-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MxBGn/vJP0amoQGYECk34fyFxspzhYBleu680M27cx55NynFrNFbMUk9XcyxAe7N /C+MUJwXI1lQqlTo3Vda5g== 0001012870-99-001040.txt : 19990407 0001012870-99-001040.hdr.sgml : 19990407 ACCESSION NUMBER: 0001012870-99-001040 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990323 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOODNOISE CORP CENTRAL INDEX KEY: 0001065013 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 650207877 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-24671 FILM NUMBER: 99588254 BUSINESS ADDRESS: STREET 1: 719 COLORADO AVENUE CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 6503308910 MAIL ADDRESS: STREET 1: 719 COLORADO AVENUE CITY: PALO ALTO STATE: CA ZIP: 94303 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): March 23, 1999 - ------------------------------------------------------------------------------- GoodNoise Corporation (Exact name of Company as specified in charter) - ------------------------------------------------------------------------------- Florida 0-24671 65-0207877 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) - ------------------------------------------------------------------------------- 719 Colorado Ave., Palo Alto, CA 94303 (Address of principal executive offices) (Zip Code) Company's telephone number, including area code (650) 322-8910 -------------------------------- Not applicable (Former name or former address, if changed since last report) Item 5. Other Events. On March 23, 1999, the Company completed a private placement of approximately 118,000 shares of Series B Convertible Preferred Stock (the "Series B Shares") for aggregate net proceeds of approximately $31 million. Each Series B Share is initially convertible into 100 shares of the Company's Common Stock. Terms of the Series B Shares The following is a summary of the rights, preferences and privileges of the Series B Shares and the rights granted pursuant to the holders of the Series B Shares pursuant to the Company's Restated Articles of Incorporation and that certain Investor Rights Agreement dated as of March 23, 1999 (the "Financing Agreements"). Such summary is qualified in full by reference to the full text of the Financing Agreements which are filed as an exhibit to this Report. Voting Rights. The holders of the Series B Shares are entitled to a number of votes equal to the number of shares of Common Stock issuable upon conversion of the Series B Shares. The holders of the Series B Shares are also entitled to elect one member of the Board of Directors. Liquidation Preference. Upon any liquidation, dissolution or winding up of the affairs of the Company, the holder of each Series B Share shall be entitled to be paid $300 per share (the "Series B Preference Amount"). If the assets of the Company upon such event are insufficient to make such payment in full, then the holders of Series B Shares shall be entitled to pro rata distribution of all the assets of the Company. After payment in full of the liquidation preference to the holders of Series B Shares, such holders are entitled to no further distributions. Dividends. The Series B Shares are entitled to dividends at an annual rate of 6% of the Series B Preference Amount. The payment of such amounts may be deferred until the Company completes an initial underwriting public offering, is sold or until March 31, 2004. Conversion. Each Series B Shares is initially convertible into 100 shares of Common Stock at the election of the holder thereof. All Series B Shares are subject to conversion on the closing of an underwritten public offering with gross proceeds of $25 million or more at a per share price of $6 or more or the approval of the holders of 67% of the Series B Shares. Adjustments to Conversion Rate. The Conversion Rate is subject to proportional adjustment upon any stock split, stock dividend or other similar change to the capital stock of the Company and certain other adjustments upon future issuances of Common Stock or rights to acquire Common Stock at a price less than $3 per share. Redemption. In the event of certain defaults by the Company or if the Series B Shares have not been converted after five years, the holders of the Series B Shares have the right to require the Company to redeem the Series B Shares. Fundamental Changes. Certain corporate actions, as more fully defined in the Company's Restated Articles of Incorporation, require the approval of the holders of 67% of the Series B Shares. 2 Registration Rights. The Company is obligated to promptly (and in any event within 120 days of the first sale of the Series B Shares) file a registration statement (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") to cover the resale of the Company's Common Stock issuable upon the conversion of the Series B Shares. Effect on Rights of Existing Security Holders There is no change to the rights, preferences or privileges of the holders of the Company's Common Stock as a result of the transactions which are the subject of the Financing Agreements. However, in addition to the dilutive impact of the issuance of additional shares of capital stock, the Series B Shares have a liquidation preference which entitles the holders thereof to receive payment upon any dissolution or liquidation of the Company in preference to the holders of Common Stock. Item 7. Exhibits. (a) Financial statements of business acquired. Not applicable. (b) Pro forma financial information. Not applicable. (c) Exhibits. Exhibit No. Description ----------- -------------------------------------------------- 3.1 Restated Articles of Incorporation 10.1 Investor Rights Agreement dated March 23, 1999 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GOODNOISE CORPORATION Date: April 2, 1999 By: /s/ Joseph Howell -------------------------------------- Joseph Howell, Chief Financial Officer 4 EXHIBIT INDEX Exhibit No. Description ------------- --------------------------------------------------------- 3.1 Restated Articles of Incorporation 10.1 Investor Rights Agreement dated March 23, 1999 EX-3.1 2 RESTATED ARTICLES OF INCORPORATION Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF GOODNOISE CORPORATION - -------------------------------------------------------------------------------- Pursuant to Section 607.1007 and 1006 of Florida Business Corporation Act - -------------------------------------------------------------------------------- GoodNoise Corporation, a corporation existing under the laws of the Florida Business Corporation Act bearing Document Number L13154 (the "Corporation") does hereby CERTIFY as follows: 1. The name of the Corporation is GoodNoise Corporation. 2. The original Articles of Incorporation of the Corporation were filed with the Department of State of the State of Florida on August 30, 1989 under the name of Atlantis Ventures Corp. and were amended pursuant to Articles of Amendment filed with the Department of State of the State of Florida on October 22, 1998 and pursuant to Articles of Amendment filed with the Department of State of the State of Florida on March 17, 1999. 3. Pursuant to authority conferred upon the Corporation's Board of Directors by the Articles of Incorporation, as heretofore amended, the Corporation, the Board of Directors of the Corporation at a meeting duly held, adopted resolutions (i) authorizing a series of the Corporation's previously authorized preferred stock, par value $0.01 per share (the "Preferred Stock"), and (ii) providing for the Amendment and Restatement of the Corporation's Articles of Incorporation, as follows: RESOLVED, that the Corporation is authorized to issue 120,000 shares of Preferred Stock par value $0.01 per share to be designated as the Series B Preferred Stock, and amend and restate the Corporation's ----------------- Articles of Incorporation to provide the designation and number of shares of Common Stock and Series B Preferred Stock, and fix the relative rights, privileges, preferences and restrictions of the Series B Preferred Stock and to eliminate the Series A Preferred Stock. 4. The text of the Corporation's Articles of Incorporation, as heretofore amended, is hereby restated and further amended to increase its authorized capital stock so as to read as set forth in full herein: ARTICLE I --------- NAME ---- The name of the Corporation is GoodNoise Corporation. ARTICLE II ---------- NATURE OF THE BUSINESS ---------------------- The Corporation shall have the power to transact or engage in any business permitted under the laws of the United States of America and of the State of Florida. ARTICLE III ----------- AUTHORIZED CAPITAL STOCK ------------------------ The total number of shares of capital stock which the Corporation has authority to issue is (i) TWO HUNDRED MILLION (200,000,000) shares of Common Stock, par value $0.01 per share (the "Common Stock"), and (ii) FIVE HUNDRED THOUSAND (500,000) shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock"). I. COMMON STOCK Section 1 Voting Rights ------------- The holders of shares of Common Stock shall be entitled to one vote for each share held with respect to all matters voted on by the stockholders of the Corporation, subject in all cases to Section 4 of Part II of this Article III. Section 2 Liquidation Rights ------------------ Subject to the prior and superior right of the Preferred Stock upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of Common Stock shall be entitled to receive that portion of the remaining funds to be distributed. Such funds shall be paid to the holders of Common Stock on the basis of the number of shares of Common Stock held by each of them. -2- Section 3 Dividends --------- Dividends may be paid on the Common Stock as and when declared by the Board of Directors; provided, however, no such dividends may be declared or paid if dividends are not simultaneously declared and paid on the Preferred Stock along with all dividend payments which have been deferred pursuant to Section 5 of Part II hereof. II. PREFERRED STOCK The rights, preferences, privileges and restrictions granted to and imposed upon the Preferred Stock are as follows: Section 1 Designation ----------- Series B Preferred Stock. There is hereby designated a series of preferred ------------------------ stock that shall be known as "Series B Preferred Stock." The number of authorized shares constituting such series shall be one hundred and twenty thousand (120,000). There are no other series of Preferred Stock. Section 2 Liquidation Rights ------------------ (a) Series B Preferred Stock Liquidation Rights. ------------------------------------------- (i) Liquidation. In the event of any liquidation, dissolution or ----------- winding up of the affairs of the Corporation, each holder of shares of Series B Preferred Stock shall be entitled to receive: (A) prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of Common Stock and any other series or class of preferred stock which is junior to the Series B Preferred Stock by reason of their ownership thereof, US$300.00 (subject to adjustment as hereinafter provided), plus any dividends which, pursuant to Section 5 hereof, have been declared but remain unpaid at such time on such Series B Preferred Stock (collectively, the "Series B Preference Amount") or (B) upon written notice of a holder of Series B Preferred Stock, a pro rata share of the distribution of any of the assets or surplus funds calculated as if each such holder of Series B Preferred Stock had converted his shares of Series B Preferred Stock to Common Stock at the Applicable Conversion Price in effect on the date of the distribution (the "Series B Participation Amount"). (ii) Pro Rata Distribution. If the assets or surplus funds to be --------------------- distributed to the holders of the Series B Preferred Stock under subparagraph (i)(A) of this Section 2(a) are insufficient to permit the payment to such holders of their full Series B Preference Amount, the assets and surplus funds legally available for distribution shall be distributed to the holders of Series B Preferred Stock (to the extent provided in Section 2(a)(i) hereof) in proportion to the number of shares of Series B Preferred Stock respectively held by them. -3- (b) Consolidation, Merger, Sale of Assets. Unless waived by the holders of ------------------------------------- at least sixty-seven percent (67%) of the outstanding shares of Series B Preferred Stock (the "Required Holders"), a consolidation or merger of the Corporation with or into another corporation, or a conveyance of all or substantially all of the assets of the Corporation, shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of Section 2(a); provided, however, that each holder of Series B Preferred Stock shall have the right to elect the benefits of the provisions of Section 3(d)(vii) hereof in lieu of receiving payment in such voluntary liquidation, dissolution or winding up of the Corporation pursuant to this Section 2. (c) Series B Preferred Stock Priority. All of the Series B Preference --------------------------------- Amount to be paid to the holders of the Series B Preferred Stock under this Section 2, shall be paid or set apart for payment in accordance with the provisions of this Section 2 before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Corporation to, the holders of the Common Stock and any other series or class of Preferred Stock which is junior to the Series B Preferred Stock in connection with such liquidation, dissolution or winding up. If and to the extent the holders of the Series B Preferred Stock are entitled by the terms of these Amendment and Restated Articles to the Series B Participation Amount, the holders of Common Stock and each holder of the Series B Preferred Stock who elected the Series B Participation Amount pursuant to Section 2(a)(i)(B) shall share the remaining assets or surplus funds pro rata as if each holder of Series B Preferred Stock had converted his shares of Series B Preferred Stock to Common Stock at the Applicable Conversion Price in effect on the date of the distribution. Section 3 Conversion ---------- The holders of the Series B Preferred Stock shall have the conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series B Preferred Stock shall be ---------------- convertible, without the payment of any additional consideration by the holder thereof, at the option of the holder thereof, at the office of the Corporation or any transfer agent for the Series B Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing US$300.00 by the Applicable Conversion Price, determined as hereinafter provided, in effect at the time of conversion. Each share of Series B Preferred Stock shall be so convertible at any time after the date of issuance of such share. The price at which shares of Common Stock shall be deliverable upon conversion of the Series B Preferred Stock without the payment of any additional consideration by the holder thereof (the "Applicable Conversion Price") shall initially be US$3.00. Such initial Applicable Conversion Price shall be subject to adjustment, in order to adjust the number of shares of Common Stock into which each series of the Series B Preferred Stock is convertible, as hereinafter provided. (b) Automatic Conversion and Conversion on Call. Each share of Series B ------------------------------------------- Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Applicable Conversion Price upon: -4- (i) the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering the offer and the sale of Common Stock for the account of the Corporation to the public at an aggregate offering price resulting in gross cash proceeds to the Corporation as seller of not less than US$25,000,000, before deducting underwriting commissions and other compensation at a per share offering price of greater than $6.00 (a "Designated Offering"). In the event of such an offering, the party or parties entitled to receive the Common stock issuable upon such conversion of the Series B Preferred Stock shall not be deemed to have converted that Series B Preferred Stock until immediately prior to the closing of such offering; or (ii) the written consent of the Required Holders. (c) Mechanics of Conversion. No fractional shares of Common Stock shall be ----------------------- issued upon conversion of the Series B Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Applicable Conversion Price. Except in the case of a conversion pursuant to Section 3(b), before any holder of Series B Preferred Stock shall be entitled to convert the same into full shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series B Preferred Stock, and shall give written notice to the Corporation at such office that he elects to convert the same. Upon the date of a conversion pursuant to Section 3(a), any party entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date, whether or not such holder has surrendered the certificate or certificates for such holder's shares of Series B Preferred Stock. A holder surrendering its or his certificate or certificates shall notify the Corporation of its or his name or names of its or his nominees in which it or he wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter (and, in any event, within ten (10) days of such surrender), issue and deliver at such office to such holder of Series B Preferred Stock, or to its or his nominee or nominees, a certificate or certificates for the number of shares of Common Stock to which it or he shall be entitled as aforesaid, together with cash in lieu of any fraction of a share. Except in the case of a conversion pursuant to Section 3(b), such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series B Preferred Stock to be converted, and the party or parties entitled to the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. Except to the extent prohibited by applicable law, each party who holds of record Series B Preferred Stock at the time of any conversion pursuant to Section 3 shall be entitled to any dividends which, pursuant to Section 5 hereof, have been declared but remain unpaid at such time. Subject to the terms and conditions of Section 5 hereof with respect to the deferral of the payment of dividends, such dividends shall be paid to all such holders with thirty (30) days of such conversion in funds of the Corporation. Such holder will receive the aggregate number of whole shares of Common Stock determined by adding all shares and fractional shares which the holder is to receive. In lieu of any remaining fractional shares to which the holder would -5- otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the Common Stock Value. The "Common Stock Value" as of the date of any conversion shall be the closing price on the NASDAQ Bulletin Board (or the Nasdaq National Market or such other principal market on which the Common Stock is then traded) for the Corporation's Common Stock on the date prior to the date any amount is payable hereunder. The Corporation warrants and agrees that all Common Stock issued in such manner will be duly authorized and issued and fully paid and non-assessable upon issue by the Corporation and free from original issue taxes. (d) Adjustment to Conversion Price for Diluting Issues: -------------------------------------------------- (i) Special Definitions. The following definitions shall apply: ------------------- (1) "Option" shall mean options, warrants and other rights -------- (other than options and warrants issued under Plans (as defined below)) to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (2) "Original Issue Date" shall mean, with respect to any shares --------------------- of Series B Preferred Stock, the date on which a share of such series of Series B Preferred Stock shall have been issued. (3) "Convertible Securities" shall mean any evidences of ------------------------ indebtedness, shares of capital stock (other than Common Stock and Series B Preferred Stock) or other securities directly or indirectly convertible into or exchangeable for Common Stock. (4) "Additional Shares of Common Stock" shall mean any or all ----------------------------------- shares of Common Stock issued (or, pursuant to Section 3(d)(iii), deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable: (A) upon conversion of shares of Series B Preferred Stock in accordance with this Section 3; (B) upon the exercise of options or warrants granted prior to the date of filing of these Amended and Restated Articles of Incorporation; (C) to employees, officers or directors of, or consultants to, the Corporation, granted after the date of filing of these Amended and Restated Articles of Incorporation, pursuant to stock grants, stock purchase and stock option plans or the like which provide for issuance of such number of shares of Common Stock as are specified in such plan or plans at such price per share as is specified therein, provided that each such plan is approved by a majority of the Board of Directors including the Director designated by the holders of the Series B Preferred Stock (a "Special Majority") or approved by the shareholders of the Corporation; all of such plans, options and grants shall be collectively referred to as the "Plans"; (D) to lenders, lessors, licensors and other parties in non- equity financing transactions; -6- (E) securities issued pursuant to any acquisitions by the Corporation of all or a part of another corporation or entity, by merger or other reorganization or by the purchase by the Corporation of the assets of another corporation or entity (including, but not limited to, the acquisition of technology or music rights) unless approved by a majority of the Board of Directors of the Corporation, or if the securities issued pursuant to an acquisition have a value in excess of $40 million, if approved by a Special Majority of the Board of Directors of the Corporation. (ii) No Adjustment of Conversion Price. Subject to the provisions --------------------------------- of Section 3(d)(iii)(2) and Section 3(d)(vi) below, no adjustment in the number of shares of Common Stock into which the Series B Preferred Stock is convertible shall be made, by adjustment in the Applicable Conversion Price of the Series B Preferred Stock in respect of the issuance of Additional Shares of Common Stock or otherwise, (1) unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Applicable Conversion Price in effect on the date of, or immediately prior to, the issue of such Additional Share of Common Stock or (2) if the Required Holders waive any such adjustment. (iii) Issue of Securities Deemed Issue of Additional Shares of Common --------------------------------------------------------------- Stock. - ----- (1) Options and Convertible Securities. In the event the ---------------------------------- Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options, or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that such Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 3(d)(v) hereof) of such Additional Shares of Common Stock would be less than the Applicable Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Applicable Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon exercise, conversion or exchange thereof, the Applicable Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent -7- adjustment based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Applicable Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall upon such expiration, be recomputed as if: (I) in the case of Convertible Securities or Options for Common Stock the only Additional Shares of Common Stock issued were the shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (II) In the case of Options for Convertible Securities only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation (determined pursuant to Section 3(d)(v) hereof) upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment to clause (B) or (C) above shall have the effect of increasing the Applicable Conversion Price to an amount which exceeds the lower of (i) the Applicable Conversion Price on the original date on which an adjustment was made pursuant to this Section 3(d)(iii)(1), or (ii) the Applicable Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between such original adjustment date and the date on which a readjustment is made pursuant to clause (B) or (C) above; (E) in the case of any Options which expire by their terms not more than thirty (30) days after the date of issue thereof, no adjustment of the Applicable Conversion Price shall made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the same manner provided in clause (C) above; and (F) if such record shall have been fixed and such Options or Convertible Securities are not issued on the date fixed therefor, the adjustment previously made in the Applicable Conversion Price that became effective on such record date shall be canceled a of the close of business on such record date, and thereafter the Applicable Conversion Price shall -8- be adjusted pursuant to this Section 3(d)(iii) only if and as of the actual date of their issuance, if any. (2) Stock Dividends, Stock Distributions and Subdivisions. In ----------------------------------------------------- the event the Corporation at any time or from time to time after the Original Issue Date shall declare or pay any dividend or make any other distribution on the Common Stock payable in Common Stock, or effect a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then and in any such event, Additional Shares of Common Stock shall be deemed to have been issued: (A) in the case of any such dividend or distribution, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend or distribution, or (B) in the case of any such subdivision, at the close of business on the date immediately prior to the date upon which such corporate action becomes effective. If such record date shall have been fixed and such dividend shall not have been paid on the date fixed for the payment thereof, the adjustment previously made in the Applicable Conversion Price which became effective on such record date shall be canceled as of the close of business on such record date, and thereafter the Applicable Conversion Price shall be adjusted pursuant to this Section 3(d)(iii) only if and as of the time of actual payment of such dividend, if any. (iv) Adjustment of Applicable Conversion Price of Series B Preferred --------------------------------------------------------------- Stock Upon Issuance of Additional Shares of Common Stock. In the event the - -------------------------------------------------------- Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 3(d)(iii)(1), but excluding Additional Shares of Common Stock deemed to be issued pursuant to Section 3(d)(iii)(2), which event is dealt with in Section 3(d)(vi) hereof) without consideration or for a consideration per share less than the Applicable Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, such Applicable Conversion Price for Series B Preferred Stock shall be reduced concurrently with such issue, to a price (calculated to the nearest cent) equal to the product of (1) the Applicable Conversion Price immediately prior to such issuance, multiplied by (2) a fraction the numerator of which is the sum of the number of shares on a fully diluted basis outstanding before the issuance ("x") plus the number of shares on a fully diluted basis ---- which would have been issued in such issuance at the Applicable Conversion Price immediately prior to such issuance ("y") and the denominator of which is the sum of the number of shares on a fully diluted basis outstanding immediately after the issuance ("z"). By way of example: Conversion Price x + y times Applicable Conversion Price = Applicable ----- immediately prior to issuance after issuance z (v) Determination of Consideration. For purposes of this Section 3(d), ------------------------------ the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: -9- (1) Cash and Property: Such consideration shall: ----------------- (A) insofar as it consists of cash, be the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest or accrued dividends; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (C) in the event Additional Shares of Common Stock are issued together with other shares of securities or other assets of the Corporation for a single undivided consideration, be the proportion of such consideration so received allocable to such Additional Shares of Common Stock, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (2) Options and Convertible Securities. The consideration per ---------------------------------- share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 3(d)(iii)(1) shall be determined by dividing (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities; by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (vi) Adjustment for Stock Dividends, Stock Distributions, --------------------------------------------------- Subdivisions, Combinations or Consolidations of Common Stock. - ------------------------------------------------------------ (1) Stock Dividends, Stock Distributions or Subdivisions. In the ---------------------------------------------------- event the Corporation shall issue Additional Shares of Common Stock pursuant to Section 3(d)(iii)(2) in a stock dividend, other stock distribution or subdivision, the Applicable Conversion Price in effect immediately prior to such stock dividend, stock distribution or subdivision shall, concurrently with the effectiveness of such stock dividend, stock distribution or subdivision, be proportionately decreased to adjust equitably for such dividend, distribution or subdivision. (2) Combinations or Consolidations. In the event the outstanding ------------------------------ shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, -10- into a lesser number of shares of Common Stock, the Applicable Conversion Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased to adjust equitably for such combination or consolidation. (vii) Adjustment for Merger or Reorganization, etc. Subject to Section -------------------------------------------- 2(b) of Part II of these Articles, in case of any consolidation or merger of the Corporation with or into another corporation (in which the Corporation is not the surviving corporation or any reincorporation of the Corporation under the laws of another jurisdiction), or any proposed reorganization or reclassification of the Corporation (except a transaction for which provision for adjustment is otherwise made in this Section 3), each share of Series B Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Series B Preferred Stock would have been entitled upon such consolidation, merger, conveyance, reorganization or reclassification; and, in any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interest thereafter of the holders of the Series B Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the Applicable Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of Series B Preferred Stock. The Corporation shall not effect any such consolidation, merger or sale unless prior to or simultaneously with the consummation thereof the successor corporation or purchaser, as the case may be, shall assume by written instrument the obligation to deliver to the holders of the Series B Preferred Stock such share of stock, securities or assets as, in accordance with the foregoing provisions, each holder is entitled to receive. (e) No Impairment. The Corporation will not, by amendment of its ------------- Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series B Preferred Stock against impairment. Without limiting the generality of the foregoing, before taking any action which would result in any adjustment to the Applicable Conversion Price then in effect below the par value of the Common Stock, the Corporation will take or cause to be taken any and all necessary corporate or other action which may be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of such Common Stock upon receipt of such Applicable Conversion Price as so adjusted. The taking of such corporate or other action shall be a condition precedent to the Corporation's taking action which would result in such adjustment. (f) Certificate as to Adjustments. Upon the occurrence of each ----------------------------- adjustment or readjustment of the Applicable Conversion Price pursuant to this Section 3, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms -11- hereof and furnish to each holder of Series B Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series B Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) all such adjustments and readjustments theretofore made, (ii) the Applicable Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at such time would be received upon the conversion of Series B Preferred Stock. (g) Notices of Record Date. In the event of any taking by the Corporation ---------------------- of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend which is in the same amount per share as cash dividends paid in previous quarters, if any) or other distribution, the Corporation shall mail to each holder of Series B Preferred Stock at least ten (10) days prior to the date thereof, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (h) Common Stock Reserved. The Corporation shall reserve and at all times --------------------- keep available out of its authorized but unissued Common Stock, free from preemptive or other preferential rights, restrictions, reservations, dedications, allocations, options, other warrants and other rights under any stock option, conversion option or similar agreement, such number of shares of Common Stock as shall from time to time be sufficient to effect conversion of the Series B Preferred Stock. Section 4 Voting Rights ------------- (a) Number of Votes. Except as otherwise required by law or in these --------------- Amended and Restated Articles of Incorporation, the holders of Series B Preferred Stock and the holders of the Common Stock shall be entitled to notice of any stockholders' meeting and to vote together as a single class of capital stock upon any matter submitted to a stockholder for a vote, on the following basis: (i) Holders of Common Stock shall have one vote per share; and (ii) Holders of Series B Preferred Stock shall have that number of votes per share as is equal to the number of shares of Common Stock into which each share of Series B Preferred Stock held by such holder is convertible at the time of such vote. (b) Election of Directors. --------------------- (i) So long as twenty thousand (20,000) shares of Series B Preferred Stock (as adjusted for any consolidations, combinations, stock distributions, stock dividends or similar events) remain outstanding, in addition to the rights specified n paragraph (a) of this Section 4, the holders of the Series B Preferred Stock, voting separately as one class, shall have the special and exclusive right to elect one (1) of the directors to the Board of Directors of the Corporation. -12- In any election of directors pursuant to this paragraph (b)(i), each holder of shares of Series B Preferred Stock entitled to vote shall be entitled to one vote for each share of Series B Preferred Stock held and no holder of Series B Preferred Stock shall be entitled to cumulate its or his votes by giving one candidate more than one vote per share. The Corporation shall use its best efforts to effectuate the terms and provisions of this paragraph (b)(i). The special and exclusive voting right of the holders of the Series B Preferred Stock, voting separately as one class, contained in this paragraph (b)(i) may be exercised either at a special meeting of the holders of Series B Preferred Stock called as provided below, or at any annual or special meeting of the stockholders of the Corporation, or by written consent of such holders in lieu of a meeting. The directors to be elected pursuant to this paragraph (b)(i) shall serve for terms extending from the date of their election and qualification until the time of the next succeeding annual meeting of stockholders or until their successors have been elected and qualified. (ii) If any time directorship to be filled by the holders of Series B Preferred Stock pursuant to paragraph (b)(i) of this Section 4 has been vacant for a period of 10 days, the Secretary of the Corporation shall, upon the written request of the holders of record of shares representing at least a twenty percent (20%) of the voting power of the Series B Preferred Stock then outstanding, call a special meeting of the holders of Series B Preferred Stock for the purpose of electing a director to fill such vacancy. Such meeting shall be held at the earliest practicable date at such place as is specified in or determined in accordance with the By-laws of the Corporation. If such meeting shall not be called by the Secretary of the Corporation within 10 days after receipt of said written request, then the holders of record of shares representing at least a twenty percent (20%) of the voting power of Series B Preferred Stock then outstanding may designate in writing one holder to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at such specified place. Any holder of Series B Preferred Stock so designated shall have access to the stock books of the Corporation relating to Series B Preferred Stock for the purpose of calling a meeting of the stockholders pursuant to these provisions. (iii) At any meeting held for the purpose of electing directors as provided in paragraph (b)(i) of this Section 4, the presence, in person or by proxy, of the holders of record of shares representing at least a majority of the voting power of Series B Preferred Stock entitled to vote then outstanding shall constitute a quorum of Series B Preferred Stock for such election. At any such meeting or adjournment thereof, the absence of a quorum of Series B Preferred Stock, the holders of record of shares representing at least a majority of the voting power present in person or by proxy shall have the power to adjourn the meeting for the election of directors which they are entitled to elect from time to time without notice other than announcement at the meeting. A vacancy in the directorship to be elected by the holders of the Series B Preferred Stock pursuant to paragraph (b)(i) of this Section 4 may be filled out by vote or written consent in lieu of a meeting of the holders of at least a majority of the voting power of Series B Preferred Stock. (c) Quorums. Except as otherwise required by law, the following shall ------- constitute quorums at meetings of stockholders: -13- (i) The presence in person or by proxy of the holders of shares constituting a majority of the votes entitled to vote thereat, calculated in accordance with section 4(a) hereof, shall constitute a quorum for the purpose of transaction of business at all meetings of stockholders, except with respect to election of directors under Section 4(b) hereof. (ii) For the purpose of electing directors under Section 4(b) hereof, the presence in person or by proxy of the holders of a majority of the shares of Series B Preferred Stock entitled to vote thereat shall constitute a quorum for the purpose of electing that number of directors of the Board of Directors which such stockholders are entitled to elect pursuant to Section 4(b) hereof. (d) Call of Board Meetings. A majority of the members of the Board of ---------------------- Directors then in office can call special meetings of the Board of Directors upon any required notice to all directors of the Corporation in the manner from time to time set forth in the Bylaws of the Corporation. Section 5 Dividend Rights --------------- Dividends on Series B Preferred Stock. ------------------------------------- (a) The holders of the Series B Preferred Stock shall be entitled to receive, out of funds generally available therefor, cumulative dividends when and as the same may be declared from time to time by the Board of Directors of the Corporation at an annual rate per share equal to six percent (6%) of the Series B Preference Amount (which amount shall be subject to equitable adjustment whenever there shall be a stock split, combination, reclassification or other similar event involving the Series B Preferred Stock) from and including the date of issuance of such Series B Preferred Stock. Such amounts shall be compounded annually only if such amounts are not paid hereunder when due. Such dividends shall accrue on the Series B Preferred Stock and be cumulative from the initial issuance of the Series B Preferred Stock, whether or not earned or declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends; provided, however, that the payment thereof may be deferred by the Corporation until the earlier of: (i) the closing of a Designated Offering, (ii) a merger, consolidation or sale of assets permitted by Section 2(b) of this Article, or March 31, 2004, at which time, subject to Section 8 regarding redemption of the Series B Preferred Stock, if applicable, all such deferred dividends shall be paid in full; and any and all dividends accruing thereafter shall be paid quarterly, in arrears on the last day of each subsequent calendar quarter through the date of conversion of the Series B Preferred Stock, if any. If such cumulative dividends in respect of any prior or current annual dividend period shall not have been declared and paid or if there shall not have been a sum sufficient for the payment thereof set apart, the deficiency shall first be fully paid or declared and set apart with respect to such class of the Corporation's capital stock, now or hereafter outstanding. The date on which the Corporation initially issues a share of Series B Preferred Stock will be deemed to be its "date of issuance" regardless of the number of times transfer of such share of Series B Preferred Stock is made on the stock records of the Corporation. -14- (b) Subsequent to the payment of dividends to the holders of Series B Preferred Stock in the aggregate amount of their cash investment in the Corporation, dividends, if any, declared by the board of directors, shall be in an equivalent per share amount for the holders of Series B Preferred Stock and Common Stock. (c) Except as expressly provided in this Section 5, the holders of shares of Series B Preferred Stock are entitled to no dividends thereon. (d) The term "distribution" as used in Section 6 of these Articles and in Section 7 shall include the transfer of cash or property without consideration, whether by way of dividend or otherwise (except a dividend in shares of Common Stock), or the purchase or redemption of shares of the Corporation, for cash or property, including such transfer, purchase or redemption by a subsidiary of the Corporation, except from employees of the Corporation upon termination of employment or pursuant to a right of first refusal or any other repurchase approved by the Board of Directors, including the director elected by the holders of the Series B Preferred Stock. The time of any distribution by way of dividends shall be the date of declaration thereof, and the time of any distribution by purchase or redemption of shares shall be the date on which cash or property is transferred by the Corporation, whether or not pursuant to a contract of an earlier date; provided that where a debt security is issued in exchange for shares, the time of the distribution is the date when the Corporation acquires the shares for such exchange. Section 6 Covenants --------- Without limiting the rights of the holders of Series B Preferred Stock to vote as a class, as required by law and the provisions of Section 4 hereof, so long as any shares of Series B Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent as provided by law) of the Required Holders: (a) pay, set aside for payment or declare any dividend or distribution in respect of Common Stock or any other equity security junior in preference to, or on parity with, the Series B Preferred Stock; (b) create or issue, directly or indirectly, any new class or series of securities (i) having preferences prior to the Series B Preferred Stock with respect to voting, dividends, redemption or upon liquidation, or (ii) having protective rights superior to the Series B Preferred Stock; (c) amend or repeal any portion of these Amended and Restated Articles of Incorporation or the Corporation's bylaws which amendment or repeal adversely impacts the rights of the holders of the Series B Preferred Stock as provided herein; (d) enter into or effect (i) statutory share exchange, consolidation or merger of the Corporation with or into any other corporation or corporations, (ii) a sale, transfer or other disposition of all or substantially all of the assets of the Corporation, or (iii) any liquidation, dissolution, capitalization or winding up of the Corporation, unless as a result of (i), (ii), or (iii) -15- above, the holders of the Series B Preferred Stock shall receive for each share of Series B Preferred Stock consideration having a value on the date of such consolidation or merger or sale of assets of at least the greater of (A) US $600.00 per share of Series B Preferred Stock, or (B) an amount which is equal to or greater than a forty percent (40%) compounded annualized rate of return on the purchase price of the Series B Preferred Stock from the date of the initial purchase of such Series B Preferred Stock; (e) unless approved by a Special Majority of the Board of Directors of the Corporation, engage in any other business other than a business directly or indirectly related to the development, acquisition, marketing and distribution of music and music rights and other goods and services which may be developed, acquired, marketed or distributed in connection therewith; (f) enter into any agreement which, by its terms, restricts the rights of the Series B Preferred Stock as set forth herein, or restricts the Corporation's performance of any duties under the terms hereof; or (g) unless approved by a majority of the Board of Directors of the Corporation, acquire all or a part of another corporation or entity, by merger or other reorganization or by the purchase by the Corporation of the assets of another corporation or entity, or unless approved by a Special Majority of the Board of Directors of the Corporation, make any such acquisition for aggregate purchase price consideration of more than $40 million. Section 7 Stock Dividends, Stock Distributions, Subdivisions, Combinations and Consolidations --------------------------------------------- In the event the Corporation shall issue additional shares of a series of Series B Preferred Stock in a stock dividend, other stock distribution or subdivision, or in the event the outstanding shares of Series B Preferred Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Series B Preferred Stock, the Series B Preference Amount set forth in subparagraph (a) of Section 2 hereof in effect immediately prior to such event shall, concurrently therewith, be proportionately decreased (in the case of a stock dividend, other stock distribution or subdivision) or increased (in the case of a combination or consolidation into a lesser number of shares of such series of Series B Preferred Stock), in each such case to adjust equitably therefor. Section 8 Redemption ---------- Subject to the terms and conditions of this Section 8, the Corporation shall, at any time after March 31, 2004, upon the written request (such request to be called the "Series B Redemption Notice") of the holders of not less than sixty-seven percent (67%) of the then outstanding Series B Preferred Stock, the Corporation shall forthwith send Notice thereof to all holders of Series B Preferred Stock who have not given Notice of Redemption (the "Non-Participating Series B Holders"). Each Non-Participating Series B Holder shall have fifteen (15) -16- days from delivery of the Notice by the Company to notify the Company (the "Return Notice") of such Non-Participating Series B Holder's election to participate in such redemption pursuant to this Section 8 or to convert all of such Holder's shares of Series B Preferred Stock to common stock pursuant to Section 3 hereof. In the event no Return Notice shall be delivered to the Company, the Non-Participating Series B Holder shall be deemed to have elected to Redeem such Holders Shares of Series B Preferred Stock pursuant to this Section 8 whereupon the Corporation shall redeem all shares of Series B Preferred Stock at the Series B Redemption Price (as defined below) in twelve equal quarterly installments (the date of the payment of each such installment being a "Redemption Date") with the first payment being due on the last business day of the calendar month immediately following the date of the Series B Redemption Notice and, thereafter, on the last business day of each of the next eleven successive calendar quarters. In the event shares of Series B Preferred Stock scheduled for redemption are not redeemed because of a prohibition under applicable law, such shares shall be redeemed as soon as such prohibition no longer exists. The number of shares to be redeemed at the end of any quarter shall be cumulative, so that any shares subject to redemption at the end of one quarter and not so redeemed shall be carried forward to the subsequent quarter and shall be subject to redemption in addition to the shares otherwise redeemable at the end of such quarter. The Series B Preferred Stock that has not been redeemed shall remain issued and outstanding until the Series B Redemption Price has been paid in full and entitled to all rights and preferences provided herein. Shares of Series B Preferred Stock required to be redeemed shall be redeemed pro rata from all holders of Series B Preferred Stock from whom a -------- Series B Redemption Notice has been received. Nothing contained herein shall restrict the right of the holders of the Series B Preferred Stock to convert their Series B Preferred Stock pursuant to Section 3 hereof; provided, that upon -------- any such conversion, all redemption rights under this Section 8 pertaining to such shares shall terminate and be of no further force or effect. On or before each Redemption Date, the holder of the Series B Preferred Stock being redeemed shall deliver to the Corporation certificates representing such shares of Series B Preferred Stock of the Corporation to be redeemed on such Redemption Date in exchange for the Series B Redemption Price. The redemption price (the "Series B Redemption Price") for each share of Preferred Stock redeemed pursuant to this Section 8 shall be equal to the Series B Preference Amount calculated to and including the applicable Redemption Date. Section 9 Residual Rights --------------- All rights accruing to the outstanding shares of capital stock of the Corporation not expressly provided for to the contrary herein shall be vested in the Common Stock. ARTICLE IV ---------- REGISTERED OFFICE; REGISTERED AGENT ----------------------------------- The address, including street, number, city and county, of the registered office of the Corporation in the State of Florida is 3260 Baldwin Drive West, Tallahassee, FL -17- 32308; and the name of the registered agent of the Corporation in the State of Florida at such address is Florida Filing & Search Services, Inc. ARTICLE V --------- INDEMNIFICATION OF OFFICERS AND DIRECTORS ----------------------------------------- The Corporation shall have power to indemnify and advance expenses to any person to the full extent permitted from time to time by the Florida Business Corporation Act. The indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VI ---------- FLORIDA STATUTES ---------------- The Corporation expressly elects not to be governed by the provisions of Sections 607.108 and 607.109 Florida Statutes. -18- (i) IN WITNESS WHEREOF, the undersigned being the president of the Corporation, has hereunto signed this Amended and Restated Articles of Incorporation this 23rd day of March, 1999. /s/ ---------------------------------------- Gene Hoffman, Jr., President ATTEST: /s/ - ------------------------------------ Robert Kohn, Secretary -19- EX-10.1 3 INVESTOR RIGHTS AGREEMENT Exhibit 10.1 INVESTOR RIGHTS AGREEMENT This Investor Rights Agreement (the "Agreement") is entered into as of the 23rd day of March, 1999, by and among GoodNoise Corporation, a Florida corporation (the "Company") and the undersigned purchasers of Series B Preferred Stock of the Company (the "Purchasers"). RECITAL ------- The Company proposes to sell up to 120,000 shares of Series B Preferred Stock to the Purchasers pursuant to a Series B Preferred Stock Purchase Agreement of even date herewith (the "Purchase Agreement"). In connection with this sale, the Company has agreed to grant the Purchasers certain registration and other rights. AGREEMENT --------- NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, the parties agree as follows: 1. Registration Rights. ------------------- 1.1. Certain Definitions. As used in this Agreement, the following terms ------------------- shall have the following respective meanings: (a) "Commission" shall mean the Securities and Exchange Commission ---------- or any other federal agency at the time administering the Securities Act. (b) "Conversion Stock" means the Common Stock issued or issuable ---------------- upon conversion of the Series B Preferred Stock. (c) "Holder" shall mean any shareholder of the Company holding ------ Registrable Securities (including Series B Preferred Stock) and any person holding Registrable Securities to whom the rights under this Section 1 have been transferred in accordance with Section 1.8. (d) "Registrable Securities" means (i) the Conversion Stock, (ii) ---------------------- Common Stock issuable upon exercise of that certain warrant dated October 28, 1998 granted by the Company to HFTP Investment LLC, (iii) Common Stock issuable upon conversion of the shares of Series B Preferred Stock issuable upon exercise of that certain warrant for the purchase of Series B Preferred Stock to be granted to Creative Labs pursuant to that certain Strategic Alliance Agreement dated as of February 9, 1999; and (iv) stock issued in respect of the stock referred to in (i), (ii) or (iii) as a result of a stock split, stock dividend, recapitalization or the like, which has not been sold to the public. 1 (e) The terms "register," "registered" and "registration" refer to -------- ---------- ------------ a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. (f) "Registration Expenses" shall mean all expenses, except as --------------------- otherwise stated below, incurred by the Company in complying with Section 1.2 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company) and the reasonable fees and expenses of one counsel for all of the selling holders up to a maximum of $15,000. (g) "Securities Act" shall mean the Securities Act of 1933, as -------------- amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. (h) "Selling Expenses" shall mean all underwriting discounts, ---------------- selling commissions and stock transfer taxes applicable to the securities registered by the Holders and, all fees and disbursements of any counsel for the selling Holders other than the up to $15,000 for one counsel paid by the Company. (i) "Stock" means and includes all shares of Common Stock issued ----- and outstanding at the relevant time plus (i) all shares of Common Stock that may be issued upon exercise of any options, warrants and other rights of any kind that are then exercisable, and (ii) all shares of Common Stock that may be issued upon conversion of (A) any convertible securities, including, without limitation, preferred stock and debt securities then outstanding, which are by their terms then convertible into or exchangeable for Common Stock (but not including the Conversion Stock) or (B) any such convertible securities issuable upon exercise of options, warrants or other rights that are then exercisable. 1.2. Registration. ------------ (a) Not later than one hundred twenty (120) days after the date of this Agreement, the Company shall file a registration statement with respect to the Registrable Securities (such registration statement and any successor or substitute registration statement being referred to in this Section 1.2 as the "Registration Statement"). The Company shall cause such Registration Statement to become effective as promptly as practicable and to maintain the effectiveness of the Registration Statement (and to maintain the current status of any prospectus contained therein) until the earlier of (i) the date three years from the date the Registration Statement becomes effective (such period to be extended by any period during which the Registration Statement is not effective), or (ii) when all the Registrable Securities have been resold pursuant to an effective Registration Statement. It shall be a condition precedent to the right of any Holder to sell Registrable Securities under the Registration Statement and the obligation of the Company to file the Registration Statement that such Holder shall have furnished to the Company such information regarding itself, the Registrable Securities held by it, 2 the intended method of distribution of such securities and any additional information as shall be required to be included in the Registration Statement with respect to such Registrable Securities. The Company shall provide each Holder with a copy of each Registration Statement, each amendment or supplement thereto, and any prospectus contained therein (as amended and/or supplemented). (b) Notwithstanding paragraph (a) above, the Company shall be entitled to postpone the declaration of effectiveness of the registration statement prepared and filed pursuant to this Section for a reasonable period of time, but not in excess of sixty (60) calendar days after the date the Commission has informed the Company that the registration statement will not be reviewed or that the Commission has no further comments with regard to the registration statement, if the Board of Directors of the Company, acting in good faith, determines that there exists material nonpublic information about the Company which the Board does not wish to disclose in a registration statement (due to the fact that the Board believes that such disclosure is not in the best interests of the Company or the Company's shareholders) which information would otherwise be required by the Securities Act to be disclosed in the registration statement to be filed pursuant to this Section. (c) Each Holder acknowledges that the Company may be required to suspend sales of the Registrable Securities under the Registration Statement in light of developments affecting the Company until such time as the Company can make an appropriate filing with the Commission. Holders acknowledge that during any such period, Holder will not be permitted to sell any Registrable Securities until the Company notifies the Holders it has made such a filing. 1.3. Expenses of Registration. Unless otherwise stated, all Selling ------------------------ Expenses relating to securities registered on behalf of the Holders shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered. All Registration Expenses incurred in connection with all registrations pursuant to Section 1.2 shall be borne by the Company. 1.4. Registration Procedures. In the case of any registration, ----------------------- qualification or compliance effected by the Company pursuant to this Section 1, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense the Company will: (a) Prepare and file with the Commission a registration statement with respect to such securities and cause such registration statement to become and remain effective for the period required pursuant to Section 1.2(a) hereof or until the distribution described in the registration statement has been completed (or longer if required by Section 1.2 hereof); (b) Furnish to the Holders (and their counsel) participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities. 3 (c) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; provided, however, that the Company shall have the right to delay the preparation of a current prospectus that complies with the Securities Act on up to two separate occasions for up to thirty (30) days on each occasion without explanation to such Holder. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing . 1.5. Indemnification; Contribution; Remedies. --------------------------------------- (a) The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling such person within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 1, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act or any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable to any such person in any such case to the extent that any such claim, 4 loss, damage, liability or expense arises out of or is based on any untrue statement or omission (or alleged untrue statement or omission), made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder, controlling person or underwriter and stated to be specifically for use therein or the preparation thereby. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein or the preparation thereby. Notwithstanding the foregoing, the liability of each Holder under this subsection (b) shall be limited to an amount equal to the net proceeds received by such Holder from the sale of Registrable Securities held by such Holder in such registration. (c) Promptly after receipt by an indemnified party of notice of the commencement of any action involving a claim referred to in the preceding paragraphs of this Section 1.5, such indemnified party will, if a claim in respect thereof is made against an indemnifying party, give written notice to the latter of the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be responsible for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof; provided, however, that if there may be one or more legal or -------- ------- equitable defenses available to such indemnified party which are materially in conflict with those available to the indemnifying party, or if the indemnifying party fails promptly to assume such defense, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party and such indemnifying party shall reimburse such indemnified party and any person controlling such indemnified party for that portion of the reasonable fees and expenses of any one counsel (but 5 not more than one) retained by the indemnified party which is reasonably related to the matters covered by the indemnity agreement provided in this Section 1.5. (d) If the indemnification provided for in this Section 1.5 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or action referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amounts paid or payable by such indemnified party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such loss, claim, damage, liability or action as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. 1.6. Information by Holder. The Holders of securities included in any --------------------- registration shall furnish to the Company such information regarding such Holders, the Registrable Securities held by them and the distribution proposed by such Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section 1. 1.7. Rule 144 Reporting. With a view to making available the benefits ------------------ of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act. (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (c) So long as a Purchaser owns any Registrable Securities to furnish to the Purchaser forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the 6 Company as the Purchaser may reasonably request in availing itself of any rule or regulation of the Commission allowing the Purchaser to sell any such securities without registration. 1.8. Transfer of Registration Rights. The rights to cause the Company ------------------------------- to register securities granted to the Purchaser under section 1.2 may be assigned to a transferee or assignee reasonably acceptable to the Company in connection with any transfer or assignment of Registrable Securities by the Purchaser provided that the transferor provides the Company with written notice of the proposed transfer and: (i) the transferee acquires all of the transferor's Registrable Securities not sold to the public; (ii) the transferee acquires at least 100,000 shares (determined on an as-converted to common stock basis, and subject to adjustments for stock splits, combinations, dividends or the like) of the transferor's Registrable Securities not sold to the public; or (iii) the transferee is a majority-owned subsidiary, constituent partner, shareholder or affiliate of the Holder. 1.9. Standoff Agreement. Each Holder agrees, upon request of the ------------------ Company or the underwriters managing the first underwritten public offering of the Company's securities, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company or such underwriters, as the case may be, for such period of not to exceed a period commencing upon the effective date of such registration and ending ninety (90) days thereafter; provided, that the officers and directors of the Company who own stock of the Company also agree to such restrictions. 1.10. Termination. Any registration rights granted pursuant to this ----------- Section 1 shall terminate upon the earlier to occur of (i) three (3) years from the date of the last sale of the Series B Preferred Stock by the Company, or (ii) with respect to any Holder, when all remaining Registrable Securities held or entitled to be held by such Holder may be sold under Rule 144 during any ninety (90) day period. 1.11. Other Registration Rights. The Company shall not, without the ------------------------- prior written consent of the holders of sixty-seven percent (67%) of the Series B Preferred Stock then outstanding grant any registration rights superior to the rights granted pursuant to this Section 1. 2. Investor Right of First Refusal Upon Issuance of Securities by the ------------------------------------------------------------------ Company. - ------- 2.1. Right of First Refusal. The Company hereby grants to each ---------------------- Purchaser or any transferees pursuant to Section 2.1(f) hereof (collectively, hereinafter, the "Rights Holders") the right of first refusal to purchase all or part of its pro rata share of New Securities (as defined in this Section 2.1) which the Company may, from time to time, propose to sell and issue. For purposes of this right of first refusal, a pro rata share for a Rights Holder is the ratio that the number of shares of Conversion Stock then held by such Rights Holder bears to the sum of the total number of shares of Conversion Stock and Stock then outstanding. (a) "Equity Securities" shall mean any securities having voting rights in the election of the Board of Directors not contingent upon default, or any securities evidencing an ownership interest in the Company, or any securities convertible into or exercisable for any 7 shares of the foregoing, or any securities issuable pursuant to any agreement or commitment to issue any of the foregoing. (b) Except as set forth below, "New Securities" shall mean any Equity Securities, whether now authorized or not, and rights, options or warrants to purchase said Equity Securities. Notwithstanding the foregoing, "New Securities" does not include (i) securities offered to the public generally pursuant to a registration statement under the Securities Act; (ii) the Conversion Stock; (iii) stock issued in connection with any stock split, stock dividend or recapitalization by the Company, (iv) shares of Common Stock issued to officers, directors, employees or consultants of the Company pursuant to stock grants, stock purchase and stock option plans or other stock incentive programs, agreements or arrangements approved by the Board of Directors, (v) securities issued pursuant to the acquisition of all or part of another company by the Company by merger or other reorganization or by purchase of all or part of the assets of another company (including but not limited to the acquisition of technology or music rights) which securities do not exceed $40 million in value; and (iv) securities issued to lenders, lessors, licensors and other parties in non-equity financing transactions. (c) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Rights Holder written notice of its intention, describing the type of New Securities, and the price and terms upon which the Company proposes to issue the same. Each Rights Holder shall have fifteen (15) days from the date of receipt of any such notice to agree to purchase up to its respective pro rata share of such New Securities for the price and upon the applicable terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (d) In the event a Rights Holder fails to exercise the right of first refusal within said fifteen (15) day period, the Company shall have ninety (90) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within forty- five (45) days from the date of said agreement) to sell the New Securities not elected to be purchased by Rights Holders at the price and upon the terms no more favorable to the purchasers of such securities than specified in the Company's notice. In the event the Company has not sold the New Securities within said ninety (90) day period (or sold and issued New Securities in accordance with the foregoing within forty-five (45) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first offering such securities in the manner provided above. (e) The right of first refusal granted under this Section 2.1 shall expire upon the closing of the earlier of (i) the consummation of a firm commitment underwritten offering of the Company's securities to the public pursuant to an effective registration statement under the Securities Act with gross proceeds to the Company of at least $25,000,000 at a price of not less than $6 per share, as adjusted for stock splits and the like, (a "Qualified Public Offering"), and (ii) a statutory share exchange, consolidation or merger of this Company with or into any other corporation or corporations (other than a wholly-owned subsidiary) which results in the Company's shareholders immediately prior to such transaction not holding at least a majority of the voting power of the surviving or continuing entity, or the sale, transfer or other disposition of all or substantially all of the assets of this Company. 8 (f) The right of first refusal hereunder may be assigned to a transferee or assignee (other than a competitor as reasonably determined by the Company in good faith) in connection with any transfer or assignment of Registrable Securities provided that the transferor provides the Company with written notice of the proposed transfer and (i) the transferee acquires all of the transferor's Registrable Securities not sold to the public; (ii) the transferee acquires at least 100,000 shares (determined on an as-converted to common stock basis, and subject to adjustments for stock splits, combinations, dividends or the like) of the transferor's Registrable Securities, or (iii) the transferee is a majority-owned subsidiary, constituent partner, shareholder or affiliate of the Holder. (g) If the Board of Directors of the Company determines it to be in the best interests of the Company, it may authorize completion of any issuance or series of issuances of New Securities without first offering the Purchasers the opportunity to exercise their rights pursuant to this Section 2 as long as promptly following such issuances the Company offers each Purchaser the opportunity to purchase such New Securities as it would have been entitled to purchase pursuant to this Section 2. 3. Information Rights. ------------------ 3.1. Annual Financing Information. So long as 20,000 shares of the ---------------------------- Series B Preferred Stock remain outstanding, the Company shall deliver to the director elected by the Series B Preferred Stock pursuant to the terms of the Company's Articles of Incorporation, as amended (the "Series B Director"), and to one other designee selected by INVESCO Private Capital (the "Observer") the following financial statements: (a) within 90 days after the end of each fiscal year, income, shareholders' equity and cash flow statement of the Company for such year, and a balance sheet of the Company as of the end of such year. Such year-end financial reports shall be in reasonable detail and shall be prepared in accordance with generally accepted accounting principles ("GAAP"), consistently applied, and certified by independent public accountants of national standing selected by the Company's Board of Directors; (b) within thirty (30) days after the monthly accounting period of the Company an unaudited monthly report including a balance sheet, income statement and cash flow statement; and (c) no later than thirty (30) days prior to the end of the fiscal year, the Company's annual financial plan for the next fiscal year on a month-to-month basis, as approved by the Company's Board of Directors. 3.2. Inspection. So long as 20,000 shares of the Series B Preferred ---------- Stock remain outstanding, the Company shall permit the Series B Director and the Observer, at such party's expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by such party. 9 3.3. Confidentiality of Information. The Purchasers shall keep ------------------------------ confidential and not disclose or divulge any confidential, proprietary or secret information which such party may obtain from the Company, and which the Company has prominently marked "confidential," "proprietary" or "secret," pursuant to financial statements, reports and other materials submitted by the Company as required hereunder or otherwise are of a character or nature that a reasonable person would understand to constitute confidential information, unless such information is or becomes known to such party from a source other than the Company without violation of any rights of the Company, or is or becomes publicly known, or unless the Company gives its written consent to such party's release of such information, except that no such written consent shall be required (and such party shall be free to release such information to such recipient) if such information is to be provided (a) to such party's counsel or accountant (and the provision of such information is directly necessary in order for such recipient to provide services to such party); or (b) to an officer, director or partner of such party, provided that such party shall inform the recipient of the confidential nature of such information, and such recipient agrees in writing in advance of disclosure to treat the information as confidential; or (c) otherwise pursuant to or as required by law or judicial or regulatory process. 3.4. Observation Rights. So long as 20,000 shares of the Series B ------------------ Preferred Stock remain outstanding, the Observer shall have the right to attend all meetings of Company's Board of Directors and all meetings of Committees of the Board of Directors, at the Company's reasonable expense, in a non-voting observer capacity, and, in this respect, the Company shall, at its expense, give the Observer copies of all notices, minutes, consents and other materials that it provides to its directors in connection with such Board of Director or Committee meetings at the same time as such notices are given to Board and Committee members; provided, however, that the Observer shall agree to hold in confidence and trust all information so provided to the same extent as if he was a member of the Company's Board of Directors. Meetings to be held by telephone conference and actions to be taken by consent shall not be prohibited provided timely notice and an opportunity to participate is given to the Observer. 4. Covenants. --------- 4.1. Financial Covenant. The Company agrees that so long as 20,000 ------------------ shares of the Series B Preferred Stock remain outstanding, it will not incur, issue, create, assume, become contingently liable for or suffer to exist, or permit any Subsidiary to incur, issue, create, assume, become contingently liable for or suffer to exist, any indebtedness for borrowed money or incur, create or enter into any agreement or other commitment for any capital expenditures greater than $250,000 unless such incurrence, issuance, creation, assumption, contingent liability or existence is approved by a Special Majority of the Board of Directors, (such "Special Majority" shall consist of a majority of the Board of Directors including the director appointed by the holders of the Series B Preferred Stock). 4.2. Vesting of Management Stock Options. The Company agrees that any ----------------------------------- options to purchase the Company's Common Stock granted after the date hereof to the Company's employees shall vest pro-rata over not less than a three year period, unless otherwise approved by the Series B Director. 10 4.3. Key Man Insurance. The Company agrees to obtain, within ninety ----------------- (90) days of the date of this Agreement, a term life insurance policy (in an amount determined by and renewable at the request of the Board of Directors) for Robert Kohn and Gene Hoffman, Jr., naming the Company as sole beneficiary. 4.4. Future Registration Rights. Except for any registration expressly -------------------------- permitted by this Agreement, the Company will not, without the prior approval of the holders of sixty-seven percent (67%) of the Series B Preferred Stock, grant to the holders of any securities issued or to be issued by the Company any registration rights superior to the rights of the Purchasers under this Agreement. 5. Voting Agreement. ---------------- 5.1. Board of Directors. ------------------ (a) From and after the date of this Agreement and until the provisions of this Section 5 cease to be effective, each Purchaser shall vote all shares of Preferred Stock of the Company over which such shareholder has voting control, and will take all other necessary or desirable actions within his or its control (whether in his or its capacity as a shareholder, director or officer of the Company or otherwise), and the Company will take all necessary and desirable actions within its control, in order to cause: (i) the election as the Series B Preferred Stock representative to the Board of Directors of the Company of one (1) representative designated by INVESCO Private Capital (the "INVESCO Representative"). (ii) in the event that the INVESCO Representative for any reason ceases to serve as a member of the Board of Directors during his or her term of office, the resulting vacancy on the Board of Directors to be filled by a representative designated as provided in clause (i) above. (b) The Company shall pay the reasonable out-of-pocket expenses incurred by the INVESCO Representative and the Observer in connection with attending the meetings of the Board of Directors and any committee thereof and in connection with any projects assigned to such director or the Observer by the Board of Directors and any committee thereof. 5.2. Application of Agreement to After-Acquired-Shares. All of the ------------------------------------------------- provisions of this Section 6 shall apply to all of the Series B Preferred Stock of the Company, whether issued before or after the Closing Date, and all Series B Preferred Stock issued as a replacement for such shares or with respect to such shares as a result of any stock dividend, stock split or other similar event. 5.3. Termination. The provisions of this Section 5 shall terminate on ----------- the earlier of (a) the consummation by the Company of a Qualified Public Offering, (b) a statutory share exchange, consolidation or merger of the Company with or into any other corporation or 11 corporations which results in the Company's shareholders immediately prior to such transaction not holding at least a majority of the voting power of the surviving or continuing entity, (c) the sale, transfer or other disposition of all or substantially all of the assets of the Company, or (d) the effective time of the liquidation of the Company. 5.4. Binding Effect on Transferees. This Section 5 and all of the ----------------------------- terms, covenants, and conditions herein contained shall be binding upon and inure to the benefit of all of the parties hereto and their respective transferees, successors, heirs, executors, administrators and assigns. 6. Events of Noncompliance; Remedies. --------------------------------- 6.1. Events of Noncompliance. The following events shall constitute ----------------------- "Events of Noncompliance": (a) failure to pay dividends on the Series B Preferred Stock when due and payable pursuant to the terms of the Company's Articles of Incorporation, as the same are amended from time to time; (b) the material breach of any representation, warranty or covenant contained in this Agreement or the Purchase Agreement; (c) commencement of any proceeding by or against the Company under any bankruptcy law; (d) failure by the Company to obtain the approval of the Holders of the Series B Preferred to the extent required pursuant to the Company's Articles of Incorporation for any: merger, consolidation, sale of all or substantially all of its assets, liquidation, recapitalization or dissolution. 6.2. Effect of Noncompliance. ----------------------- (a) Subject to the terms and conditions of this Section 6.2, should an Event of Noncompliance occur and not be cured within fifteen (15) days of written notice thereof to the Company, the Company shall, upon receiving a written request for the redemption of all of the Series B Preferred Stock under this subsection (a) signed by the holders of sixty-seven percent (67%) of the then outstanding shares of Series B Preferred Stock, to the extent that it may lawfully do so, redeem all of the outstanding shares of Series B Preferred Stock by paying to the holders the amount payable pursuant to such Holders upon redemption of the Series B Preferred Stock in accordance with the Company's Articles of Incorporation (the "Redemption Price"); provided however, that the Redemption Price shall be payable within ten (10) days of the date notice of redemption is delivered to the Company and provided further, that such redemption shall be subject to the notice and opportunity to convert provisions as set forth in the Articles of Incorporation. The date the Redemption Price is paid to holders of the Series B Preferred Stock shall be referred to hereafter as the "Redemption Date." 12 (b) If the funds of the Company legally available for redemption of the Series B Preferred Stock for which the Company has received a request to redeem pursuant to this section are insufficient to redeem the total number of Series B Preferred Stock outstanding, those funds which are legally available will be used to redeem the maximum possible number of shares pro rata among holders of then outstanding Series B Preferred Stock according to the number of shares of Series B Preferred Stock held by each holder thereof on the applicable Redemption Date. (c) The foregoing remedy shall not be exclusive of any other remedy available to the holders of the Series B Preferred Stock upon the occurrence of an Event of Noncompliance. 7. Miscellaneous. ------------- 7.1. Governing Law. This Agreement shall be governed in all respects by ------------- the laws of the State of California as applied to transactions taking place between California residents and wholly within the State of California. 7.2. Survival. The representations, warranties, covenants and -------- agreements made herein shall survive any investigation made by any Purchaser and the closing of the transactions contemplated hereby. 7.3. Successors and Assigns. Except as otherwise provided herein, the ---------------------- provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 7.4. Determination of Share Amounts. To determine the number of ------------------------------ Registrable Securities held by a Holder for purposes of this Agreement, all Registrable Securities held by an affiliate of the Holder shall be deemed held by such Holder. For purposes of this Section, "affiliate" shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Holder. 7.5. Entire Agreement; Amendment. This Agreement constitutes the full --------------------------- and entire understanding and agreement between the parties with regard to the subjects hereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein. With the written consent of the record or beneficial holders of at least 67% of the Registrable Securities held by the Purchasers, the obligations of the Company and the rights of the Holders under this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), and with the same consent the Company, when authorized by resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Agreement. Upon the effectuation of each such waiver, consent, agreement or amendment or modification, the Company shall promptly give written notice thereof to the record holders of the Registrable Securities who have not previously consented thereto in writing. This Agreement or any provision hereof may be changed, waived, discharged or 13 terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in this Section. 7.6. Notices, etc. All notices and other communications required or ------------ permitted hereunder shall be in writing and shall be delivered personally, via facsimile, mailed by first class mail, postage prepaid, or delivered by courier or overnight delivery, addressed (a) at such Purchaser's address as set forth in the Company's records, or at such other address or facsimile number as the Purchaser shall have furnished to the Company in writing or (b) if to the Company at 719 Colorado Avenue, Palo Alto, California 94303, or such address as the Company shall have furnished to the Purchaser in writing, with a copy to Peter M. Astiz, Esq., c/o Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California 94301. All such notices, requests, consents and other communications shall be deemed to have been delivered (a) in the case of personal delivery or delivery by telecopy, on the date of such delivery, (b) in the case of dispatch by nationally-recognized overnight courier, on the next business day following such dispatch and (c) in the case of mailing, on the third business day after the posting thereof. 7.7. Delays or Omissions. Except as expressly provided herein, no delay ------------------- or omission to exercise any right, power or remedy accruing to any holder of any Series B Preferred Stock or Conversion Stock, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 7.8. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 7.9. Severability. If any provision of this Agreement, or the ------------ application thereof, shall for any reason and to any extent be invalid or unenforceable the remainder of this Agreement and application of such provision to persons or circumstances shall be interpreted so as best to reasonably effect the intent of the parties hereto, the parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision which will achieve to the extent possible, the economic, business and other purposes of the void or unenforceable provision. 7.10. Titles and Subtitles. The titles and subtitles used in this -------------------- Agreement are used for convenience only and are not considered in construing or interpreting this Agreement. 8. Additional Closings. The parties to this Agreement agree that any ------------------- parties added to the Purchase Agreement after the date hereof may be added as parties to this Agreement, with 14 all the rights and obligations of the Purchasers, without further approval by the parties to this Agreement. 15 The foregoing agreement is hereby executed as of the date first above written. GOODNOISE CORPORATION By: /s/ __________________________________ Gene Hoffman, Jr., President and Chief Executive Officer 16 COUNTERPART SIGNATURE PAGE TO GOODNOISE CORPORATION RIGHTS AGREEMENT "Purchaser" If you are an individual, print your name and sign below. _____________________________________ Name (Please Print) _____________________________________ Signature If you are signing on behalf of an entity, please print the name of the entity and sign below, indicating your title. _____________________________________ Name (Please Print) _____________________________________ Signature _____________________________________ Title 17 -----END PRIVACY-ENHANCED MESSAGE-----