<PAGE>
As filed with the Securities and Exchange Commission on July 23, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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EMUSIC.COM INC.
(Exact name of registrant as specified in its charter)
Delaware 3652 94-3290594
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer
(State or Identification No.)
jurisdiction of
incorporation or
organization)
1991 Broadway, 2nd Floor
Redwood City, California 94063
(650) 216-0200
(Address and telephone number of principal executive offices)
---------------
Gene Hoffman, Jr.
President and Chief Executive Officer
EMusic.com Inc.
1991 Broadway, 2nd Floor
Redwood City, California 94063
(650) 216-0200
(Name, address and telephone number of agent for service)
Copies to:
Bruce Schaeffer, Esq Warren Lazarow, Esq.
Andrew Zeif, Esq. Armando Castro, Esq.
Craig Malina, Esq. Vahe H. Sarrafian, Esq.
Gray Cary Ware & Freidenrich LLP Andrew R. Hull, Esq.
400 Hamilton Avenue Brobeck, Phleger & Harrison LLP
Palo Alto, California 94301-1825 Two Embarcadero Place
(650) 833-2000 2200 Geng Road
Palo Alto, California 94303
(650) 424-0160
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered(a) Offering Price(b) Registration Fee(b)
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<S> <C> <C>
Common Stock ($0.001 par value).......... $127,809,563 $35,532
</TABLE>
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(a) This Registration Statement covers the sale of shares of common stock, par
value $0.001 per share, by the Registrant and by selling stockholders.
(b) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Subject to Completion, Dated July 23, 1999
The information contained in this prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
5,340,000 Shares
[EMUSIC.COM INC. LOGO]
Common Stock
$ Per Share
- --------------------------------------------------------------------------------
EMusic.com Inc. is offering 5,000,000 shares and the selling stockholders
identified in this prospectus are offering 340,000 shares. This is a firm
commitment underwriting.
The common stock is listed on the Nasdaq National Market under the symbol
"EMUS." On July 22, 1999, the last reported sale price of the common stock on
the Nasdaq National Market was $21.38 per share.
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 8 .
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Price to the public........................................ $ $
Underwriting discounts.....................................
Proceeds to EMusic.........................................
Proceeds to the selling stockholders.......................
</TABLE>
EMusic has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 801,000 additional
shares from EMusic within 30 days following the date of this prospectus to
cover over-allotments.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
CIBC World Markets
ING Barings
Prudential Securities
Volpe Brown Whelan & Company
The date of this prospectus is , 1999
<PAGE>
[Yellow background with the following text centered on the top portion of the
page:
"The way to download.
So, there's this new way of listening to music. EMusic.com. A
new site with thousands of MP3 downloadable music choices.
Where you can sample and download alternative, rock, hip hop,
jazz, blues and more. By the song or the album. Artists you've
heard of, the coolest indie lables, new things to discover. All
for less than the cost of a CD. EMusic.com is downloadable
music. Created by people who know and love music as much as you
do."
The bottom center of the page contains a picture of the back of a man's head
with headphones with our logo displayed on his head.
The bottom right-hand corner displays our logo.]
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN OUR COMMON STOCK ON NASDAQ IN ACCORDANCE WITH
RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
Table Of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 29
Management............................................................... 41
Certain Transactions and Relationships................................... 48
Principal and Selling Stockholders....................................... 49
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 55
Price Range of Common Stock.............................................. 56
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 56
Underwriting............................................................. 57
Legal Matters............................................................ 58
Experts.................................................................. 59
Where You Can Find More Information About Us............................. 59
Index to Financial Statements............................................ F-1
</TABLE>
-------------------------
Prior to June 1999, we operated under the name GoodNoise Corporation. Our
executive offices are located at 1991 Broadway, 2nd Floor, Redwood City,
California 94063, and our telephone number is (650) 216-0200. Our website can
be found at EMusic.com. Our website does not constitute part of this
prospectus.
"EMusic" is a registered trademark of EMusic.com Inc. and the EMusic logo is a
trademark of EMusic.com Inc. All other trademarks or tradenames referred to in
this prospectus are the property of their respective owners.
Unless we indicate otherwise, all information in this prospectus assumes the
conversion of our preferred stock into shares of common stock and that the
underwriters do not exercise their over-allotment option.
As used in this prospectus, the terms "we," "us," "our" and EMusic mean
EMusic.com Inc. and the term "common stock" means our common stock, par value
$0.001 per share.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order.
Until , 1999, 25 days after commencement of this offering, all dealers that
buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This delivery requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
3
<PAGE>
Prospectus Summary
This summary highlights information contained in other parts of this
prospectus. Because it is a summary, it does not contain all of the information
that you should consider before investing in our common stock. You should read
the entire prospectus carefully, including "Risk Factors" and the financial
statements and related notes, before making an investment decision.
Our Company
EMusic is a leading provider of downloadable music over the Internet. Through
our website at EMusic.com, we offer music consumers a compelling selection of
music from which they may discover, sample, and purchase popular recordings for
immediate digital delivery and enjoyment. We currently have exclusive, multi-
year, digital download licenses to over 300,000 titles, from over 75 record
labels and over 1,200 recording artists, including such well known artists as
The Offspring, They Might be Giants, Jimi Hendrix and Ella Fitzgerald. We
currently have over 13,000 titles available for download on our EMusic.com
website. In addition, our IUMA subsidiary offers our customers access to over
3,700 unsigned artists. We believe this represents one of the largest digital
music content archives currently licensed for distribution over the Internet.
Our website enables artists and labels to easily access a global customer base
while providing them with an integrated means of distributing, promoting and
tracking the sales of their recorded music. Recordings are offered for sale on
EMusic.com in the "mp3" format, the most widely-recognized compression standard
for the download of musical recordings. We believe that our combination of
selection, convenience, varied content, improved distribution and tracking
capabilities creates a compelling music purchasing experience for consumers as
well as an attractive distribution alternative for artists and independent
record labels.
The emergence of the Internet as a global communications standard, the growth
of high-speed internet access, the development of audio compression techniques,
such as mp3, and the proliferation of hardware and software that enables the
management and playback of downloadable music is currently driving rapid growth
in the sector. Forrester Research estimates that total online music revenues in
the United States are expected to grow from $88.0 million in 1998 to $6.7
billion in 2003. Of this amount, Forrester further estimates that $1.1 billion
will represent sales of downloadable music.
We operate a website that allows consumers to quickly and conveniently purchase
music and download it immediately, at a lower price than traditional CDs. We
believe that the limitations associated with the traditional music industry
present us with an opportunity to redefine the music distribution hierarchy and
enable artists and independent labels to access consumer markets at a level
currently only available to the major labels, while protecting the artists'
financial interests and providing consumers with numerous advantages in price,
convenience and music information.
Our solution provides the following benefits:
. Benefits to the Consumer. Consumer benefits include convenience, lower
prices, large selection and music information. Downloadable music can be
purchased online and used immediately, and can be more easily managed,
carried and customized than music on physical media. When using the
Internet as the distribution channel, there are none of the costs
associated with distributing physical media, and as a result, music can
be purchased at a lower cost than traditional CDs.
. Benefits to Artists and Independent Labels. Benefits to artists and
independent labels include powerful distribution capability, greater
understanding of fan base, significant new media exposure and an
infrastructure to support the payment of royalties. Our solution offers
global distribution to artists and independent labels, with higher
margins stemming from lower distribution costs. By tracking the behavior
of fans on our web site, we are able to offer artists and labels insight
into who is buying their music, allowing them to focus their creative
and promotional efforts.
4
<PAGE>
Our goal is to become the leading provider of compelling, downloadable music
directly to consumers over the Internet. Key elements of our strategy include:
. Continue to acquire compelling content through agreements with
independent record labels, owners and distributors of recording
catalogs and artists;
. Create strong brand awareness through offline and online marketing,
site development and referral fee arrangements;
. Leverage strategic relationships to build brand and acquire content;
. Improve website functionality with the addition of chat rooms, music
hubs, more content, more advanced search capabilities and dynamic
personalization;
. Leverage pricing and infrastructure to become a trusted distribution
channel by designing our technology and structuring our pricing to
dissuade piracy and track all appropriate royalty payments;
. Continue to promote development of the downloadable music market by
supporting organizations dedicated to the proliferation of
downloadable music and by providing consumers with a positive
purchase experience; and
. Continue to develop and enhance Internet Underground Music Archive by
making it easier to access and post songs and information which will
allow us to establish early relationships with potential music
content providers.
We are a development stage company and have experienced net losses since
inception in January 1998. We intend to aggressively invest to implement our
strategy, and expect to continue to incur net losses for the forseeable future.
5
<PAGE>
The Offering
Common stock offered by EMusic........
5,000,000 shares
Common stock offered by the selling
stockholders..........................
340,000 shares
Common stock to be outstanding after 33,561,237 shares
this offering.........................
Use of proceeds....................... We intend to use the net proceeds for
the acquisition of additional content,
corporate branding, expansion of our
sales and marketing activities and
general corporate purposes, including
working capital and capital
expenditures.
We will not receive any proceeds from
the sale of shares of common stock by
the selling stockholders. See "Use of
Proceeds" and "Management's Discussion
and Analysis of Financial Condition and
Results of Operations--Liquidity and
Capital Resources."
<TABLE>
<S> <C>
Nasdaq National Market symbol.................. EMUS
</TABLE>
- ------------------
These share numbers are based on shares outstanding as of July 15, 1999 and
exclude:
. 6,297,750 shares of common stock issuable upon exercise of outstanding
options at an average exercise price of $7.12;
. 1,707,800 shares of common stock issuable upon exercise of outstanding
warrants at an average exercise price of $13.31; and
. 4,656,850 shares of common stock issuable upon exercise of options that may
be granted under our stock option plans.
6
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
January 8, 1998 Nine months January 8, 1998 Three months
(inception) to ended (inception) to ended
June 30, 1998 March 31, 1999 March 31, 1998 March 31, 1999
--------------- -------------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues..................... -- $ 41,527 -- $ 21,062
Gross profit................. -- 27,687 -- 11,938
Loss from operations......... $(1,180,104) (4,267,921) $ (88,927) (2,289,781)
Net loss..................... $(1,180,104) $ (4,264,105) $ (88,927) $ (2,288,867)
=========== ============ ========== ============
Net loss applicable to common
shares...................... $(1,180,104) $(36,058,438) $ (88,927) $(33,914,153)
=========== ============ ========== ============
Net loss per common share-
basic and diluted........... $ (0.12) $ (2.48) $ (0.01) $ (2.31)
=========== ============ ========== ============
Weighted average common
shares outstanding-basic and
diluted..................... 10,234,055 14,560,552 6,607,357 14,674,372
Pro forma basic and diluted
net loss per share.......... $ (2.43) $ (2.18)
============ ============
Pro forma weighted average
common shares outstanding-
basic and diluted........... 14,865,363 15,588,805
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended
------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31,
1998 1998 1998 1998 1999
--------- ----------- --------- ----------- ------------
(all quarterly data unaudited)
<S> <C> <C> <C> <C> <C>
Quarterly Statement of Operations Data:
Net revenue............................ -- -- $ 12,452 $ 8,013 $ 21,062
Gross profit........................... -- -- 12,175 3,574 11,938
Net loss............................... $(88,927) $(1,091,177) (849,483) (1,125,755) (2,288,867)
Net loss applicable to common shares... (88,927) (1,091,177) (849,483) (1,294,802) (33,914,153)
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1999
-----------------------
Actual As Adjusted
----------- -----------
(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $32,618,240 $
Working capital......................................... 29,719,397
Total assets............................................ 38,800,350
Total long-term debt.................................... --
Total debt.............................................. --
Redeemable convertible preferred stock.................. 31,767,593
Total stockholders' equity.............................. 3,850,482
</TABLE>
- ------------------
The pro forma weighted average common shares outstanding include preferred
stock on an as converted basis as well as common stock. The as adjusted balance
sheet data presented below reflect the receipt of the net proceeds from the
sale of the 5,000,000 shares of common stock offered by us at an offering price
of and after deducting underwriting discounts, commissions and estimated
offering expenses as well as the effect of preferred stock on an as converted
basis.
7
<PAGE>
Risk Factors
Investing in our common stock involves a high degree of risk. You should
carefully consider the following factors and other information contained in
this prospectus before deciding to invest in our stock.
We have a new and unproven business model and it may not generate sufficient
revenue for our business to survive or be successful.
Our model for conducting business and generating revenues is new and unproven
and if it fails to develop as we plan, our business may not succeed. Our
business model depends upon our ability to generate revenue streams from
multiple sources through our website, including:
.online sales of downloadable music;
.website advertising fees from third parties;
.licensing of musical recordings for use by others; and
.online sales of music-related merchandise.
It is uncertain whether a music-based website such as ours, that relies on
attracting people to purchase and download music, mostly from lesser-known
artists, can generate sufficient revenues to survive. This business model may
not succeed or it may not be sustainable as our business grows.
In order for our business to be successful, we must not only develop services
that directly generate revenue, but also provide content and services that
attract consumers to our website frequently. We will need to develop new
offerings as consumer preferences change and new competitors emerge. We may not
be able to provide consumers with an acceptable blend of products, services,
and informational and community offerings that will attract consumers to our
website frequently. We provide many of our products and services without
charge, and we may not be able to generate sufficient revenue to pay for these
products and services. Accordingly, we are not certain that our business model
will be successful or that we can sustain revenue growth or be profitable.
We are competing in a new market that may not develop sufficiently to support
our business.
The market for online music promotion and distribution is new and rapidly
evolving. As a result, demand and market acceptance for our products and
services are subject to a high degree of uncertainty and risk. We are
attempting to capitalize on a talent pool of artists underserved by the
traditional recording industry. Consumers may not continue to be interested in
listening to, or purchasing music from, these artists. If this new market fails
to develop, develops more slowly than expected or becomes saturated with
competitors, or our products and services do not achieve or sustain market
acceptance, we may not generate sufficient revenues to become profitable.
The future popularity of downloadable music will depend on consumer acceptance
of downloading music generally. We believe that consumer acceptance is, in
part, dependent on the availability of portable devices to store and play this
music. To the extent that devices are not available at affordable prices, or
consumer acceptance or distribution of these portable devices is delayed, our
potential market, and thus our ability to increase our revenues, may be
reduced.
We have a limited operating history that makes an evaluation of our business
difficult.
We were incorporated in January 1998. During 1998, our operating activities
consisted largely of developing the infrastructure necessary to download music
on the Internet. Our limited operating history makes it difficult to evaluate
our current business and prospects. As a result of our limited operating
history, we do not have meaningful historical financial data upon which to
forecast quarterly revenues and results of operations. Before
8
<PAGE>
investing in us, you should evaluate the risks, expenses and problems
frequently encountered by companies such as ours that are in the early stages
of development.
We have incurred substantial losses to date and we expect net losses in the
future.
From inception through March 31, 1999, we had net losses of $37.2 million. We
expect substantial net losses and negative cash flow for the foreseeable
future. We believe it is critical to our long-term success that we continue to
develop "EMusic" brand awareness and loyalty through marketing and promotion,
expand our artist and consumer networks, develop our online content and expand
our other services. We expect that our operating expenses will increase
significantly during the next several years, especially in sales and marketing.
With increased expenses, we will need to generate significant additional
revenues to achieve profitability. As a result, we may never achieve
profitability and, if we do achieve profitability in any period, we may not be
able to sustain or increase profitability.
Our quarterly revenues and operating results are subject to fluctuation which
may result in volatility or a decline in the price of our stock.
We believe that period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as indicators of future performance.
Our quarterly operating results are likely to fluctuate significantly in the
future as a result of a variety of factors, many of which are outside of our
control, including:
. the demand for downloadable music content and Internet advertising;
. the addition or loss of advertisers;
. the level of traffic on our Internet sites;
. the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
. the introduction of new sites and services by us or our competitors;
. seasonal trends in Internet use, purchases of downloadable music, and
advertising placements;
. price competition or pricing changes in the industry;
. technical difficulties or system downtime; and
. general economic conditions, and economic conditions specific to the
Internet and Internet media.
In addition, while our revenues may vary significantly, a portion of our
expenses are fixed. As a result, any decrease in revenues will not be
accompanied by a decrease in our fixed operating expenses and our operating
results will suffer. Our quarterly results may also be significantly impacted
by the accounting treatment of acquisitions, financing transactions or other
matters. Particularly at our early stage of development, such accounting
treatment can have a material impact on the results for any quarter. Because of
these and other factors it is likely that our operating results will fall below
expectations in some future quarter and the trading price of our stock may
drop.
Shares eligible for future sale in the open market may depress our stock price.
As of July 15, 1999, there were approximately 28,561,237 shares of common stock
outstanding, of which approximately 4,045,400 were tradable without restriction
under the Securities Act and 11,015,300 were tradable under Rule 144. Upon the
effectiveness of this registration statement, substantially all of our
remaining outstanding stock will be tradable under Rule 144.
9
<PAGE>
Our stock price has been and may continue to be volatile.
Our common stock is currently traded on the Nasdaq National Market under the
ticker symbol "EMUS." Our stock is held by a limited number of investors and
there can be no assurance that an active trading market will be sustained in
the future. In addition to fluctuations in our operating results, the following
factors could cause the price of our securities to be volatile:
.development of the downloadable music market;
.technological innovations;
.new products;
.acquisitions or strategic alliances entered into by us or our competitors;
.failure to meet securities analysts' expectations;
.government regulatory action;
.patent or proprietary rights developments; and
.market conditions for internet and technology stocks in general.
If our brand name is not accepted, our ability to attract content and customers
to our website will be harmed.
During the quarter ended June 30, 1999, we began to operate under the name
EMusic.com Inc. and launched a marketing campaign to establish the brand name
"EMusic." We believe that establishing and maintaining the EMusic brand is a
critical aspect of our efforts to attract and expand our Internet audience and
acquire new content 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. We intend to incur significant expenses in
our brand building efforts. If these efforts do not generate increased revenues
our operating results will suffer. If we are unable to provide high quality
content or otherwise fail to promote and maintain our brand, our business will
be harmed.
If we are unable to maintain or expand our contracts for music content, or if
the content we license does not sell, our popularity and business may suffer.
We believe that a primary draw to our website is the ability to access music
from known artists and independent record labels. Currently, we have exclusive
multi-year contracts for much of our music library. However, if we are unable
to sign contracts for new content, or if we are unable to extend the terms of
existing contracts as they expire, our website may fail to attract new, or
retain existing, customers which would harm our business.
For much of the content we license, we pay advances against future royalties
which will be owed on sale of the content. If the content we license does not
sell in sufficient quantities, we may not be able to recover all or part of the
advances we have paid and our business could be harmed.
We rely on a third party for the hosting of our website and if this hosting
service becomes unavailable, our customers will not be able to access our
website.
We currently rely on a third party which hosts our website at a single location
in San Jose, California. We currently do not maintain a redundant website. If
for any reason our current website hosting services become unavailable or if
our hosting service experiences technical problems, customers will not be able
to access our website until these services are restored or until we are able to
make arrangements with an alternate provider.
10
<PAGE>
If we fail to adequately manage our growth we may not be successful as we may
miss market opportunities.
We expect the scope of our operations and the number of our employees to grow
rapidly. In particular, we intend to hire additional engineering, sales,
marketing, content acquisition and administrative personnel. Additionally,
acquisitions could increase our employee headcount and business activity. We
expect our rapid growth to continue to place significant stress on our
technology, operations, management and employee base. Any failure to
successfully address the needs of our growing enterprise would harm our
business.
Our technology systems must be expanded and enhanced for our business to grow.
In order to support a growing business, we will need to continue to enhance and
expand the technology infrastructure which supports our business. We have
recently begun a conversion of our central database to a new database based
upon technology licensed from Oracle Corporation and we expect to implement a
new accounting system in the first half of calendar year 2000. As our business
continues to grow, we will need to add additional servers and other hardware
and software systems as well as additional sites for website hosting. If we
fail to successfully implement these new and enhanced systems, our operations
could be disrupted, we may become less competitive, our revenues could be
reduced and we may need to incur additional costs to address these issues.
We may have difficulty executing acquisitions and integrating the acquired
companies into our business.
Our business strategy includes entering into strategic alliances and acquiring
complementary businesses, technologies, content or products. In January 1999,
we completed the acquisition of Creative Fulfillment, Inc. and in June 1999, we
completed the acquisition of Internet Underground Music Archive, Inc. These and
any other future acquisitions involve risks commonly encountered in
acquisitions of companies, including:
. exposure to unknown liabilities of acquired companies;
. incurring acquisition costs and expenses in excess of what we
anticipated;
. the occurrence of fluctuations in our quarterly and annual operating
results due to the costs and expenses of acquiring and integrating new
businesses or technologies;
. experiencing difficulties and expenses in assimilating the operations and
personnel of the acquired businesses;
. disruption of our ongoing business and diversion of our management's time
and attention;
. a possible inability to integrate successfully or to complete the
development and application of acquired technology and a possible failure
to achieve the anticipated financial, operating, and strategic benefits
from these acquisitions;
. experiencing difficulties in establishing and maintaining uniform
standards, controls, procedures, and policies;
. impairment of our relationships with key employees and customers of
acquired businesses or the loss of these key employees and customers as a
result of changes in management and ownership of the acquired businesses;
and
. incurrence of amortization expenses if an acquisition is accounted for as
a purchase, resulting in significant goodwill and other charges.
In addition, our shareholders may be diluted if the consideration for future
acquisitions consists of equity securities. We may not overcome these risks or
any other problems encountered in connection with acquisitions. If we are
unsuccessful in doing so, our business could be harmed.
11
<PAGE>
We expect competition to increase significantly in the future and we may not be
able to compete successfully.
The market for the online promotion and distribution of music and music-related
products and services is new, highly competitive and rapidly changing. The
number of websites on the Internet competing for the attention and spending of
consumers, users and advertisers has increased, and we expect it to continue to
increase, because there are few barriers to entry to Internet commerce. In
addition, the competition for advertising revenues, both on Internet websites
and in more traditional media, is intense. Currently, there are more than one
hundred music retailing websites on the Internet. We face competitive pressures
from numerous actual and potential competitors.
Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, it was recently announced that Time Warner and Sony's Columbia House
unit will merge with CDNow. In May 1999, Microsoft Corporation and Sony
Corporation announced an agreement to pursue a number of cooperative
activities. Sony has announced that it will make its music content downloadable
from the Internet using Microsoft's multimedia software. In addition, Universal
Music Group and BMG Entertainment have announced a joint venture to form an
online music store.
Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of our current and
potential competitors in the Internet and music entertainment businesses may
have substantial competitive advantages relative to us, including:
.longer operating histories;
.significantly greater financial, technical and marketing resources;
.greater brand name recognition;
.larger existing customer bases; and
.more popular content or artists.
These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to the development, promotion, and sale of their products or services than we
can. Websites maintained by our existing and potential competitors may be
perceived by consumers, artists, talent management companies and other music-
related vendors or advertisers as being superior to ours. In addition, we may
not be able to maintain or increase our website traffic levels, purchase
inquiries and number of click-throughs on our online advertisement. Further,
our competitors may experience greater growth in these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business. For
additional information regarding competition, see "Business--Competition."
We may need to obtain additional funds to execute our business plan and if we
are unable to obtain such funds, we will not be able to expand our business as
planned.
We believe that our existing capital resources together with the net proceeds
to us from this offering will be sufficient to fund our planned level of
operating activities, capital expenditures and other obligations through the
next 12 months. Further, we may need to raise additional funds in order to:
.finance unanticipated working capital requirements;
.develop or enhance existing services or products;
.fund distribution relationships;
.advertise to build global brand recognition;
.respond to competitive pressures; or
.acquire complementary businesses, technologies, content or products.
12
<PAGE>
Additional financing may not be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable terms,
our ability to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance services or products or otherwise respond to
competitive pressures would be significantly limited. If we raise additional
funds by issuing equity or convertible debt securities, the percentage
ownership of our stockholders will be reduced, and these securities may have
rights, preferences or privileges senior to those of our stockholders.
Our business is dependent on the continued development and maintenance of the
Internet and the availability of increased bandwidth to consumers.
The success of our business will depend largely on the development and
maintenance of the Internet infrastructure. This includes maintenance of a
reliable network with the necessary speed, data capacity and security, as well
as timely development of complementary products such as high speed modems, for
providing reliable Internet access and services. Because global commerce on the
Internet and the online exchange of information is new and evolving, we cannot
predict whether the Internet will prove to be a viable commercial marketplace
in the long term.
The success of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce, as well as
an efficient medium for the delivery and distribution of music. Our business
will depend on the ability of our artists and consumers to continue to upload
and download mp3 and other music file formats, as well as to conduct commercial
transactions with us, without significant delays or aggravation that may be
associated with decreased availability of Internet bandwidth and slower access
to our website. Our penetration of a broader consumer market will depend, in
part, on continued proliferation of high speed Internet access. Even compressed
in mp3 format, a typical three minute song file can occupy more than three
megabytes of storage space. This file could take approximately seven minutes to
download over a conventional 56 kbps modem compared to less than one minute
over an xDSL or cable modem.
The Internet has experienced, and is likely to continue to experience,
significant growth in the numbers of users and amount of traffic. As the
Internet continues to experience increased numbers of users, increased
frequency of use and increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
increases in users or bandwidth requirements may harm the performance of the
Internet. The Internet has experienced a variety of outages and other delays as
a result of damage to portions of its infrastructure, and it could face outages
and delays in the future. This might include outages and delays resulting from
the "year 2000" problem. These outages and delays could reduce the level of
Internet usage as well as the level of traffic, and could result in the
Internet becoming an inconvenient or uneconomical source of music and music-
related products and services. The infrastructure and complementary products or
services necessary to make the Internet a viable commercial marketplace for the
long term may not be developed successfully or in a timely manner. Even if
these products or services are developed, the Internet may not become a viable
commercial marketplace for the products or services that we offer.
We must maintain and establish strategic alliances to increase our customer
base and enhance our business.
In an attempt to increase our customer base and traffic on our website, build
brand recognition, attract paid advertising and enhance content, distribution
and commerce opportunities, we have entered into strategic alliances with
various media, hardware device and Internet-related companies such as: Creative
Labs, RealNetworks and Centraal. Our failure to maintain or renew our existing
strategic alliances or to establish and capitalize on new strategic alliances
could harm our business. Our future success depends to a significant extent
upon the success of such alliances. Moreover, we are substantially dependent on
our ability to advertise on other Internet sites and the willingness of the
owners of other sites to direct users to our Internet sites through hypertext
links. We may not achieve the strategic objectives of these alliances, and
parties to strategic alliance agreements with us may not perform their
obligations as agreed upon. Such agreements also may not be
13
<PAGE>
specifically enforceable by us. In addition, some of our strategic alliances
are short term in nature and may be terminated by either party on short notice.
The termination or impairment of these strategic alliances could reduce our
ability to attract new customers.
Our success depends on our retention of key personnel.
Our performance is substantially dependent on the services of Robert H. Kohn,
our chairman, and Gene Hoffman, Jr., our chief executive officer, as well as on
our ability to recruit, retain and motivate other officers and key 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. The loss of the services of any of our officers or
senior managers could harm our business.
We may not be able to hire and retain a sufficient number of qualified
employees to grow our business as planned.
Our future success will depend on our ability to attract, train, retain and
motivate other highly skilled technical, managerial, marketing and customer
support personnel. Competition for these personnel is intense, especially for
engineers, web designers and advertising sales personnel, and we may be unable
to successfully attract sufficiently qualified personnel. A large percentage of
our employees have joined us in 1999 and we expect that our rate of hiring will
continue at a very rapid pace. To manage the expected growth of our operations,
we will need to integrate these employees into our business. Our inability to
hire, integrate and retain qualified personnel in sufficient numbers may reduce
the quality of our programs, products and services, and could harm our
business. 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. We may be subject to
claims in the future as we seek to hire qualified personnel and those claims
may result in material litigation involving EMusic. Even if unsuccessful, these
claims could harm our business by damaging our reputation, requiring us to
incur legal costs and diverting management's attention away from our business.
Security concerns regarding credit card or other confidential information
transmitted over the web could limit our growth and subject us to liability.
A significant barrier to e-commerce and communications over the Internet has
been the need for secure transmission of confidential information over public
networks. Internet usage may not increase at the rate we expect unless some of
these concerns are adequately addressed and found acceptable by the market.
Internet usage could also decline if any well publicized compromise of security
occurred. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches. Protections
against security breaches may not be available at a reasonable price or at all.
If a third party were able to circumvent our security measures and
misappropriate our users' personal information, it may cause interruptions to
our retail website operation, damage our reputation or subject us to claims by
users. Any compromise of confidential data during transmission over the
Internet may harm our business.
Any failure of our internal security measures could cause us to lose customers
and subject us to liability.
Our business is dependent on maintaining a database of confidential user
information, including credit card numbers. If the security measures that we
use to protect personal information are ineffective, we may lose customers and
our business would be harmed. We rely on security and authentication technology
licensed from third parties. With this technology, we perform real-time credit
card authorization and verification. We cannot predict whether new
technological developments could allow these security measures to be
circumvented.
In addition, our software, databases and servers may be vulnerable to computer
viruses, physical or electronic break-ins and similar disruptions. We may need
to spend significant resources to protect against security breaches or to
alleviate problems caused by any breaches and we may not be able to prevent all
security breaches.
14
<PAGE>
Our intellectual property protection may be inadequate, and any loss or
reduction in intellectual property protection may harm our business.
Our intellectual property includes our trademarks and copyrights, proprietary
software, and other proprietary rights. We believe that our intellectual
property is important to our success and our competitive position, and we try
to protect it. However, our efforts to protect our intellectual property could
be inadequate. Use of the "EMusic" name by others could dilute our brand
identity and confuse the market. In addition, our ability to conduct our
business may be harmed if others claim we violate their intellectual property
rights. For example, Sightsound.com, Inc. has asserted that many online music
providers, including EMusic, violate patent rights that it allegedly owns
covering the sale of music over the Internet through digital downloads. If
successful, these claims, or similar claims by others, could seriously harm our
business by forcing us to cease using intellectual property that we depend on
to operate our business. Even if unsuccessful, these claims could harm our
business by damaging our reputation, requiring us to incur legal costs and
diverting management's attention away from our business.
Government regulation may require us to change the way we do business.
Laws and regulations directly applicable to Internet communications, commerce
and advertising are becoming more prevalent. The United States Congress has
enacted Internet laws regarding children's privacy, copyrights and taxation.
Such legislation could dampen the growth in use of the Internet generally and
decrease the acceptance of the Internet as a communications, commercial and
advertising medium. Although our transmissions originate in California, the
governments of other states or foreign countries might attempt to regulate our
transmissions or levy sales or other taxes relating to our activities. The
European Union recently enacted its own privacy regulations that may result in
limits on the collection and use of certain user information. The laws
governing the Internet, however, remain largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws such as those governing intellectual property, privacy,
libel and taxation apply to the Internet and Internet advertising. In addition,
the growth and development of the market for Internet commerce may prompt calls
for more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on companies conducting business
over the Internet. Furthermore, the Federal Trade Commission has recently
investigated the disclosure of personal identifying information obtained from
individuals by Internet companies. Evolving areas of law that are relevant to
our business include privacy law, proposed encryption laws, content regulation
and sales and use tax. For example, changes in copyright law could require us
to change the manner in which we conduct business or increase our costs of
doing business. Because of this rapidly evolving and uncertain regulatory
environment, we cannot predict how these laws and regulations might affect our
business. In addition, these uncertainties make it difficult to ensure
compliance with the laws and regulations governing the Internet. These laws and
regulations could harm us by subjecting us to liability or forcing us to change
how we do business. In the event the Federal Trade Commission or other
governmental authorities adopt or modify laws or regulations applicable to our
business, including those relating to the Internet and copyright matters, our
business could be harmed.
We may have liability for content on our website and liability for other
materials which we distribute.
We may be liable to third parties for content on our website and any other
materials we distribute if:
. the music, text, graphics or other content on our website violates their
copyright, trademark, or other intellectual property rights;
. our artists or labels violate their contractual obligations to others by
providing content on our website; or
. content we distribute is deemed obscene or defamatory.
We may also be subject to these types of liability for content that is
accessible from our website through links to other websites.
15
<PAGE>
Liability or alleged liability for content or other materials could harm our
business by damaging our reputation, requiring us to incur legal costs in
defense, exposing us to significant awards of damages, fines and costs and
could divert management's attention away from our business. In particular, in
addition to civil damages, liability for violations of copyright law currently
can result in penalties of up to $10,000 per occurrence.
Imposition of sales and other taxes on e-commerce transactions may impair our
ability to derive financial benefits from e-commerce.
Except for sales of tangible merchandise into certain states, we do not collect
sales or other taxes on sales of our products through our websites. Although
the Internet Tax Freedom Act precludes, for a period of three years ending
January 2002, the imposition of state and local taxes that discriminate against
or single out the Internet, it does not currently impact existing taxes.
However, one or more states may seek to impose sales tax collection obligations
on out-of-state companies such as us, which engage in or facilitate online
commerce. A number of proposals have been made at the state and local level
that would impose additional taxes on the sale of goods and services through
the Internet. Such proposals, if adopted, could substantially impair the growth
of electronic commerce and could adversely affect our opportunity to derive
financial benefit from electronic commerce. Moreover, if any state or foreign
country were to successfully assert that we should collect sales or other taxes
on the exchange of merchandise on its system, it could affect our cost of doing
business.
Legislation limiting the ability of states to impose taxes on Internet based
transactions has been proposed in the U.S. Congress. We cannot assure you that
this legislation will ultimately become law or that the tax moratorium in the
final version of this legislation will be ongoing. Failure to enact or renew
this legislation, if enacted, could allow various states to impose taxes on
Internet-based commerce, which could harm our business.
We may have difficulty expanding into international markets which could limit
the growth of our business.
Our future growth and success will depend in part on our ability to generate
international sales. There can be no assurance, however, that we will be
successful in generating international sales of our products. Sales to
customers in certain international countries may be subject to a number of
risks, including: currency exchange rate risk; the risks that agreements may be
difficult or impossible to enforce and receivables difficult to collect through
an international country's legal system; foreign customers may have longer
payment cycles; or foreign countries could impose withholding taxes or
otherwise tax our 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 our offerings and intellectual property
rights to the same extent as the laws of the United States. If we fail to
compete successfully or to expand the distribution of our offerings in
international markets the growth of our business could be limited.
Development of new standards for the electronic delivery of music may threaten
our business.
We currently rely on mp3 technology as a delivery method for the digital
distribution of music. Mp3 is an open standard adopted by the Moving Picture
Experts Group for the compression of audio files. We do not own or control mp3
technology and are dependent upon a license to obtain rights to certain patents
relating to the technology. The onset of competing industry standards for the
electronic delivery of music could significantly affect the way we operate our
business as well as the public's perception of EMusic as a company. For
example, some of the major recording studios have recently announced a plan to
develop a universal standard for the electronic delivery of music, called the
Secured Digital Music Initiative and have announced their intention to make
this delivery method available by the end of 1999. If new standards are
developed and adopted by consumers, we may not be able to obtain a license to
such technology on favorable terms or at all and our business could be harmed.
16
<PAGE>
Mp3 technology is controversial within certain segments of the traditional
music industry and we may face continued opposition to our use of mp3 which may
slow market development and harm our business.
Certain segments of the traditional music industry have not embraced the
development of the mp3 format to deliver music, in part because users of mp3
technology can download and distribute unauthorized or "pirated" copies of
copyrighted recorded music over the Internet. We believe that our success is
largely dependent upon the ease with which customers can download and play
music. We may face opposition from a number of different music industry sources
including record companies and studios, the Recording Industry Association of
America and certain artists. The adoption of competing standards may slow the
development of the market for downloadable music or result in increased costs
of doing business which could harm our business.
If we, or third parties on which we rely, fail to achieve year 2000 compliance,
our business could be harmed.
We may discover year 2000 compliance problems in our systems that will require
substantial revision. We have not conducted a year 2000 audit and have relied
only on our internal assessments of our year 2000 needs. Furthermore, we have
not developed contingency plans to respond to potential year 2000 issues. If we
unexpectedly experience failures related to the year 2000 problem or if we fail
to fix or replace any affected systems on a timely basis, our business could be
harmed. In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control, as
well as the general infrastructure of the Internet, may not be year 2000
compliant. Failure of third parties or of the general Internet infrastructure
to be year 2000 compliant could prevent us from publishing our content,
generating sales or collecting revenue, decrease the use of the Internet or
prevent users from accessing our websites for a substantial period of time
which could harm our business. For more information on our state of readiness,
costs and rights associated with year 2000 issues, see "Management Discussion
and Analysis of Financial Condition and Results of Operation--Year 2000
Readiness."
Our executive officers and directors will control approximately 21.7% of our
common stock and will have power to influence significant corporate matters,
which may delay, deter or prevent transactions that could benefit investors in
this offering.
Assuming the conversion of all our outstanding preferred stock, upon completion
of this offering, executive officers and directors will, in the aggregate,
beneficially own approximately 21.7% of our outstanding common stock. These
stockholders would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying, deterring or preventing a change in
control of EMusic and may make some transactions more difficult or impossible
without the support of these stockholders.
Anti-takeover provisions in our charter documents could negatively impact our
stockholders.
Our Board of Directors has the authority to issue up to 20,000,000 shares of
preferred stock without need for stockholder approval. The board may also
determine the economic and voting rights, of this preferred stock. The holders
of our common stock could be adversely affected by the issuance of preferred
stock. Issuance of preferred stock could impede or prevent transactions that
would cause a change in control of our company. This might discourage bids for
our common stock as a premium over the market price of our common stock and
adversely affect the trading price of our common stock. We have no current
plans to issue shares of preferred stock. In addition, other provisions in our
charter documents could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.
17
<PAGE>
Investors will experience immediate and substantial dilution.
The public offering price is expected to be substantially higher than the net
tangible book value of each outstanding share of common stock. Accordingly,
purchasers of common stock in this offering will experience immediate and
substantial dilution of approximately $ per share in the net tangible book
value of the common stock from the public offering price. Investors will incur
additional dilution upon the exercise of outstanding stock options and
warrants.
Our management has broad discretion as to the net proceeds we receive from this
offering and, if we do not allocate these proceeds wisely, your investment
could suffer.
The net proceeds we receive from this offering will be used for acquisitions of
additional content, corporate branding, expansion of our sales and marketing
activities and working capital and general corporate purposes. There is no
specific allocation of these net proceeds, and our management retains the right
to utilize net proceeds as they determine. Our management may not use the
proceeds effectively.
Our data warehousing and web server systems are vulnerable to natural
disasters, failure of third-party services and other unexpected problems.
Since our data warehousing, web server and network facilities are all located
in California, an earthquake or other natural disaster could affect all of our
facilities simultaneously. An unexpected event such as a power or
telecommunications failure, fire, flood or earthquake at our on-site data
warehousing facility or at our Internet service providers' facilities could
cause the loss of critical data and prevent us from offering our services to
artists and consumers. Our business interruption insurance may not adequately
compensate us for losses that may occur. In addition, we rely on third parties
to securely store our archived data, house our web server and network systems,
and connect us to the Internet. A failure by any of these third parties to
provide these services satisfactorily could harm our business.
You should not rely on forward-looking statements in this prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including, "could," "may," "will," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential," or "continue;" the
negative of these terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks described above and in other parts of this prospectus. These factors
may cause our actual results to differ materially from any forward-looking
statement. Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
them to actual results or to changes in our expectations.
18
<PAGE>
Use Of Proceeds
We estimate that the net proceeds from the sale of the shares of common stock
we are offering will be approximately $ . If the underwriters fully exercise
the over-allotment option, the net proceeds of the shares sold by us will be
$ . "Net Proceeds" is what we expect to receive after paying the underwriting
discount and other expenses of this offering. For the purpose of estimating net
proceeds, we are assuming that the public offering price will be $ per share.
We will not receive any proceeds from the sale of shares by the selling
stockholders.
We will use the net proceeds for:
. the acquisition of additional content;
. corporate branding; and
. the expansion of our sales and marketing activities.
We will use the balance of the net proceeds for general corporate purposes,
including working capital.
The timing and amount of our actual expenditures will be based on many factors,
including:
. the extent to which we have opportunities to acquire new content;
. the extent to which corporate branding opportunities present themselves;
and
. the rate at which we expand our sales and marketing efforts.
Until we use the net proceeds of this offering, we will invest the funds in
short-term investment grade interest-bearing securities.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We
anticipate that we will retain earnings to support operations and to finance
the growth and development of our business. Therefore, we do not expect to pay
cash dividends on our common stock in the foreseeable future.
19
<PAGE>
Capitalization
The following table shows:
. the capitalization of EMusic on March 31, 1999;
. the capitalization of EMusic on March 31, 1999, pro forma to give effect
to the conversion of Series B preferred stock and the issuance of shares
in connection with the completion of the content acquisition agreement
with Nordic Entertainment and the acquisition of Internet Underground
Music Archive; and
. the capitalization of EMusic on March 31, 1999, assuming completion of
this offering at an assumed offering price of $ per share and the use of
the net proceeds as described under "Use of Proceeds."
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------
Pro
Forma
as
Actual Pro Forma Adjusted
------------ ------------ --------
<S> <C> <C> <C>
Redeemable convertible preferred stock:
Series B, $0.01 par value;
120,000 shares authorized; 117,570
shares issued and outstanding actual;
no shares issued and outstanding, pro
forma and as adjusted.................. $ 31,767,593 $ -- $
Undesignated, $0.01 par value;
380,000 shares authorized; no shares
issued and outstanding actual, pro
forma and pro forma as
adjusted .............................. -- --
Stockholders' equity:
Common stock, $0.01 par value;
200,000,000 shares authorized;
15,655,479 shares issued and
outstanding, actual; 28,561,237 shares
issued and outstanding, pro forma; and
33,561,237 shares issued and
outstanding, as adjusted............... 156,555 285,612
Additional paid-in capital.............. 40,938,469 91,433,533
Note receivable from employee........... (6,000) (6,000)
Accumulated deficit..................... (37,238,542) (37,238,542)
------------ ------------ -----
Total stockholders' equity............. 3,850,482 54,474,603
------------ ------------ -----
Total capitalization.................. $ 35,618,075 $ 54,474,603 $
============ ============ =====
</TABLE>
- ------------------
The number of outstanding shares in the preceeding table excludes 1,707,800
shares of common stock issuable upon the exercise of outstanding warrants with
a weighted average exercise price of $13.31 per share, 6,297,750 shares of
common stock issuable upon the exercise of outstanding stock options with a
weighted average exercise price of $7.12 per share and 4,656,850 shares of
common stock reserved for future issuance under our stock option plans.
20
<PAGE>
Dilution
Our pro forma consolidated net tangible book value as of March 31, 1999 was
approximately $28,664,000 or $1.00 per share. "Net tangible book value" is
total assets minus the sum of liabilities and intangible assets. "Net tangible
book value per share" is net tangible book value divided by the total number of
shares outstanding before this offering.
After giving effect to adjustments relating to this offering, our pro forma net
tangible book value on March 31, 1999 would have been $ or $ per share. The
adjustments made to determine pro forma net tangible book value per share are
the following:
. an increase in total assets to reflect the net proceeds of this offering
as described under "Use of Proceeds" assuming that the public offering
price will be $ per share; and
. the addition of the number of shares offered by us to the number of
shares outstanding.
The following table illustrates the pro forma increase in net tangible book
value of $ per share and the dilution (the difference between the offering
price per share and net tangible book value per share) to new investors:
<TABLE>
<S> <C> <C>
Assumed public offering price per share......................... $
Pro forma net tangible book value per share as of March 31,
1999........................................................... $
Increase in net tangible book value attributable to new public
investors......................................................
-----
Pro forma as adjusted net tangible book value per share as of
March 31, 1999 after giving effect to this offering............
-----
Dilution per share to new investors in this offering............ $
=====
</TABLE>
The following table shows the difference between existing stockholders and new
investors with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share. The table assumes that
the public offering price will be $ per share. The following table does not
give effect to sales of shares by the selling stockholders.
<TABLE>
<CAPTION>
Shares Total Average
Purchased Consideration Price
-------------- -------------- Per
Number Percent Amount Percent Share
------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. % $ % $
New investors..........................
----- ----- ------ -----
Total................................ 100.0% $ 100.0%
===== ===== ====== =====
</TABLE>
21
<PAGE>
Selected Financial Data
This section presents our selected historical financial data. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements. The selected data in this section is not
intended to replace the financial statements.
The statement of operations data for the period from our inception on January
8, 1998 to June 30, 1998, and the balance sheet data at June 30, 1998, are
derived from our audited financial statements, which are included elsewhere in
this prospectus. The statement of operations data for the period from inception
to March 31, 1998 are derived from audited financial statements that are not
included in this prospectus. The statement of operations data for the nine
months ended March 31, 1999 and the period from inception through March 31,
1999 are derived from our unaudited financial statements included elsewhere in
this prospectus and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, that are necessary for the
fair presentation of the results of operations for these periods. Historical
results are not necessarily indicative of future results. We have paid no cash
dividends on our common stock.
<TABLE>
<CAPTION>
Combined
Consolidated
January 8, 1998 Nine months January 8, 1998 Nine Months
(inception) to ended (inception) to ended March
June 30, 1998 March 31, 1999 March 31, 1999 31, 1999
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Statement of Operation
Data:
Revenues................ $ -- $ 41,527 $ 41,527 $ 392,885
Cost of revenues........ -- 13,840 13,840 45,410
----------- ------------ ------------ ------------
Gross profit............ -- 27,687 27,687 347,475
----------- ------------ ------------ ------------
Operating expenses:
Product development... $ 961,349 3,580,014 4,541,363 3,723,661
Selling general and
administrative....... 218,755 715,594 934,349 5,585,286
Amortization of
deferred
compensation......... -- -- -- 130,870
----------- ------------ ------------ ------------
1,180,104 4,295,608 5,475,712 9,439,817
----------- ------------ ------------ ------------
Operating loss.......... (1,180,104) (4,267,921) (5,448,025) (9,092,342)
Interest income......... -- 39,365 39,365 39,471
Interest expense........ -- (35,549) (35,549) (35,549)
----------- ------------ ------------ ------------
Net loss................ $(1,180,104) $ (4,264,105) $ (5,444,209) $ (9,088,420)
----------- ------------ ------------ ------------
Accretion of Series A
and B preferred to
redemption value....... -- (177,255) (177,255) (177,255)
Beneficial conversion
charge, Series B
preferred stock........ -- (31,577,078) (31,577,078) (31,577,078)
Dividend on Series B
preferred stock (Note
3)..................... -- (40,000) (40,000) (40,000)
----------- ------------ ------------ ------------
Net loss applicable to
common shares.......... $(1,180,104) $(36,058,438) $(37,238,542) $(40,882,753)
=========== ============ ============ ============
Net loss per common
share--basic and
diluted................ $ (0.12) $ (2.48) $ (2.89) $ (2.64)
=========== ============ ============ ============
Weighted average common
shares outstanding--
basic and diluted...... 10,234,055 14,560,552 12,889,520 15,498,691
Pro forma net loss per
common share........... $ (0.12) $ (2.43) $ (2.85) $ (2.59)
=========== ============ ============ ============
Weighted average common
shares outstanding used
in computing pro forma
basic and diluted net
loss per share......... 10,234,055 14,865,363 13,078,713 15,803,502
</TABLE>
<TABLE>
<CAPTION>
Combined
Consolidated
June 30, 1998 March 31, 1999 March 31, 1999
------------- -------------- --------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......... $509,751 $32,618,240 $32,651,777
Working capital................... 395,913 29,719,397 28,691,105
Total assets...................... 581,860 38,800,350 47,967,092
Total long-term debt.............. -- -- 309,550
Total debt........................ -- -- 493,188
Redeemable convertible preferred
stock............................ -- 31,767,593 31,767,593
Total stockholders' equity........ 446,660 3,850,482 11,621,755
</TABLE>
22
<PAGE>
Management Discussion and Analysis of
Financial Condition and Results of Operations
You should read this discussion together with the financial statements and
other financial information included in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those indicated in these forward-
looking statements.
Results of Operations
We were incorporated on January 8, 1998 and are a development stage company.
Through March 31, 1999, we have incurred costs to organize and develop an
Internet website to conduct our business. We began selling musical recordings
over the Internet in July 1998. We may experience significant fluctuations in
operating results in future periods due to a variety of factors, including:
. the demand for downloadable music content and Internet advertising;
. the addition or loss of advertisers;
. the level of traffic on our Internet sites;
. the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
. the introduction of new sites and services by us or our competitors;
. seasonal trends in Internet use, purchases of downloadable music, and
advertising placements;
. price competition or pricing changes in the industry;
. technical difficulties or system downtime; and
. general economic conditions, and economic conditions specific to the
Internet.
Because of our limited history, we believe that period-to-period comparisons of
our operations are not meaningful. Accordingly, we have not included
comparisons in the discussions set forth below.
23
<PAGE>
The following table shows for the periods presented the dollar amounts of
selected line items from our unaudited statements of operations. Because the
revenues are limited, expenses stated as a percentage of revenue are not
meaningful.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
March 31, June 30, Sept 30, Dec 31, March 31,
1998 1998 1998 1998 1999
--------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net revenue............. -- -- $ 12,452 $ 8,013 $ 21,062
Cost of revenue......... -- -- 277 4,439 9,124
--------- ----------- ---------- ----------- ------------
Gross profit............ -- -- 12,175 3,574 11,938
--------- ----------- ---------- ----------- ------------
Operating expenses:
Product development.... $ 42,182 $ 919,167 666,712 925,249 1,988,053
Selling, general and
administrative........ 46,745 172,010 197,256 204,672 313,666
--------- ----------- ---------- ----------- ------------
Total operating
expenses............. 88,927 1,091,177 863,968 1,129,921 2,301,719
--------- ----------- ---------- ----------- ------------
Loss from operations.... (88,927) (1,091,177) (851,793) (1,126,347) (2,289,781)
Interest income......... -- -- 2,310 592 36,463
Interest expense........ -- -- -- -- (35,549)
--------- ----------- ---------- ----------- ------------
Net loss................ $ (88,927) $(1,091,177) $ (849,483) $(1,125,755) $ (2,288,867)
--------- ----------- ---------- ----------- ------------
Accretion of Series A
and B preferred stock
to redemption value.... -- -- -- (169,047) (8,208)
Beneficial conversion
charge, Series B
preferred stock........ -- -- -- -- (31,577,078)
Dividend on Series B
preferred stock........ -- -- -- -- (40,000)
--------- ----------- ---------- ----------- ------------
Net loss applicable to
common shares.......... $ (88,927) $(1,091,177) $ (849,483) $(1,294,802) $(33,914,153)
========= =========== ========== =========== ============
Net loss per common
share-basic and
diluted................ $ (0.01) $ (0.08) $ (0.06) $ (0.09) $ (2.31)
========= =========== ========== =========== ============
Weighted average common
shares outstanding
basic and diluted...... 6,607,357 12,847,724 14,591,336 14,581,212 14,674,372
</TABLE>
Net Revenues
We are a development stage company. We earned no revenue from inception through
June 30, 1998. For the three quarters ended March 31, 1999, our revenues
totaled $41,527. Our revenues to date have been comprised of advertising and
sales of physical merchandise and downloadable music recordings. In the future,
we expect sales of merchandise to be limited.
Cost of Revenues
Cost of revenues for the three quarters ended March 31, 1999 totaled $13,840.
These costs consist of the cost of merchandise sold, credit card processing
fees and royalties on downloadable music. Costs related to physical merchandise
exceeded related revenues during this period. We believe that the sale of
physical merchandise will become an increasingly smaller portion of our future
sales. As sales of physical merchandise become a lower portion of our revenues,
we expect that our gross margins will improve.
Product Development Expenses
We began our development efforts in February 1998. Product development expenses
principally consist of:
. website development, including software engineering, audio production and
graphic design;
. certain non-recoverable advances to artists and artist development;
24
<PAGE>
. telecommunications charges; and
. salaries, rent, depreciation and other expenses related to building our
music distribution business.
Product development expenses were $1,988,053 for the three months ended March
31, 1999, compared to $42,182 for the period ended March 31, 1998. They were
$3,580,014 for the nine months ended March 31, 1999 and $4,541,363 from
inception through March 31, 1999. These changes reflect the increase in our
product development efforts, particularly in software engineering, graphic
design and development of the infrastructure required to deliver downloadable
music to customers.
Product development expenses included charges of $865,168 and $1,495,608 due to
stock and stock options granted to advisors during the three and nine months
ended March 31, 1999, respectively. Product development expenses included
similar charges of $751,714 from inception through June 30, 1998. Additionally,
we charged approximately $338,000 to product development expense for the
amortization of the intangibles associated with our acquisition of Creative
Fulfillment. Because we plan to continue to aggregate musical recordings and to
develop the software necessary to manage downloads, we expect that product
development expenses will increase in future periods.
Selling and Marketing Expenses
We incurred no significant selling and marketing costs from inception through
March 31, 1999. Commencing with the launch of our EMusic brand in the quarter
ended June 30, 1999, we have begun an extensive sales and marketing campaign.
We also expect to enter into various strategic alliances, begin other targeted
advertising and direct promotion campaigns, attend trade shows and begin other
activities to attract new customers. As a result, we expect to incur
significant sales and marketing expenses in future periods.
General and Administrative Expenses
General and administrative expenses consist primarily of executive management,
finance, legal, administrative and related overhead costs, such as rent,
insurance, and depreciation. We have incurred costs of $934,349 from inception
through March 31, 1999, related to general and administrative expenses. Of
these costs, $313,666 and $715,594 were incurred in the three and nine months
ended March 31, 1999, respectively. In April 1999, we moved our headquarters to
new facilities located in Redwood City, California, resulting in an increase in
rent and facilities related expenses of approximately $200,000 per quarter. We
expect general and administrative expenses to continue to increase as we expand
our staff and incur additional costs related to the growth of our business.
Liquidity and Capital Resources
We had a cash balance of $32,618,240 at March 31, 1999. For the period from
inception through March 31, 1999, net cash of $98,122 was used for operating
activities consisting of net losses of $5,444,209, substantially offset by:
. non-cash expenses of $2,247,322 associated with stock and stock options
granted to advisors; and
. increased accrued liabilities of $2,615,422 principally related to
issuance costs for our Series B preferred stock.
Additionally, we purchased approximately $180,300 in capital equipment from
inception through March 31, 1999. We expect to incur negative cash flow from
operations for the foreseeable future, as we continue to develop our business.
In October 1998, we 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 our common stock. The Series A shares were subsequently converted
into shares of Series B preferred stock.
25
<PAGE>
During the period from December 1998 through March 1999, we received loans in
the form of convertible notes payable totaling $1,743,500. The notes, which
bore interest at 10% per annum and were to mature on March 31, 1999,
represented bridge loans in advance of the Series B preferred stock financing.
All outstanding principal and accrued interest due under these notes converted
into an aggregate of 7,109 shares of Series B preferred stock upon the closing
of the Series B financing.
On March 23, 1999, we completed a private placement of approximately 117,570
shares of Series B convertible preferred stock, which includes the conversion
of outstanding convertible notes and Series A shares into Series B shares.
Total proceeds, including proceeds from the convertible notes and Series A
shares, were $31,577,078, net of issuance costs of approximately $2,724,000, of
which approximately $2,500,000 remained in accrued liabilities at March 31,
1999. The Series B preferred stock was convertible at anytime at the option of
the holders into 11,757,000 shares of our common stock. As a result of the
beneficial conversion feature given to the holders of the Series B preferred
stock, we recorded a charge, limited to the net proceeds received, in the
period ended March 31, 1999.
In April 1999, we entered into a five-year lease agreement for office space.
Under the terms of the agreement, we will make minimum monthly lease payments
of approximately $67,000 for a period of 60 months beginning in April 1999.
This monthly amount includes certain maintenance costs associated with the
leased space, and is subject to annual increases based on the Consumer Price
Index.
Since inception, we have experienced significant losses and negative cash flows
from operations. We believe that our existing capital resources together with
the proceeds from this offering will be sufficient to fund our planned level of
operating activities, capital expenditures and other obligations through the
next 12 months. However, we may need to raise additional funds in future
periods through public or private financings, or other sources, to fund our
operations and potential acquisitions, if any, until we achieve profitability,
if ever. We may not be able to obtain adequate or favorable financing at that
time. Failure to raise capital when needed could harm our business. If we raise
additional funds through the issuance of equity securities, the percentage of
ownership of our stockholders would be reduced. Furthermore, these equity
securities might have rights, preferences or privileges senior to our common
stock.
Year 2000 Readiness
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates or have been programmed with default
dates ending in 99, the common two-digit reference for 1999. As a result, as we
transition from the 20th century to the 21st century, computer systems and
software used by many companies and organizations in a wide variety of
industries will produce erroneous results or fail unless they have been
modified or upgraded to process date information correctly. Significant
uncertainty exists concerning the scope and magnitude of problems associated
with the year 2000 issue.
State of Readiness. Although we have not conducted a formal audit internally or
by any third party, based on our current assessment, we believe our internal
systems are year 2000 compliant. We are currently conducting additional reviews
of our internal management information and other computer systems to identify
any year 2000 problems, and have begun to communicate with the external vendors
that supply us with material software and information systems and with our
significant suppliers to determine their year 2000 readiness. We have not
completed our year 2000 investigation and overall compliance initiative.
Costs. To date, we have not incurred any material costs directly associated
with our year 2000 compliance efforts, except for compensation expenses
associated with our salaried employees who have devoted some of their time to
our year 2000 assessment. We do not expect the total cost of year 2000 problems
to be material to our business. However, during the months prior to the century
change, we will continue to evaluate new software and information systems
provided to us by third parties and any new infrastructure systems that we
acquire to determine whether they are year 2000 compliant. Despite our current
assessment, we may not identify and correct all significant year 2000 problems
on a timely basis. Year 2000 compliance efforts may involve significant time
and expense and unremediated problems could substantially harm our business. We
currently have no contingency plans to address the risks associated with
unremediated year 2000 problems.
26
<PAGE>
Risks. We are not currently aware of any year 2000 readiness problems relating
to our internally-developed proprietary systems that would substantially harm
our business. We may discover year 2000 readiness problems in these systems
that will require substantial revision. In addition, third-party software,
hardware or services incorporated into our material systems may need to be
revised or replaced, all of which could be time-consuming and expensive. Our
failure to fix or replace our internally developed proprietary software or
third-party software, hardware or services on a timely basis could result in
lost revenues, increased operating costs, the loss of customers and other
business interruptions, any of which could substantially harm our business.
Moreover, our failure to adequately address year 2000 readiness issues in our
internally developed proprietary software could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend. In addition, governmental
agencies, utility companies, Internet access companies, third-party service
providers and others outside of our control may not be year 2000 ready. The
failure by these entities to be year 2000 ready could result in a systemic
failure beyond our control, such as a prolonged Internet, telecommunications or
electrical failure, which could also prevent us from delivering our services to
our customers, decrease the use of the Internet or prevent users from accessing
websites.
In particular, we rely on Card Service International for credit card processing
and AboveNet Communications, Inc. for website hosting. We have not yet received
any written assurance from Card Service or AboveNet as to their readiness for
year 2000 issues. Because we have not received written assurance, we have
assumed that Card Service and AboveNet may not be ready for the year 2000
before January 1, 2000, and that their credit card processing and website
hosting capabilities could fail at that time. Based on this assumption, we
believe such failures would be the most reasonably likely worst case year 2000
scenarios. If the Card Service services fail, we would seek to complete credit
card transaction manually using temporary staff. If Card Service were unable to
restore service promptly, we believe switching to another financial institution
for automated credit card processing would require approximately 15 days. If
the AboveNet services fail, we would not be able to operate our business until
AboveNet restored its service or until we were able to obtain another web
hosting arrangement. We believe that it would require approximately three days
to establish a new web hosting arrangement.
Contingency Plan. As discussed above, we are engaged in an ongoing year 2000
assessment and have not yet developed any contingency plans. The responses
received from third-party vendors and service providers will be taken into
account in determining the nature and extent of any contingency plans we adopt.
Quantitative and Qualitative Disclosures About Market Risk
We considered the provision of Financial Reporting Release No. 48 "Disclosure
of Accounting Policies for Derivative Financial Instruments and Derivative
Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." We had no
holdings of derivative financial or commodity instruments at March 31, 1999.
However, we are exposed to financial market risks, including changes in
interest rates. All of our revenue and capital spending is transacted in U.S.
dollars. Our investments portfolio comprises amounts invested in short term
cash deposits and therefore we believe that the fair value of our investment
portfolio or related income would not be significantly impacted by increases or
decreases in interest rates due mainly to the short-term nature of our
investment portfolio. However, a sharp increase in interest rates could have a
material adverse effect on the fair value of our investment portfolio.
Conversely, sharp declines in interest rates could seriously harm interest
earnings of our investment portfolio.
The table below presents principal amounts by expected maturity (in U.S.
dollars) and related weighted average interest rates by year of maturity for
our investment portfolio.
<TABLE>
<CAPTION>
1999 Thereafter Total
-------- ---------- --------
<S> <C> <C> <C>
Cash........................................... $509,751 $ -- $509,751
Weighted Average Interest Rate................ 4.9% --
Total Portfolio................................ $509,751 $ -- $509,751
======== ===== ========
</TABLE>
27
<PAGE>
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position No. 98-1 or SOP 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
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. We are currently evaluating the impact of SOP 98-1 on our
financial statements and related disclosures.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, or SOP 98-5, "Reporting on the Costs of Start-Up Activities."
This standard requires companies to expense the costs of start-up activities
and organization costs as incurred. In general, SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. We believe the adoption of SOP
98-5 will not have a material impact on our results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities.
SFAS 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that
exists. SFAS 133 will be effective for fiscal years beginning after June 15,
2000. We do not currently hold derivative instruments or engage in hedging
activities.
28
<PAGE>
Business
Overview
EMusic is a leading provider of downloadable music over the Internet. Through
our website at EMusic.com, we offer a compelling selection of music from which
our customers may discover, sample, and purchase popular recordings for
immediate digital delivery and enjoyment. The recordings available for download
at EMusic.com are provided through our relationships with a growing roster of
recording artists and independent record labels. We currently have exclusive,
multi-year, digital download licenses to over 300,000 titles, from over 75
record labels and over 1,200 recording artists, including such well known
artists as The Offspring, They Might be Giants, Jimi Hendrix, and Ella
Fitzgerald. We currently have over 13,000 titles available for download on our
EMusic.com website. In addition, our IUMA subsidiary offers our customers
access to over 3,700 unsigned artists. We believe this represents one of the
largest digital music content archives currently licensed for distribution over
the Internet.
Our website enables these artists and labels to easily access a global customer
base, while providing them with an integrated means of distributing, promoting
and tracking the sales of their recorded music. Recordings are offered for sale
on EMusic.com in the "mp3" format, the most widely-recognized compression
standard for the download of musical recordings. We believe that our
combination of selection, convenience, varied content, improved distribution
and tracking capabilities creates a compelling music purchasing experience for
consumers as well as an attractive distribution alternative for artists and
independent record labels.
Industry Background
Recorded Music Industry
According to a report by Market Tracking International, worldwide retail sales
in the music industry were $39.7 billion in 1997 and are expected to grow to
$46.9 billion by 2004. The music industry can be divided into two kinds of
record companies or "labels"-- the "major" record labels and the "independent"
record labels. According to Billboard, the five major record labels and their
affiliates currently account for approximately 79% of all recorded music sales
worldwide. These companies are BMG Entertainment, EMI Music, Sony Music
Entertainment, Universal Music Group and Warner Music Group. These companies
have substantial investments in the distribution infrastructure which supports
the manufacturing, distribution and retailing of records and compact discs and
through which the substantial majority of current recorded music sales take
place. Historically, the major record labels have been reluctant to participate
in any alternative distribution model which would restructure the current music
distribution hierarchy due to their investment in the current physical
distribution infrastructure and their relationship with the retail channel.
Thousands of independent record labels account for most of the remaining
recorded music sales. In contrast to the major record labels, independent
record labels generally do not have substantial existing CD and record
distribution investments and, as a result, physical distribution can be more
difficult and costly to arrange. Independent record labels also typically have
less capital available. Without the established distribution networks,
independent record labels often pay higher royalties to artists to secure
publishing and distribution rights.
Development of the Downloadable Music Industry
The Internet has emerged as a global platform that allows millions of people to
share information, communicate and conduct business. International Data
Corporation estimates that the number of Internet users worldwide will grow
from approximately 97 million users in 1998 to 320 million by the end of 2002.
The Internet presents a significant opportunity for the rapid and cost-
effective distribution, promotion and sale of recorded music. Downloading music
files is also facilitated by the increased use of high-speed connections to the
Internet, such as digital cable modems, ISDN and digital subscriber lines.
According to Forrester Research, the number of subscribers using cable, xDSL or
ISDN modems is projected to reach 22 million by 2003.
29
<PAGE>
Forrester estimates that total online music revenues in the United States are
expected to grow from $88.0 million in 1998 to $7.8 billion in 2003. Of this
amount, Forrester further estimates that $1.1 billion will represent sales of
downloadable music. According to Market Tracking International, music sold
through the Internet will account for 8% or approximately $4.0 billion of the
$46.9 billion worth of music expected to be sold worldwide in 2004.
In addition to the development of the Internet, we believe that other
technological advances will drive rapid growth of the market for downloadable
music, including the adoption of open standards-based Internet audio, the
introduction of new hardware and improved digital compression technology. Prior
to the introduction of new digital compression technologies, it was impractical
to transmit high quality audio using the Internet because recordings in digital
format can be very large. Advances in compression techniques, however, have
greatly reduced the size of digitally stored recordings. For example, if not
compressed, a three minute song can occupy more than thirty megabytes of
storage. In contrast, the mp3 open standard can compress music files to one-
tenth their original size while maintaining their audio integrity at near-CD
quality levels. According to Webnoize Inside, an affiliate of Digital Music
Network, Inc., mp3 is the most widely recognized digital music format. Mp3
playback software is currently available on most operating environments such as
Microsoft Windows 95/98, Windows NT and MacOS, most major versions of UNIX and
other operating environments for Internet enabled devices. In addition, free
copies of mp3 playback software like RealNetworks' RealJukebox and America
Online's WinAmp are widely available on the Internet. Forrester estimates that
there are already over 50 million mp3-capable users today.
In recent years, consumers have increasingly used their computers to play and
store music. Dataquest estimates that in 1998, 30% of U.S. households had
multimedia PCs with a sound card, speakers and either a CD-ROM or DVD-ROM
drive. Consumers can now play CDs on their computers with the ease and fidelity
formerly associated only with high-end stereo systems. Consumer electronics
companies and technology companies have capitalized on the growing popularity
of digital music by introducing portable music devices. The Rio, introduced in
November 1998 by Diamond Multimedia Systems has already sold over 300,000
units. Other manufacturers, including Creative Labs, Sensory Sciences,
RCA/Thomson, Samsung and LG Electronics have released, or have announced plans
to release, portable mp3 players. In addition, other manufacturers have
produced, or have announced plans to produce, other devices for playing and
storing mp3 recordings, including the Empeg Car (a removable audio system
capable of holding over 5,000 titles), Clarion's AutoPC (an auto mp3 audio
player) and Lydstrom's Songbank (a home stereo component that stores and
supports mp3 files).
Our Opportunity
We believe that a number of inefficiencies in the current structure of the
music industry leave three underserved constituencies: consumers, independent
record labels and artists.
Consumers pay higher prices than necessary for music in order for record labels
to recoup the high costs associated with distribution of music on a physical
media through traditional channels. In addition, the current dependence on
physical media limits consumer convenience by forcing them to purchase music at
retail outlets or through catalogs or Internet sites that use mail-order.
Further, physical media is less portable and harder to customize than
downloadable music. Increasingly, we believe that these shortcomings will drive
consumers to the solution of purchasing downloadable music direct from the
Internet.
We believe consumer adoption of downloadable music creates an excellent
opportunity for independent record labels to supplement or replace their
physical distribution networks with electronic channels. Currently, most
independent record labels rely on the distribution infrastructure of major
record labels to distribute their offerings. They are subject to constraints of
these physical channels, such as higher distribution costs driving lower
margins, limited shelf space and subordination to the offerings of the major
record labels, as well as
30
<PAGE>
more limited promotional capabilities. While the promise of an electronic
distribution infrastructure is compelling, most independent record labels lack
the resources and expertise to create a viable proprietary electronic
distribution channel. We believe that these independent record labels will seek
to partner with established providers of downloadable music to leverage their
branding, site traffic and technology.
By supporting independent record labels, we believe downloadable music creates
a compelling solution for artists. In return for access to the powerful
distribution and promotion capabilities of the major record labels, major label
artists are generally required to lock themselves into long-term contracts that
can reduce their royalty rates, limit their creative control and limit their
ability to promote and sell their music online. Artists who work with an
independent record label tend to enjoy less restrictive contracts, but must
face risks associated with an independent record label's less effective
distribution and promotion capabilities. Additionally, physical channels
require costly promotional efforts, making it difficult for some artists to
promote their offerings to a large audience. We believe that the cost and
contractual constraints of the major record labels and the limitations of
independent record labels using traditional distribution channels will
encourage many artists, including some major artists, to offer their music in
downloadable format, either on their own or through an independent record label
with electronic distribution capability.
Creating an infrastructure to handle royalty payments for downloadable music is
difficult, and the lack of this infrastructure has slowed acceptance of the
downloadable music distribution channel by artists, labels and songwriters.
Rights in the music industry focus on two levels; the underlying song and the
sound recording. The purchase of one song usually requires at least two
separate royalty payments, one to the songwriter and one to the performer. We
believe that the ability to accurately track and make royalty payments to the
correct parties is crucial to the proliferation of the downloadable music
distribution channel as a viable alternative to their physical counterparts.
The EMusic Solution
We are a leading provider of downloadable music. Our website allows consumers
to quickly and conveniently purchase music online at a lower price than most
traditional music CDs. Our website also allows consumers to download and listen
to music immediately. We believe that the limitations associated with the
traditional music industry present us with an opportunity to redefine the music
distribution hierarchy and enable artists and independent labels to access
consumer markets at a level currently only available to the major labels, while
protecting the artists' financial interests and providing consumers with
numerous advantages in price, convenience and music information.
We believe that our solution provides the following benefits:
Benefits to Consumers
Convenience. Through our website, consumers can download music at any time, 24
hours a day, seven days a week. Consumers can register to make purchases from
our site in a few easy steps, and can purchase titles on multiple visits to our
site without having to re-enter personal and credit card information. Consumers
can search our site using various easy to use indices and generally have the
flexibility to make purchases song by song or by album. When they make their
purchase, consumers can download and listen to their music immediately, or they
can wait until a more convenient time to download their purchased titles. Once
downloaded, digital technology allows the consumer to organize their purchased
titles into play lists. Play lists allow users to organize and play their
titles in any order they desire. Consumers can easily copy music to their
laptops or mp3 devices for greater portability, without having to carry
physical media with them. In addition, mp3 devices have no moving parts and, as
a result, do not skip and can be used in situations where traditional music CDs
are not optimal, such as running or mountain biking.
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<PAGE>
Lower Prices. Our ability to deliver music electronically eliminates the
extensive infrastructure required by the traditional music industry to
distribute physical media. This greatly reduces our costs and allows us to
offer our music at a significantly lower price to consumers.
Compelling Music Selection. We currently have exclusive, multi-year, digital
download licenses to over 300,000 titles, from over 75 record labels and over
1,200 recording artists, including such well known artists as The Offspring,
They Might Be Giants, Jimi Hendrix and Ella Fitzgerald. In addition, IUMA
offers our customers access to over 3,700 unsigned artists. We currently have
over 13,000 titles available for download on our EMusic.com website. We believe
this represents one of the largest digital music content archives currently
licensed for distribution over the Internet. Furthermore, our downloadable
music format allows us to carry hard-to-find, out-of-production or
international titles that are not commercially viable to produce or stock in a
physical format.
Varied Information and Content. Visitors to our website can access music news,
as well as links to concert information, sites for free mp3 software downloads
and other information on downloadable music. We provide our consumers with the
opportunity to sample titles before purchasing them. This enables them to
explore new music without cost and may result in them purchasing additional or
lesser-known titles. In addition, we are beginning to offer other services to
our customer base, including online concerts, organizing online chat sessions
with their favorite artists and "undiscovered" talent, and other initiatives
that we believe will offer a more direct connection between artists and
consumers.
Benefits to Artists and Independent Labels
Powerful Distribution Capabilities. Our website provides a powerful
distribution solution to artists and independent labels by allowing them access
to a broad range of music listeners. Because we are not dependent on physical
media, we can provide artists and independent record labels with much lower
distribution costs, creating higher margins for labels and allowing independent
record labels to pay artists higher royalties and publishing rates. In
addition, our distribution capabilities can allow artists to directly
distribute their offerings to the public, such as the new They Might Be Giants
mp3-only album which was recently released exclusively on our website.
Greater Understanding of Fan Base. By tracking the behavior and purchasing
patterns of users on our website, we are able to provide artists and
independent labels a level of feedback that was previously unavailable through
traditional music distribution channels. Artists and independent labels may use
our data to evaluate which songs receive the most interest, the location on the
Internet where they receive the best reception and how their music compares to
other music in the same genre or in other genres. Artists and labels may use
this information to target specific regions, increase the focus of promotional
efforts and provide a means to better connect with their fan base.
Significant New Media Exposure. The Internet is emerging as an important
promotional tool for artists and independent labels. In addition to the global
distribution of their music, we are currently beginning initiatives that will
enable us to offer artists significant exposure to their fan bases. This
includes concerts broadcast online, chat rooms featuring artists and fans, and
other exposure on our website. This relatively inexpensive promotion on a
global basis is a significant benefit to artists and independent labels.
Protection of Financial Interests. We believe that by closely tracking royalty
payments, and pricing our music low enough to discourage piracy, we provide a
valuable, trusted solution to artists and labels that will enable us to become
the preferred distribution channel for downloadable music. We have established
a proprietary database of artists, songwriters and labels that allows us to
seamlessly track and generate royalty payments to the appropriate parties. We
are currently licensed by the Harry Fox Agency, ASCAP, BMI and SESAC;
organizations dedicated to protecting the rights of, and collecting royalties
due to, artists and songwriters.
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EMusic Business Strategy
Our objective is to become the leading provider of compelling, downloadable
music directly to consumers over the Internet. Our strategy is to leverage our
first-to-market advantage together with our established music industry
relationships as we take advantage of the growing market for the digital
distribution of music. The following are key elements of our strategy:
Continue to Acquire Compelling and Varied Content. We will continue to increase
the number of musical selections available on our website in order to build our
global consumer base and increase the number of online music purchases. We are
pursuing a "best of breed" content acquisition strategy, focused on acquiring
exclusive rights to title libraries from leading independent record labels in
each well known music genre. We intend to continue to aggressively pursue the
acquisition of music content from, among others, independent record labels,
owners and distributors of recording catalogs, and established recording
artists.
Create Strong Brand Awareness. Building brand awareness of EMusic is
fundamental to expanding our global Internet user base and our ability to
attract providers of music content. We promote our brand through traditional
media, event sponsorships, online media and other marketing activities as well
as leveraging strategic relationships within the industry. We intend to enhance
brand awareness of our website by providing original and proprietary content,
aggressively expanding our online and offline marketing activities, enabling
consumers to purchase music and related merchandise, and establishing strategic
and referral fee relationships whereby other websites engage us as an online
music retail source and content provider.
Leverage Strategic Partnerships and Industry Relationships. We believe that our
strategic relationships with distribution and technology companies and our
strong relationships with media and music companies will help attract users,
significantly increase brand awareness of our website and help us to add new
content. We will seek to develop additional relationships with online music
retailers, Internet portal site companies and content providers. In addition,
we plan to establish retail relationships with other online distributors to
share commissions for sales generated from such websites.
Continue to Enhance Our Website. We intend to devote substantial resources to
improving the quality of our consumer users' experience on our website.
Features we intend to incorporate into future versions of our website include:
chat-rooms, music hubs, additional music-related content, more advanced search
capabilities and dynamic site personalization. We believe that a user-friendly
website with compelling and varied content will be a key differentiator of the
EMusic brand.
Become a Trusted Distribution Channel to the Music Industry. We intend to
further develop our technology infrastructure to be readily scaleable to
support our rapidly growing sales of online music, including the calculation of
royalty payments, while maintaining the speed and reliability of our site.
Furthermore, we intend to maintain low pricing to provide an attractive legal
alternative to piracy among the general public. We believe that providing a
reliable, trusted technology and payment infrastructure will position us more
favorably with record labels and artists as the premiere provider of
downloadable music.
Continue to Promote Development of Downloadable Music Market. We believe that
the development of the downloadable music market will be enhanced by educating
consumers about the benefits of downloadable music and by improving the
processes through which consumers purchase music online and use downloadable
music. We currently are active members of the Mp3 Association, Digital Music
Association and Electronic Frontier Foundation, organizations dedicated to
improving the ease of consumer acquisition and use of downloadable music. We
intend to continue to participate in programs which promote customer and market
awareness about downloadable music as well as industry groups which are setting
open standards for delivery. We intend to refine and simplify the downloadable
music purchasing experience through the continued development of our website,
which is designed to encourage purchases and repeat visits, demonstrating to
record labels and artists the value of the downloadable music market.
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Continue to Develop and Enhance IUMA. We believe that Internet Underground
Music Archive which allows unsigned artists to post music and related
information for access by the general public online, represents a competitive
advantage. IUMA promotes the development of the online music community and
allows us to establish early relationships with potential future music content
providers. We intend to continue to expand and improve IUMA so as to make it
easier for artists to participate and for consumers to access, search and
preview the content on the site.
Content Acquisition
We have acquired, and intend to continue to aggressively seek, download rights
to master recordings owned by independent record labels and other owners and
distributors of significant recording catalogs. These exclusive, multi-year
license agreements typically include all existing and future recordings created
during the term of the agreement. Initially, we have focused on partnering with
independent record labels and established recording artists. We are actively
identifying and targeting independent record labels spanning every well known
music genre, including, hip hop, rap, jazz, classical, country, blues, heavy
metal and alternative rock.
We have adopted a "best of breed" approach with respect to acquiring
downloadable music licenses. In many distinctly defined genres of music, we
have successfully acquired the exclusive multi-year, digital download rights to
the market sales leaders, and are aggressively continuing those efforts in each
new genre of music we add to our expanding online catalog. The following is a
sampling of labels with which we have signed exclusive content deals with genre
market leaders:
. Epitaph Records, one of the largest selling and most distinct brand names
in punk rock and alternative music, represents top Billboard artists such
as The Offspring, Tom Waits and Pennywise.
. King Biscuit Flower Hour, which is currently aired on over 180 radio
stations, is the longest running syndicated live concert radio show.
Their catalog features live recordings from such artists as The Who,
David Crosby, Iggy Pop, Elton John and Rod Stewart.
. Crunch Music Ltd., one of the United Kingdom's premier sources for
independent UK music in the mp3 format, whose content focuses on dance,
techno and hip-hop.
. Jetset Records and spinART Records, which are recognized in numerous
college magazines as the dominant music providers in the college music
niche.
. DRG Records, which owns the largest Broadway show recording library,
including numerous Grammy and Tony Award winners.
. Rykodisc, one of the largest independent recording catalogs, which
represents artists such as Elvis Costello, Frank Zappa and Robert Cray.
. Quicksilver Records, which features live recordings from The Monterey
Jazz Festival and the Palo Alto Jazz catalog.
. Fiction Music, which features new and never before released tracks from
The Cure.
We have also entered into contracts giving us the exclusive right to allow our
customers to download music from a variety of recognizable, brand name artists.
Included in the content catalog are recordings from Frank Zappa, Louis
Armstrong, Ella Fitzgerald, Judy Garland, Shirley Bassey, Kool Keith, Kansas,
Foghat and thousands of others.
In June 1999, we purchased the Jewel-Paula-Ronn catalog of master recordings
with such Blues and R&B artists as B.B. King, John Lee Hooker, Aretha Franklin
and Lightnin' Hopkins. When we acquire masters, we
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will seek to work with label partners to exploit the physical distribution
rights while also selling the music in downloadable form on our website.
Strategic Partnerships
Distribution and Marketing Partnerships
We are aggressively pursuing a variety of partnerships aimed at building a
channel of distribution for our downloadable music and music-related products
and services across the Internet. To accomplish this, we are developing
strategic relationships and alliances with high-traffic Internet sites to
feature our brand and exclusive content and in some cases offer our content for
sale.
. Examples of existing marketing and advertising relationships include
Comedy Central, CNET, Centraal, E!Online, Listen.com, ZDNet and CMJ
Online.
. In May 1999, RealNetworks and EMusic announced that mp3 tracks would be
featured in RealJukebox Music Showcase and that there would be links to
our website highlighted in the RealGuide music download section.
. In July 1999, we announced a new strategic partnership and equity
investment with Crunch Music Ltd., one of the United Kingdom's premier
sources for independent UK music in the mp3 format. Under the new
relationship, the two companies will work together on marketing,
promoting and co-branding their websites, label partners and artists on
both sides of the Atlantic. Launched in March 1999, Crunch has quickly
established itself as one of the leading sites in the UK for downloading
music and plans to expand to the rest of Western Europe. The Crunch site
hosts music from leading UK independent record labels including Dorado,
Filter, Pussyfoot, Platipus, The End, Tummy Touch, Marine Parade, TCR and
Ochre. Notable artists include Echo and The Bunnyman's Will Sargant, pka
as Glide, U2 producer DJ Howie B, Jacknife Lee, Art of Trance and Union
Jack.
In addition, we are also working with our label partners to offer them a
solution for selling our catalog directly from their websites. These label
partners can choose to sell only their own music, or the entire EMusic catalog
on EMusic created co-branded websites. Beginning in the fall of 1999, we plan
to launch a grass roots affiliate program designed to make it easy for any
website to become an affiliate and sell the EMusic catalog from their websites.
Hardware/Software/OEM Partnerships
We are building relationships with various manufacturers of computers and
consumer electronics devices, as well as software and book publishers to create
additional visibility as a source for downloadable music. As part of our
overall customer acquisition strategy, we are typically providing sample
titles, promotional coupons and other content to improve our partners' offering
to the music consumer and to continue to promote the downloadable music market.
. We have established relationships with digital audio device manufacturers
such as Creative Labs (Nomad), Diamond Multimedia (Rio) and Sensory
Sciences (Rave). In each partnership, we are featured on the outside of
the box as the premier source for downloadable music and provide sample
titles with the installation software. Beginning in mid-1999, we will
begin a marketing program with Creative Labs whereby a discount coupon
for our content will be supplied or shipped with each product supplied by
Creative Labs, including the Nomad portable mp3 player, Soundblaster
sound cards and Cambridge Soundworks speaker systems.
. In January 1999, we announced a technology and marketing alliance with
Adaptec, Inc. aimed at promoting the growth of downloadable music sales
in the popular mp3 format. Adaptec is the developer
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of the market-leading CD-recording software products, Easy CD Creator,
DirectCD and Toast. Under the terms of the agreement, EMusic and Adaptec
will jointly sell and promote each other's products and services. EMusic
and Adaptec will focus on technology solutions that allow consumers to
easily purchase and download mp3 music from the Internet and make their
own music CDs.
. As an additional way to attract customers, promote downloadable music and
distribute our label partners' music effectively, we plan to introduce
certain marketing initiatives and alliances with OEM computer suppliers,
sound card, high fidelity speaker and computer peripheral suppliers and
wireless product manufacturers. Some of these programs will target "back
to school" and the holiday season.
Industry Relationships
The reporting of information relating to the sales and performance of music is
a legally required and complex aspect of the worldwide music industry. To
facilitate our compliance with these requirements, we have focused on building
strong relationships and alliances with the following organizations:
. In February 1999, we announced a licensing agreement with the Harry Fox
Agency, or HFA, a wholly-owned licensing subsidiary of the National Music
Publishers' Association. Under this agreement, HFA will grant us the
first Digital Phonorecord Delivery License for delivering songs in the
mp3 format. Accordingly, we will submit regular reports to HFA, account
for each song purchased and pay the appropriate statutory payments to HFA
for distribution to copyright owners. This agreement helps ensure that
songwriters and music publishers will receive royalty payments for music
distributed electronically.
. We have entered into agreements with ASCAP, BMI and SESAC, the major
rights reporting organizations in the United States. Under each of these
agreements, we pay music performance royalties to the copyright holders
or performers.
. We have 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 us. We will share
peermusic income derived from music publishing rights acquired by us. We
have also licensed certain recordings from the peermusic catalog.
IUMA--Internet Underground Music Archive
In June 1999, we completed the acquisition of IUMA. IUMA was founded in 1993
and pioneered the delivery of music on the Internet. The IUMA website
(iuma.com) features more than 3,700 artists on individual websites with unique
URLs (bandname.iuma.com). IUMA artist websites enable audio sampling in mp3 and
RealAudio formats, and offer options for the sales of physical products and
downloadable music. IUMA artist websites also feature other content, including
artist bios, cover art, lyrics, photos and tour dates. IUMA has received
worldwide media attention, including articles in Rolling Stone, Newsweek, USA
Today and the Financial Times, as well as spots on MTV and CNN.
The following are key elements of our strategy with respect to IUMA.
Enhance Content and Build Traffic. We believe that by increasing IUMA's brand
recognition in the unsigned artist community through aggressive marketing
efforts, IUMA can become a premier Internet destination for unsigned artists
and fans of those artists.
Leverage the IUMA Platform to Develop New Artists. We believe that by creating
an efficient environment for unsigned artists and fans to interact, the IUMA
website will allow promising artists to surface more quickly. These artists
will then be exposed to our label partners. We believe that by facilitating the
process of signing unsigned artists, we will be promoting a new generation of
artists with a greater appreciation of the value of digital downloading of
music. Consequently, this will encourage the growth of the market as well as
position EMusic to obtain additional downloadable music rights.
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Sales and Marketing
Our sales and marketing objective is to sell downloadable music and music-
related products and services through EMusic.com and other websites, build
brand awareness, attract new visitors and convert them to loyal customers. To
accomplish this objective, our marketing strategy includes an aggressive
advertising campaign, high visibility promotions and sponsorships, strategic
public relations, a focused interactive marketing campaign, distribution
partnerships and broad loyalty programs.
The following are key elements to our sales and marketing strategy:
Enhance the EMusic.com Website. The focus of the website is to make the
consumer's experience finding, purchasing and downloading music as simple as
possible. We are regularly adding new elements designed to improve content,
navigability and the overall buying process.
Corporate Branding Campaign. We have recently launched an aggressive corporate
branding campaign. The campaign is initially targeted at early adopters, music
enthusiasts, record labels and the Internet business community. We have
designed a comprehensive media campaign, including network and cable TV ads,
billboards and print media. The campaign is also designed to attract new users
to the EMusic.com website and encourage trial download and purchases. Using the
tag line, "The Way To Download," the campaign features a mix of media vehicles
designed to reach our target audience.
Sponsorships and Promotions. We intend to sponsor highly-visible events
including concert tours, conferences and trade shows. We also plan to offer
creative promotions on EMusic.com and other websites designed to encourage
consumers to establish an account and purchase tracks.
Other elements of our sales and marketing initiatives include the introduction
of loyalty programs, such as rebates and incentives, online advertising to our
target demographic, genre specific marketing initiatives and the introduction
of co-marketing agreements with labels.
We also sell advertising on our website. This advertising is generally related
to our music offerings either by the product or music oriented nature of their
promotion. We currently use the Doubleclick Dart program to manage, track and
report our advertising sales to our advertising customers.
Operations
Our integrated systems, services and tools provide functionality in the
following areas:
Digital Asset Management. The continued development of a database management
system that indexes, retrieves and manipulates our growing multimedia content
is central to our digital asset management system. This scalable system allows
us to, among other things, track user preferences to enable effective marketing
programs and maintain an efficient royalty accounting program. This system
utilizes Oracle database technology running on Sun Microsystems' Enterprise
equipment and Linux webservers.
Ordering and Fulfillment. Our website includes an ordering system that is
designed to be easy-to-use and that facilitates convenient purchasing of
downloadable music. In order to maintain high customer satisfaction, we place
an emphasis on website and download reliability. At any time during a visit to
our website, a customer is able to click a "buy now" button to immediately
place a song or album in their personal "shopping cart." The customer can then
continue to shop on our website and add additional items if desired. New
customers are prompted to register with us at the time of purchase and to enter
their email addresses and passwords. Customers then securely submit their
credit card information online to purchase the music. The customers' email
addresses and passwords are used to identify them in the future, eliminating
the need to resubmit credit card and billing information for subsequent orders.
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Audio Encoding and Delivery. We use a variety of audio compression technologies
for our audio samples and downloads, tailoring them to specific applications.
We currently use the mp3 format for digital distribution of our downloadable
music. In light of current user patterns, we use RealNetworks' popular
RealAudio format for delivering real-time streaming 30-second audio previews
and feature-length web broadcasts. Mp3 is also used for real-time preview
samples. We are exploring other download formats and plan to adjust the format
of our content to stay current with industry trends and customer preferences.
We may need to obtain a third party license to use a newly adopted format.
Infrastructure. Our hardware and software are built upon a distributed
transaction processing model which allows software to be distributed among
multiple parallel servers. Web servers are deployed in large numbers on
inexpensive Intel platforms, managed by Cisco load-balancing technology, and
served by Solaris database servers. Our servers are based in an AboveNet
Communications co-location facility in San Jose, California. Our architecture
allows us to scale by either adding new servers or increasing the capacity of
existing servers while maintaining both user performance and cost per
transaction. The system's template technology and modular database design
allows 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 our existing sites.
Competition
The market for the online promotion and distribution of music and music-related
products and services is new, highly competitive and rapidly changing. The
number of websites on the Internet competing for the attention and spending of
consumers and advertisers has increased, and we expect it to continue to
increase, because there are few barriers to entry to Internet commerce. In
addition, the competition for advertising revenues, both on Internet websites
and in more traditional media, is intense. Currently, there are more than one
hundred music retailing websites on the Internet. We face competitive pressures
from numerous actual and potential competitors, including:
. providers of online music content such as MP3.com, MusicMaker.com and
various private companies;
. providers of music news and community such as Launch Media, Inc.,
Tunes.com and various private companies;
. companies offering mp3 or other audio compression formats, such as those
of AT&T Corp., IBM Corporation, Liquid Audio, Inc., Microsoft Corporation
and RealNetworks, Inc. Certain of these companies also offer customers
the ability to download music from their websites;
. online destination sites with greater resources than us such as online
music retailers like Amazon.com, Inc. and CDNow Inc. and online "portals"
like America Online, Excite and Yahoo!; and
. traditional music industry companies, including BMG Entertainment, a unit
of Bertelsmann AG, EMI Music, a unit of EMI Group plc, Sony Music
Entertainment, a unit of Sony Corporation, Warner Music Group, a unit of
Time Warner Inc., and Universal Music Group, a unit of the Seagram
Company Ltd. Certain of these companies have recently entered the online
commercial community and are currently backing the SDMI security format.
Certain companies have agreed to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. For
example, it was recently announced that Time Warner and Sony's Columbia House
unit will merge with CDNow. In May 1999, Microsoft Corporation and Sony
Corporation announced an agreement to pursue a number of cooperative
activities. Sony has announced that it will make its music content downloadable
from the Internet using Microsoft's multimedia software. In addition, Universal
Music Group and BMG Entertainment have announced a joint venture to form an
online music store.
We believe that we compete primarily on the bases of:
. the quality and variety of our digital content, including access to known
artists;
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. the price of the downloaded content;
. the ease of use and consumer acceptance of the compression system;
. the ability to effectively promote brand equity; and
. the ease of use and speed of our website.
Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of our current and
potential competitors in the Internet and music entertainment businesses may
have substantial competitive advantages to us, including:
. longer operating histories;
. significantly greater financial, technical and marketing resources;
. greater brand name recognition;
. larger existing customer bases; and
. more popular content or artists.
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 we can. Websites maintained by our existing and potential competitors may
be perceived by consumers, artists, talent management companies and other
music-related vendors or advertisers as being superior to ours. In addition, we
may not be able to maintain or increase our website traffic levels, purchase
inquiries and number of click-throughs on our online advertisements. Further,
our competitors may experience greater growth in these areas than we do.
Increased competition could result in advertising price reduction, reduced
margins or loss of market share, any of which could harm our business.
Intellectual Property
Our success and ability to compete are substantially dependent on our
internally developed technology. We pursue the registration of our trademarks
in the United States and internationally. We currently hold a registered
trademark from the United States Patent & Trademark Office for "EMusic." While
we rely on trademark, service mark, copyright and trade secrets laws and
restrictions in the United States and other jurisdictions, together with
contractual restrictions, to protect our proprietary rights, such trademark,
service mark, copyright and trade secret protection may not be available in
every jurisdiction in which we distribute or make available our musical content
and technology through the Internet. Although we believe that the use of
material on our websites is protected under current provisions of copyright
law, legal rights to certain aspects of Internet content and commerce are not
clearly settled. We may not be able 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 harm our business.
While we have generally entered into confidentiality or license agreements with
our employees, consultants, and corporate partners in order to limit access to
and distribution and disclosure of our proprietary information, we cannot
assure you that the steps we have taken will adequately protect or prevent
misappropriation of our proprietary rights, particularly in foreign countries
where laws or law enforcement practices may not protect our proprietary rights
as fully as in the United States. Despite our efforts, unauthorized parties may
attempt to copy or otherwise obtain and use our products and technology.
Policing unauthorized use is difficult.
There are no pending lawsuits against us regarding infringement of any existing
patents or other intellectual property rights or any material notices that we
are infringing the intellectual property rights of others. However,
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there can be no assurance that such infringement claims will not be asserted by
third parties in the future. Any such claims could result in litigation
subjecting us to significant liability for damages, or in invalidation of our
proprietary rights. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management attention
and resources, or require us to enter into royalty or licensing agreements.
Employees
As of July 22, 1999, we had 63 full-time employees, including 30 in content
acquisition and marketing, 12 in engineering and product development, 10 in
finance and operations and 11 in other administrative functions. Our future
success depends, in significant part, upon the continued service of our key
technical, editorial, product development, and senior management personnel and
on our ability to attract and retain highly qualified technical and management
personnel, for whom competition is intense. None of our employees are
represented by a collective bargaining unit, and we have never experienced a
work stoppage. Our relations with our employees are good.
Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising
out of our operations. We are not currently engaged in any legal proceedings
that, individually or in the aggregate, we expect would have a material adverse
effect on our business.
Facilities
Our corporate headquarters are located in approximately 20,000 square feet in
Redwood City, California occupied under a lease expiring in April 2004. We
believe that our existing facilities will be adequate for the foreseeable
future, and that suitable additional facilities will be available in the future
as needed on commercially reasonable terms.
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Management
Executive Officers, Directors and Key Employees
Our current executive officers and directors as well as certain members of our
senior management, and their ages and positions as of July 15, 1999 are as
follows:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Robert H. Kohn *...... 42 Chairman and Secretary
Gene Hoffman, Jr. *... 23 President, Chief Executive Officer, and Director
Joseph H. Howell *.... 47 Executive Vice President and Chief Financial Officer
Peter M. Astiz *...... 41 Executive Vice President and General Counsel
James R. Chapman *.... 32 Executive Vice President, Corporate Strategy
Gary Culpepper........ 49 Executive Vice President, Business Affairs
Brian Brinkerhoff..... 36 Vice President, Content Acquisition
Steve Grady........... 33 Vice President, Marketing
Peter Harter.......... 30 Vice President, Global Public Policy and Standards
Spencer Leyton........ 51 Vice President, Corporate Development, M&A
Marv Su............... 36 Vice President, Interactive Marketing
Brett A. Thomas....... 29 Vice President, Technology
Tor Braham............ 41 Director
Ralph Peer, II........ 54 Director
Ed Rosenblatt......... 64 Director
</TABLE>
- ------------------
*Executive Officer
Robert H. Kohn, a co-founder of EMusic, 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., 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 Borland International,
Inc., a software company. 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 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 EMusic, 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 Pretty Good Privacy. From October 1995 to November
1996, he was founder, director and Executive Vice President of PrivNet, Inc.,
an Internet privacy software company. From August 1993 to October 1995, Mr.
Hoffman was a student at the University of North Carolina, Chapel Hill.
Joseph H. Howell joined EMusic 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 multilayer printed circuit boards. From May 1988 to January 1995, Mr. Howell
served as Vice President and Controller of Borland. He also served as Borland's
acting Chief Financial Officer in 1994. Mr. Howell received a Bachelor of Arts
degree in Political Science from the University of Michigan and a Masters of
Science in Accounting from Eastern Michigan University.
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Peter M. Astiz joined EMusic in July 1999 as Executive Vice President and
General Counsel. From October 1996 to July 1999, Mr. Astiz was a partner of
Gray Cary Ware & Freidenrich LLP, a law firm. From July 1989 until October
1996, Mr. Astiz was a partner of the law firm of Baker & McKenzie. Mr. Astiz
received a Bachelor of Science degree in Business Administration from the
University of California in 1979 and a J.D. from the University of San
Francisco.
James R. Chapman joined EMusic in April 1999 as Executive Vice President,
Corporate Strategy. From April 1997 to April 1999, Mr. Chapman was Director of
the Global Private Capital Group at Warburg Dillon Read LLC (formerly UBS
Securities LLC), a major investment bank. Prior to joining UBS Securities, from
July 1995 to April 1999 Mr. Chapman was President and Founder of Ashley Capital
Management, a private equity and advisory firm focused on principal investments
in emerging growth companies located in the Pacific Northwest and Rocky
Mountain States. From September 1994 to July 1995, Mr. Chapman was a partner of
Jacobson Partners, a boutique merchant bank focused on middle market buyouts
and direct equity investments. From May 1990 to September 1994, Mr. Chapman
also worked as an associate in the technology and healthcare investment banking
groups of Oppenheimer & Co. and PaineWebber Incorporated. Mr. Chapman received
a Bachelor of Arts degree in Economics from Middlebury College.
Gary Culpepper joined EMusic 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 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. He was also Senior 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.
Brian Brinkerhof joined EMusic 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.
Steve Grady joined EMusic in June 1998 as Vice President, Corporate
Communications and was promoted to Vice President, Marketing in January 1999.
From July 1997 to May 1998, Mr. Grady was Director, Corporate Communications
for Borland, where he was responsible for public relations and investor
relations. From July 1996 to July 1997, he was Director, Marketing
Communications for Infoseek Corporation. From 1992 to June 1995, he served as
Director, Corporate Communications for Borland. Prior to Borland, 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.
Peter Harter joined EMusic in March 1999 as Vice President, Global Public
Policy and Standards. From November 1995 through March 1999, Mr. Harter was
Global Public Policy Counsel for Netscape Communications Corp. From June 1994
through November 1995, Mr. Harter was Executive Director and General Counsel
for the National Public Telecomputing Network (NPTN) in Cleveland, Ohio. Mr.
Harter was a founder of the Internet Law and Policy Forum (ILPF), an ad-hoc
body of over twenty companies from around the world focused on developing open
draft legal standards for a variety of Internet law and policy matters.
Mr. Harter received a Bachelor of Arts degree in Rhetoric & Government from
Lehigh University and a J.D. from Villanova Law School.
42
<PAGE>
Spencer Leyton joined EMusic in April 1999 as Vice President, Corporate
Development, M&A. From 1997 until April 1999, Mr. Leyton worked as an
independent business consultant. From 1995 through 1996, Mr. Leyton served as
Vice President, Mergers & Acquisitions for Sybase, Inc., a software company.
From 1989 through 1994, Mr. Leyton served as Senior Vice President, Business
Development for Borland. Mr. Leyton received a Bachelors of Arts degree in
geography from California State University, Hayward.
Marv Su joined EMusic as Vice President, Interactive Marketing in February
1999. From January 1998 through January 1999, Mr. Su served as director of
Small Business Internet Marketing and Community at Intuit, Inc., a software
company. From February 1996 through December 1997, Mr. Su served as Senior
Director of Advertising Operations at Infoseek. From August 1991 through
February 1996, Mr. Su held various management and marketing positions at Apple
Computer. He received a Bachelor of Science in Electrical Engineering from
Stanford University and a Master of Science in Management from the M.I.T. Sloan
School of Management.
Brett A. Thomas joined EMusic in April 1998 as Vice President, Technology. From
November 1996 to January 1998, Mr. Thomas was Principal Engineer for Pretty
Good Privacy, where he was responsible for the design and implementation of PGP
4.5 and 5.0 for Win32, PGP for Unix and its key server software. Previously,
Mr. Thomas was a senior engineer for NCR, where he developed 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 software community, maintaining websites operating
on Linux platform and making several modifications to the source code of the
core of the Linux operating system.
Tor Braham, a Director since May 1999, is Managing Director and Head of the
Technology Mergers & Acquisitions Department for Warburg Dillon Read. From
February 1984 until November 1997, Mr. Braham was a partner of the law firm of
Wilson Sonsini Goodrich & Rosati. Mr. Braham received a Bachelor of Science
degree in English from Columbia University and a J.D. from the New York
University Law School.
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. Mr. Peer is also a director of Fox Agency
International (Singapore) and a consultant to the board of the Mechanical
Copyright Protection Society, U.K. He is a past president and a current
director of the International Confederation of Music Publishers and in 1997 was
elected "President d'Honneur" of the Confederation.
Ed Rosenblatt, became a Director in 1999. From 1994 until his retirement in
1999, Mr. Rosenblatt served as Chairman of Geffen Records. Mr. Rosenblat helped
found Geffen Records in 1980, and served as its President and Chief Operating
Officer until 1994. Prior to Geffen Records, Mr. Rosenblatt served as Senior
Vice President of sales and promotion for Warner Brothers Records. Mr.
Rosenblatt received a degree in Applied Arts from Brooklyn College.
43
<PAGE>
Board of Directors
The terms of the board of directors are divided into three classes: Class I,
whose term will expire at the annual meeting of stockholders to be held in
1999; Class II, whose term will expire at the annual meeting of stockholders to
be held in 2000; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2001. The Class I directors are Robert Kohn and Tor
Braham, the Class II directors are Gene Hoffman, Jr. and Ed Rosenblatt, and the
Class III director is Ralph Peer. At each annual meeting of stockholders, the
successors to directors whose term expires will be elected to serve a term of
three years. This classification of directors may have the effect of delaying
or preventing changes in our control. Our board of directors consists of five
members. Our amended and restated bylaws provide that the authorized number of
directors may be changed by resolution of the board of directors.
Executive officers are elected by the board of directors annually. There are no
family relationships among any of our directors, officers or key executives.
Board Committees
We have established an Audit Committee and a Compensation Committee. The Audit
Committee, which currently consists of Messrs. Braham, Peer and Rosenblatt,
reviews our internal accounting procedures and consults with and reviews the
services provided by our independent auditors. The Compensation Committee,
which currently consists of Messrs. Braham, Peer and Rosenblatt, reviews and
recommends to the Board of Directors the compensation and benefits of our
executive officers, establishes and reviews general policies relating to our
compensation and benefits and administers our stock plans.
Director Compensation
Directors do not receive cash compensation for their services as directors or
members of committees of the board of directors, but are reimbursed for
reasonable expenses incurred in attending meetings of the board. In May 1998,
we granted Mr. Peer a fully-vested, nonqualified stock option to purchase
100,000 shares of our common stock at an exercise price of $5.00 per share. In
June 1999, we granted Messrs. Braham and Rosenblatt fully-vested, nonqualified
stock options to purchase 35,000 and 100,000 shares of our common stock,
respectively, at an exercise price of $13.63 per share.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a member of a compensation
committee or board of directors of any other entity which has an executive
officer serving as a member of the board of directors.
Change of Control Arrangements and Employment Agreements
Pursuant to agreements with Messrs. Kohn and Hoffman, upon any acquisition of
EMusic or if their employment is terminated other than for cause, the
repurchase right in favor of EMusic which applies to certain unvested shares
owned by them will terminate. Pursuant to agreements with Messrs. Howell, Astiz
and Chapman, upon any acquisition of EMusic, all unvested stock options held by
each will become vested in full. Further each executive officer is entitled to
twelve months severance in the event their employment is terminated other than
for cause.
44
<PAGE>
Executive Compensation
Summary Compensation Information
The following table sets forth information concerning the compensation we paid
for services rendered during the fiscal years ended June 30, 1998 and 1999 by
our Chief Executive Officer:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------------- ---------------------
Name and Other Annual Securities Underlying
Principal Position Year Salary Bonus Compensation Options
------------------ ---- ------- ----- ------------ ---------------------
<S> <C> <C> <C> <C> <C>
Gene Hoffman, Jr., Presi-
dent and Chief 1999 $82,291 -- -- 250,000
Executive Officer....... 1998 31,250 -- -- --
</TABLE>
- ------------------
The stock option granted to Mr. Hoffman vests ratably over a four year term. No
other executive officer received a total salary and bonus during fiscal year
1998 or 1999 in excess of $100,000.
Option Grants
The following table provides information regarding stock option grants made
during fiscal 1999 to Mr. Hoffman. Options may terminate before their
expiration date upon the termination of optionee's status as an employee or
upon the optionee's death or disability.
Option Grants in Fiscal Year 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Number of % of Total Stock Price
Securities Options Appreciation for
Underlying Granted to Exercise Option Term(2)
Options Employees in Price Per Expiration ---------------------
Name Granted Fiscal 1999(a)(1) Share Date 5% 10%
---- ---------- ----------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gene Hoffman, Jr. ...... 250,000 5.9% $13.63 6/10/09 $ 941,429 $ 2,080,312
</TABLE>
- ------------------
(1) Based on an aggregate of 4,216,000 shares subject to options granted in
fiscal 1999.
(2) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could
be achieved for the options if exercised at the end of the option term. The
assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the SEC and do not represent our estimate or
projection of the future common stock price.
Option Exercises and Year-End Holdings
There were no option exercises by Mr. Hoffman during fiscal 1999. The following
table sets forth information concerning unexercised options held as of June 30,
1999 by Mr. Hoffman.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options at
Options at 6/30/99 6/30/99
----------------------- ----------------------
Name Vested Unvested Vested Unvested
---- --------- ------------ ----------------------
<S> <C> <C> <C> <C>
Gene Hoffman, Jr................. -- 250,000 -- $ 1,750,000
</TABLE>
We have not awarded stock appreciation rights to any employee of ours and we do
not have any multi-year incentive plans.
45
<PAGE>
Stock Plans
1998 Stock Option Plan. Our 1998 stock option plan was approved by the board of
directors in March 1998 and was subsequently approved by our stockholders. The
1998 option plan provides for the grant to employees of incentive stock options
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended, and for grants of nonstatutory stock options to employees, non-
employee directors and consultants. Because non-employee directors are eligible
to receive grants under the 1998 option plan, we have not adopted a separate
plan which provides for the formula grant of stock options to non-employee
directors.
The 1998 option plan is administered by the board of directors or a committee
thereof. Subject to the provisions of the 1998 option plan, the board or
committee has the authority to select the persons to whom options are granted
and determine the terms of each option, including:
. the number of shares of common stock covered by the option;
. when the option becomes exercisable;
. the per share option exercise price, which in the case of incentive stock
options must be at least equal to the fair market value of a share of
common stock on the grant date (or 110% of such fair market value for
incentive stock options granted to 10% shareholders), and, in the case of
nonstatutory stock options, must be at least 85% of the fair market value
of a share of common stock on the grant date; and
. the duration of the option (which may not exceed ten years, or, with
respect to incentive stock options granted to 10% shareholders, five
years).
Generally, options granted under the 1998 option plan become exercisable as the
underlying shares vest. Options granted under the 1998 option plan generally
vest over four years, although the board or committee may specify a different
vesting schedule for a particular grant. Options granted under the 1998 option
plan are non-transferable other than by will or the laws of descent and
distribution.
In the event of a change in control of EMusic, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the 1998 option plan. The outstanding options will terminate to the extent that
such options are neither exercised nor assumed or substituted for by the
acquiring or successor corporation.
As of July 15, 1999, six million shares are reserved for issuance under the
1998 option plan, 45,400 shares have been issued upon the exercise of options,
options to purchase of a total of 2,946,750 shares at a weighted average
exercise price of $3.52 per share were outstanding and 3,007,850 shares were
available for future option grants.
1998 Nonstatutory Stock Option Plan. Our 1998 nonstatutory stock option plan
was approved by the board of directors in December 1998. The nonstatutory plan
provides for the grant of nonstatutory stock options to employees (who are not
officers or directors) and consultants.
The nonstatutory plan is administered by the board of directors or a committee
thereof. Subject to the provisions of the nonstatutory plan, the board or
committee has the authority to select the persons to whom options are granted
and determine the terms of each option, including:
. the number of shares of common stock covered by the option;
. when the option becomes exercisable;
. the per share option exercise price, which must be at least equal to 85% of
the fair market value of a share of common stock on the grant date; and
. the duration of the option (which may not exceed ten years).
46
<PAGE>
Generally, options granted under the nonstatutory plan become exercisable as
the underlying shares vest. Options granted under the nonstatutory plan
generally vest over four years, although the board or committee may specify a
different vesting schedule for a particular grant. Options granted under the
nonstatutory plan are non-transferable other than by will or the laws of
descent and distribution.
In the event of a change in control of EMusic, the acquiring or successor
corporation may assume or substitute for the outstanding options granted under
the nonstatutory plan. The outstanding options will terminate to the extent
that such options are neither exercised nor assumed or substituted for by the
acquiring or successor corporation.
As of July 15, 1999, five million shares are reserved for issuance under the
nonstatutory plan, no shares have been issued upon the exercise of options,
options to purchase of a total of 3,351,000 shares at a weighted average
exercise price of $10.29 per share were outstanding and 1,649,000 shares were
available for future option grants.
1999 Employee Stock Purchase Plan. A total of 250,000 shares of common stock
have been reserved for issuance under our 1999 employee stock purchase plan,
none of which have been issued as of the effective date of this offering. The
purchase plan, which is intended to qualify under section 423 of the Internal
Revenue Code, is administered by the board or by a committee thereof. Our
employees (including our officers and employee directors) and those of any of
our subsidiaries designated by the board for participation in the purchase plan
are eligible to participate in the purchase plan if they are customarily
employed for more than 20 hours per week and more than five months per year.
The purchase plan will be implemented by sequential offerings of approximately
six months duration. We have not yet determined when the first offering period
will commence. Shares will be purchased on the last day of each offering
period. The board may change the dates or duration of one or more offerings,
but no offering may exceed 27 months. The purchase plan permits eligible
employees to purchase common stock through payroll deductions at a price no
less than 85% of the lower of the fair market value of the common stock on (a)
the first day of the offering, or (b) the purchase date. Participants generally
may not purchase more than 1,000 shares in a six-month offering period or stock
having a value (measured at the beginning of the offering) greater than $25,000
in any calendar year. In the event of certain changes in control of EMusic, the
board may accelerate the purchase date of the then current offering period to a
date prior to the change in control unless the acquiring or successor
corporation assumes or replaces the purchase rights outstanding under the
purchase plan.
Limitation of Liability and Indemnification
Section 145 of the Delaware General Corporation Law permits indemnification of
officers, directors and other corporate agents under certain circumstances and
subject to certain limitations. Our amended and restated certificate of
incorporation and bylaws provide that we shall indemnify our directors,
officers, employees and agents to the full extent permitted by Delaware General
Corporation Law, including in circumstances in which indemnification is
otherwise discretionary under Delaware law. In addition, we intend to enter
into separate indemnification agreements with our directors and officers which
would require us, 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). We also
intend to continue to maintain director and officer liability insurance, if
available on reasonable terms. These indemnification provisions and the
indemnification agreements may be sufficiently broad to permit indemnification
of our officers and directors for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act.
At present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or other agents in which indemnification is
being sought nor are we aware of any threatened litigation that may result in a
claim for indemnification by any of our directors, officers, employees or other
agents.
47
<PAGE>
Certain Transactions and Relationships
We were formed on January 8, 1998 as a Delaware corporation under the name
GoodNoise Corporation. In February 1998, we issued 3,100,000 shares to each of
Robert Kohn, our chairman of the board, and Gene Hoffman, Jr., our chief
executive officer and a member of our board, and 900,000 shares to Gary
Culpepper, our executive vice president of business affairs. All such shares
were issued at $0.001 per share. Of the shares issued to Mr. Culpepper,
approximately 600,000 shares were subject to repurchase pursuant to a
restricted stock purchase agreement. As of July 15, 1999, the restricted stock
purchase agreement provides us with the right to repurchase approximately
311,000 of these shares at a nominal price subject to ratable vesting over
three years ending February 2001.
In February 1998, we entered into an agreement to borrow $10,000 from Mr. Kohn
and $50,000 from peermusic, and entity controlled by Ralph Peer, II, one of our
directors, through the issuance of promissory notes bearing interest at 10.0%
per annum, due in December 1998. On May 1, 1998, these notes were converted
into an aggregate of 150,000 shares of common stock at $0.40 per share.
On May 11, 1998, GoodNoise Corporation, a Florida corporation, formerly
Atlantis Ventures Corporation entered into an Agreement and Plan of
Reorganization pursuant to which it acquired GoodNoise Corporation, a Delaware
corporation. In connection with such acquisition, the Florida corporation
exchanged 11,015,300 shares of its common stock for all outstanding stock of
the Delaware corporation and assumed all outstanding options of the Delaware
corporation for the purchase of an additional 2,032,550 shares of the Florida
corporation's common stock. Following such transaction, the directors and
officers of the Delaware corporation became the directors and officers of the
Florida corporation. Of the shares issued as part of such transaction,
8,555,000 shares were issued to such directors and officers. The shareholders
of the Florida corporation prior to the Merger had no affiliation with the
Delaware corporation and following the Merger ceased to be affiliates of the
Florida corporation.
On March 23, 1999, we sold shares of its Series B preferred stock through
Warburg Dillon Read LLC, a placement agent. Mr. Tor Braham was a managing
director of Warburg Dillon Read LLC at this time. Mr. Braham subsequently
became a member of our board of directors on May 5, 1999. Of the 117,570 shares
of Series B preferred stock sold on March 23, 1999, we sold 614 shares to
peermusic III, Ltd. which is affiliated with Ralph Peer, II, a member of our
board of directors. We also sold 33,334 and 16,832 shares of our Series B
preferred stock to affiliates of Invesco Private Capital and VantagePoint
Venture Partners, respectively. As a result, Invesco Private Capital and
VantagePoint are deemed to own over five percent of our outstanding common
stock.
Also in connection with the sale of our Series B preferred stock, on March 23,
1999 we entered into a shareholders' agreement with Mr. Kohn and Mr. Hoffman,
as well as the purchasers of the Series B preferred stock. This agreement
provides, among other things, that the shares of our common stock owned by
Messrs. Kohn and Hoffman be held subject to a right of repurchase in favor of
EMusic. As of July 15, 1999, 2,618,136 and 2,253,514 shares of our common stock
owned by Messrs. Kohn and Hoffman, respectively, were subject to this right of
repurchase. This amount decreases by 72,726 and 62,598 shares monthly,
respectively, until March of 2002, when the right of repurchase expires.
48
<PAGE>
Principal and Selling Stockholders
The following table sets forth, immediately before this offering and
immediately after this offering, the ownership of our voting stock, including
optioned shares, assuming the conversion of all of the outstanding shares of
our common stock by:
. each person or entity who is known by us to beneficially own more than 5%
of our outstanding common stock;
. each of our directors and executive officers;
. all executive officers and directors as a group; and
. other stockholders.
Unless otherwise indicated, the address for each of the named individuals is
c/o EMusic.com Inc., 1991 Broadway, 2nd Floor, Redwood City, California 94063.
Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on shares of common stock
outstanding as of July 15, 1999. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. Shares of
common stock subject to options that are presently exercisable or exercisable
within sixty (60) days of July 15, 1999 are deemed outstanding for the purpose
of computing the percentage ownership of the person or entity holding such
options, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or entity. To the extent that any
shares are issued upon exercise of options, warrants or other rights to acquire
our capital stock that are presently outstanding or granted in the future or
reserved for future issuance under our stock plans, there will be further
dilution to new public investors.
<TABLE>
<CAPTION>
Before Offering After Offering
-------------------------- ---------------------------
Number of
Shares of Number of Number of Shares
Common Stock Shares of Common Stock
Beneficial Owner(1) Owned Percent(2) Offered Owned Percent(2)
------------------- ------------ ---------- --------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
5% Stockholders
Citiventure 96
Partnership, L.P.
c/o Invesco Private
Capital
1166 Avenue of the
Americas, 2700
New York, NY 10036..... 3,333,400(3) 11.5% 3,333,400 9.8%
VantagePoint Venture
Partners
1001 Bayhill Drive,
Suite 140
San Bruno, CA 94066.... 1,686,500(4) 5.8% 1,686,500 4.9%
Directors and Executive
Officers
Robert H. Kohn.......... 2,981,700 10.3% 100,000 2,881,700 8.5%
Gene Hoffman, Jr........ 3,702,000(5) 12.7% 100,000 3,602,000 10.6%
Joseph H. Howell........ 278,624(6) * 100,000 178,624 *
Peter M. Astiz.......... 236,000 * 20,000 216,000 *
James R. Chapman........ 99,941(7) * 20,000 79,941 *
Tor Braham.............. 46,600(8) * 46,600 *
Ralph Peer, II.......... 308,900(9) 1.0% 308,900 *
Ed Rosenblatt........... 100,000(10) * 100,000 *
Executive officers and
directors as a group (8
persons)............... 7,753,765(11) 26.7% 7,413,765 21.7%
</TABLE>
49
<PAGE>
- ------------------
* 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 shareholders of all options for the purchase of
common stock held by such shareholder which are exercisable within 60 days
of July 15, 1999.
(2) Percentage of beneficial ownership excludes up to 5,761,145 shares issuable
upon exercise of outstanding stock options and warrants.
(3) Represents shares owned by Invesco related partnerships as follows: 58,300
shares owned by Chancellor Private Capital Offshore Partners I, C.V.;
624,000 shares owned by Chancellor Private Capital Offshore Partners II,
L.P.; 379,000 shares owned by Chancellor Private Capital III, L.P.;
1,627,100 shares owned by Citiventure 96 Partnership, L.P.; and 645,000
shares owned by Drake & Co. for the account of Citiventure Private
Participations III.
(4) Represents shares owned by VantagePoint related partnerships as follows:
3,300 shares owned by Jason Strober; 1,111,100 shares owned by VantagePoint
Communications Partners, L.P.; 16,600 shares owned by VantagePoint Venture
Advisors, LLC; and 555,500 shares owned by VantagePoint Venture Partners
1996.
(5) 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.
(6) Includes 268,264 shares issuable upon exercise of outstanding options.
(7) Includes 33,341 shares issuable upon exercise of outstanding options.
(8) Includes 35,000 shares issuable upon exercise of outstanding options.
(9) Includes 100,000 shares issuable upon exercise of outstanding options.
Includes 61,400 shares of common stock held by peermusic III, Ltd. which
are issuable upon conversion of shares of Series B preferred stock. Mr.
Peer disclaims beneficial ownership of the shares held by peermusic III,
Ltd. except to the extent of his pecuniary interest therein.
(10) Represents shares issuable upon exercise of outstanding options.
(11) Includes 536,605 shares issuable upon exercise of outstanding options.
50
<PAGE>
Description of Capital Stock
Our authorized capital stock consists of 200,000,000 shares of common stock,
par value $0.001 per share, and 20,000,000 shares of preferred stock, par value
$0.001 per share.
This summary does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of our amended and restated certificate of
incorporation where such rights are set forth in full, and the provisions of
applicable law.
Common Stock
As of July 15, 1999, there were approximately 28,561,000 shares of common stock
outstanding held of record by approximately 201 shareholders. 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 EMusic, the holders of common stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any preferred stock. Holders of
common stock have no preemptive or subscription rights, and there are no
redemption or conversion rights with respect to such shares. All outstanding
shares of common stock are fully paid and non-assessable.
Preferred Stock
Our board of directors has the authority to issue preferred stock in one or
more series and to fix the number of shares constituting any such series and
the preferences, limitations and relative rights, including dividend rights,
dividend rate, voting rights, terms of redemption, redemption price or prices,
conversion rights and liquidation preferences of the shares constituting any
series, without any further vote or action by our stockholders. The issuance of
preferred stock by our board of directors could adversely affect the rights of
holders of common stock.
The potential issuance of preferred stock may have the effect of delaying or
preventing a change in control of EMusic, may discourage bids for our common
stock at a premium over the market price of the common stock and may adversely
affect the market price of, and the voting and other rights of the holders of,
common stock. Immediately after this offering there will be no shares of
preferred stock outstanding, and we have no current plans to issue shares of
preferred stock.
Warrants
As of July 15, 1999, we had outstanding warrants to purchase an aggregate of
1,707,800 shares of our common stock. Warrants as to 100,000 shares expire in
October 2003 and have an exercise price equal to $7.91. The exercise price of
these warrants is subject to certain adjustments upon future issuances of
common stock or rights to acquire common stock at a price less than the
applicable exercise price. The warrants for the remaining shares have an
exercise price of $13.63 and expire in June 2001. The exercise price of all
warrants is subject to customary adjustments on stock splits, stock dividends,
any merger or acquisition involving EMusic and similar transactions, such as to
permit the holders of warrants to receive upon exercise of the warrants that
which they would have received had they exercised the warrants immediately
prior to any such transaction.
Registration Rights of Certain Holders
In connection with the sale of shares of our Series B preferred stock, on March
23, 1999 we entered into an agreement with the holders of shares of our Series
B preferred stock and the holder of a warrant to purchase 100,000 shares of our
common stock to register the shares of our common stock into which these
securities are convertible or exercisable. In accordance with this agreement,
we intend to file a registration statement with the
51
<PAGE>
SEC with respect to the resale of up to approximately 13,200,000 shares of our
common stock prior to the completion of this offering. All shares subject to
such filing will be subject to the lock-up restrictions described below. As of
July 15, 1999, we have not granted registration rights to any other holders of
our securities.
Anti-Takeover, Limited Liability and Indemnification Provisions
Effect of Delaware Anti-takeover Statute. We are subject to Section 203 of the
Delaware General Corporation Law, as amended, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (1) by persons who are
directors and also officers and (2) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combinations to include:
. any merger or consolidation involving the corporation and any interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Certificate of Incorporation and Bylaw Provisions. Our amended and restated
certificate of incorporation and amended and restated bylaws include provisions
that may have the effect of discouraging, delaying or preventing a change in
control of EMusic or an unsolicited acquisition proposal that a stockholder
might consider favorable, including a proposal that might result in the payment
of a premium over the market price for the shares held by stockholders. These
provisions are summarized in the following paragraphs.
Classified Board of Directors. Our amended and restated certificate of
incorporation and amended and restated bylaws provide for our board to be
divided into three classes of directors serving staggered, three year terms.
The classification of the board has the effect of requiring at least two annual
stockholder meetings, instead of one, to replace a majority of the members of
the board of directors.
52
<PAGE>
Supermajority Voting. Our amended and restated certificate of incorporation
requires the approval of the holders of at least 66 2/3% of our combined voting
power to effect certain amendments to the amended and restated certificate of
incorporation with respect to the bylaws, directors, stockholder meetings and
indemnification, or to effect any business combination (as defined in Section
203) relating to us. Our amended and restated bylaws may be amended by either a
majority of the board of directors, or the holders of a majority of our voting
stock, provided that certain amendments approved by stockholders require the
approval of at least 66 2/3% of our combined voting power.
Authorized but Unissued or Undesignated Capital Stock. Our authorized capital
stock consists of 200,000,000 shares of common stock and 20,000,000 shares of
preferred stock. No preferred stock will be designated upon consummation of
this offering. After this offering, we will have outstanding approximately
33,561,000 shares of common stock. The authorized but unissued (and in the case
of preferred stock, undesignated) stock may be issued by the board of directors
in one or more transactions. In this regard, our amended and restated
certificate of incorporation grants the board of directors broad power to
establish the rights and preferences of authorized and unissued preferred
stock. The issuance of shares of preferred stock pursuant to the board of
director's authority described above could decrease the amount of earnings and
assets available for distribution to holders of common stock and adversely
affect the rights and powers, including voting rights, of such holders and may
have the effect of delaying, deferring or preventing a change in control of
EMusic. The board of directors does not currently intend to seek stockholder
approval prior to any issuance of preferred stock, unless otherwise required by
law or the rules of any exchange on which our securities are then traded.
Special Meetings of Stockholders. Our amended and restated bylaws provide that
special meetings of stockholders of EMusic may be called only by the board of
directors, or by the chairman of our board of directors or our president.
No Stockholder Action by Written Consent. Our amended and restated certificate
of incorporation and amended and restated bylaws provide that an action
required or permitted to be taken at any annual or special meeting of the
stockholders of EMusic may only be taken at a duly called annual or special
meeting of stockholders. This provision prevents stockholders from initiating
or effecting any action by written consent.
Notice Procedures. Our amended and restated bylaws establish advance notice
procedures with regard to all stockholder proposals to be brought before
meetings of stockholders of EMusic, including proposals relating to the
nomination of candidates for election as directors, the removal of directors
and amendments to our amended and restated certificate of incorporation or
amended and restated bylaws. These procedures provide that notice of such
stockholder proposals must be timely given in writing to the secretary of
EMusic prior to the meeting. Generally, to be timely, notice must be received
by our secretary not less than 120 days prior to the meeting. The notice must
contain certain information specified in the amended and restated bylaws.
Limitation of Director Liability. Our amended and restated certificate of
incorporation limits the liability of our directors (in their capacity as
directors but not in their capacity as officers) to us or our stockholders to
the fullest extent permitted by Delaware law. Specifically, directors will not
be personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, which relates
to unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. for any transaction from which the director derived an improper personal
benefit.
Indemnification Arrangements. Our amended and restated bylaws provide that our
directors and officers shall be indemnified and provide for the advancement to
them of expenses in connection with actual or threatened proceedings and claims
arising out of their status as such to the fullest extent permitted by the
Delaware
53
<PAGE>
General Corporation Law. We intend to enter into indemnification agreements
with each of our directors and executives officers that will provide them with
rights to indemnification and expense advancement to the fullest extent
permitted under the Delaware General Corporation Law.
Transfer Agent. The transfer agent and registrar for our common stock is
Interwest Transfer Company, Inc. Its address is 1981 East 4800 South, Suite
100, Salt Lake City, Utah 84117, and its telephone numbers at this location is
(801) 272-9294.
54
<PAGE>
Shares Eligible for Future Sale
Upon completion of this offering, we will have outstanding approximately
33,561,000 shares of common stock, assuming no exercise of options or warrants
after July 15, 1999. Of these shares, the 5,340,000 shares sold in this
offering will be freely tradable without restrictions or further registration
under the Securities Act unless such shares are purchased by "affiliates" of
EMusic, as that term is defined under Rule 144 under the Securities Act. Shares
purchased by affiliates are subject to certain limitations and restrictions as
described below.
Sales of Restricted Shares
The remaining 28,221,237 shares of common stock held by existing stockholders
were issued and sold by us in reliance upon exemptions from the registration
requirements of the Securities Act. We intend to file a registration statement
with the SEC covering the resale of 13,032,367 of such shares. Upon the
effectiveness of such registration statement, such shares will be freely
tradeable without restriction except to the extent that such shares are held by
affiliates of EMusic. Of the remaining shares, approximately 4,045,400 are
freely tradeable, approximately 10,695,300 shares are eligible for resale
pursuant to, and subject to the requirements of Rule 144. Approximately 448,000
shares will not be eligible for resale pursuant to Rule 144 until June 2000. Of
the outstanding shares, approximately will be subject to "lock-up"
agreements described below on the effective date of the offering.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year is entitled to sell within any
three-month period, a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements regarding
the manner of sale, notice filing and the availability of current public
information about us.
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "Rule 144(k) shares" may be sold without restriction.
Prior to this offering, there has been only a limited public market for our
common stock, and the effect, if any, that the sale or availability for sale of
shares of additional common stock will have on the trading price of our common
stock cannot be predicted. Nevertheless, sales of substantial amounts of these
shares in the public market, or the perception that these sales could occur,
could adversely affect the trading price of our common stock and could impair
our future ability to raise capital through an offering of our equity
securities.
Options
As of July 15, 1999, there were a total of 6,297,750 shares of common stock
subject to outstanding options under our stock option plans, 1,872,259 of which
were vested. All shares issuable upon exercise of options granted under our
stock option plans as well as shares issuable under our 1999 employee stock
purchase plan are generally available for resale in the public market.
55
<PAGE>
Warrants
As of July 15, 1999, 1,707,800 shares of our common stock were subject to
outstanding warrants. Of such shares, 100,000 are subject to a registration
statement which we intend to file with the SEC prior to the completion of this
offering. We have no contractual obligation to file a registration statement
with respect to the other shares issuable upon exercise of the warrants. If we
do not file such a registration statement, such shares will begin to be
eligible for resale under Rule 144 if such warrants are exercised on a "net
exercise" basis beginning in June 2001.
Lock-up Agreements
Our officers, directors and some other stockholders, holding in total
approximately of our outstanding shares, have agreed with CIBC World
Markets Corp. not to sell or otherwise dispose of any of their shares for a
period of 90 days after the date of this offering. Other stockholders holding
in total approximately of our outstanding shares are subject to
agreements with us which require that they not, directly or indirectly, offer,
sell, pledge or otherwise dispose of any of their shares for the same 90-day
period. CIBC World Markets Corp., however, may in its sole discretion and at
any time, without notice, release all or any portion of the shares subject to
these agreements.
Price Range of Common Stock
Our common stock is traded on the Nasdaq National Market under the symbol
"EMUS." Prices reported represent prices between dealers, do not include
markups, markdowns or commissions and do not necessarily represent actual
transactions. The market for our shares has been sporadic and at times very
limited.
The following table sets forth the high and low bid quotations for the common
stock for the fiscal year ending June 30, 1999 and the portion of the fiscal
year ended June 30, 1998 for which our common stock was traded.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended June 30, 1998
Fourth Quarter (after May 12, 1998)......................... $ 6.50 $ 5.00
Fiscal Year Ended June 30, 1999
First Quarter............................................... $ 8.00 $ 5.88
Second Quarter.............................................. 7.50 5.00
Third Quarter............................................... 23.88 7.00
Fourth Quarter.............................................. 29.13 13.63
</TABLE>
On July 22, 1999, the last sale price reported on the Nasdaq National Market
for our common stock was $21.38 per share.
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
In June 1998, EMusic retained PricewaterhouseCoopers LLP as EMusic's
independent accountants and dismissed Barry L. Friedman P.C., Atlantis Ventures
Corporation's former accountants. The decision to change independent
accountants was ratified by our 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 our financial statements included in this prospectus. Such reports did
not contain an adverse opinion or disclaimer of opinion or qualifications or
modifications as to uncertainty, audit scope or accounting principles. Prior to
retaining PricewaterhouseCoopers LLP, we did not consult with
PricewaterhouseCoopers LLP regarding the application of accounting principles
or the type of audit opinion that might be rendered on our financial
statements.
56
<PAGE>
Underwriting
EMusic and the selling stockholders have entered into an underwriting agreement
with the underwriters named below. CIBC World Markets Corp., ING Barings LLC,
Prudential Securities and Volpe Brown Whelan & Company, LLC are acting as
representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of common stock set forth opposite its name
below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
CIBC World Markets Corp............................................
ING Barings LLC....................................................
Prudential Securities Incorporated.................................
Volpe Brown Whelan & Company, LLC..................................
----
Total..........................................................
====
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised EMusic and the selling stockholders that the
underwriters propose to offer the shares directly to the public at the public
offering price that appears on the cover page of this prospectus. In addition,
the representatives may offer some of the shares to certain securities dealers
at such price less a concession of $ per share. The underwriters may also
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.
EMusic has granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of additional shares from
EMusic to cover over-allotments. If the underwriters exercise all or part of
this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
public will be $ million, and the total proceeds to EMusic will be $ .
The underwriters have severally agreed that, to the extent the over-allotment
option is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.
The following table provides information regarding the amount of the discount
to be given to the underwriters by EMusic and the selling stockholders.
<TABLE>
<CAPTION>
Total Without Exercise Total With Full Exercise
Per Share of Over-Allotment Option of Over-Allotment Option
--------- ------------------------ ------------------------ ---
<S> <C> <C> <C> <C>
EMusic.................. $ $ $
Selling stockholders....
Total...................
</TABLE>
57
<PAGE>
EMusic estimates that its total expenses of the offering, excluding the
underwriting discount, will be approximately $ .
EMusic and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.
EMusic, its officers and directors and some other stockholders have agreed to a
90-day "lock up" with respect to approximately shares of common stock and
certain other EMusic securities that they beneficially own, including
securities that are convertible into shares of common stock and securities that
are exchangeable or exercisable for shares of common stock. This means that,
subject to certain exceptions, for a period of 90 days following the date of
this prospectus, EMusic and such persons may not directly or indirectly offer,
sell, pledge or otherwise dispose of the EMusic securities without the prior
written consent of CIBC World Markets Corp. CIBC World Markets Corp., however
may in its sole discretion and at any time without notice, release all or any
portion of the shares subject to these agreements.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
. Stabilizing transactions--The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
. Penalty bids--If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
. Passive market making--Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject
to certain limitations, until the time, if ever, at which a stabilizing bid
is made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither EMusic nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or
otherwise. If these transactions are commenced, they may be discontinued
without notice at any time.
Legal Matters
The validity of the shares of common stock offered hereby will be passed upon
for us by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. As of the
date of this prospectus, an investment partnership of Gray Cary Ware &
Freidenrich owned an aggregate of 83 shares of our Series B preferred stock
(convertible into 8,300 shares of common stock). Various legal matters relating
to our common stock will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, Palo Alto, California.
58
<PAGE>
Experts
The financial statements of EMusic.com Inc. as of June 30, 1998 and for the
period then ended, the financial statements of Creative Fulfillment, Inc. as of
December 31, 1998 and for each of the two years in the period ended December
31, 1998 and the financial statements of Internet Underground Music Archive
Inc. as of June 30, 1998 and for each of the two years in the period ended June
30, 1998 included in this prospectus have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given upon the
authority of said firm as experts in auditing and accounting.
Where You Can Find More Information About Us
We have filed with the SEC a Registration Statement on Form S-1 under the
Securities Act with respect to the shares of common stock issued by us and the
selling stockholders. This prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedule filed therewith. For
further information with respect to EMusic and the common stock, reference is
made to the Registration Statement and the exhibits and schedules filed
therewith. Statements contained in this prospectus regarding the contents of
any agreement or any other document to which reference is made are not
necessarily complete, and, in each instance, reference is made to the copy of
such agreement or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
You may read and copy any document we file at the SEC's public reference rooms
in Washington, D.C., New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0330 for further information about the public reference rooms.
Our SEC filings are also available to the public from the SEC's website at
http://www.sec.gov.
Since September 20, 1998, we have been subject to the information and periodic
reporting requirements of the Securities Exchange Act of 1934, and, in
accordance therewith, file periodic reports, proxy statements and other
information with the SEC. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms and the SEC's website, which is described above.
59
<PAGE>
Index to Financial Statements
Index to Financial Statements- June 30, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report Of Independent Accountants......................................... F2
Balance Sheet............................................................. F3
Statements of Operations.................................................. F4
Statement of Stockholders' Equity......................................... F5
Statement Of Cash Flows................................................... F6
Notes To Financial Statements............................................. F7
Index to Unaudited Condensed Financial Statements- March 31, 1999
<CAPTION>
Page
----
<S> <C>
Unaudited Condensed Consolidated Balance Sheets........................... F14
Condensed Consolidated Statements of Operations........................... F15
Condensed Consolidated Statements Of Cash Flows........................... F16
Notes To Condensed Consolidated Financial Statements...................... F17
Index to Pro Forma Financial Statements
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Combining Financial Information............. F23
Unaudited Pro Forma Condensed Combining Income Statement Data--Nine Months
Ended
March 31, 1999........................................................... F24
Unaudited Pro Forma Condensed Combining Income Statement Data--Twelve
Months Ended
June 30, 1998............................................................ F25
Unaudited Pro Forma Condensed Combining Balance Sheet--March 31, 1999..... F26
Notes to the Unaudited Pro Forma Condensed Combining Financial
Statements............................................................... F27
Index to Financial Statements- Creative Fulfillment, Inc.
<CAPTION>
Page
----
<S> <C>
Report Of Independent Accountants......................................... F28
Balance Sheets............................................................ F29
Statements of Operations.................................................. F30
Statement of Stockholders' Equity (Deficit)............................... F31
Statements Of Cash Flows.................................................. F32
Notes To Financial Statements............................................. F33
Index to Financial Statements- IUMA
<CAPTION>
Page
----
<S> <C>
Report Of Independent Accountants......................................... F37
Balance Sheets............................................................ F38
Statements of Operations.................................................. F39
Statement of Stockholders' Deficit........................................ F40
Statements of Cash Flows.................................................. F41
Notes To Financial Statements............................................. F42
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
EMusic.com Inc. (formerly 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 EMusic.com Inc. (formerly
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
F-2
<PAGE>
EMusic.com Inc.
(formerly GOODNOISE CORPORATION)
(a Development Stage Enterprise)
BALANCE SHEET
June 30, 1998
<TABLE>
<S> <C>
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
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EMusic.com Inc.
(formerly GOODNOISE CORPORATION)
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
For the Period from January 8, 1998 (Inception) to June 30, 1998
<TABLE>
<S> <C>
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
===========
</TABLE>
The accompanying note are an integral part of these financial statements.
F-4
<PAGE>
EMusic.com Inc.
(formerly 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
Common Stock Additional Notes during the Total
------------------- 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.
F-5
<PAGE>
EMusic.com Inc.
(formerly GOODNOISE CORPORATION)
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
for the Period from January 8, 1998 (Inception) to June 30, 1998
<TABLE>
<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.
F-6
<PAGE>
EMusic.com Inc.
(formerly 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
EMusic.com (formerly 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.
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
F-7
<PAGE>
EMusic.com Inc.
(formerly Goodnoise Corporation)
(a Development Stage Enterprise)
Notes to Financial Statements--(Continued)
June 30, 1998
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. At June 30, 1998
potentially dilutive seurities arising from options outstanding amounted to
908,297 common stock equivalents.
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.
F-8
<PAGE>
EMusic.com Inc.
(formerly Goodnoise Corporation)
(a Development Stage Enterprise)
Notes to Financial Statements--(Continued)
June 30, 1998
2. Property and Equipment
<TABLE>
<CAPTION>
June 30,
1998
--------
<S> <C>
Software........................................................... $ 5,215
Computer equipment................................................. 27,169
Furniture and fixtures............................................. 5,000
-------
37,384
Less: Accumulated depreciation..................................... (3,157)
-------
$34,227
=======
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ending June 30,
<S> <C>
1999................................................................ $ 46,425
2000................................................................ 51,892
2001................................................................ 32,590
--------
$130,907
========
</TABLE>
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
F-9
<PAGE>
EMusic.com Inc.
(formerly Goodnoise Corporation)
(a Development Stage Enterprise)
Notes to Financial Statements--(Continued)
June 30, 1998
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:
<TABLE>
<CAPTION>
Outstanding Options
----------------------
Weighted
Options Average
Available Exercise
for Grant Shares Price
---------- ----------- ----------
<S> <C> <C> <C>
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
========== ===========
</TABLE>
The following table summarizes information with respect to stock options
outstanding at June 30, 1998:
<TABLE>
<CAPTION>
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
-------- ------------ ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$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
========= =======
</TABLE>
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:
<TABLE>
<CAPTION>
Period
Ended
June 30,
1998
-----------
<S> <C>
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)
</TABLE>
F-10
<PAGE>
EMusic.com Inc.
(formerly Goodnoise Corporation)
(a Development Stage Enterprise)
Notes to Financial Statements--(Continued)
June 30, 1998
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:
<TABLE>
<S> <C>
Expected volatility.................................................. 55%
Risk-free interest................................................... 5.73%
Expected life........................................................ 5 years
Expected dividend yield.............................................. 0.00%
</TABLE>
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
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.
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 certain
assets from online music company, Nordic Entertainment Worldwide, a privately
held provider of downloadable music on the Internet and to acquire Creative
Fulfillment Inc., a privately held entertainment and Internet marketing
company, for stock and cash. Under the terms of the transactions, 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
F-11
<PAGE>
EMusic.com Inc.
(formerly Goodnoise Corporation)
(a Development Stage Enterprise)
Notes to Financial Statements--(Continued)
June 30, 1998
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.
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 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.
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.
F-12
<PAGE>
This page intentionally left blank
F-13
<PAGE>
EMusic.com Inc.
(formerly GOODNOISE CORPORATION)
(a development stage enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash............................................... $ 32,618,240 $ 509,751
Accounts receivable................................ 6,892 --
Prepaid expenses and other assets.................. 276,540 21,362
------------ -----------
Total current assets.............................. 32,901,672 531,113
Property and equipment, net......................... 156,317 34,227
Intangible assets, net.............................. 5,725,841 --
Other assets........................................ 16,520 16,520
------------ -----------
Total assets..................................... $ 38,800,350 $ 581,860
============ ===========
Liabilities, Redeemable Convertible Preferred Stock
and
Stockholders' Equity
Current Liabilities:
Accounts payable................................... $ 338,780 $ 67,041
Accrued liabilities................................ 2,773,910 51,177
Acquisition related liabilities.................... 31,512 --
Accrued payroll and related benefits............... 38,073 16,982
------------ -----------
Total current liabilities......................... 3,182,275 135,200
------------ -----------
Redeemable Convertible Preferred Stock 31,767,593 --
Stockholders' Equity:
Preferred Stock, $0.01 par value................... -- --
Common Stock, $0.01 par value...................... 156,555 147,153
Additional paid-in capital......................... 40,938,469 1,485,611
Notes receivable from employees.................... (6,000) (6,000)
Deficit accumulated during the development stage... (37,238,542) (1,180,104)
------------ -----------
Total stockholders' equity........................ 3,850,482 446,660
------------ -----------
Total liabilities, redeemable convertible
preferred
stock and stockholders' equity.................. $ 38,800,350 $ 581,860
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
EMusic.com Inc.
(formerly GOODNOISE CORPORATION)
(a development stage enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months January 8, 1998 January 8, 1998
ended (Inception) to (Inception) to
March 31, 1999 March 31, 1998 March 31, 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
Revenues....................... $ 41,527 $ -- $ 41,527
Cost of revenues............... 13,840 -- 13,840
------------ --------- ------------
Gross profit................... 27,687 -- 27,687
------------ --------- ------------
Operating expenses:
Product development........... 3,580,014 42,182 4,541,363
General and administrative.... 715,594 46,745 934,349
------------ --------- ------------
4,295,608 88,927 5,475,712
------------ --------- ------------
Operating loss................. (4,267,921) (88,927) (5,448,025)
Interest income................ 39,365 -- 39,365
Interest expense............... (35,549) -- (35,549)
------------ --------- ------------
Net loss....................... $ (4,264,105) $ (88,927) $ (5,444,209)
------------ --------- ------------
Accretion of Series A and B
Preferred to redemption
value......................... (177,255) -- (177,255)
Beneficial conversion charge,
Series B Preferred Stock (Note
3)............................ (31,577,078) -- (31,577,078)
Dividend on Series B Preferred
Stock (Note 3)................ (40,000) -- (40,000)
------------ --------- ------------
Net loss applicable to common
shares........................ $(36,058,438) $ (88,927) $(37,238,542)
============ ========= ============
Net loss per Common share--
basic and diluted............. $ (2.48) $ (0.01) $ (2.89)
============ ========= ============
Weighted average common shares
outstanding--basic and
diluted....................... 14,560,552 6,607,357 12,889,520
============ ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
EMusic.com Inc.
(formerly GOODNOISE CORPORATION)
(a development stage enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months January 8, 1998 January 8, 1998
ended (Inception) to (Inception) to
March 31, 1999 March 31, 1998 March 31, 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $(4,264,105) $ (88,927) $(5,444,209)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation.................. 27,618 380 30,775
Amortization of intangible
assets....................... 338,134 -- 338,134
Issuance of common stock for
services..................... -- -- 12,600
Fair value of options issued
to advisors.................. 1,495,608 5,700 2,247,322
Interest expense converted
into Series B Preferred...... 33,750 -- 33,750
Changes in assets and
liabilities, net of effects
of merger:
Accounts receivable........... (3,830) -- (3,830)
Prepaid acquisition costs..... (105,191) -- (105,191)
Prepaid expenses and other
assets....................... (149,987) (2,576) (171,349)
Other assets.................. -- (14,020) (16,520)
Accounts payable.............. 261,510 25,458 326,901
Accrued liabilities........... 2,564,245 -- 2,615,422
Accrued payroll and related
benefits..................... 21,091 -- 38,073
----------- ----------- -----------
Net cash provided by (used
in) operating activities.... 218,843 (73,985) (98,122)
----------- ----------- -----------
Cash flows from investing
activities:
Purchase of property and
equipment..................... (142,934) (10,794) (180,318)
Cash paid for acquisition net
of cash received.............. (311,148) -- (311,148)
----------- ----------- -----------
Net cash used in investing
activities.................. (454,082) (10,794) (491,466)
----------- ----------- -----------
Cash flows from financing
activities:
Proceeds from issuance of
common stock.................. 300,400 -- 300,400
Common stock issued in
connection with merger........ -- -- 690,000
Proceeds from issuance of
Series A Preferred Stock and
warrants...................... 500,000 -- 500,000
Proceeds from issuance of
Series B Preferred Stock...... 29,799,828 -- 29,799,828
Proceeds from issuance of
convertible notes............. 1,743,500 110,000 1,913,500
Proceeds from repayment of
employee notes receivable..... -- -- 4,100
----------- ----------- -----------
Net cash provided by
financing activities........ 32,343,728 110,000 33,207,828
----------- ----------- -----------
Net increase in cash............ 32,108,489 25,221 32,618,240
Cash at beginning of period..... 509,751 -- --
----------- ----------- -----------
Cash at end of period........... $32,618,240 $ 25,221 $32,618,240
=========== =========== ===========
Supplemental disclosure of non-
cash transactions:
Conversion of notes payable
into common stock............. $ -- $ 25,221 $ 170,000
Issuance of common stock for
notes receivable.............. $ -- $ 10,100 $ 10,100
Accretion of Series A Preferred
to redemption value........... $ 169,047 $ -- $ 169,047
Accretion of Series B Preferred
to redemption value........... $ 8,208 $ -- $ 8,208
Beneficial conversion charge,
Series B Preferred Stock...... $31,577,078 $31,577,078 $31,577,078
Issuance of common stock
options for intangible
assets........................ $ 44,885 $ -- $ 44,885
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1--The Company and Summary of Significant Accounting Policies
The Company, its Recapitalization and Liquidity
EMusic.com Inc. ( formerly GoodNoise Corporation) (the "Company") 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, aggregating
musical content, acquiring operating assets and raising capital. The Company
operates within one industry segment, primarily in the United States.
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 was presented as a
recapitalization of the Company Atlantis was organized in August 1989 and had
no revenues or operations prior to the merger with the Company. As of May 11,
1998, Atlantis Common stock was traded on the NASD OTC bulletin board. Atlantis
had cash balances 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 Company has incurred losses from operations since inception and has had to
obtain additional capital to fund its ongoing operations. On March 23, 1999,
the Company completed a private placement of 117,570 shares of Series B
Convertible Preferred Stock ("Series B") for aggregate net proceeds of
approximately $31 million. See Note 3 below.
Basis of Presentation
In the opinion of management, the unaudited consolidated condensed financial
statements included herein have been prepared on a consistent basis with prior
periods reported consolidated financial statements and include all material
adjustments, consisting of normal recurring adjustments, necessary to fairly
present the information set forth therein.
The unaudited condensed consolidated financial statements included herein
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Certain information and footnote disclosures normally included in the financial
statements have been condensed or omitted pursuant to rules and regulations of
the Securities and Exchange Commission, although the Company believes that the
disclosures in the unaudited interim financial statements are adequate to
ensure that the information presented is not misleading. The results of
operations for the interim reporting periods presented herein are not
necessarily indicative of any future operating results.
The financial information as of June 30, 1998 is derived from the Company's
Form 10-SB/A as filed with the Securities Exchange Commission on December 24,
1998 (the "Form 10"). The interim financial statements presented herin should
be read in conjunction with the financial statements and the notes thereto
included in the Form 10SB.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ materially from those estimates.
F-17
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)
Revenue Recognition
Advertising revenues are derived principally from short-term advertising
agreements. These revenues are generally recognized ratably over the term of
the agreements, provided the Company has no significant remaining obligations
and collection of the resulting receivable is probable.
Revenue from music downloads and physical merchandise are recognized in the
period in which the download or shipment occurs. Revenues from music downloads
and physical merchandise have not been significant to date. Consequently, the
Company is considered to be a development stage enterprise.
Net Loss per Common Share
The weighted average shares used to compute basic net loss per share includes
outstanding shares of common stock from the date of issuance and excludes
shares of common stock subject to repurchase by the Company. The calculation of
diluted net loss per share excludes common stock issuable upon exercise of
employee stock options and common stock issuable upon the conversion of Series
B preferred shares, as their effect is antidilutive. Therefore, the number of
shares used in the calculation of basic and dilutive net loss per common share
is the same. The following table summarizes the computation of basic and
diluted net loss per share:
<TABLE>
<CAPTION>
Nine months January 8, 1998 January 8, 1998
ended (Inception) to (Inception) to
March 31, 1999 March 31, 1998 March 31, 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
Net loss....................... $ (4,264,105) $ (88,927) $ (5,444,209)
Accretion of Series A and B
Preferred to redemption
value......................... (177,255) -- (177,255)
Beneficial conversion charge,
Series B Preferred Stock...... (31,577,078) -- (31,577,078)
Dividend on Series B Preferred
Stock......................... (40,000) -- (40,000)
------------ ---------- ------------
Net loss applicable to common
shares........................ $(36,058,438) $ (88,927) $(37,238,542)
============ ========== ============
Weighted average common shares
outstanding................... 15,119,317 7,118,513 13,441,088
Common Shares subject to
repurchase.................... (558,765) (511,156) (551,568)
------------ ---------- ------------
Weighted average common shares
outstanding-- basic and
diluted....................... 14,560,552 6,607,357 12,889,520
============ ========== ============
Net loss per share--basic and
diluted....................... $ (2.48) $ (0.01) $ (2.89)
============ ========== ============
</TABLE>
Comprehensive Net Loss
There are no differences between the Company's net loss as reported for any of
the periods reported herein and the Company's comprehensive loss, as defined by
Statement of Financial Accounting Standards No. 130.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current financial statement presentation format included herein.
Recent Accounting Pronouncements
In June of 1998 the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging activities" (SFAS 133)
which establishes accounting and reporting
F-18
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)
standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management has evaluated the effects of this standard and believes there will
be no material impact on the company's financial position or results of
operations. The Company will adopt SFAS 133 as required for its first quarterly
filing of the year 2000.
In April 1998, the American Institute of Certified Public Accountants issued
statement of position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use. The Company has not yet determined the impact, if
any, of adopting this statement. The disclosure prescribed by SOP 98-1 will be
effective for the year ending December 31, 1999.
Note 2--Notes Payable
During the period from December 1998 through March 1999, the Company obtained
loans in the form of convertible notes payable totaling $1,743,500. The notes,
which bore interest at 10% per annum and were due to mature on March 31, 1999,
represented bridge loans in advance of the Series B Preferred Stock financing.
All outstanding principal and accrued interest of $33,750 due under these notes
converted into 7,109 shares of Series B Preferred Stock upon the closing of the
sale of such stock on March 23, 1999. See Note 3 below.
Note 3--Mandatorily Redeemable Convertible Preferred Stock
Convertible Preferred Stock at March 31, 1999 was composed of the following:
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation Redemption
Authorized Outstanding Amount Amount
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Series B...................... 120,000 117,570 $35,271,000 $34,800,000
Undesignated.................. 380,000 -- -- --
------- ------- ----------- -----------
500,000 117,570 $35,271,000 $34,800,000
======= ======= =========== ===========
</TABLE>
Series A
On October 28, 1998, the Company raised proceeds of approximately $500,000
through the sale of 500 shares of Series A Preferred Stock ("Series A") and
warrants to purchase 100,000 shares of the Company's common stock to one
investor. The Series A shares were convertible into shares of the Company's
Common Stock based on a conversion formula and contained certain redemption
provisions. In accordance with the accounting rules, as defined by SEC staff
announcement topic D-60 "Accounting for the Issuance of Convertible, Preferred
Stock and Debt Securities with Nondetachable Conversion Features," the
difference between the conversion price and the market value is deemed to be a
"beneficial conversion feature." Consequently, the Company recorded a preferred
dividend charge to deficit accumulated during the development stage in the
amount of $143,740 during the three months ended December 31, 1998. In
conjunction with the Company's Series B financing discussed below, all 500
shares of Series A were converted into 2,048 shares of Series B redeemable
convertible preferred stock.
The warrants, which remain outstanding at March 31, 1999 and which have a term
of four years with an initial exercise price of $7.31 per share, have been
valued and recorded as additional paid-in capital for financial statement
purposes at $343,000.
F-19
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)
Series B
On March 23, 1999 ("Issuance Date"), the Company completed a private placement
of approximately 117,570 shares of Series B Convertible Preferred Stock
("Series B"), which includes the conversion of outstanding convertible notes
and Series A shares into Series B Shares. Total proceeds, including proceeds
from the convertible notes and Series A shares, were $31,577,078, net of
issuance costs of approximately $2,724,000, of which approximately $2,500,000
remained in accrued liabilities at March 31, 1999.
Under the terms of the Series B Stock Purchase Agreement, each share of Series
B stock is convertible into 100 shares of the Company's common stock. The
conversion factor of 100 is determined by dividing the redemption value of $300
per Series B share by the conversion price per common share of $3.00.
In accordance with the accounting rules, as defined by SEC staff announcement
topic D-60 "Accounting for the Issuance of Convertible, Preferred Stock and
Debt Securities with Nondetachable Conversion Features," the difference between
the conversion price and the market value is deemed to be a "beneficial
conversion feature." On the Issuance Date, the Company's common stock price
closed at $22.63. Accordingly, the Series B shares were deemed to contain a
beneficial conversion feature. Consequently, during the three months ended
March 31, 1999, the Company was required to record a charge to accumulated
deficit for the difference between the conversion price and the market value.
The amount of this charge is limited to the aggregate amount of the net
proceeds received of $31.6 Million. The remaining difference between the Series
B carrying value and its redemption value, resulting from issuance costs
associated with the transaction, will be accreted through March 2004, using the
effective interest rate method, as a charge to deficit accumulated during the
development stage.
During the three months ended March 31, 1999, the Company recorded a $40,000
charge to accumulated deficit related to dividends accrued on the Series B
Preferred Stock. The key terms of the Series B Preferred Stock Purchase
Agreement include:
Voting Rights. The holders of the Series B Shares are entitled to a number of
votes equal to the number of shares of Common Stock issuable upon conversion of
the Series B preferred Shares. The holders of the Series B Shares are also
entitled to elect one member of the Board of Directors.
Liquidation Preference. Upon any liquidation, dissolution or winding up of the
affairs of the Company, the holder of each Series B Share shall be entitled to
be paid $300 per share (the "Series B Preference Amount"). If the assets of the
Company upon such event are insufficient to make such payment in full, then the
holders of Series B 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 B Shares, such holders are entitled to no further
distributions.
Dividends. The Series B Shareholders are entitled to cumulative dividends at an
annual rate of 6% of the Series B Preference Amount. The payment of such
amounts may be deferred until the Company completes an initial underwriten
public offering, is sold or until March 31, 2004.
Conversion. Each Series B Share is initially convertible into 100 shares of
Common Stock at the election of the holder thereof. All Series B Shares are
subject to conversion on the closing of an underwritten public offering with
gross proceeds of $25 million or more at a per share price of $6 or more or the
approval of the holders of 67% of the Series B Shares.
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 $3 per share.
F-20
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)
Redemption. In the event of certain defaults by the Company or if the Series B
Shares have not been converted after five years, the holders of the Series B
Shares have the right to require the Company to redeem the Series B Shares.
Registration Rights. The Company is obligated to promptly (and in any event
within 120 days of the first sale of the Series B Shares) 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 B Shares.
Fundamental Changes. Certain corporate actions, as more fully defined in the
Company's restated articles of incorporation, require the approval of the
holders of 67% of the series B preferred Shares.
Note 4--Creative Fulfillment Acquisition
On January 31, 1999, the Company completed the acquisition of Creative
Fulfillment, Inc. ("Creative") for a combination of cash and stock, at which
time Creative became a wholly owned subsidiary of the Company. The acquisition
has been accounted for using the purchase method of accounting. At the date of
acquisition Creative had nominal net assets and accordingly, the Company has
allocated substantially all of the total purchase price of approximately $6.0
million to the domain name and trademark "EMusic" which, the Company will
amortize over its estimated life of three years using the straight-line method.
The total purchase price of approximately $6,020,000 consisted of 630,179
shares of the Company's Common Stock (valued at $8.82 per share, the average
trading price during the several days before and after the transaction
announcement date), cash consideration of $312,500 and other acquisition
related expenses of approximately $150,000, consisting primarily of
professional fees. The acquisition has been structured as a tax free exchange
of stock, therefore, the difference between the recognized fair values of the
acquired assets and their historical tax bases are not deductible for tax
purposes.
The following unaudited pro forma consolidated financial information reflects
the results of operations for the nine months ended March 31, 1999 and the
period from January 8, 1998 (inception) through March 31, 1999 as if the
acquisition had occurred on July 1, 1998 and January 8, 1998, respectively, and
after giving effect to the acquisition accounting adjustments. These pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what operating results would have been had the acquisition
actually taken place on July 1, 1998 or January 8, 1998, nor is it an
indication of future operating results.
<TABLE>
<CAPTION>
Nine months January 8, 1998 January 8, 1998
ended (Inception) to (Inception) to
March 31, 1999 March 31, 1998 March 31, 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
Revenues.................... $ 94,214 $ 206,943 $ 824,347
Loss from operations........ (5,781,479) (3,264,534) (8,144,164)
Net loss.................... (5,817,556) (3,265,590) (8,184,629)
Net loss applicable to
common stockholders........ (37,571,889) (3,265,590) (39,928,962)
Net loss per share:
Basic and diluted.......... $ (2.48) $ (0.30) $ (2.96)
Weighted average shares.... 15,179,494 10,864,234 13,512,811
</TABLE>
F-21
<PAGE>
Notes to Unaudited Condensed Consolidated Financial Statements--(Continued)
Note 5--Subsequent Events
Asset Purchase
On April 27, 1999, the Company completed a content acquisition agreement with
Nordic Entertainment and certain other parties (collectively "Nordic"). Under
the terms of the transaction, the Company has purchased from Nordic certain
digital music distribution rights, and other intangible assets related to the
EMusic domain name. In connection with the transaction, the Company issued
665,000 shares of common stock in addition to a cash payment of approximately
$375,000. These shares of common stock are not available for resale under the
Securities Act and are restricted pursuant to Rule 144(k) therein. The Company
plans to engage an independent valuations consultant to determine an
appropriate allocation of the purchase price and the estimated useful life over
which any intangibles should be amortized.
Lease
In April, 1999, the Company entered into a five year lease agreement for office
facilities. Under the terms of the agreement, the Company shall make minimum
monthly lease payments of approximately $67,000 for a period of 60 months
commencing in April of 1999. This monthly amount includes certain maintenance
costs associated with the leased space, and is subject to annual increases
based on the Consumer Price Index.
F-22
<PAGE>
Unaudited Pro Forma Condensed Combining Financial Information
The following unaudited Pro Forma Combined Condensed Financial Statements
assume a business combination between the Company, including its wholly owned
subsidiary Creative Fulfillment, Inc. ("Creative Fulfillment"), and Internet
Underground Music Archive ("IUMA"), which was accounted for as a purchase
acquisition. The Pro Forma Combined Condensed Financial Statements are based on
the historical financial statements and the notes thereto of the Company
included in the Annual Report on Form 10-SB/A filed with the Securities and
Exchange Commission on December 24, 1998 and the Quarterly Report on Form 10-
QSB for the quarter ended March 31, 1999, the historical financial statements
and notes thereto of Creative Fulfillment included on the Form 8K/A filed with
the Securities and Exchange Commission on April 13, 1999 and the historical
financial statements and the notes thereto of IUMA included herein.
The Pro Forma Combined Condensed Balance Sheet combines the Company's March 31,
1999 balance sheet with IUMA's balance sheet dated April 30, 1999, giving
effect to the Merger as if it had occurred on March 31, 1999.
The Pro Forma Combined Condensed Statements of Operations combine the Company's
historical condensed statement of operations for:
. the nine months ended March 31, 1999 (including the operations of
Creative Fulfillment from the date of its acquisition), the condensed
consolidated statement of operations of Creative Fulfillment for the six
months ended January 31, 1999 (prior to its acquisition by the Company)
and IUMA's condensed statement of operations for the nine months ended
April 30, 1999;
. the period from January 8, 1998 (date of inception) through June 30,
1998, the condensed consolidated statement of operations of Creative
Fulfillment for the year ended July 31, 1998 and the IUMA condensed
statement of operations for the year ended July 31, 1998.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated at the beginning of the
periods presented, nor is it necessarily indicative of future operating results
or financial position. The unaudited Pro Forma Combined Condensed Financial
Statements do not incorporate any benefits from cost savings or synergy of
operations of the combined company.
The Company incurred direct transaction costs of approximately $100,000
associated with the Merger that will be included in the purchase price
allocated to acquired net assets. There can be no assurance the Company will
not incur additional charges in subsequent quarters to reflect costs associated
with the Merger or that management will be successful in its efforts to
integrate the operations of the two companies.
These Pro Forma Combined Condensed Financial Statements should be read in
conjunction with the historical financial statements and the related notes
thereto of the Company included in the Form 10-SB/A and Form 10-QSB filed with
the Securities and Exchange Commission, and the financial statements and the
notes thereto of the Company included herein.
F-23
<PAGE>
UNAUDITED PROFORMA CONDENSED COMBINING INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Creative
GoodNoise Fulfillment IUMA
-------------- ---------------- --------------
Nine Months Six Months Pro Forma Nine Months Pro Forma
Ended Ended ---------------------------- Ended ----------------------------
March 31, 1999 January 31, 1999 Adjustments Combined April 30, 1999 Adjustments Combined
-------------- ---------------- ----------- ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ 41,527 $102,688 $ (50,000)(B) $ 94,215 $ 298,670 -- $ 392,885
Cost of revenues.... 13,840 31,570 45,410 -- -- 45,410
------------ -------- ----------- ------------ ----------- ----------- ------------
Gross profit...... 27,687 71,118 (50,000) 48,805 298,670 -- 347,475
------------ -------- ----------- ------------ ----------- ----------- ------------
Operating expenses:
Product
development...... 3,580,014 57,490 (37,500)(B) 3,600,004 123,657 -- 3,723,661
Selling, general
and
administrative... 715,594 13,038 1,501,648 (C) 2,230,280 1,119,994 2,235,012 (F) 5,585,286
Amortization of
deferred
compensation..... -- -- -- -- 130,870 -- 130,870
------------ -------- ----------- ------------ ----------- ----------- ------------
Total operating
expenses....... 4,295,608 70,528 1,464,148 5,830,284 1,374,521 2,235,012 9,439,817
------------ -------- ----------- ------------ ----------- ----------- ------------
Income (loss) from
operations......... (4,267,921) 590 (1,514,148) (5,781,479) (1,075,851) (2,235,012) (9,092,342)
Interest and other
(expense) income,
net................ 3,816 106 -- 3,922 -- -- 3,922
------------ -------- ----------- ------------ ----------- ----------- ------------
Net income (loss)... $ (4,264,105) $ 696 $(1,514,148) $ (5,777,557) $(1,075,851) $(2,235,012) $ (9,088,420)
======== =========== =========== ===========
Accretion of Series
A Preferred to
redemption value... (177,255) (177,255) (177,255)
Beneficial
conversion charge,
Series B
Preferred.......... (31,577,078) (31,577,078) (31,577,078)
Dividend on Series B
Preferred.......... (40,000) (40,000) (40,000)
------------ ------------ ------------
Net loss applicable
to common
stockholders....... $(36,058,438) $(37,571,890) $(40,882,753)
============ ============ ============
Net loss per share,
basic and diluted.. $ (2.48) $ (2.50) $ (2.64)
============ ============ ============
Weighted average
common shares
outstanding, basic
and diluted........ 14,560,552 490,139 (A) 15,050,691 448,000 (D) 15,498,691
============ =========== ============ =========== ============
</TABLE>
See accompanying notes
F-24
<PAGE>
UNAUDITED PROFORMA CONDENSED COMBINING INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Creative
GoodNoise Fulfillment IUMA
January 8, 1998 Twelve Months Pro Forma Twelve Months Pro Forma
(Inception) to Ended July 31, --------------------------- Ended July 31, ---------------------------
June 30, 1998 1998 Adjustments Combined 1998 Adjustments Combined
--------------- -------------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $ -- $206,943 $ -- $ 206,943 $ 224,347 $ -- $ 431,290
Cost of revenues..... -- 153,035 -- 153,035 -- 153,035
----------- -------- ----------- ----------- --------- ----------- -----------
Gross profit..... -- 53,908 -- 53,908 224,347 -- 278,255
Operating expenses:
Product
development....... 961,349 74,385 -- 1,035,734 99,616 -- 1,135,350
Selling, general
and
administrative.... 218,755 61,756 2,002,197 (C) 2,282,708 340,493 2,980,016 (F) 5,603,217
Amortization of
deferred
compensation...... -- -- -- -- 13,662 -- 13,662
----------- -------- ----------- ----------- --------- ----------- -----------
Total operating
expenses........ 1,180,104 136,141 2,002,197 3,318,442 453,771 2,980,016 6,752,229
----------- -------- ----------- ----------- --------- ----------- -----------
Income (loss) from
operations.......... (1,180,104) (82,233) (2,002,197) (3,264,534) (229,424) (2,980,016) (6,473,974)
Interest and other
expense, net........ -- (1,056) -- (1,056) (1,011) -- (2,067)
----------- -------- ----------- ----------- --------- ----------- -----------
Net income (loss)
before income
taxes............... (1,180,104) (83,289) (2,002,197) (3,265,590) (230,435) (2,980,016) (6,476,041)
Income tax benefit... -- -- -- -- 10,542 -- 10,542
----------- -------- ----------- ----------- --------- ----------- -----------
Net income (loss).... $(1,180,104) $(83,289) $(2,002,197) $(3,265,590) $(219,893) $(2,980,016) $(6,465,499)
=========== ======== =========== =========== ========= =========== ===========
Net loss per share,
basic and diluted... $ (0.12) $ (0.30) $ (0.57)
=========== =========== ===========
Weighted average
common shares
outstanding, basic
and diluted......... 10,234,055 630,179 (A) 10,864,234 448,000 (D) 11,312,234
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
UNAUDITED PROFORMA CONDENSED COMBINING BALANCE SHEET DATA
<TABLE>
<CAPTION>
GoodNoise
Corporation IUMA
------------ -----------
March 31, April 30,
1999 1999 Adjustments Combined
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash.................. $ 32,618,240 $ 33,537 $ -- $ 32,651,777
Accounts receivable... 6,892 21,797 -- 28,689
Prepaid expenses and
other assets......... 276,540 2,293 -- 278,833
------------ ----------- ----------- ------------
Total current
assets............. 32,901,672 57,627 -- 32,959,299
------------ ----------- ----------- ------------
Property and equipment,
net.................... 156,317 41,613 -- 197,930
Intangible assets....... 5,725,841 12,884 8,990,048 (D) 14,728,773
Other assets............ 16,520 64,570 -- 81,090
------------ ----------- ----------- ------------
Total assets........ $ 38,800,350 $ 176,694 $ 8,990,048 $ 47,967,092
============ =========== =========== ============
Liabilities and
stockholders' equity
Current Liabilities:
Accounts payable...... $ 338,780 $ 391,471 $ 307,783 (D) $ 1,038,034
Accrued Liabilities... 2,773,910 -- -- 2,773,910
Acquisition related
liabilities.......... 31,512 -- -- 31,512
Accrued payroll and
related benefits..... 38,073 203,027 -- 241,100
Current portion of
notes payable........ -- 183,638 -- 183,638
------------ ----------- ----------- ------------
Total current
liabilities........ 3,182,275 778,136 307,783 4,268,194
------------ ----------- ----------- ------------
Notes payable, less
current portion........ -- 309,550 -- 309,550
Redeemable Convertible
Preferred
Stock--Series B........ 31,767,593 -- -- 31,767,593
Stockholders' Equity
(deficit):
Common Stock.......... 156,555 1,105,168 (1,105,168)(E) 156,555
4,480 (D)
Notes receivable from
shareholders......... (8,655) 8,655 (D) --
Deferred
compensation......... (528,971) 528,971 (D) --
Additional paid-in
capital.............. 40,938,469 -- 7,766,793 (D) 48,705,262
Notes receivable from
employees............ (6,000) -- -- (6,000)
Deficit accumulated
during the
development stage.... (37,238,542) (1,478,534) 1,478,534 (E) (37,238,542)
------------ ----------- ----------- ------------
Total stockholders'
equity (deficit).... 3,850,482 (910,992) 8,682,265 11,621,755
------------ ----------- ----------- ------------
Total liabilities,
redeemable
convertible
preferred stock and
stockholders'
equity (deficit)... $ 38,800,350 $ 176,694 $ 8,990,048 $ 47,967,092
============ =========== =========== ============
</TABLE>
See accompanying notes.
F-26
<PAGE>
NOTES TO UNAUDITED PROFORMA CONDENSED COMBINING FINANCIAL DATA
1. The preliminary allocation of the purchase price among the identifiable
tangible and intangible assets was based on a preliminary assessment of the
fair market value of those assets. Such preliminary purchase price
allocation is subject to adjustment based upon the Company's further
analysis, which adjustment could be material in amount. The amounts
preliminarily identified as intangible assets arising from the transaction
are expected to be amortized over an estimated useful life of three years.
2. The following pro forma adjustments are reflected in the unaudited pro forma
condensed combining financial information and are required to allocate the
preliminary purchase price and acquisition costs to the net assets acquired
from Creative Fulfillment and IUMA based on their fair value:
Adjustments reflecting the acquisition of Creative Fulfillment:
(A) Reflects the weighted average effect of the issuance of 630,179 shares
of Common Stock as if the issuance occurred at the beginning of the
periods presented.
(B) Reflects the elimination of inter-company transactions including
development consulting revenue paid by the Company to Creative
Fulfillment and a short-term loan of $12,500 made by the Company to
Emusic in January 1999.
(C) Reflects the amortization of intangible assets associated with the
purchase of Creative Fulfillment as if the acquisition was completed as
of the beginning of each period presented. Amortization is over the
estimated useful lives of the assets acquired of three years.
Adjustments reflecting the acquisition of IUMA:
(D) Reflects the allocation of the purchase price of approximately
$8,940,048, which consisted of the issuance of 448,000 shares of Common
Stock valued at $17.35 per share, net liabilities assumed of
approximately $1,118,775 and direct acquisition related expenses of
approximately $100,000.
(E) Reflects the elimination of IUMA's equity accounts.
(F) Reflects the amortization of intangible assets associated with the
purchase of IUMA as if the acquisition was completed as of the
beginning of each period presented. Amortization is over the estimated
useful lives of the assets acquired of three years.
F-27
<PAGE>
Report of Independent Accountants
The Boards of Directors and Shareholders
Creative Fulfillment, Inc. (d.b.a. "Emusic")
(a Development Stage Enterprise)
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Creative
Fulfillment, Inc. (d.b.a. "Emusic") (a development stage enterprise) at October
31, 1998, and the results of its operations and its cash flows for the years
ended October 31, 1997 and 1998 and for the period from March 14, 1995
(inception) through October 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
March 31, 1999
F-28
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
1998 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 1,770 $ 13,852
Accounts receivable................................... -- 3,062
--------- ---------
Total current assets................................. 1,770 16,914
Property and equipment, net............................ 9,664 6,774
--------- ---------
Total assets........................................ $ 11,434 $ 23,688
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Commitments (Note 4)
Current liabilities:
Accounts payable and accrued liabilities.............. $ 18,402 $ 9,443
Related party liabilities (Notes 3 & 7)............... 7,066 13,286
--------- ---------
Total current liabilities............................ 25,468 22,729
--------- ---------
Shareholders' equity:
Common stock, no par value; 25,000,000 shares
authorized, 17,079,965 shares issued and
outstanding.......................................... 186,133 186,133
Deficit accumulated during the development stage...... (200,167) (185,174)
--------- ---------
Total shareholders' equity (deficit)................. (14,034) 959
--------- ---------
Total liabilities and shareholders' equity.......... $ 11,434 $ 23,688
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 14, 1995 Three Months Ended March 14, 1995
October 31, (Inception) to January 31, (Inception) to
------------------ October 31, ----------------------- January 31,
1997 1998 1998 1998 1999 1999
-------- -------- -------------- ----------- ----------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Music revenues......... $272,253 $117,993 $685,481 $38,431 $10,092 $ 695,573
Advertising revenues... 191 39,560 39,751 -- 10,296 50,047
Other revenues......... 118 37,083 37,201 -- 50,000 87,201
-------- -------- --------- ------- ------- ---------
Total revenues........ 272,562 194,636 762,433 38,431 70,388 832,821
Cost of revenues:
Cost of music
revenues.............. 244,307 113,753 625,605 35,011 11,747 637,352
Cost of other
revenues.............. -- 17,730 17,730 -- -- 17,730
-------- -------- --------- ------- ------- ---------
Total cost of
revenues............. 244,307 131,483 643,335 35,011 11,747 655,082
-------- -------- --------- ------- ------- ---------
Gross profit............ 28,255 63,153 119,098 3,420 58,641 177,739
-------- -------- --------- ------- ------- ---------
Operating expenses:
Product development.... 48,371 76,859 158,851 4,089 40,349 199,200
Sales, general and
administrative........ 21,052 68,333 156,132 2,323 3,299 159,431
-------- -------- --------- ------- ------- ---------
Total operating
expenses............. 69,423 145,192 314,983 6,412 43,648 358,631
-------- -------- --------- ------- ------- ---------
Income (loss) from
operations............. (41,168) (82,039) (195,885) (2,992) 14,993 (180,892)
Interest and other
expense, net........... (1,731) (951) (4,282) (1,057) -- (4,282)
-------- -------- --------- ------- ------- ---------
Net income (loss)....... $(42,899) $(82,990) $(200,167) $(4,049) $14,993 $(185,174)
======== ======== ========= ======= ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock During the Shareholders'
------------------- Development Equity
Shares Amount Stage (Deficit)
---------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Issuance of Common Stock to
Founders for services.......... 13,500,000 $ 15,000 $ -- $ 15,000
Net loss........................ (29,104) (29,104)
---------- -------- --------- --------
Balance at October 31, 1995..... 13,500,000 15,000 (29,104) (14,104)
Issuance of Common Stock to
Founder in exchange for fixed
assets......................... 2,000,000 20,000 -- 20,000
Issuance of Common Stock in
exchange for advertising
services....................... 96,665 4,833 -- 4,833
Issuance of Common Stock in
exchange for cancellation of
note payable................... 1,000,000 50,000 -- 50,000
Net loss........................ -- -- (45,174) (45,174)
---------- -------- --------- --------
Balance at October 31, 1996..... 16,596,665 89,833 (74,278) 15,555
Sale of Common Stock for Cash... 47,500 9,500 -- 9,500
Issuance of Common Stock for
Services....................... 125,000 24,640 -- 24,640
Net loss........................ -- -- (42,899) (42,899)
---------- -------- --------- --------
Balance at October 31, 1997..... 16,769,165 123,973 (117,177) 6,796
Issuance of Common Stock for
Services....................... 310,800 62,160 -- 62,160
Net loss........................ -- -- (82,990) (82,990)
---------- -------- --------- --------
Balance at October 31, 1998..... 17,079,965 186,133 (200,167) (14,034)
Net income (unaudited).......... -- -- 14,993 14,993
---------- -------- --------- --------
Balance at January 31, 1999
(unaudited).................... 17,079,965 $186,133 $(185,174) $ 959
========== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 14, 1995 Three Months Ended March 14, 1995
October 31, (Inception) to January 31, (Inception) to
------------------ October 31, ----------------------- January 31,
1997 1998 1998 1998 1999 1999
-------- -------- -------------- ----------- ----------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)....... $(42,899) $(82,990) $(200,167) $(4,049) $14,993 $(185,174)
Adjustments to reconcile
net income (loss) to
net cash used in
operating activities:
Depreciation........... 12,277 12,856 30,453 3,221 2,890 33,343
Issuance of common
stock in exchange for
services.............. 24,640 62,160 106,633 -- -- 106,633
Changes in operating
assets and
liabilities:
Accounts receivable.... -- -- -- -- (3,062) (3,062)
Accounts payable and
accrued liabilities... 5,180 1,617 25,468 (4,251) (15,239) 10,229
-------- -------- --------- ------- ------- ---------
Net cash used by
operating activities... (802) (6,357) (37,613) (5,079) (418) (38,031)
-------- -------- --------- ------- ------- ---------
Cash flows from
investing activities:
Acquisition of property
and equipment.......... (2,623) (1,464) (20,117) -- -- (20,117)
-------- -------- --------- ------- ------- ---------
Net cash provided by
investing activities... (2,623) (1,464) (20,117) -- -- (20,117)
-------- -------- --------- ------- ------- ---------
Cash flows from
financing activities:
Proceeds from issuance
of note................ -- -- 50,000 -- 12,500 62,500
Net proceeds from
issuance of common
stock.................. 9,500 -- 9,500 -- -- 9,500
-------- -------- --------- ------- ------- ---------
Net cash provided by
financing activities... 9,500 -- 59,500 -- 12,500 72,000
-------- -------- --------- ------- ------- ---------
Net increase/(decrease)
in cash................ 6,075 (7,821) 1,770 (5,079) 12,082 13,852
Cash at beginning of
period................. 3,516 9,591 -- 9,591 1,770 --
-------- -------- --------- ------- ------- ---------
Cash at end of period... $ 9,591 $ 1,770 $ 1,770 $ 4,512 $13,852 $ 13,852
-------- -------- --------- ------- ------- ---------
Supplemental disclosures
of cash flow
information:
Issuance of Common Stock
in exchange for fixed
assets................. $ -- $ -- $ 20,000 $ -- $ -- $ 20,000
Conversion of notes
payable to Common
Stock.................. $ -- $ -- $ 50,000 $ -- $ -- $ 50,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
Creative Fulfillment, Inc. (d.b.a. "Emusic")
(a Development Stage Enterprise)
Notes to Financial Statements
1. Nature of Business and Significant Accounting Policies
Organization and Business
Creative Fulfillment, Inc. ("Creative" or the "Company"), a California
corporation, was incorporated on March 14, 1995 to develop an Internet web site
to sell musical recordings on CD's, the fulfillment and shipping of which is
performed by a third party. Since its inception, the Company has been in the
development stage devoting its efforts primarily to developing its web site,
acquiring operating assets and raising capital. The Company operates within one
business segment, operates only in the United States, and sells primarily to
customers in the United States.
Significant Accounting Policies
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 reported period. Actual
results could differ from those estimates.
Unaudited Interim Results
The accompanying interim financial statements as of January 31, 1999 and for
the three months ended January 31, 1998 and 1999 are unaudited. The unaudited
interim financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows as of January 31, 1999 and for the three months ended January 31,
1998 and 1999. The financial data and other information disclosed in these
notes to financial statements related to these periods are unaudited. The
results for the three months ended January 31, 1999 are not necessarily
indicative of the results to be expected for the year ending October 31, 1999.
Revenue Recognition
Music revenues are generally recognized in the period in which the shipment
occurs. A provision is made for returns based on historical return levels
experienced by the Company. All music sales are paid for by credit card.
Advertising revenues are derived principally from short-term advertising
agreements. These revenues are generally recognized ratably over the term of
the agreements, provided that the Company has no significant remaining
obligations and collection of the resulting receivable is probable.
Other revenue consists primarily of consulting revenue, which is generally
recognized ratably over the term of the agreements, provided that the Company
has no significant remaining obligations and collection of the resulting
receivable is probable.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and accounts receivable.
Cash balances are maintained with a major financial institution and have been
maintained below federally insured limits. No individual customers represented
greater than 10% of sales in fiscal 1997 or 1998. In the three months ended
January 31, 1999 (unaudited), one customer accounted for 71% of total revenues.
See also Note 3 below.
F-33
<PAGE>
Creative Fulfillment, Inc. (d.b.a. "Emusic")
(a Development Stage Enterprise)
Notes to Financial Statements--(Continued)
Cash Equivalents and Fair Value of Financial Instruments
The Company considers all highly liquid, low risk debt instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. The carrying value of the Company's financial instruments,
including cash, accounts receivable and accounts payable, approximate their
fair value due to their relatively short maturities.
Property and Equipment
Property and equipment is stated at historical cost. Depreciation is computed
using the straight-line method over estimated useful lives, generally three
years.
Comprehensive Income or Loss
There are no differences between the Company's net income or loss for the years
ended October 31, 1997 and 1998, for the period from March 14, 1995 (inception)
to October 31, 1998, the three months ended January 31, 1999 (unaudited) and
the period from March 14, 1995 (inception) to January 31, 1999 (unaudited) and
the Company's comprehensive income or loss for each of these periods.
Product Development Costs
Product development costs include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred.
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.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, "Software 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 Financial Accounting Standards Board 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 for 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.
F-34
<PAGE>
Creative Fulfillment, Inc. (d.b.a. "Emusic")
(a Development Stage Enterprise)
Notes to Financial Statements--(Continued)
2. Property and Equipment
<TABLE>
<CAPTION>
October 31, January 31,
1998 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Computer and office equipment........................ $ 40,117 $ 40,117
Less accumulated depreciation........................ (30,453) (33,343)
-------- --------
$ 9,664 $ 6,774
======== ========
</TABLE>
3. Related Party Transactions
The Company has incurred $18,000 and $19,000 in development expenses during
fiscal 1998 and the period from March 14, 1995 (inception) to October 31, 1998,
and incurred $31,010 (unaudited) and $43,510 in development expenses in the
period from March 14, 1995 (inception) to January 31, 1999 with Mango
Enterprises. Mango Enterprises is owned by the Founder and holder of 79% of the
outstanding Common Stock of Emusic.
The Company has incurred $3,927 in expenses during the period from March 14,
1995 (inception) to October 31, 1998 with WebCentral. There have been no
transactions with WebCentral since October 1998. WebCentral is owned by the
Founder and holder of 79% of the outstanding Common Stock of Emusic.
At October 31, 1998 and January 31, 1999, the Company owed $7,066 and $786
(unaudited) to the Founder of the Company for short-term advances made. Such
advances are not evidenced by a note, and are generally repaid within three
months or less.
See Note 7 below for additional related party transactions subsequent to
October 31, 1998.
4. Commitments
The Company does not have any equipment or facilities lease commitments as of
October 31, 1998 or January 31, 1999 (unaudited). Rent paid during fiscal 1997,
1998 and the three months ended January 31, 1999 (unaudited) was insignificant.
5. Income Taxes
There is no provision for income taxes for the period from March 14, 1995
(inception) through January 31, 1999 as the Company incurred a net loss. The
Company's deferred tax assets at October 31, 1998 principally relate to its net
operating loss and approximate $175,000. Due to uncertainty surrounding
recoverability, a full valuation allowance has been established against this
amount.
Utilization of the net operating losses and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
provisions of the Internal Revenue Code of 1986. The annual limitation may
result in the expiration of net operating losses and credits before full
utilization.
6. Common Stock
The Company's is authorized to issue 25,000,000 shares of Common Stock, of
which 17,079,965 shares were issued and outstanding as of October 31, 1998 and
January 31, 1999 (unaudited). Of the total shares issued and outstanding,
17,032,465 shares were issued for other than cash proceeds. The value of such
shares was based on sales of similar instruments for cash, or the value of the
goods or services received, whichever was more readily determinable.
F-35
<PAGE>
Creative Fulfillment, Inc. (d.b.a. "Emusic")
(a Development Stage Enterprise)
Notes to Financial Statements--(Continued)
7. Subsequent Events
Merger
On January 25, 1999, EMusic.com Inc. (formerly GoodNoise Corporation)
("EMusic") acquired all of the Company's outstanding shares of Common Stock, at
which time the Company became a wholly owned subsidiary of EMusic.
Related Party Loan and Consulting Revenues
In January 1999, EMusic loaned Creative $12,500, which was repaid to EMusic in
February 1999. In addition, during the three months ended January 31, 1999,
EMusic paid consulting fees totaling $50,000, which were recorded as revenue by
Creative.
F-36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Internet Underground Music Archive ("IUMA")
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in shareholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Internet
Underground Music Archive ("IUMA") at July 31, 1998 and the results of its
operations and its cash flows for the years ended July 31, 1998 and 1997 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
July 21, 1999
F-37
<PAGE>
INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")
BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, April 30,
1998 1999
--------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 1,684 $ 33,537
Accounts receivable................................... 40,204 21,797
Prepaid expenses...................................... 592 2,293
--------- -----------
Total current assets................................ 42,480 57,627
Property and equipment, net............................. 33,468 41,613
Intangible assets, net.................................. 15,921 12,884
Other assets............................................ 1,700 64,570
--------- -----------
Total assets........................................ $ 93,569 $ 176,694
========= ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................................... $ 87,356 $ 391,471
Accrued payroll and related benefits.................. -- 203,027
Current portion of notes payable...................... 51,468 183,638
--------- -----------
Total current liabilities........................... 138,824 778,136
--------- -----------
Notes payable, less current portion..................... 131,145 309,550
--------- -----------
Total liabilities....................................... 269,969 1,087,686
--------- -----------
Commitments (Note 4)
Shareholders' equity (deficit):
Common stock, no par value; 30,000,000 shares
authorized, 3,351,750 and 4,307,480 shares issued and
outstanding.......................................... 554,810 1,105,168
Notes receivable from shareholders.................... -- (8,655)
Deferred compensation................................. (328,527) (528,971)
Accumulated deficit................................... (402,683) (1,478,534)
--------- -----------
Total shareholders' equity (deficit)................ (176,400) (910,992)
--------- -----------
Total liabilities and shareholders' equity
(deficit)......................................... $ 93,569 $ 176,694
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended July Nine Months Ended
31, April 30,
-------------------- -----------------------
1997 1998 1998 1999
--------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Website hosting............... $ 55,799 $ 137,200 $ 53,061 $ 136,958
Advertising................... 162,447 79,326 55,327 64,140
Other......................... 213,814 7,821 6,872 97,572
--------- --------- --------- -----------
Total revenues............... 432,060 224,347 115,260 298,670
Operating expenses:
Product development........... 50,524 99,616 88,793 123,657
Selling, general and
administrative............... 345,346 340,493 221,576 1,119,994
Amortization of deferred
compensation................. 4,158 13,662 12,492 130,870
--------- --------- --------- -----------
Total operating expenses..... 400,028 453,771 322,861 1,374,521
--------- --------- --------- -----------
Income (loss) from operations.. 32,032 (229,424) (207,601) (1,075,851)
Interest and other expense,
net........................... -- (1,011) -- --
--------- --------- --------- -----------
Income (loss) before income
taxes......................... 32,032 (230,435) (207,601) (1,075,851)
Income tax benefit (expense)... (10,542) 10,542 10,542 --
--------- --------- --------- -----------
Net income (loss).............. $ 21,490 $(219,893) $(197,059) $(1,075,851)
========= ========= ========= ===========
Net income (loss) per common
share-basic................... $ 0.01 $ (0.07) $ (0.06) $ (0.28)
========= ========= ========= ===========
Net income (loss) per common
share-diluted................. $ 0.01 $ (0.07) $ (0.06) $ (0.28)
========= ========= ========= ===========
Weighted average common shares
outstanding-basic ............ 3,270,000 3,310,875 3,297,250 3,829,615
========= ========= ========= ===========
Weighted average common shares
outstanding-diluted........... 3,636,601 3,310,875 3,297,250 3,829,615
========= ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Notes due Total
from Deferred Accumulated Shareholders'
Shares Amount Shareholders Compensation Deficit Deficit
--------- ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31,
1996................... 270,000 $ 163,500 $ -- $ -- $ (204,280) $ (40,780)
Unearned stock-based
compensation.......... 17,333 -- (17,333) -- --
Amortization of stock-
based compensation.... -- -- -- 4,158 -- 4,158
Net income............. -- -- -- -- 21,490 21,490
--------- ---------- ------- --------- ----------- -----------
Balance at July 31,
1997................... 3,270,000 180,833 -- (13,175) (182,790) (15,132)
Issuance of common
stock for services.... 81,750 44,963 -- -- -- 44,963
Unearned stock-based
compensation.......... 329,014 -- (329,014) -- --
Amortization of stock-
based compensation.... -- -- -- 13,662 -- 13,662
Net loss............... -- -- -- -- (219,893) (219,893)
--------- ---------- ------- --------- ----------- -----------
Balance at July 31,
1998................... 3,351,750 554,810 -- (328,527) (402,683) (176,400)
Exercise of stock
options............... 955,730 9,557 (8,655) -- 902
Issuance of common
stock for services.... 125,000 209,487 -- -- -- 209,487
Unearned stock-based
compensation.......... -- 331,314 -- (331,314) -- --
Amortization of stock-
based compensation.... -- -- -- 130,870 -- 130,870
Net income
(unaudited)........... -- -- -- -- (1,075,851) (1,075,851)
--------- ---------- ------- --------- ----------- -----------
Balance at April 30,
1999 (unaudited)....... 432,480 $1,105,168 $(8,655) $(528,971) $(1,478,534) $ (910,992)
========= ========== ======= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
INTERNET UNDERGROUND MUSIC ARCHIVE INC. ("IUMA")
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended July Nine Months Ended
31, April 30,
------------------- -----------------------
1997 1998 1998 1999
-------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............... $ 21,490 $(219,893) $(197,059) $(1,075,851)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities:
Depreciation and
amortization................. 6,341 14,481 13,128 14,892
Amortization of deferred
compensation................. 4,158 13,662 12,492 130,870
Issuance of common stock for
services..................... -- 44,963 44,963 209,487
Changes in operating assets
and liabilities:
Accounts receivable......... (52,372) 27,277 40,459 18,407
Other assets................ -- (94) (2,230) (4,571)
Prepaid expenses relating to
acquisition................ -- -- -- (60,000)
Accounts payable and accrued
liabilities................ 39,922 (3,834) (15,702) 507,142
-------- --------- --------- -----------
Net cash provided (used) by
operating activities........... 19,539 (123,438) (103,949) (259,624)
-------- --------- --------- -----------
Cash flows used in investing
activities:
Acquisition of property and
equipment...................... (19,349) (18,077) (12,955) (20,000)
Cash paid for intangibles....... -- (11,756) -- --
-------- --------- --------- -----------
Net cash used in investing
activities..................... (19,349) (29,833) (12,955) (20,000)
-------- --------- --------- -----------
Cash flows from financing
activities:
Proceeds from issuance of
notes.......................... 4,100 149,342 131,145 315,100
Principal payments on notes..... -- -- -- (4,525)
Proceeds from issuance of common
stock.......................... -- -- -- 902
-------- --------- --------- -----------
Net cash provided by financing
activities..................... 4,100 149,342 131,145 311,477
-------- --------- --------- -----------
Net increase/(decrease) in
cash........................... 4,290 (3,929) 14,241 31,853
Cash at beginning of period..... 1,323 5,613 5,613 1,684
-------- --------- --------- -----------
Cash at end of period........... $ 5,613 $ 1,684 $ 19,854 $ 33,537
======== ========= ========= ===========
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest...................... $ -- $ 1,011 $ -- $ 758
</TABLE>
F-41
<PAGE>
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
NOTES TO THE FINANCIAL STATEMENTS
1. Nature of Business and Significant Accounting Policies
Organization and Business
Internet Underground Music Archive Inc. ("IUMA" or the "Company"), a California
corporation, was incorporated on July 1, 1995 to promote, distribute and sell
music from unsigned and independent musicians. The Company operates within one
business segment, operates only in the United States, and sells primarily to
customers in the United States.
Significant Accounting Policies
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 reported period. Actual
results could differ from those estimates.
Unaudited Interim Results
The accompanying interim financial statements as of April 30, 1999 and for the
nine months ended April 30, 1998 and 1999 are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and its
cash flows as of April 30, 1999 and for the nine months ended April 30, 1998
and 1999. The results for the nine months ended April 30, 1999 are not
necessarily indicative of the results to be expected for the year ending July
31, 1999.
Revenue Recognition
Website hosting and related service revenues are generally recognized ratably
over the term of the agreements, provided that the Company has no significant
remaining obligations and collection of the resulting receivable is probable.
Advertising revenues are derived principally from short-term advertising
agreements. These revenues are generally recognized ratably over the term of
the agreements, provided that the Company has no significant remaining
obligations and collection of the resulting receivable is probable.
Other revenue consists primarily of consulting revenue and commissions on music
sales. Consulting revenue is recognized ratably over the term of the
agreements. Commissions on music sales are derived from fulfillment of compact
disc sales on behalf of artists listed on the IUMA websites, and are recognized
upon shipment of the related product.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and accounts receivable.
Cash balances are maintained with a major financial institution and have been
maintained below federally insured limits. For the fiscal years ending July 31,
1997 and 1998 there were two different sets of customers, which accounted for
76% and 72% of revenues, respectively. Three customers accounted for 91% of
revenues for the nine months ending 4/30/99.
F-42
<PAGE>
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
NOTES TO THE FINANCIAL STATEMENTS
Cash Equivalents and Fair Value of Financial Instruments
The Company considers all highly liquid, low risk debt instruments with a
maturity of three months or less from the date of purchase to be cash
equivalents. The carrying value of the Company's financial instruments,
including cash, accounts receivable and accounts payable, approximate their
fair value due to their relatively short-term maturities.
Property and Equipment
Property and equipment is stated at historical cost. Depreciation is computed
using the straight-line method over estimated useful lives, generally three
years.
Net Income or Loss per Common Share
Basic earnings per share is computed by dividing net income or loss available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income per common share is computed
giving effect to all dilutive options in issuance.
Comprehensive Income or Loss
There are no differences between the Company's net income or loss for the years
ended July 31, 1997 and 1998 and for the nine months ended April 30, 1999
(unaudited) and the Company's comprehensive income or loss for the same
periods.
Product Development Costs
Product development costs include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's Web site. Product
development costs are expensed as incurred.
Income Taxes
Income taxes are accounted for using the 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 awards/options to employees using the
intrinsic value method and has adopted the disclosure only provisions of
Financial Accounting Standard No. 123.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, "Software 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 Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires that entities recognize
all derivatives as either assets or liabilities and measure those instruments
at fair value. It also provides guidance for accounting for 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, 2000. The Company does not expect that
the adoption of SFAS 133 will have a material effect on its financial
statements.
F-43
<PAGE>
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
NOTES TO THE FINANCIAL STATEMENTS
2. Property and Equipment
<TABLE>
<CAPTION>
July
31, April 30,
1998 1999
------- -----------
(unaudited)
<S> <C> <C>
Computer and office equipment........................... $48,601 $59,874
Less accumulated depreciation........................... (15,133) (18,261)
------- -------
$33,468 $41,613
======= =======
</TABLE>
Book value for assets under capital lease at July 31, 1998 and April 30, 1999
totaled approximately $5,000 and $4,000, respectively.
Depreciation expense for the periods ended July 31, 1997, July 31, 1998 and
April 30, 1999 totaled approximately $5,000, $12,000 and $12,000, respectively.
The Company incurred rental expense of $17,000, $18,000, and $14,000 for the
years ended July 31, 1997 and July 31, 1998 and for the nine months ended,
respectively.
3. Related Party Transactions
Shares of Common Stock were issued to several employees in exchange for
promissory notes. As of April 30, 1999, none of these promissory notes have
been paid in full.
The Company had the following related party transactions during the periods
presented.
. On July 12, 1996 the Company entered into an agreement with two
shareholders, under which it borrowed approximately $33,000. Under the
terms of the agreement and in return for consulting services provided,
the shareholders received stock equivalent to 18% of the outstanding
capital of the Company. The note was interest free and is payable upon
receipt by the Company of additional financing in excess of $250,000. As
of July 31, 1998 and April 30, 1999 (unaudited), the total amount
borrowed remained outstanding.
. Pursuant to an agreement dated October 23, 1998 one shareholder loaned
the Company $5,000 at 5% per annum. The loan was unsecured and payable
when the Company received additional financing.
. Two shareholders are due approximately $27,000, pursuant to a consulting
agreement dated February 5, 1997.
. During the year ended July 31, 1998 a shareholder advanced the Company
approximately $12,000 repayable at $100 per month, interest at 5.73% per
annum. As of July 31, 1998 and April 30, 1999 (unaudited), the total
amount borrowed remained outstanding.
4. Commitments
IUMA entered into a capital lease for equipment during the year ended July 31,
1998 and will have payments due of approximately $2,000 for each of the years
ended July 31, 1999, 2000 and 2001.
As of July 31, 1998, the Company had operating leases for equipment with
commitments of approximately 13,000, $13,000, 8,000 and 1000 for the years
ended July 31, 1999, 2000, 2001 and 2002, respectively.
As of July 31, 1998 the Company had a rental lease with minimum monthly
payments of approximately $1,000 for a total commitment of approximately
$12,000 for the year ended July 31, 1999.
F-44
<PAGE>
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
NOTES TO THE FINANCIAL STATEMENTS
5. Income Taxes
The Company's deferred tax assets of approximately $79,000 at July 31, 1998
principally relate to its net operating loss. A full valuation allowance has
been established because of the uncertainty of realization.
Utilization of the net operating losses and tax credit carryforwards may be
subject to a substantial annual limitation due to ownership changes. The annual
limitation may result in the expiration of net operating losses and credits
before full utilization.
6. Preferred Stock
The Company was authorized to issue 20,000,000 shares of Preferred Stock, of
which none were issued or outstanding at July 31, 1998 and April 30, 1999
7. Common Stock
The Company was authorized to issue 30,000,000 shares of Common Stock, of which
3,351,750 and 4,307,480 shares were issued and outstanding at July 31, 1998 and
April 30, 1999 (unaudited), respectively. The value of such shares was
determined based upon the value of the shares issued, as determined by cash
proceeds to the company on sales of similar instruments, or the value of the
goods or services received, whichever was more readily determinable.
8. Stock Options
Option activity
Option activity during the year ended July 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
Average
Weighted
Exercise
Shares Price
------- --------
<S> <C> <C>
Balance, July 31, 1996..................................... -- $--
Options granted........................................... 389,326 .01
-------
Balance, July 31, 1997..................................... 389,326 .01
Options granted........................................... 325,557 .01
-------
Balance, July 31, 1998..................................... 714,883 .01
=======
</TABLE>
At July 31, 1998, all outstanding options were exercisable of which 506,486
shares, at a weighted average exercise price of $0.01, are subject to the
Company's right of repurchase upon exercise.
Pro forma stock compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Had compensation cost been determined based on
the minimum value at the grant date for the awards in 1997 and 1998 consistent
with the provisions of SFAS No. 123, the Company's net loss for 1997 and 1998,
respectively, would have been as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1997 1998
------- ---------
<S> <C> <C>
Net income (loss) attributable to common stock
holders--as reported................................. $21,490 $(219,893)
Net income (loss) attributable to common
stockholders--pro forma.............................. $17,214 $(233,892)
Net income (loss) per common share--basic and diluted
as reported.......................................... $ (0.01) $ (0.07)
Net income (loss) per common share--basic and diluted
pro forma............................................ $ (0.01) $ (0.06)
</TABLE>
F-45
<PAGE>
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. ("IUMA")
NOTES TO THE FINANCIAL STATEMENTS
Such pro forma disclosures may not be representative of future compensation
cost because options vest over several years and additional grants are made
each year.
The minimum value of each option grant is estimated on the date of grant using
a type of Black-Scholes option-pricing model with the following assumptions
used for grants:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Weighted average risk-free interest rate......................... 6.49% 5.47%
Expected life (from vesting date)................................ 5 5
Expected dividends............................................... -- --
</TABLE>
Based on the above assumptions, the aggregate fair value and weighted average
fair value per share of options granted in 1997 and 1998 were $18,501 and
$0.048 and $329,665 and $1.013, respectively. All options were granted with
exercise prices below the estimated market value at the date of grant.
The options outstanding (all of which are exercisable) by exercise price at
July 31, 1998 are as follows:
Options Outstanding
<TABLE>
<CAPTION>
Weighted
Average
Remaining
Contractual
Exercise Number Life
Prices Outstanding (years)
-------- ----------- -----------
<S> <C> <C>
$0.01 714,883 8.79
</TABLE>
Deferred stock compensation
During the years ended July 31, 1997 and 1998, the Company issued options to
certain employees with exercise prices below the deemed fair market value of
the Company's common stock at the date of grant. In addition, the Company
allowed such options to be exercised in advance of full vesting, subject to
repurchase rights with respect to unvested shares. In accordance with the
requirements of APB 25, the Company has recorded deferred compensation for the
difference between the exercise price of the stock options and the fair market
value of the Company's stock at the date of grant. Deferred compensation is
being amortized over the vesting periods. At July 31, 1998, the Company
recorded deferred compensation of $328,527 (net of cancellations), of which
$4,158 and $13,662 had been amortized to expense during the years ended July
31, 1997 and 1998.
9. Subsequent Events
Leases
During October 1999 the Company entered into a second rental lease with minimum
monthly payments of approximately $1,000. This lease was cancelled in May 1999.
In addition, during July 1999 the original rental lease was also cancelled.
Merger
On June 30, 1999, EMusic.com Inc. (formerly GoodNoise Corporation) acquired all
of the Company's outstanding shares of Common Stock, at which time the Company
became a wholly owned subsidiary of EMusic.com Inc.
F-46
<PAGE>
- ----------------------------------------------------------------
[Logo]
EMusic.com Inc.
5,340,000 Shares
Common Stock
--------------
PROSPECTUS
--------------
July , 1999
CIBC World Markets
ING Barings
Prudential Securities
Volpe Brown Whelan & Company
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor
is it seeking an offer buy these securities in any jurisdiction where the offer
or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
<PAGE>
Part II
Information Not Required in Prospectus
Item 24. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law permits indemnification of
officers, directors and other corporate agents under certain circumstances and
subject to certain limitations. The Registrant's Amended and Restated
Certificate of Incorporation and Bylaws provide that the Registrant shall
indemnify its directors, officers, employees and agents to the full extent
permitted by Delaware General Corporation Law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. In
addition, the Registrant intends to enter into separate indemnification
agreements (Exhibit 10.1) with its directors and officers which would require
the Registrant, among other things, to indemnify them against certain
liabilities which may arise by reason of their status or service (other than
liabilities arising from willful misconduct of a culpable nature). The
Registrant also intends to continue to maintain director and officer liability
insurance, if available on reasonable terms. These indemnification provisions
and the indemnification agreements 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.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions to be paid by the Registrant, in connection with this
offering. All amounts shown are estimates except for the registration fee and
the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee................................................... $35,532
NASD filing fee........................................................
Nasdaq National Market listing fee.....................................
Blue Sky fees and expenses.............................................
Printing and engraving expenses........................................
Legal fees and expenses................................................
Accounting fees and expenses...........................................
Director and Officer liability insurance...............................
Transfer Agent and Registrar fees......................................
Federal taxes and state taxes and fees.................................
Miscellaneous expenses.................................................
-------
Total................................................................ $
=======
</TABLE>
- ------------------
* estimated
Item 26. Recent Sales of Unregistered Securities
On May 6, 1998, we issued 2,500,000 shares of our common stock and warrants to
purchase a total of 500,000 shares of our common stock at an exercise price of
$1.00 per share to accredited investors in exchange for $500,000.00 in reliance
on Rule 504 of Regulation D promulgated under the Securities Act. Warrants to
purchase 200,000 shares of common stock were exercised at the time of their
issuance.
On May 11, 1998, we acquired all of the outstanding shares of GoodNoise
Corporation, a Delaware corporation, in exchange for 11,015,300 shares of our
common stock in reliance on Section 4(2) of the
II-1
<PAGE>
Securities Act. On the same date, we assumed options to purchase 1,722,500
shares of the Delaware corporation's common stock, which were automatically
converted into options to purchase 2,032,550 shares of our common stock at a
weighted average exercise price of approximately $0.03 per share.
On July 29, 1998, we issued 170 shares of our common stock to a consultant in
exchange for consulting services in reliance on Section 4(2) of the Securities
Act.
On August 10, 1998, investors exercised warrants to purchase 300,000 shares of
our common stock in exchange for $300,000. These warrants had been issued as a
part of the private placement which occurred on May 6, 1998.
On October 28, 1998, we issued 500 shares of our Series A Preferred Stock and a
warrant to purchase 100,000 shares of our common stock at an exercise price of
$7.91 to an investor in reliance on Regulation D.
On December 16, 1998, we issued 10,000 shares of our common stock to an
employee upon exercise of an employee stock option in reliance on Rule 701.
On February 24, 1999, we acquired all of the outstanding shares of Creative
Fulfillment, Inc. in exchange for 630,179 shares of our common stock in
reliance on Section 4(2) of the Securities Act.
On March 23, 1999, we issued 117,570 shares of our Series B Preferred Stock to
accredited investors in exchange for $32,523,900.00 in cash, cancellation of
debt of $1,777,250 and conversion of the outstanding shares of our Series A
Preferred Stock in reliance on Rule 506 of Regulation D promulgated under the
Securities Act.
On April 27, 1999, we issued 665,188 shares of our common stock in
consideration of the acquisition of certain music rights in reliance on Section
4(2) of the Securities Act.
On June 11, 1999, we issued 448,000 shares of our common stock in exchange for
all of the outstanding shares of Internet Underground Music Archive, Inc. in
reliance on Section 4(2) of the Securities Act.
On June 10, 1999 we granted warrants for the purchase of 1,607,800 shares
solely to accredited investors in reliance on Regulation D.
From May 11, 1998 through September 20, 1998, we granted options to purchase
435,000 shares of our common stock at a weighted average exercise price of
approximately $5.07 per share. These options were granted to our employees and
consultants in exchange for services rendered in transactions exempt from
registration under the Securities Act under Rule 701. From September 21, 1998
through July 15, 1999, we granted options to purchase 4,186,000 shares of our
common stock at a weighted average purchase price of approximately $7.078 per
share. These options were granted to our employees and consultants in exchange
for services rendered in transaction exempt from registration under the
Securities Act under Section 4(2) thereof.
There were no underwriters employed in connection with any of the above
transactions.
II-2
<PAGE>
Item 27. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1(c) Underwriting Agreement
2.1(a) 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(a) 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, GNA Corporation, Internet Underground Music Archive, Inc.
and certain shareholders of Internet Underground Music Archive, Inc.
dated as of May 16, 1999
2.4(b) Agreement and Plan of Merger by and between EMusic.com Inc., a Florida
corporation, and EMusic.com Inc., a Delaware corporation, dated as of
July 21, 1999
3.1(c) Form of Amended and Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws
5.1(c) Opinion of Gray Cary Ware & Freidenrich LLP
10.1 Form of Indemnity Agreement
10.2(a) Stock Purchase Agreement dated as of March 30, 1998 with Gary
Culpepper
10.3(a) 1998 Stock Option Plan
10.4 1998 Nonstatutory Stock Option Plan
10.5 1999 Employee Stock Purchase Plan
10.6 Form of Amendment to Investor Rights Agreement dated July 19, 1999
21 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-5 of the Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- ------------------
(a) Previously filed as an exhibit to the Registrant's Form 10-SB/A dated
December 24, 1998.
(b) Previously filed as an exhibit to the Registrant's Form 8-K dated July 23,
1999.
(c) To be filed by amendment.
Item 28. Undertakings
Insofar as indemnification by the Registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by EMusic pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
II-3
<PAGE>
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
Signatures
In accordance with the requirements of the Securities Act of 1933, EMusic
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in the City of Redwood
City, State of California, on the 23rd day of July, 1999.
EMUSIC.COM INC.
/s/ Gene Hoffman, Jr.
By: _________________________________
Gene Hoffman, Jr.
Chief Executive Officer
Power Of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert H. Kohn, Gene Hoffman, Jr. and
Joseph H. Howell, and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought), and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, with full power of each to act alone, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or his or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert H. Kohn Chairman of the Board and July 23, 1999
______________________________________ Secretary
Robert H. Kohn
/s/ Gene Hoffman, Jr. President, Chief Executive July 23, 1999
______________________________________ Officer and Director
Gene Hoffman, Jr. (Principal Executive
Officer)
/s/ Joseph H. Howell Executive Vice President July 23, 1999
______________________________________ and Chief Financial
Joseph H. Howell Officer (Principal
Financial and Accounting
Officer)
/s/ Ralph Peer, II Director July 23, 1999
______________________________________
Ralph Peer, II
/s/ Tor Braham Director July 23, 1999
______________________________________
Tor Braham
Director
______________________________________
Ed Rosenblatt
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1(c) Underwriting Agreement
2.1(a) 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(a) 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, GNA Corporation, Internet Underground Music Archive, Inc.
and certain shareholders of Internet Underground Music Archive, Inc.
dated as of May 16, 1999
2.4(b) Agreement and Plan of Merger by and between EMusic.com Inc., a Florida
corporation, and EMusic.com Inc., a Delaware corporation, dated as of
July 21, 1999
3.1(c) Form of Amended and Restated Certificate of Incorporation
3.2 Amended and Restated Bylaws
5.1(c) Opinion of Gray Cary Ware & Freidenrich LLP
10.1 Form of Indemnity Agreement
10.2(a) Stock Purchase Agreement dated as of March 30, 1998 with Gary
Culpepper
10.3(a) 1998 Stock Option Plan
10.4 1998 Nonstatutory Stock Option Plan
10.5 1999 Employee Stock Purchase Plan
10.6 Form of Amendment to Investor Rights Agreement dated July 19, 1999
21 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-5 of the Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- ------------------
(a) Previously filed as an exhibit to the Registrant's Form 10-SB/A dated
December 24, 1998.
(b) Previously filed as an exhibit to the Registrant's Form 8-K dated July 23,
1999.
(c) To be filed by amendment.
<PAGE>
EXHIBIT 2.3
AGREEMENT AND PLAN OF REORGANIZATION
among GOODNOISE CORPORATION,
GNA CORPORATION,
INTERNET UNDERGROUND MUSIC ARCHIVE, INC. and
the CERTAIN SHAREHOLDERS
of INTERNET UNDERGROUND MUSIC ARCHIVE, INC.
May 16, 1999
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is entered
into this 16th day of May 1999, by and among GoodNoise Corporation, a Florida
corporation ("GoodNoise"), GNA Corporation, a Delaware corporation and wholly-
owned subsidiary of GoodNoise ("Sub"), INTERNET UNDERGROUND MUSIC ARCHIVE, Inc.,
a California corporation ("IUMA") and the shareholders of IUMA signing this
Agreement (the "Principal Shareholders").
RECITALS
A. The parties intend that, subject to the terms and conditions
hereinafter set forth, Sub shall be merged with and into IUMA, with IUMA the
surviving corporation (the "Merger"), pursuant to an 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 of IUMA 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 "California Law" shall mean the California General Corporation Law, as
amended.
1.3 "Closing" and "Closing Date" shall have the meanings set forth in
Section 2.4.
1.4 "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.5 "Commission" shall mean the Securities and Exchange Commission.
1.6 "Confidential Information" shall mean that information of a party
("Disclosing Party") which is disclosed to another party ("Receiving Party")
pursuant to this Agreement, in written form and marked "Confidential." If
Confidential Information is initially disclosed orally, the Disclosing Party
shall send a written summary of such information to the Receiving Party within
fifteen (15) days of disclosure and mark such summary "Confidential."
Confidential
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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.
1.7 "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.
1.8 "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.
1.9 "Dissenting Shares" shall mean any IUMA 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.
1.10 "Effective Time" shall mean the time the Merger becomes effective
as defined in Section 2.5.
1.11 "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.
1.12 "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
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.
1.13 "Exchange Ratio" shall mean that for each outstanding IUMA Share,
such share will be converted into the right to receive that number of shares of
GoodNoise Common Stock as is determined in accordance with Section 2.2 hereof.
1.14 "Environmental Laws" shall mean laws relating to the environment
or any Environmental Activity.
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1.15 "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.
1.16 "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.
1.17 "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).
1.18 "Indemnification Period" shall mean the period commencing on the
Closing Date and ending at the close of business on the eighteen (18) month
anniversary of the Closing Date.
1.19 "IUMA Shareholders" shall mean the holders of the IUMA Shares and
those who have a right to acquire any IUMA Shares.
1.20 "IUMA Shares" shall mean the shares of IUMA Shares issued and
outstanding at the Effective Time.
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 IUMA shall be construed, except as
specifically provided, to qualify the matter referred to herein to matters with
a value in excess of $5,000. For example, a "Material adverse effect" would be
an adverse effect resulting in costs or expenses in excess of $5,000. 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
IUMA or GoodNoise).
1.23 "Merger" shall mean the merger of Sub with and into IUMA, on the
terms and conditions described herein.
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.
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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 "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.
1.30 "Transaction Documents" shall mean all documents or agreements
required to be delivered by any party hereunder including the Agreement of
Merger.
2. PLAN OF REORGANIZATION.
2.1 The Merger. Subject to the terms and conditions of this Agreement, Sub
shall be merged with and into IUMA 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 IUMA. As
a result of the Merger, the separate corporate existence of Sub shall cease and
IUMA 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 IUMA 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.
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(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 IUMA Share 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 (the "Exchange Ratio") that
number of GoodNoise Shares as is equal to 448,000 divided by the number of IUMA
Shares outstanding at the Effective Time (on a fully diluted basis giving effect
to any options, warrants or other rights to acquire IUMA Shares issued and
outstanding at the Effective Date).
(b) 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 IUMA common stock outstanding after the
Merger.
(c) The Exchange 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 IUMA
Shares), reorganization, recapitalization or other like change with respect to
GoodNoise Common Stock or capital stock occurring after the date hereof and
prior to the Effective Time.
(d) No fraction of a share of GoodNoise Common Stock shall be issued,
but in lieu thereof each holder of IUMA 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.
2.3 Any Dissenting Shares shall not be converted into GoodNoise
Common Stock but shall instead be entitled to the rights of Dissenting Shares
pursuant to the California Law. IUMA 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 demand for the exercise of dissenters rights. Each holder of Dissenting
Shares (a "Dissenting Shareholder") who, pursuant to the provisions of the
California Law, becomes entitled to payment for IUMA 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 a
certificate or certificates representing IUMA Shares, the number of shares of
GoodNoise Common Stock to
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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 (as hereinafter defined).
2.4 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 IUMA 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.
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 as to which such holder is entitled pursuant to Section 2.2
hereof. Certificates so surrendered pursuant to this Section shall forthwith be
canceled (if not otherwise canceled or terminated in accordance with their
terms). In the event of a transfer of ownership of IUMA Shares which is not
registered on the transfer records of IUMA, the appropriate number of GoodNoise
Shares 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, 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 (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,
none of GoodNoise, the Surviving Corporation or any party hereto shall be liable
to a holder of IUMA Shares for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(c) The GoodNoise Shares paid in accordance with the terms
hereof shall be deemed to be in full satisfaction of all rights pertaining to
such IUMA Shares, and there shall be no further registration of transfers on the
records of the Surviving Corporation of IUMA 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 IUMA 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, 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
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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) As a condition to receiving the GoodNoise Shares, each IUMA
Shareholder must agree that: (i) in connection with any underwritten public
offering by GoodNoise, during the period of duration specified by GoodNoise and
an underwriter of common stock of GoodNoise following the effective date of the
registration statement of GoodNoise filed under the Securities Act with respect
to such offering (but in no event greater than 180 days), it shall not, to the
extent requested by GoodNoise 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 GoodNoise held
by it at any time during such period except common stock included in such
registration and (ii) it shall sign any lock-up or other similar agreement
requested to be signed by any such underwriter.
2.5 The Closing. Subject to termination of this Agreement as provided in
Section 12 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 IUMA may mutually select (the "Closing Date").
2.6 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 offices (the "Effective Time").
3. REPRESENTATIONS AND WARRANTIES OF IUMA. Except as otherwise set forth in
the "IUMA Disclosure Schedule," referencing the appropriate section and
paragraph numbers, to be provided to GoodNoise concurrent with the execution of
this Agreement, IUMA and the Principal Shareholders represent and warrant to
GoodNoise as set forth below. No fact or circumstance disclosed to GoodNoise by
IUMA shall constitute an exception to these representations and warranties
unless such fact or circumstance is set forth in the IUMA Disclosure Schedule.
3.1 Organization. IUMA 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. IUMA 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 IUMA Disclosure Schedule contains a true and complete listing of
the locations of all sales offices, manufacturing facilities, and any other
offices or facilities of IUMA and a true and complete list of all jurisdictions
in which IUMA maintains any employees. The IUMA Disclosure Schedule contains a
true and complete list of all jurisdictions in which IUMA is duly qualified to
transact business as a foreign corporation. True and complete copies of IUMA's
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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 IUMA consists of 20 million
shares of preferred stock, none of which is designated or outstanding and 30
million shares of common stock, 4,432,480 shares of which are issued and
outstanding and held of record by IUMA Shareholders as set forth and identified
in Section 3.2(a) of the IUMA Disclosure Schedule.
(b) Except as set forth in Section 3.2(b) of the IUMA 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 IUMA other than as contemplated by this Agreement. There are
no voting trust, buy-sell or other similar agreements in place among the IUMA
Shareholders and IUMA.
(c) All of the outstanding securities of IUMA have been duly
authorized and are validly issued, fully paid and nonassessable. All securities
of IUMA were issued in compliance with applicable securities laws. None of
IUMA's outstanding securities were issued in consideration in whole or in part
for any contribution, transfer or assignment of proprietary rights.
3.3 Power, Authority and Validity. IUMA 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 IUMA, and no
other corporate proceedings are necessary to authorize this Agreement or the
other Transaction Documents. IUMA 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 IUMA will be a party, when
executed and delivered by IUMA shall be, the valid and binding obligation of
IUMA 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 IUMA Disclosure Schedule sets forth the
balance sheet and consolidated statements of income and changes in financial
condition for the fiscal years ended July 31, 1997 and 1998 and for the period
ended April 30, 1999 (collectively, the "IUMA Financial Statements").
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(b) The IUMA Financial Statements are complete and in accordance with
the books and records of IUMA and present fairly in all material respects the
financial position of IUMA as of their historical dates. Except and to the
extent reflected or reserved against in the IUMA balance sheet as of April 30,
1999 (the "IUMA Balance Sheet"), IUMA 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 IUMA Financial
Statements are adequate in light of the contingencies with respect to which they
are made.
(c) IUMA 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 IUMA Financial Statements. All debts, liabilities, and
obligations incurred after the date of the IUMA 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) IUMA has fully and timely, properly and accurately filed all Tax
returns and reports required to be filed by it (the "IUMA 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 IUMA Returns and
all other Tax returns and reports filed by IUMA were prepared in the manner
required by applicable law. Except for any goods and services income Tax due
upon the filing of the IUMA Returns, all income, sales, use, occupation,
property or other Taxes or assessments due from IUMA 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 IUMA
Financial Statements are adequate and there are no Tax liens on any property or
assets of IUMA. There have been no audits or examinations of any Tax returns or
reports by any applicable governmental agency. No facts exist or have 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 IUMA 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) IUMA is not a party to any tax-sharing agreement or similar
arrangement with any other party.
(d) At no time has IUMA been included in the federal consolidated
income Tax return of any affiliated group of corporations.
(e) No payment which IUMA is obliged to pay to any director, officer,
employee or independent contractor pursuant to the terms of an employment
agreement,
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severance agreement or otherwise will constitute an excess parachute payment as
defined in Section 280G of the Code.
(f) IUMA 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 IUMA 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 IUMA prior to the Closing Date with
any taxing authority with regard to the Tax liability of IUMA for any Tax period
(or portion thereof) ending on or before the Closing Date.
(g) IUMA 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 IUMA Disclosure Schedule, from April 30, 1999, IUMA 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 IUMA;
(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 IUMA 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 IUMA or
declared any direct or indirect redemption, retirement, purchase or other
acquisition by IUMA of such shares;
(e) issued any shares of capital stock of IUMA or any warrants,
rights, options or entered into any commitment relating to the shares of IUMA;
(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
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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 IUMA;
(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 IUMA Financial
Statements; (ii) accounts payable or accrued salaries that have been incurred by
IUMA since April 30, 1999, in the ordinary course of business and consistent
with IUMA's past practices; and (iii) liabilities in Section 3.6(k) of the IUMA
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 IUMA
Disclosure Schedule;
(p) agreed to take any action described in this Section 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. IUMA has good and marketable title to all
the properties, interests in properties and assets, real and personal, reflected
in the IUMA Financial Statements or acquired after the date of the IUMA
Financial Statements (except properties, interests in properties and assets sold
or otherwise disposed of since the date of the IUMA 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 IUMA Disclosure Schedule, the equipment of IUMA 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 IUMA is a
party are valid, binding, enforceable and effective in accordance with
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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 IUMA 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 IUMA
Disclosure Schedule contains a description of all real and personal property
leased or owned by IUMA, 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 IUMA's leases have been provided to GoodNoise or its Representatives.
3.8 Music Rights.
(a) Section 3.8(a)(i) of the IUMA Disclosure Schedule sets forth a
true and complete list of all Music Rights owned by IUMA. Section 3.8(a)(ii) of
the IUMA Disclosure Schedule sets forth a true and complete list of all Music
Rights licensed by or to IUMA. IUMA has written contracts (each of which are
listed in the IUMA Disclosure Schedule) for all Music Rights owned, licensed,
used, marketed, and sold by it, and those licensed to it, IUMA 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. 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.
All Music Rights owned or licensed by IUMA were recorded and otherwise prepared
in all respects in accordance with the rules and regulations of any unions,
guilds and similar associations having jurisdiction. 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 IUMA Disclosure Schedule, all fees and other payments to be made by IUMA
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 IUMA.
(b) Except as set forth in Section 3.8 of the IUMA 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 IUMA
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 IUMA Disclosure Schedule.
(c) Except as described in Section 3.8(c) of the IUMA Disclosure
Schedule, IUMA does not know of or have any reason to believe that any customers
of IUMA, or any holder of Music Rights, (i) has any complaint or objection with
respect to the service or any business practices of IUMA 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 IUMA as a result of the Merger.
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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 IUMA (each a "IUMA
Proprietary Asset" and collectively, the "IUMA 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 IUMA Proprietary Asset, and
(ii) the names of the jurisdictions covered by the applicable registration or
application. Section 3.9(a)(ii) of the IUMA Disclosure Schedule identifies and
provides a brief description of all other IUMA Proprietary Assets. Section
3.9(a)(iii) of the IUMA Disclosure Schedule identifies and provides a brief
description of each Proprietary Asset licensed to IUMA by any Person (except for
any Proprietary Asset that is licensed to IUMA 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 IUMA. Except as set forth in Section
3.9(a)(iv) of the IUMA Disclosure Schedule, IUMA has good, valid and marketable
title to all IUMA Proprietary Assets identified in Sections 3.9(a)(i) and
3.9(a)(ii) of the IUMA 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
IUMA Disclosure Schedule. Except as set forth in Section 3.9(a)(v) of the IUMA
Disclosure Schedule, IUMA 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 IUMA Disclosure Schedule, IUMA 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 IUMA Disclosure
Schedule, IUMA has taken reasonable and customary measures and precautions
necessary to protect and maintain the confidentiality and secrecy of all IUMA
Proprietary Assets (except IUMA Proprietary Assets whose value would be
unimpaired by public disclosure) and otherwise to maintain and protect the value
of all IUMA Proprietary Assets. Except as set forth in the IUMA Disclosure
Schedule, IUMA has not disclosed or delivered to any Person, or permitted the
disclosure or delivery to any Person of any of the IUMA Proprietary Assets used
in or necessary for the conduct of business by IUMA as currently conducted by
IUMA.
(c) IUMA is not infringing, misappropriating or making any unlawful
use of, and IUMA 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 IUMA
Proprietary Asset.
(d) Except as set forth in Section 3.9(d) of the IUMA Disclosure
Schedule: (i) each IUMA Proprietary Asset conforms in all material respects with
any specification, documentation, performance standard, representation or
statement made or provided with respect thereto by or on behalf of IUMA; and
(ii) there has not been any claim made against IUMA by
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any customer or other person alleging that any IUMA Proprietary Asset (including
each version thereof that has ever been licensed or otherwise made available by
IUMA to any person) does not conform in any material respect with any
specification, documentation, performance standard, representation or statement
made or provided by or on behalf of IUMA, and there is no basis for any such
claim.
(e) IUMA's Proprietary Assets constitute all the proprietary assets
necessary to enable IUMA 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 IUMA Disclosure Schedule, (i) IUMA has not licensed any of the IUMA
Proprietary Assets to any person and (ii) IUMA has not entered into any covenant
not to compete or contract limiting its ability to exploit fully any of the IUMA
Proprietary Assets or to transact business in any market or geographical area or
with any person.
3.10 Employee Benefit Plans. IUMA 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 IUMA conforms to all applicable
requirements, if any, of ERISA. Section 3.10 of the IUMA Disclosure Schedule
lists and describes all such plans.
3.11 Bank Accounts and Receivables. Section 3.11 of the IUMA Disclosure
Schedule sets forth the names and locations of all banks, trusts, companies,
savings and loan associations, and other financial institutions at which IUMA
maintains accounts of any nature and the names of all persons authorized to draw
thereon or make withdrawals therefrom. Section 3.11 of the IUMA Disclosure
Schedule sets forth an accurate and complete breakdown and aging of all accounts
receivable, notes receivable, and other receivables of IUMA as of the date of
the Balance Sheet. Except as set forth on the IUMA Disclosure Schedule all
existing accounts receivable of IUMA (including those accounts receivable
reflected on the IUMA Financial Statements that have not yet been collected and
those accounts receivable that have arisen since December 31, 1998 and have not
yet been collected) (i) represent valid obligations of customers of IUMA 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 IUMA Disclosure Schedule identifies each
document or instrument to which IUMA is a party and that relates to the
acquisition, transfer, use, development, sharing or licensing of any technology
or IUMA Proprietary Asset.
(b) Except as set forth in Section 3.12(b) the IUMA Disclosure
Schedule,
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(i) IUMA has no agreements, contracts or commitments that
call for fixed and/or contingent payments or expenditures by or to IUMA of more
than Five Thousand Dollars ($5,000) over the life of any such agreement,
contract or commitment.
(ii) IUMA has no purchase agreement, contract or commitment
that calls for fixed and/or contingent payments by IUMA that are in excess of
the normal, ordinary and usual requirements of IUMA's business.
(iii) There is no outstanding sales contract, commitment or
proposal (including, without limitation, development projects) of IUMA that IUMA
currently expects (or reasonably should expect) to result in any loss to IUMA
upon completion or performance thereof.
(iv) IUMA 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) IUMA has no outstanding agreements, contracts or
commitments with sales representatives, OEM's, distributors or dealers.
(vi) IUMA is not restricted by agreement from competing with
any person or from carrying on its business anywhere in the world.
(vii) IUMA 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) IUMA 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 IUMA of any sum not reflected in the IUMA Financial Statements.
(ix) All contracts, agreements and instruments listed in the
IUMA Disclosure Schedule pursuant to Section 3.12(a) and (b) (the "IUMA Material
Contracts") are valid, binding, in full force and effect, and enforceable by
IUMA 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. To the knowledge of IUMA and the Principal Shareholders, no
party to any IUMA Material Contract intends to cancel, withdraw, modify or amend
such contract.
(c) IUMA has delivered to GoodNoise accurate and complete copies of
all written IUMA Material Contracts, including all amendments thereto and any
correspondence regarding any dispute with respect thereto. IUMA has not entered
into any Material oral contracts.
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(d) Except as set forth in Section 3.12(d) of the IUMA Disclosure
Schedule:
(i) IUMA has not violated or breached, or committed any
default under, any IUMA Material Contract, and to the knowledge of IUMA and the
Principal Shareholders, no other person has violated or breached, or committed
any default under, any IUMA 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 IUMA Material Contract, (B) give any person the right to declare default or
exercise any remedy under any IUMA Material Contract, (C) give any person the
right to accelerate the maturity or performance of any IUMA Material Contract;
or (D) give any person the right to cancel, terminate or modify any IUMA
Material Contract;
(iii) There are no unresolved claims between IUMA and any of its
principal licensors, vendors, suppliers, distributors, representatives or
customers and none of such persons has advised IUMA of its intention to cease
doing business with IUMA, or with GoodNoise following the Closing Date, whether
as a result of the transactions contemplated hereunder.
3.13 Compliance With Law. IUMA is in compliance in all material respects
with all applicable laws and regulations. All licenses, franchises, permits and
other governmental authorizations held by IUMA and which are required for its
business are valid and sufficient in all respects for the businesses presently
carried on by IUMA and as set forth in the IUMA Disclosure Schedule.
3.14 Labor Difficulties; No Discrimination.
(a) IUMA 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 IUMA actually
pending or threatened before a labor relations board.
(c) There is and has not been any claim made against IUMA 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) IUMA is not aware of any IUMA employee who intends to terminate
his or her employment with IUMA as a result of the Merger or otherwise.
3.15 Insider Transactions. No Affiliate of IUMA has any interest in (i) any
equipment or other property, real or personal, tangible or intangible,
including, without
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limitation, any IUMA Music Right or Proprietary Asset, used in connection with
or pertaining to the businesses of IUMA, or (ii) any creditor, supplier,
customer, manufacturer, agent, representative, or distributor of products of
IUMA; 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 IUMA 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 IUMA 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 IUMA are in compliance in all respects with
applicable federal, state and local laws. Section 3.16 of the IUMA Disclosure
Schedule lists the names of all persons currently employed by IUMA 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 IUMA Disclosure Schedule contains a
list of the policies of fire, liability and other forms of insurance held by
IUMA. IUMA 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 IUMA
Disclosure Schedule, there is no suit, action or proceeding which has been
served upon or threatened against IUMA (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 IUMA Disclosure Schedule, there is no
judgment, decree, injunction, or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against IUMA.
3.19 Subsidiaries. Except as set forth in Section 3.19 of the IUMA
Disclosure Schedule, IUMA has no subsidiaries. Except as set forth in Section
3.19 of the IUMA Disclosure Schedule, IUMA 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 IUMA 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. IUMA has obtained all
permits, licenses and other authorizations which are required under federal,
state and local laws applicable to IUMA and 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,
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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.
IUMA is in compliance with all terms and conditions of the required permits,
licenses and authorizations. IUMA is not aware of, nor has IUMA 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 IUMA, 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 IUMA Disclosure Schedule,
(a) No Environmental Activity has occurred in the business of IUMA or
on or in relation to any premises currently or formerly used by IUMA which may
cause IUMA 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) IUMA has held its assets, occupied its respective premises,
operated its respective businesses and conducted all other activities in
compliance with all Environmental Laws. IUMA has not received any notice of non-
compliance with Environmental Laws from any person or governmental authority and
IUMA 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 IUMA.
(d) IUMA 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 IUMA Disclosure Schedule lists each
environmental permit and each Environmental Audit conducted with respect to IUMA
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. IUMA 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
IUMA, or any securities of IUMA, and all applications for such permits, orders,
and consents; and (iv) the stock transfer books of IUMA setting forth all
transfers of any capital stock. The corporate minute books, stock certificate
books, stock registers and other corporate records of IUMA are complete 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
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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 IUMA to the IUMA 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 IUMA
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 IUMA nor any shareholder, officer or director of
IUMA 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 IUMA are complete and
correct. No representations or warranties made by IUMA 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.
There is no fact which materially and adversely affects IUMA known to IUMA which
has not been expressly and fully set forth in this Agreement or the schedules
and exhibits hereto.
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 GoodNoise concurrent with the
execution of this Agreement, GoodNoise represents and warrants to IUMA as set
forth below. No fact or circumstance disclosed to IUMA 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.
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
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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 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 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
common stock, of which not more than 16 million shares are issued and
outstanding and (ii) Five Hundred Thousand (500,000) shares of preferred stock,
of which 120,000 have been designated as Series B Preferred Stock, and not more
than 120,000 of which are issued or outstanding. GoodNoise has reserved not more
than 6,000,000 shares of common stock for issuance to employees, directors and
consultants, upon exercise of stock options.
(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 applicable securities
laws. Except for options granted pursuant to the GoodNoise stock option plans,
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.
4.4 Commission Documents; Financial Statements. GoodNoise has made
available to IUMA a true and complete copy of its Registration Statement or Form
10-SB/A and Quarterly Report on Form 10Q-SB for the quarter ended December 31,
1998 as filed with the Commission by GoodNoise; and, prior to the Effective
Time, GoodNoise will have made available to IUMA any additional documents filed
with the Commission by GoodNoise prior to the Effective Time (collectively, the
"GoodNoise Commission Documents"). 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
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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, 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). There has been no change
in GoodNoise accounting policies except as described in the notes to the
GoodNoise Financial Statements.
4.5 Accuracy of Documents and Information. 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 IUMA 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.
4.6 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 PRINCIPAL SHAREHOLDERS.
Each Principal 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 IUMA Shares held of
record by such Principal Shareholder or any portion thereof (except, with
respect to shareholders which are partnerships, partners of such shareholders).
The IUMA Shares held of record by such Principal Shareholder are and will be, at
all times until the Closing, free and clear of any liens, claims, options,
charges or other encumbrances. Such Principal Shareholder's principal place of
residence or place of business is set forth on the signature page hereto.
5.2 Such Principal 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 IUMA Shares held of record by
such Principal Shareholder 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 Principal Shareholder agrees that any shares in the capital
stock of IUMA that Principal Shareholder purchases or with respect to which such
Principal Shareholder
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otherwise acquires 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 IUMA
Shares held of record by such Principal Shareholder as of the date hereof.
5.4 Such Principal Shareholder represents to GoodNoise, that the
GoodNoise Shares which he will receive will be acquired 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 Principal 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 Such Principal 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,
such Principal 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 Principal Shareholder understands that the acquisition of
the GoodNoise Shares involves a highly speculative and risky investment.
6. COVENANTS OF IUMA AND THE PRINCIPAL SHAREHOLDERS
6.1 Advice of Changes. IUMA 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 IUMA 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 IUMA's business, taken as a whole.
6.2 Conduct of Business. Until the Closing and except as provided in
Section 6.2 of the IUMA Disclosure Schedule, IUMA will continue to conduct its
business and maintain its business relationships in the ordinary and usual
course and will not, without the prior written consent of GoodNoise:
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(a) borrow any money which borrowings exceed in the aggregate Five
Thousand Dollars ($5,000);
(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) enter into any lease or contract for the purchase or sale of any
property, real or personal except for inventory 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 $10,000;
(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 $5,000;
(l) enter into any contract;
(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;
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(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) license all or a significant portion of its assets, including, but
not limited to, any license of a significant portion of the company's catalog of
Music Rights;
(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 IUMA, 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 IUMA, 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 IUMA or GoodNoise; or
agree to do any of the things described in the preceding clauses of this
Section.
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 IUMA's
assets shall be borne by IUMA, 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 12.
6.4 Access to Information. Until the Closing and subject to the
confidentiality and nonuse provisions hereof, IUMA 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, IUMA
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, IUMA 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. IUMA shall use
its best efforts to obtain all such authorizations, approvals and consents.
6.6 Satisfaction of Conditions Precedent. IUMA 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
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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 IUMA to issue stock, warrants or options which have been offered
or promised to the employees of IUMA 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, IUMA will submit this Agreement,
the Agreement of Merger and related matters to its shareholders for
consideration and approval, and the Board of Directors of IUMA will recommend
such approval to the IUMA Shareholders. Each of the Principal Shareholders
agrees to vote all shares of IUMA capital stock in respect of which each such
shareholder is entitled to vote at any meeting, in favor of the Merger, and 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 IUMA
in writing of 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.
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 IUMA 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.
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
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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 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.
8.2 Exclusivity. Until the earlier of the Closing Date or the termination
of this Agreement, IUMA 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 IUMA, 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. IUMA 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.
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8.3 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 filed with the office of the Secretary
of State of the States of California and Delaware and the merger of Sub with and
into IUMA 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) IUMA shall execute and deliver to GoodNoise a statement
meeting the requirements of Treasury Regulation Section 1.897-2(h)(2) stating
that interests in IUMA are not United States real property interests.
10. CONDITIONS TO IUMA'S OBLIGATIONS.
IUMA'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 IUMA, but only in a writing signed by
IUMA):
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 IUMA's obligations set forth under Sections 10.1,
10.2, 10.3 and 10.4 shall have been satisfied. IUMA 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 Sections 7 and 8 to be performed on or
before the Closing, and GoodNoise shall deliver to IUMA 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, and IUMA shall receive a certificate to such
effect signed by an executive officer of GoodNoise.
10.4 Authorizations. IUMA 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
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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.
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 IUMA contained in Section 3 and the Principal 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 IUMA.
11.2 Covenants. IUMA and the Principal 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 IUMA 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 IUMA subsequent to the Closing.
11.4 Authorizations. GoodNoise shall have received from IUMA 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) IUMA Shareholders holding not less than 98% of
the outstanding IUMA voting securities have approved this Agreement, the Merger
and the transactions contemplated hereby and thereby and the actions taken by
the Board of Directors of IUMA to facilitate the foregoing.
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 IUMA subsequent to the Closing. IUMA 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 IUMA
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
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event which, in the reasonable judgment of GoodNoise, has a material and adverse
effect on IUMA'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 IUMA.
11.7 Opinion of Iuma's Counsel. GoodNoise shall have received from
counsel to IUMA an opinion in form and substance customary for acquisition
transactions and reasonably satisfactory to GoodNoise or GoodNoise shall
otherwise be sufficiently satisfied with its review of the IUMA Disclosure
Schedule and IUMA books and records such that GoodNoise is prepared to waive
such requirement.
11.8 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.
11.9 Employment Offers and Other Agreements. Each of the Principal
Shareholders shall have entered into non-compete agreements with GoodNoise in
substantially the same form as attached hereto as Exhibit B; all employees and
---------
consultants of IUMA as of the Closing shall have accepted employment (or
consultant positions, as appropriate) with GoodNoise or IUMA on terms
satisfactory to GoodNoise; such employees and consultants shall have entered
into employment letters on terms and conditions satisfactory to GoodNoise and
confidentiality and inventions agreements in GoodNoise's standard form.
11.10 Promissory Notes. GoodNoise shall be satisfied with the amounts
payable by IUMA under promissory notes and other existing obligations, including
but not limited to, obligations to existing and former employees and such
arrangements have been documented to GoodNoise's reasonable satisfaction.
12. TERMINATION OF AGREEMENT.
12.1 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.
12.2 Failure To Fulfill Conditions. Either GoodNoise or IUMA may
terminate this Agreement if the Merger has not been consummated within sixty
(60) days after 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 effected by the
delivery of notice of the terminating party to the other parties hereto.
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12.3 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.
12.4 Effect Of Termination. The termination of the Agreement pursuant
to this Section shall terminate all sections hereof other than Section 8.1.
13. INDEMNIFICATION.
13.1 Survival of Representations.
(a) The representations and warranties made by IUMA and the
Principal Shareholders under Sections 3 and 5 hereof and the representations and
warranties set forth in any certificate delivered by IUMA 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 IUMA, 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 IUMA Disclosure Schedule shall be deemed to be a
representation and warranty made by IUMA in this Agreement.
13.2 Indemnification by IUMA Shareholders.
(a) From and after the Closing Date, the IUMA 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 IUMA in connection with this
Agreement; (ii) any breach of any covenant or obligation of IUMA or the IUMA
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).
(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
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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.
(c) Notwithstanding anything to the contrary set forth herein, (i)
except for any claims regarding fraud or intentional misrepresentation or any
claims identified in item (a) of Exhibit C hereof, the liability of the IUMA
---------
Shareholders pursuant to this Section shall be limited to claims against the
Indemnity Escrow and (ii) the IUMA Shareholders shall be subject to liability
pursuant to the terms hereof for any of the claims identified in Exhibit C
---------
hereof notwithstanding anything set forth in the IUMA Disclosure Schedule.
13.3 No Contribution. The IUMA Shareholders 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 IUMA in connection with this Agreement.
13.4 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 IUMA 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 the Shareholder Representative
shall not limit any of the obligations of the IUMA Shareholders 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 IUMA
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. If
the Indemnitee so proceeds with the defense of any such claim or Legal
Proceeding:
(i) all reasonable 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 IUMA Shareholders;
(ii) the IUMA Shareholders shall make available to the Indemnitee
any non-privileged documents and materials in the possession or control of the
IUMA Shareholders that may be necessary to the defense of such claim or Legal
Proceeding except for documents or
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materials which are sealed by a court order or are subject to a nondisclosure
agreement prohibiting disclosure by the IUMA Shareholders;
(iii) the Indemnitee shall keep the IUMA Shareholders informed
of all material developments and events relating to such claim or Legal
Proceeding; and
(iv) the IUMA Shareholders shall have the right to participate
in the defense of such claim or legal proceeding at their sole cost and expense;
and
(v) the Indemnitee shall have the right to settle, adjust or
compromise such claim or Legal Proceeding with the written consent of the IUMA
Shareholders; provided, however, that the IUMA Shareholders shall not
unreasonably withhold such consent.
13.5 Indemnity Escrow. As soon as practicable after the Effective
Time, GoodNoise shall deposit into an escrow account (the "Indemnity Escrow")
with Gray Cary Ware & Freidenrich LLP, or such other Person as the parties may
agree, 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 IUMA 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 F. The Indemnity Escrow 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.
13.6 Shareholder Representative.
(a) By virtue of their approval of this Agreement, the IUMA
Shareholders will be deemed to have irrevocably constituted and appointed,
effective as of the Effective Time, Antony Brydon (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 IUMA 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
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constituting gross negligence, and any act done or omitted pursuant to the
advice of counsel shall be conclusive evidence of such good faith. The IUMA
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.
14. MISCELLANEOUS.
14.1 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.
14.2 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.
14.3 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.
14.4 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.
14.5 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.
14.6 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, except for up to $20,000 in attorneys
fees which may be paid by IUMA, all legal and accounting fees incurred by IUMA
and the IUMA Shareholders in connection with the Merger shall be deemed to be
expenses of the IUMA Shareholders, shall be borne by the IUMA Shareholders and
shall not
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become obligations of IUMA, GoodNoise or the Surviving Corporation.
The IUMA Shareholders shall make arrangements satisfactory to GoodNoise at or
prior to the Closing for the satisfaction of such amounts.
14.7 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.
14.8 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.
14.9 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.
14.10 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.
14.11 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.
14.12 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:
IUMA: IUMA
303 Potrero, Suite 7a
Santa Cruz, CA 95060
Facsimile: (831) 426-5918
34
<PAGE>
With copy to: Neal Williams
Wise & Shepard LLP
3030 Hansen Way, Ste. 100
Palo Alto, CA 94304
Facsimile: (650) 856-1344
GoodNoise or Sub: GoodNoise Corporation
1991 Broadway, 2nd Floor
Redwood City, CA 94063
Attention: Gene Hoffman, Jr.
Facsimile: (650) 556-9712
With copy to: Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301
Facsimile: (650) 327-3699
Attention: Peter M. Astiz, Esq.
14.13 Time. Time is of the essence of this Agreement.
14.14 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.
14.15 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.
14.16 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.
14.17 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.
14.18 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
35
<PAGE>
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.
14.19 Liability of the Principal Shareholders. Notwithstanding anything to
the contrary set forth herein, the liability of the Principal Shareholders for
breaches of the representations and warranties of IUMA as set forth herein shall
not exceed such Principal Shareholders' proportional share of the maximum amount
of the liability of the IUMA shareholders as set forth in Section 13.2(c)
hereof.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
36
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
GOODNOISE CORPORATION INTERNET UNDERGROUND MUSIC
ARCHIVE, INC.
By: /s/ Joseph H. Howell
-------------------------------------- By: /s/ Anthony Brydon
---------------------------
GNA CORPORATION SHAREHOLDERS:
By: /s/ Joseph H. Howell /s/ Anthony Brydon
-------------------------------------- -------------------------------
Antony Brydon
/s/ Andy Atherton
-------------------------------
Andy Atherton
[SIGNATURE PAGE FOR AGREEMENT AND PLAN OF REORGANIZATION]
37
<PAGE>
EXHIBIT A
---------
AGREEMENT OF MERGER
This Agreement of Merger (the "Merger Agreement") is entered into this
______ day of June, 1999, by and among GoodNoise Corporation, a Florida
corporation ("GoodNoise"), GNA Corporation, a Delaware corporation and wholly-
owned subsidiary of GoodNoise ("Sub") and Internet Underground Music Archive,
Inc., a California corporation ("IUMA"). Unless otherwise defined herein, all
capitalized terms have the same meaning as in the Agreement and Plan of
Reorganization dated as of May 16, 1999 (the "Plan of Reorganization").
RECITALS
--------
A. The Board of Directors of GoodNoise, Sub and IUMA have each determined
that it is advisable and in the best interests of their respective shareholders
for Sub to merge with and into IUMA, with IUMA continuing as the surviving
corporation (the "Merger").
B. The Board of Directors of GoodNoise, Sub and IUMA have approved the
Merger whereby the holders of capital stock of IUMA shall be entitled to receive
GoodNoise Common Stock and the holders of options to purchase IUMA Common Stock
shall receive options to purchase GoodNoise Common Stock.
C. GoodNoise, Sub and IUMA intend for the Merger to qualify as a tax-free
reorganization undertaken pursuant to a plan of reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and
the regulations promulgated thereunder.
D. GoodNoise, Sub, IUMA and certain shareholders of IUMA have entered
into the Plan of Reorganization, setting forth certain representations,
warranties and agreements in connection with the Merger and the transactions
contemplated hereby.
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. THE MERGER.
----------
Subject to the terms and conditions of the Plan of Reorganization, Sub
shall be merged with and into IUMA in accordance with the applicable provisions
of the California General Corporation Law (the "CGCL"), the Delaware General
Corporation Law (the "DGCL") and with the terms and conditions of this Merger
Agreement so that:
1.1 At the Effective Time (as defined in Section 4 below), Sub shall be
merged with and into IUMA. As a result of the Merger, the separate corporate
existence of Sub shall cease and IUMA shall continue as the surviving
corporation (sometimes referred to herein as the
1
<PAGE>
"Surviving Corporation") and shall succeed to and assume all of the rights and
obligations of Sub in accordance with the GCGL and the DGCL.
1.2 The Articles of Incorporation of the Surviving Corporation shall be
amended and restated to read in their entirety as set forth on Exhibit A hereto,
---------
and such Articles of Incorporation as amended and restated shall be the Articles
of Incorporation of the Surviving Corporation until thereafter amended in
accordance with the CGCL, and such Articles of Incorporation. The Bylaws of
IUMA in effect immediately prior to the Effective Time shall be the bylaws of
Surviving Corporation after the Effective Time unless and until further amended
as provided by law or by such Bylaws.
1.3 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 positions 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. EFFECT ON CAPITAL STOCK.
-----------------------
2.1 At the Effective Time, each IUMA Share (other than shares owned
directly or indirectly by IUMA) 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 that number of GoodNoise Shares as is equal to 448,000
divided by the number of IUMA Shares outstanding at the Effective Time (on a
fully diluted basis giving effect to any options, warrants or other rights to
acquire IUMA Shares issued and outstanding at the Effective Date).
2.2 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 IUMA common stock outstanding after the
Merger.
2.3 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 CGCL. IUMA agrees that, except with the prior written consent
of GoodNoise, or as required under the CGCL, 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 CGCL, becomes entitled to payment for IUMA 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 IUMA Shares, the number of shares of
GoodNoise Common Stock to which such shareholder would otherwise be entitled
under this Section 2 less the number of shares of GoodNoise Common Stock
allocable to such shareholder that have been deposited in the Indemnity Escrow.
2
<PAGE>
3. FRACTIONAL SHARES.
-----------------
No fraction of a share of GoodNoise Common Stock shall be issued, but
in lieu thereof each holder of IUMA 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.
4. THE CLOSING; EFFECTIVE TIME.
---------------------------
4.1 Subject to termination of the Plan of Reorganization as provided in
Section 12 thereof, 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 in the Plan of
Reorganization, or such other place, time and date as GoodNoise and IUMA may
mutually select (the "Closing Date").
4.2 Simultaneously with the Closing, the Merger Agreement 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
Merger Agreement with such offices (the "Effective Time").
5. MISCELLANEOUS.
-------------
5.1 It is the intention of the parties hereto that the internal laws of
the State of California (without regard to of its choice of law principles)
shall govern the validity of this Merger Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties hereto.
5.2 Subject to, and unless otherwise provided in, this Merger 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.
5.3 This Merger 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 Merger 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.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Merger Agreement
as of the date first written above.
"GOODNOISE" "IUMA"
GoodNoise Corporation Internet Underground Music Archive, Inc.
By: ________________________ By: ______________________________________
President President
By: ________________________ By: ______________________________________
Secretary Secretary
"SUB"
GNA Corporation
By: ________________________
President
By: ________________________
Secretary
4
<PAGE>
EXHIBIT A
---------
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
INTERNET UNDERGROUND MUSIC ARCHIVE, INC.
ARTICLE I
NAME
----
The name of the corporation is IUMA, Inc.
ARTICLE II
PURPOSES
--------
The purpose of the corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
STOCK
-----
The corporation is authorized to issue one class of shares designated
"Common Stock." The number of shares of Common Stock authorized to be issued is
one thousand (1,000).
5
<PAGE>
ARTICLE IV
DIRECTORS' LIABILITY AND INDEMNIFICATION OF AGENTS
--------------------------------------------------
The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to the applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the corporation and its shareholders.
Any amendment, repeal or modification of any provision of this Article IV
shall not adversely affect any right or protection of a director or officer of
the corporation existing at the time of such amendment, repeal or modification.
-6-
<PAGE>
EXHIBIT B
---------
NON-COMPETE AGREEMENT
This Agreement is dated as of May ___, 1999 by and between GoodNoise
Corporation ("Parent"), a Florida corporation with principal place of business
at 1991 Broadway, 2nd Floor Redwood City, CA 94063 and ___________ , an
individual residing at ___________________, California _______ (the
"Shareholder").
Recitals
--------
A. Shareholder holds a substantial number of shares of the outstanding
capital stock of Internet Underground Music Archive, Inc., a California
corporation ("IUMA").
B. Parent, IUMA and GNA Corporation, a Delaware corporation and a wholly-
owned subsidiary of Parent ("Sub"), have entered into an Agreement and Plan of
Reorganization dated as of May __, 1999 (the "Merger Agreement") pursuant to
which inter alia, the shareholders of IUMA will receive shares of capital stock
----------
of Parent in exchange for their shares of capital stock of IUMA.
C. As an inducement to Parent to enter into the Merger Agreement, and to
consummate the transactions contemplated by the Merger Agreement and in order to
preserve the value of the business and goodwill of IUMA, Shareholder has agreed
to enter into this Agreement.
NOW THEREFORE, in consideration of the foregoing premises and the mutual
promises, terms, provisions and conditions set forth in this Agreement, the
parties hereby agree:
1. Definitions. Terms Defined In The Merger Agreement And Not Otherwise
-----------
Defined Herein Are Used Herein As So Defined.
2. COVENANT NOT TO COMPETE.
-----------------------
2.1 Non-Compete. Shareholder covenants and agrees that for eighteen
-----------
months following the Effective Date or expiring on such earlier date if
Shareholder's employment is terminated by Parent without cause, Shareholder
shall not, directly or indirectly, as principal, partner, agent, servant,
employee, shareholder, or otherwise, anywhere in the world, engage or attempt to
engage in any business activity competitive with the business conducted or being
planned to be conducted as of the Effective Time by IUMA. The foregoing shall
not prohibit Shareholder or his spouse or children from owning beneficially (i)
any security, so long as the beneficial ownership by them, when combined with
the beneficial ownership of such security of any group (as the term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of which
any of them is a member constitutes (x) less than, in the case of publicly
traded securities, One Percent (1%) of the class of such security, or (ii) any
shares in an "investment company" (as defined in the Investment Company Act of
1940, as amended).
7
<PAGE>
2.2 Non-Solicit. Shareholder agrees that for a period of two (2) years
-----------
following the Effective Date, Shareholder shall not: (i) solicit, encourage, or
take any other action which is intended to induce any employee of the Parent or
IUMA to terminate his or her employment with the Parent or IUMA, as the case may
be; or (ii) knowingly and intentionally interfere in any manner with the
contractual or employment relationship between the Parent or IUMA and any
employee, supplier or customer of the Parent or IUMA.
2.3 Reasonableness of Restrictions. Shareholder recognizes that the
------------------------------
consideration to be paid and all other obligations of Parent to be performed
pursuant to the Merger Agreement are intended to secure Shareholder's agreement
to the conditions of this Agreement, and Shareholder recognizes that the scope
of the restrictions and the foregoing territorial and time limitations are
reasonable and properly required for the adequate protection of the business of
Parent and its subsidiary and affiliates, including, following the Effective
Time, IUMA, and that in the event the foregoing restrictions are deemed to be
unreasonable for any reason by any tribunal having jurisdiction, Shareholder
agrees to request, and to submit to, a narrowing of the scope of the foregoing
restrictions or the reduction of either said territorial or time limitation to
such an area or period as shall be deemed reasonable by such tribunal.
2.4 Severability of Claims. The existence of any claim or cause of action
----------------------
by Shareholder against Parent, if any, whether predicated upon this Agreement or
otherwise, shall not constitute a defense to the enforcement by Parent of the
foregoing restrictive covenants but shall be resolved by separate proceeding.
3. Injunctive And Other Relief. Shareholder Agrees That A Remedy At Law For
---------------------------
Any Breach Of The Provisions Of Section 2 Hereof May Be Inadequate And That
Parent Shall Be Entitled To Injunctive Relief, In Addition To Any Other Remedy
It Might Have In The Event Of Breach Or Threatened Breach Of The Provisions Of
Section 2 Of This Agreement.
4. Assignment. Neither Parent Nor Shareholder May Make Any Assignment Of This
----------
Agreement Or Any Interest Herein, By Operation Of Law Or Otherwise, Without The
Prior Written Consent Of The Other; Provided, However, That Parent May Assign
Its Rights And Obligations Under This Agreement Without The Consent Of
Shareholder In The Event That Parent Transfers All Or Substantially All Of Its
Properties Or Assets To Any Other Person. This Agreement Shall Inure To The
Benefit Of And Be Binding Upon Parent And Shareholder, Their Respective
Successors, Executors, Administrators, Heirs And Permitted Assigns.
5. Severability. If Any Term Or Provision Of This Agreement Shall Become Or
------------
Be Declared Illegal, Invalid Or Unenforceable, Such Term Or Provision Shall Be
Divisible From This Agreement And Shall Be Deemed To Be Deleted From This
Agreement, Provided That If Such Deletion Substantially Affects Or Alters The
Commercial Basis Of This Agreement The Parties Shall Negotiate In Good Faith To
Amend And Modify The Terms And Provisions Of This Agreement To Give Effect To
The Original Intent Of The Parties.
6. Waiver. No Waiver Of Any Provision Hereof Shall Be Effective Unless Made
------
In Writing And Signed By The Waiving Party. The Failure Of Either Party To
Require The Performance Of Any Term Or Obligation Of This Agreement, Or The
Waiver By Either Party Of Any Breach Of
-8-
<PAGE>
This Agreement, Shall Not Prevent Any Subsequent Enforcement Of Such Term Or
Obligation Or Be Deemed A Waiver Of Any Subsequent Breach.
7. Notices. Any And All Notices, Requests, Demands And Other Communications
-------
Provided For By This Agreement Shall Be In Writing And Shall Be Effective When
Delivered In Person To Shareholder At Shareholder's Last Known Address On The
Books Of Parent Or, In The Case Of Parent, At Its Principal Place Of Business,
Attention To President, Or To Such Other Address As Either Party May Specify By
Notice To The Other.
8. Miscellaneous. This Agreement Constitutes The Entire Agreement Between The
-------------
Parties And Supersedes All Prior Communications, Agreements And Understandings,
Written Or Oral, With Respect To The Subject Matter Hereof. This Agreement May
Be Amended Or Modified Only By A Written Instrument Signed By Shareholder And By
An Expressly Authorized Representative Of Parent. The Headings And Captions In
This Agreement Are For Convenience Only And In No Way Define Or Describe The
Scope Or Content Of Any Provision Of This Agreement. This Agreement May Be
Executed In Two Or More Counterparts, Each Of Which Shall Be An Original And All
Of Which Together Shall Constitute One And The Same Instrument. This Agreement
Shall Be Construed And Enforced Under And Be Governed In All Respects By The
Laws Of The State Of California, Without Regard To The Conflict Of Laws
Principles Thereof.
9. Termination. If, Prior To The Effective Time, The Merger Agreement Shall
-----------
Be Terminated Or If, After The Effective Time, The Shareholder Shall Be
Terminated Without Cause (As Defined In The Employment Agreement Attached As
Exhibit B To The Merger Agreement), This Agreement Shall Automatically Terminate
And Be Without Further Force Or Effect.
IN WITNESS, WHEREOF, this Agreement has been executed by Parent, by its
duly authorized representative, and by Shareholder, as of the date first above
written.
GOODNOISE CORPORATION
_________________________________ By:__________________________
Shareholder Signature
_________________________________ Title:_______________________
Print Name
-9-
<PAGE>
EXHIBIT C
---------
Indemnification Matters
Notwithstanding anything to the contrary set forth herein, the IUMA Shareholders
shall remain liable for any claims relating to:
(a) any shares of outstanding capital stock or rights to acquire capital
stock in excess of the number specified by IUMA in writing as outstanding as of
immediately prior to the Effective Time;
(b) any claim by Scott Parris;
(c) any claim that the aggregate liabilities of IUMA under any form of
indebtedness or for employee, consultant or other compensation for services
rendered prior to the Effective Date exceeds $1.2 million.
<PAGE>
EXHIBIT D
---------
INDEMNITY ESCROW AGREEMENT
This Indemnity Escrow Agreement (this "Agreement") is entered into as of
June 11, 1999, by and among GoodNoise Corporation, a Florida corporation
("GoodNoise"), __________________ (the "Indemnity Escrow Agent") and __________
(the "Shareholder Representative").
RECITALS
A. GoodNoise, GNA Corporation, a Delaware corporation and wholly-owned
subsidiary of GoodNoise ("Sub"), and Internet Underground Music Archive, Inc., a
California corporation ("IUMA") have entered into an Agreement and Plan of
Reorganization dated as of May 16, 1999 (the "Reorganization Agreement")
pursuant to which Sub will merge with and into IUMA (the "Merger"), with IUMA
surviving the Merger. Capitalized terms used in this Agreement and not
otherwise defined in this Agreement shall have the meanings ascribed to them in
the Reorganization Agreement.
B. Section 13.5 of the Reorganization Agreement provides that as soon as
practicable after the Effective Time, GoodNoise shall deposit into an escrow
account (the "Indemnity Escrow") with the Indemnity Escrow Agent, twenty percent
(20%) of the GoodNoise Shares (the "Indemnity Escrow Holdback"). The number of
shares of GoodNoise Common Stock to be contributed to the Indemnity Escrow shall
be determined according to the exchange procedures set forth in Section 2 of the
Reorganization Agreement at the Closing. The Indemnity Escrow Holdback shall be
withheld on a pro rata basis from the IUMA Shareholders who otherwise would have
been entitled to receive such consideration under the Reorganization Agreement
at the Effective Time and shall be governed by the terms set forth herein and in
the Reorganization Agreement. The Indemnity Escrow shall be available, subject
to the limitations set forth below, to compensate GoodNoise for any loss, to the
extent of the amount of Damages that GoodNoise has incurred by reason of the
breach by IUMA or the Principal Shareholders of any representation, warranty,
covenant or agreement of IUMA contained in the Reorganization Agreement, or by
reason of any misrepresentation by IUMA or the Principal Shareholders made in or
pursuant to Section 3 and 5 of the Reorganization Agreement or in any
certificate delivered by IUMA or the Principal Shareholders pursuant to the
Reorganization Agreement.
C. The parties to this Agreement desire to establish the terms and
conditions pursuant to which the Indemnity Escrow Holdback will be deposited
into, held in, and disbursed from, the Indemnity Escrow.
<PAGE>
AGREEMENT
NOW, THEREFORE, the parties to this Agreement agree as follows:
1. Escrow And Indemnification.
(a) Identification of Indemnity Escrow Agent. GoodNoise and IUMA
----------------------------------------
collectively choose the Indemnity Escrow Agent, and the Indemnity Escrow Agent
accepts said appointment to act in accordance with the terms specified herein.
(b) Indemnity Escrow. The Indemnity Escrow Agent agrees to accept
----------------
delivery of the Indemnity Escrow Holdback and to hold such Indemnity Escrow
Holdback delivered to it in escrow subject to the terms and conditions of this
Agreement and Section 13 of the Reorganization Agreement (collectively, the
"Escrow Provisions") until the Indemnity Escrow Agent is required to release
such Indemnity Escrow Holdback pursuant to the terms of this Agreement. The
Indemnity Escrow Agent shall have no responsibility for the calculation or
sufficiency of the Indemnity Escrow Holdback.
(c) Indemnification. The IUMA Shareholders by their appointment of
---------------
the Shareholder Representative have agreed in Section 13 of the Reorganization
Agreement to indemnify and hold harmless each of the Indemnitees (as defined
therein) 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 subject to the limitations and other terms
set forth in the Reorganization Agreement. Promptly after the receipt by
GoodNoise of notice or discovery of any claim, damage or legal action or
proceeding giving rise to indemnification rights under the Reorganization
Agreement, GoodNoise will give the Shareholder Representative and the Indemnity
Escrow Agent written notice of such claim, damage, legal action or proceeding (a
"Claim") in accordance with Section 3 hereof. GoodNoise shall notify the
Shareholder Representative of the progress of any such Claim and shall permit
the Shareholder Representative to participate in such defense in accordance with
Section 13.4 of the Reorganization Agreement, and GoodNoise shall not compromise
or settle any such Claim without the written consent of the Shareholder
Representative, which consent will not be unreasonably withheld.
(d) Stock Valuation. For the purposes of valuing the GoodNoise Shares
---------------
for the purposes of satisfying any Claim, such shares shall be valued at the
closing price of GoodNoise Common Stock on the Effective Date.
2. Deposit Of Indemnity Escrow Holdback; Release From Escrow.
---------------------------------------------------------
(a) Delivery of Indemnity Escrow Holdback. Promptly following the
-------------------------------------
Closing Date GoodNoise will deliver the Indemnity Escrow Holdback to the
Indemnity Escrow Agent.
(b) Final Distribution to IUMA Shareholders. Within ten (10) business
---------------------------------------
days after the date the Indemnification Period ends (the "Release Date"), the
Indemnity Escrow Agent shall release from escrow to the IUMA Shareholders their
respective portions of the Indemnity
-12-
<PAGE>
Escrow Holdback less (A) any liability delivered to GoodNoise in accordance with
Section 4 hereof in satisfaction of Claims by GoodNoise and (B) any liability
subject to delivery to GoodNoise in accordance with Section 4 hereof with
respect to any pending but unresolved Claims of GoodNoise. Any Indemnity Escrow
Holdback held as a result of clause (B) shall be released to the IUMA
Shareholders or GoodNoise (as appropriate) promptly upon resolution of each
specific Claim in accordance with Section 4 hereof. GoodNoise or the Shareholder
Representative shall give the Indemnity Escrow Agent at least seven business
days advance notice of the occurrence of the Release Date.
(c) Release of Indemnity Escrow Holdback. The Indemnity Escrow
------------------------------------
Holdback will be held by the Indemnity Escrow Agent until required to be
released pursuant to Sections 2(b) and 2(c). The Indemnity Escrow Agent will
deliver to each IUMA Shareholder the requisite portion of the Indemnity Escrow
Holdback to be released as identified by GoodNoise and the Shareholder
Representative to the Indemnity Escrow Agent in writing in accordance with such
IUMA Shareholder's instructions delivered to the Indemnity Escrow Agent at least
five (5) business days prior to such Release Date. GoodNoise and the
Shareholder Representative shall deliver a notice to the Indemnity Escrow Agent
identifying the portion of the Indemnity Escrow Holdback to be released and the
manner in which it is to be released within such five business day period.
3. Notice Of Claim.
---------------
(a) Each notice of a Claim by GoodNoise (the "Notice of Claim") shall
be delivered in writing to the Shareholder Representative and the Indemnity
Escrow Agent, and shall contain the following information to the extent it is
reasonably available to GoodNoise:
(i) GoodNoise's good faith estimate of the reasonably
foreseeable maximum amount of the alleged Damages; and
(ii) A brief description in reasonable detail of the facts,
circumstances or events giving rise to the alleged Damages based on GoodNoise's
good faith belief thereof.
(b) Upon resolution of a claim for which a Notice of Claim has been
previously submitted, GoodNoise shall submit an Invoice of Claim (the "Invoice
of Claim") setting forth the amount of the Damages actually incurred.
(c) The Indemnity Escrow Agent will not release more than the amount
of the Indemnity Escrow Holdback identified as being needed to satisfy a claim
pursuant to a Notice of Claim until such Notice of Claim has been resolved in
accordance with Section 4 below and an Invoice of Claim has been received with
respect to such Notice of Claim.
-13-
<PAGE>
4. Resolution Of Notice Of Claim And Transfer Of Indemnity Escrow Holdback.
-----------------------------------------------------------------------
Any notice of claim and invoice of claim received by the shareholder
representative and the indemnity escrow agent pursuant to section 3 above will
be resolved as follows:
(a) Uncontested Claims. In the event that the Shareholder
------------------
Representative does not contest a Notice of Claim (or contests only a portion of
the claim), in writing to the Indemnity Escrow Agent and GoodNoise within 30
days after such notice is deemed delivered pursuant to Section 11 below, the
Indemnity Escrow Agent shall promptly segregate an amount of shares necessary to
satisfy the amount specified in the Notice of Claim (that is not contested), and
said amount shall remain so held until such time as the Indemnity Escrow Agent
receives notice that no liability will result on the claim, in which case the
segregated amount will be added back to the nonsegregated balance, or an Invoice
of Claim. Upon receiving an Invoice of Claim, the Shareholder Representative
may contest the Invoice of Claim (or contest only a portion of the claim), by
delivering a writing to the Indemnity Escrow Agent and GoodNoise within 30 days
of the date such notice is deemed delivered pursuant to Section 11 below. In
the event the Shareholder Representative does not contest the Invoice of Claim
(or contests only a portion of the claim) the Indemnity Escrow Agent will
promptly deliver to GoodNoise, that portion of Indemnity Escrow Holdback equal
to the amount specified in the Invoice of Claim (that is not contested) and
notify the Shareholder Representative and GoodNoise, as applicable, of such
transfer.
(b) Contested Claims. In the event that the Shareholder
----------------
Representative gives written notice contesting all, or a portion of, a Notice of
Claim or Invoice of Claim (collectively referred to in this Section 4(b) as a
"Notice of Claim") to GoodNoise and the Indemnity Escrow Agent (a "Contested
Claim") within the 30-day period provided above, the matter will be settled by
binding arbitration. Any portion of the Notice of Claim which is not contested
shall be disbursed in accordance with Section 4(a). The final decision of the
arbitrator shall be furnished to the Indemnity Escrow Agent, the Shareholder
Representative and GoodNoise in writing and will constitute a conclusive
determination of the issue in question, binding upon the IUMA Shareholders, the
Shareholder Representative and GoodNoise and shall not be contested or appealed
by any of them. After notice that the Notice of Claim is contested by the
Shareholder Representative, the Indemnity Escrow Agent will continue to hold in
the Indemnity Escrow a portion of the Indemnity Escrow Holdback equal to the
contested amount to cover such Claim (notwithstanding the expiration of the
Release Date) until the earlier of receipt by it of (i) execution of a
settlement agreement by GoodNoise and the Shareholder Representative setting
forth a resolution of the Notice of Claim, or (ii) a copy of the final award of
the arbitrator.
(c) Arbitration. Any Contested Claim shall be settled by (i)
-----------
agreement of the Shareholder Representative and GoodNoise or (ii) arbitration in
Santa Clara, California and, except as herein specifically stated, in accordance
with the commercial arbitration rules of the American Arbitration Association
("AAA Rules") then in effect. However, in all events, these arbitration
provisions shall govern over any conflicting rules which may now or hereafter be
contained in the AAA Rules. Any judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction over the subject
matter thereof. The arbitrator shall have
-14-
<PAGE>
the authority to grant any equitable and legal remedies that would be available
in any judicial proceeding instituted to resolve a Contested Claim.
(i) Compensation of Arbitrator. Any such arbitration shall be
--------------------------
conducted before a single arbitrator who shall be compensated for his or her
services at a rate to be determined by the parties or by the American
Arbitration Association, but based upon reasonable hourly or daily consulting
rates for the arbitrator in the event the parties are not able to agree upon his
or her rate of compensation.
(ii) Selection of Arbitrator. The AAA Rules for the selection of
-----------------------
the arbitrator shall be followed by GoodNoise and the Shareholder
Representative.
(iii) Payment of Costs. GoodNoise and the IUMA Shareholders as a
----------------
group shall each pay fifty percent (50%) of the initial compensation to be paid
to the arbitrator in any such arbitration and fifty percent (50%) of the costs
of transcripts and other normal and regular expenses of the arbitration
proceedings; provided, however, that the prevailing party in any arbitration
shall be entitled to an award of attorneys' fees and costs, and all costs of
arbitration, other than those provided for above, will be paid by the losing
party.
(iv) Discovery. The parties shall be entitled to conduct
---------
discovery proceedings in accordance with the provisions of the Federal Rules of
Civil Procedure, only to the extent the arbitrator considers necessary to a full
and fair exploration of the issues in dispute.
(v) Burden of Proof. For any claim submitted to arbitration, the
---------------
burden of proof shall be as it would be if the claim were litigated in a
judicial proceedings.
(vi) Judgment. Upon the conclusion of any arbitration proceedings
--------
hereunder, the arbitrator shall render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached by him and shall deliver such documents to each party to this Agreement
along with a signed copy of the award.
(vii) Terms of Arbitration. The arbitrator chosen in accordance
--------------------
with these provisions shall not have the power to alter, amend or otherwise
affect the terms of these arbitration provisions or the provisions of this
Agreement or the Reorganization Agreement.
(viii) Exclusive Remedy. Except as specifically provided in this
----------------
Agreement or the Reorganization Agreement, arbitration shall be the sole and
exclusive remedy of the parties for any Contested Claim arising out of such
agreement.
(d) Determination of Amount of Claims. Any amount owed to GoodNoise
---------------------------------
hereunder determined pursuant to Section 4(a) or (b) above, will be payable to
GoodNoise from the Indemnity Escrow Holdback in accordance with Section 13 of
the Reorganization Agreement and will be paid promptly.
(e) No Exhaustion of Remedies. GoodNoise shall institute Claims against
-------------------------
the Indemnity Escrow Holdback and in satisfaction thereof shall recover
Indemnity Escrow
-15-
<PAGE>
Holdback in accordance with the terms of this Agreement. The assertion of
any single Claim for indemnification hereunder will not bar GoodNoise from
asserting other claims hereunder. Notwithstanding the foregoing, if GoodNoise
elects to make a Claim against the Indemnity Escrow for an action against a
third party, then the Shareholder Representative, on behalf of the IUMA
Shareholders, shall be subrogated to the rights of GoodNoise with respect to
such a Claim, and GoodNoise shall assign all of its rights in connection with
such Claim necessary for the Shareholder Representative to assert such claim
against such third party.
(f) Payment of Costs. The Indemnity Escrow Agent is authorized and
----------------
directed to disburse pro rata any payments due the IUMA Shareholders under this
Agreement out of the Indemnity Escrow in accordance with their interest and as
identified by GoodNoise and the Shareholder Representative, after (i) payment of
any attorney's and accountants' and other fees and expenses incurred on behalf
of the IUMA Shareholders as contemplated by this Agreement and (ii) withholding
such amounts to pay costs and expenses relating to potential disputes arising
with respect to indemnification or other obligations of other IUMA Shareholders
under the Escrow Provisions.
5. Limitation Of The Indemnity Escrow Agent's Liability.
----------------------------------------------------
(a) The parties acknowledge and agree that the Escrow Agent shall not
be responsible for any of the agreements referred to herein or in the
Reorganization Agreement but shall only be obligated for the performance of such
duties as are specifically set forth herein. The Indemnity Escrow Agent will
incur no liability with respect to any action taken or suffered by it in
reliance upon any notice, direction, instruction, consent, statement or other
document believed by it to be genuine and to have been signed by the proper
person (and shall have no responsibility to determine the authenticity or
accuracy thereof), nor for any other action or inaction, except its own willful
misconduct, bad faith or gross negligence. In no event shall the Indemnity
Escrow Agent be liable for indirect consequential damages. The Indemnity Escrow
Agent will not be responsible for the validity or sufficiency of the Escrow
Provisions, including the amount of Indemnity Escrow Holdback. In all questions
arising under the Escrow Provisions, the Indemnity Escrow Agent may rely on the
advice of counsel, and for anything done, omitted or suffered in good faith by
the Indemnity Escrow Agent based on such advice, the Indemnity Escrow Agent will
not be liable to anyone. The Indemnity Escrow Agent will not be required to
take any action under the Escrow Provisions involving any expense unless the
payment of such expense is made or provided for in a manner satisfactory to it.
(b) In the event conflicting demands are made or notices are served
upon the Indemnity Escrow Agent with respect to the Indemnity Escrow or should a
third party make a claim on such Escrow, the Indemnity Escrow Agent will have
the absolute right, at the Indemnity Escrow Agent's election, to do any of the
following: (i) resign so a successor can be appointed pursuant to Section 7,
(ii) file a suit in interpleader and obtain an order from a court of competent
jurisdiction requiring the parties to interplead and litigate in such court
their several claims and rights among themselves; or (iii) retain all or any of
the Indemnity Escrow in its possession, without liability to anyone, until such
dispute shall have been settled as contemplated in Section 4. In the event such
interpleader suit is brought, the Indemnity Escrow Agent will
-16-
<PAGE>
thereby be fully released and discharged from all further obligations imposed
upon it under the Escrow Provisions, and GoodNoise will pay the Indemnity Escrow
Agent (subject to reimbursement from the IUMA Shareholders pursuant to Section
4) all reasonable costs, expenses and reasonable attorney's fees expended or
incurred by the Indemnity Escrow Agent pursuant to the exercise of the Indemnity
Escrow Agent's rights under this Section 5 (such costs, fees and expenses will
be treated as extraordinary fees and expenses for the purposes of Section 6).
The resignation of the Indemnity Escrow Agent under this section shall not
affect the right of the Indemnity Escrow Agent to be paid any amount due to
Indemnity Escrow Agent hereunder.
6. Expenses.
--------
(a) Indemnity Escrow Agent. All fees and expenses including
----------------------
attorney's fees of the Indemnity Escrow Agent incurred in the ordinary course of
performing its responsibilities hereunder will be paid by GoodNoise upon receipt
of a written invoice by the Indemnity Escrow Agent. Any extraordinary fees and
expenses including attorney's fees, including without limitation any fees or
expenses incurred by the Indemnity Escrow Agent in connection with a dispute
over the distribution of Indemnity Escrow Holdback or the validity of a Claim or
Claims by GoodNoise will be paid fifty percent (50%) by GoodNoise and fifty
percent (50%) by the IUMA Shareholders (it being understood that such obligation
shall be joint and several) subject to Section 4(f). The IUMA Shareholder's
liability for the extraordinary fees and expenses of the Indemnity Escrow Agent
may be paid by GoodNoise after giving at least five (5) days written notice to
the IUMA Shareholder Representative and may be recovered as a Claim hereunder
out of the Indemnity Escrow. If GoodNoise has paid the IUMA Shareholder's
portion of such fees and expenses as permitted under this Section 6(a) then the
Indemnity Escrow Agent will, upon demand by GoodNoise, release to GoodNoise a
portion of the Indemnity Escrow Holdback equal to such portion of fees and
expenses.
GoodNoise and the IUMA Shareholders, jointly and severally, agree to assume
any and all obligations imposed now or hereafter by any applicable tax law with
respect to the distribution of Indemnity Escrow Holdback under this Agreement,
and to indemnify and hold the Indemnity Escrow Agent harmless from and against
any taxes, additions of late payment, interest, penalties and other expenses,
that may be assessed against the Indemnity Escrow Agent on any such payment or
other activities under this Agreement. GoodNoise and the IUMA Shareholders
undertake to instruct the Indemnity Escrow Agent in writing with respect to the
Indemnity Escrow Agent's responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and governmental
reporting in connection with its acting as Indemnity Escrow Agent under this
Agreement. GoodNoise and the IUMA Shareholders, jointly and severally, agree to
indemnify and hold the Indemnity Escrow Agent harmless from any liability on
account of taxes, assessments or other governmental charges, including without
limitation the withholding or deduction or the failure to withhold or deduct
same, and any liability for failure to obtain proper certifications or to
properly report to governmental authorities, to which the Indemnity Escrow Agent
may be or become subject in connection with or which arises out of this
Agreement, including costs and expenses (including reasonable legal fees),
interest and penalties. Notwithstanding the foregoing, the liability of a
shareholder of
-17-
<PAGE>
IUMA under this paragraph shall be limited to and shall not exceed his pro rata
portion of the Indemnity Escrow Holdback then held by the Indemnity Escrow
Agent.
GoodNoise and the Shareholder Representative agree to indemnify, protect,
and save and hold the Indemnity Escrow Agent, its successor and assigns,
harmless from all liabilities, obligations, losses, damages, penalties, taxes,
claims, actions, suits, costs and expenses (including attorneys' fees) of
whatsoever kind or nature imposed on, incurred by or asserted against the
Indemnity Escrow Agent which in any way relate to or arise out of the execution
and delivery of this Agreement or any action taken hereunder and will pay them
on demand; provided, however, that GoodNoise and the Shareholder Representative
shall have no such obligation to indemnify and save and hold the Indemnity
Escrow Agent harmless from any liability incurred by, imposed upon or asserted
against the Indemnity Escrow Agent for its own willful misconduct or gross
negligence.
(b) Shareholder Representative. The Shareholder Representative will
--------------------------
not be entitled to receive any compensation from GoodNoise or the IUMA
Shareholders in connection with this Agreement. Any fees and expenses incurred
by the Shareholder Representative in connection with actions taken pursuant to
the terms of the Escrow Provisions will be paid by the IUMA Shareholders to the
Shareholder Representative.
7. Successor Indemnity Escrow Agent. In the event the indemnity escrow agent
--------------------------------
becomes unavailable or unwilling to continue in its capacity as such, the
indemnity escrow agent may resign and be discharged from its duties or
obligations hereunder by giving not less than thirty (30) days' prior written
notice of such a date when such resignation will take effect. goodnoise will
designate a successor indemnity escrow agent prior to the expiration of such 30-
day period by giving written notice to the indemnity escrow agent and the
shareholder representative. goodnoise may appoint a successor indemnity escrow
agent with the consent of the shareholder representative, which consent will not
be unreasonably withheld. the indemnity escrow agent will promptly transfer the
indemnity escrow holdback to such designated successor. in the event no
successor indemnity escrow agent is appointed as described in this section 7,
the indemnity escrow agent may apply to a court of competent jurisdiction for
the appointment of a successor indemnity escrow agent.
8. limitation of responsibility; notices. the indemnity escrow agent's duties
-------------------------------------
are limited to those set forth in the escrow provisions, and no implied duties
or obligations shall be implied; and the indemnity escrow agent may rely upon
the written notices delivered to the indemnity escrow agent hereunder and under
the escrow provisions.
9. incorporation by reference of section 13. the parties agree that the terms
----------------------------------------
of section 13 of the reorganization agreement shall be deemed to be incorporated
by reference in this agreement as if such section had been set forth in its
entirety herein except that only the provisions of this agreement shall control
the responsibilities and obligations of the indemnity escrow agent.
10. shareholder representative. by virtue of their approval of the
--------------------------
reorganization agreement, the iuma shareholders will be deemed to have
irrevocably constituted and appointed, effective as of the effective time, the
shareholder representative, together with his permitted successors, as
-18-
<PAGE>
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
reorganization agreement, including, without limitation, the exercise of all or
any of the powers, authority and discretion conferred on them 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 iuma shareholders 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 and the indemnity escrow agent. no bond shall be
required of the shareholder representative, and 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 iuma shareholders. this power of attorney is coupled with an interest and is
irrevocable. the iuma shareholders will be bound by all actions taken by the
shareholder representative in connection with this agreement and goodnoise shall
be entitled to rely on any action or decision of the shareholder representative.
in performing their functions hereunder, the shareholder representative will not
be liable to the iuma shareholders in the absence of gross negligence or willful
misconduct.
11. Notices. any notice provided for or permitted under the escrow provisions
-------
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 11.
Indemnity Escrow Agent: ___________________________________
___________________________________
___________________________________
___________________________________
Attention:_________________________
Facsimile:_________________________
Shareholder Representative:
With copy to: Neal Williams
Wise & Shepard LLP
3030 Hansen Way, Ste. 100
Palo Alto, CA 94304
-19-
<PAGE>
Facsimile: (650) 856-1344
GoodNoise: GoodNoise Corporation
1991 Broadway, 2nd Floor
Redwood City, CA 94063719
Attention: Gene Hoffman
Facsimile: (650)- 556-9712
With copy to: Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301-1825
Attention: Peter M. Astiz, Esq.
Facsimile: (650) 327-3699
12. Voting rights. The right to vote the goodnoise shares shall rest with the
-------------
iuma shareholders.
13. General.
-------
(a) 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 to this Agreement.
(b) 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 in this Agreement shall be binding upon,
and inure to the benefit of, the permitted successors, executors, heirs,
representatives, administrators and assigns of the parties to this Agreement.
(c) 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 on such counterpart and all of which together shall constitute
one and the same instrument. This Agreement shall become binding when one or
more counterparts of this Agreement, individually or taken together, shall bear
the signatures of all of the parties reflected in this Agreement as signatories.
(d) Entire Agreement. Except as set forth in the Reorganization
----------------
Agreement, this Agreement, the documents referenced in this Agreement and the
exhibits to such documents, constitute the entire understanding and agreement of
the parties to this Agreement with respect to the subject matter of this
Agreement and of such documents and exhibits and supersede all prior and
contemporaneous agreements or understandings, inducements or conditions, express
or implied, written or oral, between the parties with respect to this Agreement,
provided that with respect to the Indemnity Escrow Agent, this Agreement
(without reference to any other agreements) sets forth the entire understanding
of the parties. The express terms of this
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<PAGE>
Agreement control and supersede any course of performance or usage of the trade
inconsistent with any of the terms of this Agreement.
(e) Waivers. No waiver by any party to this Agreement of any
-------
condition or of any breach of any provision of this Agreement will be effective
unless in writing. No waiver by any party of any such condition or breach, in
any one instance, will be deemed to be a further or continuing waiver of any
such condition or breach or a waiver of any other condition or breach of any
other provision contained in this Agreement.
(f) Amendment. This Agreement may be amended with the written
---------
consent of GoodNoise, the Indemnity Escrow Agent and the Shareholder
Representative, provided that if the Indemnity Escrow Agent does not agree to an
amendment agreed upon by GoodNoise and the Shareholder Representative (except an
amendment which may adversely affect the rights or interests of the Indemnity
Escrow Agent), GoodNoise will appoint a successor Indemnity Escrow Agent in
accordance with Section 7.
(g) Acts of God. Neither GoodNoise nor the IUMA Shareholders nor the
-----------
Indemnity Escrow Agent shall be responsible for delays or failures in
performance resulting from acts beyond their control. Such acts shall include
but not be limited to acts of God, strikes, lockouts, riots, acts of war,
epidemics, governmental regulations superimposed after the fact, fire
communication line failures, power failures, earthquakes or other disasters.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written and will be effective as to all the IUMA
Shareholders when executed by GoodNoise, the Indemnity Escrow Agent and the
Shareholder Representative.
GoodNoise:
GoodNoise Corporation, a Florida corporation
By:__________________________________________
Its:_________________________________________
INDEMNITY ESCROW AGENT:
By:__________________________________________
Its:_________________________________________
SHAREHOLDER REPRESENTATIVE:
_____________________________________________
[SIGNATURE PAGE FOR INDEMNITY ESCROW AGREEMENT]
-22-
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
EMUSIC.COM INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Article 1. Stockholders.................................................... 1
1.1 Place of Meetings.......................................... 1
1.2 Annual Meeting............................................. 1
1.3 Special Meetings........................................... 1
1.4 Notice of Meetings......................................... 1
1.5 Voting List................................................ 1
1.6 Quorum..................................................... 2
1.7 Adjournments............................................... 2
1.8 Voting and Proxies......................................... 2
1.9 Action at Meeting.......................................... 2
1.10 Notice of Stockholder Business............................. 3
1.11 Conduct of Business........................................ 3
1.12 No Stockholder Action Without Meeting...................... 4
Article 2. Board of Directors.............................................. 4
2.1 General Powers............................................. 4
2.2 Number and Term of Office.................................. 4
2.3 Vacancies and Newly Created Directorships.................. 5
2.4 Resignation................................................ 5
2.5 Regular Meetings........................................... 5
2.6 Special Meetings........................................... 5
2.7 Notice of Special Meetings................................. 5
2.8 Participation in Meetings by Telephone Conference Calls.... 6
2.9 Quorum..................................................... 6
2.10 Action at Meeting.......................................... 6
2.11 Action by Consent.......................................... 6
2.12 Removal.................................................... 6
2.13 Committees................................................. 6
2.14 Compensation of Directors.................................. 7
2.15 Nomination of Director Candidates.......................... 7
Article 3. Officers........................................................ 8
3.1 Enumeration................................................ 8
3.2 Election................................................... 8
3.3 Qualification.............................................. 8
3.4 Tenure..................................................... 8
3.5 Resignation and Removal.................................... 8
3.6 Chairman of the Board...................................... 8
3.7 Chief Executive Officer.................................... 9
3.8 President.................................................. 9
3.9 Vice Presidents............................................ 9
3.10 Secretary and Assistant Secretaries........................ 9
3.11 Chief Financial Officer.................................... 9
3.12 Salaries................................................... 10
</TABLE>
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.13 Delegation of Authority.................................... 10
Article 4. Capital Stock................................................... 10
4.1 Issuance of Stock.......................................... 10
4.2 Certificates of Stock...................................... 10
4.3 Transfers.................................................. 10
4.4 Lost, Stolen or Destroyed Certificates..................... 11
4.5 Record Date................................................ 11
Article 5. General Provisions.............................................. 11
5.1 Fiscal Year................................................ 11
5.2 Corporate Seal............................................. 11
5.3 Waiver of Notice........................................... 11
5.4 Actions with Respect to Securities of Other Corporations... 12
5.5 Evidence of Authority...................................... 12
5.6 Certificate of Incorporation............................... 12
5.7 Severability............................................... 12
5.8 Pronouns................................................... 12
5.9 Notices.................................................... 12
5.10 Reliance Upon Books, Reports and Records................... 12
5.11 Time Periods............................................... 13
5.12 Facsimile Signatures....................................... 13
Article 6. Amendments...................................................... 13
6.1 By the Board of Directors.................................. 13
6.2 By the Stockholders........................................ 13
Article 7. Indemnification of Directors and Officers....................... 13
7.1 Right to Indemnification................................... 13
7.2 Right of Claimant to Bring Suit............................ 14
7.3 Indemnification of Employees and Agents.................... 14
7.4 Non-Exclusivity of Rights.................................. 15
7.5 Indemnification Contracts.................................. 15
7.6 Insurance.................................................. 15
7.7 Effect of Amendment........................................ 15
</TABLE>
ii
<PAGE>
AMENDED AND RESTATED
BYLAWS OF EMUSIC.COM INC.
Article 1. Stockholders
------------
1.1 Place of Meetings. All meetings of stockholders shall be held at
-----------------
such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors or the President and Chief Executive
Officer or, if not so designated, at the registered office of the corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the
--------------
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held on a date to be fixed by
the Board of Directors or the President and Chief Executive Officer at the time
and place to be fixed by the Board of Directors or the President and stated in
the notice of the meeting. If no annual meeting is held in accordance with the
foregoing provisions, the Board of Directors shall cause the meeting to be held
as soon thereafter as convenient.
1.3 Special Meetings. Special meetings of Stockholders may be called
----------------
at any time only by the Board of Directors, the Chairman of the Board, the
President or the Chief Executive Officer.
1.4 Notice of Meetings. Written notice of each meeting of
------------------
stockholders, whether annual or special, shall be given not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or as required by law (meaning here and hereafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation). The notices of all meetings shall state the place, date and hour
of the meeting. The notice of a special meeting shall state, in addition, the
purpose or purposes for which the meeting is called. If mailed, notice is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.
1.5 Voting List. The officer who has charge of the stock ledger of the
-----------
corporation shall prepare, at least ten (10) days before each meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting, or
if not so specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during the
whole time of the meeting, and may be inspected by any stockholder who is
present. This list shall preemptively determine the identity of the stockholders
entitled to vote at the meeting and the number of shares held by each of them.
<PAGE>
1.6 Quorum. Except as otherwise provided by law or these Bylaws, the
------
holders of a majority of the shares of the capital stock of the corporation
entitled to vote at the meeting, present in person or represented by proxy,
shall constitute a quorum for the transaction of business. If a quorum shall
fail to attend any meeting, the chairman of the meeting or the holders of a
majority of the shares of stock entitled to vote who are present, in person or
by proxy, may adjourn the meeting to another place, date or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
1.7 Adjournments. Any meeting of stockholders may be adjourned to any
------------
other time and to any other place at which a meeting of stockholders may be held
under these Bylaws by the holders of a majority of the shares of stock present
or represented at the meeting and entitled to vote, although less than a quorum,
or, if no stockholder is present, by any officer entitled to preside at or to
act as Secretary of such meeting. When a meeting is adjourned to another place,
date or time, written notice need not be given of the adjourned meeting if the
place, date and time thereof are announced at the meeting at which the
adjournment is taken; provided, however, that if the date of any adjourned
meeting is more than thirty (30) days after the date for which the meeting was
originally noticed, or if a new record date is fixed for the adjourned meeting,
written notice of the place, date, and time of the adjourned meeting shall be
given in conformity herewith. At the adjourned meeting, the corporation may
transact any business which might have been transacted at the original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for each
------------------
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
by law. Each stockholder of record entitled to vote at a meeting of
stockholders, may vote in person or may authorize any other person or persons to
vote or act for him by written proxy executed by the stockholder or his
authorized agent or by a transmission permitted by law and delivered to the
Secretary of the corporation. No stockholder may authorize more than one proxy
for his shares. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section may
be substituted or used in lieu of the original writing or transmission for any
and all purposes for which the original writing or transmission could be used,
provided that such copy, facsimile transmission or other reproduction shall be a
complete reproduction of the entire original writing or transmission.
1.9 Action at Meeting. When a quorum is present at any meeting, any
-----------------
election shall be determined by a plurality of the votes cast by the
stockholders entitled to vote at the election, and all other matters shall be
determined by a majority of the votes cast affirmatively or negatively on the
matter (or if there are two or more classes of stock entitled to vote as
separate classes, then in the case of each such class, a majority of each such
class present or represented and voting affirmatively or negatively on the
matter) shall decide such matter, except when a
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different vote is required by express provision of law, the Certificate of
Incorporation or these Bylaws.
All voting, including on the election of directors, but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting. The corporation may, and to the extent
required by law, shall, in advance of any meeting of stockholders, appoint one
or more inspectors to act at the meeting and make a written report thereof. The
corporation may designate one or more persons as an alternate inspector to
replace any inspector who fails to act. If no inspector or alternate is able to
act at a meeting of stockholders, the person presiding at the meeting may, and
to the extent required by law, shall, appoint one or more inspectors to act at
the meeting. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector with
strict impartiality and according to the best of his or her ability.
1.10 Notice of Stockholder Business. At an annual meeting of the
------------------------------
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (ii) properly
brought before the meeting by or at the direction of the Board of Directors, or
(iii) properly brought before an annual meeting by a stockholder. For business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder proposal to be presented at an
annual meeting shall be received at the Corporation's principal executive
offices not less than 120 calendar days in advance of the date that the
Corporation's (or the Corporation's predecessor's) proxy statement was released
to stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been advanced by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
notice by the stockholders to be timely must be received not later than the
close of business on the tenth day following the day on which the date of the
annual meeting is publicly announced.
A stockholder's notice to the Secretary of the Corporation shall set
forth as to each matter the stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting, (ii) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business, (iii) the class and number of
shares of the Corporation which are beneficially owned by the stockholder, and
(iv) any material interest of the stockholder in such business.
1.11 Conduct of Business. At every meeting of the stockholders, the
-------------------
Chairman of the Board, if there is such an officer, or if not, the person
appointed by the Board of Directors, shall act as Chairman. The Secretary of the
corporation or a person designated by the Chairman of the
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meeting shall act as Secretary of the meeting. Unless otherwise approved by the
Chairman of the meeting, attendance at the stockholders' meeting is restricted
to stockholders of record, persons authorized in accordance with Section 1.8 of
these Bylaws to act by proxy, and officers of the corporation.
The Chairman of the meeting shall call the meeting to order, establish
the agenda, and conduct the business of the meeting in accordance therewith or,
at the Chairman's discretion, it may be conducted otherwise in accordance with
the wishes of the stockholders in attendance. The date and time of the opening
and closing of the polls for each matter upon which the stockholders will vote
at the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule
on the precedence of, and procedure on, motions and other procedural matters,
and exercise discretion with respect to such procedural matters with fairness
and good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.11 and
Section 1.10 above. The Chairman of a meeting shall, if the facts warrant,
determine and declare to the meeting that any proposed item of business was not
brought before the meeting in accordance with the provisions of this Section
1.11 and Section 1.10, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted/
1.12 No Stockholder Action Without Meeting. Any action required or
-------------------------------------
permitted to be taken by the stockholders of the Corporation must be effected at
a duly called annual or special meeting of stockholders of the Corporation and
may not be effected by any consent in writing by such stockholders.
Article 2. Board of Directors
------------------
2.1 General Powers. The business and affairs of the corporation shall
--------------
be managed by or under the direction of a Board of Directors, who may exercise
all of the powers of the corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2.2 Number and Term of Office. The number of directors shall
-------------------------
initially be five (5) and, thereafter, shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption). Upon the effective date of
the Agreement and Plan of Merger between the Corporation and EMusic.com Inc., a
Florida corporation (the "Effective Date"), the directors shall be divided into
three classes, with the term of office of the first class to expire at the first
annual meeting of stockholders held after the Effective Date; the term of office
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of the second class to expire at the second annual meeting of stockholders held
after the Effective Date; the term of office of the third class to expire at the
third annual meeting of stockholders held after the Effective Date; and
thereafter for each such term to expire at each third succeeding annual meeting
of stockholders after such election. All directors shall hold office until the
expiration of the term for which elected and until their respective successors
are elected, except in the case of the death, resignation or removal of any
director.
2.3 Vacancies and Newly Created Directorships. Subject to the rights
-----------------------------------------
of the holders of any series of Preferred Stock then outstanding, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification or other cause (including removal from office by a
vote of the stockholders) may be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for a term expiring at the next annual meeting of stockholders at which
the term of office of the class to which they have been elected expires. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
2.4 Resignation. Any director may resign by delivering his written
-----------
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.5 Regular Meetings. Regular meetings of the Board of Directors may
----------------
be held without notice at such time and place, either within or without the
State of Delaware, as shall be determined from time to time by the Board of
Directors; provided that any director who is absent when such a determination is
made shall be given notice of the determination. A regular meeting of the Board
of Directors may be held without notice immediately after and at the same place
as the annual meeting of stockholders.
2.6 Special Meetings. Special meetings of the Board of Directors may
----------------
be held at any time and place, within or without the State of Delaware,
designated in a call by the Chairman of the Board, the President and Chief
Executive Officer, two or more directors, or by one director in the event that
there is only a single director in office.
2.7 Notice of Special Meetings. Notice of any special meeting of
--------------------------
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone or
electronic voice message system at least 24 hours in advance of the meeting,
(ii) by sending a telegram, telecopy or telex, or delivering written notice by
hand, to his last known business or home address at least 24 hours in advance of
the meeting, or (iii) by mailing written notice to his last known business or
home address at least three (3) day in advance of the meeting. A notice or
waiver of notice of a meeting of the Board of Directors need not specify the
purposes of the meeting. Unless otherwise indicated in the notice thereof, any
and all business may be transacted at a special meeting.
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2.8 Participation in Meetings by Telephone Conference Calls.
-------------------------------------------------------
Directors or any members of any committee designated by the directors may
participate in a meeting of the Board of Directors or such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation by
such means shall constitute presence in person at such meeting.
2.9 Quorum. A majority of the total number of authorized directors
------
shall constitute a quorum at any meeting of the Board of Directors. In the event
one or more of the directors shall be disqualified to vote at any meeting, then
the required quorum shall be reduced by one for each such director so
disqualified; provided, however, that in no case shall less than one-third (1/3)
of the number so fixed constitute a quorum. In the absence of a quorum at any
such meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice other than announcement at the meeting,
until a quorum shall be present. Interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
at a meeting of a committee which authorizes a particular contract or
transaction.
2.10 Action at Meeting. At any meeting of the Board of Directors at
-----------------
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these Bylaws.
2.11 Action by Consent. Any action required or permitted to be taken at
-----------------
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing. Any such
written consents shall be filed with the minutes of proceedings of the Board or
committee.
2.12 Removal. Subject to the rights of the holders of any series of
-------
Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of at least a majority of the voting
power of all of the outstanding shares of capital stock entitled to vote
generally in the election of directors, voting together as a single class.
2.13 Committees. The Board of Directors may designate one or more
----------
committees, each committee to consist of one or more of the directors of the
corporation, with such lawfully delegated powers and duties as it therefor
confers, to serve at the pleasure of the Board. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members of the
committee present at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors and subject to the provisions of the
General Corporation Law of the State of Delaware, shall have and may exercise
all the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation and may authorize the seal of the
corporation to be affixed to all papers which may require it. Each such
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committee shall keep minutes and make such reports as the Board of Directors may
from time to time request. Except as the Board of Directors may otherwise
determine, any committee may make rules for the conduct of its business, but
unless otherwise provided by such rules, its business shall be conducted as
nearly as possible in the same manner as is provided in these Bylaws for the
Board of Directors.
2.14 Compensation of Directors. Directors may be paid such compensation
-------------------------
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
2.15 Nomination of Director Candidates. Subject to the rights of
---------------------------------
holders of any class or series of Preferred Stock then outstanding, nominations
for the election of Directors may be made by the Board of Directors or a proxy
committee appointed by the Board of Directors or by any stockholder entitled to
vote in the election of Directors generally. However, any stockholder entitled
to vote in the election of Directors generally may nominate one or more persons
for election as Directors at a meeting only if timely notice of such
stockholder's intent to make such nomination or nominations has been given in
writing to the Secretary of the Corporation. To be timely, a stockholder
nomination for a director to be elected at an annual meeting shall be received
at the Corporation's principal executive offices not less than 120 calendar days
in advance of the date that the Corporation's (or the Corporation's
predecessor's) proxy statement was released to stockholders in connection with
the previous year's annual meeting of stockholders, except that if no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than 30 calendar days from the date contemplated at the time of
the previous year's proxy statement, or in the event of a nomination for
director to be elected at a special meeting, notice by the stockholders to be
timely must be received not later than the close of business on the tenth day
following the day on which such notice of the date of the special meeting was
mailed or such public disclosure was made. Each such notice shall set forth: (a)
the name and address of the stockholder who intends to make the nomination and
of the person or persons to be nominated; (b) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
for the election of directors on the date of such notice and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; (d) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Corporation if so elected.
In the event that a person is validly designated as a nominee in
accordance with this Section 2.15 and shall thereafter become unable or
unwilling to stand for election to the Board of Directors, the Board of
Directors or the stockholder who proposed such nominee, as the case may
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<PAGE>
be, may designate a substitute nominee upon delivery, not fewer than five days
prior to the date of the meeting for the election of such nominee, of a written
notice to the Secretary setting forth such information regarding such substitute
nominee as would have been required to be delivered to the Secretary pursuant to
this Section 2.15 had such substitute nominee been initially proposed as a
nominee. Such notice shall include a signed consent to serve as a director of
the Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section 2.15,
such nomination shall be void; provided, however, that nothing in this Section
2.15 shall be deemed to limit any voting rights upon the occurrence of dividend
arrearages provided to holders of Preferred Stock pursuant to the Preferred
Stock designation for any series of Preferred Stock.
Article 3. Officers
--------
3.1 Enumeration. The officers of the corporation shall consist of a
-----------
Chief Executive Officer, a President, a Secretary, a Chief Financial Officer and
such other officers with such other titles as the Board of Directors shall
determine, including, at the discretion of the Board of Directors, a Chairman of
the Board, and one or more Vice Presidents and Assistant Secretaries. The Board
of Directors may appoint such other officers as it may deem appropriate.
3.2 Election. Officers shall be elected annually by the Board of
--------
Directors at its first meeting following the annual meeting of stockholders.
Officers may be appointed by the Board of Directors at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or more
-------------
offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate of
------
Incorporation or by these Bylaws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote appointing him, or until his earlier death, resignation or removal.
3.5 Resignation and Removal. Any officer may resign by delivering his
-----------------------
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event. Any officer may be removed at any time, with or without cause, by
the Board of Directors.
3.6 Chairman of the Board. The Board of Directors may appoint a
---------------------
Chairman of the Board. If the Board of Directors appoints a Chairman of the
Board, he shall perform such duties and possess such powers as are assigned to
him by the Board of Directors. Unless otherwise provided by the Board of
Directors, he shall preside at all meetings of the stockholders, and, if he is a
director, at all meetings of the Board of Directors.
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3.7 Chief Executive Officer. The Chief Executive Officer shall,
-----------------------
subject to the direction of the Board of Directors, have responsibility for the
general management and control of the business and affairs of the Corporation
and shall perform all duties and have all powers which are commonly incident to
the office of chief executive or which are delegated to him or her by the Board
of Directors. The Chief Executive Officer shall perform such other duties and
shall have such other powers as the Board of Directors may from time to time
prescribe. He or she shall have power to sign stock certificates, contracts and
other instruments of the Corporation which are authorized and shall have general
supervision and direction of all of the other officers, employees and agents of
the Corporation, other than the Chairman of the Board.
3.8 President. Should there exist an office of President which is
---------
held by a person other than the Chief Executive Officer and which differs from
the office of Chief Executive Officer, the President shall have the
responsibilities delegated to him or her by the Board of Directors.
3.9 Vice Presidents. Any Vice President shall perform such duties and
---------------
possess such powers as the Board of Directors or the Chief Executive Officer may
from time to time prescribe. In the event of the absence, inability or refusal
to act of the President, the Vice President (or if there shall be more than one,
the Vice Presidents in the order determined by the Board of Directors) shall
perform the duties of the Chief Executive Officer and when so performing shall
have at the powers of and be subject to all the restrictions upon the Chief
Executive Officer. The Board of Directors may assign to any Vice President the
title of Executive Vice President, Senior Vice President or any other title
selected by the Board of Directors.
3.10 Secretary and Assistant Secretaries. The Secretary shall perform
-----------------------------------
such duties and shall have such powers as the Board of Directors or the Chief
Executive Officer may from time to time prescribe. In addition, the Secretary
shall perform such duties and have such powers as are incident to the office of
the Secretary, including, without limitation, the duty and power to give notices
of all meetings of stockholders and special meetings of the Board of Directors,
to keep a record of the proceedings of all meetings of stockholders and the
Board of Directors, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the Chief Executive Officer or the Secretary
may from time to time prescribe. In the event of the absence, inability or
refusal to act of the Secretary, the Assistant Secretary (or if there shall be
more than one, the Assistant Secretaries in the order determined by the Board of
Directors) shall perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 Chief Financial Officer. Unless otherwise designated by the Board
-----------------------
of Directors, the Chief Financial Officer shall be the Treasurer. The Chief
Financial Officer shall perform
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such duties and shall have such powers as may from time to time be assigned to
him by the Board of Directors or the Chief Executive Officer. In addition, the
Chief Financial Officer shall perform such duties and have such powers as are
incident to the office of chief financial officer, including without limitation,
the duty and power to keep and be responsible for all funds and securities of
the corporation, to maintain the financial records of the Corporation, to
deposit funds of the corporation in depositories as authorized, to disburse such
funds as authorized, to make proper accounts of such funds, and to render as
required by the Board of Directors accounts of all such transactions and of the
financial condition of the corporation.
3.12 Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
3.13 Delegation of Authority. The Board of Directors may from time to
-----------------------
time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
Article 4. Capital Stock.
--------------
4.1 Issuance of Stock. Unless otherwise voted by the stockholders and
-----------------
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the corporation
---------------------
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or in
the name of the corporation by, the Chairman or Vice-Chairman, if any, of the
Board of Directors, or the President or a Vice President, and the Chief
Financial Officer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a facsimile.
Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
Bylaws, applicable securities laws or any agreement among any number of
shareholders or among such holders and the corporation shall have conspicuously
noted on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction.
4.3 Transfers. Except as otherwise established by rules and
---------
regulations adopted by the Board of Directors, and subject to applicable law,
shares of stock may be transferred on the books of the corporation by the
surrender to the corporation or its transfer agent of the certificate
representing such shares properly endorsed or accompanied by a written
assignment or power of attorney properly executed, and with such proof of
authority or authenticity of signature as the corporation or its transfer agent
may reasonably require. Except as may be otherwise required by
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law, by the Certificate of Incorporation or by the Bylaws, the corporation shall
be entitled to treat the record holder of stock as shown on its books as the
owner of such stock for all purposes, including the payment of dividends and the
right to vote with respect to such stock, regardless of any transfer, pledge or
other disposition of such stock until the shares have been transferred on the
books of the corporation in accordance with the requirements of these Bylaws.
4.4 Lost, Stolen or Destroyed Certificates. The corporation may
--------------------------------------
issue a new certificate of stock in place of any previously saved certificate
alleged to have been lost, stolen, or destroyed, upon such terms and conditions
as the Board of Directors may prescribe, including the presentation of
reasonable evidence of such loss, theft or destruction and the giving of such
indemnity as the Board of Directors may require for the protection of the
corporation or any transfer agent or registrar.
4.5 Record Date. The Board of Directors may fix in advance a date as a
-----------
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, concession or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than sixty (60) nor less than ten
(10) days before the date of such meeting, nor more than sixty (60) days prior
to any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed. The record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Article 5. General Provisions
------------------
5.1 Fiscal Year. The fiscal year of the corporation shall be as fixed
-----------
by the Board of Directors.
5.2 Corporate Seal. The corporate seal shall be in such form as shall
--------------
be approved by the Board of Directors.
5.3 Waiver of Notice. Whenever any notice whatsoever is required to be
----------------
given by law, by the Certificate of Incorporation or by these Bylaws, a waiver
of such notice either in
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writing signed by the person entitled to such notice or such person's duly
authorized attorney, or by telecopy, telegraph, cable or any other available
method, whether before, at or after the time stated in such waiver, or the
appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
5.4 Actions with Respect to Securities of Other Corporations. Except
--------------------------------------------------------
as the Board of Directors may otherwise designate, the President or any officer
of the corporation authorized by the President shall have the power to vote and
otherwise act on behalf of the corporation, in person or proxy, and may waive
notice of, and act as, or appoint any person or persons to act as, proxy or
attorney-in-fact to this corporation (with or without power of substitution) at
any meeting of stockholders or shareholders (or with respect to any action of
stockholders) of any other corporation or organization, the securities of which
may be held by this corporation and otherwise to exercise any and all rights and
powers which this corporation may possess by reason of this corporation's
ownership of securities in such other corporation or other organization.
5.5 Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
5.6 Certificate of Incorporation. All references in these Bylaws to
----------------------------
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7 Severability. Any determination that any provision of these
------------
Bylaws is for any reason inapplicable, illegal or ineffective shall not affect
or invalidate any other provision of these Bylaws.
5.8 Pronouns. All pronouns used in these Bylaws shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
5.9 Notices. Except as otherwise specifically provided herein or
-------
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by prepaid
telegram, mailgram, telecopy or commercial courier service. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his or her last known address as the same appears on the books of the
Corporation. The time when such notice shall be deemed to be given shall be the
time such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or be telegram or mailgram.
5.10 Reliance Upon Books, Reports and Records. Each director, each
----------------------------------------
member of any committee designated by the Board of Directors, and each officer
of the Corporation shall, in the performance of his duties, be fully protected
in relying in good faith upon the books of account
12
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or other records of the Corporation, including reports made to the Corporation
by any of its officers, by an independent certified public accountant, or by an
appraiser selected with reasonable care.
5.11 Time Periods. In applying any provision of these Bylaws which
------------
require that an act be done or not done a specified number of days prior to an
event or that an act be done during a period of a specified number of days prior
to an event, calendar days shall be used, the day of the doing of the act shall
be excluded, and the day of the event shall be included.
5.12 Facsimile Signatures. In addition to the provisions for use of
--------------------
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Article 6. Amendments
----------
6.1 By the Board of Directors. Except as is otherwise set forth in
-------------------------
these Bylaws, these Bylaws may be altered, amended or repealed or new Bylaws may
be adopted by the affirmative vote of a majority of the directors present at any
regular or special meeting of the Board of Directors at which a quorum is
present.
6.2 By the Stockholders. Except as otherwise set forth in these
-------------------
Bylaws, these Bylaws may be altered, amended or repealed or new Bylaws may be
adopted by the affirmative vote of the holders of at least sixty-six and two-
thirds percent (66-2/3%) of the shares of the capital stock of the corporation
issued and outstanding and entitled to vote at any annual meeting of
stockholders, or at any special meeting of stockholders, provided notice of such
alteration, amendment, repeal or adoption of new Bylaws shall have been stated
in the notice of such special meeting.
Article 7. Indemnification of Directors and Officers
-----------------------------------------
7.1 Right to Indemnification. Each person who was or is made a party
------------------------
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation, or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an official capacity
as a director, officer or employee or in any other capacity while serving as a
director, officer or employee, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by Delaware Law, as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said Law permitted the Corporation to provide prior
to such amendment) against all expenses, liability and loss reasonably incurred
or suffered by such person in connection therewith and such indemnification
shall continue as to a person who has ceased to be a director, officer or
employee and shall inure to the benefit of his
13
<PAGE>
or her heirs, executors and administrators; provided, however, that, except as
provided in Section 7.2 of this Article 7, the Corporation shall indemnify any
- --------
such person seeking indemnity in connection with an action, suit or proceeding
(or part thereof) initiated by such person only if (a) such indemnification is
expressly required to be made by law, (b) the action, suit or proceeding (or
part thereof) was authorized by the Board of Directors of the Corporation, (c)
such indemnification is provided by the Corporation, in its sole discretion,
pursuant to the powers vested in the Corporation under the Delaware General
Corporation Law, or (d) the action, suit or proceeding (or part thereof) is
brought to establish or enforce a right to indemnification under an indemnity
agreement or any other statute or law or otherwise as required under Section 145
of the Delaware General Corporation Law. Such right shall be a contract right
and shall include the right to be paid by the Corporation expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
--------
however that, unless the Delaware General Corporation Law then so prohibits, the
- -------
payment of such expenses incurred by a director or officer of the Corporation in
his or her capacity as a director or officer (and not in any other capacity in
which service was or is tendered by such person while a director or officer,
including, without limitation. service to an employee benefit plan) in advance
of the final disposition of such proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such director or officer,
to repay all amounts so advanced if it should be determined ultimately that such
director or officer is not entitled to be indemnified under this Section or
otherwise.
7.2 Right of Claimant to Bring Suit. If a claim under Section 7.1 is
-------------------------------
not paid in full by the Corporation within ninety (90) days after a written
claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if such suit is not frivolous or brought in bad faith, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other then an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance of
its final disposition where the required undertaking, if any, has been tendered
to this Corporation) that the claimant has not met the standards of conduct
which make it permissible under the Delaware General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual determination
by the Corporation (including its Board of Directors, independent legal counsel,
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
7.3 Indemnification of Employees and Agents. The Corporation may, to
---------------------------------------
the extent authorized from time to time by the Board of Directors, grant rights
to indemnification, and to the advancement of related expenses, to any employee
or agent of the Corporation to the fullest extent of the provisions of this
Article with respect to the indemnification of and advancement of expenses to
directors and officers of the Corporation.
14
<PAGE>
7.4 Non-Exclusivity of Rights. The rights conferred on any person in
-------------------------
Sections 7.1 and 7.2 shall not be exclusive of any other right which such
persons may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
7.5 Indemnification Contracts. The Board of Directors is authorized to
-------------------------
enter into a contract with any director, officer, employee or agent of the
Corporation, or any person serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including employee benefit plans, providing
for indemnification rights equivalent to or, if the Board of Directors so
determines, greater than, those provided for in this Article 7.
7.6 Insurance. The Corporation shall maintain insurance to the extent
---------
reasonably available, at its expense, to protect itself and any such director,
officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the Delaware
General Corporation Law.
7.7 Effect of Amendment. Any amendment, repeal or modification of any
-------------------
provision of this Article 7 by the stockholders and the directors of the
Corporation shall not adversely affect any right or protection of a director or
officer of the Corporation existing at the time of such amendment, repeal or
modification.
15
<PAGE>
EXHIBIT 10.1
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of __________, 1999, is made by and
between Emusic.com Inc., a Delaware corporation (the "Company"), and ______ (the
"Indemnitee").
RECITALS
--------
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of
directors and officers are often difficult to apply, ambiguous, or conflicting,
and therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs
of litigation may be so enormous (whether or not the case is meritorious), that
the defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers
and agents and the directors, officers and agents of its subsidiaries to assume
the risk of huge judgments and other expenses which may occur in cases in which
the director, officer or agent received no personal profit and in cases where
the director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in
litigation against a director, officer or agent of a corporation such as the
Company or its subsidiaries are often related to the knowledge, motives and
intent of such director, officer or agent, that he is usually the only witness
with knowledge of the essential facts and exculpating circumstances regarding
such matters, and that the long period of time which usually elapses before the
trial or other disposition of such litigation often extends beyond the time that
the director, officer or agent can reasonably recall such matters; and may
extend beyond the normal time for retirement for such director, officer or agent
with the result that he, after retirement or in the event of his death, his
spouse, heirs, executors or administrators, may be faced with limited ability
and undue hardship in maintaining an adequate defense, which may discourage such
a director, officer or agent from serving in that position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced
1
<PAGE>
individuals to serve as directors, officers and agents of the Company and its
subsidiaries and to encourage such individuals to take the business risks
necessary for the success of the Company and its subsidiaries, it is necessary
for the Company to contractually indemnify its directors, officers and agents
and the directors, officers and agents of its subsidiaries, and to assume for
itself maximum liability for expenses and damages in connection with claims
against such directors, officers and agents in connection with their service to
the Company and its subsidiaries, and has further concluded that the failure to
provide such contractual indemnification could result in great harm to the
Company and its subsidiaries and the Company's stockholders.
G. Section 145 of the General Corporation Law of Delaware, under
which the Company is organized ("Section 145"), empowers the Company to
indemnify its directors, officers, employees and agents by agreement and to
indemnify persons who serve, at the request of the Company, as the directors,
officers, employees or agents of other corporations or enterprises, and
expressly provides that the indemnification provided by Section 145 is not
exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the
Company and/or one or more subsidiaries of the Company, provided that he is
furnished the indemnity provided for herein.
AGREEMENT
---------
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions.
-----------
(a) Agent. For the purposes of this Agreement, "agent" of the
-----
Company means any person who is or was a director, officer, employee or other
agent of the Company or a subsidiary of the Company; or is or was serving at the
request of, for the convenience of, or to represent the interests of the Company
or a subsidiary of the Company as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) Expenses. For purposes of this Agreement, "expenses" include
--------
all out of pocket expenses costs of any type or nature whatsoever (including,
without limitation, all attorneys' fees and related disbursements), actually and
reasonably incurred by the Indemnitee in
2
<PAGE>
connection with either the investigation, defense or appeal of a proceeding or
establishing or enforcing a right to indemnification under this Agreement or
Section 145 or otherwise; provided, however, that "expenses" shall not include
any judgments, fines, ERISA excise taxes or penalties, or amounts paid in
settlement of a proceeding.
(c) Proceeding. For the purposes of this Agreement, "proceeding"
----------
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary" means
----------
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or
------------------
continue to serve as agent of the Company, at its will (or under separate
agreement, if such agreement exists), in the capacity Indemnitee currently
serves as an agent of the Company, so long as he is duly appointed or elected
and qualified in accordance with the applicable provisions of the Bylaws of the
Company or any subsidiary of the Company or until such time as he tenders his
resignation in writing; provided, however, that nothing contained in this
Agreement is intended to create any right to continued employment by Indemnitee.
3. Liability Insurance.
-------------------
(a) Maintenance of D&O Insurance. The Company hereby covenants and
----------------------------
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) Rights and Benefits. In all policies of D&O Insurance, the
-------------------
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.
(c) Limitation on Required Maintenance of D&O Insurance.
---------------------------------------------------
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
3
<PAGE>
4. Mandatory Indemnification. Subject to Section 9 below, the
-------------------------
Company shall indemnify the Indemnitee as follows:
(a) Successful Defense. To the extent the Indemnitee has been
------------------
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.
(b) Third Party Actions. If the Indemnitee is a person who was or is
-------------------
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) Derivative Actions. If the Indemnitee is a person who was or is a
------------------
party or is threatened to be made a party to any proceeding by or in the right
of the Company by reason of the fact that he is or was an agent of the Company,
or by reason of anything done or not done by him in any such capacity, the
Company shall indemnify the Indemnitee against all expenses actually and
reasonably incurred by him in connection with the investigation, defense,
settlement, or appeal of such proceeding, provided the Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and its stockholders; except that no indemnification
under this subsection 4(c) shall be made in respect to any claim, issue or
matter as to which such person shall have been finally adjudged to be liable to
the Company by a court of competent jurisdiction unless and only to the extent
that the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the court shall deem proper.
(d) Actions where Indemnitee is Deceased. If the Indemnitee is a
------------------------------------
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.
4
<PAGE>
(e) Notwithstanding the foregoing, the Company shall not be obligated
to indemnify the Indemnitee for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes and
penalties, and amounts paid in settlement) for which payment is actually made to
Indemnitee under a valid and collectible insurance policy of D&O Insurance, or
under a valid and enforceable indemnity clause, by-law or agreement.
5. Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding, but not entitled, however, to indemnification for all of
the total amount hereof, the Company shall nevertheless indemnify the Indemnitee
for such total amount except as to the portion hereof to which the Indemnitee is
not entitled.
6. Mandatory Advancement of Expenses. Subject to Section 8(a) below,
---------------------------------
the Company shall advance all expenses incurred by the Indemnitee in connection
with the investigation, defense, settlement or appeal of any proceeding to which
the Indemnitee is a party or is threatened to be made a party by reason of the
fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company.
7. Notice and Other Indemnification Procedures.
-------------------------------------------
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses of
any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee
5
<PAGE>
shall have the right to employ his counsel in any such proceeding at the
Indemnitee's expense; and (ii) if (A) the employment of counsel by the
Indemnitee has been previously authorized by the Company, (B) the Indemnitee
shall have reasonably concluded that there may be a conflict of interest between
the Company and the Indemnitee in the conduct of any such defense; or (C) the
Company shall not, in fact, have employed counsel to assume the defense of such
proceeding, the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) Lack of Good Faith. To indemnify the Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by the
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Unauthorized Settlements. To indemnify the Indemnitee under this
------------------------
Agreement for any amounts paid in settlement of a proceeding unless the Company
consents to such settlement, which consent shall not be unreasonably withheld.
9. Non-exclusivity. The provisions for indemnification and
---------------
advancement of expenses set forth in this Agreement shall not be deemed
exclusive of any other rights which the Indemnitee may have under any provision
of law, the Company's Certificate of Incorporation or Bylaws, the vote of the
Company's stockholders or disinterested directors, other agreements, or
otherwise, both as to action in his official capacity and to action in another
capacity while occupying his position as an agent of the Company, and the
Indemnitee's rights hereunder shall continue after the Indemnitee has ceased
acting as an agent of the Company and shall inure to the benefit of the heirs,
executors and administrators of the Indemnitee.
10. Enforcement. Any right to indemnification or advances granted by
-----------
this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee
in any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim is
made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification is made under this Agreement (other
than an action brought to enforce a claim for expenses pursuant to Section 6
hereof, provided that the required undertaking has
6
<PAGE>
been tendered to the Company) that Indemnitee is not entitled to indemnification
because of the limitations set forth in Sections 4 and 8 hereof. Neither the
failure of the Corporation (including its Board of Directors or its
stockholders) to have made a determination prior to the commencement of such
enforcement action that indemnification of Indemnitee is proper in the
circumstances, nor an actual determination by the Company (including its Board
of Directors or its stockholders) that such indemnification is improper, shall
be a defense to the action or create a presumption that Indemnitee is not
entitled to indemnification under this Agreement or otherwise.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
12. Survival of Rights.
------------------
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. Interpretation of Agreement. It is understood that the parties
---------------------------
hereto intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. Severability. If any provision or provisions of this Agreement
------------
shall be held to be invalid, illegal or unenforceable for any reason whatsoever,
(i) the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.
15. Modification and Waiver. No supplement, modification or
-----------------------
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver
7
<PAGE>
of any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provisions hereof (whether or not similar) nor shall such
waiver constitute a continuing waiver.
16. Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
17. Governing Law. This Agreement shall be governed exclusively by
-------------
and construed according to the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware.
18. Consent to Jurisdiction. The Company and the Indemnitee each
-----------------------
hereby consent to the jurisdiction of the courts of the State of Delaware with
respect to any action or proceeding which arises out of or relates to this
Agreement.
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The parties hereto have entered into this Indemnity Agreement
effective as of the date first above written.
THE COMPANY:
EMUSIC.COM INC.
By_______________________________________
Its______________________________________
Address: 1991 Broadway, 2/nd/ Floor
Redwood City, California 94063
INDEMNITEE:
_________________________________________
[NAME]
Address: _________________________________________
_________________________________________
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EXHIBIT 10.4
GOODNOISE CORPORATION
1998 NONSTATUTORY STOCK OPTION PLAN
1. Establishment, Purpose and Term of Plan.
---------------------------------------
1.1 Establishment. The GoodNoise Corporation 1998 Nonstatutory Stock
Option Plan (the "Plan") is hereby established effective as of December 16,
1998.
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.
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 Florida
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.
(f) "Director" means a member of the Board or of the board of
directors of any other Participating Company.
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(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; 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) "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 under the Code.
(l) "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. All Options granted under the Plan will be Nonstatutory Stock Options.
(m) "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.
(n) "Optionee" means a person who has been granted one or more
Options.
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(o) "Parent Corporation" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(p) "Participating Company" means the Company or any Parent
Corporation or Subsidiary Corporation.
(q) "Participating Company Group" means, at any point in time,
all corporations collectively which are then Participating Companies.
(r) "Securities Act" means the Securities Act of 1933, as
amended.
(s) "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.
(t) "Stock" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(u) "Subsidiary Corporation" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) 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
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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 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 determine the Fair Market Value of shares of Stock or
other property;
(c) 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;
(d) to approve one or more forms of Option Agreement;
(e) 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;
(f) 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;
(g) 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
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(h) 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.
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 under the Plan shall be Six Million (6,000,000) 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 and Consultants. For purposes of the foregoing sentence, "Employees"
and "Consultants" shall include prospective Employees and prospective
Consultants to whom Options are granted in connection with written offers of an
employment or other service relationship with the Participating Company Group.
However, notwithstanding any other provision herein to the contrary, no person
shall be eligible to be granted an Option under the Plan whose eligibility would
require approval of the Plan by the shareholders of the Company under any law or
regulation or the rules of any stock exchange or market system upon which the
Stock may then be listed. If not inconsistent with any such law, regulation or
rule, an Option
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may be granted to a person, not previously employed by a Participating Company,
as an inducement essential to entering into an employment contract with the
Participating Company. Eligible persons may be granted more than one (1) Option.
5.2 Options Authorized. Options granted under the Plan may only be
Nonstatutory Stock Options.
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 the
exercise price per share for an 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. Notwithstanding the foregoing, an 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 no Option granted to a prospective Employee or prospective Consultant may
become exercisable prior to the date on which such person commences Service with
a Participating 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
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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 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
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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 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.
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(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.
----------------------------------
7.1 Nonstatutory Stock Option Agreement. Unless otherwise provided by
the Board at the time the Option is granted, an 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.
7.2 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.
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(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 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.
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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 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
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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, no
termination or amendment of the Plan shall affect any then outstanding Option
unless expressly provided by the Board. In any event, no termination or
amendment of the Plan may adversely affect any then outstanding Option without
the consent of the Optionee, unless such termination or amendment is necessary
to comply with any applicable law, regulation or rule.
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PLAN HISTORY
------------
December 16, 1998 Board adopts Plan, with an initial reserve of 2,000,000
shares.
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EXHIBIT 10.5
GOODNOISE CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 Establishment. This 1999 Employee Stock Purchase Plan (the
"Plan") is hereby established effective as of the date of its approval by the
shareholders of the Company.
1.2 Purpose. The purpose of the Plan is to advance the interests of
Company and its shareholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides such Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock.
The Company intends that the Plan qualify as an "employee stock purchase plan"
under Section 423 of the Code.
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.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 Definitions. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. 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 a 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 Florida
corporation, or any successor corporation thereto.
(e) "Compensation" means, with respect to any Offering Period,
base wages or salary, commissions, overtime, bonuses, annual awards, other
incentive payments, shift
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premiums, and all other compensation paid in cash during such Offering Period
before deduction for any contributions to any plan maintained by a Participating
Company and described in Section 401(k) or Section 125 of the Code. Compensation
shall not include reimbursements of expenses, allowances, long-term disability,
workers' compensation or any amount deemed received without the actual transfer
of cash or any amounts directly or indirectly paid pursuant to the Plan or any
other stock purchase or stock option plan, or any other compensation not
included above.
(f) "Eligible Employee" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "Employee" means a person treated as an employee of a
Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while such individual is on
any military leave, sick leave, or other bona fide leave of absence approved by
the Company of ninety (90) days or less. In the event an individual's leave of
absence exceeds ninety (90) days, the individual shall be deemed to have ceased
to be an Employee on the ninety-first (91st) day of such leave unless the
individual's right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall determine in good
faith and in the exercise of its discretion whether an individual has become or
has ceased to be an Employee and the effective date of such individual's
employment or termination of employment, as the case may be. For purposes of an
individual's participation in or other rights, if any, under the Plan as of the
time of the Company's determination, all such determinations by the Company
shall be final, binding and conclusive, notwithstanding that the Company or any
governmental agency subsequently makes a contrary determination.
(h) "Fair Market Value" means, as of any date, if there is then
a public market for the Stock, the closing price of a share of Stock (or the
mean of the closing bid and asked prices 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
discretion. If, as of any date, there is then no public market for the Stock,
the Fair Market Value on any relevant date shall be as determined by the Board.
(i) "Offering" means an offering of Stock as provided in Section
6.
(j) "Offering Date" means, for any Offering, the first day of
the Offering Period with respect to such Offering.
(k) "Offering Period" means a period established in accordance
with Section 61.
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(l) "Parent Corporation" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(m) "Participant" means an Eligible Employee who has become a
participant in an Offering Period in accordance with Section 7 and remains a
participant in accordance with the Plan.
(n) "Participating Company" means the Company or any Parent
Corporation or Subsidiary Corporation designated by the Board as a corporation
the Employees of which may, if Eligible Employees, participate in the Plan. The
Board shall have the sole and absolute discretion to determine from time to time
which Parent Corporations or Subsidiary Corporations shall be Participating
Companies.
(o) "Participating Company Group" means, at any point in time,
the Company and all other corporations collectively which are then Participating
Companies.
(p) "Purchase Date" means the last day of an Offering Period (or
Purchase Period, if so determined by the Board).
(q) "Purchase Period" means a period, if any, established in
accordance with Section 6.2.
(r) "Purchase Price" means the price at which a share of Stock
may be purchased under the Plan, as determined in accordance with Section 9.
(s) "Purchase Right" means an option granted to a Participant
pursuant to the Plan to purchase such shares of Stock as provided in Section 8,
which the Participant may or may not exercise during the Offering Period in
which such option is outstanding. Such option arises from the right of a
Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
(t) "Stock" means the common stock of the Company, as adjusted
from time to time in accordance with Section 42.
(u) "Subscription Agreement" means a written agreement in such
form as specified by the Company, stating an Employee's election to participate
in the Plan and authorizing payroll deductions under the Plan from the
Employee's Compensation.
(v) "Subscription Date" means the last business day prior to an
Offering Date or such other date as the Company shall establish.
(w) "Subsidiary Corporation" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) 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
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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, of any form of
agreement or other document employed by the Company in the administration of the
Plan, or of any Purchase Right shall be determined by the Board and shall be
final and binding upon all persons having an interest in the Plan or the
Purchase Right. Subject to the provisions of the Plan, the Board shall
determine all of the relevant terms and conditions of Purchase Rights granted
pursuant to the Plan; provided, however, that all Participants granted Purchase
Rights pursuant to the Plan shall have the same rights and privileges within the
meaning of Section 423(b)(5) of the Code. All expenses incurred in connection
with the administration of the Plan shall be paid by the Company.
3.2 Authority of Officers. Any officer of the Company shall have the
authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 Policies and Procedures Established by the Company. The Company
may, from time to time, consistent with the Plan and the requirements of Section
423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its sole discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements of Section 423 of the Code, and (e) determination of the date and
manner by which the Fair Market Value of a share of Stock is determined for
purposes of administration of the Plan.
4. Shares Subject to Plan.
----------------------
4.1 Maximum Number of Shares Issuable. Subject to adjustment as
provided in Section 42, the maximum aggregate number of shares of Stock that may
be issued under the Plan shall be two hundred and fifty thousand (250,000), and
shall consist of authorized but unissued or reacquired shares of Stock, or any
combination thereof. If an outstanding Purchase Right for any reason expires or
is terminated or canceled, the shares of Stock allocable to the unexercised
portion of such Purchase Right 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, or in the event of any merger (including a
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<PAGE>
merger effected for the purpose of changing the Company's domicile), sale of
assets or other reorganization in which the Company is a party, appropriate
adjustments shall be made in the number and class of shares subject to the Plan
and each Purchase Right and in the Purchase Price. If a majority of the shares
which are of the same class as the shares that are subject to outstanding
Purchase Rights are exchanged for, converted into, or otherwise become (whether
or not pursuant to an Ownership Change Event) shares of another corporation (the
"New Shares"), the Board may unilaterally amend the outstanding Purchase Rights
to provide that such Purchase Rights are exercisable for New Shares. In the
event of any such amendment, the number of shares subject to, and the Purchase
Price of, the outstanding Purchase Rights 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 42 shall be rounded down to the nearest whole number,
and in no event may the Purchase Price be decreased to an amount less than the
par value, if any, of the stock subject to the Purchase Right. The adjustments
determined by the Board pursuant to this Section 42 shall be final, binding and
conclusive.
5. Eligibility.
-----------
5.1 Employees Eligible to Participate. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the
Participating Company Group for less than twenty (20) hours per week; or
(b) Any Employee who is customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
5.2 Exclusion of Certain Shareholders. Notwithstanding any provision
of the Plan to the contrary, no Employee shall be granted a Purchase Right under
the Plan if, immediately after such grant, such Employee would own or hold
options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this Section 52, the attribution rules of Section 424(d) of the Code shall apply
in determining the stock ownership of such Employee.
6. Offerings.
---------
6.1 Offering Periods. The Plan shall be implemented by sequential
Offerings (an "Offering Period"). The first Offering Period shall commence on
the August 1, 1999 and end on January 31, 2000 (the "Initial Offering Period").
Subsequent Offerings shall commence on the first day of February and August of
each year and end on the last day of July and January, respectively, occurring
thereafter, and will have a duration of approximately six (6) months.
6.2 Purchase Periods. If the Board so determines, in its discretion,
each Offering Period may consist of two (2) or more consecutive Purchase Periods
having such duration as the Board shall specify, and the last day of each such
Purchase Period shall be a Purchase Date.
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6.3 Discretion to Vary Duration. Notwithstanding the foregoing, the
Board may establish a different duration for one or more Offering Periods or
Purchase Periods or different commencing or ending dates for such periods;
provided, however, that no Offering Period may have a duration exceeding twenty-
seven (27) months. If the first or last day of an Offering Period or a Purchase
Period is not a day on which the national securities exchanges or Nasdaq Stock
Market are open for trading, the Company shall specify the trading day that will
be deemed the first or last day, as the case may be, of the period.
7. Participation in the Plan.
-------------------------
7.1 Initial Participation. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the Company not later than the close of business for
such office on the Subscription Date established by the Company for the
applicable Offering Date. An Eligible Employee who does not deliver a properly
completed Subscription Agreement to the Company's designated office on or before
the Subscription Date shall not participate in that Offering Period or any
subsequent Offering Period unless such Eligible Employee subsequently delivers a
properly completed Subscription Agreement to the appropriate office of the
Company on or before the Subscription Date for such subsequent Offering Period.
An Employee who becomes an Eligible Employee after the Offering Date of an
Offering Period (other than the Initial Offering Period) shall not be eligible
to participate in such Offering Period but may participate in any subsequent
Offering Period provided such Employee is still an Eligible Employee as of the
Offering Date of such subsequent Offering Period.
7.2 Continued Participation. A Participant shall automatically
participate in the next Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
provided that such Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan, or
(b) terminated employment as provided in Section 13. A Participant who may
automatically participate in a subsequent Offering Period, as provided in this
Section, is not required to deliver any additional Subscription Agreement for
the subsequent Offering Period in order to continue participation in the Plan.
However, a Participant may deliver a new Subscription Agreement for a subsequent
Offering Period in accordance with the procedures set forth in Section 71 if the
Participant desires to change any of the elections contained in the
Participant's then effective Subscription Agreement.
8. Right to Purchase Shares.
------------------------
8.1 Grant of Purchase Right. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in such Offering Period
shall be granted automatically, on the Offering Date, a Purchase Right
consisting of an option to purchase, on each Purchase Date within such Offering
Period, that number of whole shares of Stock determined by dividing the
aggregate payroll deductions collected from the Participant by the applicable
Purchase Price on such Purchase Date; provided, that no Participant may purchase
more than one thousand (1,000) shares of Stock on any Purchase Date.
8.2 Calendar Year Purchase Limitation. Notwithstanding any provision
of the Plan to the contrary, no Participant shall be granted a Purchase Right
which permits his or her
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right to purchase shares of Stock under the Plan to accrue at a rate which, when
aggregated with such Participant's rights to purchase shares under all other
employee stock purchase plans of a Participating Company intended to meet the
requirements of Section 423 of the Code, exceeds Twenty-Five Thousand Dollars
($25,000) in Fair Market Value (or such other limit, if any, as may be imposed
by the Code) for each calendar year in which such Purchase Right is outstanding
at any time. For purposes of the preceding sentence, the Fair Market Value of
shares purchased during a given Offering Period shall be determined as of the
Offering Date for such Offering Period. The limitation described in this Section
shall be applied in conformance with applicable regulations under Section
423(b)(8) of the Code.
9. Purchase Price.
--------------
The Purchase Price at which each share of Stock may be acquired in an
Offering Period upon the exercise of all or any portion of a Purchase Right
shall be established by the Board; provided, however, that the Purchase Price
shall not be less than eighty-five percent (85%) of the lesser of (a) the Fair
Market Value of a share of Stock on the Offering Date of the Offering Period or
(b) the Fair Market Value of a share of Stock on the Purchase Date. Unless
otherwise provided by the Board prior to the commencement of an Offering Period,
the Purchase Price for that Offering Period shall be eighty-five percent (85%)
of the lesser of (a) the Fair Market Value of a share of Stock on the Offering
Date of the Offering Period, or (b) the Fair Market Value of a share of Stock on
the Purchase Date.
10. Accumulation of Purchase Price through Payroll Deduction.
--------------------------------------------------------
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering Period for
which such Purchase Right was granted, subject to the following:
10.1 Amount of Payroll Deductions. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period (after the Offering Date)
shall be determined by the Participant's Subscription Agreement. The
Subscription Agreement shall set forth the percentage of the Participant's
Compensation to be deducted on each payday during an Offering Period (after the
Offering Date) in whole percentages of not less than one percent (1%) (except as
a result of an election pursuant to Section 103 to stop payroll deductions made
effective following the first payday during an Offering after the Offering Date)
or more than ten percent (10%). Notwithstanding the foregoing, the Board may
change the limits on payroll deductions effective as of any future Offering
Date.
10.2 Commencement of Payroll Deductions. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
herein.
10.3 Election to Change or Stop Payroll Deductions. During an
Offering Period, a Participant may elect to increase or decrease the rate of or
to stop deductions from his or her Compensation by delivering to the Company an
amended Subscription Agreement authorizing such change on or before the "Change
Notice Date." The "Change Notice Date"
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shall be a date prior to the beginning of the first pay period for which such
election is to be effective as established by the Company from time to time and
announced to the Participants. A Participant who elects to decrease the rate of
his or her payroll deductions to zero percent (0%) shall nevertheless remain a
Participant in the current Offering Period unless such Participant withdraws
from the Plan as provided in Section 121.
10.4 Administrative Suspension of Payroll Deductions. The Company
may, in its sole discretion, suspend a Participant's payroll deductions under
the Plan as the Company deems advisable to avoid accumulating payroll deductions
in excess of the amount that could reasonably be anticipated to purchase the
maximum number of shares of Stock permitted during a calendar year under the
limit set forth in Section 82. Payroll deductions shall be resumed at the rate
specified in the Participant's then effective Subscription Agreement at the
beginning of the next Offering Period the Purchase Date of which falls in the
following calendar year.
10.5 Participant Accounts. Individual bookkeeping accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of the Company. All payroll deductions
received or held by the Company may be used by the Company for any corporate
purpose.
10.6 No Interest Paid. Interest shall not be paid on sums deducted
from a Participant's Compensation pursuant to the Plan.
10.7 Voluntary Withdrawal from Plan Account. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company a written notice on a form provided by the Company for
such purpose. A Participant who withdraws the entire remaining balance credited
to his or her Plan account shall be deemed to have withdrawn from the Plan in
accordance with Section 121. Amounts withdrawn shall be returned to the
Participant as soon as practicable after the withdrawal and may not be applied
to the purchase of shares in any Offering under the Plan. The Company may from
time to time establish or change limitations on the frequency of withdrawals
permitted under this Section, establish a minimum dollar amount that must be
retained in the Participant's Plan account, or terminate the withdrawal right
provided by this Section.
11. Purchase of Shares.
------------------
11.1 Exercise of Purchase Right. On each Purchase Date, each
Participant who has not withdrawn from the Plan and whose participation in the
Offering has not terminated before such Purchase Date shall automatically
acquire pursuant to the exercise of the Participant's Purchase Right the number
of whole shares of Stock determined by dividing (a) the total amount of the
Participant's payroll deductions accumulated in the Participant's Plan account
during the Offering Period and not previously applied toward the purchase of
Stock by (b) the Purchase Price. No shares of Stock shall be purchased on a
Purchase Date on behalf of a Participant whose participation in the Offering or
the Plan has terminated before such Purchase Date.
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11.2 Pro Rata Allocation of Shares. In the event that the number of
shares of Stock which might be purchased by all Participants in the Plan on a
Purchase Date exceeds the number of shares of Stock available in the Plan as
provided in Section 41, the Company shall make a pro rata allocation of the
remaining shares in as uniform a manner as shall be practicable and as the
Company shall determine to be equitable. Any fractional share resulting from
such pro rata allocation to any Participant shall be disregarded.
11.3 Delivery of Certificates. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant, as
appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the name of the Participant, or, if requested by the Participant,
in the name of the Participant and his or her spouse, or, if applicable, in the
names of the heirs of the Participant.
11.4 Return of Cash Balance. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash to be returned to a Participant pursuant to the preceding sentence is an
amount less than the amount that would have been necessary to purchase an
additional whole share of Stock on such Purchase Date, the Company may retain
such amount in the Participant's Plan account to be applied toward the purchase
of shares of Stock in the subsequent Offering Period (or Purchase Period, if
applicable).
11.5 Tax Withholding. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some or
all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 Expiration of Purchase Right. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which the Purchase Right relates shall expire immediately upon the end of the
Offering Period.
11.7 Reports to Participants. Each Participant who has exercised all
or part of his or her Purchase Right shall receive, as soon as practicable after
the Purchase Date, a report of such Participant's Plan account setting forth the
total payroll deductions accumulated prior to such exercise, the number of
shares of Stock purchased, the Purchase Price for such shares, the date of
purchase and the cash balance, if any, remaining immediately after such purchase
that is to be refunded or retained in the Participant's Plan account pursuant to
Section 114. The report required by this Section may be delivered in such form
and by such means, including by electronic transmission, as the Company may
determine.
12. Withdrawal from Plan.
--------------------
12.1 Voluntary Withdrawal from the Plan. A Participant may withdraw
from the Plan by signing and delivering to the Company a written notice of
withdrawal on a form
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provided by the Company for such purpose. Such withdrawal may be elected at any
time prior to the end of an Offering Period. A Participant who voluntarily
withdraws from the Plan is prohibited from resuming participation in the Plan in
the same Offering from which he or she withdrew, but may participate in any
subsequent Offering by again satisfying the requirements of Sections 5 and 71.
The Company may impose a requirement that the notice of withdrawal from the Plan
be on file with the Company for a reasonable period prior to the effectiveness
of the Participant's withdrawal.
12.2 Return of Payroll Deductions. Upon a Participant's voluntary
withdrawal from the Plan pursuant to Section 121, the Participant's accumulated
payroll deductions which have not been applied toward the purchase of shares of
Stock shall be refunded to the Participant as soon as practicable after the
withdrawal, without the payment of any interest, and the Participant's interest
in the Plan shall terminate. Such accumulated payroll deductions to be refunded
in accordance with this Section may not be applied to any other Offering under
the Plan.
13. Termination of Employment or Eligibility.
----------------------------------------
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, disability or death, or the failure of a Participant to remain an
Eligible Employee, the Participant's participation in the Plan shall terminate
immediately. In such event, the payroll deductions credited to the
Participant's Plan account since the last Purchase Date shall, as soon as
practicable, be returned to the Participant or, in the case of the Participant's
death, to the Participant's legal representative, and all of the Participant's
rights under the Plan shall terminate. Interest shall not be paid on sums
returned pursuant to this Section 13. A Participant whose participation has
been so terminated may again become eligible to participate in the Plan by again
satisfying the requirements of Sections 5 and 71.
14. Change in Control.
-----------------
14.1 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
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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.
14.2 Effect of Change in Control on Purchase Rights. 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 assume the Company's rights and obligations under the Plan.
If the Acquiring Corporation elects not to assume the Company's rights and
obligations under outstanding Purchase Rights, the Purchase Date of the then
current Offering Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. All Purchase
Rights which are neither assumed 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.
15. Nontransferability of Purchase Rights.
-------------------------------------
A Purchase Right may not be transferred in any manner otherwise than
by will or the laws of descent and distribution and shall be exercisable during
the lifetime of the Participant only by the Participant.
16. Compliance with Securities Law.
------------------------------
The issuance of shares under the Plan shall be subject to compliance
with all applicable requirements of federal, state and foreign law with respect
to such securities. A Purchase Right may not be exercised if the issuance of
shares upon such exercise would constitute a violation of any applicable
federal, state or foreign securities laws or other law or regulations or the
requirements of any securities exchange or market system upon which the Stock
may then be listed. In addition, no Purchase Right may be exercised unless (a)
a registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan 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 a
Purchase Right, the Company may require the Participant 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.
11
<PAGE>
17. Rights as a Shareholder and Employee.
------------------------------------
A Participant shall have no rights as a shareholder by virtue of the
Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 42. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
18. Legends.
-------
The Company may at any time place legends or other identifying symbols
referencing any applicable federal, state or foreign securities law restrictions
or any provision convenient in the administration of the Plan on some or all of
the certificates representing shares of Stock issued under the Plan. The
Participant shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY
NOMINEE)."
19. Notification of Sale of Shares.
------------------------------
The Company may require the Participant to give the Company prompt
notice of any disposition of shares acquired by exercise of a Purchase Right
within two (2) years from the date of granting such Purchase Right or one (1)
year from the date of exercise of such Purchase Right. The Company may require
that until such time as a Participant disposes of shares acquired upon exercise
of a Purchase Right, the Participant shall hold all such shares in the
Participant's name (or, if elected by the Participant, in the name of the
Participant and his or her spouse but not in the name of any nominee) until the
lapse of the time periods with respect to such Purchase Right referred to in the
preceding sentence. The Company may direct that the certificates evidencing
shares acquired by exercise of a Purchase Right refer to such requirement to
give prompt notice of disposition.
12
<PAGE>
20. Notices.
-------
All notices or other communications by a Participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.
21. 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.
22. Amendment or Termination of the Plan.
------------------------------------
The Board may at any time amend or terminate the Plan, except that (a)
such termination shall not affect Purchase Rights previously granted under the
Plan, provided that the Board may terminate the Plan (and any Offering
thereunder) on any Purchase Date if the Board determines that such termination
is in the best interests of the Company and its shareholders except as permitted
under the Plan, and (b) no amendment may adversely affect a Purchase Right
previously granted under the Plan (except to the extent permitted by the Plan or
as may be necessary to qualify the Plan as an employee stock purchase plan
pursuant to Section 423 of the Code or to obtain qualification or registration
of the shares of Stock under applicable federal, state or foreign securities
laws). In addition, an amendment to the Plan must be approved by the
shareholders of the Company within twelve (12) months of the adoption of such
amendment if such amendment would authorize the sale of more shares than are
authorized for issuance under the Plan or would change the definition of the
corporations that may be designated by the Board as Participating Companies.
13
<PAGE>
EXHIBIT 10.6
AMENDMENT NO. 1
INVESTOR RIGHTS AGREEMENT
This Amendment No. 1 is entered into as of the 19/th/ day of July 1999 and
amends that certain Investor Rights Agreement (the "Agreement") entered into as
of March 23, 1999, by and among GoodNoise Corporation, a Florida corporation
(the "Company") and the purchasers of the Company's Series B Preferred Stock of
the Company (the "Purchasers").
RECITAL
-------
Pursuant to the terms of the Agreement, the Agreement can be amended with
the consent of the Company and the holders of at least 67% of the Registrable
Securities (as defined in the Agreement). Due to the proposed filing by the
Company of a registration statement relating to a follow-on offering (the
"Follow-on Registration Statement), it is proposed to delay the filing of the
Registration Statement (as defined in the Agreement) until all issues with the
Securities and Exchange Commission are resolved regarding the Follow-on
Registration Statement.
The parties agree as follows:
1. The first sentence of Section 1.2 of the Agreement is hereby amended
and restated as follows:
Not later than the earlier of (i) ten days following the date in which the
Company has resolved final comments with the SEC with respect to the Follow
On Offering Registration Statement or (ii) September 30, 1999, the Company
shall file a registration statement with respect to the Registrable
Securities (such registration statement and any successor or substitute
registration statement being referred to in this Section 1.2 as the
"Registration Statement").
2. Except as provided herein, the terms of the Agreement remain in full
force and effect.
1
<PAGE>
The foregoing agreement is hereby executed as of the date first above
written.
"COMPANY"
GOODNOISE CORPORATION
By: ________________________________________
Gene Hoffman, Jr.,
President and Chief Executive Officer
2
<PAGE>
COUNTERPART SIGNATURE PAGE TO
GOODNOISE CORPORATION AMEMDMENT NO. 1 TO RIGHTS AGREEMENT
"Purchaser"
If you are an individual, print your name and
sign below.
______________________________________________
Name (Please Print)
______________________________________________
Signature
If you are signing on behalf of an entity,
please print the name of the entity and sign
below, indicating your title.
______________________________________________
Name (Please Print)
______________________________________________
Signature
______________________________________________
Title
3
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Name State of Incorporation
---- ----------------------
Creative Fulfullment, Inc. California
Internet Underground Music Archive, Inc. California
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated October 28, 1998 relating to the financial statements of
EMusic.com Inc. (formerly Goodnoise Corporation), our report dated March 31,
1999 relating to the financial statements of Creative Fulfillment Inc., and our
report dated July 21, 1999 relating to the financial statements of Internet
Underground Music Archive Inc. ("IUMA") which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
July 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOODNOISE
CORPORATION'S ANNUAL REPORT ON FORMS 10-KSB/A FOR THE YEAR ENDED JUNE 30, 1998,
AND QUARTERLY REPORT ON FORMS 10-QSB FOR THE QUARTER ENDED MARCH 31, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 32,618,240
<SECURITIES> 0
<RECEIVABLES> 6,892
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,901,672
<PP&E> 187,092
<DEPRECIATION> (30,775)
<TOTAL-ASSETS> 38,800,350
<CURRENT-LIABILITIES> 3,182,275
<BONDS> 0
31,767,593
0
<COMMON> 156,555
<OTHER-SE> 3,693,927
<TOTAL-LIABILITY-AND-EQUITY> 38,800,350
<SALES> 0
<TOTAL-REVENUES> 41,526
<CGS> 0
<TOTAL-COSTS> 13,840
<OTHER-EXPENSES> 4,295,608
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,264,105)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,264,105)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,264,106)
<EPS-BASIC> (2.48)
<EPS-DILUTED> (2.48)
</TABLE>
