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As filed with the Securities and Exchange Commission on 12/24/98
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
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 (the "PSLRA"), 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. The PSLRA does not apply to initial public offerings.
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
Overview
GoodNoise Corporation ("GoodNoise" or the "Company") is a development stage
company that licenses, develops, and markets musical recordings for direct file
transfer, or "downloading," to consumers over the Internet. The Company was
formed on January 8, 1998 and began selling musical recordings over the Internet
on July 30, 1998. According to the Recording Industry Association of America
("RIAA"), recorded music sales during the past four years have been
approximately $12.0 billion per year in the United States and $38.1 billion per
year worldwide. Nearly all of this revenue was derived from the sale by physical
manufacture and delivery of compact discs ("CDs"), audiocassettes, and other
physical formats. The Company believes that the percentage of music purchases
made by direct download over the Internet will be significantly increasing
percentage of total music purchases during the next several years. This increase
is being driven by the increasing proliferation of personal computers ("PCs") in
the home, the increase in affordable storage capacity, the increase in high
speed access to the Internet, and the deployment of recordable CDs ("CD-Rs") and
portable music players, such as Diamond Multimedia Systems ("Diamond")'s Rio PMP
300 ("Rio"). GoodNoise's long-term objective is to establish itself as a major
provider of music content direct to consumers over the Internet.
The Online Music Industry
The Company believes that the Internet is an ideal medium for promoting,
marketing, and selling music and music related products and services. Potential
purchasers of music recordings can preview their purchases by listening to
high-quality sound samples, viewing text and graphics including cover art,
artists' discographies, music
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videos and reviews, and searching a catalog of available titles. Internet users
can also search for music by genre or artist, access information and events,
including music history and news, artists' biographies, cybercast concerts and
radio broadcasts, and participate in live interviews with artists. In addition,
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.
According to Jupiter Communications ("Jupiter"), a media research firm, total
online music revenues, which include prerecorded music sales, music-related
merchandising, advertising, and concert ticketing, are expected to grow from an
estimated $88.0 million in 1998 to $1.4 billion in 2002. Jupiter further
estimates that the number of online households making purchases is expected to
grow from an estimated 15.2 million in 1996 to over 54.0 million in 2002,
representing over 50% of U.S. households.
In addition to the development of the Internet, other technological
developments are facilitating the market for downloadable music. Newly developed
technologies allow users to download music in a compressed format to PCs, play
music from PCs, or store and play it on either CD-Rs or portable music players,
such as the Rio. Downloads of music files have also been facilitated by the
increasing use of high speed bandwidth connections to the Internet, such as
digital cable modems, ISDN, and digital subscriber lines (DSLs). In particular,
MP3, a file format for compressing audio data with a minimal loss of quality, is
becoming increasingly popular as a means for music downloads. MP3 is supported
natively in Microsoft Windows 98 Netshow and Media Player, and, according to
Searchterms.com, the term MP3 is the second most frequently searched term on one
of the leading Internet search engines. In addition, Forrester Research
("Forrester"), a technology market research firm, estimates that there have been
more than 10 million downloads of WinAmp, and other popular MP3
decoders/players. There are other formats for downloading music including Liquid
Audio and a2b, which are proprietary encrypted compression formats. To date,
these formats have not been widely accepted by consumers.
According to the RIAA, approximately 40% of all recorded music sales over the
last four years were to customers who are under 25 years of age. The Company
believes that those who are most likely to be early adopters of purchasing music
by download are in the 18 to 24 age bracket. For example, according to Jupiter,
college students represent 34% of all Internet users. Strategic Marketing
Communications states that there are approximately 15.0 million college students
in the United States, 83% of whom use the Internet regularly. In addition, 90%
of universities in the United States provide free high-speed Internet access to
their student and faculty community in dormitories, study areas, computer labs,
and offices.
The major record companies have been losing market share to independent
record labels for years. According to Jupiter, during the period 1992-1997, the
market share of independent record labels increased from 11.6% to 23.2%. For
1997, the independent record labels were responsible for two-thirds of all new
releases of recorded music. The new distribution opportunities resulting from
the development of the Internet and new technology facilitating the downloading
of music present significant new opportunities for independent record labels. In
particular, such labels are generally more receptive to such opportunities as
they are generally less entrenched with traditional distribution channels.
GoodNoise Business Strategy
The Company's objective is to establish itself as a major provider of
downloadable music content direct to consumers over the Internet. GoodNoise's
business strategy is to leverage its early entry into the market for
downloadable recordings to exploit the changing dynamics of the recording
industry. Key elements to this strategy include:
Acquire Content. GoodNoise will continue to acquire rights to content
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in all major music categories for sale through goodnoise.com and
affiliated websites. Currently, the Company is focusing its efforts and
resources on music content that is compelling to the 18 to 34 age
bracket. GoodNoise intends to continue to acquire its content from,
among others, independent record labels, owners of recording catalogs,
and established and new recording artists. In addition, the Company
plans to establisretail relationships with other online distributors
under which the Company and such distributors would receive commissions
for sales generated from the others' websites.
Create Strong Brand Awareness. The Company will continue to leverage
the development, marketing, and public relations experience of its
management team to build a strong brand name around the trademark
GoodNoise(TM). Building brand awareness of goodnoise.com is critical to
attracting and expanding the
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Company's global Internet user base and its ability to attract
providers of music content. GoodNoise promotes its brand through online
and traditional media, event sponsorships, FreeAmp (its free
downloadable digital audio player), and other marketing activities. The
Company intends to enhance brand awareness of its website by providing
original and proprietary content, enabling consumers to purchase music
and related merchandise, and establishing strategic and referral fee
relationships whereby other websites engage GoodNoise as an online
music retail source and content provider in return for a commission.
Foster Development of Downloadable Music Market. The Company believes
that the development of the downloadable music market will be enhanced
by facilitating the process by which consumers purchase music online.
As part of this strategy, GoodNoise continues to support and manage the
development of FreeAmp, which enables the playing, management, and
storing of music files on PCs, CD-Rs, and portable music players. The
Company has published the source code of FreeAmp and uses a free source
code licensing methodology to encourage third party applications and
improvements. The Company strives to refine and simplify the
downloadable music purchasing experience through the development of a
user friendly website. The features of this website are designed to
encourage purchases and repeat visits. By successfully promoting and
selling downloadable music, the Company intends to demonstrate to
record labels and artists the value of the downloadable music market.
Strategic Partnerships
The Company aggressively seeks objective is to establish strategic alliances
with global media, technology, and music companies to further the growth of the
downloadable music market and to attract additional users to, and increase brand
awareness of, goodnoise.com and affiliated websites.
Media Companies. The Company has established and intends to continue to
establish relationships with Internet retailers and other media companies with
high traffic websites. The Company has a strategic partnership agreement with
OnRadio (formerly Electric Village), a leading provider of syndicated content to
websites for U.S. radio stations. OnRadio provides music news content to
GoodNoise and is working to allow reference sales of GoodNoise offerings from
radio station websites. The Company also ha a strategic partnership agreement
with Zcompany (dba "MP3.com"), a popular information source for the MP3
community. Pursuant to this agreement, the companies provide each other with
advisory services and sponsor events for the promotion of MP3 as a platform for
the distribution of music.
Technology Companies. The Company has established and intends to continue to
establish alliances with a broad range of technology companies. Manufacturers of
portable music players, computer storage devices, CD-Rs and high speed modems
and Internet Service Providers have a strong interest in the development of the
downloadable music market to support increased demand for their products and
services. GoodNoise has an existing partnership with Diamond that includes
promotional marketing of the GoodNoise brand as the online music source,
sponsorship payments to GoodNoise, and GoodNoise recordings and product
materials inside and logo placement outside the box of the Rio. GoodNoise and
Diamond plan to include more GoodNoise content to supplement the existing
content in the Rio box and links back to goodnoise.com from the Rio install
application. In addition, the Company is a reseller of the Rio. Xing Technology
("Xing") has both entered into a strategic alliance with and licensed core MP3
technology to GoodNoise. Xing licensed to GoodNoise a commercially capable MP3
encoder which GoodNoise currently utilizes to produce its downloadable sound
recordings. Xing also licensed the Xing MP3 decoder to GoodNoise under the
General Public License for inclusion in FreeAmp. GoodNoise, Diamond, Xing, and
MP3.com also are founding members of the MP3 Association, which is a group
created to support and advance the MP3 open standard as well as to promote
responsible consumer use of MP3 technology.
Music Companies. The Company has an agreement with peermusic, one of the
world's largest private music publishing companies. Pursuant to this agreement,
peermusic provides music publishing administration services to GoodNoise. The
companies will share income derived from music publishing rights acquired by
GoodNoise. GoodNoise has also licensed certain recordings from the peermusic
catalog. The Company intends to continue to enter into other alliances with
music companies.
Content Acquisition
GoodNoise has acquired and will continue to acquire download rights to
certain master recordings owned by
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independent record companies and other owners of significant recording catalogs.
The Company is currently in discussions with numerous independent record labels
to acquire the downloadable rights to their music catalogs. For example,
GoodNoise has acquired the downloadable rights to the spinART record catalog
which includes 47 artists.
GoodNoise offers owners of master recording catalogs the opportunity to
promote and sell their catalogs, including out-of-print or previously unreleased
titles. On October 8, 1998, the Company entered into agreements to acquire
Nordic Entertainment Worldwide, Inc. ("Nordic")and Creative Fulfillment, Inc.
("Emusic"). Nordic maintains a large catalog of music featuring over 1,000
artists and 6,000 songs from such artists as Ray Charles, Chuck Berry, Louis
Armstrong, and Billie Holiday, as well as techn and world music artists. Emusic
is an entertainment and Internet marketing company that through its Emusic.com
website offers more than 135,000 CD titles and 30,000 video titles as well as
downloadable music through a partnership with Nordic.
The Company has established its own "record label," which has signed
established and emerging recording artists. The Company intends to use
goodnoise.com and affiliated websites, as well as record stores and other
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traditional distribution channels, to promote, distribute, and sell these
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 artists and repertoire ("A&R") and business affairs
staff.
GoodNoise plans to establish relationships with, or provide referrals to,
downloadable recordings owned by other online sound recording distribution
companies. These arrangements will provide for a sharing of net proceeds, after
the payment of certain direct costs, including royalties to the authors and
publishers of the songs embodied in these recordings.
Sales and Marketing
GoodNoise is initially concentrating its sales and marketing efforts on the
18 to 34 age bracket to take advantage of this demographic profile's familiarity
with the Internet, access to high speed Internet bandwidth, and strong
purchasing history for music and music-related products and services. The
Company intends to expand its promotional efforts to other market segments,
including audiences for genres such as jazz, classical, and R&B.
The Company's overall sales and marketing strategy is designed to sell
downloadable music and music-related products and services through goodnoise.com
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and affiliated websites, build brand awareness, attract repeat users, and drive
traffic to the website. The Company utilizes a combination of external
advertising and promotion, internal promotion and product merchandising, and
strategic partnership programs to accomplish these objectives.
Key elements to the Company's sales and marketing strategy include:
Establish a Destination Music Website. The Company has designed its website
with the objective that it become a well-known World Wide Web destination for
music consumers that offers compelling content, music programming, and music-
related merchandise. GoodNoise's website also contains music news, live
concerts, and music-related sponsorship and advertising content. Content offered
on goodnoise.com currently features modern rock and alternative music
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specifically tailored to the high tech 18 to 34 year old music consumer.
Merchandising and Customer Programs. GoodNoise 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 and related music merchandise.
In-Store Merchandising. The Company plans to use numerous merchandising
features to encourage and enhance a consumer's buying experience. GoodNoise
believes that the user's ability to listen to audio samples is a significant
incentive to purchase. The Company offers consumers the ability to access a
variety of information about an artist, music group, or album prior to making a
purchase at goodnoise.com.
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Create an Effective A&R and Promotion Infrastructure. GoodNoise has developed
customized joint marketing programs with record labels that own the music
featured for sale on the Company's website. Such programs include press
releases, artist and record label specific web pages, online banner advertising
campaigns, co-operative marketing funds, and promotional events.
Develop Free Enabling Software. The Company supports and manages the
development of FreeAmp, which enables the playing, management, and storing of
music files on PCs, CD-Rs, and portable music players. The Company has published
the FreeAmp source code and uses a free source code licensing methodology to
encourage
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third party applications and improvements.
[GRAPHIC OMITTED]
Build User Communities and Attract Advertising. The Company sells banner
advertising space on its website. By leveraging its record promotion launches
and fan/artist loyalty, the Company aggregates targeted demographic user groups,
thereby offering advertisers and sponsors access to highly defined audiences.
Advertising, Sales, and Sponsorships
GoodNoise plans to position its website as an online music source, offering
advertisers and marketers the ability to reach 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.
Ordering, Fulfillment and Customer Service
The Company's website includes an ordering system that is designed to be
easy-to-use and simple to understand. GoodNoise intends to continually upgrade
and enhance this system to further simplify the purchase of downloadable music.
In order to maintain high customer satisfaction, the Company plans to place an
emphasis on reliable product fulfillment. At any time during a visit to
goodnoise.com, 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
GoodNoise, a customer is prompted to register at the time of purchase and to
enter his or her name, address, and password. The customer then securely submits
credit card information online. 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 billing information for subsequent
orders.
Technology
GoodNoise has and will continue 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 and online delivery; (iv)
security; (v) scalability; and (vi) advanced technologies.
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 continues to
develop a database management system that allows 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, mySQL.
Website Development. The catalog of individual recordings, samples, and
other information 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. The Company uses the MP3 format for digital distribution of its
downloadable music. In light of current user patterns, the Company uses Real
Networks' popular RealAudio format for delivering real-time streaming 30-second
audio previews and feature-length web broadcasts. MP3, in streaming mode, is
also used for real-time preview sample The Company is exploring other download
formats and plans to adjust the format of its content to stay current with
moving industry trends.
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System Requirements. 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 to play music. For
example, the minimum system PC requirements for a user desiring to play an audio
sample in the MP3 audio format are an MP3 audio player and a Pentium 133Mhz CPU
on Windows 95/NT operating system with 16 megabytes of RAM.
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 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
versatile disk) multimedia authoring. Technologies with which the Company is
currently working include Sun Microsystems' Java language, Adaptec, Inc.'s CD
writing client software, multimedia tagging standard ID3v2, watermarking,
digital signatures, and MPEG-4 Advanced Audio Coding ("AAC") audio
compression/transmission format.
Competition
The market for Internet content providers is new, 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 also competes with major
and independent record labels.
The Company believes that the primary competitive factors in providing music
entertainment products and services via the Internet are name recognition,
content available on an exclusive basis, 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 downloadable music content 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
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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.
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, other
intellectual property dispute, or action to protect proprietary rights may have
a material adverse effect on the Company's business, results of operations, 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 it products. Any of these situations can have a material adverse effect
on the Company's business, results of operations, and financial condition.
Employees
As of December 1, 1998, the Company had 13 full-time employees, including 9
in operations and technical and artist development and 4 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.
Facilities
The Company's corporate headquarters is located in Palo Alto, California. The
facilities and certain other equipment are leased under operating and capital
lease agreements. GoodNoise 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 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
The Company was organized as a Delaware corporation ("GN Delaware") in
January 1998. On May 11, 1998, Atlantis Ventures Corporation ("Atlantis
Ventures"), a Florida corporation, acquired all of the outstanding Common Stock
of the Company (the "Merger"). For accounting purposes, this acquisition was
treated as a recapitalization of the Company with the Company as the acquirer
(reverse acquisition). Atlantis Ventures was organized in August 1989 and had no
revenues or operations prior to the Merger. Following the recapitalization,
Atlantis Ventures changed its name to GoodNoise Corporation.
Results of Operations
GoodNoise is a development stage company that has incurred costs to organize
and develop an Internet website through which it will conduct its business. The
Company began selling musical recordings over the Internet on July 30, 1998. 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 and 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) th 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, online commerce,
and the recorded music industry.
Net Revenues
The Company earned no revenue from inception through June 30, 1998. The
Company launched its first Internet website in April 1998 and began selling
musical recordings over the Internet on July 30, 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
From inception through June 30, 1998, the Company incurred no costs of
revenues. The Company expects that future costs of revenues will consist of
payments to third parties for fulfillment of customer orders, royalties,
copyrights, credit card processing charges, and profit participation payable to
strategic alliance partners and others.
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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 $961,349 through June 30, 1998 related to software engineering, audio and
video production, and graphic design of the Company's website and music
catalogue. The Company is dependent upon raising additional financing in order
to continue or increase the level of product development activities from that
undertaken by the Company to date. The level of product development that the
Company pursues will be substantially impacted by the amount of additional
financing, if any, that the Company is able to raise. Assuming that adequate
funding is available, the Company currently intends, among other matters, to
acquire and develop a repertoire of songs available for customer downloads, and
to continue to develop the software necessary to manage such downloads.
Sales and Marketing Expenses
From inception through June 30, 1998, the Company incurred no sales and
marketing costs. The Company is dependent upon raising additional financing in
order to continue or increase the level of sales and marketing activities from
that undertaken by the Company to date. The level of sales and marketing
activities that the Company pursues will be substantially impacted by the amount
of additional financing, if any, that the Company is able to raise. Assuming
that adequate funding is available, the Company currently intends, among other
matters, to promote its website through strategic alliances, external
advertising, website direct promotion, and trade shows. The Company expects that
the costs related to such activities will consist principally of advertising,
personnel, and consulting expenses.
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
$218,755 through June 30, 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 June 30, 1998, the Company had a cash balance of $509,751. Net cash of
$316,965 was used for operating activities from inception through June 30, 1998
principally as a result of the net losses of $1,180,104 generated during the
period. Of the net loss, $751,714 represented the expense associated with stock
and stock options granted to advisors. Purchases of property and equipment
totaled $37,384.
The Company financed its operations from inception through June 1998 using
loans of $170,000, including $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 such Series A Preferred Stock because of the pending merger with
Atlantis Ventures and, in May 1998, these notes were converted into 501,500
shares of common stock prior to the merger.
In May 1998, the Company merged with Atlantis Ventures, 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 consisted 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, and
warrants to purchase 300,000 shares of common stock were exercised in August
1998.
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On October 28, 1998, the Company raised proceeds of approximately $500,000
through the sale of 500 shares of Series A Preferred Stock and Warrants to
purchase 100,000 shares of the Company's Common Stock to one accredited
investor.
The Company's existing capital resources will not be sufficient to enable it
to maintain its operations. 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. Management is in the
process of pursuing additional equity financing, although there is no assurance
that such efforts will be successful. 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.
Since the Company's systems and software are relatively new, management does
not expect Year 2000 issues related to its own internal systems to be
significant and does not anticipate that it will incur significant operating
expenses or be required to invest heavily in computer systems improvements to be
Year 2000 compliant. As the Company makes arrangements with significant
suppliers and service providers, the Company intends to determine the extent to
which the Company's interface systems may b vulnerable should those third
parties fail to address and correct their own Year 2000 issues. The Company
anticipates that this will be an ongoing process as the Company begins to
implement supplier and service provider arrangements throughout 1999. There can
be no assurance that the systems of suppliers or other companies on which the
Company relies will be converted in a timely manner and will not have a material
adverse effect on the Company's systems. Additionally, there can be no assurance
that the computer systems necessary to maintain the viability of the Internet or
any of the Web sites that direct consumers to the Company's web site will be
Year 2000 compliant. As part of the Company's Year 2000 compliance plan, the
Company is developing plans to operate its website from different systems and/or
at a different location in the event of any significant disruption as a result
of the Year 2000 issues. The Company believes it is taking the steps necessary
regarding Year 2000 compliance with respect to matters within its control.
However, no assurance can be given that the Company's systems will be made Year
2000 compliant in a timely manner or that the Year 2000 problem will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Development Stage Company; Limited Operating History; Anticipated Losses;
Uncertainty of Future Results
GoodNoise Corporation 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. GoodNoise 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 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. GoodNoise expects negative cash flow from operations to
continue for the foreseeable future as it continues to develop and market its
business.
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Need For Additional Funds.
The Company's current capital resources will not be sufficient to enable it
to maintain its operations. 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. The Company is
currently seeking such funding. Adequate funds for these and other purposes,
whether through additional equity financing, debt financing or other sources,
may not be available 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.
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 o 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.
Use of the Internet by consumers is at an 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, results of
operations, and financial condition will be materially adversely affected.
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 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 preferences 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.
Risks of Technology Trends and Evolving Industry Standards (Bandwidth)
The Company's success will depend upon the development of the Internet
infrastructure such that large amounts of bandwidth are available to a wide
number of users. Online delivery of music, at current compression rates,
requires large amounts of Internet bandwidth to download to a customer's
computer in an acceptable time span. Until there is widespread access to high
speed Internet connections or deeper compression of music files, the market for
online music will remain limited to those Internet users with such high speed
access.
The Company's success will also depend upon its ability to develop and
provide new products and services. The delivery of music online is and will
continue to be, like the Internet, characterized by rapidly changing technology,
evolving industry standards, changes in customer requirements, and frequent new
service 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 requirements and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis. In addition, the Company's business could
be
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adversely affected if an industry standard for hardware used in the storage and
playback of the Company's products is slow or fails to develop.
Competition.
The market for Internet content providers is new, 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 also competes with major
and independent record labels.
The Company believes that the primary competitive factors in providing music
entertainment products and services via the Internet are name recognition,
content available on an exclusive basis, 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 downloadable music content 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 o services than the Company. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors.
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; the demand for
downloadable music content and Internet advertising; seasonal trends in both
Internet use, purchases of downloadable music, 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.
Risks Inherent in the Music Industry
The music 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 b no assurance that the Company will be able to generate sufficient revenues
from successful releases to cover the costs of unsuccessful releases. The music
industry is dominated by a small number of large record companies that have
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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.
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 seek alliances with computer and entertainment companies 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.
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 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 t improve its content or promote and maintain its brand,
the Company's business, results of operations, and financial condition will be
materially adversely affected.
Dependence on Key Personnel and Hiring of Additional Personnel
The Company's performance is substantially dependent on the services of
Robert H. Kohn (Chairman), Gene Hoffman, Jr. (Chief Executive Officer), and
Joseph Howell (Executive Vice President and Chief Financial Officer) 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.
The Company believes its future success will also depend in large part upon
its ability to attract and retain highly skilled management, engineering, sales
and marketing, finance, and manufacturing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The loss of the services
of any of the key personnel, the inability to attract or retain qualified
personnel in the future, or delays in hiring required personnel, particularly
engineers and sales personnel, could have a material adverse effect on the
Company's business, results of operations, and financial condition. In addition,
companies in the Internet and music industries whose employees accept positions
with competitive companies frequently claim that their competitors have engaged
in unfair hiring practices. There can be no assurance that the Company will not
receive such claims in the future as it seeks to hire qualified personne or that
such claims will not result in material litigation involving the Company. The
Company could incur substantial costs in defending itself against any such
claims, regardless of the merits of such claims.
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, results
of operations and financial condition will be materially adversely
affected.
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Risks Associated with Acquisitions
As part of its business strategy, the Company may from time to time acquire
assets and businesses principally relating to or complementary to its
operations. These acquisitions may include acquisitions for the purpose of
acquiring musical content and/or technology. The Company has entered into
agreements to acquire Nordic and Emusic. Among other things, the closing of
these transactions is dependent upon satisfactory due diligence and on the
Company obtaining $3 million of additional financing. These and any other
acquisitions by the Company involve risks commonly encountered in acquisitions
of companies. These risks include, among other things, the following: the
Company may be exposed to unknown liabilities of acquired companies; the Company
may incur acquisition costs and expenses higher than it anticipated;
fluctuations in the Company's quarterly and annual operating results may occur
due to the costs and expenses of acquiring and integrating new businesses or
technologies; the Company may experience difficulties and expenses in
assimilating the operations and personnel of the acquired businesses; the
Company's ongoing business may be disrupted and its management's time and
attention may be diverted; the Company may be unable to integrate successfully
or to complete the development and application of acquired technology and may
fail to achieve the anticipated financial, operating, and strategic benefits
from these acquisitions; the Company may experience difficulties in establishing
and maintaining uniform standards, controls, procedures, and policies; the
Company's relationships with key employees and customers of acquired businesses
may be impaired, or these key employees and customers may be lost as a result of
changes in management and ownership of the acquired businesses; and the Company
may incur amortization expenses if an acquisition is accounted for as a
purchase, resulting in significant goodwill or other intangible assets. In
addition, the Company's stockholders may be dilute if the consideration for the
acquisition consists of equity securities. The Company may not overcome these
risks or any other problems encountered in connection with acquisitions. If the
Company is unsuccessful in doing so, its business, results of operations and
financial condition could be materially and adversely affected.
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 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.
Governmental Regulation and Legal Uncertainties
The Company is not currently subject to direct federal, state, or local
regulation, and laws or regulations applicable to access to or commerce on the
Internet, other than regulations applicable to businesses generally. However,
due to the increasing popularity and use of the Internet and other online
services, it is possible that a number of laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, "indecent" materials, freedom of expression, pricing, content and
quality of products and
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services, taxation, advertising, intellectual property rights, and information
security. The adoption of any such laws or regulations might also decrease the
rate of growth of Internet use, which in turn could decrease the demand for the
Company's products and services or increase the cost of doing business or in
some other manner have a material adverse effect on the Company's business,
results of operations, and financial condition. In addition, applicability to
the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity,
and personal privacy is uncertain. The vast majority of such laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies. The Company does not believe that such regulations, which were
adopted prior to the advent of the Internet, govern the operations of the
Company's business nor have any claims been filed by any state implying that the
Company is subject to such legislation. There can be no assurance, however, that
a state will not attempt to impose these regulations upon the Company in the
future or that such imposition will not have a material adverse effect on the
Company's business, results of operations, and financial condition.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for the services of the Company or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs, or could in some other manner have a material adverse
effect on the Company's business, results of operations, and financial
condition. In addition, because the Company's services are accessible worldwide,
and the Company facilitates sales of goods to users worldwide, other
jurisdictions may claim that the Company is required to qualify to do business
as a foreign corporation in a particular state or foreign country. The Company
is qualified to do business in California, and failure by the Company to qualify
as a foreign corporation in a jurisdiction where it is required to do so could
subject the Company to taxes and penalties for the failure to qualify and could
result in the inability of the Company to enforce contracts in such
jurisdictions. Any such new legislation or regulation, or the application of
laws or regulations from jurisdictions whose laws do not currently apply to the
Company's business, could have a material adverse effect on the Company's
business, results of operations, and financial condition.
Potential Liability for Sales and Other Taxes
The Company does not currently collect sales or other similar taxes in
respect of the delivery of its products into states other than California where
the Company collects sales taxes for sales of tangible products. New state tax
regulations may subject the Company to the assessment of sales and income taxes
in additional states. Although the Internet Tax Freedom Act precludes for a
period of three years the imposition of state and local taxes that discriminate
against or single out the Internet, it does not impact currently existing taxes.
Tax authorities in a number of states are currently reviewing the appropriate
tax treatment of companies engaged in Internet retailing and are currently
considering an agreement with certain of these companies regarding the
assessment and collection of sales taxes. The Company is not a party to any such
discussions.
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 i international markets could have a material adverse effect on the
Company's business, results of operations, and financial condition.
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Management of Growth
The Company expects to experience significant growth in the number of
employees and the scope of its operations. In particular, the Company intends to
hire additional engineering, sales, marketing, and support personnel. This
hiring will result in increased responsibilities for management. The future
success of the Company will depend on its ability to increase its customer
support capability and to attract, train, and retain qualified technical, sales,
marketing, and management personnel, for whom competition is intense. In
particular, the current availability of qualified sales and engineering
personnel is quite limited, and competition among companies for such personnel
is intense. During strong business cycles, the Company expects to experience
continued difficulty in filling its needs for qualified sales, engineering, and
other personnel.
The Company's future success will be highly dependent upon its ability to
successfully manage the expansion of its operations. The Company's ability to
manage and support its growth effectively will be substantially dependent on its
ability to implement adequate improvements to financial and management controls,
reporting and order entry systems, and other procedures and hire sufficient
numbers of financial, accounting, administrative, and management personnel. The
Company's expansion and the resulting growth in the number of its employees has
resulted in increased responsibility for both existing and new management
personnel. The Company is in the process of establishing and upgrading its
financial and accounting systems and procedures. There can be no assurance that
the Company will be able to identify, attract, and retain experienced accounting
and financial personnel. The Company's future operating results will depend on
the ability of its management and other key employees to implement and improve
its systems for operations, financial control, and information management, and
to recruit, train, and manage its employee base. There can be no assurance that
the Company will be able to achieve or manage any such growth successfully or to
implement and maintain adequate financial and management controls and
procedures, and any inability to do so would have a material adverse effect on
the Company's business, results of operations, and financial condition.
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, results of
operations, and financial condition will be materially adversely affected.
Rapid Technological Change
The market in which the Company competes is characterized by frequent new
product introductions, rapidly changing technology, and the emergence of new
industry standards. The rapid development of new technologies increases the risk
that current or new competitors will develop products or services that reduce
the competitiveness and are superior to the Company's products and services. The
Company's future success will depend to a substantial degree upon its ability to
develop and introduce in a timely fashion new products and services and
enhancements to its existing products and services that meet changing customer
requirements and emerging industry standards. The development of new,
technologically advanced products and services is a complex and uncertain
process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. There is a potential for
product development delay due to the need to comply with new or modified
standards. There can be no assurance that the Company will be able to identify,
develop, market, support, or manage the transition to new or enhanced products
or services successfully or on a timely basis, that new products or services
will be responsive to technological changes or will gain market acceptance, or
that the Company will be able to respond effectively to announcements by
competitors, technological changes, or emerging industry standards. The
Company's business, results of operations, and financial condition would be
materially and adversely affected if the Company were to be unsuccessful, or to
incur significant delays, in developing and introducing new products, services,
or enhancements.
Y2K Disclosure
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.
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Since the Company's systems and software are relatively new, management does
not expect Year 2000 issues related to its own internal systems to be
significant and does not anticipate that it will incur significant operating
expenses or be required to invest heavily in computer systems improvements to be
Year 2000 compliant. As the Company makes arrangements with significant
suppliers and service providers, the Company intends to determine the extent to
which the Company's interface systems may be vulnerable should those third
parties fail to address and correct their own Year 2000 issues. The Company
anticipates that this will be an ongoing process as the Company begins to
implement supplier and service provider arrangements throughout 1999. There can
be no assurance that the systems of suppliers or other companies on which the
Company relies will be converted in a timely manner and will not have a material
adverse effect on the Company's systems. Additionally, there can be no assurance
that the computer systems necessary to maintain the viability of the Internet or
any of the Web sites that direct consumers to the Company's web site will be
Year 2000 compliant. As part of the Company's Year 2000 compliance plan, the
Company is developing plans to operate its website from different systems and/or
at a different location in the event of any significant disruption as a result
of Year 2000 issues. The Company believes it is taking the steps necessary
regarding Year 2000 compliance with respect to matters within its control.
However, no assurance can be given that the Company's systems will be made Year
2000 compliant in a timely manner or that the Year 2000 problem will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Control by Management and Existing Stockholders
The Company's executive officers, directors, and affiliated entities together
beneficially own a majority of the voting control of the Company's capital
stock. As a result, these stockholders, acting together, are able to influence
significantly and control most matters requiring approval by the Company's
stockholders, including the election of directors. Such a concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company.
Limited Public Market; Possible Volatility of Share Price
The Company's Common Stock is quoted on the OTC Bulletin Board. As of
December 14, 1998, there were approximately 15,015,300 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. The trading market for the
Company's Common Stock is currently limited to relatively low volume. There can
be no assurance that a trading market will be sustained in the future. Factors
such as announcements of technological innovations or new products by the
Company or its competitors, failure to meet securities analysts' expectations,
government regulatory action, patent or proprietary rights developments, and
market conditions for technology stocks in general could have a material effect
on the price of the Company's securities.
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.
18
<PAGE>
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 December 14, 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>
Name Number Percent (2)
- ---- ------ -----------
<S> <C> <C>
Executive Officers and Directors (1)
Robert Kohn .................................. 3,701,500 24.2%
Gene Hoffman, Jr.. (3) ....................... 3,658,000 24.0
Gary Culpepper ............................... 949,900 6.2
Joseph Howell (4) ............................ 163,888 1.1
Ralph Peer, II................................ 147,500 1.2
All executive officers and directors as a
group (5 persons) (4)....................... 8,620,788 56.5%
</TABLE>
- ---------------
* Less than 1%.
(1) 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 December 14, 1998. Unless otherwise indicated, the address of each of
the named individuals is: c/o GoodNoise Corporation, 719 Colorado Avenue,
Palo Alto, California 94303.
(2) Percentage of beneficial ownership excludes: (i) up to 2,587,550 shares
issuable upon exercise of outstanding stock options and warrants and (ii)
2,190,000 shares of Common Stock issuable in connection with the
acquisitions of Nordic and Emusic. Percentage of beneficial ownership
includes 89,500 shares of Common Stock issuable as of December 14, 1998 on
conversion of the 500 outstanding Series A Preferred shares.
(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 163,888 shares which are issuable upon exercise of options.
19
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information about the Executive
Officers, Directors and certain other officers of the Company, as well as
certain members of its senior management, and their ages and positions as of
December 1, 1998.
<TABLE>
<CAPTION>
Name Age Position(s)
- -------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Robert H. Kohn*....................... 41 Chairman and Secretary
Gene Hoffman, Jr*..................... 23 President, Chief Executive Officer, and Director
Ralph Peer, II........................ 54 Director
Gary Culpepper*....................... 48 Executive Vice President, Business Affairs
Joseph H. Howell*..................... 46 Executive Vice President and Chief Financial Officer
Brian Brinkerhoff..................... 36 Vice President, Content Acquisition
Steven Grady.......................... 32 Vice President, Corporate Communications
Brett A. Thomas....................... 28 Vice President, Engineering
</TABLE>
* Executive Officer
Robert H. Kohn, a co-founder of the Company, has been Chairman of the Board
and Secretary since January 1998. 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 (formerly Borland International, Inc.) ("Inprise"), a developer and
marketer of personal computer software. Mr. Kohn also served as chief legal
counsel for Ashton-Tate Corporation. Prior to Ashton-Tate, he was an attorney at
the Beverly Hills law offices of Rudin & Richman, an entertainment law firm
whose clients included Frank Sinatra, Liza Minelli, Cher and Warner Brothers
Music. He was also Associate Editor of the Entertainment Law Reporter, for which
he continues to serve as a member of the Advisory Board. A member of the
California Bar Association, Mr. Kohn co-authored Kohn On Music Licensing, a
treatise on music industry law for lawyers, music publishers, and songwriters.
He graduated from Loyola Law School, Los Angeles and received a Bachelor of Arts
degree in Business Administration with a minor in economics, magna cum laude,
from California State University at Northridge. Mr. Kohn is also an adjunct
professor of law at Monterey College of Law, where he teaches Corporate
Law.
Gene Hoffman, Jr., a co-founder of the Company, has been President, Chief
Executive Officer, and a Director since January 1998. From November 1996 to
December 1997, Mr. Hoffman was Director of Business Development and Director of
Interactive Marketing of PGP. While at PGP, he managed strategic opportunities
and then, as Director of Internet Marketing, he re-launched the Company website
from a marketing, sales, and technical perspective. Mr. Hoffman was responsible
for all e-commerce and export control of downloadable goods sold from the PGP
website. From October 1995 to November 1996, he was Executive Vice President of
PrivNet, Inc., an Internet privacy software company. At PrivNet, Mr. Hoffman
was responsible for product strategy, business development, and all corporate
affairs. Mr. Hoffman also worked at IBM's component facility in Charlotte, North
Carolina. From August 1993 to October 1995, Mr. Hoffman was a student at the
University of North Carolina, Chapel Hill.
Ralph Peer, II, a Director since June 1998, is Chairman and Chief Executive
Officer 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). Mr. Peer is also 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 joined the Company in April 1998 as Executive Vice President,
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
20
<PAGE>
for Sony Pictures/Columbia/TriStar Home Video. Mr. Culpepper previously served
as Vice President, Business Affairs/Music for Paramount Pictures Corporation,
where he was responsible for the negotiation, structuring, and administration of
all music-related rights for all film and soundtrack licensing agreements,
budget planning, and financial analysis for all music-related deal-making
activities. Prior to that, Mr. Culpepper was Director, Business Affairs for
Capitol Records, Inc., where he was responsible for the negotiation and
administration of all artist, producer, distribution, music video production
agreements, and master use licensing activities. He was also Senio Counsel for
Casablanca Records & Filmworks, Assistant General Counsel for ABC Records, Inc.,
and Manager, A&R Administration for A&M Records. He is a member of the
California Bar Association, graduated cum laude from University of California,
Los Angeles, and received his law degree from Southwestern University.
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
manufacturer of high-technology, multilayer, printed circuit boards. From May
1988 to January 1995, Mr. Howell served as Vice President, Controller of
Inprise. He also served as Inprise's acting Chief Financial Officer in 1994. Mr.
Howell received a Bachelor of Arts, University of Michigan in 1974 and a Masters
of Science in Accounting from Eastern Michigan University in 1977.
Brian Brinkerhoff, joined the Company in November 1998 as Vice President,
Content Acquisition. From January 1995 to November 1998, Mr. Brinkerhoff was
Head of Creative Music Publishing at The Walt Disney Company, a multinational
entertainment company. From January 1992 to December 1994, he was a principal of
Vis-a-Vis Entertainment Company, a music publishing company. From May 1989 to
December 1991, Mr. Brinkerhoff was Product Manager, Kodak Interactive Systems, a
developer and marketer of personal computer software. Mr. Brinkerhoff received a
Bachelors of Arts degree in economics from the University of California at
Davis.
Steven Grady joined the Company in May 1998 as Vice President, Corporate
Communications. From July 1997 to May 1998, Mr. Grady was Director, Corporate
Communications for Inprise, where he was responsible for public relations and
investor relations. From July 1996 to July 1997, he was Director, Marketing
Communications for Infoseek, where he was responsible for public relations,
marketing communications, and trade shows. From 1992 to June 1995, he served as
Director, Corporate Communications for Inprise. Prior to Inprise, Mr. Grady
served in a variety of corporate communications and marketing positions with
Ashton-Tate, TeraData, and Lotus Development. Mr. Grady received a Masters
degree in Communications Studies from Emerson College and a Bachelor of Arts
degree in Public Communications from Ashland University.
Brett A. Thomas joined the Company in April 1998 as Vice President,
Engineering. From November 1996 to January 1998, Mr. Thomas was Principal
Engineer for P GP, where he was responsible for the design and implementation of
PGP 4.5 and 5.0 for Win32, PGP for Unix and PGP's key server software.
Previously, Mr. Thomas was a senior engineer for NCR, where he developed r their
check processing software. Prior to NCR, he wrote automated document processing
programs for MCI, internal management software for an insurance company, and
inventory control systems under contract to IBM. Since 1994, Mr. Thomas has been
involved in the Linux (a free version of Unix) software community, maintaining
web sites operating on Linux platform and making several modifications to the
source code of the core of the Linux operating system.
Advisory Panel
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 1960's, 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 and Chief Executive Officer of Catalog City, Inc., an
Internet commerce company. Mr. Lorenzen is also a member of the Board of Fractal
Design and past Chief Executive Officer and Chairman of the Board of Altura
Software.
21
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The Company began operations in January 1998. For the period from inception
through June 30, 1998, the compensation payable to Robert H. Kohn, Gene Hoffman,
Gary Culpepper and Joseph Howell (the only officers compensated during such
period) was $25,625, $31,250, $27,917 and $15,625, respectively.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A total of 8,378,000 shares of common stock were issued by GN Delaware at
$0.01 per share to the Company's founders in February 1998, of which 1,062,000
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 590,000 of these shares at a nominal price subject to ratable vesting
over three years.
In February 1998, GN Delaware entered into an agreement to borrow $110,000
from two of the Company's directors and a member of its Advisory Board through
the issuance of promissory notes bearing interest at 10.0% per annum, due in
December 1998. In April, GN Delaware entered into agreements to borrow an
additional $60,000 from two unrelated parties under the same terms. All
outstanding principal and interest related to these notes were to be converted
at the closing of GN Delaware's initial sal of Series A Preferred Stock. GN
Delaware did not issue the Series A Preferred Stock and, on May 1, 1998, these
notes were converted into 501,500 shares of common stock (including 324,500 to
the Company's directors and member of the Advisory Board).
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 (the "Merger") GN
Delaware. In connection with such acquisition, the Registrant exchanged
11,015,300 shares of its Common Stock for all outstanding stock of GoodNoise
Delaware and assumed outstanding GN Delaware options for the purchase of an
additional 2,032,550 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. The 11,015,300
shares issued to the GN Delaware shareholders represented approximately 74.9% of
the total number of shares outstanding following the Merger. The shareholders of
the Registrant prior to the Merger had no affiliation with GN Delaware and
following the Merger ceased to be affiliates of the Registrant.
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.
Common Stock
As of December 14, 1998, there were approximately 15,015,300 shares of Common
Stock outstanding held of record by 56 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.
22
<PAGE>
Preferred Stock
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. 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.
2,000 shares of Preferred Stock have been designated as Series A Preferred
Stock ("Series A Shares"), 500 of which were outstanding as of December 14,
1998. Each Series A Share is initially convertible, at the option of its
holder, into shares of Common Stock of the Company based upon a conversion
price equal to the lower of 85% of the average of the four lowest closing
prices of the Company's Common Stock during the twenty trading days before the
conversion date or $7.91. The following is a summary of the rights,
preferences and privileges of the Series A Shares:
Dividends. The Series A Shares are not entitled to any preference with
respect to dividend payments.
Voting Rights. The holders of the Series A Shares have no voting rights
except as required by law.
Liquidation Preference. Upon any liquidation, dissolution or winding up of
the affairs of the Company, the holder of each Series A Share shall be entitled
to be paid $1,000 per share (the amount initially paid for such shares) plus an
amount calculated at the rate of six percent per annum of such price per share.
If the assets of the Company upon such event are insufficient to make such
payment in full, then the holders of Series A Shares shall be entitled to pro
rata distribution of all the assets of the Company. After payment in full of the
liquidation preference to the holders of Series A Shares, such holders are
entitled to no further distributions.
Conversion. The Series A Shares are convertible into shares of Common Stock
at the election of the holder of such Series A Shares at a price (the
"Conversion Rate") equal to the lower of (i) $7.91, (ii) 110% the closing price
on the day 180 days following October 28, 1998 or (iii) the market price when a
holder of Series A Shares delivers notice of his election to convert such
shares. "Market price" is generally determined by the average of the four lowest
closing prices for the 20 trading days prior to the applicable date.
Any Series A Shares outstanding three years after the date such shares were
initially issued automatically convert into shares of the Company's Common Stock
at the then applicable Conversion Rate.
Adjustments to Conversion Rate. The Conversion Rate is subject to
proportional adjustment upon any stock split, stock dividend or other similar
change to the capital stock of the Company and certain other adjustments upon
future issuances of Common Stock or rights to acquire Common Stock at a price
less than the then applicable Conversion Rate.
Redemption. Under certain circumstances the Company has the right to redeem
the Series A Shares. Under certain other circumstances the Investor has the
right to require the Company to redeem the Series A Shares.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Interwest Transfer
Co. Inc.
23
<PAGE>
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 April 27 1998 initially under the symbol ALVT and since May 12, 1998 under
the symbol GDNO. The following table sets forth the highest and lowest closing
prices for the periods indicated.
<TABLE>
<CAPTION>
1998 High Low
- -------------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Second calendar quarter (prior to May 12, 1998) 1.00 .06
Second calendar quarter (after to May 12, 1998) 7.25 5.00
Third calendar quarter 8.19 6.00
Fourth calendar quarter (through December 14, 1998) 7.88 6.50
</TABLE>
Such amounts reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
On December 14, 1998, there were approximately 15,015,300 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. In addition, there
are 500 shares of Series A Preferred Stock outstanding, convertible into shares
of Common Stock at the election of the holder of such Series A Shares at a price
(the "Conversion Rate") equal to the lower of (i) $7.91, (ii) 110% of the
closing price on the day 180 days following October 28, 1998 or (iii) the market
price when a holder of Series A Shares delivers notice of election to convert
such shares. "Market price" is generally determined by the average of the four
lowest closing prices for the 20 trading days prior to the applicable date. Any
Series A Shares outstanding three years after October 28, 1998 (the date such
shares were initially issued) automatically convert into shares of the Company's
Common Stock at the then applicable Conversion Rate.
Dividend Policy
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
24
<PAGE>
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
From inception until the Merger, GN Delaware issued approximately 9,300,000
shares of Common Stock. Approximately 8,200,000 of such shares were issued in
reliance on Rule 701 as shares issued to employees, consultants and advisors. Of
such shares, 1,000,000 were issued for nominal cash investments ($0.01 to $0.03
per share and $10,000 in aggregate) and 7,210,000 shares were issued to the
Company's founders. The balance of such shares were issued in reliance on
Section 4(2) of the Securities Act Of such shares 150,000 were issued for an
aggregate purchase price of $60,000. All such purchasers were experienced
entertainment businesspersons, professionals, sophisticated investors or family
members related to the founders of the Company. All investors had access to
information regarding GN Delaware that was necessary to make an informed
investment decision. In connection with the Merger, each outstanding GN Delaware
share was converted into 1.18 shares of GoodNoise Common Stock.
Through June 1998, GN Delaware issued convertible promissory notes to two
directors, one member of its advisory board and two other individuals with an
aggregate principal amount of $170,000. Such notes were converted into an
aggregate of 501,500 shares of GN Delaware Common Stock in May 1998. The
issuance of such notes and the shares issued on conversion thereof were exempt
pursuant to Section 4(2) of the Securities Act. Each of such investors were
sophisticated investors who had access to al relevant information regarding GN
Delaware necessary to make an informed investment decision.
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 at the time of issuance. The remaining warrants were
exercisable through August 1998. Such shares and warrants were issued to
accredited investors only in contemplation of the Merger pursuant to Rule 504 of
Regulation D.
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 was treated as a recapitalization of the Company with
the Company as the acquirer (reverse acquisition). Atlantis Ventures 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 acquisition was a transaction by an issuer
not involving any public offering. The investment decision by Atlantis Ventures,
the de facto acquired company, was made by accredited investors who owned 98% of
the outstanding shares of Atlantis Ventures and who were provided with access to
information regarding the Company necessary to make an informed investment
decision.
From inception until the Merger, GN Delaware granted options to purchase
approximately 2,032,550 shares of Common Stock. The option grants were all to
employees and consultants to the Company in transactions exempt pursuant to Rule
701.
On August 10, 1998, investors exercised warrants to purchase 300,000 shares
of the Company's Common Stock for aggregate proceeds of $300,000. The warrants
had been issued as part of the May 1998 private placement.
On October 28, 1998, the Company raised proceeds of approximately $0.5
million through the sale of 500 shares of Series A Preferred Stock and Warrants
to purchase 100,000 shares of the Company's Common Stock to one accredited
investor. The exercise price of the Warrants is equal to the lower of $ 7.10 or
the closing price on April 28, 1999. See "Description of Capital Stock--
Warrants." Such issuance was exempt pursuant to Regulation D.
From inception the closing of the Merger until December 14, 1998, the Company
granted options to purchase 405,000 shares of Common Stock. The option grants
were all to employees and consultants to the Company in transactions exempt
pursuant to Rule 701 or Section 4(2).
25
<PAGE>
There were no underwriters employed in connection with any of the above
transactions.
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 requir 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.
26
<PAGE>
PART F/S
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants.................................. 28
Balance Sheet...................................................... 29
Statement of Operations............................................ 30
Statement of Stockholders' Equity.................................. 31
Statement of Cash Flows............................................ 32
Notes to Financial Statements...................................... 33
27
<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 stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of GoodNoise Corporation (a
development stage enterprise) at June 30, 1998, and the results of its
operations and its cash flows for the period from January 8, 1998 (Inception) to
June 30, 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 plans are 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
October 28, 1998
28
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
JUNE 30, 1998
- --------------------------------------------------------------------------------
ASSETS:
Current Assets:
Cash $ 509,751
Prepaid expenses and other current assets 21,362
-------------
Total current assets 531,113
Property and equipment, net 34,227
Other assets 16,520
-------------
Total assets $ 581,860
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 118,218
Accrued compensation 16,982
-------------
Total current liabilities 135,200
-------------
Commitments (Note 5)
Stockholders' Equity:
Preferred Stock, $0.01 par value; 500,000 shares
authorized; no shares issued
and outstanding -
Common Stock, $0.01 par value; 200,000,000
shares authorized; 14,715,300 shares
issued and outstanding 147,153
Additional paid-in capital 1,485,611
Notes receivable from employees (6,000)
Deficit accumulated during the development stage (1,180,104)
-------------
Total stockholders' equity 446,660
-------------
Total liabilities and stockholders' equity $ 581,860
=============
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 8, 1998 (INCEPTION) TO JUNE 30, 1998
- --------------------------------------------------------------------------------
Revenues $ -
---------------
Operating expenses:
Product development 961,349
General and administrative 218,755
---------------
1,180,104
---------------
Net loss $ (1,180,104)
===============
Net loss per share - basic and diluted $ (0.12)
===============
Weighted average common shares
outstanding - basic and diluted 10,234,055
===============
The accompanying note are an integral part of these financial statements.
30
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 8, 1998 (INCEPTION) TO JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL NOTES DURING THE TOTAL
COMMON STOCK PAID-IN RECEIVABLE DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL FROM EMPLOYEES STAGE EQUITY
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock at
inception of the Company 8,378,000 $ 83,780 $ (83,780) $ - $ - $ -
Issuance of common stock on March 30, 1998 1,191,800 11,918 (1,818) (10,100) - -
Issuance of common stock in exchange for
services on March 30, 1998 672,600 6,726 (1,026) - - 5,700
Issuance of common stock in exchange
for services on April 12, 1998 271,400 2,714 4,186 - - 6,900
Conversion of notes payable into common stock
on May 1, 1998 501,500 5,015 164,985 - - 170,000
Payment on note receivable - - - 4,100 - 4,100
Issuance of shares in connection with merger
(Note 1) 3,700,000 37,000 651,350 - - 688,350
Issuance of options to advisors - - 751,714 - - 751,714
Net loss for the period from January 8, 1998
(inception) through June 30, 1998 - - - - (1,180,104) (1,180,104)
---------- ---------- ---------- ---------- ----------- -----------
Balance at June 30, 1998 14,715,300 $ 147,153 $1,485,611 $ (6,000) $(1,180,104) $ 446,660
========== ========== ========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 8, 1998 (INCEPTION) TO JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,180,104)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 3,157
Common stock issued for services 12,600
Options issued to advisors 751,714
Changes in assets and liabilities, net of effects of merger:
Prepaid expenses and other current assets (21,362)
Accounts payable 116,568
Accrued compensation 16,982
Other assets (16,520)
-------------
Net cash used in operating activities (316,965)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (37,384)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repayment of notes receivable from employees 4,100
Issuance of common stock in connection with merger (Note 1) 690,000
Proceeds from issuance of notes payable 170,000
-------------
Net cash provided by financing activities 864,100
-------------
Cash at end of period $ 509,751
=============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Non cash transactions:
Conversion of notes payable into common stock $ 170,000
Issuance of common stock for notes receivable $ 10,100
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
- --------------------------------------------------------------------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY, ITS RECAPITALIZATION AND LIQUIDITY
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.
On May 11, 1998, Atlantis Ventures Corporation ("Atlantis"), a Florida
corporation, acquired 9,335,000 shares of Common Stock of the Company
representing its then outstanding common stock in exchange for 11,015,300
shares of Atlantis. Prior to the merger, Atlantis had 3,700,000 shares
issued and outstanding. For accounting purposes, this transaction has been
presented as a recapitalization of the Company. Atlantis is a publicly
traded company that was organized in August 1989 and had no revenues or
operations prior to the merger with the Company. As of May 11, 1998,
Atlantis had cash of $690,000, liabilities of $1,650 and an accumulated
deficit of $1,650. Following the recapitalization, Atlantis changed its name
to GoodNoise Corporation. The accompanying financial statements reflect all
share amounts after giving effect to the recapitalization.
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 is in the process of pursuing additional equity
financing although there can be no assurance that they will be successful in
their efforts. The financial statements do not include any adjustment that
might result from the outcome of this uncertainty.
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
and accounts 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 estimated useful lives of the assets,
generally two to three years, or the lease term of the respective assets.
33
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
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.
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." The Company accounts for stock
issued to non employees in accordance with provisions of SFAS 123.
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 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 June 30, 1998, 508,056 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.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
comprehensive income and its components in financial statements.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from nonowner sources. There are no differences between the
net loss for the period from January 8, 1998 (inception) to June 30, 1998
and comprehensive income (loss) for the same period.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company
does not expect that the adoption of SOP No. 98-1 will have a material
impact on its financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It also
provides guidance for accounting changes in the fair value of a derivative
(i.e., gains and losses). SFAS 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not expect that the adoption
of SFAS 133 will have a material effect on its financial statements.
34
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT
JUNE 30,
1998
Software $ 5,215
Computer equipment 27,169
Furniture and fixtures 5,000
--------------
37,384
Less: Accumulated depreciation (3,157)
--------------
$ 34,227
==============
3. BORROWINGS
During the period ended June 30, 1998, the Company entered into agreements
to borrow $170,000, through the issuance of promissory notes which bore
interest at 10.0% per annum, of which $110,000 were issued to two of the
Company's directors and one member of its advisory board. All outstanding
principal and interest related to these notes was to be 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 and, on May 1, 1998,
these notes were converted into 501,500 shares of Common Stock.
4. RELATED PARTY TRANSACTIONS
At June 30, 1998, the Company had notes receivable related to stock
purchases by certain employees of the Company totaling $6,000. The notes are
non-interest bearing and are payable on demand.
See Note 3 for additional related party transactions.
5. COMMITMENTS
The Company leases office space under a noncancelable operating lease that
expires in March 2001. Rent expense was $12,934 for the period from January
8, 1998 (inception) to June 30, 1998.
Future minimum lease payments under this noncancelable operating lease are
as follows:
YEAR ENDING
JUNE 30,
1999 $ 46,425
2000 51,892
2001 32,590
-----------
$ 130,907
===========
35
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY
RESTRICTED STOCK
A total of 8,378,000 shares of Common Stock were issued to founders of which
1,062,000 shares were issued under a Restricted Stock Purchase Agreement
(the "Agreement") to one of the founders. The Agreement provides the Company
with the right to repurchase 590,000 of these shares at $0.01, subject to
ratable vesting over three years. As of June 30, 1998, a total of 508,056
shares were subject to repurchase by the Company.
STOCK OPTION PLAN
On March 30, 1998, the Company adopted the 1998 Stock Option Plan ("1998
Plan") that provides for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock
and for stock-based awards to officers, directors and key employees of the
Company and to non-employee consultants and independent contractors. Options
granted to employees under the 1998 Plan generally vest ratably over three
years.
Option activity under the 1998 plan for the period January 8, 1998
(inception) to June 30, 1998 was as follows:
OUTSTANDING OPTIONS
-------------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE EXERCISE
FOR GRANT SHARES PRICE
Authorized 2,360,000 - $ -
Granted (2,437,550) 2,437,550 0.85
Authorized 640,000 - -
----------- ----------- -----------
As of June 30, 1998 562,450 2,437,550 0.85
=========== =========== ===========
The following table summarizes information with respect to stock options
outstanding at June 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE REMAINING NUMBER AVERAGE NUMBER AVERAGE
EXERCISE CONTRACTUAL OUTSTANDING EXERCISE EXERCISABLE EXERCISE
PRICE LIFE (YEARS) JUNE 30, 1998 PRICE JUNE 30, 1998 PRICE
$0.01-0.03 4.83 2,032,550 $ 0.03 416,606 $ 0.02
5.00 4.92 405,000 5.00 380,694 5.00
---------- ----------
2,437,550 0.85 797,300 2.40
========== ==========
36
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's Stock Option Plan been determined
based on the fair value at the grant date for awards in 1998 consistent with
the provisions of SFAS No. 123, the Company's net loss and net loss per
share for the period from January 8, 1998 (inception) through June 30, 1998
would have been as follows:
PERIOD
ENDED
JUNE 30,
1998
Net loss - as reported $(1,180,104)
Net loss - pro forma (1,458,199)
Net loss per share basic and diluted - as reported (0.12)
Net loss per share basic and diluted - pro forma (0.14)
The above pro forma disclosures are not necessarily representative of the
effects on reported net income for future years.
The aggregate fair value and weighted average fair value per share of
options granted to employees and advisors in fiscal 1998 were $1,121,000 and
$0.46 per share, respectively. Of this amount, $751,714 was recorded as
product development expense representing the fair value of 280,000 options
issued to various advisors of the Company which vested upon issuance. The
fair value of each option grant is estimated on the date of grant using the
Black Scholes Option Pricing Model with the following assumptions:
Expected volatility 55%
Risk-free interest 5.73%
Expected life 5 years
Expected dividend yield 0.00%
WARRANTS
As a result of the merger described in Note 1, the Company has 1,500,000
warrants outstanding to purchase an aggregate of 300,000 shares of common
stock as five warrants entitle the holder to purchase one common share for
$1.00. The warrants remained outstanding at June 30, 1998 and were exercised
in August 1998. See Note 8.
7. INCOME TAXES
There is no provision for income taxes for the period from January 8, 1998
(inception) through June 30, 1998 as the Company incurred a net loss, the
benefit of which was not recognized due to the uncertainty of its
realization. The Company's deferred tax assets at June 30, 1998 principally
relate to its net operating loss and approximated $170,000. Due to the
uncertainty surrounding recoverability, a full valuation allowance has been
established against this amount.
37
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating loss 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.
8. SUBSEQUENT EVENTS
On July 30, 1998, the Company commenced selling musical recordings over the
Internet.
On August 10, 1998, the 1,500,000 warrants described in Note 6 were
exercised to purchase 300,000 shares of common stock for cash proceeds of
$300,000.
On October 8, 1998, the Company entered into agreements to acquire online
music companies Nordic Entertainment Worldwide, a privately held provider of
downloadable music on the Internet and Creative Fulfillment Inc., a
privately held entertainment and Internet marketing company, for stock and
cash. Under the terms of the transactions, which the Company intends to
account for under the purchase method of accounting, the Company will issue
up to 2,100,000 shares of common stock subject to certain closing
conditions. Among other conditions, the closing of these transactions is
dependant upon satisfactory due diligence and the Company obtaining
$3,000,000 of additional financing.
On October 28, 1998, the Company issued 500 shares of Series A Preferred
Stock ("Series A") and warrants to purchase 100,000 shares of the Company's
common stock for gross proceeds of $500,000 to one accredited investor. The
agreements, subject to various conditions, provide for the issuance of an
additional 500 shares of Series A and warrants to purchase 100,000 shares of
common stock under the same terms as the initial issuance except that the
warrant price will be based upon the current market price of the common
stock.
The Series A Shares are not entitled to any preference with respect to
dividend payments and have no voting rights except as required by law. Upon
any liquidation, dissolution or winding up of the affairs of the Company,
the holder of each Series A Share shall be entitled to be paid $1,000 per
share (the amount initially paid for such shares) plus an amount calculated
at the rate of six percent per annum of such price per share. If the assets
of the Company upon such event are insufficient to make such payment in
full, then the holders of Series A Shares shall be entitled to pro rata
distribution of all assets of the Company. After payment in full of the
liquidation preference to the holders of Series A Shares, such holders are
entitled to no further distributions.
38
<PAGE>
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
- --------------------------------------------------------------------------------
The Series A Shares are convertible into shares of common stock at the
election of the holder at a price (the "Conversion Rate") equal to the lower
of (i) $7.91, (ii) 110% the closing price on the day 180 days following
October 28, 1998 or (iii) the market price when a holder of Series A Shares
delivers notice of his election to convert such shares. "Market price" is
generally determined by the average of the four lowest closing prices for
the 20 trading days prior to the applicable date. Any Series A Shares
outstanding three years after the date such shares were initially issued
automatically convert into shares of the Company's common stock at the then
applicable Conversion Rate. The Conversion Rate is initially based on a
conversion price equal to the lower of 85% of the average of the four lowest
closing prices of the Company's common stock during the twenty trading days
before the conversion date or $7.91. The Conversion Rate is subject to
proportional adjustment upon any stock split, stock dividend or other
similar change to the capital stock of the Company and certain other
adjustments upon future issuances of common stock or rights to acquire
common stock at a price less than the then applicable Conversion Rate. Under
certain circumstances, the Company has the right to redeem the Series A
Shares. Under certain other circumstances, the holder has the right to
require the Company to redeem the Series A Shares. As a result, the Series A
Shares will be reflected as redeemable stock and the Company will record a
charge for the "in the money" conversion feature of such shares.
The Company is obligated to promptly file a registration statement (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") to cover the resale of the Company's common stock issuable upon the
conversion of the Series A Shares and exercise of the Warrants as well as
subsequently issuable Series A Shares and Warrants. The Company is obligated
to use its reasonable best efforts to have the Registration Statement
declared effective by the SEC and remain effective until the Company's
common stock subject to the registration statement may otherwise be freely
traded without registration. The Company is also obligated to list such
shares on the OTC Bulletin Board and to take certain actions to comply with
applicable state securities laws and regulations.
The warrants have a four year term and an exercise price equal to the lower
of (i) the closing price the day prior to the date of issuance of such
warrant or (ii) the closing price on the day six months following the
original date of issuance of such warrant. The initial exercise price of the
warrants is $7.10 per share. The exercise price of the warrants is subject
to adjustments on stock splits, stock dividends, any merger or acquisition
involving the Company and similar transactions, such as to permit the
investors to receive upon exercise of the warrants that which they would
have received had they exercised the warrants immediately prior to any such
transaction. The exercise price of the warrants is also subject to certain
other adjustments upon future issuances of common stock or rights to acquire
common stock at a price less than the then applicable exercise price.
39
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<S> <C>
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
2.2 Agreement and Plan of Reorganization by and among GoodNoise
Corporation, Creative Fulfillment, Inc., GN Acquisition Corp and
certain other parties dated as of October 8, 1998
2.3 Agreement and Plan of Reorganization by and among GoodNoise
Corporation, Nordic Entertainment Worldwide, Inc., GNA Corp and certain
other parties dated as of October 8, 1998
3.1* Articles of Incorporation
3.2* Bylaws
3.3** Articles of Amendment for Series A Preferred Stock
10.1* Form of Indemnity Agreement
10.2 Stock Purchase Agreement dated as of March 30, 1998 with Gary Culpepper
10.3 1998 Stock Option Plan 10.4** Securities Purchase Agreement dated
October 28, 1998 10.5** Registration Rights Agreement dated October 28,
1998 10.6** Form of Warrant
21* Subsidiaries
* Previously filed as exhibit to the Registrant's Form 10-SB
** Previously filed as exhibit to the Registrant's Current Report on Form
8-K dated October 28, 1998.
</TABLE>
40
<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
41
<PAGE>
EXHIBIT 2.2
AGREEMENT AND PLAN OF REORGANIZATION
among GOODNOISE CORPORATION,
GNA CORPORATION,
NORDIC ENTERTAINMENT WORLDWIDE, INC. and
certain SHAREHOLDERS of NORDIC ENTERTAINMENT WORLDWIDE, INC.
October 8, 1998
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered into
this 8th day of October 1998, by and among GoodNoise Corporation, a Florida
corporation ("GoodNoise"), GNA Corporation, a Delaware corporation and wholly-
owned subsidiary of GoodNoise ("Sub"), Nordic Entertainment Worldwide, Inc., a
California corporation ("Nordic") and certain shareholders of Nordic (the
"Shareholders").
RECITALS
A. The parties intend that, subject to the terms and conditions
hereinafter set forth, Sub shall be merged with and into Nordic, with Nordic the
surviving corporation (the "Merger"), pursuant to Agreement of Merger
substantially in the form attached hereto as Exhibit A (the "Agreement of
---------
Merger") and the applicable provisions of the laws of the State of California
and Delaware. Upon the Merger, the Shareholders shall be entitled to receive
shares of GoodNoise common stock, par value $0.01 per share, at the exchange
ratio set forth herein.
B. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended.
AGREEMENT
NOW, THEREFORE, in reliance on the foregoing recitals and in and for the
consideration and mutual covenants set forth herein, the parties agree as
follows:
1. Definitions.
1.1 "Affiliate" shall have the meaning set forth in the rules and
regulations promulgated by the Commission pursuant to the Securities Act.
1.2 "Average Closing Stock Price" shall mean the closing or last trade
price for GoodNoise Common Stock for the seven consecutive trading days
immediately preceding, but not including, the date immediately prior to the date
of the Closing.
1.3 "California Law" shall mean the California General Corporation
Law, as amended.
1.4 "Closing" and "Closing Date" shall have the meanings set forth in
Section 2.4.
1.5 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.6 "Commission" shall mean the Securities and Exchange Commission.
1
<PAGE>
1.7 "Confidential Information" shall mean that information of a party
("Disclosing Party") which is disclosed to another party ("Receiving Party")
pursuant to this Agreement. Confidential Information shall include, but not be
limited to, trade secrets, know-how, inventions, techniques, processes,
algorithms, software programs, schematics, designs, contracts, customer lists,
financial information, sales and marketing plans and business information.
Confidential Information shall not include any information which a recipient can
document: (a) was in the public domain at or subsequent to the time such
information was communicated to such recipient by the other party through no
fault of such recipient, (b) was rightfully in such recipient's possession free
of any obligation of confidence at or subsequent to the time such information
was communicated to such recipient by the other party, (c) was developed by
employees or agents of such recipient independently of and without reference to
any information communicated to such recipient by the other party, or (d) was
communicated by the other party to an unaffiliated third party free of any
obligation of confidence.
1.8 "Contaminant" shall mean, without limitation, any pollutants,
residues, infectious materials, flammable, dangerous, toxic or hazardous
substances, hazardous materials or waste of any description whatsoever, except
for non-hazardous waste of the kind generated in the normal course of
operations, including any of the foregoing as defined in or regulated under any
Environmental Law, including but not limited to polychlorinated biphenyls,
asbestos or asbestos containing materials, petroleum and petroleum containing
materials.
1.9 "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, liability, claim, demand, settlement, judgment, award,
fine, penalty, tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation) or expense of any nature.
1.10 "Dissenting Shares" shall mean any Nordic Shares held by persons
who have not voted such shares for approval of the Merger and with respect to
which such persons have become entitled to exercise dissenter's rights in
accordance with the California General Corporation Law.
1.11 "Effective Time" shall mean the time the Merger becomes effective
as defined in Section 2.5.
1.12 "Nordic Shares" shall mean the shares of Nordic common stock, no
par value, issued and outstanding at the Effective Time.
1.13 "Entity" shall mean corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
1.14 "Environmental Activity" shall mean, without limitation, any
activity, event or circumstance in respect of a Contaminant, including, without
limitation, its storage, use, holding, collection, purchase, accumulation,
assessment, generation, manufacture, construction, processing, treatment,
recycling, stabilization, disposition, handling or transportation or its
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affirmative or accidental release into the natural environment including
movement through or in the air, soil, subsoil, surface water or groundwater or
any other activity, event or circumstance which is subject to any of the
Environmental Laws including but not limited to noise, vibration, odor or
similar nuisance.
1.15 "Exchange Ratio" shall mean that for each outstanding share of
Nordic common stock, such share will be converted into the right to receive that
number of shares of GoodNoise Common Stock and that amount of cash as is
determined in accordance with Section 2.2 hereof.
1.16 "Environmental Laws" shall mean laws relating to the environment
or any Environmental Activity.
1.17 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.18 "GoodNoise Shares" shall mean the aggregate number of shares of
GoodNoise common stock, par value $0.01 per share, issued in accordance with
Section 2.2.
1.19 "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body, or Entity and any court or
other tribunal).
1.20 "Indemnification Period" shall mean the period commencing on the
Closing Date and ending at the close of business on the first anniversary of the
Closing Date.
1.21 "Legal Proceeding" shall mean any action, suit, litigation,
arbitration proceeding (including any civil, criminal, administrative,
investigative or appellate proceeding), hearing, inquiry, audit, examination or
investigation commenced, brought, conducted or heard by or before, or otherwise
involving any court or other Governmental Body or any arbitrator or arbitration
panel.
1.22 "Material" when capitalized and used in reference to the
business, products or financial situation of Nordic shall be construed, except
as specifically provided, to qualify the matter referred to herein to matters
with a value in excess of $17,500. For example, a "Material adverse effect"
would be an adverse effect resulting in costs or expenses in excess of $17,500.
When the word "material" is not capitalized it shall mean material with respect
to the matter referenced. For example, a reference to a material breach of a
particular agreement would mean a breach that is material with respect to the
particular contract (and not necessarily with respect to the overall business of
Nordic or GoodNoise).
1.23 "Merger" shall mean the merger of Sub with and into Nordic, on
the terms and conditions described herein.
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1.24 "Music Rights" shall mean any music recording masters, musical
arrangements, copyrights, lyrics, song titles, artwork, graphics, song rights or
other forms of music-related intellectual property rights or licenses thereto
whether on an exclusive or nonexclusive basis.
1.25 "Person" shall mean any individual, Entity or Governmental Body.
1.26 "Proprietary Asset" shall mean: (a) any patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, invention, design, blueprint, engineering drawing,
proprietary product, technology, proprietary right or other intellectual
property right or intangible asset; and (b) any right to use or exploit any of
the foregoing including rights granted by third parties under license
agreements.
1.27 "Representatives" shall mean officers, directors, employees,
agents, attorneys, accountants and advisors.
1.28 "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.29 "Shareholder Representative" shall mean Kent Kiefer.
1.30 "Tax" or "Taxes" shall mean all U.S. federal, territorial, state,
municipal, local or other taxes, including without limitation income capital,
sales and use taxes, value added and goods and services taxes, excise taxes,
transfer and stamp taxes, custom duties and franchise taxes, real and personal
property taxes and payroll taxes (including tax withholdings, employer health
taxes, workers' compensation assessments and ERISA plans and unemployment
insurance premiums, contributions and remittances and the U.S. equivalents
thereof), and penalties, interest and surcharges in respect of any of the
foregoing and all words derived from or including the word "Tax," such as
"Taxing" and "Taxation" shall bear a corresponding meaning.
1.31 "Transaction Documents" shall mean all documents or agreements
required to be delivered by any party hereunder including the Agreement of
Merger.
1.32 "Valuation Stock Price" shall mean $7.61 per share.
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2. Plan of Reorganization.
2.1 The Merger. Subject to the terms and conditions of this
Agreement, Sub shall be merged with and into Nordic in accordance with the
applicable provisions of the laws of the States of California and Delaware and
with the terms and conditions of this Agreement so that:
(a) At the Effective Time, Sub shall be merged with and into
Nordic. As a result of the Merger, the separate corporate existence of Sub shall
cease and Nordic shall continue as the surviving corporation (sometimes referred
to herein as the "Surviving Corporation") and shall succeed to and assume all of
the rights and obligations of Sub in accordance with the laws of the States of
California and Delaware.
(b) The Articles of Incorporation and the Bylaws of Nordic in
effect immediately prior to the Effective Time shall be the articles of
incorporation and bylaws, respectively, of the Surviving Corporation after the
Effective Time unless and until further amended as provided by law.
(c) The directors and officers of Sub immediately prior to the
Effective Time shall be the directors and officers of the Surviving Corporation
after the Effective Time. Such directors and officers shall hold their position
until the election and qualification of their respective successors or until
their tenure is otherwise terminated in accordance with the Bylaws of Surviving
Corporation.
2.2 Cancellation of Shares and Delivery of Consideration.
(a) At the Effective Time, each share of Nordic capital stock,
if any, that is owned directly or indirectly by Nordic shall be canceled and no
cash or other consideration shall be delivered in exchange therefor.
(b) At the Effective Time, each Nordic Share (other than shares
owned directly or indirectly by Nordic) shall, by virtue of the Merger, and
without further action on the part of any holder thereof, be converted and
exchanged for the right to receive
(i) that number of GoodNoise Shares as is equal to the
quotient of (i) (A) Four Million Two Hundred and Twenty-Five Thousand Dollars
($4,225,000) divided by (B) the number of Nordic Shares outstanding at the
Effective Time (on a fully diluted basis giving effect to any options, warrants
or other rights to acquire Nordic Shares issued and outstanding at the Effective
Date) divided by (ii) the Valuation Period Stock Price (the "Exchange Ratio");
provided, however, that in the event the Average Closing Stock Price is less
than $5.00, then the Exchange Ratio shall be recalculated to be the quotient of
(i) (A) Four Million Two Hundred and Twenty-Five Thousand Dollars ($4,225,000)
divided by (B) the number of Nordic Shares outstanding at the Effective Time (on
a fully diluted basis giving effect to any options, warrants or other rights to
acquire Nordic Shares issued and outstanding at the Effective Date) divided by
(ii) the Average Closing Stock Price; provided further, that in no
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event shall the number of GoodNoise Shares issuable be less than 528,125 or more
than 845,000; plus
(ii) that number of GoodNoise Shares as is equal to 500,000
divided by (B) the number of Nordic Shares outstanding at the Effective Time (on
a fully diluted basis giving effect to any options, warrants or other rights to
acquire Nordic Shares issued and outstanding at the Effective Date); provided,
however, that the release of such additional shares shall be subject to the
conditions and provisions of Section 2.7 hereof; plus
(iii) an amount of cash (the "Cash Merger Consideration")
per Nordic Share equal to $275,000 divided by the number of Nordic Shares
outstanding at the Effective Time (on a fully diluted basis giving effect to any
options, warrants or other rights to acquire Nordic Shares issued and
outstanding at the Effective Date) (the "Cash Ratio").
(c) At the Effective Time, each share of capital stock of Sub
outstanding immediately prior to the Merger shall, by virtue of the Merger, and
without further action on the part of any holder thereof, continue to be issued
and shall be converted into one share of Nordic common stock outstanding after
the Merger.
(d) The Exchange Ratio and the Cash Ratio shall be adjusted to
reflect the effect of any stock split, reverse split, stock dividend (including
any dividend or distribution of securities convertible into GoodNoise Common
Stock or Nordic common stock), reorganization, recapitalization or other like
change with respect to GoodNoise Common Stock or Nordic common stock occurring
after the date hereof and prior to the Effective Time.
(e) No fraction of a share of GoodNoise Common Stock shall be
issued, but in lieu thereof each holder of Nordic Shares who would otherwise be
entitled to a fraction of a share of GoodNoise Common Stock (after aggregating
all fractional shares of GoodNoise Common Stock to be received by such holder)
shall receive from GoodNoise an amount of cash (rounded to the nearest whole
cent) equal to the product of (i) such fraction, multiplied by (ii) the average
last sale price of a share of GoodNoise Common Stock for the five most recent
days that GoodNoise Common Stock has traded ending on the trading day
immediately prior to the Effective Time.
(f) Any Dissenting Shares shall not be converted into GoodNoise
Common Stock but shall instead be converted into the right to Dissenting Shares
pursuant to the California Law. Nordic agrees that, except with the prior
written consent of GoodNoise, or as required under the California Law, it will
not voluntarily make any payment with respect to, or settle or offer to settle,
any such purchase demand. Each holder of Dissenting Shares (a "Dissenting
Shareholder") who, pursuant to the provisions of the California Law, becomes
entitled to payment for Nordic Shares shall receive payment therefor (but only
after the value therefor shall have been agreed upon or finally determined
pursuant to such provisions). If, after the Effective Time, any Dissenting
Shares shall lose their status as Dissenting Shares, GoodNoise shall issue and
deliver, upon surrender by such shareholder of certificate or certificates
representing Nordic Shares, the number of shares of GoodNoise Common Stock to
which such shareholder would otherwise be entitled under this Section 2.2 less
the number of
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shares of GoodNoise Common Stock allocable to such shareholder that have been
deposited in the Indemnity Escrow.
2.3 Exchange Procedures.
(a) Subject to paragraph (e) hereof, following the Closing Date,
GoodNoise shall mail to each holder of record of certificate(s) or other
documents which represent Nordic Shares (the "Certificates"), to be exchanged
pursuant to Section 2.2 hereof (i) a letter of transmittal (which shall specify
that, with respect to the Certificates, delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to GoodNoise and shall be in such form and have such other
provisions as GoodNoise shall reasonably require) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for GoodNoise Shares
and the Cash Merger Consideration. Upon surrender of a Certificate for
cancellation to GoodNoise, together with such letter of transmittal, duly
executed, the holder of such Certificates shall be entitled to receive in
exchange therefor his pro rata allocation of the GoodNoise Shares and the Cash
Merger Consideration as to which such holder is entitled pursuant to Section 2.2
hereof. Certificates so surrendered pursuant to this Section 2.3 shall forthwith
be canceled (if not otherwise canceled or terminated in accordance with their
terms). In the event of a transfer of ownership of Nordic Shares which is not
registered on the transfer records of Nordic, the appropriate number of
GoodNoise Shares and the Cash Merger Consideration may be delivered to a
transferee if the Certificate representing such transferred security is
presented to GoodNoise and accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock transfer taxes
have been paid. Until surrendered as contemplated by this Section 2.3, each
Certificate shall be deemed at any time after the Effective Time to represent
solely the right to receive upon such surrender that number of GoodNoise Shares
and the Cash Merger Consideration (without interest and subject to applicable
withholding, escheat and other laws) to which such holder is entitled.
(b) Notwithstanding anything to the contrary in this Section
2.3, none of GoodNoise, the Surviving Corporation or any party hereto shall be
liable to a holder of Nordic Shares for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar law .
(c) The GoodNoise Shares and the Cash Merger Consideration paid
in accordance with the terms hereof shall be deemed to be in full satisfaction
of all rights pertaining to such Nordic Shares, and there shall be no further
registration of transfers on the records of the Surviving Corporation of Nordic
Shares. If, after the Effective Time, Certificates are presented to the
surviving Corporation for any reason, they shall be canceled and exchanged as
provided in Section 2.2.
(d) In the event any Certificates evidencing Nordic Shares shall
have been lost, stolen or destroyed, GoodNoise 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 holders pro rata allocation of GoodNoise Shares
and the Cash Merger Consideration as may be required pursuant to Section 2.2;
provided, however, that GoodNoise may, in its discretion and
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as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
GoodNoise with respect to the Certificates alleged to have been lost, stolen or
destroyed.
(e) Notwithstanding anything to the contrary set forth herein,
the GoodNoise Shares shall be deposited into escrow pursuant to the terms of the
Indemnity Escrow Agreement and remain in escrow until such time as the
conditions subsequent described in Section 12 are satisfied. In the event
GoodNoise satisfies those conditions subsequent, eighty percent (80%) of the
GoodNoise Shares shall be removed from escrow and distributed to the
Shareholders in accordance with the terms set forth in Section 2.2. Should
GoodNoise fail to satisfy any or all of the conditions subsequent and the
Shareholders elect to cancel the transactions contemplated herein, all of the
GoodNoise Shares shall be removed from escrow and delivered to GoodNoise in
accordance with the terms of the Indemnity Escrow Agreement.
2.4 The Closing. Subject to termination of this Agreement as
provided in Section 13 below, the closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Gray Cary Ware
& Freidenrich LLP at 10:00 a.m. local time on the date three (3) days following
the satisfaction of all conditions to closing set forth herein, or such other
place, time and date as GoodNoise and Nordic may mutually select (the "Closing
Date").
2.5 Effective Time. Simultaneously with the Closing, the Agreement
of Merger shall be filed in the offices of the Secretaries of State of the
States of California and Delaware. The Merger shall become effective immediately
upon the filing of the Agreement of Merger with such office (the "Effective
Time").
2.6 Cash Merger Consideration. The Cash Merger Consideration shall
be paid within five days of the earlier of (i) the closing by GoodNoise of
additional financing in an amount of $5,000,000 or more or (ii) six months from
the date of this Agreement; provided however, that if the $5,000,000 in
additional financing is received prior to the Closing, the Cash Merger
Consideration shall be paid within five days of the Effective Time. If GoodNoise
has not made such payment when due, the Nordic Shareholders shall have a right
to cancel the transactions contemplated herein in their entirety pursuant to
Section 12 hereof, or to convert the amount payable in cash to GoodNoise Shares
based upon eighty percent (80%) of the average last trade price for GoodNoise
Shares for the seven days prior to the Effective Date. Any election to cancel
the transactions must be made as to all Nordic Shareholders based upon the
approval of the holders of a majority of the Nordic Shares. The obligation to
pay the Cash Merger Consideration shall be evidenced by a promissory note (the
"Note") and security agreement (the "Security Agreement") in the form attached
as Exhibit B hereto.
2.7 Conditional Shares. Notwithstanding anything to the contrary set
forth herein, the 500,000 shares of GoodNoise common stock issuable pursuant to
Section 2.2(b)(ii) (the "Conditional Shares") shall be deposited into escrow
pursuant to the terms of the Indemnity
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Escrow Agreement. Upon Nordic achieving the following milestones by January 31,
1999, the number of Conditional Shares specified below shall be released.
(a) 100,000 shares shall be released if Nordic achieves each of
the following milestones:
(i) written agreements signed for the download rights for
a total of 30,000 recordings (including those completed by Nordic as of the
Closing Date), one-half of which will be on an exclusive basis;
(ii) written agreements signed with a total of 25 radio
stations (including those currently completed by Nordic as of the Closing Date)
for inclusion in the Nordic radio station affiliates program;
(iii) written agreements signed with a total of 50 affiliate
web sites (including those currently completed by Nordic as of the Closing Date)
for inclusion in the Nordic web site affiliates program.
(b) an additional 100,000 shares shall be released if Nordic
achieves each of the following milestones:
(i) written agreements signed for the download rights for
a cumulative total of 50,000 recordings (including those completed by Nordic as
of the Closing Date), one-half of which will be on an exclusive basis;
(ii) written agreements signed with a cumulative total of
60 radio stations (including those currently completed by Nordic as of the
Closing Date) for inclusion in the Nordic radio station affiliates program;
(iii) written agreements signed with a cumulative total of
75 affiliate web sites (including those currently completed by Nordic as of the
Closing Date) for inclusion in the Nordic web site affiliates program.
(c) an additional 300,000 shares shall be released if Nordic
achieves each of the following milestones:
(i) written agreements signed for the download rights for
a cumulative total of 100,000 recordings (including those completed by Nordic as
of the Closing Date), one-half of which will be on an exclusive basis;
(ii) written agreements signed with a cumulative total of
75 radio stations (including those currently completed by Nordic as of the
Closing Date) for inclusion in the Nordic radio station affiliates program;
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(iii) written agreements signed with a cumulative total of
100 affiliate web sites (including those currently completed by Nordic as of the
Closing Date) for inclusion in the Nordic web site affiliates program.
In the event that any of the above described milestones have not been met by
January 31, 1999, any Conditional Shares which remain in escrow shall be
returned to GoodNoise and cancelled; provided however, that for every day that
GoodNoise fails to make available to Nordic the $350,000.00 of funding as
committed pursuant to the employment letter to be entered into by and between
GoodNoise and Kent Kiefer, for every day that any portion of such sum is not
available to Nordic for closing such agreements, beginning October 14, 1998,
then an additional day will be added to the January 31, 1999 target date for
each of the above described milestones.
3. Representations and Warranties of Nordic. Except as otherwise set forth
in the "Nordic Disclosure Schedule," referencing the appropriate section and
paragraph numbers, to be provided to GoodNoise prior to the Closing and which
shall be subject to GoodNoise approval, which approval shall not be unreasonably
withheld (and which shall apply regardless of whether the particular subsection
of this Section 3 refers to such schedule), Nordic and the Shareholders
represent and warrant to GoodNoise as set forth below. No fact or circumstance
disclosed to GoodNoise by Nordic shall constitute an exception to these
representations and warranties unless such fact or circumstance is set forth in
the Nordic Disclosure Schedule.
3.1 Organization. Nordic is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has corporate power and authority to carry on its business as
it is now being conducted and as it is proposed to be conducted. Nordic is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or properties makes such
qualification or licensing necessary. The Nordic Disclosure Schedule contains a
true and complete listing of the locations of all sales offices, manufacturing
facilities, and any other offices or facilities of Nordic and a true and
complete list of all jurisdictions in which Nordic maintains any employees. The
Nordic Disclosure Schedule contains a true and complete list of all
jurisdictions in which Nordic is duly qualified to transact business as a
foreign corporation. True and complete copies of Nordic's charter documents as
in effect on the date hereof and as to be in effect immediately prior to the
Closing, have been provided to GoodNoise or its Representatives.
3.2 Capitalization.
(a) The authorized and issued capital stock of Nordic as of the
date of this Agreement and a list of all holders of record are as set forth and
identified in Section 3.2(a) of the Nordic Disclosure Schedule.
(b) Except as set forth in Section 3.2(b) of the Nordic
Disclosure Schedule, there are no outstanding options, warrants, rights,
commitments, conversion rights, rights of exchange, plans or other agreements of
any character providing for the purchase, issuance or sale of any shares of the
capital stock of Nordic other than as contemplated by this
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Agreement. There are no voting trust, buy-sell or other similar agreements in
place among the Nordic Shareholders and Nordic.
(c) All of the outstanding securities of Nordic have been duly
authorized and are validly issued, fully paid and nonassessable. All securities
of Nordic were issued in compliance with applicable securities laws. None of
Nordic's outstanding securities were issued in consideration in whole or in part
for any contribution, transfer, assignment or any proprietary rights.
3.3 Power, Authority and Validity. Nordic has the corporate power and
authority to enter into this Agreement and the other Transaction Documents to
which it is a party and to carry out its obligations hereunder and thereunder.
The execution and delivery of this Agreement and the Transaction Documents to
which it is a party and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by the board of directors of Nordic, and
no other corporate proceedings are necessary to authorize this Agreement or the
other Transaction Documents. Nordic is not subject to or obligated under any
charter, bylaw or contract provision or any license, franchise or permit, or
subject to any order or decree, which would be breached or violated by or in
conflict with its executing and carrying out this Agreement and the transactions
contemplated hereunder and under the Transaction Documents. This Agreement is,
and each of the other Transaction Documents to which Nordic will be a party,
when executed and delivered by Nordic shall be, the valid and binding obligation
of Nordic enforceable in accordance with their respective terms, subject to (i)
laws of general application relating to bankruptcy, insolvency, and the relief
of debtors, and (ii) rules of law governing specific performance, injunctive
relief and other equitable remedies.
3.4 Financial Statements.
(a) Schedule 3.4(a) of the Nordic Disclosure Schedule sets forth the
balance sheet and statements of income for Nordic and its predecessors for the
fiscal years ended October 31, 1996 and 1997 and for the ten month period ended
August 30, 1998 (the "Nordic Financial Statements").
(b) The Nordic Financial Statements are complete and in accordance
with the books and records of Nordic and present fairly in all respects the
financial position of Nordic as of their historical dates. Except and to the
extent reflected or reserved against in the Nordic balance sheet as of June 30,
1998 (the "Nordic Balance Sheet"), Nordic does not have, as of the date of such
balance sheet, any liabilities or obligations (absolute or contingent) of a
nature required or customarily reflected in a balance sheet (or the notes
thereto). The aggregate reserves, if any, reflected on the Nordic Financial
Statements are adequate in light of the contingencies with respect to which they
are made.
(c) Nordic does not have any debt, liability, or obligation of any
nature, whether accrued, absolute or contingent that is not reflected or
reserved against in the Nordic Financial Statements. All debts, liabilities, and
obligations incurred after the date of the Nordic Financial Statements, whether
absolute or contingent, were incurred in the ordinary course of business and are
usual and normal in amount both individually and in the aggregate.
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3.5 Tax Matters.
(a) Nordic has fully and timely, properly and accurately filed all
Tax returns and reports required to be filed by it (the "Nordic Returns"),
including all federal, foreign, state and local returns and reports for all
years and periods for which any such returns or reports were due. The Nordic
Returns and all other Tax returns and reports filed by Nordic were prepared in
the manner required by applicable law. Except for any Tax due upon the filing of
the Nordic Returns for current periods, all income, sales, use, occupation,
property or other Taxes or assessments due from Nordic have been paid, and there
are no pending assessments, asserted deficiencies or claims for additional Taxes
that have not been paid. The reserves for Taxes, if any, reflected on the Nordic
Financial Statements are adequate and there are no Tax liens on any property or
assets of Nordic. There have been no audits or examinations of any Tax returns
or reports by any applicable governmental agency. No state of facts exists or
has existed which would constitute grounds for the assessment of any penalty or
of any further Tax liability beyond that shown on the respective Tax reports or
returns. There are no outstanding agreements or waivers extending the statutory
period of limitation applicable to any federal, state or local income Tax return
or report for any period.
(b) All Taxes which Nordic has been required to collect or withhold
have been duly withheld or collected and, to the extent required, have been paid
to the proper taxing authority.
(c) Nordic is not a party to any tax-sharing agreement or similar
arrangement with any other party.
(d) At no time has Nordic been included in the federal consolidated
income Tax return of any affiliated group of corporations.
(e) No payment which Nordic is obliged to pay to any director,
officer, employee or independent contractor pursuant to the terms of an
employment agreement, severance agreement or otherwise will constitute an excess
parachute payment as defined in Section 280G of the Code.
(f) Nordic will not be required to include any adjustment in taxable
income for any Tax period (or portion thereof) ending after the Closing Date
pursuant to Section 481(c) of the Code or any provision of the Tax laws of any
jurisdiction requiring Tax adjustments as a result of a change in method of
accounting implemented by Nordic prior to the Closing Date for any Tax period
(or portion thereof) ending on or before the Closing Date or pursuant to the
provisions of any agreement entered into by Nordic prior to the Closing Date
with any taxing authority with regard to the Tax liability of Nordic for any Tax
period (or portion thereof) ending on or before the Closing Date.
(g) Nordic is not currently under any contractual obligation to pay
to any Governmental Body any Tax obligations of, or with respect to any
transaction relating to, any other person or to indemnify any other person with
respect to any Tax.
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3.6 Absence of Certain Changes or Events. Except as set forth in Section
3.6 of the Nordic Disclosure Schedule, from June 30, 1998, Nordic has not:
(a) suffered any Material adverse change in its financial condition
or in the operations of its business, nor any Material Adverse Change in its
balance sheet, including but not limited to cash distributions or decreases in
the net assets of Nordic;
(b) suffered any physical damage, destruction or loss, whether or not
covered by insurance, in an aggregate amount in excess of Ten Thousand Dollars
($10,000);
(c) granted or agreed to make any increase in the compensation
payable or to become payable by Nordic to its officers or employees, except
those occurring in the ordinary course of business;
(d) declared, set aside or paid any dividend or made any other
distribution on or in respect of the shares of the capital stock of Nordic or
declared any direct or indirect redemption, retirement, purchase or other
acquisition by Nordic of such shares;
(e) issued any shares of capital stock of Nordic or any warrants,
rights, options or entered into any commitment relating to the shares of Nordic;
(f) made any change in the accounting methods or practices it
followed, whether for general financial or Tax purposes, or any change in
depreciation or amortization policies or rates adopted therein;
(g) sold, leased, abandoned or otherwise disposed of any real
property or any machinery, equipment or other operating property other than in
the ordinary course of business;
(h) sold, assigned, transferred, licensed or otherwise disposed of
any patent, trademark, trade name, brand name, copyright (or pending application
for any patent, trademark or copyright), invention, work of authorship, process,
know-how, formula or trade secret or interest thereunder or other intangible
asset except for equipment sales in the ordinary course of their business;
(i) suffered any dispute involving any employee that could have a
Material adverse effect on Nordic;
(j) engaged in any activity or entered into any commitment or
transaction (including without limitation any borrowing or capital expenditure),
in either case, other than in the ordinary course of business;
(k) incurred any liabilities, absolute or contingent except for (i)
liabilities identified as such in the "liabilities" column of the Nordic
Financial Statements; (ii) accounts payable or accrued salaries that have been
incurred by Nordic since June 30, 1998,
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in the ordinary course of business and consistent with Nordic's past practices;
and (iii) liabilities in Section 3.6(k) of the Nordic Disclosure Schedule;
(l) permitted or allowed any of its property or assets to be
subjected to any mortgage, deed of trust, pledge, lien, security interest or
other encumbrance of any kind, other than any purchase money security interests
incurred in the ordinary course of business;
(m) made any capital expenditure or commitment for additions to
property, plant or equipment, in the aggregate, in excess of Five Thousand
Dollars ($5,000);
(n) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets to, or entered into any agreement or arrangement
with any of its Affiliates, officers, directors or shareholders or any Affiliate
or associate of any of the foregoing;
(o) made any amendment to or terminated any agreement which, if not
so amended or terminated, would be required to be disclosed in the Nordic
Disclosure Schedule;
(p) agreed to take any action described in this Section 3.6 or
outside of its ordinary course of business or which would constitute a breach of
any of the representations contained in this Agreement.
3.7 Title and Related Matters. Nordic has good and marketable title to
all the properties, interests in properties and assets, real and personal,
reflected in the Nordic Financial Statements or acquired after the date of the
Nordic Financial Statements (except properties, interests in properties and
assets sold or otherwise disposed of since the date of the Nordic Financial
Statements in the ordinary course of business), free and clear of all mortgages,
liens, pledges, charges or encumbrances of any kind or character, except the
lien of current Taxes not yet due and payable and except for liens which in the
aggregate do not secure more than Ten Thousand Dollars ($10,000) in liabilities.
Except as noted in Section 3.7 of the Nordic Disclosure Schedule, the equipment
of Nordic used in the operation of its business is in good operating condition
and repair, normal wear and tear excepted. All real or personal property leases
to which Nordic is a party are valid, binding, enforceable and effective in
accordance with their respective terms, subject to (i) laws of general
application relating to bankruptcy, insolvency, and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies. There is not under any of such leases any existing default
by Nordic or, any other event of default or event which, with notice or lapse of
time or both, would constitute a default by any other party to such leases.
Section 3.7 of the Nordic Disclosure Schedule contains a description of all real
and personal property leased or owned by Nordic, describing its interest in said
property and with respect to real property a description of each parcel and a
summary description of the buildings, structures and improvements thereon. True
and correct copies of Nordic's leases have been provided to GoodNoise or its
Representatives.
3.8 Music Rights
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(a) Section 3.8(a)(i) of the Nordic Disclosure Schedule sets forth a
true and complete list of all Music Rights owned by Nordic. Section 3.8(a)(ii)
of the Nordic Disclosure Schedule sets forth a true and complete list of all
Music Rights licensed by or to Nordic. Except as provided in Section 3.8(a)(iii)
of the Nordic Disclosure Schedule, Nordic has written contracts (each of which
are listed in the Nordic Disclosure Schedule) for all Music Rights owned,
licensed, used, marketed, and sold by it, and those licensed to it, Nordic has
not received any notice from any party to such a contract challenging the
enforceability of such a contract, and all such contracts are enforceable in
accordance with their terms. Except as provided in Section 3.8(a)(iv) of the
Nordic Disclosure Schedule, the Merger will not constitute or be deemed to
constitute an assignment of any such Music Rights or otherwise require the
consent of any third party. Except as provided in Section 3.8(a)(v) of the
Nordic Disclosure Schedule, all Music Rights owned or licensed by Nordic were
recorded and otherwise prepared in all respects in accordance with the rules and
regulations of any unions, guilds and similar associations having jurisdiction.
Except as provided in Section 3.8(a)(vii) of the Nordic Disclosure Schedule,
each person or entity who has rendered any service or provided any materials in
connection with, or has contributed in any way, to the making of the Music
Rights has the right to grant such rights, render such services or furnish such
materials. Except as disclosed in the Nordic Disclosure Schedule, all fees and
other payments applicable to or resulting from the creation, recording,
manufacture, duplication, and distribution of the Music Rights, including, but
not limited to, payments to performers, producers, engineers and others, have
been fully and completely paid by Nordic.
(b) Except as set forth in Section 3.8 of the Nordic Disclosure
Schedule, there are no amounts owed or that will become owing to any holder of
rights for royalties arising as a result of the Music Rights, nor has the Nordic
paid an advance in respect of such royalties, except to the extent that such
advance has been depleted or to the extent that the balance of any such advance
is set forth in Section 3.8 of the Nordic Disclosure Schedule.
(c) Except as described in Section 3.8(c) of the Nordic Disclosure
Schedule, Nordic does not know of or have any reason to believe that any
customers of the Nordic, or any holder of Music Rights, (i) has any complaint or
objection with respect to the service or any business practices of the Nordic or
the transactions contemplated hereby which could reasonably be expected to have
a Material Adverse Effect, or (ii) will cease to do business, or significantly
reduce the business conducted, with Nordic as a result of the Merger which could
reasonably be expected to have a Material Adverse Effect.
3.9 Proprietary Rights and Warranty Claims.
(a) Section 3.9(a)(i) of the Disclosure Schedule sets forth, with
respect to each Proprietary Asset owned or used by Nordic (each a "Nordic
Proprietary Asset" and collectively, the "Nordic Proprietary Assets") registered
with any Governmental Body or for which an application has been filed with any
Governmental Body, (i) a brief description of such Nordic Proprietary Asset, and
(ii) the names of the jurisdictions covered by the applicable registration or
application. Section 3.9(a)(ii) of the Nordic Disclosure Schedule identifies and
provides a brief description of all other Nordic Proprietary Assets. Section
3.9(a)(iii) of the
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Nordic Disclosure Schedule identifies and provides a brief description of each
Proprietary Asset licensed to Nordic by any Person (except for any Proprietary
Asset that is licensed to Nordic under any third party software license
generally available to the public at a cost of less than One Thousand Dollars
($1,000)), and identifies the license agreement under which such Proprietary
Asset is being licensed to Nordic. Except as set forth in Section 3.9(a)(iv) of
the Nordic Disclosure Schedule, Nordic has good, valid and marketable title to
all Nordic Proprietary Assets identified in Sections 3.9(a)(i) and 3.9(a)(ii) of
the Nordic Disclosure Schedule, free and clear of all liens and other
encumbrances and of all third party licensed technology, and has a valid right
to use all Proprietary Assets identified in Section 3.9(a)(iii) of the Nordic
Disclosure Schedule. Except as set forth in Section 3.9(a)(v) of the Nordic
Disclosure Schedule, Nordic is not obligated to make any payment to any Person
for the use of any Proprietary Asset. Except as set forth in Section 3.9(a)(vi)
of the Nordic Disclosure Schedule, Nordic has not developed jointly with any
other Person any Proprietary Asset with respect to which such other Person has
any rights.
(b) Except as set forth in Section 3.9(b) of the Nordic Disclosure
Schedule, Nordic has taken reasonable and customary measures and precautions
necessary to protect and maintain the confidentiality and secrecy of all Nordic
Proprietary Assets (except Nordic Proprietary Assets whose value would be
unimpaired by public disclosure) and otherwise to maintain and protect the value
of all Nordic Proprietary Assets. Except as set forth in the Nordic Disclosure
Schedule, Nordic has not disclosed or delivered to any Person, or permitted the
disclosure or delivery to any Person of any of the Nordic Proprietary Assets
used in or necessary for the conduct of business by Nordic as currently
conducted by Nordic.
(c) Except as provided in Section 3.9(c) of the Nordic Disclosure
Schedule, Nordic is not infringing, misappropriating or making any unlawful use
of, and Nordic has not at any time infringed, misappropriated or made any
unlawful use of, or received any notice or other communication (in writing or
otherwise) of any actual, alleged, possible or potential infringement,
misappropriation or unlawful use of, any Proprietary Asset owned or used by any
other person ("Third Party Proprietary Asset"). No other person is infringing,
misappropriating or making any unlawful use of, and no Third Party Proprietary
Asset owned or used by any other person infringes or conflicts with, any Nordic
Proprietary Asset.
(d) Except as set forth in Section 3.9(d) of the Nordic Disclosure
Schedule: (i) each Nordic Proprietary Asset conforms with any specification,
documentation, performance standard, representation or statement made or
provided with respect thereto by or on behalf of Nordic; and (ii) there has not
been any claim made against Nordic by any customer or other person alleging that
any Nordic Proprietary Asset (including each version thereof that has ever been
licensed or otherwise made available by Nordic to any person) does not conform
with any specification, documentation, performance standard, representation or
statement made or provided by or on behalf of Nordic, and there is no basis for
any such claim.
(e) Nordic's Proprietary Assets constitute all the proprietary assets
necessary to enable Nordic to conduct its business in the manner in which such
business has been and is being conducted. Except as set forth in Section 3.9(e)
of the Nordic Disclosure Schedule,
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(i) Nordic has not exclusively licensed any of the Nordic Proprietary Assets to
any person and (ii) Nordic has not entered into any covenant not to compete or
contract limiting its ability to exploit fully any of the Nordic Proprietary
Assets or to transact business in any market or geographical area or with any
person.
3.10 Employee Benefit Plans. Nordic does not maintain, or is obligated to
contribute to, any defined benefit pension plan or any employee benefit plan
that is subject to either Title IV of the Employee Retirement Income Security
Act of 1974 ("ERISA") or the minimum funding standards of ERISA or the Code.
Each bonus, incentive, deferred compensation, pension, profit-sharing,
retirement, vacation, severance pay, stock purchase, stock option, group
insurance and other employee benefit or fringe benefit plans, whether formal or
informal (whether written or not), maintained by Nordic conforms to all
applicable requirements, if any, of ERISA. Section 3.10 of the Nordic
Disclosure Schedule lists and describes all such plans.
3.11 Bank Accounts and Receivables. Section 3.11 of the Nordic Disclosure
Schedule sets forth the names and locations of all banks, trusts, companies,
savings and loan associations, and other financial institutions at which Nordic
maintains accounts of any nature and the names of all persons authorized to draw
thereon or make withdrawals therefrom. Section 3.11 of the Nordic Disclosure
Schedule sets forth an accurate and complete breakdown and aging of all accounts
receivable, notes receivable, and other receivables of Nordic as of the date of
the Balance Sheet. Except as set forth on the Nordic Disclosure Schedule all
existing accounts receivable of Nordic (including those accounts receivable
reflected on the Nordic Financial Statements that have not yet been collected
and those accounts receivable that have arisen since June 30, 1998 and have not
yet been collected) (i) represent valid obligations of customers of Nordic
arising from bona fide transactions entered into in the ordinary course of
business, (ii) are current and will be collected in full when due, without any
counterclaim or setoff.
3.12 Contracts.
(a) Section 3.12(a) the Nordic Disclosure Schedule identifies each
document or instrument to which Nordic is a party and that relates to the
acquisition, transfer, use, development, sharing or licensing of any technology
or Nordic Proprietary Asset.
(b) Except as set forth in Section 3.12(b) the Nordic Disclosure
Schedule,
(i) Nordic has no agreements, contracts or commitments that
call for fixed and/or contingent payments or expenditures by or to Nordic of
more than Five Thousand Dollars ($5,000) over the life of any such agreement,
contract or commitment.
(ii) Nordic has no purchase agreement, contract or commitment
that calls for fixed and/or contingent payments by Nordic that are in excess of
the normal, ordinary and usual requirements of Nordic's business.
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(iii) There is no outstanding sales contract, commitment or
proposal (including, without limitation, development projects) of Nordic that
Nordic currently expects (or reasonably should expect) to result in any loss to
Nordic upon completion or performance thereof.
(iv) Nordic has no outstanding agreements, contracts or
commitments with officers, employees, agents, consultants, advisors, salesmen,
sales representatives, distributors or dealers that are not cancelable by it on
notice of not longer than thirty (30) days and without liability, penalty or
premium.
(v) Nordic has no outstanding agreements, contracts or
commitments with sales representatives, OEM's, distributors or dealers.
(vi) Nordic is not restricted by agreement from competing with
any person or from carrying on its business anywhere in the world.
(vii) Nordic has not guaranteed any obligations of other
persons, including each other, or made any agreements to acquire or guarantee
any obligations of other persons, including each other.
(viii) Nordic does not have any outstanding loan or advance to
any person; nor is it party to any line of credit, standby financing, revolving
credit or other similar financing arrangement of any sort which would permit the
borrowing by Nordic of any sum not reflected in the Nordic Financial Statements.
(ix) All contracts, agreements and instruments listed in the
Nordic Disclosure Schedule pursuant to Section 3.11 (a) and (b) (the "Nordic
Material Contracts") are valid, binding, in full force and effect, and
enforceable by Nordic in accordance with their respective terms, subject to (i)
laws of general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies. No party to any Nordic Material Contract intends
to cancel, withdraw, modify or amend such contract.
(c) Nordic has delivered to GoodNoise accurate and complete copies of
all written Nordic Material Contracts, including all amendments thereto and any
correspondence regarding any dispute with respect thereto. Nordic has not
entered into any Material oral contracts.
(d) Except as set forth in Section 3.12(d) of the Nordic Disclosure
Schedule:
(i) Nordic has not violated or breached, or committed any
default under, any Nordic Material Contract, and no other person has violated or
breached, or committed any default under, any Nordic Material Contract;
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(ii) No event has occurred, and no circumstance or condition
exists, that (with or without notice or lapse of time) will, or could reasonably
be expected to, (A) result in a violation or breach of any of the provisions of
any Nordic Material Contract, (B) give any person the right to declare default
or exercise any remedy under any Nordic Material Contract, (C) give any person
the right to accelerate the maturity or performance of any Nordic Material
Contract; or (D) give any person the right to cancel, terminate or modify any
Nordic Material Contract;
(iii) There are no unresolved claims between Nordic and any of
its principal licensors, vendors, suppliers, distributors, representatives or
customers and none of such persons has advised Nordic of its intention to cease
doing business with Nordic, or with GoodNoise following the Closing Date,
whether as a result of the transactions contemplated hereunder.
3.13 Compliance With Law. Except as provided in Section 3.13 of the Nordic
Disclosure Schedule, Nordic is in compliance in all material respects with all
applicable laws and regulations. All licenses, franchises, permits and other
governmental authorizations held by Nordic and which are required for its
business are valid and sufficient in all respects for the businesses presently
carried on by Nordic and as set forth in the Nordic Disclosure Schedule.
3.14 Labor Difficulties; No Discrimination.
(a) Nordic is not engaged in any unfair labor practice or in
violation of any applicable laws respecting employment and employment practices,
health and safety, human rights, terms and conditions of employment, and wages
and hours.
(b) There is no unfair labor practice complaint against Nordic
actually pending or threatened before a labor relations board.
(c) There is and has not been any claim made against Nordic based on
actual or alleged wrongful termination or on actual or alleged race, age, sex,
disability or other harassment or discrimination, or similar tortious conduct,
nor is there any basis for any such claim.
(d) Nordic is not aware of any Nordic employee who intends to
terminate his or her employment with Nordic as a result of the Merger or
otherwise.
3.15 Insider Transactions. No Affiliate of Nordic has any interest in (i)
any equipment or other property, real or personal, tangible or intangible,
including, without limitation, any Nordic Proprietary Asset, used in connection
with or pertaining to the businesses of Nordic, or (ii) any creditor, supplier,
customer, manufacturer, agent, representative, or distributor of products of
Nordic; provided, however, that no such Affiliate or other person shall be
deemed to have such an interest solely by virtue of the ownership of less than
one percent (1%) of the outstanding stock or debt securities of any publicly-
held company whose stock or debt securities are traded on a recognized U.S.
stock exchange or quoted on the National Association of Securities Dealers
Automated Quotation System.
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3.16 Employees, Independent Contractors and Consultants. Section 3.16 of
the Nordic Disclosure Schedule lists and describes all currently effective
written and oral consulting, independent contractor and/or employment agreements
and other agreements concluded with individual employees, independent
contractors or consultants to which Nordic is a party. True and correct copies
of all such written agreements have been provided to GoodNoise or its
Representatives. All salaries and wages paid by Nordic are in compliance in all
respects with applicable federal, state and local laws. Section 3.16 of the
Nordic Disclosure Schedule lists the names of all persons currently employed by
Nordic as well as the salaries and other compensation arrangements (bonus,
deferred compensation, etc.) and the accrued vacation time for each such person.
3.17 Insurance. Section 3.17 of the Nordic Disclosure Schedule contains a
list of the policies of fire, liability and other forms of insurance held by
Nordic. Nordic has done nothing, either by way of action or inaction, that might
invalidate such insurance policies in whole or in part.
3.18 Litigation. Except as set forth in Section 3.18 of the Nordic
Disclosure Schedule, there is no suit, action or proceeding which has been
served upon or threatened against Nordic (nor is there any reasonable basis
therefor), in each case other than immaterial matters, or which questions or
challenges the validity of this Agreement or the Transaction Documents. Except
as set forth in Section 3.18 of the Nordic Disclosure Schedule, there is no
judgment, decree, injunction, or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against Nordic.
3.19 Subsidiaries. Nordic has no subsidiaries. Except as set forth in
Section 3.19 of the Nordic Disclosure Schedule, Nordic does not own or control
(directly or indirectly) any capital stock, bonds or other securities of, and
does not have any proprietary interest in, any other corporation, general or
limited partnership, joint venture, firm, association or business organization,
entity or enterprise, and Nordic does not control (directly or indirectly) the
management or policies of any other corporation, partnership, firm, association
or business organization, entity or enterprise.
3.20 Compliance with Environmental Requirements. Nordic has obtained all
permits, licenses and other authorizations which are required under federal,
state and local laws applicable to Nordic relating to pollution or protection of
the environment, including laws or provisions relating to emissions, discharges,
releases or threatened releases of pollutants, contaminants, or hazardous or
toxic materials, substances, or wastes into air, surface water, groundwater, or
land, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants, contaminants
or hazardous or toxic materials, substances, or wastes. Except as set forth in
Section 3.20 of the Nordic Disclosure Schedule, Nordic is in compliance with all
terms and conditions of the required permits, licenses and authorizations.
Except as set forth in Section 3.20 of the Nordic Disclosure Schedule, Nordic is
not aware of, nor has Nordic received written notice of, any conditions,
circumstances, activities, practices, incidents, or actions which may form the
basis of any claim, action, suit, proceeding, hearing, or investigation of, by,
against or relating to Nordic, based on or
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related to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling, or the emission, discharge, release or
threatened release into the environment, of any pollutant, contaminant, or
hazardous or toxic substance, material or waste.
Except as disclosed in Section 3.20 of the Nordic Disclosure Schedule,
(a) No Environmental Activity has occurred in the business of
Nordic or on or in relation to any premises currently or formerly used by Nordic
which may cause Nordic to incur expenses or costs for the elimination,
neutralization or amelioration of the results of the Environmental Activity or
become liable for compensation to any third party.
(b) Nordic has held its assets, occupied its respective
premises, operated its respective businesses and conducted all other activities
in compliance with all Environmental Laws. Nordic has not received any notice of
non-compliance with Environmental Laws from any person or governmental authority
and Nordic does not know of any facts which could give rise to any such notice.
(c) There are no underground storage tanks or surface
impoundments at, on, or under premises formerly or currently used by Nordic.
(d) Nordic has maintained all environmental and operating
documents and records substantially in the manner and for the time periods
required by any Environmental Laws. Section 3.20 of the Nordic Disclosure
Schedule lists each environmental permit and each Environmental Audit conducted
with respect to Nordic or its premises while occupied by either of them. An
"Environmental Audit" shall mean any evaluation, inspection, assessment, study
or test performed at the request of or on behalf of a governmental authority,
including but not limited to, a public liaison committee, as well as a self-
evaluation, whether or not required by Environmental Law.
3.21 Corporate Documents. Nordic has furnished to GoodNoise for its
examination all documents requested by GoodNoise, including, but not limited to:
(i) copies of its charter documents; (ii) its minute book containing all records
required to be set forth of all proceedings, consents, actions, and meetings of
the shareholders, the board of directors and any committees thereof; (iii) all
permits, orders, and consents issued by any regulatory agency with respect to
Nordic, or any securities of Nordic, and all applications for such permits,
orders, and consents; and (iv) the stock transfer books of Nordic setting forth
all transfers of any capital stock. The corporate minute books, stock
certificate books, stock registers and other corporate records of Nordic are
complete and, and the signatures appearing on all documents contained therein
are the true signatures of the persons purporting to have signed the same. All
actions reflected in such books and records were duly and validly taken in
compliance with the laws of the applicable jurisdiction.
3.22 Accuracy of Information In Information or Proxy Statement. The
information furnished by Nordic to the Nordic Shareholders in connection with
the solicitation of shareholder consent or proxies for the approval and adoption
of this Agreement and the approval and adoption of the Merger shall not, on the
date the Information or Proxy Statement is first
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mailed to the Nordic shareholders, on any date subsequent thereto and prior to
the Effective Time or at the Effective Time, contain any untrue statement of a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
false or misleading, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
consent or proxies which has become false or misleading.
3.23 No Brokers. Neither Nordic nor any shareholder, officer or director
of Nordic is obligated for the payment of fees or expenses of any broker or
finder in connection with the origin, negotiation or execution of this Agreement
or in connection with any transaction contemplated hereby.
3.24 Accuracy of Documents and Information. The copies of all
instruments, agreements, other documents and written information set forth as,
or referenced in, the schedules or exhibits to this Agreement or specifically
required to be furnished pursuant to this Agreement to GoodNoise by Nordic are
complete and correct. No representations or warranties made by Nordic in this
Agreement, nor any document, written information, statement, financial
statement, certificate, schedule or exhibit furnished directly to GoodNoise
pursuant to this Agreement contains any untrue statement of a material fact, or
omits to state a material fact necessary to make the statements or facts
contained herein not misleading.
4. Representations and Warranties of GoodNoise and Sub. Except as otherwise
set forth in the "GoodNoise Disclosure Schedule," referencing the appropriate
section and paragraph numbers, to be provided to Nordic concurrent with the
execution of this Agreement, GoodNoise represents and warrants to Nordic as set
forth below. No fact or circumstance disclosed to Nordic by GoodNoise shall
constitute an exception to these representations and warranties unless such fact
or circumstance is set forth in the GoodNoise Disclosure Schedule.
4.1 Organization. GoodNoise and Sub are corporations duly organized,
validly existing and in good standing under the laws of their jurisdictions and
have corporate power and authority to carry on their businesses as they are now
being conducted and as they are proposed to be conducted. Each of GoodNoise and
Sub is duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or properties makes such
qualification or licensing necessary.
4.2 Power, Authority and Validity. GoodNoise and Sub have the corporate
power and authority to enter into this Agreement and other Transaction Documents
to which they are a party and to carry out their obligations hereunder and
thereunder. The execution and delivery of this Agreement and the Transaction
Documents to which they are a party and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the board of
directors of GoodNoise and Sub, and no other corporate proceedings are necessary
to authorize this Agreement or the other Transaction Documents. GoodNoise and
Sub are not subject to or obligated under any charter, bylaw or contract
provision or any license, franchise or permit or subject to any order or decree,
which would be breached or violated in a material manner by or in material
conflict with its executing and carrying out this Agreement and the
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transactions contemplated hereunder and under the Transaction Documents. This
Agreement is, and each of the other Transaction Documents to which GoodNoise and
Sub are a party, when executed and delivered by GoodNoise and Sub shall be, the
valid and binding obligations of GoodNoise and Sub, enforceable in accordance
with their respective terms, subject to (i) laws of general application relating
to bankruptcy, insolvency, and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
4.3 Capitalization.
(a) The authorized capital stock of GoodNoise as of the date of this
Agreement consists of: (i) Two Hundred Million (200,000,000) shares of GoodNoise
Common Stock, of which 14,985,800 shares are issued and outstanding and (ii)
Five Hundred Thousand (500,000) shares of preferred stock, none of which are
issued or outstanding. GoodNoise has reserved 3,000,000 shares of GoodNoise
Common Stock for issuance to employees, directors and consultants, upon exercise
of stock options. Except as set forth in the GoodNoise Disclosure Schedule,
there are no outstanding options, warrants, rights, commitments, conversion
rights, rights of exchange, plans or other agreements of any character providing
for the purchase, issuance or sale of any shares of the capital stock of
GoodNoise from GoodNoise other than as contemplated by this Agreement.
(b) All of the outstanding securities of GoodNoise have been duly
authorized and are validly issued, fully paid and nonassessable. All securities
of GoodNoise were issued in compliance with all applicable federal and state
securities laws. Except as otherwise set forth in the GoodNoise Disclosure
Schedule or in the GoodNoise Commission Documents (as defined in Section 4.4
below), GoodNoise does not have any other shares of its capital stock issued or
outstanding and does not have any other outstanding subscriptions, options,
warrants, rights or other agreements or commitments obligating GoodNoise to
issue shares of its capital stock or other securities. GoodNoise is not a party
to or aware of any shareholders agreements among the shareholders of GoodNoise.
(c) The GoodNoise Shares have been duly authorized and, when issued
and delivered in accordance with the terms hereof, will be validly issued, fully
paid and nonassessable and will be issued in compliance with all applicable
federal and state securities laws. There are no preemptive rights of any
stockholder of GoodNoise to acquire the GoodNoise Shares.
4.4 Litigation. There is no suit, action or proceeding which has been
served upon or, to the knowledge of GoodNoise, threatened against GoodNoise, in
each case other than immaterial matters, or which questions or challenges the
validity of this Agreement or the Transaction Documents. There is no judgment,
decree, injunction, or order of any court, governmental department, commission,
agency, instrumentality or arbitrator outstanding against GoodNoise.
4.5 Compliance With Law. GoodNoise is in compliance in all material
respects with all applicable laws and regulations. All licenses, franchises,
permits and other
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governmental authorizations held by GoodNoise and which are required for its
business are valid and sufficient in all respects for the businesses presently
carried on by GoodNoise.
4.6 Tax Matters. GoodNoise has fully and timely, properly and accurately
filed all Tax returns and reports required to be filed by it (the "GoodNoise
Returns"), including all federal, foreign, state and local returns and reports
for all years and periods for which any such returns or reports were due. The
GoodNoise Returns and all other Tax returns and reports filed by GoodNoise were
prepared in the manner required by applicable law. Except for any Tax due upon
the filing of the GoodNoise Returns for current periods, all income, sales, use,
occupation, property or other Taxes or assessments due from GoodNoise have been
paid, and there are no pending assessments, asserted deficiencies or claims for
additional Taxes that have not been paid. The reserves for Taxes, if any,
reflected on the GoodNoise Financial Statements are adequate and there are no
Tax liens on any property or assets of GoodNoise. There have been no audits or
examinations of any Tax returns or reports by any applicable governmental
agency. No state of facts exists or has existed which would constitute grounds
for the assessment of any penalty or of any further Tax liability beyond that
shown on the respective Tax reports or returns. There are no outstanding
agreements or waivers extending the statutory period of limitation applicable to
any federal, state or local income Tax return or report for any period.
4.7 Commission Documents; Financial Statements. GoodNoise has made
available to Nordic a true and complete copy of its Registration Statement or
Form 10-SB as filed with the Commission by GoodNoise; and, prior to the
Effective Time, GoodNoise will have made available to Nordic any additional
documents filed with the Commission by GoodNoise prior to the Effective Time
(collectively, the "GoodNoise Commission Documents"). To date, GoodNoise has not
been subject to the reporting obligations under either Section 13(a) or 15(d) of
the Exchange Act. As of their respective filing dates, the GoodNoise Commission
Documents complied in all material respects with the requirements of the
Exchange Act and the Securities Act, and none of the GoodNoise Commission
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected by a subsequently filed GoodNoise
Commission Document prior to the date hereof. The financial statements of
GoodNoise, including the notes thereto, included in the GoodNoise Commission
Documents (the "GoodNoise Financial Statements") were complete and correct in
all material respects as of their respective dates, complied as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of the Commission with respect thereto as of their
respective dates, and have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent throughout the periods
indicated and consistent with each other (except as may be indicated in the
notes thereto or, in the case of unaudited statements included in Quarterly
Reports on Form 10-Qs Q, as permitted by Form 10-Q of the Commission). The
GoodNoise Financial statements fairly present the consolidated financial
condition and operating results of GoodNoise and its subsidiaries at the dates
and during the periods indicated therein (subject, in the case of unaudited
statements, to normal, recurring year-end adjustments).
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4.8 Absence of Changes. There has been no change in GoodNoise
GoodNoise's accounting policies except as described in the notes to the
GoodNoise Financial Statements. Since June 30, 1998, except for losses in the
ordinary course of business or as otherwise disclosed in the GoodNoise
Commission Documents, there has been no material adverse change and no material
adverse development in the business, properties, operations, financial
condition, or results of operations of GoodNoise.
4.9 Private Offering. Subject to the accuracy of the Shareholders'
representations and warranties set forth in Section 5 hereof, the offer, sale
and issuance of the GoodNoise Shares as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act. GoodNoise
agrees that neither GoodNoise nor anyone acting on its behalf will offer any
GoodNoise common stock or any similar securities for issuance or sale, or
solicit any offer to acquire any of the same from anyone so as to render the
issuance and sale of the GoodNoise Shares subject to the registration
requirements of the Securities Act. The Company has not offered or sold the
GoodNoise Shares by any form of general solicitation or general advertising, as
such terms are used in Rule 502(c) under the Securities Act.
4.10 Accuracy of Documents and Information. The copies of al
instruments, agreements, other documents and written information set forth as,
or referenced in the schedules or exhibits to this Agreement or specifically
required to be furnish pursuant to this Agreement to Nordic by GoodNoise or Sub
are complete and correct. No representations or warranties made by GoodNoise or
Sub in this Agreement, nor any document, written information, statement,
financial statement, certificate, schedule or exhibit furnished directly to
Nordic pursuant to this Agreement, taken as a whole, contains any untrue
statement of a material fact, or omits to state a material fact necessary to
make the statements or facts contained herein not misleading.
4.11 No Brokers. GoodNoise is not obligated to pay fees or expenses
to any broker or finder in connection with the origin, negotiation or execution
of this Agreement or in connection with any transaction contemplated hereby.
5. Representations and Warranties of Shareholders.
Each Shareholder as to itself, himself or herself represents and
warrants to GoodNoise as follows:
5.1 No person or entity not a signatory of this Agreement has a
beneficial interest in or a right to acquire or vote the Nordic Shares held of
record by such Shareholder or any portion thereof (except, with respect to
shareholders which are partnerships, partners of such shareholders). The Nordic
Shares are and will be, at all times until the Closing, free and clear of any
liens, claims, options, charges or other encumbrances. Such Shareholder's
principal place of residence or place of business is set forth on the signature
page hereto.
5.2 Such Shareholder will not transfer (except as may be specifically
required by court order or by operation of law), sell, exchange, pledge or
otherwise dispose of or encumber the Nordic Shares or any New Securities (as
defined below), or make any offer or agreement relating thereto, at any time
prior to the Closing.
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5.3 Such Shareholder agrees that any shares in the capital stock of
Nordic that Shareholder purchases or with respect to which such Shareholder
otherwise acquired beneficial ownership after the date of this Agreement and
prior to the Closing (the "New Securities") shall be subject to the terms and
conditions of this Agreement to the same extent as if they constituted Nordic
Shares.
5.4 Such Shareholder represents to GoodNoise, that the GoodNoise
Shares which he will receive will be acquired with his own property or funds or
property for investment for an indefinite period for his own account, not as a
nominee or agent, and not with a view to the sale or distribution of any part
thereof, and that he has no present intention of selling, granting participation
in, or otherwise distributing the same.
5.5 Such Shareholder understands that the GoodNoise Shares will not
be registered under the Securities Act of 1933 (the "Securities Act") on the
ground that the sale provided for in this Agreement is exempt pursuant to
section 4(2) of the Securities Act, and that GoodNoise's reliance on such
exemption is predicated on his representations set forth herein.
5.6 Until such time as the GoodNoise Shares shall become registered
for resale under the Securities Act or no longer subject to restriction pursuant
to Rule 144(k), such Shareholder agrees that in no event will he make a
disposition of any of the GoodNoise Shares unless and until (a) he shall have
notified GoodNoise of the proposed disposition and shall have furnished
GoodNoise with a statement of the circumstances surrounding the proposed
disposition and (b) he shall have furnished GoodNoise with an opinion of counsel
satisfactory to GoodNoise to the effect that (i) such disposition will not
require registration of such Stock under the Securities Act or (ii) that
appropriate action necessary for compliance with the Securities Act has been
taken or (c) GoodNoise shall have waived, expressly and in writing, its rights
under clauses (a) and (b) of this Section.
5.7 In connection with the investment representations made herein,
Shareholder represents that he is able to fend for himself in the transactions
contemplated by this Agreement, has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of his
investment, has the ability to bear the economic risks of his investment.
5.8 Such Shareholder understands that the acquisition of the
GoodNoise Shares involves a highly speculative and risky investment and that
GoodNoise may not be able to continue as a going concern unless it is able to
raise substantial funds from outside investors and that there is no assurance
that GoodNoise will be able to do so.
6. Covenants of Nordic and the Shareholders
6.1 Advice of Changes. Nordic will promptly advise GoodNoise in
writing (i) of any event occurring subsequent to the date of this Agreement
which would render any representation or warranty of Nordic contained in this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect and (ii) of any material adverse
change in Nordic's business, taken as a whole.
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6.2 Conduct of Business. Until the Closing, Nordic will continue to
conduct its business and maintain its business relationships in the ordinary and
usual course and will not, except as set forth in Section 6.2 of the Nordic
Disclosure Schedule or without the prior written consent of GoodNoise:
(a) borrow any money which borrowings exceed in the aggregate
Five Thousand Dollars ($5,000) per month;
(b) incur any liability other than in the ordinary and usual
course of business or in connection with the performance or consummation of
this Agreement;
(c) encumber or permit to be encumbered any of its assets except
in the ordinary course of its business;
(d) dispose of any of its assets, except inventory in the
regular and ordinary course of business;
(e) except as provided in Section 6.2(h) hereof, enter into any
lease or contract for the purchase or sale of any property, real or personal
except for inventory and licenses purchased in the ordinary course of business
or other leases or contracts for less than $5,000;
(f) fail to maintain its equipment and other assets in good
working condition and repair according to the standards it has maintained up to
the date of this Agreement, subject only to ordinary wear and tear;
(g) pay or authorize any bonus, increased salary, or special
remuneration to any officer or employee, including any amounts for accrued but
unpaid salary or bonuses;
(h) enter into any agreement for the acquisition or license of
any Music Rights with advances or minimum future commitments in excess of
$30,000;
(i) adopt or change any accounting methods;
(j) declare, set aside or pay any cash or stock dividend or
other distribution in respect of capital, or redeem or otherwise acquire any of
its capital stock;
(k) amend or terminate any contract, agreement or license to
which it is a party except non-Material agreements in the ordinary course of
business or other agreements with an annual value of less than $17,500;
(l) enter into any Material contract outside of the ordinary
course of business or which grants an exclusive license of a substantial part of
its assets, catalogue or right for a period over ninety (90) days. Good Noise
shall be given a reasonable prior notice of any such agreement and a right of
consultation, provided that after forty-five days from the date of
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this Agreement, Nordic may enter into Material contracts without consent
provided that such contracts are in the ordinary course of business consistent
with Nordic's past practices;
(m) loan any amount to any person or entity, or guaranty or act
as a surety for any obligation;
(n) waive or release any right or claim;
(o) issue or sell any shares of its capital stock of any class
or any other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, or other commitments to issue
shares of capital stock or amend the terms of any agreement regarding the
foregoing;
(p) split or combine the outstanding shares of its capital stock
of any class or enter into any recapitalization affecting the number of
outstanding shares of its capital stock of any class or affecting any other of
its securities;
(q) merge, consolidate or reorganize with any entity;
(r) grant any exclusive license to all or a significant portion
of its assets, including, but not limited to, any exclusive license of a
significant portion of the company's catalog of Music Rights for a period of
over ninety (90) days;
(s) amend its Articles of Incorporation or Bylaws;
(t) make or change any election, change any annual accounting
period, file any tax return or amended tax return, enter into any closing
agreement, settle any tax claim or assessment relating to Nordic, surrender any
right to claim refund of taxes, consent to any extension or waiver of the
limitation period applicable to any tax claim or assessment relating to Nordic,
or take any other action or omit to take any action, if any such election,
adoption, change, amendment, agreement, settlement, surrender, consent or other
action or omission would have the effect of increasing the tax liability of
Nordic or GoodNoise; or
(u) agree to do any of the things described in the preceding
clauses of this Section 6.2.
Notwithstanding the above, Nordic or Radiant Records may enter into new
agreements with recording artists that provide for recording funds of no more
than $15,000 per agreement and at an aggregate cost not in excess of $30,000,
exclusive of renewal options. Before entering into any such agreements, Nordic
shall provide GoodNoise with copies of any such agreements for prior review and
comment.
6.3 Risk of Loss. Until the Closing and subject to the
confidentiality and nonuse provisions hereof, all risk of loss, damage or
destruction to Nordic's assets shall be borne by Nordic, and the Merger terms
described in Section 2 shall, in case of any such loss, damage or
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destruction, be revised as the parties may agree, or this Agreement shall be
terminated in accordance with Section 13.
6.4 Access to Information. Until the Closing and subject to the
confidentiality and nonuse provisions hereof, Nordic shall allow GoodNoise and
its Representatives free access upon reasonable notice and during normal working
hours to its files, books, records, and offices, including, without limitation,
any and all information relating to taxes, commitments, contracts, leases,
licenses, and personal property and financial condition. Until the Closing,
Nordic shall cause its accountants to cooperate with GoodNoise and its
Representatives in making available all financial information requested,
including without limitation the right to examine all working papers pertaining
to all financial statements prepared or audited by such accountants.
6.5 Regulatory Approvals. Prior to the Closing, Nordic shall execute
and file, or join in the execution and filing, of any application or other
document which may be necessary in order to obtain the authorization, approval
or consent of any Governmental Body, federal, state or local, which may be
reasonably required, or which GoodNoise may reasonably request, in connection
with the consummation of the transactions contemplated by this Agreement Nordic
shall use its best efforts to obtain all such authorizations, approvals and
consents.
6.6 Satisfaction of Conditions Precedent. Nordic will use its best
efforts to satisfy or cause to be satisfied all the conditions precedent which
are set forth in Section 11, and, without limiting the generality of the
foregoing, to obtain all consents and authorizations of third parties and to
make all filings with, and give all notices to, third parties which may be
necessary or reasonably required on its part in order to effect the transactions
contemplated hereby.
6.7 Equity Compensation Arrangements. Prior to the Closing, any
obligation of Nordic to issue stock, warrants or options which have been offered
or promised to the employees of Nordic shall have been fulfilled or been
terminated to the satisfaction of GoodNoise.
6.8 Shareholder Consent. Prior to the Closing, whether by special
meeting or written consent of its shareholders, Nordic will submit this
Agreement, the Agreement of Merger and related matters to its shareholders for
consideration and approval, and the Board of Directors of Nordic will recommend
such approval to the Nordic Shareholders. Each of the Shareholders agrees to
vote all shares of Nordic capital stock in respect of which each such
shareholder is entitled to vote at any meeting, in favor of the Merger, the
approval of the transactions contemplated by this Agreement.
7. Covenants of GoodNoise and Sub.
7.1 Advice of Changes. GoodNoise and Sub will promptly advise Nordic
in writing of (i) any event occurring subsequent to the date of this Agreement
which would render any representation or warranty of GoodNoise or Sub contained
in this Agreement, if made on or
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as of the date of such event or the Closing Date, untrue or inaccurate in any
material respect and (ii) any material adverse change in GoodNoise's business,
taken as a whole.
7.2 Regulatory Approvals. Prior to the Closing, GoodNoise and Sub
shall execute and file, or join in the execution and filing, of any application
or other document which may be necessary in order to obtain the authorization,
approval or consent of any Governmental Body, federal, state or local, which may
be reasonably required, or which Nordic may reasonably request, in connection
with the consummation of the transactions contemplated by this Agreement. Such
persons and entities shall use their best efforts to obtain all such
authorizations, approvals and consents.
7.3 Satisfaction of Conditions Precedent. GoodNoise will use its
best efforts to satisfy or cause to be satisfied all the conditions precedent
which are set forth in Section 10, and GoodNoise will use its best efforts to
cause the transactions contemplated by this Agreement to be consummated, and,
without limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties which may be necessary or reasonably required on its
part in order to effect the transactions contemplated hereby. Notwithstanding
the foregoing, the condition precedent payment obligations of GoodNoise
hereunder, including the $25,000 signing bonus and $3,125 per week consulting
fees are due when payable in accordance with the terms hereof and are firm
commitments not subject to a best efforts condition.
7.4 Registration Rights. GoodNoise agrees that if prior to the time
the GoodNoise Shares may be freely sold pursuant to Rule 144, GoodNoise
registers for the account of any other person, or grants to any other party
rights to register, GoodNoise Shares under the Securities Act, GoodNoise shall
provide to the Shareholders the right to participate in such registration or
become parties to the registration rights agreement, as the case may be, on the
same or substantially the same terms and conditions as pertain to such other
party; provided however, that the foregoing shall not apply to the extent that
registration rights are granted in connection with an equity offering of or by
GoodNoise unless such rights are also granted to other existing shareholders of
GoodNoise or to other parties receiving shares in connection with any other
transaction, including a purchase or sale of assets or stock, between GoodNoise
and any other person. Notwithstanding the foregoing, GoodNoise shall not permit
either Gene Hoffman or Robert Kohn (the "GoodNoise Founders") to sell any shares
of GoodNoise stock owned by them into the public market unless or until the
GoodNoise Shares have been registered for resale under the Securities Act or are
otherwise eligible for resale pursuant to Rule 144.
7.5 Nasdaq Listing. Following the closing, GoodNoise shall use its
best efforts to obtain a Nasdaq listing for its Common Stock within one year of
the Effective Date.
7.6 Consulting Fee. Following the execution of this Agreement and
until the Closing or termination of this Agreement, GoodNoise shall pay to
Nordic a consulting fee of $3,125 per week payable on Monday of each week;
provided however, that GoodNoise shall not be obligated to pay such fee if
Nordic is in breach of this Agreement or otherwise if the delay in the closing
is due to actions or inaction of Nordic.
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8. Mutual Covenants.
8.1 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, employees, consultants and permitted sublicensees 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 which protects the Confidential Information of the Disclosing
Party. The Receiving Party shall promptly 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, which
remedies shall include injunctive relief without the necessity of posting a bond
or proving damages. 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;
(c) is received by the Receiving Party from a third party
without restriction on 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 agency 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.
GoodNoise and Sub, on the one hand, and Nordic and the Shareholders, on
the other, individually and collectively, agree that neither they nor their
Representatives will disclose the
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existence of this Agreement or the transactions contemplated herein without the
prior written consent of the other party. Notwithstanding the foregoing,
GoodNoise may make any disclosure deemed by it based upon the advice of counsel
to be necessary or appropriate pursuant to the requirements of applicable
securities laws.
8.2 Exclusivity. Until the earlier of the Closing Date or the
termination of this Agreement, Nordic agrees that it will not (and that it will
use best efforts to assure that its employees, agents and affiliates do not on
its behalf) discuss or enter into any agreement concerning the sale or
acquisition of Nordic, a controlling interest in its stock (including by means
of any public offering thereof, but excluding issuance of stock and options to
employees in the ordinary course of business consistent with past practices) or
a substantial part of its assets with any party other than GoodNoise, and that
any such discussions presently in progress will be terminated or suspended
during that period. Nordic represents and warrants that it has the legal right
to terminate or suspend any such pending negotiations and agrees to indemnify
GoodNoise, its representatives and agents from and against any claims by any
party to such negotiations based upon or arising out of the discussion or any
consummation of the Merger.
8.3 Further Assurances. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
8.4 Tax-Free Organization. Each party shall each use its best
efforts to cause the Merger to be treated as a reorganization within the meaning
of Section 368(a) of the Code.
9. The Closing.
9.1 Merger. On the date of the Closing, but not prior to the
Closing, the Agreement of Merger shall be simultaneously filed with the office
of the Secretary of State of the States of California and Delaware and the
merger of Sub with and into Nordic shall be consummated.
9.2 Additional Documents.
(a) At any time and from time to time at or after the Closing,
the parties shall at the request of the other party execute and deliver or cause
to be executed and delivered all such assignments, consents and other documents
and take or cause to be taken all such other actions as either party may
reasonably deem necessary or desirable, in order to more fully and effectively
carry out the intents and purposes of this Agreement.
(b) Nordic shall execute and deliver to GoodNoise a statement
meeting the requirements of Treasury Regulation Section 1.897-2(h)(2) stating
that interests in Nordic are not United States real property interests.
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10. Conditions Precedent to Nordic's Obligations.
Nordic's obligations hereunder are subject to the fulfillment or
satisfaction on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Nordic, but only in a writing signed by
Nordic):
10.1 Accuracy of Representations and Warranties. The representations
and warranties of GoodNoise and Sub set forth in Section 4 shall be true on and
as of the Closing with the same force and effect as if they had been made at the
Closing and the conditions to Nordic's obligations set forth under Sections
10.1, 10.2, 10.3 and 10.4 shall have been satisfied. Nordic shall receive a
certificate to such effect from an executive officer of GoodNoise.
10.2 Covenants. GoodNoise and Sub shall have performed and complied
with all of their covenants contained in this Agreement to be performed on or
before the Closing, and GoodNoise shall deliver to Nordic a certificate executed
by an executive officer of GoodNoise at Closing stating that such condition has
been satisfied.
10.3 No Litigation. No litigation or proceeding shall be threatened
or pending against GoodNoise or Sub with the purpose or with the probable effect
of enjoining or preventing the consummation of any of the transactions
contemplated by this Agreement or which would have a material adverse effect on
the business, liabilities, operations of GoodNoise following the Closing, taken
as a whole, and Nordic shall receive a certificate to such effect signed by an
executive officer of GoodNoise.
10.4 Authorizations. Nordic shall have received from GoodNoise and
Sub written evidence that the execution, delivery and performance of GoodNoise
and Sub's obligations under this Agreement and the Agreement of Merger have been
duly and validly approved and authorized by the Board of Directors of GoodNoise
and Sub, respectively, and the shareholder of Sub.
10.5 Government Consents. There shall have been obtained at or prior
to the date of Closing such permits or authorizations, and there shall have been
taken such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken, including, but not limited to, compliance with applicable
state and federal securities laws.
10.6 Employment Offers and Other Agreements. Kent Kiefer shall have
entered into a non-compete agreement with GoodNoise in substantially the same
form as attached hereto as Exhibit C, and an employment agreement in
---------
substantially the form as attached hereto as Exhibit D.
---------
10.7 Financing. GoodNoise shall have raised not less than $3,000,000
through the issuance of additional equity securities within ninety (90) days
from the date of this Agreement.
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10.8 Payments. GoodNoise shall have made all payments due to Nordic
or Kiefer pursuant to the terms of this Agreement or the Kiefer Employment
Agreement prior to the Closing.
11. Conditions to GoodNoise and Sub's Obligations.
GoodNoise's and Sub's obligations hereunder are subject to the
fulfillment or satisfaction on and as of the Closing, of each of the following
conditions (any one or more of which may be waived by GoodNoise, but only in a
writing signed by GoodNoise):
11.1 Accuracy of Representations and Warranties. The representations
and warranties of Nordic contained in Section 3 and the Shareholders in Section
5 shall be true on and as of the Closing with the same force and effect as if
they had been made at the Closing and the conditions to GoodNoise's and Sub's
obligations set forth under Sections 11.1, 11.2, 11.3 and 11.4 shall have been
satisfied. GoodNoise shall receive a certificate to such effect from an
executive officer of Nordic.
11.2 Covenants. Nordic and the Shareholders shall have performed and
complied with all of their covenants set forth in this Agreement on or before
the Closing.
11.3 No Litigation. On and as of the Closing, no litigation or
proceeding shall be threatened or pending against Nordic for the purpose or with
the probable effect of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement, or which would have a material
adverse effect on the business, liabilities, income, property, operations or
prospects of Nordic subsequent to the Closing.
11.4 Authorizations. GoodNoise shall have received from Nordic
written evidence that (i) the execution, delivery and performance of this
Agreement and the Agreement of Merger have been duly and validly approved and
authorized by its Board of Directors and (ii) the Nordic Shareholders holding
not less than 85% of the Nordic Shares shall have approved this Agreement, the
Merger and the transactions contemplated hereby and thereby.
11.5 No Adverse Development. There shall be no order, decree, or
ruling by any court or Governmental Body or threat thereof or any other fact or
circumstance, which might prohibit or render illegal or have a Material adverse
effect on the business, prospects, liabilities, income, property, assets or
operations of Nordic subsequent to the Closing. Nordic shall not have sustained
a loss, whether or not insured, by reason of physical damage caused by fire,
flood or earthquake, accident or other calamity which materially affects the
Nordic Balance Sheet or its ability to carry on its business as proposed to be
conducted, and which, in the judgment of GoodNoise, renders it inadvisable to
proceed with the Closing. There shall have been no other event which, in the
reasonable judgment of GoodNoise, has a material and adverse effect on Nordic's
assets, business, liabilities, income, property, assets, prospects or operations
subsequent to the Closing.
11.6 Required Consents. GoodNoise shall have received all written
consents, assignments, waivers, authorizations or other certificates reasonably
deemed necessary by
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GoodNoise's legal counsel to provide for the continuation in full force and
effect of any and all contracts and leases of Nordic.
11.7 Government Consents. There shall have been obtained at or prior
to the Closing Date such permits or authorizations and there shall have been
taken such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken, including, but not limited to, compliance with applicable
state and federal securities laws.
11.8 Employment Offers and Other Agreements. Kent Kiefer shall have
entered into non-compete and employment agreements with GoodNoise in
substantially the same form as attached hereto as Exhibits C and D.
-----------------
11.9 Financing. GoodNoise shall have raised not less than $3,000,000
through the issuance of additional equity securities within ninety (90) days of
the date upon which the last party hereto executed this Agreement.
11.10 Emusic Acquisition. GoodNoise shall have closed (or shall close
simultaneously with this Agreement) the acquisition of Creative Fulfillment,
Inc.
11.11 Disclosure Schedule. GoodNoise shall have been provided and
approved the Nordic Disclosure Schedule, which approval shall not be
unreasonably withheld.
12. Condition Subsequent. As a condition to the continued ownership of
Nordic by Good Noise, Good Noise shall have closed an aggregate of $5,000,000 or
more in financing (including the $3,000,000 which is a condition to the Closing
of this Agreement) within six months from the date of this Agreement and shall
have paid the Cash Merger Consideration in the sum of $300,000 on the earlier of
closing said $5,000,000 in financing or six months from the date hereof. Until
such time as (i) GoodNoise has raised not less than $5,000,000 of additional
financing (including the $3,000,000 which is a condition to the Closing of this
Agreement) and (ii) GoodNoise has paid the Cash Merger Consideration, the
GoodNoise Shares and Nordic Share shall remain in escrow pursuant to the terms
of the Indemnity Escrow Agreement. In the event that GoodNoise has not satisfied
the conditions of the preceding sentence (the "Conditions Subsequent") on or
before the date six months following the date of this Agreement, the Nordic
Shareholders, exercising the right by majority in interest, may elect to rescind
the Merger and have returned to them all of the Nordic Shares and related assets
of Nordic or exercise their rights under the Security Agreement. Such election
to rescind shall be effective fifteen (15) days following written notice thereof
from the Representative to GoodNoise, provided that GoodNoise shall have not
satisfied the Conditions Subsequent prior to that time.
12.1 Bankruptcy. During the period following the Closing and before
the Conditions Subsequent are satisfied, GoodNoise agrees that it shall remain
solvent and refrain from filing (voluntarily or involuntarily) for bankruptcy
protection and shall make no assignment for the benefit of creditors. If
GoodNoise files for bankruptcy protection, the Merger shall be deemed rescinded
on the date immediately prior to the date of the bankruptcy filing.
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12.2 Non-Merger Consideration. It is expressly understood that if the
Merger fails to close or is rescinded in accordance with the provisions of this
Section, neither Nordic nor any Nordic Shareholder shall have any obligation to
return any payment or other non-GoodNoise Share consideration or other payments
received by such shareholder pursuant to the terms hereof and prior to the date
of such rescinding.
13. Termination of Agreement.
13.1 Mutual Agreement. This Agreement may be terminated at any time
prior to the Closing by the mutual written consent of each of the parties
hereto.
13.2 Failure to Fulfill Conditions. Either GoodNoise or Nordic may
terminate this Agreement if the Merger has not been consummated within ninety
(90) days of the date of this Agreement (provided that the right to terminate
this Agreement under this Section shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date). Any
termination of this Agreement under this Section shall be effective by the
delivery of notice of the terminating party to the other parties hereto.
13.3 No Liability. Any termination of this Agreement pursuant to this
Section shall be without further obligation or liability upon any party in favor
of any other party hereto.
13.4 Effect of Termination. The termination of the Agreement pursuant
to this Section shall terminate all sections hereof other than Section 8.1.
14. Indemnification.
14.1 Survival of Representations.
(a) The representations and warranties made by Nordic and the
Shareholders under Sections 3 and 5 hereof and the representations and
warranties set forth in any certificate delivered by Nordic in connection with
this Agreement shall survive the Closing and shall remain in full force and
effect and shall survive until the end of the Indemnification Period and shall
survive thereafter only with respect to any claims made prior to the end of the
Indemnification Period.
(b) The representations, warranties, covenants and obligations
of Nordic, and the rights and remedies that may be exercised by the Indemnitees
(as defined herein), shall not be limited or otherwise affected by or as a
result of any information furnished to, or any investigation made by or
knowledge of, any of the Indemnitees or any of their Representatives.
(c) For purposes of this Agreement, each statement or other
item of information set forth in the Nordic Disclosure Schedule shall be deemed
to be a representation and warranty made by Nordic in this Agreement.
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14.2 Indemnification by Nordic Shareholders.
(a) From and after the Closing Date, the Nordic Shareholders
shall be jointly and severally liable for and shall hold harmless and indemnify
GoodNoise and the Surviving Corporation (each an "Indemnitee") from and against,
and shall compensate and reimburse each of the Indemnitees for, any Damages
which are directly or indirectly suffered or incurred by any of the Indemnitees
or to which any of the Indemnitees may otherwise become subject (regardless of
whether or not such Damages relate to any third-party claim) and which arise
from or as a result of, or are directly or indirectly connected with: (i) any
inaccuracy in or breach of any representation or warranty set forth in Section 3
or 5 hereunder or in any certificate delivered by Nordic in connection with this
Agreement; (ii) any breach of any covenant or obligation of Nordic or the
Shareholders hereunder or pursuant to any agreement delivered in connection
herewith; or (iii) any Legal Proceeding relating to any inaccuracy, breach or
expense of the type referred to in clause "(i)" or "(ii)" above (including any
Legal Proceeding commenced by any Indemnitee for the purpose of enforcing any of
its rights under this Section if such Indemnitee is the prevailing party in any
such Legal Proceeding). The aggregate liability arising by reason of this
Section shall not exceed the value of the GoodNoise Shares held in escrow
pursuant to the terms of the Indemnity Escrow Agreement, even if the Damages
exceed the value of such shares.
(b) If the Surviving Corporation suffers, incurs or otherwise
becomes subject to any Damages as a result of or in connection with any
inaccuracy in or breach of any representation, warranty, covenant or obligation,
then (without limiting any of the rights of the Surviving Corporation as an
Indemnitee) GoodNoise shall also be deemed, by virtue of its ownership of the
stock of the Surviving Corporation, to have incurred Damages as a result of and
in connection with such inaccuracy or breach.
14.3 No Contribution. The Nordic Shareholders acknowledge and agree
that they shall not have and shall not exercise or assert (or attempt to
exercise or assert), any right of contribution, right of indemnity or other
right or remedy against the Surviving Corporation which they have in their
capacity as shareholders in connection with any indemnification obligation or
any other liability to which it may become subject under or in connection with
this Agreement or any certificate delivered by Nordic in connection with this
Agreement.
14.4 Defense of Third Party Claims. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against the
Surviving Corporation, against GoodNoise or against any other Person) with
respect to which the Nordic Shareholders may become obligated to hold harmless,
indemnify, compensate or reimburse any Indemnitee pursuant to this Section, the
procedure set forth below shall be followed.
(a) Notice. GoodNoise shall give prompt written notice of the
commencement of any such Legal Proceeding against GoodNoise or the Surviving
Corporation for which indemnity may be sought; provided, however, that any
failure on the part of GoodNoise to so notify Nordic shall not limit any of the
obligations of Nordic under this Section unless the ability to defend such claim
is materially prejudiced by such failure or delay.
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The Indemnification Period shall be tolled solely with respect to a particular
claim for the period beginning on the date the Nordic Shareholders receive
written notice of that claim until the final resolution of such claim so long as
such claim is made within the Indemnification Period.
(b) Defense of Claim. The Indemnitee shall have the right to be
represented by counsel of its choice and to defend or otherwise control the
handling of any claim, or Legal Proceeding for which indemnity is sought;
provided however that the choice of such counsel shall be subject to the
approval of the Shareholder Representative, which approval shall not be
unreasonably withheld. If the Indemnitee so proceeds with the defense of any
such claim or Legal Proceeding:
(i) all expenses relating to the defense of such claim or
Legal Proceeding (whether or not incurred by the Indemnitee) shall be borne and
paid exclusively by the Nordic Shareholders;
(ii) the Nordic Shareholders shall make available to the
Indemnitee any non-privileged documents and materials in the possession or
control of the Nordic Shareholders that may be necessary to the defense of such
claim or Legal Proceeding except for documents or materials which are sealed by
a court order or are subject to a nondisclosure agreement prohibiting disclosure
by the Nordic Shareholders;
(iii) the Indemnitee shall keep the Nordic Shareholders
informed of all material developments and events relating to such claim or Legal
Proceeding; and
(iv) the Nordic Shareholders shall have the right to
participate in the defense of such claim or legal proceeding through the
Shareholder Representative (including, if desired, obtaining counsel separate
and apart from GoodNoise); provided that any such participation shall be at
their sole cost and expense (including the costs of any such counsel); and
(v) the Indemnitee shall have the right to settle, adjust
or compromise such claim or Legal Proceeding with the written consent of the
Nordic Shareholders; provided, however, that the Nordic Shareholders shall not
unreasonably withhold such consent.
14.5 Indemnity Escrow. As soon as practicable after the Effective
Time, GoodNoise shall deposit into an escrow account (the "Indemnity Escrow")
with a national bank or other financial institution reasonably acceptable to
Nordic, as escrow agent (the "Indemnity Escrow Agent"), twenty percent (20%) of
the GoodNoise Shares (the "Indemnity Escrow Holdback"). The Indemnity Escrow
Holdback shall be withheld on a pro rata basis from the Nordic Shareholders who
otherwise are entitled to such amounts at the Effective Time and shall be
governed by the terms set forth herein and in an escrow agreement (the
"Indemnity Escrow Agreement") in substantially the form attached hereto as
Exhibit E. The Indemnity Escrow (but only up to a maximum of the total
- ----------
aggregate value of the Indemnity Escrow Holdback) shall be available to
compensate the Indemnitees for any loss, to the extent of the amount of Damages
that such Indemnitee has incurred and which are subject to indemnification
hereunder.
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So long as the GoodNoise shares remain subject to escrow, the Shareholders
shall have the right to vote said shares or give a proxy for the same.
Furthermore, any distribution of money or property (including additional shares
of GoodNoise equity) paid by GoodNoise on the Indemnity Escrow Holdback shall be
added to the Indemnity Escrow Holdback and become subject to the Indemnity
Escrow. Said additions shall thereafter be distributed to the Shareholders upon
expiration of the Indemnity Escrow.
14.6 Shareholder Representative.
(a) By virtue of their approval of this Agreement, the Nordic
Shareholders will be deemed to have irrevocably constituted and appointed,
effective as of the Effective Time, Kent Kiefer (the "Shareholder
Representative"), as their true and lawful agent and attorney-in-fact to enter
into any agreement in connection with the transactions contemplated by this
Agreement or the Indemnity Escrow Agreement, to exercise all or any of the
powers, authority and discretion conferred on him under any such agreement, to
waive any terms and conditions of any such agreement, to give and receive
notices and communications, to authorize delivery to GoodNoise of the Indemnity
Escrow Holdback or other property from the Indemnity Escrow in satisfaction of
claims by GoodNoise, 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 holders of a majority in interest of the Indemnity Escrow from
time to time upon not less than ten (10) days' prior written notice to
GoodNoise. The Shareholder Representative shall receive no compensation for his
services. Notices or communications to or from the Shareholder Representative
shall constitute notice to or from each of the Nordic Shareholders. This power
of attorney is coupled with an interest and is irrevocable.
(b) The Shareholder Representative shall not be liable for any
act done or omitted hereunder as Shareholder Representative while acting in good
faith and not in a manner constituting gross negligence, and any act done or
omitted pursuant to the advice of counsel shall be conclusive evidence of such
good faith. The Nordic Shareholders shall severally indemnify the Shareholder
Representative and hold him harmless against any loss, liability or expense
incurred without gross negligence or bad faith on the part of such Shareholder
Representative and arising out of or in connection with the acceptance or
administration of his duties hereunder.
15. Miscellaneous.
15.1 Governing Laws. It is the intention of the parties hereto that
the internal laws of the State of California (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties hereto.
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15.2 Binding upon Successors and Assigns. Subject to, and unless
otherwise provided in, this Agreement, each and all of the covenants, terms,
provisions, and agreements contained herein shall be binding upon, and inure to
the benefit of, the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
15.3 Severability. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
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 which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
15.4 Entire Agreement. This Agreement, the exhibits and schedules
hereto, the documents referenced herein, and the exhibits and schedules thereto,
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and thereof and supersede all prior and
contemporaneous agreements or understandings, inducements or conditions, express
or implied, written or oral, between the parties with respect hereto and
thereto. The express terms hereof control and supersede any course of
performance or usage of the trade inconsistent with any of the terms hereof.
15.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
15.6 Expenses. Except as provided to the contrary herein, each party
shall pay all of its own costs and expenses incurred with respect to the
negotiation, execution and delivery of this Agreement and the exhibits hereto.
In the event the Merger is consummated, all legal and accounting fees incurred
by Nordic and the Nordic Shareholders in connection with the Merger shall be
deemed to be expenses of the Nordic Shareholders, shall be borne by the Nordic
Shareholders and shall not become obligations of Nordic, GoodNoise or the
Surviving Corporation. The Nordic Shareholders shall make arrangements
satisfactory to GoodNoise at or prior to the Closing for the satisfaction of
such amounts.
15.7 Other Remedies. Except as otherwise provided herein, any and
all remedies herein expressly conferred upon a party shall be deemed cumulative
with and not exclusive of any other remedy conferred hereby or by law on such
party, and the exercise of any one remedy shall not preclude the exercise of any
other.
15.8 Amendment and Waivers. Any term or provision of this Agreement
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default
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in payment of any amount due hereunder or default in the performance hereof
shall not be deemed to constitute a waiver of any other default or any
succeeding breach or default.
15.9 Survival of Agreements. All covenants, agreements,
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby notwithstanding any investigation of the parties hereto.
15.10 No Waiver. The failure of any party to enforce any of the
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
15.11 Attorneys' Fees. Should suit be brought to enforce or interpret
any part of this Agreement, the prevailing party shall be entitled to recover,
as an element of the costs of suit and not as damages, reasonable attorneys'
fees to be fixed by the court (including without limitation, costs, expenses and
fees on any appeal). The prevailing party shall be the party entitled to recover
its costs of suit, regardless of whether such suit proceeds to final judgment. A
party not entitled to recover its costs shall not be entitled to recover
attorneys' fees. No sum for attorneys' fees shall be counted in calculating the
amount of a judgment for purposes of determining if a party is entitled to
recover costs or attorneys' fees.
15.12 Notices. Any notice provided for or permitted under this
Agreement will be treated as having been received (a) when delivered personally,
(b) when sent by confirmed telex or telecopy, (c) one (1) day following when
sent by commercial overnight courier with written verification of receipt, or
(d) three (3) days following when mailed postage prepaid by certified or
registered mail, return receipt requested, to the party to be notified, at the
address set forth below, or at such other place of which the other party has
been notified in accordance with the provisions of this Section:
Nordic: Nordic Entertainment Worldwide, Inc.
2512 Jefferson Street
Napa, California 94558
With copy to: W.R. Johnson, Esq.
GOFF JOHNSON, LLP
12424 Wilshire Boulevard, Suite 1120
Los Angeles, California 90025
Facsimile: (310) 979-3110
GoodNoise or Sub: GoodNoise Corporation
719 Colorado Avenue
Palo Alto, California 94306
Attention: Gene Hoffman
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With copy to: Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Facsimile: (650) 327-3699
Attention: Peter M. Astiz, Esq.
15.13 Time. Time is of the essence of this Agreement.
15.14 Construction of Agreement. This Agreement has been negotiated
by the respective parties hereto and their attorneys and the language hereof
shall not be construed for or against any party. The titles and headings herein
are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole.
15.15 No Joint Venture. Nothing contained in this Agreement shall be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party shall have any power or authority to bind or
commit any other. No party shall hold itself out as having any authority or
relationship in contravention of this Section 15.15.
15.16 Pronouns. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
15.17 Further Assurances. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
15.18 Absence of Third Party Beneficiary Rights. No provisions of
this Agreement are intended, nor shall be interpreted, to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, shareholder, partner of any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof shall be personal solely between the parties
to this Agreement .
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
GOODNOISE CORPORATION NORDIC ENTERTAINMENT
WORLDWIDE, INC.
By: /s/ By: /s/
-------------------------- ---------------------------
GNA CORPORATION SHAREHOLDERS:
By: /s/ By: /s/
-------------------------- ---------------------------
Kent Kiefer
[SIGNATURE PAGE FOR AGREEMENT AND PLAN OF REORGANIZATION]
<PAGE>
EXHIBIT 2.3
AGREEMENT AND PLAN OF REORGANIZATION
among GOODNOISE CORPORATION,
GN ACQUISITION CORPORATION,
CREATIVE FULFILLMENT, INC. and
the SHAREHOLDERS of CREATIVE FULFILLMENT, INC.
October 8, 1998
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered into
this 8th day of October 1998, by and among GoodNoise Corporation, a Florida
corporation ("GoodNoise"), GN Acquisition Corporation, a Delaware corporation
and wholly-owned subsidiary of GoodNoise ("Sub"), Creative Fulfillment, Inc., a
California corporation ("Emusic") and certain shareholders of Emusic (the
"Shareholders").
RECITALS
A. The parties intend that, subject to the terms and conditions
hereinafter set forth, Sub shall be merged with and into Emusic, with Emusic the
surviving corporation (the "Merger"), pursuant to Agreement of Merger
substantially in the form attached hereto as Exhibit A (the "Agreement of
---------
Merger") and the applicable provisions of the laws of the State of California
and Delaware. Upon the Merger, the Shareholders shall be entitled to receive
shares of GoodNoise common stock, par value $0.01 per share, at the exchange
ratio set forth herein.
B. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended.
AGREEMENT
NOW, THEREFORE, in reliance on the foregoing recitals and in and for the
consideration and mutual covenants set forth herein, the parties agree as
follows:
1. DEFINITIONS.
1.1 "Affiliate" shall have the meaning set forth in the rules and
regulations promulgated by the Commission pursuant to the Securities Act.
1.2 "Average Closing Stock Price" shall mean the closing or last trade
price for GoodNoise Common Stock for the seven consecutive trading days
immediately preceding, but not including, the date immediately prior to the date
of the Closing.
1.3 "California Law" shall mean the California General Corporation
Law, as amended.
1.4 "Closing" and "Closing Date" shall have the meanings set forth in
Section 2.4.
1.5 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.6 "Commission" shall mean the Securities and Exchange Commission.
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1.7 "Confidential Information" shall mean that information of a party
("Disclosing Party") which is disclosed to another party ("Receiving Party")
pursuant to this Agreement. Confidential Information shall include, but not be
limited to, trade secrets, know-how, inventions, techniques, processes,
algorithms, software programs, schematics, designs, contracts, customer lists,
financial information, sales and marketing plans and business information.
Confidential Information shall not include any information which a recipient can
document: (a) was in the public domain at or subsequent to the time such
information was communicated to such recipient by the other party through no
fault of such recipient, (b) was rightfully in such recipient's possession free
of any obligation of confidence at or subsequent to the time such information
was communicated to such recipient by the other party, (c) was developed by
employees or agents of such recipient independently of and without reference to
any information communicated to such recipient by the other party, or (d) was
communicated by the other party to an unaffiliated third party free of any
obligation of confidence.
1.8 "Contaminant" shall mean, without limitation, any pollutants,
residues, infectious materials, flammable, dangerous, toxic or hazardous
substances, hazardous materials or waste of any description whatsoever, except
for non-hazardous waste of the kind generated in the normal course of
operations, including any of the foregoing as defined in or regulated under any
Environmental Law, including but not limited to polychlorinated biphenyls,
asbestos or asbestos containing materials, petroleum and petroleum containing
materials.
1.9 "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, liability, claim, demand, settlement, judgment, award,
fine, penalty, tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation) or expense of any nature.
1.10 "Dissenting Shares" shall mean any Emusic Shares held by persons
who have not voted such shares for approval of the Merger and with respect to
which such persons have become entitled to exercise dissenter's rights in
accordance with the California General Corporation Law.
1.11 "Effective Time" shall mean the time the Merger becomes effective
as defined in Section 2.5.
1.12 "Emusic Shares" shall mean the shares of Emusic common stock, no
par value, issued and outstanding at the Effective Time.
1.13 "Entity" shall mean corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
1.14 "Environmental Activity" shall mean, without limitation, any
activity, event or circumstance in respect of a Contaminant, including, without
limitation, its storage, use, holding, collection, purchase, accumulation,
assessment, generation, manufacture, construction, processing, treatment,
recycling, stabilization, disposition, handling or transportation or its
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affirmative or accidental release into the natural environment including
movement through or in the air, soil, subsoil, surface water or groundwater or
any other activity, event or circumstance which is subject to any of the
Environmental Laws including but not limited to noise, vibration, odor or
similar nuisance.
1.15 "Exchange Ratio" shall mean that for each outstanding share of
Emusic common stock, such share will be converted into the right to receive that
number of shares of GoodNoise Common Stock and that amount of cash as is
determined in accordance with Section 2.2 hereof.
1.16 "Environmental Laws" shall mean laws relating to the environment
or any Environmental Activity.
1.17 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.18 "GoodNoise Shares" shall mean the aggregate number of shares of
GoodNoise common stock, par value $0.01 per share, issued in accordance with
Section 2.2.
1.19 "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body, or Entity and any court or
other tribunal).
1.20 "Indemnification Period" shall mean the period commencing on the
Closing Date and ending at the close of business on the first anniversary of the
Closing Date.
1.21 "Legal Proceeding" shall mean any action, suit, litigation,
arbitration proceeding (including any civil, criminal, administrative,
investigative or appellate proceeding), hearing, inquiry, audit, examination or
investigation commenced, brought, conducted or heard by or before, or otherwise
involving any court or other Governmental Body or any arbitrator or arbitration
panel.
1.22 "Material" when capitalized and used in reference to the
business, products or financial situation of Emusic shall be construed, except
as specifically provided, to qualify the matter referred to herein to matters
with a value in excess of $17,500. For example, a "Material adverse effect"
would be an adverse effect resulting in costs or expenses in excess of $17,500.
When the word "material" is not capitalized it shall mean material with respect
to the matter referenced. For example, a reference to a material breach of a
particular agreement would mean a breach that is material with respect to the
particular contract (and not necessarily with respect to the overall business of
Emusic or GoodNoise).
1.23 "Merger" shall mean the merger of Sub with and into Emusic, on
the terms and conditions described herein.
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1.24 "Music Rights" shall mean any music recording masters, musical
arrangements, copyrights, lyrics, song titles, artwork, graphics, song rights or
other forms of music-related intellectual property rights or licenses thereto
whether on an exclusive or nonexclusive basis.
1.25 "Person" shall mean any individual, Entity or Governmental Body.
1.26 "Proprietary Asset" shall mean: (a) any patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, invention, design, blueprint, engineering drawing,
proprietary product, technology, proprietary right or other intellectual
property right or intangible asset; and (b) any right to use or exploit any of
the foregoing including rights granted by third parties under license
agreements.
1.27 "Representatives" shall mean officers, directors, employees,
agents, attorneys, accountants and advisors.
1.28 "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.29 "Shareholder Representative" shall mean Mark Chasan.
1.30 "Tax" or "Taxes" shall mean all U.S. federal, territorial, state,
municipal, local or other taxes, including without limitation income capital,
sales and use taxes, value added and goods and services taxes, excise taxes,
transfer and stamp taxes, custom duties and franchise taxes, real and personal
property taxes and payroll taxes (including tax withholdings, employer health
taxes, workers' compensation assessments and ERISA plans and unemployment
insurance premiums, contributions and remittances and the U.S. equivalents
thereof), and penalties, interest and surcharges in respect of any of the
foregoing and all words derived from or including the word "Tax," such as
"Taxing" and "Taxation" shall bear a corresponding meaning.
1.31 "Transaction Documents" shall mean all documents or agreements
required to be delivered by any party hereunder including the Agreement of
Merger.
1.32 "Valuation Stock Price" shall mean $ 7.61 per share.
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2. PLAN OF REORGANIZATION.
2.1 THE MERGER. Subject to the terms and conditions of this Agreement,
Sub shall be merged with and into Emusic in accordance with the applicable
provisions of the laws of the States of California and Delaware and with the
terms and conditions of this Agreement so that:
(a) At the Effective Time, Sub shall be merged with and into
Emusic. As a result of the Merger, the separate corporate existence of Sub shall
cease and Emusic shall continue as the surviving corporation (sometimes referred
to herein as the "Surviving Corporation") and shall succeed to and assume all of
the rights and obligations of Sub in accordance with the laws of the States of
California and Delaware.
(b) The Articles of Incorporation and the Bylaws of Emusic in
effect immediately prior to the Effective Time shall be the articles of
incorporation and bylaws, respectively, of the Surviving Corporation after the
Effective Time unless and until further amended as provided by law.
(c) The directors and officers of Sub immediately prior to the
Effective Time shall be the directors and officers of the Surviving Corporation
after the Effective Time. Such directors and officers shall hold their position
until the election and qualification of their respective successors or until
their tenure is otherwise terminated in accordance with the Bylaws of Surviving
Corporation.
2.2 CANCELLATION OF SHARES AND DELIVERY OF CONSIDERATION.
(a) At the Effective Time, each share of Emusic capital stock, if
any, that is owned directly or indirectly by Emusic shall be canceled and no
cash or other consideration shall be delivered in exchange therefor.
(b) At the Effective Time, each Emusic Share (other than shares
owned directly or indirectly by Emusic) shall, by virtue of the Merger, and
without further action on the part of any holder thereof, be converted and
exchanged for the right to receive
(i) that number of GoodNoise Shares as is equal to the
quotient of (i) (A) Four Million Two Hundred and Twenty-Five Thousand Dollars
($4,225,000) divided by (B) the number of Emusic Shares outstanding at the
Effective Time (on a fully diluted basis giving effect to any options, warrants
or other rights to acquire Emusic Shares issued and outstanding at the Effective
Date) divided by (ii) the Valuation Period Stock Price (the "Exchange Ratio");
provided, however, that in the event the Average Closing Stock Price is less
than $5.00, then the Exchange Ratio shall be recalculated to be the quotient of
(i) (A) Four Million Two Hundred and Twenty-Five Thousand Dollars ($4,225,000)
divided by (B) the number of Emusic Shares outstanding at the Effective Time (on
a fully diluted basis giving effect to any options, warrants or other rights to
acquire Emusic Shares issued and outstanding at the Effective Date) divided by
(ii) the Average Closing Stock Price; provided further, that in no
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event shall the number of GoodNoise Shares issuable be less than 528,125 or more
than 845,000; plus
(ii) an amount of cash (the "Cash Merger Consideration") per
Emusic Share equal to $300,000 divided by the number of Emusic Shares
outstanding at the Effective Time (on a fully diluted basis giving effect to any
options, warrants or other rights to acquire Emusic Shares issued and
outstanding at the Effective Date) (the "Cash Ratio").
(c) At the Effective Time, each share of capital stock of Sub
outstanding immediately prior to the Merger shall, by virtue of the Merger, and
without further action on the part of any holder thereof, continue to be issued
and shall be converted into one share of Emusic common stock outstanding after
the Merger.
(d) The Exchange Ratio and the Cash Ratio shall be adjusted to
reflect the effect of any stock split, reverse split, stock dividend (including
any dividend or distribution of securities convertible into GoodNoise Common
Stock or Emusic common stock), reorganization, recapitalization or other like
change with respect to GoodNoise Common Stock or Emusic common stock occurring
after the date hereof and prior to the Effective Time.
(e) No fraction of a share of GoodNoise Common Stock shall be
issued, but in lieu thereof each holder of Emusic Shares who would otherwise be
entitled to a fraction of a share of GoodNoise Common Stock (after aggregating
all fractional shares of GoodNoise Common Stock to be received by such holder)
shall receive from GoodNoise an amount of cash (rounded to the nearest whole
cent) equal to the product of (i) such fraction, multiplied by (ii) the average
last sale price of a share of GoodNoise Common Stock for the five most recent
days that GoodNoise Common Stock has traded ending on the trading day
immediately prior to the Effective Time.
(f) Any Dissenting Shares shall not be converted into GoodNoise
Common Stock but shall instead be converted into the right to Dissenting Shares
pursuant to the California Law. Emusic agrees that, except with the prior
written consent of GoodNoise, or as required under the California Law, it will
not voluntarily make any payment with respect to, or settle or offer to settle,
any such purchase demand. Each holder of Dissenting Shares (a "Dissenting
Shareholder") who, pursuant to the provisions of the California Law, becomes
entitled to payment for Emusic Shares shall receive payment therefor (but only
after the value therefor shall have been agreed upon or finally determined
pursuant to such provisions). If, after the Effective Time, any Dissenting
Shares shall lose their status as Dissenting Shares, GoodNoise shall issue and
deliver, upon surrender by such shareholder of certificate or certificates
representing Emusic Shares, the number of shares of GoodNoise Common Stock to
which such shareholder would otherwise be entitled under this Section 2.2 less
the number of shares of GoodNoise Common Stock allocable to such shareholder
that have been deposited in the Indemnity Escrow.
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2.3 EXCHANGE PROCEDURES.
(a) Subject to paragraph (e) hereof, following the Closing Date,
GoodNoise shall mail to each holder of record of certificate(s) or other
documents which represent Emusic Shares (the "Certificates"), to be exchanged
pursuant to Section 2.2 hereof (i) a letter of transmittal (which shall specify
that, with respect to the Certificates, delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to GoodNoise and shall be in such form and have such other
provisions as GoodNoise shall reasonably require) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for GoodNoise Shares
and the Cash Merger Consideration. Upon surrender of a Certificate for
cancellation to GoodNoise, together with such letter of transmittal, duly
executed, the holder of such Certificates shall be entitled to receive in
exchange therefor his pro rata allocation of the GoodNoise Shares and the Cash
Merger Consideration as to which such holder is entitled pursuant to Section 2.2
hereof. Certificates so surrendered pursuant to this Section 2.3 shall forthwith
be canceled (if not otherwise canceled or terminated in accordance with their
terms). In the event of a transfer of ownership of Emusic Shares which is not
registered on the transfer records of Emusic, the appropriate number of
GoodNoise Shares and the Cash Merger Consideration may be delivered to a
transferee if the Certificate representing such transferred security is
presented to GoodNoise and accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock transfer taxes
have been paid. Until surrendered as contemplated by this Section 2.3, each
Certificate shall be deemed at any time after the Effective Time to represent
solely the right to receive upon such surrender that number of GoodNoise Shares
and the Cash Merger Consideration (without interest and subject to applicable
withholding, escheat and other laws) to which such holder is entitled.
(b) Notwithstanding anything to the contrary in this Section 2.3,
none of GoodNoise, the Surviving Corporation or any party hereto shall be liable
to a holder of Emusic Shares for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(c) The GoodNoise Shares and the Cash Merger Consideration paid
in accordance with the terms hereof shall be deemed to be in full satisfaction
of all rights pertaining to such Emusic Shares, and there shall be no further
registration of transfers on the records of the Surviving Corporation of Emusic
Shares. If, after the Effective Time, Certificates are presented to the
surviving Corporation for any reason, they shall be canceled and exchanged as
provided in Section 2.2.
(d) In the event any Certificates evidencing Emusic Shares shall
have been lost, stolen or destroyed, GoodNoise 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 holders pro rata allocation of GoodNoise Shares
and the Cash Merger Consideration as may be required pursuant to Section 2.2;
provided, however, that GoodNoise 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 in such sum as it may reasonably direct
as indemnity
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against any claim that may be made against GoodNoise with respect to the
Certificates alleged to have been lost, stolen or destroyed.
(e) Notwithstanding anything to the contrary set forth herein,
the GoodNoise Shares shall be deposited into escrow pursuant to the terms of the
conditions subsequent described in Section 12 are satisfied. In the event
GoodNoise satisfies those conditions subsequent, eighty percent (80%) of the
GoodNoise Shares shall be removed from escrow and distributed to the
Shareholders in accordance with the terms set forth in Section 2.2. Should
GoodNoise fail to satisfy any or all of the conditions subsequent and the
Shareholders elect to cancel the transactions contemplated herein, all of the
GoodNoise Shares shall be removed from escrow and delivered to GoodNoise in
accordance with the terms of the Indemnity Escrow Agreement.
2.4 THE CLOSING. Subject to termination of this Agreement as provided
in Section 13 below, the closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Gray Cary Ware &
Freidenrich LLP at 10:00 a.m. local time on the date three (3) days following
the satisfaction of all conditions to closing set forth herein, or such other
place, time and date as GoodNoise and Emusic may mutually select (the "Closing
Date").
2.5 EFFECTIVE TIME. Simultaneously with the Closing, the Agreement of
Merger shall be filed in the offices of the Secretaries of State of the States
of California and Delaware. The Merger shall become effective immediately upon
the filing of the Agreement of Merger with such office (the "Effective Time").
2.6 CASH MERGER CONSIDERATION. The Cash Merger Consideration shall be
paid within five days of the earlier of (i) the closing by GoodNoise of
additional financing in an amount of $5,000,000 or more or (ii) six months from
the date of this Agreement; provided however, that if the $5,000,000 in
additional financing is received prior to the Closing, the Cash Merger
Consideration shall be paid within five days of the Effective Time. If GoodNoise
has not made such payment when due, the Emusic Shareholders shall have a right
to cancel the transactions contemplated herein in their entirety pursuant to
Section 12 hereof, or to convert the amount payable in cash to GoodNoise Shares
based upon eighty percent (80%) of the average last trade price for GoodNoise
Shares for the seven days prior to the Effective Date. Any election to cancel
the transactions must be made as to all Emusic Shareholders based upon the
approval of the holders of a majority of the Emusic Shares. The obligation to
pay the Cash Merger Consideration shall be evidenced by a promissory note (the
"Note") and security agreement (the "Security Agreement") in the form attached
as Exhibit B hereto.
3. REPRESENTATIONS AND WARRANTIES OF EMUSIC. Except as otherwise set
forth in the "Emusic Disclosure Schedule," referencing the appropriate section
and paragraph numbers, to be provided to GoodNoise concurrent with the execution
of this Agreement (and which shall apply regardless of whether the particular
subsection of this Section 3 refers to such schedule), Emusic and the
Shareholders represent and warrant to GoodNoise as set forth below. No fact or
circumstance disclosed to GoodNoise by Emusic shall constitute an exception to
these
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representations and warranties unless such fact or circumstance is set forth in
the Emusic Disclosure Schedule.
3.1 ORGANIZATION. Emusic is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has corporate power and authority to carry on its business as
it is now being conducted and as it is proposed to be conducted. Emusic is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or properties makes such
qualification or licensing necessary. The Emusic Disclosure Schedule contains a
true and complete listing of the locations of all sales offices, manufacturing
facilities, and any other offices or facilities of Emusic and a true and
complete list of all jurisdictions in which Emusic maintains any employees. The
Emusic Disclosure Schedule contains a true and complete list of all
jurisdictions in which Emusic is duly qualified to transact business as a
foreign corporation. True and complete copies of Emusic's charter documents as
in effect on the date hereof and as to be in effect immediately prior to the
Closing, have been provided to GoodNoise or its Representatives.
3.2 CAPITALIZATION.
(a) The authorized capital stock of Emusic as of the date of this
Agreement consists of 25,000,000 shares of Emusic common stock; and, as of the
date of this Agreement, 16,909,165 shares of Emusic common stock are issued and
outstanding and held of record by Emusic Shareholders as set forth and
identified in Section 3.2(a) of the Emusic Disclosure Schedule.
(b) Except as set forth in Section 3.2(b) of the Emusic
Disclosure Schedule, there are no outstanding options, warrants, rights,
commitments, conversion rights, rights of exchange, plans or other agreements of
any character providing for the purchase, issuance or sale of any shares of the
capital stock of Emusic other than as contemplated by this Agreement. There are
no voting trust, buy-sell or other similar agreements in place among the Emusic
Shareholders and Emusic.
(c) All of the outstanding securities of Emusic have been duly
authorized and are validly issued, fully paid and nonassessable. All securities
of Emusic were issued in compliance with applicable securities laws. None of
Emusic's outstanding securities were issued in consideration in whole or in part
for any contribution, transfer, assignment or any proprietary rights.
3.3 POWER, AUTHORITY AND VALIDITY. Emusic has the corporate power and
authority to enter into this Agreement and the other Transaction Documents to
which it is a party and to carry out its obligations hereunder and thereunder.
The execution and delivery of this Agreement and the Transaction Documents to
which it is a party and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by the board of directors of Emusic, and
no other corporate proceedings are necessary to authorize this Agreement or the
other Transaction Documents. Emusic is not subject to or obligated under any
charter, bylaw or contract provision or any license, franchise or permit, or
subject to any order or decree, which would be breached or violated by or in
conflict with its executing and carrying out
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this Agreement and the transactions contemplated hereunder and under the
Transaction Documents. This Agreement is, and each of the other Transaction
Documents to which Emusic will be a party, when executed and delivered by Emusic
shall be, the valid and binding obligation of Emusic enforceable in accordance
with their respective terms, subject to (i) laws of general application relating
to bankruptcy, insolvency, and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
3.4 FINANCIAL STATEMENTS.
(a) Schedule 3.4(a) of the Emusic Disclosure Schedule sets forth
the balance sheet and statements of income for Emusic and its predecessors for
the fiscal years ended October 31, 1996 and 1997 and for the ten month period
ended August 30, 1998 (the "Emusic Financial Statements").
(b) The Emusic Financial Statements are complete and in
accordance with the books and records of Emusic and present fairly in all
respects the financial position of Emusic as of their historical dates. Except
and to the extent reflected or reserved against in the Emusic balance sheet as
of June 30, 1998 (the "Emusic Balance Sheet"), Emusic does not have, as of the
date of such balance sheet, any liabilities or obligations (absolute or
contingent) of a nature required or customarily reflected in a balance sheet (or
the notes thereto). The aggregate reserves, if any, reflected on the Emusic
Financial Statements are adequate in light of the contingencies with respect to
which they are made.
(c) Emusic does not have any debt, liability, or obligation of
any nature, whether accrued, absolute or contingent that is not reflected or
reserved against in the Emusic Financial Statements. All debts, liabilities, and
obligations incurred after the date of the Emusic Financial Statements, whether
absolute or contingent, were incurred in the ordinary course of business and are
usual and normal in amount both individually and in the aggregate.
3.5 TAX MATTERS.
(a) Emusic has fully and timely, properly and accurately filed
all Tax returns and reports required to be filed by it (the "Emusic Returns"),
including all federal, foreign, state and local returns and reports for all
years and periods for which any such returns or reports were due. The Emusic
Returns and all other Tax returns and reports filed by Emusic were prepared in
the manner required by applicable law. Except for any Tax due upon the filing
of the Emusic Returns for current periods, all income, sales, use, occupation,
property or other Taxes or assessments due from Emusic have been paid, and
there are no pending assessments, asserted deficiencies or claims for
additional Taxes that have not been paid. The reserves for Taxes, if any,
reflected on the Emusic Financial Statements are adequate and there are no Tax
liens on any property or assets of Emusic. There have been no audits or
examinations of any Tax returns or reports by any applicable governmental
agency. No state of facts exists or has existed which would constitute grounds
for the assessment of any penalty or of any further Tax liability beyond that
shown on the respective Tax reports or returns. There are no outstanding
agreements or waivers extending the statutory period of limitation applicable
to any federal, state or local income Tax return or report for any period.
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(b) All Taxes which Emusic has been required to collect or
withhold have been duly withheld or collected and, to the extent required, have
been paid to the proper taxing authority.
(c) Emusic is not a party to any tax-sharing agreement or similar
arrangement with any other party.
(d) At no time has Emusic been included in the federal
consolidated income Tax return of any affiliated group of corporations.
(e) No payment which Emusic is obliged to pay to any director,
officer, employee or independent contractor pursuant to the terms of an
employment agreement, severance agreement or otherwise will constitute an excess
parachute payment as defined in Section 280G of the Code.
(f) Emusic will not be required to include any adjustment in
taxable income for any Tax period (or portion thereof) ending after the Closing
Date pursuant to Section 481(c) of the Code or any provision of the Tax laws of
any jurisdiction requiring Tax adjustments as a result of a change in method of
accounting implemented by Emusic prior to the Closing Date for any Tax period
(or portion thereof) ending on or before the Closing Date or pursuant to the
provisions of any agreement entered into by Emusic prior to the Closing Date
with any taxing authority with regard to the Tax liability of Emusic for any Tax
period (or portion thereof) ending on or before the Closing Date.
(g) Emusic is not currently under any contractual obligation to
pay to any Governmental Body any Tax obligations of, or with respect to any
transaction relating to, any other person or to indemnify any other person with
respect to any Tax.
3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in
Section 3.6 of the Emusic Disclosure Schedule, from June 30, 1998, Emusic has
not:
(a) suffered any Material adverse change in its financial
condition or in the operations of its business, nor any Material Adverse Change
in its balance sheet, including but not limited to cash distributions or
decreases in the net assets of Emusic;
(b) suffered any physical damage, destruction or loss, whether or
not covered by insurance, in an aggregate amount in excess of Ten Thousand
Dollars ($10,000);
(c) granted or agreed to make any increase in the compensation
payable or to become payable by Emusic to its officers or employees, except
those occurring in the ordinary course of business;
(d) declared, set aside or paid any dividend or made any other
distribution on or in respect of the shares of the capital stock of Emusic or
declared any direct or indirect redemption, retirement, purchase or other
acquisition by Emusic of such shares;
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(e) issued any shares of capital stock of Emusic or any warrants,
rights, options or entered into any commitment relating to the shares of Emusic;
(f) made any change in the accounting methods or practices it
followed, whether for general financial or Tax purposes, or any change in
depreciation or amortization policies or rates adopted therein;
(g) sold, leased, abandoned or otherwise disposed of any real
property or any machinery, equipment or other operating property other than in
the ordinary course of business;
(h) sold, assigned, transferred, licensed or otherwise disposed
of any patent, trademark, trade name, brand name, copyright (or pending
application for any patent, trademark or copyright), invention, work of
authorship, process, know-how, formula or trade secret or interest thereunder or
other intangible asset except for equipment sales in the ordinary course of
their business;
(i) suffered any dispute involving any employee that could have a
Material adverse effect on Emusic;
(j) engaged in any activity or entered into any commitment or
transaction (including without limitation any borrowing or capital expenditure),
in either case, other than in the ordinary course of business;
(k) incurred any liabilities, absolute or contingent except for
(i) liabilities identified as such in the "liabilities" column of the Emusic
Financial Statements; (ii) accounts payable or accrued salaries that have been
incurred by Emusic since June 30, 1998, in the ordinary course of business and
consistent with Emusic's past practices; and (iii) liabilities in Section 3.6(k)
of the Emusic Disclosure Schedule;
(l) permitted or allowed any of its property or assets to be
subjected to any mortgage, deed of trust, pledge, lien, security interest or
other encumbrance of any kind, other than any purchase money security interests
incurred in the ordinary course of business;
(m) made any capital expenditure or commitment for additions to
property, plant or equipment, in the aggregate, in excess of Five Thousand
Dollars ($5,000);
(n) paid, loaned or advanced any amount to, or sold, transferred
or leased any properties or assets to, or entered into any agreement or
arrangement with any of its Affiliates, officers, directors or shareholders or
any Affiliate or associate of any of the foregoing;
(o) made any amendment to or terminated any agreement which, if
not so amended or terminated, would be required to be disclosed in the Emusic
Disclosure Schedule;
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(p) agreed to take any action described in this Section 3.6 or
outside of its ordinary course of business or which would constitute a breach of
any of the representations contained in this Agreement.
3.7 TITLE AND RELATED MATTERS. Emusic has good and marketable title to
all the properties, interests in properties and assets, real and personal,
reflected in the Emusic Financial Statements or acquired after the date of the
Emusic Financial Statements (except properties, interests in properties and
assets sold or otherwise disposed of since the date of the Emusic Financial
Statements in the ordinary course of business), free and clear of all mortgages,
liens, pledges, charges or encumbrances of any kind or character, except the
lien of current Taxes not yet due and payable and except for liens which in the
aggregate do not secure more than Ten Thousand Dollars ($10,000) in liabilities.
Except as noted in Section 3.7 of the Emusic Disclosure Schedule, the equipment
of Emusic used in the operation of its business is in good operating condition
and repair, normal wear and tear excepted. All real or personal property leases
to which Emusic is a party are valid, binding, enforceable and effective in
accordance with their respective terms, subject to (i) laws of general
application relating to bankruptcy, insolvency, and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies. There is not under any of such leases any existing default
by Emusic or, any other event of default or event which, with notice or lapse of
time or both, would constitute a default by any other party to such leases.
Section 3.7 of the Emusic Disclosure Schedule contains a description of all real
and personal property leased or owned by Emusic, describing its interest in said
property and with respect to real property a description of each parcel and a
summary description of the buildings, structures and improvements thereon. True
and correct copies of Emusic's leases have been provided to GoodNoise or its
Representatives.
3.8 MUSIC RIGHTS
(a) Section 3.8(a)(i) of the Emusic Disclosure Schedule sets
forth a true and complete list of all Music Rights owned by Emusic. Section
3.8(a)(ii) of the Emusic Disclosure Schedule sets forth a true and complete list
of all Music Rights licensed by or to Emusic. Except as provided in Section
3.8(a)(iii) of the Emusic Disclosure Schedule, Emusic has written contracts
(each of which are listed in the Emusic Disclosure Schedule) for all Music
Rights owned, licensed, used, marketed, and sold by it, and those licensed to
it, Emusic has not received any notice from any party to such a contract
challenging the enforceability of such a contract, and all such contracts are
enforceable in accordance with their terms. Except as provided in Section
3.8(a)(iv) of the Emusic Disclosure Schedule, the Merger will not constitute or
be deemed to constitute an assignment of any such Music Rights or otherwise
require the consent of any third party. Except as provided in Section 3.8(a)(v)
of the Emusic Disclosure Schedule, all Music Rights owned or licensed by Emusic
were recorded and otherwise prepared in all respects in accordance with the
rules and regulations of any unions, guilds and similar associations having
jurisdiction. Except as provided in Section 3.8(a)(vii) of the Emusic Disclosure
Schedule, each person or entity who has rendered any service or provided any
materials in connection with, or has contributed in any way, to the making of
the Music Rights has the right to grant such rights, render such services or
furnish such materials. Except as
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disclosed in the Emusic Disclosure Schedule, all fees and other payments
applicable to or resulting from the creation, recording, manufacture,
duplication, and distribution of the Music Rights, including, but not limited
to, payments to performers, producers, engineers and others, have been fully and
completely paid by Emusic.
(b) Except as set forth in Section 3.8 of the Emusic Disclosure
Schedule, there are no amounts owed or that will become owing to any holder of
rights for royalties arising as a result of the Music Rights, nor has the Emusic
paid an advance in respect of such royalties, except to the extent that such
advance has been depleted or to the extent that the balance of any such advance
is set forth in Section 3.8 of the Emusic Disclosure Schedule.
(c) Except as described in Section 3.8(c) of the Emusic
Disclosure Schedule, Emusic does not know of or have any reason to believe that
any customers of the Emusic, or any holder of Music Rights, (i) has any
complaint or objection with respect to the service or any business practices of
the Emusic or the transactions contemplated hereby which could reasonably be
expected to have a Material Adverse Effect, or (ii) will cease to do business,
or significantly reduce the business conducted, with Emusic as a result of the
Merger which could reasonably be expected to have a Material Adverse Effect.
3.9 PROPRIETARY RIGHTS AND WARRANTY CLAIMS.
(a) Section 3.9(a)(i) of the Disclosure Schedule sets forth,
with respect to each Proprietary Asset owned or used by Emusic (each a "Emusic
Proprietary Asset" and collectively, the "Emusic Proprietary Assets") registered
with any Governmental Body or for which an application has been filed with any
Governmental Body, (i) a brief description of such Emusic Proprietary Asset, and
(ii) the names of the jurisdictions covered by the applicable registration or
application. Section 3.9(a)(ii) of the Emusic Disclosure Schedule identifies and
provides a brief description of all other Emusic Proprietary Assets. Section
3.9(a)(iii) of the Emusic Disclosure Schedule identifies and provides a brief
description of each Proprietary Asset licensed to Emusic by any Person (except
for any Proprietary Asset that is licensed to Emusic under any third party
software license generally available to the public at a cost of less than One
Thousand Dollars ($1,000)), and identifies the license agreement under which
such Proprietary Asset is being licensed to Emusic. Except as set forth in
Section 3.9(a)(iv) of the Emusic Disclosure Schedule, Emusic has good, valid and
marketable title to all Emusic Proprietary Assets identified in Sections
3.9(a)(i) and 3.9(a)(ii) of the Emusic Disclosure Schedule, free and clear of
all liens and other encumbrances and of all third party licensed technology, and
has a valid right to use all Proprietary Assets identified in Section
3.9(a)(iii) of the Emusic Disclosure Schedule. Except as set forth in Section
3.9(a)(v) of the Emusic Disclosure Schedule, Emusic is not obligated to make any
payment to any Person for the use of any Proprietary Asset. Except as set forth
in Section 3.9(a)(vi) of the Emusic Disclosure Schedule, Emusic has not
developed jointly with any other Person any Proprietary Asset with respect to
which such other Person has any rights.
(b) Except as set forth in Section 3.9(b) of the Emusic
Disclosure Schedule, Emusic has taken reasonable and customary measures and
precautions necessary to
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protect and maintain the confidentiality and secrecy of all Emusic Proprietary
Assets (except Emusic Proprietary Assets whose value would be unimpaired by
public disclosure) and otherwise to maintain and protect the value of all Emusic
Proprietary Assets. Except as set forth in the Emusic Disclosure Schedule,
Emusic has not disclosed or delivered to any Person, or permitted the disclosure
or delivery to any Person of any of the Emusic Proprietary Assets used in or
necessary for the conduct of business by Emusic as currently conducted by
Emusic.
(c) Except as provided in Section 3.9(c) of the Emusic
Disclosure Schedule, Emusic is not infringing, misappropriating or making any
unlawful use of, and Emusic has not at any time infringed, misappropriated or
made any unlawful use of, or received any notice or other communication (in
writing or otherwise) of any actual, alleged, possible or potential
infringement, misappropriation or unlawful use of, any Proprietary Asset owned
or used by any other person ("Third Party Proprietary Asset"). No other person
is infringing, misappropriating or making any unlawful use of, and no Third
Party Proprietary Asset owned or used by any other person infringes or conflicts
with, any Emusic Proprietary Asset.
(d) Except as set forth in Section 3.9(d) of the Emusic
Disclosure Schedule: (i) each Emusic Proprietary Asset conforms with any
specification, documentation, performance standard, representation or statement
made or provided with respect thereto by or on behalf of Emusic; and (ii) there
has not been any claim made against Emusic by any customer or other person
alleging that any Emusic Proprietary Asset (including each version thereof that
has ever been licensed or otherwise made available by Emusic to any person) does
not conform with any specification, documentation, performance standard,
representation or statement made or provided by or on behalf of Emusic, and
there is no basis for any such claim.
(e) Emusic's Proprietary Assets constitute all the
proprietary assets necessary to enable Emusic to conduct its business in the
manner in which such business has been and is being conducted. Except as set
forth in Section 3.9(e) of the Emusic Disclosure Schedule, (i) Emusic has not
exclusively licensed any of the Emusic Proprietary Assets to any person and (ii)
Emusic has not entered into any covenant not to compete or contract limiting its
ability to exploit fully any of the Emusic Proprietary Assets or to transact
business in any market or geographical area or with any person.
3.10 EMPLOYEE BENEFIT PLANS. Emusic does not maintain, or is
obligated to contribute to, any defined benefit pension plan or any employee
benefit plan that is subject to either Title IV of the Employee Retirement
Income Security Act of 1974 ("ERISA") or the minimum funding standards of ERISA
or the Code. Each bonus, incentive, deferred compensation, pension, profit-
sharing, retirement, vacation, severance pay, stock purchase, stock option,
group insurance and other employee benefit or fringe benefit plans, whether
formal or informal (whether written or not), maintained by Emusic conforms to
all applicable requirements, if any, of ERISA. Section 3.10 of the Emusic
Disclosure Schedule lists and describes all such plans.
3.11 BANK ACCOUNTS AND RECEIVABLES. Section 3.11 of the Emusic
Disclosure Schedule sets forth the names and locations of all banks, trusts,
companies, savings and loan
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associations, and other financial institutions at which Emusic maintains
accounts of any nature and the names of all persons authorized to draw thereon
or make withdrawals therefrom. Section 3.11 of the Emusic Disclosure Schedule
sets forth an accurate and complete breakdown and aging of all accounts
receivable, notes receivable, and other receivables of Emusic as of the date of
the Balance Sheet. Except as set forth on the Emusic Disclosure Schedule all
existing accounts receivable of Emusic (including those accounts receivable
reflected on the Emusic Financial Statements that have not yet been collected
and those accounts receivable that have arisen since June 30, 1998 and have not
yet been collected) (i) represent valid obligations of customers of Emusic
arising from bona fide transactions entered into in the ordinary course of
business, (ii) are current and will be collected in full when due, without any
counterclaim or setoff.
3.12 CONTRACTS.
(a) Section 3.12(a) the Emusic Disclosure Schedule
identifies each document or instrument to which Emusic is a party and that
relates to the acquisition, transfer, use, development, sharing or licensing of
any technology or Emusic Proprietary Asset.
(b) Except as set forth in Section 3.12(b) the Emusic
Disclosure Schedule,
(i) Emusic has no agreements, contracts or commitments
that call for fixed and/or contingent payments or expenditures by or to Emusic
of more than Five Thousand Dollars ($5,000) over the life of any such agreement,
contract or commitment.
(ii) Emusic has no purchase agreement, contract or
commitment that calls for fixed and/or contingent payments by Emusic that are in
excess of the normal, ordinary and usual requirements of Emusic's business.
(iii) There is no outstanding sales contract,
commitment or proposal (including, without limitation, development projects) of
Emusic that Emusic currently expects (or reasonably should expect) to result in
any loss to Emusic upon completion or performance thereof.
(iv) Emusic has no outstanding agreements, contracts or
commitments with officers, employees, agents, consultants, advisors, salesmen,
sales representatives, distributors or dealers that are not cancelable by it on
notice of not longer than thirty (30) days and without liability, penalty or
premium.
(v) Emusic has no outstanding agreements, contracts or
commitments with sales representatives, OEM's, distributors or dealers.
(vi) Emusic is not restricted by agreement from
competing with any person or from carrying on its business anywhere in the
world.
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(vii) Emusic has not guaranteed any obligations of
other persons, including each other, or made any agreements to acquire or
guarantee any obligations of other persons, including each other.
(viii) Emusic does not have any outstanding loan or
advance to any person; nor is it party to any line of credit, standby financing,
revolving credit or other similar financing arrangement of any sort which would
permit the borrowing by Emusic of any sum not reflected in the Emusic Financial
Statements.
(ix) All contracts, agreements and instruments listed in
the Emusic Disclosure Schedule pursuant to Section 3.11 (a) and (b) (the "Emusic
Material Contracts") are valid, binding, in full force and effect, and
enforceable by Emusic in accordance with their respective terms, subject to (i)
laws of general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies. No party to any Emusic Material Contract intends
to cancel, withdraw, modify or amend such contract.
(c) Emusic has delivered to GoodNoise accurate and complete
copies of all written Emusic Material Contracts, including all amendments
thereto and any correspondence regarding any dispute with respect thereto.
Emusic has not entered into any Material oral contracts.
(d) Except as set forth in Section 3.12(d) of the Emusic
Disclosure Schedule:
(i) Emusic has not violated or breached, or committed
any default under, any Emusic Material Contract, and no other person has
violated or breached, or committed any default under, any Emusic Material
Contract;
(ii) No event has occurred, and no circumstance or
condition exists, that (with or without notice or lapse of time) will, or could
reasonably be expected to, (A) result in a violation or breach of any of the
provisions of any Emusic Material Contract, (B) give any person the right to
declare default or exercise any remedy under any Emusic Material Contract, (C)
give any person the right to accelerate the maturity or performance of any
Emusic Material Contract; or (D) give any person the right to cancel, terminate
or modify any Emusic Material Contract;
(iii) There are no unresolved claims between Emusic and
any of its principal licensors, vendors, suppliers, distributors,
representatives or customers and none of such persons has advised Emusic of its
intention to cease doing business with Emusic, or with GoodNoise following the
Closing Date, whether as a result of the transactions contemplated hereunder.
3.13 COMPLIANCE WITH LAW. Except as provided in Section 3.13
of the Emusic Disclosure Schedule, Emusic is in compliance in all material
respects with all applicable laws and regulations. All licenses, franchises,
permits and other governmental authorizations held by
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Emusic and which are required for its business are valid and sufficient in all
respects for the businesses presently carried on by Emusic and as set forth in
the Emusic Disclosure Schedule.
3.14 LABOR DIFFICULTIES; NO DISCRIMINATION.
(a) Emusic is not engaged in any unfair labor practice
or in violation of any applicable laws respecting employment and employment
practices, health and safety, human rights, terms and conditions of employment,
and wages and hours.
(b) There is no unfair labor practice complaint against
Emusic actually pending or threatened before a labor relations board.
(c) There is and has not been any claim made against
Emusic based on actual or alleged wrongful termination or on actual or alleged
race, age, sex, disability or other harassment or discrimination, or similar
tortious conduct, nor is there any basis for any such claim.
(d) Emusic is not aware of any Emusic employee who
intends to terminate his or her employment with Emusic as a result of the Merger
or otherwise.
3.15 INSIDER TRANSACTIONS. No Affiliate of Emusic has any
interest in (i) any equipment or other property, real or personal, tangible or
intangible, including, without limitation, any Emusic Proprietary Asset, used in
connection with or pertaining to the businesses of Emusic, or (ii) any creditor,
supplier, customer, manufacturer, agent, representative, or distributor of
products of Emusic; provided, however, that no such Affiliate or other person
shall be deemed to have such an interest solely by virtue of the ownership of
less than one percent (1%) of the outstanding stock or debt securities of any
publicly-held company whose stock or debt securities are traded on a recognized
U.S. stock exchange or quoted on the National Association of Securities Dealers
Automated Quotation System.
3.16 EMPLOYEES, INDEPENDENT CONTRACTORS AND CONSULTANTS.
Section 3.16 of the Emusic Disclosure Schedule lists and describes all currently
effective written and oral consulting, independent contractor and/or employment
agreements and other agreements concluded with individual employees, independent
contractors or consultants to which Emusic is a party. True and correct copies
of all such written agreements have been provided to GoodNoise or its
Representatives. All salaries and wages paid by Emusic are in compliance in all
respects with applicable federal, state and local laws. Section 3.16 of the
Emusic Disclosure Schedule lists the names of all persons currently employed by
Emusic as well as the salaries and other compensation arrangements (bonus,
deferred compensation, etc.) and the accrued vacation time for each such person.
3.17 INSURANCE. Section 3.17 of the Emusic Disclosure
Schedule contains a list of the policies of fire, liability and other forms of
insurance held by Emusic. Emusic has done nothing, either by way of action or
inaction, that might invalidate such insurance policies in whole or in part.
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3.18 LITIGATION. Except as set forth in Section 3.18 of the
Emusic Disclosure Schedule, there is no suit, action or proceeding which has
been served upon or threatened against Emusic (nor is there any reasonable basis
therefor), in each case other than immaterial matters, or which questions or
challenges the validity of this Agreement or the Transaction Documents. Except
as set forth in Section 3.18 of the Emusic Disclosure Schedule, there is no
judgment, decree, injunction, or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against Emusic.
3.19 SUBSIDIARIES. Emusic has no subsidiaries. Except as set
forth in Section 3.19 of the Emusic Disclosure Schedule, Emusic does not own or
control (directly or indirectly) any capital stock, bonds or other securities
of, and does not have any proprietary interest in, any other corporation,
general or limited partnership, joint venture, firm, association or business
organization, entity or enterprise, and Emusic does not control (directly or
indirectly) the management or policies of any other corporation, partnership,
firm, association or business organization, entity or enterprise.
3.20 COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS. Emusic has
obtained all permits, licenses and other authorizations which are required under
federal, state and local laws applicable to Emusic relating to pollution or
protection of the environment, including laws or provisions relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, or hazardous or toxic materials, substances, or wastes into air,
surface water, groundwater, or land, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants or hazardous or toxic materials,
substances, or wastes. Except as set forth in Section 3.20 of the Emusic
Disclosure Schedule, Emusic is in compliance with all terms and conditions of
the required permits, licenses and authorizations. Except as set forth in
Section 3.20 of the Emusic Disclosure Schedule, Emusic is not aware of, nor has
Emusic received written notice of, any conditions, circumstances, activities,
practices, incidents, or actions which may form the basis of any claim, action,
suit, proceeding, hearing, or investigation of, by, against or relating to
Emusic, based on or related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling, or the emission,
discharge, release or threatened release into the environment, of any pollutant,
contaminant, or hazardous or toxic substance, material or waste.
Except as disclosed in Section 3.20 of the Emusic Disclosure Schedule,
(a) No Environmental Activity has occurred in the
business of Emusic or on or in relation to any premises currently or formerly
used by Emusic which may cause Emusic to incur expenses or costs for the
elimination, neutralization or amelioration of the results of the Environmental
Activity or become liable for compensation to any third party.
(b) Emusic has held its assets, occupied its respective
premises, operated its respective businesses and conducted all other activities
in compliance with all Environmental Laws. Emusic has not received any notice of
non-compliance with Environmental Laws from any person or governmental authority
and Emusic does not know of any facts which could give rise to any such notice.
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(c) There are no underground storage tanks or surface
impoundments at, on, or under premises formerly or currently used by Emusic.
(d) Emusic has maintained all environmental and
operating documents and records substantially in the manner and for the time
periods required by any Environmental Laws. Section 3.20 of the Emusic
Disclosure Schedule lists each environmental permit and each Environmental Audit
conducted with respect to Emusic or its premises while occupied by either of
them. An "Environmental Audit" shall mean any evaluation, inspection,
assessment, study or test performed at the request of or on behalf of a
governmental authority, including but not limited to, a public liaison
committee, as well as a self-evaluation, whether or not required by
Environmental Law.
3.21 CORPORATE DOCUMENTS. Emusic has furnished to GoodNoise
for its examination all documents requested by GoodNoise, including, but not
limited to: (i) copies of its charter documents; (ii) its minute book containing
all records required to be set forth of all proceedings, consents, actions, and
meetings of the shareholders, the board of directors and any committees thereof;
(iii) all permits, orders, and consents issued by any regulatory agency with
respect to Emusic, or any securities of Emusic, and all applications for such
permits, orders, and consents; and (iv) the stock transfer books of Emusic
setting forth all transfers of any capital stock. The corporate minute books,
stock certificate books, stock registers and other corporate records of Emusic
are complete and, and the signatures appearing on all documents contained
therein are the true signatures of the persons purporting to have signed the
same. All actions reflected in such books and records were duly and validly
taken in compliance with the laws of the applicable jurisdiction.
3.22 ACCURACY OF INFORMATION IN INFORMATION OR PROXY
STATEMENT. The information furnished by Emusic to the Emusic Shareholders in
connection with the solicitation of shareholder consent or proxies for the
approval and adoption of this Agreement and the approval and adoption of the
Merger shall not, on the date the Information or Proxy Statement is first mailed
to the Emusic shareholders, on any date subsequent thereto and prior to the
Effective Time or at the Effective Time, contain any untrue statement of a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
false or misleading, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
consent or proxies which has become false or misleading.
3.23 NO BROKERS. Neither Emusic nor any shareholder, officer
or director of Emusic is obligated for the payment of fees or expenses of any
broker or finder in connection with the origin, negotiation or execution of this
Agreement or in connection with any transaction contemplated hereby.
3.24 ACCURACY OF DOCUMENTS AND INFORMATION. The copies of all
instruments, agreements, other documents and written information set forth as,
or referenced in, the schedules or exhibits to this Agreement or specifically
required to be furnished pursuant to this Agreement to GoodNoise by Emusic are
complete and correct. No representations or
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warranties made by Emusic in this Agreement, nor any document, written
information, statement, financial statement, certificate, schedule or exhibit
furnished directly to GoodNoise pursuant to this Agreement contains any untrue
statement of a material fact, or omits to state a material fact necessary to
make the statements or facts contained herein not misleading.
4. REPRESENTATIONS AND WARRANTIES OF GOODNOISE AND SUB. Except as otherwise
set forth in the "GoodNoise Disclosure Schedule," referencing the appropriate
section and paragraph numbers, to be provided to Emusic concurrent with the
execution of this Agreement, GoodNoise represents and warrants to Emusic as set
forth below. No fact or circumstance disclosed to Emusic by GoodNoise shall
constitute an exception to these representations and warranties unless such fact
or circumstance is set forth in the GoodNoise Disclosure Schedule.
4.1 ORGANIZATION. GoodNoise and Sub are corporations duly
organized, validly existing and in good standing under the laws of their
jurisdictions and have corporate power and authority to carry on their
businesses as they are now being conducted and as they are proposed to be
conducted. Each of GoodNoise and Sub is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or properties makes such qualification or licensing necessary.
4.2 POWER, AUTHORITY AND VALIDITY. GoodNoise and Sub have the
corporate power and authority to enter into this Agreement and other Transaction
Documents to which they are a party and to carry out their obligations hereunder
and thereunder. The execution and delivery of this Agreement and the Transaction
Documents to which they are a party and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the board of
directors of GoodNoise and Sub, and no other corporate proceedings are necessary
to authorize this Agreement or the other Transaction Documents. GoodNoise and
Sub are not subject to or obligated under any charter, bylaw or contract
provision or any license, franchise or permit or subject to any order or decree,
which would be breached or violated in a material manner by or in material
conflict with its executing and carrying out this Agreement and the transactions
contemplated hereunder and under the Transaction Documents. This Agreement is,
and each of the other Transaction Documents to which GoodNoise and Sub are a
party, when executed and delivered by GoodNoise and Sub shall be, the valid and
binding obligations of GoodNoise and Sub, enforceable in accordance with their
respective terms, subject to (i) laws of general application relating to
bankruptcy, insolvency, and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
4.3 CAPITALIZATION.
(a) The authorized capital stock of GoodNoise as of the
date of this Agreement consists of: (i) Two Hundred Million (200,000,000) shares
of GoodNoise Common Stock, of which 14,985,800 shares are issued and outstanding
and (ii) Five Hundred Thousand (500,000) shares of preferred stock, none of
which are issued or outstanding. GoodNoise has reserved 3,000,000 shares of
GoodNoise Common Stock for issuance to employees, directors and consultants,
upon exercise of stock options. Except as set forth in the GoodNoise Disclosure
Schedule, there are no outstanding options, warrants, rights, commitments,
conversion rights,
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rights of exchange, plans or other agreements of any character providing for the
purchase, issuance or sale of any shares of the capital stock of GoodNoise from
GoodNoise other than as contemplated by this Agreement.
(b) All of the outstanding securities of GoodNoise have
been duly authorized and are validly issued, fully paid and nonassessable. All
securities of GoodNoise were issued in compliance with all applicable federal
and state securities laws. Except as otherwise set forth in the GoodNoise
Disclosure Schedule or in the GoodNoise Commission Documents (as defined in
Section 4.4 below), GoodNoise does not have any other shares of its capital
stock issued or outstanding and does not have any other outstanding
subscriptions, options, warrants, rights or other agreements or commitments
obligating GoodNoise to issue shares of its capital stock or other securities.
GoodNoise is not a party to or aware of any shareholders agreements among the
shareholders of GoodNoise.
(c) The GoodNoise Shares have been duly authorized and,
when issued and delivered in accordance with the terms hereof, will be validly
issued, fully paid and nonassessable and will be issued in compliance with all
applicable federal and state securities laws. There are no preemptive rights of
any stockholder of GoodNoise to acquire the GoodNoise Shares.
4.4 LITIGATION. There is no suit, action or proceeding which
has been served upon or, to the knowledge of GoodNoise, threatened against
GoodNoise, in each case other than immaterial matters, or which questions or
challenges the validity of this Agreement or the Transaction Documents. There is
no judgment, decree, injunction, or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against GoodNoise.
4.5 COMPLIANCE WITH LAW. GoodNoise is in compliance in all
material respects with all applicable laws and regulations. All licenses,
franchises, permits and other governmental authorizations held by GoodNoise and
which are required for its business are valid and sufficient in all respects for
the businesses presently carried on by GoodNoise.
4.6 TAX MATTERS. GoodNoise has fully and timely, properly and
accurately filed all Tax returns and reports required to be filed by it (the
"GoodNoise Returns"), including all federal, foreign, state and local returns
and reports for all years and periods for which any such returns or reports were
due. The GoodNoise Returns and all other Tax returns and reports filed by
GoodNoise were prepared in the manner required by applicable law. Except for any
Tax due upon the filing of the GoodNoise Returns for current periods, all
income, sales, use, occupation, property or other Taxes or assessments due from
GoodNoise have been paid, and there are no pending assessments, asserted
deficiencies or claims for additional Taxes that have not been paid. The
reserves for Taxes, if any, reflected on the GoodNoise Financial Statements are
adequate and there are no Tax liens on any property or assets of GoodNoise.
There have been no audits or examinations of any Tax returns or reports by any
applicable governmental agency. No state of facts exists or has existed which
would constitute grounds for the assessment of any penalty or of any further Tax
liability beyond that shown on the respective Tax reports or
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returns. There are no outstanding agreements or waivers extending the statutory
period of limitation applicable to any federal, state or local income Tax return
or report for any period.
4.7 COMMISSION DOCUMENTS; FINANCIAL STATEMENTS. GoodNoise has
made available to Emusic a true and complete copy of its Registration Statement
or Form 10-SB as filed with the Commission by GoodNoise; and, prior to the
Effective Time, GoodNoise will have made available to Emusic any additional
documents filed with the Commission by GoodNoise prior to the Effective Time
(collectively, the "GoodNoise Commission Documents"). To date, GoodNoise has not
been subject to the reporting obligations under either Section 13(a) or 15(d) of
the Exchange Act. As of their respective filing dates, the GoodNoise Commission
Documents complied in all material respects with the requirements of the
Exchange Act and the Securities Act, and none of the GoodNoise Commission
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected by a subsequently filed GoodNoise
Commission Document prior to the date hereof. The financial statements of
GoodNoise, including the notes thereto, included in the GoodNoise Commission
Documents (the "GoodNoise Financial Statements") were complete and correct in
all material respects as of their respective dates, complied as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of the Commission with respect thereto as of their
respective dates, and have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent throughout the periods
indicated and consistent with each other (except as may be indicated in the
notes thereto or, in the case of unaudited statements included in Quarterly
Reports on Form 10-Qs Q, as permitted by Form 10-Q of the Commission). The
GoodNoise Financial statements fairly present the consolidated financial
condition and operating results of GoodNoise and its subsidiaries at the dates
and during the periods indicated therein (subject, in the case of unaudited
statements, to normal, recurring year-end adjustments).
4.8 ABSENCE OF CHANGES. There has been no change in GoodNoise
GoodNoise's accounting policies except as described in the notes to the
GoodNoise Financial Statements. Since June 30, 1998, except for losses in the
ordinary course of business or as otherwise disclosed in the GoodNoise
Commission Documents, there has been no material adverse change and no material
adverse development in the business, properties, operations, financial
condition, or results of operations of GoodNoise.
4.9 PRIVATE OFFERING. Subject to the accuracy of the
Shareholders' representations and warranties set forth in Section 5 hereof, the
offer, sale and issuance of the GoodNoise Shares as contemplated by this
Agreement are exempt from the registration requirements of the Securities Act.
GoodNoise agrees that neither GoodNoise nor anyone acting on its behalf will
offer any GoodNoise common stock or any similar securities for issuance or sale,
or solicit any offer to acquire any of the same from anyone so as to render the
issuance and sale of the GoodNoise Shares subject to the registration
requirements of the Securities Act. The Company has not offered or sold the
GoodNoise Shares by any form of general solicitation or general advertising, as
such terms are used in Rule 502(c) under the Securities Act.
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4.10 ACCURACY OF DOCUMENTS AND INFORMATION. The copies of al
instruments, agreements, other documents and written information set forth as,
or referenced in the schedules or exhibits to this Agreement or specifically
required to be furnish pursuant to this Agreement to Emusic by GoodNoise or Sub
are complete and correct. No representations or warranties made by GoodNoise or
Sub in this Agreement, nor any document, written information, statement,
financial statement, certificate, schedule or exhibit furnished directly to
Emusic pursuant to this Agreement, taken as a whole, contains any untrue
statement of a material fact, or omits to state a material fact necessary to
make the statements or facts contained herein not misleading.
4.11 NO BROKERS. GoodNoise is not obligated to pay fees or
expenses to any broker or finder in connection with the origin, negotiation or
execution of this Agreement or in connection with any transaction contemplated
hereby.
5. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS.
Each Shareholder as to itself, himself or herself represents
and warrants to GoodNoise as follows:
5.1 No person or entity not a signatory of this Agreement has
a beneficial interest in or a right to acquire or vote the Emusic Shares held of
record by such Shareholder or any portion thereof (except, with respect to
shareholders which are partnerships, partners of such shareholders). The Emusic
Shares are and will be, at all times until the Closing, free and clear of any
liens, claims, options, charges or other encumbrances. Such Shareholder's
principal place of residence or place of business is set forth on the signature
page hereto.
5.2 Such Shareholder will not transfer (except as may be
specifically required by court order or by operation of law), sell, exchange,
pledge or otherwise dispose of or encumber the Emusic Shares or any New
Securities (as defined below), or make any offer or agreement relating thereto,
at any time prior to the Closing.
5.3 Such Shareholder agrees that any shares in the capital
stock of Emusic that Shareholder purchases or with respect to which such
Shareholder otherwise acquired beneficial ownership after the date of this
Agreement and prior to the Closing (the "New Securities") shall be subject to
the terms and conditions of this Agreement to the same extent as if they
constituted Emusic Shares.
5.4 Such Shareholder represents to GoodNoise, that the
GoodNoise Shares which he will receive will be acquired with his own property or
funds or property for investment for an indefinite period for his own account,
not as a nominee or agent, and not with a view to the sale or distribution of
any part thereof, and that he has no present intention of selling, granting
participation in, or otherwise distributing the same.
5.5 Such Shareholder understands that the GoodNoise Shares
will not be registered under the Securities Act of 1933 (the "Securities Act")
on the ground that the sale provided for in this Agreement is exempt pursuant to
section 4(2) of the Securities Act, and that GoodNoise's reliance on such
exemption is predicated on his representations set forth herein.
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5.6 Until such time as the GoodNoise Shares shall become
registered for resale under the Securities Act or no longer subject to
restriction pursuant to Rule 144(k), such Shareholder agrees that in no event
will he make a disposition of any of the GoodNoise Shares unless and until (a)
he shall have notified GoodNoise of the proposed disposition and shall have
furnished GoodNoise with a statement of the circumstances surrounding the
proposed disposition and (b) he shall have furnished GoodNoise with an opinion
of counsel satisfactory to GoodNoise to the effect that (i) such disposition
will not require registration of such Stock under the Securities Act or (ii)
that appropriate action necessary for compliance with the Securities Act has
been taken or (c) GoodNoise shall have waived, expressly and in writing, its
rights under clauses (a) and (b) of this Section.
5.7 In connection with the investment representations made
herein, Shareholder represents that he is able to fend for himself in the
transactions contemplated by this Agreement, has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits and
risks of his investment, has the ability to bear the economic risks of his
investment.
5.8 Such Shareholder understands that the acquisition of the
GoodNoise Shares involves a highly speculative and risky investment and that
GoodNoise may not be able to continue as a going concern unless it is able to
raise substantial funds from outside investors and that there is no assurance
that GoodNoise will be able to do so.
6. COVENANTS OF EMUSIC AND THE SHAREHOLDERS
6.1 ADVICE OF CHANGES. Emusic will promptly advise GoodNoise in
writing (i) of any event occurring subsequent to the date of this Agreement
which would render any representation or warranty of Emusic contained in this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect and (ii) of any material adverse
change in Emusic's business, taken as a whole.
6.2 CONDUCT OF BUSINESS. Until the Closing, Emusic will continue
to conduct its business and maintain its business relationships in the ordinary
and usual course and will not, except as set forth in Section 6.2 of the Emusic
Disclosure Schedule or without the prior written consent of GoodNoise:
(a) borrow any money which borrowings exceed in the aggregate
Five Thousand Dollars ($5,000) per month;
(b) incur any liability other than in the ordinary and usual
course of business or in connection with the performance or consummation of this
Agreement;
(c) encumber or permit to be encumbered any of its assets
except in the ordinary course of its business;
(d) dispose of any of its assets, except inventory in the
regular and ordinary course of business;
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(e) except as provided in Section 6.2(h) hereof, enter into
any lease or contract for the purchase or sale of any property, real or personal
except for inventory and licenses purchased in the ordinary course of business
or other leases or contracts for less than $5,000;
(f) fail to maintain its equipment and other assets in good
working condition and repair according to the standards it has maintained up to
the date of this Agreement, subject only to ordinary wear and tear;
(g) pay or authorize any bonus, increased salary, or special
remuneration to any officer or employee, including any amounts for accrued but
unpaid salary or bonuses;
(h) enter into any agreement for the acquisition or license
of any Music Rights with advances or minimum future commitments in excess of
$30,000;
(i) adopt or change any accounting methods;
(j) declare, set aside or pay any cash or stock dividend or
other distribution in respect of capital, or redeem or otherwise acquire any of
its capital stock;
(k) amend or terminate any contract, agreement or license to
which it is a party except non-Material agreements in the ordinary course of
business or other agreements with an annual value of less than $17,500;
(l) enter into any Material contract outside of the ordinary
course of business or which grants an exclusive license of a substantial part of
its assets, catalogue or right for a period over ninety (90) days. Good Noise
shall be given a reasonable prior notice of any such agreement and a right of
consultation, provided that after forty-five days from the date of this
Agreement, Emusic may enter into Material contracts without consent provided
that such contracts are in the ordinary course of business consistent with
Emusic's past practices;;
(m) loan any amount to any person or entity, or guaranty or
act as a surety for any obligation;
(n) waive or release any right or claim;
(o) issue or sell any shares of its capital stock of any
class or any other of its securities, or issue or create any warrants,
obligations, subscriptions, options, convertible securities, or other
commitments to issue shares of capital stock or amend the terms of any agreement
regarding the foregoing;
(p) split or combine the outstanding shares of its capital
stock of any class or enter into any recapitalization affecting the number of
outstanding shares of its capital stock of any class or affecting any other of
its securities;
(q) merge, consolidate or reorganize with any entity;
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(r) grant any exclusive license to all or a significant
portion of its assets, including, but not limited to, any exclusive license of a
significant portion of the company's catalog of Music Rights for a period of
over ninety (90) days;
(s) amend its Articles of Incorporation or Bylaws;
(t) make or change any election, change any annual accounting
period, file any tax return or amended tax return, enter into any closing
agreement, settle any tax claim or assessment relating to Emusic, surrender any
right to claim refund of taxes, consent to any extension or waiver of the
limitation period applicable to any tax claim or assessment relating to Emusic,
or take any other action or omit to take any action, if any such election,
adoption, change, amendment, agreement, settlement, surrender, consent or other
action or omission would have the effect of increasing the tax liability of
Emusic or GoodNoise; or
(u) agree to do any of the things described in the preceding
clauses of this Section 6.2.
Notwithstanding the above, Emusic or Radiant Records may enter into new
agreements with recording artists that provide for recording funds of no more
than $15,000 per agreement and at an aggregate cost not in excess of $30,000,
exclusive of renewal options. Before entering into any such agreements, Emusic
shall provide GoodNoise with copies of any such agreements for prior review and
comment.
6.3 RISK OF LOSS. Until the Closing and subject to the
confidentiality and nonuse provisions hereof, all risk of loss, damage or
destruction to Emusic's assets shall be borne by Emusic, and the Merger terms
described in Section 2 shall, in case of any such loss, damage or destruction,
be revised as the parties may agree, or this Agreement shall be terminated in
accordance with Section 13.
6.4 ACCESS TO INFORMATION. Until the Closing and subject to the
confidentiality and nonuse provisions hereof, Emusic shall allow GoodNoise and
its Representatives free access upon reasonable notice and during normal working
hours to its files, books, records, and offices, including, without limitation,
any and all information relating to taxes, commitments, contracts, leases,
licenses, and personal property and financial condition. Until the Closing,
Emusic shall cause its accountants to cooperate with GoodNoise and its
Representatives in making available all financial information requested,
including without limitation the right to examine all working papers pertaining
to all financial statements prepared or audited by such accountants.
6.5 REGULATORY APPROVALS. Prior to the Closing, Emusic shall
execute and file, or join in the execution and filing, of any application or
other document which may be necessary in order to obtain the authorization,
approval or consent of any Governmental Body, federal, state or local, which may
be reasonably required, or which GoodNoise may reasonably request, in connection
with the consummation of the transactions contemplated by this Agreement Emusic
shall use its best efforts to obtain all such authorizations, approvals and
consents.
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6.6 SATISFACTION OF CONDITIONS PRECEDENT. Emusic will use its
best efforts to satisfy or cause to be satisfied all the conditions precedent
which are set forth in Section 11, and, without limiting the generality of the
foregoing, to obtain all consents and authorizations of third parties and to
make all filings with, and give all notices to, third parties which may be
necessary or reasonably required on its part in order to effect the transactions
contemplated hereby.
6.7 EQUITY COMPENSATION ARRANGEMENTS. Prior to the Closing, any
obligation of Emusic to issue stock, warrants or options which have been offered
or promised to the employees of Emusic shall have been fulfilled or been
terminated to the satisfaction of GoodNoise.
6.8 SHAREHOLDER CONSENT. Prior to the Closing, whether by special
meeting or written consent of its shareholders, Emusic will submit this
Agreement, the Agreement of Merger and related matters to its shareholders for
consideration and approval, and the Board of Directors of Emusic will recommend
such approval to the Emusic Shareholders. Each of the Shareholders agrees to
vote all shares of Emusic capital stock in respect of which each such
shareholder is entitled to vote at any meeting, in favor of the Merger, the
approval of the transactions contemplated by this Agreement.
7. COVENANTS OF GOODNOISE AND SUB.
7.1 ADVICE OF CHANGES. GoodNoise and Sub will promptly advise
Emusic in writing of (i) any event occurring subsequent to the date of this
Agreement which would render any representation or warranty of GoodNoise or Sub
contained in this Agreement, if made on or as of the date of such event or the
Closing Date, untrue or inaccurate in any material respect and (ii) any material
adverse change in GoodNoise's business, taken as a whole.
7.2 REGULATORY APPROVALS. Prior to the Closing, GoodNoise and Sub
shall execute and file, or join in the execution and filing, of any application
or other document which may be necessary in order to obtain the authorization,
approval or consent of any Governmental Body, federal, state or local, which may
be reasonably required, or which Emusic may reasonably request, in connection
with the consummation of the transactions contemplated by this Agreement. Such
persons and entities shall use their best efforts to obtain all such
authorizations, approvals and consents.
7.3 SATISFACTION OF CONDITIONS PRECEDENT. GoodNoise will use its
best efforts to satisfy or cause to be satisfied all the conditions precedent
which are set forth in Section 10, and GoodNoise will use its best efforts to
cause the transactions contemplated by this Agreement to be consummated, and,
without limiting the generality of the foregoing, to obtain all consents and
authorizations of third parties and to make all filings with, and give all
notices to, third parties which may be necessary or reasonably required on its
part in order to effect the transactions contemplated hereby. Notwithstanding
the foregoing, the condition precedent payment obligations of GoodNoise
hereunder, including the $25,000 signing bonus and $3,125 per week consulting
fees are due when payable in accordance with the terms hereof and are firm
commitments not subject to a best efforts condition.
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7.4 REGISTRATION RIGHTS. GoodNoise agrees that if prior to the
time the GoodNoise Shares may be freely sold pursuant to Rule 144, GoodNoise
registers for the account of any other person, or grants to any other party
rights to register, GoodNoise Shares under the Securities Act, GoodNoise shall
provide to the Shareholders the right to participate in such registration or
become parties to the registration rights agreement, as the case may be, on the
same or substantially the same terms and conditions as pertain to such other
party; provided however, that the foregoing shall not apply to the extent that
registration rights are granted in connection with an equity offering of or by
GoodNoise unless such rights are also granted to other existing shareholders of
GoodNoise or to other parties receiving shares in connection with any other
transaction, including a purchase or sale of assets or stock, between GoodNoise
and any other person. Notwithstanding the foregoing, GoodNoise shall not permit
either Gene Hoffman or Robert Kohn (the "GoodNoise Founders") to sell any shares
of GoodNoise stock owned by them into the public market unless or until the
GoodNoise Shares have been registered for resale under the Securities Act or are
otherwise eligible for resale pursuant to Rule 144.
7.5 NASDAQ LISTING. Following the closing, GoodNoise shall use its
best efforts to obtain a Nasdaq listing for its Common Stock within one year of
the Effective Date.
7.6 CONSULTING FEE. Following the execution of this Agreement and
until the Closing or termination of this Agreement, GoodNoise shall pay to
Emusic a consulting fee of $3,125 per week payable on Monday of each week;
provided however, that GoodNoise shall not be obligated to pay such fee if
Emusic is in breach of this Agreement or otherwise if the delay in the closing
is due to actions or inaction of Emusic.
8. MUTUAL COVENANTS.
8.1 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, employees, consultants and permitted sublicensees 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 which protects the Confidential Information of the Disclosing
Party. The Receiving Party shall promptly 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, which
remedies shall include injunctive relief without the necessity of posting a bond
or proving damages. These obligations shall not apply to the extent that
Confidential Information includes information which:
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(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;
(c) is received by the Receiving Party from a third party
without restriction on 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 agency 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.
GoodNoise and Sub, on the one hand, and Emusic and the Shareholders, on the
other, individually and collectively, agree that neither they nor their
Representatives will disclose the existence of this Agreement or the
transactions contemplated herein without the prior written consent of the other
party. Notwithstanding the foregoing, GoodNoise may make any disclosure deemed
by it based upon the advice of counsel to be necessary or appropriate pursuant
to the requirements of applicable securities laws.
8.2 EXCLUSIVITY. Until the earlier of the Closing Date or the
termination of this Agreement, Emusic agrees that it will not (and that it will
use best efforts to assure that its employees, agents and affiliates do not on
its behalf) discuss or enter into any agreement concerning the sale or
acquisition of Emusic, a controlling interest in its stock (including by means
of any public offering thereof, but excluding issuance of stock and options to
employees in the ordinary course of business consistent with past practices) or
a substantial part of its assets with any party other than GoodNoise, and that
any such discussions presently in progress will be terminated or suspended
during that period. Emusic represents and warrants that it has the legal right
to terminate or suspend any such pending negotiations and agrees to indemnify
GoodNoise, its representatives and agents from and against any claims by any
party to such negotiations based upon or arising out of the discussion or any
consummation of the Merger.
8.3 FURTHER ASSURANCES. Each party agrees to cooperate fully with
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
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8.4 TAX-FREE ORGANIZATION. Each party shall each use its best
efforts to cause the Merger to be treated as a reorganization within the meaning
of Section 368(a) of the Code.
9. THE CLOSING.
9.1 MERGER. On the date of the Closing, but not prior to the
Closing, the Agreement of Merger shall be simultaneously filed with the office
of the Secretary of State of the States of California and Delaware and the
merger of Sub with and into Emusic shall be consummated.
9.2 ADDITIONAL DOCUMENTS.
(a) At any time and from time to time at or after the Closing,
the parties shall at the request of the other party execute and deliver or cause
to be executed and delivered all such assignments, consents and other documents
and take or cause to be taken all such other actions as either party may
reasonably deem necessary or desirable, in order to more fully and effectively
carry out the intents and purposes of this Agreement.
(b) Emusic shall execute and deliver to GoodNoise a statement
meeting the requirements of Treasury Regulation Section 1.897-2(h)(2) stating
that interests in Emusic are not United States real property interests.
10. CONDITIONS PRECEDENT TO EMUSIC'S OBLIGATIONS.
Emusic's obligations hereunder are subject to the fulfillment or
satisfaction on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Emusic, but only in a writing signed by
Emusic):
10.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of GoodNoise and Sub set forth in Section 4 shall
be true on and as of the Closing with the same force and effect as if they had
been made at the Closing and the conditions to Emusic's obligations set forth
under Sections 10.1, 10.2, 10.3 and 10.4 shall have been satisfied. Emusic shall
receive a certificate to such effect from an executive officer of GoodNoise.
10.2 COVENANTS. GoodNoise and Sub shall have performed and complied
with all of their covenants contained in this Agreement to be performed on or
before the Closing, and GoodNoise shall deliver to Emusic a certificate executed
by an executive officer of GoodNoise at Closing stating that such condition has
been satisfied.
10.3 NO LITIGATION. No litigation or proceeding shall be threatened
or pending against GoodNoise or Sub with the purpose or with the probable effect
of enjoining or preventing the consummation of any of the transactions
contemplated by this Agreement or which would have a material adverse effect on
the business, liabilities, operations of GoodNoise following the Closing, taken
as a whole, and Emusic shall receive a certificate to such effect signed by an
executive officer of GoodNoise.
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10.4 AUTHORIZATIONS. Emusic shall have received from GoodNoise and
Sub written evidence that the execution, delivery and performance of GoodNoise
and Sub's obligations under this Agreement and the Agreement of Merger have been
duly and validly approved and authorized by the Board of Directors of GoodNoise
and Sub, respectively, and the shareholder of Sub.
10.5 GOVERNMENT CONSENTS. There shall have been obtained at or prior
to the date of Closing such permits or authorizations, and there shall have been
taken such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken, including, but not limited to, compliance with applicable
state and federal securities laws.
10.6 EMPLOYMENT OFFERS AND OTHER AGREEMENTS. Mark Chasan shall have
entered into a non-compete agreement with GoodNoise in substantially the same
form as attached hereto as Exhibit C, and an employment agreement in
---------
substantially the form as attached hereto as Exhibit D.
---------
10.7 FINANCING. GoodNoise shall have raised not less than
$3,000,000 through the issuance of additional equity securities within ninety
(90) days from the date of this Agreement.
10.8 PAYMENTS. GoodNoise shall have made all payments due to Emusic
or Chasan pursuant to the terms of this Agreement or the Chasan Employment
Agreement prior to the Closing.
11. CONDITIONS TO GOODNOISE AND SUB'S OBLIGATIONS.
GoodNoise's and Sub's obligations hereunder are subject to the
fulfillment or satisfaction on and as of the Closing, of each of the following
conditions (any one or more of which may be waived by GoodNoise, but only in a
writing signed by GoodNoise):
11.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Emusic contained in Section 3 and the Shareholders in Section
5 shall be true on and as of the Closing with the same force and effect as if
they had been made at the Closing and the conditions to GoodNoise's and Sub's
obligations set forth under Sections 11.1, 11.2, 11.3 and 11.4 shall have been
satisfied. GoodNoise shall receive a certificate to such effect from an
executive officer of Emusic.
11.2 COVENANTS. Emusic and the Shareholders shall have performed and
complied with all of their covenants set forth in this Agreement on or before
the Closing.
11.3 NO LITIGATION. On and as of the Closing, no litigation or
proceeding shall be threatened or pending against Emusic for the purpose or with
the probable effect of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement, or which would have a material
adverse effect on the business, liabilities, income, property, operations or
prospects of Emusic subsequent to the Closing.
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11.4 AUTHORIZATIONS. GoodNoise shall have received from Emusic
written evidence that (i) the execution, delivery and performance of this
Agreement and the Agreement of Merger have been duly and validly approved and
authorized by its Board of Directors and (ii) the Emusic Shareholders holding
not less than 85% of the Emusic Shares shall have approved this Agreement, the
Merger and the transactions contemplated hereby and thereby.
11.5 NO ADVERSE DEVELOPMENT. There shall be no order, decree, or
ruling by any court or Governmental Body or threat thereof or any other fact or
circumstance, which might prohibit or render illegal or have a Material adverse
effect on the business, prospects, liabilities, income, property, assets or
operations of Emusic subsequent to the Closing. Emusic shall not have sustained
a loss, whether or not insured, by reason of physical damage caused by fire,
flood or earthquake, accident or other calamity which materially affects the
Emusic Balance Sheet or its ability to carry on its business as proposed to be
conducted, and which, in the judgment of GoodNoise, renders it inadvisable to
proceed with the Closing. There shall have been no other event which, in the
reasonable judgment of GoodNoise, has a material and adverse effect on Emusic's
assets, business, liabilities, income, property, assets, prospects or operations
subsequent to the Closing.
11.6 REQUIRED CONSENTS. GoodNoise shall have received all written
consents, assignments, waivers, authorizations or other certificates reasonably
deemed necessary by GoodNoise's legal counsel to provide for the continuation in
full force and effect of any and all contracts and leases of Emusic.
11.7 GOVERNMENT CONSENTS. There shall have been obtained at or prior
to the Closing Date such permits or authorizations and there shall have been
taken such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken, including, but not limited to, compliance with applicable
state and federal securities laws.
11.8 EMPLOYMENT OFFERS AND OTHER AGREEMENTS. Mark Chasan shall have
entered into non-compete and employment agreements with GoodNoise in
substantially the same form as attached hereto as Exhibits C and D.
-----------------
11.9 FINANCING. GoodNoise shall have raised not less than $3,000,000
through the issuance of additional equity securities within ninety (90) days of
the date upon which the last party hereto executed this Agreement.
11.10 NORDIC ACQUISITION. GoodNoise shall have closed (or shall
close simultaneously with this Agreement) the acquisition of Nordic
Entertainment Worldwide, Inc.
12. CONDITION SUBSEQUENT. As a condition to the continued ownership of
Emusic by Good Noise, Good Noise shall have closed an aggregate of $5,000,000 or
more in financing (including the $3,000,000 which is a condition to the Closing
of this Agreement) within six months from the date of this Agreement and shall
have paid the Cash Merger Consideration in the sum of $300,000 on the earlier of
closing said $5,000,000 in financing or six months from the date hereof. Until
such time as (i) GoodNoise has raised not less than $5,000,000 of additional
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financing (including the $3,000,000 which is a condition to the Closing of this
Agreement) and (ii) GoodNoise has paid the Cash Merger Consideration, the
GoodNoise Shares and Emusic Share shall remain in escrow pursuant to the terms
of the Indemnity Escrow Agreement. In the event that GoodNoise has not satisfied
the conditions of the preceding sentence (the "Conditions Subsequent") on or
before the date six months following the date of this Agreement, the Emusic
Shareholders, exercising the right by majority in interest, may elect to rescind
the Merger and have returned to them all of the Emusic Shares and related assets
of Emusic or exercise their rights under the Security Agreement. Such election
to rescind shall be effective fifteen (15) days following written notice thereof
from the Representative to GoodNoise, provided that GoodNoise shall have not
satisfied the Conditions Subsequent prior to that time.
12.1 BANKRUPTCY. During the period following the Closing and before
the Conditions Subsequent are satisfied, GoodNoise agrees that it shall remain
solvent and refrain from filing (voluntarily or involuntarily) for bankruptcy
protection and shall make no assignment for the benefit of creditors. If
GoodNoise files for bankruptcy protection, the Merger shall be deemed rescinded
on the date immediately prior to the date of the bankruptcy filing.
12.2 NON-MERGER CONSIDERATION. It is expressly understood that if
the Merger fails to close or is rescinded in accordance with the provisions of
this Section, neither Emusic nor any Emusic Shareholder shall have any
obligation to return any payment or other non-GoodNoise Share consideration or
other payments received by such shareholder pursuant to the terms hereof and
prior to the date of such rescinding.
13. TERMINATION OF AGREEMENT.
13.1 MUTUAL AGREEMENT. This Agreement may be terminated at any time
prior to the Closing by the mutual written consent of each of the parties
hereto.
13.2 FAILURE TO FULFILL CONDITIONS. Either GoodNoise or Emusic may
terminate this Agreement if the Merger has not been consummated within ninety
(90) days of the date of this Agreement (provided that the right to terminate
this Agreement under this Section shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date). Any
termination of this Agreement under this Section shall be effective by the
delivery of notice of the terminating party to the other parties hereto.
13.3 NO LIABILITY. Any termination of this Agreement pursuant to this
Section shall be without further obligation or liability upon any party in favor
of any other party hereto.
13.4 EFFECT OF TERMINATION. The termination of the Agreement pursuant
to this Section shall terminate all sections hereof other than Section 8.1.
14. INDEMNIFICATION.
14.1 SURVIVAL OF REPRESENTATIONS.
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(a) The representations and warranties made by Emusic and the
Shareholders under Sections 3 and 5 hereof and the representations and
warranties set forth in any certificate delivered by Emusic in connection with
this Agreement shall survive the Closing and shall remain in full force and
effect and shall survive until the end of the Indemnification Period and shall
survive thereafter only with respect to any claims made prior to the end of the
Indemnification Period.
(b) The representations, warranties, covenants and obligations
of Emusic, and the rights and remedies that may be exercised by the Indemnitees
(as defined herein), shall not be limited or otherwise affected by or as a
result of any information furnished to, or any investigation made by or
knowledge of, any of the Indemnitees or any of their Representatives.
(c) For purposes of this Agreement, each statement or other
item of information set forth in the Emusic Disclosure Schedule shall be deemed
to be a representation and warranty made by Emusic in this Agreement.
14.2 INDEMNIFICATION BY EMUSIC SHAREHOLDERS.
(a) From and after the Closing Date, the Emusic Shareholders
shall be jointly and severally liable for and shall hold harmless and indemnify
GoodNoise and the Surviving Corporation (each an "Indemnitee") from and against,
and shall compensate and reimburse each of the Indemnitees for, any Damages
which are directly or indirectly suffered or incurred by any of the Indemnitees
or to which any of the Indemnitees may otherwise become subject (regardless of
whether or not such Damages relate to any third-party claim) and which arise
from or as a result of, or are directly or indirectly connected with: (i) any
inaccuracy in or breach of any representation or warranty set forth in Section 3
or 5 hereunder or in any certificate delivered by Emusic in connection with this
Agreement; (ii) any breach of any covenant or obligation of Emusic or the
Shareholders hereunder or pursuant to any agreement delivered in connection
herewith; or (iii) any Legal Proceeding relating to any inaccuracy, breach or
expense of the type referred to in clause "(i)" or "(ii)" above (including any
Legal Proceeding commenced by any Indemnitee for the purpose of enforcing any of
its rights under this Section if such Indemnitee is the prevailing party in any
such Legal Proceeding). The aggregate liability arising by reason of this
Section shall not exceed the value of the GoodNoise Shares held in escrow
pursuant to the terms of the Indemnity Escrow Agreement, even if the Damages
exceed the value of such shares.
(b) If the Surviving Corporation suffers, incurs or otherwise
becomes subject to any Damages as a result of or in connection with any
inaccuracy in or breach of any representation, warranty, covenant or obligation,
then (without limiting any of the rights of the Surviving Corporation as an
Indemnitee) GoodNoise shall also be deemed, by virtue of its ownership of the
stock of the Surviving Corporation, to have incurred Damages as a result of and
in connection with such inaccuracy or breach.
14.3 NO CONTRIBUTION. The Emusic Shareholders acknowledge and agree
that they shall not have and shall not exercise or assert (or attempt to
exercise or assert), any right of
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contribution, right of indemnity or other right or remedy against the Surviving
Corporation which they have in their capacity as shareholders in connection with
any indemnification obligation or any other liability to which it may become
subject under or in connection with this Agreement or any certificate delivered
by Emusic in connection with this Agreement.
14.4 DEFENSE OF THIRD PARTY CLAIMS. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against the
Surviving Corporation, against GoodNoise or against any other Person) with
respect to which the Emusic Shareholders may become obligated to hold harmless,
indemnify, compensate or reimburse any Indemnitee pursuant to this Section, the
procedure set forth below shall be followed.
(a) NOTICE. GoodNoise shall give prompt written notice of the
commencement of any such Legal Proceeding against GoodNoise or the Surviving
Corporation for which indemnity may be sought; provided, however, that any
failure on the part of GoodNoise to so notify Emusic shall not limit any of the
obligations of Emusic under this Section unless the ability to defend such claim
is materially prejudiced by such failure or delay. The Indemnification Period
shall be tolled solely with respect to a particular claim for the period
beginning on the date the Emusic Shareholders receive written notice of that
claim until the final resolution of such claim so long as such claim is made
within the Indemnification Period.
(b) DEFENSE OF CLAIM. The Indemnitee shall have the right to be
represented by counsel of its choice and to defend or otherwise control the
handling of any claim, or Legal Proceeding for which indemnity is sought;
provided however that the choice of such counsel shall be subject to the
approval of the Shareholder Representative, which approval shall not be
unreasonably withheld. If the Indemnitee so proceeds with the defense of any
such claim or Legal Proceeding:
(i) all expenses relating to the defense of such claim or
Legal Proceeding (whether or not incurred by the Indemnitee) shall be borne and
paid exclusively by the Emusic Shareholders;
(ii) the Emusic Shareholders shall make available to the
Indemnitee any non-privileged documents and materials in the possession or
control of the Emusic Shareholders that may be necessary to the defense of such
claim or Legal Proceeding except for documents or materials which are sealed by
a court order or are subject to a nondisclosure agreement prohibiting disclosure
by the Emusic Shareholders;
(iii) the Indemnitee shall keep the Emusic Shareholders
informed of all material developments and events relating to such claim or Legal
Proceeding; and
(iv) the Emusic Shareholders shall have the right to
participate in the defense of such claim or legal proceeding through the
Shareholder Representative (including, if desired, obtaining counsel separate
and apart from GoodNoise); provided that any such participation shall be at
their sole cost and expense (including the costs of any such counsel); and
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(v) the Indemnitee shall have the right to settle, adjust
or compromise such claim or Legal Proceeding with the written consent of the
Emusic Shareholders; provided, however, that the Emusic Shareholders shall not
unreasonably withhold such consent.
14.5 INDEMNITY ESCROW. As soon as practicable after the Effective
Time, GoodNoise shall deposit into an escrow account (the "Indemnity Escrow")
with a national bank or other financial institution reasonably acceptable to
Emusic, as escrow agent (the "Indemnity Escrow Agent"), twenty percent (20%) of
the GoodNoise Shares (the "Indemnity Escrow Holdback"). The Indemnity Escrow
Holdback shall be withheld on a pro rata basis from the Emusic Shareholders who
otherwise are entitled to such amounts at the Effective Time and shall be
governed by the terms set forth herein and in an escrow agreement (the
"Indemnity Escrow Agreement") in substantially the form attached hereto as
Exhibit E. The Indemnity Escrow (but only up to a maximum of the total
- ----------
aggregate value of the Indemnity Escrow Holdback) shall be available to
compensate the Indemnitees for any loss, to the extent of the amount of Damages
that such Indemnitee has incurred and which are subject to indemnification
hereunder.
So long as the GoodNoise shares remain subject to escrow, the Shareholders
shall have the right to vote said shares or give a proxy for the same.
Furthermore, any distribution of money or property (including additional shares
of GoodNoise equity) paid by GoodNoise on the Indemnity Escrow Holdback shall be
added to the Indemnity Escrow Holdback and become subject to the Indemnity
Escrow. Said additions shall thereafter be distributed to the Shareholders upon
expiration of the Indemnity Escrow.
14.6 SHAREHOLDER REPRESENTATIVE.
(a) By virtue of their approval of this Agreement, the Emusic
Shareholders will be deemed to have irrevocably constituted and appointed,
effective as of the Effective Time, Mark Chasan (the "Shareholder
Representative"), as their true and lawful agent and attorney-in-fact to enter
into any agreement in connection with the transactions contemplated by this
Agreement or the Indemnity Escrow Agreement, to exercise all or any of the
powers, authority and discretion conferred on him under any such agreement, to
waive any terms and conditions of any such agreement, to give and receive
notices and communications, to authorize delivery to GoodNoise of the Indemnity
Escrow Holdback or other property from the Indemnity Escrow in satisfaction of
claims by GoodNoise, 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 holders of a majority in interest of the Indemnity Escrow from
time to time upon not less than ten (10) days' prior written notice to
GoodNoise. The Shareholder Representative shall receive no compensation for his
services. Notices or communications to or from the Shareholder Representative
shall constitute notice to or from each of the Emusic Shareholders. This power
of attorney is coupled with an interest and is irrevocable.
37
<PAGE>
(b) The Shareholder Representative shall not be liable for any
act done or omitted hereunder as Shareholder Representative while acting in good
faith and not in a manner constituting gross negligence, and any act done or
omitted pursuant to the advice of counsel shall be conclusive evidence of such
good faith. The Emusic Shareholders shall severally indemnify the Shareholder
Representative and hold him harmless against any loss, liability or expense
incurred without gross negligence or bad faith on the part of such Shareholder
Representative and arising out of or in connection with the acceptance or
administration of his duties hereunder.
15. MISCELLANEOUS.
15.1 GOVERNING LAWS. It is the intention of the parties hereto
that the internal laws of the State of California (irrespective of its choice of
law principles) shall govern the validity of this Agreement, the construction of
its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.
15.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and
unless otherwise provided in, this Agreement, each and all of the covenants,
terms, provisions, and agreements contained herein shall be binding upon, and
inure to the benefit of, the permitted successors, executors, heirs,
representatives, administrators and assigns of the parties hereto.
15.3 SEVERABILITY. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
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 which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
15.4 ENTIRE AGREEMENT. This Agreement, the exhibits and
schedules hereto, the documents referenced herein, and the exhibits and
schedules thereto, constitute the entire understanding and agreement of the
parties hereto with respect to the subject matter hereof and thereof and
supersede all prior and contemporaneous agreements or understandings,
inducements or conditions, express or implied, written or oral, between the
parties with respect hereto and thereto. The express terms hereof control and
supersede any course of performance or usage of the trade inconsistent with any
of the terms hereof.
15.5 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against any party
whose signature appears thereon and all of which together shall constitute one
and the same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
15.6 EXPENSES. Except as provided to the contrary herein,
each party shall pay all of its own costs and expenses incurred with respect to
the negotiation, execution and delivery of this Agreement and the exhibits
hereto. In the event the Merger is consummated, all legal and
38
<PAGE>
accounting fees incurred by Emusic and the Emusic Shareholders in connection
with the Merger shall be deemed to be expenses of the Emusic Shareholders, shall
be borne by the Emusic Shareholders and shall not become obligations of Emusic,
GoodNoise or the Surviving Corporation. The Emusic Shareholders shall make
arrangements satisfactory to GoodNoise at or prior to the Closing for the
satisfaction of such amounts.
15.7 OTHER REMEDIES. Except as otherwise provided herein, any
and all remedies herein expressly conferred upon a party shall be deemed
cumulative with and not exclusive of any other remedy conferred hereby or by law
on such party, and the exercise of any one remedy shall not preclude the
exercise of any other.
15.8 AMENDMENT AND WAIVERS. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either retroactively
or prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default.
15.9 SURVIVAL OF AGREEMENTS. All covenants, agreements,
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby notwithstanding any investigation of the parties hereto.
15.10 NO WAIVER. The failure of any party to enforce any of
the provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
15.11 ATTORNEYS' FEES. Should suit be brought to enforce or
interpret any part of this Agreement, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including without limitation, costs,
expenses and fees on any appeal). The prevailing party shall be the party
entitled to recover its costs of suit, regardless of whether such suit proceeds
to final judgment. A party not entitled to recover its costs shall not be
entitled to recover attorneys' fees. No sum for attorneys' fees shall be counted
in calculating the amount of a judgment for purposes of determining if a party
is entitled to recover costs or attorneys' fees.
15.12 NOTICES. Any notice provided for or permitted under this
Agreement will be treated as having been received (a) when delivered personally,
(b) when sent by confirmed telex or telecopy, (c) one (1) day following when
sent by commercial overnight courier with written verification of receipt, or
(d) three (3) days following when mailed postage prepaid by certified or
registered mail, return receipt requested, to the party to be notified, at the
address set forth below, or at such other place of which the other party has
been notified in accordance with the provisions of this Section:
Emusic: Creative Fulfillment, Inc.
1437 5th Street, Suite 305
39
<PAGE>
Santa Monica, California 90401
With copy to: W. R. Johnson, Esq.
GOFF JOHNSON, LLP
12424 Wilshire Boulevard, Suite 1120
Los Angeles, California 90025
Facsimile: (310) 979-3110
GoodNoise or Sub: GoodNoise Corporation
719 Colorado Avenue
Palo Alto, California 94306
Attention: Gene Hoffman
With copy to: Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Facsimile: (650) 327-3699
Attention: Peter M. Astiz, Esq.
15.13 TIME. Time is of the essence of this Agreement.
15.14 CONSTRUCTION OF AGREEMENT. This Agreement has been
negotiated by the respective parties hereto and their attorneys and the language
hereof shall not be construed for or against any party. The titles and headings
herein are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole.
15.15 NO JOINT VENTURE. Nothing contained in this Agreement
shall be deemed or construed as creating a joint venture or partnership between
any of the parties hereto. No party is by virtue of this Agreement authorized as
an agent, employee or legal representative of any other party. No party shall
have the power to control the activities and operations of any other and their
status is, and at all times, will continue to be, that of independent
contractors with respect to each other. No party shall have any power or
authority to bind or commit any other. No party shall hold itself out as having
any authority or relationship in contravention of this Section 15.15.
15.16 PRONOUNS. All pronouns and any variations thereof shall
be deemed to refer to the masculine, feminine or neuter, singular or plural, as
the identity of the person, persons, entity or entities may require.
15.17 FURTHER ASSURANCES. Each party agrees to cooperate
fully with the other parties and to execute such further instruments, documents
and agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
40
<PAGE>
15.18 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions
of this Agreement are intended, nor shall be interpreted, to provide or create
any third party beneficiary rights or any other rights of any kind in any
client, customer, affiliate, shareholder, partner of any party hereto or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof shall be personal solely between
the parties to this Agreement.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
GOODNOISE CORPORATION CREATIVE FULFILLMENT, INC.
By: /s/ By /s/
--------------------------- ----------------------------
GN ACQUISITION CORPORATION SHAREHOLDERS:
By: /s/ By /s/
--------------------------- ----------------------------
Mark S. Chasan
[SIGNATURE PAGE FOR AGREEMENT AND PLAN OF REORGANIZATION]
<PAGE>
EXHIBIT 10.2
COMMON STOCK PURCHASE AGREEMENT
-------------------------------
THIS AGREEMENT is made as of the 30th day of March, 1998 by and between
Good Noise Corporation, a Delaware corporation (the "Company"), and Gary
Culpepper (the "Purchaser").
WITNESSETH:
----------
WHEREAS, the Purchaser has devoted time and resources to the development of
certain technology. The Company desires to obtain all rights to such technology
and related assets as more fully described in Attachment I to Exhibit A hereto
(the "Assets") in consideration of which, the Company will issue shares of its
Common Stock on the terms and conditions hereinafter set forth.
WHEREAS, the Purchaser is an employee, officer and/or director of the
Company.
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. Number of Shares and Price Per Share. The Purchaser hereby agrees to
------------------------------------
purchase from the Company and the Company agrees to sell to Purchaser 900,000
shares of the Company's Common Stock (the "Stock") in consideration of the
transfer of all of the Purchaser's rights in the Assets. Purchaser agrees to
execute the form of Bill of Sale attached hereto as Exhibit A and such other
documents as the Company may from time to time to request to confirm such
transfer. The closing of such purchase shall occur immediately upon execution of
this Agreement.
2. Unvested Share Repurchase Option. In the event the Purchaser's
--------------------------------
employment with the Company is terminated for any reason or no reason, with or
without cause, or if the Purchaser or the Purchaser's legal representative
attempts to sell, exchange, transfer, pledge or otherwise dispose of any shares
purchased pursuant to this Purchase Agreement which have not vested in the
Purchaser pursuant to Section 2(a) below (the "Unvested Shares"), the Company
shall have the right to reacquire the Unvested Shares under the terms and
subject to the conditions set forth in this Section 2 (the "Unvested Share
Repurchase Option").
(a) Vesting of Shares. The term "Initial Vesting Date" shall mean the
-----------------
Effective Date of this Agreement. The Stock purchased hereby will vest in the
Purchaser and become "Vested Shares" on and after the Initial Vesting Date in
accordance with the following schedule:
Date Portion Vested
---------------------------------- ----------------------------------
As of the Initial Vesting Date 300,000 shares of Stock will vest.
For each full month of continuous An additional 16,667 of the Stock
service to the Company following will vest for each such full month
the Initial Vesting Date. of employment.
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Provided that the aggregate percentage of Stock constituting Vested Shares may
not exceed 100%, and that such numbers shall be adjusted appropriately to
reflect any stock splits or recombinations, recapitalizations or the like by the
Company.
(b) Exercise of Unvested Share Repurchase Option. Except as provided
--------------------------------------------
in Section 2(e) below, if the Purchaser's employment or consultancy with the
Company is terminated for any reason or for no reason, with or without cause, or
if the Purchaser or the Purchaser's legal representative attempts to dispose of
any Unvested Shares other than as allowed in this Agreement, the Company may
exercise the Unvested Share Repurchase Option by written notice to the Escrow
Agent (as defined in Section 9 below) and to the Purchaser or the Purchaser's
legal representative within sixty (60) days after such termination or after the
Company has received notice of the attempted disposition. For the purposes
hereof, to be continuous, employment or consultancy must be for a minimum of 20
hours per week unless otherwise approved in writing by the Company.
(c) Payment for Shares and Return of Shares. Payment by the Company
---------------------------------------
to the Escrow Agent on behalf of the Purchaser or the Purchaser's legal
representative shall be made in cash within sixty (60) days after the date of
the mailing of the written notice of exercise of the Unvested Share Repurchase
Option. For purposes of the foregoing, cancellation of any promissory note of
the Purchaser to the Company shall be treated as payment to the Purchaser in
cash to the extent of the unpaid principal and any accrued interest canceled.
The purchase price per share being purchased by the Company shall be an amount
equal to the $0.01 per share. Within thirty (30) days after payment by the
Company, the Escrow Agent shall give the shares which the Company has purchased
to the Company and shall give the payment received from the Company to the
Purchaser.
(d) Early Termination of Unvested Share Repurchase Option. The other
-----------------------------------------------------
provisions of Section 2 notwithstanding, the Unvested Share Repurchase Option
shall be terminated upon the closing of any of the following transactions: (1) a
merger or the sale or exchange by the shareholders of the Company of all or
substantially all of the stock of the Company where the shareholders of the
Company before such merger or sale or exchange do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the surviving Company; (2) the sale or exchange of all or substantially all
of the Company's assets (other than a sale or transfer to a subsidiary of the
Company as defined in section 425(f) of the Internal Revenue Code of 1986, as
amended (the "Code")); or (3) in such other event as the Company's Board of
Directors may determine to be appropriate; provided however, that the Unvested
Share Repurchase Option shall be terminated with no action required by the Board
of Directors if following any of the transactions described in (1)-(2) above,
the employment of the Purchaser is terminated by the Company or its successor
without cause.
(e) Transfers Not Subject to the Unvested Share Repurchase Option.
-------------------------------------------------------------
The Unvested Share Repurchase Option shall not apply to a transfer to the
Purchaser's ancestors, descendants or spouse or to a trustee for their benefit
or the benefit of the Purchaser, provided that such transferee shall agree in
writing (in a form satisfactory to the Company) to take the Stock subject to all
the terms and conditions of this Agreement, including this Section 2 providing
for an Unvested Share Repurchase Option.
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(f) Legends. The Company may at any time place a legend or legends
-------
referencing the Unvested Share Repurchase Option on any shares subject to the
Unvested Share Repurchase Option.
(g) Assignment of Unvested Share Repurchase Option. In the event the
----------------------------------------------
Company is unable to exercise the Unvested Share Repurchase Option or the Right
of First Refusal (as defined in Section 4 below) pursuant to the provisions of
Section 500 et seq. of the California Corporations Code, or the corresponding
-- ---
provisions of other applicable law, the Company shall have the right to assign
the Unvested Share Repurchase Option or the Right of First Refusal to one or
more persons as may be selected by the Company.
3. Stock Dividends, etc. If, from time to time, there is any stock
--------------------
dividend, stock split or other change in the character or amount of any of the
outstanding stock of the Company, then in such event any and all new substituted
or additional securities to which Purchaser is entitled by reason of Purchaser's
ownership of the shares acquired pursuant to this Agreement shall be considered
Stock and shall be immediately subject to the Unvested Share Repurchase Option
and the Right of First Refusal and all other terms of this Agreement with the
same force and effect as the shares subject to the Unvested Share Repurchase
Option, the Right of First Refusal and all other terms of this Agreement
immediately before such event in accordance with the formula set forth in
Section 2(a) above.
4. Agreements Between the Company and Founders.
-------------------------------------------
(a) Right of First Refusal.
----------------------
(i) The Right. In the event the Purchaser proposes to sell any
---------
of the Stock to one or more third parties pursuant to an understanding with such
third parties in a transaction not registered under the Securities Act of 1933
(the "Securities Act") in reliance upon a claimed exemption thereunder, then the
Purchaser shall first grant the Company the right to purchase all of any part of
such securities (the "Offered Securities") on the same terms as the Purchaser is
willing to sell such Stock to such third parties. Further, each such agreement
provides that (i) the Purchaser shall deliver written notice (the "Purchaser's
Notice") to the Company at least thirty (30) days prior to the closing of the
proposed sale describing all material terms of the proposed sale of the Stock,
which notice shall either be signed by the proposed transferee(s) or include a
copy of the offer letter or letter of agreement signed by such proposed
transferee(s), (ii) the Company shall be entitled to a period in which to
exercise its right of first refusal of a least thirty (30) days in length from
the date of the delivery of the Purchaser's Notice to the Company (the "Exercise
Period"), and (iii) as required pursuant to Section 4(a)(ii) below, the Company
shall assign such right of first refusal to all other shareholders of the
Company (the "Eligible Purchasers" to the extent such right is not exercised
with respect to all of the Offered Securities and, in the event of such an
assignment, the Exercise Period shall be extended for an additional fifteen (15)
days from the date of such assignment.
(ii) Reapportionment. If the Eligible Purchasers as a group do
---------------
not purchase the maximum portion of the Remaining Securities to which they are
entitled pursuant to this Section 4(a) (the "Maximum Portion"), each such
Eligible Purchaser shall be entitled to purchase an additional share of the
Maximum Portion in the proportion, as nearly as practicable,
3
<PAGE>
the pro rata share of the Remaining Securities which such Eligible Purchaser
indicated that he desired to purchase bore to the Maximum Portion. The Eligible
Purchasers and the Purchaser shall use their best efforts to purchase and sell
the Remaining Securities within thirty (30) days of the date of the delivery of
the Assignment Notice. If an Eligible Purchaser gives the Purchaser notice that
it desires to purchase its share of the Remaining Securities, then payment for
the Remaining Securities shall be for the consideration and in accordance with
the other terms of the written agreement between the Company and the Purchaser.
(iii) Failure to Notify. If, within fifteen (15) days after the
-----------------
date of the delivery of the Assignment Notice, the Eligible Purchasers as a
group do not notify the Purchaser that they elect to purchase all of the
Remaining Securities described in such notice on the terms set forth therein,
then the Purchaser may during the ninety (90) days following the end of such
fifteen (15) day period, sell such Offered Securities as to which the Company
and the Eligible Purchasers do not indicate a desire to purchase to the third
parties (or to the representative of such third parties and other investors
designed by such representative) with whom the understanding had been reached at
a price and upon terms and conditions no more favorable in any material respect
to such third parties as those set forth in the Purchaser's Notice. In the event
the Purchaser has not sold such Offered Securities or entered into an agreement
to sell such Offered Securities within said ninety (90) day period, the
Purchaser shall not thereafter sell any Equity Securities without first offering
such securities to the Company in the manner provided above and pursuant to the
terms of the written agreement between the Company and the Purchaser.
(b) Condition to Transfer. All transferees of shares of Stock or any
---------------------
interest therein other than the Company shall be required as a condition of such
transfer to agree in writing (in a form satisfactory to the Company) that they
will receive and hold such shares of Stock or interests subject to the
provisions of this Agreement, including the Right of First Refusal and the
restrictions set forth in Section 4 of this Agreement.
(c) The Right of First Refusal shall terminate at such time as a
public market exists for the Company's Common Stock (or any other stock issued
by the Company, or any successor, in exchange for the Stock). For the purpose of
this Agreement, a "public market" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the Securities
Exchange Act of 1934) or (ii) such stock is traded on the over-the-counter
market and prices therefore are published daily on business days in a recognized
financial journal.
(d) Limitation on Right. Notwithstanding the provisions of this
-------------------
Section 4, the Right of First Refusal set forth in this Section 4 shall not
apply to:
(i) any transfer to the Purchaser's (or Founder's) ancestors or
descendants or spouse or to a trustee for their benefit provided that in any
case any such transferee shall agree in writing (in a form satisfactory to the
Company) to take the Stock subject to all the terms of this Agreement, including
the Right of First Refusal.
4
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(ii) any sale or transfer of Vested Shares of the Stock in a
public offering of securities of the Company registered under the Securities Act
in which the Company receives net proceeds of at least $10,000,000.
5. Restrictions on Transfer of Unvested Shares. The Purchaser may not
-------------------------------------------
sell, transfer, pledge or otherwise dispose of any Unvested Shares of the Stock
still subject to the Unvested Share Repurchase Option except as provided in
Section 2(e) and 4(c).
6. "Market Stand-Off" Agreement. Purchaser hereby agrees that in
----------------------------
connection with any underwritten public offering by the Company, during the
period of duration specified by the Company and an underwriter of the Common
Stock of the Company following the effective date of the registration statement
of the Company filed under the Securities Act with respect to the offering, it
shall not, to the extent requested by the Company and such underwriter, directly
or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase, pledge or otherwise
transfer or dispose of (other than to donees who agree to be similarly bound)
any securities of the Company held by it at any time during such period except
the Common Stock included in such registration.
7. Consent of Spouse. If the Purchaser is married on the date of this
-----------------
Agreement, the Purchaser's spouse shall execute a Consent of Spouse in the form
of Exhibit B hereto, effective on the date hereof. Such consent shall not be
---------
deemed to confer or convey to the spouse any rights in the Stock that do not
otherwise exist by operation of law or the agreement of the parties. If the
Purchaser should marry or remarry subsequent to the date of this Agreement, the
Purchaser shall within thirty (30) days thereafter obtain his or her new
spouse's acknowledgment of and consent to the existence and binding effect of
all restrictions contained in this Agreement by signing an additional Consent of
Spouse in the form of Exhibit B.
---------
8. Legends. All certificates representing any shares of Stock subject to
-------
the provisions of this Agreement shall have endorsed thereon the following
legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
REPURCHASE OPTION, A RIGHT OF FIRST REFUSAL IN FAVOR OF THE CORPORATION OR ITS
ASSIGNEE, AND OTHER RESTRICTIONS ON TRANSFER SET FORTH IN AN AGREEMENT BETWEEN
THE CORPORATION AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN
INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS
CORPORATION."
(b) "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE
COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT
FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
5
<PAGE>
(c) Any legend required to be placed thereon by the California
Commissioner of Corporations.
9. Release.
-------
(a) In partial consideration for the issuance of the Stock, the
Purchaser hereby releases the Company and each of its officers, directors,
shareholders, affiliates and all agents, successors, or assigns of said persons
or entities (the "Released Parties") from any and all claims, demands,
liabilities, damages, causes of action, costs, expenses and compensation of any
kind or nature whatsoever, whether or not now known or unknown, suspected or
claimed, matured or unmatured, fixed or contingent, which the Purchaser ever
had, now has, or may claim to have from the beginning of time, against the
Released Parties (whether directly or indirectly), or any of them, by reason of
any act, event, or omission concerning any matter, cause or thing, including
those which arise out of, or result from, or occurred in connection with the
Purchaser's work with the Released Parties which preceded or related to the
incorporation of the Company and its business.
(b) The Purchaser acknowledges that there is a risk that, subsequent
to the execution of this Agreement, he may discover, incur or suffer from claims
which were unknown or unanticipated at the time this Agreement is executed,
including, without limitation, unknown or unanticipated claims which arose from,
are based upon, or are related to the matters released herein which, if known by
him on the date this Agreement is being executed, may have materially affected
his decision to execute this Agreement. The Purchaser acknowledges that he is
assuming the risk of such unknown and unanticipated claims and agree that this
Agreement applies thereto. The Purchaser expressly waive the benefits of Section
1542 of the Civil Code of the State of California, which reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR."
10. Warranties and Representations. In connection with the proposed
------------------------------
purchase of the Stock, the Purchaser hereby agrees, represents and warrants as
follows:
(a) The Purchaser is purchasing the Stock solely for his or her own
account for investment and not with a view to, or for resale in connection with,
any distribution thereof within the meaning of the Securities Act of 1933 as
amended (the "Act"). The Purchaser further represents that he or she does not
have any present intention of selling, offering to sell or otherwise disposing
of or distributing the Stock or any portion thereof; and that the entire legal
and beneficial interest of the Stock he or she is purchasing is being purchased
for, and will be held for the account of, the Purchaser only and neither in
whole nor in part for any other person.
(b) The Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Stock. The Purchaser
further represents and warrants that he or she has discussed the Company and its
plans, operations and financial condition with its
6
<PAGE>
officers, has received all such information as he or she deems necessary and
appropriate to enable him or her to evaluate the financial risk inherent in
making an investment in the Stock and has received satisfactory and complete
information concerning the business and financial condition of the Company in
response to all inquiries in respect thereof.
(c) The Purchaser realizes that his or her purchase of the Stock will
be a highly speculative investment, and he or she is able, without impairing his
financial condition, to hold the Stock for an indefinite period of time and to
suffer a complete loss on his or her investment.
(d) The Company has disclosed to the Purchaser that:
(i) The sale of the Stock has not been registered under the Act,
and the Stock must be held indefinitely unless a transfer of it is subsequently
registered under the Act or an exemption from such registration is available,
and that the Company is under no obligation to register the Stock;
(ii) The Company will make a notation in its records of the
aforementioned restrictions on transfer and legends.
(e) The Purchaser is aware of the provisions of Rule 144, promulgated
under the Act, which, in substance, permits limited public resale of "restricted
securities" acquired, directly or indirectly, from the issuer thereof (or an
affiliate of such issuer), in a non-public offering subject to the satisfaction
of certain conditions, including among other things: the resale occurring not
less than one year from the date the Purchaser has purchased and paid for the
Stock; the availability of certain public information concerning the Company;
the sale being through a broker in an unsolicited "broker's transaction" or in a
transaction directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934); and that any sale of the Stock may be made by
him or her only in limited amounts during any three-month period not exceeding
specified limitations. The Purchaser further represents that he or she
understands that at the time he or she wishes to sell the Stock there may be no
public market upon which to make such a sale, and that, even if such a public
market then exists, the Company may not be satisfying the current public
information requirements of Rule 144, and that, in such event, he or she would
be precluded from selling the Stock under Rule 144 even if the one-year minimum
holding period had been satisfied. The Purchaser represents that he or she
understands that in the event all of the requirements of Rule 144 are not
satisfied, registration under the Act or compliance with an exemption from
registration will be required; and that, notwithstanding the fact that Rule 144
is not exclusive, the staff of the SEC has expressed its opinion that persons
proposing to sell private placement securities other than in a registered
offering and otherwise than pursuant to Rule 144 will have a substantial burden
of proof in establishing that an exemption from registration is available for
such offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk.
(f) Without in any way limiting the Purchaser's representations and
warranties set forth above, the Purchaser further agrees that he or she shall in
no event make any disposition of all or any portion of the Stock which he or she
is purchasing unless and until:
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(i) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with said Registration Statement; or
(ii) The Purchaser shall have (1) notified the Company of the
proposed disposition and furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition, and (2) furnished the
Company with an opinion of his or her own counsel to the effect that such
disposition will not require registration of such shares under the Act, and such
opinion of his or her counsel shall have been concurred in by counsel for the
Company, and the Company shall have advised the Purchaser of such concurrence.
11. Escrow. As security for his or her faithful performance of the terms
------
of this Agreement and to insure the availability for delivery of the Stock upon
exercise of the Unvested Share Repurchase Unvested Shares and the Right of First
Refusal herein provided for, the Purchaser agrees to deliver to and deposit with
Gray Cary Ware & Freidenrich LLP, counsel to the Company (the "Escrow Agent"),
as Escrow Agent in this transaction, two Stock Assignments duly endorsed (with
date and number of shares blank) in the form attached hereto as Exhibit C,
together with the certificate or certificates evidencing the Stock; such
documents are to be held by the Escrow Agent pursuant to the Joint Escrow
Instructions of the Company and the Purchaser set forth in Exhibit D attached
hereto and incorporated by this reference, which instructions shall also be
delivered to the Escrow Agent at the closing hereunder.
12. Transfers in Violation of Agreement. The Company shall not be
-----------------------------------
required (i) to transfer on its books any shares of Stock of the Company which
shall have been sold or transferred in violation of any of the provisions set
forth in this Agreement or (ii) to treat as owner of such shares or to accord
the right to vote as such owner or to pay dividends to any transferee to whom
such shares shall have been so transferred.
13. Rights as Shareholder. Subject to the provisions of this Agreement,
---------------------
the Purchaser shall, during the term of this Agreement, exercise all rights and
privileges of a shareholder of the Company with respect to the Stock deposited
in escrow.
14. Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
15. Notice. Any notice required or permitted hereunder shall be given in
------
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to the other party hereto at the address
hereinafter shown below his or her signature or at such other address as such
party may designate by ten (10) days' advance written notice to the other party
hereto.
16. Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
the successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, be binding upon the Purchaser, his or her heirs,
executors, administrators, successors and assigns.
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17. Entire Agreement; Amendments. This Agreement, together with the
----------------------------
Exhibits hereto, shall be construed under the laws of the State of California
(as it applies to agreements between California residents, entered into and to
be performed entirely within California), and constitutes the entire agreement
of the parties with respect to the subject matter hereof superseding all prior
written or oral agreements, and no amendment or addition hereto shall be deemed
effective unless agreed to in writing by the parties hereto.
18. Right to Specific Performance. The Purchaser agrees that the Company
-----------------------------
shall be entitled to a decree of specific performance of the terms hereof or an
injunction restraining violation of this Agreement, said right to be in addition
to any other remedies available to the Company.
19. Separability. If any provision of this Agreement is held by a court of
------------
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way and shall be construed in accordance with the
purposes and tenor and effect of this Agreement.
20. Tax Election Notification. The Purchaser shall notify the Company in
-------------------------
writing if Purchaser files an election pursuant to Section 83(b) of the Internal
Revenue Code of 1986, as amended, to be filed with the Internal Revenue Service
within thirty (30) days of the date of the sale herein contemplated. The
Company intends, in the event it does not receive from Purchaser evidence of
such filing, to claim a tax deduction for any amount which would otherwise be
taxable to Purchaser in the absence of such an election.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
"PURCHASER" "COMPANY"
GARY CULPEPPER GOOD NOISE CORPORATION
____________________________ By:___________________________________
Gary Culpepper Eugene Hoffman, Jr., President
Address:
2545 Humbolt Dr.
San Leandro, CA 94577
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EXHIBIT 10.3
GOODNOISE CORPORATION
1998 STOCK OPTION PLAN
1. Establishment, Purpose and Term of Plan.
---------------------------------------
1.1 Establishment. The GoodNoise Corporation 1998 Stock Option Plan
(the "Plan") is hereby established effective as of March 30, 1998 (the
"Effective Date").
1.2 Purpose. The purpose of the Plan is to advance the interests of the
Participating Company Group and its shareholders by providing an incentive to
attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 Term of Plan. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed. However, all Incentive Stock Options shall
be granted, if at all, within ten (10) years from the Effective Date.
2. Definitions and Construction.
----------------------------
2.1 Definitions. Whenever used herein, the following terms shall have
their respective meanings set forth below:
(a) "Board" means the Board of Directors of the Company. If one or
more Committees have been appointed by the Board to administer the Plan, "Board"
also means such Committee(s).
(b) "Code" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "Committee" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "Company" means GoodNoise Corporation, a Delaware corporation,
or any successor corporation thereto.
(e) "Consultant" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
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(f) "Director" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "Disability" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company group because
of the sickness or injury of the Optionee.
(h) "Employee" means any person treated as an employee (including
an officer or a Director who is also treated as an employee) in the records of a
Participating Company and, with respect to any Incentive Stock Option granted to
such person, who is an employee for purposes of Section 422 of the Code;
provided, however, that neither service as a Director nor payment of a
director's fee shall be sufficient to constitute employment for purposes of the
Plan.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the Stock,
the Fair Market Value of a share of Stock shall be the closing sale price of a
share of Stock (or the mean of the closing bid and asked prices of a share of
Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, The Nasdaq SmallCap Market or such other national or regional securities
exchange or market system constituting the primary market for the Stock, as
reported in The Wall Street Journal or such other source as the Company deems
-----------------------
reliable. If the relevant date does not fall on a day on which the Stock has
traded on such securities exchange or market system, the date on which the Fair
Market Value shall be established shall be the last day on which the Stock was
so traded prior to the relevant date, or such other appropriate day as shall be
determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by its
terms, will never lapse.
(k) "Incentive Stock Option" means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(l) "Insider" means an officer or a Director of the Company or any
other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(m) "Nonstatutory Stock Option" means an Option not intended to be
(as set forth in the Option Agreement) or which does not qualify as an Incentive
Stock Option.
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(n) "Option" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(o) "Option Agreement" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(p) "Optionee" means a person who has been granted one or more
Options.
(q) "Parent Corporation" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "Participating Company" means the Company or any Parent
Corporation or Subsidiary Corporation.
(s) "Participating Company Group" means, at any point in time, all
corporations collectively which are then Participating Companies.
(t) "Rule 16b-3" means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(u) "Section 162(m)" means Section 162(m) of the Code, as amended
by the Revenue Reconciliation Act of 1993 (P.L. 103-66).
(v) "Securities Act" means the Securities Act of 1933, as amended.
(w) "Service" means an Optionee's employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. Furthermore, an Optionee's Service
with the Participating Company Group shall not be deemed to have terminated if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company; provided, however, that if any such leave
exceeds ninety (90) days, on the ninety-first (91st) day of such leave the
Optionee's Service shall be deemed to have terminated unless the Optionee's
right to return to Service with the Participating Company Group is guaranteed by
statute or contract. Notwithstanding the foregoing, unless otherwise designated
by the Company or required by law, a leave of absence shall not be treated as
Service for purposes of determining vesting under the Optionee's Option
Agreement. The Optionee's Service shall be deemed to have terminated either upon
an actual termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its sole discretion, shall determine whether the
Optionee's Service has terminated and the effective date of such termination.
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<PAGE>
(x) "Stock" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(y) "Subsidiary Corporation" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(z) "Ten Percent Owner Optionee" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 Construction. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. Administration.
--------------
3.1 Administration by the Board. The Plan shall be administered by the
Board. All questions of interpretation of the Plan or of any Option shall be
determined by the Board, and such determinations shall be final and binding upon
all persons having an interest in the Plan or such Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, determination or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, determination or election.
3.2 Administration with Respect to Insiders. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.
3.3 Powers of the Board. In addition to any other powers set forth in
the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or other
property;
4
<PAGE>
(d) to determine the terms, conditions and restrictions applicable
to each Option (which need not be identical) and any shares acquired upon the
exercise thereof, including, without limitation, (i) the exercise price of the
Option, (ii) the method of payment for shares purchased upon the exercise of the
Option, (iii) the method for satisfaction of any tax withholding obligation
arising in connection with the Option or such shares, including by the
withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of Service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, cancel, renew, reprice or otherwise
adjust the exercise price of, or grant a new Option in substitution for, any
Option or to waive any restrictions or conditions applicable to any Option or
any shares acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the exercisability of
any Option or the vesting of any shares acquired upon the exercise thereof,
including with respect to the period following an Optionee's termination of
Service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and policies
relating to the Plan, or to adopt supplements to, or alternative versions of,
the Plan, including, without limitation, as the Board deems necessary or
desirable to comply with the laws of, or to accommodate the tax policy or custom
of, foreign jurisdictions whose citizens may be granted Options; and
(i) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
3.4 Committee Complying with Section 162(m). If a Participating
Company is a "publicly held corporation" within the meaning of Section 162(m),
the Board may establish a Committee of "outside directors" within the meaning of
Section 162(m) to approve the grant of any Option which might reasonably be
anticipated to result in the payment of employee remuneration that would
otherwise exceed the limit on employee remuneration deductible for income tax
purposes pursuant to Section 162(m).
4. Shares Subject to Plan.
----------------------
4.1 Maximum Number of Shares Issuable. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued
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<PAGE>
under the Plan shall be Two Million (2,000,000) and shall consist of authorized
but unissued or reacquired shares of Stock or any combination thereof. If an
outstanding Option for any reason expires or is terminated or canceled or shares
of Stock acquired, subject to repurchase, upon the exercise of an Option are
repurchased by the Company, the shares of Stock allocable to the unexercised
portion of such Option, or such repurchased shares of Stock, shall again be
available for issuance under the Plan.
4.2 Adjustments for Changes in Capital Structure. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number and class of shares subject
to the Plan and to any outstanding Options and in the exercise price per share
of any outstanding Options. If a majority of the shares which are of the same
class as the shares that are subject to outstanding Options are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event, as defined in Section 8.1) shares of another corporation (the "New
Shares"), the Board may unilaterally amend the outstanding Options to provide
that such Options are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the exercise price per share of,
the outstanding Options shall be adjusted in a fair and equitable manner as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded up or down to the nearest whole number, as determined by the
Board, and in no event may the exercise price of any Option be decreased to an
amount less than the par value, if any, of the stock subject to the Option. The
adjustments determined by the Board pursuant to this Section 4.2 shall be final,
binding and conclusive.
5. Eligibility and Option Limitations.
----------------------------------
5.1 Persons Eligible for Options. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees," "Consultants" and "Directors" shall include prospective Employees,
prospective Consultants and prospective Directors to whom Options are granted in
connection with written offers of an employment or other service relationship
with the Participating Company Group. Eligible persons may be granted more than
one (1) Option.
5.2 Option Grant Restrictions. Any person who is not an Employee on
the effective date of the grant of an Option to such person may be granted only
a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
5.3 Fair Market Value Limitation. To the extent that options
designated as Incentive Stock Options (granted under all stock option plans of
the Participating Company Group, including the Plan) become exercisable by an
Optionee for the first time during any calendar year for stock having a Fair
Market Value greater than One Hundred Thousand Dollars
6
<PAGE>
($100,000), the portion of such options which exceeds such amount shall be
treated as Nonstatutory Stock Options. For purposes of this Section 5.3, options
designated as Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of stock shall be
determined as of the time the option with respect to such stock is granted. If
the Code is amended to provide for a different limitation from that set forth in
this Section 5.3, such different limitation shall be deemed incorporated herein
effective as of the date and with respect to such Options as required or
permitted by such amendment to the Code. If an Option is treated as an Incentive
Stock Option in part and as a Nonstatutory Stock Option in part by reason of the
limitation set forth in this Section 5.3, the Optionee may designate which
portion of such Option the Optionee is exercising. In the absence of such
designation, the Optionee shall be deemed to have exercised the Incentive Stock
Option portion of the Option first. Separate certificates representing each such
portion shall be issued upon the exercise of the Option.
6. Terms and Conditions of Options.
-------------------------------
Options shall be evidenced by Option Agreements specifying the number
of shares of Stock covered thereby, in such form as the Board shall from time to
time establish. No Option or purported Option shall be a valid and binding
obligation of the Company unless evidenced by a fully executed Option Agreement.
An Option Agreement may incorporate all or any of the terms of the Plan by
reference and shall comply with and be subject to the following terms and
conditions:
6.1 Exercise Price. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty-five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Incentive
Stock Option granted to a Ten Percent Owner Optionee shall have an exercise
price per share less than one hundred ten percent (110%) of the Fair Market
Value of a share of Stock on the effective date of grant of the Option.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a
Nonstatutory Stock Option) may be granted with an exercise price lower than the
minimum exercise price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner qualifying under the
provisions of Section 424(a) of the Code.
6.2 Exercise Period. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Incentive Stock Option shall be exercisable after the expiration of
ten (10) years after the effective date of grant of such Option, (b) no
Incentive Stock Option granted to a Ten Percent Owner Optionee shall be
exercisable after the expiration of five (5) years after the effective date of
grant of such Option and, (c) no Option granted to a prospective Employee,
prospective Consultant or prospective Director may become exercisable prior to
the date on which such person commences Service with a Participating
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<PAGE>
Company. Subject to the foregoing, unless otherwise specified by the Board in
the grant of an Option, any Option granted hereunder shall have a term of ten
(10) years from the Effective Date of grant of the Option.
6.3 Payment of Exercise Price.
(a) Forms of Consideration Authorized. Except as otherwise provided
below, payment of the exercise price for the number of shares of Stock being
purchased pursuant to any Option shall be made (i) in cash, by check, or cash
equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"Cashless Exercise"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) Tender of Stock. Notwithstanding the foregoing, an Option may
not be exercised by tender to the Company of shares of Stock to the extent such
tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) Cashless Exercise. The Company reserves, at any and all times,
the right, in the Company's sole and absolute discretion, to establish, decline
to approve or terminate any program or procedures for the exercise of Options by
means of a Cashless Exercise.
(d) Payment by Promissory Note. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity
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<PAGE>
affecting the extension of credit in connection with the Company's securities,
any promissory note shall comply with such applicable regulations, and the
Optionee shall pay the unpaid principal and accrued interest, if any, to the
extent necessary to comply with such applicable regulations.
6.4 Tax Withholding. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5 Repurchase Rights. Shares issued under the Plan may be subject to a
right of first refusal, one or more repurchase options, or other conditions and
restrictions as determined by the Board in its sole discretion at the time the
Option is granted. The Company shall have the right to assign at any time any
repurchase right it may have, whether or not such right is then exercisable, to
one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.
6.6 Effect of Termination of Service.
(a) Option Exercisability. Subject to earlier termination of the
Option as otherwise provided herein, an Option shall be exercisable after an
Optionee's termination of Service as follows:
(i) Disability. If the Optionee's Service with the
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of six (6) months (or such longer or shorter period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the date of
expiration of the Option's term as set forth in the Option Agreement evidencing
such Option (the "Option Expiration Date").
(ii) Death. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent
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unexercised and exercisable on the date on which the Optionee's Service
terminated, may be exercised by the Optionee's legal representative or other
person who acquired the right to exercise the Option by reason of the Optionee's
death at any time prior to the expiration of six (6) months (or such longer or
shorter period of time as determined by the Board, in its sole discretion) after
the date on which the Optionee's Service terminated, but in any event no later
than the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within one (1) month after
the Optionee's termination of Service.
(iii) Other Termination of Service. If the Optionee's Service with
the Participating Company Group terminates for any reason other than Disability
or death, the Option, to the extent unexercised and exercisable by the Optionee
on the date on which the Optionee's Service terminated, may be exercised by the
Optionee within one (1) month (or such longer or shorter period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
(b) Extension if Exercise Prevented by Law. Notwithstanding the
foregoing, if the exercise of an Option within the applicable time periods set
forth in Section 6.6(a) is prevented by the provisions of Section 11 below, the
Option shall remain exercisable until one (1) month after the date the Optionee
is notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
(c) Extension if Optionee Subject to Section 16(b). Notwithstanding the
foregoing, if a sale within the applicable time periods set forth in Section
6.6(a) of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
7. Standard Forms of Option Agreement.
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7.1 Incentive Stock Options. Unless otherwise provided by the Board at
the time the Option is granted, an Option designated as an "Incentive Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Incentive Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
7.2 Nonstatutory Stock Options. Unless otherwise provided by the Board
at the time the Option is granted, an Option designated as a "Nonstatutory Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Nonstatutory Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
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7.3 Authority to Vary Terms. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement shall be in
accordance with the terms of the Plan.
8. Change in Control.
-----------------
8.1 Definitions.
(a) An "Ownership Change Event" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "Change in Control" shall mean an Ownership Change Event or
a series of related Ownership Change Events (collectively, the "Transaction")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 Effect of Change in Control on Options. In the event of a Change in
Control, the surviving, continuing, successor, or purchasing corporation or
parent corporation thereof, as the case may be (the "Acquiring Corporation"),
may either assume the Company's rights and obligations under outstanding Options
or substitute for outstanding Options substantially equivalent options for the
Acquiring Corporation's stock. For purposes of this
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Section 8.2, an Option shall be deemed assumed if, following the Change in
Control, the Option confers the right to purchase in accordance with its terms
and conditions, for each share of Stock subject to the Option immediately prior
to the Change in Control, the consideration (whether stock, cash or other
securities or property) to which a holder of a share of Stock on the effective
date of the Change in Control was entitled. Any Options which are neither
assumed or substituted for by the Acquiring Corporation in connection with the
Change in Control nor exercised as of the date of the Change in Control shall
terminate and cease to be outstanding effective as of the date of the Change in
Control. Notwithstanding the foregoing, shares acquired upon exercise of an
Option prior to the Change in Control and any consideration received pursuant to
the Change in Control with respect to such shares shall continue to be subject
to all applicable provisions of the Option Agreement evidencing such Option
except as otherwise provided in such Option Agreement. Furthermore,
notwithstanding the foregoing, if the corporation the stock of which is subject
to the outstanding Options immediately prior to an Ownership Change Event
described in Section 8.1(a)(i) constituting a Change in Control is the surviving
or continuing corporation and immediately after such Ownership Change Event less
than fifty percent (50%) of the total combined voting power of its voting stock
is held by another corporation or by other corporations that are members of an
affiliated group within the meaning of Section 1504(a) of the Code without
regard to the provisions of Section 1504(b) of the Code, the outstanding Options
shall not terminate unless the Board otherwise provides in its sole discretion.
9. Provision of Information.
------------------------
Each Optionee shall be given access to information concerning the
Company equivalent to that information generally made available to the Company's
common shareholders.
10. Nontransferability of Options.
-----------------------------
During the lifetime of the Optionee, an Option shall be exercisable
only by the Optionee or the Optionee's guardian or legal representative. No
Option shall be assignable or transferable by the Optionee, except by will or by
the laws of descent and distribution.
11. Compliance with Securities Law.
------------------------------
The grant of Options and the issuance of shares of Stock upon exercise
of Options shall be subject to compliance with all applicable requirements of
federal, state and foreign law with respect to such securities. Options may not
be exercised if the issuance of shares of Stock upon exercise would constitute a
violation of any applicable federal, state or foreign securities laws or other
law or regulations or the requirements of any stock exchange or market system
upon which the Stock may then be listed. In addition, no Option may be
exercised unless (a) a registration statement under the Securities Act shall at
the time of exercise of the Option be in effect with respect to the shares
issuable upon exercise of the Option or (b) in the opinion of legal counsel to
the Company, the shares issuable upon exercise of the Option may be issued in
accordance with the terms of an applicable exemption from the registration
requirements of the Securities Act. The inability of the Company to obtain from
any regulatory body having
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jurisdiction the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares hereunder shall relieve
the Company of any liability in respect of the failure to issue or sell such
shares as to which such requisite authority shall not have been obtained. As a
condition to the exercise of any Option, the Company may require the Optionee to
satisfy any qualifications that may be necessary or appropriate, to evidence
compliance with any applicable law or regulation and to make any representation
or warranty with respect thereto as may be requested by the Company.
12. Indemnification.
---------------
In addition to such other rights of indemnification as they may have
as members of the Board or officers or employees of the Participating Company
Group, members of the Board and any officers or employees of the Participating
Company Group to whom authority to act for the Board or the Company is delegated
shall be indemnified by the Company against all reasonable expenses, including
attorneys' fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
13. Termination or Amendment of Plan.
--------------------------------
The Board may terminate or amend the Plan at any time. However,
subject to changes in applicable law, regulations or rules that would permit
otherwise, without the approval of the Company's shareholders, there shall be
(a) no increase in the maximum aggregate number of shares of Stock that may be
issued under the Plan (except by operation of the provisions of Section 4.2),
(b) no change in the class of persons eligible to receive Incentive Stock
Options, and (c) no other amendment of the Plan that would require approval of
the Company's shareholders under any applicable law, regulation or rule. In any
event, no termination or amendment of the Plan may adversely affect any then
outstanding Option or any unexercised portion thereof, without the consent of
the Optionee, unless such termination or amendment is required to enable an
Option designated as an Incentive Stock Option to qualify as an Incentive Stock
Option or is necessary to comply with any applicable law, regulation or rule.
14. Shareholder Approval.
--------------------
The Plan or any increase in the maximum number of shares of Stock
issuable thereunder as provided in Section 4.1 (the "Maximum Shares") shall be
approved by the shareholders of the Company within twelve (12) months of the
date of adoption thereof by the
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Board. Options granted prior to shareholder approval of the Plan or in excess of
the Maximum Shares previously approved by the shareholders shall become
exercisable no earlier than the date of shareholder approval of the Plan or such
increase in the Maximum Shares, as the case may be.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing is the GoodNoise Corporation 1998 Stock Option Plan as duly
adopted by the Board on March 30, 1998.
/s/
--------------------------------------
Secretary
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