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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
GOODNOISE CORPORATION
(Name of Small Business Issuer in its charter)
FLORIDA 65-0207877
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
719 COLORADO AVENUE, PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices and Zip Code)
Issuer's telephone number, including area code: (650) 322-8910
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
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FORWARD-LOOKING STATEMENTS
This Form 10-SB contains forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including, but not
limited to statements related to the Company's business objectives and strategy,
the Company's Internet website and the development of the Company's music-
related content. Such forward-looking statements are based on current
expectations, estimates and projections about the Company's industry, management
beliefs, and certain assumptions made by the Company's management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results may differ materially from
those expressed, forecasted, or contemplated by any such forward-looking
statements.
Factors that could cause actual events or results to differ materially
include, among others, the following: market acceptance of the Internet as a
medium for consumers to obtain sound recordings, the Company's ability to
create, license, and deliver compelling music-related content, intense
competition from other providers of music-related content over the Internet, the
Company's early state of development, delays or errors in the Company's ability
to effect electronic commerce transactions, potential liability for defamation,
negligence, intellectual property infringement, and the distribution of obscene
or indecent material over the Internet, and other risks inherent in the record
industry and associated with doing business over the Internet. See,
"Management's Discussion and Analysis or Plan of Operation -- Factors That May
Affect Future Results and Market Price of Stock." Given these uncertainties,
investors are cautioned not to place undue reliance on any such forward-looking
statements.
Unless required by law, the Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. However, readers should carefully review the risk
factors set forth in other reports or documents the Company files from time to
time with the Securities and Exchange Commission, particularly the Annual
Reports on Form 10-KSB, the Quarterly Reports on Form 10-QSB and any Current
Reports on Form 8-K.
PART I
ITEM 1. BUSINESS
GENERAL
GoodNoise Corporation, The Internet Record Company, is a development
stage company that seeks to engage in the business of developing and marketing a
compelling repertoire of musical recordings and offering such recordings by
direct file transfer, or "downloading," to consumers over the Internet. The
Company was formed on January 8, 1998 and has established an Internet website,
but has not yet begun to offer recordings for sale. The Company's long-term
objective is to establish itself as a major provider of digital music content
direct to consumers over the Internet. Though the Company will also offer its
musical recordings in the form of compact discs (or "CDs") distributed to the
consumers through traditional retail channels, the Company foresees a gradual
shift from the distribution of physical CDs through retail channels to the
delivery of digitized sound recordings to consumers directly over the Internet
for home recording on personal computer hard disks and other magnetic storage
media, recordable CDs ("CD-Rs"), and solid-state sound recording players.
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The Company believes that the percentage of music purchases made by direct
download over the Internet will be an increasing percentage of total music
purchases, and that this percentage will grow significantly during the next
several years. During the transition from traditional distribution of physical
CDs to the delivery of recordings by digital transmission over the Internet, the
Company's strategy will be to acquire compelling music content for marketing to
audiences, most likely to be early-adopters of the software and equipment
necessary to use the Internet to download, record and play musical recordings on
their home computers, CD-Rs, and solid-state players. During that time, the
Company will seek to build a strong brand name for the delivery of music content
over the Internet around the trademark GoodNoise. Later, as market acceptance of
the Internet as a medium for consumers to obtain sound recordings grows, the
Company will expand its repertoire of music for promotion and sale in other
markets.
The Company will organize its music repertoire on its website, which is
currently under development. Initially, the Company plans to design its website
to enable consumers to download sound recordings, purchase music-related
merchandise, obtain music news, and listen to web-radio broadcasts. Later, the
Company intends to enhance its website to allow the Company to offer music
reviews, live concerts, and music videos. The Company also intends to seek to
attract sponsors and advertisers wishing to reach the audience for the Company's
content. The Company's strategy is to increase the size of its user base, and
leverage off of such increased user base to increase revenues from sales of
music, related merchandise, advertising and sponsorship programs. The Company
also plans to enter into strategic alliances with other online CD retailers to
allow reference sales of their online catalog and to allow the sale of the
Company's catalog.
Content offered on the Company's website will initially focus on modern
rock and alternative music for the college-aged audience, specially tailored for
the young, high-tech music consumer. In the future, the Company may offer
genre-specific music websites for Jazz, Classical, and specific artists in the
Company's repertoire, allowing users to view artist biographies and
discographies, musicians' influences and historical information, and to hear and
view cybercasts and recording and video samples. The Company believes that by
providing a broad array of information in a highly-personalized, interactive
context, it can create an entertaining environment that will attract traffic to
its website, foster brand awareness and encourage purchases of music and related
merchandise. Product purchases will be coordinated through the website, which
will act as the Company's on-line retail store.
The Company plans to develop a repertoire of recording artists and to
develop its own catalog, and specifically licensed third party catalogs, for
sale either by downloadable track or by CD. The Company also intends to employ
innovative arrangements with aspiring recording artists who might not otherwise
be able to gain the attention of traditional record companies and with record
labels looking for new channels for the distribution of their recording
catalogs. Thus, recordings offered by the Company will include those from the
Company's own repertoire, as well as masters licensed from other record labels.
The Company seeks to develop a relationship with one of the major record
distributors to handle domestic distribution of the Company's recordings.
The Company plans to establish its own music publishing company, GoodNoise
Music Publishing, which will acquire an interest in the music publishing rights
of some of the artists in the Company's repertoire. The Company's music
publishing interests will be administered through an arrangement with peermusic,
one of the largest music publishing companies. Ralph Peer, the Chief Executive
Officer of peermusic, is a member of the Company's Board of Directors.
The Company plans to employ third-party technologies to allow the streaming
downloads of samples and full songs directly from the Company's website. The
Company will develop its own
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technology where needed to facilitate the usability of CD recorder devices and
sound recording player devices.
The Company was organized in January 1998. On May 11, 1998, Atlantis
Ventures Corporation, a Florida corporation, acquired all of the outstanding
common stock of the Company. For accounting purposes, this acquisition will be
treated as a recapitalization of the Company with the Company as the acquirer
(reverse acquisition). Atlantis Ventures is a publicly traded company that was
organized in August 1989 and had no revenues or operations prior to the merger
with the Company. Following the recapitalization, Atlantis Ventures changed its
name to GoodNoise Corporation.
The Company's executive offices are located at 719 Colorado Avenue, Palo Alto,
California 94303, and its telephone number is (650) 322-8910.
THE ON-LINE MUSIC INDUSTRY
The Company believes that substantial growth opportunities exist in the on-
line music industry. According to Jupiter Communications ("Jupiter"), a news
media research firm that focuses on on-line industries, total on-line music
revenues, which include prerecorded music sales, music-related merchandising,
advertising and concert ticketing, are expected to grow to $2.8 billion by the
year 2002, up from an estimated $22.5 million in 1996 and $71.0 million in 1997.
Jupiter estimates that the number of on-line households making purchases is
expected to grow from an estimated 15.2 million households in 1996 to 57.0
million households, representing over 50% of U.S. households, by the year 2002.
During the same time period, Jupiter estimates that the percentage of on-line
households making on-line purchases annually is expected to grow from
approximately 20% to 70%. Ad revenue on music websites is expected to grow from
$12.1 million worldwide in 1997 to more than $200 million by 2000.
The Company believes that the multimedia features available through the
Internet, including audio, video and graphics, make it an ideal medium for
promoting, marketing and selling music and related merchandise. Potential
purchasers of music recordings can preview their purchases by listening to high-
quality sound samples, viewing text and video clips (including cover art,
artists' discographies, music videos and reviews) and searching from a catalog
of available titles. The Internet and current technologies also allow users to
digitally download music in a compressed format to a personal computer, play
music from a PC or store and play it on either a CD-R drive or a solid-state
sound recording player device.
Internet users can also search for music by genre or artist, access a
wealth of information and events, including music history and news, artists'
biographies, cybercast concerts and radio broadcasts, and participate in live
interviews with artists. Because the Internet is a highly interactive medium and
user responses can be tracked, the Company believes that advertisers will become
increasingly attracted to opportunities to focus their marketing efforts on
specific target markets.
The Company believes that Internet-based retailers have advantages over
traditional retail channels. The Company believes that traditional retail stores
do not have the same capability to track individual customer purchases and
demographic data for use in direct marketing programs and in developing a one-
to-one relationship with the consumer. Further, the "bricks and mortar" retail
model is limited to consumers within the local vicinity of physical retail
outlets. The Company believes it can leverage the Internet to promote less well
known artists who may cater to regional or smaller market niches.
An individual electronic commerce website can maximize its awareness and
traffic through the use of strategic alliances with other websites having high
user traffic. Through the use of embedded hyperlinks, higher traffic websites
can refer potential customers to electronic commerce websites for
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potential purchases of goods or services. These agreements generally involve
economic arrangements including up-front payments or commissions on the dollar
volume of goods sold. These payments are analogous to rent paid by traditional
"brick and mortar" retail locations, and can be critical to an electronic
commerce website's ability to expand.
Historically, the music industry has benefited from innovations in
technology, such as the introduction of the CD in 1983. Over the last ten years,
much of the industry's growth resulted from consumers replacing existing music
collections with the CD format. According to the Recording Industry Association
of America ("RIAA"), domestic music sales grew from $5.6 billion in 1987 to
$12.5 billion in 1996. In recent years, however, music sales growth has slowed
due to a number of factors, including a shortage of major releases by new
artists and a slowdown in the rate of growth of CD sales, as consumers have
replaced most of their music collections.
The Company believes, however, that another period of similar growth may
occur as consumers replace their existing music collections in the CD format
with new electronic formats arising from the shift to downloadable recordings.
In addition, the Company believes that consumers will find it easier to purchase
a downloadable recording than to convert their existing CDs to electronic
formats.
Further, according to Jupiter, the major record companies have been losing
market share to independent record labels for years. During the period 1992-
1996, the market share of independent record labels increased from 11.6% to
21.2%. For the year 1996, the independent record labels were responsible for
two-thirds of all new releases of recorded music.
BUSINESS STRATEGY
The Company's strategy includes the following key elements:
1. MARKETING STRATEGY
A. Long Term
The Company's long-term objective is to establish itself as a major
provider of digital music content direct to consumers over the Internet. The
Company's strategy is to make an early entry into the market for downloadable
recordings, and leverage that early entry to exploit the emerging level playing
field in the recording industry.
The Company believes that before CD-R recording devices, solid-state
recording player devices, and high-bandwidth access to the Internet become
widely available, the delivery of sound recordings for home performance will
remain a small percentage of overall music sales. However, once such devices
and bandwidth become common, electronic commerce in downloadable recordings will
begin to cause a shift from the distribution of physical CDs though retail
establishments to the downloading of recordings by the listening public directly
off of the Internet.
The Company believes that the increasing percentage of recordings delivered
over the Internet will open up new opportunities for the marketing and
distribution of music content by independent recording companies, especially
those who understand the nature of the new medium and how it will affect
contractual relationships among artists, music publishers, and record companies.
The Company believes its management team understands these relationships and is
well positioned to execute on a plan to exploit them.
B. Short Term
Establish a "Cool" Music Web Site. The Company intends to build a well-
known World Wide Web destination for music consumers, around which the Company
will organize its repertoire, music programming, and music related merchandise.
The Company plans for its website to contain music news, reviews, live concerts,
and music related sponsorship and advertising content. Content offered on
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the Company's website will initially cover the modern rock and alternative music
genres, specially tailored for the high tech music consumer. Recordings offered
will include those from the Company's record label repertoire, and the Company
plans to license and acquire masters from other record labels.
Create Strong Brand Awareness. Until such time as CD-R recording devices,
solid-state player devices, and high bandwidth Internet access are common, the
Company intends to use the development, marketing and public relations
experience of its management team to build a strong brand name around the
trademark GoodNoise. The Company believes that building brand awareness of the
GoodNoise website is critical to attracting and expanding its global Internet
user base and its ability to attract new recording acts. GoodNoise will promote
its brand through on-line and traditional media, event sponsorships, free
branded software, and other marketing activities. The Company intends to enhance
brand awareness of its website by providing original and proprietary content,
providing consumers the ability to purchase music and related merchandise and
establishing strategic and bounty relationships whereby other websites engage
GoodNoise as an on-line music retail source and content provider.
Develop Key Industry and Website Alliances. The Company will seek to
establish strategic alliances with global music and media companies to attract
additional users to, and increase brand awareness of, the Company's websites.
Develop Free Enabling Software. The Company plans to develop and
distribute free software that enables or facilitates the playing, management and
storing of music files on PCs, CD recording devices and solid-state player
devices, where and when necessary or appropriate. The Company's strategy is to
publish the source code of its software and use a free source code licensing
methodology to encourage third party applications and improvements.
Engage in Traditional Record Promotion and Distribution. The Company plans
to seek strategic alliances with other online CD retailers to allow reference
sales of their online stock and to allow the sale of the Company's catalog. The
Company also intends to work with major record distributors to distribute the
Company's recordings in traditional retail channels in the United States.
Build User Communities and Attract Advertising. The Company plans to sell
banner advertising space on its website. By leveraging its record promotion
launches and fan/artist loyalty, the Company believes that it should be able to
aggregate targeted demographic user groups, thereby offering advertisers and
sponsors access to highly defined audiences
2. REPERTOIRE DEVELOPMENT
A. Long Term
Build GoodNoise Record Label. The Company is in the process of creating
what is commonly known as a "record label," which the Company intends to use
with its website, as well as record stores and other traditional distribution
channels, to promote, distribute and sell original and licensed artist
recordings. The Company believes that it can leverage its Internet platform by
promoting and selling its own proprietary titles acquired by its A&R (Artists
and Repertoire) and Business Affairs staff.
Build Music Publishing Catalog. The Company also plans to establish its own
music publishing company, GoodNoise Music Publishing. Through an arrangement
with peermusic, one of the world's largest international music publishing
companies, the Company intends to acquire an interest in the music publishing
rights of some of the artists in the Company's repertoire.
B. Short Term
Create an Effective A&R and Promotion Infrastructure. The Company plans to
create a network of college students to find prospective new talent and promote
the Company. These individuals, which
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the Company intends to seek at each major university in the Company's initial
target markets, will be responsible for initial screening of artist talent and
distributing marketing and promotional material in their location. In this way,
the Company intends to augment its international online promotional activities
with a specific network of physical promotion for its online sales offerings.
Focus Marketing and Acquisition Activities. The Company plans to focus its
marketing and its music acquisition demographically. Initially, the Company will
concentrate its sales and marketing on the 18-34 age bracket as the Company
feels that these consumers have the expertise, demand, and bandwidth to take
best advantage of the Company's offerings.
SALES AND MARKETING
The Company's overall sales and marketing strategy is designed to
merchandise music and related products sold through the Company's website, build
brand awareness, attract repeat users and drive traffic to GoodNoise's website.
The Company intends to utilize a combination of external advertising and
promotion, internal promotion and product merchandising and on-line partnering
programs to accomplish these objectives.
Merchandising and Customer Programs. The Company believes that a key part
of its merchandising and customer acquisition and retention strategies will be
its ability to link its music genre, artist and title-specific content, such as
record reviews, artist profiles and special promotions, to the music ordering
section of its website and stimulate and facilitate consumer purchases of
downloadable music tracks, CDs, and related music merchandise.
In-Store Merchandising. The Company plans to use numerous merchandising
features to encourage and enhance a consumer's buying experience. The Company
believes that the user's ability to listen to audio samples is a significant
incentive to purchase. Prior to making a purchase on the Company's website, the
Company plans to offer a consumer the ability to access a variety of information
about an artist, music group, or album.
ADVERTISING, SALES AND SPONSORSHIPS
The Company plans to position its website as an on-line music source,
offering advertisers and marketers the ability to reach highly targeted
communities of music fans worldwide. Advertisers will be offered a variety of
advertising options which can be combined in different percentages to reach the
desired advertising mix. The Company plans to implement a proprietary software
package for advertising space management, tracking of page impressions and
reporting to advertisers. The Company will also track website traffic and
activity through a generally available website traffic management service. The
Company plans to partner with a third party Internet Advertising Bureau as soon
as it is appropriate.
ORDERING, FULFILLMENT AND CUSTOMER SERVICE
The Company is designing an ordering system to be easy-to-use and simple to
understand. In order to maintain high customer satisfaction and price
competitiveness, the Company plans to place an emphasis on reliable product
fulfillment. At any time during a visit to the Company's website, a customer
will be able to click on the "order now" button to place an item in his or her
personal shopping basket. The customer can continue to shop the website, adding
chosen items. If not previously registered with the Company, a customer is
prompted to register at the time of purchase and to enter his or her name,
address and password. The customer then has the option of securely submitting
credit card information on-line or calling or faxing the information to the
GoodNoise Service Department. By assigning a password to every buyer, the
Company's ordering process will facilitate repeat purchases by eliminating the
need to re-submit credit card and shipping information for subsequent orders.
TECHNOLOGY
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The Company plans to develop information services, delivery, and user
tracking systems by integrating third-party systems, when available, and by
developing proprietary tools. The Company's integrated systems and tools provide
functionality in six primary areas: (i) multimedia asset management, (ii)
website development, (iii) audio encoding, on-line delivery, and physical
delivery, (iv) security, (v) scalability and (vi) advanced technologies. At the
same time, the systems and tools will provide scalability to maintain
performance as the number of users of the system and the amount of data
processed increases and to add new functionality as new needs and technologies
emerge.
Multimedia Asset Management. Central to the Company's system is the
development of a database management system necessary to index, retrieve and
manipulate the Company's growing multimedia content. The Company intends to
develop a database management system to allow for rapid searching, sorting,
viewing and distribution of, among other things, audio samples, video clips,
cover art and photos. The Company has chosen a publicly available source
distribution of an SQL and RDBMS compatible database, mSQL.
Website Development. The catalog of individual recordings, samples, and CDs
stored in an SQL database, forms the core of the music entertainment content
collection and contains links to related content (e.g., audio samples, images,
editorial content and charts). Each individual page of the Company's website is
built dynamically from these elements using a proprietary web page template
technology.
Audio Encoding and Delivery. The Company uses a variety of audio
compression technologies for its audio samples and downloads, tailoring them to
specific applications. In light of current user patterns, the Company will use
the popular Progressive Networks' RealAudio format for delivering real-time
streaming 30-second audio previews and feature-length web broadcasts. The MPEG-1
layer 3 streaming format is also used for real-time preview samples, and
primarily for those tracks which are available for digital distribution. The
Company is exploring other download formats and plans to adjust the format of
its content to stay current with moving industry trends.
Each of the Company's audio formats has certain minimum system requirements
for hardware and software in order for a user to listen to the audio samples on
the Company's website. A user must have a multimedia-equipped personal computer
and must download software in each format. For example, the minimum system PC
requirements for a user desiring to play an audio sample in the MPEG audio
format are an MPEG Audio Player and a Pentium 133mhz CPU on Windows 95/NT
operating system with sixteen megabytes of random access memory.
Scalability. The structure of the Company's hardware and software is built
upon a distributed transaction processing model which allows software to be
distributed among multiple parallel servers. This architecture allows the
Company to scale by either adding new servers or increasing the capacity of
existing servers. The current system is designed to easily scale from 2,000
simultaneous users currently to at least 10,000 users, while maintaining both
user performance and cost per transaction. In the rapidly changing Internet
environment, the ability to update the application system to stay current with
new technologies is important. The system's template technology and modular
database design allow the addition or replacement of server-based applications
such as multimedia formats and delivery systems, and search and retrieval
engines. This architecture also enables low-cost, rapid deployment of additional
websites that integrate with the Company's existing sites.
Advanced Technologies. The Company continually evaluates emerging
technologies, new developments in web technologies and CD/DVD (digital video
disk) multimedia authoring. Technologies with which the Company is currently
working include Sun's Java language, CD Writing client software,
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Real Time Streaming Protocol (RTSP) for the orderly delivery of multimedia
content over the Internet and the newly popular MPEG-4 and AAC audio
compression/transmission format.
COMPETITION
The market for Internet content providers is highly competitive and rapidly
changing. Since the Internet's commercialization in the early 1990's, the number
of websites on the Internet competing for consumers' attention and spending has
proliferated. With no substantial barriers to entry, the Company expects that
competition will continue to intensify. Currently, there are more than one
hundred music retailing websites on the Internet. With respect to competing for
consumers' attention, in addition to intense competition from Internet content
providers, the Company also faces competition from traditional media such as
radio, television and print. GoodNoise competes with the major, and other
independent, record labels.
The Company believes that the primary competitive factors in providing
music entertainment products and services via the Internet are name recognition,
variety of value-added services, ease of use, price, quality of service,
availability of customer support, reliability, technical expertise and
experience. The Company's success in this market will depend heavily upon its
ability to provide high quality, entertaining content, along with cutting-edge
technology and value-added Internet services. Other factors that will affect the
Company's success include the Company's ability to attract experienced
marketing, sales and management talent. In addition, the competition for
advertising revenues, both on Internet websites and in more traditional media,
is intense. The Company believes that its high-quality music-related content,
offered free of charge, will be an important differentiation from other music-
related and music-merchandising websites.
Many of the Company's current and potential competitors in the Internet and
music entertainment businesses have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition
and larger existing customer bases than the Company. These competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements and to devote greater resources to the development,
promotion and sale of their products or services than the Company. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors.
INTELLECTUAL PROPERTY
The Company relies on a combination of copyright law, trademark law,
contract law, and other intellectual property protection methods to protect its
musical content, license rights, and technology. The Company believes that its
use of material on its websites is protected under current provisions of
copyright law. However, legal rights to certain aspects of Internet content and
commerce are not clearly settled. There can be no assurance that the Company
will be able to continue to maintain rights to information, including webcasting
of popular sound recordings, downloadable music samples, and artist,
entertainment and other information. The failure to be able to offer such
information would have a material adverse effect on the Company's business,
results of operations and financial condition. The Company pursues the
registration of its trademarks in the United States and internationally, and has
applied for an "intent to use" trademark registration for a number of its
trademarks, including "GoodNoise," in the United States Patent & Trademark
Office.
Effective trademark, copyright, and other intellectual property protection
may not be available in every country in which the Company's musical content and
technology are distributed or made available through the Internet. There can be
no assurance that the Company's means of protecting its proprietary rights in
the United States or abroad will be adequate or that competitors will not
independently develop similar technology.
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There are no pending lawsuits against the Company regarding infringement of
any existing patents or other intellectual property rights or any material
notices that the Company is infringing the intellectual property rights of
others. However, there can be no assurance that such infringement claims will
not be asserted by third parties in the future. If any such claims are asserted
and determined to be valid, there can be no assurance that the Company will be
able to obtain licenses of the intellectual property rights in question on
reasonable terms. The Company's involvement in any patent dispute or other
intellectual property dispute or action to protect proprietary rights may have a
material adverse effect on the Company's business, operating results and
financial condition. Adverse determinations in any litigation may subject the
Company to significant liabilities to third parties, require the Company to seek
licenses from third parties and prevent the Company from manufacturing and
selling its products. Any of these situations can have a material adverse effect
on the Company's business, operating results and financial condition.
EMPLOYEES
As of June 26, 1998, the Company had 10 full-time employees, including 7 in
operations and technical and artistic development and 3 in general and
administrative, and 1 part-time primarily focused on artist development. The
Company's future success depends, in significant part, upon the continued
service of its key technical, editorial, product development and senior
management personnel and on its ability to attract and retain highly qualified
employees. There is no assurance that the Company will continue to attract and
retain high-caliber employees, as competition for such personnel is intense. The
Company's employees are not represented by any collective bargaining
organization. The Company has never experienced a work stoppage and considers
relations with its employees to be good.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains forward-looking statements that are
subject to significant risks and uncertainties. There are several important
factors that could cause actual results to differ materially from historical
results and percentages and results anticipated by the forward-looking
statements. The Company has sought to identify the most significant risks to
its business, but cannot predict whether or to what extent any of such risks may
be realized nor can there be any assurance that the Company has identified all
possible risks that might arise. Investors should carefully consider all of
such risks before making an investment decision with respect to the Company's
stock. In particular, investors should refer to the section entitled, "Factors
That May Affect Future Results and Market Price of Stock."
OVERVIEW
GoodNoise Corporation (the "GoodNoise" or "Company") is a development stage
enterprise that seeks to become one of the leading on-line music entertainment
companies using the Internet as a global platform for promoting, marketing and
selling music and related content. The Company plans to develop and market a
compelling repertoire of musical recordings and offer such recordings to
consumers by direct file transfer, or "downloading," over the Internet. The
Company will also offer its musical recordings in the form of compact discs (or
"CDs") distributed to the consumers over the Internet and through traditional
retail channels.
The Company was organized in January 1998. On May 11, 1998, Atlantis
Ventures Corporation, a Florida corporation, acquired all of the outstanding
Common Stock of the Company. For accounting purposes, this acquisition will be
treated as a recapitalization of the Company with the Company as the acquirer
(reverse acquisition). Atlantis Ventures is a publicly traded company that was
organized in August 1989 and had no revenues or operations prior to the merger
with the Company. Following the recapitalization, Atlantis Ventures changed its
name to GoodNoise Corporation.
The Company's executive offices are located at 719 Colorado Avenue, Palo
Alto, California 94303, and its telephone number is (650) 322-8910.
RESULTS OF OPERATIONS
The Company was formed on January 8, 1998 and is a development stage
enterprise that has incurred costs to organize and develop its business, but has
yet to earn revenue. The Company expects to experience significant fluctuations
in operating results in future periods due to a variety of factors, including,
but not limited to, (i) market acceptance of the Internet as a medium for
consumers to obtain sound recordings, (ii) the Company's ability to create,
license, and deliver compelling music-related content, (iii) the level of
traffic on the Company's website, (iv) intense competition from other providers
of music-related content over the Internet, (v) delays or errors in the
Company's ability to effect electronic commerce transactions, (vi) the Company's
ability to upgrade and develop its systems and infrastructure in a timely and
effective manner (vii) technical difficulties, system downtime or Internet
brownouts, (viii) the Company's ability to attract customers at a steady rate
and maintain customer satisfaction, (ix) seasonality of the recorded music
industry, (x) seasonality of advertising sales, (xi) Company promotions and
sales programs, (xii) the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business, operations and
infrastructure and the implementation of marketing programs, key agreements and
strategic alliances, (xiii) the number of recorded music releases introduced
during the period, (xiv) the level of returns experienced by the Company and
(xv) general economic conditions and economic conditions specific to the
Internet, on-line commerce and the recorded music industry.
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<PAGE>
NET REVENUES
The Company is a development stage enterprise that has earned no revenue
since its inception. The Company launched its first Internet website in April
1998. The Company believes that future revenues will result largely from the
sale of musical recordings, the sale of advertising space on the Company's
website, and related sponsorship programs.
COST OF REVENUES
Since its inception, the Company has incurred no costs of revenues. The
Company expects that future cost of revenues will consist of payments to third
parties for distribution of CDs and cassettes, fulfillment of customer orders,
manufacturing expenses, inventory management, royalties, copyrights, credit card
processing charges and profit participation payable to strategic alliance
partners and others.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses consist principally of website and other
software engineering, audio and video production, graphic design, certain non-
recoverable advances to artists, artist relations, telecommunications charges,
and the cost of computer operations, including related salaries, rent and
depreciation, that support the Company's music entertainment business.
The Company began its development efforts in February 1998, incurring costs
of $42,182 through March 31, 1998, related to software engineering, audio and
video production, and graphic design of the Company's website and music
catalogue.
SALES AND MARKETING EXPENSES
Since its inception, the Company has incurred no sales and marketing costs.
The Company expects that future costs will consist primarily of costs associated
with the Company's various strategic alliances, external advertising, promotion,
trade show, advertising sales and personnel expenses associated with marketing
of the Company's website.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of executive management,
accounting, legal and expenditures for applicable overhead costs, including
related rent, insurance and depreciation. The Company has incurred costs of
$46,745 through March 31, 1998 related to general and administrative expenses.
The Company expects general and administrative expenses to continue to increase
in absolute dollars as the Company expands its staff and incurs additional costs
related to the growth of its business.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had a cash balance of $25,221. Net cash of
$73,985 was used for operating activities for the period ended March 31, 1998
principally as a result of the net losses generated during the period.
Purchases of property and equipment totaled $10,794. The Company expects to
incur negative cash flow from operations for the foreseeable future, as it
continues to develop its market and operations.
The Company financed its operations from inception through March 31, 1998
using $110,000 loaned to the Company by two of its Directors and a member of its
Advisory Board. These loans were secured by notes with an interest rate of
10.0% per annum, due in December 1998. All outstanding principal and interest
related to these notes was to have been converted at the closing of the
Company's initial sale of Series A Preferred Stock. The Company did not issue
the Series A Preferred Stock because of the merger and, in May 1998, these notes
were converted into 275,000 shares of common stock prior to the merger.
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<PAGE>
In May 1998, the Company merged with Atlantis Ventures Corporation, a
Florida corporation that was organized in August 1989 and had no revenues or
operations of any kind prior to the merger with the Company. Prior to the
merger, Atlantis Ventures issued 2,500,000 units at a price of $0.20 per share
in a private placement. Each unit consists of one share of common stock and one
warrant with each five warrants entitling the holder to purchase one common
share for $1.00. Warrants to purchase 200,000 shares of common stock were
exercised in May 1998. The remaining warrants are exercisable through August
1998.
Based on current levels of operations and planned growth, the Company
anticipates that its existing capital resources will not be sufficient to enable
it to maintain its operations through the end of 1998. The Company will require
additional funds to sustain and expand its sales and marketing and research and
development activities and its strategic alliances and may need additional
funding. Adequate funds for these and other purposes, whether through additional
equity financing, debt financing or other sources, may not be available when
needed or on terms acceptable to the Company, or may result in significant
dilution to existing stockholders. The inability to obtain sufficient funds
from operations and external sources would have a material adverse effect on the
Company's business, results of operations and financial condition.
RISKS ASSOCIATED WITH THE YEAR 2000
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. As a result, date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities.
The Company believes that it does not have a material exposure to the Year
2000 issue with respect to its own information systems since its existing
systems correctly define the Year 2000. The Company intends to conduct an
analysis in 1998 to determine the extent to which its major suppliers' systems
(insofar as they relate to the Company's business) are subject to the Year 2000
issue. The Company is currently unable to predict the extent to which the Year
2000 issue will affect its suppliers, or the extent to which it would be
vulnerable to its suppliers' failure to remediate any Year 2000 issues on a
timely basis. The failure of a major supplier subject to the Year 2000 issue to
convert its systems on a timely basis or a conversion that is incompatible with
the Company's systems could have a material adverse effect on the Company. In
particular, most of the purchases from the Company's Internet website will be
made with credit cards and the Company's operations may be materially adversely
affected to the extent its customers are unable to use their credit cards due to
Year 2000 issues that are not rectified by their credit card providers.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
LIMITED OPERATING HISTORY; ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE
RESULTS. GoodNoise has only a limited operating history upon which an
evaluation of the Company and its prospects can be based. The Company's
prospects must be evaluated with a view to the risks encountered by a company in
an early stage of development, particularly in light of the uncertainties
relating to the new and evolving markets in which the Company intends to operate
and acceptance of the Company's business model. The Company will be incurring
costs to develop, introduce and enhance its website, to establish marketing and
distribution relationships, to create and enhance its music catalog, and to
build an administrative organization. To the extent that such expenses are not
subsequently followed by commensurate revenues, the Company's business, results
of operations and financial condition will be
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materially adversely affected. There can be no assurance that the Company will
be able to generate sufficient revenues from the sale of music recordings,
related merchandise, advertising and sponsorships to achieve or maintain
profitability on a quarterly or annual basis in the future. The Company expects
negative cash flow from operations to continue for the foreseeable future as it
continues to develop and market its business. If cash generated by operations is
insufficient to satisfy the Company's liquidity requirements, the Company may be
required to sell additional equity or debt securities. The sale of additional
equity or convertible debt securities would result in additional dilution to the
Company's stockholders.
NEED FOR ADDITIONAL FUNDS. Based on current levels of operations and
planned growth, the Company anticipates that its existing capital resources will
not be sufficient to enable it to maintain its operations through the end of
1998. The Company will require additional funds to sustain and expand its sales
and marketing and research and development activities and its strategic
alliances and may need additional funding if a well-financed competitor emerges
or if there is a shift in the type of Internet services that are developed and
ultimately receive customer acceptance. Adequate funds for these and other
purposes, whether through additional equity financing, debt financing or other
sources, may not be available when needed or on terms acceptable to the Company,
or may result in significant dilution to existing stockholders. The inability to
obtain sufficient funds from operations and external sources would have a
material adverse effect on the Company's business, results of operations and
financial condition.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
quarterly operating results may fluctuate significantly in the future as a
result of a variety of factors, most of which are outside the Company's control,
including the level of use of the Internet, demand for downloadable music
content and Internet advertising, seasonal trends in both Internet use and
advertising placements, the addition or loss of advertisers, the level of
traffic on the Company's Internet sites, the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's Internet
operations, the introduction of new sites and services by the Company or its
competitors, price competition or pricing changes in the industry, technical
difficulties or system downtime, general economic conditions and economic
conditions specific to the Internet and Internet media. Due to the foregoing
factors, among others, it is likely that the Company's operating results will
fall below the expectations of the Company or investors in some future quarter.
UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MUSICAL CONTENT DELIVERY MEDIUM.
Use of the Internet by consumers is at a very early stage of development, and
market acceptance of the Internet as a medium for obtaining recordings,
information, entertainment, commerce and advertising is subject to a high level
of uncertainty. If Internet-based downloading of musical content is not widely
accepted by consumers and recording artists, the Company's business, financial
condition and operating results will be materially adversely affected.
UNCERTAIN ACCEPTANCE OF THE COMPANY'S INTERNET CONTENT. The Company's
future success will be significantly dependent upon its ability to create,
license and deliver entertaining and compelling Internet music-related content
in order to attract users to its websites to purchase recorded music and related
merchandise and to attract advertisers to its websites. There can be no
assurance that the Company's content will be attractive to a sufficient number
of users to generate significant revenues. There can also be no assurance that
the Company will be able to anticipate, monitor and successfully respond to
rapidly changing consumer tastes and references so as to continually attract a
sufficient number of users to its websites. If the Company is unable to develop
Internet content that allows it to attract, retain and expand a loyal user base,
its business, results of operations and financial condition will be materially
adversely affected.
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COMPETITION. The market for Internet content providers is highly
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990's, the number of websites on the Internet competing for consumers'
attention and spending has proliferated. With no substantial barriers to entry,
the Company expects that competition will continue to intensify. With respect to
competition for consumers' attention, in addition to intense competition from
Internet content providers, the Company also faces competition from traditional
media such as radio, television and print. GoodNoise expects to compete with the
major, and other independent, record labels. With respect to recorded music
sales, the Company expects to compete with numerous Internet retailers,
including traditional music retail chains, record labels and independents with
websites on the Internet. In addition, the Company expects to compete with
traditional retail stores, including chains and megastores, mass merchandisers,
consumer electronics stores and music clubs. The Company believes that the
primary competitive factors in providing music entertainment products and
services via the Internet will be name recognition, a variety of value-added
services, ease of use, price, quality of service, availability of customer
support, reliability, technical expertise and experience. The Company's success
will depend heavily upon its ability to provide high quality, entertaining
content, along with cutting-edge technology and value-added Internet services.
Other factors that will affect the Company's success include the Company's
ability to attract recording artists who become popular with the listening
public. The Company's failure to compete successfully in the music entertainment
business would have a material adverse effect on the Company's business, results
of operations and financial condition. In addition, the competition for
advertising revenues, both on Internet websites and in more traditional media,
is intense. To the extent the Company is not able to attract significant sources
of revenues from paid advertisements and sponsorships on its websites, the
Company's business, results of operations and financial condition will be
materially adversely affected.
Most of the Company's current and potential competitors in the Internet and
music entertainment businesses have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition
and larger existing customer bases than the Company. These competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements and to devote greater resources to the development,
promotion and sale of their products or services than the Company. There can be
no assurance that the Company will be able to compete successfully.
RISKS INHERENT IN THE RECORD LABEL INDUSTRY. The record label industry,
like other creative industries, involves a substantial degree of risk. Each
recording is an individual artistic work, and its commercial success is
primarily determined by consumer taste, which is unpredictable and constantly
changing. Accordingly, there can be no assurance as to the financial success of
any particular release, the timing of any such success or the popularity of any
particular artist, or the Company's ability to attract and sign artists to the
GoodNoise record label. Furthermore, the Company believes that it is standard
practice for record companies to pay substantial advances to artists. The
Company may incur significant expenses in connection with paying its artists
such advances, which could materially adversely affect the Company's results of
operations and financial position. In circumstances when the Company does not
pay such advances, it will be competing for artistic talent at a disadvantage to
other record labels that do pay such advances. There can be no assurance that
the Company will be able to generate sufficient revenues from successful
releases to cover the costs of unsuccessful releases. The record label industry
is dominated by a small number of large record companies that have significantly
greater experience and financial, marketing and distribution resources than the
Company. There can be no assurance of the Company's ability to compete
effectively in that market.
UNCERTAIN ACCEPTANCE AND MAINTENANCE OF THE GOODNOISE BRAND. The Company
believes that establishing and maintaining the GoodNoise brand is a critical
aspect of its efforts to attract and expand its Internet audience and that the
importance of brand recognition will increase due to the
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growing number of Internet sites and the relatively low barriers to entry in
providing Internet content. If the Company is unable to provide high quality
content or otherwise fails to promote and maintain its brand, or if the Company
incurs excessive expenses in an attempt to improve its content or promote and
maintain its brand, the Company's business, financial condition and operating
results will be materially adversely affected.
MANAGING EXPENSES. The Company's future success depends upon its ability to
address potential market opportunities while managing its expenses to match its
ability to finance its operations. This need to manage its expenses will place a
significant strain on the Company's management and operational resources. If the
Company is unable to manage its expenses effectively, the Company's business,
financial condition and operating results will be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's performance is substantially
dependent on the services of Robert H. Kohn (Chairman), Gene Hoffman, Jr. (Chief
Executive Officer), and Gary Culpepper (Executive Vice President of Business
Affairs), as well as on the Company's ability to recruit, retain and motivate
its other officers and key employees. The Company's success also depends on its
ability to attract and retain additional qualified employees. Competition for
qualified personnel is intense and there are a limited number of persons with
knowledge of and experience in the Internet and music entertainment industries.
There can be no assurance that the Company will be able to attract and retain
key personnel. The loss of one or more key employees could have a material
adverse effect on the Company.
DEPENDENCE ON THIRD PARTIES FOR INTERNET OPERATIONS. The Company's ability
to advertise on other Internet sites and the willingness of the owners of such
sites to direct users to the Company's Internet sites through hypertext links
are critical to the success of the Company's Internet operations. The Company
also relies on the cooperation of owners of copyrighted materials and Internet
search services and on its relationships with third party vendors of Internet
development tools and technologies. There can be no assurance that the
necessary cooperation from third parties will be available on acceptable
commercial terms or at all. If the Company is unable to develop and maintain
satisfactory relationships with such third parties on acceptable commercial
terms, or if the Company's competitors are better able to leverage such
relationships, the Company's business, financial condition and operating results
will be materially adversely affected.
DEPENDENCE UPON STRATEGIC ALLIANCES. The Company intends to rely on
certain strategic alliances to attract users to its websites, to attract paid
advertising to its websites, and to provide alternative distribution channels
for music rights and licenses it hopes to acquire. For example, the Company will
seek to enter into a strategic alliance with a major music publishing company
for the worldwide administration of any music publishing rights the Company
acquires from its recording artists. The Company will also seek to enter into a
relationship with a major record distributor for the manufacture and
distribution through traditional retail channels of CDs recorded by its artists
and produced by the Company. The Company will seek alliances with Intel,
Adaptec, Philips, 3COM and others, which the Company believes will result in
increased traffic to its websites. The inability to enter into new, and to
maintain any one or more of its existing, strategic alliances could have a
material adverse effect on the Company's business, results of operations and
financial condition.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS. The Company's
success will depend upon its ability to develop and provide new services that
meet customers' changing requirements. The music entertainment industry has been
characterized by significant technological changes, such as the introduction of
CDs which have had a significant impact on the industry and industry
participants, and further technological changes are expected to occur. The
Internet is characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new service
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and product introductions. The Company's future success will depend, in part, on
its ability to effectively use leading technologies, to continue to develop its
technological expertise, to enhance its current services, to develop new
services that meet changing customer needs and to influence and respond to
merging industry standards and other technological changes on a timely and cost-
effective basis.
DEPENDENCE ON THE INTERNET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS A
MEDIUM FOR COMMERCE. Use of the Internet by consumers is at an early stage of
development, and market acceptance of the Internet as a medium for commerce is
subject to a high level of uncertainty. The Company's future success will depend
on its ability to significantly increase revenues, which will require the
development and widespread acceptance of the Internet as a medium for commerce.
There can be no assurance that the Internet will be a successful retailing
channel. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, such as
reliable network backbones, or complementary services, such as high speed modems
and security procedures for financial transactions. The viability of the
Internet may prove uncertain due to delays in the development and adoption of
new standards and protocols (for example, the next generation Internet Protocol)
to handle increased levels of Internet activity or due to increased government
regulation. If use of the Internet does not continue to grow, or if the
necessary Internet infrastructure or complementary services are not developed to
effectively support growth that may occur, the Company's business, results of
operations and financial condition could be materially adversely affected.
CAPACITY CONSTRAINTS AND SYSTEM DISRUPTIONS. The satisfactory performance,
reliability and availability of the Company's Internet sites and its network
infrastructure are critical to attracting Internet users and maintaining
relationships with subscribing customers. System interruptions that result in
the unavailability of the Company's Internet sites or slower response times for
users would reduce the number of goods and services delivered and reduce the
attractiveness of the Company's Internet sites to users, subscribers and
advertisers. The Company's Internet operations are also vulnerable to
interruption by fire, earthquake, power loss, telecommunications failure and
other events beyond the Company's control. All of the Company's servers and
Internet equipment is currently located in San Francisco, California, an area
that is susceptible to earthquakes.
LIABILITY FOR INTERNET AND MUSICAL CONTENT. As a publisher and a
distributor of content over the Internet, the Company faces potential liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the materials that it publishes
or distributes. The Company may be subject to the provisions of the
Communications Decency Act, and similar legislation, which, among other things,
may impose criminal penalties on anyone that distributes "obscene" or "indecent"
material over the Internet.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS AND INVESTMENTS. The
Company's current strategy is to broaden the number, scope and content of its
Internet site through the acquisition of rights or licenses to musical content,
as well as through internally developed or other licensed content. Any such
investments would involve many of the same risks posed by acquisitions,
particularly risks related to the diversion of resources, the inability to
generate revenues, the impairment of relationships with third parties and
potential additional expenses. There can be no assurance that the Company would
be successful in overcoming these risks or any other problems encountered in
connection with such acquisitions or new investments.
SECURITY RISKS. A party who is able to circumvent the Company's security
measures could misappropriate proprietary information or cause interruptions in
the Company's Internet operations. The Company may be required to expend
significant capital and resources to protect against the threat of such security
breaches or to alleviate problems caused by such breaches. Consumer concern over
Internet security has been, and could continue to be, a barrier to commercial
activities requiring consumers to
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send their credit card information over the Internet. Computer viruses, break-
ins or other security problems could lead to misappropriation of proprietary
information and interruptions, delays or cessation in service to the Company's
customers. Moreover, until more comprehensive security technologies are
developed, the security and privacy concerns of existing and potential customers
may inhibit the growth of the Internet as a merchandising medium.
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS; RISKS OF INFRINGEMENT. The
Company relies on copyright and trade secret laws to protect its content and
proprietary technologies and information, but there can be no assurance that
such laws will provide sufficient protection to the Company, that others will
not develop technologies that are similar or superior to the Company's, or that
third parties will not copy or otherwise obtain and use the Company's content or
technologies without authorization.
DEPENDENCE ON LICENSED TECHNOLOGY. The Company may rely on certain
technology licensed from third parties, and there can be no assurance that these
third party technology licenses will be available to the Company on acceptable
commercial terms or at all.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTY. Although there are currently
few laws and regulations directly applicable to the Internet, it is possible
that new laws and regulations will be adopted covering issues such as privacy,
copyrights, obscene or indecent communications and the pricing, characteristics
and quality of Internet products and services. The adoption of restrictive laws
or regulations could decrease the growth of the Internet or expose the Company
to significant liabilities. The Company believes that its use of material on
its websites is protected under current provisions of copyright law. However,
legal rights to certain aspects of Internet content and commerce are not clearly
settled. There can be no assurance that the Company will be able to continue to
maintain rights to information, including downloadable music samples and artist,
record and other information. The failure to be able to offer such information
would have a material adverse effect on the Company's business, results of
operations and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS. The future success of the
Company will depend in part on its ability to generate international sales.
There can be no assurance, however, that the Company will be successful in
generating international sales of its products. Sales to customers in certain
foreign countries will be subject to a number of risks, including foreign
currency risk, the risks that agreements may be difficult or impossible to
enforce and receivables difficult to collect through a foreign country's legal
system; foreign customers may have longer payment cycles; or foreign countries
could impose withholding taxes or otherwise tax the Company's foreign income,
impose tariffs, embargoes or exchange controls, or adopt other restrictions on
foreign trade. In addition, the laws of certain countries do not protect the
Company's offerings and intellectual property rights to the same extent as the
laws of the United States. Failure of the Company's efforts to compete
successfully or to expand the distribution of its offerings in international
markets could have a material adverse effect on the Company's business,
operating results and financial condition.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters is located in Palo Alto, California.
The Company has leased its facilities and certain other equipment under
operating and capital lease agreements. The Company has leased approximately
1,600 square feet of office space at these facilities. The Company believes that
its existing facilities plans are adequate for its current requirements and that
additional space can be obtained to meet its requirements for the foreseeable
future.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as June 30, 1998 (i) by each person who
is known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) by each of the Named Executive Officers and by each of the Company's
directors and (iii) by all current executive officers and directors as a group.
Except pursuant to applicable community property laws or as indicated in the
footnotes to this table, each stockholder identified in the table possesses sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by such stockholder.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (2)
-----------------------
NAME NUMBER PERCENT
- ---- ------ -------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS (1)
Robert H. Kohn, Chairman of the Board 3,687,500 25.1%
Gene Hoffman, Jr., President, Chief
Executive Officer and Director (3) 3,658,000 24.9%
Gary Culpepper, Executive Vice President,
Business Affairs 1,062,000 7.2%
Ralph Peer, II, Director 147,500 1.0%
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP (5 PERSONS) (4) 8,620,555 58.6%
</TABLE>
(1) Unless otherwise indicated, the address of each of the named individuals is:
c/o GoodNoise Corporation, 719 Colorado Avenue, Palo Alto, California 94303.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of options.
Calculations of percentages of beneficial ownership assume the exercise by
only the respective named stockholders of all options for the purchase of
Common Stock held by such stockholder which are exercisable within 60 days
of June 30, 1998.
(3) Includes 400,000 shares for which Gene Hoffman has voting rights pursuant to
a voting agreement. Mr. Hoffman disclaims beneficiary ownership of such
shares except to the extent of his pecuniary interest therein.
(4) Includes 65,555 shares which are issuable upon exercise of options.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following are the directors and officers of the Company at June 24,
1998:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Robert H. Kohn 41 Chairman of the Board, Secretary
Gene Hoffman, Jr. 22 President, Chief Executive Officer and Director
Ralph Peer, II 54 Director
Gary D. Culpepper 48 Executive Vice President, Business Affairs
Joseph H. Howell 46 Executive Vice President and Chief Financial Officer
Steven Grady 32 Vice President, Corporate Communications
Sandy Pearlman 49 Vice President, Media & Artist Development
Brett Thomas 28 Vice President, Engineering
</TABLE>
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All Directors hold office until the next annual meeting of shareholders or
the election and qualification of their successors. There is no family
relationship between any of the directors or officers of the Company.
ROBERT H. KOHN, Chairman of the Board and Secretary. From October 1996 to
December 1997, Mr. Kohn was Vice President, Business Development and General
Counsel of Pretty Good Privacy, Inc. (PGP), a developer and marketer of
Internet encryption and security software. From March 1987 to September 1996, he
was Senior Vice President of Corporate Affairs, Secretary and General Counsel of
Inprise Corporation (new name, formerly Borland International, Inc.), a
developer and marketer of personal computer software. A member of the
California Bar, Mr. Kohn co-wrote Kohn On Music Licensing, a treatise on music
industry law for lawyers, music publishers and songwriters.
GENE HOFFMAN, JR., President and Chief Executive Officer. From November
1996 to December 1997, Mr. Hoffman was Director of Business Development and
Director of Interactive Marketing of Pretty Good Privacy, Inc. (PGP), a
developer and marketer of Internet encryption and security software Prior to
PGP, he was Executive Vice President of PrivNet, Inc., a developer and marketer
of Internet encryption and security software
RALPH PEER, II, Director, is chairman and CEO of peermusic, a global
network of music publishing and production companies. In addition, Mr. Peer is
vice president and director of the National Music Publishers' Association
(U.S.A.) and the Harry Fox Agency. He is a lifetime director and past
president of the Country Music Association and a publisher/director of ASCAP
(American Society of Composers, Authors, and Publishers). Peer is a director of
Fox Agency International (Singapore) and a consultant to the board of MCPS
(Mechanical Copyright Protection Society, U.K.). He is a past president and a
current director of ICMP (International Confederation of Music Publishers) and
in 1997 was elected "President d'Honneur" of the Confederation.
GARY CULPEPPER, Executive Vice President of Business Affairs. From May
1995 to March 1998 Mr. Culpepper was in private law practice, specializing in
music and entertainment transactions for recording artists, producers and
songwriters. From April 1994 to April 1995 Mr. Culpepper was Senior Counsel
for Sony Pictures/Columbia/TriStar Home Video. Mr. Culpepper previously served
as Vice President, Business Affairs/Music for Paramount Pictures Corporation,
Director, Business Affairs for Capitol Records, Inc., Senior Counsel for
Casablanca Records & Filmworks and, Assistant General Counsel for ABC Records,
Inc. He is a member of the California Bar.
JOSEPH H. HOWELL joined the Company in April 1998 as Executive Vice
President and Chief Financial Officer. From January 1995 to April 1998, Mr.
Howell was Senior Vice President and Chief Financial Officer of Merix
Corporation, a leading manufacturer of high-technology, multilayer, printed
circuit boards. From May 1988 to January 1995, Mr. Howell served as Vice
President, Controller of Inprise Corporation (formerly Borland International,
Inc.), a developer and marketer of personal computer software.
STEVEN GRADY joined the Company in May, 1998 as Vice President of Corporate
Communications. From July 1997 to May 1998, Mr. Grady was Director, Corporate
Communications, Inprise Corporation (formerly Borland International, Inc.), a
developer and marketer of personal computer software. From July 1996 to July
1997, he was Director, Marketing Communications for Infoseek. From 1992 to
June, 1995, he served as Director, Corporate Communications, Borland
International, Inc.
SAMUEL "SANDY" PEARLMAN, Vice President of Media and Artist Development.
Prior to joining the Company, Mr. Pearlman was president of 415 Records, an
alternative record label and an
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independent recorder producer most known for his work with The Blue Oyster Cult
--------------------
and The Clash. Mr. Pearlman is also an independent songwriter and rock
---------
journalist.
BRETT A. THOMAS joined the Company in April 1998 as Vice President of
Engineering. From November 1996 to January 1998, Mr. Thomas was Principal
Engineer for Pretty Good Privacy, Inc. (PGP), a developer and marketer of
Internet encryption and security software. Prior to PGP, Mr. Thomas was an
independent engineering consultant.
ADVISORY BOARD
. PETER YARROW is a member of PETER, PAUL & MARY, and is co-writer of such
songs as Puff The Magic Dragon, Weave Me The Sunshine, Light One Candle,
Torn Between Two Lovers, and Day Is Done. In addition, Peter co-produced
and co-wrote a musical called You Are What You Eat in the late 60s, and he
created a number of children's videos based on Puff The Magic Dragon.
. KEVIN CRONIN is the lead singer of REO SPEEDWAGON, and writer of the songs
Keep Pushin' and Roll With The Changes and his first number one song: Keep
On Loving You.
. LEE LORENZEN, Chairman & CEO of Catalog City, Inc., an Internet commerce
company. Mr. Lorenzen is also a member of the Board of Fractal Design and
past CEO and Chairman of the Board of Altura Software.
ITEM 6. EXECUTIVE COMPENSATION
The Company began operations in January 1998. For the three months ended
March 31, 1998, the compensation payable to Robert H. Kohn, Gene Hoffman and
Gary Culpepper (the only officers compensated during such period) was $10,000,
$12,500 and $10,833, respectively.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 11, 1998, the Registrant (GoodNoise Corporation, a Florida
corporation, formerly Atlantis Ventures Corporation) entered into an Agreement
and Plan of Reorganization pursuant to which it acquired GoodNoise Corporation,
a Delaware corporation ("GN Delaware"). In connection with such acquisition, the
Registrant exchanged 10,985,800 shares of its Common Stock for all outstanding
stock of GoodNoise Delaware and assumed outstanding GN Delaware options for the
purchase of an additional 2,062,050 shares of the Registrant's Common Stock.
Following such transaction, the directors and officers of GN Delaware became the
directors and officers of the Registrant. Of the shares issued as part of such
transaction, 8,555,000 shares were issued to such directors and officers.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 200,000,000 shares of
Common Stock and 500,000 shares of Preferred Stock. The following summary of
certain provisions of the Common Stock and the Preferred Stock of the Company
does not purport to be complete and is subject to, and qualified in its entirety
by, the Articles of Incorporation and Bylaws of the Company that are included as
exhibits to this Form 10-SB and by the provisions of applicable law.
21
<PAGE>
COMMON STOCK
As of June 24, 1998, there were approximately 14,685,800 shares of Common
Stock outstanding held of record by 75 stockholders. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the holders of Common Stock. Subject to preferences
applicable to any outstanding Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any Preferred Stock. Holders of
Common Stock have no preemptive or subscription rights, and there are no
redemption or conversion rights with respect to such shares. All outstanding
shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK
As of June 24, 1998, no shares of Preferred Stock were designated or
outstanding. The Board of Directors has the authority to issue up to 500,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any unissued
shares of Preferred Stock and to fix the number of shares constituting any
series and the designations of such series, without any further vote or action
by the stockholders. Although it presently has no intention to do so, the Board
of Directors, without stockholder approval, can issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Interwest Transfer Co.
Inc.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the OTC Bulletin Board since
May 12, 1998 under the symbol GDNO. Since commencing trading through June 30,
1998, the high and low bid prices for Common Stock on the OTC Bulletin Board has
been $0.06 and $7.38 per share. Such amounts reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
On June 24, 1998, there were 14,685,800 shares of Common Stock outstanding,
of which approximately 2.8 million are freely tradable without restriction under
the Securities Act. Substantially all of the remaining shares will not be
tradable under Rule 144 until May 1999.
DIVIDEND POLICY
22
<PAGE>
The Company has paid no dividends and intends to retain all future earnings,
if any, for use in the development and operation of its business and does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
None.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June 1998, the Company retained PricewaterhouseCoopers LLP as the
Company's independent accountants and dismissed Barry L. Friedman P.C. ("Barry
Friedman"), Atlantis Ventures Corporation's former accountants. The decision to
change independent accountants was ratified by the Company's Board of Directors.
During the two most recent fiscal years audited by Barry Friedman through June
29, 1998, there were no disagreements with Barry Friedman regarding any matters
with respect to accounting principles or practices, financial statement
disclosure or audit scope or procedure, which disagreements, if not resolved to
the satisfaction of the former accountants, would have caused Barry Friedman to
make reference to the subject matter of the disagreement in connection with this
report. The former accountants reports for the years and periods audited by
them are not part of the financial statements of the Company included in this
Form 10-SB. Such reports did not contain an adverse opinion or disclaimer of
opinion or qualifications or modifications as to uncertainty, audit scope or
accounting principles. Prior to retaining PricewaterhouseCoopers LLP, the
Company had not consulted with PricewaterhouseCoopers LLP regarding the
application of accounting principles or the type of audit opinion that might be
rendered on the Company's financial statements.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On May 6, 1998, the Registrant (GoodNoise Corporation, a Florida
corporation, formerly Atlantis Ventures Corporation) issued 2,500,000 units at a
price of $0.20 per share in a private placement. Each unit consists of one share
of common stock and one warrant with each five warrants entitling the holder to
purchase one common share for $1.00. Warrants to purchase 200,000 shares of
common stock were exercised in May 1998. The remaining warrants are exercisable
through August 1998.
On May 11, 1998, Atlantis Ventures Corporation, a Florida corporation,
acquired all of the outstanding Common Stock of the Company. For accounting
purposes, this acquisition will be treated as a recapitalization of the Company
with the Company as the acquirer (reverse acquisition). Atlantis Ventures is a
publicly traded company that was organized in August 1989 and had no revenues or
operations prior to the merger with the Company. Following the
recapitalization, Atlantis Ventures changed its name to GoodNoise Corporation.
There were no underwriters employed in connection with any of the above
transactions.
The issuances of securities described above were deemed to be exempt from
registration under the Securities Act in reliance on Regulation D, Section 4(2)
and Rule 701 of the Securities Act, respectively. The issuance of Common Stock
and Warrants was exempt pursuant to Rule 504 of the Securities Act. The
acquisition was a transaction by an issuer not involving any public offering.
The recipients of securities in each such transaction represented their
intention to acquire the securities for
23
<PAGE>
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Act ("Florida Law") permits the indemnification of
officers, directors, and other corporate agents under certain circumstances and
subject to certain limitations. The Registrant's Articles of Incorporation and
Bylaws provide that the Registrant shall indemnify its directors, officers,
employees, and agents to the full extent permitted by Florida Law. In addition,
the Registrant has entered into separate indemnification agreements with its
directors and officers which require the Registrant, among other things, to
indemnify them against certain liabilities which may arise by reason of their
status or service (other than liabilities arising from willful misconduct of a
culpable nature). These indemnification provisions may be sufficiently broad to
permit indemnification of the Registrant's officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act of 1933, as amended (the "Securities Act").
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
24
<PAGE>
PART F/S
INDEX TO FINANCIAL STATEMENTS
GOODNOISE CORPORATION
Report of Independent Accountants....................................... 26
Balance Sheet........................................................... 27
Statement of Operations................................................. 28
Statement of Changes in Stockholders' Deficit........................... 29
Statement of Cash Flows................................................. 30
Notes to Financial Statements........................................... 31
ATLANTIS VENTURES CORPORATION
Report of Independent Accountants....................................... 36
Balance Sheet........................................................... 37
Statement of Operations................................................. 38
Statement of Changes in Stockholders' Deficit........................... 39
Statement of Cash Flows................................................. 40
Notes to Financial Statements........................................... 41
PRO FORMA COMBINED BALANCE SHEET,
GOODNOISE CORPORATION
Introduction to Unaudited Pro Forma Combined Balance Sheet.............. 44
Pro Forma Combined Balance Sheet (Unaudited)............................ 45
Notes to Pro Forma Combined Balance Sheet............................... 46
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GoodNoise Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of GoodNoise
Corporation (a development stage enterprise) at March 31, 1998, and the results
of its operations and its cash flows for the period from inception (January 8,
1998) through March 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses from operations since
inception and has to obtain additional capital to fund its ongoing operations.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management's plan in regard to these matters is also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
July 8, 1998
26
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1998
------------
<S> <C>
ASSETS
Current Assets:
Cash $ 25,221
Prepaid expenses and other current assets 2,576
--------
Total current assets 27,797
Property and equipment, net 10,414
Other assets 14,020
--------
Total assets $ 52,231
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 25,458
--------
Total current liabilities 25,458
Notes payable- related parties (Note 3) 110,000
--------
Total liabilities 135,458
--------
Commitments (Note 4)
Stockholders' Deficit:
Common Stock, $0.001 par value; 10,000,000
shares authorized; 8,680,000 shares
issued and outstanding 1,580
Additional paid-in capital 14,220
Notes receivable (Note 3) (10,100)
Deficit accumulated during the development stage (88,927)
--------
Total stockholders' deficit (83,227)
--------
Total liabilities and stockholders' deficit $ 52,231
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 8,
1998
(INCEPTION)
TO MARCH 31,
1998
------------
<S> <C>
Revenues $ -
------------
Operating expenses:
Product development 42,182
General and administrative 46,745
------------
88,927
------------
Net loss $ (88,927)
============
Net loss per share- basic and diluted $ (0.01)
============
Weighted average number of common
shares outstanding- basic and diluted 6,607,357
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE TOTAL
---------------------- PAID-IN NOTES DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE STAGE DEFICIT
--------- ------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
at formation in February 1998 7,100,000 $ - $ - $ - $ - $ -
Issuance of common stock
in March 1998 1,010,000 1,010 9,090 (10,100) - -
Issuance of common stock
in March 1998 in
exchange for services 570,000 570 5,130 - - 5,700
Net loss for the period from
January 8, 1998 (inception)
through March 31, 1998 - - - - (88,927) (88,927)
--------- ------ ------- ---------- -------- ---------
Balance at March 31, 1998 8,680,000 $1,580 $14,220 $(10,100) $(88,927) $(83,227)
========= ====== ======= ========== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 8,
1998 (INCEPTION)
TO MARCH 31,
1998
----------------
<S> <C>
Cash flows from operating activities:
Net loss $(88,927)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 380
Issuance of common stock in exchange for services 5,700
Changes in assets and liabilities:
Prepaid expenses and other current assets (2,576)
Accounts payable 25,458
Deposits (14,020)
--------
Net cash used in operating activities (73,985)
--------
Cash flows from investing activities:
Purchase of property and equipment (10,794)
--------
Cash flows from financing activities:
Proceeds from issuance of notes payable-related parties 110,000
--------
Net increase in cash 25,221
Cash at beginning of period -
--------
Cash at end of period $ 25,221
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
GoodNoise Corporation, (the "Company"), a Delaware corporation, was
incorporated on January 8, 1998 to develop and market a repertoire of musical
recordings offered for sale to consumers by direct file transfer, or
"downloading," over the Internet. Since its inception, the Company has been in
the development stage devoting its efforts primarily to organizing itself as a
public reporting entity, recruiting management and technical staff, developing
its product, acquiring operating assets and raising capital. The Company
operates within one industry segment.
The Company has incurred losses from operations since inception and must
obtain additional capital to fund its ongoing operations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management plans to raise additional capital in 1998 to finance the Company's
operations although there can be no assurance that they will be successful in
such efforts. The financial statements do not include any adjustment that might
result from the outcome of this uncertainty. See Note 7.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash,
accounts payable and notes payable, approximate their fair value due to the
relatively short maturities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets, generally two to three years, or the lease term of the respective
assets.
INCOME TAXES
Income taxes are accounted for using an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of current and deferred tax assets
and liabilities are based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized.
31
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25 "Accounting for Stock Issued to
Employees," and complies with disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." Under APB No. 25, compensation cost is
recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin ("SAB") No.
98. Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
shares outstanding during the period. The weighted average shares used to
compute basic net loss per share include outstanding shares of common stock from
the date of issuance and excludes, for the period from January 8, 1998
(inception) through March 31, 1998, 566,666 shares of common stock subject to
repurchase rights. In addition , the calculation of diluted net loss per share
excludes common stock issuable upon exercise of employee stock options and
shares subject to repurchase as their effect is antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." The adoption of both statements is
required for fiscal years beginning after December 15, 1997.
SFAS No. 130 requires that companies report in the financial statements, in
addition to net income, comprehensive income including, as applicable, foreign
currency items and unrealized gains and losses on certain investments in debt
and equity securities. The Company adopted SFAS No. 130 in January 1998 and
there are no differences between the net loss and comprehensive income (loss)
for the period from January 8, 1998 (inception) through March 31, 1998.
SFAS No. 131 requires that companies report separately in the financial
statements certain financial and descriptive information about operating
segments profit or loss, certain specific revenue and expense items and segment
assets. Additionally, companies are required to report information about the
revenues derived from their products and service groups, about geographic areas
in which the Company earns revenues and holds assets, and about major customers.
The adoption of SFAS No. 131 will not have any material impact on the Company's
financial statements.
32
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
MARCH 31,
1998
---------
<S> <C>
Computer equipment $ 5,794
Furniture and fixtures 5,000
-------
10,794
Less: Accumulated depreciation (380)
-------
$10,414
=======
</TABLE>
NOTE 3 - RELATED PARTY TRANSACTIONS:
In February 1998, the Company entered into an agreement with two of the
Company's Directors and a member of its Advisory Board to borrow $110,000,
through the issuance of promissory notes which bear interest at 10.0% per annum,
due in December 1998. All outstanding principal and interest related to these
notes were to be converted at the closing of the Company's initial sale of
Series A Preferred Stock at the rate of $0.40 per share. The Company did not
issue the Series A Preferred Stock and, in May 1998, these notes were converted
into 275,000 shares of common stock at $0.40 per share. The accompanying
financial statements reflect the notes payable as a noncurrent liability due to
the conversion.
At March 31, 1998, the Company had notes receivable related to stock purchases
from certain employees of the Company totaling $10,100. The notes are non-
interest bearing and payable on demand.
NOTE 4 - COMMITMENTS:
The Company leases office space under a noncancelable operating lease that
expires in March 2001. Rent expense was $7,953 for the period from inception
(January 8, 1998) through March 31, 1998.
Future minimum lease payments under the noncancelable operating lease are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1998 $ 34,560
1999 47,117
2000 48,530
2001 12,222
Thereafter -
--------
$142,429
========
</TABLE>
33
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - STOCK OPTION PLAN:
RESTRICTED STOCK
A total of 7,100,000 shares of common stock were issued at $0.001 per share to
the Company's founders in February 1998, of which 900,000 were issued subject to
a Restricted Stock Purchase Agreement (the "Agreement") to one of the founders.
The Agreement provides the Company with the right to repurchase 600,000 of these
shares at $0.01 per share subject to ratable vesting over three years. As of
March 31, 1998, a total of 566,666 shares were subject to repurchase by the
Company.
STOCK OPTION PLAN
On March 30, 1998, the Company adopted the 1998 Stock Option Plan that
provides for the granting of either incentive or nonqualified stock options to
purchase shares of the Company's common stock and for stock-based awards to
officers, directors and key employees and non-employee consultants. The Company
reserved 2,000,000 shares for issuance under the Plan. As of March 31, 1998, no
stock options had been granted under the Plan.
NOTE 6 - INCOME TAXES:
There is no provision for income taxes for the period from January 8, 1998
(inception) through March 31, 1998 as the Company incurred a net loss. The
Company's deferred tax assets at March 31, 1998 principally relate to its net
operating loss and approximated $35,000, for which a full valuation allowance
was provided due to uncertainty regarding their realization.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses and tax credit carryforwards that can be utilized in the future
may be impaired or limited in certain circumstances, including changes in
ownership, as defined.
NOTE 7 - SUBSEQUENT EVENTS:
On May 11, 1998, Atlantis Ventures Corporation, a Florida corporation,
acquired 9,310,000 shares representing all of the outstanding Common Stock of
the Company in exchange for 10,985,800 shares of Atlantis Ventures Corporation
common stock. For accounting purposes, this transaction will be treated as a
recapitalization of the Company. Atlantis Ventures is a publicly traded company
that was organized in August 1989 and had no revenues or operations prior to the
merger with the Company. Following the recapitalization, Atlantis Ventures
changed its name to GoodNoise Corporation.
Through May 11, 1998, the Company issued options to purchase 1,747,500 common
shares at prices ranging from $0.01 to $0.03 per share. In connection with the
recapitalization, such options were exchanged for options to purchase 2,062,050
common shares of Atlantis Ventures Corporation.
34
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
In addition, in May 1998, Atlantis Ventures Corporation issued 2,500,000 units
at a price of $0.20 per share in a private placement. Each unit consists of one
share of common stock and one warrant with each five warrants entitling the
holder to purchase one common share for $1.00. Warrants to purchase 200,000
shares of common stock were exercised in May 1998. The remaining warrants are
exercisable through August 1998.
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Atlantis Ventures Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Atlantis Ventures
Corporation (a development stage enterprise) at March 31, 1998, December 31,
1997 and December 1996 and the results of its operations and its cash flows for
the three months ended March 31, 1998, for the years ended December 31, 1997 and
1996 and for the period from inception (August 30, 1989) through March 31, 1998
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has cumulative losses from operations since
inception and has no assets and a net capital deficiency which raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plan in regard to these matters is also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
July 8, 1998
36
<PAGE>
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31.
MARCH 31, -----------------------------------------
1998 1997 1996
---------------- ----------------- ------------------
<S> <C> <C> <C>
ASSETS
Current Assets $ - $ - $ -
------------- -------------- ---------------
Total current assets - - -
------------- -------------- ---------------
Total assets $ - $ - $ -
============= ============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable- related party $ 1,650 $ - $ -
------------- -------------- ---------------
Total current liabilities 1,650 - -
------------- -------------- ---------------
Stockholders' Deficit:
Preferred stock, $0.01 par value; 500,000 shares
authorized; none issued or outstanding - - -
Common Stock, $0.01 par value; 200,000,000, shares
authorized; 1,000,000 issued and outstanding 1,000 1,000 1,000
Accumulated deficit (2,650) (1,000) (1,000)
------------- -------------- ---------------
Total stockholders' deficit (1,650) - -
------------- -------------- ---------------
Total liabilities and stockholders' deficit $ - $ - $ -
============= ============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
AUG 30, 1989
JAN 1, 1998 TO YEAR ENDED DECEMBER 31, (INCEPTION) TO
MARCH 31, ------------------------------- MARCH 31,
1998 1997 1996 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ - $ - $ - $ -
---------- ---------- ---------- ----------
Operating expenses:
General and administrative 1,650 - - 2,650
---------- ---------- ---------- ----------
1,650 - - 2,650
---------- ---------- ---------- ----------
Net loss $ (1,650) $ - $ - $ (2,650)
========== ========== ========== ==========
Net loss per share- basic and diluted $ - $ - $ - $ -
---------- ---------- ---------- ----------
Weighted average number of common
shares outstanding-basic and diluted 1,000,000 1,000,000 1,000,000 1,000,000
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
--------- ------ ------------ ---------
<S> <C> <C> <C> <C>
Issuance of common stock for
Services in August 1991 1,000,000 $1,000 $ - $ 1,000
Net loss for year ended
December 31, 1991 (1,000) (1,000)
--------- ------ ------- -------
Balance at December 31, 1995 1,000,000 1,000 (1,000) -
--------- ------ ------- -------
Balance at December 31, 1996 1,000,000 1,000 (1,000) -
--------- ------ ------- -------
Balance at December 31, 1997 1,000,000 1,000 (1,000) -
Net loss for the period from
January 1, 1998 to March 31, 1998 - - (1,650) (1,650)
--------- ------ ------- -------
Balance at March 31, 1998 1,000,000 $1,000 $(2,650) $(1,650)
========= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
AUG 30, 1989
JAN 1, 1998 TO YEAR ENDED DECEMBER 31, (INCEPTION) TO
MARCH 31, ---------------------------------- MARCH 31,
1998 1997 1996 1998
----------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,650) $ - $ - $(2,650)
Adjustments to reconcile net
loss to cash used in
operating activities:
Issuance of common stock
in exchange for services - - - 1,000
Changes in assets and liabilities:
Accounts payable - related party 1,650 - - 1,650
------- ----- ----- -------
Net cash used in
operating activities - - - -
------- ----- ----- -------
Net change in cash - - - -
Cash at beginning of period - - - -
------- ----- ----- -------
Cash at end of period $ - $ - $ - $ -
======= ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Atlantis Ventures Corporation, (the "Company"), a Florida corporation, was
incorporated on August 2, 1989. Since inception, the Company has had no
revenue, assets or operations.
Since inception, the Company has been in the development stage. The Company
was formed to pursue an acquisition of an operating company and has been
inactive since formation. The Company has incurred cumulative losses from
operations since inception and has no assets and a net capital deficiency.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management plans to raise additional capital in 1998 to
finance the Company's operations although there can be no assurance they will be
successful in such efforts. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern. See Note 4.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments approximate their
fair value due to the relatively short maturities.
INCOME TAXES
Income taxes are accounted for using an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences of events that have been recognized in the Company's financial
statements or tax returns. The measurement of deferred tax assets and
liabilities are based on provisions of the enacted tax law; the effects of
future changes in tax laws or rates are not anticipated. Deferred tax assets
are reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share". Under SFAS No. 128 and SAB No. 98, basic
net loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding for the period. The
calculation of diluted net loss per share excludes common stock issuable upon
exercise of employee stock options, if any, as their effect is antidilutive.
41
<PAGE>
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." The adoption of both statements is
required for fiscal years beginning after December 15, 1997.
SFAS No. 130 requires that companies report in the financial statements, in
addition to net income, comprehensive income including, as applicable, foreign
currency items and unrealized gains and losses on certain investments in debt
and equity securities. The Company adopted SFAS No. 130 in January 1998 and
there are no differences between the net loss and comprehensive income (loss)
for all periods presented.
SFAS No. 131 requires that companies report separately in the financial
statements certain financial and descriptive information about operating
segments profit or loss, certain specific revenue and expense items and segment
assets. Additionally, companies are required to report information about the
revenues derived from their products and service groups, about geographic areas
in which the Company earns revenues and holds assets, and about major customers.
The adoption of SFAS No. 131 will not have a material impact on the Company's
financial statements.
NOTE 2 - RELATED PARTY TRANSACTIONS:
The Company neither owns or leases real or personal property. Office services
are provided without charge by a director. The cost of such services were not
material and, accordingly, are not reflected in these financial statements.
On August 2, 1991, the Company issued 1,000,000 shares of its common stock for
services valued at $1,000.
During the three months ended March 31, 1998, a stockholder paid certain fees
totaling $1,650 on behalf of the Company which remains payable to the
stockholder at March 31, 1998.
NOTE 3 -INCOME TAXES:
There is no provision for income taxes for the periods from inception through
March 31, 1998 as the Company incurred net losses. The Company does not have any
significant deferred tax assets or liabilities for all periods presented.
42
<PAGE>
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - SUBSEQUENT EVENTS:
On May 11, 1998, the Company acquired 9,310,000 shares representing all of the
outstanding common stock of GoodNoise Corporation ("GoodNoise"), a development
stage enterprise, in exhange for 10,985,800 shares of the Company's common
stock. For accounting purposes, this transaction will be treated as a
recapitalization of GoodNoise. Following the recapitalization, the Company
changed its name to GoodNoise Corporation.
Through May 11, 1998, GoodNoise Corporation issued options to purchase
1,747,500 common shares at prices ranging from $0.01 to $0.03 per share. Such
options were exchanged for options to purchase 2,062,050 common shares of the
Company.
In addition, in May 1998, the Company issued 2,500,000 units at a price of
$0.20 per share in a private placement. Each unit consists of one share of
common stock and one warrant with each five warrants entitling the holder to
purchase one common share for $1.00. Warrants to purchase 200,000 shares of
common stock were exercised in May 1998. The remaining warrants are exercisable
through August 1998.
43
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The following unaudited pro forma combined financial statements give effect to
the Company's private placement, exercise of stock warrants, the conversion of
GoodNoise Corporation ("GoodNoise") notes payable to common stock and the
Company's acquisition of GoodNoise which was accounted for as a
recapitalization. The unaudited pro forma combined balance sheet is based on
the individual balance sheets of the Company and GoodNoise appearing elsewhere
in this Form 10-SB, and has been prepared to reflect the recapitalization as of
March 31, 1998. An unaudited pro forma statements of operations is not
presented since the operations of the Company prior to the recapitalization were
not material. The unaudited pro forma combined balance sheet should be read in
conjunction with the historical financial statements and notes thereto of
GoodNoise and the Company included elsewhere in this Form 10-SB.
44
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------
PRIVATE
PLACEMENT,
EXERCISE OF
HISTORICAL WARRANTS
HISTORICAL ATLANTIS AND NOTE PRO FORMA
GOODNOISE VENTURES CONVERSION ACQUISITION AS ADJUSTED
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 25,221 $ - $ 700,000 (a) $ - $ 725,221
Prepaid expenses and other current assets 2,576 - - - 2,576
--------- -------- ---------- ---------- ---------
Total current assets 27,797 - 700,000 - 727,797
Property and equipment, net 10,414 - - - 10,414
Other assets 14,020 - - - 14,020
--------- -------- ---------- ---------- ---------
Total assets $ 52,231 $ - $ 700,000 $ - $ 752,231
========= ======== ========== ========== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 25,458 $ - $ - $ - $ 25,458
Accounts payable-related party - 1,650 - - 1,650
--------- -------- ---------- ---------- ---------
Total current liabilities 25,458 1,650 - - 27,108
Notes payable-related parties 110,000 - (110,000) (b) - -
--------- -------- ---------- ---------- ---------
Total liabilities 135,458 1,650 (110,000) - 27,108
--------- -------- ---------- ---------- ---------
Stockholder' Equity (Deficit)
Preferred stock, $0.01 par value;
500,000 shares authorized;
none issued or outstanding - - - - -
Common stock, $0.01 par value;
200,000,000 shares authorized;
1,000,000 shares issued and outstanding
at March 31, 1998; 14,266,900 shares
on a pro forma, as adjusted basis - 1,000 8,100 (a)(b) 133,569 (c) 142,669
Common Stock, $0.001 par value;
10,000,000 shares authorized;
8,680,000 shares issued and outstanding
at March 31, 1998 1,580 - - (1,580) (c) -
Additional paid-in capital 14,220 - 801,900 (a)(b) (134,639) (c) 681,481
Notes receivable (10,100) - - - (10,100)
Deficit accumulated during the
development stage (88,927) (2,650) - 2,650 (c) (88,927)
--------- -------- ---------- ---------- ---------
Total stockholders'
equity (deficit) (83,227) (1,650) 810,000 - 725,123
--------- -------- ---------- ---------- ---------
Total liabilities and stockholders'
equity (deficit) $ 52,231 $ - $ 700,000 $ - $ 752,231
========= ======== ========== ========== =========
</TABLE>
45
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
(a) Represents issuance of 2,500,000 units at a price of $0.20 per share in a
private placement. Each unit consists of one share of common stock and one
warrant with each five warrants entitling the holder to purchase one common
share for $1.00. Warrants to purchase 200,000 shares of common stock were
exercised in May 1998. The remaining warrants are exercisable through August
1998.
(b) Represents the conversion of notes payable in the amount of $110,000 into
275,000 shares of GoodNoise Corporation common stock prior to the
acquisition.
(c) Represents the acquisition of GoodNoise Corporation by Atlantis Ventures
through the issuance of 10,242,000 shares of Atlantis Ventures common stock
for all the outstanding shares of GoodNoise Corporation common stock. This
transaction was treated as a recapitalization of GoodNoise Corporation.
Pro forma share outstanding assuming the recapitalization occurred as of
March 31, 1998 comprise the following:
<TABLE>
<S> <C>
Existing Atlantis Ventures shares 1,000,000
Conversion of existing GoodNoise Corporation
shares as of March 31, 1998 (8,680,000
shares x 1.18 conversion ratio) 10,242,400
Private placement (see (a) above) 2,500,000
Exercise of warrants (see (a) above) 200,000
Conversion of notes payable (275,000 shares x
1.18 conversion ratio)(see (b) above) 324,500
----------
Total pro forma shares 14,266,900
==========
</TABLE>
46
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
2.1 Agreement and Plan of Reorganization by and among GoodNoise Corporation,
Atlantis Ventures Corp., GN Acquisition Corp and certain other parties
dated as of May 11, 1998
3.1 Articles of Incorporation
3.2 Bylaws
10.1 Form of Indemnity Agreement
16.1 Letter dated July 16, 1998 from Barry L. Friedman, P.C.
21 Subsidiaries
47
<PAGE>
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
GoodNoise CORPORATION
By /s/ Joseph H. Howell
_________________________
Joseph H. Howell
Its Executive Vice President and
Chief Financial Officer
48
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
GOODNOISE CORPORATION,
ATLANTIS VENTURES CORP.,
GN ACQUISITION CORP.
TIDEWATER ENTERPRISES LTD.
AND
John A. Xinos
Dated as of May 11, 1998
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of May 11, 1998 by and among GoodNoise Corporation, a Delaware
corporation ("GoodNoise"), Atlantis Ventures Corp., a Florida corporation
("Atlantis"), GN Acquisition Corp., a Delaware corporation ("Sub"), and
Tidewater Enterprises Ltd., a British Columbia corporation, and John A. Xinos
(together the "Principal Shareholder").
The parties agree as follows:
1. THE MERGER.
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement, Sub shall be
merged into GoodNoise (the "Merger), the separate corporate existence of Sub
shall cease and GoodNoise shall continue as the surviving corporation and as a
wholly-owned subsidiary of Atlantis. The surviving corporation after the Merger
is hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated
--------------
pursuant to Section 8.1, the closing of the Merger (the "Closing") will take
place as promptly as practicable, but no later than five (5) business days
following satisfaction or waiver of the conditions set forth in Section 6, at
the offices of Gray Cary Ware & Freidenrich, LLP, 400 Hamilton Avenue, Palo
Alto, California, unless another place or time is agreed to in writing by
Atlantis and GoodNoise. The date upon which the Closing actually occurs is
herein referred to as the "Closing Date." On the Closing Date, the parties
hereto shall cause the Merger to be consummated by filing Articles of Merger (or
like instrument) in the form attached hereto as Exhibit A with the Secretary of
---------
State of the State Delaware (the "Merger Articles"), in accordance with the
applicable provisions of Delaware law (the time of acceptance by the Secretary
of State of the State of Delaware of such filing being referred to herein as the
"Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in the applicable provisions of Delaware law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
Sub and GoodNoise shall vest in the Surviving Corporation, and all debts,
liabilities and duties of Sub and GoodNoise shall become the debts, liabilities
and duties of the Surviving Corporation.
1.4 Articles of Incorporation, Bylaws. As of the Effective Time, the
----------------------------------
Articles of Incorporation and Bylaws of Atlantis shall be amended to read as set
forth in Exhibits B-1 and B-2 hereto and the form of Indemnity Agreement set
------------ ---
forth in Exhibit B-3 shall have been approved by the shareholders of Atlantis.
-----------
The Certificate of Incorporation and Bylaws of GoodNoise shall be the
Certificate of Incorporation and Bylaws of the Surviving Corporation.
1.5 Directors and Officers. Directors of the Surviving Corporation
----------------------
and Atlantis immediately after the Effective Time shall be the directors of
GoodNoise immediately
1
<PAGE>
prior to the Effective Time, each to hold the office in accordance with the
provisions of applicable laws and the Bylaws of the Surviving Corporation and
Atlantis, respectively, until their successors are duly qualified and elected.
The officers of Surviving Corporation immediately after the Effective Time shall
be the officers of GoodNoise and Atlantis immediately prior to the Effective
Time, each to hold office in accordance with the provisions of the Bylaws of the
Surviving Corporation and Atlantis, respectively.
1.6 Conversion of GoodNoise Common Stock.
------------------------------------
(a) At the Effective Time, each share of GoodNoise Common Stock,
par value $0.001 per share ("GoodNoise Common Stock"), upon the terms and
subject to the conditions set forth below shall be converted automatically into
1.18 shares (the "Exchange Ratio") of Atlantis Common Stock par value $0.01 per
share ("Atlantis Common Stock").
(b) At the Effective Time, any outstanding options or warrants
(collectively, "GoodNoise Options") to acquire GoodNoise Common Stock, will be,
in connection with the Merger, assumed by Atlantis. Each GoodNoise Option so
assumed or replaced by Atlantis under this Agreement shall continue to have, and
be subject to, the same terms and conditions, including vesting (if applicable),
set forth in the respective GoodNoise Option agreements immediately prior to the
Effective Time, except that (A) such assumed or replaced GoodNoise Option will
be exercisable for that number of whole shares of Atlantis Common Stock equal to
the product obtained by multiplying the number of shares of GoodNoise Common
Stock that were issuable upon exercise of such assumed or replaced GoodNoise
Option immediately prior to the Effective Time, by the Exchange Ratio, rounded
down to the nearest whole number of shares of Atlantis Common Stock and (B) the
per share exercise price for the shares of Atlantis Common Stock issuable upon
exercise of such assumed or replaced GoodNoise Option shall be equal to the
quotient obtained by dividing the exercise price per share of GoodNoise Common
Stock at which such assumed or replaced GoodNoise Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded up to the
nearest whole cent. It is the intention of the parties that any GoodNoise
Options that qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), shall remain
"incentive stock options" following the Effective Time. GoodNoise Options shall
be assumed in accordance with the rules of Section 424(a) of the Code, and the
regulations promulgated thereunder, and such rules shall apply even with respect
to options that are not "incentive stock options."
(c) The Exchange Ratio shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into Atlantis Common Stock or
GoodNoise Common Stock), reorganization, recapitalization or other like charge
with respect to Atlantis Common Stock or GoodNoise Common Stock occurring after
the date hereof.
2
<PAGE>
(d) No fractional share of Atlantis Common Stock shall be issued
in the Merger. In lieu thereof, any fractional share shall be rounded up to the
nearest whole share of Atlantis Common Stock.
(e) Each share of Common Stock of Sub issued and outstanding
immediately prior to the Effective Time shall be converted into and exchanged
for one validly issued, fully paid and nonassessable share of Common Stock of
the Surviving Corporation. Each stock certificate of Sub evidencing ownership of
any such shares shall continue to evidence ownership of such shares of capital
stock of the Surviving Corporation.
1.7 Surrender of Certificates.
-------------------------
(a) Exchange Agent. The Corporate Secretary of Atlantis shall
--------------
serve as exchange agent (the "Exchange Agent") in the Merger.
(b) Atlantis to Provide Cash and Common Stock. Promptly after the
-----------------------------------------
Effective Time, Atlantis shall make available to the Exchange Agent for exchange
in accordance with this Section, the shares of Atlantis Common Stock issuable
pursuant to Section 1.6(b) in exchange for all of the outstanding shares of
GoodNoise Common Stock.
(c) Exchange Procedures. On or after the Closing Date, the
-------------------
holders of GoodNoise Common Stock will surrender the certificates representing
their GoodNoise Common Stock (the "GoodNoise Stock Certificate") to Atlantis for
cancellation together with a letter of transmittal in such form and having such
provisions that Atlantis reasonably requests. Promptly following the Effective
Time, Atlantis will issue to the such stockholders certificates for the number
of shares of Atlantis Common Stock to which such stockholders are entitled
pursuant to Section 1.6.
(d) Transfers of Ownership. If any certificate for shares of
----------------------
Atlantis Common Stock is to be issued in a name other than that in which the
certificate surrendered in exchange therefor is registered or if any cash is to
be delivered to a person other than the person whose name is on the certificate
surrendered, it will be a condition to the issuance and/or delivery thereof that
the certificate so surrendered will be properly endorsed and otherwise in proper
form for transfer and that the person requesting such exchange will have paid to
Atlantis or any agent designated by it any transfer or other taxes required by
reason or the issuance of a certificate for shares of Atlantis Common Stock or
the delivery of any cash in any name other than that of the registered holder of
the certificate surrendered, or established to the satisfaction of Atlantis or
any agent designated by it that such tax has been paid or is not payable.
(e) No Liability. Notwithstanding anything to the contrary in
------------
this Section 1.7, none of the Exchange Agent, the Surviving Corporation or any
party hereto shall be liable to a holder of shares of Atlantis Common Stock or
GoodNoise Common Stock for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
3
<PAGE>
1.8 No Further Ownership Rights in GoodNoise Common Stock. All shares
-----------------------------------------------------
of Atlantis Common Stock issued upon the surrender for exchange of shares of
GoodNoise Common Stock in accordance with the terms hereof, and any cash paid in
respect thereof, shall be deemed to be full satisfaction of all rights
pertaining to such shares of GoodNoise Common Stock, and there shall be no
further registration of transfers on the records of the Surviving Corporation of
shares of GoodNoise Common Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, GoodNoise Stock Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Section 1.
1.9 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
certificates evidencing shares of GoodNoise Common Stock shall have been lost,
stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificates, upon the making of an affidavit of that fact
by the holder thereof, such amount, if any, as may be required pursuant to
Section 1.6; provided, however, that Atlantis may, in its discretion and as a
-------- -------
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificates to deliver a bond or indemnity in such sum as
it may reasonably direct against any claim that may be made against Atlantis or
the Exchange Agent with respect to the certificates alleged to have been lost,
stolen or destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger will constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended. Each party has consulted with its own
tax advisors with respect to the tax consequences of the Merger.
1.11 Taking of Necessary Action; Further Action. If, at any time
------------------------------------------
after the Effective Time, any such further action is necessary or desirable to
carry out the purposes of this Agreement and to vest the Surviving Corporation
with full right, title and possession to all assets, property, rights,
privileges, powers and franchises of GoodNoise, the officers and directors of
GoodNoise and Atlantis are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
2. REPRESENTATIONS AND WARRANTIES OF ATLANTIS AND THE
PRINCIPAL SHAREHOLDER.
Each of Atlantis and the Principal Shareholder hereby, jointly and
severally, represents and warrants to GoodNoise, subject to such exceptions as
are specifically disclosed in the Atlantis Disclosure Schedule (referencing the
appropriate Section and paragraph numbers) supplied by Atlantis and the
Principal Shareholder to GoodNoise (the "Atlantis Disclosure Schedule") and
dated as of the date hereof, as follows:
2.1 Organization of Atlantis. Each of Atlantis and Sub is a
------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Florida and Delaware, respectively. Each has the corporate power
to own its properties and to carry on its business as proposed to be conducted
following the Effective Date. Atlantis is duly qualified to
4
<PAGE>
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified could have a material adverse effect on
the business, assets (including intangible assets), condition (financial or
otherwise), results of operations or prospects of Atlantis (hereinafter referred
to as a "Material Adverse Effect"). GoodNoise has delivered a true and correct
copy of its Articles of Incorporation and Bylaws and the Certificate of
Incorporation and Bylaws of Sub, each as amended to date, to GoodNoise. Christof
Koumbis is the sole director and officers of Atlantis and Sub. Neither Atlantis
nor Sub has ever has never conducted any operations.
2.2 Atlantis Capital Structure.
--------------------------
(a) The authorized capital stock of Atlantis consists of
200,000,000 shares of authorized Common Stock, par value $0.01 per share, of
which 3,700,000 shares are issued and outstanding and 500,000 shares of
preferred stock, par value $0.01 per share, none of which are outstanding.
Atlantis Common Stock is held by the persons, with the domicile addresses and in
the amounts set forth on Section 2.2(a) of the Atlantis Disclosure Schedule. All
outstanding shares of Atlantis Common Stock are duly authorized, validly issued,
fully paid and non-assessable and not subject to preemptive rights created by
statute, the Articles of Incorporation or Bylaws of Atlantis or any agreement to
which Atlantis is a party or by which it is bound and have been issued in
compliance with federal and state securities laws. Atlantis has no other capital
stock authorized, issued or outstanding.
(b) Atlantis has outstanding warrants granted as of May 8, 1998
originally entitling the holders thereof to purchase a total of up to 500,000
shares of Atlantis Common Stock until three months following the completion of
the Merger at an exercise price of $1.00 per share (the "Atlantis Warrants").
The Atlantis Warrants have been exercised as to 200,000 shares. Except for the
Atlantis Warrants, there are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which Atlantis or any of its
shareholders is a party or by which Atlantis or any of its shareholders is bound
obligating Atlantis or any of its shareholders to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of Atlantis or obligating Atlantis to
grant, extend, accelerate the vesting of, change the price of, otherwise amend
or enter into any such option warrant, call, right, commitment or agreement.
There are no outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to Atlantis. There are no
voting trusts, proxies, or other agreements or understandings with respect to
the voting stock of Atlantis.
(c) The shares of Atlantis Common Stock to be issued pursuant to
the Merger will be duly authorized, validly issued, fully paid, non-assessable.
(d) The Atlantis Common Stock has been duly approved for
quotation on the NASD OTC Bulletin Board.
2.3 Subsidiaries. Atlantis does not have, and has never had, any
------------
subsidiaries or affiliated companies other than Sub and does not otherwise
5
<PAGE>
own, and has not otherwise owned, any shares in the capital of or any interest
in, or control, directly or indirectly, any other corporation, partnership,
association, joint venture or other business entity. Atlantis owns all of the
outstanding securities of Sub.
2.4 Authority. Each of Atlantis, Sub and the Principal Shareholder
---------
has all requisite power and authority to enter into this Agreement and any
Related Agreements (as hereinafter defined) to which it is a party and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and any Related Agreements to which it is a party and
the consummation of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action on the part of Atlantis and
Sub, and no further action is required on the part of Atlantis, Sub or the
Principal Shareholder to authorize the Agreement, any Related Agreements to
which it is a party and the transactions contemplated hereby and thereby. This
Agreement and any Related Agreements to which Atlantis, Sub or the Principal
Shareholder is a party have been duly executed and delivered by Atlantis or such
Principal Shareholder, as the case may be, and, assuming the due authorization,
execution and delivery by the other parties hereto and thereto, constitute the
valid and binding obligation of Atlantis or such Principal Shareholder, as the
case may be, enforceable in accordance with their respective terms, subject to
the laws of general application relating to bankruptcy, insolvency and the
relief of debtors, and to rules of law governing specific performance,
injunctive relief or other equitable remedies. The "Related Agreements" shall
mean all such ancillary agreements required in this Agreement to be executed and
delivered in connection with the transactions contemplated hereby.
2.5 Conflict. The execution and delivery of this Agreement and any
--------
Related Agreements to which it is a party by Atlantis, Sub and the Principal
Shareholder do not, and, the consummation of the transactions contemplated
hereby and thereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation, modification or acceleration of any
obligation or loss of any benefit under (any such event, a "Conflict") (i) any
provision of the Articles of Incorporation and Bylaws of Atlantis or Sub, (ii)
any mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise or license to which Atlantis, Sub or the Principal
Shareholder or any of their respective properties or assets are subject, or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Atlantis, Sub or the Principal Shareholder or their respective
properties or assets.
2.6 Consents. No consent, waiver, approval, order or authorization
--------
of, or registration, declaration or filing with, any court, administrative
agency or commission or other federal, state, county, local or other foreign
governmental authority, instrumentality, agency or commission ("Governmental
Entity") or any third party, including a party to any agreement with Atlantis or
Sub (so as not to trigger any Conflict), is required by or with respect to
Atlantis or Sub in connection with the execution and delivery of this Agreement
and any Related Agreements to which Atlantis or Sub or the Principal Shareholder
is a party or the consummation of the transactions contemplated hereby and
thereby, except for (i) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
6
<PAGE>
applicable securities laws thereby, and (ii) the filing of the Merger Articles
with the Secretary of State of the Delaware.
2.7 Atlantis Financial Statements. Atlantis has provided GoodNoise
-----------------------------
with a copy of it's audited balance sheets as of March 13, 1998, December 31,
1997 and December 31, 1996 and the related audited statements of operations,
stockholders' equity and cash flow for the periods then ended (the "Audited
Financials") and Atlantis's unaudited balance sheet of April 1998 and the
related unaudited statements of income and cash flow for the period from March
13, 1998 to such date (the "Unaudited Financials"). The Audited Financials and
the Unaudited Financials are correct in all material respects and have been
prepared in accordance with GAAP applied on a basis consistent throughout the
periods indicated and consistent with each other (except that the Unaudited
Financials do not contain all the notes that may be required by GAAP). The
Audited Financials and Unaudited Financials present fairly the financial
condition, operating results and cash flows of Atlantis as of the dates and
during the periods indicated therein, subject in the case of the Unaudited
Financials, to normal year-end adjustments, which will not be material in amount
or significance.
2.8 No Undisclosed Liabilities. Atlantis and Sub do not have any
--------------------------
liability, indebtedness, obligation, expense, claim, deficiency, guaranty or
endorsement of any type, whether accrued, absolute, contingent, matured,
unmatured or other (whether or not required to be reflected in financial
statements in accordance with GAAP).
2.9 No Changes. Since inception of Atlantis, there has not been,
----------
occurred or arisen any:
(a) transaction, commitment or obligation by Atlantis of any kind
other than the stock and warrant issuances described in paragraph (b) hereof;
(b) issuance or sale, or contract to issue or sell, by Atlantis
of any shares of Atlantis Common Stock, or securities exchangeable, convertible
or exercisable therefor, or any securities, warrants, options or rights to
purchase any of the foregoing, except for the issuance of 3,700,000 shares of
Atlantis Common Stock and the issuance of the Atlantis Warrants;
(c) negotiation or agreement by Atlantis or any officer or
employees thereof to do any of the things described in the preceding clauses (a)
or (b) (other than negotiations with GoodNoise and its representatives regarding
the transactions contemplated by this Agreement).
2.10 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which Atlantis is a party or otherwise binding upon Atlantis which has or may
have the effect of prohibiting or impairing any business practice of Atlantis or
the Surviving Corporation, any acquisition of property (tangible
7
<PAGE>
or intangible) by Atlantis or the Surviving Corporation or the conduct of
business by Atlantis or the Surviving Corporation.
2.11 Agreements, Contracts and Commitments. Atlantis is not a party
-------------------------------------
to nor is it bound by any contracts, obligations or agreements or any kind.
Atlantis is in compliance with and has not breached, violated or defaulted
under, or received notice that it has breached, violated or defaulted under, any
of the terms or conditions of any agreement, contract, covenant, instrument,
lease, license or commitment to which Atlantis is a party or by which it is
bound (collectively a "Contract"), nor is Atlantis or the Principal Shareholder
aware of any event that would constitute such a breach, violation or default
with the lapse of time, giving of notice or both. Atlantis has obtained, or will
obtain prior to the Closing Date, all necessary consents, waivers and approvals
as are required in connection with the Merger.
2.12 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or, to Atlantis's or the Principal Shareholder's knowledge, threatened,
against Atlantis, its properties or any of its officers or directors, nor, to
the knowledge of Atlantis or the Principal Shareholder, is there any reasonable
basis therefor. There is no investigation pending or, to Atlantis's or the
Principal Shareholder's knowledge threatened, against Atlantis, its properties
or any of its officers or directors (nor, to the best knowledge of Atlantis or
the Principal Shareholder, is there any reasonable basis therefor) by or before
any Governmental Entity. No Governmental Entity has at any time challenged or
questioned the legal right of Atlantis or any subsidiary to conduct its
operations as presently or previously conducted.
2.13 Minute Books. The minutes of Atlantis made available to counsel
------------
for GoodNoise are the only minutes of Atlantis and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of
Atlantis and its shareholders or actions by written consent since the time of
incorporation of Atlantis.
2.14 Brokers' and Finders' Fees: Third Party Expenses. Atlantis has
------------------------------------------------
not incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with the Agreement or any transaction contemplated hereby.
2.15 Compliance with Laws. Atlantis has complied with, is not in
--------------------
violation of, and has not received any notices of violation with respect to, any
foreign, federal, state or local statute, law or regulation.
2.16 Complete Copies of Materials. Atlantis has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by GoodNoise or its counsel.
2.17 Representations Complete. None of the representations or
------------------------
warranties made by Atlantis or the Principal Shareholder (as modified by the
Atlantis Disclosure Schedule), nor any statement made in any Schedule or
certificate furnished by Atlantis or the Principal Shareholder pursuant to this
Agreement or finished in or in connection with documents mailed or
8
<PAGE>
delivered to the shareholders of Atlantis for use in soliciting their consent to
this Agreement and the Merger contains or will contain at the Effective Time,
any untrue statement of a material fact, or omits or will omit at the Effective
Time to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which made,
not misleading.
3. REPRESENTATIONS AND WARRANTIES OF GOODNOISE.
GoodNoise represents and warrants to Atlantis as follows:
3.1 Organization Standing and Power. GoodNoise is a corporation duly
-------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware. GoodNoise has the corporate power to own its properties and to carry
on its business as now being conducted and is duly qualified to do business and
is in good standing in each jurisdiction in which the failure to be so qualified
would have a material adverse effect on the ability of GoodNoise to consummate
the transactions contemplated hereby.
3.2 Authority. GoodNoise has all requisite corporate power and
---------
authority to enter into this Agreement and the Related Agreements and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the Related Agreements and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of GoodNoise except that the Merger
must be approved by the stockholders of GoodNoise. This Agreement has been duly
executed and delivered by GoodNoise and constitutes, and the Related Agreements,
when duly executed and delivered by GoodNoise, will constitute the valid and
binding obligations of GoodNoise, enforceable in accordance with their terms,
except as such enforceability may be limited by principles of public policy and
subject to the laws of general application relating to bankruptcy, insolvency
and the relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies.
3.3 Capital Structure.
-----------------
(a) The authorized stock of GoodNoise consists of 10,000,000
shares of Common Stock, $0.001 par value, of which 9,207,500 shares are issued
and outstanding. All such shares of GoodNoise have been duly authorized, and all
such issued and outstanding shares have been validly issued, are fully paid and
nonassessable and are free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders shares of Common Stock under
applicable securities laws and except to the extent that certain of such shares
are subject to a right of repurchase in favor of GoodNoise relating to a vesting
schedule based upon continued service to GoodNoise.
(b) Except for options to purchase 1,540,000 shares of Common
Stock granted pursuant to the GoodNoise 1998 Stock Option Plan (the "GoodNoise
Option Plan"), there are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which GoodNoise or any of its
stockholders is a party or by which GoodNoise or any
9
<PAGE>
of its stockholders is bound obligating GoodNoise or any of its stockholders to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of GoodNoise.
There are no outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to GoodNoise.
3.4 Conflict. The execution and delivery of this Agreement and any
--------
Related Agreements to which it is a party by GoodNoise do not, and, the
consummation of the transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation, modification or acceleration of any obligation or loss of any
benefit under (any such event, a "Conflict") (i) any provision of the Articles
of Incorporation and Bylaws of GoodNoise, (ii) any mortgage, indenture, lease,
contract or other agreement or instrument, permit, concession, franchise or
license to which GoodNoise or any of its properties or assets are subject, or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to GoodNoise or its properties or assets.
3.5 Consents. No consent, waiver, approval, order or authorization
--------
of, or registration, declaration or filing with, any court, administrative
agency or commission or other federal, state, county, local or other foreign
governmental authority, instrumentality, agency or commission ("Governmental
Entity") or any third party, including a party to any agreement with GoodNoise
(so as not to trigger any Conflict), is required by or with respect to GoodNoise
in connection with the execution and delivery of this Agreement and any Related
Agreements to which GoodNoise is a party or the consummation of the transactions
contemplated hereby and thereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws thereby, and (ii) the filing of
the Merger Articles with the Secretary of State of the Delaware.
3.6 GoodNoise Financial Statements. GoodNoise has furnished Atlantis
------------------------------
with a true and complete copy of its unaudited balance sheet as of March 31,
1998 (the "GoodNoise Financials"). The GoodNoise Financials present fairly the
financial condition of GoodNoise as of the date indicated therein, subject, to
year-end adjustments.
3.7 Restrictions on Business Activities. Other than license and other
-----------------------------------
restrictions included in agreements entered into in the ordinary course of
business, there is no agreement (noncompete or otherwise), commitment, judgment,
injunction, order or decree to which GoodNoise is a party or otherwise binding
upon GoodNoise which has or may have the effect of prohibiting or impairing any
business practice of GoodNoise or the Surviving Corporation, any acquisition of
property (tangible or intangible) by GoodNoise or the Surviving Corporation or
the conduct of business by GoodNoise or the Surviving Corporation.
3.8 Agreements, Contracts and Commitments. GoodNoise is in compliance
-------------------------------------
with and has not breached, violated or defaulted under, or received notice that
it has breached, violated or defaulted under, any of the terms or conditions of
any agreement, contract, covenant,
10
<PAGE>
instrument, lease, license or commitment to which GoodNoise is a party or by
which it is bound (collectively a "Contract"), nor is GoodNoise aware of any
event that would constitute such a breach, violation or default with the lapse
of time, giving of notice or both. GoodNoise has obtained, or will obtain prior
to the Closing Date, all necessary consents, waivers and approvals as are
required in connection with the Merger.
3.9 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or, to GoodNoise's knowledge, threatened, against GoodNoise, its
properties or any of its officers or directors, nor, to the knowledge of
GoodNoise, is there any reasonable basis therefor. There is no investigation
pending or, to GoodNoise's knowledge threatened, against GoodNoise, its
properties or any of its officers or directors (nor, to the best knowledge of
GoodNoise, is there any reasonable basis therefor) by or before any Governmental
Entity. No Governmental Entity has at any time challenged or questioned the
legal right of GoodNoise to conduct its operations as presently or previously
conducted.
3.10 Minute Books. The minutes of GoodNoise made available to counsel
------------
for Atlantis are the only minutes of GoodNoise and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of
GoodNoise and its shareholders or actions by written consent since the time of
incorporation of GoodNoise.
3.11 Brokers' and Finders' Fees: Third Party Expenses. GoodNoise has
------------------------------------------------
not incurred, nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with the Agreement or any transaction contemplated hereby.
3.12 Compliance with Laws. GoodNoise has complied with in all
--------------------
material respects, is not in violation of, and has not received any notices of
violation with respect to, any foreign, federal, state or local statute, law or
regulation.
3.13 Complete Copies of Materials. GoodNoise has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by Atlantis or its counsel.
3.14 Representations Complete. None of the representations or
------------------------
warranties made by GoodNoise (as modified by the GoodNoise Disclosure Schedule),
nor any statement made in any Schedule or certificate furnished by GoodNoise
pursuant to this Agreement or finished in or in connection with documents mailed
or delivered to the shareholders of GoodNoise for use in soliciting their
consent to this Agreement and the Merger contains or will contain at the
Effective Time, any untrue statement of a material fact, or omits or will omit
at the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.
4. CONDUCT PRIOR TO THE EFFECTIVE TIME.
11
<PAGE>
4.1 Conduct of Business of GoodNoise. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, GoodNoise agrees that it shall not:
(a) issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities except if in connection therewith, it negotiates a
proportionate adjustment in the Exchange Ratio.
(b) cause or permit any amendments to its Articles of
Incorporation or Bylaws; or
(c) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1 above, or any other action that would prevent
GoodNoise from performing or cause GoodNoise not to perform its covenants
hereunder.
4.2 Conduct of Business of Atlantis. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, Atlantis agrees that it shall not:
(a) issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock (other than shares issued upon exercise of the
Atlantis Warrants) or securities convertible into, or subscriptions, rights,
warrants or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible securities
except if in connection therewith, it negotiates a proportionate adjustment in
the Exchange Ratio;
(b) enter into any contract, arrangement or obligation of any
kind;
(c) cause or permit any amendments to its Articles of
Incorporation or Bylaws; or
(d) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.2 above, or any other action that would prevent
Atlantis from performing or cause Atlantis not to perform its covenants
hereunder.
5. ADDITIONAL AGREEMENTS.
5.1 Sale of Shares. The parties hereto acknowledge and agree that the
--------------
shares of Atlantis Common Stock issuable to the stockholders of GoodNoise
pursuant to Section 1.6 (the "Merger Shares") shall constitute "restricted
securities" within the meaning of the Securities Act. The certificates for the
Merger Shares shall bear appropriate legends to identify such
12
<PAGE>
privately placed shares as being restricted under the Securities Act, to comply
with applicable state securities laws and, if applicable, to notice the
restrictions on transfer of such shares.
5.2 Stockholder Approval. GoodNoise and Atlantis shall promptly
--------------------
submit this Agreement and the transactions contemplated hereby to their
stockholders for approval and adoption as required by law. The Principal
Shareholder agrees to vote in favor of the Merger.
5.3 Access to Information. Each party shall afford the other and its
---------------------
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of such
party's properties, books, contracts, commitments and records and (b) all other
information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of such party as the other may
reasonably request. No information or knowledge obtained in any investigation
pursuant to this Section shall affect or be deemed to modify any representation
or warranty contained herein or the conditions to the obligations of the parties
to consummate the Merger.
5.4 Confidentiality. Each party acknowledges that in the course of
---------------
the performance of this Agreement, it may obtain the Confidential Information of
the other party. The Receiving Party shall, at all times, both during the term
of this Agreement and thereafter, keep in confidence and trust all of the
Disclosing Party's Confidential Information received by it. The Receiving Party
shall not use the Confidential Information of the Disclosing Party other than as
expressly permitted under the terms of this Agreement or by a separate written
agreement. The Receiving Party shall take all reasonable steps to prevent
unauthorized disclosure or use of the Disclosing Party's Confidential
Information and to prevent it from falling into the public domain or into the
possession of unauthorized persons. The Receiving Party shall not disclose
Confidential Information of the Disclosing Party to any person or entity other
than its officers or employees (or outside legal, financial or accounting
advisors) who need access to such Confidential Information in order to effect
the intent of this Agreement and who have entered into confidentiality
agreements with such person's employer or who are subject to ethical
restrictions on disclosure which protects the Confidential Information of the
Disclosing Party. The Receiving Party shall immediately give notice to the
Disclosing Party of any unauthorized use or disclosure of Disclosing Party's
Confidential Information. The Receiving Party agrees to assist the Disclosing
Party to remedy such unauthorized use or disclosure of its Confidential
Information. These obligations shall not apply to the extent that Confidential
Information includes information which:
(a) is already known to the Receiving Party at the time of
disclosure, which knowledge the Receiving Party shall have the burden of
proving;
(b) is, or through no act or failure to act of the Receiving
Party becomes, publicly known;
13
<PAGE>
(c) is received by the Receiving Party from a third party without
restriction on disclosure (although this exception shall not apply if such third
party is itself violating a confidentiality obligation by making such
disclosure);
(d) is independently developed by the Receiving Party without
reference to the Confidential Information of the Disclosing Party, which
independent development the Receiving Party will have the burden of proving;
(e) is approved for release by written authorization of the
Disclosing Party; or
(f) is required to be disclosed by a Government Body to further
the objectives of this Agreement or by a proper order of a court of competent
jurisdiction; provided, however that the Receiving Party will use its best
efforts to minimize such disclosure and will consult with and assist the
Disclosing Party in obtaining a protective order prior to such disclosure.
5.5 Expenses. Whether or not the Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") incurred by a party in
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby, shall be the obligation
of the respective party incurring such fees and expenses. The costs and expenses
incurred by Atlantis in connection with the Merger in excess of $10,000 shall be
considered costs and expenses of the shareholders of Atlantis and shall be borne
by such shareholders and not Atlantis or the Surviving Corporation.
5.6 Public Disclosure. Unless otherwise required by law, prior to the
-----------------
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Atlantis and GoodNoise prior to release, provided that such approval
shall not be unreasonably withheld.
5.7 Consents. Each party shall use its best efforts to obtain the
--------
consents, waivers and approvals as may be required in connection with the Merger
so as to preserve all rights of, and benefits to, such party following the
Merger.
5.8 Reasonable Effort. Subject to the terms and conditions provided
-----------------
in this Agreement, each of the parties hereto shall use commercially reasonable
efforts to take promptly, or cause to be taken, all actions, and to do promptly,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to complete and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals and
to effect all necessary registrations and filings and to remove any injunctions
or other impediments or delays, legal or otherwise, in order to consummate and
make effective the transactions
14
<PAGE>
contemplated by this Agreement for the purpose of securing to the parties hereto
the benefits contemplated by this Agreement.
5.9 Notification of Certain Matters. Each party shall give prompt
-------------------------------
notice to the other of (i) the occurrence or non-occurrence of any event, the
occurrence or non-occurrence of which is likely to cause any representation or
warranty of such party contained in this Agreement to be untrue or inaccurate at
or prior to the Effective Time and (ii) any failure of such party to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any notice pursuant to
this Section shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.10 Additional Documents and Further Assurances. Each party hereto,
-------------------------------------------
at the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
6. CONDITIONS TO THE MERGER.
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) No Injunctions or Restraints; Illegality. 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 Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal.
(b) Governmental Approval. Approvals from Governmental Entities
---------------------
(if any) deemed appropriate or necessary by any party to this Agreement shall
have been timely obtained.
(c) Litigation. There shall be no bona fide action, suit, claim
----------
or proceeding of any nature pending, or overtly threatened, against the Atlantis
or GoodNoise, their respective properties or any of their officers or directors,
arising out of, or in any way connected with, the Merger or the other
transactions contemplated by the terms of this Agreement.
(d) Warrant Exercise. The Atlantis Warrants shall have been
----------------
exercised as to not less than 200,000 shares of Atlantis Common Stock.
(e) Minimum Asset Value. Effective as of the Closing and
-------------------
assuming that $10,000 has been previously paid for expenses as permitted
hereunder, Atlantis shall have
15
<PAGE>
not less than $690,000 of cash and shall have no commitments, obligations or
liabilities, whether fixed, accrued or contingent, other than as set forth in
this Agreement.
6.2 Additional Conditions to Obligations of GoodNoise. The
-------------------------------------------------
obligations of GoodNoise to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by GoodNoise:
(a) Representations, Warranties and Covenants. The
-----------------------------------------
representations and warranties of Atlantis, Sub and the Principal Shareholder in
this Agreement shall be true and correct in all material respects on and as of
the Effective Time as though such representations and warranties were made on
and as of such time and each of Atlantis, Sub the Principal Shareholder shall
have performed and complied in all material respects with all covenants and
obligations of this Agreement required to be performed and complied with by it
as of the Effective Time.
(b) Claims. There shall not have occurred any claims (whether or
------
not asserted in litigation) of any kind which may adversely affect the
consummation of the transactions contemplated hereby or the business, assets
(including intangible assets), financial condition or results of operations of
Atlantis or GoodNoise.
(c) Articles, Bylaws. The Articles of Incorporation, Bylaws and
----------------
form of Indemnity Agreement attached as Exhibits B-1, B-2, and B-3 shall have
been approved by the shareholders of Atlantis.
(d) Certificate of President. GoodNoise shall have been provided
------------------------
with a certificate executed on behalf of Atlantis by its President to the effect
that, as of the Effective Time:
(i) all representations and warranties made by the
Atlantis, Sub and the Principal Shareholder in this Agreement are true and
correct in all material respects;
(ii) all covenants and obligations of this Agreement to be
performed by the Atlantis, Sub and the Principal Shareholder on or before such
date have been so performed in all material respects.
(iii) the conditions set forth in Section 6.1 and 6.2 have
been satisfied.
(e) Officers and Directors. The officers and directors of
Atlantis shall have submitted written resignations effective as of the Closing
and the officers and directors of GoodNoise shall have been appointed as the
officers and directors of Atlantis effective as of the Closing.
16
<PAGE>
6.3 Additional Conditions to the Obligations of Atlantis. The
----------------------------------------------------
obligations of Atlantis to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Atlantis:
(a) Representations, Warranties and Covenants. The
-----------------------------------------
representations and warranties of GoodNoise in this Agreement shall be true and
correct in all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of the Effective Time and
GoodNoise shall have performed and complied in all material respects with all
covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Claims. There shall not have occurred any claims (whether or
------
not asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or may have a material
adverse effect on GoodNoise.
(c) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals required by GoodNoise shall have been obtained.
(d) No Material Adverse Changes. There shall not have occurred
---------------------------
any material adverse change in the business, assets (including intangible
assets), results of operations, liabilities (contingent or accrued), financial
condition or prospects of GoodNoise since the date of this Agreement.
(e) Certificate of GoodNoise. Atlantis shall have been provided
------------------------
with a certificate executed on behalf of GoodNoise by its President to the
effect that, as of the Effective Time:
(i) all representations and warranties made by GoodNoise in
this Agreement are true and correct in all material respects; and
(ii) all covenants and obligations of this Agreement to be
performed by GoodNoise on or before such date have been so performed in all
material respects.
(iii) the provisions set forth in Section 6.3 have been
satisfied.
7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
7.1 Survival of Representations and Warranties. Atlantis' and the
------------------------------------------
Principal Shareholder's representations and warranties in this Agreement or in
any instrument delivered pursuant to this Agreement shall terminate on the
thirty-six (36) month anniversary of the Effective Time; provided, however, that
the representations and warranties relating or pertaining to any Tax or Returns
related to such Tax set forth in Section 2 hereof, shall survive until the
17
<PAGE>
expiration of all applicable statutes of limitations, or extensions thereof,
governing each Tax or Returns related to such Tax.
7.2 Indemnity. Atlantis and the Principal Shareholder jointly and
---------
severally agree to indemnify and hold GoodNoise and its stockholders prior to
the Effective Time (the "GoodNoise Stockholders"), and the officers, directors
and affiliates of GoodNoise harmless against all claims, losses, liabilities,
damages, deficiencies, costs and expenses, including reasonable attorneys' fees
and expenses of investigation and defense (hereinafter individually a "Loss" and
collectively "Losses") incurred by Atlantis, GoodNoise, the GoodNoise
stockholders or the Surviving Corporation, or its officers, directors, or
affiliates, directly or indirectly as a result of (i) any inaccuracy or breach
of a representation or warranty of Atlantis, Sub, or the Principal Shareholder
contained in this Agreement, or (ii) any failure by Atlantis, Sub or the
Principal Shareholder to perform or comply with any covenant contained in this
Agreement. The shareholders of Atlantis shall not have any right of contribution
from Atlantis with respect to any Loss claimed after the Effective Time. Nothing
herein shall limit the liability of Atlantis, Sub or the Principal Shareholder
for any breach of any representation, warranty or covenant if the Merger does
not close.
7.3 Indemnity Claims. In the event of any Loss, Atlantis or the
----------------
GoodNoise Representative, as hereinafter defined, shall deliver to the
Shareholder Representative a certificate signed by any officer of Atlantis or
the GoodNoise Representative (an "Officer's Certificate"): (A) stating that
Atlantis has paid or properly accrued or reasonably anticipates that it will
have to pay or accrue Losses, and (B) specifying in reasonable detail the
individual items of Losses included in the amount so stated, the date each such
item was paid or properly accrued, or the basis for such anticipated liability,
and the nature of the misrepresentation, breach of warranty or covenant to which
such item is related. In the event such claim is not contested by the
Shareholder Representative, Atlantis shall promptly issue to the GoodNoise
Stockholders, in proportion to the number of shares of GoodNoise Common Stock
held by each immediately prior to the Effective Time, new shares of Atlantis
Common Stock with an aggregate value equal to such Losses. For the purposes of
determining the number of shares of Atlantis Common Stock to be delivered as
indemnity pursuant to this Section 7, the shares of Atlantis Common Stock shall
be valued at $0.143 per share.
7.4 Objections to Claims. For a period of thirty (30) days after
--------------------
delivery of an Officer's Certificate to the Shareholder Representative, Atlantis
shall make no delivery to the GoodNoise Stockholders of any new Atlantis Common
Stock unless Atlantis shall have received written authorization from the
Shareholder Representative to make such delivery. After the expiration of such
thirty (30) day period, Atlantis shall make delivery of shares of Atlantis
Common Stock in accordance with Section 7.3 hereof, provided, however, that no
-------- -------
such delivery may be made if the Shareholder Representative shall object in a
detailed written statement to the claim made in the Officer's Certificate, and
such statement shall have been delivered to Atlantis prior to the expiration of
such thirty (30) day period.
18
<PAGE>
7.5 Resolution of Conflicts; Arbitration.
------------------------------------
(a) In case the Shareholder Representative shall object in
writing to any claim or claims made in any Officer's Certificate within thirty
(30) days after delivery of such Officer's Certificate, the Shareholder
Representative and the GoodNoise Representative shall attempt in good faith to
agree upon the rights of the respective parties with respect to each of such
claims. If the Shareholder Representative and the GoodNoise Representative
should so agree, a memorandum setting forth such agreement shall be prepared and
signed by both parties.
(b) If no such agreement can be reached after good faith
negotiation, either the Shareholder Representative or the GoodNoise
Representative may demand arbitration of the matter unless the amount of the
damage or Loss is at issue in pending litigation with a third party, in which
event arbitration shall not be commenced until such amount is ascertained or
both parties agree to arbitration; and in either such event the matter shall be
settled by arbitration conducted by one arbitrator mutually agreeable to the
GoodNoise Representative and the Shareholder Representative. In the event that
within forty-five (45) days after submission of any dispute to arbitration, the
GoodNoise Representative and the Shareholder Representative cannot mutually
agree on one arbitrator the GoodNoise Representative and the Shareholder
Representative shall each select one arbitrator, and the two arbitrators so
selected shall select a third arbitrator. The arbitrator or arbitrators, as the
case may be, shall set a limited time period and establish procedures designed
to reduce the cost and time for discovery while allowing the parties an
opportunity, adequate in the sole judgment of the arbitrator or majority of the
three arbitrators, as the case may be, to discover relevant information from the
opposing parties about the subject matter of the dispute. The arbitrator or a
majority of the three arbitrators, as the case may be, shall rule upon motions
to compel or limit discovery and shall have the authority to impose sanctions,
including attorneys' fees and costs, to the extent as a competent court of law
or equity, should the arbitrators or a majority of the three arbitrators, as the
case may be, determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of the arbitrator or a majority of the three
arbitrators, as the case may be, as to the validity and amount of any claim in
such Officer's Certificate shall be binding and conclusive upon the parties to
this Agreement. Such decision shall be written and shall be supported by written
findings of fact and conclusions which shall set forth the award, judgment,
decree or order awarded by the arbitrator(s).
(c) Judgment upon any award rendered by the arbitrator(s) may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara County, California, under the rules then in effect of the American
Arbitration Association. The arbitrator(s) shall determine how all expenses
relating to the arbitration shall be paid, including without limitation, the
respective expenses of each party, the fees of each arbitrator and the
administrative fee of the American Arbitration Association.
7.6 Third-Party Claims. In the event the GoodNoise Representative
------------------
becomes aware of a third-party claim which Atlantis believes may result in a
Claim, the GoodNoise Representative shall notify the Shareholder Representative
of such claim, and the Shareholder
19
<PAGE>
Representative shall be entitled, at its expense, to participate in, but not to
determine or conduct, the defense of such claim. Atlantis shall have the right
in its sole discretion to conduct the defense of and settle any such claim;
provided, however, that except with the consent of the Shareholder
- -------- -------
Representative, no settlement of any such claim with third-party claimants shall
be determinative of the number of shares issuable pursuant to Section 7.3. In
the event that the Shareholder Representative has consented to any such
settlement, the shareholders of Atlantis shall have no power or authority to
object to the amount of any claim by the GoodNoise Stockholders with respect to
such settlement.
7.7 Shareholder Representative.
--------------------------
(a) In the event that the Merger is approved, effective upon such
vote, and without further act of any shareholder of Atlantis, the Principal
Shareholder shall be appointed as agent and attorney-in-fact (the "Shareholder
Representative") for each such shareholder, for and on behalf of shareholders,
to give and receive notices and communications, to authorize delivery to the
GoodNoise Stockholders of shares of Atlantis Common Stock in satisfaction of
Claims, to object to such deliveries, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to such claims, and to take all
actions necessary or appropriate in the judgment of the Shareholder
Representative for the accomplishment of the foregoing. Such agency may be
changed by the shareholders of Atlantis prior to the Effective Time (the
"Atlantis Shareholders") from time to time upon not less than thirty (30) days
prior written notice to Atlantis; provided, however, that the Shareholder
-------- -------
Representative may not be removed unless holders of a two-thirds interest of the
Atlantis Shareholders agree to such removal and to the identity of the
substituted agent. Any vacancy in the position of Shareholder Representative may
be filled by approval of the holders of a majority in interest of the Atlantis
Shareholders. No bond shall be required of the Shareholder Representative, and
the Shareholder Representative shall not receive compensation for his or her
services. Notices or communications to or from the Shareholder Representative
shall constitute notice to or from each of the Atlantis Shareholders.
(b) A decision, act, consent or instruction of the Shareholder
Representative shall be final, binding and conclusive upon each of the Atlantis
Shareholders, and Atlantis may rely upon any such decision, act, consent or
instruction of the Shareholder Representative.
7.8 GoodNoise Representative.
------------------------
(a) In the event that the Merger is approved, effective upon such
vote, and without further act of any shareholder of GoodNoise, Gene Hoffman
shall be designated as the representative of the holders of GoodNoise Common
Stock outstanding prior to the Effective Time (the "GoodNoise Representative").
The GoodNoise Representative shall be appointed as agent and attorney-in-fact
for each such stockholder, for and on behalf of stockholders, to give and
receive notices and communications, to approve any resolution of any matter with
respect to any Losses, to agree to, negotiate, enter into settlements and
compromises of, and demand
20
<PAGE>
arbitration and comply with orders of courts and awards of arbitrators with
respect to such claims, and to take all actions necessary or appropriate in the
judgment of the GoodNoise Representative for the accomplishment of the
foregoing. Such agency may be changed by the GoodNoise Stockholders from time to
time upon not less than thirty (30) days prior written notice to the Shareholder
Representative and Atlantis; provided, however, that the GoodNoise
-----------------
Representative may not be removed unless holders of a two-thirds interest of the
GoodNoise Stockholders agree to such removal and to the identity of the
substituted agent. Any vacancy in the position of Stockholder Representative may
be filled by approval of the holders of a majority in interest of the GoodNoise
Stockholders. No bond shall be required of the GoodNoise Representative, and the
GoodNoise Representative shall not receive compensation for his or her services.
Notices or communications to or from the GoodNoise Representative shall
constitute notice to or from each of the GoodNoise Stockholders.
(b) A decision, act, consent or instruction of the GoodNoise
Representative shall be final, binding and conclusive upon each of the GoodNoise
Stockholders, and Atlantis and may rely upon any such decision, act, consent or
instruction of the GoodNoise Representative.
(c) Without limiting the authority of the GoodNoise
Representative as granted above, the holders of a majority of the shares held by
the GoodNoise Stockholders shall have the right, on behalf of all of the
GoodNoise Stockholders, to amend or waive any rights of the GoodNoise
Stockholders under this Section 7.
8. TERMINATION, AMENDMENT AND WAIVER.
8.1 Termination. Except as provided in Section 8.2, this Agreement
-----------
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual consent of GoodNoise and Atlantis;
(b) by Atlantis or GoodNoise if (i) the Effective Time has not
occurred by May 15, 1998; (ii) there shall be a final nonappealable order of a
federal or state court in effect preventing consummation of the Merger; or (iii)
there shall be any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any Governmental Entity that would
make consummation of the Merger illegal;
(c) by either party if there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would: (i) prohibit
Atlantis' ownership or operation of any portion of the business of GoodNoise or
(ii) compel Atlantis or GoodNoise to dispose of or hold separate all or a
portion of the business or assets of GoodNoise or Atlantis as a result of the
Merger;
(d) by GoodNoise if it is not in material breach of its
obligations under this Agreement and there has been a material breach of any
representation, warranty, covenant or
21
<PAGE>
agreement contained in this Agreement on the part of Atlantis, Sub or the
Principal Shareholder and such breach has not been cured within ten (10)
calendar days after written notice to Atlantis; provided, however, that, no cure
-------- -------
period shall be required for a breach which by its nature cannot be cured;
(e) by Atlantis if neither it nor Sub or the Principal
Shareholder is in material breach of their respective obligations under this
Agreement and there has been a material breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of GoodNoise and
such breach has not been cured within ten (10) calendar days after written
notice to GoodNoise; provided, however, that no cure period shall be required
-----------------
for a breach which by its nature cannot be cured.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Atlantis or
GoodNoise, or their respective officers, directors or shareholders, provided
that each party shall remain liable for any breaches of this Agreement prior to
its termination; provided further that, the provisions of Sections 5.4, 5.5 and
5.6, Section 9 and this Section 8.2 shall remain in full force and effect and
survive any termination of this Agreement.
8.3 Amendment. This Agreement may be amended by the parties hereto at
---------
any time by execution of an instrument in writing signed on behalf of each of
the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time,
-----------------
Atlantis, GoodNoise and the Principal Shareholder, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations of
the other party hereto, (ii) waive any inaccuracies in the representations and
warranties made to such party contained herein or in any document delivered
pursuant hereto, and (iii) waive compliance with any of the agreements or
conditions for the benefit of such party contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
9. GENERAL PROVISIONS.
9.1 Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice), provided, however,
--------
that notices sent by mail will not be deemed given until received:
22
<PAGE>
(a) if to Atlantis or the Principal Shareholder, to:
Venture Law Corporation
688 West Hastings Street, Suite 618
Vancouver, BC, V6B 1P1
Attention: Alixe B. Cormick
Telephone No.: (604) 659-9188
Facsimile No.: (604) 659-9178
(b) if to GoodNoise or the GoodNoise Representative, to:
GoodNoise Corporation
Palo Alto, CA 94303
Attention: President
Telephone No.: (650) 322-8910
Facsimile No.: (650) 654-0211
with a copy to:
Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301-1852
Telephone No: (650)328-6561
Facsimile No.: (650)327-3699
Attention: Peter M. Astiz, Esq.
9.2 Interpretation. The words "include," "includes" and "including"
--------------
when used herein shall be deemed in each case to be followed by the words
"without limitation." 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.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall 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 party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the Exhibits hereto
----------------------------
and the documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral among the parties with respect to the
subject matter hereof, (b) are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise.
9.5 Severability. In the event that any provision of this Agreement
------------
or the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void
23
<PAGE>
or unenforceable, the remainder of this Agreement will continue in full force
and effect and the application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof. Each of the parties hereto irrevocably consents to the exclusive
jurisdiction and venue of any court within Santa Clara County, State of
California, in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, agrees that process may be served
upon them in any manner authorized by the laws of the State of California for
such persons and waives and covenants not to assert or plead any objection which
they might otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have
---------------------
been represented by counsel during the negotiation and execution of this
Agreement and, therefor, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
24
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
Effective Date.
ATLANTIS VENTURES CORP. GOODNOISE CORPORATION
By: /s/ By: /s/
------------------------------ -----------------------------
TIDEWATER ENTERPRISES LTD. GN ACQUISITION CORP.
By: /s/ By: /s/
------------------------------ -----------------------------
JOHN A. XINOS
/s/
- ---------------------------------
25
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
GOODNOISE CORPORATION
The undersigned subscriber to these Articles of Incorporation, a natural
person competent to contract, hereby forms a corporation under the laws of the
State of Florida.
ARTICLE I
NAME
The name of this corporation is GOODNOISE CORPORATION
ARTICLE II
NATURE OF THE BUSINESS
This corporation shall have the power to transact or engage in any business
permitted under the laws of the United States and of the State of Florida.
ARTICLE III
The capital stock of this corporation shall consist of 200,000 shares of
common stock having a par value of $.01 per share and 500,000 shares of
Preferred Stock, $.01 par value per share.
The Preferred Stock may be issued from time to time, with such
designations, preferences, conversion rights, cumulative, relative,
participating, optional or other rights, qualifications, limitations,
restrictions thereof as shall be stated and expressed in the resolution or
resolutions provided for the issuance of such Preferred Stock adopted by the
Board of Directors pursuant to the authority in this paragraph given.
ARTICLE IV
INITIAL CAPITAL
The amount of capital with which this corporation shall commence business
shall be not less than One Hundred ($100.00) Dollars.
<PAGE>
ARTICLE V
TERM OF EXISTENCE
This corporation shall have perpetual existence.
ARTICLE VI
INITIAL ADDRESS
The initial address of the principal place of business of this corporation
in the State of Florida shall be 3167 N.W. 47th Terrace, Suite 214, Lauderdale
Lakes, Florida 33319. The Board of Directors may at any time and from time to
time move the principal office of this corporation to any location within or
without the State of Florida.
ARTICLE VII
DIRECTORS
The business of this corporation shall be managed by its Board of
Directors. The number of such directors shall be not less than one (1) and,
subject to such minimum may be increased or decreased from time to time in the
manner provided in the By-Laws. The number of persons constituting the initial
Board of Directors shall be 1.
ARTICLE VIII
INITIAL DIRECTORS
The names and addresses of the initial Board of Directors are as follows:
Stanley Fineberg 3167 N.W. 47th Terrace
Suite 214
Lauderdale Lakes, Florida 33319
-2-
<PAGE>
ARTICLE IX
SUBSCRIBER
The name and address of the person signing these Articles of Incorporation
as subscriber is:
Eric P. Littman
Suite 202
1428 Brickell Avenue
Miami, FL 33131
ARTICLE X
VOTING FOR DIRECTORS
The Board of Directors shall be elected by the Stockholders of the
corporation at such time and in such manner as provided in the By-Laws.
ARTICLE XI
CONTRACTS
No contract or other transaction between this corporation and any person,
firm or corporation shall be affected by the fact that any officer or director
of this corporation is such other party or is, or at some time in the future
becomes, an officer, director or partner of such other contracting party, or has
now or hereafter a direct or indirect interest in such contract.
ARTICLE XII
INDEMNIFICATION OF OFFICERS AND DIRECTORS
This corporation shall have the power, in its By-Laws or in any resolution
of its stockholders or directors, to undertake to indemnify the officers and
directors of this corporation against any contingency or peril as may be
determined to be in the best interests of this corporation, and in conjunction
therewith, to procure, at this corporation's expense, policies of insurance.
-3-
<PAGE>
ARTICLE XIII
FLORIDA STATUTES
The corporation expressly elects not to be governed by the provisions of
Sections 607.108 and 607.109, Florida Statutes.
ARTICLE XIV
RESIDENT AGENT
The name and address of the initial resident agent of this corporation is:
Berlit Corporate Services, Inc.
Suite 202
1428 Brickell Avenue
Miami, FL 33131
-4-
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
GOODNOISE CORPORATION
(A FLORIDA CORPORATION)
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
ARTICLE ONE - OFFICES
Section 1. Principal Office................................................. 1
Section 2. Other Offices.................................................... 1
ARTICLE TWO - MEETINGS OF SHAREHOLDERS
Section 1. Place............................................................ 1
Section 2. Time of Annual Meeting........................................... 1
Section 3. Call of Special Meetings......................................... 1
Section 4. Conduct of Meetings.............................................. 1
Section 5. Notice and Waiver of Notice...................................... 1
Section 6. Business and Nominations for Annual and Special Meetings......... 2
Section 7. Quorum........................................................... 2
Section 8. Voting Rights Per Share.......................................... 2
Section 9. Voting of Shares................................................. 2
Section 10. Proxies.......................................................... 3
Section 11. Shareholder List................................................. 3
Section 12. Action Without Meeting........................................... 3
Section 13. Fixing Record Date............................................... 4
Section 14. Inspectors and Judges............................................ 4
Section 15. Voting for Directors............................................. 4
ARTICLE THREE - DIRECTORS
Section 1. Number; Term; Election; Qualification............................ 4
Section 2. Resignation; Vacancies; Removal.................................. 4
Section 3. Powers........................................................... 5
Section 4. Place of Meetings................................................ 5
Section 5. Annual Meetings.................................................. 5
Section 6. Regular Meetings................................................. 5
Section 7. Special Meetings and Notice...................................... 5
Section 8. Quorum and Required Vote......................................... 5
Section 9. Action Without Meeting........................................... 5
Section 10. Conference Telephone or Similar Communications Equipment Meetings 5
Section 11. Committees....................................................... 6
Section 12. Compensation of Directors........................................ 6
ARTICLE FOUR - OFFICERS
Section 1. Positions........................................................ 6
Section 2. Election of Specified Officers by Board.......................... 6
Section 3. Election or Appointment of Other Officers........................ 6
Section 4. Compensation..................................................... 6
Section 5. Term; Resignation; Removal; Vacancies............................ 7
Section 6. Chairman of the Board............................................ 7
Section 7. Chief Executive Officer.......................................... 7
Section 8. President........................................................ 7
Section 9. Vice Presidents.................................................. 7
Section 10. Secretary........................................................ 7
Section 11. Chief Financial Officer.......................................... 8
Section 12. Treasurer........................................................ 8
Section 13. Other Officers; Employees and Agents............................. 8
ARTICLE FIVE - CERTIFICATES FOR SHARES
Section 1. Issue of Certificates............................................ 8
Section 2. Legends for Preferences and Restrictions on Transfer............. 8
Section 3. Facsimile Signatures............................................. 9
Section 4. Lost Certificates................................................ 9
Section 5. Transfer of Shares............................................... 9
Section 6. Registered Shareholders.......................................... 9
Section 7. Redemption of Control Shares..................................... 9
ARTICLE SIX - GENERAL PROVISIONS
Section 1. Dividends........................................................ 9
Section 2. Reserves......................................................... 10
Section 3. Checks........................................................... 10
Section 4. Fiscal Year...................................................... 10
Section 5. Seal............................................................. 10
Section 6. Gender........................................................... 10
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE SEVEN - AMENDMENT OF BYLAWS............................................... 10
</TABLE>
ii
<PAGE>
BYLAWS
OF
GOODNOISE CORPORATION
ARTICLE ONE
OFFICES
-------
Section 1. Principal Office. The principal office of GoodNoise Corporation.
----------------
a Florida corporation (the "Corporation"), shall be located at such place
determined by the Board of Directors of the Corporation (the "Board of
Directors") in accordance with applicable law.
Section 2. Other Offices. The Corporation may also have offices at such
-------------
other places, either within or without the State of Florida, as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
ARTICLE TWO
MEETINGS OF SHAREHOLDERS
------------------------
Section 1. Place. All annual meetings of shareholders shall be held at such
-----
place, within or without the State of Florida, as may be designated by the Board
of Directors and stated in the notice of the meeting or in a duly executed
waiver of notice thereof. Special meetings of shareholders may be held at such
place, within or without the State of Florida, and at such time as shall be
stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. Time of Annual Meeting. Annual meetings of shareholders shall be
----------------------
held on such date and at such time fixed, from time to time, by the Board of
Directors, provided, that there shall be an annual meeting held every calendar
year at which the shareholders shall elect a board of directors and transact
such other business as may properly be brought before the meeting.
Section 3. Call of Special Meetings. Special meetings of the shareholders
------------------------
shall be held if called in accordance with the procedures set forth in the
Corporation's Articles of Incorporation (the "Articles of Incorporation") for
the call of a special meeting of shareholders.
Section 4. Conduct of Meetings. The Chairman of the Board of Directors (or
-------------------
in his absence, the President, or in his absence, such other designee of the
Chairman of the Board of Directors) shall preside at the annual and special
meetings of shareholders and shall be given full discretion in establishing the
rules and procedures to be followed in conducting the meetings, except as
otherwise provided by law or in these Bylaws.
Section 5. Notice and Waiver of Notice. Except as otherwise provided by
---------------------------
law, written or printed notice stating the place, date and time of the meeting
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (10) nor more than sixty
(60) days before the date of the meeting, either personally or by first-class
mail or other legally sufficient means, by or at the direction of the Chairman
of the Board, President, or the persons calling the meeting, to each shareholder
of record entitled to vote at such meeting. If the notice is mailed at least
thirty (30) days before the date of the meeting, it may be done by a class of
United States mail other than first class. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail addressed to the
shareholder at the address appearing on the stock transfer books of the
Corporation, with postage thereon prepaid. If a meeting is adjourned to another
time and/or place, and if an announcement of the
<PAGE>
adjourned time and/or place is made at the meeting, it shall not be necessary to
give notice of the adjourned meeting unless the Board of Directors, after
adjournment, fixes a new record date for the adjourned meeting. Whenever any
notice is required to be given to any shareholder, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether signed before,
during or after the time of the meeting stated therein, and delivered to the
Corporation for inclusion in the minutes or filing with the corporate records,
shall constitute an effective waiver of such notice. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
shareholders need be specified in any written waiver of notice. Attendance of a
person at a meeting shall constitute a waiver of (a) lack of or defective notice
of such meeting, unless the person objects at the beginning to the holding of
the meeting or the transacting of any business at the meeting, or (b) lack of or
defective notice of a particular matter at a meeting that is not within the
purpose or purposes described in the meeting notice, unless the person objects
to considering such matter when it is presented.
Section 6. Business and Nominations for Annual and Special Meetings.
--------------------------------------------------------
Business transacted at any special meeting shall be confined to the purposes
stated in the notice thereof. At any annual meeting of shareholders, only such
business shall be conducted as shall have been properly brought before the
meeting in accordance with the requirements and procedures set forth in the
Articles of Incorporation. Only such persons who are nominated for election as
directors of the Corporation in accordance with the requirements and procedures
set forth in the Articles of Incorporation shall be eligible for election as
directors of the Corporation.
Section 7. Quorum. Shares entitled to vote as a separate voting group may
------
take action on a matter at a meeting only if a quorum of those shares exists
with respect to that matter. Except as otherwise provided in the Articles of
Incorporation or applicable law, shares representing a majority of the votes
pertaining to outstanding shares which are entitled to be cast on the matter by
the voting group constitute a quorum of that voting group for action on that
matter. If less than a quorum of shares are represented at a meeting, the
holders of a majority of the shares so represented may adjourn the meeting from
time to time. After a quorum has been established at any shareholders' meeting,
the subsequent withdrawal of shareholders, so as to reduce the number of shares
entitled to vote at the meeting below the number required for a quorum, shall
not affect the validity of any action taken at the meeting or any adjournment
thereof. Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.
Section 8. Voting Rights Per Share. Each outstanding share, regardless of
-----------------------
class, shall be entitled to vote on each matter submitted to a vote at a meeting
of shareholders, except to the extent that the voting rights of the shares of
any class are limited or denied by or pursuant to the Articles of Incorporation
or the Florida Business Corporation Act.
Section 9. Voting of Shares. A shareholder may vote at any meeting of
----------------
shareholders of the Corporation, either in person or by proxy. Shares standing
in the name of another corporation, domestic or foreign, may be voted by the
officer, agent or proxy designated by the bylaws of such corporate shareholder
or, in the absence of any applicable bylaw, by such person or persons as the
board of directors of the corporate shareholder may designate. In the absence
of any such designation, or, in case of conflicting designation by the corporate
shareholder, the chairman of the board, the president, any vice president, the
secretary and the treasurer of the corporate shareholder, in that order, shall
be presumed to be fully authorized to vote such shares. Shares held by an
administrator, executor, guardian, personal representative, or conservator may
be voted by such person, either in person or by proxy, without a transfer of
such shares into his name. Shares standing in the name of a trustee may be
voted by such person, either in person or by proxy, but no trustee shall be
entitled to vote shares held by such person without a transfer of such shares
into his name or the name of his nominee. Shares held by or under the control
of a receiver, a trustee in bankruptcy proceedings, or an assignee for the
benefit of creditors may be voted by such person without the transfer thereof
into his name. If shares stand of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety or
2
<PAGE>
otherwise, or if two or more persons have the same fiduciary relationship
respecting the same shares, unless the Secretary of the Corporation is given
notice to the contrary and is furnished with a copy of the instrument or order
appointing them or creating the relationship wherein it is so provided, then
acts with respect to voting shall have the following effect: (a) if only one
votes, in person or by proxy, his act binds all; (b) if more than one vote, in
person or by proxy, the act of the majority so voting binds all; (c) if more
than one vote, in person or by proxy, but the vote is evenly split on any
particular matter, each faction is entitled to vote the share or shares in
question proportionally; or (d) if the instrument or order so filed shows that
any such tenancy is held in unequal interest, a majority or a vote evenly split
for purposes hereof shall be a majority or a vote evenly split in interest. The
principles of this paragraph shall apply, insofar as possible, to execution of
proxies, waivers, consents, or objections and for the purpose of ascertaining
the presence of a quorum.
Section 10. Proxies. Any shareholder of the Corporation, other person
-------
entitled to vote on behalf of a shareholder pursuant to law, or attorney-in-fact
for such persons may vote the shareholder's shares in person or by proxy. Any
shareholder of the Corporation may appoint a proxy to vote or otherwise act for
such person by signing an appointment form, either personally or by his
attorney-in-fact. An executed telegram or cablegram appearing to have been
transmitted by such person, or a photographic, photostatic, or equivalent
reproduction of an appointment form, shall be deemed a sufficient appointment
form. An appointment of a proxy is effective when received by the Secretary of
the Corporation (the "Secretary") or such other officer or agent which is
authorized to tabulate votes, and shall be valid for up to 11 months, unless a
longer period is expressly provided in the appointment form. The death or
incapacity of the shareholder appointing a proxy does not affect the right of
the Corporation to accept the proxy's authority unless notice of the death or
incapacity is received by the Secretary or other officer or agent authorized to
tabulate votes before the proxy authority under the appointment is exercised.
An appointment of a proxy is revocable by the shareholder unless the appointment
form conspicuously states that it is irrevocable and the appointment is coupled
with an interest.
Section 11. Shareholder List. After fixing a record date for a meeting of
----------------
shareholders, the Corporation shall prepare an alphabetical list of the names of
all its shareholders who are entitled to notice of the meeting, arranged by
voting group with the address of, and the number and class and series, if any,
of shares held by each. The shareholders' list must be available for inspection
by any shareholder for a period of ten (10) days prior to the meeting or such
shorter time as exists between the record date and the meeting and continuing
through the meeting at the Corporation's principal office, at a place identified
in the meeting notice in the city where the meeting will be held, or at the
office of the Corporation's transfer agent or registrar. Any shareholder of the
Corporation or such person's agent or attorney is entitled on written demand to
inspect the shareholders' list (subject to the requirements of law), during
regular business hours and at his expense, during the period it is available for
inspection. The Corporation shall make the shareholders' list available at the
meeting of shareholders, and any shareholder or agent or attorney of such
shareholder is entitled to inspect the list at any time during the meeting or
any adjournment. The shareholders' list is prima facie evidence of the identity
of shareholders entitled to examine the shareholders' list or to vote at a
meeting of shareholders.
Section 12. Action Without Meeting. Any action required or permitted by law
----------------------
to be taken at a meeting of shareholders may be taken without a meeting or
notice if a consent, or consents, in writing, setting forth the action so taken,
shall be dated and 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 voting groups and shares entitled to vote
thereon were present and voted with respect to the subject matter thereof, and
such consent shall be delivered to the Corporation, within the period required
by Section 607.0704 of the Florida Business Corporation Act, by delivery to its
principal office in the State of Florida, its principal place of business, the
Secretary or another officer or agent of the Corporation having custody of the
book in which proceedings of meetings of shareholders are recorded. Within ten
(10) days after obtaining such authorization by written consent, notice must be
given to those shareholders who have not consented in writing or who are not
entitled to vote on the action, in accordance with the requirements of Section
607.0704 of the Florida Business Corporation Act.
3
<PAGE>
Section 13. Fixing Record Date. For the purpose of determining shareholders
------------------
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or entitled to receive payment of any dividend, or in order
to make a determination of shareholders for any other proper purposes, the Board
of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than seventy
(70) days, and, in case of a meeting of shareholders, not less than ten (10)
days, before the meeting or action requiring such determination of shareholders.
If no record date is fixed for the determination of shareholders entitled to
notice of or to vote at a meeting of shareholders or the determination of
shareholders entitled to receive payment of a dividend, the date before the day
on which the first notice of the meeting is mailed or the date on which the
resolutions of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section, such determination shall
apply to any adjournment thereof, except where the Board of Directors fixes a
new record date for the adjourned meeting.
Section 14. Inspectors and Judges. The Board of Directors in advance of any
---------------------
meeting may, but need not, appoint one or more inspectors of election or judges
of the vote, as the case may be, to act at the meeting or any adjournment
thereof. If any inspector or inspectors, or judge or judges, are not appointed,
the person presiding at the meeting may, but need not, appoint one or more
inspectors or judges. In case any person who may be appointed as an inspector
or judge fails to appear or act, the vacancy may be filled by the Board of
Directors in advance of the meeting, or at the meeting by the person presiding
thereat. The inspectors or judges, if any, shall determine the number of shares
of stock outstanding and the voting power of each, the shares of stock
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots and consents, hear and determine
all challenges and questions arising in connection with the right to vote, count
and tabulate votes, ballots and consents, determine the result, and do such acts
as are proper to conduct the election or vote with fairness to all shareholders.
On request of the person presiding at the meeting, the inspector or inspectors
or judge or judges, if any, shall make a report in writing of any challenge,
question or matter determined by him or them, and execute a certificate of any
fact found by him or them.
Section 15. Voting for Directors. Unless otherwise provided in the Articles
--------------------
of Incorporation, directors shall be elected by a plurality of the votes cast by
the shares entitled to vote in the election at a meeting at which a quorum is
present.
ARTICLE THREE
DIRECTORS
---------
Section 1. Number; Term; Election; Qualification. The number of directors
-------------------------------------
of the Corporation shall be fixed from time to time, within the limits specified
by the Articles of Incorporation, by resolution of the Board of Directors.
Directors shall be elected in the manner and hold office for the term as
prescribed in the Articles of Incorporation. Directors must be natural persons
who are 18 years of age or older but need not be residents of the State of
Florida, shareholders of the Corporation or citizens of the United States.
Section 2. Resignation; Vacancies; Removal. A director may resign at any
-------------------------------
time by giving written notice to the Board of Directors or the Chairman of the
Board. Such resignation shall take effect at the date of receipt of such notice
or at any later time specified therein; and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
In the event the notice of resignation specifies a later effective date, the
Board of Directors may fill the pending vacancy (subject to the provisions of
the Articles of Incorporation) before the effective date if they provide that
the successor does not take office until the effective date. Director vacancies
shall be filled, and directors may be removed, in the manner prescribed in the
Corporation's Articles of Incorporation.
4
<PAGE>
Section 3. Powers. The business and affairs of the Corporation shall be
------
managed by the Board of Directors, which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the Articles of Incorporation or by these Bylaws directed or required to be
exercised and done by the shareholders.
Section 4. Place of Meetings. Meetings of the Board of Directors, regular
-----------------
or special, may be held either within or without the State of Florida.
Section 5. Annual Meetings. Unless scheduled for another time by the Board
---------------
of Directors, the first meeting of each newly elected Board of Directors shall
be held, without call or notice, immediately following each annual meeting of
shareholders.
Section 6. Regular Meetings. Regular meetings of the Board of Directors may
----------------
also be held without notice at such time and at such place as shall from time to
time be determined by the Board of Directors.
Section 7. Special Meetings and Notice. Special meetings of the Board of
---------------------------
Directors may be called by the President or Chairman of the Board and shall be
called by the Secretary on the written request of any two directors. At least
forty-eight (48) hours' prior written notice of the date, time and place of
special meetings of the Board of Directors shall be given to each director.
Except as required by law, neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting. Notices to
directors shall be in writing and delivered to the directors at their addresses
appearing on the books of the Corporation by personal delivery, mail or other
legally sufficient means. Subject to the provisions of the preceding sentence,
notice to directors may also be given by telegram, teletype or other form of
electronic communication. Notice by mail shall be deemed to be given at the
time when the same shall be received. Whenever any notice is required to be
given to any director, a waiver thereof in writing signed by the person or
persons entitled to such notice, whether before, during or after the meeting,
shall constitute an effective waiver of such notice. Attendance of a director
at a meeting shall constitute a waiver of notice of such meeting and a waiver of
any and all objections to the place of the meeting, the time of the meeting and
the manner in which it has been called or convened, except when a director
states, at the beginning of the meeting or promptly upon arrival at the meeting,
any objection to the transaction of business because the meeting is not lawfully
called or convened.
Section 8. Quorum and Required Vote. A majority of the prescribed number of
------------------------
directors determined as provided in the Articles of Incorporation shall
constitute a quorum for the transaction of business and the act of the majority
of the directors present at a meeting at which a quorum is present shall be the
act of the Board of Directors, unless a greater number is required by the
Articles of Incorporation. Whenever, for any reason, a vacancy occurs in the
Board of Directors, a quorum shall consist of a majority of the remaining
directors until the vacancy has been filled. If a quorum shall not be present at
any meeting of the Board of Directors, a majority of the directors present
thereat may adjourn the meeting to another time and place, without notice other
than announcement at the time of adjournment. At such adjourned meeting at
which a quorum shall be present, any business may be transacted that might have
been transacted at the meeting as originally notified and called.
Section 9. Action Without Meeting. Any action required or permitted to be
----------------------
taken at a meeting of the Board of Directors or committee thereof may be taken
without a meeting if a consent in writing, setting forth the action taken, is
signed by all of the members of the Board of Directors or the committee, as the
case may be, and such consent shall have the same force and effect as a
unanimous vote at a meeting. Action taken under this Section 9 is effective
when the last director signs the consent, unless the consent specifies a
different effective date. A consent signed under this Section 9 shall have the
effect of a meeting vote and may be described as such in any document.
Section 10. Conference Telephone or Similar Communications Equipment
--------------------------------------------------------
Meetings. Directors and committee members may participate in and hold a meeting
- --------
by means of conference telephone or similar
5
<PAGE>
communications equipment by means of which all persons participating in the
meeting can hear each other. Participation in such a meeting shall constitute
presence in person at the meeting, except where a person participates in the
meeting for the express purpose of objecting to the transaction of any business
on the ground the meeting is not lawfully called or convened.
Section 11. Committees. The Board of Directors, by resolution adopted by a
----------
majority of the whole Board of Directors, may designate from among its members
an executive committee and one or more other committees, each of which, to the
extent provided in such resolution, shall have and may exercise all of the
authority of the Board of Directors in the business and affairs of the
Corporation except where the action of the full Board of Directors is required
by applicable law. Each committee must have two or more members who serve at
the pleasure of the Board of Directors. The Board of Directors, by resolution
adopted in accordance with this Article Three, may designate one or more
directors as alternate members of any committee, who may act in the place and
stead of any absent member or members at any meeting of such committee.
Vacancies in the membership of a committee may be filled only by the Board of
Directors at a regular or special meeting of the Board of Directors. The
executive committee shall keep regular minutes of its proceedings and report the
same to the Board of Directors when required. The designation of any such
committee and the delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any responsibility imposed
upon it or such member by law.
Section 12. Compensation of Directors. The directors may be paid their
-------------------------
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director. No such payment shall preclude any director
from serving the Corporation in any other capacity and receiving compensation
therefor. Similarly, members of special or standing committees may be allowed
compensation for attendance at committee meetings or a stated salary as a
committee member and payment of expenses for attending committee meetings.
Directors may receive such other compensation as may be approved by the Board of
Directors.
ARTICLE FOUR
OFFICERS
--------
Section 1. Positions. The officers of the Corporation shall consist of a
---------
Chairman of the Board, a Chief Executive Officer, a President, one or more Vice
Presidents (any one or more of whom may be given the additional designation of
rank of Executive Vice President or Senior Vice President), a Secretary, a Chief
Financial Officer and a Treasurer. Any two or more offices may be held by the
same person. Officers other than the Chairman of the Board need not be members
of the Board of Directors. The Chairman of the Board must be a member of the
Board of Directors.
Section 2. Election of Specified Officers by Board. The Board of Directors
---------------------------------------
at its first meeting after each annual meeting of shareholders shall elect a
Chairman of the Board, a Chief Executive Officer, a President, one or more Vice
Presidents (including any Senior or Executive Vice Presidents), a Secretary, a
Chief Financial Officer and a Treasurer.
Section 3. Election or Appointment of Other Officers. Such other officers
-----------------------------------------
and assistant officers and agents as may be deemed necessary may be elected or
appointed by the Board of Directors, or, unless otherwise specified herein,
appointed by the Chairman of the Board. The Board of Directors shall be advised
of appointments by the Chairman of the Board at or before the next scheduled
Board of Directors meeting.
Section 4. Compensation. The salaries, bonuses and other compensation of
------------
the Chairman of the Board and all officers of the Corporation to be elected by
the Board of Directors pursuant to Section 2 of this Article Four shall be fixed
from time to time by the Board of Directors or pursuant to its direction. The
salaries of all other elected or appointed officers of the Corporation shall be
fixed from time to time by the Chairman of the Board or pursuant to his
direction.
6
<PAGE>
Section 5. Term; Resignation; Removal; Vacancies. The officers of the
-------------------------------------
Corporation shall hold office until their successors are chosen and qualified.
Any officer or agent elected or appointed by the Board of Directors or the
Chairman of the Board may be removed, with or without cause, by the Board of
Directors, but such removal shall be without prejudice to the contract rights,
if any, of the person so removed. Any officer or agent appointed by the
Chairman of the Board pursuant to Section 3 of this Article Four may also be
removed from such office or position by the Board of Directors or the Chairman
of the Board, with or without cause. Any vacancy occurring in any office of the
Corporation by death, resignation, removal or otherwise shall be filled by the
Board of Directors, or, in the case of an officer appointed by the Chairman of
the Board, by the Chairman of the Board or the Board of Directors. Any officer
of the Corporation may resign from his respective office or position by
delivering notice to the Corporation, and such resignation shall be effective
without acceptance. Such resignation shall be effective when delivered unless
the notice specifies a later effective date. If a resignation is made effective
at a later date and the Corporation accepts the future effective date, the Board
of Directors may fill the pending vacancy before the effective date if the Board
provides that the successor does not take office until such effective date.
Section 6. Chairman of the Board. The Chairman of the Board shall preside
---------------------
at all meetings of the shareholders and the Board of Directors. The Chairman of
the Board shall also serve as the chairman of any executive committee.
Section 7. Chief Executive Officer. Subject to the control of the Board of
-----------------------
Directors, the Chief Executive Officer, in conjunction with the President, shall
have general and active management of the business of the Corporation, shall see
that all orders and resolutions of the Board of Directors are carried into
effect and shall have such powers and perform such duties as may be prescribed
by the Board of Directors. In the absence of the Chairman of the Board or in the
event the Board of Directors shall not have designated a Chairman of the Board,
the Chief Executive Officer shall preside at meetings of the shareholders and
the Board of Directors. The Chief Executive Officer shall also serve as the
vice-chairman of any executive committee.
Section 8. President. Subject to the control of the Board of Directors, the
---------
President, in conjunction with the Chief Executive Officer, shall have general
and active management of the business of the Corporation and shall have such
powers and perform such duties as may be prescribed by the Board of Directors.
In the absence of the Chairman of the Board and the Chief Executive Officer or
in the event the Board of Directors shall not have designated a Chairman of the
Board and a Chief Executive Officer shall not have been elected, the President
shall preside at meetings of the shareholders and the Board of Directors. The
President shall also serve as the vice-chairman of any executive committee.
Section 9. Vice Presidents. The Vice Presidents, in the order of their
---------------
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the President and the Chief Executive Officer, perform
the duties and exercise the powers of the President. They shall perform such
other duties and have such other powers as the Board of Directors, the Chairman
of the Board or the Chief Executive Officer shall prescribe or as the President
may from time to time delegate. Executive Vice Presidents shall be senior to
Senior Vice Presidents, and Senior Vice Presidents shall be senior to all other
Vice Presidents.
Section 10. Secretary. The Secretary shall attend all meetings of the
---------
shareholders and all meetings of the Board of Directors and record all the
proceedings of the meetings of the shareholders and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. The Secretary shall give, or cause to be
given, notice of all meetings of the shareholders and special meetings of the
Board of Directors and shall keep in safe custody the seal of the Corporation
and, when authorized by the Board of Directors, affix the same to any instrument
requiring it. The Secretary shall perform such other duties as may be
prescribed by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer or the President.
7
<PAGE>
Section 11. Chief Financial Officer. The Chief Financial Officer shall be
-----------------------
responsible for maintaining the financial integrity of the Corporation, shall
prepare the financial plans for the Corporation and shall monitor the financial
performance of the Corporation and its subsidiaries, as well as performing such
other duties as may be prescribed by the Board of Directors, the Chairman of the
Board, the Chief Executive Officer or the President.
Section 12. Treasurer. The Treasurer shall have the custody of corporate
---------
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Chairman of the Board and the Board of Directors at its regular meetings or
when the Board of Directors so requires an account of all his transactions as
Treasurer and of the financial condition of the Corporation. The Treasurer
shall perform such other duties as may be prescribed by the Board of Directors,
the Chairman of the Board, the Chief Executive Officer or the President.
Section 13. Other Officers; Employees and Agents. Each and every other
------------------------------------
officer, employee and agent of the Corporation shall possess, and may exercise,
such power and authority, and shall perform such duties, as may from time to
time be assigned to such person by the Board of Directors, the officer so
appointing such person or such officer or officers who may from time to time be
designated by the Board of Directors to exercise such supervisory authority.
ARTICLE FIVE
CERTIFICATES FOR SHARES
-----------------------
Section 1. Issue of Certificates. The shares of the Corporation shall be
---------------------
represented by certificates, provided that the Board of Directors of the
Corporation may provide by resolution or resolutions that some or all of any or
all classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until such
certificate is surrendered to the Corporation. Notwithstanding the adoption of
such a resolution by the Board of Directors, every holder of stock represented
by certificates (and upon request every holder of uncertificated shares) shall
be entitled to have a certificate signed by or in the name of the Corporation by
the Chairman of the Board or a Vice Chairman of the Board, or the Chief
Executive Officer, President or Vice President, and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, representing the number of shares registered in certificate form.
Section 2. Legends for Preferences and Restrictions on Transfer. The
----------------------------------------------------
designations, relative rights, preferences and limitations applicable to each
class of shares and the variations in rights, preferences and limitations
determined for each series within a class (and the authority of the Board of
Directors to determine variations for future series) shall be summarized on the
front or back of each certificate. Alternatively, each certificate may state
conspicuously on its front or back that the Corporation will furnish the
shareholder a full statement of this information on request and without charge.
Every certificate representing shares that are restricted as to the sale,
disposition, or transfer of such shares shall also indicate that such shares are
restricted as to transfer, and there shall be set forth or fairly summarized
upon the certificate, or the certificate shall indicate that the Corporation
will furnish to any shareholder upon request and without charge, a full
statement of such restrictions. If the Corporation issues any shares that are
not registered under the Securities Act of 1933, as amended, or not registered
or qualified under the applicable state securities laws, the transfer of any
such shares shall be restricted substantially in accordance with the following
legend:
8
<PAGE>
"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE
SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE LAW, OR (2) AT HOLDER'S
EXPENSE, AN OPINION (SATISFACTORY TO THE CORPORATION) OF COUNSEL
(SATISFACTORY TO THE CORPORATION) THAT REGISTRATION IS NOT REQUIRED."
Section 3. Facsimile Signatures. Any and all signatures on the certificate
--------------------
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon such certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 4. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issue
of a new certificate or certificates, the Corporation may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such lost
or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost or destroyed.
Section 5. Transfer of Shares. Upon surrender to the Corporation or the
------------------
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 6. Registered Shareholders. The Corporation shall be entitled to
-----------------------
recognize the exclusive rights of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of the State of
Florida.
Section 7. Redemption of Control Shares. As provided by the Florida
----------------------------
Business Corporation Act, if a person acquiring control shares of the
Corporation does not file an acquiring person statement with the Corporation,
the Corporation may, at the discretion of the Board of Directors, redeem the
control shares at the fair value thereof at any time during the 60-day period
after the last acquisition of such control shares. If a person acquiring control
shares of the Corporation files an acquiring person statement with the
Corporation, the control shares may be redeemed by the Corporation, at the
discretion of the Board of Directors, only if such shares are not accorded full
voting rights by the shareholders as provided by law.
ARTICLE SIX
GENERAL PROVISIONS
------------------
Section 1. Dividends. The Board of Directors may from time to time declare,
---------
and the Corporation may pay, dividends on its outstanding shares in cash,
property, stock (including its own shares) or otherwise pursuant to law and
subject to the provisions of the Articles of Incorporation.
9
<PAGE>
Section 2. Reserves. The Board of Directors may by resolution create a
--------
reserve or reserves out of earned surplus for any proper purpose or purposes,
and may abolish any such reserve in the same manner.
Section 3. Checks. All checks or demands for money and notes of the
------
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the Corporation shall end on
-----------
December 31 of each year, unless otherwise fixed by resolution of the Board of
Directors.
Section 5. Seal. The corporate seal shall have inscribed thereon the name
----
and state of incorporation of the Corporation. The seal may be used by causing
it or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
Section 6. Gender. All words used in these Bylaws in the masculine gender
------
shall extend to and shall include the feminine and neuter genders.
ARTICLE SEVEN
AMENDMENT OF BYLAWS
--------------------
Except as otherwise set forth herein, these Bylaws may be altered, amended or
repealed or new Bylaws may be adopted at any meeting of the Board of Directors
at which a quorum is present, by the affirmative vote of a majority of the
directors present at such meeting.
10
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is dated as of May __, 1998
between GOODNOISE CORPORATION, a Florida corporation (the Company"), and
___________________________ (the "Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as directors and
officers the most capable persons available;
WHEREAS, Indemnitee is or is proposed as a director or officer of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers of
both public and private companies in today's environment; and
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to induce or enhance Indemnitee's continued
service to the Company in an effective manner and in part to provide Indemnitee
with specific contractual assurance that the indemnification protection provided
by the Articles of Incorporation and the Bylaws of the Company will be available
to Indemnitee (regardless of, among other things, any amendment to or revocation
of such Articles of Incorporation and the Bylaws or any change in the
composition of the Company's Board of Directors or acquisition transaction
relating to the Company), and in order to induce Indemnitee to continue to
provide services to the Company as a director thereof, the Company wishes to
provide in this Agreement for the indemnification of and the advancing of
expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the continued coverage of Indemnitee under the
Company's directors' and officers' liability insurance policies.
NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing
to serve the Company directly or, at its request, another enterprise, and
intending to be legally bound hereby, the parties agree as follows:
1. CERTAIN DEFINITIONS.
--------------------
(a) Change in Control: shall be deemed to have occurred if (i) any
-----------------
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Act")), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act),
directly or indirectly, of securities of the Company representing twenty percent
(20%) or more of the total voting power represented by the Company's then
outstanding Voting Securities, or (ii) during any period of two (2) consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Company and any new director whose election by the Board of
Directors or
<PAGE>
nomination for election by the Company's stockholders was approved by a vote of
at least two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least eighty percent (80%) of the total voting power
represented by the Voting Securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company (in one transaction or a
series of transactions) of all or substantially all the Company's assets.
(b) Claim: any threatened, pending or completed action, suit, proceeding
-----
or alternate dispute resolution mechanism, or any inquiry, hearing or
investigation, whether conducted by the Company or any other party, that
Indemnitee in good faith believes might lead to the institution of any such
action, suit, proceeding or alternate dispute resolution mechanism, whether
civil, criminal, administrative, investigative or other.
(c) Expenses: include attorneys' fees and all other costs, travel
--------
expenses, fees of experts, transcript costs, filing fees, witness fees,
telephone charges, postage, delivery service fees, expenses and obligations of
any nature whatsoever paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence that takes place either
-------------------
prior to or after the execution of this Agreement related to the fact that
Indemnitee is or was a director, officer, employee, agent or fiduciary of the
Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.
(e) Potential Change in Control: shall be deemed to have occurred if (i)
---------------------------
the Company enters into an agreement or arrangement, the consummation of which
would result in the occurrence of a Change in Control; (ii) any person
(including the Company) publicly announces an intention to take or to consider
taking actions which if consummated would constitute a Change in Control; (iii)
any person, other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
who is or becomes the beneficial owner, directly or indirectly, of securities of
the Company representing ten percent (10%) or more of the combined voting power
of the Company's then outstanding Voting Securities, increases his beneficial
ownership of such securities by five percent (5%) or more over the percentage so
owned by such person on the date hereof; or (iv) the Board of Directors adopts a
resolution to the effect that, for purposes of this Agreement, a Potential
Change in Control has occurred.
2
<PAGE>
(f) Reviewing Party: any appropriate person or body consisting of a
---------------
member or members of the Company's Board of Directors or any other person or
body appointed by the Board who is not a party to the particular Claim for which
Indemnitee is seeking indemnification, or Independent Legal Counsel.
(g) Independent Legal Counsel: Independent Legal Counsel shall refer to
-------------------------
an attorney who is a partner of a lawfirm with a generalized recognized
expertise in corporate and securities law, selected by the Company with the
prior written consent of the Indemnitee which consent shall not be unreasonably
withheld, who shall not have otherwise performed services for the Company or
Indemnitee within the last five years (other than in connection with seeking
indemnification under this Agreement). Independent Legal Counsel shall not be
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's rights under this
Agreement, nor shall Independent Legal Counsel be any person who has been
sanctioned or censured for ethical violations of applicable standards of
professional conduct.
(h) Voting Securities: any securities of the Company which vote generally
-----------------
in the election of directors.
2. BASIC INDEMNIFICATION ARRANGEMENT.
----------------------------------
(a) In the event Indemnitee was, is or becomes a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, a Claim by reasons of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than
thirty (30) days after written demand is presented to the Company, against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim and any federal, state, local or
foreign taxes imposed on the Indemnitee as a result of the actual or deemed
receipt of any payments under this Agreement. If so requested by Indemnitee, the
Company shall advance (within five (5) business days of such request) any and
all Expenses to Indemnitee (an "Expense Advance"). Notwithstanding anything in
this Agreement to the contrary and except as provided in Section 3, prior to a
---------
Change in Control Indemnitee shall not be entitled to indemnification pursuant
to this Agreement in connection with any Claim initiated by Indemnitee against
the Company or any director or officer of the Company unless the Company has
joined in or consented to the initiation of such Claim.
(b) Notwithstanding the foregoing, (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
-----------
shall not have determined that Indemnitee would not be permitted to be
indemnified under applicable law, and (ii) the obligation of the Company to make
an Expense Advance pursuant to Section 2(a) shall be subject to the condition
-----------
that, if, when and to the extent that the Reviewing Party determines that
Indemnitee would not be permitted to be so indemnified under applicable law, the
Company shall be entitled to
3
<PAGE>
be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to
reimburse the Company for Expense Advances shall be unsecured and no interest
shall be charged thereon. If there has not been a Change in Control, the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be an
Independent Legal Counsel. If there has been no determination by the Reviewing
Party or if the Reviewing Party determines that Indemnitee substantively would
not be permitted to be indemnified in whole or in part under applicable law,
Indemnitee shall have the right to commence litigation in any court in the State
of Florida having subject matter jurisdiction thereof and in which venue is
proper seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, or the legal or
factual bases therefor, and the Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the Reviewing Party
otherwise shall be conclusive and binding on the Company and Indemnitee.
3. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within five business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any claim asserted against or in connection with any action
brought by Indemnitee for (i) indemnification or advance payment of Expenses by
the Company under this Agreement or any other agreement or Articles of
Incorporation or Bylaws of the Company now or hereafter in effect relating to
Claims for Indemnifiable Events and/or (ii) recovery under any directors' and
officers' liability insurance policies maintained by the Company, regardless of
whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
4. PARTIAL INDEMNITY, ETC. If Indemnitee is entitled under any provision of
----------------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgment, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in party an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, Indemnitee shall be indemnified against all Expenses incurred in
connection therewith.
4
<PAGE>
5. DEFENSE TO INDEMNIFICATION, BURDEN OF PROOF AND PRESUMPTIONS. It shall be
------------------------------------------------------------
a defense to any action brought by the Indemnitee against the Company to enforce
this Agreement (other than an action brought to enforce a claim for expenses
incurred in defending a claim in advance of its final disposition where the
required undertaking has been tendered to the Company) that the Indemnitee has
not met the standards of conduct that make it permissible under the Florida
Business Corporation Act for the Company to indemnify the Indemnitee for the
amount claimed. In connection with any determination by the Reviewing Party or
otherwise as to whether the Indemnitee is entitled to be indemnified hereunder,
the burden of providing such a defense shall be on the Company. Neither the
failure of the Company (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action by the Indemnitee that Indemnification of the
claimant is proper under the circumstances because he or she has met the
applicable standard of conduct set forth in the Florida Business Corporation
Act, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its stockholders) that the Indemnitee
had not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the Indemnitee has not met the applicable
standard of conduct. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.
6. NON-EXCLUSIVITY, ETC.. The rights of Indemnitee hereunder shall be in
---------------------
addition to any other rights Indemnitee may have under the Articles of
Incorporation or Bylaws of the Company or the Florida Business Corporation Act
or otherwise. To the extent that a change in the Florida Business Corporation
Act (whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Articles of Incorporation
and Bylaws of the Company and this Agreement, it is the intent of the parties
hereto that Indemnitee shall be entitled by this Agreement to the greater
benefits so afforded by such change.
7. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained herein shall
---------------------------------------
be construed as giving Indemnitee any right to be retained in the employ of the
Company or its subsidiaries, if any.
8. LIABILITY INSURANCE. To the extent the Company maintains an insurance
-------------------
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
9. AMENDMENTS, ETC. No supplement, modification or amendment of this
----------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
5
<PAGE>
10. SUBROGATION. In the event of payment under this Agreement, the Company
-----------
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
11. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, the Articles of Incorporation or Bylaws of the
Company or otherwise) of the amounts otherwise indemnifiable hereunder.
12. BINDING EFFECT, ETC. This Agreement shall be binding upon and inure to
--------------------
the benefit of and be enforceable by the parties hereto and their spouses,
heirs, personal and legal representatives and their respective successors and
assigns, including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business and/or
assets of the Company. The Company shall require and cause any successor
(whether direct or indirect by purchase, merger, consolidation or otherwise) to
all, substantially all, or a substantial part, of the business and/or assets of
the Company, by written agreement expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director and officer of the Company or of any other enterprise at the Company's
request.
13. SEVERABILITY. The provisions of this Agreement shall be severable in the
------------
event that any of the provisions hereof (including any provision within a single
section, paragraph of sentence) are held by a court of competent jurisdiction to
be invalid, void or otherwise unenforceable, and the remaining provisions shall
remain enforceable to the fullest extent permitted by law. Furthermore, to the
fullest extent possible, the provisions of this Agreement (including, without
limitation, each portion of this Agreement containing any provision held to be
invalid, void or otherwise unenforceable, that is not itself invalid, void or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Florida applicable to contracts made
and to be performed in such state without giving effect to the principles of
conflicts of laws.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Agreement as of the date first above written.
GOODNOISE CORPORATION
By:_____________________________________
INDEMNITEE:
________________________________________
7
<PAGE>
EXHIBIT 16.1
BARRY L. FRIEDMAN, P.C.
Certified Public Accountant
1582 Tulita Drive OFFICE (702) 361-8414
Las Vegas, Nevada 89123 FAX NO. (702) 396-0278
July 16, 1998
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
GoodNoise Corporation
---------------------
We have read Item 3 of GoodNoise Corporation's Form 10-SB to be dated on or
approximately July 17, 1998 and are in agreement with the statements contained
therein.
Yours very truly,
/s/ Barry L. Friedman
- ---------------------------
Barry L. Friedman, P.C.
<PAGE>
EXHIBIT 21
Subsidiaries
GoodNoise Corporation, a Delaware corporation
