent of, or registration, declaration or filing with, or
permit from, any Governmental Entity is required to be obtained or made by or
with respect to any of the Columbia House Entities or any Columbia House
Subsidiary in connection with the execution, delivery and performance of any
Transaction Agreement to which Time Warner and Sony are parties or the
consummation of the Transactions, other than (i) compliance with and filings
under the HSR Act and the Canadian Competition Act and receipt of the Canadian
Competition Act Approval, (ii) the filing with the SEC of such reports under
Sections 13 and 16 of the Exchange Act as may be required in connection with
this Agreement, the other Transaction Agreements and the Transactions, (iii)
compliance with and such filings as may be required under applicable
Environmental Laws, (iv) such Consents, registrations or filings as may be
required under applicable state securities laws or the laws of any foreign
country, (v) such filings as may be required in connection with the Taxes
described in Section 8.09 and (vi) such other items as are set forth in the
Columbia House Entities Disclosure Letter.
SECTION 4.06. Financial Statements; Undisclosed Liabilities. The
Columbia House Entities Disclosure Letter sets forth the combined balance
sheets, statements of operations, statements of cash flows and statements of
venturers' deficit as of and for the years ended December 19, 1997 and December
18, 1998 for Columbia House, Columbia House Canada and the Columbia House
Subsidiaries (the "Columbia House and Columbia House Canada Financial
Statements"). The combined balance sheet for Columbia House, Columbia House
Canada and the Columbia House Subsidiaries dated December 18, 1998 is referred
to in this Agreement as the "Columbia House and Columbia House Canada Balance
Sheet". The Columbia House and Columbia House Canada Financial Statements were
prepared in accordance with GAAP applied on a consistent basis during the
periods
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42
involved (except as may be indicated in the notes thereto) and fairly presented
the financial position of Columbia House, Columbia House Canada and the Columbia
House Subsidiaries as of the dates thereof and the consolidated results of
operations and cash flows for the periods then ended. The Columbia House
Entities Disclosure Letter sets forth the balance sheets, statements of changes
in stockholders' equity and statements of changes in financial position as of
and for the years ended December 31, 1997 and December 31, 1998 for Columbia
House Mexico (the "Columbia House Mexico Financial Statements", and together
with the Columbia House and Columbia House Canada Financial Statements, the
"Columbia House Entities Financial Statements"). The balance sheet for Columbia
House Mexico dated December 31, 1998 is referred to in this Agreement as the
"Columbia House Mexico Balance Sheet". Except as set forth in the Columbia House
Entities Disclosure Letter, the Columbia House Mexico Financial Statements were
prepared in accordance with accounting principles generally accepted in Mexico
and fairly presented the financial position of Columbia House Mexico as of the
dates thereof and the results of operations and changes in stockholders' equity
for the periods then ended. Except as disclosed in the Columbia House Entities
Financial Statements and except for liabilities and obligations incurred since
December 18, 1998 (with respect to Columbia House, Columbia House Canada and the
Columbia House Subsidiaries) or December 31, 1998 (with respect to Columbia
House Mexico) in the ordinary course of business consistent with past practice
or as set forth in the Columbia House Entities Disclosure Letter, none of the
Columbia House Entities or the Columbia House Subsidiaries has any liabilities
or obligations of any nature (whether accrued, absolute, contingent or
otherwise) required by GAAP to be set forth on a consolidated balance sheet or
in the notes thereto (with respect to Columbia House, Columbia House Canada and
the Columbia House Subsidiaries) or required by accounting principles generally
accepted in Mexico to be set forth on a balance sheet or in the notes thereto
(with respect to Columbia House Mexico), except those liabilities or obligations
that, individually and in the aggregate, have not had and could not reasonably
be expected to have a Columbia House Entities Material Adverse Effect. None of
the Columbia House Entities or the Columbia House Subsidiaries is, or has at any
time been, subject to the reporting requirements of Sections 13(a) and 15(d) of
the Exchange Act. The Columbia House Entities Financial Statements have not been
restated for adjustments which may be required in connection with the filing of
the Form S-4 with the SEC.
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43
SECTION 4.07. Information Supplied. None of the information supplied
or to be supplied by any of the Columbia House Entities for inclusion or
incorporation by reference in (i) the Form S-4 will, at the time the Form S-4 is
filed with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or (ii) the Proxy
Statement will, at the date the Proxy Statement is first mailed to CDnow's
shareholders or at the time of the CDnow Shareholders Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
SECTION 4.08. Absence of Certain Changes or Events. Except as set
forth in the Columbia House Entities Disclosure Letter, since December 18, 1998,
each of the Columbia House Entities and each Columbia House Subsidiary has
conducted its business only in the ordinary course, and
there has not been:
(i) any event, change, effect or development that, individually or
in the aggregate, has had or could reasonably be expected to have a
Columbia House Entities Material Adverse Effect;
(ii) any declaration, setting aside or payment of any dividend or
other distribution (whether in cash, stock or property) with respect to
any equity interests of any of the Columbia House Entities or any
repurchase for value by any of the Columbia House Entities of any equity
interests of any Columbia House Entity, other than any of the foregoing
permitted by Section 7.01(b)(i);
(iii) any split, combination or reclassification of any equity
interests of any Columbia House Entity or any issuance or the
authorization of any issuance of any other securities in respect of, in
lieu of, or in substitution for, such equity interests;
(iv) (A) any granting by any of the Columbia House Entities or any
Columbia House Subsidiary to any director or executive officer of, or any
consultant (who performs services comparable to an employee) to, any
Columbia House Entity or any Columbia House Subsidiary of any increase in
compensation, except for customary increases in cash compensation in the
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44
ordinary course of business consistent with prior practice or as was
required under employment agreements or plans in effect as of December 18,
1998, (B) any granting by any Columbia House Entity or any Columbia House
Subsidiary to any such director, executive officer or consultant of any
increase in severance or termination pay, except as was required under any
employment, severance or termination agreements or plans in effect as of
December 18, 1998, or (C) any entry by any Columbia House Entity or any
Columbia House Subsidiary into, or any amendment of, any employment,
consulting, deferred compensation, indemnification, severance or
termination agreement with any such director, executive officer or
consultant;
(v) any change in accounting methods, principles or practices by any
Columbia House Entity or any Columbia House Subsidiary materially
affecting the consolidated assets, liabilities or results of operations of
such Columbia House Entity or such Columbia House Subsidiary, except
insofar as may have been required by a change in GAAP or by SEC
interpretations with respect to filings therewith;
(vi) any material elections or changes in accounting methods with
respect to Taxes by any Columbia House Entity or any Columbia House
Subsidiary or settlement or compromise by any Columbia House Entity or any
Columbia House Subsidiary of any material
Tax liability or refund;
(vii) any acquisition by any Columbia House Entity or any Columbia
House Subsidiary (A) by merging or consolidating with, or by purchasing
assets of, or by any other manner, any equity interest in or portion of
any business of any corporation, partnership, company, limited liability
company, joint venture, association or other business organization or
division thereof or (B) of any assets that, individually, are in excess of
$3 million or, in the aggregate, are in excess of $7.5 million, except
purchases of inventory for resale and renewals of licenses, in each case
in the ordinary course of business consistent with prior practice; or
(viii) any sale, lease, assignment, transfer, conveyance, delivery
or other disposition, or any divestiture, by any Columbia House Entity or
any Columbia House Subsidiary of any properties or assets of such Columbia
House Entity or Columbia House Subsidiary, other than sales of inventory
and renewals
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45
of licenses, in each case in the ordinary course of business consistent
with prior practice and sale/leaseback transactions in respect of
equipment financings not to exceed $3 million in the aggregate.
SECTION 4.09. Taxes. (a) Each Columbia House Entity and each
Columbia House Subsidiary has timely filed, or has had or caused to be timely
filed on its behalf, all Tax Returns required to be filed by it, and all such
Tax Returns are true, complete and accurate, except to the extent any failure to
file or any inaccuracies in any filed Tax Returns, individually and in the
aggregate, have not had and could not reasonably be expected to have a Columbia
House Entities Material Adverse Effect. All Taxes shown to be due on such Tax
Returns, or otherwise owed, have been timely paid, except to the extent that any
failure to pay, individually and in the aggregate, has not had and could not
reasonably be expected to have a Columbia House Entities Material Adverse
Effect. Each Columbia House Entity and each Columbia House Subsidiary has
withheld or collected and has paid over to the appropriate taxing authority (or
is properly holding for payment to such taxing authority) all Taxes required by
law to be withheld or collected, except for amounts that would not, individually
and in the aggregate, have a Columbia House Entities Material Adverse Effect.
(b) The Columbia House Entities Financial Statements contained in
the Columbia House Entities Disclosure Letter reflect an adequate reserve for
all Taxes payable by Columbia House and the Columbia House Subsidiaries for all
Taxable periods and portions thereof through the date of such financial
statements. Except as set forth in the Columbia House Entities Disclosure
Letter, no deficiency with respect to any Taxes has been proposed, asserted or
assessed or, to the knowledge of Time Warner or Sony, threatened against any
Columbia House Entity or any Columbia House Subsidiary, no waivers of the time
to assess any such Taxes are outstanding and no requests for any other waivers
are pending, except for any such deficiency, waiver or request for waiver, that
individually and in the aggregate, has not had and could not reasonably be
expected to have a Columbia House Entities Material Adverse Effect.
(c) Except as set forth in the Columbia House Entities Disclosure
Letter, none of the Tax Returns of any Columbia House Entity or any Columbia
House Subsidiary has been examined by any taxing authority or is currently being
examined by any taxing authority or is the subject of a pending examination. All
assessments for Taxes due with respect to any completed or settled examinations
or any
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46
concluded litigation have been fully paid. Except as set forth in the Columbia
House Entities Disclosure Letter, none of the Columbia House Entities or any
Columbia House Subsidiary has entered into a closing agreement with any taxing
authority with respect to Taxes.
(d) There are no material Liens for Taxes (other than for current
Taxes not yet due and payable or that are being contested in good faith in
appropriate proceedings) on the assets of any of the Columbia House Entities or
any Columbia House Subsidiary. Except as set forth in the Columbia House
Entities Disclosure Letter, no Columbia House Entity and no Columbia House
Subsidiary (i) is bound by any agreement with any affiliate with respect to
Taxes, other than a tax-related service agreement with SMEI and an agreement
with respect to Permitted Tax Distributions (as defined in Section 7.01(b)) or
(ii) otherwise is bound by any tax sharing allocation or similar agreement or
any indemnification or reimbursement agreement with respect to Taxes.
(e) None of the Columbia House Entities or any Columbia House
Subsidiary (i) has agreed or is required to make any adjustments pursuant to
Section 481 of the Code; (ii) has knowledge that the Internal Revenue Service
has proposed any such adjustment or a change in accounting method with respect
to such entity; or (iii) has an application pending with the Internal Revenue
Service or any other taxing authority requesting permission for any change in
accounting method.
(f) Neither Time Warner nor Sony has any reason to believe that any
conditions exist that could reasonably be expected to prevent the Contributions
and the Merger from qualifying as exchanges under Section 351 of the Code.
(g) No notice of a claim or pending investigation has been received,
or to the knowledge of Time Warner and Sony, has been threatened, by any state,
local or other jurisdiction with which any of the Columbia House Entities or any
Columbia House Subsidiary does not currently file Tax Returns, alleging that the
Columbia House Entities or any Columbia House Subsidiary has a duty to file Tax
Returns and pay Taxes or is otherwise subject to the taxing authority of such
jurisdiction, nor, to the knowledge of Time Warner or Sony, has any of the
Columbia House Entities or any Columbia House Subsidiary received any notice or
questionnaire from any such jurisdiction that suggests or asserts that any of
the Columbia House Entities or any Columbia House Subsidiary may have a duty to
file such Tax Returns and pay such Taxes,
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47
or otherwise is subject to the taxing authority of such jurisdiction.
SECTION 4.10. Absence of Changes in Benefit Plans. Except as set
forth in the Columbia House Entities Disclosure Letter, since December 18, 1998,
there has not been any adoption or amendment in any material respect by any
Columbia House Entity or any Columbia House Subsidiary or any Columbia House
ERISA Affiliate (as defined below) of any collective bargaining agreement or any
bonus, pension, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, stock option, phantom stock, retirement,
vacation, severance, disability, death benefit, hospitalization, medical or
other plan, arrangement or understanding (whether or not legally binding)
providing benefits to any current or former employee, officer or director of any
Columbia House Entity, any Columbia House Subsidiary or any entity that, with
any Columbia House Entity or any Columbia House Subsidiary, formed or forms a
"Controlled Group" within the meaning of Section 412(n)(6) of the Code (a
"Columbia House ERISA Affiliate") (collectively, "Columbia House Entities
Benefit Plans"). Except as set forth in the Columbia House Entities Disclosure
Letter, as of the date of this Agreement, there are no employment, consulting,
indemnification, severance or termination agreements or arrangements between any
of the Columbia House Entities or any Columbia House Subsidiary and any current
or former employee, executive officer or director of any Columbia House Entity
or any Columbia House Subsidiary. Except as set forth in the Columbia House
Entities Disclosure Letter, no Columbia House Entity or Columbia House
Subsidiary has any general severance plan or policy.
SECTION 4.11. ERISA Compliance; Excess Parachute Payments. (a) The
Columbia House Entities Disclosure Letter contains a list of all "employee
pension benefit plans" (as defined in Section 3(2) of ERISA, whether or not
subject thereto) (sometimes referred to herein as "Columbia House Entities
Pension Plans"), "employee welfare benefit plans" (as defined in Section 3(1) of
ERISA) and all other Columbia House Entities Benefit Plans (other than Columbia
House Entities Foreign Plans as defined in Section 4.11(g)) maintained, or
contributed to, by any Columbia House Entity or any Columbia House Subsidiary
for the benefit of any current or former employees, officers or directors of any
Columbia House Entity or any Columbia House Subsidiary. The Columbia House
Entities have delivered to CDnow true, complete and correct copies of (i) each
Columbia House Entities Benefit Plan (or, in the case of any unwritten Columbia
House Entities Benefit Plan, a description
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thereof), (ii) the most recent annual report on Form 5500 filed with the
Internal Revenue Service with respect to each Columbia House Entities Benefit
Plan (if any such report was required), (iii) the most recent summary plan
description for each Columbia House Entities Benefit Plan for which such summary
plan description is required and (iv) each trust agreement and group annuity
contract relating to any Columbia House Entities Benefit Plan.
(b) Except as set forth in the Columbia House Entities Disclosure
Letter, each Columbia House Entities Pension Plan that is intended to be
qualified under Section 401(a) of the Code has been the subject of a
determination letter from the Internal Revenue Service to the effect that such
Columbia House Entities Pension Plan is qualified and exempt from Federal income
taxes under Sections 401(a) and 501(a), respectively, of the Code, and no such
determination letter has been revoked nor, to the knowledge of Time Warner and
Sony, has revocation been threatened, nor has any such Columbia House Entities
Pension Plan been amended since the date of its most recent determination letter
or application therefor in any respect that would adversely affect its
qualification or materially increase its costs.
(c) Except as set forth in the Columbia House Entities Disclosure
Letter, no Columbia House Entities Pension Plan is a defined benefit plan
subject to Title IV of ERISA. No Columbia House Entities Pension Plan is a
Multiemployer Plan. None of the Columbia House Entities Pension Plans has an
"accumulated funding deficiency" (as such term is defined in Section 302 of
ERISA or Section 412 of the Code), whether or not waived. None of the Columbia
House Entities, any Columbia House Subsidiary, any Columbia House ERISA
Affiliate, any officer of any Columbia House Entity, any Columbia House
Subsidiary or any Columbia House ERISA Affiliate or any of the Columbia House
Entities Benefit Plans which are subject to ERISA, including the Columbia House
Entities Pension Plans, any trusts created thereunder or any trustee or
administrator thereof, has engaged in a "prohibited transaction" (as such term
is defined in Section 406 of ERISA or Section 4975 of the Code) or any other
breach of fiduciary responsibility that could subject any Columbia House Entity,
any Columbia House Subsidiary, any Columbia House ERISA Affiliate or any officer
of any Columbia House Entity, any Columbia House Subsidiary or any Columbia
House ERISA Affiliate to the tax or penalty on prohibited transactions imposed
by such Section 4975 or to any liability under Section 502(i) or 502(1) of
ERISA. None of such Columbia House Entities Benefit Plans and trusts has been
terminated, nor has there
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been any "reportable event" (as that term is defined in Section 4043 of ERISA)
with respect to any Columbia House Entities Benefit Plan during the last five
years. None of the Columbia House Entities, any Columbia House Subsidiary or any
Columbia House ERISA Affiliate has incurred a "complete withdrawal" or a
"partial withdrawal" (as such terms are defined in Sections 4203 and 4205,
respectively, of ERISA) since the effective date of such Sections 4203 and 4205
with respect to any Multiemployer Plan.
(d) With respect to any Columbia House Entities Benefit Plan that is
an employee welfare benefit plan, except as set forth in the Columbia House
Entities Disclosure Letter, (i) no such Columbia House Entities Benefit Plan is
funded through a "welfare benefits fund" (as such term is defined in Section
419(e) of the Code), (ii) each such Columbia House Entities Benefit Plan that is
a "group health plan" (as such term is defined in Section 5000(b)(1) of the
Code) complies in all material respects with the applicable requirements of
Section 4980B(f) of the Code and (iii) each such Columbia House Entities Benefit
Plan (including any such plan covering retirees or other former employees) may
be amended or terminated without material liability to any of the Columbia House
Entities or any Columbia House Subsidiary on or at any time after the Effective
Time.
(e) Any amount that could be received (whether in cash or property
or the vesting of property) as a result of the Transactions by any employee,
officer or director of any of the Columbia House Entities or any of their
affiliates who is a "disqualified individual" (as such term is defined in
proposed Treasury Regulation Section 1.280G-1) under any employment, severance
or termination agreement, other compensation arrangement or Columbia House
Entities Benefit Plan currently in effect would not be characterized as an
"excess parachute payment" (as defined in Section 280G(b)(1) of the Code).
(f) Each Columbia House Benefit Plan has been maintained in all
material respects in accordance with its terms and with all applicable
provisions of the Code, ERISA and other applicable laws.
(g) Each Columbia House Entities Canadian Plan (as defined below)
has been maintained in substantial compliance with its terms and with the
requirements of any and all applicable laws, statutes, rules, regulations and
orders in all material respects and has been maintained, where required, in good
standing with applicable regulatory authorities, and neither the Columbia House
Entities nor any
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50
Columbia House Subsidiary has incurred any material obligation in connection
with the termination or withdrawal from any Columbia House Entities Canadian
Plan for which payment has not been fully made. Except for any failure to comply
that has not had and could not reasonably be expected to have a Columbia House
Entities Material Adverse Effect, (i) each Columbia House Entities Foreign Plan
(as defined below) has been maintained in substantial compliance with its terms
and with the requirements of any and all applicable laws, statutes, rules,
regulations and orders and has been maintained, where required, in good standing
with applicable regulatory authorities, and (ii) neither the Columbia House
Entities nor any Columbia House Subsidiary has incurred any material obligation
in connection with the termination or withdrawal from any Columbia House
Entities Foreign Plan for which payment has not been fully made. For purposes of
this Section 4.11, "Columbia House Entities Canadian Plan" shall mean any
Columbia House Entities Benefit Plan established or maintained in Canada
primarily for the benefit of employees residing in Canada and which plan is not
subject to ERISA. For purposes of this Section 4.11, "Columbia House Entities
Foreign Plan" shall mean any Columbia House Entities Benefit Plan established or
maintained outside the United States primarily for the benefit of employees
residing outside the United States and which plan is not subject to ERISA, other
than a Columbia House Entities Canadian Plan. In no event shall any provision
under this Section 4.11 other than this paragraph (g) relate to matters with
respect to any Columbia House Entities Canadian Plans or Columbia House Entities
Foreign Plans, which are the subject of this Section 4.11(g).
SECTION 4.12. Litigation. Except as set forth in the Columbia House
Entities Disclosure Letter, there is no suit, action or proceeding pending or,
to the knowledge of Time Warner and Sony, threatened against or affecting any
Columbia House Entity or any Columbia House Subsidiary (and Time Warner and Sony
are not aware of any basis for any such suit, action or proceeding) that,
individually or in the aggregate, has had or could reasonably be expected to
have a Columbia House Entities Material Adverse Effect, nor is there any
Judgment outstanding against or, to the knowledge of Time Warner and Sony,
investigation by any Governmental Entity involving, any Columbia House Entity or
any Columbia House Subsidiary that, individually or in the aggregate, has had or
could reasonably be expected to have a Columbia House Entities Material Adverse
Effect.
SECTION 4.13. Compliance with Applicable Laws. Each of the Columbia
House Entities and each of the Columbia House Subsidiaries is in compliance with
all Laws applicable
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51
to such Columbia House Entity or Columbia House Subsidiary, except for instances
of possible noncompliance that, individually and in the aggregate, have not had
and could not reasonably be expected to have a Columbia House Entities Material
Adverse Effect. As of the date of this Agreement, except as set forth in the
Columbia House Entities Disclosure Letter, no Columbia House Entity or Columbia
House Subsidiary has received during the past two years, from a Governmental
Entity, any written communication that alleges that any Columbia House Entity or
any Columbia House Subsidiary is not in compliance in any material respect with
any applicable Law. This Section 4.13 does not relate to matters with respect to
Taxes, which are the subject of Section 4.09, compliance with ERISA, which is
the subject of Section 4.11, or Environmental Matters, which are the subject of
Section 4.16.
SECTION 4.14. Brokers; Schedule of Fees and Expenses. No broker,
investment banker, financial advisor or other person, other than Credit Suisse
First Boston Corporation, the fees and expenses of which will be paid by
Columbia House, is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the Transactions based upon
arrangements made by or on behalf of the Columbia House Entities and the
Columbia House Subsidiaries. The Columbia House Entities Disclosure Letter sets
forth an estimate of all legal, accounting and investment banking fees and
expenses incurred as of the date of this Agreement by the Columbia House
Entities and the Columbia House Subsidiaries in connection with the
Transactions.
SECTION 4.15. Year 2000 Compliance. Except as set forth in the
Columbia House Entities Disclosure Letter, the computer systems and software
programs of the Columbia House Entities and the Columbia House Subsidiaries are
Year 2000 Compliant. The best current estimates of Columbia House of capital
expenditures to be Year 2000 Compliant are set forth in the Columbia House
Entities Disclosure Letter.
SECTION 4.16. Environmental Matters. Except as set forth on the
Columbia House Entities Disclosure Letter, and except as would not, individually
and in the aggregate, be reasonably likely to have a Columbia House Entities
Material Adverse Effect, (i) each of the Columbia House Entities and each of the
Columbia House Subsidiaries is in compliance with all applicable Environmental
Laws, (ii) each of the Columbia House Entities and each of the Columbia House
Subsidiaries has all permits, authorizations, licenses, consents and approvals
required under applicable Environmental Laws and is in compliance with their
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52
respective requirements, (iii) there are no pending, or to the knowledge of Time
Warner and Sony, threatened, claims, proceedings or investigations against any
of the Columbia House Entities or any of the Columbia House Subsidiaries
alleging a violation of Environmental Law, (iv) none of the Columbia House
Entities or Columbia House Subsidiaries has received written notice alleging
that such Columbia House Entity or Columbia House Subsidiary is potentially
liable for the costs of investigating or remediating Hazardous Substances at any
property; (v) to the knowledge of Time Warner and Sony, there have been no
Releases of Hazardous Substances in, on, under or at any properties currently
owned or leased by any of the Columbia House Entities or Columbia House
Subsidiaries; (vi) to the knowledge of Time Warner and Sony, there are no
underground storage tanks at any properties currently owned or leased by any of
the Columbia House Entities or Columbia House Subsidiaries; and (vii) to the
knowledge of Time Warner and Sony, the Columbia House Entities and Columbia
House Subsidiaries have made available for review by CDnow and the CDnow
Subsidiaries all material environmental reports, studies and related
correspondence, as of the date hereof, relating to properties currently owned or
leased by any of the Columbia House Entities or Columbia House Subsidiaries.
SECTION 4.17. Contracts. Except as set forth in the Columbia House
Entities Disclosure Letter, there are no Contracts in effect as of the date of
this Agreement that are material to the business, properties, assets, condition
(financial or otherwise) or results of operations of the Columbia House Entities
and the Columbia House Subsidiaries, taken as a whole, the termination of which,
other than in accordance with their respective terms, could reasonably be
expected to have a Columbia House Entities Material Adverse Effect. Except as
set forth in the Columbia House Entities Disclosure Letter and Contracts entered
into after the date of this Agreement not in violation of any other provision of
this Agreement, none of the Columbia House Entities nor any Columbia House
Subsidiary is party to any:
(i) Contract with any labor union;
(ii) employment agreement, or consulting agreement or other contract
for services pursuant to which an individual performs services comparable
to an employee, with annual financial obligations of any Columbia House
Entity or any Columbia House Subsidiary in excess of $300,000;
(iii) loan agreement or instrument relating to indebtedness for
borrowed money;
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53
(iv) Contract with any agent, dealer or distributor acting on behalf
of any Columbia House Entity or any Columbia House Subsidiary;
(v) stand-by letters of credit, guarantees or performance bonds
involving amounts in excess of $300,000 in the aggregate;
(vi) Contract with any affiliate of any Columbia House Entity; or
(vii) Contract that establishes any form of exclusivity restriction
on any Columbia House Entity or any Columbia House Subsidiary, any
exclusive or preferred vendor relationship restricting any Columbia House
Entity or any Columbia House Subsidiary in any material respect, any
covenant not to compete restricting any Columbia House Entity or any
Columbia House Subsidiary in any material respect or any covenant
restricting in any material respect the development, marketing or
distribution by any Columbia House Entity or any Columbia House Subsidiary
of any of its products, content or services, in each case that is binding
on any Columbia House Entity or any Columbia House Subsidiary for the
calendar year 1999 or thereafter.
Except as set forth in the Columbia House Entities Disclosure Letter, none of
the Columbia House Entities nor any Columbia House Subsidiary is in violation of
or in default under (nor does there exist any condition which upon the passage
of time or the giving of notice would cause such a violation of or default
under) any Contract to which it is a party or by which it or any of its
properties or assets is bound, nor, to the knowledge of Time Warner and Sony, is
any other party to any such Contract in violation of or in default under such
Contract, except for violations or defaults that, individually and in the
aggregate, have not had and could not reasonably be expected to have a Columbia
House Entities Material Adverse Effect.
SECTION 4.18. Title to Properties. (a) Except as set forth in the
Columbia House Entities Disclosure Letter, each Columbia House Entity and each
Columbia House Subsidiary has (i) good and marketable title to, or valid
leasehold interests in, all its real properties and (ii) good and valid title
to, or valid leasehold interests in, all its personal properties and assets, in
each case except for such as are no longer used or useful in the conduct of its
businesses or as have been disposed of in the ordinary course of business and
except for defects in title,
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54
easements, restrictive covenants and similar encumbrances or impediments that,
in the aggregate, do not and will not materially interfere with its ability to
conduct its business as currently conducted. All such assets and properties,
other than assets and properties in which any Columbia House Entity or any
Columbia House Subsidiary has leasehold interests, are free and clear of all
Liens other than those disclosed in the Columbia House Entities Disclosure
Letter and except for Liens that, in the aggregate, do not and will not
materially interfere with the ability of the Columbia House Entities and the
Columbia House Subsidiaries to conduct business as currently conducted.
(b) Except as set forth in the Columbia House Entities Disclosure
Letter, each Columbia House Entity and each Columbia House Subsidiary has
complied in all material respects with the terms of all leases to which it is a
party and under which it is in occupancy, and all such leases are in full force
and effect. Each Columbia House Entity and each Columbia House Subsidiary enjoys
peaceful and undisturbed possession under all such leases.
SECTION 4.19. Intellectual Property. Except as set forth in the
Columbia House Entities Disclosure Letter, the Columbia House Entities and the
Columbia House Subsidiaries own, or are validly licensed or otherwise have the
right to use, all Intellectual Property Rights which are material to the conduct
of the business as currently conducted of the Columbia House Entities and the
Columbia House Subsidiaries, taken as a whole. Except as set forth in the
Columbia House Entities Disclosure Letter, no claims are pending or, to the
knowledge of Time Warner and Sony, threatened that any of the Columbia House
Entities or any Columbia House Subsidiary is infringing or otherwise adversely
affecting the rights of any person with regard to any Intellectual Property
Right, except in each case for any such claims that, individually and in the
aggregate, have not had and could not reasonably be expected to have a Columbia
House Entities Material Adverse Effect. To the knowledge of Time Warner and
Sony, as of the date of this Agreement, except as set forth in the Columbia
House Entities Disclosure Letter, no person is infringing the rights of any
Columbia House Entity or any Columbia House Subsidiary with respect to any
Intellectual Property Right. Except as set forth in the Columbia House Entities
Disclosure Letter, none of the Columbia House Entities nor any Columbia House
Subsidiary has licensed, or otherwise granted, to any party (other than any
Columbia House Entity or any Columbia House Subsidiary) any rights in or to any
Intellectual Property Rights material to the conduct of the
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55
business as currently conducted of the Columbia House Entities and the Columbia
House Subsidiaries, taken as a whole.
SECTION 4.20. Labor Matters. Except as set forth in the Columbia
House Entities Disclosure Letter, (i) there are no collective bargaining or
other labor union agreements to which any of the Columbia House Entities or any
Columbia House Subsidiary is a party or by which any of them is bound and (ii)
to the knowledge of Time Warner and Sony, during the past five years none of the
Columbia House Entities or Columbia House Subsidiaries has encountered any labor
union organizing activity, or had any actual or threatened employee strikes,
work stoppages, slowdowns or lockouts.
SECTION 4.21. Insurance. Each of the Columbia House Entities and
each of the Columbia House Subsidiaries have insurance covering their respective
properties, operations and businesses, which insurance is in amounts and insures
against such losses and risks as are adequate, in the opinion of Time Warner and
Sony, to protect each of the Columbia House Entities and its business and each
of the Columbia House Subsidiaries and its business.
ARTICLE V
Representations and Warranties of Time Warner
Time Warner represents and warrants to CDnow and Sony as follows:
SECTION 5.01. Authority; Execution and Delivery; Enforceability.
Each of Time Warner and Time Warner Canada has all requisite power and authority
to execute and deliver each Transaction Agreement to which it is a party and to
consummate the Transactions. The execution and delivery by each of Time Warner
and Time Warner Canada of each Transaction Agreement to which it is a party and
the consummation by each of Time Warner and Time Warner Canada of the
Transactions have been duly authorized by all necessary action on the part of
Time Warner and Time Warner Canada. Each of Time Warner and Time Warner Canada
has duly executed and delivered each Initial Agreement to which it is a party,
and, assuming the due authorization, execution and delivery by each person other
than Time Warner and Time Warner Canada party thereto, each Initial Agreement to
which it is a party constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms. On or prior to the Closing
Date, each of Time Warner and Time Warner Canada shall have duly executed and
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56
delivered each Supplemental Agreement to which it is a party, and, when so
executed and delivered, and duly authorized, executed and delivered by each
person other than Time Warner and Time Warner Canada party thereto, each
Supplemental Agreement to which it is a party will constitute its legal, valid
and binding obligation, enforceable against it in accordance with its terms.
SECTION 5.02. No Conflicts; Consents. (a) Except as set forth in the
letter, dated as of the date of this Agreement, from Time Warner to CDnow (the
"Time Warner Disclosure Letter"), the execution and delivery by each of Time
Warner and Time Warner Canada of this Agreement and each other Transaction
Agreement to which it is a party do not, and the consummation of the
Transactions and compliance with the terms hereof and thereof will not, conflict
with, or result in any violation of or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination, cancelation or
acceleration of any obligation or to loss of a material benefit under, or to
increased, additional, accelerated or guaranteed rights or entitlements of any
person under, or result in the creation of any Lien upon any of the properties
or assets of Time Warner or Time Warner Canada under, any provision of (i) its
Certificate of Incorporation or By-laws (or comparable organizational
documents), (ii) any Contract to which Time Warner or Time Warner Canada is a
party or by which any of their respective properties or assets is bound or (iii)
subject to the filings and other matters referred to in Section 5.02(b), any
Judgment or Law applicable to Time Warner or Time Warner Canada or their
respective properties or assets, other than, in the case of clauses (ii) and
(iii), any such items that, individually and in the aggregate, have not had and
could not reasonably be expected to have a material adverse effect on Time
Warner and Time Warner Canada, taken as a whole, or a material adverse effect on
the ability of Time Warner or Time Warner Canada to perform its obligations
under any of the Transaction Agreements to which it is a party or to consummate
the Transactions, except to the extent such effect is the result of actions
taken by CDnow (other than actions required by any Transaction Agreement) or
economic factors affecting the economy as a whole or the industry in which Time
Warner competes.
(b) No Consent of, or registration, declaration or filing with, or
permit from, any Governmental Entity is required to be obtained or made by or
with respect to Time Warner or Time Warner Canada in connection with the
execution, delivery and performance of any Transaction Agreement to which it is
a party or the consummation of the
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57
Transactions, other than (i) compliance with and filings under the HSR Act and
the Canadian Competition Act and receipt of the Canadian Competition Act
Approval, (ii) the filing with the SEC of such reports under Sections 13 and 16
of the Exchange Act as may be required in connection with this Agreement, the
other Transaction Agreements and the Transactions, (iii) such Consents,
registrations or filings as may be required under applicable state securities
laws or the laws of any foreign country, (iv) compliance with and such filings
as may be required under applicable Environmental Laws, (v) such filings as may
be required in connection with the Taxes described in Section 8.09 and (vi) such
other items as are set forth in the Time Warner Disclosure Letter.
SECTION 5.03. Time Warner Interests. (a) The Time Warner Partnership
Interests represent 50% of the general partnership interests in each of MCo and
VCo. Time Warner Sub has good and valid title to the Time Warner Partnership
Interests, free and clear of any Liens. Assuming Holdco or Delaware Sub I, as
applicable, has the requisite power and authority to be the lawful owner of the
Time Warner Partnership Interests, upon delivery to Holdco or Delaware Sub I, as
Holdco shall direct, at the Closing of a duly executed instrument of transfer in
customary form to effect the transfer of the Time Warner Partnership Interests
to Holdco or Delaware Sub I, as Holdco shall direct, and upon Time Warner Sub's
receipt of shares of Holdco Class B Common Stock and the assumption by Holdco or
Delaware Sub I, as Holdco shall direct, of all of the liabilities, obligations
and commitments of Time Warner Sub and Time Warner that relate to, or arise out
of, the Time Warner Partnership Interests (pursuant to an instrument of
assumption in customary form), in accordance with Section 1.02(a), good and
valid title to the Time Warner Partnership Interests will pass to Holdco or
Delaware Sub I, as Holdco shall direct, free and clear of any Liens.
(b) All of the issued and outstanding shares of capital stock of
Time Warner Mexico are held indirectly by Time Warner. A subsidiary of Time
Warner has good and valid title to such shares, free and clear of any Liens.
Assuming Holdco has the requisite power and authority to be the lawful owner of
the Time Warner Mexico Shares, upon delivery to Holdco at the Closing of a duly
executed instrument of transfer in customary form to effect the transfer of the
Time Warner Mexico Shares to Holdco, and upon Warner Music Group's receipt of
shares of Holdco Class B Common Stock and the assumption by Holdco of all of the
liabilities, obligations and commitments of Warner Music Group and Time Warner
that relate to, or arise out of, the Time Warner
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58
Mexico Shares (pursuant to an instrument of assumption in customary form), in
accordance with Section 1.02(a), good and valid title to the Time Warner Mexico
Shares will pass to Holdco, free and clear of any Liens.
(c) Time Warner Canada is an indirect wholly owned subsidiary of
Time Warner. Time Warner Canada owns 50% of the general partnership interests in
Columbia House Canada, and Time Warner Canada has good and valid title to such
general partnership interests, free and clear of any Liens.
ARTICLE VI
Representations and Warranties of Sony
Sony represents and warrants to CDnow and Time Warner as follows:
SECTION 6.01. Authority; Execution and Delivery; Enforceability.
Each of Sony and Sony Canada has all requisite power and authority to execute
and deliver each Transaction Agreement to which it is a party and to consummate
the Transactions. The execution and delivery by each of Sony and Sony Canada of
each Transaction Agreement to which it is a party and the consummation by each
of Sony and Sony Canada of the Transactions have been duly authorized by all
necessary action on the part of Sony and Sony Canada. Each of Sony and Sony
Canada has duly executed and delivered each Initial Agreement to which it is a
party, and, assuming the due authorization, execution and delivery by each
person other than Sony and Sony Canada party thereto, each Initial Agreement to
which it is a party constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms. On or prior to the Closing
Date, each of Sony and Sony Canada shall have duly executed and delivered each
Supplemental Agreement to which it is a party, and, when so executed and
delivered, and duly authorized, executed and delivered by each person other than
Sony and Sony Canada party thereto, each Supplemental Agreement to which it is a
party will constitute its legal, valid and binding obligation, enforceable
against it in accordance with its terms.
SECTION 6.02. No Conflicts; Consents. (a) Except as set forth in the
letter, dated as of the date of this Agreement, from Sony to CDnow (the "Sony
Disclosure Letter"), the execution and delivery by each of Sony and Sony Canada
of this Agreement and each other Transaction Agreement to which it is a party do
not, and the
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consummation of the Transactions and compliance with the terms hereof and
thereof will not, conflict with, or result in any violation of or default (with
or without notice or lapse of time, or both) under, or give rise to a right of
termination, cancelation or acceleration of any obligation or to loss of a
material benefit under, or to increased, additional, accelerated or guaranteed
rights or entitlements of any person under, or result in the creation of any
Lien upon any of the properties or assets of Sony or Sony Canada under, any
provision of (i) its Certificate of Incorporation or By-laws (or comparable
organizational documents), (ii) any Contract to which Sony or Sony Canada is a
party or by which any of their respective properties or assets is bound or (iii)
subject to the filings and other matters referred to in Section 6.02(b), any
Judgment or Law applicable to Sony or Sony Canada or their respective properties
or assets, other than, in the case of clauses (ii) and (iii), any such items
that, individually and in the aggregate, have not had and could not reasonably
be expected to have a material adverse effect on Sony and Sony Canada, taken as
a whole, or a material adverse effect on the ability of Sony or Sony Canada to
perform its obligations under any of the Transaction Agreements or to consummate
the Transactions, except to the extent such effect is the result of actions
taken by CDnow (other than actions required by any Transition Agreement) or
economic factors affecting the economy as a whole or the industry in which Sony
competes.
(b) No Consent of, or registration, declaration or filing with, or
permit from, any Governmental Entity is required to be obtained or made by or
with respect to Sony or Sony Canada in connection with the execution, delivery
and performance of any Transaction Agreement to which it is a party or the
consummation of the Transactions, other than (i) compliance with and filings
under the HSR Act and the Canadian Competition Act and receipt of the Canadian
Competition Act Approval, (ii) the filing with the SEC of such reports under
Sections 13 and 16 of the Exchange Act as may be required in connection with
this Agreement, the other Transaction Agreements and the Transactions, (iii)
such Consents, registrations or filings as may be required under applicable
state securities laws or the laws of any foreign country, (iv) compliance with
and such filings as may be required under applicable Environmental Laws, (v)
such filings as may be required in connection with the Taxes described in
Section 8.09 and (vi) such other items as are set forth in the Sony Disclosure
Letter.
SECTION 6.03. Sony Interests. (a) The Sony Partnership Interests
represent 50% of general partnership
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interests in each of MCo and VCo. SMEI has good and valid title to the Sony
Partnership Interests, free and clear of any Liens. Assuming Holdco or Delaware
Sub II, as applicable, has the requisite power and authority to be the lawful
owner of the Sony Partnership Interests, upon delivery to Holdco or Delaware Sub
II, as Holdco shall direct, at the Closing of a duly executed instrument of
transfer in customary form to effect the transfer of the Sony Partnership
Interests to Holdco or Delaware Sub II, as Holdco shall direct, and upon SMEI's
receipt of shares of Holdco Class B Common Stock and the assumption by Holdco or
Delaware Sub II, as Holdco shall direct, of all of the liabilities, obligations
and commitments of SMEI and Sony that relate to, or arise out of, the Sony
Partnership Interests (pursuant to an instrument of assumption in customary
form), in accordance with Section 1.02(b), good and valid title to the Sony
Partnership Interests will pass to Holdco or Delaware Sub II, as Holdco shall
direct, free and clear of any Liens.
(b) All of the issued and outstanding shares of capital stock of
Sony Mexico are held directly by SMEI. SMEI has good and valid title to such
shares, free and clear of any Liens. Assuming Holdco has the requisite power and
authority to be the lawful owner of the Sony Mexico Shares, upon delivery to
Holdco at the Closing of a duly executed instrument of transfer in customary
form to effect the transfer of the Sony Mexico Shares to Holdco, and upon SMEI's
receipt of shares of Holdco Class B Common Stock and the assumption by Holdco of
all of the liabilities, obligations and commitments of SMEI and Sony that relate
to, or arise out of, the Sony Mexico Shares (pursuant to an instrument of
assumption in customary form), in accordance with Section 1.02(b), good and
valid title to the Sony Mexico Shares will pass to Holdco, free and clear of any
Liens.
(c) Sony Canada is a direct wholly owned subsidiary of Sony. Sony
Canada owns 50% of the general partnership interests in Columbia House Canada,
and Sony Canada has good and valid title to such general partnership interests,
free and clear of any Liens.
ARTICLE VII
Covenants Relating to Conduct of Business
SECTION 7.01. Conduct of Business. (a) Conduct of Business by CDnow.
Except for matters set forth in the CDnow Disclosure Letter or otherwise
expressly permitted by
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this Agreement, from the date of this Agreement to the Effective Time, CDnow
shall, and shall cause each CDnow Subsidiary to, conduct its business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted and, to the extent consistent therewith, use all reasonable
efforts to preserve intact its current business organization, keep available the
services of its current officers and employees and keep its relationships with
customers, suppliers, licensors, licensees, distributors and others having
business dealings with them to the end that its goodwill and ongoing business
shall be unimpaired at the Effective Time. In addition, and without limiting the
generality of the foregoing, except for matters set forth in the CDnow
Disclosure Letter or otherwise expressly permitted by this Agreement, from the
date of this Agreement to the Effective Time, CDnow shall not, and shall not
permit any CDnow Subsidiary to, do any of the following without the prior
written consent of Time Warner and Sony:
(i) (A) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by a direct or indirect wholly owned
subsidiary of CDnow to its parent, (B) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or (C) purchase, redeem or otherwise acquire any shares of
capital stock of CDnow or any CDnow Subsidiary or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities;
(ii) issue, deliver, sell, grant, pledge or otherwise encumber or
subject to any Lien (A) any shares of its capital stock, (B) any Voting
CDnow Debt or other voting securities, (C) any securities convertible into
or exchangeable for, or any options, warrants or rights to acquire, any
such shares, Voting CDnow Debt, voting securities or convertible or
exchangeable securities or (D) any "phantom" stock, "phantom" stock
rights, stock appreciation rights or stock-based performance units, other
than the issuance of CDnow Common Stock upon the exercise of CDnow
Employee Stock Options and CDnow Warrants outstanding on the date of this
Agreement and in accordance with their present terms;
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(iii) amend its certificate of incorporation, by-laws or other
comparable charter or organizational documents;
(iv) acquire or agree to acquire (A) by merging or consolidating
with, or by purchasing assets of, or by any other manner, any equity
interest in or portion of any business of any corporation, partnership,
company, limited liability company, joint venture, association or other
business organization or division thereof or (B) any assets that,
individually, are in excess of $1 million or, in the aggregate, are in
excess of $2.5 million, except purchases of inventory for resale and
renewals of licenses, in each case in the ordinary course of business
consistent with prior practice;
(v) enter into any joint venture agreement or strategic alliance or
similar agreement or arrangement with any person;
(vi) sell, lease (as lessor), license, mortgage or otherwise
encumber or subject to any Lien or otherwise dispose of any properties or
assets (including securitizations), except sales of inventory and renewals
of licenses, in each case in the ordinary course of business consistent
with prior practice and sale/leaseback transactions in respect of
equipment financings not to exceed $1 million in the aggregate;
(vii) sell, lease, assign, transfer, convey, deliver or otherwise
dispose of, or divest, or purchase or acquire, or enter into any material
agreement with any person with respect to, any Intellectual Property
Rights, except in the ordinary course of business consistent with prior
practice;
(viii) (A) grant to any officer or director of CDnow or any CDnow
Subsidiary any increase in compensation, except in the ordinary course of
business consistent with prior practice or to the extent required under
employment agreements in effect as of March 18, 1999, (B) grant to any
employee, officer or director of CDnow or any CDnow Subsidiary any
increase in severance or termination pay, except to the extent required
under any agreement or plan in effect as of March 18, 1999, (C) enter into
any employment, consulting, deferred compensation, indemnification,
severance or termination agreement with any such employee, officer or
director (other than such agreements with newly hired employees, in the
ordinary course of business consistent with prior practice, involving
total annual compensation not
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63
to exceed $125,000 individually or $2,500,000 in the aggregate), (D)
establish, adopt, enter into or amend in any material respect any
collective bargaining agreement or CDnow Benefit Plan, (E) take any action
to accelerate any rights or benefits, or make any material determinations
not in the ordinary course of business consistent with prior practice,
under any collective bargaining agreement or CDnow Benefit Plan or (F)
take any action to accelerate, or, where CDnow has reserved the unilateral
discretion to prevent such acceleration, fail to take any action to
prevent the acceleration of, the vesting of any CDnow Employee Stock
Options or other equity-based compensation;
(ix) make any change in accounting methods, principles or practices
materially affecting the reported consolidated assets, liabilities or
results of operations of CDnow, except insofar as may be required by a
change in GAAP or by SEC interpretations with respect to filings
therewith;
(x) (A) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of CDnow or any
CDnow Subsidiary, guarantee any debt securities of another person, enter
into any "keep well" or other agreement to maintain any financial
statement condition of another person or enter into any arrangement having
the economic effect of any of the foregoing, except for (I) short-term
borrowings incurred in the ordinary course of business consistent with
prior practice, (II) incurrence by CDnow, on or after December 15, 1999,
of indebtedness for borrowed money in an amount not to exceed $30,000,000
("CDnow Financing") so long as such indebtedness (v) does not constitute
Voting CDnow Debt, (w) is not convertible into or exchangeable for, and,
except as provided in Section 8.14(b), does not include any options,
warrants or rights to acquire, shares of capital stock, Voting CDnow Debt,
voting securities or convertible or exchangeable securities, (x) may be
prepaid any time without premium or penalty of any kind, (y) does not
contain any covenants or restrictions that would impede or delay
consummation of the Transactions or adversely effect the ability of CDnow
or any of the CDnow Subsidiaries to perform its obligations under any of
the Transaction Agreements or that would survive any payment of such
indebtedness and (z) otherwise satisfies the requirements of "Permitted
Interim Financing" under the Interim Loan Documents (for the avoidance of
doubt, CDnow may enter into
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64
definitive agreements for the CDnow Financing prior to December 15, 1999,
but shall not draw on any such facility prior to December 15, 1999), and
(III) as contemplated by the Interim Loan Documents, or (B) make any
loans, advances (other than for travel, entertainment and relocation
expenses of employees in the ordinary course of business consistent with
prior practice in an outstanding amount not to exceed $250,000 in the
aggregate at any given time) or capital contributions to, or investments
in, any other person, other than to or in CDnow or any direct or indirect
wholly owned subsidiary of CDnow;
(xi) make or agree to make any new capital expenditure or
expenditures that, individually, is in excess of $1 million or, in the
aggregate, are in excess of $2 million in any calendar quarter;
(xii) make or change any material Tax election, make any material
change in accounting methods with respect to Taxes or settle or compromise
any material Tax liability or refund;
(xiii) (A) pay, discharge, settle or satisfy any claims,
liabilities, obligations or litigation (absolute, accrued, asserted or
unasserted, contingent or otherwise) in excess of $500,000 individually or
$1.5 million in the aggregate, other than (i) the payment, discharge,
settlement or satisfaction, in the ordinary course of business consistent
with prior practice or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent
financial statements (or the notes thereto) included in the Filed CDnow
SEC Documents or incurred since the date of such financial statements in
the ordinary course of business consistent with prior practice and (ii)
with respect to Taxes, (B) cancel any indebtedness or waive any claims or
rights of substantial value or (C) waive the benefits of, or agree to
modify in any manner, any confidentiality, standstill or similar agreement
to which CDnow or any CDnow Subsidiary is a party;
(xiv) enter into, modify, amend or terminate any of the Contracts of
the type listed in Section 3.18, other than, in the case of Contracts of
the type listed in clause (iv) of Section 3.18, in the ordinary course of
business consistent with prior practice;
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65
(xv) engage in any transaction or enter into any agreement or
arrangement with any shareholder or affiliate of CDnow or any of the CDnow
Subsidiaries; or
(xvi) authorize any of, or commit or agree to take any of, the
foregoing actions.
(b) Conduct of Business of the Columbia House Entities. Except for
matters set forth in the Columbia House Disclosure Letter or otherwise expressly
permitted by this Agreement, from the date of this Agreement to the Effective
Time each of Time Warner and Sony shall cause each Columbia House Entity and
each Columbia House Subsidiary to conduct its business in the usual, regular and
ordinary course in substantially the same manner as previously conducted and, to
the extent consistent therewith, use all reasonable efforts to preserve intact
its current business organization, keep available the services of its current
officers and employees and keep its relationships with customers, suppliers,
licensors, licensees, distributors and others having business dealings with them
to the end that its goodwill and ongoing business shall be unimpaired at the
Effective Time. In addition, and without limiting the generality of the
foregoing, except for matters set forth in the Columbia House Entities
Disclosure Letter or otherwise expressly permitted by this Agreement, from the
date of this Agreement to the Effective Time, Time Warner and Sony shall not
permit any Columbia House Entity to do any of the following without the prior
written consent of CDnow:
(i) (A) declare, set aside or pay any distributions in respect of
any of its partnership interests, other than (1) for the avoidance of
doubt, payments that reduce on a dollar-for-dollar basis the amount of
accounts payable to Time Warner or Sony or any of their affiliates and (2)
Permitted Tax Distributions (as defined below) or (B) purchase, redeem or
otherwise acquire any partnership interests or shares of capital stock in
any Columbia House Entity or any other securities thereof or any rights to
acquire any such interests or other securities; for purposes of this
Agreement "Permitted Tax Distributions" shall mean distributions to SMEI
and Time Warner Sub, with respect to any taxable period after March 31,
1999, in an aggregate amount not to exceed the amount payable by MCo or
VCo, as the case may be, pursuant to the tax distributions section (Annex
8, Section 6(ii)) of the Joint Venture Agreements dated December 29, 1994
among SMEI, Time Warner Sub and Warner Music Group;
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66
(ii) issue, deliver, sell, grant, pledge or otherwise encumber or
subject to any Lien (A) any partnership interests, (B) any Voting Columbia
House Entities Debt or other voting securities or (C) any securities
convertible into or exchangeable for, or any options, warrants or rights
to acquire, any such partnership interests, Voting Columbia House Entities
Debt, voting securities or convertible or exchangeable securities;
(iii) amend its organizational documents, except as contemplated by
this Agreement and the other Transaction Agreements;
(iv) sell, lease (as lessor), license, mortgage or otherwise
encumber or subject to any Lien or otherwise dispose of any properties or
assets that are material to the business of the Columbia House Entities
and the Columbia House Subsidiaries, taken as a whole, (including
securitizations), except sales of inventory and renewals of licenses, in
each case in the ordinary course of business consistent with prior
practice and sale/leaseback transactions in respect of equipment
financings not to exceed $3 million in the aggregate;
(v) make any change in accounting methods, principles or practices
materially affecting the reported consolidated assets, liabilities or
results of operations of any Columbia House Entity, except insofar as may
have been required by a change in GAAP or by SEC interpretation with
respect to filings therewith;
(vi) (A) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, except pursuant to the Columbia House
Credit Agreement, issue or sell any debt securities or warrants or other
rights to acquire any debt securities of any Columbia House Entity or any
Columbia House Subsidiary, guarantee any debt securities of another
person, enter into any "keep well" or other agreement to maintain any
financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing, except for
(I) short-term borrowings incurred in the ordinary course of business
consistent with prior practice and (II) increases in accounts payable to
Time Warner and Sony and their affiliates in the ordinary course of
business consistent with prior practice and conversion of accounts payable
into indebtedness, or (B) make any loans, advances (other than for travel,
entertainment and relocation expenses of employees in the ordinary
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67
course of business consistent with prior practice in an outstanding amount
not to exceed $500,000 in the aggregate at any given time) or capital
contributions to, or investments in, any other person, other than to or in
any Columbia House Entity or any Columbia House Subsidiary or pursuant to
the Interim Loan Documents;
(vii) (A) pay, discharge, settle or satisfy any claims, liabilities,
obligations or litigation (absolute, accrued, asserted or unasserted,
contingent or otherwise) in excess of $1.5 million individually or $4.5
million in the aggregate, other than (i) the payment, discharge or
satisfaction, in the ordinary course of business consistent with prior
practice or in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the Columbia House Entities
Financial Statements or incurred since the date of such financial
statements in the ordinary course of business consistent with prior
practice, (ii) the transactions contemplated by Section 9.03(f) and (iii)
with respect to Taxes or (B) cancel any indebtedness or waive any claims
or rights of substantial value; or
(viii) authorize any of, or commit or agree to take any of, the
foregoing actions.
(c) Other Actions. CDnow, Time Warner and Sony shall not, and shall
not permit any of their respective subsidiaries to, take any action that would,
or that could reasonably be expected to, result in (i) any of the
representations and warranties of such party set forth in this Agreement that is
qualified as to materiality becoming untrue, (ii) any of such representations
and warranties that is not so qualified becoming untrue in any material respect
or (iii) except as otherwise permitted by Section 7.02, any condition to the
Transactions set forth in Article IX not being satisfied.
(d) Advice of Changes. CDnow, on the one hand, and Time Warner and
Sony, on the other hand, shall promptly advise the other orally and in writing
of any change or event that has or could reasonably be expected to have a
material adverse effect on such party, in the case of CDnow, or the Columbia
House Entities in the case of Time Warner and Sony.
(e) Transition Planning. CDnow, Time Warner and Sony agree that they
shall work together to coordinate all aspects of transition planning and
implementation relating to the Transactions. During the period between the date
of
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68
this Agreement and the Effective Time, CDnow, on the one hand, and Time Warner
and Sony, on the other hand, shall jointly examine, consistent with all
applicable laws, various alternatives regarding the manner in which to best
organize and manage the businesses of CDnow and the Columbia House Entities
after the Effective Time. The members of the joint transition planning team and
the parties designating such members are identified on Exhibit P. Each member of
the joint transition planning team shall have the right to grant waivers of
Sections 7.01(a) and (b) (excluding Section 7.01(b)(i)(A)) on behalf of the
party to this Agreement that designated such member; provided that any such
waiver shall be in writing and signed by the member of the joint transition
planning team designated by the party to be bound by such waiver.
SECTION 7.02. No Solicitation. (a) CDnow shall not, nor shall it
authorize or permit any of the CDnow Subsidiaries, any of its or their
respective officers, directors or employees or any investment banker, financial
advisor, attorney, accountant or other advisor or representative retained by
CDnow or any of the CDnow Subsidiaries to, directly or indirectly through
another person, (i) solicit, initiate or knowingly encourage (including by way
of furnishing information), or knowingly take any action designed to facilitate,
any inquiries or the making of a proposal which constitutes, or may reasonably
be expected to lead to, any CDnow Takeover Proposal (as defined in Section
7.02(e)) or (ii) participate in any discussions or negotiations regarding any
CDnow Takeover Proposal; provided, however, that during the 30-day period
following the date of this Agreement (the "Initial Period"), CDnow may, in
response to a Superior CDnow Proposal (as defined in Section 7.02(e)) that was
unsolicited and that did not otherwise result from a breach of this Section
7.02(a), and subject to providing prior written notice of its decision to take
such action to Time Warner and Sony and compliance with Section 7.02(c), (x)
furnish information with respect to CDnow to the person making the Superior
CDnow Proposal pursuant to a confidentiality agreement not less restrictive of
such person than the Confidentiality Agreement dated March 3, 1999, among CDnow
Online, N2K Inc., a Delaware corporation ("N2K"), CDnow, TWI and Sony (the
"Confidentiality Agreement") and (y) participate in discussions or negotiations
regarding such Superior CDnow Proposal.
(b) Neither CDnow, nor the CDnow Board nor any committee thereof
shall withdraw or modify, or propose publicly to withdraw or modify, in a manner
adverse to Time Warner, Sony or any of the Columbia House Entities, the
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69
approval or recommendation by such Board or any such committee of this
Agreement, any other Transaction Agreement, the Merger or any other Transaction.
Neither CDnow, nor the CDnow Board nor any committee thereof shall, without the
prior written consent of Time Warner and Sony in their sole discretion, (i)
cause CDnow or any CDnow Subsidiary to enter into any letter of intent,
agreement in principle, acquisition agreement, joint venture agreement,
strategic alliance agreement or other similar agreement (each, an "Acquisition
Agreement") related to any transaction referred to in clause (A), (B) or (C) of
the definition of "CDnow Takeover Proposal" (a "CDnow Takeover Transaction") or
(ii) approve or recommend, or propose publicly to approve or recommend, any
CDnow Takeover Transaction. Notwithstanding the foregoing, at any time during
the Initial Period, in response to a Superior CDnow Proposal which was not
solicited by CDnow and which did not otherwise result from a breach of Section
7.02(a), the CDnow Board may (subject to this sentence and the definition of the
term "Superior CDnow Proposal") terminate this Agreement (and concurrently with
or after such termination, if it so chooses, cause CDnow to enter into any
Acquisition Agreement with respect to any Superior CDnow Proposal), but only at
a time that is during the Initial Period and is after the third business day
following receipt by Time Warner and Sony of written notice advising Time Warner
and Sony that the CDnow Board is prepared to accept a Superior CDnow Proposal,
specifying the material terms and conditions of such Superior CDnow Proposal and
identifying the person making such Superior CDnow Proposal (or if such third
business day would fall after expiration of the Initial Period, then such
shorter period (but in no event less than 24 hours notice) as is necessary for
such termination to occur prior to expiration of the Initial Period).
(c) In addition to the obligations of CDnow set forth in paragraphs
(a) and (b) of this Section 7.02, CDnow promptly shall advise Time Warner and
Sony orally and in writing of any request for information or of any CDnow
Takeover Proposal, or any inquiry with respect to or which would reasonably be
expected to lead to any CDnow Takeover Proposal, the material terms and
conditions of such request, CDnow Takeover Proposal or inquiry, and the identity
of the person making any such request, CDnow Takeover Proposal or inquiry. CDnow
will keep Time Warner and Sony informed of the status and details (including
amendments or proposed amendments) of any such request, CDnow Takeover Proposal
or inquiry.
(d) Nothing contained in this Section 7.02 shall prohibit CDnow from
(x) taking and disclosing to its
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shareholders a position contemplated by Rule 14e-2(a) promulgated under the
Exchange Act or (y) making any disclosure to CDnow's shareholders if, in the
good faith judgment of the majority of the members of the CDnow Board, in
consultation with independent counsel, failure to so disclose would constitute a
violation of the Federal securities laws; provided, however, that neither CDnow
nor the CDnow Board nor any committee thereof shall withdraw or modify, or
propose publicly to withdraw or modify, its position with respect to this
Agreement, the other Transaction Agreements, the Merger or the other
Transactions, or approve or recommend, or propose publicly to approve or
recommend, a CDnow Takeover Transaction.
(e) For purposes of this Agreement:
(i) "Superior CDnow Proposal" means any bona fide proposal made by a
third party (i) to acquire, directly or indirectly, including pursuant to
a tender offer, exchange offer, merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar
transaction, for consideration consisting of cash and/or securities, more
than 50% of the combined voting power of the shares of CDnow Common Stock
then outstanding or all or substantially all the assets of CDnow, (ii)
that is otherwise on terms which the CDnow Board determines in its good
faith judgment (based on the advice of a financial advisor of nationally
recognized reputation) to be more favorable to CDnow's shareholders than
the Merger and the other Transactions after taking into account all
constituencies (including shareholders), the terms of this Agreement and
the other Transaction Agreements (including any proposal by Time Warner
and Sony to amend the terms of the Transactions) and pertinent factors
permitted under the PBCL, (iii) for which financing, to the extent
required, is then committed or which, in the good faith judgment of the
CDnow Board, is reasonably capable of being obtained by such third party
and (iv) for which, in the good faith judgment of the CDnow Board, no
domestic or foreign regulatory approvals are required, including antitrust
approvals, that could not reasonably be expected to be obtained; and
(ii) "CDnow Takeover Proposal" means any inquiry, proposal or offer
from any person relating to any (A) direct or indirect acquisition,
purchase, exchange or license of, or joint venture or strategic alliance
involving, a business or assets that constitute, in any such case, 20% or
more of the net revenues, net income or the assets of CDnow or the CDnow
Subsidiaries, taken
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as a whole, (B) direct or indirect acquisition or purchase of 20% or more
of any class of equity securities of CDnow or the CDnow Subsidiaries or
any tender offer or exchange offer that if consummated would result in any
person beneficially owning 20% or more of any class of equity securities
of CDnow or any of the CDnow Subsidiaries or (C) direct or indirect
merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving CDnow or any of
the CDnow Subsidiaries, in each case other than the Transactions.
ARTICLE VIII
Additional Agreements
SECTION 8.01. Preparation of the Form S-4 and the Proxy Statement;
Shareholders Meeting. (a) As soon as practicable following the date of this
Agreement, CDnow, Holdco, Time Warner and Sony shall jointly prepare and CDnow
shall file with the SEC the Proxy Statement in preliminary form and CDnow,
Holdco, Time Warner and Sony shall jointly prepare and Holdco shall file with
the SEC the Form S-4, in which the Proxy Statement will be included as a
prospectus, and each of CDnow, Holdco, Time Warner and Sony shall use its
reasonable efforts to respond as promptly as practicable to any comments of the
SEC with respect thereto. Each of CDnow, Holdco, Time Warner and Sony shall use
its reasonable efforts to have the Form S-4 declared effective under the
Securities Act as promptly as practicable after such filing. CDnow shall use its
reasonable efforts to cause the Proxy Statement to be mailed to CDnow's
shareholders as promptly as practicable after the Form S-4 is declared effective
under the Securities Act. Holdco shall take any action (other than qualifying to
do business in any jurisdiction in which CDnow or Columbia House are not now so
qualified) required to be taken under any applicable state securities laws in
connection with the issuance of Holdco Common Stock in the Transactions and
under CDnow Stock Plans and CDnow Warrants, and CDnow shall furnish all
information concerning CDnow and the holders of CDnow Common Stock and rights to
acquire CDnow Common Stock pursuant to CDnow Stock Plans and CDnow Warrants as
may be reasonably requested in connection with any such action. The parties
shall notify each other promptly of the receipt of any comments from the SEC or
its staff and of any request by the SEC or its staff for amendments or
supplements to the Proxy Statement or the Form S-4 or for additional information
and shall supply each other with copies of all correspondence between any of its
representatives, on the one hand, and the SEC or its staff,
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72
on the other hand, with respect to the Proxy Statement, the Form S-4 or the
Transactions. No filing of, or amendment or supplement to, the Form S-4 will be
made by Holdco, or the Proxy Statement will be made by CDnow, without providing
each of Time Warner and Sony the opportunity to review and comment thereon and
receiving the prior approval thereof of each of Time Warner and Sony.
(b) If at any time prior to the Effective Time any event with
respect to CDnow or any CDnow Subsidiary or with respect to other information
supplied by CDnow for inclusion in the Proxy Statement or the Form S-4 shall
occur which is required to be described in an amendment of, or a supplement to,
the Proxy Statement or the Form S-4, CDnow shall promptly notify Time Warner and
Sony of such event, and CDnow and Holdco shall cooperate with Time Warner and
Sony in the prompt filing with the SEC of any necessary amendment or supplement
to the Proxy Statement and Form S-4 and, as required by Law, in disseminating
the information contained in such amendment or supplement to CDnow's
shareholders.
(c) If at any time prior to the Effective Time any event with
respect to any of the Columbia House Entities or any of the Columbia House
Subsidiaries, or with respect to any other information supplied by Time Warner
or Sony for inclusion in the Proxy Statement or the Form S-4, shall occur which
is required to be described in an amendment of, or a supplement to, the Proxy
Statement or the Form S-4, Time Warner or Sony, as the case may be, shall
promptly notify CDnow of such event, and Time Warner and Sony shall cooperate
with CDnow and Holdco in the prompt filing with the SEC of any necessary
amendment or supplement to the Proxy Statement and the Form S-4 and, as required
by Law, in disseminating the information contained in such amendment or
supplement to CDnow's shareholders.
(d) CDnow shall, as soon as practicable following the date of this
Agreement, establish a record date (which shall be as soon as practicable
following the date of this Agreement) for, and duly call, give notice of,
convene and hold, a meeting of its shareholders (the "CDnow Shareholders
Meeting") for the purpose of obtaining the CDnow Shareholder Approval. CDnow
shall use its reasonable efforts to cause the Proxy Statement to be mailed to
CDnow's shareholders as promptly as practicable after the Form S-4 is declared
effective under the Securities Act. CDnow shall, through the CDnow Board,
recommend to its shareholders that they give the CDnow Shareholder Approval.
Without limiting the generality of the foregoing, CDnow agrees that its
obligations pursuant to this Section 8.01(d) shall not be
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73
affected by the commencement, public proposal, public disclosure or
communication to CDnow of any CDnow Takeover Proposal.
(e) CDnow shall use its reasonable efforts to cause to be delivered
to Time Warner and Sony a letter of Arthur Andersen LLP, CDnow's independent
auditors, dated a date within two business days before the date on which the
Form S-4 shall become effective and addressed to Time Warner and Sony, in form
and substance reasonably satisfactory to Time Warner and Sony and customary in
scope and substance for comfort letters delivered by independent public
accountants in connection with registration statements similar to the Form S-4.
(f) Time Warner and Sony shall use their reasonable efforts to cause
to be delivered to CDnow a letter of Ernst & Young LLP, Columbia House's
independent auditors, dated a date within two business days before the date on
which the Form S-4 shall become effective and addressed to CDnow, in form and
substance reasonably satisfactory to CDnow and customary in scope and substance
for comfort letters delivered by independent public accountants in connection
with registration statements similar to the Form S-4.
(g) Time Warner and Sony shall use their reasonable efforts to cause
to be delivered to Holdco as soon as practicable following the date of this
Agreement combined financial statements for MCo, VCo, Columbia House, Columbia
House Mexico and Columbia House Canada that comply with the requirements of
Items 14(e), (f) and (g) of Form S-4 under the Securities Act, to be included
in the Proxy Statement and the Form S-4.
SECTION 8.02. Access to Information; Confidentiality. (a) Upon
reasonable notice, CDnow shall, and shall cause the CDnow Subsidiaries to, and
each of Time Warner and Sony shall cause the Columbia House Entities and the
Columbia House Subsidiaries to, afford to the other party and to the officers,
employees, accountants, counsel, financial advisors and other representatives of
such other party, reasonable access during normal business hours during the
period prior to the Effective Time to all their respective properties, books,
contracts, commitments, personnel and records and, during such period, each of
CDnow, Time Warner and Sony shall furnish promptly to the other party (a) a copy
of each report, schedule, registration statement and other document filed by it
or any of its subsidiaries during such period pursuant to the requirements of
Federal or state securities laws and (b) all
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other information concerning its business, properties and personnel as such
other party reasonably may request. All information exchanged pursuant to this
Section 8.02 shall be treated confidentially in accordance with the provisions
of paragraphs A.1 through A.5 and B.1 through B.5 of the Confidentiality
Agreement and such provisions are hereby incorporated by reference herein with
the same force and effect as if restated herein in their entirety.
(b) CDnow shall provide, and Time Warner and Sony shall cause
Columbia House to provide, reasonable cooperation to CDnow's independent
auditors and to Columbia House's independent auditors to enable them to issue
the letters referred to in Sections 8.01(e) and (f) and shall use reasonable
efforts to cause such letters to be issued.
SECTION 8.03. Reasonable Efforts; Notification. (a) On the terms and
subject to the conditions set forth in this Agreement, each of the parties shall
use all reasonable efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Transactions,
including (i) the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from Governmental Entities and the making of all
necessary registrations and filings (including filings with Governmental
Entities, if any) and the taking of all reasonable steps as may be necessary to
obtain an approval or waiver from, or to avoid an action or proceeding by, any
Governmental Entity, (ii) the obtaining of all necessary consents, approvals or
waivers from third parties, (iii) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
any other Transaction Agreement or the consummation of the Transactions,
including seeking to have any stay or temporary restraining order entered by any
court or other Governmental Entity vacated or reversed, and (iv) the execution
and delivery of any additional instruments necessary to consummate the
Transactions and to fully carry out the purposes of the Transaction Agreements;
provided, however, that none of Time Warner, Sony or any of their respective
affiliates shall be required to consent (or offer to consent) to (i) any
prohibition or limitation on the ownership or operation by Time Warner or Sony
or any of their respective subsidiaries or affiliates of any material portion of
the business or assets of Holdco, CDnow, any Columbia House Entity, Time Warner
or Sony or any of their respective subsidiaries or affiliates, (ii) the disposal
of or holding separate of any material portion of the business or assets of
Holdco, CDnow, any Columbia House Entity, Time
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Warner or Sony or any of their respective subsidiaries or affiliates, (iii) any
limitations on the ability of Holdco, Time Warner, Time Warner Canada, Sony or
Sony Canada, or any of their respective subsidiaries or affiliates, to acquire
or hold, or exercise full rights of ownership of, any equity interests in
Holdco, CDnow, any Columbia House Entity or any of their respective
subsidiaries, including limitations on the ability of Time Warner, Time Warner
Canada, Sony or Sony Canada, or any of their respective subsidiaries or
affiliates, to vote Holdco Common Stock or instruct the voting trustee as to
voting the Voting Preferred Share on all matters properly presented to the
stockholders of Holdco, or limitations on the ability of Holdco to vote CDnow
Common Stock on all matters properly presented to the shareholders of CDnow, or
(iv) any prohibition on Time Warner or Sony or any of their respective
subsidiaries or affiliates effectively controlling in any material respect the
business or operations of Holdco, CDnow, any Columbia House Entity and their
respective subsidiaries or affiliates. In connection with and without limiting
the foregoing, CDnow and the CDnow Board shall (i) take all corporate actions
necessary to ensure that no state takeover statute or similar statute or
regulation is or becomes applicable to the Merger, any other Transaction, this
Agreement or any other Transaction Agreement and (ii) if any state takeover
statute or similar statute or regulation becomes applicable to the Merger, any
other Transaction, this Agreement or any other Transaction Agreement, take all
corporate action necessary to ensure that the Transactions may be consummated as
promptly as practicable on the terms contemplated by the Transaction Agreements
and otherwise to minimize the effect of such statute or regulation on this
Agreement and the other Transaction Agreements.
(b) CDnow shall give prompt notice to Time Warner and Sony, and Time
Warner or Sony, as applicable, shall give prompt notice to CDnow, of (i) any
representation or warranty made by it or any of its affiliates or subsidiaries
contained in any Transaction Agreement that is qualified as to materiality
becoming untrue or inaccurate in any respect or any such representation or
warranty that is not so qualified becoming untrue or inaccurate in any material
respect or (ii) the failure by it to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied by
it under any Transaction Agreement; provided, however, that no such notification
shall affect the representations, warranties, covenants or agreements of the
parties or the conditions to the obligations of the parties under the
Transaction Agreements.
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SECTION 8.04. CDnow Employee Stock Options. (a) As soon as
practicable following the date of this Agreement, the CDnow Board (or, if
appropriate, any committee administering CDnow Stock Plans) shall adopt such
resolutions or take such other actions as may be required to effect the
following:
(i) adjust the terms of all outstanding CDnow Employee Stock Options
(as defined in Section 8.04(d)) to provide that, at the Effective Time,
each CDnow Employee Stock Option outstanding immediately prior to the
Effective Time shall be deemed to constitute an option to acquire, on the
same terms and conditions as were applicable under such CDnow Employee
Stock Option, the same number of shares of Holdco Class A Common Stock as
the holder of such CDnow Employee Stock Option would have been entitled to
receive pursuant to the Merger had such holder exercised such CDnow
Employee Stock Option in full immediately prior to the Effective Time, at
a price per share equal to (A) the aggregate exercise price for the shares
of CDnow Common Stock otherwise purchasable pursuant to such Employee
Stock Option divided by (B) the number of shares of Holdco Class A Common
Stock deemed purchasable pursuant to such CDnow Employee Stock Option;
provided, however, that in the case of any option to which Section 421 of
the Code applies by reason of its qualification under either Section 422
or 424 of the Code ("qualified stock options"), the option price, the
number of shares purchasable pursuant to such option and the terms and
conditions of exercise of such option shall be determined in order to
comply with Section 424(a) of the Code;
(ii) make such other changes to CDnow Stock Plans as it deems
appropriate to give effect to the Merger (subject to the approval of Time
Warner and Sony, which shall not be unreasonably withheld);
(iii) ensure that, after the Effective Time, no CDnow Employee Stock
Options may be granted under any CDnow Stock Plan; and
(iv) ensure that the conversion pursuant to Section 2.01 of CDnow
Capital Stock held by any director or officer of CDnow, and the conversion
pursuant to this Section 8.04 into Holdco Employee Stock Options of CDnow
Employee Stock Options held by any director or officer of CDnow, will be
eligible for exemption under Rule 16b-3(e) under the Exchange Act.
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(b) At the Effective Time, and subject to compliance by CDnow with
Section 8.04(a), Holdco shall assume all the obligations of CDnow under CDnow
Stock Plans, each outstanding CDnow Employee Stock Option and the agreements
evidencing the grants thereof. As soon as practicable after the Effective Time,
Holdco shall deliver to the holders of CDnow Employee Stock Options appropriate
notices setting forth such holders' rights pursuant to the respective CDnow
Stock Plans, and the agreements evidencing the grants of such CDnow Employee
Stock Options shall continue in effect on the same terms and conditions (subject
to the adjustments required by this Section 8.04 after giving effect to the
Merger). Holdco shall comply with the terms of CDnow Stock Plans and ensure, to
the extent required by, and subject to the provisions of, such CDnow Stock
Plans, that CDnow Employee Stock Options that qualified as qualified stock
options prior to the Effective Time continue to qualify as qualified stock
options after the Effective Time.
(c) Holdco shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Holdco Common Stock for delivery upon
exercise of CDnow Employee Stock Options assumed in accordance with this Section
8.04. On the first business day after the Effective Time, Holdco shall file a
registration statement on Form S-8 (or any successor or other appropriate form)
with respect to the shares of Holdco Common Stock subject to such CDnow Employee
Stock Options and shall use its best efforts to maintain the effectiveness of
such registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
CDnow Employee Stock Options remain outstanding. With respect to those
individuals who subsequent to the Merger will be subject to the reporting
requirements under Section 16(a) of the Exchange Act, where applicable, Holdco
shall administer CDnow Stock Plans assumed pursuant to this Section 8.04 in a
manner that complies with Rule 16b-3 under the Exchange Act to the extent the
applicable CDnow Stock Plan complied with such rule prior to the Merger. Prior
to the Effective Time, Holdco shall take all actions as may be reasonably
required to cause the acquisition of equity securities of Holdco, as
contemplated by this Section 8.04, by any person who is or will become a
director or officer of Holdco to be eligible for exemption under Rule 16b-3(d)
under the Exchange Act.
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(d) In this Agreement:
"CDnow Employee Stock Option" means any option to purchase CDnow
Common Stock granted under any CDnow Stock Plan or as described in Section
3.03 of the CDnow Disclosure Letter.
"CDnow Stock Plans" means the CDnow 1999 Equity Compensation Plan,
the CDnow 1996 Equity Compensation Plan, the N2K 1997 Directors Stock
Option Plan, the 1987 Telebase Employee Incentive Stock Option Plan, the
1996 N2K Employee Stock Purchase Plan and the 1996 N2K Stock Option Plan.
"Holdco Employee Stock Option" means any option to purchase Holdco
Common Stock granted under any equity-based compensation plan adopted or
maintained by Holdco.
(e) As soon as practicable after the date of this Agreement, CDnow
shall cause each CDnow Warrant outstanding immediately prior to the Effective
Time to be amended and converted, as of the Effective Time, into a warrant to
acquire, on the same terms and conditions as were applicable under such CDnow
Warrant, the same number of shares of Holdco Common Stock as the holder of such
CDnow Warrant would have been entitled to receive pursuant to the Merger had
such holder exercised such CDnow Warrant in full immediately prior to the
Effective Time, at a price per share equal to (A) the aggregate exercise price
for the shares of CDnow Common Stock otherwise purchasable pursuant to such
CDnow Warrant divided by (B) the number of shares of Holdco Common Stock deemed
purchasable pursuant to such CDnow Warrant.
SECTION 8.05. Benefit Plans. (a) For a period of one year after the
Effective Time, Holdco shall provide or cause the Surviving Corporation (or, in
such case, its successors or assigns) to provide retirement and welfare benefits
(1) to employees of CDnow and the CDnow Subsidiaries that, taken as a whole, are
not materially less favorable in the aggregate to such employees than those in
effect on the date of this Agreement and (2) to employees of the Columbia House
Entities and Columbia House Subsidiaries that, taken as a whole, are not
materially less favorable in the aggregate to such employees than those in
effect on the date of this Agreement.
(b) From and after the Effective Time, Holdco shall, and shall cause
the Surviving Corporation to, honor in accordance with their respective terms
(as in effect on
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the date of this Agreement), all employment, severance and termination
agreements, plans and policies of CDnow disclosed in the CDnow Disclosure Letter
and all employment, severance and termination agreements, plans and policies of
the Columbia House Entities disclosed in the Columbia House Entities Disclosure
Letter.
(c) From and after the Effective Date, Holdco shall, and shall cause
the Surviving Corporation to, design all equity-based compensation plans (based
on shares of Holdco Common Stock) such that any stock options and stock
appreciation rights granted thereunder will be eligible to qualify as "qualified
performance-based compensation" as defined in Section 1.162-27(e) of the U.S.
Treasury regulation. As soon as practicable following the date of this
Agreement, CDnow shall use its best efforts to cause CDnow's shareholders to
approve such a plan of Holdco in accordance with Section 162(m) of the Code.
(d) To the extent that service is relevant for purposes of
eligibility, participation or vesting under any employee benefit plan or program
maintained after the Effective Time, employees of the Surviving Corporation (or
in the case of a transfer of all or substantially all the assets and business of
the Surviving Corporation, its successors or assigns) shall be credited for
service accrued or deemed accrued with CDnow and the CDnow Subsidiaries, or the
Columbia House Entities and Columbia House Subsidiaries, as the case may be,
prior the Effective Time.
SECTION 8.06. Indemnification. (a) Holdco agrees that all rights to
indemnification for acts or omissions occurring prior to the Effective Time now
existing in favor of the current or former directors or officers of CDnow as
provided in the CDnow Charter and the CDnow By-laws shall survive the Merger and
shall continue in full force and effect in accordance with their terms for a
period of time not less than the period necessary for the statutes of limitation
for all possible claims to have run. As of the Effective Time, Holdco shall
unconditionally and irrevocably guarantee, for the benefit of such persons, the
obligations of CDnow under the foregoing indemnification arrangements. Holdco
shall cause to be maintained for a period of not less than six years from the
Effective Time CDnow's current directors' and officers' insurance and
indemnification policy to the extent that it provides coverage for events
occurring prior to the Effective Time (the "D&O Insurance") for all persons who
are directors and officers of CDnow on the date of this Agreement, so long as
the annual premium therefor would not be in excess of 200% of the last annual
premium paid prior to the date of this Agreement (such 200%
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amount, the "Maximum Premium"). If the existing D&O Insurance expires, is
terminated or canceled during such six-year period, Holdco shall use all
reasonable efforts to cause to be obtained as much D&O Insurance as can be
obtained for the remainder of such period for an annualized premium not in
excess of the Maximum Premium, on terms and conditions no less advantageous than
the existing D&O Insurance. CDnow represents to Holdco, Time Warner and Sony
that the Maximum Premium is $518,000.
(b) If the Closing shall occur, Holdco shall indemnify each of Time
Warner, Time Warner Sub, Warner Music Group, Sony and SMEI, and each of their
respective affiliates, stockholders, partners, directors, officers, employees
and agents, against and hold them harmless from (i) any and all losses,
liabilities, claims, damages, costs and expenses (including attorneys' fees and
disbursements and other reasonable professional fees and disbursements, whether
or not litigation is instituted) (collectively, "Losses") suffered or incurred
by any such indemnified party related to, or arising out of, the Time Warner
Partnership Interests, the Time Warner Mexico Shares, the Sony Partnership
Interests or the Sony Mexico Shares, as the case may be, and (ii) any and all
Losses related to, or arising out of, the business, operations, activities,
affairs, properties, assets or liabilities of any of the Columbia House Entities
or the Columbia House Subsidiaries, whether arising before, on or after the
Closing Date.
SECTION 8.07. Fees and Expenses. (a) Except as provided below, all
fees and expenses incurred in connection with the Transactions shall be paid by
the party incurring such fees or expenses, whether or not the Transactions are
consummated, except that expenses incurred in connection with filing, printing
and mailing the Proxy Statement and the Form S-4 (excluding legal and accounting
fees and expenses) as well as expenses incurred in connection with the formation
of Holdco, Pennsylvania Sub, Delaware Sub I and Delaware Sub II shall be shared
equally by Columbia House, on the one hand, and CDnow, on the other hand. For
the avoidance of doubt, fees and expenses of legal and accounting advisors to
Time Warner and Sony have been incurred for the benefit of, and shall be borne
by, Columbia House.
(b) In the event that (1) a proposal or offer for a CDnow Takeover
Transaction shall have been made known to CDnow or has been made directly to its
shareholders or any person has announced an intention (whether or not
conditional) to make a proposal or offer for a CDnow Takeover Transaction and
thereafter this Agreement is
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terminated by either Time Warner and Sony, on the one hand, or CDnow, on the
other hand, pursuant to Section 10.01(b)(i), 10.01(b)(iii) or 10.01(c), and
within 12 months after such termination CDnow or any CDnow Subsidiary enters
into any Acquisition Agreement with respect to, or approves, recommends or
consummates, any CDnow Takeover Transaction, or any person consummates a tender
offer or an exchange offer constituting a CDnow Takeover Transaction, (2) this
Agreement is terminated by Time Warner and Sony pursuant to Section 10.01(d)(i),
and within 18 months after such termination CDnow or any CDnow Subsidiary enters
into any Acquisition Agreement with respect to, or approves, recommends or
consummates, any CDnow Takeover Transaction, or any person consummates a tender
offer or an exchange offer constituting a CDnow Takeover Transaction, or (3)
this Agreement is terminated (x) by CDnow pursuant to Section 10.01(f) or (y) by
Time Warner and Sony pursuant to Section 10.01(d)(ii), 10.01(d)(iii) or
10.01(d)(iv), then CDnow shall:
(A) in the case of a termination described in clause (1)
above, no later than the first to occur of (x) CDnow or any CDnow
Subsidiary entering into any Acquisition Agreement with respect to,
or approving or recommending any Control-Shifting CDnow Takeover
Transaction (as defined below), (y) CDnow or any CDnow Subsidiary
consummating any CDnow Takeover Transaction or (z) any person
consummating a tender offer or an exchange offer constituting a
CDnow Takeover Transaction, pay a fee equal to $19 million (As used
herein the term "Control-Shifting CDnow Takeover Transaction" means
any transaction referred to in clause (A), (B) or (C) of the
definition of "CDnow Takeover Proposal" (but replacing 20% with 45%
in clause (A) and (B) thereof);
(B) in the case of a termination described in clause (2)
above, no later than the first to occur of (x) CDnow or any CDnow
Subsidiary entering into any Acquisition Agreement with respect to,
or approving or recommending, any Control-Shifting CDnow Takeover
Transaction, (y) CDnow or any CDnow Subsidiary consummating any
CDnow Takeover Transaction or (z) any person consummating a tender
offer or an exchange offer constituting a CDnow Takeover
Transaction, pay a fee equal to $31 million; and
(C) in the case of a termination described in clause (3)
above, promptly, but in no event later
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than the date of such termination, pay a fee equal to $31 million
(any such fee described in clause (A), (B) or (C) above (the "Termination
Fee")), to Time Warner and Sony (to be shared by them equally) by wire transfer
of same day funds. If, prior to the time at which the Termination Fee becomes
payable pursuant to clause (A), (B) or (C) above, Time Warner and Sony shall
have exercised a Cash-Out Right (as defined in the Stock Option Agreement)
pursuant to Section 6(c) of the Stock Option Agreement, the amount payable by
CDnow under this Section 8.07(b), together with the aggregate amount previously
received by Time Warner and Sony under Section 6(c) of the Stock Option
Agreement, shall not exceed (i) in the case of a Termination Fee pursuant to
clause (A) above, $25 million and (ii) in the case of a Termination Fee pursuant
to clause (B) or (C) above, $31 million. CDnow acknowledges that the agreements
contained in this Section 8.07(b) are an integral part of the Transactions, and
that, without these agreements, Time Warner and Sony would not enter into this
Agreement or the other Transaction Agreements; accordingly, if CDnow fails
promptly to pay the amounts due pursuant to this Section 8.07(b), and, in order
to obtain such payment, Time Warner and Sony commence a suit which results in a
judgment against CDnow for the amounts set forth in this Section 8.07(b), CDnow
shall pay to Time Warner and Sony their respective reasonable costs and expenses
(including attorneys' fees and expenses) in connection with such suit, together
with interest on the amounts set forth in this Section 8.07(b) at the prime rate
of Citibank, N.A. in effect on the date such payment was required to be made.
(c) CDnow acknowledges and agrees that in the event of a breach of
Section 7.02, the payment of the Termination Fee shall not constitute the
exclusive remedies available to Time Warner and Sony, and that Time Warner and
Sony shall be entitled to the remedies set forth in Section 11.10, including
injunction and specific performance, and all other remedies available at law or
in equity to which Time Warner and Sony are entitled.
SECTION 8.08. Public Announcements. Time Warner and Sony, on the one
hand, and CDnow, on the other hand, shall consult with each other before
issuing, and provide each other the opportunity to review and comment upon, any
press release or other public statements with respect to the Transactions, and
CDnow shall not issue any such press release or make any such public statement
without the prior approval of each of Time Warner and Sony. The initial press
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release announcing the Transactions shall be in the form of Exhibit Q.
SECTION 8.09. Transfer Taxes. All stock transfer, real estate
transfer, documentary, stamp, recording, sales and other similar Taxes
(including interest, penalties and additions to any such Taxes) ("Transfer
Taxes") incurred in connection with the Transactions shall be paid by either
Holdco or the Surviving Corporation, and CDnow, Time Warner and Sony shall
cooperate with Holdco or the Surviving corporation in preparing, executing and
filing any Tax Returns with respect to such Transfer Taxes, including supplying
in a timely manner a complete list of all real property interests held
(including by lease) by CDnow that are located in New York State and any
information with respect to such property that is reasonably necessary to
complete such Tax Returns. The portion of the consideration to be received by
holders of CDnow Common Stock in connection with the Merger that is allocable to
the real property of CDnow and its subsidiaries in New York State shall be
determined by Holdco in its reasonable discretion.
SECTION 8.10. Affiliates. Prior to the Closing Date, CDnow shall
deliver to each of Time Warner, Sony and Holdco a letter identifying all persons
who are expected by CDnow to be, on the Closing Date, "affiliates" of CDnow for
purposes of Rule 145 under the Securities Act. CDnow shall use its best efforts
to cause each such person to deliver to each of Time Warner, Sony and Holdco on
or prior to the Closing Date a written agreement substantially in the form of
Exhibit R attached hereto.
SECTION 8.11. Stock Exchange Listing. Holdco shall use all
reasonable efforts to cause the shares of Holdco Class A Common Stock to be
issued pursuant to this Agreement and under the CDnow Stock Plans and the CDnow
Warrants to be approved for listing on the Nasdaq National Market ("Nasdaq"),
subject to official notice of issuance, prior to the Closing Date.
SECTION 8.12. Tax Treatment. Each party and its affiliates shall use
reasonable efforts (i) to cause the Transactions to qualify as exchanges
governed by Section 351 of the Code, (ii) to cause the Canadian Transactions to
qualify for tax-deferred treatment under the Income Tax Act (Canada) and (iii)
to obtain the opinions of counsel referred to in Sections 9.02(f) and 9.03(d).
SECTION 8.13. Shareholder Litigation. CDnow shall give Time Warner
and Sony the opportunity to
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participate in the defense of any shareholder litigation against CDnow and/or
its directors relating to any of the Transactions or any Transaction Agreement.
SECTION 8.14. Certain Financing Arrangements and Contributions. (a)
From and after the Closing Date and until the third anniversary of the Closing
Date, each of Time Warner and SMEI shall severally guarantee (on a 50-50 basis)
a credit facility (the "Guaranteed Facility") of Holdco, and Sony Capital
Corporation shall guarantee SMEI's obligations under the foregoing guarantee,
providing Holdco with availability of financing in an aggregate amount equal to
the sum of (i) "net debt", which shall be calculated as (x) the sum of
short-term debt and long-term debt less (y) cash and cash equivalents, in each
case as set forth on the combined balance sheet for Columbia House, Columbia
House Mexico, Columbia House Canada and the Columbia House Subsidiaries dated as
of the Closing Date (the "Columbia House Closing Date Balance Sheet") or in the
notes thereto, and (ii) $150 million less any amounts outstanding under the
CDnow Working Capital Facility or any CDnow Financing on the Closing Date. Each
such guarantee shall provide for an absolute and unconditional guarantee, as
principal and not as surety, of (i) in the case of the Time Warner and SMEI
guarantees, one-half of Holdco's obligations under the Guaranteed Facility, and
(ii) in the case of the Sony Capital Corporation guarantee, all of SMEI's
obligations under the foregoing Sony guarantee, and will provide the guarantor
with full rights of subrogation in respect of any payments made pursuant to such
guarantee.
(b) In the event that the Transactions shall not have been
consummated prior to December 15, 1999, Columbia House, or, in their sole
discretion, Time Warner and SMEI severally (on a 50-50 basis), shall make
available to CDnow, on and as of such date, a credit facility for working
capital purposes (the "CDnow Working Capital Facility") in an amount equal to
$30 million ($15 million from each of Time Warner and SMEI, in the case of a
non-Columbia House facility); provided that the obligations of Columbia House,
or Time Warner and SMEI shall be reduced, on a dollar-for-dollar basis, by the
amount of any committed CDnow Financing. The terms of the CDnow Working Capital
Facility shall be as set forth in the Interim Loan Documents. CDnow may issue
warrants to purchase shares of CDnow Common Stock to any lender in respect of
the CDnow Financing so long as (i) such warrants (the "CDnow Financing
Warrants") (x) represent the right to acquire, in the aggregate, not more than a
number of shares of CDnow Common Stock having a Market Value (as defined below)
at the time of issuance of such warrants equal to 10% of the principal amount of
the
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CDnow Financing and (y) by their terms provide that from and after the Effective
Time such warrants shall only represent the right to receive, upon exercise, the
amount and form of Merger Consideration the holder would have received in the
Merger had such CDnow Financing Warrant been exercised immediately prior to the
Effective Time (and no other consideration) and (ii) CDnow simultaneously issues
to Time Warner and SMEI warrants on the same terms (including exercise price and
tenor) as the CDnow Financing Warrants (provided that such warrants shall
provide that (a) they shall not vest until, but shall become fully vested and
exercisable immediately prior to, the Effective Time and (b) they shall be
exercisable for shares of Holdco Class B Common Stock) and in an aggregate
amount (to be split 50-50 between Time Warner and SMEI) representing the right
to acquire an aggregate number of shares of CDnow Common Stock that is equal to
the product of (x) 2.8462 and (y) the aggregate number of shares of CDnow Common
Stock issuable under the CDnow Financing Warrants. For purposes of this Section
8.14(b), "Market Value" shall mean the average of the daily closing prices of
CDnow Common Stock as reported on Nasdaq on each of the ten consecutive trading
days ending with the trading day immediately preceding the date of issuance of
the CDnow Financing Warrants.
(c) On the Closing Date, each of Time Warner and Sony shall, or
shall cause one or more of its affiliates to, contribute to Holdco cash in an
amount previously agreed upon by the parties.
SECTION 8.15. Initial Independent Directors of Holdco. The initial
Independent Directors to hold office at the Effective Time shall be designated
by the members of a committee consisting of the persons designated by the Time
Warner Group as the initial Time Warner Directors (the "Time Warner Designees"),
the persons designated by the Sony Group as the initial Sony Directors (the
"Sony Designees") and Jason Olim. No person shall be designated as an initial
Independent Director unless the Time Warner Designees and the Sony Designees
agree to such designation. Capitalized terms used in this Section 8.15 and not
otherwise defined have the meanings assigned to them in the Governance
Agreement.
SECTION 8.16. Transition Services. On the Closing Date SMEI and
Holdco shall enter into a transition services agreement on terms, and in a form,
mutually agreeable among CDnow, Sony and Time Warner.
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ARTICLE IX
Conditions Precedent
SECTION 9.01. Conditions to Each Party's Obligation To Effect the
Transactions. The obligation of each party to consummate the Transactions and
any other transaction contemplated by this Agreement is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Shareholder Approval. CDnow shall have obtained the CDnow
Shareholder Approval.
(b) Listing. The shares of Holdco Class A Common Stock issuable to
CDnow's shareholders pursuant to this Agreement and under the CDnow Stock Plans
and the CDnow Warrants shall have been approved for listing on Nasdaq, subject
to official notice of issuance.
(c) Antitrust. The waiting period (and any extension thereof)
applicable to the Transactions under the HSR Act shall have been terminated or
shall have expired, and the Canadian Competition Act Approval with respect to
the Canadian Transactions shall have been received. Any consents, approvals and
filings under any domestic or foreign antitrust law, the absence of which would
prohibit the consummation of the Transactions, shall have been obtained or made.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Transactions shall be in effect; provided, however, that
prior to asserting this condition, subject to Section 8.03, each of the parties
shall have used all reasonable efforts to prevent the entry of any such
injunction or other order and to appeal as promptly as possible any such
injunction or other order that may be entered.
(e) Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order, and Holdco shall have received all state securities or
"blue sky" authorizations and all authorizations under the laws of any foreign
country necessary to issue Holdco Common Stock and the Voting Preferred Share
pursuant to the Transactions.
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(f) Required Third-Party Consents. All necessary consents, approvals
or waivers from third parties to the Transactions shall have been obtained,
except for those the failure of which to obtain, individually and in the
aggregate, are not reasonably likely to have a CDnow Material Adverse Effect or
a Columbia House Entities Material Adverse Effect, as the case may be; provided,
however, that prior to asserting this condition, subject to Section 8.03, each
of the parties shall have used commercially reasonable efforts to obtain such
consent, approval or waiver.
SECTION 9.02. Conditions to Obligations of Time Warner and Sony. The
obligations of Time Warner and Sony to consummate the Transactions and any other
transaction contemplated by this Agreement are further subject to the following
conditions:
(a) Representations and Warranties. The representations and
warranties of CDnow in this Agreement that are qualified as to materiality shall
be true and correct and those not so qualified shall be true and correct in all
material respects, as of the date of this Agreement and as of the Closing Date
as though made on and as of such time, except to the extent such representations
and warranties expressly relate to an earlier date (in which case such
representations and warranties qualified as to materiality shall be true and
correct, and those not so qualified shall be true and correct in all material
respects, on and as of such earlier date). Time Warner and Sony shall have
received a certificate signed on behalf of CDnow to such effect, in each case
signed by the chief executive officer and the chief financial officer of CDnow.
(b) Performance of Obligations of CDnow and its Subsidiaries. CDnow
and each CDnow Subsidiary shall have performed in all material respects all
obligations required to be performed by them under this Agreement and under the
Master Canadian Transaction Agreement on or prior to the Closing Date, and Time
Warner and Sony shall have received a certificate signed on behalf of CDnow by
the chief executive officer and the chief financial officer of CDnow to such
effect. Holdco shall have performed in all material respects all obligations
required to be performed by it under the Master Canadian Transaction Agreement
on or prior to the Closing Date, and Time Warner and Sony shall have received a
certificate signed on behalf of Holdco by the chief executive officer and the
chief financial officer of Holdco, who shall also be officers of CDnow, to such
effect.
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(c) No Governmental Proceedings. There shall not be pending or
threatened any suit, action or proceeding by any Governmental Entity, (i)
challenging the acquisition by Time Warner, Time Warner Canada, Sony or Sony
Canada or any of their respective subsidiaries or affiliates of any Holdco
Common Stock or CDnow Common Stock, seeking to restrain or prohibit the
consummation of the Transactions or seeking to obtain from Time Warner, Time
Warner Canada, Sony, Sony Canada, any Columbia House Entity or CDnow any damages
that are material in relation to CDnow and the CDnow Subsidiaries taken as a
whole, (ii) seeking to prohibit or limit the ownership or operation by Holdco,
CDnow, any Columbia House Entity, Time Warner or Sony or any of their respective
subsidiaries or affiliates of any material portion of the business or assets of
Holdco, CDnow, any Columbia House Entity, Time Warner or Sony or any of their
respective subsidiaries or affiliates, or to compel Holdco, CDnow, any Columbia
House Entity, Time Warner or Sony or any of their respective subsidiaries or
affiliates to dispose of or hold separate any material portion of the business
or assets of Holdco, CDnow, any Columbia House Entity, Time Warner or Sony or
any of their respective subsidiaries or affiliates, as a result of the Merger or
any other Transaction, (iii) seeking to impose limitations on the ability of
Holdco, Time Warner, Time Warner Canada, Sony or Sony Canada, or any of their
respective subsidiaries or affiliates, to acquire or hold, or exercise full
rights of ownership of, any equity interests in Holdco, CDnow, any Columbia
House Entity or any of their respective subsidiaries, including limitations on
the ability of Time Warner, Time Warner Canada, Sony or Sony Canada, or any of
their respective subsidiaries or affiliates, to vote Holdco Common Stock or
instruct the voting trustee as to voting the Voting Preferred Share on all
matters properly presented to the stockholders of Holdco, or limitations on the
ability of Holdco to vote CDnow Common Stock on all matters properly presented
to the shareholders of CDnow, (iv) seeking to prohibit Time Warner or Sony or
any of their respective subsidiaries or affiliates from effectively controlling
in any material respect the business or operations of Holdco, CDnow, any
Columbia House Entity, and their respective subsidiaries or affiliates or (v)
which otherwise is reasonably likely to have a CDnow Material Adverse Effect;
provided, however, that the provisions of this Section 9.02(b) shall not be
applicable to any suit, action or proceeding by any Mexican Governmental Entity.
(d) Absence of CDnow Material Adverse Effect. Except as disclosed in
the Filed CDnow SEC Documents or in the CDnow Disclosure Letter, since December
31, 1998, there shall not have been any event, change, effect or development
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89
that, individually or in the aggregate, has had or could reasonably be expected
to have a CDnow Material Adverse Effect.
(e) CDnow Board. Each director of CDnow shall have resigned.
(f) Tax Opinion. Time Warner shall have received a written opinion,
dated as of the Closing Date, from Cravath, Swaine & Moore, and Sony shall have
received a written opinion, dated as of the Closing Date, from Dewey Ballantine
LLP, to the effect that, on the basis of the facts, representations and
assumptions set forth in such opinion, the Time Warner Contribution and the Sony
Contribution, respectively, will qualify as exchanges governed by the provisions
of Section 351 of the Code; it being understood that in rendering their
respective opinions, such tax counsel shall be entitled to rely upon
representations reasonably requested by such counsel from the parties to this
Agreement.
(g) Letters from CDnow Affiliates. Time Warner and Sony shall have
received from each person named in the letter referred to in Section 8.10 an
executed copy of an agreement substantially in the form of Exhibit R attached
hereto.
(h) Transaction Agreements. Each person, other than Time Warner and
Sony (and their respective affiliates), shall have executed and delivered to
Time Warner and Sony a counterpart to each Transaction Agreement to which it is
a party.
(i) Dissenters Rights. The shares of CDnow Common Stock held by all
persons who comply with all the provisions of the PBCL concerning the right of
any holder of shares of CDnow Common Stock to dissent from the Merger and obtain
payment of the fair market value of such holders' shares of CDnow Common Stock
shall constitute less than 5% of the issued and outstanding shares of CDnow
Common Stock immediately prior to the Effective Time.
SECTION 9.03. Conditions to Obligations of CDnow. The obligation of
the CDnow to consummate the Transactions and any other transaction contemplated
by this Agreement is further subject to the following conditions:
(a) Representations and Warranties. The representations and
warranties of Time Warner and Sony in this Agreement that are qualified as to
materiality shall be true and correct and those not so qualified shall be true
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90
and correct in all material respects, as of the date of this Agreement and on
the Closing Date as though made on and as of such time, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties qualified as to materiality shall
be true and correct, and those not so qualified shall be true and correct in all
material respects, on and as of such earlier date). CDnow shall have received a
certificate from each of Time Warner and Sony to such effect, in each case
signed by two executive officers of Time Warner or Sony, as applicable.
(b) Performance of Obligations of Time Warner and Sony. Time Warner
and Sony shall have performed in all material respects all obligations required
to be performed by them under this Agreement on or prior to the Closing Date,
and CDnow shall have received certificates from Time Warner and Sony to such
effect, in each case signed by two executive officers of Time Warner or Sony, as
applicable. Time Warner Canada and Sony Canada shall have performed in all
material respects all obligations required to be performed by them under the
Master Canadian Transaction Agreement on or prior to the Closing Date, and CDnow
shall have received certificates from Time Warner Canada and Sony Canada to such
effect, in each case signed by two executive officers of Time Warner Canada or
Sony Canada, as applicable.
(c) Absence of Columbia House Entities Material Adverse Effect.
Except as disclosed in the Columbia House Disclosure Letter, since December 18,
1998, there shall not have been any event, change, effect or development that,
individually or in the aggregate, has had or could reasonably be expected to
have a Columbia House Entities Material Adverse Effect.
(d) Tax Opinion. CDnow shall have received a written opinion, dated
as of the Closing Date, from Morgan, Lewis & Bockius LLP to the effect that, on
the basis of the facts, representations and assumptions set forth in such
opinion, the Merger will qualify as an exchange governed by the provisions of
Section 351 of the Code; it being understood that in rendering such opinion,
such tax counsel shall be entitled to rely upon representations reasonably
requested by such counsel from the parties to this Agreement.
(e) Transaction Agreements. Each person, other than CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I and Delaware Sub II (and their affiliates),
shall have executed
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91
and delivered to CDnow a counterpart to each Transaction Agreement to which it
is a party.
(f) Contribution of Notes; Contribution of Cash and Repayment of
Notes. Each of Time Warner and SMEI shall have either (i) contributed to the
capital of each applicable Columbia House Entity the Notes of such Columbia
House Entity dated March 1994 and December 29, 1994, held by Time Warner or
SMEI, as applicable, and such Notes shall have been canceled with no cost or
expense to any of the Columbia House Entities or (ii) contributed to the capital
of each applicable Columbia House Entity an amount in cash sufficient to repay
in full the principal of, accrued and unpaid interest on and premium, if any,
with respect to the Notes of such Columbia House Entity dated March 1994 and
December 29, 1994, held by Time Warner or SMEI, as applicable, and such Notes
shall have been repaid in full.
(g) Guaranteed Credit Facility. The closing of the Guaranteed
Facility shall occur concurrently with the Closing.
ARTICLE X
Termination, Amendment and Waiver
SECTION 10.01. Termination. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after receipt of the CDnow
Shareholder Approval:
(a) by mutual written consent of Time Warner, Sony and CDnow;
(b) by either Time Warner and Sony, on the one hand, or CDnow, on
the other hand:
(i) if the Merger, the Contributions and the other
Transactions are not consummated on or before March 13, 2000 (the
"Outside Date"), unless the failure to consummate the Transactions
is the result of a breach of any Transaction Agreement by the party
seeking to terminate this Agreement or any affiliate of such party;
provided, however, that the passage of such period shall be tolled
for any part thereof during which any party or any of its affiliates
shall be subject to a nonfinal order, decree, ruling or action
restraining, enjoining or otherwise prohibiting the consummation of
the Transactions;
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92
(ii) if any Governmental Entity issues an order, decree or
ruling or takes any other action permanently enjoining, restraining
or otherwise prohibiting the Transactions and such order, decree,
ruling or other action shall have become final and nonappealable; or
(iii) if the CDnow Shareholder Approval shall not have been
obtained at the CDnow Shareholders Meeting duly convened therefor or
at any adjournment or postponement thereof;
(c) by Time Warner and Sony, if CDnow or any CDnow Subsidiary
breaches or fails to perform in any material respect any of its
representations, warranties or covenants contained in any Initial
Agreement, which breach or failure to perform (i) would give rise to the
failure of a condition set forth in Section 9.02(a) or 9.02(b) and (ii)
cannot be or has not been cured within 20 business days after the giving
of written notice to CDnow of such breach (provided that neither Time
Warner nor Sony nor any of their respective affiliates is then in breach
of any representation, warranty or covenant contained in any Initial
Agreement);
(d) by Time Warner and Sony:
(i) if CDnow or any of its directors or officers shall breach
Section 7.02;
(ii) if CDnow, or the CDnow Board or any committee thereof, in
violation of Section 7.02, (A) withdraws or modifies, or proposes
publicly to withdraw or modify, in a manner adverse to Time Warner,
Sony or any of the Columbia House Entities, the approval or
recommendation by such Board or any such committee of this
Agreement, any other Transaction Agreement, the Merger or any other
Transaction, or (B) without the prior written consent of Time Warner
and Sony in their sole discretion, (x) causes CDnow or any CDnow
Subsidiary to enter into any Acquisition Agreement related to any
CDnow Takeover Transaction or (y) approves or recommends, or
proposes publicly to approve or recommend, any CDnow Takeover
Transaction;
(iii) if CDnow or any of its directors or officers shall make
any disclosure to the shareholders of CDnow permitted pursuant to
Section 7.02(d) that has the effect of
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93
(x) withdrawing, modifying or changing the approval or
recommendation of the CDnow Board or any committee thereof of this
Agreement, the other Transaction Agreements or the Transactions in a
manner adverse to Time Warner, Sony, Pennsylvania Sub, Time Warner
Canada or Sony Canada, (y) approving or recommending to the
shareholders of CDnow a CDnow Takeover Transaction or (z) approving
or recommending that the shareholders of CDnow tender their shares
of CDnow Common Stock into any tender offer or exchange offer that
is a CDnow Takeover Proposal or is related thereto; or
(iv) if any person shall have consummated a tender offer or an
exchange offer constituting a CDnow Takeover Transaction;
(e) by CDnow, if any of Time Warner, Sony, Time Warner Canada or
Sony Canada breaches or fails to perform in any material respect any of
its representations, warranties or covenants contained in any Initial
Agreement, which breach or failure to perform (i) would give rise to the
failure of a condition set forth in Section 9.03(a) or 9.03(b), and (ii)
cannot be or has not been cured within 30 days after the giving of written
notice to Time Warner, Sony, Time Warner Canada or Sony Canada, as
applicable, of such breach (provided that CDnow is not then in breach of
any representation, warranty or covenant in any Initial Agreement); or
(f) during the Initial Period, by CDnow in accordance with Section
7.02(b); provided that, in order for the termination of this Agreement
pursuant to this paragraph (f) to be deemed effective, CDnow shall have
complied with all of the provisions of Section 7.02, including the notice
provisions therein, and with applicable requirements, including prior
payment of the Termination Fee, of Section 8.07.
SECTION 10.02. Effect of Termination. In the event of termination of
this Agreement by CDnow or Time Warner and Sony as provided in Section 10.01,
(i) this Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of CDnow, Time Warner or Sony other than
Section 3.14, Section 4.14, the last sentence of Section 8.02(a), Section 8.07,
this Section 10.02 and Article XI, which provisions shall survive such
termination, and except to the extent that such termination results from the
wilful and material breach by a party of any of its representations, warranties
or covenants
<PAGE>
94
set forth in any Transaction Agreement and (ii) the Master Canadian Transaction
Agreement shall simultaneously become void and have no effect, without any
liability or obligation on the part of Holdco, Columbia House Canada, Time
Warner Canada or Sony Canada other than Article 7 thereof, which provisions
shall survive such termination.
SECTION 10.03. Amendment. This Agreement may be amended by the
parties at any time before or after receipt of the CDnow Shareholder Approval;
provided, however, that after receipt of the CDnow Shareholder Approval, there
shall be made no amendment that by law requires further approval by the
shareholders of CDnow without the further approval of such shareholders. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties.
SECTION 10.04. Extension; Waiver. At any time prior to the Effective
Time, the parties may, to the extent legally allowed, (a) extend the time for
the performance of any of the obligations or other acts of the other parties,
(b) waive any inaccuracies in the representations and warranties contained in
this Agreement or in any document delivered pursuant to this Agreement or (c)
subject to the proviso of Section 10.03, waive compliance with any of the
agreements or conditions contained in this Agreement or the Master Canadian
Transaction Agreement. Except as otherwise provided in Section 7.01(e), any
agreement on the part of a party to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party.
The failure of any party to this Agreement to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of such rights.
SECTION 10.05. Procedure for Termination, Amendment, Extension or
Waiver. A termination of this Agreement pursuant to Section 10.01, an amendment
of this Agreement pursuant to Section 10.03 or an extension or waiver pursuant
to Section 10.04 (other than a waiver pursuant to Section 7.01(e)) shall, in
order to be effective, require in the case of Time Warner, Sony or CDnow, action
by its Board of Directors or the duly authorized designee of its Board of
Directors.
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95
ARTICLE XI
General Provisions
SECTION 11.01. Nonsurvival of Representations and Warranties. None
of the representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time. This
Section 11.01 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time.
SECTION 11.02. Notices. All notices, requests, claims, demands and
other communications under this Agreement shall be in writing and shall be
deemed given upon receipt by the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Time Warner, to
Time Warner Inc.
75 Rockefeller Plaza
New York, New York 10019
Attention: General Counsel
with a copy to:
Cravath, Swaine & Moore
825 Eighth Avenue
New York, New York 10019
Attention: Faiza J. Saeed, Esq.
and:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attention: James H. Schwab, Esq.
(b) if to Sony, to
Sony Corporation of America
550 Madison Avenue
New York, New York 10022
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96
Attention: Executive Vice President and
Chief Financial Officer
with a copy to:
Sony Corporation of America
550 Madison Avenue
New York, New York 10019
Attention: Vice President,
Legal Department
and:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Attention: Morton A. Pierce, Esq.
and:
Rosenman & Colin
575 Madison Avenue
New York, New York 10022
Attention: H. Paul Burak, Esq.
(c) if to CDnow, to
CDnow, Inc.
1005 Virginia Drive
Ft. Washington, Pennsylvania 19034
Attention: General Counsel
with a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Square
Philadelphia, Pennsylvania 19103
Attention: James W. McKenzie, Jr., Esq.
SECTION 11.03. Definitions. For purposes of this Agreement:
An "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person.
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97
A "material adverse effect" on a party means a material adverse
effect on the business, assets, condition (financial or otherwise), or results
of operations of such party and its subsidiaries, taken as a whole.
A "person" means any individual, firm, corporation, partnership,
company, limited liability company, trust, joint venture, association,
Governmental Entity or other entity.
A "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting interests, 50% or more of
the equity interests of which) is owned directly or indirectly by such first
person.
SECTION 11.04. Interpretation; Disclosure Letters. When a reference
is made in this Agreement to a Section, such reference shall be to a Section of
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". Any matter disclosed in
any section of either the CDnow Disclosure Letter or the Columbia House Entities
Disclosure Letter shall be deemed disclosed only for the purposes of the
specific Sections of this Agreement to which such section relates.
SECTION 11.05. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule or law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
SECTION 11.06. Counterparts. This Agreement may be executed in one
or more counterparts, all of which shall
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98
be considered one and the same agreement and shall become effective when one or
more counterparts have been signed by each of the parties and delivered to the
other parties.
SECTION 11.07. Entire Agreement; No Third-Party Beneficiaries. The
Transaction Agreements, taken together with the Strategic Commitments Letter,
the CDnow Disclosure Letter, the Columbia House Disclosure Letter, the Time
Warner Disclosure Letter and the Sony Disclosure Letter and any other agreement
entered into by the parties hereto contemporaneously herewith (a) constitute the
entire agreement, and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the Transactions and (b)
except for the provisions of Article II, Section 8.04 and Section 8.06, are not
intended to confer upon any person other than the parties any rights or
remedies.
SECTION 11.08. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of New York, regardless
of the laws that might otherwise govern under applicable principles of conflicts
of laws thereof, except to the extent the laws of the Commonwealth of
Pennsylvania are mandatorily applicable to the Merger; provided, however, that
the laws of the respective states of incorporation of each of the parties hereto
shall govern the relative rights, obligations, powers, duties and other internal
affairs of such party and its Board of Directors.
SECTION 11.09. Assignment. Neither this Agreement nor any of the
rights, interests or obligations under this Agreement shall be assigned, in
whole or in part, by operation of law or otherwise by any of the parties without
the prior written consent of the other parties. Any purported assignment without
such consent shall be void. Subject to the preceding sentences, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
SECTION 11.10. Enforcement. (a) Except as provided in Section
11.10(b), the parties agree that irreparable damage would occur and that the
parties would not have any adequate remedy at law in the event that any of the
provisions of any Transaction Agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed that,
except as provided in Section 11.10(b), the parties shall be entitled to an
injunction or injunctions to prevent breaches of any Transaction Agreement and
to enforce specifically the terms and provisions of any Transaction Agreement in
any
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99
New York state court or, any Federal court located in the State of New York,
this being in addition to any other remedy to which they are entitled at law or
in equity. Each of the parties hereto (i) consents to submit itself to the
personal jurisdiction of any New York state court or any Federal court located
in the State of New York in the event any dispute arises out of any Transaction
Agreement or any Transaction (other than in respect of the Strategic Commitments
Letter to the extent provided in Section 11.10(b)) (ii) agrees that it will not
attempt to deny or defeat such personal jurisdiction by motion or other request
for leave from any such court, (iii) agrees that it will not bring any action
relating to any Transaction Agreement or any Transaction in any court other than
any New York state court or any Federal court sitting in the State of New York
and (iv) waives any right to trial by jury with respect to any action related to
or arising out of any Transaction Agreement or any Transaction, including in
respect of the Strategic Commitments Letter.
(b) (i) In the event of any dispute, controversy or claim whatsoever
arising out of or relating to the Strategic Commitments Letter, including the
existence, satisfaction, termination or breach of any obligation under the
Strategic Commitments Letter and the validity of the Strategic Commitments
Letter or any provision thereof (any such dispute, controversy or claim, a
"Strategic Commitments Dispute"), each of Time Warner, Sony and Holdco may
initiate negotiations to resolve such Strategic Commitments Dispute by
delivering to the other person or persons, as the case may be, with respect to
which such Strategic Commitments Dispute has arisen written notice, which notice
shall set forth a description of such Strategic Commitments Dispute and the
relief requested. Upon receipt of such notice, the recipient or recipients
thereof shall promptly prepare (but in no event later than 15 business days) and
deliver to the person sending such notice, a written response, which response
shall set forth the position of such recipient or recipients in respect of such
Strategic Commitments Dispute and propose a resolution to such Strategic
Commitments Dispute. If such Strategic Commitments Dispute shall fail to be
resolved through such correspondence to the satisfaction of the claimant, then
each of Time Warner, Sony and Holdco shall designate one senior officer to
participate in discussions designed to resolve such Strategic Commitments
Dispute, which discussions shall include an exchange of relevant information and
perspectives and shall begin no later than 10 business days from receipt of such
response.
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100
(ii) In the event that such representatives are unable to resolve
such Strategic Commitments Dispute through negotiation within 15 business days
from the start of such discussions or such longer period as may be unanimously
agreed among the three representatives, such Strategic Commitments Dispute shall
be submitted within five business days thereafter to J-A-M-S/Endispute (or its
successor) for nonbinding mediation (any such proceeding, a "Mediation") that
shall be governed by and conducted in accordance with the following rules:
(A) such Mediation shall be conducted in New York, New York before a
single mediator (the "Mediator") selected by a senior officer of
J-A-M-S/Endispute (or its successor);
(B) each of the parties to such Strategic Commitments Dispute shall
deliver to the Mediator a written description of such Strategic
Commitments Dispute and the relief requested; and
(C) any statements made or documents provided to the Mediator by
Time Warner, Sony or Holdco (or any of their respective agents or
representatives) shall simultaneously be delivered to each other such
person.
The Mediation shall be completed within 30 calendar days after submission to
J-A-M-S/Endispute (or its successor).
(iii) In the event that Strategic Commitments Dispute is not
resolved through Mediation, all information, events and all other matters from
the Mediation shall be disregarded in their entirety, and such Strategic
Commitments Dispute shall be determined in a binding arbitration proceeding (any
such proceeding, an "Arbitration") that shall be governed by and conducted in
accordance with the following rules:
(A) such Arbitration shall be conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration Association;
(B) such Arbitration shall be conducted in New York, New York before
a panel of three arbitrators (the "Arbitrators") (each of whom shall be a
lawyer duly admitted to practice law in the State of New York), which
Arbitrators shall be selected by the parties to such Strategic Commitments
Dispute (and shall be reasonably acceptable to any of Time Warner, Sony or
Holdco that is not a party to such Strategic Commitments Dispute); in the
event that the parties
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101
fail to select such Arbitrators within 30 calendar days after the
conclusion or termination of such Mediation, then the New York Regional
Director of the American Arbitration Association shall select the
Arbitrators upon receipt of a written request from any party to such
Strategic Commitments Dispute within 30 calendar days of receipt of such
request; unless otherwise agreed by the parties to such Strategic
Commitments Dispute, none of the Arbitrators shall have been a Mediator;
(C) each of the parties to such Strategic Commitments Dispute shall
deliver to the Arbitrators a written description of such Strategic
Commitments Dispute and the relief requested within 30 calendar days of
the appointment of the Arbitrators;
(D) a hearing (an "Arbitration Hearing") designed to resolve such
Strategic Commitments Dispute shall be held in accordance with the
Commercial Arbitration Rules of the American Arbitration Association and
shall commence within 45 calendar days following the submissions
contemplated in clause (C) above;
(E) any statements made or documents provided to the Arbitrators by
Time Warner, Sony or Holdco (or any of their respective agents or
representatives) shall simultaneously be delivered to each other such
person;
(F) each of Time Warner, Sony and Holdco may submit to the
Arbitrators such proposed findings and conclusions as such person shall
deem necessary or appropriate;
(G) at the conclusion of such Arbitration (which shall be conducted
as expeditiously as reasonably practicable by the American Arbitration
Association), the Arbitrators shall deliver a written decision (the
"Arbitration Decision") to each of Time Warner, Sony and Holdco that shall
set forth therein with particularity the Arbitrators' determinations with
respect to such Strategic Commitments Dispute; the Arbitrators shall not
have the power to award punitive or exemplary damages;
(H) the Arbitration Decision shall be final, binding and conclusive
on each of Time Warner, Sony and Holdco, and all other parties thereto,
with no right of appeal or judicial review therefrom in respect of TWI,
Sony Corporation or Holdco, or any other party thereto;
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102
(I) the Arbitrators shall, upon the written application of Time
Warner, Sony or Holdco, or any other party to the Arbitration, have the
right and jurisdiction to resolve all disputes with respect to the
interpretation, application or implementation of the Arbitration Decision,
and any determinations made by the Arbitrators pursuant to this clause (I)
shall have the same force and effect as such Arbitration Decision; and
(J) any proceeding seeking a judgment confirming any Arbitration
Decision may only be brought in a New York state court or in any Federal
court located in the State of New York; provided, however, that following
the entry of judgment, it may be registered and enforced in any other
jurisdiction pursuant to that jurisdiction's laws and procedures.
(iv) THE PROVISIONS FOR NEGOTIATION, MEDIATION AND ARBITRATION SET
FORTH IN THIS SECTION 11.10(B) SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDY
FOR ANY AND ALL STRATEGIC COMMITMENT DISPUTES, REGARDLESS OF THE NATURE OF THE
CONDUCT GIVING RISE TO ANY STRATEGIC COMMITMENTS DISPUTE, AND THE CONCLUSIONS
REACHED UPON ANY SUCH NEGOTIATION, MEDIATION OR ARBITRATION SHALL BE FINAL,
BINDING AND CONCLUSIVE ON ALL PERSONS FOR ALL PURPOSES, AND ANY AND ALL RIGHT TO
SEEK MODIFICATION OR VACATION OF ANY ARBITRATION DECISION (OR ANY OTHER REMEDY)
UNDER SECTION 7511 OF THE CIVIL PRACTICE LAW AND RULES OF THE
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103
STATE OF NEW YORK, OR ANY SUCCESSOR OR SIMILAR RULE, OR OTHERWISE, SHALL BE
WAIVED BY EACH OF THE PARTIES TO ANY STRATEGIC COMMITMENTS DISPUTE.
IN WITNESS WHEREOF, each of the parties hereto have duly executed
this Agreement, all as of the date first written above.
TIME WARNER INC.,
by /s/ RICHARD J. BRESSLER
-----------------------------------
Name: RICHARD J. BRESSLER
Title: Executive Vice President and
Chief Financial Officer
SONY CORPORATION OF AMERICA,
by /s/ HOWARD STRINGER
-----------------------------------
Name: HOWARD STRINGER
Title: Chairman and Chief Executive
Officer
CDNOW, INC.,
by /s/ JASON OLIM
-----------------------------------
Name: JASON OLIM
Title: President and Chief
Executive Officer
DELAWARE HOLDCO CORPORATION,
by /s/ JASON OLIM
-----------------------------------
Name: JASON OLIM
Title: President and Chief
Executive Officer
PENNSYLVANIA SUBSIDIARY, INC.
by /s/ JASON OLIM
-----------------------------------
Name: JASON OLIM
Title: President and Chief
Executive Officer
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DELAWARE SUB I L.L.C.,
by /s/ JASON OLIM
-----------------------------------
Name: JASON OLIM
Title: President and Chief
Executive Officer
DELAWARE SUB II L.L.C.,
by /s/ JASON OLIM
-----------------------------------
Name: JASON OLIM
Title: President and Chief
Executive Officer
<PAGE>
EXECUTION COPY
STOCK OPTION AGREEMENT dated as of July 12, 1999, among
CDNOW, INC., a Pennsylvania corporation ("CDnow"),TIME WARNER
INC., a Delaware corporation ("Time Warner"), and SONY
CORPORATION OF AMERICA, a New York corporation ("Sony").
WHEREAS Time Warner, Sony, CDnow, Delaware Holdco Corporation, a
Delaware corporation and a wholly owned subsidiary of CDnow, Pennsylvania
Subsidiary, Inc., a Pennsylvania corporation and a wholly owned subsidiary of
Holdco, Delaware Sub I L.L.C., a Delaware limited liability company and a wholly
owned subsidiary of Holdco, and Delaware Sub II L.L.C., a Delaware limited
liability company and a wholly owned subsidiary of Holdco, propose to enter into
an Agreement of Merger and Contribution dated as of the date hereof (as the same
may be amended or supplemented, the "Merger Agreement"; capitalized terms used
but not defined herein shall have the meanings set forth in the Merger
Agreement), providing for, among other things, the merger of Pennsylvania Sub
with and into CDnow, with CDnow, as the surviving corporation in the Merger,
becoming a wholly owned subsidiary of Holdco; and
WHEREAS, as a condition and inducement to the willingness of Time
Warner and Sony to enter into the Merger Agreement, Time Warner and Sony have
requested that CDnow agree, and CDnow has agreed, to grant to Time Warner and
Sony the Option (as defined below).
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
SECTION 1. Grant of Option. Upon the terms and subject to the
conditions set forth herein, CDnow hereby grants to Time Warner and Sony (to be
shared equally by them) an irrevocable option (the "Option") to purchase up to
4,531,721 (as adjusted as set forth herein) shares (the "Option Shares") of
CDnow Common Stock at a cash purchase price per Option Share (the "Purchase
Price") equal to $17.9689.
SECTION 2. Exercise of the Option. (a) The Option may be exercised,
with respect to any or all the Option Shares, at any time or from time to time,
subject to the provisions of Section 2(c), after the occurrence of any event as
a result of which Time Warner and Sony are entitled to receive the Termination
Fee under Section 8.07(b) of the Merger Agreement (a "Purchase Event");
provided, however, that (i) except as provided in the last sentence of this
Section 2(a), the Option will terminate and be of no further
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force and effect upon the earliest to occur of (A) the Effective Time, (B) 90
days after the Termination Fee is paid pursuant to the Merger Agreement and (C)
the termination of the Merger Agreement in accordance with its terms prior to
the occurrence of a Purchase Event, unless, in the case of this clause (C), Time
Warner and Sony may have the right to receive the Termination Fee following such
termination upon the occurrence of certain events, in which case the Option will
not terminate until the later of (x) 90 days after the Termination Fee is paid
pursuant to the Merger Agreement and (y) the expiration of the period in which
Time Warner and Sony may have such right to receive the Termination Fee, and
(ii) any purchase of Option Shares upon exercise of the Option will be subject
to compliance with the HSR Act and obtaining or making of any consents,
approvals, orders, notifications, filings or authorizations, the failure of
which to have obtained or made would have the effect of making the issuance of
Option Shares to Time Warner or Sony illegal (the "Regulatory Approvals").
Notwithstanding the termination of the Option, Time Warner and Sony will be
entitled to purchase Option Shares if they have exercised the Option in
accordance with the terms hereof prior to the termination of the Option, and the
termination of the Option will not affect any rights hereunder which by their
terms do not terminate or expire prior to or as of such termination. For
avoidance of doubt, with respect to clause (A)(y) and (B)(y) of Section 8.07(b)
of the Merger Agreement, the relevant "Purchase Event" shall be deemed to occur
at the earliest of the time CDnow or any CDnow Subsidiary enters into an
Acquisition Agreement with respect to, or approves, recommends or consummates
the applicable CDnow Takeover Transaction.
(b) If Time Warner and Sony wish to exercise the Option, they may do
so by giving a joint written notice (an "Exercise Notice"; the date of such
notice being herein called the "Notice Date") to CDnow specifying the number of
Option Shares, if any, that are to be purchased pursuant to this Section 2(b),
the number of Option Shares, if any, with respect to which the Cash-Out Right
(as defined herein) is to be exercised pursuant to Section 6(c), the
denominations of the certificate or certificates evidencing the Option Shares
that are to be purchased pursuant to this Section 2(b) and a date (an "Option
Closing Date"), subject to the following sentence, not earlier than two trading
days, nor later than 10 trading days from the Notice Date for the closing of
such purchase (an "Option Closing"). Any Option Closing will be at an agreed
location and time in New York, New York on the applicable Option Closing Date or
at such later date as may be necessary so as to comply with the first sentence
of Section 2(a).
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(c) Notwithstanding anything to the contrary contained herein, any
exercise of the Option and purchase of Option Shares shall be subject to
compliance with applicable laws and regulations, which may prohibit the purchase
of all the Option Shares specified in the Exercise Notice without first
obtaining or making certain Regulatory Approvals. In such event, if the Option
is otherwise exercisable and Time Warner and Sony wish to exercise the Option,
the Option may be exercised in accordance with Section 2(b), and Time Warner and
Sony shall acquire the maximum number of Option Shares specified in the Exercise
Notice that Time Warner and Sony are then permitted to acquire under the
applicable laws and regulations, and if Time Warner and Sony thereafter obtain
the Regulatory Approvals to acquire the remaining balance of the Option Shares
specified in the Exercise Notice, then Time Warner and Sony shall be entitled to
acquire such remaining balance. CDnow agrees to use its reasonable efforts to
assist Time Warner and Sony in seeking any Regulatory Approvals.
In the event (i) Time Warner or Sony receives official notice that a
Regulatory Approval required for the purchase of any Option Shares will not be
issued or granted or (ii) such Regulatory Approval has not been issued or
granted within six months of the date of the Exercise Notice, Time Warner and
Sony shall have the right to exercise their Cash-Out Right pursuant to Section
6(c) with respect to the Option Shares for which such Regulatory Approval will
not be issued or granted or has not been issued or granted.
SECTION 3. Payment and Delivery of Certificates. (a) At any Option
Closing, Time Warner and Sony will each pay to CDnow in immediately available
funds by wire transfer to a bank account designated in writing by CDnow an
amount equal to one-half of the product of the Purchase Price multiplied by the
number of Option Shares to be purchased at such Option Closing.
(b) At any Option Closing, simultaneously with the delivery of
immediately available funds as provided in Section 3(a), CDnow will deliver to
each of Time Warner and Sony certificates in the denominations designated by
Time Warner and Sony representing one-half of the Option Shares to be purchased
at such Option Closing, which Option Shares will be free and clear of all Liens.
If at the time of issuance of Option Shares pursuant to an exercise of the
Option, CDnow shall have issued any securities similar to rights under a
shareholder rights plan, then each Option Share issued pursuant to such exercise
will also represent such a corresponding right with terms substantially the same
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as and at least as favorable to Time Warner and Sony as are provided under any
such shareholder rights plan then in effect.
(c) Certificates for the Option Shares delivered at an Option
Closing will have typed or printed thereon a restrictive legend which will read
substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF JULY 12,
1999, A COPY OF WHICH MAY BE OBTAINED FROM THE SECRETARY OF CDNOW AT ITS
PRINCIPAL EXECUTIVE OFFICES."
It is understood and agreed that (i) the reference to restrictions arising under
the Securities Act in the above legend will be removed by delivery of substitute
certificate(s) without such reference if such Option Shares have been registered
pursuant to the Securities Act, such Option Shares have been sold in reliance on
and in accordance with Rule 144 under the Securities Act or Time Warner or Sony
has delivered to CDnow a copy of a letter from the staff of the SEC, or an
opinion of counsel in form and substance reasonably satisfactory to CDnow and
its counsel, to the effect that such legend is not required for purposes of the
Securities Act and (ii) the reference to restrictions pursuant to this Agreement
in the above legend will be removed by delivery of substitute certificate(s)
without such reference if the Option Shares evidenced by certificate(s)
containing such reference have been sold or transferred in compliance with the
provisions of this Agreement under circumstances that do not require the
retention of such reference.
SECTION 4. Representations and Warranties of CDnow. CDnow hereby
represents and warrants to each of Time Warner and Sony as follows: CDnow has
taken all necessary corporate and other action to authorize and reserve and,
subject to the expiration or termination of any required waiting period under
the HSR Act, to permit it to issue, and, at all times from the date hereof until
the obligation to deliver Option Shares upon the exercise of the Option
terminates, shall have reserved for issuance, upon exercise of the Option,
shares of CDnow Common Stock necessary for Time Warner and Sony to exercise the
Option, and CDnow will take all necessary corporate action to authorize and
reserve
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for issuance all additional shares of CDnow Common Stock or other securities
which may be issued pursuant to Section 6 upon exercise of the Option. The
shares of CDnow Common Stock to be issued upon due exercise of the Option,
including all additional shares of CDnow Common Stock or other securities which
may be issuable upon exercise of the Option or any other securities which may be
issued pursuant to Section 6, upon issuance pursuant hereto, will be duly and
validly issued, fully paid and nonassessable and will be delivered free and
clear of all Liens, including any preemptive rights of any shareholder of CDnow.
SECTION 5. Representations and Warranties of Time Warner and Sony.
Each of Time Warner and Sony, severally and not jointly, hereby represents and
warrants to CDnow as to itself as follows: any Option Shares or other securities
acquired by it upon exercise of the Option will not be transferred or otherwise
disposed of except in a transaction registered, or exempt from registration,
under the Securities Act.
SECTION 6. Adjustment upon Changes in Capitalization, Etc. (a) In
the event of any change in CDnow Common Stock by reason of a stock dividend,
stock split, split-up, merger, recapitalization, combination, exchange of
shares, or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price thereof, will be adjusted
appropriately, and proper provision will be made in the agreements governing
such transaction, so that Time Warner and Sony will receive upon exercise of the
Option the number and class of shares or other securities or property that they
would have received in respect of CDnow Common Stock if the Option had been
exercised immediately prior to such event or the record date therefor, as
applicable.
Subject to Section 1, and without limiting the parties' relative
rights and obligations under the Merger Agreement, if any additional shares of
CDnow Common Stock are issued after the date of this Agreement (other than
pursuant to an event described in the first sentence of this Section 6(a)) or if
the number of outstanding shares of CDnow Common Stock is reduced, then the
number of shares of CDnow Common Stock subject to the Option will be adjusted so
that, after such issuance or reduction, it equals 15% of the number of shares of
CDnow Common Stock then issued and outstanding, without giving effect to any
shares subject to or issued pursuant to the Option.
(b) Without limiting the parties' relative rights and obligations
under the Merger Agreement, in the event
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that CDnow enters into an agreement (other than the Merger Agreement) (i) to
consolidate with or merge into any person and CDnow will not be the continuing
or surviving corporation in such consolidation or merger, (ii) to permit any
person to merge into CDnow and CDnow will be the continuing or surviving
corporation, but in connection with such merger, the shares of CDnow Common
Stock outstanding immediately prior to the consummation of such merger will be
changed into or exchanged for stock or other securities of CDnow or any other
person or cash or any other property, or the shares of CDnow Common Stock
outstanding immediately prior to the consummation of such merger will, after
such merger, represent less than 50% of the outstanding voting securities of the
merged company, or (iii) to sell or otherwise transfer all or substantially all
of its assets to any person then, and in each such case, CDnow shall cause the
agreement governing such transaction to make proper provision so that the Option
will, upon the consummation of any such transaction and upon the terms and
conditions set forth herein, be converted into, or exchanged for, an option with
identical terms appropriately adjusted to acquire the number and class of shares
or other securities or property that Time Warner and Sony would have acquired in
respect of CDnow Common Stock if the Option had been exercised immediately prior
to such consolidation, merger, sale or transfer, or the record date therefor, as
applicable, and make any other necessary adjustments.
(c) If, at any time during the period commencing on a Purchase Event
and ending on the termination of the Option in accordance with Section 2, Time
Warner and Sony jointly send to CDnow an Exercise Notice indicating an election
to exercise their right (the "Cash-Out Right") pursuant to this Section 6(c),
then CDnow shall pay to each of Time Warner and Sony on the Option Closing Date,
in exchange for the cancelation of the Option with respect to such number of
Option Shares as Time Warner and Sony specify in the Exercise Notice, an amount
in cash equal to one half of such number of Option Shares multiplied by the
difference between (i) the average closing price, for the 10 trading days
commencing on the 12th trading day immediately preceding the Notice Date, per
share of CDnow Common Stock as reported on Nasdaq (or, if not listed on Nasdaq,
as reported on any other national securities exchange or national securities
quotation system on which the CDnow Common Stock is listed or quoted) and (ii)
the Purchase Price. Notwithstanding the termination of the Option, Time Warner
and Sony will be entitled to exercise their rights pursuant to this Section 6 if
they have exercised such rights in accordance with this Section 6 prior to the
termination of the Option. If, prior to the time at which
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the Cash-Out Right is exercised pursuant to this Section 6(c), Time Warner and
Sony shall have received a Termination Fee pursuant to clause (A), (B) or (C) of
Section 8.07(b) of the Merger Agreement, the number of Option Shares in respect
of which the Cash-Out Right may be exercised shall be reduced to the extent
necessary such that the amount of cash payable by CDnow under this Section 6(c),
together with the aggregate amount of any Termination Fee previously received by
Time Warner and Sony under Section 8.07(b) of the Merger Agreement, shall not
exceed $25 million (in the case of a Termination Fee described in clause (A) of
Section 8.07(b)) or $31 million (in the case of a Termination Fee described in
clause (B) or (C) of Section 8.07(b)). For the avoidance of doubt, Time Warner
and Sony shall continue to be entitled to purchase in accordance with Section 3
any Option Shares specified in the Exercise Notice in respect of which the
Cash-Out Right may not be exercised as a result of the application of the
previous sentence.
7. Registration Rights. CDnow will, if requested by Time Warner
and/or Sony (individually as to one registration each and jointly as to the
third registration) at any time and from time to time within three years of the
exercise by Time Warner and Sony of the Option, as expeditiously as possible
prepare and file a total of up to three registration statements under the
Securities Act if such registration is necessary in order to permit the sale or
other disposition of any or all shares of securities that have been acquired by
or are issuable to Time Warner and Sony upon exercise of the Option in
accordance with the intended method of sale or other disposition stated by Time
Warner and Sony, including "shelf" registration statements under Rule 415 under
the Securities Act or any successor provision, and CDnow will use its best
efforts to qualify such shares or other securities under any applicable state
securities laws. Each of Time Warner and Sony agrees to use reasonable efforts
to cause, and to cause any underwriters of any sale or other disposition to
cause, any sale or other disposition pursuant to such registration statement to
be effected on a widely distributed basis so that upon consummation thereof no
purchaser or transferee will own beneficially more than 4.9% of the
then-outstanding voting power of CDnow. CDnow will use reasonable efforts to
cause each such registration statement to become effective, to obtain all
consents or waivers of other parties which are required therefor and to keep
such registration statement effective for such period not in excess of 180
calendar days from the day such registration statement first becomes effective
as may be reasonably necessary to effect such sale or other disposition. The
obligations of CDnow hereunder to file a registration statement and to maintain
its
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effectiveness may be suspended for up to 60 calendar days in the aggregate if
the CDnow Board shall have determined that the filing of such registration
statement or the maintenance of its effectiveness would require premature
disclosure of material nonpublic information that would materially and adversely
affect CDnow or otherwise interfere with or adversely affect any pending or
proposed offering of securities of CDnow or any other material transaction
involving CDnow. Any registration statement prepared and filed under this
Section 7, and any sale covered thereby, will be at CDnow's expense (which shall
include all registration filing fees, printing expenses and fees and
disbursements of counsel to CDnow), except for underwriting discounts or
commissions, brokers' fees and the fees and disbursements of counsel to Time
Warner and Sony related thereto. Each of Time Warner and Sony will provide all
information regarding itself reasonably requested by CDnow for inclusion in any
registration statement to be filed hereunder. If, during the time periods
referred to in the first sentence of this Section 7, CDnow effects a
registration under the Securities Act of CDnow Common Stock for its own account
or for any other shareholders of CDnow (other than on Form S-4 or Form S-8, or
any successor form), it will allow Time Warner and Sony the right to participate
in such registration, and such participation will not affect the obligation of
CDnow to effect demand registration statements for Time Warner and Sony under
this Section 7; provided that, if the managing underwriters of such offering
advise CDnow in writing that in their opinion the number of shares of CDnow
Common Stock requested to be included in such registration exceeds the number
which can be sold in such offering, CDnow will include the shares requested to
be included therein by Time Warner and Sony pro rata with the shares intended to
be included therein by CDnow. In connection with any registration pursuant to
this Section 7, CDnow, on the one hand, and Time Warner and Sony (severally and
not jointly), on the other, will provide the other and any underwriter of the
offering with customary representations, warranties, covenants, indemnification
and contribution in connection with such registration.
8. Transfers. The Option Shares may not be sold, assigned,
transferred, or otherwise disposed of except (i) in an underwritten public
offering as provided in Section 7 or (ii) to any purchaser or transferee who
would not, to the knowledge of Time Warner or Sony, as applicable, after
reasonable inquiry immediately following such sale, assignment, transfer or
disposal, beneficially own more than 4.9% of the then-outstanding voting power
of CDnow; provided, however, that each of Time Warner and Sony shall be
permitted to (i) sell any Option Shares if such sale is
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made pursuant to a tender or exchange offer that has been approved or
recommended by a majority of the members of the CDnow Board and (ii) transfer
any Option Shares to any of its affiliates.
9. Listing. If CDnow Common Stock or any other securities to be
acquired upon exercise of the Option are then listed on Nasdaq (or any other
national securities exchange or national securities quotation system), CDnow,
upon the request of Time Warner and Sony, will promptly file an application to
list the shares of CDnow Common Stock or other securities to be acquired upon
exercise of the Option on Nasdaq (or any such other national securities exchange
or national securities quotation system) and will use reasonable efforts to
obtain approval of such listing as promptly as practicable.
10. Loss or Mutilation. Upon receipt by CDnow of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancelation of this
Agreement, if mutilated, CDnow will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered will constitute an
additional contractual obligation on the part of CDnow, whether or not the
Agreement so lost, stolen, destroyed, or mutilated shall at any time be
enforceable by anyone.
11. Miscellaneous. (a) Expenses. Except as otherwise provided in
this Agreement or in the Merger Agreement, each of the parties hereto will bear
and pay all costs and expenses incurred by it or on its behalf in connection
with the transactions contemplated hereunder, including fees and expenses of its
own financial consultants, investment bankers, accountants and counsel.
(b) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(c) Notice. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or sent by
overnight courier (providing proof of delivery) to Time Warner, Sony or CDnow in
accordance with Section 11.02 of the Merger Agreement (or at such other address
for a party as shall be specified by like notice).
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(d) Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section to this Agreement unless
otherwise indicated. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Wherever the words "include", "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation".
(e) Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule or law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement. This
Agreement shall become effective against Time Warner and Sony when one or more
counterparts have been signed by both Time Warner and Sony and delivered to
CDnow. This Agreement shall become effective against CDnow when one or more
counterparts have been executed by CDnow and delivered to Time Warner and Sony.
Each party need not sign the same counterpart.
(g) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(i) constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof and (ii) except for the last sentence of Section 7, is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
(h) Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law thereof.
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(i) Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise, by any of the parties without the prior
written consent of the other parties; provided, however, that each of Time
Warner and Sony may assign its rights, interests and obligations under this
Agreement to any affiliate thereof that is a party to the Transactions, without
the prior written consent of the other parties. Any purported assignment without
such consent shall be void. Subject to the preceding sentences, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
(j) Enforcement. The parties agree that irreparable damage would
occur and that the parties would not have any adequate remedy at law in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any New York state court, or any
Federal court located in the State of New York, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (i) consents to submit itself to the personal jurisdiction
of any New York state court or any Federal court located in the State of New
York in the event any dispute arises out of this Agreement, (ii) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, (iii) agrees that it will not bring any
action relating to this Agreement in any court other than a New York state court
or any Federal court sitting in the State of New York and (iv) waives any right
to trial by jury with respect to any claim or proceeding related to or arising
out of this Agreement or any transaction contemplated hereby.
(k) Further Assurances. In the event of any exercise of the Option
by Time Warner and Sony, CDnow and Time Warner and Sony will execute and deliver
all other documents and instruments and take all other actions that may be
reasonably necessary in order to consummate the transactions provided for by
such exercise.
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IN WITNESS WHEREOF, each party has cause this Agreement to be signed
by its officers thereunto duly authorized as of the day and year first written
above.
TIME WARNER INC.,
by /s/ RICHARD J. BRESSLER
----------------------------------
Name: RICHARD J. BRESSLER
Title: Executive Vice President
and Chief Financial Officer
SONY CORPORATION OF AMERICA,
by /s/ HOWARD STRINGER
------------------------------
Name: HOWARD STRINGER
Title: Chairman and Chief
Executive Officer
CDNOW, INC.,
by /s/ JASON OLIM
------------------------------
Name: JASON OLIM
Title: President and Chief
Executive Officer
<PAGE>
EXECUTION COPY
CDNOW, INC. SHAREHOLDER AGREEMENT dated as of July 12,
1999, among TIME WARNER INC., a Delaware corporation ("Time
Warner"), SONY CORPORATION OF AMERICA, a New York corporation
("Sony"), and the individuals and other parties listed on
Schedule A hereto (each, a "Shareholder" and, collectively,
the "Shareholders").
WHEREAS Time Warner, Sony, CDnow, Inc., a Pennsylvania corporation
("CDnow"), Delaware Holdco Corporation, a Delaware corporation and a wholly
owned subsidiary of CDnow ("Holdco"), Pennsylvania Subsidiary, Inc., a
Pennsylvania corporation and a wholly owned subsidiary of Holdco, Delaware Sub I
L.L.C., a Delaware limited liability company and a wholly owned subsidiary of
Holdco, and Delaware Sub II L.L.C., a Delaware limited liability company and a
wholly owned subsidiary of Holdco, propose to enter into an Agreement of Merger
and Contribution dated as of the date hereof (as the same may be amended or
supplemented, the "Merger Agreement"; capitalized terms used but not defined
herein shall have the meanings set forth in the Merger Agreement);
WHEREAS each Shareholder owns the number of shares of CDnow Common
Stock set forth opposite his name on Schedule A hereto (such shares of CDnow
Common Stock, together with any other shares of capital stock of CDnow acquired
by such Shareholder after the date hereof and during the term of this Agreement,
being collectively referred to herein as the "Subject Shares" of such
Shareholder); and
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, Time Warner and Sony have requested that each Shareholder enter into
this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Representations and Warranties of Each Shareholder. Each
Shareholder hereby, severally and not jointly, represents and warrants to Time
Warner and Sony as of the date hereof in respect of himself as follows:
(a) Authority; Execution and Delivery; Enforceability. The
Shareholder has all requisite power and authority to execute this Agreement and
to consummate the transactions contemplated hereby. The Shareholder has duly
executed and delivered this Agreement, and this Agreement constitutes the legal,
valid and binding obligation of the
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Shareholder, enforceable against the Shareholder in accordance with its terms.
The execution and delivery by the Shareholder of this Agreement do not, and the
consummation of the transactions contemplated hereby and compliance with the
terms hereof will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancelation or acceleration of any obligation or to loss
of a material benefit under, or result in the creation of any Lien upon any of
the properties or assets of the Shareholder under, any provision of any Contract
to which the Shareholder is a party or by which any properties or assets of the
Shareholder are bound or, subject to the filings and other matters referred to
in the next sentence, any provision of any Judgment or Law applicable to the
Shareholder or the properties or assets of the Shareholder. No Consent of, or
registration, declaration or filing with, any Governmental Entity is required to
be obtained or made by or with respect to the Shareholder in connection with the
execution, delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby, other than such reports under Sections 13(d)
and 16 of the Exchange Act as may be required in connection with this Agreement
and the transactions contemplated hereby. If the Shareholder is married and the
Subject Shares of the Shareholder constitute community property, or spousal or
other approval is otherwise required for this Agreement to be legal, valid and
binding, this Agreement has been duly authorized, executed and delivered by, and
constitutes a valid and binding agreement of, the Shareholder's spouse,
enforceable against such spouse in accordance with its terms.
(b) The Subject Shares. The Shareholder is the record and beneficial
owner of and has good and marketable title to, the Subject Shares set forth
opposite his name on Schedule A attached hereto, free and clear of any Liens.
The Shareholder does not own, of record or beneficially, any shares of capital
stock of CDnow other than the Subject Shares set forth opposite his name on
Schedule A attached hereto. The Shareholder has the sole right to vote such
Subject Shares, and none of such Subject Shares is subject to any voting trust
or other agreement, arrangement or restriction with respect to the voting of
such Subject Shares, except as contemplated by this Agreement.
SECTION 2. Representations and Warranties of Time Warner and Sony.
Each of Time Warner and Sony, severally and not jointly, hereby represents and
warrants to each Shareholder as to itself as follows: It has all requisite
corporate power and authority to execute this Agreement and
<PAGE>
3
to consummate the transactions contemplated hereby. The execution and delivery
by it of this Agreement and consummation of the transactions contemplated hereby
have been duly authorized by all necessary action on its part. It has duly
executed and delivered this Agreement, and this Agreement constitutes its legal,
valid and binding obligation, enforceable against it in accordance with the
terms hereof.
SECTION 3. Covenants of Each Shareholder. Each Shareholder,
severally and not jointly, covenants and agrees as follows:
(a) (1) At any meeting of the shareholders of CDnow called to seek
the CDnow Shareholder Approval or in any other circumstances upon which a vote,
consent or other approval (including by written consent) with respect to the
Merger Agreement, any other Transaction Agreement or any Transaction is sought,
the Shareholder shall, including by executing a written consent solicitation if
requested by Time Warner and Sony, vote (or cause to be voted) the Subject
Shares of the Shareholder in favor of granting the CDnow Shareholder Approval.
(2) The Shareholder hereby irrevocably grants to, and appoints Time
Warner or Sony, or any of them, and any individual designated in writing by any
of them, and each of them individually, as the Shareholder's proxy and
attorney-in-fact (with full power of substitution), for and in the name, place
and stead of the Shareholder, to vote the Subject Shares of the Shareholder, or
grant a consent or approval in respect of the Subject Shares of the Shareholder
in a manner consistent with this Section 3. The Shareholder understands and
acknowledges that Time Warner and Sony are entering into the Merger Agreement in
reliance upon the Shareholder's execution and delivery of this Agreement. The
Shareholder hereby affirms that the irrevocable proxy set forth in this Section
3(a) is given in connection with the execution of the Merger Agreement, and that
such irrevocable proxy is given to secure the performance of the duties of the
Shareholder under this Agreement. The Shareholder hereby further affirms that
the irrevocable proxy is coupled with an interest and may under no circumstances
be revoked. The Shareholder hereby ratifies and confirms all that such
irrevocable proxy may lawfully do or cause to be done by virtue hereof. Such
irrevocable proxy is executed and intended to be irrevocable in accordance with
the provisions of Section 1759 of the PBCL. The irrevocable proxy granted
hereunder shall automatically terminate upon the termination of Sections 3(a)
and 3(b).
<PAGE>
4
(b) At any meeting of shareholders of CDnow or at any adjournment
thereof or in any other circumstances upon which the Shareholder's vote, consent
or other approval is sought, the Shareholder shall vote (or cause to be voted)
the Subject Shares of the Shareholder against (i) any Acquisition Agreement,
merger, consolidation, combination, sale of substantial assets, reorganization,
recapitalization, dissolution, liquidation or winding up of or by CDnow (other
than the Merger Agreement and the Transactions), (ii) any CDnow Takeover
Proposal and (iii) any amendment of the CDnow Charter or the CDnow Bylaws or
other proposal or transaction involving CDnow or any CDnow Subsidiary, which
amendment or other proposal or transaction would in any manner impede,
frustrate, prevent or nullify any provision of the Merger Agreement, any other
Transaction Agreement, any Transaction or change in any manner the voting rights
of any class of CDnow Capital Stock. The Shareholder shall not commit or agree
to take any action inconsistent with the foregoing.
(c) Other than this Agreement, the Shareholder shall not (i) except
as set forth on Schedule A attached hereto, sell, transfer, pledge, assign or
otherwise dispose of (including by gift) (collectively, "Transfer"), or enter
into any Contract, option or other arrangement (including any profit sharing
arrangement) with respect to the Transfer of, any Subject Shares to any person
other than pursuant to the Transactions or (ii) enter into any voting
arrangement, whether by proxy, voting agreement or otherwise, with respect to
any Subject Shares and shall not commit or agree to take any of the foregoing
actions; provided, however, that, at any time that is not more than three days
prior to the date on which such tender offer expires, the Shareholder may
Transfer the Subject Shares pursuant to any tender offer solely involving cash
consideration and constituting a Superior CDnow Proposal (it being understood
that any voting rights with respect to such Transferred Subject Shares shall
also be transferred).
(d) The Shareholder shall not, nor shall it authorize or permit any
employee of, or any investment banker, financial advisor, attorney, accountant
or other advisor or representative retained by, the Shareholder to, directly or
indirectly through another person, (i) solicit, initiate or encourage (including
by way of furnishing information), or take any action designed to facilitate,
any inquiries or the making of a proposal which constitutes, or may reasonably
be expected to lead to, any CDnow Takeover Proposal, (ii) participate in any
discussions or negotiations regarding any CDnow Takeover Proposal or (iii) enter
into any agreement with respect to any CDnow
<PAGE>
5
Takeover Proposal; provided, however, that the Shareholder may participate in
discussions or negotiations with any person regarding a Superior CDnow Proposal
if at such time CDnow is permitted to engage in, and is actually engaged in,
discussions or negotiations with such person pursuant to Section 7.02(a) of the
Merger Agreement. The Shareholder promptly shall advise Time Warner and Sony
orally and in writing of any request for information or of any CDnow Takeover
Proposal, or any inquiry made to the Shareholder with respect to or that could
lead to any CDnow Takeover Proposal, the material terms and conditions of such
request, CDnow Takeover Proposal or inquiry and the identity of the person
making any such request, CDnow Takeover Proposal or inquiry. The Shareholder
will keep Time Warner, Sony and CDnow informed of the status and details
(including amendments and proposed amendments) of any such request, CDnow
Takeover Proposal or inquiry.
(e) The Shareholder shall use all reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Transactions. The Shareholder shall not issue any press release
or make any other public statement with respect to any Transaction Agreement or
any Transaction without the prior consent of Time Warner and Sony, except as may
be required by applicable Law.
(f) The Shareholder hereby consents to and approves the actions
taken by the CDnow Board in approving the Transaction Agreements and the
Transactions. The Shareholder hereby waives, and agrees not to exercise or
assert, any dissent rights under Subchapter D in connection with the
Transactions.
(g) If, at the time the Merger Agreement is submitted for approval
to the shareholders of CDnow, the Shareholder is an "affiliate" of CDnow for
purposes of Rule 145 under the Securities Act, the Shareholder shall deliver to
Time Warner and Sony at least 30 days prior to the Closing a written agreement
substantially in the form attached as Exhibit R to the Merger Agreement.
SECTION 4. Termination. This Agreement shall terminate upon the
earliest of (i) the Effective Time and (ii) the termination of the Merger
Agreement in accordance with its terms.
<PAGE>
6
SECTION 5. Additional Matters. (a) Each Shareholder shall, from time
to time, execute and deliver, or cause to be executed and delivered, such
additional or further consents, documents and other instruments as Time Warner
and Sony may reasonably request for the purpose of effectively carrying out the
transactions contemplated by this Agreement.
(b) No person executing this Agreement who is or becomes during the
term hereof a director or officer of CDnow makes any agreement or understanding
herein in his or her capacity as such director or officer of CDnow. Each
Shareholder signs solely in his, her or its capacity as the record holder and
beneficial owner of such Shareholder's Subject Shares and nothing herein shall
limit or affect any actions taken by any Shareholder in his capacity as an
officer or director of CDnow to the extent specifically permitted by the Merger
Agreement.
SECTION 6. General Provisions.
(a) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(b) Notice. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or sent by
overnight courier (providing proof of delivery) to Time Warner and Sony in
accordance with Section 11.02 of the Merger Agreement and to the Shareholders at
their respective addresses set forth on Schedule A hereto (or at such other
address for a party as shall be specified by like notice).
(c) Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Wherever the words "include", "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation".
(d) Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule or law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to
<PAGE>
7
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
(e) Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement. This
Agreement shall become effective against Time Warner and Sony when one or more
counterparts have been signed by Time Warner and Sony and delivered to each
Shareholder. This Agreement shall become effective against any Shareholder when
one or more counterparts have been executed by such Shareholder and delivered to
Time Warner and Sony. Each party need not sign the same counterpart.
(f) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(i) constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof and (ii) is not intended to confer upon any person other
than the parties hereto any rights or remedies hereunder.
(g) Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law thereof.
(h) Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise, by any of the parties without the prior
written consent of the other parties; provided, however, that each of Time
Warner and Sony may assign its rights, interests and obligations under this
Agreement to any affiliate thereof that is a party to the Transactions, without
the prior written consent of the other parties. Any purported assignment without
such consent shall be void. Subject to the preceding sentences, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
(i) Enforcement. The parties agree that irreparable damage would
occur and that the parties would not have any adequate remedy at law in the
event that any of the provisions of this Agreement were not performed in
<PAGE>
8
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any New York state court, or any
Federal court located in the State of New York, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (i) consents to submit itself to the personal jurisdiction
of any New York state court or any Federal court located in the State of New
York in the event any dispute arises out of this Agreement, (ii) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, (iii) agrees that it will not bring any
action relating to this Agreement in any court other than a New York state court
or any Federal court sitting in the State of New York and (iv) waives any right
to trial by jury with respect to any claim or proceeding related to or arising
out of this Agreement or any transaction contemplated hereby.
<PAGE>
9
IN WITNESS WHEREOF, each party has duly executed this Agreement, all
as of the date first written above.
TIME WARNER INC.,
by /s/ RICHARD J. BRESSLER
---------------------------------
Name: RICHARD J. BRESSLER
Title: Executive Vice President
and Chief Financial Officer
SONY CORPORATION OF AMERICA,
by /s/ HOWARD STRINGER
---------------------------------
Name: HOWARD STRINGER
Title: Chairman and Chief
Executive Officer
/s/ JASON OLIM
---------------------------------
JASON OLIM
/s/ MATTHEW OLIM
---------------------------------
MATTHEW OLIM
/s/ JONATHAN V. DIAMOND
---------------------------------
JONATHAN V. DIAMOND
/s/ ROBERT DAVID GRUSIN
---------------------------------
ROBERT DAVID GRUSIN
/s/ JAMES E. COANE
---------------------------------
JAMES E. COANE
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of Shares
Name and Address of CDnow Common Exceptions to
of Shareholder Stock Owned Section 3(c)(i)
- ---------------- ---------------- ---------------
<S> <C> <C>
Jason Olim 2,960,025 Bona fide pledge
765 Limekiln Pike, #18 of up to 165,000
Glenside, PA 19038 Subject Shares to
secure the down payment
and improvements loan for
the property to be
purchased by JO for his
home; provided that Mr.
Olim retains all voting
rights with respect to
such pledged Subject
Shares.
Matthew Olim 2,960,025 Bona fide pledge
8460 Limekiln Pike of up to 165,000
PH-8 Subject Shares to
Wyncote, PA 19095 secure margin
loans or the down payment
on a home mortgage loan;
provided that Mr. Olim
retains all voting rights
with respect to such
pledged Subject Shares.
Jonathan V. Diamond 663,382 None.
1 West 67th Street
New York, NY 10023
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Name and Address of CDnow Common Exceptions to
of Shareholder Stock Owned Section 3(c)(i)
- ---------------- ---------------- ---------------
<S> <C> <C>
Robert David Grusin 584,668 If Mr. Grusin
700 Garrin Street ceases to be a
Santa Fe, NM 87501 member of the
Board of Directors of
CDnow, thereafter he will
have the right to
Transfer his Subject
Shares without regard to
the restrictions set
forth in Section 3(c)(i)
and upon any such
Transfer, such Subject
Shares shall cease to be
bound by this Agreement.
James E. Coane 88,902 Sale of up to
3 Constance Court 50,000 Subject
East Setawket, NY 11733 Shares.
</TABLE>
<PAGE>
MASTER CANADIAN TRANSACTION AGREEMENT
MEMORANDUM OF AGREEMENT made as of the 12th day of July, 1999
B E T W E E N:
WARNER MUSIC CANADA LTD.
a corporation incorporated under the laws of Ontario
(hereinafter referred to as "Time Warner Canada")
- and -
SONY MUSIC ENTERTAINMENT (CANADA) INC.
a corporation incorporated under the laws of Canada
(hereinafter referred to as "Sony Canada")
- and -
THE COLUMBIA HOUSE COMPANY (CANADA) a general
partnership formed under the laws of Ontario
(hereinafter referred to as "Columbia House Canada"),
the partners of which are Time Warner Canada and Sony
Canada
- and -
CANADIAN SUB an unlimited liability company formed
under the laws of Nova Scotia (hereinafter referred
to as "Canadian Sub")
- and -
DELAWARE HOLDCO CORPORATION
a corporation incorporated under the laws of Delaware
(hereinafter referred to as "Holdco").
WHEREAS in connection with the merger of certain businesses of CDnow,
Inc., Time Warner Inc., and Sony Corporation of America pursuant to an Agreement
of Merger and Contribution dated as of July 12, 1999 (the "Merger and
Contribution Agreement") the parties hereto desire to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary or
desirable under applicable law to complete a transaction resulting in the
transfer of certain assets
<PAGE>
to and assumption of liabilities of Columbia House Canada by Canadian Sub, a
Nova Scotia unlimited liability company that will become a wholly-owned
subsidiary of Holdco, and the receipt of shares of Class B Common Stock, with a
par value U.S. $0.01 per share, of Holdco and exchangeable shares of Canadian
Sub that may be exchanged for shares of Holdco Common Stock;
WHEREAS for U.S. federal income tax purposes it is intended that the
Merger and the Contributions (as defined in the Merger and Contribution
Agreement), as well as the transfer by Columbia House Canada of Canadian Sub to
Holdco in exchange for Holdco Class B Common Stock and the acquisition of the
Canadian Sub Exchangeable Shares (as such terms are defined below), qualify as
exchanges under Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code");
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties agree as
follows:
ARTICLE 1
DEFINITIONS AND PRINCIPLES OF INTERPRETATION
1.1 DEFINITIONS - Terms used but not defined herein shall have the meanings
set forth in the Merger and Contribution Agreement. In addition, whenever
used in this Agreement, unless there is something inconsistent in the
subject matter or context, the following words and terms shall have the
meanings set out below:
"AGREEMENT" means this Master Canadian Transaction Agreement, including
all schedules, and all instruments supplementing, amending or confirming
this Agreement and references to "ARTICLE", "SCHEDULE" or "SECTION" mean
and refer to the specified Article or Section of or Schedule to this
Agreement;
"BOOKS AND RECORDS" means all books, records, books of account, sales and
purchase records, lists of suppliers and customers, personnel records,
business reports, plans and projections and all other documents, files,
records, correspondence, and other data and information, financial or
otherwise, relating to the Business or the Business Assets;
"BUSINESS" means all of the commercial activities currently carried on by
Columbia House Canada;
"BUSINESS ASSETS" means all the assets of Columbia House Canada other than
Cash;
"CANADIAN SUB COMMON SHARES" shall have the meaning given in Section 2.4;
"CANADIAN SUB EXCHANGE SHARES" shall have the meaning given in Section
2.4;
-2-
<PAGE>
"CANADIAN TRANSACTION AGREEMENTS" means this Agreement, the Support
Agreement, Exchange Agreement and Voting Trust Agreement;
"CANADIAN TRANSACTION" means the acquisition and transfer of the Business
Assets, the exchange of Canadian Sub shares by Columbia House Canada with
Holdco for Common Stock of Holdco, the acquisition of Exchangeable Shares,
the distribution of property of Columbia House Canada, the dissolution and
distribution of the remaining property of Columbia House Canada to Time
Warner Canada and Sony Canada, all other actions contemplated by this
Agreement and all actions necessary or desirable to give effect to the
foregoing;
"CASH" means cash and cash equivalents;
"CLAIMS" means any claim, demand, action, cause of action, damage, loss,
cost, liability or expense, including, without limitation, reasonable
professional fees and all costs incurred (i) in investigating or pursuing
any of the foregoing or any proceeding relating to any of the foregoing or
(ii) in pursuing any claim for indemnity or damages pursuant hereto
provided that the Person pursuing such claim is determined to be entitled
to such indemnity or damages;
"CLOSING" means the completion of the Canadian Transaction;
"CLOSING DATE" means the date determined under the Merger and Contribution
Agreement to be the date that the Closing of the transactions contemplated
thereby shall occur or such other date as the Parties may agree as the
date upon which the Closing shall take place;
"CLOSING TIME" means the Effective Time determined under the Merger and
Contribution Agreement;
"ELECTED AMOUNT" shall have the meaning given in Section 2.6;
"ENCUMBRANCES" means any pledge, lien, charge, mortgage, encumbrance or
security interest of any kind or nature;
"EXCHANGE AGREEMENT" means the exchange agreement to be entered into
between Holdco, and Columbia House Canada as of the Closing Date in the
form of Schedule 1.1.1;
"EXCHANGEABLE SHARES" means the exchangeable shares in the capital of
Canadian Sub which shall have the rights, privileges, restrictions and
conditions set forth in Schedule 1.1.2, including the right on demand to
exchange such shares for an equal number of shares of Common Stock of
Holdco;
"GOVERNMENTAL AUTHORITIES" means any government, regulatory authority,
governmental department, agency, commission, board, tribunal, crown
corporation, or court having
-3-
<PAGE>
jurisdiction on behalf of any nation, or province or state or other
subdivision thereof or any municipality, district or other subdivision
thereof;
"GST" shall have the meaning given in Section 2.10;
"ITA" shall have the meaning given in Section 2.1(g);
"LAWS" means all laws, by-laws, rules, regulations, orders, ordinances,
protocols, codes, guidelines, policies, notices, directions and judgements
or other requirements of any Governmental Authority;
"PARTIES" means Time Warner Canada, Sony Canada, Columbia House Canada,
Holdco and Canadian Sub collectively, and "Party" means any one of them;
"PARTNERSHIP AGREEMENT" shall have the meaning given in Section 2.1(f);
"SUPPORT AGREEMENT" means the support agreement to be entered into as of
the Closing Date between Holdco and Canadian Sub in the form of Schedule
1.1.3;
"TAXES" includes, without limitation, all taxes, duties, fees, premiums,
assessments, imposts, levies and other charges of any kind whatsoever
imposed by any Governmental Authority, together with all interest,
penalties, fines, additions to tax or other additional amounts imposed in
respect thereof, including, without limitation, those levied on, or
measured by, or referred to as income, gross receipts, profits, capital,
transfer, land transfer, sales, goods and services, use, value-added,
excise, stamp, withholding, business, franchising, property, payroll,
employment, health, social services, education and social security taxes,
all surtaxes, all customs duties and import and export taxes, all license,
franchise and registration fees and all unemployment insurance, health
insurance and government pension plan premiums;
"VOTING TRUST AGREEMENT" means the voting trust agreement to be entered
into as of the Closing Date between Holdco, Canadian Sub, Columbia House
Canada and an appointed trustee satisfactory to the Parties in the form of
Schedule 1.1.4.
1.2 CERTAIN RULES OF INTERPRETATION - In this Agreement:
(a) TIME - time is of the essence in the performance of the Parties'
respective obligations;
(b) CURRENCY - unless otherwise specified, all amounts in this Agreement
are stated and shall be paid in Canadian currency;
(c) HEADINGS - the descriptive headings of Articles and Sections are
inserted solely for convenience of reference and are not intended as
complete or accurate descriptions of the content of such Articles or
Sections and shall not affect in any way the meaning or
interpretation of this Agreement;
-4-
<PAGE>
(d) SINGULAR, ETC. - unless the context otherwise requires, words
importing the singular include the plural and vice versa and words
importing gender include all genders;
1.3 ENTIRE AGREEMENT - The Canadian Transaction Agreements, taken together
with all documents delivered pursuant thereto, (a) constitute the entire
agreement, and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the Canadian
Transaction and (b) are not intended to confer upon any person other than
the parties any rights or remedies.
1.4 APPLICABLE LAW - This Agreement shall be construed in accordance with the
laws of the Province of Ontario and the laws of Canada applicable therein
and shall be treated, in all respects, as an Ontario contract. The Parties
shall attorn to the non-exclusive jurisdiction of the Courts of the
Province of Ontario.
1.5 ACCOUNTING PRINCIPLES - All accounting terms not otherwise defined in this
Agreement have the meanings assigned to them by Canadian generally
accepted accounting principles.
1.6 SCHEDULES - The schedules to this Agreement, as listed below, are an
integral part of this Agreement:
Schedule 1.1.1 - Exchange Agreement
Schedule 1.1.2 - Exchangeable Share Provisions of Canadian Sub
Schedule 1.1.3 - Support Agreement
Schedule 1.1.4 - Voting Trust Agreement
Schedule 1.1.5 - Assignment and Conveyance
Schedule 2.5 - Purchase Price Allocation
ARTICLE 2
CANADIAN TRANSACTION
2.1 ACTION BY THE PARTIES - At the Closing Time the Canadian Transaction shall
be completed in the following order:
(a) TRANSFER OF BUSINESS ASSETS - Columbia House Canada shall transfer
to Canadian Sub (a wholly-owned subsidiary of Columbia House Canada
and a Nova Scotia unlimited liability company) all of the Business
Assets and Cash in the amount of $500,000 in exchange for 2 Canadian
Sub Common Shares and 4,989,052 Canadian Sub Exchange Shares
(collectively, the "Canadian Sub Shares") and the assumption of
liabilities described in paragraph 2.1(b) below. Canadian Sub shall
deliver to Columbia House Canada the Canadian Sub Shares as provided
in Section 2.4.
-5-
<PAGE>
Columbia House Canada shall execute and deliver to Canadian Sub all
such conveyances, assignments, instruments of transfer, deeds,
assurances, consents and other documents as Canadian Sub considers
necessary to effectively transfer to Canadian Sub all Columbia House
Canada's right, title and interest in, to and under, or in respect
of the Business Assets and Canadian Sub shall effect such
registrations, recordings and filings with public authorities as may
be required in connection with the transfer of ownership to Canadian
Sub of the Business Assets.
(b) ASSUMPTION OF LIABILITIES - Simultaneously with the transfer of
assets described in paragraph 2.1(a) above, Canadian Sub shall
assume and agree to discharge or perform when due the liabilities,
debts and obligations of Columbia House Canada, whether as debtor,
guarantor, surety or otherwise and whether present or future,
absolute or contingent, arising before, on or after the Closing
Date.
(c) EXCHANGE OF SHARES - Immediately following the transfer and
assumption referred to in paragraphs 2.1(a) and (b) above, Columbia
House Canada will transfer to Holdco the Canadian Sub Common Shares,
in exchange for 3,888 shares of Class B Common Stock of Holdco, so
that following such transfer, Holdco will hold all of the issued and
outstanding Canadian Sub Common Shares and Columbia House Canada
will hold 3,888 shares of Class B Common Stock of Holdco and all the
issued and outstanding Canadian Sub Exchange Shares.
(d) TRANSFER OF EXCHANGE SHARES TO CANADIAN SUB IN EXCHANGE FOR
EXCHANGEABLE SHARES - Immediately following the exchange of shares
referred to in paragraph 2.1(c) above, Columbia House Canada shall
transfer the Canadian Sub Exchange Shares to Canadian Sub in
exchange for Exchangeable Shares. Following the transfer of Exchange
Shares to Canadian Sub, the Exchange Shares shall be cancelled. As a
result of such transfer, Columbia House Canada shall be the sole and
beneficial owner of 4,989,052 Exchangeable Shares. Holdco shall
take, and shall cause Canadian Sub to take, all steps and
proceedings, including filing articles of amendment to the Articles
of Association of Canadian Sub to create the Exchangeable Shares and
providing for the transfer of Exchange Shares to Canadian Sub in
exchange for Exchangeable Shares, as may be required to give effect
to the foregoing. In connection with the transfer of Canadian Sub
Exchange Shares, Columbia House Canada shall surrender any Canadian
Sub Exchange Share certificates and thereupon be issued share
certificates representing the Exchangeable Shares.
(e) EXECUTION OF CERTAIN AGREEMENTS - Immediately following the
completion of the matters referred to in paragraph 2.1(d) above, the
Exchange Agreement, the Support Agreement and the Voting Trust
Agreement shall be executed and delivered by the parties thereto.
(f) DISTRIBUTION OF COLUMBIA HOUSE CANADA'S PROPERTY - Immediately
following the completion of the matters referred to in paragraph
2.1(e) above, Columbia House
-6-
<PAGE>
Canada shall distribute to each of Time Warner Canada and Sony
Canada, in accordance with the provisions of the Columbia House
Canada Partnership Agreement (the "Partnership Agreement") and all
applicable Laws, all the property of Columbia House Canada other
than the Exchangeable Shares and Cash of Columbia House Canada,
including, for greater certainty, all the rights and obligations of
Columbia House Canada under the Exchange Agreement and the Voting
Trust Agreement, and all of the shares of Class B Common Stock of
Holdco held by Columbia House Canada. Columbia House Canada shall
execute and deliver to each of Time Warner Canada and Sony Canada
all such conveyances, assignments, instruments of transfer, deeds,
assurances, consents and other documents as either Time Warner
Canada or Sony Canada considers necessary to effectively transfer to
them all Columbia House Canada's right, title and interest in, to
and under, or in respect of such property, including the Assignment
and Conveyance in the form of Schedule 1.1.5. hereto, and each of
Time Warner Canada and Sony Canada shall effect such registrations,
recordings and filings with public authorities as may be required in
connection with the transfer of ownership to Time Warner Canada and
Sony Canada of such property. Such shares of Class B Common Stock of
Holdco shall thereupon be registered in the names of Time Warner
Canada and Sony Canada in accordance with their respective interests
therein.
(g) DISSOLUTION OF COLUMBIA HOUSE CANADA AND DISTRIBUTION OF COLUMBIA
HOUSE CANADA'S PROPERTY - Time Warner Canada and Sony Canada hereby
agree that effective immediately following the completion of the
steps outlined above, Columbia House Canada shall be dissolved and
wound-up pursuant to the provisions of the Partnership Agreement and
applicable Laws, thereby causing Columbia House Canada to cease to
exist. In connection with the dissolution and wind-up of Columbia
House Canada, all of the remaining property of Columbia House
Canada, which shall consist of any remaining Cash of Columbia House
Canada and the Exchangeable Shares, shall be distributed on the
Closing Date in accordance with the provisions of the Partnership
Agreement and applicable Laws, including Subsection 85(3) of the
Income Tax Act (Canada) (the "ITA") to Time Warner Canada and Sony
Canada.
(h) OTHER DOCUMENTS - The Parties shall deliver such other documents as
may be necessary or desirable to complete all transactions
contemplated by this Agreement (including Schedules) and as provided
for herein.
2.2 PLACE OF CLOSING - The Closing shall take place on the Closing Date at the
offices of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York
10019, or at such other place as may be agreed upon by the Parties.
2.3 CONSIDERATION - The consideration payable by Canadian Sub for the Business
Assets (the "Consideration") shall be the amount equal to the aggregate of
the value of 4,989,052 shares of Class B Common Stock of Holdco and
$100,000 and the assumption of liabilities pursuant to paragraph 2.1(b),
exclusive of all applicable sales and transfer taxes.
-7-
<PAGE>
2.4 SATISFACTION OF CONSIDERATION - At the Closing Time, the Consideration
shall be satisfied by (i) the issuance by Canadian Sub to Columbia House
Canada of (a) 4,989,052 special shares in the capital of Canadian Sub (the
"Canadian Sub Exchange Shares")(which shares will be transferred to
Canadian Sub immediately following the issuance thereof in exchange for
Exchangeable Shares) and (b) 2 common shares in the capital of Canadian
Sub (the "Canadian Sub Common Shares") and (ii) the assumption of
liabilities and the performance of the other covenants required to be
performed on or prior to Closing hereunder or under the Exchange
Agreement, the Support Agreement or the Voting Trust Agreement.
2.5 ALLOCATION OF THE CONSIDERATION - For Canadian tax purposes, the
Consideration shall be allocated among the Business Assets in accordance
with Schedule 2.5. Columbia House Canada, the partners of Columbia House
Canada and Canadian Sub agree to report the acquisition and transfer of
the Business Assets in any returns required to be filed under the ITA and
any other taxation statutes in accordance with the provisions thereof.
2.6 SECTION 85 ELECTIONS - It is intended that the transfer hereunder of the
Business Assets to Canadian Sub and of the Exchange Shares to Canadian Sub
be on a tax-deferred basis to Columbia House Canada for purposes of the
ITA and applicable provincial income tax statutes. In order to give effect
to this intention, Columbia House Canada and Canadian Sub shall, in a
timely manner, jointly execute and file elections under Subsection 85(2)
of the ITA in prescribed form and elections in prescribed form under the
corresponding provisions of applicable provincial income tax statutes in
respect of the transfer of the Business Assets and the Exchange Shares.
2.7 U.S. TAX CHARACTERIZATION - It is intended at all times for U.S. federal
income tax purposes that (a) the Exchangeable Shares be treated as Common
Stock of Holdco; and (b) Canadian Sub be treated as a "disregarded entity"
and, as such, after giving effect to the transaction contemplated hereby,
a branch or division of Holdco. The Parties agree to, and agree to cause
their respective affiliates to, file all U.S. tax returns consistent with
such treatment and to otherwise follow such treatment for all U.S. tax
purposes.
2.8 INDEMNIFICATION - If the Closing shall occur, Holdco shall indemnify each
of Time Warner Canada, Sony Canada and each of their respective
affiliates, stockholders, partners, directors, officers, employees and
agents, against and hold them harmless from (i) any and all losses,
liabilities, claims, damages, costs and expenses (including attorneys'
fees and disbursements and other reasonable professional fees and
disbursements, whether or not litigation is instituted) (collectively,
"Losses") suffered or incurred by any such indemnified party related to,
or arising out of, the liabilities of Columbia House Canada assumed by
Canadian Sub, (ii) any and all Losses related to, or arising out of, the
business, operations, activities, affairs, properties, assets or
liabilities of Columbia House Canada or any of its subsidiaries, whether
arising before, on or after the Closing Date, and (iii) any and all Losses
(other than any income tax or capital tax liability incurred by Time
Warner Canada or Sony Canada in their personal capacities) incurred by any
such indemnified party related to, or arising out of,
-8-
<PAGE>
liabilities of Canadian Sub due to the status of Sony Canada and Time
Warner Canada under Canadian federal and provincial Law as shareholders of
Canadian Sub.
2.9 SALES AND TRANSFER TAXES - Each of Canadian Sub and Columbia House Canada
shall pay directly to the appropriate taxing authorities all sales and
transfer taxes, registration charges and transfer fees other than the
goods and services tax ("GST") imposed under Part IX of the Excise Tax Act
(Canada) payable by it, applicable in respect of the purchase and sale of
the Business Assets under this Agreement and, upon the reasonable request
of each such Party, the other such Party shall furnish proof of such
payment.
2.10 GST ELECTION - Canadian Sub and Columbia House Canada shall jointly elect
under subsection 167(1) of Part IX of the Excise Tax Act (Canada) and any
provincial legislation imposing a similar value added or multi-staged tax,
that no tax be payable with respect to the transfer and acquisition of the
Business Assets pursuant to this Agreement. Canadian Sub and Columbia
House Canada shall make such election in the prescribed form containing
prescribed information pursuant to the Excise Tax Act and any provincial
legislation imposing a similar value added or multi-staged tax, and
Canadian Sub shall file the joint election in compliance with the
requirements of the Excise Tax Act and any provincial legislation imposing
a similar value added or multi-staged tax.
2.11 BULK SALES ACT - It is agreed that Canadian Sub shall not require Columbia
House Canada to comply, or to assist Canadian Sub to comply, with the
requirements of the Bulk Sales Act (Ontario), or such other comparable
legislation in any other jurisdiction as may be applicable to the transfer
of the Business Assets.
ARTICLE 3
CONDITIONS PRECEDENT
The respective obligations of the Parties to complete the Canadian
Transaction and any other transaction contemplated under the Canadian
Transaction Agreements shall be subject to the satisfaction (or waiver by the
applicable beneficiary of the applicable condition) of each of the conditions
precedent set forth in Article IX of the Merger and Contribution Agreement.
ARTICLE 4
GENERAL
4.1 EXPENSES - All fees and expenses incurred in connection with the Canadian
Transaction shall be borne by Canadian Sub if the Canadian Transaction is
consummated.
-9-
<PAGE>
4.2 NOTICES - Any notice, request, claim, demand and other communication under
this Agreement shall be in writing and shall be deemed given upon receipt
by the Parties at the following addresses (or at such other address for a
Party as shall be specified by like notice):
(a) if to Time Warner Canada at:
Address: Warner Music Canada Ltd.
3751 Victoria Park Avenue
Toronto, Ontario
M1P 2J1
Attention: Garry Newman
President
Telephone: (416) 491-5005
Fax: (416) 491-0460
(b) if to Sony Canada at:
Address: Sony Canada
1121 Leslie Street
Don Mills, Ontario
Attention: Richard C. Camilleri
President
Telephone: (416) 391-3311
Facsimile: (416) 447-5236
(c) if to The Columbia House Company (Canada) at:
Address: 5900 Finch Avenue East
Scarborough, Ontario
M1B 5X7
Attention: Harjinder Atwal
Executive Vice-President and General Manager
Telephone: (416) 299-9400
Facsimile: (416) 299-2737
-10-
<PAGE>
(d) if to Canadian Sub at:
Address: c/o The Columbia House Company (Canada)
5900 Finch Avenue East
Scarborough, Ontario
M1B 5X7
Attention: Harjinder Atwal
Executive Vice-President and General Manager
Telephone: (416) 299-9400
Facsimile: (416) 299-2737
(e) if to Delaware Holdco Corporation at:
Address: c/o CDnow, Inc.
1005 Virginia Drive
Ft. Washington, Pennsylvania
19034
Attention: General Counsel
Telephone: (215) 619-9325
Facsimile: (215) 619-9521
4.3 ASSIGNMENT - Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part,
by operation of law or otherwise by any of the Parties without the prior
written consent of the other parties; provided, however, that each of Time
Warner Canada and Sony Canada may assign its rights, interests and
obligations under this Agreement without the prior written consent of the
other Parties to an affiliate that will consummate the Canadian
Transaction. Any purported assignment without such consent shall be void.
Subject to the preceding sentences, this Agreement will be binding upon,
inure to the benefit of, and be enforceable by, the Parties and their
respective successors and assigns.
4.4 TERMINATION - This Agreement may be terminated at any time prior to the
Closing Time by mutual written consent of Time Warner Canada, Sony Canada
and Holdco. This Agreement shall terminate automatically upon the
termination of the Merger and Contribution Agreement in accordance with
the terms thereof. In the event of a termination of this Agreement as
provided herein, this Agreement shall forthwith become void and have no
effect, without liability or obligation on the part of any of the Parties
hereto other than pursuant to this Article 7, which provisions shall
survive such termination, and except to the extent that such termination
results from the wilful and material breach by a Party of its
representations, warranties or covenants set forth in any Canadian
Transaction Agreement.
-11-
<PAGE>
4.5 AMENDMENT - This Agreement may be amended by the Parties at any time by an
instrument in writing signed on behalf of each of the Parties.
4.6 COUNTERPARTS - This Agreement may be executed by the Parties in separate
counterparts each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the
same instrument.
-12-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
duly executed as of the date first above written.
WARNER MUSIC CANADA LTD.
By: /s/ GARRY NEWMAN
--------------------------------------
By:
--------------------------------------
SONY MUSIC ENTERTAINMENT
(CANADA) INC.
By: /s/ RICHARD C. CAMILLERI
--------------------------------------
By: /s/ ALAN DYER
--------------------------------------
THE COLUMBIA HOUSE
COMPANY (CANADA)
By: /s/ HARJINDER ATWAL
-------------------------------------
By:
-------------------------------------
CANADIAN SUB
By: /s/ HARJINDER ATWAL
-------------------------------------
By:
-------------------------------------
DELAWARE HOLDCO
CORPORATION
By: /s/ JASON OLIM
-------------------------------------
By:
-------------------------------------
EXECUTION COPY
- --------------------------------------------------------------------------------
CONVERTIBLE LOAN AGREEMENT
between
CDnow, Inc.
as Borrower,
and
SONY MUSIC ENTERTAINMENT INC.
TIME WARNER INC.
as Lenders
Dated as of July 12, 1999
$30,000,000
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1
DEFINITIONS
Section 1.1 Definitions..................................................1
SECTION 2
AMOUNT AND TERMS OF CREDIT FACILITY
Section 2.1 Term Loans...................................................9
Section 2.2 Notice of Borrowing..........................................9
Section 2.3 Disbursement of Funds.......................................10
Section 2.4 The Notes...................................................10
Section 2.5 Interest....................................................10
Section 2.6 Voluntary Prepayments.......................................11
Section 2.7 Mandatory Prepayments.......................................11
Section 2.8 Repayment; Reduction in Loan Commitment.....................12
Section 2.9 Method and Place of Payment.................................13
Section 2.10 Taxes.......................................................14
SECTION 3
CONDITIONS PRECEDENT
Section 3.1 Conditions Precedent........................................14
Section 3.2 Conditions Precedent to All Loans...........................15
Section 3.3 Conditions Precedent to First Loan..........................16
SECTION 4
REPRESENTATIONS AND WARRANTIES
Section 4.1 Merger Agreement Representations............................17
Section 4.2 Authority Relative to this Agreement........................17
Section 4.3 Consents and Approvals; No Violation........................17
Section 4.4 Margin Regulations..........................................18
Section 4.5 Investment Company Act......................................18
Section 4.6 Absence of Indebtedness and Liens...........................18
i
<PAGE>
SECTION 5
AFFIRMATIVE COVENANTS
Section 5.1 Information Covenants.......................................18
Section 5.2 Officer's Certificate.......................................21
Section 5.3 Inspection..................................................21
Section 5.4 Conduct of Business.........................................21
Section 5.5 Maintenance of Property; Insurance..........................22
Section 5.6 Notice of Suit or Adverse Change in
Business.................................................22
Section 5.7 Books, Records, Inspections.................................23
SECTION 6
NEGATIVE COVENANTS
Section 6.1 Merger Agreement Covenants..................................23
Section 6.2 Changes in Business.........................................23
Section 6.3 Limitation on Indebtedness..................................23
Section 6.4 Limitation on Issuances of Guarantees by
Subsidiaries.............................................23
Section 6.5 Limitation on Liens.........................................24
Section 6.6 Limitation on Asset Sales...................................24
Section 6.7 Use of Proceeds.............................................24
Section 6.8 Limitation on Modifications of Certain
Indebtedness.............................................24
Section 6.9 Limitation on Negative Pledge Clauses.......................24
SECTION 7
EVENTS OF DEFAULT
Section 7.1 Events of Default...........................................25
Section 7.2 Rights and Remedies.........................................27
SECTION 8
CONVERSION
Section 8.1 Conversion Privilege and Conversion Price...................27
Section 8.2 Exercise of Conversion Privileges...........................28
Section 8.3 Fractions of Shares.........................................29
Section 8.4 Adjustment of Conversion Price..............................29
Section 8.5 Notice of Adjustments of Conversion Price...................29
Section 8.6 Company to Reserve CDnow Common Stock.......................29
Section 8.7 Taxes on Conversions........................................29
Section 8.8 Covenant as to CDnow Common Stock...........................30
ii
<PAGE>
Section 8.9 Investment Intent; Private Placement........................30
SECTION 9
REGISTRATION RIGHTS............................31
SECTION 10
MISCELLANEOUS
Section 10.1 Payment of Expenses, Indemnity, etc.........................31
Section 10.2 Right of Setoff.............................................32
Section 10.3 Notices.....................................................32
Section 10.4 Successors and Assigns; Assignments.........................34
Section 10.5 Amendments and Waivers......................................34
Section 10.6 No Waiver; Remedies Cumulative..............................34
Section 10.7 Governing Law, Submission to Jurisdiction...................35
Section 10.8 Counterparts................................................36
Section 10.9 Headings Descriptive........................................36
Section 10.10 Marshalling; Recapture......................................36
Section 10.11 Severability................................................36
Section 10.12 Survival....................................................36
Section 10.13 Limitation of Liability.....................................36
Section 10.14 [Reserved.].................................................37
Section 10.15 Waiver of Trial by Jury.....................................37
Section 10.16 Interest Rate Limitation....................................37
Section 10.17 Senior Indebtedness.........................................37
Section 10.18 Adjustments; Set-Off........................................38
Section 10.19 Merger Agreement............................................38
Exhibit A - Form of Note
Exhibit B - Form of Guarantee and Collateral Agreement
Exhibit C - Form of Notice of Conversion Election
Exhibit D - Anti-dilution provisions
Schedules
1.1(a) Existing Debt Agreements
1.1(b) Permitted Liens
4.3 Consents and Approvals
iii
<PAGE>
CONVERTIBLE LOAN AGREEMENT, dated as of July 12, 1999, between
CDnow, Inc., a Pennsylvania corporation (the "Borrower"), and SONY MUSIC
ENTERTAINMENT INC. and TIME WARNER INC. (each, a "Lender" and, together the
"Lenders").
WHEREAS, this Agreement is being executed and delivered in
connection with, and as a condition to closing under, that certain Agreement of
Merger and Contribution (the "Merger Agreement"), dated as of July 12, 1999,
among Time Warner Inc. ("Time Warner"), Sony Corporation of America ("Sony"),
CDnow, Inc., Holdco, Pennsylvania Sub, Delaware Sub I and Delaware Sub II, as
each such term is defined in the Merger Agreement;
WHEREAS, in connection with the Merger Agreement, the Borrower has
requested that the Lenders make available to it certain interim financing to
satisfy working capital needs of the Borrower; and
WHEREAS, the Lenders are willing to provide such financing to the
Borrower upon the terms and conditions set forth herein,
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and intending to be legally bound
hereby, the Borrower and the Lenders hereby agree as follows:
SECTION 1. DEFINITIONS.
Section 1.1 Definitions. As used herein, the following terms shall
have the meanings herein specified unless the context otherwise requires.
Defined terms in this Agreement shall include in the singular number the plural
and in the plural number the singular. Capitalized terms used but not otherwise
defined herein shall have the respective meanings ascribed thereto in the Merger
Agreement.
"Affiliate" shall have the meaning ascribed thereto in the
Governance Agreement.
"Agreement" shall mean this Convertible Loan Agreement as in effect
from time to time.
"Assignee" shall have the meaning provided in Section 10.4(b).
"Attributable Indebtedness" shall mean, with respect to any Sale and
Leaseback Transaction of any Person, as at the time of determination, the
greater of (i) the capitalized amount in respect of such transaction that would
<PAGE>
2
appear on the balance sheet of such Person in accordance with GAAP and (ii) the
present value (discounted at a rate consistent with accounting guidelines, as
determined in good faith by such Person) of the payments during the remaining
term of the lease (including any period for which such lease has been extended
or may, at the option of the lessor, be extended) or until the earliest date on
which the lessee may terminate such lease without penalty or upon payment of a
penalty (in which case the rental payments shall include such penalty).
"Availability Date" shall mean, December 16, 1999.
"Bankruptcy Code" shall mean Title 11 of the United States Code
entitled "Bankruptcy," as amended from time to time, and any successor statute
or statutes.
"Borrower" shall have the meaning provided in the first paragraph of
this Agreement.
"Borrowing" shall mean the incurrence of Loans from the Lenders on a
given date.
"Business Day" shall mean any day excluding Saturday, Sunday and any
day which shall be in New York City a legal holiday or a day on which banking
institutions are authorized or required by law or other government actions to
close.
"Capital Expenditures" shall mean all expenditures (including,
capitalized portions of Capitalized Lease Obligations) for any property, plant
or equipment (including replacements thereof, substitutions therefore and
additions thereto) that have a useful life of one year or more, where such
expenditures are or would be capitalized on the consolidated balance sheet of
the Borrower and its Subsidiaries during the relevant period in conformity with
GAAP.
"Capitalized Lease" shall mean (i) any lease of property, real or
personal, the obligations under which are capitalized on the consolidated
balance sheet of the Borrower and its Subsidiaries, and (ii) any other such
lease to the extent that the then present value of the minimum rental commitment
thereunder should, in accordance with GAAP, be capitalized on a balance sheet of
the lessee.
"Capitalized Lease Obligations" shall mean all obligations of the
Borrower and its Subsidiaries under or in respect of Capitalized Leases.
<PAGE>
3
"Closing Price" shall mean, with respect to any security, the
closing sale price of such security on the date of determination on the
principal U.S. or foreign securities exchange on which such securities are
listed or primarily traded or, if such securities are not listed or primarily
traded on any such exchange, the closing sale price of such securities on such
date of determination on NASDAQ or any comparable system then in use (or, in the
event no such sale price is reported on such day, the average of the reported
closing bid and asked prices for such day).
"Collateral" shall mean the property subject to the Lien of the
Security Agreement and all payments and proceeds thereof, as more particularly
defined in the Security Agreement.
"Conversion Price" shall mean an amount equal to the lesser of (a)
$14.3751 and (b) the Closing Price of CDnow Common Stock on the Trading Day
immediately preceding the relevant date on which a Notice of Conversion Election
is given.
"Default" shall mean any event, act or condition which, with notice
or lapse of time, or both, would constitute an Event of Default.
"Default Rate" shall have the meaning provided in Section 2.5(b).
"Disqualified Stock" shall mean any Equity Security which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable), or upon the happening of any event, or otherwise, matures
or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the holder thereof or is
exchangeable for Indebtedness at any time, in whole or in part, on or prior to
the 366th day following the date on which the Loans mature.
"Equity Security" shall have the meaning ascribed thereto in the
Governance Agreement.
"Eurodollar Rate" with respect to any Loan shall mean an interest
rate per annum equal to the rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page)
as the London interbank offered rate for deposits in the lawful money of the
United States at approximately 11:00 A.M. (London time) two Business Days prior
to the Borrowing of
<PAGE>
4
such Loan for a term of six months. If for any reason such rate is not
available, the term "Eurodollar Rate" shall mean, for any Loan, the rate per
annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on
Reuters Screen LIBO Page as the London interbank offered rate for deposits in
the lawful money of the United States at approximately 11:00 A.M. (London time)
two Business Days prior to the Borrowing of such Loan for a term of six months;
provided, however, if more than one rate is specified on Reuters Screen LIBO
Page, the applicable rate shall be the arithmetic mean of all such rates
(rounded upwards, if necessary, to the nearest 1/100 of 1%).
"Event of Default" shall have the meaning provided in Section 7.
"Exchange Rate Obligations" means, with respect to any Person, any
currency swap agreements, forward exchange rate agreements, foreign currency
futures or options, exchange rate collar agreements, exchange rate insurance and
other agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Debt Agreements" shall mean the agreements listed on
Schedule 1.1(a).
"Final Maturity Date" shall mean the earlier of (a) such time as the
Loan Commitment is reduced to zero pursuant to the terms hereof, (b) January 15,
2001 or (c) the Effective Time.
"Governance Agreement" means the form of Governance Agreement
attached as Exhibit F to the Merger Agreement.
"Indebtedness" means at any time (without duplication), with respect
to any Person, whether recourse is to all or a portion of the assets of such
Person, and whether or not contingent, (i) any obligation of such Person for
money borrowed, (ii) any obligation of such Person evidenced by bonds,
debentures, notes, guarantees or other similar instruments, including, without
limitation, any such obligations incurred in connection with the acquisition of
Property, assets or businesses, excluding trade accounts payable made in the
ordinary course of business, (iii) any reimbursement obligation of such Person
with respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such Person, (iv) any obligation of such Person issued
or assumed as the deferred purchase price of Property or services (but excluding
trade
<PAGE>
5
accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith) (v) any Capitalized Lease Obligations of such
Person, (vi) the maximum fixed redemption or repurchase price of Disqualified
Stock of such Person and, to the extent held by other Persons, the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person's
Subsidiaries, at the time of determination, (vii) the principal amount of any
Interest Hedging Obligations or Exchange Rate Obligations of such Person at the
time of determination, (viii) any Attributable Indebtedness with respect to any
Sale and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise. For the purposes of the preceding sentence, the maximum fixed
repurchase price of any Disqualified Stock that does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Disqualified
Stock as if such Disqualified Stock were repurchased on any date on which
Indebtedness shall be required to be determined pursuant hereto. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability of any guarantees at such date.
"Interest" shall have the meaning provided in Section 2.5.
"Interest Hedging Obligation" means, with respect to any Person, an
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its Subsidiaries'
exposure to fluctuations in interest rates.
"Interest Rate" shall mean a rate per annum equal to the Eurodollar
Rate plus 3%, provided that, from and after the 180th day following termination
of the Merger Agreement, such Interest Rate shall be equal to twenty-five
percent (25%) per annum.
"Lien" means any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), charge or other
security interest or any preference, priority or other security agreement or
<PAGE>
6
preferential arrangement of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement and any
financing lease having substantially the same economic effect as any of the
foregoing).
"Loan Commitment" means the maximum aggregate amount of $30,000,000;
provided that in no event shall the Loan Commitment of either Lender exceed
$15,000,000, individually.
"Loan Documents" shall mean this Agreement, the Notes and the
Security Agreement as in effect from time to time.
"Loan Party" shall mean and include the Borrower and its
Subsidiaries.
"Loans" shall have the meaning provided in Section 2.1(a).
"Merger Agreement" shall have the meaning provided in the first
Whereas clause as in effect from time to time, and all references herein to the
Merger Agreement shall be references thereto regardless of whether or not such
agreement shall have been terminated.
"Net Debt Proceeds" shall mean, with respect to any incurrence of
Indebtedness for borrowed money, the cash proceeds (net of underwriting
discounts and commissions and other reasonable costs associated therewith)
received by the respective Person from the respective incurrence of such
Indebtedness for borrowed money.
"Net Sale Proceeds" shall mean, for any sale, lease, transfer or
disposition, the gross cash proceeds received from such transaction, net of the
reasonable costs of such transaction and the incremental taxes paid or payable
as a result of such transaction and any reasonable reserves established in
connection therewith as determined in good faith by the Borrower.
"Note" and "Notes" shall have the meanings provided in Section 2.4.
"Notice of Borrowing" shall have the meaning provided in Section
2.2.
"Notice of Conversion Election" shall have the meaning provided in
Section 8.2.
<PAGE>
7
"Obligations" shall mean all obligations, liabilities and
Indebtedness of every nature of the Borrower from time to time owing to the
Lenders under or in connection with this Agreement or any other Loan Document.
"Permitted Indebtedness" shall mean Permitted Interim Financing and
Purchase Money Indebtedness and Indebtedness outstanding on the date hereof
under Existing Debt Agreements.
"Permitted Interim Financing" shall mean Indebtedness for borrowed
money incurred by the Borrower provided that (i) the Net Debt Proceeds therefrom
shall be applied in accordance with Section 2.7, (ii) the maturity date thereof
extends to at least 366 days beyond the Final Maturity Date, (iii) such
Indebtedness is unsecured and is not guaranteed by any Subsidiary of the
Borrower, (iv) such Indebtedness contains representations, warranties, covenants
and agreements which are not more restrictive, individually or taken as a whole,
than those in effect hereunder, (v) such Indebtedness is subject to
subordination and intercreditor arrangements satisfactory to the Lenders (and
appropriate to reflect the senior, secured nature of the Obligations) and (vi)
such Indebtedness otherwise satisfies the requirements of Section
7.01(a)(x)(A)(II) of the Merger Agreement.
"Permitted Liens" shall mean (a) Liens for taxes, levies,
assessments or other governmental charges not yet due or which are being
contested in good faith by appropriate proceedings; (b) carriers',
warehousemen's, mechanics', materialmen's, repairman's or other like Liens
arising in the ordinary course of business in respect of actions permitted
hereunder which are not overdue for a period of more than 60 days or which are
being contested in good faith by appropriate proceedings; (c) easements,
rights-of-way, restrictions and other similar encumbrances incurred in the
ordinary course of business which, in the aggregate, do not materially interfere
with the ordinary conduct of the business of the Borrower or any Subsidiary; (d)
Liens in existence on the date hereof listed on Schedule 1.1(b), securing
Indebtedness arising under the Existing Debt Agreements, provided that no such
Lien is spread to cover any additional Property after the date hereof and that
the amount of Indebtedness secured thereby is not increased; and (e) Liens
securing Purchase Money Indebtedness of the Borrower and its Subsidiaries
incurred to finance the acquisition of fixed or capital assets; provided that no
such Lien is spread to cover any additional Property and that the amount of
Indebtedness secured thereby is not increased.
<PAGE>
8
"Pledged Shares" means the Equity Securities that are subject to the
Lien of the Security Agreement and any and all dividends, distributions,
payments and proceeds thereof, as more particularly defined in the Security
Agreement.
"Property" means, with respect to any Person, any interest of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible.
"Purchase Money Indebtedness" shall mean Indebtedness of the
Borrower and its Subsidiaries incurred to finance the acquisition of fixed or
capital assets (including pursuant to any permitted Sale and Leaseback
Transaction under Section 6.6(iv)) so long as the principal amount thereof does
not exceed 100% of the fair market value of the asset so acquired at the time of
incurrence. Any asset acquired with proceeds of Purchase Money Indebtedness
shall be deemed to be a capital asset subject to restrictions in Section
7.01(a)(xi) of the Merger Agreement.
"Receivables" shall have the meaning provided in Section 4.11.
"Sale and Leaseback Transaction" means, with respect to any Person,
any direct or indirect arrangement pursuant to which Property is sold or
transferred by such Person or a Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Subsidiaries.
"Security Agreement" means the Guarantee and Collateral Agreement,
dated the date hereof, to be executed by the Borrower, a form of which is
attached as Exhibit B hereto.
"Subsidiary" shall have the meaning ascribed thereto in the
Governance Agreement.
"Third Party Tender Offer" shall have the meaning ascribed thereto
in the Governance Agreement.
"Trading Day" means, with respect to a securities exchange or
automated quotation system, a day on which such exchange or system is open for a
full day of trading.
"Transactions" shall mean each of the transactions contemplated by
the Loan Documents.
<PAGE>
9
SECTION 2. AMOUNT AND TERMS OF CREDIT FACILITY.
Section 2.1 Term Loans. (a) Subject to and upon the terms and
conditions herein set forth, each Lender severally agrees, at any time and from
time to time on and after the Availability Date and prior to the Final Maturity
Date, to make term loans (collectively, "Loans") to the Borrower, in the case of
each Borrowing, in an amount equal to one-half of the amount requested in the
relevant Notice of Borrowing, which Loans shall not at any time exceed in
aggregate principal amount at any time outstanding the Loan Commitment.
(b) Loans may be voluntarily prepaid pursuant to Section 2.6
and shall be mandatorily prepaid pursuant to Section 2.7. Any amounts so prepaid
may not be reborrowed. The Loan Commitment shall expire and the Loans shall
mature on the Final Maturity Date, without further action on the part of the
Lender.
(c) Each Borrowing under this Section 2.1 shall be in the
aggregate maximum amount of the lesser of (i) $5,000,000 or (ii) the remaining
unborrowed amount of the Loan Commitment.
Section 2.2 Notice of Borrowing. Whenever the Borrower desires to
borrow hereunder, the Borrower's Chief Financial Officer shall make a formal
request to each Lender for such Borrowing by giving each Lender prior written
notice thereof (each such notice, a "Notice of Borrowing") on or before 10:00
a.m., New York City time, at least two Business Days prior to the date requested
for such Borrowing. Each Notice of Borrowing shall specify (a) the aggregate
principal amount of the requested Borrowing, (b) the proposed date of the
Borrowing (which shall be a Business Day and which shall not be less than ten
Business Days from the last date of Borrowing), (c) the proposed use of the
proceeds of any such Borrowing, which use of proceeds shall be in compliance
with Section 6.7 and (d) that each of the conditions set forth in Section 3 has
been, and remains, satisfied as of the date of such Notice of Borrowing.
Section 2.3 Disbursement of Funds. Upon receipt of a Notice of
Borrowing delivered in accordance with and in compliance with Section 2.2 above,
on the date specified in such Notice of Borrowing, each Lender will make
available one-half of the aggregate principal amount of the Borrowing requested
to be made on such date, in U.S. dollars by wire transfer in immediately
available funds to an account specified in a written instrument signed by the
Chief Financial Officer of the Borrower and delivered to
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10
such Lender, together with any Notice of Borrowing. The failure of a Lender to
fund any Loan to be made by it shall not relieve the other Lender from its
obligation to fund any Loan to be made by it.
Section 2.4 The Notes. The Borrower's obligation to pay the
principal of, and Interest on, the Loans made by a Lender hereunder, shall be
evidenced by a promissory note (each a "Note," and collectively the "Notes"),
payable to such Lender duly executed and delivered by the Borrower,
substantially in the form of Exhibit A hereto. The Borrower hereby irrevocably
authorizes each of the Lenders to endorse the date and amount of each Loan made
by such Lender and any payment and repayment of the principal amount thereof or
Interest thereon, on the Schedule of Principal, Conversion and Repayment
attached to such Note and constituting a part thereof, which endorsement shall
constitute prima facie evidence of the information so endorsed; provided,
however, that any failure of a Lender to make such endorsement shall not affect
the obligation of the Borrower to make any payments hereunder.
Section 2.5 Interest. (a) The Borrower agrees to pay interest in
respect of the unpaid principal amount of each Loan ("Interest") at the Interest
Rate in effect from time to time, in respect of such Loan, from the date of the
making of such Loan until the earlier of (i) the date on which such Loan shall
be paid in full and (ii) the Final Maturity Date, such Interest to be computed
on the basis of a 360-day year and the actual number of days elapsed.
(b) Overdue principal and, to the extent permitted by law,
overdue Interest in respect of each Loan, and any other overdue amount payable
hereunder (including, without limitation, all amounts outstanding following an
Event of Default) shall bear interest at a rate per annum (the "Default Rate")
equal to the rate which is 2% in excess of the rate then borne by such Loans,
computed on the basis of a 360-day year and the actual number of days elapsed;
provided that nothing in any Loan Document shall permit the Lenders to receive
interest in excess of the maximum rate of interest permitted by law.
(c) Interest on each Loan shall accrue from and including the
date of the Borrowing thereof to but excluding the date of any repayment thereof
(provided that any Loan borrowed and repaid on the same day shall accrue one
day's interest) and shall be payable on the Final Maturity Date.
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11
(d) In the event that a Lender elects to convert any accrued
and unpaid amount of interest on any Loan into CDnow Common Stock in accordance
with the provisions of Section 8 hereof, the Borrower's obligation to pay
Interest on such Loan, pursuant to this Section 2.5, shall be deemed satisfied
by the delivery of the CDnow Common Stock upon conversion of such accrued and
unpaid interest as therein provided, to the extent of such conversion. Each
Lender agrees to give Borrower at least one Business Day's notice of its intent
to convert any Interest otherwise due and payable, or to become due and payable,
into CDnow Common Stock in accordance with this Agreement.
Section 2.6 Voluntary Prepayments. The Borrower shall have the right
to prepay in accordance with Section 2.9 the Loans in whole or in part from time
to time on the following terms and conditions: (i) the Borrower shall give the
Lenders written notice (or telephonic notice promptly confirmed in writing),
which notice shall be irrevocable, of its intent to prepay the Loans, at least
two, or after the Merger Agreement has terminated, five Business Days prior to a
prepayment, which notice shall specify the date (which shall be a Business Day),
the Loans and the amount of such prepayment and (ii) each partial prepayment
shall be in an aggregate principal amount of $1,000,000 or integral multiples
thereof.
Section 2.7 Mandatory Prepayments. (a) If the Borrower or any of its
Subsidiaries shall receive any proceeds from any sale, lease, transfer or
disposition to any Person of any of its Property or Equity Securities (other
than sales of inventory in the ordinary course of business and permitted Sale
and Leaseback Transactions) then the Borrower shall immediately upon receipt
thereof apply in accordance with Section 2.9 an amount in cash equal to 100% of
the Net Sale Proceeds from such sale, lease, transfer or disposition to the
Lenders as a mandatory repayment of outstanding Loans and reduction in the
remaining Loan Commitment in accordance with the requirements of Section 2.8.
(b) If the Borrower or any of its Subsidiaries shall receive
any proceeds from any incurrence by the Borrower or any of its Subsidiaries of
Permitted Interim Financing, then the Borrower shall immediately upon receipt
thereof apply in accordance with Section 2.9 an amount equal to 100% of the Net
Debt Proceeds from the Permitted Interim Financing to the Lenders as a mandatory
repayment of outstanding Loans and reduction in the
<PAGE>
12
remaining Loan Commitment in accordance with the requirements of Section 2.8.
(c) If the Borrower enters into any Acquisition Agreement
relating to a CDnow Takeover Proposal or there is consummated a Third Party
Tender Offer or the Merger Agreement is terminated pursuant to Section 10.01 (c)
(to the extent that one or more of the breaches of the representations,
warranties, covenants and agreements of CDnow that formed the basis of such
termination could reasonably be expected to have been avoided had CDnow used its
reasonable best efforts to ensure the continued accuracy, compliance and
performance of its representations, warranties, covenants and agreements under
the Merger Agreement) or Section 10.01(d) thereof, then (i) the Loan Commitment
shall automatically and immediately terminate and the unpaid aggregate principal
amount of, and any and all accrued Interest on, the Loans and any and all other
Obligations shall automatically become immediately due and payable, with all
Interest from time to time accrued thereon and without presentation, demand or
protest or other requirements of any kind (including without limitation,
valuation and appraisement, due diligence, presentment, notice of intent to
demand or accelerate and notice of acceleration), all of which are hereby
expressly waived by the Borrower, and the obligation of the Lenders to make any
Loans hereunder shall thereupon terminate.
Section 2.8 Repayment; Reduction in Loan Commitment. Each amount
required or permitted to be applied to repay outstanding Loans under Section 2.6
or 2.7 shall be applied first, to prepay accrued but unpaid Interest on the
Loans and other Obligations (other than the principal on the Loans) hereunder
and second to prepay amounts in respect of principal outstanding under the
Loans. The excess of any Net Debt Proceeds or Net Sale Proceeds over amounts
required to repay principal and Interest shall reduce the remaining unused Loan
Commitment. Each reduction shall be allocated pro rata between the Lenders. By
three Business Days prior notice to the Lenders, the Borrower may at any time
reduce the amount of the Loan Commitment to an amount not less than the
outstanding principal amount of the Loans. By notice to the Lenders, the
Borrower may, at any time when no Loans are outstanding and no Obligations
remain unpaid, terminate the Loan Commitment.
Section 2.9 Method and Place of Payment. (a) All payments and
prepayments of principal and Interest under this Agreement and the Notes shall
be made in equal amounts to each Lender not later than 12:00 noon, New York City
time, on the date when due and shall be made in lawful money
<PAGE>
13
of the United States of America by wire transfer in immediately available funds
to such account as shall be designated by each Lender.
Any funds received by the Lenders after such time shall, for all
purposes hereof, be deemed to have been paid on the next succeeding Business
Day.
(b) Whenever any payment to be made hereunder or under the
Notes shall be stated to be due on a day which is not a Business Day, the due
date thereof shall be extended to the next succeeding Business Day and, with
respect to payments of principal, Interest shall be payable at the applicable
rate during such extension.
(c) All payments made by the Borrower hereunder and under any
Note shall be made irrespective of, and without any reduction for, any setoff or
counterclaims, including, without limitation, any setoff or counterclaims
arising due to a breach or alleged breach by a Lender or any of its Subsidiaries
or Affiliates of any other agreement to which a Lender or any of its
Subsidiaries or Affiliates and any of the Loan Parties are parties.
Section 2.10 Taxes. All payments made by the Borrower under this
Agreement shall be made free and clear of, and without reduction or withholding
for or on account of, any present or future Taxes. If any Taxes are required to
be withheld from any amounts payable to the Lender hereunder or under any Note,
the amounts so payable to the Lender shall be increased to the extent necessary
to yield to the Lender (after payment of all Taxes) Interest or any such other
amounts payable hereunder at the rates or in the amounts specified in this
Agreement and the specific Note. Whenever any Taxes are payable by the Borrower,
as promptly as possible thereafter, the Borrower shall send to the applicable
Lender a certified copy of an original official receipt received by the Borrower
showing payment thereof. If the Borrower fails to pay any Taxes when due to the
appropriate taxing authority or fails to remit to a Lender the required receipts
or other required documentary evidence, the Borrower shall indemnify such Lender
for any incremental taxes, interest or penalties that may become payable by such
Lender as a result of any such failure. The agreements in this Section 2.10
shall survive the termination of this Agreement and the payment of the Notes and
all other Obligations.
<PAGE>
14
SECTION 3. CONDITIONS PRECEDENT.
Section 3.1 Conditions Precedent. This Agreement shall become
effective upon satisfaction of the following conditions precedent:
(a) Loan Documents.
(i) Convertible Loan Agreement. The Borrower shall have
executed and delivered this Agreement to the Lenders.
(ii) Security Agreement. Each Loan Party shall have
executed and delivered the Security Agreement to the Lenders.
(iii) Notes. The Borrower shall have executed and
delivered to each Lender a Note as provided herein.
(b) Corporate Documents. The Lenders shall have received the
Articles of Incorporation of each Loan Party as in effect on the effective date
of this Agreement, certified to be true, correct and complete by the Secretary
of State of the State of the jurisdiction of incorporation of such Loan Party.
(c) Certified Resolutions, etc. The Lenders shall have
received a certificate of the Secretary or Assistant Secretary of each Loan
Party dated the date hereof certifying (i) the names and true signatures of the
incumbent officers of such Person authorized to sign the Loan Documents to which
it is a party, (ii) the By-Laws of such Person as in effect on the date of the
adoption of the resolutions referred to in clause (iii), (iii) the resolutions
of such Person's Board of Directors approving and authorizing the execution,
delivery and performance of the Loan Documents to which it is a party, and (iv)
that there have been no changes in the Articles of Incorporation of such Person
since the date of the most recent certification thereof by the appropriate
Secretary of State.
(d) Delivery of Collateral and Pledged Shares. The Borrower
shall have delivered to the Lender stock certificates representing the Pledged
Shares, registered in the name of the Borrower, accompanied by undated stock
powers duly executed in blank.
(e) Actions to Perfect Liens. The Lenders shall have received
evidence in form and substance satisfactory to them that all filings,
recordings,
<PAGE>
15
registrations and other actions, including, without limitation, the filing of
duly executed financing statements on form UCC-1, necessary or, in the opinion
of the Lenders, desirable to perfect the Liens created by the Security Agreement
shall have been completed.
(f) Lien Searches. The Lenders shall have received the results
of a recent search by a Person satisfactory to the Lenders, of the Uniform
Commercial Code, judgement and tax lien filings which may have been filed with
respect to personal property of the Loan Parties, and the results of such search
shall be satisfactory to the Lenders.
(g) Representations. The representations and warranties set
forth in Section 4 and in the Security Agreement shall be true and correct.
Section 3.2 Conditions Precedent to All Loans. In addition to the
provisions of Section 2.2, the obligation of the Lenders to make any Loan is
subject to the satisfaction on the date such Loan is made of the following
conditions precedent:
(a) No Event of Default. No Event of Default hereunder shall
have occurred and be continuing on such date either before or after giving
effect to the making of such Loans.
(b) No Injunction. No law or regulation shall have been
adopted, no order, judgment or decree of any Governmental Entity shall have been
issued, and no litigation shall be pending, that is seeking to enjoin, prohibit
or restrain, the making or repayment of the Loans.
(c) No Termination of Merger Agreement. The Merger Agreement
shall not have been terminated (i) by Sony or Time Warner pursuant to Section
10.01(c) (to the extent that one or more of the breaches of the representations,
warranties, covenants and agreements of CDnow that formed the basis of such
termination could reasonably be expected to have been avoided had CDnow used its
reasonable best efforts to ensure the continued accuracy, compliance and
performance of its representations, warranties, covenants and agreements under
the Merger Agreement) or Section 10.01(d) thereof; or (ii) by CDnow other than
pursuant to Sections 10.01(b)(i) or Section 10.01(e) thereof.
(d) No Third Party Tender Offer or Takeover Proposal. There
shall not have been commenced a Third Party
<PAGE>
16
Tender Offer and CDnow shall not have entered into an Acquisition Agreement with
respect to a CDnow Takeover Proposal.
(e) Available Cash. The aggregate cash and cash equivalents of
the Borrower and its Subsidiaries shall be less than $7,500,000.
The acceptance of the proceeds of each Loan shall constitute a
representation and warranty by the Borrower to the Lenders that all of the
conditions required to be satisfied under this Section 3 in connection with the
making of such Loan have been satisfied.
Section 3.3 Conditions Precedent to First Loan. In addition to the
provisions of Section 3.2, the obligation of each Lender to make its first Loan
hereunder is subject to the receipt by the Lenders of a legal opinion, dated the
date of Borrowing of the first Loan, from counsel to the Loan Parties,
concerning due authorization, execution, delivery and the enforceability of this
Agreement, the Notes and the Security Agreement, absence of conflicts with laws,
articles, by-laws, agreements, absence of consents and approvals and the
perfection of the Lenders' security interest in the Collateral, all in form and
substance reasonably satisfactory to the Lenders.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
In order to induce the Lenders to enter into this Agreement and to
make the Loans, the Borrower makes the following representations and warranties,
which shall survive the execution and delivery of this Agreement and the Notes
and the making of the Loans:
Section 4.1 Merger Agreement Representations. Each of the
representations and warranties of the Borrower set forth in Section 3 of the
Merger Agreement is incorporated herein by reference as if set forth by length
as the representations and warranties of the Borrower hereunder.
Section 4.2 Authority Relative to this Agreement. Each Loan Party
has full corporate power and authority to execute, deliver and perform its
obligations under the Loan Documents to which it is a party and to consummate
the Transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Loan Documents to which it is a party and the
consummation of the Transactions contemplated hereby and thereby have been duly
and validly authorized by all corporate and shareholder
<PAGE>
17
action, and no other corporate proceedings on the part of any Loan Party are
necessary to authorize the Loan Documents to which it is a party or to
consummate the Transactions contemplated hereby and thereby. The Loan Documents
to which it is a party have been duly and validly executed and delivered by each
Loan Party party thereto, and constitute valid and binding agreements of each
Loan Party party thereto, enforceable against such Loan Party in accordance with
their respective terms.
Section 4.3 Consents and Approvals; No Violation. (a) Except as set
forth in Schedule 4.3, the execution and delivery by each Loan Party of each
Loan Document to which it is a party will not (i) conflict with or result in any
breach of any provision of the Articles of Incorporation or Bylaws of such Loan
Party, (ii) require any consent, approval, authorization or permit of, or filing
with or notification to, any governmental or regulatory authority, (iii) result
in a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, agreement or other instrument or obligation
to which any Loan Party is a party or by which any Loan Party or any of its
assets may be bound, except for such defaults (or rights of termination,
cancellation or acceleration) as to which requisite waivers or consents have
been obtained, or (iv) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to any Loan Party or any of its assets.
(b) Except for any registration statement filed with the
United States Securities and Exchange Commission (the "SEC") pursuant to Section
9 hereof, no declaration, filing or registration with, or notice to, or
authorization, consent or approval of any governmental or regulatory body or
authority is necessary for the consummation by the Borrower of the Transactions.
Section 4.4 Margin Regulations. No part of the proceeds of any Loan
will be used by the Borrower to purchase or carry any Margin Stock or to extend
credit to others for the purpose of purchasing or carrying any Margin Stock.
Neither the making of any Loan nor the use of the proceeds thereof will violate
or be inconsistent with the provisions of Regulations T, U or X of the Federal
Reserve Board.
Section 4.5 Investment Company Act. Neither the Borrower nor any of
its Subsidiaries is an "investment company" or a company "controlled" by an
"investment
<PAGE>
18
company," within the meaning of the Investment Company Act of 1940, as amended.
Section 4.6 Absence of Indebtedness and Liens. Neither the Borrower
nor any Subsidiary has any liabilities or obligations, either accrued, absolute,
contingent, or otherwise, in respect of any Indebtedness or Liens, except (a)
under Existing Debt Agreements, (b) Permitted Indebtedness and (c) Permitted
Liens.
SECTION 5. AFFIRMATIVE COVENANTS.
The Borrower covenants and agrees that from the Availability Date
and until the Loan Commitment has terminated and the Obligations are paid in
full:
Section 5.1 Information Covenants. The Borrower will furnish to each
Lender:
(a) Quarterly Statements -- within 45 days after the end of
each quarterly fiscal period in each fiscal year of the Borrower (other than the
last quarterly fiscal period of each such fiscal year), duplicate copies of
(i) a consolidated balance sheet of the Borrower and its
Subsidiaries as at the end of such quarter, and
(ii) consolidated statement of operations, shareholders'
equity and changes in financial position of the Borrower and its Subsidiaries
for such quarter and (in the case of the second and third quarters) for the
portion of the fiscal year ending with such quarter, in each case setting forth
in comparative form the figures for the corresponding periods in the previous
fiscal year, prepared in accordance with GAAP applicable to quarterly financial
statements generally, and certified by the Chief Financial Officer of the
Borrower as fairly presenting, in all material respects, the financial position
of the companies being reported on and their results of operations and cash
flows, except for the absence of footnotes and changes resulting from year-end
adjustments, provided that delivery within the time period specified above of
the Borrower's Quarterly Report on Form 10-Q prepared in compliance with the
requirements therefor and filed with the SEC shall be deemed to satisfy the
requirements of this Section 5.1;
(b) Annual Statements - within 90 days after the end of each
fiscal year of the Borrower, duplicate copies of
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19
(i) a consolidated balance sheet of the Borrower and its
Subsidiaries as at the end of such year, and
(ii) consolidated statements of operations,
shareholders' equity and changes in financial position of the Borrower and its
Subsidiaries for such year, setting forth in each case in comparative form the
figures for the previous fiscal year, prepared in accordance with GAAP, and
accompanied by an opinion thereon of independent certified public accountants of
recognized national standing, which opinion shall state that such financial
statements present fairly, in all material respects, the financial position of
the companies being reported upon and their results of operations and cash flows
and have been prepared in conformity with GAAP, and that the examination of such
accountants in connection with such financial statements has been made in
accordance with generally accepted auditing standards, and that such audit
provides a reasonable basis for such opinion in the circumstances, provided that
the delivery within the time period specified above of the Borrower's Annual
Report on Form 10-K for such fiscal year (together with the Borrower's annual
report to shareholders, if any, prepared pursuant to Rule 14a-3 under the
Exchange Act) prepared in accordance with the requirements therefor and filed
with the SEC, shall be deemed to satisfy the requirements of this Section
5.1(b);
(c) Audit Reports, etc. -- promptly (and in any event within
five Business Days) after receipt thereof, copies of all management letters and
reports submitted to the Borrower or any of its Subsidiaries by independent
certified public accountants in connection with any annual, interim or special
audit of the Borrower or any Subsidiary made by such accountants;
(d) SEC and Other Reports -- promptly upon their becoming
available, one copy of (i) each financial statement, report, notice or proxy
statement sent by the Borrower or any Subsidiary to public securities holders
generally, and (ii) each regular or periodic reports, each registration
statement (without exhibits except as expressly requested by a Lender), and each
prospectus and all amendments thereto filed by the Borrower or any Subsidiary
with the SEC and of all press releases and other statements made available
generally by the Borrower or any Subsidiary to the public concerning
developments that are material;
(e) Notice of Default or Event of Default -- immediately (and
in any event within two Business Days) after the Borrower becomes aware of the
existence of any
<PAGE>
20
Default or Event of Default, a written notice specifying the nature and period
of existence thereof and what action the Borrower is taking or proposes to take
with respect thereto;
(f) Notices from Governmental Authority -- promptly, and in
any event within five days of receipt thereof, copies of any notice to the
Borrower or any Subsidiary from any federal, state or foreign Governmental
Entity relating to any order, ruling, statute or other law or regulation that
could reasonably be expected to have a CDnow Material Adverse Effect or that
could reasonably be expected to impair the ability of the Borrower to perform
any of its obligations hereunder or under any of the Loan Documents;
(g) Requested Information -- with reasonable promptness, such
other data and information relating to the business, operations, affairs,
financial condition, assets or property of the Borrower or any of its
Subsidiaries or relating to the ability of the Borrower to perform its
obligations hereunder, under the Notes and under the Security Agreement as from
time to time may be reasonably requested by the Lenders; and
(h) Notice of Prepayment Transaction -- two, or after the
Merger Agreement has terminated, five Business Days prior to the Borrower or any
Subsidiary entering into any transaction or taking any action which would result
in a mandatory prepayment under Section 2.7(a) and (b), a written notice
specifying the nature thereof.
Section 5.2 Officer's Certificate. Each set of financial statements
delivered to a Lender pursuant to Section 5.l(a) or Section 5.l(b) hereof shall
be accompanied by a certificate of the Chief Financial Officer containing a
statement that such officer has reviewed the relevant terms hereof and has made,
or caused to be made, under his or her supervision, a review of the transactions
and conditions of the Borrower and its Subsidiaries from the beginning of the
quarterly or annual period covered by the statements then being furnished to the
date of the certificate and that such review shall not have disclosed the
existence during such period of any condition or event that constitutes a
Default or an Event of Default or, if any such condition or event existed or
exists, specifying the nature and period of existence thereof and what action
the Borrower or its Subsidiaries shall have taken or proposes to take with
respect thereto.
Section 5.3 Inspection. Each Lender, or any person designated from
time to time by such Lender, shall
<PAGE>
21
have the right, from time to time hereafter, to call at the Borrower's or its
Subsidiaries' place or places of business during ordinary business hours, and,
without hindrance or delay, (a) to inspect, audit, check, and makes copies of
and extracts from the Borrower's and its Subsidiaries' books, records, journals,
orders, receipts, and any correspondence and other data relating to the business
of the Borrower or its Subsidiaries or to any transactions between the parties
hereto, and (b) to discuss the affairs, finances, and business of the Borrower
and its Subsidiaries with the officers of the Borrower and its Subsidiaries.
Section 5.4 Conduct of Business. (a) The Borrower shall, and shall
cause each Subsidiary to (i) maintain its existence and qualification to do
business in good standing in each jurisdiction where the failure to be so
qualified would have a material adverse effect on the financial condition of the
Borrower and its Subsidiaries taken as a whole, (ii) maintain in full force and
effect all licenses, bonds, franchises, leases, patents, contracts, and other
rights necessary to the conduct of its business, and (iii) comply in all
material respects with all applicable laws and regulations of any federal,
state, or local governmental authority, including those relating to
environmental matters, labor and employment laws and employee benefit matters.
(b) The Borrower shall, and shall cause its Subsidiaries to,
duly pay and discharge (i) all lawful claims, whether for labor, materials,
supplies, services, or anything else, which might or could, if unpaid, become a
lien or charge upon its property or assets, unless and to the extent only that
the validity thereof is being contested in good faith and by such appropriate
proceedings, (ii) all of its trade bills when due in accordance with customary
practice, and (iii) all taxes, unless and to the extent that the validity
thereof is being contested by the Borrower in good faith and by appropriate
proceedings.
Section 5.5 Maintenance of Property; Insurance. (a) The
Borrower shall keep and maintain, and shall cause its Subsidiaries to keep and
maintain, at their sole cost and expense, (i) all Property necessary to the
business of the Borrower and its Subsidiaries in reasonably good working order
and condition, ordinary wear and tear excepted, (ii) insurance on their assets
for the full replacement value (or the full insurable value) thereof against
loss or damage by fire, theft, explosion, and all other hazards and risks
ordinarily insured against by other owners or users of such properties in
similar businesses similarly situated; and (iii) public liability insurance
<PAGE>
22
relating to the Borrower's and its Subsidiaries' ownership and use of their
assets.
(b) All such insurance shall (i) provide that no cancellation,
material reduction in amount or material change in coverage thereof shall be
effective until at least 30 days after receipt by the Lenders of written notice
thereof, (ii) name the Security Agent (as such term is defined in the Security
Agreement) as insured party or loss payee, (iii) if reasonably requested by the
Lenders, include a breach of warranty clause and (iv) be reasonably satisfactory
in all other respects to the Lenders.
(c) All such policies of insurance shall be in such form and
in such amounts as is customary in the case of other owners or users of like
properties in similar businesses, with insurers as shall be reasonably
satisfactory to each Lender. Upon demand, the Borrower shall deliver to each
Lender the original (or certified) copy of each policy insurance, and evidence
of payment of all premiums for each such policy.
Section 5.6 Notice of Suit or Adverse Change in Business. The
Borrower shall give written notice to each Lender (a) as soon as possible, and
in any event within five business days after the Borrower receives actual notice
(written or oral) of any material proceeding(s) being instituted against the
Borrower or any Subsidiary in any federal, state, or local court or before any
commission or other regulatory body (federal, state, or local), and (b) as soon
as possible, and in any event within five business days after the Borrower
learns of any material adverse change in the financial condition, results of
operations, business, or assets of the Borrower and its Subsidiaries taken as a
whole.
Section 5.7 Books, Records, Inspections. The Borrower will, and will
cause each of its Subsidiaries to, keep proper books of record and accounts in
which full, true and correct entries in conformity with generally accepted
accounting principles and all requirements of law shall be made of all dealings
and transactions in relation to its business and activities.
SECTION 6. NEGATIVE COVENANTS.
The Borrower covenants and agrees that from the date hereof (except,
in the case of Sections 6.2 and 6.7, which shall be from the Availability Date)
until the Loan
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23
Commitment has terminated, and the Obligations are paid in full, without the
prior written consent of Lenders:
Section 6.1 Merger Agreement Covenants. The covenants and agreements
of the Borrower set forth in the first sentence of Section 7.01(a) and Sections
7.01(a)(i), (iii), (iv) (other than acquisitions made solely for Equity
Securities of the Borrower), (vii), (viii), (x)(B), (xi), (xiii), (xiv) as it
relates to clause (ix) of Section 3.18 of the Merger Agreement (provided that
the Borrower may consummate transactions of the type described in clause (B) of
such Section 3.18(ix) without regard to the dollar limits referred to therein so
long as such transactions (I) are on market terms, (II) do not extend for a
period of greater than thirty-six months, (III) are only entered into after good
faith consultations by the Borrower with the Lenders and (IV) are consummated at
a cost per customer target not in excess of the amount previously disclosed to
the Lenders (or, if lower, the cost per customer target then in effect)), and
(xv) of the Merger Agreement are hereby incorporated herein by reference as of
set forth at length and shall be covenants and agreements of the Borrower
hereunder. To the extent there is a waiver under the Merger Agreement then there
shall be deemed to be a waiver under this Agreement and, to the extent that
matters are set forth in the CDnow Disclosure Letter, they shall be deemed to be
set forth herein. For the avoidance of doubt, nothing contained herein shall
derogate from the Borrower's obligations to comply with every covenant and
agreement contained in the Merger Agreement during the term thereof in
accordance with the terms thereof.
Section 6.2 Changes in Business. The Borrower shall not, and shall
not permit any of its Subsidiaries to, enter into any business which is
substantially different from that conducted by the Borrower, as the case may be,
on the date hereof.
Section 6.3 Limitation on Indebtedness. The Borrower will not, and
will not permit its Subsidiaries to, directly or indirectly, incur any
Indebtedness other than Permitted Indebtedness (so long as, in the case of
Permitted Interim Financing, the Net Debt Proceeds thereof are applied as
required by Section 2.7) and the Borrower will not issue any Disqualified Stock
or permit any of its Subsidiaries to issue any Disqualified Stock.
Section 6.4 Limitation on Issuances of Guarantees by Subsidiaries.
The Borrower will not permit any Subsidiary to guarantee, directly or
indirectly, any
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24
Indebtedness of the Borrower, other than Permitted Indebtedness.
Section 6.5 Limitation on Liens. The Borrower will not, and will not
permit any of its Subsidiaries to, directly or indirectly, enter into, create,
incur, assume or suffer to exist any Liens of any kind (other than Permitted
Liens) on or with respect to any of their Property or assets now owned or
hereafter acquired, or any interest therein or any income or profits therefrom.
Section 6.6 Limitation on Asset Sales. The Borrower will not, and
will not permit any of its Subsidiaries to, directly or indirectly, convey,
sell, lease, assign, transfer or otherwise dispose of any of its Property,
whether now on or hereafter acquired, except:
(i) obsolete Property disposed of in the ordinary course of
business;
(ii) the sale of inventory in ordinary course of business;
(iii) the sale or other disposition of any Property for fair
market value and for consideration consisting solely of cash and so long as the
Net Sale Proceeds thereof are applied as required by Section 2.8; and
(iv) (a) Sale and Leaseback Transactions in respect of capital
equipment acquired ninety days or less prior to consummation of such Sale and
Leaseback Transaction and (b) other Sale and Leaseback Transactions in respect
of which the Attributable Indebtedness does not exceed $1,000,000 in the
aggregate; provided that all of such Sale and Leaseback Transactions referred to
in both clauses (a) and (b) are for fair market value.
Section 6.7 Use of Proceeds. The Borrower will not use the proceeds
of any Loan for any purpose other than in the ordinary course of the Borrower's
business and to meet the ongoing working capital needs of the Borrower.
Section 6.8 Limitation on Modifications of Certain Indebtedness. The
Borrower will not, and will not permit any of its Subsidiaries to, directly or
indirectly amend or modify, or permit the amendment or modification of, any
Existing Debt Agreement.
Section 6.9 Limitation on Negative Pledge Clauses. The Borrower will
not, and will not permit its Subsidiaries to, directly or indirectly, enter into
with any
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25
Person any agreement, other than (a) this Agreement and (b) any Purchase Money
Indebtedness permitted by this Agreement (in which case, any prohibition or
limitation shall only be effective against the assets financed thereby), which
prohibits or limits the ability of the Borrower or any of its Subsidiaries to
create, incur, assume or suffer to exist any Lien upon any of its Property or
revenues, whether now owned or hereafter acquired.
SECTION 7. EVENTS OF DEFAULT.
Section 7.1 Events of Default. Each of the following events, acts,
occurrences or conditions shall constitute an Event of Default under this
Agreement, regardless of whether such event, act, occurrence or condition is
voluntary or involuntary or results from the operation of law or pursuant to or
as a result of compliance by any Person with any judgment, decree, order, rule
or regulation of any court or administrative or governmental body:
(a) Failure to Make Payments. The Borrower shall (i) default
in the payment when due of any principal of, or Interest on, the Loans or (ii)
default in the payment when due of any other amounts owing hereunder, and in the
case of the circumstances described in this clause (ii), such default shall
continue unremedied for three or more Business Days, provided, however, that in
the event that a Lender elects to convert any amount of principal or Interest
otherwise due under any of the Notes into CDnow Common Stock in accordance with
the provisions of Section 8 hereof, the amount so converted shall be deemed to
have been timely paid and the failure to make payment in respect thereof shall
not constitute a Default or Event of Default hereunder.
(b) Breach of Representations. The representations and
warranties of the Borrower set forth in Section 4 or in the Security Agreement
shall, individually or in the aggregate, have been untrue or inaccurate in any
material respect when made.
(c) Breach of Covenants.
(i) The Borrower shall fail to perform or observe any
agreement, covenant or obligation arising under Section 6 hereof or
Section 5 of the Security Agreement.
(ii) The Borrower shall fail to perform or observe any
agreement, covenant or obligation arising under this Agreement or other
Loan Agreement
<PAGE>
26
Document (except those described in subsections (a) and (b)(i) above), and
such failure shall continue for 15 days after notice thereof to the
Borrower.
(d) Default Under Other Agreements. Any Loan Party shall
default in the payment when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) of any amount owing in respect of
any Indebtedness (including any Indebtedness under the Existing Debt Agreements)
individually or in the aggregate in excess of $250,000 other than the
Obligations; or any Loan Party shall default in the performance or observance of
any obligation or condition with respect to any such Indebtedness or any other
event shall occur or condition exist, if the effect of such default, event or
condition is to accelerate the maturity of any such Indebtedness or to permit
(without regard to any required notice or lapse of time) the holder or holders
thereof, or any trustee or agent for such holders, to accelerate the maturity of
any such Indebtedness, or any such Indebtedness shall become or be declared to
be due and payable prior to its stated maturity other than as a result of a
regularly scheduled payment.
(e) Loan Documents. Any Loan Document shall at any time and
for any reason not be or shall cease to be valid, binding and enforceable
against any Loan Party or any Loan Party or any other Person shall contest or
deny the validity and enforceability of any Loan Document or shall disaffirm or
repudiate any of its or any Loan Party's obligations thereunder, or the
Obligations (or any of them) shall fail to be secured by a first-priority
perfected security interest in the Collateral.
(f) Bankruptcy, etc. (i) Any Loan Party shall commence a
voluntary case concerning itself under the Bankruptcy Code; or (ii) an
involuntary case is commenced against any Loan Party and the petition is not
controverted within 10 days, or is not dismissed within 60 days, after
commencement of the case; or (iii) a custodian (as defined in the Bankruptcy
Code) is appointed for, or takes charge of, all or substantially all of the
property of any Loan Party or any Loan Party commences any other proceedings
under any reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect relating to any Loan Party or there is
commenced against any Loan Party any such proceeding which remains undismissed
for a period of 60 days; or (iv) any order of relief or other order approving
any such case or proceeding is entered; or (v) any Loan Party is adjudicated
insolvent or bankrupt; or (vi) any Loan Party makes a general
<PAGE>
27
assignment for the benefit of creditors; or (vii) any Loan Party shall fail to
pay, or shall state that it is unable to pay, or shall be unable to pay, its
debts generally as they become due; or (viii) any Loan Party shall cooperate
with its creditors with a view to arranging a composition or adjustment of its
debts; or (ix) any Loan Party shall by any act or failure to act consent to,
approve of or acquiesce in any of the foregoing; or (x) any corporate action is
taken by any Loan Party for the purpose of effecting any of the foregoing.
Section 7.2 Rights and Remedies. Upon the occurrence of any Event of
Default described in Section 7.1(f), the Loan Commitment shall automatically and
immediately terminate and the unpaid principal amount of, and any and all
accrued interest on, the Loans and any and all other Obligations shall
automatically become immediately due and payable, with all additional interest
from time to time accrued thereon and without presentation, demand, or protest
or other requirements of any kind (including, without limitation, valuation and
appraisement, due diligence, presentment, notice of intent to demand or
accelerate and notice of acceleration), all of which are hereby expressly waived
by the Borrower, and the obligation of the Lenders to make any Loan hereunder
shall thereupon terminate; and upon the occurrence and during the continuance of
any other Event of Default, without limiting the other provisions of this
Agreement (including Section 2.7), each Lender may, by written notice to the
Borrower, (i) declare that its Loan Commitment is terminated, whereupon such
Loan Commitment and the obligation of such Lender to make any Loan hereunder
shall immediately terminate, and (ii) declare the unpaid principal amount of and
any and all accrued and unpaid interest on the Loans of such Lender and any and
all other Obligations owed to such Lender to be, and the same shall thereupon
be, immediately due and payable with all additional Interest from time to time
accrued thereon and without presentation, demand, or protest or other
requirements of any kind (including, without limitation, valuation and
appraisement, diligence, presentment, notice of intent to demand or accelerate
and notice of acceleration), all of which are hereby expressly waived by the
Borrower.
SECTION 8. CONVERSION.
Section 8.1 Conversion Privilege and Conversion Price. Subject to
and upon compliance with the provisions of this Section 8, each Lender, at its
sole option, may, at any time after termination of the Merger Agreement and from
time to time thereafter, convert (a) each Note or any
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28
portion of the principal amount thereof which equals $500,000 or any integral
multiple thereof, and (b) the amount of accrued and unpaid Interest on the Loan
represented by such Note (including without limitation any overdue Interest
accruing at the Default Rate), into a number of fully paid and nonassessable
shares (calculated as to each conversion to the nearest 1/100 of a share) of
CDnow Common Stock equal to the quotient obtained by dividing (i) the aggregate
of such principal amount and accrued and unpaid interest to be so converted by
(ii) the Conversion Price, determined as hereinafter provided, in effect at the
time of conversion.
Any certificates evidencing CDnow Common Stock issued upon the
conversion of the Note shall bear such legends, including legends reflecting
restrictions on transfer required in order to maintain compliance with the
provisions of the Securities Act, as the Borrower shall deem to be necessary or
appropriate.
Section 8.2 Exercise of Conversion Privileges. In order to exercise
the conversion privilege with respect to any amount of principal or Interest
(including any defaulted Interest) of any Note, a Lender shall, in the case of a
conversion with respect to all outstanding principal only, surrender such Note,
duly endorsed or assigned to the Borrower or in blank, at the principal
executive offices of the Borrower, and, in all cases, deliver a Notice of
Conversion Election (in the form attached hereto as Exhibit C, a "Notice of
Conversion Election") to the effect that such Lender elects to convert such Note
or, if less than the entire principal amount and Interest thereof is to be
converted, the portion thereof to be converted.
Any amount of principal and Interest of a Note shall be deemed to
have been converted immediately prior to the close of business on the day of
delivery of the relevant Notice of Conversion Election in accordance with the
foregoing provisions, and at such time the rights of such Lender as a holder of
the Note with respect to the principal amount to be so converted (or, in the
case of conversion of any Interest payable on the Note, the right of Lender to
be paid such Interest in cash) shall cease, and the Person or Persons entitled
to receive the CDnow Common Stock of the Borrower issuable upon conversion shall
be treated for all purposes as the record holder or holders of such CDnow Common
Stock as and after such time. As promptly as practicable on or after conversion
date, the Borrower shall issue and shall deliver to such Lender, at the address
specified by such Lender in writing, a certificate or certificates for the
number of full shares of CDnow Common
<PAGE>
29
Stock of the Borrower issuable upon conversion, together with payment in lieu of
any fraction of a share, as provided in Section 8.3.
Section 8.3 Fractions of Shares. No fractional share of CDnow Common
Stock shall be issued upon conversion of a Note. Instead of any fractional share
of such CDnow Common Stock which would otherwise be issuable upon conversion of
such Note (or a portion thereof), or upon the conversion of any Interest
(including defaulted Interest) payable with respect to such Note, the Borrower
shall pay a cash adjustment in respect of such fractional share in an amount
equal to such fraction multiplied by the Closing Price of the CDnow Common Stock
at the close of business on the day of conversion (or, if such day is not a
Trading Day, on the Trading Date immediately preceding such day).
Section 8.4 Adjustment of Conversion Price. The Conversion Price
then applicable to any Note shall be appropriately adjusted in accordance with
the anti-dilution provisions attached hereto as Exhibit D.
Section 8.5 Notice of Adjustments of Conversion Price. Whenever the
Conversion Price of any Note is adjusted, the Borrower shall compute the
adjusted Conversion Price in accordance with Section 8.4 and shall prepare a
certificate signed by the Chief Financial Officer of the Borrower setting forth
the adjusted Conversion Price and showing in reasonable detail the facts upon
which such adjustment is based, and such certificate shall be provided to the
Lenders.
Section 8.6 Company to Reserve CDnow Common Stock. The Borrower
shall at all times reserve and keep available, free from preemptive rights, out
of its authorized but unissued CDnow Common Stock or out of its CDnow Common
Stock held in treasury, for the purpose of effecting the conversion of Notes and
any accrued and unpaid Interest thereon, the full number of shares of its CDnow
Common Stock then issuable upon the conversion of the entire principal amount of
the aggregate Loan Commitment and all Interest that would accrue on such
aggregate amount up to and including the Final Maturity Date.
Section 8.7 Taxes on Conversions. The Borrower will pay any and all
original issuance, transfer, stamp and other similar taxes that may be payable
in respect of the issue or delivery of shares of its Common Shock on conversion
of Notes and any accrued and unpaid Interest thereon pursuant hereto. The
Borrower shall not, however, be required to pay any tax which may be payable in
respect
<PAGE>
30
of any transfer involved in the issue and delivery of shares of its CDnow Common
Stock in a name other than that of a Lender or other holder of the Note, portion
thereof or Interest thereon to be converted, and no such issue or delivery shall
be made unless and until the person requesting such issue has paid to the
Borrower the amount of any such tax, or has established to the satisfaction of
the Borrower that such tax has been paid.
Section 8.8 Covenant as to CDnow Common Stock.
(a) The Borrower covenants that all shares of its CDnow Common
Stock which may be issued upon conversion of Notes or any Interest payment in
respect thereof will upon issue be validly issued, fully paid and nonassessable.
(b) The Borrower shall from time to time take all action
necessary so that the CDnow Common Stock which may be issued upon conversion of
Notes or any Interest payment in respect thereof, immediately upon their
issuance (or, if such CDnow Common Stock is subject to restrictions on transfer
under the Securities Act, upon their resale pursuant to any effective
registration statement under the Securities Act), will be listed on the
principal securities exchanges, interdealer quotation systems and markets, if
any, on which shares of CDnow Common Stock are then listed or quoted.
Section 8.9 Investment Intent; Private Placement. Each Lender
represents and warrants to the Borrower that:
(a) The Lender is knowledgeable, sophisticated and experienced
in making, and is qualified to make, decisions with respect to investments in
equity securities presenting an investment decision like that involved in the
acquisition of CDnow Common Stock upon the conversion of Notes and any accrued
and unpaid Interest thereon pursuant to this Section 8.
(b) Upon the conversion of any Notes or any Interest payment
in respect thereof, the Lender will be acquiring CDnow Common Stock issued upon
such conversion for investment for its own account only and not with a view to,
or for resale in connection with, any "distribution" thereof within the meaning
of the Securities Act. The Lender has no present intention of selling, granting
and participation in, or otherwise distributing the CDnow Common Stock, except
in compliance with the Securities Act or pursuant to an available exemption
thereunder.
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31
(c) The Lender understands that the CDnow Common Stock has not
been registered under the Securities Act or registered or qualified under any
state securities law in reliance on specific exemptions therefrom, which
exemptions may depend upon, among other things, the bona fide nature of the
Lender's investment intent as expressed herein. The Lender is familiar with Rule
144 under the Securities Act, as presently in effect, and understands the resale
limitations imposed thereby and by the Securities Act. The Lender further
understands that the certificate(s) representing the CDnow Common Stock shall
bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THE SHARES MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM.
SECTION 9. REGISTRATION RIGHTS.
The Lenders and the Borrower agree that, with respect to any and all
shares of Common Stock of the Borrower issued upon conversion of any Note or any
portion thereof, or any Interest payable with respect thereto, the Lenders shall
have the registration rights provided for in the Stock Option Agreement
regardless of whether or not such agreement shall be in effect, and any and all
shares of Common Stock of the Borrower issued upon conversion of the Loans or
any portion thereof, or any Interest payable with respect thereto, shall
constitute shares of securities that have been acquired by or are issuable to
the Lenders upon exercise of the "Option" as defined therein.
SECTION 10. MISCELLANEOUS.
Section 10.1 Payment of Expenses, Indemnity, etc. The Borrower
shall:
(a) pay all reasonable out-of-pocket costs and expenses of
each Lender in connection with the preservation of rights under, and enforcement
of, the Loan Documents and the documents and instruments referred to therein or
in connection with any restructuring or rescheduling of the Obligations
(including, without limitation, the reasonable fees and disbursements of counsel
for each Lender);
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32
(b) pay, and hold the Lenders harmless from and against, any
and all present and future stamp, excise and other similar taxes with respect to
the foregoing matters and hold the Lenders harmless from and against any and all
liabilities with respect to or resulting from any delay or omission (other than
to the extent attributable to the Lender) to pay such taxes; and
(c) indemnify each Lender, its officers, directors, employees,
representatives and agents (each an "Indemnitee") from, and hold each of them
harmless against, any and all losses, liabilities, claims, damages, expenses,
obligations, penalties, actions, judgments, suits, costs or disbursements of any
kind or nature whatsoever (including, without limitation, the fees and
disbursements of counsel for such Indemnitee in connection with any
investigative, administrative or judicial proceeding commenced or threatened,
whether or not such Indemnitee shall be designated a party thereto) that may at
any time (including, without limitation, at any time following the payment of
the Obligations) be imposed on, asserted against or incurred by any Indemnitee
as a result of, or arising out of, or in any way related to or by reason of, any
of the Transactions or the execution, delivery or performance of any Loan
Document except to the extent resulting from the gross negligence or willful
misconduct of the Indemnitee.
Section 10.2 Right of Setoff. In addition to any rights now or
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence and during the continuance of
any Event of Default each Lender is hereby authorized at any time or from time
to time, without presentment, demand, protest or other notice of any kind to any
Loan Party or any other Person, any such notice being hereby expressly waived,
to set off any other indebtedness or other obligation at any time held or owing
by such Lender to or for the credit or the account of any Loan Party against and
on account of the Obligations of the Loan Parties to such Lender under this
Agreement or under any of the other Loan Documents, and all other claims of any
nature or description arising out of or connected with this Agreement or any
other Loan Document, irrespective of whether or not the Lenders shall have made
any demand hereunder and although said Obligations, liabilities or claims, or
any of them, shall be contingent or unmatured.
Section 10.3 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed effectively given upon personal delivery
to the party to be notified; on the next Business Day after delivery to a
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33
recognized overnight courier service; upon confirmation of receipt of a
facsimile transmission; or five days after deposit with the United States Post
Office, by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice; provided that notices of a change
of address shall be effective only upon receipt thereof):
If to the Borrower, to:
1005 Virginia Drive
Ft. Washington, PA 19034
Facsimile: (215) 619-9521
Attention: General Counsel
with a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
Facsimile: (215) 963-5299
Attention: James W. McKenzie, Jr., Esq.
If to Time Warner Inc., to:
Time Warner Inc.
75 Rockefeller Plaza
New York, NY 10019
Facsimile: (212) 307-0126
Attention: Chief Financial Officer
with a copy to:
Time Warner Inc.
75 Rockefeller Plaza
New York, NY 10019
Facsimile: (212) 275-3901
Attention: General Counsel
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Facsimile: (212) 757-3990
Attention: James H. Schwab, Esq.
and
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34
If to Sony Music Entertainment Inc., to:
Sony Music Entertainment Inc.
550 Madison Avenue
New York, NY 10022
Facsimile: (212) 833-8083
Attention: General Counsel
with a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022-21585
Facsimile: (212) 940-8776
Attention: Lisa Weiss, Esq.
Section 10.4 Successors and Assigns; Assignments.
(a) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the Borrower, the Lenders, all future holders
of the Notes and their respective successors and assigns, except that the
Borrower may not assign or transfer any of its rights or obligations under this
Agreement without the prior written consent of the Lenders.
(b) Assignments. Either Lender may at any time assign to any
other Person (each an "Assignee") other than a competitor of the Borrower or any
of its Subsidiaries all but not in part of its rights and obligations under this
Agreement, the Notes and any other Loan Documents, and the Borrower and the
Lenders agree that to the extent of any assignment, the Assignee shall be deemed
to have the same rights and benefits under the Loan Documents as the Lenders
hereunder; provided that such assignment shall not relieve the Lenders of their
respective obligations hereunder. Any assignment by a Lender to any Person that
is not an Affiliate of such Lender shall require the prior written consent of
the non-assigning Lender.
Section 10.5 Amendments and Waivers. Neither this Agreement, any
other Loan Document to which the Borrower is a party, nor any terms hereof or
thereof may be amended, supplemented, modified or waived except in accordance
with the provisions of this Section. The Lenders acting jointly and the Borrower
may, from time to time, enter into written amendments, supplements,
modifications or waivers for the purpose of adding, deleting, changing or
waiving any provisions to this Agreement or any Note. Any such amendment,
supplement, modification or waiver shall
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35
apply to and shall be binding upon the Borrower, the Lenders and all future
holders of such Notes or any portion thereof or participation therein. In the
case of any waiver, the Borrower and the Lenders shall be restored to their
former position and rights hereunder and under the outstanding Notes, and any
Default or Event of Default waived shall be deemed to be cured and not
continuing, but no such waiver shall extend to any subsequent or other Default
or Event of Default, or impair any right consequent thereon.
Section 10.6 No Waiver; Remedies Cumulative. No failure or delay on
the part of the Lenders or any subsequent holder of a Note in exercising any
right, power or privilege hereunder or under any other Loan Document and no
course of dealing between any Loan Party and the Lenders or the subsequent
holder of any Note shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege hereunder or under any other
Loan Document preclude any other or further exercise thereof of the exercise of
any other right, power or privilege hereunder or thereunder. The rights and
remedies herein expressly provided are cumulative and not exclusive of any
rights or remedies which the Lenders or the subsequent holder of any Note would
otherwise have. No notice to or demand on any Loan Party in any case shall
entitle any Loan Party to any other or further notice or demand in similar or
other circumstances or constitute a waiver of the rights of the Lenders or the
subsequent holder of any Note to any other or further action in any
circumstances without notice or demand.
Section 10.7 Governing Law, Submission to Jurisdiction. (a) THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE
PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW).
(b) Any legal action or proceeding with respect to this
Agreement or any other Loan Document and any action for enforcement of any
judgment in respect thereof may be brought in the courts of the State of New
York in New York County or of the United States of America for the Southern
District of New York, and, by execution and delivery of this Agreement, the
Borrower hereby accepts for itself and in respect of its property, generally and
unconditionally, the non-exclusive jurisdiction of the aforesaid courts and
appellate courts from any thereof. The Borrower irrevocably consents to the
service of process out of any of the aforementioned courts in any such action or
<PAGE>
36
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, the Borrower at its address set forth in Section 10.3. The
Borrower hereby irrevocably waives any objection which it may now or hereafter
have to the laying of venue of any of the aforesaid actions or proceedings
arising out of or in connection with this Agreement or any other Loan Document
brought in the courts referred to above and hereby further irrevocably waives
and agrees not to plead or claim in any such court that any such action or
proceeding brought in any such court has been brought in an inconvenient forum.
Nothing herein shall affect the right of the Lenders or any holder of a Note to
serve process in any other manner permitted by law or to commence legal
proceedings or otherwise proceed against the Borrower in any other jurisdiction.
Section 10.8 Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument.
Section 10.9 Headings Descriptive. The headings of the several
Sections and subsections of this Agreement are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of this
Agreement.
Section 10.10 Marshalling; Recapture. The Lenders shall be under no
obligation to marshall any assets in favor of any Loan Party or any other party
or against or in payment of any or all of the Obligations. To the extent the
Lenders receive any payment by or on behalf of any Loan Party, which payment or
any part thereof is subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to such Loan Party or its
estate, trustee, receiver, custodian or any other party under any bankruptcy
law, state or federal law, common law or equitable cause, then to the extent of
such payment or repayment, the obligation or part thereof which has been paid,
reduced or satisfied by the amount so repaid shall be reinstated by the amount
so repaid and shall be included within the liabilities of such Loan Party to the
Lenders as of the date such initial payment, reduction or satisfaction occurred.
Section 10.11 Severability. In case any provision in or obligation
under this Agreement or any Note shall be invalid, illegal or unenforceable in
any jurisdiction, the validity, legality and enforceability of
<PAGE>
37
the remaining provisions or obligations, or of such provision or obligation in
any other Jurisdiction, shall not in any way be affected or impaired thereby.
Section 10.12 Survival. All indemnities set forth herein shall
survive the execution and delivery of this Agreement and the Notes and the
making and repayment of the Loans hereunder.
Section 10.13 Limitation of Liability. No claim may be made by any
Loan Party or any other Person against any Lender or any of its Affiliates,
directors, officers, employees, attorneys or agents for any special, indirect,
consequential or punitive damages in respect of any claim for breach of contract
or any other theory of liability arising out of or related to the transactions
contemplated by this Agreement or any act, omission or event occurring in
connection herewith; and each Loan Party hereby waives, releases and agrees not
to sue upon any claim for any such damages, whether or not accrued and whether
or not known or suspected to exist in its favor. For the avoidance of doubt, the
parties expressly acknowledge and agree that each Lender's obligations under
this Agreement, including without limitation Section 2, are separate and
individual in nature and are not joint and several. In no event shall a Lender
be held responsible for a breach by the other Lender of this Agreement.
Section 10.14 [Reserved.]
Section 10.15 Waiver of Trial by Jury. TO THE EXTENT PERMITTED BY
APPLICABLE LAW, EACH OF THE BORROWER AND EACH LENDER HEREBY IRREVOCABLY WAIVES
ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT
OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY MATTER
ARISING HEREUNDER OR THEREUNDER.
Section 10.16 Interest Rate Limitation. Notwithstanding anything
herein to the contrary, if at any time the Interest rate applicable to any Loan,
together with all fees, charges and other amounts which are treated as interest
on such Loan under applicable law (collectively the "Charges"), shall exceed the
maximum lawful rate (the "Maximum Rate") which may be contracted for, charged,
taken, received or reserved by the Lenders holding such Loan in accordance with
applicable law, the rate of interest payable in respect of such Loan hereunder,
together with all Charges payable in respect thereof, shall be limited to the
Maximum Rate and, to the extent lawful, the Interest and Charges that would have
been payable in respect of such Loan but were not payable as a result of the
operation of this
<PAGE>
38
Section 10.16 shall be cumulated and the Interest and Charges payable to such
Lender in respect of other Loans or periods shall be increased (but not above
the Maximum Rate therefor) until such cumulated amount shall have been received
by Lenders.
Section 10.17 Senior Indebtedness. The Indebtedness created pursuant
to the Loan Documents shall be senior in right of payment, as to principal,
Interest and all other Obligations, to all other Indebtedness of the Borrower,
whether now existing, or hereafter created, except for Indebtedness under the
Existing Debt Agreements, Purchase Money Indebtedness and Sale and Leaseback
Transactions entered into in accordance with Section 6.6(iv).
Section 10.18 Adjustments; Set-Off. If any Lender (a "benefitted
Lender") shall at any time receive any payment of all or part of its Loans, or
Interest thereon, or receive any collateral in respect thereof (whether
voluntarily or involuntarily, by set-off, pursuant to events or proceedings of
the nature referred to in Section 7, or otherwise), in a greater proportion than
any such payment to or collateral received by any other Lender, if any, in
respect of such other Lender's Loans, or Interest thereon, such benefitted
Lender shall purchase for cash from the other Lenders a participating interest
in such portion of each such other Lender's Loan, or shall provide such other
Lenders with the benefits of any such collateral, or the proceeds thereof, as
shall be necessary to cause such benefitted Lender to share the excess payment
or benefits of such collateral or proceeds ratably with each of the Lenders;
provided, however, that if all or any portion of such excess payment or benefits
is thereafter recovered from such benefitted Lender, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest.
Section 10.19 Merger Agreement. Nothing in this Agreement shall
reduce or relieve any of the Loan Parties from any of their obligations under
the Merger Agreement.
<PAGE>
39
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
CDnow, Inc.
By: /s/ JASON OLIM
----------------------------------
Name: JASON OLIM
Title: President and Chief
Executive Officer
SONY MUSIC ENTERTAINMENT INC.
By: /s/ KEVIN KELLEHER
----------------------------------
Name: KEVIN KELLEHER
Title: Executive Vice President
and Chief Financial Officer
TIME WARNER INC.
By: /s/ RICHARD J. BRESSLER
-----------------------------------
Name: RICHARD J. BRESSLER
Title: Executive Vice President
and Chief Financial Officer
<PAGE>
CDnow, Inc.
SCHEDULES TO
CONVERTIBLE LOAN AGREEMENT, DATED AS OF JULY 12, 1999
BETWEEN CDnow, Inc., SONY MUSIC ENTERTAINMENT INC.
and TIME WARNER INC.
<PAGE>
Exhibit A
[Form of Promissory Note]
CDnow, Inc.
PROMISSORY NOTE
$15,000,000 New York, New York
[Date]
FOR VALUE RECEIVED, the undersigned, CDnow, Inc., a Pennsylvania
corporation (the "Borrower"), hereby unconditionally promises to pay to
__________ or registered assigns (the "Lender"), on the Final Maturity Date (as
defined in Credit Agreement referred to below), in lawful money of the United
States of America and in immediately available funds, the principal amount of
Fifteen Million Dollars ($15,000,000) or, if less, the aggregate amount
outstanding of the Loans made by the Lender (as defined in the Credit
Agreement). The Borrower hereby unconditionally further agrees to pay interest
in like money on the unpaid principal amount hereof from time to time from the
date hereof at the rates and on the dates specified in Section 2.5 of the
Convertible Loan Agreement dated as of July 12, 1999 between the Borrower and
the Lender and ___________ (as amended, modified or supplemented from time to
time, the "Credit Agreement").
This Note is one of the Notes referred to in Section 2.4 of the Credit Agreement
and is entitled to the benefits thereof. All of the terms, conditions, and
covenants of the Credit Agreement are expressly made a part of this Note by
reference in the same manner and with the same effect as if set forth herein.
Any transferee of this Note, by its acceptance hereof, agrees to be bound by all
the terms, conditions and covenants of the Credit Agreement applicable to the
holder of a Note.
The principal amount of this Note, together with all accrued and unpaid interest
thereon, is convertible into Common Stock of the Borrower at any time and from
time to time, as, and subject to the conditions and limitations, specified in
the Credit Agreement. The Conversion Price applicable to this Note and any
accrued and unpaid Interest hereon shall be specified in the Credit Agreement,
which Conversion Price
<PAGE>
2
shall be subject to adjustment as set forth in the Credit Agreement.
As provided in the Credit Agreement, the Loans evidenced by this Note are
subject to optional and mandatory repayments, in whole and in part, all as
specified in the Credit Agreement.
If an Event of Default, as defined in the Credit Agreement, occurs and is
continuing, all amounts remaining unpaid on this Note shall become, or may be
declared to be, immediately due and payable, all as provided therein.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE PRINCIPLES
THEREOF RELATING TO CONFLICTS OF LAW).
CDnow, Inc.
By: ________________________
Name:
Title:
<PAGE>
Schedule of Principal Advances, Conversions and Repayments
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal
Amount Interest
Amount of Amount of Amount of Converted Converted
Principal Interest Principal into Common into Common
Date Advance Payment Repayment Stock Stock
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT C
To: CDnow, Inc.
1005 Virginia Drive
Ft. Washington, PA 19034
Facsimile No.: (215) 619-9521
Attention: General Counsel
NOTICE OF CONVERSION ELECTION
Reference is hereby made to that certain Convertible Loan Agreement,
dated as of July 12, 1998, by and between Sony Music Entertainment, Inc., Time
Warner Inc. and CDnow, Inc. ("CDnow").
The undersigned hereby exercises its rights to convert the Note, or
a portion thereof, or Interest payable with respect thereto, into Common Stock
of CDnow, as provided in the Convertible Loan Agreement, and requests that
certificates representing shares of CDnow Common Stock issuable upon such
conversion be issued in the name of, and delivered to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print Name, Address, and Social Security Number)
and, if conversion shall not be with respect to the entire principal amount of
the Note, that a new Note for the principal balance remaining of the Note issued
and registered in the name of, and delivered to, the undersigned at the address
stated below.
Principal Amount To Be Converted $
Interest Amount To Be Converted $
Date: Name _____________________
(Print)
Address:______________________________________________________
__________________
(Signature)
<PAGE>
Strategic Commitments
Time Warner Inc. and Sony Corporation of America (each, a "Partner" and
together, the "Partners") will work to promote the growth and profitability of
the combined company formed by the merger of Columbia House Company (including
its related Mexican and Canadian partnerships) and CDnow, Inc. (the "Company")
by making the commitments set forth below to the Company. In addition, the
Company makes the commitments set forth below to each of the Partners.
Notwithstanding anything to the contrary contained in this Strategic Commitments
letter, the territory of the commitments, terms and conditions contained in this
Strategic Commitments letter, as applicable to Sony Corporation of America,
shall be deemed to exclude the country of Japan. In addition, since these
strategic commitments are only binding on each Partner and the companies owned
and controlled by each Partner, the Parties acknowledge that they are not
binding on Sony Music Entertainment (Japan) Inc. among others.
For purposes of this Strategic Commitments letter, "third party" shall not
include any internal division or controlled affiliate of either Partner.
1. Primary Online Packaged Music Retailing Outlet
a) The Company will be the primary vehicle for each Partner to pursue
the packaged music e-commerce business, provided that neither
Partner shall be limited in selling music or other product to other
on-line retailers.
b) "Buy now" Links: The music-related internet and proprietary online
service sites controlled by the recorded music businesses of each of
the Partners ("Partner Sites") shall contain "Buy Now Links" (as
defined below) to the Company site(s) as set forth below. (For
purposes of this Strategic Commitments letter, "control" shall mean
operational and management control, not mere equity ownership.) "Buy
Now Links" means any type of active packaged music e-commerce link
that will link to another site, including, without limitation, "buy"
and other forms of buttons, contextual links and graphical links,
but excluding generally accepted forms of banner advertisements that
also contain an active link to another site.
For purposes of this Strategic Commitments letter: (i) "prominent"
placement of a Buy Now Link means that the contents of such Buy Now
Link are easily readable on a standard display monitor based on the
good faith determination of the Company and the respective Partner
and is placed above-the-fold on such type of standard display
monitor, and (ii) "preferred"
<PAGE>
2
placement of a Buy Now Link relative to any other Buy Now Link on
the same Partner Site means placement of any other Buy Now Link
which is as good or better than the placement of such other Buy Now
Link; provided that such prominent or preferred placement shall in
each case be subject to each Partner's decisions in its sole
discretion concerning editorial and design integrity relating to the
Partner Site concerned.
i) Packaged Music Buy Now Links.
A) US and Canada: With respect to each Partner Site
targeted to customers in the US and Canada the link to
the Company site(s) for the purchase of packaged music
shall be exclusive relative to any other exclusively
online packaged music retailer and shall be
non-exclusive, but prominent and preferred, relative to
any Buy Now Link of any other retailer of packaged music
(i.e., "brick and mortar" retailers that may also sell
packaged music on line). The Buy Now Links on Partner
Sites to on-line retailers other than the Company shall
be provided to such other on-line retailers on arm's
length terms.
B) Outside of the United States and Canada: In each country
outside of the United States and Canada where the
performance criteria described in the next sentence of
this paragraph are met by the Company, Partner Sites
shall contain non-exclusive Buy Now Links to Company
sites for the purchase of packaged music. The
performance criteria to be met by the Company to qualify
for Partner Buy Now Links in a particular country are as
follows: (i) ability to source and fulfill each
Partner's product locally in the country (or source and
fulfill each Partner's product from an alternative
non-local source approved by the relevant Partner); (ii)
the ability to handle orders in local currency; (iii)
ability to provide all product normally available at
retail in the country; and (iv) ability to target the
customer base in the local languages in the country.
Additionally for such territories in which the
performance criteria are met by the Company, each
Partner will individually evaluate in good faith on a
country-by-country basis the appropriateness (given the
specific market conditions of the particular country and
the overall strength of the Company's activities in that
country) of committing to provide the Company with (A)
<PAGE>
3
preferred and prominent Buy Now Links on Partner Sites,
and (B) exclusive Buy Now Links on Partner Sites.
ii) Digital Distribution Buy Now Links: The parties acknowledge
that third parties engaged in the "brick and mortar" or online
retail sale of packaged music may also engage in the retail
sale of music via digital distribution (such third parties are
referred to as "Hybrid Retailers").
A) US and Canada: When and if either Partner is providing
content in the US and Canada pursuant to paragraph 8
below, and such Partner is providing Buy Now Links on
Partner Sites targeted to customers in the US and Canada
to digital distribution sites of similarly situated
Hybrid Retailers, then the digital distribution Buy Now
Links to Company site(s) which are contained on such
Partner Sites shall be prominent and preferred in
relation to the digital distribution Buy Now Links to
sites of similarly situated Hybrid Retailers which are
also contained on the Partner Site concerned.
B) Outside of the United States and Canada: When and if (1)
either Partner is providing content in any country
outside the US and Canada pursuant to paragraph 8 below,
and (2) such Partner is providing Buy Now Links on
Partner Sites targeted to customers in the country
concerned to digital distribution sites of similarly
situated Hybrid Retailers, and (3) the Company meets the
performance criteria set forth in the first sentence of
subsection 1(b)(i)(B) above in the country concerned,
then each Partner shall consider in good faith the
appropriateness (given the criteria set forth in the
parenthetical of the last sentence of subsection
1(b)(i)(B) above) of giving prominent and preferred
placement to the digital distribution Buy Now Links to
Company site(s) which are contained on such Partner
Sites relative to the digital distribution Buy Now Links
to sites of similarly situated Hybrid Retailers which
are also contained on the Partner Sites concerned.
iii) Notwithstanding the foregoing sections 1(b)(i) and (ii):
A) Each Partner will have the right to place on Partner
Sites exclusive Buy Now Links to retail site(s) not
owned by the Company in connection with specific
promotions of limited
<PAGE>
4
duration or other specific events of limited duration
that such Partner deems appropriate to its business.
B) If either Partner is unable to place Company Buy Now
Links on a Partner Site by reason of the existence of
third party equity interest holders or control persons,
then such Partner shall use commercially reasonable
efforts to permit the Company to purchase Buy Now Links
on such Partner Site on market terms, and if such
advertising is accepted by the Company, then the cost of
any such purchase shall be applied against the $25
million advertising availability to be offered by such
Partner in the year concerned.
c) Banner Ads: No Partner Site which is targeted to customers in the
United States and Canada shall contain banner ads specifically
advertising the sale of packaged music by music retailers who
operate exclusively on-line, except for banner ads advertising the
sale of packaged music in connection with specific promotions of
limited duration or other specific events of limited duration that
such Partner deems appropriate to its business, and except as
provided in the next sentence. Partner Sites may contain banner ads
advertising the sale of packaged music through so-called "brick and
mortar" retailers or their on-line music stores.
2. Promotion and Advertising
The Company and each Partner recognize that the success of the venture will
require significant advertising by the Company. Each Partner will use
commercially reasonable efforts to provide the advertising described in this
paragraph 2 as set forth below.
a) Standard Advertising. Each Partner will make available to the
Company standard advertising to the extent made available to other
internal divisions or controlled affiliates(1) of such Partner on
terms comparable to those afforded to such internal divisions or
controlled affiliates. Each Partner will
- --------
(1) The internal divisions or controlled affiliates of Sony Corporation of
America currently are Sony Music Entertainment Inc., Sony Pictures Entertainment
Inc. (which includes as an internal division Sony Online Entertainment Inc.) and
Sony Electronics Inc. The internal divisions or controlled affiliates of Time
Warner currently are Publishing, Music, Programming-Turner, Programming-HBO,
Cable and Filmed Entertainment. For the avoidance of doubt, the terms of this
paragraph 2 shall not apply to transactions or advertising rates offered within
internal divisions or controlled affiliates of each Partner.
<PAGE>
5
also offer to the Company the opportunity to purchase other standard
advertising to the extent offered to third party advertisers on
terms no less favorable than those offered to such third parties
under similar business conditions (it being understood that this
sentence will not require either Partner to offer to the Company the
opportunity to purchase advertising that is offered only to
"special" or "preferred" accounts or is offered as part of a broader
package of advertising offered to a specific third party
advertiser). Such advertising will include standard advertising in
magazines and other publications, television networks and
programming (by way of example, The WB, TBS, CNN, Telemundo, The
Game Show Network, etc.), marketing affinity programs, tour
sponsorships, online web sites and other outlets that are controlled
by a Partner to the extent that each outlet is made available to
other internal divisions or controlled affiliates of such Partner or
third parties. Each Partner may exercise its reasonable discretion
to select the specific standard advertising to be made available.
b) Non-Standard Advertising. Each Partner will make available to the
Company certain non-standard advertising opportunities. Any such
non- standard advertising will be made available to the Company at
rates to be agreed upon by the Company and the relevant Partner,
provided that, where applicable, the terms offered to the Company
will be no less favorable to the Company than those offered to the
internal divisions or controlled affiliates of such Partner or
similarly situated third parties under similar business conditions.
The Partners and the Company understand that these non- standard
advertising opportunities are difficult to define in advance and,
therefore, establish the following guidelines for creating mutually
agreeable programs.
i) Contextual Marketing. Contextual marketing opportunities are
defined as marketing opportunities that are integrated
appropriately with editorial or entertainment content. Some
examples are provision of commercial messages alongside the
album promotion at the end of a television program, promotion
along with a movie soundtrack advertisement, or on-air
promotion. Each Partner will use commercially reasonable
efforts to provide the Company with contextual marketing and
selling opportunities in its web sites, television programs,
magazines, database marketing, direct marketing, and other
similar outlets. This obligation will not require either
Partner to compromise editorial or creative integrity or
brand, and each Partner will continue to have sole discretion
over editorial or creative integrity or brand. Each Partner
may exercise its
<PAGE>
6
reasonable discretion to select the areas, if any, where this
contextual marketing will be made available.
ii) Ride-Along Marketing. Each Partner will use commercially
reasonable efforts to provide the Company with ride-along
marketing opportunities in its packaging and consumer contact
programs. Some examples are inserts in personal electronics
devices, service billing statements, magazine "blow-ins",
InfoBeat and other existing physical and electronic consumer
contact programs. Each Partner may exercise its reasonable
discretion to select the areas where ride- along marketing
will be made available.
iii) Music and Music Video Product Ride-Along. Each Partner will
consider in good faith displaying the URLs of web sites owned
or controlled by it in the packaging of music and music videos
distributed by such Partner. This may include displaying such
URLs in the back cover and liner notes of the relevant music
or music video product, and in paper inserts in CDs, videos
and DVDs. Such URLs will point to Partner-controlled music
sites that link to the Company site(s) as described above.
c) Advertising Availability. Each Partner will offer to sell or make
available to the Company approximately $25 million per year (for a
total of $50 million per year) of promotion and advertising
(including the standard and non-standard advertising and database
access described herein), valued at the price such Partner charges
the Company for such advertising and promotion. At the beginning of
each year, each Partner and the Company will discuss the advertising
and promotion activities contemplated by the Company for the coming
year. The parties acknowledge that each Partner's obligations under
this paragraph are subject to the availability in any year of the
above- described categories of advertising and promotion.
Accordingly, if either Partner offers less than $25 million of
advertising in any year, its commitment for the following year will
be increased by the shortfall. If any such shortfall is in existence
as of the expiration of the Term of this Strategic Commitments
letter, then the relevant Partner shall commit to offer such
advertising and promotion to the Company following expiration of the
Term of this Strategic Commitments letter until such shortfall is
fulfilled under the same terms and conditions as set forth in this
Strategic Commitments letter. If either Partner offers more than $25
million of advertising in any year and the Company accepts such
additional advertising, its commitment for the following year will
be decreased by the excess. If advertising and promotion is offered
by either Partner in any year, but the Company elects not to
<PAGE>
7
purchase all of such advertising and promotion, then such Partner
shall nonetheless be deemed to have satisfied in full its obligation
for the year concerned. If either Partner offers the Company
opportunities to purchase advertising and promotion from third
parties at favorable rates in the ordinary course of business, the
cost of such advertising shall be applied against the $25 million
advertising availability to be offered by such Partner in the year
concerned.
d) Cross Promotion by the Company.
i) The Company will use reasonable efforts to make available to
each Partner standard and non-standard advertising and
promotion to the extent advertising and promotion is made
available to third parties, at the most favorable price
offered to third parties under similar business conditions.
ii) If the Company enters into any arrangement with a record label
or video company other than a label or company owned or
controlled by a Partner providing such label or company with
preferred placement or other benefits, then subject to the
Company's reasonable discretion, each Partner will have the
right to enter into good faith negotiations with the Company
to provide a comparable opportunity to such Partner on
substantially similar terms.
iii) The Company will offer each Partner (acting individually),
based on good faith negotiations, the opportunity for
promotion and exposure substantially equivalent to that
provided by the Company to other major record labels, on terms
no less favorable to each Partner than that provided to such
other labels under similar business conditions.
3. Database Access
a) Each Partner will use commercially reasonable efforts to provide the
Company with access to consumer information databases for the
Company's own direct marketing purposes, both online and direct
mail, to the extent provided to third parties on terms substantially
comparable to those granted to third parties by the relevant Partner
under similar business conditions. If requested by the Company, each
Partner will consider in good faith providing to the Company other
consumer databases identified by the Company (i.e., those not
provided to third parties) to the extent such databases are relevant
to the business of the Company at fair and reasonable
<PAGE>
8
rates to be negotiated between the relevant Partner and the Company
on an individual basis. These databases may include, by way of
example only, warranty registration databases, consumer
electronics-related customer databases, service databases, magazine,
and direct marketing and e-commerce infrastructure databases,
record label consumer databases and online gaming databases. The
foregoing will not require either Partner to provide access to any
databases if doing so would violate any privacy commitments that may
have been made to the consumer or the privacy policies of such
Partner.
b) If requested, the Company will negotiate in good faith with each
Partner individually to provide it with access to Company databases
which are relevant to such Partner's business, on arm's length
terms, for use in a manner which is not directly competitive with,
or materially detrimental to, the Company's business.
4. Access to Musical Artist Content/Promotion
Each Partner and the Company recognize that the ability to offer valuable and
unique materials about and by musical artists is important to the success of the
Company. Accordingly, each Partner shall use commercially reasonable efforts to
provide the Company with exclusive and non-exclusive (i) interviews, footage,
photographs and likenesses for promotions and contests, (ii) chats and other
similar assets for online use by the Company in the creation of its web pages,
product promotion and other uses beneficial to the Company, and (iii) to the
extent made generally available to similarly situated third parties, digital
downloads for promotional purposes. Each Partner will endeavor to provide the
Company with sufficient musical artist content and promotional materials, such
that in the aggregate, but not on an artist-by-artist basis, during the Term of
this Strategic Commitments letter, the Company is not materially disadvantaged
in its advertising, marketing and promotion activities relative to its
competitors.
5. Music Video Licenses
a) If a Partner enters into an agreement to license any of its music
videos on a non-exclusive basis to a similarly situated third party
Hybrid Retailer engaged in the Internet streaming of music videos
for non-promotional purposes, then such Partner shall provide the
Company with non-exclusive access to such music videos on similar
terms and conditions.
<PAGE>
9
b) If a Partner enters into an agreement to license any of its music
videos on a non-exclusive basis to a similarly situated third party
Hybrid Retailer engaged in the Internet streaming of music videos
for promotional purposes, then such Partner shall provide the
Company with non-exclusive access to such music videos for similar
promotional purposes on similar terms and conditions, subject to
approval by the applicable record label of the Partner concerned and
the terms of such record label's promotional plans.
c) If any non-exclusive music video license agreement entered into by
either Partner contains exclusivity provisions, subparagraphs 5(a)
and (b) shall apply solely with respect to the non-exclusive
provisions of such license agreement.
6. Special Music Products
Each Partner will provide the Company with exclusive special music product
opportunities negotiated on an arm's length basis (e.g., albums with exclusive
bonus tracks, compilations and single tracks).
7. Direct Sale of Music Product
With respect to the Company's online music retail business in the US, each
Partner will provide the Company with a direct account for the purchase of "top
200" music product for shipment in the US on terms and prices consistent with
those offered by such Partner to other similarly situated wholesale accounts.
Each Partner shall negotiate prices and other terms with the Company on an
individual basis. The Company may in its own discretion accept or reject such
offer. In addition, each Partner shall consider in good faith providing the
Company with the opportunity to purchase music product direct outside the US on
a country-by-country basis, subject to local considerations.
8. Digital Distribution of Music Product
Each Partner, acting individually, will enter into separate arrangements with
the Company pursuant to which the Company will be permitted to sell in the
United States and Canada such Partner's generally available music product to the
Company's customers in individually priced transactions via secure digital
downloading platform(s) acceptable to such Partner, including a mutually
approved rights management clearinghouse system, but only to the extent that the
Partners permit other similarly situated third party Hybrid Retailers to sell
such music product in comparable transactions via secure digital downloading. In
addition,
<PAGE>
10
in each country outside of the United States and Canada where the performance
criteria described in subsection 1(b)(i)(B) are met by the Company, each
Partner, acting individually, will enter into separate arrangements with the
Company pursuant to which the Company will be permitted to sell in the country
concerned such Partner's generally available music product to the Company's
customers in individually priced transactions via secure digital downloading
platform(s) acceptable to such Partner, including a mutually approved rights
management clearinghouse system, but only to the extent that the Partners permit
other similarly situated third party Hybrid Retailers to sell such music product
in the country concerned in comparable transactions via secure digital
downloading. Notwithstanding the preceding two (2) sentences, each Partner may
make available music product to third party online music retailers via digital
downloading on an exclusive basis in connection with limited duration specific
promotions or other limited duration specific events that such Partner deems
appropriate to its business. Each Partner will (i) begin working with the
Company as soon as practically feasible and on a good faith basis so that the
Company may be prepared to offer music for sale in the United States and Canada
(and other countries provided the criteria described in subsection 1(b)(i)(B)
are met by the Company in the country concerned) via digital downloading when
other similarly situated third party Hybrid Retailers are also ready and
permitted by the Partners to make such sales, and (ii) continue working with the
Company during the Term of this Strategic Commitments letter so that the Company
may continue to offer music for sale in the United States and Canada (and other
countries provided the criteria described in subsection 1(b)(i)(B) are met by
the Company in the country concerned) via digital downloading so long as other
similarly situated third party Hybrid Retailers are also permitted by the
Partners to continue to offer music for sale via digital downloading, and so
long as it is part of the Company's board-approved business plan. Such
arrangements will provide that the Company will receive from the relevant
Partner terms and conditions consistent with market conditions applicable in the
country concerned to then-existing similarly situated third party Hybrid
Retailers in similar transactions. Each Partner shall negotiate prices and other
terms with the Company on an individual basis.
9. Additional Strategic Opportunities
a) The parties acknowledge that from time to time each Partner
independently may pursue Internet and e-commerce initiatives that
may relate to the music or other business of the Company. The
relevant Partner will consider ways to enhance the business of the
Company by utilizing initiatives and alliances that such Partner
deems appropriate.
b) It is the spirit of this Strategic Commitments letter that neither
Partner will enter into a strategic commitments arrangement
substantially similar to this
<PAGE>
11
Strategic Commitments letter, taken as a whole, with any other third
party for the purpose of engaging in the online music business.
10. Joint Marketing and Planning
Each year each Partner (through appropriate executive designees) and the Company
will work together to develop a comprehensive marketing plan, which may be
periodically updated by the Partners and the Company, that contemplates the
exploitation of the strategic relationships described above. Each plan will
include a description of the advertising and promotion activities contemplated
in the year concerned. The marketing plan will also identify additional
opportunities for co-promotion.
11. Manufacturing and Other Corporate Services
a) To the extent the Company intends to have product manufactured (as
opposed to purchasing finished product), and either Partner has
manufacturing capability, the Company and such Partner will enter
into arrangements pursuant to which such Partner will provide
manufacturing for the Company's business on market terms and in
accordance with the applicable manufacturing agreements. Each
Partner shall negotiate prices and other terms with the Company on
an individual basis.
b) Sony Music Entertainment Inc. will enter into a transitional
services agreement with the Company on market terms for
administrative services required during the transition period (with
the services to be provided and the transition period to be mutually
agreed by the parties).
12. Term of Strategic Commitments
a) Five years from closing.
b) If any further agreement is entered into in connection with the
commitments described herein, then the term of such other agreement
shall terminate no later than the end of the above five-year period.
13. The foregoing commitments shall be subject to, and limited by, each
Partner's determination of its applicable existing and future: (i) legal,
regulatory and contractual restrictions and obligations; (ii) fiduciary
duties of each Partner to others; and (iii) each Partner's commitments to,
and relationships with (A) artists, (B)
<PAGE>
12
retailers and (C) other third parties that are significant to its
applicable present or future core businesses; provided, however, that this
paragraph 13 (except insofar as it relates to legal and regulatory
restrictions) does not apply to subparagraph 9(b) above; and provided
further that if a situation develops in which this paragraph substantially
and materially impairs the intent of this Strategic Commitments letter
taken as a whole, then the Company will notify the Partners of the causes
of such situation in a timely manner (and in no event less timely than
within three (3) months) and the Partners and the Company will begin
working together as soon as practicable and in good faith to promptly seek
mutually acceptable and appropriate alternative opportunities to benefit
the Company.
<PAGE>
EXHIBIT G
(TO MERGER AGREEMENT)
================================================================================
GOVERNANCE AGREEMENT
BY AND AMONG
DELAWARE HOLDCO CORPORATION,
SONY MUSIC ENTERTAINMENT INC.,
WARNER MUSIC GROUP INC.,
AND
CERTAIN OTHER PARTIES
--------------------
Dated as of ______________, 1999
--------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
DEFINITIONS ............................................................................................2
ARTICLE 1
GOVERNANCE.................................................................................14
1.1 Board of Directors..............................................................14
1.2 Proxies.........................................................................16
1.3 Organizational Documents........................................................17
1.4 Approvals Required for Certain Action...........................................17
1.5 Conflicting Charter and By-Laws.................................................21
1.6 Liability Insurance.............................................................21
1.7 Business Plans; Budgets.........................................................21
ARTICLE 2
TRANSFERS OF STOCK.........................................................................22
2.1 Transfers of Stock..............................................................22
2.2 Right of First Offer............................................................23
2.3 Tag-Along Rights................................................................25
2.4 Certain Matters Relating to Transfers...........................................26
2.5 Automatic Transfer..............................................................26
2.6 Conversion......................................................................27
2.7 Legend..........................................................................27
ARTICLE 3
STANDSTILL; PURCHASE RIGHTS; REGISTRATION RIGHTS...........................................27
3.1 Purchaser Standstill Obligations................................................27
3.2 Purchase Rights.................................................................29
3.3 Registration Rights.............................................................29
ARTICLE 4
COVENANTS AND REPRESENTATIONS..............................................................30
4.1 Covenants of the Company........................................................30
4.2 Further Assurances and Additional Agreements....................................30
4.3 Representations and Warranties of the Purchasers................................30
4.4 Representations and Warranties of the Company...................................31
ARTICLE 5
MISCELLANEOUS..............................................................................32
5.1 Amendment.......................................................................32
5.2 Waiver..........................................................................32
5.3 Specific Performance............................................................32
5.4 Assignment......................................................................32
5.5 Notices.........................................................................32
5.6 Third Party Beneficiary.........................................................33
5.7 Term of Agreement...............................................................33
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.8 Section Headings................................................................33
5.9 Choice of Law...................................................................33
5.10 Entire Agreement................................................................34
5.11 Severability....................................................................34
5.12 Cumulative Rights...............................................................34
5.13 Obligations.....................................................................34
5.14 Counterparts....................................................................34
</TABLE>
EXHIBIT A - Form of Proxy
EXHIBIT B - Certificate of Incorporation
EXHIBIT C - By-Laws
ii
<PAGE>
GOVERNANCE AGREEMENT
GOVERNANCE AGREEMENT (this "Agreement"), dated as of ___,
1999,(1) by and among SONY MUSIC ENTERTAINMENT INC., a Delaware corporation
("SONY MUSIC"), SONY MUSIC ENTERTAINMENT (CANADA) INC., a corporation organized
under the laws of Ontario ("SONY CANADA" and, together with SONY MUSIC, "SONY"),
WARNER MUSIC GROUP INC., a Delaware corporation ("WARNER MUSIC"), WARNER MUSIC
CANADA LTD., a corporation organized under the laws of Ontario ("WARNER
CANADA"), WCI RECORD CLUB INC., a Delaware corporation ("WARNER RECORD CLUB"
and, together with WARNER MUSIC and WARNER CANADA, "WARNER") and DELAWARE HOLDCO
CORPORATION, a Delaware corporation (the "Company").
A. The Company has authorized capital stock of ___________
shares, consisting of __,000,000 shares of Class A Common Stock, par value $0.01
per share (the "Class A Stock"), __,000,000 shares of Class B Common Stock, par
value $0.01 per share (the "Class B Stock" and, together with the Class A Stock,
the "Common Stock") and ______ shares of Preferred Stock, par value $0.01 per
share, of which one (1) share has been designated as a series of Special
Preferred Voting Stock, having an aggregate liquidation preference of $1.00 (the
"Special Voting Share").
B. This Agreement is being executed and delivered in
connection with, and as a condition to closing under, that certain Agreement of
Merger and Contribution (the "Merger Agreement"), dated as of July 12, 1999,
among the Company, Time Warner Inc., Sony Corporation of America, CDnow, Inc., a
Pennsylvania corporation ("CDnow") and certain other parties named therein.
Pursuant to the Merger Agreement, Time Warner Inc. and Sony Corporation of
America are causing, subject to the terms and conditions specified therein,
certain assets to be contributed, directly or indirectly, to the Company and
certain of its subsidiaries, including 3030809 Nova Scotia ULC, an unlimited
liability company formed under the laws of Nova Scotia, all of the common stock
of which is owned by the Company ("Canada Sub"). In exchange for such
contributions and as a result of the transactions contemplated by the Merger
Agreement, (i) Sony Music holds an aggregate of __,000,000 shares of the Class B
Stock; (ii) Sony Canada holds __________ shares of Class B Stock and __________
shares of Exchangeable Stock (as defined below); (iii) Warner Music holds an
aggregate of __,000,000 shares of the Class B Stock; (iv) Warner Canada holds
__________ shares of Class B Stock and __________ shares of Exchangeable Stock
(as defined below); (v) Warner Record Club holds an aggregate of _____ shares of
the Class B Stock and (vi) ___________________, a ___________________
("Trustee") holds the Special Voting Share for the benefit of Sony Canada and
Warner Canada in accordance with the terms of and conditions contained in the
Canadian Transaction Agreements (as defined below).
C. The parties hereto have agreed, inter alia, to make certain
provisions for the governance of the Company and to restrict the transfer of
their shares of Stock.
NOW, THEREFORE, in consideration of the covenants and
agreements herein, the parties hereto agree as follows:
- ----------------
(1) This agreement will be attached as an exhibit to the Merger Agreement and
executed at Closing.
<PAGE>
2
DEFINITIONS
The following definitions shall apply equally to both the
singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms. All references herein to Articles, Sections, Exhibits and
Schedules shall be deemed to be references to Articles and Sections of, and
Exhibits and Schedules to, this Agreement unless the context shall otherwise
require. All Exhibits and Schedules attached hereto shall be deemed incorporated
herein as if set forth in full herein and, unless otherwise defined therein, all
terms used in any Exhibit or Schedule shall have the meaning ascribed to such
term in this Agreement. The words "include", "includes" and "including" shall be
deemed to be followed by the phrase "without limitation". The words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement. Unless otherwise expressly provided herein, any agreement,
instrument or statute defined or referred to herein or in any agreement or
instrument that is referred to herein means such agreement, instrument or
statute as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes) by succession of comparable successor statutes and references to all
attachments thereto and instruments incorporated therein. Capitalized terms used
in this Agreement but not otherwise defined herein shall have the respective
meanings ascribed thereto in the Merger Agreement or the Certificate (as defined
below), as applicable. All references to specific numbers of shares of Stock
contained in this Agreement shall be appropriately adjusted to take into account
any stock splits, stock dividends, subdivisions, reclassifications,
combinations, recapitalizations, or similar transactions involving such Stock,
including a stock dividend or distribution in the form of shares of such Stock
pursuant to the Certificate. As used in this Agreement, the following terms
shall have the following meanings:
"Affiliate" of any Person shall mean any Person
controlling, Controlled by or under common Control with such Person.
For the purposes of this definition "Control," when used with respect
to any specified Person, shall mean the power to direct or cause the
direction of the management and policies of such Person, directly or
indirectly, whether through ownership of voting securities or
partnership or other ownership interests, by contract or otherwise; and
the terms "Controlling" and "Controlled" shall have correlative
meanings. For purposes of this definition, the Company and its
Subsidiaries and Controlled Affiliates shall not be considered
Affiliates of either Purchaser. For the avoidance of doubt, a
"Controlled Affiliate" means, with respect to any Person, any Affiliate
of such Person that is directly or indirectly Controlled by such Person
(but shall not include any Controlled Affiliate of such Person's
Ultimate Parent unless such Controlled Affiliate is directly or
indirectly Controlled by such Person).
"Approved Business" shall have the meaning ascribed
thereto in the Certificate.
"Beneficial Ownership" shall have the meaning
ascribed to such term in Rule 13d-3, as in effect on the date hereof,
promulgated under the Exchange Act; "Beneficially Owned" "Owned
Beneficially", "Beneficially Own" and like terms shall have correlative
meanings.
"Board" means the Board of Directors of the Company.
<PAGE>
3
"Board Governance Actions" shall have the meaning
ascribed thereto in the Certificate.
"Business Day" shall mean any day except a Saturday,
Sunday or other day on which commercial banks in New York, New York,
are authorized by law to close.
"By-Laws" shall mean the By-Laws of the Company, as
may be amended from time to time in accordance with Section 1.4 hereof,
the Certificate and such By-Laws.
"Canadian Transaction Agreements" shall mean,
collectively, (a) the Master Canadian Transaction Agreement, dated as
of July 12, 1999, among Warner Canada, Sony Canada, The Columbia House
Company (Canada), Canada Sub and the Company (including the terms of
the Exchangeable Stock, attached thereto); (b) the Exchange Agreement,
dated as of the date of the Closing, among the Company, Warner Canada
and Sony Canada; (c) the Support Agreement, dated as of the date of the
Closing between the Company and Canada Sub; and (d) the Voting Trust
Agreement, dated as of the date of the Closing, among the Company,
Warner Canada, Sony Canada, Canada Sub and the Trustee, in each case as
the same may be amended, modified or supplemented from time to time in
accordance therewith.
"CEO" shall mean the chief executive officer of the
Company.
"Certificate" shall mean the Certificate of
Incorporation of the Company in effect at Closing, as may be amended
from time to time in accordance with Section 1.4 hereof and such
Certificate.
"Change in Control of the Company" shall mean any of
the following: (i) a merger, consolidation, exchange or other business
combination or transaction involving the Company if all of the
stockholders of the Company immediately prior to the effective date of
such merger, consolidation, exchange or other business combination or
transaction collectively have, as a result of such transaction,
Beneficial Ownership of voting securities representing less than 50% of
the Total Current Voting Power of the surviving corporation following
such merger, consolidation, exchange or other business combination or
transaction; (ii) an acquisition by any Person or 13D Group (other than
a Purchaser or a Controlled Affiliate of a Purchaser or a 13D Group in
which a Purchaser or a Controlled Affiliate of a Purchaser is a member)
of direct or indirect Beneficial Ownership of Voting Stock of the
Company representing 25% or more of the Total Current Voting Power of
the Company; (iii) a sale or other direct or indirect disposition of
all or substantially all the assets of the Company and its
Subsidiaries; or (iv) a liquidation or dissolution of the Company.
"Closing" shall have the meaning ascribed thereto in
the Merger Agreement.
"Club" shall have the meaning ascribed thereto in the
Merger Agreement.
"Consumer Price Index" means the Consumer Price Index
(all urban consumers -- all items) published by the Bureau of Labor
Statistics of the United States Department of Labor (or by any office
of the United States government succeeding to the functions of such
Bureau) for all U.S. cities.
<PAGE>
4
"Disinterested Stockholder" shall mean any holder of
shares of capital stock of the Company who is not an Interested
Stockholder.
"Disinterested Stockholder Approval" shall mean the
affirmative vote or written consent of Disinterested Stockholders
representing greater than 50% of the Total Current Voting Power of the
Company held by all Disinterested Stockholders, duly obtained in
accordance with the applicable provisions of the Certificate, By-laws
and applicable law.
"Encumber" shall mean mortgage, pledge, grant a
security interest in, grant any options on or other interests in,
hypothecate or otherwise encumber, or create any lien or other
restriction on, or agree to do any of the foregoing.
"Equity Security" has the meaning ascribed to such
term in Rule 405 promulgated under the Securities Act as in effect on
the date hereof, and in any event includes any interest or security
having the attendant right to vote for directors or similar
representatives and any interest or security convertible into or
exchangeable for any of the foregoing.
"Event of Automatic Conversion" shall have the
meaning ascribed thereto in the Certificate.
"Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
"Exchangeable Stock" means the exchangeable stock of
Canada Sub, each share of which is convertible, exercisable,
retractable, redeemable or exchangeable into or for one share of Class
B Stock (or, after an Event of Automatic Conversion, Class A Stock)
pursuant to the terms and conditions contained in the Canadian
Transaction Agreements.
"Fully-Diluted Basis" means, with respect to any
Purchaser, the aggregate number of shares of Class B Stock that would
be Beneficially Owned by such Purchaser and its Affiliates assuming all
shares of Exchangeable Stock Beneficially Owned by such Purchaser and
its Affiliates were converted, exercised, retracted, or exchanged into
or for Class B Stock (or, following an Event of Automatic Conversion,
Class A Stock) in accordance with the Canadian Transaction Agreements.
"Holding Period" means the period of time beginning
on Closing and ending on the third anniversary of Closing.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Indebtedness" shall mean at any particular time,
without duplication, (i) any indebtedness for borrowed money or issued
in substitution for or exchange of indebtedness for borrowed money,
(ii) any indebtedness evidenced by any note, bond, debenture or other
debt security, (iii) any indebtedness for the deferred purchase price
of property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade
payables and other current liabilities incurred in the ordinary course
of business), (iv) any commitment by which a Person assures a creditor
against loss, (v) any indebtedness guaranteed in any manner by a Person
(including, without limitation, guarantees in the form of an agreement
to repur chase or reimburse) and (vi) any obligations under capitalized
leases with respect
<PAGE>
5
to which a Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or with respect to which obligations a Person
assures a creditor against loss.
"Independent Director" shall have the meaning set
forth under the rules of NASDAQ, so long as the Class A Stock is quoted
on NASDAQ and, thereafter, shall have the meaning set forth under the
rules of the principal U.S. or foreign securities exchange on which the
Class A Stock is listed or, if not listed on any such exchange, the
rules of NASDAQ or any securities exchange on which the Class A Stock
was last quoted or listed, as applicable.
"Interested Stockholder" shall mean a Purchaser or a
Controlled Affiliate of a Purchaser or a member of a 13D Group in which
a Purchaser or a Controlled Affiliate of a Purchaser is also a member.
"JO Employment Agreement" shall mean the employment
agreement, dated July 12, 1999 between Jason Olim and the Company, as
amended from time in accordance therewith and herewith.
"Market Value" means, as of any date of
determination, with respect to Marketable Securities, (a) the average
of the closing sale prices of such securities during the 20 trading
days immediately preceding such date of determination on the principal
U.S. or foreign securities exchange on which such securities are listed
(or, in the event no such sale price is reported on such day, the
average of the reported closing bid and asked prices for such day) or,
if such securities are not listed or primarily traded on any such
exchange, the average of the closing sale prices of such security
during the 20-day period preceding such date of determination on NASDAQ
or any comparable system then in use (or, in the event no such sale
price is reported on such day, the average of the reported closing bid
and asked prices for such day) or (b) in respect of a Small Offering,
the closing sale price of such securities on such date of determination
on the principal U.S. or foreign securities exchange on which such
securities are listed or primarily traded or, if such securities are
not listed or primarily traded on any such exchange, the closing sale
price of such securities on such date of determination on NASDAQ or any
comparable system then in use (or, in the event no such sale price is
reported on such day, the average of the reported closing bid and asked
prices for such day).
"Marketable Securities" shall mean any debt or Equity
Securities of a Person that are (or with respect to which depositary
receipts are) listed on a national securities exchange or quoted on
NASDAQ or any comparable system then in use during the applicable
period in which the Market Value of such securities is determined and
are freely tradeable under the Securities Act by the recipient thereof
(or are accompanied by registration rights comparable in all material
respects to those contained in the Registration Rights Agreement);
provided, that shares of Class B Stock shall be deemed Marketable
Securities and, for purposes of determining the Market Value thereof,
shall be deemed to have been converted into shares of Class A Stock
pursuant to the Certificate in accordance with an Event of Automatic
Conversion.
"Minimum Third Party Price" means, with respect to
any Offered Shares subject to a First Offer Notice, 100% of the Offer
Price stated in the First Offer Notice received by a Rightholder;
provided, that in the case of a Small Offering, the Minimum Third Party
Price shall mean the Market Value (as defined in clause (b) of such
definition (but using the actual sale price instead of the closing sale
price (or, in the event no such sale price is reported on the
<PAGE>
6
relevant day, the average of the closing bid and asked prices)) as of
the date of Transfer of such Offered Shares; provided, further, that
in the case of a Registration, the Minimum Third Party Price shall
mean 80% of the Offer Price stated in the First Offer Notice.
"NASDAQ" means The NASDAQ Stock Market.
"Nominating Committee" shall mean a committee of the
Board consisting of all directors other than the Independent Directors.
"Number of Class B Directors" shall have the meaning
ascribed thereto in the Certificate.
"Option Period" shall mean, with respect to any First
Offer, on or before the close of business on the twentieth (20th)
Business Day following receipt of the First Offer Notice by a
Rightholder; provided, that, notwithstanding anything to the contrary
herein, in the case of a Small Offering, the Option Period shall
terminate on the close of business on the second Business Day following
such receipt; provided, further, that, notwithstanding anything to the
contrary herein, with respect to any Tender, the Option Period shall
not extend beyond the second Business Day prior to the scheduled
expiration date of the relevant Third Party Tender Offer.
"Parent" shall mean, with respect to any Person, any
other Person that controls such Person directly or indirectly through
any Subsidiary of such other Person, or owns directly or indirectly
through any Subsidiary of such other Person more than 50% of the
outstanding common stock or outstanding Equity Securities ordinarily
entitled to vote of such Person; provided, however, that, for purposes
of this Agreement, an Ultimate Parent shall be deemed to have no
Parent.
"Permitted Affiliate Transfer" shall mean any direct
or indirect Transfer of Stock by a Purchaser to a Permitted Affiliate
Transferee pursuant to Section 2.1(b) hereof and otherwise made in
compliance with this Agreement (including Section 2.4 hereof).
"Permitted Affiliate Transferee" shall mean, with
respect to any Permitted Affiliate Transfer, any Transferee that is an
Affiliate of the Transferor.
"Person" shall mean an individual, firm, corporation,
limited liability company, partnership, trust, incorporated or
unincorporated association, joint venture, joint stock company,
government (or an agency or political subdivision thereof) or other
entity of any kind.
"Pro Rata Number" means, with respect to each of the
two Purchasers:
(i) If the Number of Class B Directors is eight
(8), the number set forth opposite the first applicable Relative
Class B Ownership Percentage for such Purchaser in the table
below:
<PAGE>
7
<TABLE>
<CAPTION>
Pro Rata
Relative Class B Ownership Percentage Number
- ------------------------------------------------------- -------------
<S> <C>
Greater than or equal to 93.75% 8
Greater than 81.25% 7
Greater than or equal to 68.75% 6
Greater than 56.25% 5
Greater than or equal to 43.75% 4
Greater than 31.25% 3
Greater than or equal to 18.75% 2
Greater than 6.25% 1
6.25% or less 0
</TABLE>
(ii) If the Number of Class B Directors is six
(6), the number set forth opposite the first applicable Relative
Class B Ownership Percentage for such Purchaser in the table
below:
<TABLE>
<CAPTION>
Pro Rata
Relative Class B Ownership Percentage Number
- ----------------------------------------------------- -------------
<S> <C>
Greater than or equal to 91.67% 6
Greater than 75% 5
Greater than or equal to 58.33% 4
Greater than 41.67% 3
Greater than or equal to 25% 2
Greater than 8.33% 1
8.33% or less 0
</TABLE>
(iii) If the Number of Class B Directors is
four (4), the number set forth opposite the first applicable
Relative Class B Ownership Percentage for such Purchaser in the
table below:
<TABLE>
<CAPTION>
Pro Rata
Relative Class B Ownership Percentage Number
- ---------------------------------------------------- --------------
<S> <C>
Greater than or equal to 87.5% 4
Greater than 62.5% 3
Greater than or equal to 37.5% 2
Greater than 12.5% 1
12.5% or less 0
</TABLE>
(iv) in any other event, zero.
"Purchaser Proposal" shall mean a bona fide proposal
by one or both Purchasers or any Controlled Affiliate of one or both
Purchasers (or any 13D Group that includes a Purchaser or any
Controlled Affiliate of a Purchaser) to purchase, exchange or otherwise
acquire, for cash or other consideration, 100% of the Total Current
Voting Power of the Company then in effect (other than shares of Voting
Stock owned by any Purchaser or any Affiliate of a Purchaser), whether
pursuant to a tender offer, merger, consolidation, exchange or other
<PAGE>
8
business combination or transaction; provided, that no Purchaser
Proposal may be consummated during the Standstill Period unless (i) in
the case of a tender or exchange offer, such Purchaser Proposal has
received Required Independent Director Approval and is conditioned upon
a majority of the Voting Stock held by Disinterested Stockholders being
tendered or exchanged and not withdrawn with respect to such offer and
(ii) in the case of any other Purchaser Proposal, such Purchaser
Proposal shall have either received Qualifying Stockholder Approval or
Required Independent Approval.
"Purchasers" shall mean, collectively, the Sony Group
and the Warner Group.
"Qualifying Fairness Opinion" shall mean an opinion
of a nationally recognized investment banking firm, in its customary
form, to the effect that the consideration to be received by (i) the
Disinterested Stockholders, in the case of Section 1.4(d)(iv) hereof or
(ii) the Company, in the case of Sections 1.4(d)(v) hereof, is fair
from a financial point of view.
"Qualifying Shares" shall mean shares of Common Stock
acquired by an Interested Stockholder from and after such time as such
Interested Stockholder shall have publicly disclosed an intention to
acquire all of the shares of Stock held by Disinterested Stockholders.
"Qualifying Stockholder Approval" shall mean the
affirmative vote or written consent of holders of capital stock of the
Company representing greater than 50% of the sum of Total Current
Voting Power of the Company held by (i) Disinterested Stockholders and
by (ii) Interested Stockholders in the form of Qualifying Shares, such
vote or written consent being duly obtained in accordance with the
applicable provisions of the Certificate, By-laws and applicable law.
"Recorded Music Business" shall mean, with respect to
a Purchaser, the recorded music business (including the Beneficial
Ownership of Stock) of such Purchaser and its Affiliates, other than
(a) the music publishing business and (b) in the case of the Sony
Group, any business conducted by Sony Music Entertainment (Japan) Inc.
and its Subsidiaries.
"Related Party" shall mean any holder of Voting Stock
representing more than 25% of the Total Current Voting Power of the
Company or a Related Party Affiliate of such holder.
"Related Party Affiliate" shall mean, with respect to
any Related Party, any other Person that directly or indirectly,
through one or more intermediaries, Controls, is Controlled by, or is
under common Control with, such first Person; provided that, for
purposes of this definition, any Person owning, directly or indirectly,
in excess of 25% of the Equity Securities (on a fully diluted basis) of
any other Person shall be deemed to Control such other Person.
"Related Party Agreement" shall mean any transaction
between the Company and a Related Party; provided, however, that the
following transactions will not be Related Party Agreements: any
transaction or series of related transactions, that (x) are in the
ordinary course of business and (y) are on arms'-length terms, provided
that the terms of such transaction are no more favorable to such
Related Party and its Related Party Affiliates than the terms of
<PAGE>
9
similar agreements then currently offered by or generally available
from the Company or its Affiliates.
"Relative Class B Ownership Percentage" means, with
respect to any Purchaser, a fraction (expressed as a percentage), the
numerator of which is the number of shares of Class B Stock
Beneficially Owned by such Purchaser on a Fully-Diluted Basis and the
denominator of which is the total number of issued and outstanding
shares of Class B Stock Beneficially Owned by both Purchasers on a
Fully-Diluted Basis.
"Relative Ownership Percentage" means, with respect
to any Purchaser, a fraction (expressed as a percentage), the numerator
of which is the percentage of Total Current Voting Power of the Company
Beneficially Owned by such Purchaser on a Fully-Diluted Basis and the
denominator of which is the percentage of Total Current Voting Power of
the Company Beneficially Owned by both Purchasers on a Fully-Diluted
Basis.
"Required Class B Director Approval" shall have the
meaning ascribed thereto in the Certificate.
"Required Purchaser Approval" shall mean the prior
written consent of each Purchaser (if any) owning at least _____ shares
of Class B Stock on a Fully-Diluted Basis.(2)
"Required Stockholder Approval" shall mean (a) in the
case of Sections 1.4(d)(i), (ii), (iii), and (v) hereof, Disinterested
Stockholder Approval, and (b) in the case of Section 1.4(d)(iv) hereof,
Qualifying Stockholder Approval.
"Securities Act" shall mean the Securities Act of
1933, as amended.
"Securities Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
"Sony Group" means, collectively, Sony and each of
its Permitted Affiliate Transferees that hold shares of Stock from time
to time in accordance herewith; provided, however, that for purposes of
exercising any rights of a Purchaser hereunder, all such Persons shall
be deemed to constitute a single Purchaser and the Sony Representative
shall have the sole power hereunder to exercise any right of the Sony
Group; provided, further, that from and after any Permitted Transfer by
any member of the Sony Group or any of its Affiliates in which the
Successor is not a Controlled Affiliate of the Ultimate Parent of the
Sony Group, any reference herein to Sony or its Affiliates shall be
deemed a reference to such Successor or its Affiliates (as the case may
be) for all purposes hereunder (including this definition).
"Sony Representative" shall mean one Person selected
by the Persons in the Sony Group holding a majority of all of the
shares of Stock held by the Sony Group on a Fully Diluted Basis, which
Person shall initially be Sony until such time as the Sony
Representative notifies the Company in writing of the identity of a
subsequent Sony Representative.
- ----------------
(2) Number to represent 66 2/3% of the number of shares of Class B Stock and
Exchangeable Shares issued to each Purchaser in the merger (e.g., 25 of
37.5 shares).
<PAGE>
10
"Standstill Limit" shall mean 85% of the Total
Current Voting Power of the Company.
"Standstill Period" shall mean the period beginning
on the date hereof and ending on the occurrence of a Standstill
Termination Event.
"Standstill Reinstatement Event" shall mean the
occurrence of either of the following prior to the third anniversary of
the Closing: (i) withdrawal or termination of a Third Party Proposal at
any time during which a Purchaser Proposal is not then outstanding or
(ii) withdrawal, termination or material alteration of a Purchaser
Proposal other than an increase in price.
"Standstill Revised Limit" shall mean the percentage
of the Total Current Voting Power of the Company represented by all
shares of Voting Stock held by the Purchasers on a Fully Diluted Basis
as of the occurrence of a Standstill Reinstatement Event.
"Standstill Termination Event" shall mean the
earliest to occur of the following: (i) the third anniversary of the
Closing, (ii) a Change in Control of the Company, (iii) the
commencement or making of a Third Party Proposal, (iv) the commencement
or making of a Purchaser Proposal (provided that the making of a
Purchaser Proposal shall only relieve the Purchaser making such
proposal of its obligations under Section 3.1 hereof with respect to
such Purchaser Proposal) or (v) any Person who is not a Purchaser or an
Affiliate of a Purchaser or 13D Group in which a Purchaser or an
Affiliate of a Purchaser is a member has acquired any Voting Stock
which results in such Person or 13D Group owning or having the right to
acquire more than 10% of the Total Current Voting Power of the Company
unless such acquisition of shares by such Person or 13D Group was
approved by the Required Class B Director Approval; provided, however,
that upon a Standstill Reinstatement Event, the Standstill Termination
Event shall be deemed not to have occurred and the Standstill Period
shall be deemed to be reinstated except that, upon the third
anniversary of the Closing, the Standstill Period shall be permanently
terminated for all purposes hereunder; and provided further that, upon
a Standstill Reinstatement Event, if the Standstill Revised Limit is
greater than the Standstill Limit, then the Standstill Revised Limit
and not the Standstill Limit shall thereafter be deemed the Standstill
Limit for all purposes hereunder.
"Subsidiary" shall mean, with respect to any Person,
any corporation, partnership, limited liability company or other
business entity Controlled by such Person directly or indirectly
through one or more Subsidiaries of such Person or in which such Person
owns directly or indirectly through one or more other Subsidiaries of
such Person more than 50% of the outstanding Total Current Voting Power
of such Person.
"Stock" means Common Stock, Exchangeable Stock and/or
the Special Voting Share.
"Third Party" means any Person other than any member
of the Sony Group or the Warner Group (or any of their respective
Affiliates).
"Third Party Expiration Date" means with respect to
any Transfer of Offered Shares, the later of (a) one hundred and twenty
(120) days from the date of the First Offer Notice and (b) five (5)
days following expiration or waiver of any applicable waiting period
for such Transfer under the HSR Act; provided, however, that (a) with
respect to any Small Offering the Third Party Expiration
<PAGE>
11
Date shall not be later than the third (3rd) Business Day following
expiration of the Option Period and (b) with respect to any Tender, the
Third Party Expiration Date shall not be earlier than the closing or
termination of the relevant Third Party Tender Offer.
"Third Party Proposal" shall mean a Third Party
Tender Offer or other bona fide proposal by a Third Party which, if
consummated, would result in a Change in Control of the Company.
"Third Party Tender Offer" shall mean a bona fide
public tender offer subject to the provisions of Regulation 14D when
first commenced (within the meaning of Rule 14d-2(a) of the rules and
regulations under the Exchange Act), by a Person or 13D Group (which is
not made by and does not include any of the Company, a Purchaser or any
Controlled Affiliate of any of such Persons) to purchase or exchange
for cash or Marketable Securities any Common Stock and which consists
of an offer to acquire 50% or more of the then Total Current Voting
Power of the Company.
"Total Current Voting Power" shall mean, with respect
to any corporation, partnership, limited liability company or other
business entity, the total number of votes which may be cast in an
election of members of the board of directors or comparable
representatives of such corporation, partnership, limited liability
company or other business entity in which all classes of every Equity
Security ordinarily entitled to vote in any election of members of the
board of directors or other comparable representatives of such entity
are entitled to vote in such election.
"Transfer" shall mean any transfer, sale, assignment,
pledge, lease, hypothecation, mortgage, gift or creation of security
interest, lien or trust (voting or otherwise) or other encumbrance or
other disposition, in whole or in part (whether by operation of law or
otherwise), including, without limitation, in connection with a merger,
consolidation or other transaction having a similar effect; provided
that a pledge or other encumbrance in favor of a financial institution
in connection with a bona fide incurrence of Indebtedness or other
extensions of credit shall not be deemed to constitute a Transfer
hereunder. Each of "Transferor" and "Transferee," respectively, shall
have correlative meanings.
"Ultimate Parent" shall mean with respect to any
Person, the Parent of such Person that is not a Subsidiary of any other
Person.
"Voting Stock" shall mean shares of the Common Stock,
the Special Voting Share and any other Equity Securities of the Company
ordinarily having the power to vote in an election of members of the
Board.
"Warner Group" means, collectively, Warner and each
of its Permitted Affiliate Transferees that hold shares of Stock from
time to time in accordance herewith; provided, however, that for
purposes of exercising any rights of a Purchaser hereunder, all such
Persons shall be deemed to constitute a single Purchaser and the Warner
Representative shall have the sole power hereunder to exercise any
right of the Warner Group; provided, further, that from and after any
Permitted Transfer by any member of the Warner Group or any of its
Affiliates in which the Successor is not a Controlled Affiliate of the
Ultimate Parent of the Warner Group, any reference herein to Warner or
its Affiliates shall be deemed a reference to such Successor or its
Affiliates (as the case may be) for all purposes hereunder (including
this definition).
<PAGE>
12
"Warner Representative" shall mean one Person
selected by the Persons in the Warner Group holding a majority of all
of the shares of Stock held by the Warner Group on a Fully Diluted
Basis, which Person shall initially be Warner until such time as the
Warner Representative notifies the Company in writing of the identity
of a subsequent Warner Representative.
"13D Group" means any group of Persons formed for the
purpose of acquiring, holding, voting or disposing of Equity Securities
which would be required under Section 13(d) of the Exchange Act, and
the rules and regulations promulgated thereunder, to file a statement
on Schedule 13D (herein, a "13D Report") pursuant to Rule 13d-l(a) or a
Schedule 13G pursuant to Rule 13d-l(c) with the SEC as a "person"
within the meaning of Section 13(d)(3) of the Exchange Act if such
group "beneficially owned" Equity Securities representing more than 5%
of any class of Equity Securities then outstanding.
CROSS-REFERENCES
Definitions of the following terms may be found in the
following Sections of this Agreement:
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Acceptance Notice...................................................... 3.2
Agreement.............................................................. Recitals
Annual Operating Budget................................................ 1.4(a)(xiii)
Approved Annual Budget................................................. 1.7(b)
Board.................................................................. Recitals
Business Plan.......................................................... 1.4(a)(xiii)
Buying Purchaser....................................................... 3.1(d)
Canada Sub............................................................. Recitals
CDnow.................................................................. Recitals
Chosen Court........................................................... 5.9
Class A Stock.......................................................... Recitals
Class B Director....................................................... 1.1(a)(i)
Class B Stock.......................................................... Recitals
Common Directors....................................................... 1.1(a)(iii)
Common Stock........................................................... Recitals
Company................................................................ Recitals
Default Budget......................................................... 1.7(c)
Designating Party...................................................... 1.1(e)
Exchangeable Stock..................................................... Recitals
Exercise Notice........................................................ 2.2(c)
Federal Bankruptcy Act................................................. 1.4(a)(iv)
First Offer............................................................ 2.2(a)
First Offer Notice..................................................... 2.2(b)
Initial Budget Plan.................................................... 1.7(a)
Inspecting Purchasers.................................................. 4.1(a)
Liens.................................................................. 2.2(e)
</TABLE>
<PAGE>
13
<TABLE>
<CAPTION>
Term Section
- ----
<S> <C>
Management Director..................................................... 1.1(a)
Merger Agreement........................................................ Recitals
New Issuance............................................................ 3.2
Offer Price............................................................. 2.2(b)
Offered Shares.......................................................... 2.2(a)
Offering Stockholder.................................................... 2.2(a)
Other Purchaser......................................................... 3.1(d)
Other Stockholder....................................................... 2.3(a)(ii)
Ownership Report........................................................ 3.1(c)
Permitted Transfer...................................................... 2.1(b)
Purchaser Common Director............................................... 1.1(b)(iii)
Registration............................................................ 2.2(b)
Registration Rights Agreement........................................... 3.3
Related Party Transaction............................................... 1.4(c)
Required Independent Approval........................................... 1.4(c)
Required Transferor..................................................... 2.5
Rightholder............................................................. 2.2(a)
Sellers................................................................. 2.3(c)
Significant Transaction................................................. 1.4(a)
Small Offering.......................................................... 2.2(b)
Special Voting Share.................................................... Recitals
Sony.................................................................... Recitals
Sony Canada............................................................. Recitals
Sony Music.............................................................. Recitals
Sony Director........................................................... 1.1(c)
Subscribed Number....................................................... 4.1(g)
Subscribed Shares....................................................... 4.1(g)
Successor............................................................... 2.1(b)(ii)
Tag-Along Offer......................................................... 2.3(b)
Tag Exercise Notice..................................................... 2.3(c)
Tender.................................................................. 2.2(b)
Transferor.............................................................. 2.3(a)
Transferor's Notice..................................................... 2.3(a)(ii)
Transferee Stockholder.................................................. 2.5
Trustee................................................................. Recitals
Unaudited Financials.................................................... 4.1(a)
Warner.................................................................. Recitals
Warner Canada........................................................... Recitals
Warner Music............................................................ Recitals
Warner Record Club...................................................... Recitals
Warner Director......................................................... 1.1(c)
</TABLE>
<PAGE>
14
ARTICLE 1
GOVERNANCE
1.1 Board of Directors.
(a) Number of Authorized Directors. Each of the
Purchasers and the Company agree that the Board shall consist of twelve (12)
directors, designated as follows:
(i) a number of directors (the "Class B
Directors") equal to the Number of Class B Directors, designated by the
Purchasers in accordance with Section 1.1(c) hereof and elected by a
plurality of the votes cast by the holders of the issued and
outstanding Class B Stock and the Special Voting Share, voting together
as a single class;
(ii) two (2) Independent Directors
designated by the Nominating Committee and elected by a plurality of
the votes cast by the holders of the issued and outstanding Stock,
voting together as a single class; and
(iii) a number of directors equal to the
difference between ten (10) and the Number of Class B Directors, which
directors (collectively, the "Common Directors") shall be nominated by
the Board and shall be elected by a plurality of the votes cast by the
holders of the issued and outstanding Stock, voting together as a
single class.
(b) Board Nominations. The Company and each Purchaser
shall use its best efforts, including without limitation, with respect to each
Purchaser, by voting or acting by written consent with respect to all shares of
Stock which it is entitled to vote or so act (and by directing the holder of the
Special Voting Share pursuant to the Canadian Transaction Agreements to vote or
act by written consent with respect to the Special Voting Share, with respect to
that number of votes it is entitled to so direct such holder pursuant to the
Canadian Transaction Agreements), to cause the Board to effect, the nomination
of the following individuals as Common Directors:
(i) JO, so long as the JO Employment Agreement provides
that JO shall serve as a director of the Company;
(ii) the CEO; and
(iii) from and after an Event of Automatic Conversion, two
individuals designated by the Purchasers, provided that the
Purchasers Beneficially Own in the aggregate at least ____
shares(3) of Class A Stock on a Fully-Diluted Basis (assuming
that every reference to "Class B Stock" in the definition of
"Fully-Diluted Basis" was replaced with "Class A Stock") (the
"Purchaser Common Directors").
(c) Purchaser Designations. With respect to the Class
B Directors, each Purchaser shall have the right to designate a number of such
Class B Directors as is equal to its Pro Rata Number; provided, however, that if
any Purchaser Transfers shares of Class B Stock or Exchangeable Stock to the
other Purchaser pursuant
- ----------------
(3) Number to represent 25% of the total number of shares of Class B Stock and
Exchangeable Shares issued in merger (e.g., 18.75 of 75 shares).
<PAGE>
15
to Section 2.2 hereof, appropriate adjustment shall be made to each Purchaser's
Pro Rata Number so that each Purchaser will be entitled to designate the number
of directors it would have been entitled to designate had such shares been
transferred to a Third Party, after giving effect to any attendant reduction in
the Number of Class B Directors which would have resulted from such Transfer if
it had been made to a Third Party; provided, that, in no event shall a Transfer
between Purchasers cause a reduction in the Number of Class B Directors, and the
difference, if any, between (x) the Number of Class B Directors prior to such
transfer and (y) the sum of each Purchaser's Pro Rata Number as computed in this
sentence shall be added to the non-transferring Purchaser's Pro Rata Number.
With respect to the Purchaser Common Directors, if a Purchaser's Relative
Ownership Percentage is greater than 66-2/3%, such Purchaser shall have the
right to designate both Purchaser Common Directors; otherwise each Purchaser
shall have the right to designate one of the Purchaser Common Directors. The
directors so designated by the Sony Group and the Warner Group are referred to
herein as the "Sony Directors" and the "Warner Directors," respectively.
(d) Voting Agreement. Each Purchaser shall use its
best efforts, including, without limitation, by voting or acting by written
consent with respect to all shares of Stock which it is entitled to vote or so
act (and, to the extent the Special Voting Share would be entitled to vote
thereon, by directing the holder of the Special Voting Share pursuant to the
Canadian Transaction Agreements to vote or act by written consent with respect
to the Special Voting Share, with respect to that number of votes it is entitled
to so direct such holder pursuant to the Canadian Transaction Agreements), to
cause the Board at all times to be constituted in accordance with this Section
1.1, and the Company shall, at all times, use its best efforts to cause the Sony
Directors, the Warner Directors, the Independent Directors and the Common
Directors to be elected as directors of the Company.
(e) Removal; Vacancies. A majority of the Sony
Directors or the Sony Group shall be entitled at any time and for any reason (or
for no reason) to designate one or more Sony Directors for removal and each
Purchaser and the Company shall use its best efforts, including, without
limitation, in the case of each Purchaser, by voting or acting by written
consent with respect to all shares of Stock which it is entitled to vote or so
act (and, to the extent the Special Voting Share would be entitled to vote
thereon, by directing the holder of the Special Voting Share pursuant to the
Canadian Transaction Agreements to vote or act by written consent with respect
to the Special Voting Share, with respect to that number of votes it is entitled
to so direct such holder pursuant to the Canadian Transaction Agreements), to
cause any such removal. A majority of the Warner Directors or the Warner Group
shall be entitled at any time and for any reason (or for no reason) to designate
one or more Warner Directors for removal and each Purchaser and the Company
shall use its best efforts, including, without limitation, in the case of each
Purchaser, by voting or acting by written consent with respect to all shares of
Stock which it is entitled to vote or so act (and, to the extent the Special
Voting Share would be entitled to vote thereon by directing the holder of the
Special Voting Share pursuant to the Canadian Transaction Agreements to vote or
act by written consent with respect to the Special Voting Share, with respect to
that number of votes it is entitled to so direct such holder pursuant to the
Canadian Transaction Agreements), to cause any such removal. If for any reason a
vacancy is created on the Board by reason of the death, removal or resignation
of any Sony Director or Warner Director, each Purchaser and the Company shall
promptly take such action as is reasonably necessary, including, in the case of
each Purchaser, by voting or acting by written consent with respect to shares of
Stock which it is entitled to vote or so to act (and, to the extent the Special
Voting Share would be entitled to vote thereon, by directing the holder of the
Special Voting Share pursuant to the Canadian Transaction Agreements to vote or
act by written consent with respect to the Special Voting Share, with respect to
that number of votes it is entitled to so direct such holder pursuant to the
<PAGE>
16
Canadian Transaction Agreements), to elect a director or directors designated by
the Sony Group or the Warner Group, respectively, to fill such vacancy or
vacancies. For the avoidance of doubt, no Purchaser shall vote to remove any
member of the Board designated in accordance with this Section 1.1 unless the
Person that designated such director (the "Designating Party") shall so vote or
otherwise consent, and, if the Designating Party shall so vote or otherwise
consent, the Purchasers shall likewise so vote. Any vacancy on the Board created
by resignation, removal, death or incapacity of any individual designated under
the foregoing provisions of this Section 1.1, shall be filled by an individual
designated by the Designating Party. Each of the Purchasers, by voting or acting
by written consent with respect to shares of Stock which it is entitled to vote
or so to act (and, to the extent the Special Voting Share would be entitled to
vote thereon, by directing the holder of the Special Voting Share pursuant to
the Canadian Transaction Agreements to vote or act by written consent with
respect to the Special Voting Share, with respect to that number of votes it is
entitled to so direct such holder pursuant to the Canadian Transaction
Agreements), shall vote in accordance with each new designation and no such
vacancy shall be filled in the absence of a new designation by the original
Designating Party. Notwithstanding anything herein to the contrary, for purposes
of this Section 1.1, "Person" shall include the Nominating Committee and the
Board. Notwithstanding anything to the contrary herein, but subject to the final
sentence of Section 5.1 hereof, each Purchaser shall refrain from seeking, and
shall vote against, any removal of Jason Olim from the Board so long as Mr. Olim
remains employed by the Company under the JO Employment Agreement.
1.2 Proxies.
(a) In furtherance of their respective obligations
under, and concurrently with the execution of this Agreement, the Purchasers are
entering into Irrevocable Proxies in the form of Exhibit A attached hereto,
pursuant to which:
(i) The Warner Group irrevocably constitutes
and appoints the Sony Group as its sole and exclusive and true and lawful agent
and attorney-in-fact, with full power of substitution, to vote or act by written
consent with respect to all shares of Stock which the Warner Group is entitled
to vote and to direct, to the extent the Special Voting Share would be entitled
to vote thereon, the holder of the Special Voting Share to vote or act by
written consent with respect to the Special Voting Stock, with respect to that
number of votes the Warner Group is entitled to so direct such holder pursuant
to the Canadian Transaction Agreements, with respect to the election or removal
of the Sony Directors;
(ii) The Sony Group irrevocably constitutes
and appoints the Warner Group as its sole and exclusive and true and lawful
agent and attorney-in-fact, with full power of substitution, to vote or act by
written consent with respect to all shares of Stock which the Sony Group is
entitled to vote and to direct, to the extent the Special Voting Share would be
entitled to vote thereon, the holder of the Special Voting Share to vote or act
by written consent with respect to the Special Voting Stock, with respect to
that number of votes the Sony Group is entitled to so direct such holder
pursuant to the Canadian Transaction Agreements, with respect to the election or
removal of the Warner Directors.
(b) In addition, each Purchaser agrees to vote its
shares of Stock in favor of the election as a director of the individuals
designated by the Board as Independent Directors or Common Directors in
accordance with this Agreement (including Section 1.1(e) hereof) and to vote its
shares for the removal as a director of any individual no longer so designated
by the Board as an Independent Director or a Common Director. Each Purchaser
hereby agrees to execute such additional documents as the other Purchaser may
reasonably request to effectuate such other Purchaser's rights
<PAGE>
17
under the proxies granted pursuant to this Section 1.2. Each Purchaser intends
that the proxy granted to the other hereby shall be coupled with an interest
pursuant to this Agreement, and therefore that such proxy shall be irrevocable
so long as this Section 1.2 remains in effect pursuant to the terms of this
Agreement. Notwithstanding anything to the contrary herein, but subject to the
final sentence of Section 5.1 hereof, each Purchaser shall refrain from seeking,
and shall vote against, any removal of Jason Olim from the Board so long as Mr.
Olim remains employed by the Company under the JO Employment Agreement.
1.3 Organizational Documents. Attached hereto as Exhibits
B and C, respectively, are the Certificate and the By-Laws in effect as of the
Closing.
1.4 Approvals Required for Certain Action.
(a) Purchaser Approvals. The Company and each
Purchaser acknowledge and agree that the Company shall not be authorized,
without any Required Purchaser Approval (in addition to any approvals required
hereunder, pursuant to the Certificate or applicable law), to take, cause,
permit or authorize any of the following actions (each a "Significant
Transaction"), and any attempt to take or authorize any such Significant
Transaction without such Required Purchaser Approval shall be deemed void ab
initio:
(i) authorize, amend, alter or repeal any
provision of the Certificate (including resolutions of the Board
setting forth the terms of any class or series of capital stock) or
By-Laws;
(ii) authorize, issue or enter into any
agreement providing for the issuance (contingent or otherwise) of, or
reclassification of any security into any capital stock or other Equity
Securities (or any securities convertible into or exercisable or
exchangeable for any capital stock or other Equity Securities) of the
Company, other than pursuant to an employee stock option plan or other
benefit plan, which stock option or other benefit plan shall have
received any Required Purchaser Approval, or pursuant to the terms of
any Equity Securities issued in the transactions contemplated by the
Merger Agreement (including, without limitation, pursuant to the
Canadian Transaction Agreements);
(iii) subject to Section 253 of the DGCL,
authorize or enter into any merger, consolidation, reorganization,
amalgamation, recapitalization or other form of business combination
involving the Company or any direct or indirect sale or other
disposition of all or substantially all of the business or assets of
the Company;
(iv) authorize, permit or effect the
liquidation, dissolution or winding up in any form of transaction
(including, without limitation, any reorganization into partnership or
other non-corporate form) of the Company or the commencement by the
Company of a voluntary case or proceeding under title 11 of the United
States Code, 11 U.S.C. 'SS''SS' 101 et seq. (the "Federal Bankruptcy
Act") or any other similar federal or state law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent
(whether by action or inaction) by the Company, to the entry of a
decree or order for relief in respect of the Company, in an involuntary
case or proceeding under the Federal Bankruptcy Act or any other
similar federal or state law or to the commencement of any bankruptcy
or insolvency case or proceeding against the Company, or the filing by
the Company of a petition or answer or consent seeking reorganization
or relief under any applicable federal or state law, or the
<PAGE>
18
consent by the Company to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar official of the
Company, or of any substantial part of the property of the Company, or
the making by the Company of an assignment for the benefit of
creditors, or the admission by the Company in writing of its inability
to pay its debts generally as they become due;
(v) authorize or approve the creation,
incurrence, guarantee, assumption or refinancing of Indebtedness by the
Company or any of its Subsidiaries in excess of an aggregate of
$5,000,000 outstanding at any one time in excess of the amount
permitted by the Approved Annual Budget then in effect;
(vi) except with respect to inventory sold
in the ordinary course of business, authorize, permit or effect the
sale, lease or other disposition of the assets of the Company or any of
its Subsidiaries in any transaction or series of transactions which are
valued, in the aggregate, in excess of $1,000,000;
(vii) directly or indirectly, declare or pay
any dividends or make any distributions upon any of the Company's
capital stock or other Equity Securities, other than dividends payable
solely in shares of Stock issued upon the outstanding shares of Stock
or pursuant to the Canadian Transaction Agreements;
(viii) other than pursuant to Section 2.2
hereof, redeem, purchase or otherwise acquire for cash (including by
merger or otherwise), any Equity Securities of the Company or any
warrants, options and rights or securities convertible into,
exchangeable or exercisable for any Equity Securities of the Company or
redeem or purchase for cash or make any cash payments with respect to
any stock appreciation rights or phantom stock plans of the Company
(excluding any such redemption, purchase or payment from any of the
Company's Subsidiaries), other than pursuant to an employee stock
option plan or other benefit plan, which stock option or other benefit
plan shall have received any Required Purchaser Approval, or pursuant
to the Canadian Transaction Agreements;
(ix) adopt any "poison pill," stockholder
rights plan, share purchase rights, or any amendment of, or redemption
or exchange of rights issued pursuant to such plan, or any other plan
or arrangement that could reasonably be expected to disadvantage any
holder of Class B Stock or Exchangeable Stock on the basis of the size
or duration of its shareholding, such that any such holder, or any of
its Affiliates, would be adversely affected;
(x) except as provided in Section 1.1,
authorize or effect any change in the number of directors constituting
the entire Board or the voting rights or classification of any members
of the Board or form, disband or delegate any matter to (or appoint,
suspend or remove any director to or from) any committee of the Board;
(xi) authorize or enter into any Related
Party Agreement, or amend, modify or grant any waiver or consent under
any such Related Party Agreement, including this Agreement, the JO
Employment Agreement, the Merger Agreement, the Canadian Transaction
Agreements and the other agreements contemplated thereby;
<PAGE>
19
(xii) select, appoint (including a renewal
of such appointment at the expiration of any applicable term), remove
or approve the terms of employment (including compensation) of any
individual serving as, or performing the functions generally associated
with, (i) the CEO, (ii) the chief financial officer of the Company,
(iii) the general counsel of the Company, (iv) the chief executive
officer of any division or Subsidiary of the Company or (v) the chief
technology officer of the Company;
(xiii) authorize or approve (or modify or
amend) the annual financial and operating budget of the Company (the
"Annual Operating Budget") and the business plan of the Company (the
"Business Plan"), or any transaction that would result in a material
deviation from any Approved Annual Budget or Business Plan;
(xiv) authorize or approve or effect any
material change in the Company's business direction, including, without
limitation, the Company's conducting any business not directly related
to the Approved Business and any activities reasonably related thereto;
(xv) enter into any agreement, arrangement
or understanding with any other Person, including, without limitation,
the acquisition of an equity or ownership interest in, or any security
of, or assets (other than in the ordinary course of business) or
business from, any Person (other than a wholly-owned Subsidiary of the
Company), the consideration (including assumption of debt) for which is
valued in excess of $1,000,000 ($5,000,000 in the case of acquisitions;
provided that any acquisition with consideration in excess of
$1,000,000 but less than $5,000,000 shall also be subject to the
receipt of Required Purchaser Approval unless previously approved by
the Board);
(xvi) engage or dismiss the Company's
independent public accountants (whether in connection with the audit of
financial statements or otherwise) or legal counsel;
(xvii) enter into any agreement, arrangement
or understanding to do any of the foregoing;
(xviii) authorize, permit or effect any
exercise by the Company or any of its Subsidiaries of its rights under
the Canadian Transaction Agreements to cause the exchange, retraction
or redemption of outstanding Exchangeable Stock for Common Stock; or
(xix) do, permit or cause any of the
foregoing with respect to a Subsidiary of the Company.
(b) Class B Director Approvals. The Company and each
Purchaser acknowledges and agrees that, until the occurrence of an Event of
Automatic Conversion, the Company shall not be authorized, without the Required
Class B Director Approval (in addition to any approvals required hereunder,
pursuant to the Certificate or applicable law), to take, cause, permit or
authorize any of the Board Governance Actions and any attempt to take or
authorize any such action without the Required Class B Director Approval shall
be deemed void ab initio.
(c) Independent Director Approval. The Company and
each Purchaser acknowledges and agrees that the Company shall not be authorized,
without the approval or ratification of a majority (but not less than two (2))
of the Independent
<PAGE>
20
Directors who are not also Class B Directors (such approval or ratification
being referred to herein as "Required Independent Approval") (in addition to any
approvals required hereunder, pursuant to the Certificate or applicable law), to
take, cause, permit or authorize any of the following actions, and any attempt
to take or authorize any such action without such approval shall be deemed void
ab initio (unless ratified at the next meeting of the Board by Required
Independent Approval which, for this purpose, shall be determined without giving
effect to the vote of any Independent Director elected to office following the
time such action was taken if such Independent Director was elected to fill a
vacancy resulting from the removal without cause of an Independent Director in
office at the time such action was taken):
(i) amend, alter or repeal Sections 6, 10,
11 or 14 (or, to the extent incorporated in any such Section, the
relevant definitions contained in Section 3) of the Certificate or any
provision of the By-laws that would have the effect of permitting any
action otherwise prohibited by such Sections of the Certificate; or
(ii) amend, alter or repeal any provision of
this Agreement (except for Sections 1.1(c), 2.2 (other than (x) the
definition of "Holding Period" or (y) any other change that is
materially adverse to the Company), 2.3 or 3.1(d) (other than the last
sentence thereof) or the Strategic Commitments Letter (other than de
minimis modifications in the case of the Strategic Commitments Letter).
(d) Required Stockholder Approval. Except as
permitted in Sections 1.4(d)(iv) and (v) below, the Company and each Purchaser
acknowledges and agrees that the Company shall not be authorized, without
Required Stockholder Approval (in addition to any other approvals required
hereunder, pursuant to the Certificate or applicable law), to take, cause,
permit or authorize any of the following actions, and any attempt to take or
authorize any such action without such approval shall be deemed void ab initio:
(i) any amendment to Section 6(b)(ii) of the
Certificate in any manner that is disproportionately adverse to holders
of Class A Stock;
(ii) authorize, issue or enter into any
agreement (other than the Canadian Transaction Agreements) providing
for any issuance of Class B Stock (contingent or otherwise) or
reclassification of any security into any shares of Class B Stock (or
any securities convertible into or exercisable or exchangeable for
shares of Class B Stock) except pursuant to the Canadian Transaction
Agreements or pursuant to Sections 6(b)(ii) or 6(c) of the Certificate;
or
(iii) any amendment to Section 1.4(c),
1.4(d) or 3.1 hereof, to the definition of "Holding Period" to the
extent relevant in Article 2 hereof or to Article 2 hereof to the
extent that any such amendment would have the effect of expanding the
definition of "Permitted Transfer";
(iv) the consummation of a merger,
consolidation, reorganization or other business combination, including
by way of the sale of all or substantially all of the assets of the
Company, with, to or into an Interested Stockholder; provided, however,
that such Required Stockholder Approval shall not be so required with
respect to the consummation of any such transaction as to which a
Qualifying Fairness Opinion has been obtained; or
<PAGE>
21
(v) issuance of any shares of Preferred
Stock or other Equity Securities (other than (x) pursuant to the
Certificate (but only to the extent holders of Class A Stock are
entitled to receive the same security on a per share basis as the
holders of Class B Stock) and (y) pursuant to the Canadian Transaction
Agreements) to an Interested Stockholder; provided, however, that such
Required Stockholder Approval shall not be so required with respect to
the consummation of any such issuance as to which a Qualifying Fairness
Opinion has been obtained.
1.5 Conflicting Charter and By-Laws. The Company and each
Purchaser agree to use its best efforts, including, without limitation, in the
case of each Purchaser, by voting or acting by written consent with respect to
all shares of Stock which it is entitled to vote or so act (and by directing the
holder of the Special Voting Share, pursuant to the Canadian Transaction
Agreements to vote or act by written consent with respect to the Special Voting
Share, to the extent such Purchaser is entitled to so direct such holder
pursuant to the Canadian Transaction Agreements), to ensure that the Certificate
and By-Laws of the Company facilitate and do not at any time prohibit the
actions contemplated by, or otherwise conflict with, this Agreement.
1.6 Liability Insurance. The Purchasers and the Company hereby
acknowledge and agree that it is in the best interests of the Company to
establish and maintain an officers' and directors' liability insurance policy,
and each Purchaser hereby covenants and agrees to take, or cause to be taken,
all action necessary or appropriate (including, but not limited to, action at a
meeting of the stockholders of the Company or pursuant to a written consent
thereof) to cause the Company to obtain and maintain an officers' and directors'
liability insurance policy covering all officers and directors that is
reasonably acceptable in all respects to a majority of the members of the Board
designated by each of the Purchasers.
1.7 Business Plans; Budgets.
(a) The Purchasers and the Company hereby agree to
negotiate in good faith with respect to, and to use commercially reasonable
efforts to develop, a detailed financial and operating budget of the Company
that is applicable to the period commencing with the first month following the
date hereof through December 31, 2002 (the "Initial Budget Plan").
(b) Prior to September 30th of each calendar year, the
CEO shall prepare (or cause to be prepared) the Annual Operating Budget for the
following calendar year and shall present to the Board and the Purchasers such
Annual Operating Budget for approval. An "Approved Annual Budget" shall mean the
then current Annual Operating Budget that is approved by the Board and with
respect to which the Required Purchaser Approval has been obtained or, if no
Annual Operating Budget is so approved by the Board and the Purchasers for any
calendar year, (i) in the case of the Annual Operating Budget for 2000, 2001 or
2002 the budget for such year as set forth in the Initial Budget Plan, and (ii)
in the case of the Annual Operating Budget for any year after 2002, the terms of
Section 1.7(c) shall govern. Each Purchaser acknowledges and agrees that any
failure to affirmatively veto an Annual Operating Budget presented to it for
approval as aforesaid within twenty (20) Business Days of such presentment shall
be deemed an approval by such Purchaser of such Annual Operating Budget for
purposes of Section 1.4 and this Section 1.7.
(c) If approval of any proposed Annual Operating Budget
for any year after 2002 is withheld or delayed for any reason, the most recent
Approved Annual Budget shall be the Approved Annual Budget for such year, as
adjusted based on a business-as-usual assumption (as adjusted, the "Default
Budget"), for (i) inflation
<PAGE>
22
based on the change in the Consumer Price Index from September 30th of the
calendar year for which such Approved Annual Budget was initially adopted to
September 30th of the current calendar year, (ii) salary and benefit increases
granted in the ordinary course of business consistent with past practice and
(iii) increases in capital expenditures due to ongoing projects (including
contractual commitments and cost escalation provisions), until an Annual
Operating Budget for the current calendar year is approved.
(d) Notwithstanding anything to the contrary herein, an
Annual Operating Budget must be submitted to a Purchaser for approval pursuant
to this Section 1.7 only in the event that such Purchaser owns ___ shares of
Class B Stock (on a Fully-Diluted Basis).(4)
ARTICLE 2
TRANSFERS OF STOCK
2.1 Transfers of Stock.
(a) Except as otherwise permitted in this Article 2
or, after expiration of the Holding Period, in Section 3.3 hereof, (i) no
Purchaser shall, and each Purchaser shall cause its direct and indirect
Affiliates not to, Transfer, directly or indirectly, all or any Stock; (ii) no
Purchaser shall and each Purchaser shall cause its direct and indirect Parents
not to, issue or Transfer any Equity Securities of such Purchaser or of any of
its direct or indirect Controlling or Controlled Affiliates (other than its
Ultimate Parent) and (iii) no Purchaser shall, and each Purchaser shall cause
its direct and indirect Affiliates not to, subject any Stock to any arrangement
or agreement with any Third Party (other than the Canadian Transaction
Agreements) with respect to the voting of Stock or exercising rights hereunder
or under the Certificate or otherwise act in concert with any Third Party for
the purpose of holding, voting or disposing of Stock or exercising rights
hereunder or under the Certificate (any action in this clause (iii) being deemed
a Transfer of Stock), it being understood that any such Transfer or issuance
described in clauses (i) through (iii) above will be deemed to constitute a
Transfer of Stock by such Stockholder in violation of this Agreement, shall be
void ab initio and the Company shall not recognize or be bound by any such
Transfer or issuance. Without limiting the generality of the foregoing, the
rights of a Stockholder hereunder are personal to it and, other than pursuant to
a Transfer in compliance with the provisions of this Agreement, no Purchaser
shall (and each Purchaser shall cause its Affiliates not to) enter into any
agreement, arrangement or understanding, written or oral, pursuant to which it
shall transfer, or otherwise grant to or provide any Person, directly or
indirectly, with any of its rights or interests under this Agreement.
(b) Notwithstanding subsection (a) hereof, the
following direct or indirect Transfers or issuances of Stock or other Equity
Securities (each, a "Permitted Transfer") shall be expressly permitted
hereunder, subject to compliance with the further provisions of this Article 2:
(i) any Transfer or issuance of Stock or
other Equity Securities between the Ultimate Parent of any Purchaser or
any of its direct or indirect Controlled Affiliates, on the one hand,
and the Ultimate Parent of the other Purchaser or any of its direct or
indirect Controlled Affiliates on the other hand;
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(4) Number to be same as Required Purchaser Approval threshold.
<PAGE>
23
(ii) any Transfer or issuance by a Purchaser
or any of its Affiliates of Stock or other Equity Securities; provided,
that all of the Stock that was Beneficially Owned by such Purchaser or
any of its Affiliates before giving effect to such Transfer or issuance
is, after giving effect to such Transfer or issuance, Beneficially
Owned by one or more Controlled Affiliates (each, a "Successor") of the
Ultimate Parent of either (A) such Purchaser or (B) the Person or
Persons that Beneficially Own and conduct the Recorded Music Business
that was Beneficially Owned and conducted by such Purchaser and its
Affiliates immediately prior to such Transfer or issuance;
(iii) any Transfer or issuance by a
Purchaser or any of its Affiliates in connection with a merger,
reorganization, recapitalization or other form of business combination
of the Company or any other Significant Transaction (including
redemptions or repurchases by the Company); provided that such
transaction has been approved in accordance with Section 1.4 hereof; or
(iv) any Transfer or issuance of
Exchangeable Shares permitted or contemplated pursuant to the Canadian
Transaction Agreements.
For the avoidance of doubt, nothing contained in this Article
2 shall prohibit the Transfer or issuance of Equity Securities of any Affiliate
of a Purchaser which is not either (x) a Controlled or a Controlling Affiliate
of such Purchaser or (y) an Affiliate of such Purchaser that Beneficially Owns
Stock.
2.2 Right of First Offer.
(a) Notwithstanding Section 2.1(a), in connection
with a Third Party Tender Offer or following expiration of the Holding Period,
either Purchaser may Transfer, directly or indirectly, any or all of its Stock
(the "Offered Shares"), provided that, unless such Transfer is a Permitted
Transfer, such Purchaser (collectively with its Affiliates, the "Offering
Stockholder") shall first offer (the "First Offer") to sell the Offered Shares
to the other Purchaser (such other Purchaser is referred to herein as the
"Rightholder") in accordance with this Section 2.2 and otherwise in compliance
with this Agreement (other than Section 2.1 hereof).
(b) The Offering Stockholder shall send written
notice of the First Offer (the "First Offer Notice") to the Company and the
Rightholder, which First Offer Notice shall (i) state that the Offering
Stockholder proposes to effect a Transfer of shares of Stock and the number of
the Offered Shares and (ii) contain a copy of the terms and conditions of the
First Offer (including, without limitation, the purchase price for the Offered
Shares, which shall be payable by the Rightholder solely in cash (the "Offer
Price")). In the event that the Offering Stockholder shall not have delivered
another First Offer Notice pursuant to this Section 2.2 within one hundred and
eighty (180) days prior to the delivery of such First Offer Notice then if (x)
the Market Value of such Offered Shares in such First Offer as of the close of
business on the date of the First Offer Notice is less than $10,000,000 (a
"Small Offering") or (y) the Offering Stockholder has requested demand or
incidental registration of the Offered Shares pursuant to the Registration
Rights Agreement ("Registration"), then the Offering Stockholder may elect to
offer the Offered Shares at Market Value as of the close of business on the date
of the First Offer Notice, by including a statement of such election in the
First Offer Notice, whereupon the Market Value of such Offered Shares on such
date shall be considered the Offer Price. In the event that the Offering
Stockholder desires to Transfer the Offered Shares pursuant to a Third Party
Tender Offer (such proposed Transfer being referred to herein as a "Tender"),
then the Offering Stockholder shall so notify the Rightholder in the First Offer
Notice, which must be received by the Rightholder at least ten (10) Business
Days prior to the scheduled expiration or termination of such Third Party
<PAGE>
24
Tender Offer. Upon receipt of a First Offer Notice, the Rightholder shall be
entitled to purchase the Offered Shares upon the terms and conditions set forth
in the First Offer Notice. A Rightholder electing to purchase Offered Shares
shall be entitled to purchase all, but not less than all, of the Offered Shares
for the Offer Price.
(c) The right of First Offer shall be exercisable by
delivery of written notice of exercise (an "Exercise Notice") to the Offering
Stockholder (with a copy to the Company) within the Option Period. If a
Rightholder shall fail to respond to the Offering Stockholder within the Option
Period, such failure shall be regarded as a rejection of the First Offer by such
Person. Upon the failure by a Rightholder to exercise its right of First Offer,
the Company shall, subject to receipt of the Required Purchaser Approval, be
entitled to purchase all, but not less than all, of the Offered Shares for the
Offer Price, so long as the Company has delivered an Exercise Notice to such
effect within the Option Period.
(d) In the event that any proposed Transfer of
Offered Shares would also require the Offering Stockholder to make a Tag-Along
Offer to a Rightholder pursuant to this Section 2.2, the Exercise Notice
required to be given under Section 2.2(c) shall also specify whether the
Rightholder wishes to exercise its Tag-Along Rights as set forth in Section
2.3.
(e) The closing of any purchase of Offered Shares by
a Rightholder or the Company, as the case may be, under this Section 2.2 shall
be held at the principal office of the Company as promptly as practicable, but
in any event on or before the sixtieth (60th) day following delivery of the
First Offer Notice to the Rightholder (or such later time as may be necessary to
comply with the HSR Act and other applicable laws) or at such other time and
place as the parties to the transaction may agree. At such closing, the Offering
Stockholder shall deliver certificates representing the Offered Shares being
purchased by the Rightholder or the Company, as the case may be, duly endorsed
for Transfer and accompanied by all requisite stock transfer taxes, if any, and
such shares shall be free and clear of any liens, claims, options, charges,
encumbrances or rights of others arising through the action or inaction of the
Offering Stockholder (other than those arising hereunder) (collectively,
"Liens") and the Offering Stockholder shall so represent and warrant, and
further represent and warrant that it is the record and Beneficial Owner of all
such shares, with full authority and power to Transfer such shares. The
Rightholder or the Company, as the case may be, shall deliver to the Offering
Stockholder at such closing the Offer Price payable in cash by wire transfer at
an account designated in writing by the Offering Stockholder. At such closing,
the parties to the transaction shall execute and/or deliver such additional
documents as are otherwise necessary or appropriate to effectuate the Transfer
of the Offered Shares.
(f) Notwithstanding anything to the contrary
contained in this Section 2.2, if the Rightholder or the Company, as the case
may be, rejects the First Offer or does not consummate such purchase of Offered
Shares within the period specified in Section 2.2(e), the Offering Stockholder
may Transfer to any Third Party, subject to the provisions of Section 2.3 and
the provisions in this Section 2.2(f), all, but not less than all, of the
Offered Shares (i) for a purchase price that is no lower than the Minimum Third
Party Price, payable in any combination of cash or Marketable Securities (having
a Market Value as of the second (2nd) Business Day immediately preceding the
date of the First Offer Notice equal to the portion of the purchase price not
paid in cash) and (ii) upon terms and conditions no more favorable to such Third
Party than those stated in the First Offer Notice; provided, however, that such
Transfer is bona fide and made on or before the Third Party Expiration Date. If
such sale is not consummated on or before the Third Party Expiration Date, the
restrictions provided for in this Section 2.2 shall again become effective, and
no Transfer of shares may be made thereafter without again
<PAGE>
25
offering the same to the Rightholder in accordance with the terms and conditions
of this Agreement.
2.3 Tag-Along Rights.
(a) (i) If, at any time following the expiration of
the Holding Period, any Purchaser desires to Transfer (other than
pursuant to a (A) Permitted Transfer, (B) Small Offering, (C) Tender or
(D) Registration) to any Person, directly or indirectly, in one or a
series of related Transfers, more than ___ shares(5) of Stock) in a
single transaction or series of related transactions (each such
Transferring Stockholder and its Affiliates is collectively referred to
in this Section 2.3 as a "Transferor"), such Transferor shall comply
with the requirements of this Section 2.3.
(ii) Each Transferor shall, prior to
making any such Transfer, first notify the other Purchaser (an "Other
Stockholder") of such Transfer and otherwise comply with the
requirements of this Section 2.3 and such notice (the "Transferor's
Notice") shall (x) specify the proposed Transferee thereof (if known),
the number of shares of Stock proposed to be Transferred and the amount
of consideration proposed to be received therefor and (y) contain the
Tag-Along Offer. The Transferor's Notice required to be given pursuant
to this Section 2.3 shall be included in a First Offer Notice given
pursuant to Section 2.2.
(b) The Transferor shall offer (the "Tag-Along
Offer") to include in the proposed Transfer a number of shares of Stock
designated by the Other Stockholder not to exceed the number of shares of Stock
that bears the same proportion to the total of such Other Stockholder's
Beneficial Ownership of shares of Stock (on a Fully-Diluted Basis) that the
number of shares of Stock to be sold by the Transferor bears to its total
Beneficial Ownership of shares of Stock (on a Fully-Diluted Basis), and the
Tag-Along Offer shall be conditioned upon the Transferor consummating a Transfer
on substantially the terms described in the Transferor's Notice to the
Transferee (if known) named in the Transferor's Notice on substantially the
terms described in such notice; provided that the Transferor shall not be
obligated to consummate any such Transfer.
(c) The Tag-Along Offer right shall be exercisable by
delivery of written notice of exercise (the "Tag Exercise Notice") to the
Transferor, with a copy to the Company (which shall be made in the Exercise
Notice required by Section 2.2(c)) on or before the twentieth (20th) Business
Day following receipt by the Other Stockholder of the Transferor's Notice. An
Other Stockholder that (i) accepts the First Offer, (ii) does not indicate its
desire to exercise the Tag-Along Offer rights pursuant to a Tag Exercise Notice
(including as provided in Section 2.2(c)) or (iii) fails to provide such a Tag
Exercise Notice, shall be deemed to have waived its rights under this Section
2.3 (for purposes only of the particular Transfer described in the Transferor's
Notice). The Transferor may and, if the Transferor Transfers its shares, the
Other Stockholder that has not waived its rights under this Section 2.3 (the
Transferor and the accepting Other Stockholder being hereinafter sometimes
called "Sellers") shall, unless the Other Stockholder shall have accepted the
First Offer, Transfer the shares described in the Transferor's Notice and the
shares included by such Other Stockholder pursuant to the Tag-Along Offer to the
proposed Transferee, in accordance with substantially the terms of such Transfer
set forth in the Transferor's Notice, so long as such Transfer is at a price at
least equal to that stated in the Transferor's Notice and occurs on or before
the later of
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(5) Number to represent 50% of shares of Class B Stock and Exchangeable Shares
issued to each Purchaser in the merger (e.g., 18.75 of 37.5 shares).
<PAGE>
26
one hundred and twenty (120) days after the date the Transferor's Notice was
received by the Other Stockholder or the date which is five days after the
expiration or waiver of any waiting period applicable to such proposed Transfer
pursuant to the HSR Act. If such Transfer is not consummated within such period,
the restrictions in this Section 2.3 shall again become effective and no such
Transfer may be made without again providing the Other Stockholder with
Tag-Along Offer rights in accordance herewith. The price per share (which shall
be payable solely in cash and/or Marketable Securities) for sales of Stock made
pursuant to this Section 2.3 shall be the same for the Transferor and the Other
Stockholder accepting the Tag-Along Offer, and such accepting Other Stockholder
shall be subject, on an individual and not joint or several basis, to the same
representations and warranties (but only to the best of its knowledge with
respect to matters related to the Company), covenants, indemnities, holdbacks
and escrow provisions, if any, and any similar components of the Tag-Along Offer
to which the Transferor is subject; provided that to the extent the Sellers are
required to provide indemnities in connection with the Transfer of their shares,
no Seller shall be required to provide indemnification that would result in an
aggregate liability to such Seller in excess of such Seller's proceeds from the
sale of its shares of Stock pursuant to this Section 2.3 and such indemnities
shall be made by the Sellers individually and not jointly or severally;
provided, further, that no Seller shall be required to provide agreements or
covenants surviving the closing of the Transfer other than indemnities or other
similar monetary obligations not restricting or otherwise affecting the conduct
of business by a Seller or any of its Affiliates. All fees and expenses incurred
by the parties (including, without limitation, with respect to financial
advisors, accountants and counsel to the Sellers) in connection with a Transfer
pursuant to this Section 2.3 shall be borne by the party incurring such fees and
expenses.
(d) The provisions of this Section 2.3 shall not
apply to Transfers to a Rightholder pursuant to their exercise of their
respective rights pursuant to Section 2.2 or Section 3.3.
2.4 Certain Matters Relating to Transfers. Notwithstanding
anything to the contrary in this Agreement, (a) prior to an event resulting in a
Permitted Affiliate Transferee no longer being such, the relevant Purchaser
shall cause the Permitted Affiliate Transferee to Transfer (provided that the
provisions of Sections 2.2 and 2.3 shall not apply to such Transfer) the shares
of Stock back to such Purchaser (or another Permitted Affiliate Transferee
thereof) and (b) any direct or indirect Transfer or issuance of Stock or other
Equity Securities otherwise permitted or required by this Agreement: (i) shall
be in compliance with federal and state securities laws, including, without
limitation, the Securities Act, and if the Company reasonably requests, the
Transferor of any Stock shall deliver to the Company an opinion, reasonably
satisfactory to the Company, of counsel to the Transferor as to such compliance;
and (ii) in case of a Permitted Transfer, each Permitted Affiliate Transferee
and Successor, as the case may be, shall agree to take and hold such Stock,
subject to this Agreement and to all the obligations, restrictions, terms and
conditions of this Agreement (including, without limitation, Section 1.2) and
shall have executed and delivered to the other parties hereto an appropriate
instrument pursuant to which it agrees to be bound by, and that any Stock so
transferred will be subject to the terms of, this Agreement.
2.5 Automatic Transfer. If an Offering Stockholder (a
"Required Transferor") is required to Transfer shares of Stock to the other
Purchaser (the "Transferee Stockholder") pursuant to this Agreement and the
Required Transferor is unable or unwilling to Transfer such shares of Stock on
or prior to the closing date for such Transfer, then, on such closing date, upon
payment of the purchase price therefor by the Transferee Stockholder to the
Company to hold in a segregated account for the benefit of the Required
Transferor and compliance by the Transferee Stockholder with the remaining terms
of such Transfer, the shares of Stock owned by the Required
<PAGE>
27
Transferor shall automatically, with no further action required to be taken by
the Company or any other Person (including the Required Transferor), be
transferred to the Transferee Stockholders who have paid the purchase price
therefor to the Company to hold in a segregated account. Thereafter, the
Transferee Stockholder (upon payment of such purchase price to the Company to
hold in a segregated account) shall be deemed to be the holder of record of the
number of shares of Stock of the Required Transferor which such Transferee
Stockholder is entitled to purchase under this Agreement notwithstanding that
certificates representing such shares of Stock shall not then be actually
delivered to such Transferee Stockholder. Upon notice from the Company, the
Required Transferor (or its legal representative) shall promptly surrender to
the Transferee Stockholder, at the Company's principal office, certificates
representing the shares of Stock so Transferred, duly endorsed in blank or
accompanied by proper instruments of Transfer. Each Purchaser hereby appoints
the Secretary of the Company as attorney-in-fact for such Purchaser with the
power to execute such documents and take such other action to provide for the
Transfer of the shares of Stock owned by such Purchaser in accordance with this
Section 2.5. In addition, the Secretary of the Company is hereby authorized to
Transfer such shares of Stock on the books of the Company in accordance with
this Agreement and without regard to the surrender of certificates representing
such shares held by any Required Transferor. Any such certificates not
surrendered as required by this Agreement shall become null and void upon such
Transfer. Any amounts paid by a Transferee Stockholder to the Company for the
benefit of a Required Transferor that remain unclaimed at the end of two years
from the date of payment may, to the extent permitted by law, be retained by the
Company and applied in the sole discretion of the Company.
2.6 Conversion. Each Purchaser and the Company agree not to
cause or permit the conversion of any share of Class B Stock pursuant to Section
6 (d)(ii) of the Certificate except in connection with the closing of a Transfer
of such shares to a Third Party or to the Company in compliance with this
Agreement.
2.7 Legend. Certificates evidencing shares of Stock owned by
the Purchasers shall bear the following legend:
"The sale, assignment, transfer, gift, pledge, encumbrance and voting
of any of the stock represented by this certificate is subject to the
terms of a certain Governance Agreement, dated as of ________ __, 1999,
among DELAWARE HOLDCO CORPORATION (the "Company"), SONY MUSIC
ENTERTAINMENT INC., WARNER MUSIC GROUP INC. and certain other parties
named therein, a copy of which may be inspected at the Company's
principal office. The stock represented by this certificate has not
been registered under the Securities Act of 1933, as amended (or
applicable state securities laws), and may not be transferred except
pursuant to an effective registration statement or an exemption from
compliance with the requirements of such act."
ARTICLE 3
STANDSTILL; PURCHASE RIGHTS; REGISTRATION RIGHTS
3.1 Purchaser Standstill Obligations.
(a) Notwithstanding anything to the contrary
contained herein and only during the Standstill Period, no Purchaser or 13D
Group of which such Purchaser or any of its Controlled Affiliates is a member
shall, directly or indirectly, acquire Voting Stock or authorize or make a
tender offer, exchange offer or other offer therefor, if the effect of such
acquisition or offer would be to increase the percentage of
<PAGE>
28
Total Current Voting Power of the Company represented by all shares of Voting
Stock Beneficially Owned by both Purchasers or 13D Groups of which such
Purchasers or their respective Controlled Affiliates are members collectively,
on a Fully Diluted Basis, to more than the Standstill Limit, provided that, the
foregoing shall not prohibit a Purchaser and/or any of its Controlled Affiliates
from making or consummating a Purchaser Proposal during the Standstill Period.
(b) A Purchaser shall not be deemed to have violated
its obligations under this Section 3.1 by virtue of any increase in the
aggregate percentage of the Total Current Voting Power of the Company
represented by shares of Voting Stock Beneficially Owned by such Purchaser or
its Affiliates on a Fully Diluted Basis if such increase is the result of a
recapitalization of the Company, a repurchase of securities by the Company or
other actions taken by the Company or any of the Company's Affiliates that have
the effect of reducing the Total Current Voting Power of the Company and such
recapitalization, repurchase or other action by the Company was approved by
Required Independent Approval (in addition to any other approval required
hereunder).
(c) During the Standstill Period, each Purchaser
shall notify the Company and the other Purchaser of any acquisition of
Beneficial Ownership of Voting Stock by such Purchaser or its Controlled
Affiliates (other than pursuant to the Merger Agreement, the Canadian
Transaction Agreements or an exercise of a Purchaser's rights set forth in
Section 3.2 hereof) promptly after each such acquisition and in any event not
more than five (5) Business Days thereafter. Each such notice (an "Ownership
Report") shall contain a statement of the total number of shares of Voting Stock
Beneficially Owned by such Purchaser or any 13D Group of which such Purchaser or
any of its Controlled Affiliates is a member. For purposes of this Section 3.1,
(i) each Purchaser shall rely upon the last Ownership Report or 13D Report of
the other Purchaser (whichever is more recent), and (ii) any acquisition by a
Purchaser otherwise in violation of this Section 3.1 shall be deemed permitted
hereunder if such acquisition would have been permitted had the other
Purchaser's Beneficial Ownership of Voting Stock been as reported in such
Ownership Report or 13D Report of such other Purchaser at the time of such
acquisition. In the event a Purchaser or its Controlled Affiliates obtains
Voting Stock and fails to satisfy its obligations under this Section 3.1(c) and,
thereafter, the other Purchaser or its Controlled Affiliates acquires Voting
Stock in excess of the Standstill Limit that, but for the provisions of clause
(ii) of the preceding sentence, would have been prohibited under this Section
3.1, then the Purchaser and its Controlled Affiliates that so failed to satisfy
its obligations under this Section 3.1(c) shall not be permitted to vote (for
purposes of approving a transaction contemplated under Section 1.4(d)(iv)) that
number of shares of Voting Stock equal to the number of shares of Voting Stock
by which the Standstill Limit was so exceeded at the record date for determining
stockholders entitled to vote thereon.
(d) During the Standstill Period, each Purchaser
(together with its Affiliates, a "Buying Purchaser") shall, if the other
Purchaser owns at least _______ shares(6) of Class B Stock on a Fully-Diluted
Basis (such other Purchaser being referred to as the "Other Purchaser"), notify
the Other Purchaser at least five (5) Business Days prior to the acquisition
during any six-month period by such Buying Purchaser or 13D Group of which such
Buying Purchaser or any of its Controlled Affiliates is a member of Beneficial
Ownership of Voting Stock representing 1% or more of the Total Current Voting
Power of the Company, which notice shall specify the amount and type of Voting
Stock to be acquired and the proposed terms and conditions of such acquisition.
The Buying Purchaser and the Other Purchaser will cooperate in good faith and
shall use
- ----------------
(6) Number to represent 66 2/3% of the shares of Class B Stock and Exchangeable
Shares issued to each Purchaser in the merger (25 of 37.5 shares).
<PAGE>
29
commercially reasonable efforts to provide the Other Purchaser with the
opportunity to purchase Voting Stock at the same price and time and on the same
basis as the Buying Purchaser in order that the Relative Ownership Percentage of
each Purchaser immediately prior to such acquisition is maintained after giving
effect to such acquisition. Nothing in this Section 3.1(d) shall in any way
diminish the obligations of the Purchasers in the foregoing provisions of this
Section 3.1.
3.2 Purchase Rights. Subject to Section 3.1, each Purchaser
shall have a right to purchase or subscribe to any shares of any class of
capital stock or other Equity Securities of the Company as set forth herein. The
Company shall give each of the Purchasers at least thirty (30) days' prior
written notice of the proposed issuance of any capital stock or other Equity
Securities by the Company (each a "New Issuance") (other than capital stock to
be issued in connection (i) with an employee stock option plan that is approved
by the Board or (ii) an acquisition or other strategic transaction approved by
the Board, so long as not more than twenty-five percent (25%) of the fair market
value (as determined by the Board) of the consideration for such issuance is
cash or Marketable Securities). Such notice shall specify the number and class
of securities to be issued, the rights, terms and privileges thereof and the
price at which such securities will be issued. By written notice (the
"Acceptance Notice") to the Company given within fifteen (15) days of being
notified of such New Issuance, each Purchaser shall be entitled to purchase that
percentage of the New Issuance determined by dividing (a) the total number of
shares of Class B Stock Beneficially Owned by such Purchaser (on a Fully-
Diluted Basis) by (b) the total number of shares of Class B Stock then
Beneficially Owned (on a Fully-Diluted Basis) by the number of Purchasers
participating in such purchase; provided, however, that no Purchaser shall have
any right to purchase securities pursuant to this Section 3.2 if, prior to a
sale of securities to such Purchaser pursuant to this Section 3.2, such
securities would be required to be registered under the Securities Act. If a
Purchaser does not fully subscribe for the number or amount of shares of capital
stock or other Equity Securities that it is entitled to purchase (or that it
would otherwise have been entitled to purchase but for the proviso to the
preceding sentence) pursuant to this Section 3.2, then the other Purchaser
participating in such purchase to the full extent provided for in the preceding
sentence shall have the right to purchase that percentage of the New Issuance
not so subscribed for.
3.3 Registration Rights. The Company has granted to each of
the Purchasers certain registration rights with respect to the Stock owned by
them on the terms set forth in the Registration Rights Agreement dated as of the
date hereof among the parties hereto (the "Registration Rights Agreement")
substantially in the form contemplated by the Merger Agreement.
ARTICLE 4
COVENANTS AND REPRESENTATIONS
4.1 Covenants of the Company.
(a) Information and Inspection Rights. The Company
shall deliver to each Purchaser that owns at least ___ shares(7) of Class B
Stock on a Fully-Diluted Basis (each such Purchaser, an "Inspecting Purchaser")
(i) annual audited consolidated balance sheets and the related statements of
income and cash flows (or the equivalent) within 60 days after the end of each
fiscal year; (ii) unaudited quarterly
- --------
(7) Number to represent 25% of shares of Class B Stock and Exchangeable Shares
issued to each Purchaser in the merger (e.g., 9.375 of 37.5 shares).
<PAGE>
30
consolidated balance sheets, related statements of income and cash flows and any
other statements routinely prepared and delivered to the Board (the "Unaudited
Financials") within 30 days of the end of each fiscal quarter; (iii) monthly
Unaudited Financials within 30 days of the end of each month; and (iv) the
Annual Operating Budget within 60 days prior to the end of each fiscal year.
Each Inspecting Purchaser and its respective agents shall be entitled, during
normal business hours, to inspect all of the facilities, properties, books,
records, contracts and commitments of the Company and its Subsidiaries and the
Company shall make its officers available to the Purchasers and their respective
agents, as such may reasonably request from time to time. In addition, the
Company shall deliver to each Purchaser copies of the Company's Forms 10-K,
10-Q, 8-K (as filed with the SEC), annual reports to shareholders of the Company
and any other schedules, registrations or other statements, forms or reports
promptly after such documents are filed with the SEC. The Company shall file all
reports required to be filed by it under the Securities Act and the Securities
Exchange Act and the rules and regulations adopted by the SEC thereunder.
(b) Subsidiary Boards. The Company shall take all
action necessary to ensure that the board of directors (or similar governing
body) of each Subsidiary of the Company shall be, and shall form committees that
are, identical, with respect to authority and qualifications of members, to
those of the Board and its committees, respectively.
4.2 Further Assurances and Additional Agreements. Subject to
the terms and conditions of this Agreement, each party hereto agrees to use its
reasonable commercial efforts to cause the terms and conditions of this
Agreement to be satisfied, and to take, or cause to be taken, all action and to
do, or cause to be done, all things necessary, proper or advisable under
applicable law to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement, including cooperating fully with
the other parties, by providing information and making all necessary filings in
connection with, among other things, the HSR Act and the rules and regulations
promulgated thereunder.
4.3 Representations and Warranties of the Purchasers. Each
Purchaser hereby represents and warrants to each other party hereto that:
(a) it is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, and it has the corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder;
(b) its execution, delivery and performance of this
Agreement has been duly authorized by all necessary corporate actions on the
part of such Purchaser, and upon execution and delivery by such Purchaser, and
assuming due execution and delivery by the other parties hereto, this Agreement
will constitute the legal, valid and binding obligation of the Purchaser
enforceable against such Purchaser in accordance with its terms; and
(c) neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, by such
Purchaser will, except as disclosed in the Merger Agreement, (i) conflict with
or violate any provision of its Certificate of Incorporation or By-Laws, (ii)
violate, conflict with or constitute (or with notice or lapse of time or both
constitute) a default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of, or result in
the creation of any encumbrance upon any of its property pursuant to the terms
of, any note, bond, lease, mortgage, indenture, members agreement, license or
other instrument or any other material agreement, instrument or obligation to
which such
<PAGE>
31
Purchaser is a party or by which it or any of its properties or assets may be
bound or affected, (iii) violate any law, statute, rule or regulation, or any
judgment, order, award, writ, injunction or decree of any court, arbitrator,
administrative agency or governmental body, applicable to such Purchaser or any
of its properties or assets, or (iv) require any filing, declaration or
registration with, or permit, consent or approval of, or the giving of notice
to, any public or governmental authority or other third party; excluding from
the foregoing clauses (i) through (iv) such conflicts, violations, breaches,
defaults, accelerations, filings, declarations, registrations, permits,
consents, approvals and notices, the absence of which, either singularly or in
the aggregate are not material.
4.4 Representations and Warranties of the Company. The Company
hereby represents and warrants to each other party hereto that:
(a) it is a corporation duly organized, validly
existing and in good standing under the laws of Delaware, and has the corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder;
(b) its execution, delivery and performance of this
Agreement has been duly authorized by all necessary corporate action on the part
of the Company, and upon execution and delivery by it, and assuming due
execution and delivery by each of the other parties hereto, this Agreement will
constitute the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms; and
(c) neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby by the
Company will, except as disclosed in the Merger Agreement, (i) conflict with or
violate any provision of its Certificate or By-Laws, (ii) violate, conflict with
or constitute (or with notice or lapse of time or both constitute) a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of, or result in the creation of any
encumbrance upon any of its property pursuant to the terms of, any note, bond,
lease, mortgage, indenture, members agreement, license or other instrument or
any other material agreement, instrument or obligation to which the Company is a
party or by which it or any of its properties or assets may be bound or
affected, (iii) violate any law, statute, rule or regulation, or any judgment,
order, award, writ, injunction or decree of any court, arbitrator,
administrative agency or governmental body, applicable to the Company or any of
its properties or assets, or (iv) require any filing, declaration or
registration with, or permit, consent or approval of, or the giving of notice
to, any public or governmental authority or other third party; excluding from
the foregoing clauses (i) through (iv) such conflicts, violations, breaches,
defaults, accelerations, filings, declarations, registrations, permits,
consents, approvals and notices, the absence of which, either singularly or in
the aggregate are not material.
ARTICLE 5
MISCELLANEOUS
5.1 Amendment. Subject to receipt of any approvals required
under Section 1.4, any provision of this Agreement may be amended or waived if,
but only if, such amendment or waiver is in writing and signed, in the case of
an amendment, by each Purchaser and, other than with respect to any amendment to
Section 1.1(c) or Sections 2.2 (other than the definition of "Holding Period"),
2.3, or 3.1(d) (other than the last sentence thereof), the Company or in the
case of a waiver, by the parties against whom the waiver is to be effective.
Notwithstanding the foregoing, no amendment to Sections 1.1(b)(i), 1.1(d),
1.1(e), 1.2(b) or 5.6 hereof, or this Section 5.1, that adversely
<PAGE>
32
affects the parties' obligations with respect to the nomination, election or
removal of Jason Olim as a member of the Board shall be effective without the
prior written approval of Mr. Olim (who shall be deemed to be a third party
beneficiary hereof, solely with respect to such obligations and this sentence).
Nothing contained in this Agreement shall in any way diminish the authority or
discretion of the Board in making any decision with respect to the termination
or continuation of Mr. Olim's employment.
5.2 Waiver. No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise of
any right, power or privilege.
5.3 Specific Performance. The parties recognize that the
obligations imposed on them in Articles 1, 2 and 3 of this Agreement are
special, unique and of extraordinary character, and that in the event of breach
by any party, damages will be an insufficient remedy; consequently, it is agreed
that the parties hereto shall be entitled to specific performance (in addition
to damages) as a remedy for the enforcement of such provisions, without proving
damages or the posting of any bond, including, an injunction, restraining order
or other equitable relief to prevent or remedy any breach of this Agreement. No
party shall raise any argument as to the sufficiency of money damages as a
remedy for breach of such provisions.
5.4 Assignment. Except as otherwise provided herein and
subject to Article 2 hereof, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of the parties hereto; provided, however, that this Agreement may not be
assigned by the Company without the prior written consent of the Purchasers,
except that the Company may assign its rights herein to any duly approved
successor to all or substantially all of its assets (by merger or otherwise).
Any purported assignment made in violation of this Agreement shall be void and
of no force and effect.
5.5 Notices. Any and all notices, consents, offers,
acceptances, or any other communication provided for herein shall be sufficient
if given in writing and deemed received when delivered by first class,
registered or certified mail, postage prepaid or overnight courier or hand
delivery, or when sent by facsimile transmission (confirmed by facsimile machine
report) which shall be addressed, or sent, as follows:
The Company:
Delaware Holdco Corporation
[Address]
Telecopy: ____________
Attention: with a copy to the General Counsel
any member of Sony Group:
Sony Music Entertainment Inc.
550 Madison Avenue
New York, New York 10022
Telecopy: ____________
Attention: General Counsel
With a copy to:
<PAGE>
33
any member of Warner Group:
Warner Music Group Inc.
75 Rockefeller Plaza
New York, New York 10019
Telecopy: ________________
Attention: General Counsel
With a copy to:
And in the case of any other party hereto, such address as such
party shall specify upon becoming party hereto or bound hereby;
or, in each case, such other address or telecopy number as the party shall
specify to the Company and the other parties hereto.
5.6 Third Party Beneficiary. Nothing in this Agreement,
express or implied, is intended or shall confer upon any Person (other than the
parties hereto and their permitted successors and assigns and, to the extent set
forth in the penultimate sentence of Section 5.1 hereof, Jason Olim) any right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.
5.7 Term of Agreement. This Agreement shall become effective
upon the execution and delivery hereof and, except with respect to Section
1.1(b) (iii), the penultimate sentence of Sections 1.1(c), 1.2 and 3.3, Article
5, and the relevant definitions therein, shall terminate upon the occurrence of
an Event of Automatic Conversion.
5.8 Section Headings. Headings contained in this Agreement are
inserted only as a matter of convenience and in no way define, limit or extend
the scope or intent of this Agreement or any provisions hereof.
5.9 Choice of Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
the agreement made and to be performed entirely within such state. Each party
hereto agrees that it shall bring any action or proceeding in respect of any
claim arising out of or related to this Agreement or the transactions contained
in or contemplated by this Agreement, whether in tort or contract or otherwise
or at law or in equity, exclusively in the State Courts of Delaware or the
federal district court located in Delaware (the "Chosen Courts") and (i)
irrevocably submits to the exclusive jurisdiction of the Chosen Courts, (ii)
waives any objection to laying venue in any such action or proceeding in the
Chosen Courts and (iii) waives any objection that the Chosen Courts is an
inconvenient forum or does not have jurisdiction over any party hereto.
5.10 Entire Agreement. This Agreement (including the Exhibits
and Schedules attached hereto) contains the entire understanding of the parties
hereto with respect to the subject matter hereof and thereof and supersedes all
prior agreements, discussions and understandings with respect to such subject
matter.
5.11 Severability. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provisions were omitted; provided, however, if any particular
provision is deemed invalid or unenforceable, the parties hereto will work
together in good faith to enter into alternative arrangements reasonably
acceptable to the parties designed to preserve the rights and benefits intended
to be provided by any such provision.
<PAGE>
34
5.12 Cumulative Rights. The rights of each party under this
Agreement are cumulative and in addition to all other rights or remedies that
any party may otherwise have at law or in equity.
5.13 Obligations. For the avoidance of doubt, the parties
expressly acknowledge and agree that each Purchaser's obligations under this
Agreement, including without limitation Section 3.1, are separate and individual
in nature and are not joint and several. In no event shall a Purchaser be held
responsible for a breach by the other Purchaser of this Agreement, including
without limitation Section 3.1.
5.14 Counterparts. This Agreement may be executed by the
parties hereto on separate counterparts and such counterparts will be deemed to
be one and the same instrument. The parties hereto confirm that any facsimile
copy of the other party's executed counterpart of this Agreement (or its
signature page thereof) will be deemed to be an executed original thereof.
<PAGE>
35
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
DELAWARE HOLDCO CORPORATION
By:_________________________________
Name:
Title:
SONY MUSIC ENTERTAINMENT INC.
By:_________________________________
Name:
Title:
SONY MUSIC ENTERTAINMENT (CANADA)
INC.
By:_________________________________
Name:
Title:
<PAGE>
36
WARNER MUSIC GROUP INC.
By:_________________________________
Name:
Title:
WARNER MUSIC CANADA LTD
By:_________________________________
Name:
Title:
WCI RECORD CLUB INC.
By:_________________________________
Name:
Title:
The undersigned ____________________________, in its capacity as
Trustee, hereby acknowledges and agrees that the Special Voting Share is subject
to the restrictions contained in the foregoing Agreement.
TRUSTEE
By:____________________________________ Date:______________________
Name:
Title:
<PAGE>
EXHIBIT 10.7
RESTATED
CERTIFICATE OF INCORPORATION
OF
DELAWARE HOLDCO CORPORATION
The undersigned officers of DELAWARE HOLDCO CORPORATION, a
Delaware corporation (the "Corporation"), do hereby certify as follows:
FIRST: The name of the Corporation is DELAWARE HOLDCO
CORPORATION. The Corporation was originally incorporated under the name DELAWARE
HOLDCO CORPORATION, and its original certificate of incorporation was filed with
the office of the Secretary of State of the State of Delaware on
________________.
SECOND: This Restated Certificate of Incorporation was duly
adopted in accordance with Sections 242 and 245 of the General Corporation Law
of the State of Delaware ("DGCL") and by unanimous written consent of
stockholders in accordance with Section 228 of the DGCL.
THIRD: This Restated Certificate of Incorporation restates and
integrates and further amends the certificate of incorporation of the
Corporation.
FOURTH: The text of the certificate of incorporation of the
Corporation is amended and restated so as to read in its entirety as follows:
1. Name. The name of the corporation is DELAWARE HOLDCO
CORPORATION(the "Corporation").
2. Address; Registered Office and Agent. The address of the
Corporation's registered office in the State of Delaware is _________________
___________________________. The name of its registered agent at such address is
__________________________.
3. Definitions. Unless otherwise defined herein, capitalized
terms shall have the meanings ascribed thereto below:
"Affiliate" of any Person shall mean any Person controlling,
controlled by or under common control with such Person. For the purposes of this
definition "control," when used with respect to any specified Person, shall mean
the power to direct or cause the direction of the management and policies of
such Person, directly or indirectly, whether through ownership of voting
securities or partnership or other ownership interests, by contract or
otherwise; and the terms "controlling" and "controlled" shall have correlative
meanings. For purposes of this definition, the Corporation and its Subsidiaries
and controlled Affiliates shall not be considered Affiliates of any Class B
Stockholder.
<PAGE>
2
"Approved Business" shall have the meaning ascribed thereto in
Section 4 hereof.
"Beneficial Ownership" shall have the meaning ascribed to such
term in Rule 13d-3, as in effect on the date hereof, promulgated under the
Exchange Act; "Beneficially Owned" "Owned Beneficially", "Beneficially Own" and
like terms shall have correlative meanings.
"Board" shall mean the Board of Directors of the Corporation.
"Board Governance Actions" shall mean (a) any action that is
in violation of the Corporation's obligations under Article 1 of the Governance
Agreement, (b) any action of the Board recommending or effecting any change in
the number of directors constituting the entire Board or to the voting rights or
classification of members of the Board from the number, rights or classification
established herein, (c) the designation or dissolution of any committee of the
Board or the delegation of any matter to, or the establishment of or alteration
to any rules of conduct for, any such committee, or (d) any appointment or
removal of any director to or from any committee of the Board.
"By-Laws" shall mean the By-Laws of the Corporation, as
amended, modified or supplemented from time to time in accordance herewith and
the By-Laws.
"Canada Sub" shall mean 3030809 Nova Scotia ULC, an unlimited
liability company formed under the laws of Nova Scotia, all of the common stock
of which is owned by the Corporation.
"Canadian Transaction Agreements" shall mean, collectively,
(a) the Master Canadian Transaction Agreement, dated as of July 12, 1999, among
Warner Music Canada Ltd., Sony Music Entertainment (Canada) Inc., Canada Sub and
the Corporation (including the terms of the Exchangeable Shares attached
thereto); (b) the Exchange Agreement, dated as of Closing, among the
Corporation, Warner Music Canada Ltd. and Sony Music Entertainment (Canada)
Inc.; (c) the Support Agreement, dated as of the Closing between the Corporation
and Canada Sub; and (d) the Voting Trust Agreement, dated as of the Closing,
among the Corporation, Canada Sub, Warner Music Canada Ltd., Sony Music
Entertainment (Canada) Inc. and the Trustee, in each case as the same may be
amended, modified or supplemented from time to time in accordance therewith.
"CDnow" shall mean CDnow, Inc., a Pennsylvania corporation.
"CEO" shall mean the chief executive officer of the
Corporation.
"Certificate" shall mean the Certificate of Incorporation of
the Corporation, as amended, modified or supplemented from time to time in
accordance herewith.
"Class A Stock" shall have the meaning ascribed thereto in
Section 5(b) hereof.
"Class A Stockholder" shall have the meaning ascribed thereto
in Section 5(b) hereof.
<PAGE>
3
"Class B Certificate" shall have the meaning ascribed thereto
in Section 6(d)(iii) hereof.
"Class B Directors" shall have the meaning ascribed thereto in
Section 6(a)(iv) hereof.
"Class B Stock" shall have the meaning ascribed thereto in
Section 5(b) hereof.
"Class B Stockholder" shall have the meaning ascribed thereto
in Section 5(b) hereof.
"Closing" shall have the meaning ascribed thereto in the
Merger Agreement.
"Columbia House" shall mean The Columbia House Company, a New
York general partnership.
"Columbia House Canada" shall mean The Columbia House Company
(Canada), a general partnership formed under the laws of Ontario.
"Common Stock" shall have the meaning ascribed thereto in
Section 5(a) hereof.
"Conversion Time" shall have the meaning ascribed thereto in
Section 6(d)(v) hereof.
"Converted Share" shall have the meaning ascribed thereto in
Section 6(d)(iv) hereto.
"Convertible Securities" shall mean any Equity Securities of
the Corporation or any of its Subsidiaries, including, without limitation, the
Exchangeable Shares (other than any class of Common Stock) that are convertible
into, exercisable or exchangeable for, or evidence the right to purchase or
receive, any class of Common Stock, whether upon conversion, exercise or
exchange, pursuant to anti-dilution provisions of such securities or otherwise.
"Covered Person" shall have the meaning ascribed thereto in
Section 13(a) hereof.
"DGCL" shall mean the General Corporation Law of the State of
Delaware as in effect from time to time.
"Equity Security" has the meaning ascribed to such term in
Rule 405 promulgated under the Securities Act as in effect on the date hereof,
and in any event includes any interest or security having the attendant right to
vote for directors or similar representatives and any interest or security
convertible into or exchangeable for any of the foregoing.
"Event of Automatic Conversion" shall have the meaning
ascribed thereto in Section 6(d)(iii) hereof.
<PAGE>
4
"Event of Transfer Conversion" shall have the meaning ascribed
thereto in Section 6(d)(iv) hereof.
"Exchangeable Number" means, as of any date, the aggregate
number of Exchangeable Shares outstanding as of such date other than any
Exchangeable Shares Beneficially Owned by the Corporation or any of its
Subsidiaries.
"Exchangeable Shares" shall mean the exchangeable shares of
Canada Sub referenced in the Canada Transaction Agreements.
"Extraordinary Action" shall mean any of the following
actions:
(a) authorize, amend, alter or repeal any provision of the
Certificate (including resolutions of the Board setting forth the terms of any
class or series of capital stock) or By-Laws;
(b) authorize, issue or enter into any agreement providing for
the issuance (contingent or otherwise) of, or reclassification of any security
into, any capital stock or other Equity Securities (or any securities
convertible into or exercisable or exchangeable for any capital stock or other
Equity Securities) of the Corporation, other than pursuant to an employee stock
option plan or other benefit plan, which stock option or other benefit plan
shall have previously received any Required Class B Stockholder Approval, or
pursuant to the terms of any Equity Securities issued in the transactions
contemplated by the Merger Agreement (including, without limitation, pursuant to
the Canadian Transaction Agreements);
(c) subject to Section 253 of DGCL, authorize or approve any
merger, consolidation, reorganization, amalgamation, recapitalization or other
form of business combination involving the Corporation or any direct or indirect
sale or other disposition of all or substantially all of the business or assets
of the Corporation;
(d) authorize or approve the liquidation, dissolution or
winding up in any form of transaction (including, without limitation, any
reorganization into partnership or other non-corporate form) of the Corporation
or the commencement by the Corporation of a voluntary case or proceeding under
the Federal Bankruptcy Act or any other similar federal or state law or of any
other case or proceeding to be adjudicated bankrupt or insolvent, or the consent
(whether by action or inaction) by the Corporation to the entry of a decree or
order for relief in respect of the Corporation in an involuntary case or
proceeding under the Federal Bankruptcy Act or any other similar federal or
state law or to the commencement of any bankruptcy or insolvency case or
proceeding against the Corporation or the filing by the Corporation of a
petition or answer or consent seeking reorganization or relief under any
applicable federal or state law, or the consent by the Corporation to the filing
of such petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or similar official of the
Corporation, or of any substantial part of the property of the Corporation, or
the making by the Corporation of an assignment for the benefit of creditors, or
the admission by the Corporation in writing of its inability to pay its debts
generally as they become due;
(e) directly or indirectly declare or pay any dividend or make
any distribution upon any of the capital stock or other Equity Securities of the
<PAGE>
5
Corporation, except for dividends payable solely in shares of Common Stock
issued upon outstanding shares of Common Stock or pursuant to the Canadian
Transaction Agreements;
(f) cause or permit any Board Governance Action; or
(g) cause or permit any of the foregoing with respect to a
Subsidiary of the Corporation.
"Federal Bankruptcy Act" shall mean Title 11 of the United
States Code, 11 U.S.C. 'SS''SS' 101 et seq.
"Fully-Diluted Basis" means, with respect to any Class B
Stockholder, the aggregate number of shares of Class B Stock that would be
Beneficially Owned by such Class B Stockholder and its Affiliates assuming that
all Exchangeable Shares Beneficially Owned by such Class B Stockholder and its
Affiliates were converted, exercised, retracted or exchanged into or for Class B
Stock (or, following an Event of Automatic Conversion, Class A Stock) in
accordance with the Canadian Transaction Agreements.
"Governance Agreement" shall mean the Governance Agreement
among the Corporation, Sony Music Entertainment Inc., Warner Music Group Inc.
and certain other parties, dated as of ____ , 1999, as the same may be amended,
modified or supplemented from time to time in accordance therewith.
"Indebtedness" shall mean at any particular time, without
duplication, (i) any indebtedness for borrowed money or issued in substitution
for or exchange of indebtedness for borrowed money, (ii) any indebtedness
evidenced by any note, bond, debenture or other debt security, (iii) any
indebtedness for the deferred purchase price of property or services with
respect to which a Person is liable, contingently or otherwise, as obligor or
otherwise (other than trade payables and other current liabilities incurred in
the ordinary course of business), (iv) any commitment by which a Person assures
a creditor against loss, (v) any indebtedness guaranteed in any manner by a
Person (including, without limitation, guarantees in the form of an agreement to
repurchase or reimburse), and (vi) any obligations under capitalized leases with
respect to which a Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or with respect to which obligations a Person assures a
creditor against loss.
"Merger Agreement" shall mean that certain Agreement of Merger
and Contribution, dated as of July 12, 1999, among the Corporation, Time Warner
Companies, Inc., Sony Music Entertainment Inc., CDnow, Inc. and certain other
parties named therein, as in effect from time to time.
"Number of Class B Directors" shall mean, as of any date, the
number set forth below opposite the total number of shares of Class B Stock
Beneficially Owned collectively by the Class B Stockholders on a Fully-Diluted
Basis (such share number being appropriately adjusted to reflect any stock
split, combination, reclassification, recapitalization or similar transaction
involving the Class B Stock, including a stock dividend or distribution in the
form of shares of Class B Stock pursuant to Section 6 hereof):
<PAGE>
6
<TABLE>
<CAPTION>
Number of Shares of Class B Stock
Owned by the Class B Stockholders
on a Fully-Diluted Basis(1) Number of Directors
- -------------------------------------------------- -------------------
<S> <C>
[X] or more 8
Less than [X] but not less than [Y] 6
Less than [Y] but not less than [Z] 4
[Z] or less 0
</TABLE>
"Other Entity" shall have the meaning ascribed thereto in
Section 13(a) hereof.
"Person" shall mean an individual, firm, corporation, limited
liability company, partnership, trust, incorporated or unincorporated
association, joint venture, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"Preferred Stock" shall have the meaning ascribed thereto in
Section 5(a) hereof.
"Principal Stockholders" shall have the meaning ascribed
thereto in Section 11(a) hereof.
"Proceeding" shall have the meaning ascribed thereto in
Section 12(a) hereof.
"Required Class B Director Approval" shall mean the prior
written consent of: (a) six (6) Class B Directors so long as the Number of Class
B Directors is eight (8); (b) four (4) Class B Directors so long as the Number
of Class B Directors is six (6); or (c) three (3) Class B Directors so long as
the Number of Class B Directors is four (4).
"Required Class B Stockholder Approval" shall mean the prior
affirmative vote or written consent of each Class B Stockholder, if any, that
together with its Affiliates, Beneficially Owns at least ________ shares of
Class B Stock on a Fully-Diluted Basis (such share number being appropriately
adjusted to reflect any stock split, combination, reclassification,
recapitalization or similar transaction involving the Class B
- --------------------
(1) X = a number representing 66 2/3% of the total number of shares of Class B
Stock and Exchangeable Shares issued in the merger (e.g., 50 of the 75 Class B
Shares); Y = a number representing 50% of the total number of shares of Class B
Stock and Exchangeable Shares issued in the merger (e.g., 37.5 of the 75 Class B
Shares); Z = a number representing 33 1/3 of the total number of shares of Class
B Stock and Exchangeable Shares issued in the merger (e.g., 25 of the 75 Class B
shares).
<PAGE>
7
Stock, including a stock dividend or distribution in the form of shares of Class
B Stock pursuant to Section 6 hereof).(2)
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Special Voting Share" shall have the meaning ascribed thereto
in Section 5 hereof.
"Subsidiary" shall mean, with respect to any Person, any
corporation, partnership, limited liability company or other business entity
controlled by such Person directly or indirectly through one or more
Subsidiaries of such Person or in which such Person owns directly or indirectly
through one or more other Subsidiaries of such Person more than 50% of the
outstanding common stock or other outstanding Equity Securities ordinarily
entitled to vote for directors or comparable representatives of such Person.
"Sony Stockholder" shall mean the Sony Group, as defined in
the Governance Agreement.
"Third Party" shall have the meaning ascribed thereto in the
Governance Agreement.
"Total Current Voting Power" shall mean, with respect to any
corporation, partnership, limited liability company or other business entity,
the total number of votes which may be cast in an election of members of the
board of directors or comparable representatives of such corporation,
partnership, limited liability company or other business entity in which all
classes of every Equity Security entitled to vote in any election of members of
the board of directors or other comparable representatives of such entity are
entitled to vote in such election.
"Transfer" shall mean any transfer, sale, assignment, pledge,
lease, hypothecation, mortgage, gift or creation of security interest, lien or
trust (voting or otherwise) or other encumbrance or other disposition, in whole
or in part (whether by operation of law or otherwise), including, without
limitation, in connection with a merger, consolidation or other transaction
having a similar effect; provided that a pledge or other encumbrance in favor of
a financial institution in connection with a bona fide incurrence of
Indebtedness or other extensions of credit shall not be deemed to constitute a
Transfer hereunder.
"Transfer Agent" shall have the meaning ascribed thereto in
Section 6(d)(ii) hereto.
"Trustee" shall have the meaning ascribed thereto in the
Canadian Transaction Agreements.
"Voting Stock" shall mean shares of Common Stock, the Special
Voting Share and any other Equity Securities of the Corporation ordinarily
having the power to vote in an election of members of the Board.
- ----------
2 Number will represent 66 2/3% of the number of shares of Class B Stock and
Exchangeable Shares issued in the merger to each Purchaser (e.g., 25 of 37.50
shares).
<PAGE>
8
"Warner Stockholder" shall mean the Warner Group, as defined
in the Governance Agreement.
4. Purposes. The purpose of the Corporation is to engage in
the businesses conducted, directly or indirectly, as of the Closing by CDnow or
Columbia House, and any lawful act or activity for which corporations may be
organized under the DGCL that is in furtherance of such purpose and reasonably
related thereto ("Approved Business"), and any other business as may be approved
by the Board from time to time, provided that approval of such other business
receives any Required Class B Stockholder Approval.
5. Authorized Number of Shares.
(a) Total Shares. The total number of shares of all
classes of capital stock that the Corporation shall have authority to issue is
___________ shares, consisting of (i) _________ shares of common stock, par
value $0.01 per share (the "Common Stock") and (ii) _________ shares of
Preferred Stock, par value $0.01 per share ("Preferred Stock").
(b) Common Stock. The Common Stock shall consist
solely of two classes, designated "Class A Common Stock" and "Class B Common
Stock." The authorized number of shares of Class A Common Stock ("Class A
Stock") shall be __________, and the authorized number of shares of Class B
Common Stock ("Class B Stock") shall be _________. The holders of the Class A
Stock shall be referred to as the "Class A Stockholders" and the holders of the
Class B Stock shall be referred to as the "Class B Stockholders."
(c) Preferred Stock. The Preferred Stock shall
consist of (i) a series designated "Special Voting Preferred Stock," comprised
of one (1) share (the "Special Voting Share") and having the powers, preferences
and rights, and the limitations and restrictions thereof, set forth in Section 8
hereof, and (ii) such other series as may be determined from time to time in
accordance with Section 7 hereof. The holder of the Special Voting Share shall
be referred to as the "Special Voting Stockholder."
6. Terms of Common Stock. All shares of Common Stock shall,
except as otherwise provided herein, be identical in all respects and shall
entitle the holders thereof to the same rights and privileges.
(a) Voting Rights. Subject to the voting rights of
the Preferred Stock, the holders of shares of Common Stock shall have the
following voting rights:
(i) Each share of Class A Stock and Class B
Stock shall entitle the holder thereof to one vote on all matters
submitted to a vote or for written consent of the holders of shares of
such Class of Common Stock of the Corporation.
(ii) Except for the matters described in
clause (iii) or (iv) of this Section 6(a), and as otherwise set forth
in this Certificate (including, without limitation, Sections 7, 8 and
14 hereof) or as required by applicable law, the Class A Stockholders,
the Class B Stockholders and the Special Voting
<PAGE>
9
Stockholder shall vote together as one class on all matters submitted
to a vote or for written consent of the stockholders of the
Corporation.
(iii) Until the occurrence of an Event of
Automatic Conversion, the Corporation shall not, and the holders of any
other class or series of capital stock of the Corporation shall not be
authorized to or to cause the Corporation to, without any Required
Class B Stockholder Approval, take, cause, permit or authorize any
Extraordinary Action.
(iv) The holders of Class B Stock and the
Special Voting Stockholder, voting together as a single class, shall
have the right to elect, by a plurality of the votes cast by holders of
shares of Class B Stock and the Special Voting Stockholder, in each
case present in person or represented by proxy at a meeting duly called
for that purpose or by written consent in accordance with Section 9(c)
below, a number of directors equal to the Number of Class B Directors
(such directors elected pursuant to this Section 6(a)(iv) by the
holders of the Class B Stock and the Special Voting Stockholder are
hereinafter collectively referred to as the "Class B Directors").
(v) The holders of Common Stock and the
Special Voting Stockholder, voting together as a single class, shall
have the right to elect, by a plurality of the votes cast by the
holders of shares of Common Stock and the Special Voting Stockholder,
in each case present in person or represented by proxy at a meeting
duly called for that purpose or by written consent in accordance with
Section 9(c) below, a number of directors equal to the excess of the
number of directors comprising the entire Board over the Number of
Class B Directors.
(vi) The right of the holders of Class B
Stock, voting together with the Special Voting Stockholder as a single
class, to elect Class B Directors shall be in addition to their right
to vote, together as a single class with the holders of the Class A
Stock and the Special Voting Stockholder, whether acting by written
consent or by vote at a meeting called for the purpose, of election of
directors, in the election of all other directors.
(b) Dividends and Distributions.
(i) Subject to provisions of law and the
terms of any outstanding Preferred Stock, the holders of the Class A
Stock and the Class B Stock shall be entitled to receive dividends or
other distributions with respect to such stock, in an equal amount per
share, at such times and in such amounts as may be determined by the
Board and declared out of any funds lawfully available therefor, and
shares of Preferred Stock of any series shall not be entitled to share
therein except as otherwise expressly provided in the resolution or
resolutions of the Board providing for the issue of such series.
Dividends and other distributions with respect to the Class A Stock and
the Class B Stock shall be payable only when, as and if declared by the
Board.
(ii) Subject to the provisions of law and
the terms of any outstanding Preferred Stock, if at any time a dividend
or other distribution with respect to the Class A Stock and Class B
Stock is to be paid in shares of Class A
<PAGE>
10
Stock, Class B Stock or any other securities of the Corporation or any
other Person (hereinafter sometimes called a "share distribution"),
such share distribution shall be declared and paid only as follows, and
share distributions declared and paid as follows shall be deemed to be
equal distributions for purposes of the preceding clause (i):
(A) a share distribution (I) consisting
of Class A Stock (or Convertible
Securities that are convertible
into, exchangeable for, or evidence
the right to purchase, shares of
Class A Stock) to holders of Class A
Stock and Class B Stock, on an equal
per share basis; (II) consisting of
shares of Class B Stock (or
Convertible Securities that are
convertible into, exchangeable for
or evidence the right to purchase
shares of Class B Stock) to holders
of Class A Stock and Class B Stock,
on an equal per share basis; or
(III) consisting of shares of Class
A Stock (or Convertible Securities
that are convertible into,
exchangeable for or evidence the
right to purchase shares of Class A
Stock) to holders of Class A Stock
and, on an equal per share basis,
shares of Class B Stock (or
Convertible Securities that are
convertible into, exchangeable for
or evidence the right to purchase
shares of Class B Stock) to holders
of Class B Stock; and
(B) a share distribution consisting of
shares of any class or series of
securities of the Corporation or any
other Person other than Class A
Stock or Class B Stock (and other
than Convertible Securities that are
convertible into, exchangeable for
or evidence the right to purchase
shares of Class A Stock or Class B
Stock), either (I) on the basis of a
distribution of identical
securities, on an equal per share
basis, to holders of Class A Stock
and Class B Stock or (II) on the
basis of a distribution of one class
or series of securities to holders
of Class A Stock and another class
or series of securities to holders
of Class B Stock (and, if
applicable, the securities into
which the distributed securities are
convertible, or for which they are
exchangeable, or which the
distributed securities evidence the
right to purchase), provided that
such classes of securities do not
differ in any respect other than
their relative voting rights and
related differences in conversion
and share distribution provisions,
with holders of shares of Class B
Stock receiving the class or series
having the higher relative voting
rights (without regard to whether
such rights differ to a greater or
lesser extent than the corresponding
differences in voting rights and
related differences in conversion
<PAGE>
11
and share distribution provisions
between the Class A Stock and the
Class B Stock), and provided that if
the securities so distributed
constitute capital stock of a
Subsidiary of the Corporation, such
rights shall not differ to a greater
extent than the corresponding
differences in voting rights,
conversion and share distribution
provisions between the Class A Stock
and Class B Stock, and provided in
each case that such distribution is
otherwise made on an equal per share
basis.
(c) Stock Splits. If the Corporation shall in any
manner reclassify, subdivide or combine the outstanding shares of Class A Stock
or Class B Stock, the outstanding shares of the other class of Common Stock
shall be proportionally reclassified, subdivided or combined to preserve the
relative rights of the outstanding shares of each class and the relative
proportion of the equity of the Corporation represented by the outstanding
shares of each class immediately prior to the transaction giving rise to an
adjustment pursuant to this paragraph.
(d) Conversion.
(i) No Conversion of Class A Stock. The
holders of the Class A Stock shall not have the right to convert their
shares of Class A Stock into any other securities.
(ii) Optional Conversion of Class B Stock.
Each share of Class B Stock may at any time be converted into one fully
paid and nonassessable share of Class A Stock. Such right shall be
exercised by the surrender of the certificate representing any share of
Class B Stock to be converted to the Corporation at any time during
normal business hours at the principal executive offices of the
Corporation, or if an agent for the registration of transfer of shares
of Class B Stock is then duly appointed and acting (said agent being
hereinafter called the "Transfer Agent"), then at the office of the
Transfer Agent, accompanied by a written notice of the election by the
holder thereof to convert and (if so required by the Corporation or the
Transfer Agent) by instruments of transfer, in form satisfactory to the
Corporation and to the Transfer Agent, duly executed by such holder or
such holder's duly authorized attorney, together with any transfer tax
stamps or funds therefor required pursuant to subparagraph (viii) of
this subsection (d).
(iii) Mandatory Conversion of All Class B
Stock. If at any time the Class B Stockholders cease to Beneficially
Own collectively at least ______ shares(3) of Class B Stock on a
Fully-Diluted Basis (such number being appropriately adjusted to
reflect any stock split, combination, reclassification,
recapitalization or similar transaction involving the Class B Stock,
including a stock dividend or distribution in the form of shares of
Class B Stock pursuant to Section 6(b)(ii) hereof) (an "Event of
Automatic Conversion"), each share of
- ----------------
(3) Number will represent 33 1/3% of the total number of Shares of Class
B Stock and Exchangeable Shares issued in merger (e.g. 25 of 75 shares).
<PAGE>
12
Class B Stock shall be automatically converted into one fully paid and
non-assessable share of Class A Stock; provided, that, the Corporation
shall not authorize, approve or enter into any transaction that would
result in such automatic conversion of the Class B Stock without the
approval of the holders of a majority of the then outstanding shares of
Class B Stock and, if applicable, any Required Class B Stockholder
Approval. Upon the occurrence of an Event of Automatic Conversion, each
holder of a certificate representing a number of shares of Class B
Stock (each, a "Class B Certificate") shall be entitled to receive a
certificate representing the same number of shares of Class A Stock by
surrendering such Class B Certificate held by it at the office of the
Corporation or of the Transfer Agent, if one is then duly appointed and
acting, accompanied by a written notice of such holder of the
occurrence of such Event of Automatic Conversion and (if so required by
the Corporation or the Transfer Agent) by instruments of transfer in a
form satisfactory to the Corporation and the Transfer Agent, duly
executed by such holder or such holder's authorized attorney, together
with any transfer tax stamps or funds therefor required pursuant to
subparagraph (viii) of this subsection (d).
(iv) Mandatory Conversion of Transferred
Class B Stock. Without in any way limiting the restrictions on
transfers contained in the Governance Agreement, each share of Class B
Stock (a "Converted Share") that is Transferred to any Third Party
(such Transfer being referred to herein as an "Event of Transfer
Conversion") shall be automatically converted, effective immediately
prior to such Transfer, into one fully paid and non-assessable share of
Class A Stock. Upon the occurrence of an Event of Transfer Conversion,
each holder of the Class B Certificate representing a number of shares
of Converted Shares shall be entitled to receive a certificate
representing the same number of shares of Class A Stock by surrendering
such Class B Certificate held by it at the office of the Corporation or
of the Transfer Agent, if one is then duly appointed and acting,
accompanied by written notice of such holder of such Event of Transfer
Conversion and (if so required by the Corporation or the Transfer
Agent) by instruments of transfer in form satisfactory to the
Corporation and the Transfer Agent, duly executed by such holder or
such holder's authorized attorney, together with any transfer tax
stamps or funds therefor required pursuant to subparagraph (viii) of
this subsection (d).
(v) Conversion Procedures. As promptly as
practicable after the surrender for conversion of a certificate
representing shares of Class B Stock in the manner provided in
subparagraphs (ii), (iii) or (iv) of this subsection (d) and the
payment in cash of any amount required by the provisions of
subparagraph (viii) of this subsection (d), the Corporation will
deliver or cause to be delivered at the office of the Transfer Agent to
or upon the written order of the holder of such certificate, a
certificate or certificates representing the number of full shares of
Class A Stock issuable upon such conversion, issued in such name or
names as such holder may direct. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date
of the surrender of the certificates representing shares of Class B
Stock, and all rights of the holder of such shares as such holder shall
cease at such time and the Person or Persons in whose name or names the
certificate or certificates representing the shares of Class A Stock
are to be issued shall be treated for all purposes as having become the
record holder or holders of such shares of Class A Stock at such time;
<PAGE>
13
provided, however, if any such surrender and payment is made on any
date when the stock transfer books of the Corporation shall be closed,
the Person or Persons in whose name or names the certificate or
certificates representing shares of Class A Stock are to be issued as
the record holder or holders thereof shall be treated for all purposes
as having become the record holder or holders of such shares
immediately prior to the close of business on the next succeeding day
on which such stock transfer books are open. Notwithstanding the
foregoing, to the extent permitted by law, conversion of shares of
Class B Stock into shares of Class A Stock pursuant to an Event of
Automatic Conversion or Event of Transfer Conversion shall be deemed to
have been effected as of the date on which the Event of Automatic
Conversion or Event of Transfer Conversion, as the case may be,
occurred (such time being the "Conversion Time"). The Person entitled
to receive the shares of Class A Stock issuable upon such conversion
shall be treated for all purposes as the record holder of such shares
of Class A Stock at and as of the Conversion Time, and the right of
such Person as a Class B Stockholder shall cease and terminate at and
as of the Conversion Time, in each case without regard to any failure
by the holder to deliver the certificates or the notice required by
this Section 6(d).
(vi) Adjustments. No adjustments in respect
of dividends or other distributions shall be made upon the conversion
of any share of Class B Stock; provided, however, that if a share shall
be converted subsequent to the record date for the payment of a
dividend or other distribution on shares of Class B Stock but prior to
such payment, the registered holder of such share at the close of
business on such record date shall be entitled to receive the dividend
or other distribution payable on such share upon the date set for
payment of such dividend or other distribution notwithstanding the
conversion thereof or the Corporation's default in payment of the
dividend due on such date; provided, further, that if such distribution
was to have included any shares of Class B Stock, then as a result of
such conversion the registered holder of such share at the close of
business on such record date shall be entitled to receive, in lieu of
any such shares of Class B Stock, an equal number of shares of Class A
Stock.
(vii) Reservation of Shares. The Corporation
will at all times reserve and keep available, solely for the purpose of
issuance upon conversion of the outstanding shares of Class B Stock and
shares of Class B Stock issuable upon conversion, retraction or
exchange of the Exchangeable Shares, and upon conversion, retraction or
exchange of the Exchangeable Shares following the Conversion Time, such
number of shares of Class A Stock as shall be issuable upon any such
conversion, retraction and/or exchange, as the case may be, of all such
outstanding shares; provided, however, that nothing contained herein
shall be construed to preclude the Corporation from satisfying its
obligations in respect of the conversion of the outstanding shares of
Class B Stock or the conversion, retraction or exchange of Exchangeable
Shares following the Conversion Time by delivery of purchased shares of
Class A Stock which are held in the treasury of the Corporation. If any
shares of Class A Stock required to be reserved for purposes of
conversion, retraction and/or exchange, as the case may be, hereunder
require registration with or approval of any governmental authority
under any federal or state law before such shares of Class A Stock may
be issued upon conversion, retraction and/or exchange, as the case may
be, the Corporation will cause such shares to be duly registered or
approved, as the case may be. All
<PAGE>
14
shares of Class A Stock which shall be issued upon any such conversion,
retraction and/or exchange, as the case may be, will, upon issue, be
fully paid and nonassessable and not subject to any preemptive rights.
(viii) Stamps and Taxes, etc. The issuance
of certificates for shares of Class A Stock upon conversion of shares
of Class B Stock or the conversion, retraction or exchange of
Exchangeable Shares following the Conversion Time shall be made without
charge for any stamp or other similar tax in respect of such issuance.
However, if any such certificate is to be issued in a name other than
that of the holder of the share or shares of Class B Stock or
Exchangeable Shares to be converted, retracted or exchanged, the person
or persons requesting the issuance thereof shall pay to the Corporation
the amount of any tax which may be payable in respect of any transfer
involved in such issuance or shall establish to the satisfaction of the
Corporation that such tax has been paid.
(ix) Status of Converted Shares. In the
event any shares of Class B Common Stock shall be converted pursuant to
this Section 6(d), such shares shall be canceled and shall not be
subject to reissue by the Corporation.
(e) Liquidation. Upon the liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, subject to any
preferential or other amounts to be distributed to the holders of the Preferred
Stock and any other class or series of stock then outstanding, the holders of
Class A Stock and Class B Stock shall be entitled to receive all the assets of
the Corporation of whatever kind available for distribution to its stockholders
ratably as a single class in proportion to the number of shares held by them.
(f) Rights of Common Stock Subject to Preferred
Stock. Notwithstanding anything to the contrary contained herein, the Class A
Stock and the Class B Stock are subject to all the powers, rights, privileges,
preferences and priorities of any series of Preferred Stock as shall be stated
and expressed in any resolution or resolutions adopted by the Board, pursuant to
authority expressly granted to and vested in it by the provisions of Section 7.
7. Terms of Preferred Stock. Subject to receipt of the
Required Class B Stockholder Approval, the Board is hereby expressly authorized,
by resolution or resolutions, to provide, out of the unissued shares of
Preferred Stock, for one or more series of Preferred Stock (in addition to the
Special Voting Preferred Stock) and, with respect to each such series, to fix
the number of shares constituting such series and the designation of such
series, the voting powers (if any) of the shares of such series, and the
preferences and relative, participating, optional or other special rights, if
any, and any qualifications, limitations or restrictions thereof, of the shares
of such series. The powers, preferences and relative, participating, optional
and other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding.
8. Terms of Special Voting Preferred Stock.
(a) Voting Rights. Except for matters described in
clause (iii) of Section 6(a) hereof, and as otherwise set forth in this
Certificate (including, without limitation, Section 7 and 14 hereof), or as
required by applicable law, the Special Voting
<PAGE>
15
Share shall entitle the Special Voting Stockholder to cast a number of votes
equal to the Exchangeable Number (determined as of the applicable record date)
on all matters submitted to a vote or for written consent of the holders of
Class A Stock, Class B Stock and Common Stock of the Corporation.
(b) Dividends. The Special Voting Stockholder shall
not be entitled, in its capacity as holder or owner of the Special Voting Share,
to receive any dividends or other distributions made by the Corporation to its
stockholders.
(c) Liquidation Preference. Upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation, the
Special Voting Stockholder shall be entitled to receive out of the assets of the
Corporation available for distribution to the stockholders, an aggregate amount
equal to $1.00 before any distribution is made on the Common Stock of the
Corporation or any other stock ranking junior to the Special Voting Share as to
distribution of assets upon liquidation, dissolution or winding-up.
(d) Ranking. The Special Voting Share shall, with
respect to rights on liquidation, winding up and dissolution, rank (i) senior to
all classes of Common Stock of the Corporation and (ii) unless otherwise
provided by the terms of such other class or series, junior to any other class
or series of capital stock of the Corporation.
(e) Redemption. The Special Voting Share shall not be
subject to redemption, except that at such time as no Exchangeable Shares (other
than Exchangeable Shares Beneficially Owned by the Corporation and its
Subsidiaries) shall be outstanding, the Special Voting Share shall automatically
be redeemed and canceled by the Corporation, for an aggregate amount equal to
$1.00 due and payable upon such redemption.
9. Stockholder Meetings; Consent.
(a) Meetings Generally. Meetings of stockholders may
be held within or without the State of Delaware, as the By-laws may provide. The
books of the Corporation may be kept (subject to any provision of Delaware law)
outside the State of Delaware at such place or places as may be designated from
time to time by the Board or in the By-laws.
(b) Special Meetings. Special meetings of the
stockholders shall be called only (i) upon the written request of any Class B
Stockholders that, together with their respective Affiliates, Beneficially Own
at least shares of Class B Stock on a Fully-Diluted Basis (such share number
being appropriately adjusted to reflect any stock split, combination,
reclassification or recapitalization of the Class B Stock, including a stock
dividend or distribution in the form of shares of Class B Stock pursuant to
Section 6 hereof);(4) (ii) upon request of a majority of the Board or any two
(2) Class B Directors; or (iii) by the CEO, provided that the CEO shall have
requested that the Board call such special meeting (stating the purpose for
which such meeting is to be called) and the Board shall have failed to call such
meeting within ten (10) calendar days of such
- ----------------
(4) Number to equal 33 1/3% of total number of Shares of Class B Stock and
Exchangeable Shares issued in the merger (25 of 75 Shares).
<PAGE>
16
request by the CEO. Special meetings of the stockholders may be held at such
time and place as may be stated in the notice of the meeting.
(c) Written Consent. So long as the shares of
outstanding Class B Stock (on a Fully-Diluted Basis) represent at least 40% of
the outstanding shares of Common Stock, then unless otherwise prohibited by the
DGCL, any action required or permitted by the DGCL, this Certificate or the
By-Laws to be taken at any annual or special meeting of stockholders may be
taken without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted and shall be
delivered (by hand or by certified or registered mail, return receipt requested)
to the Corporation by delivery to its registered office in the State of
Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book(s) in which proceedings of meetings of
the stockholders are recorded. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent of the holders
of shares entitled to be voted thereon shall be given as required by applicable
law or regulation.
10. Board.
(a) Management by Board. Except as otherwise provided
in this Certificate, the business and affairs of the Corporation shall be
managed by or under the direction of the Board. The Board may adopt such rules
and regulations, not inconsistent with this Certificate, the By-laws or
applicable law, as it may deem proper for the conduct of its meetings and the
management of the Corporation.
(b) Election of Directors. Directors shall be elected
at the annual meeting of stockholders, and each director elected shall hold
office until such director's successor has been elected and qualified at the
next annual meeting of stockholders or until his or her earlier death, removal
or resignation. A director need not be a stockholder of the Corporation.
(c) Number of Authorized Directors. Prior to an Event
of Automatic Conversion, the number of directors comprising the entire Board
shall be twelve (12) and, thereafter, such number shall be as set forth in the
By-Laws.
(d) Removal. Subject to the Governance Agreement, any
director other than a Class B Director may be removed for any reason (or for no
reason) by vote or written consent of the holders of Voting Stock representing a
majority of the Total Current Voting Power of the Company, voting together as a
single class. Subject to the Governance Agreement, a Class B Director may only
be removed (a) without cause by vote or written consent of the holders of a
majority of the outstanding shares of Class B Stock on a Fully-Diluted Basis,
voting separately as a class, or (b) for cause, by vote or written consent of
the holders of Voting Stock representing at least ninety percent (90%) of the
Total Current Voting Power of the Company, voting together as a single class.
For purposes hereof "cause" means, with respect to any director, (x) substantial
and prolonged refusal by such director to perform his/her fiduciary duties, (y)
conviction (not subject to further appeal) of such director of a felony or (z)
substantial and prolonged physical or mental incapacity rendering such director
incapable of fulfilling his/her fiduciary duties.
<PAGE>
17
(e) Vacancies. Subject to the Governance Agreement,
any vacancy in the office of a Class B Director may be filled solely by the
Class B Stockholders and the Special Voting Stockholder at a meeting called for
such purpose (which may be the same meeting at which the removal of a Class B
Director was voted upon) or by written consent in accordance with Section 9(c)
hereof. Subject to the Governance Agreement, any vacancy in the office of a
director other than a Class B Director may be filled solely by the affirmative
votes of a majority of the directors then in office, although less than a
quorum, or by a sole remaining director. Any director elected to fill a vacancy
shall serve the remaining term of his or her predecessor and until his or her
successor has been elected and qualified or until the director's earlier death,
resignation or removal.
(f) Quorum. At all meetings of the Board, other than
meetings of Board committees, a quorum shall exist only if a majority of the
directors comprising the entire Board are present at the meeting.
(g) Action of Board. Subject to any greater or
additional vote of the Board or of any class of directors required by law or by
this Certificate, an act of the Board shall require the affirmative vote of at
least a majority of the directors present at a meeting of the Board at which a
quorum is present. Each director shall have one vote. In addition to the
foregoing, the Required Class B Director Approval shall be necessary for the
Board to take, cause, permit or authorize any Board Governance Actions.
11. Provisions Relating to Principal Stockholders
(a) Principal Stockholders. In that shares of capital
stock of the Corporation will be owned, directly or indirectly, by Persons other
than Affiliates of the Sony Stockholder and the Warner Stockholder (the Sony
Stockholder and the Warner Stockholder, collectively, including Affiliates of
each and as further defined in Section 11(d) below, the "Principal
Stockholders"), but that the Principal Stockholders will be, directly or
indirectly, stockholders of the Corporation, and in anticipation that the
Corporation and the Principal Stockholders may engage in the same or similar
activities or lines of business and have an interest in the same areas of
corporate opportunities, and in recognition of the benefits to be derived by the
Corporation through its continued contractual, corporate and business relations
with the Principal Stockholders (including service of officers, directors or
employees of the Principal Stockholders as directors of the Corporation), the
provisions of this Section 11 are set forth to regulate, define and guide, to
the fullest extent permitted by the DGCL, the conduct of certain affairs of the
Corporation as they may involve the Principal Stockholders and their respective
officers and directors, and the powers, rights and duties of the Corporation and
the Principal Stockholders and their respective officers and directors in
connection therewith.
(b) Competition and Corporate Opportunities. None of
the Principal Stockholders shall have any duty to refrain from engaging directly
or indirectly in the same or similar business activities or lines of business as
the Corporation. In the event that any of the Principal Stockholders acquires
knowledge of a potential transaction or matter that may be a corporate
opportunity for any of the Principal Stockholders and the Corporation, subject
to Section 11(c) below, none of the Principal Stockholders shall have any duty
to communicate or offer such corporate opportunity to the Corporation,
<PAGE>
18
and any Principal Stockholders shall be entitled to pursue or acquire such
corporate opportunity for itself or to direct such corporate opportunity to
another person or entity. In addition, the fact that a Principal Stockholder
shall engage in a particular business activity shall not, of itself, provide a
basis for determining that there has been a violation of Section 11(c) hereof.
(c) Allocation of Corporate Opportunities. The
following provisions shall be applicable to the maximum extent consistent with,
and permitted by, applicable Delaware law. In the event that a director, officer
or employee of the Corporation who is also a director, officer or employee of
any of the Principal Stockholders acquires knowledge of a potential transaction
or matter that may be a corporate opportunity for both the Corporation and any
of the Principal Stockholders, such director, officer or employee of the
Corporation shall act in good faith in a manner consistent with the following:
(i) a corporate opportunity offered to any
person who is an officer or employee (whether or not a director) of the
Corporation and who is also a director but not an officer or employee
of a Principal Stockholder shall belong to the Corporation, unless such
opportunity is expressly offered to such person primarily in his or her
capacity as a director of a Principal Stockholder, in which case such
opportunity shall belong to the relevant Principal Stockholder;
(ii) a corporate opportunity offered to any
person who is a director but not an officer or employee of the
Corporation and who is also an officer or employee (whether or not a
director) of a Principal Stockholder shall belong to the relevant
Principal Stockholder, unless such opportunity is expressly offered to
such person in his or her capacity as a director of the Corporation, in
which case such opportunity shall belong to the Corporation; and
(iii) a corporate opportunity:
(A) offered to any person who is either
(1) an officer or employee of both
the Corporation and a Principal
Stockholder or (2) a director of
both the Corporation and a Principal
Stockholder (but not an officer or
employee of the Corporation or any
Principal Stockholder), and
(B) that is expressly offered to such
person
(I) in his or her capacity as an officer, employee or director
of the Corporation shall belong to the Corporation; and
(II) in his or her capacity as an officer, employee or
director of a Principal Stockholder shall belong to the
relevant Principal Stockholder.
(d) Certain Matters Deemed Not Corporate
Opportunities.
(i) In addition to and notwithstanding the
foregoing provisions of this Section 11, a corporate opportunity shall
not be deemed to belong to the Corporation if it is a business
opportunity that the Corporation is
<PAGE>
19
not permitted to undertake under the terms of Section 4 or that the
Corporation is not financially able or contractually permitted or
legally able to undertake, or that is, from its nature, not in the line
of the Corporation's business or is of no practical advantage to it or
that is one in which the Corporation has no interest or reasonable
expectancy.
(ii) For purposes of this Section 11 only,
(A) the term "Corporation" shall mean the Corporation and all
corporations, limited liability companies, partnerships, joint
ventures, associations and other entities in which the Corporation
beneficially owns (directly or indirectly) fifty percent (50%) or more
of the outstanding voting stock, voting power or similar voting
interests, except that for purposes of determining those persons who
are directors of the Corporation, such term shall mean the Corporation
without regard to any other entities in which it may hold an interest
and (B) the term "Principal Stockholder" shall mean a Principal
Stockholder and all corporations, limited liability companies,
partnerships, joint ventures, associations and other entities (other
than the Corporation) in which such Principal Stockholder beneficially
owns (directly or indirectly) fifty percent (50%) or more of the
outstanding voting stock, voting power or similar interests and, if a
Principal Stockholder is a partnership, shall also include those
entities which constitute its corporate general partners.
(e) Expiration of Certain Provisions. Notwithstanding
anything in this Certificate to the contrary, the provisions of this Section 11
shall expire as to any Principal Stockholder on the date that both (i) such
Principal Stockholder ceases to Beneficially Own Common Stock representing at
least five percent (5%) of the number of outstanding shares of Common Stock of
the Corporation and (ii) no person who is a director or officer of the
Corporation is also a director or officer of such Principal Stockholder. Neither
the alteration, amendment, change or repeal of any provision of this Section 11
nor the adoption of any provision of this Certificate inconsistent with any
provision of this Section 11 shall eliminate or reduce the effect of this
Section 11 in respect of any matter that occurred, or any cause of action, suit
or claim that, but for this Section 11, would have accrued or arisen, prior to
such alteration, amendment, repeal or adoption.
(f) Deemed Notice. Any person or entity purchasing or
otherwise acquiring any interest in any shares of the Corporation shall be
deemed to have notice of and to have consented to the provisions of this Section
11.
12. Limitation of Liability.
(a) To the fullest extent that the DGCL, as it exists
or as it may hereafter be amended, permits the limitation or elimination of the
liability of directors, no director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director.
(b) No amendment to or repeal of this Section 12
shall apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
<PAGE>
20
13. Indemnification.
(a) To the fullest extent not prohibited by law, the
Corporation shall indemnify and hold harmless any person (a "Covered Person")
who is or was made, or threatened to be made, a party to any threatened, pending
or completed action, suit or proceeding (a "Proceeding"), whether civil,
criminal, administrative or investigative, including, without limitation, an
action by or in the right of the Corporation to procure a judgment in its favor,
by reason of the fact that such person, or a person of whom such person is the
legal representative, is or was a director or officer of the Corporation, or, at
the request of the Corporation, while an officer or director of the Corporation
is or was serving as a director or officer, or in a capacity with comparable
authority or responsibilities, of any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise (an "Other Entity"),
against all judgments, fines, penalties, excise taxes, amounts paid in
settlement and costs, charges and expenses (including fees, charges and
disbursements of attorneys) incurred by such person in connection with such
Proceeding or any claim made in connection therewith. Persons who are not
directors or officers of the Corporation (or otherwise entitled to
indemnification pursuant to the preceding sentence) may be similarly indemnified
in respect of service to the Corporation or to an Other Entity at the request of
the Corporation to the extent the Board at any time specifies that such persons
are entitled to the benefits of this Section 13.
(b) The Corporation shall, from time to time,
reimburse or advance to any Covered Person the funds necessary for payment of
expenses, including fees, charges and disbursements of attorneys, incurred in
connection with any Proceeding, in advance of the final disposition of such
Proceeding; provided, however, that, if required by the DGCL, such expenses
incurred by or on behalf of any Covered Person may be paid in advance of the
final disposition of a Proceeding only upon receipt by the Corporation of an
undertaking, by or on behalf of such Covered Person, to repay any such amount so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right of appeal that such Covered Person is not
entitled to be indemnified for such expenses.
(c) The rights to indemnification and reimbursement
or advancement of expenses provided by, or granted pursuant to, this Section 13
shall not be exclusive of any other rights to which a person seeking
indemnification or reimbursement or advancement of expenses may have or
hereafter be entitled under any statute, this Certificate, the By-Laws, any
agreement, any vote of stockholders or disinterested directors or otherwise,
both as to action in his or her official capacity and as to action in another
capacity while holding such office.
(d) The rights to indemnification and reimbursement
or advancement of expenses provided by, or granted pursuant to, this Section 13
shall continue as to a person who has ceased to be a Covered Person and shall
inure to the benefit of the executors, administrators, legatees and distributees
of such person.
(e) The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of an Other Entity,
against any liability asserted against such person and incurred by such person
in any such capacity, or arising out of such person's
<PAGE>
21
status as such, whether or not the Corporation would have the power to indemnify
such person against such liability under the provisions of this Section 13, the
By-Laws or under Section 145 of the DGCL or any other provision of law.
(f) The provisions of this Section 13 shall be a
contract between the Corporation, on the one hand, and each director and officer
who serves in such capacity at any time while this Section 13 is in effect and
any other Covered Person entitled to indemnification hereunder, on the other
hand, pursuant to which the Corporation and each such Covered Person intend to
be, and shall be, legally bound. No repeal or modification of this Section 13
shall affect any rights or obligations with respect to any state of facts then
or theretofore existing or thereafter arising or any Proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
(g) The rights to indemnification and reimbursement
or advancement of expenses provided by, or granted pursuant to, this Section 13
shall be enforceable by any person entitled to such indemnification or
reimbursement or advancement of expenses in any court of competent jurisdiction.
The burden of proving that such indemnification or reimbursement or advancement
of expenses is not appropriate shall be on the Corporation. Neither the failure
of the Corporation (including its disinterested directors or a committee
thereof, its independent legal counsel and its stockholders) to have made a
determination prior to the commencement of such action that such indemnification
or reimbursement or advancement of expenses is proper in the circumstances nor
an actual determination by the Corporation (including its disinterested
directors or a committee thereof, its independent legal counsel and its
stockholders) that such person is not entitled to such indemnification or
reimbursement or advancement of expenses shall constitute a defense to the
action or create a presumption that such person is not so entitled. Such a
person shall also be indemnified for any expenses incurred in connection with
successfully establishing his or her right to such indemnification or
reimbursement or advancement of expenses, in whole or in part, in any such
proceeding.
(h) Any director or officer of the Corporation
serving in any capacity (i) another corporation of which a majority of the
shares entitled to vote in the election of its directors is held, directly or
indirectly, by the Corporation, or (ii) any employee benefit plan of the
Corporation or any corporation referred to in clause (i) of this Section 13(h)
shall be deemed to be doing so at the request of the Corporation.
(i) Any person entitled to be indemnified or to
reimbursement or advancement of expenses as a matter of right pursuant to this
Section 13 may, to the extent permitted by law, elect to have the right to
indemnification or reimbursement or advancement of expenses interpreted on the
basis of the applicable law in effect at the time of the occurrence of the event
or events giving rise to the applicable Proceeding, or on the basis of the
applicable law in effect at the time such indemnification or reimbursement or
advancement of expenses is sought. Such election shall be made, by a notice in
writing to the Corporation, at the time indemnification or reimbursement or
advancement of expenses is sought; provided, however, that if no such notice is
given, the right to indemnification or reimbursement or advancement of expenses
shall be determined by the law in effect at the time indemnification or
reimbursement or advancement of expenses is sought.
<PAGE>
22
14. Adoption, Amendment and/or Repeal of Certificate or
By-Laws.
(a) This Certificate may not be amended, altered or
repealed without, in addition to any other vote required by applicable law, any
Required Class B Stockholder Approval and any approval required under Section
1.4(c) of the Governance Agreement. In addition, the approval of the holders of
a majority of the outstanding shares of any class of Stock shall be required for
any amendment that would alter or change the powers, preferences or rights of
such class of Stock so as to affect such class adversely, but that would not so
affect the other class of Stock.
(b) The By-Laws may be amended, altered, restated or
repealed, and new By-Laws may be adopted, by the Board, subject to any Required
Class B Director Approval, any Required Class B Stockholder Approval and any
additional approval required pursuant to the Governance Agreement.
15. DGCL Section 203. The Corporation hereby expressly elects
not to be governed by the provisions of Section 203 of the DGCL, and the
restrictions and limitations set forth therein.
WITNESS the signature of this Certificate this ____ day of
______, 1999.
_________________________________________
Incorporator
<PAGE>
EXHIBIT 10.8
REGISTRATION RIGHTS AGREEMENT dated
as of [ ], among DELAWARE HOLDCO CORPORATION, a Delaware
corporation (the "Issuer"), and the Holders (as defined
herein).
WHEREAS the parties hereto are parties to an Agreement of Merger
and Contribution (the "Merger Agreement") dated as of July 12, 1999, among Time
Warner Inc., a Delaware corporation ("Time Warner"), Sony Corporation of
America, a New York corporation ("Sony"), CDnow, Inc., a Pennsylvania
corporation, the Issuer, Pennsylvania Subsidiary, Inc., a Pennsylvania
corporation, Delaware Sub I L.L.C., a Delaware limited liability company, and
Delaware Sub II L.L.C., a Delaware limited liability company; and
WHEREAS as a condition to the consummation of the transactions
contemplated by the Merger Agreement, the Issuer has agreed to grant to each of
Time Warner and Sony and their respective Affiliates (as defined below) and
transferees certain registration rights with respect to their respective
Registrable Securities (as defined below).
NOW, THEREFORE, in consideration of the mutual promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
ARTICLE I
Definitions
SECTION 1.01. Definitions. As used in this Agreement, the
following terms have the following meanings:
"Affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person.
"Board of Directors" means the Board of Directors of the Issuer.
"Commission" means the Securities and Exchange Commission or
any successor governmental body or agency.
"Demand Holder Group" means each Demand Holder, together with each
of its Affiliates and each other person that acquires from such Demand Holder
(or any of its Affiliates) Registrable Securities, in each case without
violation of any provision restricting transfers of Issuer Class A Stock and
Issuer Class B Stock contained in the Governance Agreement.
<PAGE>
2
"Demand Holders" means Time Warner and Sony.
"Demand Registration" has the meaning ascribed thereto in Section
2.02(a)(i).
"Demand Request" has the meaning ascribed thereto in Section
2.02(a).
"Disadvantageous Condition" has the meaning ascribed thereto in
Section 2.04.
"Effective Period" means the period from the third anniversary of
the date of this Agreement (or such earlier date as an "Event of Automatic
Conversion" (as defined in the Governance Agreement) shall have occurred) until
the first date on which all Registrable Securities are eligible for sale
pursuant to Rule 144 or Rule 145 (without being subject to any holding period,
volume limitations or manner of sale restrictions thereunder).
"Exchangeable Shares" has the meaning ascribed thereto in the
Master Canadian Transaction Agreement.
"Financial Intermediary" means an investment bank, commercial
bank, insurance company or other financial institution that has engaged in a
Financial Transaction.
"Financial Transaction" means a transaction between a Holder
(other than a Financial Intermediary) and a Financial Intermediary involving (i)
the acquisition by such Financial Intermediary of Registrable Securities from
such Holder or (ii) the purchase or sale of a put, call or other derivative
security in respect of, or related to the value of, Registrable Securities or
other securities of the Issuer or one or more third parties (including an index
of securities).
"Governance Agreement" means the Governance Agreement dated as of
[INSERT CLOSING DATE], among Holdco, Sony and Time Warner, as in effect from
time to time.
"Governmental Entity" means any Federal, state, local or foreign
government or any court of competent jurisdiction, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign.
"Holder" means a person who owns Registrable Securities and is:
(i) an Investor;
(ii) an Affiliate of an Investor that has agreed to be bound by
the terms of this Agreement;
<PAGE>
3
(iii) a person that (A) has agreed to be bound by the terms of
this Agreement as if such person were an Investor and (B) is a transferee
of Registrable Securities from an Investor; or
(iv) a Financial Intermediary that has agreed to be bound by the
terms of this Agreement.
"Inspectors" has the meaning ascribed thereto in Section 2.06(h).
"Investor" means each person listed on Schedule I hereto.
"Issuer Class A Common Stock" means the Class A common stock, par
value $0.01 per share, of the Issuer.
"Issuer Class B Common Stock" means the Class B common stock, par
value $0.01 per share, of the Issuer.
"Master Canadian Transaction Agreement" means the Master Canadian
Transaction Agreement dated as of July 12, 1999, among Warner Music Canada Ltd.,
a corporation formed under the laws of Ontario, Sony Music Entertainment
(Canada) Inc., a corporation incorporated under the laws of Canada, The Columbia
House Company (Canada), a general partnership formed under the laws of Ontario,
3030809 Nova Scotia ULC, an unlimited liability company organized under the laws
of Nova Scotia, and Delaware Holdco Corporation, a Delaware corporation.
"Merger Agreement" has the meaning ascribed thereto in the
recitals of this Agreement.
"1933 Act" means the Securities Act of 1933, as amended.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"Optimal Amount" has the meaning ascribed thereto in Section 2.10.
"person" means any individual, firm, corporation, partnership,
company, limited liability company, trust, joint venture, association,
Governmental Entity or other entity.
"Records" has the meaning ascribed thereto in Section 2.06(h).
"Registrable Securities" means:
(i) Issuer Class A Common Stock (A) issued upon conversion of any
Issuer Class B Common Stock (x) issued pursuant to the transactions
contemplated by the Merger Agreement (including upon the exercise of the
warrants referred to in clause (ii) of the last sentence of Section
8.14(b) of the Merger Agreement) or the Master Canadian Transaction
Agreement, (y) issued upon exchange of any Exchangeable
<PAGE>
4
Shares issued pursuant to the transactions contemplated by the Master
Canadian Transaction Agreement, or (z) acquired by an Investor pursuant
to Section 2.2 of the Governance Agreement, (B) issued upon exchange of
any Exchangeable Shares issued pursuant to the transactions contemplated
by the Master Canadian Transaction Agreement, or (C) acquired by an
Investor pursuant to Section 2.2 of the Governance Agreement;
(ii) Issuer Class A Common Stock acquired or to be sold by a
Financial Intermediary pursuant to, or in connection with, a Financial
Transaction;
(iii) puts, calls or other derivative securities in respect of, or
related to the value of, Issuer Class A Common Stock or Issuer Class B
Common Stock to be sold by an Investor or a Financial Intermediary; and
(iv) securities of a trust or other special purpose vehicle formed
for the purpose of disposing of Issuer Class A Common Stock described in
clause (i) above.
As used in this definition of Registrable Securities, (i) the term
"Issuer Class A Common Stock" shall include any shares of stock or other
securities into which or for which shares of Issuer Class A Common Stock may
hereafter be changed, converted or exchanged and any other shares or securities
issued to holders of Issuer Class A Common Stock (or such shares of stock or
other securities into which or for which shares of Issuer Class A Common Stock
are so changed, converted or exchanged) upon any reclassification, share
combination, share subdivision, share dividend, share exchange, merger,
consolidation or similar transaction or event and (ii) the term "Issuer Class B
Common Stock" shall include any shares of stock or other securities into which
or for which shares of Issuer Class B Common Stock may hereafter be changed,
converted or exchanged and any other shares or securities issued to holders of
Issuer Class B Common Stock (or such shares of stock or other securities into
which or for which shares of Issuer Class B Common Stock are so changed,
converted or exchanged) upon any reclassification, share combination, share
subdivision, share dividend, share exchange, merger, consolidation or similar
transaction or event.
As to any particular Registrable Securities, such Registrable
Securities shall cease to be Registrable Securities as soon as (i) such
Registrable Securities have been sold or otherwise disposed of pursuant to a
registration statement that was filed with the Commission in accordance with
this Agreement and declared effective under the 1933 Act, (ii) based on an
opinion of counsel or a no-action letter of the Commission, in either case
reasonably acceptable to the Issuer and the Holder of such Registrable
Securities, such Registrable Securities are eligible for sale pursuant to Rule
144 or Rule 145 (without being subject to any holding period, volume limitations
or manner of sale restrictions thereunder), (iii) such Registrable Securities
shall have been otherwise sold, transferred or disposed of by a Holder to any
person that is not a Holder or (iv) such Registrable Securities shall have
ceased to be outstanding.
<PAGE>
5
"Registration Expenses" means any and all expenses incident to the
performance of or compliance with the provisions of this Agreement, including
(i) the fees, disbursements and expenses of the Issuer's counsel and accountants
(including in connection with the delivery of opinions and "cold comfort"
letters); (ii) all expenses and fees of compliance with securities and blue sky
laws; (iii) all expenses and fees, including filing fees, in connection with the
preparation, printing and filing of one or more registration statements (and
amendments thereto) pursuant to this Agreement; (iv) the expenses, fees and
disbursements of any special experts retained in connection with the
registration of the Registrable Securities; (v) the cost of producing or
printing any agreements among underwriters and underwriting agreements and any
blue sky memoranda and legal investment memoranda; (vi) the fees, disbursements
and expenses of underwriters customarily paid by issuers or sellers of
securities; (vii) the expenses and fees, including filing fees, incident to
securing any required review by the National Association of Securities Dealers,
Inc. of the Registrable Securities to be disposed of or the terms of any
disposition of Registrable Securities; (viii) all fees and expenses payable in
connection with the quotation of any Registrable Securities on any automated
interdealer quotation system or the listing of any Registrable Securities on any
securities exchange on which the Issuer Class A Common Stock or Issuer Class B
Common Stock is then quoted or listed; (ix) all transfer agents' and registrars'
expenses and fees in connection with any offering or disposition of Registrable
Securities; (x) all security engraving and security printing expenses; (xi) all
messenger and delivery expenses and fees; (xii) the fees, disbursements and
expenses of one legal counsel for the Holders in connection with each Demand
Registration, which legal counsel shall be selected by Holders owning a majority
of the Registrable Securities then being registered and reasonably acceptable to
all other Holders owning Registrable Securities then being registered; and
(xiii) any other reasonable out-of-pocket expenses incurred by the Issuer or any
Holder pursuant to any provision of this Agreement; provided, however, that
Registration Expenses shall exclude (x) all underwriting discounts and
underwriting commissions and transfer taxes, if any, in connection with the sale
of any Registrable Securities and (y) the fees and expenses of counsel for any
Holder (other than pursuant to clause (xii) above).
"Rule 144" means Rule 144 (or any successor rule to similar
effect) promulgated under the 1933 Act.
"Rule 145" mean Rule 145 (or any successor rule to similar effect)
promulgated under the 1933 Act.
"Rule 415 Offering" means an offering on a delayed or continuous
basis pursuant to Rule 415 (or any successor rule to similar effect) promulgated
under the 1933 Act.
"Section 2.04 Period" has the meaning ascribed thereto in
Section 2.04.
"Section 2.06(e) Period" has the meaning ascribed thereto in
Section 2.06(e).
<PAGE>
6
"Selling Holder" means any Holder who sells Registrable Securities
pursuant to a public offering registered pursuant to this Agreement.
"Sony" has the meaning ascribed thereto in the recitals of this
Agreement.
"Time Warner" has the meaning ascribed thereto in the recitals to
this Agreement.
SECTION 1.02. Internal References. Unless the context indicates
otherwise, references to Articles, Sections and paragraphs shall refer to the
corresponding articles, sections and paragraphs in this Agreement, and
references to the parties shall mean the parties to this Agreement.
ARTICLE II
Registration Rights
SECTION 2.01. Piggy-Back Registration. (a) Whenever during the
Effective Period the Issuer shall propose to file a registration statement under
the 1933 Act relating to the public offering of Issuer Class A Common Stock for
cash (other than pursuant to a registration statement on Form S-4 or Form S-8 or
any successor forms, or an offering of securities solely to existing
stockholders or employees of the Issuer), including in respect of a Demand
Registration, the Issuer shall (i) provide a written notice at least 20 days
prior to the filing thereof to each Holder, specifying the approximate date on
which the Issuer proposes to file such registration statement and advising such
Holder of its right to have any or all of the Registrable Securities held by
such Holder included among the securities to be covered thereby and (ii) at the
written request of any such Holder given to the Issuer within 15 days after
receipt of such written notice from the Issuer, include among the securities
covered by such registration statement the number of Registrable Securities that
such Holder shall have requested be so included (subject, however, to reduction
in accordance with Section 2.01(b) and subject to compliance with any
restrictions to which such Holder may be subject under the Governance
Agreement). The Issuer shall use reasonable efforts to cause the lead or
managing underwriter, if any, of any proposed underwritten offering to permit
the Holders of Registrable Securities requested to be covered by the
registration statement for such offering to include such securities in such
offering on the same terms and subject to the same conditions as any similar
securities included therein; provided, however, that the Issuer shall not be
required under this Section 2.01(a) to use any efforts to cause any lead or
managing underwriter of any such offering to permit any such Holder to include
any such securities in such offering unless such Holder accepts the terms of any
underwriting agreed upon between the Issuer (and any other Holder whose
securities are included in such offering) and such underwriter (and any other
underwriter) and performs such Holder's obligations thereunder.
<PAGE>
7
(b) Each Holder of Registrable Securities desiring to participate
in an offering pursuant to Section 2.01(a) may include shares of Issuer Class A
Common Stock in any registration statement relating to such offering to the
extent that the inclusion of such shares of Issuer Class A Common Stock shall
not reduce the number of shares of Issuer Class A Common Stock to be offered and
sold by the Issuer pursuant thereto. If the lead or managing underwriter for an
underwritten offering pursuant to Section 2.01(a) determines that marketing
factors require a limitation on the number of shares of Issuer Class A Common
Stock to be offered and sold by the stockholders of the Issuer in such offering,
there shall be included in the offering only that number of shares of Issuer
Class A Common Stock, if any, that such lead or managing underwriter reasonably
and in good faith believes will not jeopardize the success of the offering of
all the shares of Issuer Class A Common Stock that the Issuer desires to sell
for its own account (including a material reduction in the price per share of
the shares of Issuer Class A Common Stock to be sold). In such event, and
provided the lead or managing underwriter has so notified the Issuer in writing,
the number of shares of Issuer Class A Common Stock to be offered and sold by
stockholders of the Issuer, including Holders of Registrable Securities,
desiring to participate in such offering shall be allocated among such
stockholders of the Issuer pro rata on the basis of the relative number of
shares requested to be included therein by each such stockholder.
(c) Nothing in this Section 2.01 shall create any liability on the
part of the Issuer to the Holders of Registrable Securities if the Issuer for
any reason should decide not to file a registration statement proposed to be
filed pursuant to Section 2.01(a) or to withdraw a registration statement filed
pursuant to Section 2.01(a) subsequent to its filing, regardless of any action
whatsoever that a Holder may have taken, whether as a result of the issuance by
the Issuer of any notice under this Section 2.01 or otherwise; provided that any
Demand Holder shall be entitled to initiate or continue such registration as a
Demand Registration pursuant to Section 2.02 following such failure to file or
withdrawal to the extent that such registration by such Demand Holder would
otherwise satisfy the requirements of Section 2.02 and provided further that the
Issuer shall be obligated to pay all Registration Expenses to the extent
incurred in connection with any such registration statement proposed to be filed
or withdrawn subsequent to its filing.
(d) A request by Holders to include Registrable Securities in a
proposed underwritten offering pursuant to Section 2.01(a) shall not be deemed
to be a request for a Demand Registration.
SECTION 2.02. Demand Registration. (a) Upon written notice to the
Issuer from any Demand Holder at any time during the Effective Period (the
"Demand Request") requesting that the Issuer effect the registration under the
1933 Act of any or all of the Registrable Securities held by such requesting
Demand Holder or any member of such requesting Demand Holder's Demand Holder
Group, which notice shall specify the intended method or methods of disposition
of such Registrable Securities (which method or methods may relate to a "shelf"
registration pursuant to Rule 415 promulgated under the 1933 Act), subject to
compliance with any restrictions to which such Demand Holder may be subject
under the Governance Agreement, the Issuer shall
<PAGE>
8
prepare and, within 30 days after such request, file with the Commission a
registration statement with respect to such Registrable Securities and
thereafter use its best efforts to cause such registration statement to be
declared effective under the 1933 Act for purposes of dispositions in accordance
with the intended method or methods of disposition stated in such request.
Notwithstanding any other provision of this Agreement to the contrary:
(i) each Demand Holder may exercise its rights to request
registration in respect of Registrable Securities held by such Demand
Holder or any member of such Demand Holder's Demand Holder Group under
this Section 2.02(a) on not more than four occasions (each such
registration being referred to herein as a "Demand Registration");
(ii) the Issuer shall not be required to effect more than one
Demand Registration in any period of 120 consecutive days;
(iii) the Issuer shall not be required to effect a Demand
Registration unless the Registrable Securities to be registered pursuant
to such Demand Registration shall have a then current market value of at
least $1,000,000, unless such Demand Registration is for all remaining
Registrable Securities held by the requesting Demand Holder or any member
of the requesting Demand Holder's Demand Holder Group, as the case may
be; and
(iv) the Issuer shall not be required to effect a Demand
Registration at any time that it shall have effective a shelf
registration statement pursuant to which the requesting Demand Holder or
members of the requesting Demand Holder's Demand Holder Group, as the
case may be, could effect the disposition of the Registrable Securities
held by such Demand Holder or member of such Demand Holder's Demand
Holder Group in the manner requested.
(b) Notwithstanding any other provision of this Agreement to the
contrary, a Demand Registration requested by a Demand Holder pursuant to this
Section 2.02 shall not be deemed to have been effected, and, therefore, not
requested and the rights of such Demand Holder shall be deemed not to have been
exercised for purposes of Section 2.02(a), (i) if such Demand Holder has not
received notice (confirmed by the Commission) that such Demand Registration has
become effective under the 1933 Act or (ii) if such Demand Registration, after
it became effective under the 1933 Act, was not maintained effective under the
1933 Act (other than as a result of any stop order, injunction or other order or
requirement of the Commission or other Governmental Entity solely on the account
of a material misrepresentation or omission of such Demand Holder) for at least
(x) in the case of a Demand Registration that is a Rule 415 Offering, twelve
months, (y) in the case of a Demand Registration that is an underwritten
offering, 120 days and (z) in the case of any other Demand Registration, 180
days (or, in each case, such shorter period ending when all the Registrable
Securities covered thereby have been disposed of pursuant thereto (but in no
event before the expiration of the 90-day period referred to in Section 4(3) of
the 1933 Act and Rule 174 promulgated thereunder, if applicable)). The time
periods referred to in the
<PAGE>
9
preceding sentence shall be extended, with respect to any Demand Registration,
by the number of days in any Section 2.04 Period and/or Section 2.06(e) Period
applicable to such Demand Registration. If a Demand Request is made by any
Demand Holder during the Effective Period but the related Demand Registration is
delayed or not effected in the circumstances set forth in this Section 2.02(b),
then such Demand Holder shall be deemed not to have used one of its rights to
request a Demand Registration under this Section 2.02 and shall continue to have
such right.
(c) The Issuer shall not include any securities that are not
Registrable Securities in any registration statement filed pursuant to a Demand
Registration without the prior written consent of the members of the Demand
Holder Groups who hold a majority of the Registrable Securities proposed to be
sold therein.
(d) If the lead or managing underwriter referred to in Section
2.03 determines that marketing factors require a limitation on the number of
Registrable Securities to be offered and sold by the Holders pursuant to a
Demand Registration, there shall be included in the offering only that number of
Registrable Securities that such lead or managing underwriter reasonably and in
good faith believes will not jeopardize the success of the offering (including a
material reduction in the price per share of the Registrable Securities to be
sold). In such event, and providing the lead or managing underwriter has so
notified the Holders of the Registrable Securities proposed to be sold in such
Demand Registration in writing (with a copy to the Issuer), the number of
Registrable Securities to be offered and sold by such Holders in such offering
shall be allocated pro rata among such Holders on the basis of the relative
number of Registrable Securities requested to be included therein by each such
Holder (in which case Section 2.02(a)(iii) shall be disregarded for purposes of
such Demand Registration); provided that the Demand Holder that made such Demand
Request shall be entitled to request one additional Demand Registration (without
needing to make a Demand Request therefor within the Effective Period and
disregarding Sections 2.02(a)(i) and 2.02(a)(iii) for purposes of such
additional Demand Registration) if, as a result of such allocation, less than
50% of the Registrable Securities originally proposed to be sold in such
offering are actually included and sold in such offering.
SECTION 2.03. Other Matters in Connection with Registrations. In
the event that any Demand Registration shall involve, in whole or in part, an
underwritten offering, the Demand Holder requesting such Demand Registration
shall have the right to designate an underwriter or underwriters as the lead or
managing underwriter or underwriters of such underwritten offering, which
underwriter or underwriters shall be reasonably acceptable to the Issuer.
SECTION 2.04. Certain Delay Rights. Notwithstanding any other
provision of this Agreement to the contrary, if at any time while a Demand
Registration is effective the Issuer provides written notice to each Holder of
Registrable Securities covered by the registration statement in respect of such
Demand Registration that the Board of Directors has
<PAGE>
10
determined, in its reasonable business judgment, by a majority vote of the
entire Board of Directors, that it would be materially disadvantageous to the
Issuer (because the sale of Registrable Securities covered by such registration
statement or the disclosure of information therein or in any related prospectus
or prospectus supplement would materially interfere with or otherwise adversely
affect in any material respect any acquisition, financing, corporate
reorganization or other material transaction or development involving the Issuer
(a "Disadvantageous Condition")) for sales of Registrable Securities thereunder
to then be permitted, and setting forth in general terms the reasons for such
determination, the Issuer may refrain from maintaining current the prospectus
contained in such registration statement until such Disadvantageous Condition no
longer exists (notice of which the Issuer shall promptly deliver to each Holder
or Registrable Securities covered by such registration statement). Furthermore,
notwithstanding any other provision of this Agreement to the contrary, with
respect to any registration statement filed, or to be filed, pursuant to Section
2.02, if the Issuer provides written notice to each Holder of Registrable
Securities to be covered by such registration statement that the Board of
Directors has determined, in its reasonable business judgment, by a majority
vote of the entire Board of Directors, that it would be materially
disadvantageous to the Issuer (because of a Disadvantageous Condition) for such
a registration statement to be maintained effective, or to be filed or to become
effective, and setting forth in general terms the reasons for such
determination, the Issuer shall be entitled to cause such registration statement
to be withdrawn or the effectiveness of such registration statement to be
terminated, or, in the event no registration statement has been filed, the
Issuer shall be entitled to not file such registration statement, until such
Disadvantageous Condition no longer exists (notice of which the Issuer shall
promptly deliver to each Holder of Registrable Securities covered, or to be
covered, by such registration statement).
With respect to each Holder of Registrable Securities covered any
registration statement in respect of a Demand Registration, upon receipt by such
Holder of any notice from the Issuer of a Disadvantageous Condition, such Holder
shall forthwith discontinue use of the prospectus and any prospectus supplement
under such registration statement and shall suspend sales of Registrable
Securities until such Disadvantageous Condition no longer exists and, if so
directed by the Issuer by such notice, such Holder will deliver to the Issuer
all copies (other than permanent file copies) then in such Holder's possession
of the prospectus and prospectus supplements then covering such Registrable
Securities at the time of receipt of such notice.
Notwithstanding anything else contained in this Agreement to the
contrary, (i) the maintaining current of a prospectus (and the suspension of
sales of Registrable Securities) in connection with a Demand Registration may
not be delayed under this Section 2.04 for more than a total of 90 days in any
twelve-month period and (ii) neither the filing nor the effectiveness of any
registration statement under Section 2.02 may be delayed for more than a total
of 90 days pursuant to this Section 2.04. The time period during which any
registration statement under Section 2.02 must be maintained effective pursuant
to Section 2.02(b) shall be extended by the number of days in any delay period
imposed pursuant to this Section 2.04 (a "Section 2.04 Period").
<PAGE>
11
In no event shall the Issuer be entitled to delay the maintaining current of a
prospectus (and the suspension of sales of Registrable Securities) in connection
with any Demand Registration or to delay the filing or effectiveness of any
registration statement under Section 2.02 unless the Issuer shall (i)
concurrently prohibit sales by other security holders under registrable
statements covering securities held by such other securityholders and (ii)
forbid purchases and sales of securities of the Issuer in the open market by
senior executives of the Issuer.
In the event any registration statement in respect of a Demand
Registration is withdrawn or the effectiveness of such registration statement is
terminated, or a registration statement is not filed in respect of a Demand
Registration, in each case pursuant to this Section 2.04, then the Demand Holder
requesting such Demand Registration shall have the right to withdraw such Demand
Holder's request for such Demand Registration at any time following receipt of
any notice from the Issuer of a Disadvantageous Condition, and such Demand
Holder shall be deemed not to have used one of its rights to request a Demand
Registration under Section 2.02 and shall continue to have such right.
SECTION 2.05. Expenses. Except as otherwise provided in this
Agreement, the Issuer shall pay all Registration Expenses with respect to each
registration under this Agreement. Notwithstanding the foregoing, (i) each
Holder and the Issuer shall be responsible for its own internal administrative
and similar costs, which shall not constitute Registration Expenses, (ii) each
Holder shall be responsible for the legal fees and expenses of its own counsel
(except as provided in clause (xii) of the definition of Registration Expenses),
(iii) each Holder shall be responsible for all underwriting discount and
underwriting commissions and transfer taxes, if any, in connection with the sale
of securities by such Holder, and (iv) the Holders shall be severally
responsible (pro rata on the basis of the relative number of Registrable
Securities requested to be included in the applicable registration) for all
out-of-pocket costs and expenses of the Issuer and its officers in connection
with providing the assistance and/or attendance contemplated by Section 2.06(m)
in connection with any Demand Registration.
SECTION 2.06. Registration and Qualification. If and whenever the
Issuer effects the registration of any Registrable Securities under the 1933 Act
as provided in Section 2.01 or 2.02, the Issuer shall as promptly as practicable
(but subject, in the case of any registration as provided in Section 2.02, to
the provisions thereof):
(a) prepare and file with the Commission (within 30 days after
such request) a registration statement (as well as any necessary
supplements and amendments thereto) which counsel for the Issuer shall
deem appropriate on such form as shall be available for the sale of such
Registrable Securities in accordance with the intended method of
distribution thereof (including, if requested by the Holders making a
Demand Request, distributions under a Rule 415 Offering) and use its best
efforts to cause such registration statement to become effective and
remain effective until the earlier to occur of (i) such time as all
<PAGE>
12
Registrable Securities covered by such registration statement have been
disposed of in accordance with the intended methods of disposition set
forth in such registration statement (but in no event before the
expiration of the 90-day period referred to in Section 4(3) of the 1933
Act and Rule 174 promulgated thereunder, if applicable) and (ii) the
expiration of (A) in the case of a Demand Registration that is a Rule 415
Offering, twelve months after such registration statement becomes
effective, (B) in the case of a Demand Registration that is an
underwritten offering, 120 days after such registration statement becomes
effective and (C) in the case of any other Demand Registration, 180 days
after such registration statement becomes effective, which period shall
be extended in the case of any Demand Registration by the number of days
in any Section 2.04 Period and/or Section 2.06(e) Period applicable to
such Demand Registration; provided, however, that, before filing a
registration statement or prospectus or any amendments or supplements
thereto, the Issuer shall (x) provide counsel selected by Selling Holders
owning a majority of such Registrable Securities with an opportunity to
participate in the preparation of such registration statement and each
prospectus included therein (and each amendment or supplement thereto) to
be filed with the Commission, which shall be subject to the review and
approval (which approval shall not be unreasonably withheld) of such
counsel, and (y) notify each Selling Holder and such counsel of any stop
order issued or, to the best knowledge of the Issuer, threatened by the
Commission and take all reasonable action required to prevent the entry
of such stop order or to remove it if entered;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective until the earlier to occur of (i) such time as all
Registrable Securities covered by such registration statement have been
disposed of in accordance with the intended methods of disposition set
forth in such registration statement (but in no event before the
expiration of the 90-day period referred to in Section 4(3) of the 1933
Act and Rule 174 promulgated thereunder, if applicable) and (ii) the
expiration of (A) in the case of a Demand Registration that is a Rule 415
Offering, twelve months after such registration statement becomes
effective, (B) in the case of a Demand Registration that is an
underwritten offering, 120 days after such registration statement becomes
effective and (C) in the case of any other Demand Registration, 180 days
after such registration statement becomes effective, which period shall
be extended in the case of any Demand Registration by the number of days
in any Section 2.04 Period and/or Section 2.06(e) Period applicable to
such Demand Registration, and comply with the provisions of the 1933 Act
with respect to the disposition of all securities covered by such
registration statement during such period in accordance with the intended
methods of disposition set forth in such registration statement;
<PAGE>
13
(c) furnish to each Holder of such Registrable Securities and to
any underwriter of such Registrable Securities, prior to the filing of
such registration statement, copies of such registration statement as
proposed to be filed and thereafter such number of copies of such
registration statement, each amendment and supplement thereto (in each
case, including all exhibits thereto), the prospectus included in such
registration statement (including each preliminary prospectus), in
conformity with the requirements of the 1933 Act, such documents
incorporated by reference in such registration statement or prospectus
and such other documents as such Holder or underwriter may reasonably
request;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such
jurisdictions as each Holder of Registrable Securities covered by such
Registration Statement requests and do any and all other acts and things
which may be reasonably necessary or advisable to enable each such Holder
to consummate the disposition of the Registrable Shares held by such
Holder in such jurisdictions; provided that the Issuer shall not be
required to (i) qualify generally to do business in any jurisdiction in
which it would not otherwise be required to qualify but for this Section
2.06(d), (ii) subject itself to taxation in any such jurisdiction or
(iii) consent to general service of process in any such jurisdiction;
(e) promptly notify each Selling Holder in writing (i) at any time
when a prospectus relating to such Registrable Securities is required to
be delivered under 1933 Act, upon discovery that, or upon the occurrence
of any event as a result of which, the prospectus included in such
registration statement contains an untrue statement of a material fact or
omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made or (ii) of any request by the
Commission or any other Governmental Entity for any amendment of or
supplement to any registration statement or other document relating to
such offering, and in either such case the Issuer shall promptly prepare
a supplement or amendment to such prospectus and furnish to each Selling
Holder a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, after delivery to the
purchasers of such Registrable Securities, such prospectus shall not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under
which they were made (the number of days from (x) the date the written
notice contemplated by this paragraph (e) is given by the Issuer to (y)
the date on which the Issuer delivers to the Selling Holders the
supplement or amendment contemplated by this paragraph (e) is referred to
in this Agreement as a "Section 2.06(e) Period");
(f) use its best efforts to cause such Registrable Securities to
be registered with or approved by such other Governmental Entities as may
be necessary by virtue of the business and operations of the Issuer to
<PAGE>
14
enable each Holder of Registrable Securities covered by such Registration
Statement to consummate the disposition of the Registrable Securities
held by such Holder;
(g) enter into and perform customary agreements (including an
underwriting agreement in customary form) and take such other actions as
are reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities, and each Selling Holder shall
also enter into and perform its obligations under such agreements;
(h) make available for inspection by any lead or managing
underwriter participating in any disposition pursuant to such
registration statement, any Selling Holder, counsel selected by Selling
Holders owning a majority of such Registrable Securities, counsel for any
Selling Holder and any attorney, accountant or other agent retained by
any lead or managing underwriter, the Selling Holders owning a majority
of such Registrable Securities or any Selling Holder (collectively, the
"Inspectors") all financial and other records, pertinent corporate
documents and properties of the Issuer (collectively, the "Records") as
shall be reasonably necessary to enable the Inspectors to exercise their
due diligence responsibility and cause the Issuer's officers, directors
and employees and the independent public accountants of the Issuer to
supply all information reasonably requested by any such Inspector in
connection with such registration statement; Records that the Issuer
determines, in good faith, to be confidential and in respect of which the
Issuer notifies each Selling Holder that such Records are confidential
shall not be disclosed by the Inspectors unless (x) the disclosure of
such Records is necessary to avoid or correct a misstatement or omission
in the applicable registration statement (in which case, the Selling
Holders shall cooperate with the Issuer in seeking confidential treatment
of such Records) or (y) the release of such Records is ordered pursuant
to a subpoena or other order from a court of competent jurisdiction; each
Selling Holder agrees that it shall, upon learning that disclosure of
such Records is sought in a court of competent jurisdiction, give notice
to the Issuer and allow the Issuer, at the Issuer's expense, to undertake
appropriate action to prevent disclosure of such Records;
(i) in the event such sale is effected pursuant to an underwritten
offering, obtain a "cold comfort" letter from the Issuers's independent
public accountants in customary form and covering such matters of the
type customarily covered by "cold comfort" letters as counsel for the
lead or managing underwriter, counsel for Selling Holders owning a
majority of such Registrable Securities or counsel for any Selling Holder
reasonably requests;
(j) furnish, at the request of any Selling Holder, on the date
such Registrable Securities are delivered to any underwriter for sale
pursuant to such registration or, if such Registrable Securities are not
being sold through any underwriter, on the date the registration
statement with respect to such Registrable Securities becomes effective,
an opinion,
<PAGE>
15
dated as of such date, of counsel representing the Issuer for the
purposes of such registration, addressed to the underwriters, if any, and
to each Selling Holder, covering such legal matters with respect to the
registration as any Selling Holder may reasonably request and are
customarily included in such opinions;
(k) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission and make available to each
Selling Holder, as soon as reasonably practicable, an earnings statement
covering a period of 12 months beginning after the effective date of the
registration statement, in a manner which satisfies the provisions of
Section 11(a) of the 1933 Act;
(l) cause all such Registrable Securities to be quoted on each
interdealer quotation system or listed on each securities exchange, if
any, on which other securities of the same class issued by the Issuer are
then quoted or listed (subject to notice of issuance); provided that the
applicable listing requirements are satisfied;
(m) use its best efforts to assist the Selling Holders in the
marketing of Registrable Securities in connection with underwritten
offerings (including, to the extent reasonably consistent with work
commitments, using reasonable efforts to have officers of the Issuer
attend "road shows" and analyst or investor presentations scheduled in
connection with such registration), with all out-of-pocket costs and
expenses incurred by the Issuer or such officers in connection with such
attendance or assistance to be paid by the Holders as provided in Section
2.05;
(n) furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration effected
pursuant to Section 2.01 or 2.02 unlegended certificates representing
ownership of the Registrable Securities being sold in such denominations
as shall be requested by the Selling Holders or the underwriters; and
(o) keep each Selling Holder advised in writing as to the
initiation and progress of such registration.
SECTION 2.07. Underwriting. If requested by the underwriters for
any underwritten offering of Registrable Securities pursuant to a registration
requested under Section 2.02(a), the Issuer shall enter into an underwriting
agreement with such underwriters for such offering, which agreement will contain
such representations and warranties by the Issuer and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including indemnification and contribution
provisions substantially to the effect and to the extent provided in Section
2.08, and agreements as to the provision of opinions of counsel and accountants'
letters to the effect and to the extent provided in Sections 2.06(j) and
2.06(i), respectively. Such underwriting agreement shall also contain such
representations and warranties by such Selling Holders and
<PAGE>
16
such other terms and provisions as are customarily contained in underwriting
agreements with respect to secondary distributions, including indemnification
and contribution provisions substantially to the effect and to the extent
provided in Section 2.08.
SECTION 2.08. Indemnification and Contribution. (a) The Issuer
agrees to indemnify and hold harmless, to the fullest extent permitted by law,
each Holder, its officers, directors, agents, trustees, stockholders and each
person, if any, who controls each Holder (within the meaning of either Section
15 of the 1933 Act or Section 20 of the 1934 Act) and any investment advisor of
such Holder from and against any and all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation and reasonable
attorneys' fees, disbursements and expenses) arising out of or based upon (i)
any untrue statement or alleged untrue statement of a material fact contained in
any registration statement or any amendment thereof, any preliminary prospectus
or prospectus (as amended or supplemented if the Issuer shall have furnished any
amendment or supplements thereto) relating to the Registrable Securities or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except insofar as such
untrue statement or omission or alleged untrue statement or omission was made
(x) in reliance upon and in conformity with any information furnished to the
Issuer in writing by such Holder expressly for use therein, (y) in any
prospectus used after such time as the Issuer advised such Holder in writing
that the filing of a post-effective amendment or supplement thereto was
required, other than such prospectus as so amended or supplemented or (z) in any
prospectus used after such time as the obligation of the Issuer to keep such
prospectus effective and current shall have expired or (ii) any violation by the
Issuer of the 1933 Act in connection with such registration. The Issuer shall
also indemnify any underwriters of the Registrable Securities, their officers
and directors and each person that controls such underwriters (within the
meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act) to
the same extent as provided in this Section 2.08 with respect to the
indemnification of the Holders.
(b) In connection with any registration statement pursuant to
which Registrable Securities owned by any Holders are being registered as
provided in Section 2.01 or 2.02, each such Holder shall furnish to the Issuer
in writing such information with respect to such Holder as the Issuer may
reasonably request for use in connection with any such registration statement or
related prospectus and agrees to indemnify and hold harmless, to the fullest
extent permitted by law, the Issuer, its officers, directors, agents, trustees
and stockholders and each person, if any, that controls the Issuer (within the
meaning of either Section 15 of the 1993 Act or Section 20 of the 1934 Act) from
and against any and all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation and reasonable attorneys' fees,
disbursements and expenses) arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement or any amendment thereof, any preliminary prospectus or prospectus (as
amended or supplemented if the Issuer shall have furnished any amendment or
supplement thereto) relating to the Registrable Securities or
<PAGE>
17
any omission or alleged omission to state therein a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, but only insofar as such losses, claims, damages,
liabilities and expenses are caused by information furnished in writing to the
Issuer by such Holder expressly for use therein.
(c) Each party indemnified under paragraph (a) or (b) above shall,
promptly after receipt of notice of a claim or action against such indemnified
party in respect of which indemnity may be sought hereunder, notify the
indemnifying party in writing of the claim or action; provided that the failure
to notify the indemnifying party shall not relieve it from any liability that it
may have to an indemnified party on account of the indemnity agreement contained
in paragraph (a) or (b) above except to the extent that the indemnifying party
was actually substantially prejudiced by such failure, and in no event shall
such failure relieve the indemnifying party from any other liability that it may
have to such indemnified party. If any such claim or action shall be brought
against an indemnified party, and it shall have notified the indemnifying party
thereof, unless based on the advice of counsel to such indemnified party a
conflict of interest between such indemnified party and indemnifying parties may
exist in respect of such claim, the indemnifying party shall be entitled to
participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof. After
notice from the indemnifying party to the indemnified party of its election to
assume the defense of such claim or action and the prompt undertaking of such
defense with counsel reasonably acceptable to the indemnified party, the
indemnifying party shall not be liable to the indemnified party under this
Section 2.08 for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof. Any indemnifying party
against whom indemnity may be sought under this Section 2.08 shall not be liable
to indemnify an indemnified party if such indemnified party settles such claim
or action without the consent of the indemnifying party (such consent not to be
unreasonably withheld, delayed or conditional). The indemnifying party may not
agree to any settlement of any such claim or action, other than solely for
monetary damages for which the indemnifying party shall be responsible
hereunder, the result of which any remedy or relief shall be applied to or
against the indemnified party, without the prior written consent of the
indemnified party, which consent shall not be unreasonably withheld. In any
action hereunder as to which the indemnifying party has assumed the defense
thereof, the indemnified party shall continue to be entitled to participate in
the defense thereof, with counsel of its own choice, but the indemnifying party
shall not be obligated hereunder to reimburse the indemnified party for the
costs thereof unless (i) the indemnifying party agrees to pay such costs or (ii)
the indemnifying party fails to promptly assume and continue the defense of such
claim or action with counsel reasonably satisfactory to the indemnified party.
(d) If the indemnification provided for in this Section 2.08 from
an indemnifying party shall for any reason be unavailable to an indemnified
party (other than in accordance with its terms) in respect of any loss, claim,
damage, liability or expense referred to herein, then such indemnifying party
shall, in lieu of indemnifying such indemnified party, contribute to the amount
<PAGE>
18
paid or payable by such indemnified party as a result of such loss, claim,
damage, liability or expense in such proportion as is appropriate to reflect the
relative fault of such indemnifying party on the one hand and of such
indemnified party on the other hand in connection with the statements or
omissions (or actions) that resulted in such losses, claims, damages,
liabilities or expenses as well as any other relevant equitable considerations.
The relative fault of the indemnifying party on the one hand and the indemnified
party on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such indemnifying party or indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage, liability or expense in respect
thereof referred to above in this paragraph (d), shall be deemed to include, for
purposes of this paragraph (d), any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 2.08 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in this paragraph (d).
Notwithstanding any other provision of this Section 2.08, no Holder shall be
required to contribute any amount in excess of the amount by which the proceeds
of the offering received by such Holder exceeds the amount of any damages which
such Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. Each Holder's obligation to contribute is
several in the proportion that the proceeds of the offering received by such
Holder bears to the total proceeds of the offering, and not joint.
(e) The obligations of the parties under this Section 2.08 shall
be in addition to any liability that any party may otherwise have to any other
party.
SECTION 2.09. Holdback Agreements. (a) Restrictions on Holders. To
the extent not inconsistent with applicable law, in the event that any
Registrable Securities shall be registered in connection with an underwritten
offering, each Holder agrees not to effect (and to cause its Affiliates not to
effect) any public sale or distribution of Registrable Securities or any other
equity security of the Issuer, or any securities convertible into or
exchangeable or exercisable for Registrable Securities or other equity
securities of the Issuer, including a sale pursuant to Rule 144 promulgated
under the 1933 Act (except as part of such registration), during the 20 days
prior to, and during the 90-day period beginning on, the later of (i) the
effective date of such registration or (ii) the commencement of a public
distribution of such Registrable Securities pursuant to such registration, in
each case if and to the extent requested by the lead or managing underwriter of
such underwritten offering.
<PAGE>
19
(b) Restrictions on the Issuer. In connection with any
registration of Registrable Securities in connection with an underwritten
offering, the Issuer agrees not to effect any public sale or distribution of any
of its equity securities, or any securities convertible into or exchangeable or
exercisable for its equity securities (except pursuant to a registration
statement on Form S-4 or Form S-8 or any successor or similar forms thereto)
during the 20 days prior to, and during the 90-day period beginning on, the
later of (i) the effective date of such registration or (ii) the commencement of
a public distribution of such Registrable Securities pursuant to such
registration.
SECTION 2.10. Priority Rights of Holders. The Issuer hereby agrees
not to enter into any agreement for the registration, sale or distribution of
any of the Issuer's securities with terms preferential to or pari passu with the
terms set forth in this Agreement with respect to each Holder. In the event that
any Holder shall request that the Issuer effect a registration of Registrable
Securities pursuant to Section 2.01 or 2.02 and at such time the Issuer has been
requested to effect a registration of any of its securities pursuant to any such
other agreement and the lead or managing underwriter for an underwritten
offering of such Registrable Securities under such registration advises the
Issuer that, in its opinion, the Issuer should not at such time effect the
concurrent registration of such securities and Registrable Securities or advises
that the aggregate number of such securities and Registrable Securities proposed
to be registered exceed the amount (the "Optimal Amount") that can be sold in
(or during the time of) such offering without delaying or jeopardizing the
success of such offering (including a material reduction in the price per share
of such Registrable Securities), then the Issuer shall be obligated to effect
the registration of Registrable Securities pursuant to Section 2.01 or Section
2.02 and not effect the registration of such other securities or shall
alternatively reduce the number of securities (other than Registrable
Securities) to be registered in connection with such offering to an amount that,
together with the number of Registrable Securities to be registered, would not
exceed the Optimal Amount.
SECTION 2.11. Registration Expenses. The Issuer shall pay all
Registration Expenses in connection with the first four Demand Registrations
with respect to each Demand Holder and all "piggyback registrations" pursuant to
Section 2.01 or 2.02, and each Holder shall pay its pro rata portion of all
underwriting discounts, underwriting commissions and transfer taxes, if any,
allocable to the sale or disposition of any Registrable Securities of such
Holder in connection with any registration of such Registrable Securities
effected pursuant to Section 2.01 or 2.02 based on the aggregate market value of
the Registrable Securities of each Holder included in such registration.
SECTION 2.12. Holder Covenants. Each Holder hereby covenants and
agrees that:
(a) it will not sell any Registrable Securities under the
registration statement until is has received notice from the Issuer that such
registration statement and any post-effective amendments thereto have become
effective; provided that the Issuer shall notify each Holder promptly when such
<PAGE>
20
registration statement and any post-effective amendments thereto have become
effective;
(b) it will comply with the prospectus delivery requirements of
the Securities Act as applicable to it in connection with the sales of
Registrable Securities pursuant to a registration statement; and
(c) it shall furnish to the Issuer such information regarding the
Holder, the Registrable Securities held by it and the distribution proposed by
the Holder as the Issuer may request in writing to the extent such information
is required in connection with any registration, qualification or compliance
referred to in this Agreement.
ARTICLE III
Miscellaneous
SECTION 3.01. Amendments, Waivers, Etc. This Agreement may not be
amended, waived or otherwise modified or terminated except by an instrument in
writing signed by the Issuer and Holders representing at least 66 2/3 of the
Registrable Securities then held by all Holders (other than Financial
Intermediaries).
SECTION 3.02. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or sent by overnight courier (providing proof of delivery) (i) to each Demand
Holder and the Issuer in accordance with Section 11.02 of the Merger Agreement
(or at such other address for such party as shall be specified by like notice)
and (ii) to each Holder other than a Demand Holder at the address for such
Holder set forth on the signature pages hereto (or at such other address for
such party as shall be specified by like notice).
SECTION 3.03. Interpretation. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Wherever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".
SECTION 3.04. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule or law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
<PAGE>
21
SECTION 3.05. Counterparts. This Agreement may be executed in one
or more counterparts, all of which shall be considered one and the same
agreement. Each party need not sign the same counterpart.
SECTION 3.06. Entire Agreement; No Third-Party Beneficiaries. This
Agreement (i) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof and (ii) except for the provisions of
Section 2.08, is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
SECTION 3.07. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of New York regardless
of the laws that might otherwise govern under applicable principles of conflicts
of law thereof.
SECTION 3.08. Assignment. Except as provided in clause (ii) or
(iii) of the definition of Holder, neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise, by any of the parties without the prior
written consent of the other parties. Any purported assignment without such
consent shall be void. Subject to the preceding sentences, this Agreement will
be binding upon, inure to the benefit of, and be enforceable by, the parties and
their respective successors and assigns.
SECTION 3.09. Enforcement. The parties agree that irreparable
damage would occur and that the parties would not have any adequate remedy at
law in the event that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any New York state court or, any
Federal court located in the State of New York, this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (i) consents to submit itself to the personal jurisdiction
of any New York state court or any Federal court located in the State of New
York in the event any dispute arises out of this Agreement, (ii) agrees that it
will not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court, (iii) agrees that it will not bring any
action relating to this Agreement in any court other than a New York state court
or any Federal court sitting in the State of New York and (iv) waives any right
to trial by jury with respect to any claim or proceeding related to or arising
out of this Agreement or any transaction contemplated hereby.
<PAGE>
22
IN WITNESS WHEREOF, the Issuer and the Holders have caused this
Agreement to be duly executed as of the day and year first above written.
DELAWARE HOLDCO
CORPORATION,
by ___________________
Name:
Title:
Holders
TIME WARNER INC.,
by ___________________
Name:
Title:
Address:
WARNER MUSIC CANADA LTD.,
by ___________________
Name:
Title:
Address:
WARNER MUSIC GROUP INC.,
by ___________________
Name:
Title:
Address:
<PAGE>
23
WCI RECORD CLUB INC.,
by ___________________
Name:
Title:
Address:
SONY CORPORATION OF AMERICA,
by ___________________
Name:
Title:
Address:
SONY MUSIC ENTERTAINMENT INC.,
by ___________________
Name:
Title:
Address:
SONY MUSIC ENTERTAINMENT
(CANADA) INC.,
by ___________________
Name:
Title:
Address:
<PAGE>
24
SCHEDULE I
Investors
Time Warner Inc.
Warner Music Canada Ltd.
Warner Music Group Inc.
WCI Record Club Inc.
Sony Corporation of America
Sony Music Entertainment Inc.
Sony Music Entertainment (Canada) Inc.
<PAGE>
For Immediate Release
CDNOW TO MERGE WITH SONY'S AND TIME WARNER'S COLUMBIA HOUSE
TO CREATE WORLD'S LEADING MUSIC AND VIDEO E-COMMERCE COMPANY
New Company to Mine More Than 16 Million
Active Columbia House Music and Video Buyers
New Company Expects to Have
Initial Combined Online Customer Base of Approximately 4 Million
New Company to be Premier Retailer of
Packaged Music and an Integral Part
of Sony's and Time Warner's
E-Commerce Strategies
FORT WASHINGTON, PA and NEW YORK, NY, July 13, 1999--CDNOW, Inc. (NASDAQ: CDNW),
a leader in music and video commerce, content and community, has entered into a
definitive agreement with Sony Corporation of America and Time Warner Inc. to
merge with Columbia House, the leading club-based direct marketer of music and
videos, which is owned equally by Sony Corporation (NYSE: SNE) and Time Warner
Inc. (NYSE: TWX), it was announced today. The new public company resulting from
the merger will be owned 37 percent each by Sony and Time Warner. CDNOW's
existing stockholders will own the remaining 26 percent.
Backed by two of the world's largest media companies, the merger will create a
major entertainment, e-commerce and direct marketing company by bringing
together a leading music web destination and the largest music and video club in
the U.S. and Canada. Sony and Time Warner will make the new company an integral
part of their overall e-commerce activities. CDNOW shareholders will benefit
from the new company's ability to leverage the cross-promotional strengths and
full resources of Sony and Time Warner to lower its customer acquisition costs
and boost its customer base, providing an e-commerce model with a sound economic
basis.
Commenting on the agreement, Jonathan Diamond, chairman of the board of CDNOW,
and Jason Olim, president and CEO of CDNOW, said: "Today CDNOW takes its place
among the world's great music brands. With the combined resources of Time
Warner, Sony, Columbia House and CDNOW, our new company will be a leader in
music, commerce, content and community. This merger will dramatically accelerate
our growth and fulfill our vision of leading the digital revolution in the music
industry. We are excited to tap the 16 million music- and
<PAGE>
CDNOW TO MERGE WITH SONY'S AND TIME WARNER'S COLUMBIA HOUSE, PAGE 2--
video-buying customers of Columbia House, to expand our brand development
through advertising and integration on Sony and Time Warner's entertainment,
media and communications properties, and to develop a close, mutually supportive
relationship with Sony and Time Warner's music divisions. CDNOW began the
digital music revolution in 1994 and will continue as its leader in the new
millennium."
Gerald M. Levin, chairman and CEO of Time Warner, said: "Through this alliance,
we are creating an exciting new enterprise that will be the centerpiece of our
strong and growing presence in music and video e-commerce. With the commercial
arrival of the digital downloading of music, it also gives us an important
platform for offering consumers the opportunity to order or download music
instantly."
Nobuyuki Idei, president and CEO of Sony Corporation, said: "This innovative,
multi-partied transaction is an important corporate initiative for Sony that
advances our strategy to create new business platforms, and reflects our
determination to become a leader in entertainment-based new media. By joining
the powerful and complementary capabilities of Columbia House and CDNOW, we are
creating a strong foundation to capitalize on future e-commerce growth
opportunities."
Subject to the terms of the relevant agreements, Sony and Time Warner have made
significant strategic commitments to the new company. The two companies'
music-controlled web sites will be linked to the new company's online retail web
sites, enabling music fans to sample content relating to their favorite artists
and genres and then make a purchase with the click of a mouse. Sony and Time
Warner will provide the new company with opportunities to purchase a broad array
of advertising from the two companies' vast media properties. The considerable
content-related resources of Sony and Time Warner will help enrich the
entertainment content of the new company's e-commerce sites to create an
exciting and entertaining environment for consumers. Sony and Time Warner have
also agreed to provide certain financing guarantees to afford the merged company
financial flexibility to address its future capital needs and growth plans.
Columbia House will continue to operate as a "club membership" company offering
primarily music and video products, subject to the normal club restrictions.
CDNOW will continue as an online retailer that purchases its inventory from
distributors and/or directly from music companies. These two companies will
combine their complementary strengths to their mutual benefit. Columbia House
currently sells in excess of 15,000 music titles, while CDNOW sells in excess of
500,000 titles.
<PAGE>
CDNOW TO MERGE WITH SONY'S AND TIME WARNER'S COLUMBIA HOUSE, PAGE 3--
Howard Stringer, chairman and CEO of Sony Corporation of America, said: "This is
a compelling combination that brings together CDNOW's leadership position in
online music retailing with Columbia House's 16 million-member base, including a
rapidly growing Internet core of nearly two million members. It will create a
unique, publicly traded entity with two strong brands, broad distribution
channels, powerful customer linkage, and a seasoned group of executives. We
intend to build further on this platform and create new technology-based
distribution approaches that will supplement and leverage many of our business
entities."
Richard J. Bressler, chairman and CEO of Time Warner Digital Media, said: "This
exciting deal will enable us to drive down customer acquisition costs by using
Columbia House's 16 million active club members to support the growth of the new
company and by capitalizing on the tremendous cross-promotional opportunities
offered by the collective entertainment assets of Time Warner and Sony. These
include record labels, movie and television production and distribution
companies, cable and broadcast networks, and magazine and book publishers."
Richard C. Wolter, chairman and CEO of Columbia House, said: "With this year's
online sales projected at approximately $100 million and nearly two million
current online members, Columbia House has established itself as a significant
Internet player. This merger will accelerate and enhance both Columbia House's
and CDNOW's online activities, provide rich cross-promotional opportunities, and
enable us both to quickly expand and realize the full promise of interactive
media. I'm excited about working with the entire CDNOW team to mine the enormous
potential of the merger and to provide our valued members with greater choice
and an enhanced online experience."
The new company will have a 12-member board of directors, composed of four
designees each from Sony and Time Warner, CDNOW's President and CEO Jason Olim,
two independent directors, and the CEO of the new company.
An aggressive search is currently underway for the CEO of the new company. Jason
Olim will serve as CEO of the new company's Online/Retail division and Richard
C. Wolter, chairman and CEO of Columbia House, will continue to head the club
operations of the new company as CEO. After a transition period, Jonathan
Diamond will leave the new company to pursue other opportunities in the Internet
world.
The board of directors of CDNOW has unanimously approved the merger. The merger
agreement is subject to CDNOW's shareholder approval and customary conditions,
including
<PAGE>
CDNOW TO MERGE WITH SONY'S AND TIME WARNER'S COLUMBIA HOUSE, PAGE 4--
clearance by U.S. and Canadian antitrust authorities. The parties anticipate
completion of the transaction by year end.
In connection with the merger agreement, Sony and Time Warner have entered into
agreements with certain shareholders of CDNOW, including its President, CEO and
Co-Founder, Jason Olim, Co-Founder Matthew Olim and Chairman Jonathan Diamond,
who collectively control approximately 25 percent of the outstanding shares of
common stock of CDNOW. These agreements provide, among other things, that these
shareholders will vote their shares for the merger.
In 1998 Columbia House had net revenues of approximately $1.4 billion and
earnings before interest, taxes, depreciation and amortization of intangible
assets (EBITDA) of approximately $100 million. Last year, Columbia House
directly distributed approximately 200 million music and video units to its
membership base from its existing fulfillment operations. Columbia House has
experienced rapid growth in its online music and video clubs
(columbiahouse.com). Columbia House's online revenues have also grown rapidly,
and are projected to total approximately $100 million this year.
CDNOW, which currently serves an online music community of 2.3 million
customers, was formed by the merger of CDNOW Inc. and N2K Inc. in March of 1999.
CDNOW had revenues of $98.5 million in 1998 and estimated revenues of
approximately $71 million during the first six months of 1999, both stated on a
pro forma basis combined with the results of N2K for the periods prior to the
merger.
CDNOW, Sony and Time Warner expect to prepare and file a proxy
statement/prospectus with respect to the CDNOW shareholders meeting to approve
the merger and the registration of the new company's common stock to be issued
in the merger. The offering of the shares to be issued pursuant to the merger
will be made only by means of a prospectus.
CDNOW helps people to enrich their lives by providing a digital connection to
music. CDNOW (cdnow.com) offers approximately 500,000 music-related items - ten
times the size of the typical megastore - intelligent album recommendations,
custom CDs and music samples. CDNOW offers a vast library of reviews and
features from its own top music writers in addition to editorial content from
Rolling Stone, MTV/VH1 and CMJ New Music Monthly. CDNOW's network of strategic
partners includes America Online, Yahoo!, Lycos/Tripod, Netscape, Excite,
WebCrawler, MTV/VH1, RollingStone.com, and CBS Cable's TNN, CMT and country.com.
<PAGE>
CDNOW TO MERGE WITH SONY'S AND TIME WARNER'S COLUMBIA HOUSE, PAGE 5--
Sony Corporation of America (http://www.world.sony.com/SCA/index.html), based in
New York City, is the U.S. subsidiary of Sony Corporation
(http://www.world.sony.com), headquartered in Tokyo. Sony Corporation is a
leading manufacturer of audio, video, communications and information technology
products for the consumer and professional markets. Its music, motion pictures,
and computer entertainment operations make Sony one of the most comprehensive
entertainment companies in the world. Sony recorded consolidated annual sales of
over $56 billion in the last fiscal year ended March 31, 1999.
Time Warner Inc. (NYSE: TWX, www.timewarner.com), the world's leading media
company, consists of four businesses: cable networks, publishing, entertainment
and cable.
Caution Concerning Forward-Looking Statements This press release includes
certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on
management's current expectations and are naturally subject to uncertainty and
changes in circumstances. Actual results may vary materially from the
expectations contained herein due to changes in economic, business, competitive
and/or regulatory factors, as well as the difficulty of integrating the
organizations, operations and personnel of CDNOW and Columbia House, the
potential for impairment of relationships with employees or customers and the
uncertainty inherent in the execution of a new business plan for the combined
company. More detailed cautionary information is set forth in the most recent
quarterly report and other filings with the Securities and Exchange Commission
made by the companies named herein. None of the companies named herein are under
any obligation to (and expressly disclaim any such obligation to) update or
alter their forward-looking statements whether as a result of new information,
future events or otherwise.
####
<TABLE>
<CAPTION>
Contacts:
<S> <C> <C>
CDNOW, Inc. Sony Corporation of America Sony Music Entertainment
Marlo Zoda Ann Morfogen Patricia Kiel
215-619-9432 212-833-6873 212-833-4647
Time Warner Inc. Warner Music Group
Edward Adler Jim Noonan
212-484-6630 818-954-5489
</TABLE>
<PAGE>
Selected Financial and Operating Highlights
(Unaudited; $ in millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------- --------------------------- ---------------------------
(Financial highlights are for fiscal year 1998) Columbia
House CDNOW
- ------------------------------------------------------------- --------------------------- ---------------------------
<S> <C> <C>
Pro Forma Revenues $1,425 $98.5
Pro Forma EBITDA $99 $(105.4)
Pro Forma Net Debt - as of 3/31/99 $300 $3
Shares O/S - as of 3/31/99 N/A 30 million
Active Members/Customers - Off-line 14.6 million (c) N/A
- Online 1.9 million (c) 2.3 million (b)
Reach % - May 1999 (a) 3.8% 6.0%
Unique visitors - May 1999 (a) 2.3 million 3.7 million
Avg. time spent - May 1999 (a) 12.5 minutes 13.1 minutes
- ------------------------------------------------------------- --------------------------- ---------------------------
Online Activities Time Warner Sony
Reach % - May 1999 (a) 21.2% 7.1%
Unique visitors - May 1999 (a) 13.1 million 4.4 million
Avg. time spent per month - May 1999 (a) 19.0 minutes 17.3 minutes
- ------------------------------------------------------------- --------------------------- ---------------------------
</TABLE>
(a) Source: MediaMetrix.
(b) As of June 1999.
(c) As of May 1999.
