<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): January 31, 1999
----------
GOODNOISE CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 0-24671 65-0207877
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification
Number)
719 COLORADO AVE., PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 322-8910
<PAGE>
Item 2. Acquisition or Disposition of Assets
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
January 31, 1999, related to the Registrant's completion of the acquisition of
Creative Fulfillment, Inc. (d.b.a "Emusic") by means of a merger (the "Merger")
of GN Acquisition Corporation, a Delaware corporation and wholly-owned
subsidiary of GoodNoise ("Sub"), and Emusic, a California corporation, and the
shareholders of Emusic (the "Shareholders"), as set forth below and in the pages
attached hereto:
Item 7: Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired
See Exhibit 99.2 for the audited financial statements of Creative
Fulfillment, Inc. (d.b.a. "Emusic").
(b) Pro Forma Financial Information
See Exhibit 99.1 for the Unaudited Pro Forma Combined Condensed Financial
Information.
(c) Exhibits
Exhibit No. Description
----------- -----------
99.1 Unaudited Pro Forma Combined Condensed Financial Information
99.2 Audited Financial Statements of Creative Fulfillment Inc.
(d.b.a. "Emusic") for the fiscal years ended October 31, 1997
and 1998, and unaudited Financial Statements for the three
months ended January 31, 1998 and 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GoodNoise Corporation
April 12, 1999 By: /s/ Joseph Howell
-------------------------------
Joseph Howell
Executive Vice President and
Chief Financial Officer
1
<PAGE>
Exhibit 99.1
Unaudited Pro Forma Condensed Combining Financial Information
The following unaudited Pro Forma Combined Condensed Financial Statements
assume a business combination between GoodNoise Corporation ("GoodNoise" or the
"Company") and Creative Fulfillment, Inc. (d.b.a. "Emusic") 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 GoodNoise 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 December 31, 1998, and the
historical financial statements and the notes thereto of Emusic included herein.
The Pro Forma Combined Condensed Balance Sheet combines GoodNoise's
December 31, 1998 balance sheet with EMusic's balance sheet dated January 31,
1999, giving effect to the Merger as if it had occurred on December 31, 1998.
The Pro Forma Combined Condensed Statements of Operations combine
GoodNoise's historical condensed statement of operations for:
* the six months ended December 31, 1998 with the Emusic condensed
statement of operations for the six months ended January 31, 1999;
* the period from inception (January 8, 1998) through June 30, 1998 with
the Emusic condensed statement of operations for the twelve month period
from August 1, 1997 through July 31, 1998;
* the period from inception (January 8, 1998) through June 30, 1998 with
the Emusic condensed statement of operations for the period from
inception (March 14, 1995) through January 31, 1999.
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.
GoodNoise incurred direct transaction costs of approximately $150,000
associated with the Merger which will be included in the purchase price
allocated to acquired net assets. There can be no assurance that GoodNoise 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 GoodNoise 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 Emusic included herein.
2
<PAGE>
UNAUDITED PROFORMA CONDENSED COMBINING INCOME STATEMENT DATA
<TABLE>
<CAPTION>
GoodNoise Emusic Pro Forma
-------------------- ------------------ ------------------------------------------
Six Months Six Months
Ended Ended
December 31, January 31,
1998 1999 Adjustments Combined
-------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Revenues................................. $ 20,465 $102,688 $ (50,000) (B) $ 73,153
Cost of revenues......................... 4,716 31,570 -- 36,286
----------- -------- ----------- ------------
Gross profit........................... 15,749 71,118 (50,000) 36,867
----------- -------- ----------- ------------
Operating expenses:
Product development...................... 1,591,961 57,490 (37,500) (B) 1,611,951
Sales, general and administrative........ 401,928 13,038 1,001,098 (D) 1,416,064
----------- -------- ----------- ------------
Total operating expenses............... 1,993,889 70,528 963,598 3,028,015
----------- -------- ----------- ------------
Income (loss) from operations............ (1,978,140) 590 (1,013,598) (2,991,148)
Interest and other expense, net.......... 2,902 106 -- 3,008
----------- -------- ----------- ------------
Net income (loss)........................ $(1,975,238) $ 696 $(1,013,598) $ (2,988,140)
======== ===========
Accretion of Series A Preferred to
redemption value........................ (169,047) (169,047)
----------- ------------
Net loss applicable to common
stockholders............................ $(2,144,285) $ (3,157,187)
=========== ------------
Net loss per share, basic and diluted.... $ (0.15) $ (0.21)
=========== ------------
Weighted average common shares
outstanding, basic and diluted.......... 14,504,346 630,179 (A) 154,134,525
=========== =========== ============
</TABLE>
See accompanying notes.
3
<PAGE>
UNAUDITED PROFORMA CONDENSED COMBINING INCOME STATEMENT DATA
<TABLE>
<CAPTION>
GoodNoise Emusic Pro Forma
-------------------- ----------------- --------------------------------------
January 8, 1998 Twelve Months
(Inception) to Ended
June 30, 1998 July 31, 1998 Adjustments Combined
------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues................................. $ -- $206,943 $ -- $ 206,943
Cost of revenues......................... -- 153,035 -- 153,035
----------- -------- ----------- -----------
Gross profit........................... -- 53,908 -- 53,908
----------- -------- ----------- -----------
Operating expenses:
Product development..................... 961,349 74,385 -- 1,035,734
Sales, general and administrative....... 218,755 61,756 2,002,197 (D) 2,282,708
----------- -------- ----------- -----------
Total operating expenses............... 1,180,104 136,141 2,002,197 3,318,442
----------- -------- ----------- -----------
Income (loss) from operations............ (1,180,104) (82,233) (2,002,197) (3,264,534)
Interest and other expense, net.......... -- (1,056) -- (1,056)
----------- -------- ----------- -----------
Net income (loss)........................ $(1,180,104) $(83,289) $(2,002,197) $(3,265,590)
=========== ======== =========== ===========
Net loss per share, basic and diluted.... $ (0.12) $ (0.30)
=========== ===========
Weighted average common shares
outstanding, basic and diluted.......... 10,234,055 630,179 (A) 10,864,234
=========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
UNAUDITED PROFORMA CONDENSED COMBINING INCOME STATEMENT DATA
<TABLE>
<CAPTION>
GoodNoise Emusic Pro Forma
-------------------- ------------------- ----------------------------------------
January 8, 1998 March 14, 1995
(Inception) to (Inception) to
December 31, January 31,
1998 1999 Adjustments Combined
-------------------- ------------------- --------------------- ---------------
<S> <C> <C> <C> <C>
Revenues................................. $ 20,465 $ 832,821 $ (50,000) (B) $ 803,286
Cost of revenues......................... 4,716 655,082 -- 659,798
----------- --------- ------------ -----------
Gross profit........................... 15,749 177,739 (50,000) 143,488
----------- --------- ------------ -----------
Operating expenses:
Product development..................... 2,553,310 199,200 (37,500) (B) 2,715,010
Sales, general and administrative....... 620,683 159,431 2,002,197 (D) 2,782,311
----------- --------- ------------ -----------
Total operating expenses............... 3,173,993 358,631 1,964,697 5,497,321
----------- --------- ------------ -----------
Income (loss) from operations............ (3,158,244) (180,892) (2,014,697) (5,353,833)
Interest and other expense, net.......... 2,902 (4,282) -- (1,380)
----------- --------- ------------ -----------
Net income (loss)........................ $(3,155,342) $(185,174) $(2,014,697) $(5,355,213)
========= ============
Accretion of Series A Preferred to
redemption value........................ (169,047) (169,047)
----------- -----------
Net loss applicable to common
stockholders............................ $(3,324,389) $(5,524,260)
=========== ===========
Net loss per share, basic and diluted.... $ (0.27) $ (0.42)
=========== ===========
Weighted average common shares
outstanding, basic and diluted.......... 12,437,698 630,179 (A) 13,067,877
=========== ============ ===========
</TABLE>
See accompanying notes.
5
<PAGE>
UNAUDITED PROFORMA CONDENSED COMBINING BALANCE SHEET DATA
<TABLE>
<CAPTION>
GoodNoise Emusic Pro Forma
------------------ ------------------ ----------------------------------------------
December 31, January 31,
1998 1999 Adjustments Combined
------------------ ------------------ -------------------- ---------------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash.............................. $ 348,101 $ 13,852 $ (312,500) (A) $ 49,453
Accounts receivable............... 4,000 3,062 -- 7,062
Prepaid expenses and other assets 153,067 -- (89,820) (A) 63,247
----------- --------- ----------- ------------
Total current assets.............. 505,168 16,914 (402,320) 119,762
----------- --------- ----------- ------------
Property and equipment, net 101,407 6,774 -- 108,181
Intangible assets -- -- 6,006,590 (A) 6,006,590
Other assets 16,520 -- -- 16,520
----------- --------- ----------- ------------
Total assets $ 623,095 $ 23,688 $ 5,604,270 $ 6,251,053
=========== ========= =========== ============
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
Current Liabilities:
Notes payable..................... $ 410,348 $ 12,500 $ (12,500) (B) $ 410,348
Accounts payable.................. 143,792 10,229 72,680 (A) 226,701
Accrued payroll and related
benefits......................... 19,221 -- -- 19,221
----------- --------- ----------- ------------
Total current liabilities......... 573,361 22,729 60,180 656,270
----------- --------- ----------- ------------
Redeemable Convertible Preferred
Stock - Series A.................... 182,307 -- -- 182,307
----------- --------- ----------- ------------
Stockholders' Equity (Deficit):
Common Stock...................... 150,253 186,133 (186,133) (C) 156,555
6,302 (A)
Additional paid-in capital........ 3,047,563 -- 5,551,247 8,598,810
Notes receivable from employees... (6,000) -- -- (6,000)
Deficit accumulated during the
development stage................ (3,324,389) (185,174) 185,174 (C) (3,336,889)
(50,000) (B)
37,500 (B)
----------- --------- ----------- ------------
Total stockholders' equity (deficit) (132,573) 959 5,544,090 5,412,476
----------- --------- ----------- ------------
Total liabilities, redeemable
convertible preferred stock and
stockholders' equity (deficit)...... $ 623,095 $ 23,688 $ 5,604,270 $ 6,251,053
=========== ========= =========== ============
</TABLE>
See accompanying notes.
6
<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 GoodNoise'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 Emusic based on their fair value:
(A) Reflects the allocation of the purchase price of approximately $6.0
million, which consisted of cash payments of $312,500, issuance of
630,179 shares of Common Stock, and direct acquisition related
expenses of approximately $150,000.
(B) Reflects the elimination of inter-company transactions including
development consulting revenue paid by GoodNoise to Emusic and a short-
term loan of $12,500 made by GoodNoise to Emusic in January 1999.
(C) Reflects the elimination of Emusic's equity accounts.
(D) Reflects the amortization of intangible assets associated with the
purchase of Emusic 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.
7
<PAGE>
Exhibit 99.2
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS.......... 9
BALANCE SHEETS......................................................... 10
STATEMENTS OF OPERATIONS............................................... 11
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)............................ 12
STATEMENTS OF CASH FLOWS............................................... 13
NOTES TO FINANCIAL STATEMENTS.......................................... 14
</TABLE>
8
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP, 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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 31, 1999
9
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, 1998 January 31, 1999
(Audited) (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.
10
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
March 14, March 14,
1995 1995
(Inception) Three Months Ended (Inception)
Years Ended October 31, to October 31, January 31, to January 31,
------------------------ -------------- --------------------------- --------------
1997 1998 1998 1998 1999 1999
---------- -------- ------------- --------- --------- -------
(audited) (audited) (audited) (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.
11
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock During the Total
--------------------------------- Development Shareholders'
Shares Amount Stage Equity (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.
12
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March 14,
1995
(Inception) Three Months Ended
Years Ended October 31, to October 31, January 31,
---------------------------------- --------------- ----------------------------------
1997 1998 1998 1998 1999
--------------- --------------- --------------- --------------- ---------------
(audited) (audited) (audited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $(42,899) $(82,990) $(200,167) $(4,049) $ 14,993
Adjustments to reconcile
net income (loss) to net
cash used in operating
activities:
Depreciation.............. 12,277 12,856 30,453 3,221 2,890
Issuance of common stock
in exchange for services. 24,640 62,160 106,633 -- --
Changes in operating
assets and liabilities:
Accounts receivable..... -- -- -- -- (3,062)
Accounts payable and
accrued liabilities.... 5,180 1,617 25,468 (4,251) (15,239)
--------------- --------------- --------------- --------------- ---------------
Net cash used by
operating activities...... (802) (6,357) (37,613) (5,079) (418)
--------------- --------------- --------------- --------------- ---------------
Cash flows from investing
activities:
Acquisition of property
and equipment............. (2,623) (1,464) (20,117) -- --
--------------- --------------- --------------- --------------- ---------------
Net cash provided by
investing activities...... (2,623) (1,464) (20,117) -- --
--------------- --------------- --------------- --------------- ---------------
Cash flows from financing
activities:
Proceeds from issuance of -- -- 50,000 -- 12,500
note......................
Net proceeds from issuance
of common stock........... 9,500 -- 9,500 -- --
Net cash provided by
financing activities...... 9,500 -- 59,500 -- 12,500
--------------- --------------- --------------- --------------- ---------------
Net increase/(decrease) in 6,075 (7,821) 1,770 (5,079) 12,082
cash......................
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
=============== =============== =============== =============== ===============
Supplemental disclosures
of cash flow information:
Issuance of Common Stock
in exchange for fixed $ -- $ -- $ 20,000 $ -- $ --
assets....................
Conversion of notes
payable to Common Stock... $ -- $ -- $ 50,000 $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
March 14,
1995
(Inception)
to January 31,
----------------
1999
----------------
(unaudited)
<S> <C>
Cash flows from operating
activities:
Net income (loss).......... $(185,174)
Adjustments to reconcile
net income (loss) to net
cash used in operating
activities:
Depreciation.............. 33,343
Issuance of common stock
in exchange for services. 106,633
Changes in operating
assets and liabilities:
Accounts receivable..... (3,062)
Accounts payable and
accrued liabilities.... 10,229
---------------
Net cash used by
operating activities...... (38,031)
---------------
Cash flows from investing
activities:
Acquisition of property
and equipment............. (20,117)
---------------
Net cash provided by
investing activities...... (20,117)
---------------
Cash flows from financing
activities:
Proceeds from issuance of 62,500
note......................
Net proceeds from issuance
of common stock........... 9,500
---------------
Net cash provided by
financing activities...... 72,000
---------------
Net increase/(decrease) in 13,852
cash......................
Cash at beginning of period
Cash at end of period...... $ 13,852
===============
Supplemental disclosures
of cash flow information:
Issuance of Common Stock
in exchange for fixed $ 20,000
assets....................
Conversion of notes
payable to Common Stock... $ 50,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<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. (d.b.a. "Emusic" 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.
14
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
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.
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.
15
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
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.
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 leased facilities or 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.
16
<PAGE>
CREATIVE FULFILLMENT, INC. (d.b.a. "EMUSIC")
(a Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS (continued)
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
benefit of which was not recognized due to the uncertainty of its realization.
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 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.
7. Subsequent Events
Merger
On January 25, 1999, GoodNoise Corporation ("GoodNoise") acquired all of
the Company's outstanding shares of Common Stock, at which time the Company
became a wholly owned subsidiary of GoodNoise.
Related Party Loan and Consulting Revenues
In January 1999, GoodNoise loaned Emusic $12,500, which was repaid to
GoodNoise in February 1999. In addition, during the three months ended January
31, 1999, GoodNoise paid consulting fees totaling $50,000, which were recorded
as revenue by Emusic.
17
