Registration of Securities of a Small-Business Issuer — Form 10-SB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10SB12G Registration of Securities of a Small-Business 48 218K
Issuer
2: EX-2.1 Agreement and Plan of Reorganization 26 98K
3: EX-3.1 Articles of Incorporation 4 12K
4: EX-3.2 Bylaws 13 75K
5: EX-10.1 Form of Indemnity Agreement 7 36K
6: EX-16.1 Letter From Barry L. Friedman 1 6K
7: EX-21 Subsidiaries 1 4K
10SB12G — Registration of Securities of a Small-Business Issuer
Document Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
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, 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.
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
GENERAL
GoodNoise Corporation, The Internet Record Company, is a development
stage company that seeks to engage in the business of developing and marketing a
compelling repertoire of musical recordings and offering such recordings by
direct file transfer, or "downloading," to consumers over the Internet. The
Company was formed on January 8, 1998 and has established an Internet website,
but has not yet begun to offer recordings for sale. The Company's long-term
objective is to establish itself as a major provider of digital music content
direct to consumers over the Internet. Though the Company will also offer its
musical recordings in the form of compact discs (or "CDs") distributed to the
consumers through traditional retail channels, the Company foresees a gradual
shift from the distribution of physical CDs through retail channels to the
delivery of digitized sound recordings to consumers directly over the Internet
for home recording on personal computer hard disks and other magnetic storage
media, recordable CDs ("CD-Rs"), and solid-state sound recording players.
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The Company believes that the percentage of music purchases made by direct
download over the Internet will be an increasing percentage of total music
purchases, and that this percentage will grow significantly during the next
several years. During the transition from traditional distribution of physical
CDs to the delivery of recordings by digital transmission over the Internet, the
Company's strategy will be to acquire compelling music content for marketing to
audiences, most likely to be early-adopters of the software and equipment
necessary to use the Internet to download, record and play musical recordings on
their home computers, CD-Rs, and solid-state players. During that time, the
Company will seek to build a strong brand name for the delivery of music content
over the Internet around the trademark GoodNoise. Later, as market acceptance of
the Internet as a medium for consumers to obtain sound recordings grows, the
Company will expand its repertoire of music for promotion and sale in other
markets.
The Company will organize its music repertoire on its website, which is
currently under development. Initially, the Company plans to design its website
to enable consumers to download sound recordings, purchase music-related
merchandise, obtain music news, and listen to web-radio broadcasts. Later, the
Company intends to enhance its website to allow the Company to offer music
reviews, live concerts, and music videos. The Company also intends to seek to
attract sponsors and advertisers wishing to reach the audience for the Company's
content. The Company's strategy is to increase the size of its user base, and
leverage off of such increased user base to increase revenues from sales of
music, related merchandise, advertising and sponsorship programs. The Company
also plans to enter into strategic alliances with other online CD retailers to
allow reference sales of their online catalog and to allow the sale of the
Company's catalog.
Content offered on the Company's website will initially focus on modern
rock and alternative music for the college-aged audience, specially tailored for
the young, high-tech music consumer. In the future, the Company may offer
genre-specific music websites for Jazz, Classical, and specific artists in the
Company's repertoire, allowing users to view artist biographies and
discographies, musicians' influences and historical information, and to hear and
view cybercasts and recording and video samples. The Company believes that by
providing a broad array of information in a highly-personalized, interactive
context, it can create an entertaining environment that will attract traffic to
its website, foster brand awareness and encourage purchases of music and related
merchandise. Product purchases will be coordinated through the website, which
will act as the Company's on-line retail store.
The Company plans to develop a repertoire of recording artists and to
develop its own catalog, and specifically licensed third party catalogs, for
sale either by downloadable track or by CD. The Company also intends to employ
innovative arrangements with aspiring recording artists who might not otherwise
be able to gain the attention of traditional record companies and with record
labels looking for new channels for the distribution of their recording
catalogs. Thus, recordings offered by the Company will include those from the
Company's own repertoire, as well as masters licensed from other record labels.
The Company seeks to develop a relationship with one of the major record
distributors to handle domestic distribution of the Company's recordings.
The Company plans to establish its own music publishing company, GoodNoise
Music Publishing, which will acquire an interest in the music publishing rights
of some of the artists in the Company's repertoire. The Company's music
publishing interests will be administered through an arrangement with peermusic,
one of the largest music publishing companies. Ralph Peer, the Chief Executive
Officer of peermusic, is a member of the Company's Board of Directors.
The Company plans to employ third-party technologies to allow the streaming
downloads of samples and full songs directly from the Company's website. The
Company will develop its own
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technology where needed to facilitate the usability of CD recorder devices and
sound recording player devices.
The Company was organized in January 1998. 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 will be
treated as a recapitalization of the Company with the Company as the acquirer
(reverse acquisition). Atlantis Ventures is a publicly traded company that 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 Company's executive offices are located at 719 Colorado Avenue, Palo Alto,
California 94303, and its telephone number is (650) 322-8910.
THE ON-LINE MUSIC INDUSTRY
The Company believes that substantial growth opportunities exist in the on-
line music industry. According to Jupiter Communications ("Jupiter"), a news
media research firm that focuses on on-line industries, total on-line music
revenues, which include prerecorded music sales, music-related merchandising,
advertising and concert ticketing, are expected to grow to $2.8 billion by the
year 2002, up from an estimated $22.5 million in 1996 and $71.0 million in 1997.
Jupiter estimates that the number of on-line households making purchases is
expected to grow from an estimated 15.2 million households in 1996 to 57.0
million households, representing over 50% of U.S. households, by the year 2002.
During the same time period, Jupiter estimates that the percentage of on-line
households making on-line purchases annually is expected to grow from
approximately 20% to 70%. Ad revenue on music websites is expected to grow from
$12.1 million worldwide in 1997 to more than $200 million by 2000.
The Company believes that the multimedia features available through the
Internet, including audio, video and graphics, make it an ideal medium for
promoting, marketing and selling music and related merchandise. Potential
purchasers of music recordings can preview their purchases by listening to high-
quality sound samples, viewing text and video clips (including cover art,
artists' discographies, music videos and reviews) and searching from a catalog
of available titles. The Internet and current technologies also allow users to
digitally download music in a compressed format to a personal computer, play
music from a PC or store and play it on either a CD-R drive or a solid-state
sound recording player device.
Internet users can also search for music by genre or artist, access a
wealth of information and events, including music history and news, artists'
biographies, cybercast concerts and radio broadcasts, and participate in live
interviews with artists. 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.
The Company believes that Internet-based retailers have advantages over
traditional retail channels. The Company believes that traditional retail stores
do not have the same capability to track individual customer purchases and
demographic data for use in direct marketing programs and in developing a one-
to-one relationship with the consumer. Further, the "bricks and mortar" retail
model is limited to consumers within the local vicinity of physical retail
outlets. The Company believes it can leverage the Internet to promote less well
known artists who may cater to regional or smaller market niches.
An individual electronic commerce website can maximize its awareness and
traffic through the use of strategic alliances with other websites having high
user traffic. Through the use of embedded hyperlinks, higher traffic websites
can refer potential customers to electronic commerce websites for
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potential purchases of goods or services. These agreements generally involve
economic arrangements including up-front payments or commissions on the dollar
volume of goods sold. These payments are analogous to rent paid by traditional
"brick and mortar" retail locations, and can be critical to an electronic
commerce website's ability to expand.
Historically, the music industry has benefited from innovations in
technology, such as the introduction of the CD in 1983. Over the last ten years,
much of the industry's growth resulted from consumers replacing existing music
collections with the CD format. According to the Recording Industry Association
of America ("RIAA"), domestic music sales grew from $5.6 billion in 1987 to
$12.5 billion in 1996. In recent years, however, music sales growth has slowed
due to a number of factors, including a shortage of major releases by new
artists and a slowdown in the rate of growth of CD sales, as consumers have
replaced most of their music collections.
The Company believes, however, that another period of similar growth may
occur as consumers replace their existing music collections in the CD format
with new electronic formats arising from the shift to downloadable recordings.
In addition, the Company believes that consumers will find it easier to purchase
a downloadable recording than to convert their existing CDs to electronic
formats.
Further, according to Jupiter, the major record companies have been losing
market share to independent record labels for years. During the period 1992-
1996, the market share of independent record labels increased from 11.6% to
21.2%. For the year 1996, the independent record labels were responsible for
two-thirds of all new releases of recorded music.
BUSINESS STRATEGY
The Company's strategy includes the following key elements:
1. MARKETING STRATEGY
A. Long Term
The Company's long-term objective is to establish itself as a major
provider of digital music content direct to consumers over the Internet. The
Company's strategy is to make an early entry into the market for downloadable
recordings, and leverage that early entry to exploit the emerging level playing
field in the recording industry.
The Company believes that before CD-R recording devices, solid-state
recording player devices, and high-bandwidth access to the Internet become
widely available, the delivery of sound recordings for home performance will
remain a small percentage of overall music sales. However, once such devices
and bandwidth become common, electronic commerce in downloadable recordings will
begin to cause a shift from the distribution of physical CDs though retail
establishments to the downloading of recordings by the listening public directly
off of the Internet.
The Company believes that the increasing percentage of recordings delivered
over the Internet will open up new opportunities for the marketing and
distribution of music content by independent recording companies, especially
those who understand the nature of the new medium and how it will affect
contractual relationships among artists, music publishers, and record companies.
The Company believes its management team understands these relationships and is
well positioned to execute on a plan to exploit them.
B. Short Term
Establish a "Cool" Music Web Site. The Company intends to build a well-
known World Wide Web destination for music consumers, around which the Company
will organize its repertoire, music programming, and music related merchandise.
The Company plans for its website to contain music news, reviews, live concerts,
and music related sponsorship and advertising content. Content offered on
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the Company's website will initially cover the modern rock and alternative music
genres, specially tailored for the high tech music consumer. Recordings offered
will include those from the Company's record label repertoire, and the Company
plans to license and acquire masters from other record labels.
Create Strong Brand Awareness. Until such time as CD-R recording devices,
solid-state player devices, and high bandwidth Internet access are common, the
Company intends to use the development, marketing and public relations
experience of its management team to build a strong brand name around the
trademark GoodNoise. The Company believes that building brand awareness of the
GoodNoise website is critical to attracting and expanding its global Internet
user base and its ability to attract new recording acts. GoodNoise will promote
its brand through on-line and traditional media, event sponsorships, free
branded software, and other marketing activities. The Company intends to enhance
brand awareness of its website by providing original and proprietary content,
providing consumers the ability to purchase music and related merchandise and
establishing strategic and bounty relationships whereby other websites engage
GoodNoise as an on-line music retail source and content provider.
Develop Key Industry and Website Alliances. The Company will seek to
establish strategic alliances with global music and media companies to attract
additional users to, and increase brand awareness of, the Company's websites.
Develop Free Enabling Software. The Company plans to develop and
distribute free software that enables or facilitates the playing, management and
storing of music files on PCs, CD recording devices and solid-state player
devices, where and when necessary or appropriate. The Company's strategy is to
publish the source code of its software and use a free source code licensing
methodology to encourage third party applications and improvements.
Engage in Traditional Record Promotion and Distribution. The Company plans
to seek strategic alliances with other online CD retailers to allow reference
sales of their online stock and to allow the sale of the Company's catalog. The
Company also intends to work with major record distributors to distribute the
Company's recordings in traditional retail channels in the United States.
Build User Communities and Attract Advertising. The Company plans to sell
banner advertising space on its website. By leveraging its record promotion
launches and fan/artist loyalty, the Company believes that it should be able to
aggregate targeted demographic user groups, thereby offering advertisers and
sponsors access to highly defined audiences
2. REPERTOIRE DEVELOPMENT
A. Long Term
Build GoodNoise Record Label. The Company is in the process of creating
what is commonly known as a "record label," which the Company intends to use
with its website, as well as record stores and other traditional distribution
channels, to promote, distribute and sell 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 A&R (Artists
and Repertoire) and Business Affairs staff.
Build Music Publishing Catalog. The Company also plans to establish its own
music publishing company, GoodNoise Music Publishing. Through an arrangement
with peermusic, one of the world's largest international music publishing
companies, the Company intends to acquire an interest in the music publishing
rights of some of the artists in the Company's repertoire.
B. Short Term
Create an Effective A&R and Promotion Infrastructure. The Company plans to
create a network of college students to find prospective new talent and promote
the Company. These individuals, which
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the Company intends to seek at each major university in the Company's initial
target markets, will be responsible for initial screening of artist talent and
distributing marketing and promotional material in their location. In this way,
the Company intends to augment its international online promotional activities
with a specific network of physical promotion for its online sales offerings.
Focus Marketing and Acquisition Activities. The Company plans to focus its
marketing and its music acquisition demographically. Initially, the Company will
concentrate its sales and marketing on the 18-34 age bracket as the Company
feels that these consumers have the expertise, demand, and bandwidth to take
best advantage of the Company's offerings.
SALES AND MARKETING
The Company's overall sales and marketing strategy is designed to
merchandise music and related products sold through the Company's website, build
brand awareness, attract repeat users and drive traffic to GoodNoise's website.
The Company intends to utilize a combination of external advertising and
promotion, internal promotion and product merchandising and on-line partnering
programs to accomplish these objectives.
Merchandising and Customer Programs. The Company 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, CDs, and related music merchandise.
In-Store Merchandising. The Company plans to use numerous merchandising
features to encourage and enhance a consumer's buying experience. The Company
believes that the user's ability to listen to audio samples is a significant
incentive to purchase. Prior to making a purchase on the Company's website, the
Company plans to offer a consumer the ability to access a variety of information
about an artist, music group, or album.
ADVERTISING, SALES AND SPONSORSHIPS
The Company plans to position its website as an on-line music source,
offering advertisers and marketers the ability to reach highly 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. The
Company plans to partner with a third party Internet Advertising Bureau as soon
as it is appropriate.
ORDERING, FULFILLMENT AND CUSTOMER SERVICE
The Company is designing an ordering system to be easy-to-use and simple to
understand. In order to maintain high customer satisfaction and price
competitiveness, the Company plans to place an emphasis on reliable product
fulfillment. At any time during a visit to the Company's website, 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 the Company, a customer is
prompted to register at the time of purchase and to enter his or her name,
address and password. The customer then has the option of securely submitting
credit card information on-line or calling or faxing the information to the
GoodNoise Service Department. 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 shipping information for subsequent orders.
TECHNOLOGY
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The Company plans 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, on-line delivery, and physical
delivery, (iv) security, (v) scalability and (vi) advanced technologies. At the
same time, the systems and tools will provide scalability to maintain
performance as the number of users of the system and the amount of data
processed increases and to add new functionality as new needs and technologies
emerge.
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 intends to
develop a database management system to allow 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, mSQL.
Website Development. The catalog of individual recordings, samples, and CDs
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. In light of current user patterns, the Company will use
the popular Progressive Networks' RealAudio format for delivering real-time
streaming 30-second audio previews and feature-length web broadcasts. The MPEG-1
layer 3 streaming format is also used for real-time preview samples, and
primarily for those tracks which are available for digital distribution. The
Company is exploring other download formats and plans to adjust the format of
its content to stay current with moving industry trends.
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 in each format. For example, the minimum system PC
requirements for a user desiring to play an audio sample in the MPEG audio
format are an MPEG Audio Player and a Pentium 133mhz CPU on Windows 95/NT
operating system with sixteen megabytes of random access memory.
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 from 2,000
simultaneous users currently to at least 10,000 users, 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 video
disk) multimedia authoring. Technologies with which the Company is currently
working include Sun's Java language, CD Writing client software,
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Real Time Streaming Protocol (RTSP) for the orderly delivery of multimedia
content over the Internet and the newly popular MPEG-4 and AAC audio
compression/transmission format.
COMPETITION
The market for Internet content providers is 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 competes with the major, and other
independent, record labels.
The Company believes that the primary competitive factors in providing
music entertainment products and services via the Internet are name recognition,
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 music-related content,
offered free of charge, 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 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.
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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 or other
intellectual property dispute or action to protect proprietary rights may have a
material adverse effect on the Company's business, operating results 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 its products. Any of these situations can have a material adverse effect
on the Company's business, operating results and financial condition.
EMPLOYEES
As of June 26, 1998, the Company had 10 full-time employees, including 7 in
operations and technical and artistic development and 3 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.
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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
GoodNoise Corporation (the "GoodNoise" or "Company") is a development stage
enterprise that seeks to become one of the leading on-line music entertainment
companies using the Internet as a global platform for promoting, marketing and
selling music and related content. The Company plans to develop and market a
compelling repertoire of musical recordings and offer such recordings to
consumers by direct file transfer, or "downloading," over the Internet. The
Company will also offer its musical recordings in the form of compact discs (or
"CDs") distributed to the consumers over the Internet and through traditional
retail channels.
The Company was organized in January 1998. 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 will be
treated as a recapitalization of the Company with the Company as the acquirer
(reverse acquisition). Atlantis Ventures is a publicly traded company that 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 Company's executive offices are located at 719 Colorado Avenue, Palo
Alto, California 94303, and its telephone number is (650) 322-8910.
RESULTS OF OPERATIONS
The Company was formed on January 8, 1998 and is a development stage
enterprise that has incurred costs to organize and develop its business, but has
yet to earn revenue. 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-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) the 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, on-line commerce and the recorded music industry.
11
NET REVENUES
The Company is a development stage enterprise that has earned no revenue
since its inception. The Company launched its first Internet website in April
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
Since its inception, the Company has incurred no costs of revenues. The
Company expects that future cost of revenues will consist of payments to third
parties for distribution of CDs and cassettes, fulfillment of customer orders,
manufacturing expenses, inventory management, royalties, copyrights, credit card
processing charges and profit participation payable to strategic alliance
partners and others.
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 $42,182 through March 31, 1998, related to software engineering, audio and
video production, and graphic design of the Company's website and music
catalogue.
SALES AND MARKETING EXPENSES
Since its inception, the Company has incurred no sales and marketing costs.
The Company expects that future costs will consist primarily of costs associated
with the Company's various strategic alliances, external advertising, promotion,
trade show, advertising sales and personnel expenses associated with marketing
of the Company's website.
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
$46,745 through March 31, 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 March 31, 1998, the Company had a cash balance of $25,221. Net cash of
$73,985 was used for operating activities for the period ended March 31, 1998
principally as a result of the net losses generated during the period.
Purchases of property and equipment totaled $10,794. The Company expects to
incur negative cash flow from operations for the foreseeable future, as it
continues to develop its market and operations.
The Company financed its operations from inception through March 31, 1998
using $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
the Series A Preferred Stock because of the merger and, in May 1998, these notes
were converted into 275,000 shares of common stock prior to the merger.
12
In May 1998, the Company merged with Atlantis Ventures Corporation, 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 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 in May 1998. The remaining warrants are exercisable through August
1998.
Based on current levels of operations and planned growth, the Company
anticipates that its existing capital resources will not be sufficient to enable
it to maintain its operations through the end of 1998. 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. 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.
The Company believes that it does not have a material exposure to the Year
2000 issue with respect to its own information systems since its existing
systems correctly define the Year 2000. The Company intends to conduct an
analysis in 1998 to determine the extent to which its major suppliers' systems
(insofar as they relate to the Company's business) are subject to the Year 2000
issue. The Company is currently unable to predict the extent to which the Year
2000 issue will affect its suppliers, or the extent to which it would be
vulnerable to its suppliers' failure to remediate any Year 2000 issues on a
timely basis. The failure of a major supplier subject to the Year 2000 issue to
convert its systems on a timely basis or a conversion that is incompatible with
the Company's systems could have a material adverse effect on the Company. In
particular, most of the purchases from the Company's Internet website will be
made with credit cards and the Company's operations may be materially adversely
affected to the extent its customers are unable to use their credit cards due to
Year 2000 issues that are not rectified by their credit card providers.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
LIMITED OPERATING HISTORY; ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE
RESULTS. GoodNoise 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. The Company 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
13
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. The Company expects
negative cash flow from operations to continue for the foreseeable future as it
continues to develop and market its business. If cash generated by operations is
insufficient to satisfy the Company's liquidity requirements, the Company may be
required to sell additional equity or debt securities. The sale of additional
equity or convertible debt securities would result in additional dilution to the
Company's stockholders.
NEED FOR ADDITIONAL FUNDS. Based on current levels of operations and
planned growth, the Company anticipates that its existing capital resources will
not be sufficient to enable it to maintain its operations through the end of
1998. 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. 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.
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, demand for downloadable music
content and Internet advertising, seasonal trends in both Internet use 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.
UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MUSICAL CONTENT DELIVERY MEDIUM.
Use of the Internet by consumers is at a very 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, financial
condition and operating results will be materially adversely affected.
UNCERTAIN ACCEPTANCE OF THE COMPANY'S INTERNET CONTENT. 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 recorded 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 references 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.
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COMPETITION. The market for Internet content providers is 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. With respect to
competition 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 expects to compete with the
major, and other independent, record labels. With respect to recorded music
sales, the Company expects to compete with numerous Internet retailers,
including traditional music retail chains, record labels and independents with
websites on the Internet. In addition, the Company expects to compete with
traditional retail stores, including chains and megastores, mass merchandisers,
consumer electronics stores and music clubs. The Company believes that the
primary competitive factors in providing music entertainment products and
services via the Internet will be name recognition, a 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
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 recording artists who become popular with the listening
public. The Company's failure to compete successfully in the music entertainment
business would have a material adverse effect on the Company's business, results
of operations and financial condition. In addition, the competition for
advertising revenues, both on Internet websites and in more traditional media,
is intense. To the extent the Company is not able to attract significant sources
of revenues from paid advertisements and sponsorships on its websites, the
Company's business, results of operations and financial condition will be
materially adversely affected.
Most 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.
RISKS INHERENT IN THE RECORD LABEL INDUSTRY. The record label 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 be no assurance that
the Company will be able to generate sufficient revenues from successful
releases to cover the costs of unsuccessful releases. The record label industry
is dominated by a small number of large record companies that have 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.
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
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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 to improve its content or promote and
maintain its brand, the Company's business, financial condition and operating
results will be materially adversely affected.
MANAGING EXPENSES. 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,
financial condition and operating results will be materially adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's performance is substantially
dependent on the services of Robert H. Kohn (Chairman), Gene Hoffman, Jr. (Chief
Executive Officer), and Gary Culpepper (Executive Vice President of Business
Affairs), 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.
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, financial condition and operating results
will be materially adversely affected.
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 also seek to enter into a
relationship with a major record distributor for the manufacture and
distribution through traditional retail channels of CDs recorded by its artists
and produced by the Company. The Company will seek alliances with Intel,
Adaptec, Philips, 3COM and others, 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.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS. The Company's
success will depend upon its ability to develop and provide new services that
meet customers' changing requirements. The music entertainment industry has been
characterized by significant technological changes, such as the introduction of
CDs which have had a significant impact on the industry and industry
participants, and further technological changes are expected to occur. The
Internet is characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new service
16
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 needs and to influence and respond to
merging industry standards and other technological changes on a timely and cost-
effective basis.
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 of 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.
CAPACITY CONSTRAINTS AND SYSTEM DISRUPTIONS. The satisfactory performance,
reliability and availability of the Company's Internet sites and its network
infrastructure are critical to attracting Internet users and maintaining
relationships with subscribing customers. System interruptions that result in
the unavailability of the Company's Internet sites or slower response times for
users would reduce the number of goods and services delivered and reduce the
attractiveness of the Company's Internet sites to users, subscribers and
advertisers. The Company's Internet operations are also vulnerable to
interruption by fire, earthquake, power loss, telecommunications failure and
other events beyond the Company's control. All of the Company's servers and
Internet equipment is currently located in San Francisco, California, an area
that is susceptible to earthquakes.
LIABILITY FOR INTERNET AND MUSICAL CONTENT. As a publisher and a
distributor of content over the Internet, the Company faces potential liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the materials that it publishes
or distributes. The Company may be subject to the provisions of the
Communications Decency Act, and similar legislation, which, among other things,
may impose criminal penalties on anyone that distributes "obscene" or "indecent"
material over the Internet.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS AND INVESTMENTS. The
Company's current strategy is to broaden the number, scope and content of its
Internet site through the acquisition of rights or licenses to musical content,
as well as through internally developed or other licensed content. Any such
investments would involve many of the same risks posed by acquisitions,
particularly risks related to the diversion of resources, the inability to
generate revenues, the impairment of relationships with third parties and
potential additional expenses. There can be no assurance that the Company would
be successful in overcoming these risks or any other problems encountered in
connection with such acquisitions or new investments.
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
17
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.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTY. Although there are currently
few laws and regulations directly applicable to the Internet, it is possible
that new laws and regulations will be adopted covering issues such as privacy,
copyrights, obscene or indecent communications and the pricing, characteristics
and quality of Internet products and services. The adoption of restrictive laws
or regulations could decrease the growth of the Internet or expose the Company
to significant liabilities. 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 downloadable music samples and artist,
record 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 condition.
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 in international
markets could have a material adverse effect on the Company's business,
operating results and financial condition.
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 June 30, 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]
BENEFICIAL OWNERSHIP (2)
-----------------------
NAME NUMBER PERCENT
---- ------ -------
EXECUTIVE OFFICERS AND DIRECTORS (1)
Robert H. Kohn, Chairman of the Board 3,687,500 25.1%
Gene Hoffman, Jr., President, Chief
Executive Officer and Director (3) 3,658,000 24.9%
Gary Culpepper, Executive Vice President,
Business Affairs 1,062,000 7.2%
Ralph Peer, II, Director 147,500 1.0%
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP (5 PERSONS) (4) 8,620,555 58.6%
(1) Unless otherwise indicated, the address of each of the named individuals is:
c/o GoodNoise Corporation, 719 Colorado Avenue, Palo Alto, California 94303.
(2) 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 June 30, 1998.
(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 65,555 shares which are issuable upon exercise of options.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following are the directors and officers of the Company at June 24,
1998:
[Download Table]
NAME AGE TITLE
---- --- -----
Robert H. Kohn 41 Chairman of the Board, Secretary
Gene Hoffman, Jr. 22 President, Chief Executive Officer and Director
Ralph Peer, II 54 Director
Gary D. Culpepper 48 Executive Vice President, Business Affairs
Joseph H. Howell 46 Executive Vice President and Chief Financial Officer
Steven Grady 32 Vice President, Corporate Communications
Sandy Pearlman 49 Vice President, Media & Artist Development
Brett Thomas 28 Vice President, Engineering
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All Directors hold office until the next annual meeting of shareholders or
the election and qualification of their successors. There is no family
relationship between any of the directors or officers of the Company.
ROBERT H. KOHN, Chairman of the Board and Secretary. 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 (new name, formerly Borland International, Inc.), a
developer and marketer of personal computer software. A member of the
California Bar, Mr. Kohn co-wrote Kohn On Music Licensing, a treatise on music
industry law for lawyers, music publishers and songwriters.
GENE HOFFMAN, JR., President and Chief Executive Officer. From November
1996 to December 1997, Mr. Hoffman was Director of Business Development and
Director of Interactive Marketing of Pretty Good Privacy, Inc. (PGP), a
developer and marketer of Internet encryption and security software Prior to
PGP, he was Executive Vice President of PrivNet, Inc., a developer and marketer
of Internet encryption and security software
RALPH PEER, II, Director, is chairman and CEO 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). Peer is 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, Executive Vice President of Business Affairs. From May
1995 to March 1998 Mr. Culpepper was in private law practice, specializing in
music and entertainment transactions for recording artists, producers and
songwriters. From April 1994 to April 1995 Mr. Culpepper was Senior Counsel
for Sony Pictures/Columbia/TriStar Home Video. Mr. Culpepper previously served
as Vice President, Business Affairs/Music for Paramount Pictures Corporation,
Director, Business Affairs for Capitol Records, Inc., Senior Counsel for
Casablanca Records & Filmworks and, Assistant General Counsel for ABC Records,
Inc. He is a member of the California Bar.
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 leading manufacturer of high-technology, multilayer, printed
circuit boards. From May 1988 to January 1995, Mr. Howell served as Vice
President, Controller of Inprise Corporation (formerly Borland International,
Inc.), a developer and marketer of personal computer software.
STEVEN GRADY joined the Company in May, 1998 as Vice President of Corporate
Communications. From July 1997 to May 1998, Mr. Grady was Director, Corporate
Communications, Inprise Corporation (formerly Borland International, Inc.), a
developer and marketer of personal computer software. From July 1996 to July
1997, he was Director, Marketing Communications for Infoseek. From 1992 to
June, 1995, he served as Director, Corporate Communications, Borland
International, Inc.
SAMUEL "SANDY" PEARLMAN, Vice President of Media and Artist Development.
Prior to joining the Company, Mr. Pearlman was president of 415 Records, an
alternative record label and an
20
independent recorder producer most known for his work with The Blue Oyster Cult
--------------------
and The Clash. Mr. Pearlman is also an independent songwriter and rock
---------
journalist.
BRETT A. THOMAS joined the Company in April 1998 as Vice President of
Engineering. From November 1996 to January 1998, Mr. Thomas was Principal
Engineer for Pretty Good Privacy, Inc. (PGP), a developer and marketer of
Internet encryption and security software. Prior to PGP, Mr. Thomas was an
independent engineering consultant.
ADVISORY BOARD
. 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 60s, 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 & CEO of Catalog City, Inc., an Internet commerce
company. Mr. Lorenzen is also a member of the Board of Fractal Design and
past CEO and Chairman of the Board of Altura Software.
ITEM 6. EXECUTIVE COMPENSATION
The Company began operations in January 1998. For the three months ended
March 31, 1998, the compensation payable to Robert H. Kohn, Gene Hoffman and
Gary Culpepper (the only officers compensated during such period) was $10,000,
$12,500 and $10,833, respectively.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 GoodNoise Corporation,
a Delaware corporation ("GN Delaware"). In connection with such acquisition, the
Registrant exchanged 10,985,800 shares of its Common Stock for all outstanding
stock of GoodNoise Delaware and assumed outstanding GN Delaware options for the
purchase of an additional 2,062,050 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.
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.
21
COMMON STOCK
As of June 24, 1998, there were approximately 14,685,800 shares of Common
Stock outstanding held of record by 75 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.
PREFERRED STOCK
As of June 24, 1998, no shares of Preferred Stock were designated or
outstanding. 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. Although it presently has no intention to do so, 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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Interwest Transfer Co.
Inc.
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
May 12, 1998 under the symbol GDNO. Since commencing trading through June 30,
1998, the high and low bid prices for Common Stock on the OTC Bulletin Board has
been $0.06 and $7.38 per share. Such amounts reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
On June 24, 1998, there were 14,685,800 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.
DIVIDEND POLICY
22
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 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
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 in May 1998. The remaining warrants are exercisable
through August 1998.
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 will be treated as a recapitalization of the Company
with the Company as the acquirer (reverse acquisition). Atlantis Ventures is a
publicly traded company that 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.
There were no underwriters employed in connection with any of the above
transactions.
The issuances of securities described above were deemed to be exempt from
registration under the Securities Act in reliance on Regulation D, Section 4(2)
and Rule 701 of the Securities Act, respectively. The issuance of Common Stock
and Warrants was exempt pursuant to Rule 504 of the Securities Act. The
acquisition was a transaction by an issuer not involving any public offering.
The recipients of securities in each such transaction represented their
intention to acquire the securities for
23
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.
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 require the Registrant, among other things, to
indemnify them against certain liabilities which may arise by reason of their
status or service (other than liabilities arising from willful misconduct of a
culpable nature). 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.
24
PART F/S
INDEX TO FINANCIAL STATEMENTS
GOODNOISE CORPORATION
Report of Independent Accountants....................................... 26
Balance Sheet........................................................... 27
Statement of Operations................................................. 28
Statement of Changes in Stockholders' Deficit........................... 29
Statement of Cash Flows................................................. 30
Notes to Financial Statements........................................... 31
ATLANTIS VENTURES CORPORATION
Report of Independent Accountants....................................... 36
Balance Sheet........................................................... 37
Statement of Operations................................................. 38
Statement of Changes in Stockholders' Deficit........................... 39
Statement of Cash Flows................................................. 40
Notes to Financial Statements........................................... 41
PRO FORMA COMBINED BALANCE SHEET,
GOODNOISE CORPORATION
Introduction to Unaudited Pro Forma Combined Balance Sheet.............. 44
Pro Forma Combined Balance Sheet (Unaudited)............................ 45
Notes to Pro Forma Combined Balance Sheet............................... 46
25
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 changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of GoodNoise
Corporation (a development stage enterprise) at March 31, 1998, and the results
of its operations and its cash flows for the period from inception (January 8,
1998) through March 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our 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 plan in regard to these matters is 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
July 8, 1998
26
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
[Download Table]
MARCH 31,
1998
------------
ASSETS
Current Assets:
Cash $ 25,221
Prepaid expenses and other current assets 2,576
--------
Total current assets 27,797
Property and equipment, net 10,414
Other assets 14,020
--------
Total assets $ 52,231
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 25,458
--------
Total current liabilities 25,458
Notes payable- related parties (Note 3) 110,000
--------
Total liabilities 135,458
--------
Commitments (Note 4)
Stockholders' Deficit:
Common Stock, $0.001 par value; 10,000,000
shares authorized; 8,680,000 shares
issued and outstanding 1,580
Additional paid-in capital 14,220
Notes receivable (Note 3) (10,100)
Deficit accumulated during the development stage (88,927)
--------
Total stockholders' deficit (83,227)
--------
Total liabilities and stockholders' deficit $ 52,231
========
The accompanying notes are an integral part of these financial statements.
27
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
[Download Table]
JANUARY 8,
1998
(INCEPTION)
TO MARCH 31,
1998
------------
Revenues $ -
------------
Operating expenses:
Product development 42,182
General and administrative 46,745
------------
88,927
------------
Net loss $ (88,927)
============
Net loss per share- basic and diluted $ (0.01)
============
Weighted average number of common
shares outstanding- basic and diluted 6,607,357
============
The accompanying notes are an integral part of these financial statements.
28
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
[Enlarge/Download Table]
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE TOTAL
---------------------- PAID-IN NOTES DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE STAGE DEFICIT
--------- ------- -------- ---------- ----------- ------------
Issuance of common stock
at formation in February 1998 7,100,000 $ - $ - $ - $ - $ -
Issuance of common stock
in March 1998 1,010,000 1,010 9,090 (10,100) - -
Issuance of common stock
in March 1998 in
exchange for services 570,000 570 5,130 - - 5,700
Net loss for the period from
January 8, 1998 (inception)
through March 31, 1998 - - - - (88,927) (88,927)
--------- ------ ------- ---------- -------- ---------
Balance at March 31, 1998 8,680,000 $1,580 $14,220 $(10,100) $(88,927) $(83,227)
========= ====== ======= ========== ======== =========
The accompanying notes are an integral part of these financial statements.
29
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
[Download Table]
JANUARY 8,
1998 (INCEPTION)
TO MARCH 31,
1998
----------------
Cash flows from operating activities:
Net loss $(88,927)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 380
Issuance of common stock in exchange for services 5,700
Changes in assets and liabilities:
Prepaid expenses and other current assets (2,576)
Accounts payable 25,458
Deposits (14,020)
--------
Net cash used in operating activities (73,985)
--------
Cash flows from investing activities:
Purchase of property and equipment (10,794)
--------
Cash flows from financing activities:
Proceeds from issuance of notes payable-related parties 110,000
--------
Net increase in cash 25,221
Cash at beginning of period -
--------
Cash at end of period $ 25,221
========
The accompanying notes are an integral part of these financial statements.
30
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
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.
The Company has incurred losses from operations since inception and must
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 plans to raise additional capital in 1998 to finance the Company's
operations although there can be no assurance that they will be successful in
such efforts. The financial statements do not include any adjustment that might
result from the outcome of this uncertainty. See Note 7.
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,
accounts payable and notes 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 shorter of the estimated useful lives of the
assets, generally two to three years, or the lease term of the respective
assets.
INCOME TAXES
Income taxes are accounted for using an asset and liability method which
requires the recognition of deferred tax assets and liabilities for the future
tax consequences of events that have been recognized in the Company's 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.
31
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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." Under APB No. 25, compensation cost is
recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock.
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 ("SAB") 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 March 31, 1998, 566,666 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." The adoption of both statements is
required for fiscal years beginning after December 15, 1997.
SFAS No. 130 requires that companies report in the financial statements, in
addition to net income, comprehensive income including, as applicable, foreign
currency items and unrealized gains and losses on certain investments in debt
and equity securities. The Company adopted SFAS No. 130 in January 1998 and
there are no differences between the net loss and comprehensive income (loss)
for the period from January 8, 1998 (inception) through March 31, 1998.
SFAS No. 131 requires that companies report separately in the financial
statements certain financial and descriptive information about operating
segments profit or loss, certain specific revenue and expense items and segment
assets. Additionally, companies are required to report information about the
revenues derived from their products and service groups, about geographic areas
in which the Company earns revenues and holds assets, and about major customers.
The adoption of SFAS No. 131 will not have any material impact on the Company's
financial statements.
32
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - PROPERTY AND EQUIPMENT:
[Download Table]
MARCH 31,
1998
---------
Computer equipment $ 5,794
Furniture and fixtures 5,000
-------
10,794
Less: Accumulated depreciation (380)
-------
$10,414
=======
NOTE 3 - RELATED PARTY TRANSACTIONS:
In February 1998, the Company entered into an agreement with two of the
Company's Directors and a member of its Advisory Board to borrow $110,000,
through the issuance of promissory notes which bear interest at 10.0% per annum,
due in December 1998. All outstanding principal and interest related to these
notes were to be converted at the closing of the Company's initial sale of
Series A Preferred Stock at the rate of $0.40 per share. The Company did not
issue the Series A Preferred Stock and, in May 1998, these notes were converted
into 275,000 shares of common stock at $0.40 per share. The accompanying
financial statements reflect the notes payable as a noncurrent liability due to
the conversion.
At March 31, 1998, the Company had notes receivable related to stock purchases
from certain employees of the Company totaling $10,100. The notes are non-
interest bearing and payable on demand.
NOTE 4 - COMMITMENTS:
The Company leases office space under a noncancelable operating lease that
expires in March 2001. Rent expense was $7,953 for the period from inception
(January 8, 1998) through March 31, 1998.
Future minimum lease payments under the noncancelable operating lease are as
follows:
[Download Table]
YEAR ENDING
DECEMBER 31,
1998 $ 34,560
1999 47,117
2000 48,530
2001 12,222
Thereafter -
--------
$142,429
========
33
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - STOCK OPTION PLAN:
RESTRICTED STOCK
A total of 7,100,000 shares of common stock were issued at $0.001 per share to
the Company's founders in February 1998, of which 900,000 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 600,000 of these
shares at $0.01 per share subject to ratable vesting over three years. As of
March 31, 1998, a total of 566,666 shares were subject to repurchase by the
Company.
STOCK OPTION PLAN
On March 30, 1998, the Company adopted the 1998 Stock Option Plan that
provides for the granting of either incentive or nonqualified stock options to
purchase shares of the Company's common stock and for stock-based awards to
officers, directors and key employees and non-employee consultants. The Company
reserved 2,000,000 shares for issuance under the Plan. As of March 31, 1998, no
stock options had been granted under the Plan.
NOTE 6 - INCOME TAXES:
There is no provision for income taxes for the period from January 8, 1998
(inception) through March 31, 1998 as the Company incurred a net loss. The
Company's deferred tax assets at March 31, 1998 principally relate to its net
operating loss and approximated $35,000, for which a full valuation allowance
was provided due to uncertainty regarding their realization.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses 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.
NOTE 7 - SUBSEQUENT EVENTS:
On May 11, 1998, Atlantis Ventures Corporation, a Florida corporation,
acquired 9,310,000 shares representing all of the outstanding Common Stock of
the Company in exchange for 10,985,800 shares of Atlantis Ventures Corporation
common stock. For accounting purposes, this transaction will be treated as a
recapitalization of the Company. Atlantis Ventures is a publicly traded company
that 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.
Through May 11, 1998, the Company issued options to purchase 1,747,500 common
shares at prices ranging from $0.01 to $0.03 per share. In connection with the
recapitalization, such options were exchanged for options to purchase 2,062,050
common shares of Atlantis Ventures Corporation.
34
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
In addition, in May 1998, 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 in May 1998. The remaining warrants are
exercisable through August 1998.
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Atlantis Ventures Corporation
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Atlantis Ventures
Corporation (a development stage enterprise) at March 31, 1998, December 31,
1997 and December 1996 and the results of its operations and its cash flows for
the three months ended March 31, 1998, for the years ended December 31, 1997 and
1996 and for the period from inception (August 30, 1989) through March 31, 1998
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide 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 cumulative losses from operations since
inception and has no assets and a net capital deficiency which raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plan in regard to these matters is 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
July 8, 1998
36
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
[Enlarge/Download Table]
DECEMBER 31.
MARCH 31, -----------------------------------------
1998 1997 1996
---------------- ----------------- ------------------
ASSETS
Current Assets $ - $ - $ -
------------- -------------- ---------------
Total current assets - - -
------------- -------------- ---------------
Total assets $ - $ - $ -
============= ============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable- related party $ 1,650 $ - $ -
------------- -------------- ---------------
Total current liabilities 1,650 - -
------------- -------------- ---------------
Stockholders' Deficit:
Preferred stock, $0.01 par value; 500,000 shares
authorized; none issued or outstanding - - -
Common Stock, $0.01 par value; 200,000,000, shares
authorized; 1,000,000 issued and outstanding 1,000 1,000 1,000
Accumulated deficit (2,650) (1,000) (1,000)
------------- -------------- ---------------
Total stockholders' deficit (1,650) - -
------------- -------------- ---------------
Total liabilities and stockholders' deficit $ - $ - $ -
============= ============== ===============
The accompanying notes are an integral part of these financial statements.
37
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
[Enlarge/Download Table]
AUG 30, 1989
JAN 1, 1998 TO YEAR ENDED DECEMBER 31, (INCEPTION) TO
MARCH 31, ------------------------------- MARCH 31,
1998 1997 1996 1998
---------- ---------- ---------- ----------
Revenues $ - $ - $ - $ -
---------- ---------- ---------- ----------
Operating expenses:
General and administrative 1,650 - - 2,650
---------- ---------- ---------- ----------
1,650 - - 2,650
---------- ---------- ---------- ----------
Net loss $ (1,650) $ - $ - $ (2,650)
========== ========== ========== ==========
Net loss per share- basic and diluted $ - $ - $ - $ -
---------- ---------- ---------- ----------
Weighted average number of common
shares outstanding-basic and diluted 1,000,000 1,000,000 1,000,000 1,000,000
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
38
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
[Download Table]
TOTAL
ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
--------- ------ ------------ ---------
Issuance of common stock for
Services in August 1991 1,000,000 $1,000 $ - $ 1,000
Net loss for year ended
December 31, 1991 (1,000) (1,000)
--------- ------ ------- -------
Balance at December 31, 1995 1,000,000 1,000 (1,000) -
--------- ------ ------- -------
Balance at December 31, 1996 1,000,000 1,000 (1,000) -
--------- ------ ------- -------
Balance at December 31, 1997 1,000,000 1,000 (1,000) -
Net loss for the period from
January 1, 1998 to March 31, 1998 - - (1,650) (1,650)
--------- ------ ------- -------
Balance at March 31, 1998 1,000,000 $1,000 $(2,650) $(1,650)
========= ====== ======= =======
The accompanying notes are an integral part of these financial statements.
39
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
AUG 30, 1989
JAN 1, 1998 TO YEAR ENDED DECEMBER 31, (INCEPTION) TO
MARCH 31, ---------------------------------- MARCH 31,
1998 1997 1996 1998
----------------- -------------- --------------- -------------
Cash flows from operating activities:
Net loss $(1,650) $ - $ - $(2,650)
Adjustments to reconcile net
loss to cash used in
operating activities:
Issuance of common stock
in exchange for services - - - 1,000
Changes in assets and liabilities:
Accounts payable - related party 1,650 - - 1,650
------- ----- ----- -------
Net cash used in
operating activities - - - -
------- ----- ----- -------
Net change in cash - - - -
Cash at beginning of period - - - -
------- ----- ----- -------
Cash at end of period $ - $ - $ - $ -
======= ===== ===== =======
The accompanying notes are an integral part of these financial statements.
40
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Atlantis Ventures Corporation, (the "Company"), a Florida corporation, was
incorporated on August 2, 1989. Since inception, the Company has had no
revenue, assets or operations.
Since inception, the Company has been in the development stage. The Company
was formed to pursue an acquisition of an operating company and has been
inactive since formation. The Company has incurred cumulative losses from
operations since inception and has no assets and a net capital deficiency.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management plans to raise additional capital in 1998 to
finance the Company's operations although there can be no assurance they will be
successful in such efforts. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern. See Note 4.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
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 approximate their
fair value due to the relatively short maturities.
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 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. Deferred tax assets
are reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share". 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 for the period. The
calculation of diluted net loss per share excludes common stock issuable upon
exercise of employee stock options, if any, as their effect is antidilutive.
41
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." The adoption of both statements is
required for fiscal years beginning after December 15, 1997.
SFAS No. 130 requires that companies report in the financial statements, in
addition to net income, comprehensive income including, as applicable, foreign
currency items and unrealized gains and losses on certain investments in debt
and equity securities. The Company adopted SFAS No. 130 in January 1998 and
there are no differences between the net loss and comprehensive income (loss)
for all periods presented.
SFAS No. 131 requires that companies report separately in the financial
statements certain financial and descriptive information about operating
segments profit or loss, certain specific revenue and expense items and segment
assets. Additionally, companies are required to report information about the
revenues derived from their products and service groups, about geographic areas
in which the Company earns revenues and holds assets, and about major customers.
The adoption of SFAS No. 131 will not have a material impact on the Company's
financial statements.
NOTE 2 - RELATED PARTY TRANSACTIONS:
The Company neither owns or leases real or personal property. Office services
are provided without charge by a director. The cost of such services were not
material and, accordingly, are not reflected in these financial statements.
On August 2, 1991, the Company issued 1,000,000 shares of its common stock for
services valued at $1,000.
During the three months ended March 31, 1998, a stockholder paid certain fees
totaling $1,650 on behalf of the Company which remains payable to the
stockholder at March 31, 1998.
NOTE 3 -INCOME TAXES:
There is no provision for income taxes for the periods from inception through
March 31, 1998 as the Company incurred net losses. The Company does not have any
significant deferred tax assets or liabilities for all periods presented.
42
ATLANTIS VENTURES CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - SUBSEQUENT EVENTS:
On May 11, 1998, the Company acquired 9,310,000 shares representing all of the
outstanding common stock of GoodNoise Corporation ("GoodNoise"), a development
stage enterprise, in exhange for 10,985,800 shares of the Company's common
stock. For accounting purposes, this transaction will be treated as a
recapitalization of GoodNoise. Following the recapitalization, the Company
changed its name to GoodNoise Corporation.
Through May 11, 1998, GoodNoise Corporation issued options to purchase
1,747,500 common shares at prices ranging from $0.01 to $0.03 per share. Such
options were exchanged for options to purchase 2,062,050 common shares of the
Company.
In addition, in May 1998, the Company 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 in May 1998. The remaining warrants are exercisable
through August 1998.
43
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The following unaudited pro forma combined financial statements give effect to
the Company's private placement, exercise of stock warrants, the conversion of
GoodNoise Corporation ("GoodNoise") notes payable to common stock and the
Company's acquisition of GoodNoise which was accounted for as a
recapitalization. The unaudited pro forma combined balance sheet is based on
the individual balance sheets of the Company and GoodNoise appearing elsewhere
in this Form 10-SB, and has been prepared to reflect the recapitalization as of
March 31, 1998. An unaudited pro forma statements of operations is not
presented since the operations of the Company prior to the recapitalization were
not material. The unaudited pro forma combined balance sheet should be read in
conjunction with the historical financial statements and notes thereto of
GoodNoise and the Company included elsewhere in this Form 10-SB.
44
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
[Enlarge/Download Table]
PRO FORMA ADJUSTMENTS
-----------------------------------
PRIVATE
PLACEMENT,
EXERCISE OF
HISTORICAL WARRANTS
HISTORICAL ATLANTIS AND NOTE PRO FORMA
GOODNOISE VENTURES CONVERSION ACQUISITION AS ADJUSTED
------------ ------------ ------------- ------------- -------------
ASSETS
Current Assets:
Cash $ 25,221 $ - $ 700,000 (a) $ - $ 725,221
Prepaid expenses and other current assets 2,576 - - - 2,576
--------- -------- ---------- ---------- ---------
Total current assets 27,797 - 700,000 - 727,797
Property and equipment, net 10,414 - - - 10,414
Other assets 14,020 - - - 14,020
--------- -------- ---------- ---------- ---------
Total assets $ 52,231 $ - $ 700,000 $ - $ 752,231
========= ======== ========== ========== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 25,458 $ - $ - $ - $ 25,458
Accounts payable-related party - 1,650 - - 1,650
--------- -------- ---------- ---------- ---------
Total current liabilities 25,458 1,650 - - 27,108
Notes payable-related parties 110,000 - (110,000) (b) - -
--------- -------- ---------- ---------- ---------
Total liabilities 135,458 1,650 (110,000) - 27,108
--------- -------- ---------- ---------- ---------
Stockholder' Equity (Deficit)
Preferred stock, $0.01 par value;
500,000 shares authorized;
none issued or outstanding - - - - -
Common stock, $0.01 par value;
200,000,000 shares authorized;
1,000,000 shares issued and outstanding
at March 31, 1998; 14,266,900 shares
on a pro forma, as adjusted basis - 1,000 8,100 (a)(b) 133,569 (c) 142,669
Common Stock, $0.001 par value;
10,000,000 shares authorized;
8,680,000 shares issued and outstanding
at March 31, 1998 1,580 - - (1,580) (c) -
Additional paid-in capital 14,220 - 801,900 (a)(b) (134,639) (c) 681,481
Notes receivable (10,100) - - - (10,100)
Deficit accumulated during the
development stage (88,927) (2,650) - 2,650 (c) (88,927)
--------- -------- ---------- ---------- ---------
Total stockholders'
equity (deficit) (83,227) (1,650) 810,000 - 725,123
--------- -------- ---------- ---------- ---------
Total liabilities and stockholders'
equity (deficit) $ 52,231 $ - $ 700,000 $ - $ 752,231
========= ======== ========== ========== =========
45
GOODNOISE CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
(a) Represents issuance of 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 in May 1998. The remaining warrants are exercisable through August
1998.
(b) Represents the conversion of notes payable in the amount of $110,000 into
275,000 shares of GoodNoise Corporation common stock prior to the
acquisition.
(c) Represents the acquisition of GoodNoise Corporation by Atlantis Ventures
through the issuance of 10,242,000 shares of Atlantis Ventures common stock
for all the outstanding shares of GoodNoise Corporation common stock. This
transaction was treated as a recapitalization of GoodNoise Corporation.
Pro forma share outstanding assuming the recapitalization occurred as of
March 31, 1998 comprise the following:
[Download Table]
Existing Atlantis Ventures shares 1,000,000
Conversion of existing GoodNoise Corporation
shares as of March 31, 1998 (8,680,000
shares x 1.18 conversion ratio) 10,242,400
Private placement (see (a) above) 2,500,000
Exercise of warrants (see (a) above) 200,000
Conversion of notes payable (275,000 shares x
1.18 conversion ratio)(see (b) above) 324,500
----------
Total pro forma shares 14,266,900
==========
46
PART III
ITEM 1. INDEX TO EXHIBITS
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
3.1 Articles of Incorporation
3.2 Bylaws
10.1 Form of Indemnity Agreement
16.1 Letter dated July 16, 1998 from Barry L. Friedman, P.C.
21 Subsidiaries
47
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
48
Dates Referenced Herein
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