<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K/A
CURRENT REPORT
Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 15, 1999
EMUSIC.COM INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Delaware 0-24671 65-0207877
- ------------------------------- ------------------------ ---------------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation)
- ---------------------------------------------------------------------------------------------------------------------------
1991 Broadway, 2nd Floor
Redwood City, California 94063
(Address of principal executive offices) (Zip Code)
- ---------------------------------------------------------------------------------------------------------------------------
Registrant's telephone number, including area code: (650) 216-0200
(Former name or former address, if changed since last report)
</TABLE>
<PAGE>
This Amendment No. 1 to the Current Report on Form 8-K dated November 22,
1999 (the "Report") filed by Emusic.com Inc., a Delaware corporation (the
"Company"), is being filed in connection with the Company's acquisition of
Group K Inc., a New York corporation, d.b.a. Cductive, by way of a merger of
GNA Corporation, a Delaware corporation and wholly owned subsidiary of the
Company, with and into Group K Inc. (the "Merger") with Group K Inc. being the
surviving corporation in the Merger, pursuant to the terms and conditions set
forth in the Agreement and Plan of Reorganization, dated as of November 15,
1999, and previously filed as Exhibit 99.1 to the Report. The Company hereby
amends Item 5 and Item 7 of the Report as set forth below to provide for
certain supplementary financial information.
Item 5. Other Events.
The following supplemental financial information relating to the Merger
is filed as part of this Report:
(a) Unaudited pro forma condensed combining financial information; and
(b) Audited financial statements of Group K Inc. for the fiscal years
ended December 31, 1997 and 1998, and unaudited financial statements
for the nine months ended September 30, 1999.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
See Exhibit 99.3 for the audited financial statements of Group K Inc.
(b) Pro Forma Financial Information
See Exhibit 99.2 for the Unaudited Pro Forma Combined Condensed
Financial Information.
(c) Exhibits
Exhibit No. Description
----------- -----------
23.1 Consent of Richard A. Eisner & Company, LLP,
Independent Auditors.
99.1* Agreement and Plan of Reorganization, dated as of
November 15, 1999.
99.2 Unaudited Pro Forma Condensed Combining Financial
Information.
99.3 Audited Financial Statements of Group K Inc. for the
fiscal years ended December 31, 1997 and 1998, and
unaudited Financial Statements for the nine months
ended September 30, 1999.
* Previously filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
EMUSIC.COM INC.
Date: December 22, 1999
By: /s/ Joseph Howell
-------------------
Joseph Howell
Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement Form
S-8 Nos. 333-82841 and 333-86551 of EMusic.com Inc., of our report dated
November 19, 1999 on our audit of financial statements of Group K Inc., included
in this Current Report (Form 8-K/A dated on or about December 22, 1999, filed
with the Securities and Exchange Commission.
/s/ Richard A. Eisner & Company, LLP
New York, New York
December 20, 1999
<PAGE>
EXHIBIT 99.2
UNAUDITED PROFORMA CONDENSED COMBINING BALANCE SHEET DATA
(In thousands)
<TABLE>
<CAPTION>
EMusic.com Cductive Pro Forma
------------- ------------- ----------------------
September 30, September 30,
1999 1999 Adjustments Combined
------------- ------------- ----------- --------
(see note 5)
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash..................... $ 78,904 $ 888 $ -- $ 79,792
Accounts receivable...... 168 -- -- 168
Prepaid expenses and
other assets............ 9,531 17 -- 9,548
-------- ------- ------- --------
Total current assets... 88,603 905 -- 89,508
-------- ------- ------- --------
Property and equipment,
net....................... 1,989 219 2,208
Music content, net......... 11,746 239 11,985
Trade names, net........... 22,397 -- 35,867 (J) 58,264
Other intangible assets,
net....................... -- -- --
Other assets............... 430 73 -- 503
-------- ------- ------- --------
Total assets........... $125,165 $ 1,436 $35,867 $162,468
-------- ------- ------- --------
Liabilities and
Stockholders' Equity
Current Liabilities:
Accounts payable......... $ 406 $ 272 $ -- $ 678
Accrued liabilities...... 1,829 28 100 (J) 1,957
Accrued payroll and
related benefits........ 430 -- -- 430
Deferred revenue......... -- -- -- --
Dividends payable on
preferred stock......... 1,061 92 -- 1,153
Current portion of long
term debt............... -- 69 -- 69
-------- ------- ------- --------
Total current
liabilities........... 3,726 461 100 4,287
-------- ------- ------- --------
Long term debt............. -- 60 -- 60
Redeemable convertible
preferred stock........... -- 1,217 (1,217)(K) --
-------- ------- ------- --------
Total Liabilities.......... 3,726 1,738 (1,117) 4,347
-------- ------- ------- --------
Stockholders' Equity
(Deficit):
Preferred Stock.......... -- -- -- --
Common Stock............. 34 3 (3)(K) 2,170
2,136 (J)
Additional paid-in 184,498 2,008 (2,008)(K) 219,044
capital................. 34,546 (J)
Common stock to be issued.. -- -- -- --
Deficit accumulated
during the development
stage................... (63,093) (2,313) 2,313 (K) (63,093)
-------- ------- ------- --------
Total stockholders'
equity................ 121,439 (302) 36,984 158,121
-------- ------- ------- --------
Total liabilities and
stockholders' equity.. $125,165 $ 1,436 $35,867 $162,468
======== ======= ======= ========
</TABLE>
<PAGE>
UNAUDITED PROFORMA CONDENSED COMBINING BALANCE SHEET DATA--(Continued)
(In thousands)
<TABLE>
<CAPTION>
Tunes.com Pro Forma
------------- -----------------------
September 30,
1999 Adjustments Combined
------------- ----------- --------
(see Note 5)
<S> <C> <C> <C>
Assets
Current Assets:
Cash................................... $ 7,528 $ -- $ 87,320
Accounts receivable.................... 882 -- 1,050
Prepaid expenses and other assets...... 2,777 -- 12,325
-------- -------- --------
Total current assets................. 11,187 -- 100,695
-------- -------- --------
Property and equipment, net.............. 1,593 -- 3,801
Music content, net....................... -- -- 11,985
Trade names, net......................... 1,423 137,933 (L) $197,620
Other intangible assets, net............. 2,044 (2,044)(L) --
Other assets............................. 52 -- 555
-------- -------- --------
Total assets......................... $ 16,299 $135,889 $314,656
-------- -------- --------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable....................... $ 1,327 -- 2,005
Accrued liabilities.................... 1,783 3,893 (L) 7,633
Accrued payroll and related benefits... 537 -- 967
Deferred revenue....................... 96 -- 96
Dividends payable on preferred stock... -- -- 1,153
Current portion of long term debt...... -- -- 69
-------- -------- --------
Total current liabilities............ 3,743 3,893 11,923
-------- -------- --------
Long term debt........................... 82 -- 142
Deferred tax liability................... -- 9,435 (L) 9,435
Redeemable convertible preferred stock... 43,135 (43,135)(M) --
-------- -------- --------
Total liabilities........................ 46,960 (29,807) 21,500
-------- -------- --------
Stockholders' Equity (Deficit):
Preferred Stock
Common Stock........................... 15 (15)(M) 2,176
6 (L)
Additional paid-in capital............. 10,673 (10,673)(M) 354,073
135,029 (L)
Common stock to be issued................ 55 (55)(M) --
Deficit accumulated during the
development stage..................... (41,404) 41,404 (M) (63,093)
-------- -------- --------
Total stockholders' equity........... (30,661) 165,696 293,156
-------- -------- --------
Total liabilities and stockholders'
equity.............................. $(16,299) $135,889 $314,656
======== ======== ========
</TABLE>
<PAGE>
UNAUDITED PROFORMA CONDENSED COMBINING STATEMENT OF OPERATIONS DATA
(In thousands except per share amounts)
<TABLE>
<CAPTION>
EMusic.com Cductive Pro Forma
------------- ------------- ----------------------
Three Months Three Months
Ended Ended
September 30, September 30,
1999 1999 Adjustments Combined
------------- ------------- ----------- --------
(see note
5)
<S> <C> <C> <C> <C>
Revenues................... $ 180 $ 22 $ -- $ 202
Cost of revenues........... 25 32 -- 57
-------- ------ ------- --------
Gross profit (loss)....... 155 (10) -- 145
-------- ------ ------- --------
Operating expenses:
Product development....... 6,011 226 -- 6,237
Selling and marketing..... 4,771 111 -- 4,882
General and
administrative........... 812 531 -- 1,343
Amortization of trade
names.................... 2,283 -- $ 2,989 (B) 5,272
-------- ------ ------- --------
Total operating expenses.. 13,877 868 2,989 17,734
-------- ------ ------- --------
Operating loss............. (13,722) (878) (2,989) (17,589)
Interest and other income
(expense), net............ 203 (6) -- 197
-------- ------ ------- --------
Net income (loss).......... $(13,519) $ (884) $(2,989) $(17,392)
Accretion of Series B
Preferred to redemption
value..................... (224) -- -- (224)
Dividend on Series B
Preferred Stock........... (493) -- -- (493)
-------- ------ ------- --------
Net loss applicable to
common stockholders....... $(14,236) $ (884) $2,989 $(18,109)
======== ====== ======= ========
Net loss per share, basic
and diluted............... $ (1.09) $ (1.19)
======== ========
Weighted average common
shares outstanding, basic
and diluted............... 13,058 2,136 (A) 15,194
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Tunes.com Pro Forma
------------- ----------------------
Three Months
Ended
September 30,
1999 Adjustments Combined
------------- ----------- --------
<S> <C> <C> <C>
Revenues................................. $ 1,305 $ -- $ 1,507
Cost of revenues......................... 1,106 (340)(E) 823
------- ------- --------
Gross profit (loss)..................... 199 -- 684
------- ------- --------
Operating expenses:
Product development..................... 1,006 340 (E) 7,583
Selling and marketing................... 4,343 -- 9,225
General and administrative.............. 1,135 -- 2,478
Amortization of trade names............. 681 8,789 (D) 14,742
------- ------- --------
Total operating expenses................ 7,165 9,129 34,028
------- ------- --------
Operating loss........................... (6,966) (8,789) (33,344)
Interest and other income (expense),
net..................................... 126 -- 323
------- ------- --------
Net income (loss)........................ $(6,840) $(8,789) $(33,021)
Accretion of Series B Preferred to
redemption value........................ -- -- (224)
Dividend on Series B Preferred Stock..... -- -- (493)
------- ------- --------
Net loss applicable to common
stockholders............................ $ 6,840 $(8,789) $(33,738)
======= ======= ========
Net loss per share, basic and diluted.... $ (1.60)
========
Weighted average common shares
outstanding, basic and diluted.......... -- 5,892 (C) 21,086
======= ======= ========
</TABLE>
See accompanying notes.
<PAGE>
UNAUDITED PROFORMA CONDENSED COMBINING STATEMENT OF OPERATIONS DATA--(Continued)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
EMusic.com
------------- Creative IUMA Cductive.com
Twelve Months Fulfillment Nine Twelve
Ended Six Months Ended Months Ended Months Ended
June 30, 1999 January 31, 1999 April 30, 1999 June 30, 1999
------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues................ $ 92 $103 $ 299 $ 105
Cost of revenues........ 27 32 -- 108
-------- ---- ------- -------
Gross profit (loss).... 65 71 299 (3)
-------- ---- ------- -------
Operating expenses:
Product development.... 11,690 57 255 496
Selling and marketing.. 556 -- -- 183
General and
administrative........ 1,599 13 1,120 551
Amortization of trade
names................. 1,682 -- -- --
-------- ---- ------- -------
Total operating
expenses.............. 15,527 70 1,375 1,230
-------- ---- ------- -------
Operating loss.......... (15,462) 1 (1,076) (1,233)
Interest and other
income (expense), net.. 322 -- -- (14)
-------- ---- ------- -------
Net income (loss)....... $(15,140) $ 1 $(1,076) $(1,247)
Accretion of Series A
Preferred to redemption
value.................. (25) -- -- --
Beneficial conversion
charge, Series A
Preferred Stock........ (144) -- -- --
Accretion of Series B
Preferred to redemption
value.................. (222) -- -- --
Beneficial conversion
charge, Series B
Preferred Stock........ (31,577) -- -- --
Dividend on Series B
Preferred Stock........ (569) -- -- --
-------- ---- ------- -------
Net loss applicable to
common stockholders.... $(47,677) $ 1 $ 1,076 (1,247)
======== ==== ======= =======
Net loss per share,
basic and diluted...... $ (3.52)
========
Weighted average common
shares outstanding,
basic and diluted...... 13,564
========
</TABLE>
<TABLE>
<CAPTION>
Tunes.com
Twelve Months
Ended
June 30, 1999 Adjustments Combined
------------- ----------- ---------
(see Note 5)
<S> <C> <C> <C>
Revenues................................ $ 3,351 $ (50)(G) $ 3,900
Cost of revenues........................ 4,008 (1,271)(H) 2,904
-------- -------- ---------
Gross profit (loss).................... (657) 1,221 6,804
-------- -------- ---------
Operating expenses:
Product development.................... 9,600 1,233 (H) 23,331
Selling and marketing.................. 6,055 -- 6,794
General and administrative............. 3,754 -- 7,037
Amortization of trade names............ 2,836 50,849 (I) 55,367
-------- -------- ---------
Total operating expenses............... 22,245 52,082 92,529
-------- -------- ---------
Operating loss.......................... (22,902) (50,861) (85,725)
Interest and other income (expense),
net.................................... 280 -- 588
-------- -------- ---------
Net income (loss)....................... $(22,622) $(50,861) $ (85,137)
Accretion of Series A Preferred to
redemption value....................... -- -- (25)
Beneficial conversion charge, Series A
Preferred Stock........................ -- -- (144)
Accretion of Series B Preferred to
redemption value....................... -- -- (222)
Beneficial conversion charge, Series B
Preferred Stock........................ -- -- (31,577)
Dividend on Series B Preferred Stock.... -- -- (569)
-------- -------- ---------
Net loss applicable to common
stockholders.......................... (22,622) (50,861) $(117,674)
======== ======== ---------
Net loss per share, basic and diluted... $ (5.26)
=========
Weighted average common shares
outstanding, basic and diluted......... -- 8,806 (F) 22,370
======== ======== =========
</TABLE>
See accompanying notes
<PAGE>
NOTES TO UNAUDITED PROFORMA CONDENSED COMBINING FINANCIAL DATA
1. The preliminary allocation of the purchase price among the indentifiable
tangible and intangible assets was based on a preliminary assessment of the
fair market value of those assets. The Company is amortizing the intangible
assets over their estimated useful life of three and ten years using the
straight line method. For the purposes of the unaudited proforma condensed
combining financial data we allocated 30% of intangible assets obtained through
the acquisition of Tunes.com to Rollingstone.com, to be amortized over ten
years. Rollingstone.com is a trade name that Tunes.com acquired pursuant to an
agreement that has a life of ten years but contains provisions for a five year
extension based on certain contingencies. The Company has engaged an
independent valuations consultant to perform an allocation of the purchase
price based on generally accepted valuation techniques. To the extent the
purchase price is allocated to Rollingstone.com or a longer life is determined,
the adjustment will be made to the amortization which could be material in
amount. Any adjustments arising as a result of the valuation work will be
recorded upon its completion.
2. Below is a table of the estimated acquisition cost, estimated purchase
price allocation and estimated amortization of intangible assets of Tunes.com
and Cductive as of September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
September 30, 1999: Tunes.com Cductive
------------------- --------- --------
<S> <C> <C>
Estimated acquisition price:
Value of securities issued............................... $135,035 $36,682
Acquisition costs........................................ 3,893 100
-------- -------
Total acquisition costs................................ 138,928 36,782
Deferred tax liability................................... 9,435 --
-------- -------
Total.................................................. 148,363 36,782
======== =======
Estimated purchase price allocation:
Tangible net assets acquired............................. $ 9,007 $ 915
Goodwill and other intangibles........................... 139,356 35,867
-------- -------
Total.................................................. 148,363 36,782
======== =======
Estimated amortization (based on composite amortization
period of approximately four years)
Annual..................................................... $ 35,156 $11,956
======== =======
</TABLE>
The tangible net assets of Tunes.com and Cductive include cash, accounts
receivable, other current assets and property and equipment net of liabilities.
Liabilities include accounts payable and other accrued liabilities.
3. The unaudited pro forma combined loss per share is based on the weighted
average number of common and common equivalent shares of EMusic, 630,000 shares
issued to Creative Fulfillment, 448,000 shares issued to IUMA, 2,136,000 shares
issued to Cductive and 5,892,000 shares to be issued to Tunes.com for the three
month period ended September 30, 1999 and the year ended June 30, 1999. The
dilutive effect of stock options has been excluded since the unaudited pro
forma condensed statement of operations results in a net loss for the three-
months ended September 30, 1999 and the year ended June 30, 1999.
The pro-forma combined basic and diluted loss per share information was
determined as follows for the three-months ended September 30, 1999 (in
thousands):
<TABLE>
<S> <C>
EMusic shares used for net loss per share calculation............... 13,058
EMusic shares issued for the acquisition of Cductive................ 2,136
EMusic shares issued for the acquisition of Tunes.com............... 5,892
------
Pro forma combined EMusic shares used for loss per share
calculation........................................................ 21,086
======
</TABLE>
<PAGE>
The pro forma combined basic and diluted loss per share information was
determined as follows for the year ended June 30, 1999 (in thousands):
<TABLE>
<S> <C>
EMusic shares used for net loss per share calculation............... 13,564
Adjustment to give full period effect of EMusic shares issued for
Creative Fulfillment............................................... 367
Adjustment to give full period effect of EMusic shares issued for
acquisition of IUMA................................................ 411
EMusic shares issued for the acquisition of Cductive................ 2,136
EMusic shares issued for the acquisition of Tunes.com............... 5,892
------
Pro forma combined EMusic shares used for loss per share
calculation........................................................ 22,370
======
</TABLE>
4. These unaudited pro forma combined condensed financial statements reflect
the issuance of 5,891,712 shares of EMusic common stock in exchange for all of
the outstanding shares of common stock of Tunes.com as of September 30, 1999.
The following table details the pro forma share issuance in connection with
the acquisition as of September 30, 1999 (in thousands):
<TABLE>
<S> <C>
Number of shares of EMusic common stock issued for Cductive net
tangible assets.................................................... 2,136
Number of shares of EMusic common stock issued for Tunes.com net
tangible assets.................................................... 5,892
Number of shares of EMusic common stock outstanding as of September
30, 1999........................................................... 34,002
------
Number of shares of EMusic common stock outstanding after the
completion of acquisition.......................................... 42,030
======
</TABLE>
5. 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, IUMA, Cductive and Tunes.com based on their fair
value:
Adjustments reflecting the acquisition of Cductive and Tunes.com for the
three months ended September 30, 1999:
(A) Reflects the issuance of 2,136,000 shares of Common Stock in exchange
for all outstanding common shares of Cductive.
(B) Reflects the amortization of intangible assets associated with the
purchase of Cductive 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. Any adjustments
arising as a result of the completion of valuation work to be performed
by the independent valuation consultant, may have a material effect on
the amortization for the period reported.
(C) Reflects the issuance of 5,892,000 shares of Common Stock in exchange
for all the outstanding common stock of Tunes.com.
(D) Reflects the amortization of intangible assets associated with the
purchase of Tunes.com 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. Any adjustments arising as a
result of the completion of valuation work to be performed by the
independent valuation consultant, may have a material effect on the
amortization for the period reported.
(E) Reflects the adjustment to Tunes.com to conform expense classifications
for reporting with respect to the allocation of expense to cost of
revenues versus product development.
<PAGE>
Adjustments reflecting the acquisition of Creative Fulfillment, IUMA,
Cductive and Tunes.com for the twelve months ended June 30, 1999:
(F) Reflects the issuance of 367,000 shares for Creative Fulfillment,
411,000 shares for IUMA, 2,136,000 shares for Cductive and 5,892,000
shares for Tunes.com.
(G) Reflects the elimination of inter-company development consulting
revenue paid by EMusic.com to Creative Fulfillment.
(H) Reflects the adjustment to Tunes.com to conform expense classifications
for reporting and the elimination of expense related to inter-company
development consulting revenue paid by EMusic.com to Creative
Fulfillment.
(I) Reflects the amortization of intangible assets associated with the
purchase of Creative Fulfillment, IUMA, Cductive and Tunes.com as if
the acquisition was completed as of July 1, 1998. Amortization for
Cductive and Tunes.com is over the estimated useful lives of the assets
acquired. Any adjustments arising as a result of the completion of
valuation work to be performed by the independent valuations
consultant, may have a material effect on the amortization for the
period reported.
Adjustments reflecting the acquisition of Cductive and Tunes.com on September
30, 1999:
(J) Reflects the allocation of the Cductive purchase price of approximately
$36,782,000, which consisted of the issuance of 2,136,000 shares of
Common Stock valued at $14.85 per share, assumption of fully-vested
warrants and options for 471,000 shares of Common Stock, net assets
assumed of approximately $915,000 and direct acquisition related
expenses of $100,000.
(K) Reflects the elimination of Cductive's equity accounts.
(L) Reflects the allocation of the Tunes.com purchase price of
approximately $138,928,000, which consisted of the issuance of
5,892,000 shares of Common Stock valued at $14.29 per share, assumption
of fully-vested warrants and options for 4,708,000 shares of Common
Stock, net assets assumed of approximately $9,007,000 and direct
acquisition related expenses of $3,893,000.
(M) Reflects the elimination of Tunes.com's equity accounts.
<PAGE>
EXHIBIT 99.3
GROUP K INC.
(A Development Stage Company)
(Note L[1])
Contents
<TABLE>
<CAPTION>
Page
----
Financial Statements
<S> <C>
Independent auditors' report............................................. 1
Balance sheets as of December 31, 1998 and 1997 and September 30, 1999
(unaudited)............................................................. 2
Statements of operations for the period from June 16, 1997 (inception)
through December 31, 1998, the year ended December 31, 1998, for the
period from June 16, 1997 (inception) through December 31, 1997, for the
period June 16, 1997 (inception) through September 30, 1999 (unaudited)
and for the nine months ended September 30, 1999 and 1998 (unaudited)... 3
Statements of stockholders' equity for the period from June 16, 1997
(inception) through December 31, 1997 and for the year ended December
31, 1998 and for the nine months ended September 30, 1999 (unaudited)... 4
Statements of cash flows for the period from June 16, 1997 (inception)
through December 31, 1998, the year ended December 31, 1998, for the
period from June 16, 1997 (inception) through December 31, 1997 and for
the nine months ended September 30, 1999 and 1998 (unaudited)........... 5
Notes to financial statements............................................ 6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Group K Inc.
New York, New York
We have audited the accompanying balance sheets of Group K Inc. (a development
stage company) (Note L[1]) as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity and cash flows for the period
from June 16, 1997 (inception) through December 31, 1998, the year ended
December 31, 1998 and the period June 16, 1997 (inception) through December 31,
1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Group K Inc. (Note L[1]) as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the period from June 16, 1997 (inception) through December 31, 1998,
the year ended December 31, 1998 and the period June 16, 1997 (inception)
through December 31, 1997 in conformity with generally accepted accounting
principles.
Richard A. Eisner & Company, LLP
New York, New York
November 19, 1999
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1998 1997 1999
----------- -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 849,000 $ 36,000 $ 888,000
Subscription receivable (collected in
1999).................................. 283,000 -- --
Prepaid and other current assets........ 25,000 21,000 256,000
----------- -------- ----------
Total current assets.................. 1,157,000 57,000 1,144,000
Property and equipment, net............... 169,000 45,000 219,000
Other assets.............................. 42,000 -- 73,000
----------- -------- ----------
$ 1,368,000 $102,000 $1,436,000
=========== ======== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses... $ 75,000 $ 2,000 $ 300,000
Loans payable........................... -- 50,000 --
Current portion of capital lease
obligations.............................. 60,000 9,000 69,000
Dividends payable--preferred stock........ 38,000 -- 92,000
----------- -------- ----------
Total current liabilities............. 173,000 61,000 461,000
Capital lease obligations, less current
portion.................................. 92,000 29,000 60,000
----------- -------- ----------
265,000 90,000 521,000
----------- -------- ----------
Redeemable Preferred Stock (liquidation
preference $1,500,000)................... -- -- 1,217,000
----------- -------- ----------
Commitments and contingency
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Preferred stock--$.10 par value; 2,000,000
shares authorized;
Series B issued and outstanding 269,933
shares (liquidation preference
$810,000).............................. 27,000 -- --
Common stock--$.001 par value; 18,500,000
shares authorized;
3,154,002, 2,499,999 and 3,440,602 shares
issued and outstanding,
respectively............................. 3,000 2,000 3,000
Additional paid-in capital................ 1,766,000 58,000 2,008,000
Deficit accumulated during the development
stage.................................... (693,000) (48,000) (2,313,000)
----------- -------- ----------
1,103,000 12,000 (302,000)
----------- -------- ----------
$1,368,000 $102,000 $1,436,000
=========== ======== ==========
</TABLE>
See notes to financial statements
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
June 16, June 16,
1997 1997 June 16, 1997
(Inception) Year (Inception) Nine months ended (Inception)
Through Ended Through September 30, Through
December 31, December 31, December 31, ----------------------- September 30,
1998 1998 1997 1999 1998 1999
------------ ------------ ------------ ----------- ---------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 61,000 $ 60,000 $ 1,000 $ 80,000 $ 31,000 $ 141,000
Cost of sales........... 55,000 55,000 109,000 21,000 164,000
--------- --------- -------- ----------- --------- -----------
Gross profit (loss)..... 6,000 5,000 1,000 (29,000) 10,000 (23,000)
Expenses:
Selling, general and
administrative
expenses (excluding
equity
compensation)........ (570,000) (506,000) (64,000) (1,577,000) (285,000) (2,147,000)
Noncash compensation
charge............... (150,000) (150,000) -- (11,000) -- 161,000
Interest expense...... (13,000) (12,000) (1,000) (16,000) (6,000) (29,000)
Interest income......... 6,000 6,000 13,000 4,000 19,000
Other income............ 28,000 12,000 16,000 -- 12,000 28,000
--------- --------- -------- ----------- --------- -----------
Net loss................ $(693,000) $(645,000) $(48,000) $(1,620,000) $(265,000) $(2,313,000)
========= ========= ======== =========== ========= ===========
</TABLE>
See notes to financial statements
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
STATEMENTS OF STOCKHOLDERS' EQUITY (Capital Deficiency)
<TABLE>
<CAPTION>
Deficit Total
Accumulated Stockholders'
Preferred Stock Common Stock Additional During the Equity
------------------ ---------------- Paid-in Development (Capital
Shares Amount Shares Amount Capital Stage Deficiency)
-------- -------- --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
at inception of the
Company................ 2,499,999 $2,000 $ 58,000 $ 60,000
Net loss................ $ (48,000) (48,000)
-------- -------- --------- ------ ---------- ----------- -----------
Balance--December 31,
1997................... 2,499,999 2,000 58,000 (48,000) 12,000
Conversion of loans
payable into Series A
convertible preferred
stock at $0.90 per
share in April 1998.... 66,670 $ 7,000 53,000 60,000
Issuance of Series A
convertible preferred
stock at $1.00 per
share in April 1998.... 504,000 50,000 454,000 504,000
Issuance of Series B
convertible preferred
stock at $3.00 per
share in December
1998................... 269,933 27,000 783,000 810,000
Issuance of common stock
and 213,000 warrants in
December 1998.......... 83,333 250,000 250,000
Conversion of Series A
preferred stock into
common stock in
December 1998.......... (570,670) (57,000) 570,670 1,000 56,000 0
Value of options
granted................ 150,000 150,000
Dividends declared in
December 1998.......... (38,000) (38,000)
Net loss................ (645,000) (645,000)
-------- -------- --------- ------ ---------- ----------- -----------
Balance--December 31,
1998................... 269,933 $ 27,000 3,154,002 $3,000 $1,766,000 $ (693,000) $ 1,103,000
======== ======== ========= ====== ========== =========== ===========
Conversion of Series B
preferred stock into
common stock in August
1999................... (269,933) (27,000) 269,933 27,000
Issuance of common stock
through preferred stock
financing.............. 16,667 75,000 75,000
Issuance of common stock
warrants through
preferred stock
financing.............. 188,000 188,000
Accretion of Series C
preferred stock to
redemption value....... (5,000) (5,000)
Dividends declared in
August 1999............ (54,000) (54,000)
Value of options granted
to investors........... 11,000 11,000
Net loss................ (1,620,000) (1,620,000)
-------- -------- --------- ------ ---------- ----------- -----------
Balance--September 30,
1999 (unaudited)....... -- $ -- 3,440,602 $3,000 $2,008,000 $(2,313,000) $ (302,000)
======== ======== ========= ====== ========== =========== ===========
</TABLE>
See notes to financial statements
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 16, 1997 June 16, 1997 June 16, 1997
(Inception) (Inception) (Inception) Nine Months Ended
Through Year Ended Through Through September 30,
December 31, December 31, December 31, September 30, ----------------------
1998 1998 1997 1999 1999 1998
------------- ------------ ------------- ------------- ----------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $ (693,000) $ (645,000) $(48,000) $(2,313,000) $(1,620,000) $(265,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 46,000 42,000 4,000 111,000 65,000 24,000
Compensation expense
attributable to
options............... 150,000 150,000 161,000 11,000
Changes in:
Other assets.......... (67,000) (46,000) (21,000) (329,000) (262,000) (30,000)
Accounts payable and
accrued expenses..... 75,000 73,000 2,000 300,000 225,000 9,000
---------- ---------- -------- ----------- ----------- ---------
Net cash used in
operating activities... (489,000) (426,000) (63,000) (2,070,000) (1,581,000) (262,000)
---------- ---------- -------- ----------- ----------- ---------
Cash flows from
investing activities:
Additions to property
and equipment.......... (34,000) (24,000) (10,000) (122,000) (88,000) (46,000)
---------- ---------- -------- ----------- ----------- ---------
Cash flows from
financing activities:
Payment of capital lease
obligations............ (29,000) (28,000) (1,000) (79,000) (50,000) (15,000)
Loans payable........... 60,000 10,000 50,000 60,000 10,000
Proceeds from sale of
stock and warrants..... 1,341,000 1,281,000 60,000 3,099,000 1,758,000 504,000
---------- ---------- -------- ----------- ----------- ---------
Net cash provided by
financing activities... 1,372,000 1,263,000 109,000 3,080,000 1,708,000 449,000
---------- ---------- -------- ----------- ----------- ---------
Net increase in cash and
cash equivalents....... 849,000 813,000 36,000 888,000 39,000 191,000
Cash and cash
equivalents at
beginning of period.... 36,000 -- 849,000 36,000
---------- ---------- -------- ----------- ----------- ---------
Cash and cash
equivalents at end of
period................. $ 849,000 $ 849,000 $ 36,000 $ 888,000 $ 888,000 $ 227,000
========== ========== ======== =========== =========== =========
Cash paid for:
Interest................ $ 12,000 $ 11,000 $ 1,000 $ 28,000 $ 16,000 $ 6,000
Taxes................... $ 1,000 $ 1,000 $ 5,000 $ 4,000 $ 1,000
Supplemental disclosures
of noncash financing
activities:
Equipment purchased
under capital leases... $ 181,000 $ 142,000 $ 39,000 $ 208,000 $ 27,000 $ 74,000
Dividends declared not
yet paid............... $ 38,000 $ 38,000 $ 92,000 $ 54,000 $
Conversion of loans into
preferred stock........ $ 60,000 $ 60,000 $ 60,000 $ 60,000
</TABLE>
See notes to financial statements
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)
Note A--The Company
Group K Inc. (the "Company") (Note L[1]) incorporated on June 16, 1997 in the
State of New York and is doing business as CDuctive. The Company is an online
aggregator and distributor of independent label music. The Company offers its
catalog in digital download and custom CD compilation formats from its web site
www.cductive.com. The Company also provides distribution and e-commerce
services to a number of online partners. In May 1999, the Company expanded into
direct digital downloads with the launch of its MP3 digital download web site.
Since its inception the Company has been in the development stage devoting its
efforts primarily to organizing itself, recruiting management and technical
staff, developing its business, acquiring operating assets and raising capital.
Note B--Significant Accounting Policies
[1]Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
[2]Property and equipment:
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful life of three years.
[3]Revenue recognition:
The Company generates revenues from custom compact disc sales through
affiliated partners and direct sales or from the Company's web site. Sales
are recognized when compact disc are shipped or when music is downloaded.
[4]Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates.
[5]Stock-based compensation:
The Company has elected to follow the intrinsic value method set forth in
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" in accounting for its stock option incentive plan. As such,
compensation expense would be recorded on the date of grant if the current
market price of the underlying stock exceeded the exercise price of the
option.
[6]Unaudited interim financial statements:
The financial information presented as of September 30, 1999 and for the
nine month periods ended September 30, 1999 and 1998 is unaudited, but in
the opinion of management contains all adjustments
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)
(consisting only of normally recurring adjustments) necessary for a fair
presentation of such financial information. Results of operations for
interim periods are not necessarily indicative of those to be achieved for
full fiscal years.
Note C--Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist of cash and cash equivalents. At December 31, 1998, the
Company held its cash and cash equivalents at one bank primarily in money
market accounts.
Note D--Property and Equipment
Property and equipment consists of:
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1998 1997 1999
-------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Computer hardware.......................... $201,000 $49,000 $314,000
Furniture.................................. 1,000 1,000
Leasehold improvements..................... 13,000 15,000
-------- ------- --------
215,000 49,000 330,000
Less accumulated depreciation.............. 46,000 4,000 111,000
-------- ------- --------
$169,000 $45,000 $219,000
======== ======= ========
</TABLE>
Depreciation and amortization expense for the period June 16, 1997 (inception)
through December 31, 1997 was $4,000 and for the year ended December 31, 1998
it was $42,000 and for the nine months ended September 30, 1999 and 1998 was
$65,000 and $24,000, respectively.
Assets under capital leases with a net book value of approximately $127,000 and
$118,000 are included in property and equipment at December 31, 1998 and
September 30, 1999, respectively.
Note E--Income Taxes
The Company files its United States income tax returns on the cash basis of
accounting. Deferred taxes represent the expected future tax consequences of
the differences between (i) the carrying amounts of the assets and liabilities
(principally accounts payable and accrued expenses which are stated for
financial reporting purposes on the accrual basis) and (ii) their income tax
basis.
At December 31, 1998, the Company had available net operating loss
carryforwards of approximately $414,000 to reduce future taxable income. The
net operating loss carryforwards expire in 2018.
At December 31, 1998 and 1997, the Company had deferred tax assets of
approximately $296,000 and $18,000, respectively, representing the benefits of
its net operating loss carryforwards and certain expenses not currently
deductible for tax purposes. The Company has not recorded a benefit for such
items because realization of the benefit is uncertain and therefore a valuation
allowance has been fully provided against the deferred tax assets.
The difference between the statutory federal rate of 34% and the Company's
effective tax rate of 0% is due to an increase in valuation allowance of
$278,000 and $18,000 in 1998 and 1997.
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)
Note F--Commitments
[1]Capital leases:
Certain equipment and computer software were acquired pursuant to capital
leases expiring through 2002. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999.............................................................. $72,000
2000.............................................................. 62,000
2001.............................................................. 37,000
2002.............................................................. 1,000
-------
Total minimum lease payments...................................... 172,000
Less deferred interest............................................ (20,000)
-------
Present value of net minimum lease payments....................... 152,000
Current portion................................................... 60,000
-------
Noncurrent portion................................................ $92,000
=======
</TABLE>
The noncurrent portion of such leases is due as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000............................................................. $56,000
2001............................................................. 35,000
2002............................................................. 1,000
-------
Noncurrent portion............................................... $92,000
=======
</TABLE>
Certain of these leases are collateralized by personal guarantees and
securities of the Company's principal stockholders.
[2]Leases of office premises:
Office space is leased through the year 2002 at the following minimum
annual rentals.
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999............................................................ $ 81,000
2000............................................................ 109,000
2001............................................................ 91,000
2002............................................................ 46,000
--------
$327,000
========
</TABLE>
Rent expense was approximately $13,000 and $21,000 for the period from June
16, 1997 (inception) through December 31, 1997 and for the year ended
December 31, 1998, respectively and for the nine
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)
Note F--Commitments (continued)
months ended September 30, 1999 and 1998 was $51,000 and $14,000,
respectively. The 1997 expense represents payments to three directors of
the Company who provided office space during the initial stages (June
through December 1997).
[3]Royalty and licensing agreements:
The Company has entered into various license agreements which provide for
the payment of royalties at various percentages of the selling price of
each title sold. These royalty fees are accrued by the Company on a
quarterly basis. Certain of these agreements included a provision for the
Company to make nonrefundable advances. Royalty fees incurred under these
agreements are first applied to the advance. Once the advance is
liquidated, the Company pays fees as incurred.
In addition, these agreements require the payment of mechanical royalties,
$0.07 per track, to be paid to the party that has publishing rights to the
title.
[4]Employment agreements:
Effective January 1, 1999, the Company entered into employment and
consulting agreements with several employees. The agreements continue at
the will of the Company, are not for a specific period and provide for
various levels of annual compensation. Certain of the employment agreements
have guarantees upon termination. The Company issued 4,667 shares of common
stock valued at approximately $14,000 to one stockholder in connection with
a signing bonus offered at time of employment with the Company.
Note G--Related Party Transactions
Other income includes consulting fees received for services provided by a
director of the Company to his previous employer. See Notes F, I and L for
additional related party transactions.
Note H--Stockholders' Equity
[1]Series A preferred stock:
The Company issued 504,000 shares of Series A perpetual convertible
preferred stock, par value $.10, in April 1998 at $1.00 per share. In
addition, loans of $60,000 were converted into 66,670 Series A convertible
preferred stock. These shares automatically converted to common stock in
December 1998 when the Company issued shares of Series B convertible
preferred stock. Immediately prior to the automatic conversion, a 10%
dividend was declared on Series A convertible preferred stock.
[2]Series B preferred stock:
The Company issued 269,933 shares of Series B perpetual convertible
preferred stock, par value $.10, in December 1998. The proceeds of this
offering amounted to $810,000. The shares are automatically
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)
Note H--Stockholders' Equity (continued)
convertible into common stock at the option of the holder or by the
corporation on the completion of an equity financing as defined. Series B
shares are entitled to one vote per share, have a liquidated preference of
$3.00 per share and entitled to a dividend of 10% per annum. In August
1999, the Series B preferred stock automatically converted into common
stock upon the issuance of Series C preferred stock (see Note L[2]). In
addition, a dividend of $.20 per share was declared to the holders of
Series B preferred stock on August 18, 1999.
Note I--Warrants
In December 1998, in connection with the sale of 83,333 shares of common stock
at $2.97 per share the Company sold 213,000 redeemable warrants to an investor
for $2,130. The warrants are exerciseable into common stock at a price of $3.00
per share through December 2008.
During 1999, 145,918 warrants were issued (see Note L[2]).
Note J--Stock Options
In December 1998, the Board of Directors approved, subject to stockholders'
approval, a stock option plan under which options to acquire up to 700,000
shares of common stock may be granted to employees and select board members.
Options generally vest in eight quarterly installments commencing three months
from the date of grant or as otherwise determined by the board. The exercise
price for each option granted may not be less than 100% of the fair market
value of the stock on the grant date or such other amount as determined by the
board from time to time. No option granted under the plan may be exercised in
whole or in part more than ten years after its grant date. The plan is to be
administered by the board or a committee appointed by the board, comprised of
not less than one member of the board. The shareholders ratified the plan at
the annual meeting on August 31, 1999.
Stock option activity under the plan including options granted to employees
outside the plan is summarized as follows:
<TABLE>
<CAPTION>
June 16, 1997
(Inception)
Year Ended Through Nine months
December 31, December 31, ended September
1998 1997 30, 1999
---------------- --------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------ -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period........ 27,000 $1.00 165,533 $1.30
Granted..................... 138,533 1.36 27,000 $1.00 259,764 $3.04
------- ------ -------
Options outstanding at end
of period.................. 165,533 1.30 27,000 1.00 425,297 $2.36
======= ====== =======
Options exercisable at end
of period.................. 102,250 1.02 0 254,495
======= ====== =======
</TABLE>
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)
Note J--Stock Options (continued)
At December 31, 1998 and September 30, 1999, there were 605,217 and 355,153
options, respectively, for the purchase of shares available for future grants
under the plan.
In December 1998, the Company issued options to three stockholders to purchase
25,000 shares of stock each at an exercise price of $2.00 below fair value at
date of grant. As a result, a noncash compensation charge of $150,000 was
recorded in 1998.
The following table presents information relating to stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Exercise Life in Exercise
Price Shares Price Years Shares Price
-------- ------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
$1.00 135,750 $1.00 9.62 100,583 $1.00
2.00 10,000 2.00 9.67 1,667 2.00
3.00 19,783 3.00 10.00
------- ----- ----- ------- -----
165,533 1.30 9.67 102,250 1.02
======= ===== ===== ======= =====
</TABLE>
The fair value of options at date of grant was estimated using the Black-
Scholes option pricing model utilizing the following assumptions:
<TABLE>
<CAPTION>
June 16, 1997
(Inception)
Year Ended Through
December 31, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Risk-free interest rates...................... 4.64% to 5.61% 5.71%
Expected option life in years................. 5 5
Expected stock price volatility............... 40% 40%
Expected dividend yield....................... 0% 0%
</TABLE>
Had the Company elected to recognize compensation cost based on the fair value
of the options at the date of grant as prescribed by SFAS No. 123, the
Company's net loss would have been as presented in the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
June 16,
1997 June 16, 1997
(Inception) (Inception)
Through Year Ended Through
December December 31, December 31,
31, 1998 1998 1997
----------- ------------ -------------
<S> <C> <C> <C>
Net loss:
As reported....................... $(693,000) $(645,000) $(48,000)
Pro forma......................... (698,000) (650,000) (48,000)
Weighted average fair value of
options granted.................... .52 .53 .44
</TABLE>
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)
Note K--Contingency
The Company has received cease and desist letters regarding the sale of certain
songs recorded by a musical group. Such letters were sent on behalf of the
group and the record label, asserting that two record labels do not hold the
rights to the music licensed to the Company. The Company has signed agreements
with the record labels which indemnify the Company from the accusations being
levied against the Company in the aforementioned letters. However, one of the
record labels is attempting to repudiate its agreement with the Company
claiming lack of authority of its signator. The Company is currently attempting
to resolve the matter with the parties involved, however, should it become
necessary, the Company will vigorously defend its rights.
Note L--Subsequent Events
[1]Sale of company:
In November 1999, the Company entered into an agreement with EMusic.com,
Inc. ("EMusic") whereby EMusic would acquire the Company for stock. The
agreement provides for shares of the Company to be exchanged for the right
to receive an equivalent value of EMusic stock at a predetermined exchange
ratio. At the closing of this agreement, the separate corporate existence
of the Company would cease.
[2]Series C convertible preferred stock:
From August to November 1999, the Company sold an aggregate of 477,005
shares of Series C convertible preferred stock for aggregate proceeds of
$2,146,550. In conjunction therewith, the Company issued warrants to
purchase 119,251 shares of common stock, exercisable at a price of $5.40
per share from August through November 2009.
The Series C convertible preferred stock is convertible into common stock
on a one for one basis and is entitled to one vote per share. Such shares
have preferential liquidation rights of $4.50 per share. This series of
shares may be converted at the option of the holder in its entirety at any
time after issuance, unless otherwise subject to mandatory conversion by
the Company. The preferred stock automatically convert into common stock
upon the completion of an initial public offering as defined. The shares
have no dividend rights. The shares are redeemable at $4.50 per share upon
the earlier of a change in control as defined or their fifth anniversary
date and have a liquidation preference of $4.50 per share. In connection
with this series of preferred stock, the Company paid the placement agent
$25,000 and issued 16,667 shares of common stock and warrants to purchase
26,667 shares of common stock at an exercise price of $5.40.
At September 30, 1999 the Company valued the warrants and common stock
issued in connection with the Series C at a fair value of $263,000.
Accordingly, the preferred stock has been recorded at its fair value
including the value of the common stock, warrants and expenses related to
the preferred stock offering as a preferred stock discount, which is to be
accreted against the preferred stock until the fifth anniversary date.
<PAGE>
GROUP K INC.
(A Development Stage Company)
(Note L[1])
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(Unaudited with respect to the data as of September 30, 1999 and for the nine-
month periods ended September 30, 1999 and 1998)
Note L--Subsequent Events (continued)
[3]Stock options:
In January 1999, the Company granted stock options under the plan to
purchase 40,000 shares of common stock at an exercise price of $3.00 per
share to a director of the Company.
In February 1999, the Company granted stock options to purchase 4,667
shares of common stock at an exercise price of $3.60 per share to an
employee as a signing bonus under the plan.
In July 1999, the Company granted the three founding stockholders 14,000
options each to purchase shares of common stock in consideration for
guaranties of 1999 capital leases. The Company also issued each of the
founding stockholders 13,167 options to purchase shares of common stock as
deferred compensation from December 1, 1998 to June 30, 1999. Both grants
were at an exercise price of $3.00.
The Company granted an additional 196,496 stock options authorized under
the Company's stock option plan during 1999.
At various times during 1999, the Company granted options outside of the
plan to purchase 13,866 shares of common stock at exercise prices ranging
from $3.60 to $4.50 to fourteen various music labels in connection with the
licensing of electronic download rights.
