Amendment to Registration of Securities of a Small-Business Issuer — Form 10-SB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10SB12G/A Amendment to Registration of Securities of a 41 230K
Small-Business Issuer
2: EX-2.2 Agreement and Plan of Reorganization 44 161K
3: EX-2.3 Agreement and Plan of Reorganization 43 155K
4: EX-10.2 Common Stock Purchase Agreement 9 44K
5: EX-10.3 1998 Stock Option Plan 14 57K
10SB12G/A — Amendment to Registration of Securities of a Small-Business Issuer
Document Table of Contents
As filed with the Securities and Exchange Commission on 12/24/98
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under section 12(b) or (g) of The Securities Exchange Act of 1934
GOODNOISE CORPORATION
(Name of Small Business Issuer in its charter)
FLORIDA 65-0207877
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
719 COLORADO AVENUE, PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices and Zip Code)
Issuer's telephone number, including area code: (650) 322-8910
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
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FORWARD-LOOKING STATEMENTS
This Form 10-SB contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "PSLRA"), including, but
not limited to statements related to the Company's business objectives and
strategy, the Company's Internet website and the development of the Company's
music-related content. Such forward-looking statements are based on current
expectations, estimates and projections about the Company's industry, management
beliefs, and certain assumptions made by the Company's management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results may differ materially from
those expressed, forecasted, or contemplated by any such forward- looking
statements. The PSLRA does not apply to initial public offerings.
Factors that could cause actual events or results to differ materially
include, among others, the following: market acceptance of the Internet as a
medium for consumers to obtain sound recordings, the Company's ability to
create, license, and deliver compelling music-related content, intense
competition from other providers of music-related content over the Internet, the
Company's early state of development, delays or errors in the Company's ability
to effect electronic commerce transactions, potential liability for defamation,
negligence, intellectual property infringement, and the distribution of obscene
or indecent material over the Internet, and other risks inherent in the record
industry and associated with doing business over the Internet. See,
"Management's Discussion and Analysis or Plan of Operation -- Factors That May
Affect Future Results and Market Price of Stock." Given these uncertainties,
investors are cautioned not to place undue reliance on any such forward-looking
statements
Unless required by law, the Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. However, readers should carefully review the risk
factors set forth in other reports or documents the Company files from time to
time with the Securities and Exchange Commission, particularly the Annual
Reports on Form 10-KSB, the Quarterly Reports on Form 10-QSB and any Current
Reports on Form 8-K.
PART I
ITEM 1. BUSINESS
Overview
GoodNoise Corporation ("GoodNoise" or the "Company") is a development stage
company that licenses, develops, and markets musical recordings for direct file
transfer, or "downloading," to consumers over the Internet. The Company was
formed on January 8, 1998 and began selling musical recordings over the Internet
on July 30, 1998. According to the Recording Industry Association of America
("RIAA"), recorded music sales during the past four years have been
approximately $12.0 billion per year in the United States and $38.1 billion per
year worldwide. Nearly all of this revenue was derived from the sale by physical
manufacture and delivery of compact discs ("CDs"), audiocassettes, and other
physical formats. The Company believes that the percentage of music purchases
made by direct download over the Internet will be significantly increasing
percentage of total music purchases during the next several years. This increase
is being driven by the increasing proliferation of personal computers ("PCs") in
the home, the increase in affordable storage capacity, the increase in high
speed access to the Internet, and the deployment of recordable CDs ("CD-Rs") and
portable music players, such as Diamond Multimedia Systems ("Diamond")'s Rio PMP
300 ("Rio"). GoodNoise's long-term objective is to establish itself as a major
provider of music content direct to consumers over the Internet.
The Online Music Industry
The Company believes that the Internet is an ideal medium for promoting,
marketing, and selling music and music related products and services. Potential
purchasers of music recordings can preview their purchases by listening to
high-quality sound samples, viewing text and graphics including cover art,
artists' discographies, music
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videos and reviews, and searching a catalog of available titles. Internet users
can also search for music by genre or artist, access information and events,
including music history and news, artists' biographies, cybercast concerts and
radio broadcasts, and participate in live interviews with artists. In addition,
because the Internet is a highly interactive medium and user responses can be
tracked, the Company believes that advertisers will become increasingly
attracted to opportunities to focus their marketing efforts on specific target
markets.
According to Jupiter Communications ("Jupiter"), a media research firm, total
online music revenues, which include prerecorded music sales, music-related
merchandising, advertising, and concert ticketing, are expected to grow from an
estimated $88.0 million in 1998 to $1.4 billion in 2002. Jupiter further
estimates that the number of online households making purchases is expected to
grow from an estimated 15.2 million in 1996 to over 54.0 million in 2002,
representing over 50% of U.S. households.
In addition to the development of the Internet, other technological
developments are facilitating the market for downloadable music. Newly developed
technologies allow users to download music in a compressed format to PCs, play
music from PCs, or store and play it on either CD-Rs or portable music players,
such as the Rio. Downloads of music files have also been facilitated by the
increasing use of high speed bandwidth connections to the Internet, such as
digital cable modems, ISDN, and digital subscriber lines (DSLs). In particular,
MP3, a file format for compressing audio data with a minimal loss of quality, is
becoming increasingly popular as a means for music downloads. MP3 is supported
natively in Microsoft Windows 98 Netshow and Media Player, and, according to
Searchterms.com, the term MP3 is the second most frequently searched term on one
of the leading Internet search engines. In addition, Forrester Research
("Forrester"), a technology market research firm, estimates that there have been
more than 10 million downloads of WinAmp, and other popular MP3
decoders/players. There are other formats for downloading music including Liquid
Audio and a2b, which are proprietary encrypted compression formats. To date,
these formats have not been widely accepted by consumers.
According to the RIAA, approximately 40% of all recorded music sales over the
last four years were to customers who are under 25 years of age. The Company
believes that those who are most likely to be early adopters of purchasing music
by download are in the 18 to 24 age bracket. For example, according to Jupiter,
college students represent 34% of all Internet users. Strategic Marketing
Communications states that there are approximately 15.0 million college students
in the United States, 83% of whom use the Internet regularly. In addition, 90%
of universities in the United States provide free high-speed Internet access to
their student and faculty community in dormitories, study areas, computer labs,
and offices.
The major record companies have been losing market share to independent
record labels for years. According to Jupiter, during the period 1992-1997, the
market share of independent record labels increased from 11.6% to 23.2%. For
1997, the independent record labels were responsible for two-thirds of all new
releases of recorded music. The new distribution opportunities resulting from
the development of the Internet and new technology facilitating the downloading
of music present significant new opportunities for independent record labels. In
particular, such labels are generally more receptive to such opportunities as
they are generally less entrenched with traditional distribution channels.
GoodNoise Business Strategy
The Company's objective is to establish itself as a major provider of
downloadable music content direct to consumers over the Internet. GoodNoise's
business strategy is to leverage its early entry into the market for
downloadable recordings to exploit the changing dynamics of the recording
industry. Key elements to this strategy include:
Acquire Content. GoodNoise will continue to acquire rights to content
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in all major music categories for sale through goodnoise.com and
affiliated websites. Currently, the Company is focusing its efforts and
resources on music content that is compelling to the 18 to 34 age
bracket. GoodNoise intends to continue to acquire its content from,
among others, independent record labels, owners of recording catalogs,
and established and new recording artists. In addition, the Company
plans to establisretail relationships with other online distributors
under which the Company and such distributors would receive commissions
for sales generated from the others' websites.
Create Strong Brand Awareness. The Company will continue to leverage
the development, marketing, and public relations experience of its
management team to build a strong brand name around the trademark
GoodNoise(TM). Building brand awareness of goodnoise.com is critical to
attracting and expanding the
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Company's global Internet user base and its ability to attract
providers of music content. GoodNoise promotes its brand through online
and traditional media, event sponsorships, FreeAmp (its free
downloadable digital audio player), and other marketing activities. The
Company intends to enhance brand awareness of its website by providing
original and proprietary content, enabling consumers to purchase music
and related merchandise, and establishing strategic and referral fee
relationships whereby other websites engage GoodNoise as an online
music retail source and content provider in return for a commission.
Foster Development of Downloadable Music Market. The Company believes
that the development of the downloadable music market will be enhanced
by facilitating the process by which consumers purchase music online.
As part of this strategy, GoodNoise continues to support and manage the
development of FreeAmp, which enables the playing, management, and
storing of music files on PCs, CD-Rs, and portable music players. The
Company has published the source code of FreeAmp and uses a free source
code licensing methodology to encourage third party applications and
improvements. The Company strives to refine and simplify the
downloadable music purchasing experience through the development of a
user friendly website. The features of this website are designed to
encourage purchases and repeat visits. By successfully promoting and
selling downloadable music, the Company intends to demonstrate to
record labels and artists the value of the downloadable music market.
Strategic Partnerships
The Company aggressively seeks objective is to establish strategic alliances
with global media, technology, and music companies to further the growth of the
downloadable music market and to attract additional users to, and increase brand
awareness of, goodnoise.com and affiliated websites.
Media Companies. The Company has established and intends to continue to
establish relationships with Internet retailers and other media companies with
high traffic websites. The Company has a strategic partnership agreement with
OnRadio (formerly Electric Village), a leading provider of syndicated content to
websites for U.S. radio stations. OnRadio provides music news content to
GoodNoise and is working to allow reference sales of GoodNoise offerings from
radio station websites. The Company also ha a strategic partnership agreement
with Zcompany (dba "MP3.com"), a popular information source for the MP3
community. Pursuant to this agreement, the companies provide each other with
advisory services and sponsor events for the promotion of MP3 as a platform for
the distribution of music.
Technology Companies. The Company has established and intends to continue to
establish alliances with a broad range of technology companies. Manufacturers of
portable music players, computer storage devices, CD-Rs and high speed modems
and Internet Service Providers have a strong interest in the development of the
downloadable music market to support increased demand for their products and
services. GoodNoise has an existing partnership with Diamond that includes
promotional marketing of the GoodNoise brand as the online music source,
sponsorship payments to GoodNoise, and GoodNoise recordings and product
materials inside and logo placement outside the box of the Rio. GoodNoise and
Diamond plan to include more GoodNoise content to supplement the existing
content in the Rio box and links back to goodnoise.com from the Rio install
application. In addition, the Company is a reseller of the Rio. Xing Technology
("Xing") has both entered into a strategic alliance with and licensed core MP3
technology to GoodNoise. Xing licensed to GoodNoise a commercially capable MP3
encoder which GoodNoise currently utilizes to produce its downloadable sound
recordings. Xing also licensed the Xing MP3 decoder to GoodNoise under the
General Public License for inclusion in FreeAmp. GoodNoise, Diamond, Xing, and
MP3.com also are founding members of the MP3 Association, which is a group
created to support and advance the MP3 open standard as well as to promote
responsible consumer use of MP3 technology.
Music Companies. The Company has an agreement with peermusic, one of the
world's largest private music publishing companies. Pursuant to this agreement,
peermusic provides music publishing administration services to GoodNoise. The
companies will share income derived from music publishing rights acquired by
GoodNoise. GoodNoise has also licensed certain recordings from the peermusic
catalog. The Company intends to continue to enter into other alliances with
music companies.
Content Acquisition
GoodNoise has acquired and will continue to acquire download rights to
certain master recordings owned by
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independent record companies and other owners of significant recording catalogs.
The Company is currently in discussions with numerous independent record labels
to acquire the downloadable rights to their music catalogs. For example,
GoodNoise has acquired the downloadable rights to the spinART record catalog
which includes 47 artists.
GoodNoise offers owners of master recording catalogs the opportunity to
promote and sell their catalogs, including out-of-print or previously unreleased
titles. On October 8, 1998, the Company entered into agreements to acquire
Nordic Entertainment Worldwide, Inc. ("Nordic")and Creative Fulfillment, Inc.
("Emusic"). Nordic maintains a large catalog of music featuring over 1,000
artists and 6,000 songs from such artists as Ray Charles, Chuck Berry, Louis
Armstrong, and Billie Holiday, as well as techn and world music artists. Emusic
is an entertainment and Internet marketing company that through its Emusic.com
website offers more than 135,000 CD titles and 30,000 video titles as well as
downloadable music through a partnership with Nordic.
The Company has established its own "record label," which has signed
established and emerging recording artists. The Company intends to use
goodnoise.com and affiliated websites, as well as record stores and other
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traditional distribution channels, to promote, distribute, and sell these
original and licensed artist recordings. The Company believes that it can
leverage its Internet platform by promoting and selling its own proprietary
titles acquired by its artists and repertoire ("A&R") and business affairs
staff.
GoodNoise plans to establish relationships with, or provide referrals to,
downloadable recordings owned by other online sound recording distribution
companies. These arrangements will provide for a sharing of net proceeds, after
the payment of certain direct costs, including royalties to the authors and
publishers of the songs embodied in these recordings.
Sales and Marketing
GoodNoise is initially concentrating its sales and marketing efforts on the
18 to 34 age bracket to take advantage of this demographic profile's familiarity
with the Internet, access to high speed Internet bandwidth, and strong
purchasing history for music and music-related products and services. The
Company intends to expand its promotional efforts to other market segments,
including audiences for genres such as jazz, classical, and R&B.
The Company's overall sales and marketing strategy is designed to sell
downloadable music and music-related products and services through goodnoise.com
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and affiliated websites, build brand awareness, attract repeat users, and drive
traffic to the website. The Company utilizes a combination of external
advertising and promotion, internal promotion and product merchandising, and
strategic partnership programs to accomplish these objectives.
Key elements to the Company's sales and marketing strategy include:
Establish a Destination Music Website. The Company has designed its website
with the objective that it become a well-known World Wide Web destination for
music consumers that offers compelling content, music programming, and music-
related merchandise. GoodNoise's website also contains music news, live
concerts, and music-related sponsorship and advertising content. Content offered
on goodnoise.com currently features modern rock and alternative music
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specifically tailored to the high tech 18 to 34 year old music consumer.
Merchandising and Customer Programs. GoodNoise believes that a key part of
its merchandising and customer acquisition and retention strategies will be its
ability to link its music genre, artist, and title-specific content, such as
record reviews, artist profiles, and special promotions, to the music ordering
section of its website and stimulate and facilitate consumer purchases of
downloadable music tracks and related music merchandise.
In-Store Merchandising. The Company plans to use numerous merchandising
features to encourage and enhance a consumer's buying experience. GoodNoise
believes that the user's ability to listen to audio samples is a significant
incentive to purchase. The Company offers consumers the ability to access a
variety of information about an artist, music group, or album prior to making a
purchase at goodnoise.com.
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Create an Effective A&R and Promotion Infrastructure. GoodNoise has developed
customized joint marketing programs with record labels that own the music
featured for sale on the Company's website. Such programs include press
releases, artist and record label specific web pages, online banner advertising
campaigns, co-operative marketing funds, and promotional events.
Develop Free Enabling Software. The Company supports and manages the
development of FreeAmp, which enables the playing, management, and storing of
music files on PCs, CD-Rs, and portable music players. The Company has published
the FreeAmp source code and uses a free source code licensing methodology to
encourage
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third party applications and improvements.
[GRAPHIC OMITTED]
Build User Communities and Attract Advertising. The Company sells banner
advertising space on its website. By leveraging its record promotion launches
and fan/artist loyalty, the Company aggregates targeted demographic user groups,
thereby offering advertisers and sponsors access to highly defined audiences.
Advertising, Sales, and Sponsorships
GoodNoise plans to position its website as an online music source, offering
advertisers and marketers the ability to reach targeted communities of music
fans worldwide. Advertisers will be offered a variety of advertising options
which can be combined in different percentages to reach the desired advertising
mix. The Company plans to implement a proprietary software package for
advertising space management, tracking of page impressions, and reporting to
advertisers. The Company will also track website traffic and activity through a
generally available website traffic management service.
Ordering, Fulfillment and Customer Service
The Company's website includes an ordering system that is designed to be
easy-to-use and simple to understand. GoodNoise intends to continually upgrade
and enhance this system to further simplify the purchase of downloadable music.
In order to maintain high customer satisfaction, the Company plans to place an
emphasis on reliable product fulfillment. At any time during a visit to
goodnoise.com, a customer will be able to click on the "order now" button to
place an item in his or her personal shopping basket. The customer can continue
to shop the website adding chosen items. If not previously registered with
GoodNoise, a customer is prompted to register at the time of purchase and to
enter his or her name, address, and password. The customer then securely submits
credit card information online. By assigning a password to every buyer, the
Company's ordering process will facilitate repeat purchases by eliminating the
need to re-submit credit card and billing information for subsequent
orders.
Technology
GoodNoise has and will continue to develop information services, delivery,
and user tracking systems by integrating third-party systems, when available,
and by developing proprietary tools. The Company's integrated systems and tools
provide functionality in six primary areas: (i) multimedia asset management;
(ii) website development; (iii) audio encoding and online delivery; (iv)
security; (v) scalability; and (vi) advanced technologies.
Multimedia Asset Management. Central to the Company's system is the
development of a database management system necessary to index, retrieve, and
manipulate the Company's growing multimedia content. The Company continues to
develop a database management system that allows for rapid searching, sorting,
viewing, and distribution of, among other things, audio samples, video clips,
cover art, and photos. The Company has chosen a publicly available source
distribution of an SQL and RDBMS compatible database, mySQL.
Website Development. The catalog of individual recordings, samples, and
other information stored in an SQL database, forms the core of the music
entertainment content collection and contains links to related content (e.g.,
audio samples, images, editorial content and charts). Each individual page of
the Company's website is built dynamically from these elements using a
proprietary web page template technology.
Audio Encoding and Delivery. The Company uses a variety of audio compression
technologies for its audio samples and downloads, tailoring them to specific
applications. The Company uses the MP3 format for digital distribution of its
downloadable music. In light of current user patterns, the Company uses Real
Networks' popular RealAudio format for delivering real-time streaming 30-second
audio previews and feature-length web broadcasts. MP3, in streaming mode, is
also used for real-time preview sample The Company is exploring other download
formats and plans to adjust the format of its content to stay current with
moving industry trends.
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System Requirements. Each of the Company's audio formats has certain minimum
system requirements for hardware and software in order for a user to listen to
the audio samples on the Company's website. A user must have a multimedia-
equipped personal computer and must download software to play music. For
example, the minimum system PC requirements for a user desiring to play an audio
sample in the MP3 audio format are an MP3 audio player and a Pentium 133Mhz CPU
on Windows 95/NT operating system with 16 megabytes of RAM.
Scalability. The structure of the Company's hardware and software is built
upon a distributed transaction processing model which allows software to be
distributed among multiple parallel servers. This architecture allows the
Company to scale by either adding new servers or increasing the capacity of
existing servers. The current system is designed to easily scale while
maintaining both user performance and cost per transaction. In the rapidly
changing Internet environment, the ability to update the application system to
stay current with new technologies is important. The system's template
technology and modular database design allow the addition or replacement of
server-based applications such as multimedia formats and delivery systems, and
search and retrieval engines. This architecture also enables low-cost, rapid
deployment of additional websites that integrate with the Company's existing
sites.
Advanced Technologies. The Company continually evaluates emerging
technologies, new developments in web technologies, and CD/DVD (digital
versatile disk) multimedia authoring. Technologies with which the Company is
currently working include Sun Microsystems' Java language, Adaptec, Inc.'s CD
writing client software, multimedia tagging standard ID3v2, watermarking,
digital signatures, and MPEG-4 Advanced Audio Coding ("AAC") audio
compression/transmission format.
Competition
The market for Internet content providers is new, highly competitive, and
rapidly changing. Since the Internet's commercialization in the early 1990's,
the number of websites on the Internet competing for consumers' attention and
spending has proliferated. With no substantial barriers to entry, the Company
expects that competition will continue to intensify. Currently, there are more
than one hundred music retailing websites on the Internet. With respect to
competing for consumers' attention, in addition to intense competition from
Internet content providers, the Company also faces competition from traditional
media such as radio, television, and print. GoodNoise also competes with major
and independent record labels.
The Company believes that the primary competitive factors in providing music
entertainment products and services via the Internet are name recognition,
content available on an exclusive basis, variety of value-added services, ease
of use, price, quality of service, availability of customer support,
reliability, technical expertise, and experience. The Company's success in this
market will depend heavily upon its ability to provide high quality,
entertaining content, along with cutting-edge technology and value-added
Internet services. Other factors that will affect the Company's success include
the Company's ability to attract experienced marketing, sales, and management
talent. In addition, the competition for advertising revenues, both on Internet
websites and in more traditional media, is intense. The Company believes that
its high-quality downloadable music content will be an important differentiation
from other music-related and music-merchandising websites.
Many of the Company's current and potential competitors in the Internet and
music entertainment businesses have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition,
and larger existing customer bases than the Company. These competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements and to devote greater resources to the development,
promotion, and sale of their products or services than the Company. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors.
Intellectual Property
The Company relies on a combination of copyright law, trademark law, contract
law, and other intellectual property protection methods to protect its musical
content, license rights, and technology. The Company believes that its use of
material on its websites is protected under current provisions of copyright law.
However, legal rights to certain aspects of Internet content and commerce are
not clearly settled. There can be no assurance that the Company will be able to
continue to maintain rights to information, including webcasting of popular
sound recordings, downloadable music samples, and artist, entertainment and
other information. The failure to be able to offer such information would have a
material adverse effect on the Company's business, results of operations, and
financial
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condition. The Company pursues the registration of its trademarks in the United
States and internationally, and has applied for an "intent to use" trademark
registration for a number of its trademarks, including " GoodNoise," in the
United States Patent & Trademark Office.
Effective trademark, copyright, and other intellectual property protection
may not be available in every country in which the Company's musical content and
technology are distributed or made available through the Internet. There can be
no assurance that the Company's means of protecting its proprietary rights in
the United States or abroad will be adequate or that competitors will not
independently develop similar technology.
There are no pending lawsuits against the Company regarding infringement of
any existing patents or other intellectual property rights or any material
notices that the Company is infringing the intellectual property rights of
others. However, there can be no assurance that such infringement claims will
not be asserted by third parties in the future. If any such claims are asserted
and determined to be valid, there can be no assurance that the Company will be
able to obtain licenses of the intellectual property rights in question on
reasonable terms. The Company's involvement in any patent dispute, other
intellectual property dispute, or action to protect proprietary rights may have
a material adverse effect on the Company's business, results of operations, and
financial condition. Adverse determinations in any litigation may subject the
Company to significant liabilities to third parties, require the Company to seek
licenses from third parties, and prevent the Company from manufacturing and
selling it products. Any of these situations can have a material adverse effect
on the Company's business, results of operations, and financial condition.
Employees
As of December 1, 1998, the Company had 13 full-time employees, including 9
in operations and technical and artist development and 4 in general and
administrative, and 1 part-time primarily focused on artist development. The
Company's future success depends, in significant part, upon the continued
service of its key technical, editorial, product development, and senior
management personnel and on its ability to attract and retain highly qualified
employees. There is no assurance that the Company will continue to attract and
retain high-caliber employees, as competition for such personnel is intense. The
Company's employees are not represented by any collective bargaining
organization. The Company has never experienced a work stoppage and considers
relations with its employees to be good.
Facilities
The Company's corporate headquarters is located in Palo Alto, California. The
facilities and certain other equipment are leased under operating and capital
lease agreements. GoodNoise has leased approximately 1,600 square feet of office
space at these facilities. The Company believes that its existing facilities
plans are adequate for its current requirements and that additional space can be
obtained to meet its requirements for the foreseeable future.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains forward-looking statements that are
subject to significant risks and uncertainties. There are several important
factors that could cause actual results to differ materially from historical
results and percentages and results anticipated by the forward-looking
statements. The Company has sought to identify the most significant risks to its
business, but cannot predict whether or to what extent any of such risks may be
realized nor can there be any assurance that the Company has identified all
possible risks that might arise. Investors should carefully consider all of such
risks before making an investment decision with respect to the Company's stock.
In particular, investors should refer to the section entitled, "Factors That May
Affect Future Results and Market Price of Stock."
Overview
The Company was organized as a Delaware corporation ("GN Delaware") in
January 1998. On May 11, 1998, Atlantis Ventures Corporation ("Atlantis
Ventures"), a Florida corporation, acquired all of the outstanding Common Stock
of the Company (the "Merger"). For accounting purposes, this acquisition was
treated as a recapitalization of the Company with the Company as the acquirer
(reverse acquisition). Atlantis Ventures was organized in August 1989 and had no
revenues or operations prior to the Merger. Following the recapitalization,
Atlantis Ventures changed its name to GoodNoise Corporation.
Results of Operations
GoodNoise is a development stage company that has incurred costs to organize
and develop an Internet website through which it will conduct its business. The
Company began selling musical recordings over the Internet on July 30, 1998. The
Company expects to experience significant fluctuations in operating results in
future periods due to a variety of factors, including, but not limited to: (i)
market acceptance of the Internet as a medium for consumers to obtain sound
recordings; (ii) the Company's ability to create, license, and deliver
compelling music and music-related content; (iii) the level of traffic on the
Company's website; (iv) intense competition from other providers of
music-related content over the Internet; (v) delays or errors in the Company's
ability to effect electronic commerce transactions; (vi) the Company's ability
to upgrade and develop its systems and infrastructure in a timely and effective
manner; (vii) technical difficulties, system downtime or Internet brownouts;
(viii) th Company's ability to attract customers at a steady rate and maintain
customer satisfaction; (ix) seasonality of the recorded music industry; (x)
seasonality of advertising sales; (xi) Company promotions and sales programs;
(xii) the amount and timing of operating costs and capital expenditures relating
to expansion of the Company's business, operations, and infrastructure and the
implementation of marketing programs, key agreements and strategic alliances;
(xiii) the number of recorded music releases introduced during the period; (xiv)
the level of returns experienced by the Company; and (xv) general economic
conditions and economic conditions specific to the Internet, online commerce,
and the recorded music industry.
Net Revenues
The Company earned no revenue from inception through June 30, 1998. The
Company launched its first Internet website in April 1998 and began selling
musical recordings over the Internet on July 30, 1998. The Company believes that
future revenues will result largely from the sale of musical recordings, the
sale of advertising space on the Company's website, and related sponsorship
programs.
Cost of Revenues
From inception through June 30, 1998, the Company incurred no costs of
revenues. The Company expects that future costs of revenues will consist of
payments to third parties for fulfillment of customer orders, royalties,
copyrights, credit card processing charges, and profit participation payable to
strategic alliance partners and others.
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Product Development Expenses
Product development expenses consist principally of website and other
software engineering, audio and video production, graphic design, certain
non-recoverable advances to artists, artist relations, telecommunications
charges, and the cost of computer operations, including related salaries, rent,
and depreciation, that support the Company's music entertainment business.
The Company began its development efforts in February 1998, incurring costs
of $961,349 through June 30, 1998 related to software engineering, audio and
video production, and graphic design of the Company's website and music
catalogue. The Company is dependent upon raising additional financing in order
to continue or increase the level of product development activities from that
undertaken by the Company to date. The level of product development that the
Company pursues will be substantially impacted by the amount of additional
financing, if any, that the Company is able to raise. Assuming that adequate
funding is available, the Company currently intends, among other matters, to
acquire and develop a repertoire of songs available for customer downloads, and
to continue to develop the software necessary to manage such downloads.
Sales and Marketing Expenses
From inception through June 30, 1998, the Company incurred no sales and
marketing costs. The Company is dependent upon raising additional financing in
order to continue or increase the level of sales and marketing activities from
that undertaken by the Company to date. The level of sales and marketing
activities that the Company pursues will be substantially impacted by the amount
of additional financing, if any, that the Company is able to raise. Assuming
that adequate funding is available, the Company currently intends, among other
matters, to promote its website through strategic alliances, external
advertising, website direct promotion, and trade shows. The Company expects that
the costs related to such activities will consist principally of advertising,
personnel, and consulting expenses.
General and Administrative Expenses
General and administrative expenses consist of executive management,
accounting, legal, and expenditures for applicable overhead costs, including
related rent, insurance, and depreciation. The Company has incurred costs of
$218,755 through June 30, 1998 related to general and administrative expenses.
The Company expects general and administrative expenses to continue to increase
in absolute dollars as the Company expands its staff and incurs additional costs
related to the growth of its business.
Liquidity and Capital Resources
At June 30, 1998, the Company had a cash balance of $509,751. Net cash of
$316,965 was used for operating activities from inception through June 30, 1998
principally as a result of the net losses of $1,180,104 generated during the
period. Of the net loss, $751,714 represented the expense associated with stock
and stock options granted to advisors. Purchases of property and equipment
totaled $37,384.
The Company financed its operations from inception through June 1998 using
loans of $170,000, including $110,000 loaned to the Company by two of its
Directors and a member of its Advisory Board. These loans were secured by notes
with an interest rate of 10.0% per annum, due in December 1998. All outstanding
principal and interest related to these notes was to have been converted at the
closing of the Company's initial sale of Series A Preferred Stock. The Company
did not issue such Series A Preferred Stock because of the pending merger with
Atlantis Ventures and, in May 1998, these notes were converted into 501,500
shares of common stock prior to the merger.
In May 1998, the Company merged with Atlantis Ventures, a Florida corporation
that was organized in August 1989 and had no revenues or operations of any kind
prior to the merger with the Company. Prior to the merger, Atlantis Ventures
issued 2,500,000 units at a price of $0.20 per share in a private placement.
Each unit consisted of one share of common stock and one warrant with each five
warrants entitling the holder to purchase one common share for $1.00. Warrants
to purchase 200,000 shares of common stock were exercised in May 1998, and
warrants to purchase 300,000 shares of common stock were exercised in August
1998.
10
On October 28, 1998, the Company raised proceeds of approximately $500,000
through the sale of 500 shares of Series A Preferred Stock and Warrants to
purchase 100,000 shares of the Company's Common Stock to one accredited
investor.
The Company's existing capital resources will not be sufficient to enable it
to maintain its operations. The Company will require additional funds to sustain
and expand its sales and marketing and research and development activities and
its strategic alliances and may need additional funding. Management is in the
process of pursuing additional equity financing, although there is no assurance
that such efforts will be successful. Adequate funds for these and other
purposes, whether through additional equity financing, debt financing or other
sources, may not be available when needed or on terms acceptable to the Company,
or may result in significant dilution to existing stockholders. The inability to
obtain sufficient funds from operations and external sources would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Risks Associated with the Year 2000
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. As a result, date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities.
Since the Company's systems and software are relatively new, management does
not expect Year 2000 issues related to its own internal systems to be
significant and does not anticipate that it will incur significant operating
expenses or be required to invest heavily in computer systems improvements to be
Year 2000 compliant. As the Company makes arrangements with significant
suppliers and service providers, the Company intends to determine the extent to
which the Company's interface systems may b vulnerable should those third
parties fail to address and correct their own Year 2000 issues. The Company
anticipates that this will be an ongoing process as the Company begins to
implement supplier and service provider arrangements throughout 1999. There can
be no assurance that the systems of suppliers or other companies on which the
Company relies will be converted in a timely manner and will not have a material
adverse effect on the Company's systems. Additionally, there can be no assurance
that the computer systems necessary to maintain the viability of the Internet or
any of the Web sites that direct consumers to the Company's web site will be
Year 2000 compliant. As part of the Company's Year 2000 compliance plan, the
Company is developing plans to operate its website from different systems and/or
at a different location in the event of any significant disruption as a result
of the Year 2000 issues. The Company believes it is taking the steps necessary
regarding Year 2000 compliance with respect to matters within its control.
However, no assurance can be given that the Company's systems will be made Year
2000 compliant in a timely manner or that the Year 2000 problem will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Development Stage Company; Limited Operating History; Anticipated Losses;
Uncertainty of Future Results
GoodNoise Corporation has only a limited operating history upon which an
evaluation of the Company and its prospects can be based. The Company's
prospects must be evaluated with a view to the risks encountered by a company in
an early stage of development, particularly in light of the uncertainties
relating to the new and evolving markets in which the Company intends to operate
and acceptance of the Company's business model. GoodNoise will be incurring
costs to develop, introduce, and enhance its website, to establish marketing and
distribution relationships, to create and enhance its music catalog, and to
build an administrative organization. To the extent that such expenses are not
subsequently followed by commensurate revenues, the Company's business, results
of operations, and financial condition will be materially adversely affected.
There can be no assurance that the Company will be able to generate sufficient
revenues from the sale of music recordings, related merchandise, advertising,
and sponsorships to achieve or maintain profitability on a quarterly or annual
basis in the future. GoodNoise expects negative cash flow from operations to
continue for the foreseeable future as it continues to develop and market its
business.
11
Need For Additional Funds.
The Company's current capital resources will not be sufficient to enable it
to maintain its operations. The Company will require additional funds to sustain
and expand its sales and marketing and research and development activities and
its strategic alliances and may need additional funding if a well-financed
competitor emerges or if there is a shift in the type of Internet services that
are developed and ultimately receive customer acceptance. The Company is
currently seeking such funding. Adequate funds for these and other purposes,
whether through additional equity financing, debt financing or other sources,
may not be available or on terms acceptable to the Company, or may result in
significant dilution to existing stockholders. The inability to obtain
sufficient funds from operations and external sources would have a material
adverse effect on the Company's business, results of operations and financial
condition.
Dependence on the Internet; Uncertain Acceptance of the Internet as a Medium for
Commerce
Use of the Internet by consumers is at an early stage of development, and
market acceptance of the Internet as a medium for commerce is subject to a high
level of uncertainty. The Company's future success will depend on its ability to
significantly increase revenues, which will require the development and
widespread acceptance of the Internet as a medium for commerce. There can be no
assurance that the Internet will be a successful retailing channel. The Internet
may not prove to be a viable commercial marketplace because of inadequate
development of the necessary infrastructure, such as reliable network backbones,
or complementary services, such as high speed modems and security procedures for
financial transactions. The viability of the Internet may prove uncertain due to
delays in the development and adoption of new standards and protocols (for
example, the next generation Internet Protocol) to handle increased levels of
Internet activity or due to increased government regulation. If use o the
Internet does not continue to grow, or if the necessary Internet infrastructure
or complementary services are not developed to effectively support growth that
may occur, the Company's business, results of operations, and financial
condition could be materially adversely affected.
Use of the Internet by consumers is at an early stage of development, and
market acceptance of the Internet as a medium for obtaining recordings,
information, entertainment, commerce, and advertising is subject to a high level
of uncertainty. If Internet-based downloading of musical content is not widely
accepted by consumers and recording artists, the Company's business, results of
operations, and financial condition will be materially adversely affected.
The Company's future success will be significantly dependent upon its ability
to create, license, and deliver entertaining and compelling Internet music-
related content in order to attract users to its websites to purchase music and
related merchandise and to attract advertisers to its websites. There can be no
assurance that the Company's content will be attractive to a sufficient number
of users to generate significant revenues. There can also be no assurance that
the Company will be able to anticipate, monitor, and successfully respond to
rapidly changing consumer tastes and preferences so as to continually attract a
sufficient number of users to its websites. If the Company is unable to develop
Internet content that allows it to attract, retain, and expand a loyal user
base, its business, results of operations, and financial condition will be
materially adversely affected.
Risks of Technology Trends and Evolving Industry Standards (Bandwidth)
The Company's success will depend upon the development of the Internet
infrastructure such that large amounts of bandwidth are available to a wide
number of users. Online delivery of music, at current compression rates,
requires large amounts of Internet bandwidth to download to a customer's
computer in an acceptable time span. Until there is widespread access to high
speed Internet connections or deeper compression of music files, the market for
online music will remain limited to those Internet users with such high speed
access.
The Company's success will also depend upon its ability to develop and
provide new products and services. The delivery of music online is and will
continue to be, like the Internet, characterized by rapidly changing technology,
evolving industry standards, changes in customer requirements, and frequent new
service and product introductions. The Company's future success will depend, in
part, on its ability to effectively use leading technologies to continue to
develop its technological expertise to enhance its current services, to develop
new services that meet changing customer requirements and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis. In addition, the Company's business could
be
12
adversely affected if an industry standard for hardware used in the storage and
playback of the Company's products is slow or fails to develop.
Competition.
The market for Internet content providers is new, highly competitive, and
rapidly changing. Since the Internet's commercialization in the early 1990's,
the number of websites on the Internet competing for consumers' attention and
spending has proliferated. With no substantial barriers to entry, the Company
expects that competition will continue to intensify. Currently, there are more
than one hundred music retailing websites on the Internet. With respect to
competing for consumers' attention, in addition to intense competition from
Internet content providers, the Company also faces competition from traditional
media such as radio, television, and print. GoodNoise also competes with major
and independent record labels.
The Company believes that the primary competitive factors in providing music
entertainment products and services via the Internet are name recognition,
content available on an exclusive basis, variety of value-added services, ease
of use, price, quality of service, availability of customer support,
reliability, technical expertise, and experience. The Company's success in this
market will depend heavily upon its ability to provide high quality,
entertaining content, along with cutting-edge technology and value-added
Internet services. Other factors that will affect the Company's success include
the Company's ability to attract experienced marketing, sales, and management
talent. In addition, the competition for advertising revenues, both on Internet
websites and in more traditional media, is intense. The Company believes that
its high-quality downloadable music content will be an important differentiation
from other music-related and music-merchandising websites.
Many of the Company's current and potential competitors in the Internet and
music entertainment businesses have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition,
and larger existing customer bases than the Company. These competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements and to devote greater resources to the development,
promotion, and sale of their products o services than the Company. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors.
Potential Fluctuations in Quarterly Operating Results
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, most of which are outside the
Company's control, including: the level of use of the Internet; the demand for
downloadable music content and Internet advertising; seasonal trends in both
Internet use, purchases of downloadable music, and advertising placements; the
addition or loss of advertisers; the level of traffic on the Company's Internet
sites; the amount and timing of capital expenditures and other costs relating to
the expansion of the Company's Internet operations; the introduction of new
sites and services by the Company or its competitors; price competition or
pricing changes in the industry; technical difficulties or system downtime;
general economic conditions, and economic conditions specific to the Internet
and Internet media. Due to the foregoing factors, among others, it is likely
that the Company's operating results will fall below the expectations of the
Company or investors in some future quarter.
Risks Inherent in the Music Industry
The music industry, like other creative industries, involves a substantial
degree of risk. Each recording is an individual artistic work, and its
commercial success is primarily determined by consumer taste, which is
unpredictable and constantly changing. Accordingly, there can be no assurance as
to the financial success of any particular release, the timing of any such
success or the popularity of any particular artist, or the Company's ability to
attract and sign artists to the GoodNoise record label. Furthermore, the Company
believes that it is standard practice for record companies to pay substantial
advances to artists. The Company may incur significant expenses in connection
with paying its artists such advances, which could materially adversely affect
the Company's results of operations, and financial position. In circumstances
when the Company does not pay such advances, it will be competing for artistic
talent at a disadvantage to other record labels that do pay such advances. There
can b no assurance that the Company will be able to generate sufficient revenues
from successful releases to cover the costs of unsuccessful releases. The music
industry is dominated by a small number of large record companies that have
13
significantly greater experience and financial, marketing, and distribution
resources than the Company. There can be no assurance of the Company's ability
to compete effectively in that market.
Dependence Upon Strategic Alliances
The Company intends to rely on certain strategic alliances to attract users
to its websites, to attract paid advertising to its websites, and to provide
alternative distribution channels for music rights and licenses it hopes to
acquire. For example, the Company will seek to enter into a strategic alliance
with a major music publishing company for the worldwide administration of any
music publishing rights the Company acquires from its recording artists. The
Company will seek alliances with computer and entertainment companies which the
Company believes will result in increased traffic to its websites. The inability
to enter into new, and to maintain any one or more of its existing, strategic
alliances could have a material adverse effect on the Company's business,
results of operations, and financial condition.
Uncertain Acceptance and Maintenance of the GoodNoise Brand
The Company believes that establishing and maintaining the GoodNoise brand is
a critical aspect of its efforts to attract and expand its Internet audience and
that the importance of brand recognition will increase due to the growing number
of Internet sites and the relatively low barriers to entry in providing Internet
content. If the Company is unable to provide high quality content or otherwise
fails to promote and maintain its brand, or if the Company incurs excessive
expenses in an attempt t improve its content or promote and maintain its brand,
the Company's business, results of operations, and financial condition will be
materially adversely affected.
Dependence on Key Personnel and Hiring of Additional Personnel
The Company's performance is substantially dependent on the services of
Robert H. Kohn (Chairman), Gene Hoffman, Jr. (Chief Executive Officer), and
Joseph Howell (Executive Vice President and Chief Financial Officer) as well as
on the Company's ability to recruit, retain, and motivate its other officers and
key employees. The Company's success also depends on its ability to attract and
retain additional qualified employees. Competition for qualified personnel is
intense and there are a limited number of persons with knowledge of and
experience in the Internet and music entertainment industries. There can be no
assurance that the Company will be able to attract and retain key personnel. The
loss of one or more key employees could have a material adverse effect on the
Company.
The Company believes its future success will also depend in large part upon
its ability to attract and retain highly skilled management, engineering, sales
and marketing, finance, and manufacturing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The loss of the services
of any of the key personnel, the inability to attract or retain qualified
personnel in the future, or delays in hiring required personnel, particularly
engineers and sales personnel, could have a material adverse effect on the
Company's business, results of operations, and financial condition. In addition,
companies in the Internet and music industries whose employees accept positions
with competitive companies frequently claim that their competitors have engaged
in unfair hiring practices. There can be no assurance that the Company will not
receive such claims in the future as it seeks to hire qualified personne or that
such claims will not result in material litigation involving the Company. The
Company could incur substantial costs in defending itself against any such
claims, regardless of the merits of such claims.
Dependence on Third Parties for Internet Operations
The Company's ability to advertise on other Internet sites and the
willingness of the owners of such sites to direct users to the Company's
Internet sites through hypertext links are critical to the success of the
Company's Internet operations. The Company also relies on the cooperation of
owners of copyrighted materials and Internet search services and on its
relationships with third party vendors of Internet development tools and
technologies. There can be no assurance that the necessary cooperation from
third parties will be available on acceptable commercial terms or at all. If the
Company is unable to develop and maintain satisfactory relationships with such
third parties on acceptable commercial terms, or if the Company's competitors
are better able to leverage such relationships, the Company's business, results
of operations and financial condition will be materially adversely
affected.
14
Risks Associated with Acquisitions
As part of its business strategy, the Company may from time to time acquire
assets and businesses principally relating to or complementary to its
operations. These acquisitions may include acquisitions for the purpose of
acquiring musical content and/or technology. The Company has entered into
agreements to acquire Nordic and Emusic. Among other things, the closing of
these transactions is dependent upon satisfactory due diligence and on the
Company obtaining $3 million of additional financing. These and any other
acquisitions by the Company involve risks commonly encountered in acquisitions
of companies. These risks include, among other things, the following: the
Company may be exposed to unknown liabilities of acquired companies; the Company
may incur acquisition costs and expenses higher than it anticipated;
fluctuations in the Company's quarterly and annual operating results may occur
due to the costs and expenses of acquiring and integrating new businesses or
technologies; the Company may experience difficulties and expenses in
assimilating the operations and personnel of the acquired businesses; the
Company's ongoing business may be disrupted and its management's time and
attention may be diverted; the Company may be unable to integrate successfully
or to complete the development and application of acquired technology and may
fail to achieve the anticipated financial, operating, and strategic benefits
from these acquisitions; the Company may experience difficulties in establishing
and maintaining uniform standards, controls, procedures, and policies; the
Company's relationships with key employees and customers of acquired businesses
may be impaired, or these key employees and customers may be lost as a result of
changes in management and ownership of the acquired businesses; and the Company
may incur amortization expenses if an acquisition is accounted for as a
purchase, resulting in significant goodwill or other intangible assets. In
addition, the Company's stockholders may be dilute if the consideration for the
acquisition consists of equity securities. The Company may not overcome these
risks or any other problems encountered in connection with acquisitions. If the
Company is unsuccessful in doing so, its business, results of operations and
financial condition could be materially and adversely affected.
Security Risks
A party who is able to circumvent the Company's security measures could
misappropriate proprietary information or cause interruptions in the Company's
Internet operations. The Company may be required to expend significant capital
and resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. Consumer concern over Internet
security has been, and could continue to be, a barrier to commercial activities
requiring consumers to send their credit card information over the Internet.
Computer viruses, break-ins, or other security problems could lead to
misappropriation of proprietary information and interruptions, delays, or
cessation in service to the Company's customers. Moreover, until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet as a merchandising medium.
Dependence on Intellectual Property Rights; Risks of Infringement
The Company relies on copyright and trade secret laws to protect its content
and proprietary technologies and information, but there can be no assurance that
such laws will provide sufficient protection to the Company, that others will
not develop technologies that are similar or superior to the Company's, or that
third parties will not copy or otherwise obtain and use the Company's content or
technologies without authorization.
Dependence on Licensed Technology
The Company may rely on certain technology licensed from third parties, and
there can be no assurance that these third party technology licenses will be
available to the Company on acceptable commercial terms or at all.
Governmental Regulation and Legal Uncertainties
The Company is not currently subject to direct federal, state, or local
regulation, and laws or regulations applicable to access to or commerce on the
Internet, other than regulations applicable to businesses generally. However,
due to the increasing popularity and use of the Internet and other online
services, it is possible that a number of laws and regulations may be adopted
with respect to the Internet or other online services covering issues such as
user privacy, "indecent" materials, freedom of expression, pricing, content and
quality of products and
15
services, taxation, advertising, intellectual property rights, and information
security. The adoption of any such laws or regulations might also decrease the
rate of growth of Internet use, which in turn could decrease the demand for the
Company's products and services or increase the cost of doing business or in
some other manner have a material adverse effect on the Company's business,
results of operations, and financial condition. In addition, applicability to
the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity,
and personal privacy is uncertain. The vast majority of such laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies. The Company does not believe that such regulations, which were
adopted prior to the advent of the Internet, govern the operations of the
Company's business nor have any claims been filed by any state implying that the
Company is subject to such legislation. There can be no assurance, however, that
a state will not attempt to impose these regulations upon the Company in the
future or that such imposition will not have a material adverse effect on the
Company's business, results of operations, and financial condition.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for the services of the Company or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs, or could in some other manner have a material adverse
effect on the Company's business, results of operations, and financial
condition. In addition, because the Company's services are accessible worldwide,
and the Company facilitates sales of goods to users worldwide, other
jurisdictions may claim that the Company is required to qualify to do business
as a foreign corporation in a particular state or foreign country. The Company
is qualified to do business in California, and failure by the Company to qualify
as a foreign corporation in a jurisdiction where it is required to do so could
subject the Company to taxes and penalties for the failure to qualify and could
result in the inability of the Company to enforce contracts in such
jurisdictions. Any such new legislation or regulation, or the application of
laws or regulations from jurisdictions whose laws do not currently apply to the
Company's business, could have a material adverse effect on the Company's
business, results of operations, and financial condition.
Potential Liability for Sales and Other Taxes
The Company does not currently collect sales or other similar taxes in
respect of the delivery of its products into states other than California where
the Company collects sales taxes for sales of tangible products. New state tax
regulations may subject the Company to the assessment of sales and income taxes
in additional states. Although the Internet Tax Freedom Act precludes for a
period of three years the imposition of state and local taxes that discriminate
against or single out the Internet, it does not impact currently existing taxes.
Tax authorities in a number of states are currently reviewing the appropriate
tax treatment of companies engaged in Internet retailing and are currently
considering an agreement with certain of these companies regarding the
assessment and collection of sales taxes. The Company is not a party to any such
discussions.
Risks Associated with International Markets
The future success of the Company will depend in part on its ability to
generate international sales. There can be no assurance, however, that the
Company will be successful in generating international sales of its products.
Sales to customers in certain foreign countries will be subject to a number of
risks, including: foreign currency risk; the risks that agreements may be
difficult or impossible to enforce and receivables difficult to collect through
a foreign country's legal system; foreign customers may have longer payment
cycles; or foreign countries could impose withholding taxes or otherwise tax the
Company's foreign income, impose tariffs, embargoes, or exchange controls, or
adopt other restrictions on foreign trade. In addition, the laws of certain
countries do not protect the Company's offerings and intellectual property
rights to the same extent as the laws of the United States. Failure of the
Company's efforts to compete successfully or to expand the distribution of its
offerings i international markets could have a material adverse effect on the
Company's business, results of operations, and financial condition.
16
Management of Growth
The Company expects to experience significant growth in the number of
employees and the scope of its operations. In particular, the Company intends to
hire additional engineering, sales, marketing, and support personnel. This
hiring will result in increased responsibilities for management. The future
success of the Company will depend on its ability to increase its customer
support capability and to attract, train, and retain qualified technical, sales,
marketing, and management personnel, for whom competition is intense. In
particular, the current availability of qualified sales and engineering
personnel is quite limited, and competition among companies for such personnel
is intense. During strong business cycles, the Company expects to experience
continued difficulty in filling its needs for qualified sales, engineering, and
other personnel.
The Company's future success will be highly dependent upon its ability to
successfully manage the expansion of its operations. The Company's ability to
manage and support its growth effectively will be substantially dependent on its
ability to implement adequate improvements to financial and management controls,
reporting and order entry systems, and other procedures and hire sufficient
numbers of financial, accounting, administrative, and management personnel. The
Company's expansion and the resulting growth in the number of its employees has
resulted in increased responsibility for both existing and new management
personnel. The Company is in the process of establishing and upgrading its
financial and accounting systems and procedures. There can be no assurance that
the Company will be able to identify, attract, and retain experienced accounting
and financial personnel. The Company's future operating results will depend on
the ability of its management and other key employees to implement and improve
its systems for operations, financial control, and information management, and
to recruit, train, and manage its employee base. There can be no assurance that
the Company will be able to achieve or manage any such growth successfully or to
implement and maintain adequate financial and management controls and
procedures, and any inability to do so would have a material adverse effect on
the Company's business, results of operations, and financial condition.
The Company's future success depends upon its ability to address potential
market opportunities while managing its expenses to match its ability to finance
its operations. This need to manage its expenses will place a significant strain
on the Company's management and operational resources. If the Company is unable
to manage its expenses effectively, the Company's business, results of
operations, and financial condition will be materially adversely affected.
Rapid Technological Change
The market in which the Company competes is characterized by frequent new
product introductions, rapidly changing technology, and the emergence of new
industry standards. The rapid development of new technologies increases the risk
that current or new competitors will develop products or services that reduce
the competitiveness and are superior to the Company's products and services. The
Company's future success will depend to a substantial degree upon its ability to
develop and introduce in a timely fashion new products and services and
enhancements to its existing products and services that meet changing customer
requirements and emerging industry standards. The development of new,
technologically advanced products and services is a complex and uncertain
process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. There is a potential for
product development delay due to the need to comply with new or modified
standards. There can be no assurance that the Company will be able to identify,
develop, market, support, or manage the transition to new or enhanced products
or services successfully or on a timely basis, that new products or services
will be responsive to technological changes or will gain market acceptance, or
that the Company will be able to respond effectively to announcements by
competitors, technological changes, or emerging industry standards. The
Company's business, results of operations, and financial condition would be
materially and adversely affected if the Company were to be unsuccessful, or to
incur significant delays, in developing and introducing new products, services,
or enhancements.
Y2K Disclosure
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. As a result, date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities.
17
Since the Company's systems and software are relatively new, management does
not expect Year 2000 issues related to its own internal systems to be
significant and does not anticipate that it will incur significant operating
expenses or be required to invest heavily in computer systems improvements to be
Year 2000 compliant. As the Company makes arrangements with significant
suppliers and service providers, the Company intends to determine the extent to
which the Company's interface systems may be vulnerable should those third
parties fail to address and correct their own Year 2000 issues. The Company
anticipates that this will be an ongoing process as the Company begins to
implement supplier and service provider arrangements throughout 1999. There can
be no assurance that the systems of suppliers or other companies on which the
Company relies will be converted in a timely manner and will not have a material
adverse effect on the Company's systems. Additionally, there can be no assurance
that the computer systems necessary to maintain the viability of the Internet or
any of the Web sites that direct consumers to the Company's web site will be
Year 2000 compliant. As part of the Company's Year 2000 compliance plan, the
Company is developing plans to operate its website from different systems and/or
at a different location in the event of any significant disruption as a result
of Year 2000 issues. The Company believes it is taking the steps necessary
regarding Year 2000 compliance with respect to matters within its control.
However, no assurance can be given that the Company's systems will be made Year
2000 compliant in a timely manner or that the Year 2000 problem will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
Control by Management and Existing Stockholders
The Company's executive officers, directors, and affiliated entities together
beneficially own a majority of the voting control of the Company's capital
stock. As a result, these stockholders, acting together, are able to influence
significantly and control most matters requiring approval by the Company's
stockholders, including the election of directors. Such a concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company.
Limited Public Market; Possible Volatility of Share Price
The Company's Common Stock is quoted on the OTC Bulletin Board. As of
December 14, 1998, there were approximately 15,015,300 shares of Common Stock
outstanding, of which approximately 2.8 million are freely tradable without
restriction under the Securities Act. Substantially all of the remaining shares
will not be tradable under Rule 144 until May 1999. The trading market for the
Company's Common Stock is currently limited to relatively low volume. There can
be no assurance that a trading market will be sustained in the future. Factors
such as announcements of technological innovations or new products by the
Company or its competitors, failure to meet securities analysts' expectations,
government regulatory action, patent or proprietary rights developments, and
market conditions for technology stocks in general could have a material effect
on the price of the Company's securities.
ITEM 3. DESCRIPTION OF PROPERTY.
The Company's corporate headquarters is located in Palo Alto, California. The
Company has leased its facilities and certain other equipment under operating
and capital lease agreements. The Company has leased approximately 1,600 square
feet of office space at these facilities. The Company believes that its existing
facilities plans are adequate for its current requirements and that additional
space can be obtained to meet its requirements for the foreseeable future.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as December 14, 1998 (i) by each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) by each of the Named Executive Officers and by each of the
Company's directors and (iii) by all current executive officers and directors as
a group. Except pursuant to applicable community property laws or as indicated
in the footnotes to this table, each stockholder identified in the table
possesses sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by such stockholder.
[Download Table]
Name Number Percent (2)
---- ------ -----------
Executive Officers and Directors (1)
Robert Kohn .................................. 3,701,500 24.2%
Gene Hoffman, Jr.. (3) ....................... 3,658,000 24.0
Gary Culpepper ............................... 949,900 6.2
Joseph Howell (4) ............................ 163,888 1.1
Ralph Peer, II................................ 147,500 1.2
All executive officers and directors as a
group (5 persons) (4)....................... 8,620,788 56.5%
---------------
* Less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of options.
Calculations of percentages of beneficial ownership assume the exercise by
only the respective named stockholders of all options for the purchase of
Common Stock held by such stockholder which are exercisable within 60 days
of December 14, 1998. Unless otherwise indicated, the address of each of
the named individuals is: c/o GoodNoise Corporation, 719 Colorado Avenue,
Palo Alto, California 94303.
(2) Percentage of beneficial ownership excludes: (i) up to 2,587,550 shares
issuable upon exercise of outstanding stock options and warrants and (ii)
2,190,000 shares of Common Stock issuable in connection with the
acquisitions of Nordic and Emusic. Percentage of beneficial ownership
includes 89,500 shares of Common Stock issuable as of December 14, 1998 on
conversion of the 500 outstanding Series A Preferred shares.
(3) Includes 400,000 shares for which Gene Hoffman has voting rights pursuant
to a voting agreement. Mr. Hoffman disclaims beneficiary ownership of such
shares except to the extent of his pecuniary interest therein.
(4) Includes 163,888 shares which are issuable upon exercise of options.
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ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information about the Executive
Officers, Directors and certain other officers of the Company, as well as
certain members of its senior management, and their ages and positions as of
December 1, 1998.
[Enlarge/Download Table]
Name Age Position(s)
-------------------------------------- --- ------------------------------------------------
Robert H. Kohn*....................... 41 Chairman and Secretary
Gene Hoffman, Jr*..................... 23 President, Chief Executive Officer, and Director
Ralph Peer, II........................ 54 Director
Gary Culpepper*....................... 48 Executive Vice President, Business Affairs
Joseph H. Howell*..................... 46 Executive Vice President and Chief Financial Officer
Brian Brinkerhoff..................... 36 Vice President, Content Acquisition
Steven Grady.......................... 32 Vice President, Corporate Communications
Brett A. Thomas....................... 28 Vice President, Engineering
* Executive Officer
Robert H. Kohn, a co-founder of the Company, has been Chairman of the Board
and Secretary since January 1998. From October 1996 to December 1997, Mr. Kohn
was Vice President, Business Development and General Counsel of Pretty Good
Privacy, Inc. ("PGP"), a developer and marketer of Internet encryption and
security software. From March 1987 to September 1996, he was Senior Vice
President of Corporate Affairs, Secretary, and General Counsel of Inprise
Corporation (formerly Borland International, Inc.) ("Inprise"), a developer and
marketer of personal computer software. Mr. Kohn also served as chief legal
counsel for Ashton-Tate Corporation. Prior to Ashton-Tate, he was an attorney at
the Beverly Hills law offices of Rudin & Richman, an entertainment law firm
whose clients included Frank Sinatra, Liza Minelli, Cher and Warner Brothers
Music. He was also Associate Editor of the Entertainment Law Reporter, for which
he continues to serve as a member of the Advisory Board. A member of the
California Bar Association, Mr. Kohn co-authored Kohn On Music Licensing, a
treatise on music industry law for lawyers, music publishers, and songwriters.
He graduated from Loyola Law School, Los Angeles and received a Bachelor of Arts
degree in Business Administration with a minor in economics, magna cum laude,
from California State University at Northridge. Mr. Kohn is also an adjunct
professor of law at Monterey College of Law, where he teaches Corporate
Law.
Gene Hoffman, Jr., a co-founder of the Company, has been President, Chief
Executive Officer, and a Director since January 1998. From November 1996 to
December 1997, Mr. Hoffman was Director of Business Development and Director of
Interactive Marketing of PGP. While at PGP, he managed strategic opportunities
and then, as Director of Internet Marketing, he re-launched the Company website
from a marketing, sales, and technical perspective. Mr. Hoffman was responsible
for all e-commerce and export control of downloadable goods sold from the PGP
website. From October 1995 to November 1996, he was Executive Vice President of
PrivNet, Inc., an Internet privacy software company. At PrivNet, Mr. Hoffman
was responsible for product strategy, business development, and all corporate
affairs. Mr. Hoffman also worked at IBM's component facility in Charlotte, North
Carolina. From August 1993 to October 1995, Mr. Hoffman was a student at the
University of North Carolina, Chapel Hill.
Ralph Peer, II, a Director since June 1998, is Chairman and Chief Executive
Officer of peermusic, a global network of music publishing and production
companies. In addition, Mr. Peer is Vice President and Director of the National
Music Publishers' Association (U.S.A.) and the Harry Fox Agency. He is a
lifetime director and past president of the Country Music Association and a
publisher/director of ASCAP (American Society of Composers, Authors, and
Publishers). Mr. Peer is also a director of Fox Agency International (Singapore)
and a consultant to the board of MCPS (Mechanical Copyright Protection Society,
U.K.). He is a past president and a current director of ICMP (International
Confederation of Music Publishers) and in 1997 was elected "President d'Honneur"
of the Confederation.
Gary Culpepper joined the Company in April 1998 as Executive Vice President,
Business Affairs. From May 1995 to March 1998, Mr. Culpepper was in private law
practice, specializing in music and entertainment transactions for recording
artists, producers, and songwriters. From April 1994 to April 1995, Mr.
Culpepper was Senior Counsel
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for Sony Pictures/Columbia/TriStar Home Video. Mr. Culpepper previously served
as Vice President, Business Affairs/Music for Paramount Pictures Corporation,
where he was responsible for the negotiation, structuring, and administration of
all music-related rights for all film and soundtrack licensing agreements,
budget planning, and financial analysis for all music-related deal-making
activities. Prior to that, Mr. Culpepper was Director, Business Affairs for
Capitol Records, Inc., where he was responsible for the negotiation and
administration of all artist, producer, distribution, music video production
agreements, and master use licensing activities. He was also Senio Counsel for
Casablanca Records & Filmworks, Assistant General Counsel for ABC Records, Inc.,
and Manager, A&R Administration for A&M Records. He is a member of the
California Bar Association, graduated cum laude from University of California,
Los Angeles, and received his law degree from Southwestern University.
Joseph H. Howell joined the Company in April 1998 as Executive Vice President
and Chief Financial Officer. From January 1995 to April 1998, Mr. Howell was
Senior Vice President and Chief Financial Officer of Merix Corporation, a
manufacturer of high-technology, multilayer, printed circuit boards. From May
1988 to January 1995, Mr. Howell served as Vice President, Controller of
Inprise. He also served as Inprise's acting Chief Financial Officer in 1994. Mr.
Howell received a Bachelor of Arts, University of Michigan in 1974 and a Masters
of Science in Accounting from Eastern Michigan University in 1977.
Brian Brinkerhoff, joined the Company in November 1998 as Vice President,
Content Acquisition. From January 1995 to November 1998, Mr. Brinkerhoff was
Head of Creative Music Publishing at The Walt Disney Company, a multinational
entertainment company. From January 1992 to December 1994, he was a principal of
Vis-a-Vis Entertainment Company, a music publishing company. From May 1989 to
December 1991, Mr. Brinkerhoff was Product Manager, Kodak Interactive Systems, a
developer and marketer of personal computer software. Mr. Brinkerhoff received a
Bachelors of Arts degree in economics from the University of California at
Davis.
Steven Grady joined the Company in May 1998 as Vice President, Corporate
Communications. From July 1997 to May 1998, Mr. Grady was Director, Corporate
Communications for Inprise, where he was responsible for public relations and
investor relations. From July 1996 to July 1997, he was Director, Marketing
Communications for Infoseek, where he was responsible for public relations,
marketing communications, and trade shows. From 1992 to June 1995, he served as
Director, Corporate Communications for Inprise. Prior to Inprise, Mr. Grady
served in a variety of corporate communications and marketing positions with
Ashton-Tate, TeraData, and Lotus Development. Mr. Grady received a Masters
degree in Communications Studies from Emerson College and a Bachelor of Arts
degree in Public Communications from Ashland University.
Brett A. Thomas joined the Company in April 1998 as Vice President,
Engineering. From November 1996 to January 1998, Mr. Thomas was Principal
Engineer for P GP, where he was responsible for the design and implementation of
PGP 4.5 and 5.0 for Win32, PGP for Unix and PGP's key server software.
Previously, Mr. Thomas was a senior engineer for NCR, where he developed r their
check processing software. Prior to NCR, he wrote automated document processing
programs for MCI, internal management software for an insurance company, and
inventory control systems under contract to IBM. Since 1994, Mr. Thomas has been
involved in the Linux (a free version of Unix) software community, maintaining
web sites operating on Linux platform and making several modifications to the
source code of the core of the Linux operating system.
Advisory Panel
Peter Yarrow is a member of Peter, Paul & Mary, and is co-writer of such
songs as "Puff The Magic Dragon," "Weave Me The Sunshine," "Light One Candle,"
"Torn Between Two Lovers," and "Day Is Done." In addition, Peter co-produced and
co-wrote a musical called You Are What You Eat in the late 1960's, and he
created a number of children's videos based on Puff The Magic Dragon.
Kevin Cronin is the lead singer of REO Speedwagon, and writer of the songs
"Keep Pushin'" and "Roll With The Changes" and his first number one song, "Keep
On Loving You."
Lee Lorenzen, Chairman and Chief Executive Officer of Catalog City, Inc., an
Internet commerce company. Mr. Lorenzen is also a member of the Board of Fractal
Design and past Chief Executive Officer and Chairman of the Board of Altura
Software.
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ITEM 6. EXECUTIVE COMPENSATION
The Company began operations in January 1998. For the period from inception
through June 30, 1998, the compensation payable to Robert H. Kohn, Gene Hoffman,
Gary Culpepper and Joseph Howell (the only officers compensated during such
period) was $25,625, $31,250, $27,917 and $15,625, respectively.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A total of 8,378,000 shares of common stock were issued by GN Delaware at
$0.01 per share to the Company's founders in February 1998, of which 1,062,000
were issued subject to a Restricted Stock Purchase Agreement (the "Agreement")
to one of the founders. The Agreement provides the Company with the right to
repurchase 590,000 of these shares at a nominal price subject to ratable vesting
over three years.
In February 1998, GN Delaware entered into an agreement to borrow $110,000
from two of the Company's directors and a member of its Advisory Board through
the issuance of promissory notes bearing interest at 10.0% per annum, due in
December 1998. In April, GN Delaware entered into agreements to borrow an
additional $60,000 from two unrelated parties under the same terms. All
outstanding principal and interest related to these notes were to be converted
at the closing of GN Delaware's initial sal of Series A Preferred Stock. GN
Delaware did not issue the Series A Preferred Stock and, on May 1, 1998, these
notes were converted into 501,500 shares of common stock (including 324,500 to
the Company's directors and member of the Advisory Board).
On May 11, 1998, the Registrant (GoodNoise Corporation, a Florida
Corporation, formerly Atlantis Ventures Corporation) entered into an Agreement
and Plan of Reorganization pursuant to which it acquired (the "Merger") GN
Delaware. In connection with such acquisition, the Registrant exchanged
11,015,300 shares of its Common Stock for all outstanding stock of GoodNoise
Delaware and assumed outstanding GN Delaware options for the purchase of an
additional 2,032,550 shares of the Registrant's Common Stock. Following such
transaction, the directors and officers of GN Delaware became the directors and
officers of the Registrant. Of the shares issued as part of such transaction,
8,555,000 shares were issued to such directors and officers. The 11,015,300
shares issued to the GN Delaware shareholders represented approximately 74.9% of
the total number of shares outstanding following the Merger. The shareholders of
the Registrant prior to the Merger had no affiliation with GN Delaware and
following the Merger ceased to be affiliates of the Registrant.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 200,000,000 shares of
Common Stock and 500,000 shares of Preferred Stock. The following summary of
certain provisions of the Common Stock and the Preferred Stock of the Company
does not purport to be complete and is subject to, and qualified in its entirety
by, the Articles of Incorporation and Bylaws of the Company that are included as
exhibits to this Form 10-SB and by the provisions of applicable law.
Common Stock
As of December 14, 1998, there were approximately 15,015,300 shares of Common
Stock outstanding held of record by 56 stockholders. The holders of Common Stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of the holders of Common Stock. Subject to preferences applicable to
any outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any Preferred Stock. Holders of Common Stock have no preemptive or
subscription rights, and there are no redemption or conversion rights with
respect to such shares. All outstanding shares of Common Stock are fully paid
and non-assessable.
22
Preferred Stock
The Board of Directors has the authority to issue up to 500,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued shares of
Preferred Stock and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders. The Board of Directors, without stockholder approval, can issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company.
2,000 shares of Preferred Stock have been designated as Series A Preferred
Stock ("Series A Shares"), 500 of which were outstanding as of December 14,
1998. Each Series A Share is initially convertible, at the option of its
holder, into shares of Common Stock of the Company based upon a conversion
price equal to the lower of 85% of the average of the four lowest closing
prices of the Company's Common Stock during the twenty trading days before the
conversion date or $7.91. The following is a summary of the rights,
preferences and privileges of the Series A Shares:
Dividends. The Series A Shares are not entitled to any preference with
respect to dividend payments.
Voting Rights. The holders of the Series A Shares have no voting rights
except as required by law.
Liquidation Preference. Upon any liquidation, dissolution or winding up of
the affairs of the Company, the holder of each Series A Share shall be entitled
to be paid $1,000 per share (the amount initially paid for such shares) plus an
amount calculated at the rate of six percent per annum of such price per share.
If the assets of the Company upon such event are insufficient to make such
payment in full, then the holders of Series A Shares shall be entitled to pro
rata distribution of all the assets of the Company. After payment in full of the
liquidation preference to the holders of Series A Shares, such holders are
entitled to no further distributions.
Conversion. The Series A Shares are convertible into shares of Common Stock
at the election of the holder of such Series A Shares at a price (the
"Conversion Rate") equal to the lower of (i) $7.91, (ii) 110% the closing price
on the day 180 days following October 28, 1998 or (iii) the market price when a
holder of Series A Shares delivers notice of his election to convert such
shares. "Market price" is generally determined by the average of the four lowest
closing prices for the 20 trading days prior to the applicable date.
Any Series A Shares outstanding three years after the date such shares were
initially issued automatically convert into shares of the Company's Common Stock
at the then applicable Conversion Rate.
Adjustments to Conversion Rate. The Conversion Rate is subject to
proportional adjustment upon any stock split, stock dividend or other similar
change to the capital stock of the Company and certain other adjustments upon
future issuances of Common Stock or rights to acquire Common Stock at a price
less than the then applicable Conversion Rate.
Redemption. Under certain circumstances the Company has the right to redeem
the Series A Shares. Under certain other circumstances the Investor has the
right to require the Company to redeem the Series A Shares.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Interwest Transfer
Co. Inc.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS.
Price Range of Common Stock
The Company's Common Stock has been quoted on the OTC Bulletin Board
since April 27 1998 initially under the symbol ALVT and since May 12, 1998 under
the symbol GDNO. The following table sets forth the highest and lowest closing
prices for the periods indicated.
[Enlarge/Download Table]
1998 High Low
-------------------------------------------------------------------------------- ----------------- -----------------
Second calendar quarter (prior to May 12, 1998) 1.00 .06
Second calendar quarter (after to May 12, 1998) 7.25 5.00
Third calendar quarter 8.19 6.00
Fourth calendar quarter (through December 14, 1998) 7.88 6.50
Such amounts reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
On December 14, 1998, there were approximately 15,015,300 shares of Common
Stock outstanding, of which approximately 2.8 million are freely tradable
without restriction under the Securities Act. Substantially all of the remaining
shares will not be tradable under Rule 144 until May 1999. In addition, there
are 500 shares of Series A Preferred Stock outstanding, convertible into shares
of Common Stock at the election of the holder of such Series A Shares at a price
(the "Conversion Rate") equal to the lower of (i) $7.91, (ii) 110% of the
closing price on the day 180 days following October 28, 1998 or (iii) the market
price when a holder of Series A Shares delivers notice of election to convert
such shares. "Market price" is generally determined by the average of the four
lowest closing prices for the 20 trading days prior to the applicable date. Any
Series A Shares outstanding three years after October 28, 1998 (the date such
shares were initially issued) automatically convert into shares of the Company's
Common Stock at the then applicable Conversion Rate.
Dividend Policy
The Company has paid no dividends and intends to retain all future earnings,
if any, for use in the development and operation of its business and does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
None.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June 1998, the Company retained PricewaterhouseCoopers LLP as the
Company's independent accountants and dismissed Barry L. Friedman P.C. ("Barry
Friedman"), Atlantis Ventures Corporation's former accountants. The decision to
change independent accountants was ratified by the Company's Board of Directors.
During the two most recent fiscal years audited by Barry Friedman through June
29, 1998, there were no disagreements with Barry Friedman regarding any matters
with respect to accounting principles or practices, financial statement
disclosure or audit scope or procedure, which disagreements, if not resolved to
the satisfaction of the former accountants, would have caused Barry Friedman to
make reference to the subject matter of the disagreement in connection with this
report. The former accountants reports for the years and periods audited by them
are not part of the financial statements of the Company included in this
Form 10-SB. Such reports did not
24
contain an adverse opinion or disclaimer of opinion or qualifications or
modifications as to uncertainty, audit scope or accounting principles. Prior to
retaining PricewaterhouseCoopers LLP, the Company had not consulted with
PricewaterhouseCoopers LLP regarding the application of accounting principles or
the type of audit opinion that might be rendered on the Company's financial
statements.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
From inception until the Merger, GN Delaware issued approximately 9,300,000
shares of Common Stock. Approximately 8,200,000 of such shares were issued in
reliance on Rule 701 as shares issued to employees, consultants and advisors. Of
such shares, 1,000,000 were issued for nominal cash investments ($0.01 to $0.03
per share and $10,000 in aggregate) and 7,210,000 shares were issued to the
Company's founders. The balance of such shares were issued in reliance on
Section 4(2) of the Securities Act Of such shares 150,000 were issued for an
aggregate purchase price of $60,000. All such purchasers were experienced
entertainment businesspersons, professionals, sophisticated investors or family
members related to the founders of the Company. All investors had access to
information regarding GN Delaware that was necessary to make an informed
investment decision. In connection with the Merger, each outstanding GN Delaware
share was converted into 1.18 shares of GoodNoise Common Stock.
Through June 1998, GN Delaware issued convertible promissory notes to two
directors, one member of its advisory board and two other individuals with an
aggregate principal amount of $170,000. Such notes were converted into an
aggregate of 501,500 shares of GN Delaware Common Stock in May 1998. The
issuance of such notes and the shares issued on conversion thereof were exempt
pursuant to Section 4(2) of the Securities Act. Each of such investors were
sophisticated investors who had access to al relevant information regarding GN
Delaware necessary to make an informed investment decision.
On May 6, 1998, the Registrant (GoodNoise Corporation, a Florida Corporation,
formerly Atlantis Ventures Corporation) issued 2,500,000 units at a price of
$0.20 per share in a private placement. Each unit consists of one share of
common stock and one warrant with each five warrants entitling the holder to
purchase one common share for $1.00. Warrants to purchase 200,000 shares of
common stock were exercised at the time of issuance. The remaining warrants were
exercisable through August 1998. Such shares and warrants were issued to
accredited investors only in contemplation of the Merger pursuant to Rule 504 of
Regulation D.
On May 11, 1998, Atlantis Ventures Corporation, a Florida corporation,
acquired all of the outstanding Common Stock of the Company. For accounting
purposes, this acquisition was treated as a recapitalization of the Company with
the Company as the acquirer (reverse acquisition). Atlantis Ventures was
organized in August 1989 and had no revenues or operations prior to the merger
with the Company. Following the recapitalization, Atlantis Ventures changed its
name to GoodNoise Corporation. The acquisition was a transaction by an issuer
not involving any public offering. The investment decision by Atlantis Ventures,
the de facto acquired company, was made by accredited investors who owned 98% of
the outstanding shares of Atlantis Ventures and who were provided with access to
information regarding the Company necessary to make an informed investment
decision.
From inception until the Merger, GN Delaware granted options to purchase
approximately 2,032,550 shares of Common Stock. The option grants were all to
employees and consultants to the Company in transactions exempt pursuant to Rule
701.
On August 10, 1998, investors exercised warrants to purchase 300,000 shares
of the Company's Common Stock for aggregate proceeds of $300,000. The warrants
had been issued as part of the May 1998 private placement.
On October 28, 1998, the Company raised proceeds of approximately $0.5
million through the sale of 500 shares of Series A Preferred Stock and Warrants
to purchase 100,000 shares of the Company's Common Stock to one accredited
investor. The exercise price of the Warrants is equal to the lower of $ 7.10 or
the closing price on April 28, 1999. See "Description of Capital Stock--
Warrants." Such issuance was exempt pursuant to Regulation D.
From inception the closing of the Merger until December 14, 1998, the Company
granted options to purchase 405,000 shares of Common Stock. The option grants
were all to employees and consultants to the Company in transactions exempt
pursuant to Rule 701 or Section 4(2).
25
There were no underwriters employed in connection with any of the above
transactions.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Act ("Florida Law") permits the indemnification of
officers, directors, and other corporate agents under certain circumstances and
subject to certain limitations. The Registrant's Articles of Incorporation and
Bylaws provide that the Registrant shall indemnify its directors, officers,
employees, and agents to the full extent permitted by Florida Law. In addition,
the Registrant has entered into separate indemnification agreements with its
directors and officers which requir the Registrant, among other things, to
indemnify them against certain liabilities which may arise by reason of their
status or service (other than liabilities arising from willful misconduct of a
culpable nature). These indemnification provisions may be sufficiently broad to
permit indemnification of the Registrant's officers and directors for
liabilities (including reimbursement of expenses incurred) arising under the
Securities Act of 1933, as amended (the "Securities Act").
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
26
PART F/S
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants.................................. 28
Balance Sheet...................................................... 29
Statement of Operations............................................ 30
Statement of Stockholders' Equity.................................. 31
Statement of Cash Flows............................................ 32
Notes to Financial Statements...................................... 33
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
GoodNoise Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of GoodNoise Corporation (a
development stage enterprise) at June 30, 1998, and the results of its
operations and its cash flows for the period from January 8, 1998 (Inception) to
June 30, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses from operations since
inception and has to obtain additional capital to fund its ongoing operations.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
October 28, 1998
28
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
JUNE 30, 1998
--------------------------------------------------------------------------------
ASSETS:
Current Assets:
Cash $ 509,751
Prepaid expenses and other current assets 21,362
-------------
Total current assets 531,113
Property and equipment, net 34,227
Other assets 16,520
-------------
Total assets $ 581,860
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 118,218
Accrued compensation 16,982
-------------
Total current liabilities 135,200
-------------
Commitments (Note 5)
Stockholders' Equity:
Preferred Stock, $0.01 par value; 500,000 shares
authorized; no shares issued
and outstanding -
Common Stock, $0.01 par value; 200,000,000
shares authorized; 14,715,300 shares
issued and outstanding 147,153
Additional paid-in capital 1,485,611
Notes receivable from employees (6,000)
Deficit accumulated during the development stage (1,180,104)
-------------
Total stockholders' equity 446,660
-------------
Total liabilities and stockholders' equity $ 581,860
=============
The accompanying notes are an integral part of these financial statements.
29
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 8, 1998 (INCEPTION) TO JUNE 30, 1998
--------------------------------------------------------------------------------
Revenues $ -
---------------
Operating expenses:
Product development 961,349
General and administrative 218,755
---------------
1,180,104
---------------
Net loss $ (1,180,104)
===============
Net loss per share - basic and diluted $ (0.12)
===============
Weighted average common shares
outstanding - basic and diluted 10,234,055
===============
The accompanying note are an integral part of these financial statements.
30
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 8, 1998 (INCEPTION) TO JUNE 30, 1998
--------------------------------------------------------------------------------
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DEFICIT
ACCUMULATED
ADDITIONAL NOTES DURING THE TOTAL
COMMON STOCK PAID-IN RECEIVABLE DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL FROM EMPLOYEES STAGE EQUITY
Issuance of common stock at
inception of the Company 8,378,000 $ 83,780 $ (83,780) $ - $ - $ -
Issuance of common stock on March 30, 1998 1,191,800 11,918 (1,818) (10,100) - -
Issuance of common stock in exchange for
services on March 30, 1998 672,600 6,726 (1,026) - - 5,700
Issuance of common stock in exchange
for services on April 12, 1998 271,400 2,714 4,186 - - 6,900
Conversion of notes payable into common stock
on May 1, 1998 501,500 5,015 164,985 - - 170,000
Payment on note receivable - - - 4,100 - 4,100
Issuance of shares in connection with merger
(Note 1) 3,700,000 37,000 651,350 - - 688,350
Issuance of options to advisors - - 751,714 - - 751,714
Net loss for the period from January 8, 1998
(inception) through June 30, 1998 - - - - (1,180,104) (1,180,104)
---------- ---------- ---------- ---------- ----------- -----------
Balance at June 30, 1998 14,715,300 $ 147,153 $1,485,611 $ (6,000) $(1,180,104) $ 446,660
========== ========== ========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
31
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 8, 1998 (INCEPTION) TO JUNE 30, 1998
--------------------------------------------------------------------------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,180,104)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 3,157
Common stock issued for services 12,600
Options issued to advisors 751,714
Changes in assets and liabilities, net of effects of merger:
Prepaid expenses and other current assets (21,362)
Accounts payable 116,568
Accrued compensation 16,982
Other assets (16,520)
-------------
Net cash used in operating activities (316,965)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (37,384)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repayment of notes receivable from employees 4,100
Issuance of common stock in connection with merger (Note 1) 690,000
Proceeds from issuance of notes payable 170,000
-------------
Net cash provided by financing activities 864,100
-------------
Cash at end of period $ 509,751
=============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Non cash transactions:
Conversion of notes payable into common stock $ 170,000
Issuance of common stock for notes receivable $ 10,100
The accompanying notes are an integral part of these financial statements.
32
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
--------------------------------------------------------------------------------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY, ITS RECAPITALIZATION AND LIQUIDITY
GoodNoise Corporation, (the "Company"), a Delaware corporation, was
incorporated on January 8, 1998 to develop and market a repertoire of
musical recordings offered for sale to consumers by direct file transfer, or
"downloading," over the Internet. Since its inception, the Company has been
in the development stage devoting its efforts primarily to organizing itself
as a public reporting entity, recruiting management and technical staff,
developing its product, acquiring operating assets and raising capital. The
Company operates within one industry segment.
On May 11, 1998, Atlantis Ventures Corporation ("Atlantis"), a Florida
corporation, acquired 9,335,000 shares of Common Stock of the Company
representing its then outstanding common stock in exchange for 11,015,300
shares of Atlantis. Prior to the merger, Atlantis had 3,700,000 shares
issued and outstanding. For accounting purposes, this transaction has been
presented as a recapitalization of the Company. Atlantis is a publicly
traded company that was organized in August 1989 and had no revenues or
operations prior to the merger with the Company. As of May 11, 1998,
Atlantis had cash of $690,000, liabilities of $1,650 and an accumulated
deficit of $1,650. Following the recapitalization, Atlantis changed its name
to GoodNoise Corporation. The accompanying financial statements reflect all
share amounts after giving effect to the recapitalization.
The Company has incurred losses from operations since inception and has to
obtain additional capital to fund its ongoing operations. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management is in the process of pursuing additional equity
financing although there can be no assurance that they will be successful in
their efforts. The financial statements do not include any adjustment that
might result from the outcome of this uncertainty.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, including cash
and accounts payable, approximate their fair value due to the relatively
short maturities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally two to three years, or the lease term of the respective assets.
33
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
--------------------------------------------------------------------------------
INCOME TAXES
Income taxes are accounted for using an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. The measurement of current and deferred
tax assets and liabilities are based on provisions of the enacted tax law;
the effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount
of any tax benefits that, based on available evidence, are not expected to
be realized.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company accounts for stock
issued to non employees in accordance with provisions of SFAS 123.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98.
Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by
dividing the net loss for the period by the weighted average number of
common shares outstanding during the period. The weighted average shares
used to compute basic net loss per share include outstanding shares of
common stock from the date of issuance and excludes, for the period from
January 8, 1998 (inception) through June 30, 1998, 508,056 shares of common
stock subject to repurchase rights. In addition, the calculation of diluted
net loss per share excludes common stock issuable upon exercise of employee
stock options and shares subject to repurchase as their effect is
antidilutive.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
comprehensive income and its components in financial statements.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from nonowner sources. There are no differences between the
net loss for the period from January 8, 1998 (inception) to June 30, 1998
and comprehensive income (loss) for the same period.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company
does not expect that the adoption of SOP No. 98-1 will have a material
impact on its financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities and measure those instruments at fair value. It also
provides guidance for accounting changes in the fair value of a derivative
(i.e., gains and losses). SFAS 133 is effective for all fiscal years
beginning after June 15, 1999. The Company does not expect that the adoption
of SFAS 133 will have a material effect on its financial statements.
34
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
--------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT
JUNE 30,
1998
Software $ 5,215
Computer equipment 27,169
Furniture and fixtures 5,000
--------------
37,384
Less: Accumulated depreciation (3,157)
--------------
$ 34,227
==============
3. BORROWINGS
During the period ended June 30, 1998, the Company entered into agreements
to borrow $170,000, through the issuance of promissory notes which bore
interest at 10.0% per annum, of which $110,000 were issued to two of the
Company's directors and one member of its advisory board. All outstanding
principal and interest related to these notes was to be converted at the
closing of the Company's initial sale of Series A Preferred Stock. The
Company did not issue the Series A Preferred Stock and, on May 1, 1998,
these notes were converted into 501,500 shares of Common Stock.
4. RELATED PARTY TRANSACTIONS
At June 30, 1998, the Company had notes receivable related to stock
purchases by certain employees of the Company totaling $6,000. The notes are
non-interest bearing and are payable on demand.
See Note 3 for additional related party transactions.
5. COMMITMENTS
The Company leases office space under a noncancelable operating lease that
expires in March 2001. Rent expense was $12,934 for the period from January
8, 1998 (inception) to June 30, 1998.
Future minimum lease payments under this noncancelable operating lease are
as follows:
YEAR ENDING
JUNE 30,
1999 $ 46,425
2000 51,892
2001 32,590
-----------
$ 130,907
===========
35
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
--------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY
RESTRICTED STOCK
A total of 8,378,000 shares of Common Stock were issued to founders of which
1,062,000 shares were issued under a Restricted Stock Purchase Agreement
(the "Agreement") to one of the founders. The Agreement provides the Company
with the right to repurchase 590,000 of these shares at $0.01, subject to
ratable vesting over three years. As of June 30, 1998, a total of 508,056
shares were subject to repurchase by the Company.
STOCK OPTION PLAN
On March 30, 1998, the Company adopted the 1998 Stock Option Plan ("1998
Plan") that provides for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock
and for stock-based awards to officers, directors and key employees of the
Company and to non-employee consultants and independent contractors. Options
granted to employees under the 1998 Plan generally vest ratably over three
years.
Option activity under the 1998 plan for the period January 8, 1998
(inception) to June 30, 1998 was as follows:
OUTSTANDING OPTIONS
-------------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE EXERCISE
FOR GRANT SHARES PRICE
Authorized 2,360,000 - $ -
Granted (2,437,550) 2,437,550 0.85
Authorized 640,000 - -
----------- ----------- -----------
As of June 30, 1998 562,450 2,437,550 0.85
=========== =========== ===========
The following table summarizes information with respect to stock options
outstanding at June 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE REMAINING NUMBER AVERAGE NUMBER AVERAGE
EXERCISE CONTRACTUAL OUTSTANDING EXERCISE EXERCISABLE EXERCISE
PRICE LIFE (YEARS) JUNE 30, 1998 PRICE JUNE 30, 1998 PRICE
$0.01-0.03 4.83 2,032,550 $ 0.03 416,606 $ 0.02
5.00 4.92 405,000 5.00 380,694 5.00
---------- ----------
2,437,550 0.85 797,300 2.40
========== ==========
36
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
--------------------------------------------------------------------------------
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's Stock Option Plan been determined
based on the fair value at the grant date for awards in 1998 consistent with
the provisions of SFAS No. 123, the Company's net loss and net loss per
share for the period from January 8, 1998 (inception) through June 30, 1998
would have been as follows:
PERIOD
ENDED
JUNE 30,
1998
Net loss - as reported $(1,180,104)
Net loss - pro forma (1,458,199)
Net loss per share basic and diluted - as reported (0.12)
Net loss per share basic and diluted - pro forma (0.14)
The above pro forma disclosures are not necessarily representative of the
effects on reported net income for future years.
The aggregate fair value and weighted average fair value per share of
options granted to employees and advisors in fiscal 1998 were $1,121,000 and
$0.46 per share, respectively. Of this amount, $751,714 was recorded as
product development expense representing the fair value of 280,000 options
issued to various advisors of the Company which vested upon issuance. The
fair value of each option grant is estimated on the date of grant using the
Black Scholes Option Pricing Model with the following assumptions:
Expected volatility 55%
Risk-free interest 5.73%
Expected life 5 years
Expected dividend yield 0.00%
WARRANTS
As a result of the merger described in Note 1, the Company has 1,500,000
warrants outstanding to purchase an aggregate of 300,000 shares of common
stock as five warrants entitle the holder to purchase one common share for
$1.00. The warrants remained outstanding at June 30, 1998 and were exercised
in August 1998. See Note 8.
7. INCOME TAXES
There is no provision for income taxes for the period from January 8, 1998
(inception) through June 30, 1998 as the Company incurred a net loss, the
benefit of which was not recognized due to the uncertainty of its
realization. The Company's deferred tax assets at June 30, 1998 principally
relate to its net operating loss and approximated $170,000. Due to the
uncertainty surrounding recoverability, a full valuation allowance has been
established against this amount.
37
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
--------------------------------------------------------------------------------
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating loss and tax credit carryforwards that can be utilized in the
future may be impaired or limited in certain circumstances, including
changes in ownership, as defined.
8. SUBSEQUENT EVENTS
On July 30, 1998, the Company commenced selling musical recordings over the
Internet.
On August 10, 1998, the 1,500,000 warrants described in Note 6 were
exercised to purchase 300,000 shares of common stock for cash proceeds of
$300,000.
On October 8, 1998, the Company entered into agreements to acquire online
music companies Nordic Entertainment Worldwide, a privately held provider of
downloadable music on the Internet and Creative Fulfillment Inc., a
privately held entertainment and Internet marketing company, for stock and
cash. Under the terms of the transactions, which the Company intends to
account for under the purchase method of accounting, the Company will issue
up to 2,100,000 shares of common stock subject to certain closing
conditions. Among other conditions, the closing of these transactions is
dependant upon satisfactory due diligence and the Company obtaining
$3,000,000 of additional financing.
On October 28, 1998, the Company issued 500 shares of Series A Preferred
Stock ("Series A") and warrants to purchase 100,000 shares of the Company's
common stock for gross proceeds of $500,000 to one accredited investor. The
agreements, subject to various conditions, provide for the issuance of an
additional 500 shares of Series A and warrants to purchase 100,000 shares of
common stock under the same terms as the initial issuance except that the
warrant price will be based upon the current market price of the common
stock.
The Series A Shares are not entitled to any preference with respect to
dividend payments and have no voting rights except as required by law. Upon
any liquidation, dissolution or winding up of the affairs of the Company,
the holder of each Series A Share shall be entitled to be paid $1,000 per
share (the amount initially paid for such shares) plus an amount calculated
at the rate of six percent per annum of such price per share. If the assets
of the Company upon such event are insufficient to make such payment in
full, then the holders of Series A Shares shall be entitled to pro rata
distribution of all assets of the Company. After payment in full of the
liquidation preference to the holders of Series A Shares, such holders are
entitled to no further distributions.
38
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
--------------------------------------------------------------------------------
The Series A Shares are convertible into shares of common stock at the
election of the holder at a price (the "Conversion Rate") equal to the lower
of (i) $7.91, (ii) 110% the closing price on the day 180 days following
October 28, 1998 or (iii) the market price when a holder of Series A Shares
delivers notice of his election to convert such shares. "Market price" is
generally determined by the average of the four lowest closing prices for
the 20 trading days prior to the applicable date. Any Series A Shares
outstanding three years after the date such shares were initially issued
automatically convert into shares of the Company's common stock at the then
applicable Conversion Rate. The Conversion Rate is initially based on a
conversion price equal to the lower of 85% of the average of the four lowest
closing prices of the Company's common stock during the twenty trading days
before the conversion date or $7.91. The Conversion Rate is subject to
proportional adjustment upon any stock split, stock dividend or other
similar change to the capital stock of the Company and certain other
adjustments upon future issuances of common stock or rights to acquire
common stock at a price less than the then applicable Conversion Rate. Under
certain circumstances, the Company has the right to redeem the Series A
Shares. Under certain other circumstances, the holder has the right to
require the Company to redeem the Series A Shares. As a result, the Series A
Shares will be reflected as redeemable stock and the Company will record a
charge for the "in the money" conversion feature of such shares.
The Company is obligated to promptly file a registration statement (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") to cover the resale of the Company's common stock issuable upon the
conversion of the Series A Shares and exercise of the Warrants as well as
subsequently issuable Series A Shares and Warrants. The Company is obligated
to use its reasonable best efforts to have the Registration Statement
declared effective by the SEC and remain effective until the Company's
common stock subject to the registration statement may otherwise be freely
traded without registration. The Company is also obligated to list such
shares on the OTC Bulletin Board and to take certain actions to comply with
applicable state securities laws and regulations.
The warrants have a four year term and an exercise price equal to the lower
of (i) the closing price the day prior to the date of issuance of such
warrant or (ii) the closing price on the day six months following the
original date of issuance of such warrant. The initial exercise price of the
warrants is $7.10 per share. The exercise price of the warrants is subject
to adjustments on stock splits, stock dividends, any merger or acquisition
involving the Company and similar transactions, such as to permit the
investors to receive upon exercise of the warrants that which they would
have received had they exercised the warrants immediately prior to any such
transaction. The exercise price of the warrants is also subject to certain
other adjustments upon future issuances of common stock or rights to acquire
common stock at a price less than the then applicable exercise price.
39
PART III
ITEM 1. INDEX TO EXHIBITS
[Download Table]
2.1* Agreement and Plan of Reorganization by and among GoodNoise
Corporation, Atlantis Ventures Corp., GN Acquisition Corp and certain
other parties dated as of May 11, 1998
2.2 Agreement and Plan of Reorganization by and among GoodNoise
Corporation, Creative Fulfillment, Inc., GN Acquisition Corp and
certain other parties dated as of October 8, 1998
2.3 Agreement and Plan of Reorganization by and among GoodNoise
Corporation, Nordic Entertainment Worldwide, Inc., GNA Corp and certain
other parties dated as of October 8, 1998
3.1* Articles of Incorporation
3.2* Bylaws
3.3** Articles of Amendment for Series A Preferred Stock
10.1* Form of Indemnity Agreement
10.2 Stock Purchase Agreement dated as of March 30, 1998 with Gary Culpepper
10.3 1998 Stock Option Plan 10.4** Securities Purchase Agreement dated
October 28, 1998 10.5** Registration Rights Agreement dated October 28,
1998 10.6** Form of Warrant
21* Subsidiaries
* Previously filed as exhibit to the Registrant's Form 10-SB
** Previously filed as exhibit to the Registrant's Current Report on Form
8-K dated October 28, 1998.
40
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In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
GOODNOISE CORPORATION
By /s/ Joseph H. Howell
--------------------------------
Joseph H. Howell
Its Executive Vice President and
Chief Financial Officer
41
Dates Referenced Herein and Documents Incorporated by Reference
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