-----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, TS29MiD0YzWGiR+K28nRvRLQGO+SUhxPMCRf9YxvhNYQdlIKqNPdkUZEa7Zkq0CD 9PlH8Uzy8ug/UdpJmvpPig== 0001021408-99-000307.txt : 19990218 0001021408-99-000307.hdr.sgml : 19990218 ACCESSION NUMBER: 0001021408-99-000307 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 33 FILED AS OF DATE: 19990216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CDNOW N2K INC CENTRAL INDEX KEY: 0001078887 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 232978814 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-72463 FILM NUMBER: 99543758 BUSINESS ADDRESS: STREET 1: 1005 VIRGINIA DRIVE CITY: FORT WASHINGTON STATE: PA ZIP: 19034 BUSINESS PHONE: 2156199900 MAIL ADDRESS: STREET 1: 1005 VIRGINIA DRIVE CITY: FORT WASHINGTON STATE: PA ZIP: 19034 S-4 1 FORM S-4 FOR CDNOW/N2K, INC. As filed with the Securities and Exchange Commission on February 16, 1999 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------- Form S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ---------------- CDnow/N2K, Inc. (Exact name of registrant as specified in its charter) Pennsylvania 5735 23-2979814 (State or other (Primary Standard Industrial (I.R.S. Employer jurisdiction of Classification No.) Identification No.) incorporation or organization) 1005 Virginia Drive Ft. Washington, Pennsylvania 19034 610/619-9900 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ---------------- JASON OLIM President and Chief Executive Officer 1005 Virginia Drive Ft. Washington, Pennsylvania 19034 610/619-9900 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- Copies to: DAVID A. CAPOZZI JAMES W. McKENZIE, JR. FRANK E. MORGAN, II Morgan, Lewis & Bockius LLP Dewey Ballantine LLP Vice President and General 1701 Market Street 1301 Avenue of the Counsel Americas Philadelphia, PA 19103 CDnow/N2K, Inc. New York, NY 10019 1005 Virginia Drive 215/963-4852 Ft. Washington, PA 19034 212/259-8320 610/619-9325 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver of all other conditions to the merger of a subsidiary of the registrant with and into CDnow, Inc., and a merger of a subsidiary of the registrant with and into N2K Inc., described in the enclosed joint proxy statement/prospectus. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement of the same offering. [_] ---------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed maximum Title of each class of aggregate Proposed maximum Amount of securities Amount to be offering price aggregate registration to be registered registered(1) per share(2) offering price(2) fee(3) - ---------------------------------------------------------------------------------------------- Common Stock of CDnow/ N2K, Inc., no par value (4).................... 33,481,529 $16.00 $535,624,356 $148,904 - ----------------------------------------------------------------------------------------------
(1) Represents the maximum number of shares of common stock, no par value per share, of CDnow/N2K, Inc. issuable in connection with the mergers contemplated by the merger agreement. Includes up to 3,670,731 shares of common stock of CDnow/N2K, Inc. issuable upon the exercise of CDnow and N2K options and warrants that are outstanding and unexercised at the effective time. (2) Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(f)(1). The proposed maximum aggregate offering price is based upon the sum of (a) the product of (i) $17.90625 (the average of the high and low prices of CDnow common stock on February 10, 1999) times (ii) 19,181,271 (the sum of the number of shares of CDnow common stock outstanding plus the number of shares of CDnow common stock issuable prior to the effective time of the mergers upon the exercise of options and warrants to purchase CDnow common stock) plus (b) the product of (i) $13.4375 (the average of the high and low prices of N2K common stock on February 10, 1999) times (ii) 17,229,227 (the sum of the number of shares of N2K common stock outstanding plus the number of shares of N2K common stock issuable prior to the effective time of the mergers upon the exercise of options and warrants to purchase N2K common stock). The proposed maximum offering price per share is based upon the proposed maximum aggregate offering price divided by the amount to be registered. (3) The registration fee for the securities registered hereby has been calculated pursuant to Section 6(b) of the Securities Act, of the proposed maximum aggregate offering price multiplied by .000278. A fee of $45,887 was paid on November 13, 1998 pursuant to Rules 14a-6 and 0-11 promulgated under the Exchange Act, in respect of the mergers upon filing by CDnow and N2K of a preliminary joint proxy statement relating thereto. Pursuant to Rule 457(b) promulgated under the Securities Act and Section 14(g)(2) of the Exchange Act and Rule 0-11 promulgated thereunder, the amount of such previously paid fee has been credited against the registration fee payable in connection with this filing. (4) This registration statement also relates to an indeterminate number of shares of common stock of CDnow/N2K, Inc. that may be issued upon stock splits, stock dividends or similar transactions in accordance with Rule 416 under the Securities Act. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. Merger Proposed--Your Vote Is Important The boards of directors of CDnow, Inc. and N2K Inc. agreed on a merger designed to create one of the leading electronic commerce companies and a leading online music retailer. The parties will create a new publicly-traded company to be owned by the shareholders of CDnow and N2K. We expect to select a single corporate name and an online music store brand following the closing of the merger. In the interim, the combined company will be named CDnow/N2K, Inc. CDnow and N2K common stock are both listed on the Nasdaq National Market. We will list the shares of CDnow/N2K, Inc. on the Nasdaq National Market. CDnow's Nasdaq symbol is CDNW. N2K's Nasdaq symbol is NTKI. If we complete the merger, N2K shareholders will receive 0.83 shares of common stock of the new company for each share of N2K common stock that they own. CDnow shareholders will receive one share of common stock of the new company for each share of CDnow common stock that they own. Based on the number of shares of CDnow and N2K outstanding on December 31, 1998, we expect that approximately 29,810,799 shares of CDnow/N2K common stock will be issued in connection with the merger. CDnow/N2K, Inc. would like to provide employees, consultants, advisors and non- employee directors the opportunity to receive stock options and restricted stock. The CDnow/N2K, Inc. 1999 Equity Compensation Plan relates to such grants. You will vote on the adoption of this equity compensation plan. The merger cannot be completed unless approved by the shareholders of both companies. We scheduled special meetings for you to vote on the merger. Your vote is very important. This joint proxy statement/prospectus provides you with detailed information about the proposed merger and the equity compensation plan. In addition, you may obtain information about our companies from documents that we have filed with the Securities and Exchange Commission. We encourage you to read this entire document carefully. Please see "Risk Factors" beginning on page 12 of the joint proxy statement/prospectus for a description of certain risks associated with approval of the merger proposal and the equity plan proposal. The dates, times and places of the meetings are as follows: For CDnow Shareholders: 9:00 a.m., March 17, 1999 CDnow Corporate Headquarters 1005 Virginia Drive Fort Washington, PA 19034 For N2K Shareholders: 9:00 a.m., March 17, 1999 N2K Inc. 55 Broad Street New York, NY 10004 Whether or not you plan to attend your meeting, please take the time to vote by completing the enclosed proxy card and mailing it to us as soon as possible. If you sign, date and mail your proxy card without indicating how you want to vote, your proxy will be counted as a vote in favor of the merger. If you are a N2K shareholder and you fail to return your card, the effect will be a vote against the merger, but a failure to return your card will have no effect on the vote relating to the adoption of the 1999 Equity Compensation Plan. If you are a CDnow shareholder, failure to return your card will have no effect on the vote for the merger or for the 1999 Equity Compensation Plan. ____________________________________ ______________________________________ Jason Olim Lawrence Rosen Chairman and Chief Executive Officer Chairman and Chief Executive Officer CDnow, Inc. N2K Inc. [SIGNATURE APPEARS HERE] [SIGNATURE APPEARS HERE] Neither the SEC nor any state securities regulators have approved the common stock to be issued in the merger or determined if this joint proxy statement/prospectus is accurate or adequate. Any representation to the contrary is a criminal offense. Joint proxy statement/prospectus dated February 16, 1999. This joint proxy statement/prospectus is first being mailed to shareholders of CDnow and N2K on February 17, 1999. Notice of Special Meeting of Shareholders To Be Held On Wednesday, March 17, 1999 February 17, 1999 CDnow, Inc. will hold a special meeting of its shareholders on Wednesday, March 17, 1999 at 9:00 a.m. at CDnow Corporate Headquarters, 1005 Virginia Drive, Fort Washington, PA 19034, for the following purposes: 1. To consider and vote on a proposal to approve an Agreement and Plan of Merger, dated as of October 22, 1998, among CDnow, Inc., N2K Inc. and CDnow/N2K, Inc., as amended. The merger agreement provides for the issuance of shares of CDnow/N2K common stock to the shareholders of CDnow and N2K in consideration for the shares of CDnow and N2K now held by these shareholders. After the merger the shareholders of CDnow and N2K will be shareholders of CDnow/N2K. CDnow and N2K will be subsidiaries of CDnow/N2K. 2. To approve and adopt the CDnow/N2K, Inc. 1999 Equity Compensation Plan. 3. To transact such other business as may properly come before the CDnow special meeting. CDnow fixed the close of business on January 26, 1999 for shareholders entitled to vote at the CDnow special meeting or at any adjournment of the CDnow special meeting. A list of such shareholders will be available for inspection by shareholders of record during business hours at 1005 Virginia Drive, Fort Washington, PA 19034 for ten days prior to the date of the CDnow special meeting. This list will also be available at the CDnow special meeting. Approval of the merger proposal and the equity compensation plan proposal requires the affirmative vote of a majority of the shares of CDnow common stock cast at the CDnow special meeting. The board of directors unanimously recommends that shareholders vote to approve the merger proposal and the equity compensation plan proposal, which are described in detail in the accompanying joint proxy statement/prospectus. Please sign and promptly return the proxy card in the enclosed envelope, whether or not you expect to attend the CDnow special meeting. Shareholders will be admitted to the meeting upon presentation of proof of ownership. For shareholders who own stock held by banks, brokers, or investment plans, examples of proof of ownership would include a 1998 brokerage statement or a letter from the bank or broker. By order of the board of directors, Matthew Olim Secretary Notice of Special Meeting of Shareholders February 17, 1999 N2K Inc. will hold a special meeting of its shareholders on March 17, 1999 at 9:00 a.m. at N2K, Inc., 55 Broad Street, New York, NY 10004 for the following purposes: 1. To consider and vote on a proposal to approve an Agreement and Plan of Merger, dated as of October 22, 1999 among CDnow, Inc., N2K and CDnow/N2K, Inc., as amended. The merger agreement provides for the issuance of shares of CDnow/N2K common stock to the shareholders of CDnow and N2K in consideration for the shares of CDnow and N2K now held by these shareholders. After the merger the shareholders of CDnow and N2K will be shareholders of CDnow/N2K. CDnow and N2K will be subsidiaries of CDnow/N2K. 2. To approve and adopt the CDnow/N2K, Inc. 1999 Equity Compensation Plan. 3. To transact such other business as may properly come before the N2K special meeting. The accompanying joint proxy statement/prospectus describes the merger proposal and the actions to be taken in connection with the merger proposal. It also contains information relating to the equity compensation plan proposal. Please read all of these materials carefully. Your board of directors, after careful consideration, determined that the terms and provisions of the merger proposal and the transactions contemplated thereby are in your best interest. In addition, your board of directors determined that the terms and provisions of the equity compensation plan proposal are in your best interest. Accordingly, the board unanimously recommends that you approve and adopt the merger proposal and the equity plan proposal. Approval of the merger proposal requires the affirmative vote of a majority of the outstanding shares of N2K common stock entitled to vote at the N2K special meeting. Approval of the equity compensation plan proposal requires the affirmative vote of a majority of the shares present in person or represented by proxy at the N2K special meeting and entitled to vote. Holders of record of shares of N2K common stock at the close of business on January 26, 1999 will be entitled to vote at the N2K special meeting and at any adjournment of the N2K special meeting. Bruce Johnson Secretary Your Vote is Important It is extremely important that your shares be represented at the N2K special meeting. Whether or not you plan to attend the N2K special meeting, please sign and date the enclosed proxy card and return it in the enclosed prepaid envelope. Failure to return a properly executed proxy card or to vote at the N2K special meeting will have the same effect as a vote against the merger proposal. Please do not send in your stock certificates at this time. TABLE OF CONTENTS Summary..................................................................... 2 Risk Factors................................................................ 11 The Merger.................................................................. 20 Background of the Merger................................................... 21 CDnow Reasons for the Merger; Recommendation of the CDnow Board............ 24 N2K Reasons for the Merger; Recommendation of the N2K Board................ 25 Cautionary Statement Concerning Forward-Looking Statements................. 26 Accounting Treatment....................................................... 27 Material Federal Income Tax Consequences................................... 27 Dissenters' Rights......................................................... 30 Comparative Per Share Market Price and Dividend Information................. 34 The Special Meetings........................................................ 35 Times and Places; Purposes................................................. 35 Voting Rights; Votes Required for Approval................................. 35 Proxies.................................................................... 36 Directors and Management of CDnow/N2K Following the Merger.................. 38 Directors.................................................................. 38 Committees of the Board of Directors....................................... 39 Compensation of Directors.................................................. 40 Management and Executive Officers of CDnow/N2K............................. 40 Executive Compensation..................................................... 41 Interests of CDnow and N2K Executive Officers in the Merger................. 42 Employment Agreements with CDnow/N2K....................................... 42 Interests of N2K Directors and Executive Officers.......................... 43 Interests of CDnow Executive Officer....................................... 45 Indemnification and Insurance.............................................. 45 The Merger Agreement........................................................ 46 The Merger................................................................. 46 Conversion of Shares....................................................... 46 Exchange of Stock Certificates............................................. 46 Representations and Warranties............................................. 47 Material Covenants......................................................... 48 Conditions to Obligations to Effect the Merger............................. 53 Termination; Termination Fees and Expenses................................. 55 Amendment and Waiver....................................................... 57 Other Agreements............................................................ 58 N2K Stock Option Agreement................................................. 58 CDnow Stock Option Agreement............................................... 59 N2K Shareholder Support Agreement.......................................... 60 CDnow Shareholder Support Agreement........................................ 61 Opinions of Financial Advisors.............................................. 62 Opinion of CDnow's Financial Advisor....................................... 62 Opinion of N2K's Financial Advisor......................................... 68 Ownership of CDnow, N2K and CDnow/N2K....................................... 74 Compliance with Section 16(a) of the Securities Exchange Act of 1934........ 75 Comparison of Shareholders' Rights.......................................... 76 Comparison of Rights of Current CDnow Shareholders with CDnow/N2K Shareholders Following the Merger......................................... 76 Comparison of Rights of Current N2K Shareholders with CDnow/N2K Shareholders Following the Merger......................................... 78 Description of CDnow/N2K Capital Stock Following the Merger................. 87 Authorized Capital Stock................................................... 87 Common Stock............................................................... 87 Preferred Stock............................................................ 87 Pennsylvania Anti-Takeover Laws............................................ 88 Transfer Agent and Registrar............................................... 89 Nasdaq National Market Listing; Delisting and Deregistration of CDnow and N2K Common Stock.......................................................... 89 Federal Securities Laws Consequences; Stock Transfer Restriction Agreements................................................................ 89 Industry Overview........................................................... 90 Description of CDnow........................................................ 91 Business................................................................... 91 The CDnow Online Retail Store.............................................. 91 Marketing and Promoting.................................................... 93 Customer Service........................................................... 96 Distribution and Fulfillment............................................... 96 Technology................................................................. 96 Competition................................................................ 97 Intellectual Property...................................................... 98 Employees.................................................................. 98 Facilities................................................................. 98 Legal Proceedings.......................................................... 99
Table of Contents i Selected Historical Financial Information of CDnow......................... 100 CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 102 Overview.................................................................. 102 Results of Operations..................................................... 103 Liquidity and Capital Resources........................................... 107 Seasonality............................................................... 107 Factors Affecting CDnow's Business and Prospects.......................... 108 Recently Issued Accounting Pronouncements................................. 109 Description of N2K......................................................... 110 Business.................................................................. 110 N2K Web sites............................................................. 111 Encoded Music............................................................. 114 Advertising Sales and Sponsorships........................................ 114 Marketing and Promotion................................................... 115 Sales and Marketing....................................................... 116 Technology................................................................ 119 Competition............................................................... 121 Employees................................................................. 121 Trademarks and Patents.................................................... 122 Facilities................................................................ 122 Litigation................................................................ 122 Selected Historical Financial Information of N2K........................... 124 N2K Management's Discussion and Analysis of Financial Conditions and Results of Operations..................................................... 126 Overview.................................................................. 126 Recent Events............................................................. 127 Results of Operations..................................................... 127 Liquidity and Capital Resources........................................... 130 Discontinued Operations................................................... 132 Recent Accounting Pronouncements.......................................... 133 Risks Associated with the Year 2000....................................... 133 Adoption of the CDnow/N2K, Inc. 1999 Equity Compensation Plan.............. 135 Proposal.................................................................. 135 Purposes and Effects...................................................... 135 Vote Required for Approval................................................ 138 Legal Matters.............................................................. 139 Experts.................................................................... 140 Future Shareholder Proposals............................................... 141 Where You Can Find More Information........................................ 142
Appendix I: Agreement and Plan of Merger, as amended Appendix II: Amended and Restated Articles of Incorporation of CDnow/N2K Appendix III: Amended and Restated Bylaws of CDnow/N2K Appendix IV: PBCL Subchapter D--Dissenters' Rights Appendix V: Opinion of BT Alex. Brown Incorporated Appendix VI: Opinion of Allen & Company Incorporated Appendix VII: CDnow/N2K, Inc. 1999 Equity Compensation Plan Table of Contents ii Summary Summary This summary highlights selected information from this document and may not contain all of the information that is important to you. To understand the merger and the equity compensation plan fully and for a more complete description of the legal terms of the merger and the equity compensation plan, you should carefully read this entire document and the documents to which we have referred you. See "Where You Can Find More Information." (See page 142) The Companies CDnow, Inc. 1005 Virginia Drive Fort Washington, Pennsylvania 19034 (215) 619-9900 CDnow, Inc., through its internet site "cdnow.com," is one of the leading online music retail stores. CDnow offers more than 390,000 items and over 345,000 sound samples--ten times the size of the average music store. Founded in 1994 by twin brothers Jason and Matthew Olim, CDnow is building a better music store through a large catalogue of products, software that makes purchase recommendations to the customer based on the customer's preferences and purchasing history, custom compilation CDs, music samples, and a vast library of reviews, editorials, and features from top music writers from Rolling Stone Network, MTV/VH1 and CMJ News Music Monthly. CDnow is the premier music store for Yahoo!, and the exclusive music store for Lycos, Lycos-Bertelsmann, Webcrawler, Tripod, GeoCities, MTV/VH1 and Rolling Stone Network. N2K Inc. 55 Broad Street New York, New York 10004 (212) 378-5555 N2K's Music Boulevard through its internet site "musicblvd.com," is one of the leading online music retail stores. N2K's Music Boulevard Network combines Music Boulevard and the award-winning music channels: Rocktropolis, Jazz Central Station, Classical Insites and the Star Sites, including official sites for Leonard Bernstein and Miles Davis. Music Boulevard offers a choice of more than 470,000 items and over 350,000 music samples. The Music Boulevard Network is the exclusive music store for America Online's Music Space, AOL Japan, AOL Europe, Netscape, Excite, Disney.com, ABC.com, ABC Radio Networks, Infoseek, iVillage, AT&T WorldNet, StarMedia, CBS Cable's TNN, CMT and country.com and MTV International sites in Europe, Japan, Asia and Brazil. Our Reasons for the Merger We believe that the merger presents an opportunity to create one of the leading electronic commerce companies and a leading online music retailer. By combining, we believe that we will be able to increase our revenues, reduce our costs, and improve our service. We expect that the combined company will operate under a single brand, build on our common strengths and provide our shareholders and customers with added value. In reaching their recommendations in favor of the merger, each of our boards of directors considered a number of factors, including: . the rapidly changing competitive environment in the online retail music industry; . the challenge of combining the businesses of two dynamic corporations and the risk of diverting management resources from other strategic opportunities and operational matters for an extended period of time; . the significant operating losses incurred by each company since inception and the anticipation that significant losses would continue for the combined company for the foreseeable future; and . the possibility that the combined company might require additional financing. To review our reasons for the merger in greater detail see pages 24 through 27. -1- Summary The Merger What You Will Receive in the Merger (see page 20) As a result of the merger, if you are an N2K shareholder, you will receive 0.83 of a share of CDnow/N2K common stock for each share of N2K common stock that you own. No fractional shares will be issued. Instead, N2K shareholders will receive a check in payment for any fractional shares based on the market value of the CDnow/N2K stock. If you are a CDnow shareholder, you will receive one share of CDnow/N2K common stock for each share of CDnow common stock that you own. You should not send in your stock certificates until we instruct you to do so after we complete the merger. Dissenters' Rights (see page 30) Under Delaware law, N2K shareholders are not entitled to an appraisal of the value of their shares. The Pennsylvania corporation law grants CDnow shareholders dissenters' rights. CDnow shareholders may object to the merger proposal and demand the fair value of their CDnow common stock if they follow the procedures set forth under the Pennsylvania corporate law. These procedures require that a dissenter . file with CDnow a written notice of intention to dissent prior to the vote on the merger proposal, . make no change in the beneficial ownership of CDnow shares from the date of filing until the effective time of the merger and . refrain from voting for the approval and adoption of the merger proposal. Dissenters' rights will be forfeited if these requirements are not fully and precisely satisfied. See "The Merger--Dissenters' Rights" and a copy of the text of Subchapter 15D attached as Appendix IV to this joint proxy statement/prospectus. Tax Consequences (see page 27) The exchange of your shares for shares in CDnow/N2K generally will be tax-free to you for federal income tax purposes, except for tax payable because of cash received instead of fractional shares by N2K shareholders. A holder's aggregate tax basis in the CDnow/N2K common stock received in the merger generally will be the same as that holder's aggregate federal income tax basis in the stock surrendered in the merger, reduced in the case of holders of N2K common stock by any federal income tax basis allocable to fractional shares for which cash is received. Tax matters are very complicated, and the tax consequences of the merger to you will depend on the facts of your own situation. You should consult your tax advisor for a full understanding of the tax consequences of the merger to you. Vote Required to Approve the Merger Proposal (see page 35) CDnow--the CDnow merger must be approved by a majority of the votes cast at the special meeting. N2K--the N2K merger must be approved by a majority of the shares issued and outstanding. Agreements that Require Jason Olim and N2K Executive Officers to Vote Their Shares in Favor of the Merger--(see pages 60 and 61) Jason Olim agreed to vote his shares in favor of the merger. Mr. Olim owns 16.7% of the outstanding shares of CDnow common stock. N2K executive officers controlling 16.7% of the outstanding shares of N2K agreed to vote their shares in favor of the merger. You should realize that these arrangements make it more likely that we will receive the necessary shareholder approval of the merger. Litigation Related to the Merger (see page 122) Plaintiffs filed a complaint against N2K, its directors and CDnow in connection with the merger. This action alleges that the consideration to be received by N2K shareholders in the merger is unfair and grossly inadequate. We believe these claims are without merit and intend to defend the action vigorously. N2K and its directors moved to dismiss the complaint for failure to state a claim. Recommendations to Shareholders To CDnow Shareholders: The CDnow board believes that the merger is in your best interest and unanimously recommends that you vote FOR the proposal to approve and adopt the merger proposal. To N2K Shareholders: The N2K board believes that the merger is in your best interest and unanimously recommends that you -2- Summary vote FOR the proposal to approve and adopt the merger proposal. Interests of Officers and Directors in the Merger (see page 42) You should be aware that a number of executive officers and directors of CDnow and N2K who recommend you vote in favor of the merger proposal have employment or severance agreements or benefit plans that provide them with interests in the merger that are different from, or in addition to, yours. Each of these persons could receive compensation or other rights if the merger is completed. Severance and Employment Agreements CDnow entered into a severance agreement with David A. Capozzi. If, as a result of the merger, Mr. Capozzi is no longer employed by CDnow/N2K he will be entitled to approximately $140,000. We describe the severance agreement on page 45. The following persons entered into employment agreements with N2K: James Coane Jonathan Diamond Robert David Grusin Bruce Johnson David Pakman Jerold J. Rosen Lawrence Rosen and Artuhr S. Weiner Under their employment agreements, they will receive severance payments and contribution of benefits if we terminate their employment because of the merger. The aggregate amounts payable would be approximately $1,579,167. We describe these agreements on pages 43 and 44. Stock Options N2K granted stock options and warrants to its executive officers under plans and employment agreements. The stock options granted to Messrs. L. Rosen, Diamond, Grusin, Coane, Johnson and Weiner will become fully vested and exercisable upon consummation of the merger. We estimate the aggregate value of such options as of December 1, 1998 to be approximately $2,776,146.70. Please see pages 42 through 45 for additional information about employment agreements, incentive agreements and option holdings of executive officers and directors of CDnow and N2K. Opinions of Financial Advisors (see page 62) BT Alex. Brown Incorporated has delivered to the CDnow board of directors a written opinion stating that, as of the date of the opinion and based upon and limited by the assumptions made, matters considered and limitations stated in the opinion, the CDnow exchange ratio was fair, from a financial point of view, to the holders of CDnow common stock. The full text of the written opinion of BT Alex. Brown, which states the assumptions made, matters considered and limitations on the review undertaken, is attached as Appendix V to this joint proxy statement/prospectus. We urge CDnow shareholders to read the opinion carefully and in its entirety. BT Alex. Brown's opinion is directed to the CDnow board, addresses only the fairness of the CDnow exchange ratio from a financial point of view and does not constitute a recommendation to any shareholder as to how that shareholder should vote at the CDnow special meeting. See "--Opinion of CDnow's Financial Advisor." Allen & Company Incorporated has delivered to the N2K board of directors its written opinion stating that, as of the date of the opinion and based upon and limited by matters stated in the opinion, the terms of the merger were fair to the holders of N2K common stock from a financial point of view. The full text of the written opinion of Allen & Company which states the assumptions made, matters considered and limits on the review undertaken, is attached as Appendix VI to this joint proxy statement/prospectus. We urge N2K shareholders to read the opinion carefully and in its entirety. Allen & Company's opinion is written and directed only to the fairness, from a financial point of view, of the terms of the merger to the holders of N2K common stock and does not constitute a recommendation of the merger over other courses of action that may be available to N2K or constitute a recommendation to any holder of N2K common stock concerning how that shareholder should vote with respect to the merger. See "-- Opinion of N2K's Financial Advisor." -3- Summary Agreements Which May Deter Third Parties from Making Bids to Acquire CDnow or N2K (see pages 58 through 59) CDnow and N2K each granted to the other an option to acquire up to 19.9% of its outstanding common stock. CDnow or N2K may only exercise the option if the merger agreement terminates. The existence of these options may make it more difficult for a third party to acquire either company, because that party would also need to acquire the shares underlying these option grants. Upon the closing of the merger, the 19.9% options automatically terminate. The Combined Company Board of Directors and Management of CDnow/N2K Following the Merger (see pages 38 through 41) We expect that after the merger, Jonathan V. Diamond, the Vice Chairman of N2K, will be CDnow/N2K's Chairman of the Board. We also expect that Jason Olim, the Chairman and Chief Executive Officer of CDnow, will be the President and Chief Executive Officer of CDnow/N2K. Messrs. Diamond and Olim will enter into employment agreements with CDnow/N2K at the close of the merger. Descriptions of these and other executive officers appear on page 40. The board of directors of CDnow/N2K will consist of nine members, four chosen by CDnow and three chosen by N2K. CDnow and N2K will jointly select two directors who will not be employees of or affiliated with either company. Ownership of CDnow/N2K Following the Merger (see pages 74 and 75) The shares of CDnow/N2K common stock issued to CDnow shareholders in the merger will be approximately 60% of the outstanding CDnow/N2K common stock after the merger. The shares of CDnow/N2K common stock issued to N2K shareholders in the merger will be approximately 40% of the outstanding common stock of CDnow/N2K after the merger. Based on the shares of CDnow and N2K outstanding on December 31, 1998, we anticipate that CDnow/N2K will have approximately 29,810,799 shares of common stock outstanding after the merger. The Equity Compensation Plan The CDnow/N2K, Inc. 1999 Equity Compensation Plan (see page 135) The CDnow board, the N2K board and the CDnow/N2K board of directors approved the CDnow/N2K, Inc. 1999 Equity Compensation Plan. The purpose of the equity plan is to encourage our employees, consultants, advisors and non-employee directors to contribute to the growth of CDnow/N2K by giving them the opportunity to receive grants of incentive stock options, nonqualified stock options and restricted stock. To comply with the requirements of the tax code, the public shareholders of CDnow/N2K must adopt and approve the equity plan. Because the current shareholders of CDnow and N2K will be the public shareholders of CDnow/N2K, we need your approval of the equity plan. The CDnow and N2K boards of directors recommend that you vote FOR the approval and adoption of the equity plan. Comparative Per Share Market Price Information (see page 34) CDnow's and N2K's common stock are listed on the Nasdaq National Market. On October 22, 1998, the last full trading day on the Nasdaq National Market prior to the public announcement of the proposed merger, N2K stock closed at $5.50 per share and CDnow stock closed at $9.4375 per share. On February 8, 1999, N2K stock closed at $14.81 per share and CDnow stock closed at $19.56 per share. -4- Summary Selected Historical Financial Information of CDnow CDnow provides the following financial information to aid you in your analysis of the financial aspects of the merger. Read the following summary selected historical financial information of CDnow in conjunction with the Consolidated Financial Statements of CDnow and the notes, "Selected Historical Financial Information of CDnow" and "CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this joint proxy statement/prospectus. In addition, see Note 2 to Notes to CDnow's Consolidated Financial Statements for an explanation of the computation of the net loss per common share amounts. See Note 7 to Notes to CDnow's Consolidated Financial Statements for an explanation of the dispute settlement.
Period from Inception (February 12, Nine Months Ended 1994) to Year Ended December 31, September 30, December 31, ------------------------------------- ------------------------- 1994 1995 1996 1997 1997 1998 ------------- ---------- ----------- ------------ ----------- ------------ Statement of Operations Data: Net sales............... $ 103,116 $2,176,474 $ 6,300,294 $ 17,372,795 $ 9,452,864 $ 35,503,805 Cost of sales........... 92,962 1,815,672 5,074,087 13,847,773 7,333,069 28,549,562 --------- ---------- ----------- ------------ ----------- ------------ Gross profit............ 10,154 360,802 1,226,207 3,525,022 2,119,795 6,954,243 Operating expenses: Operating and development............ 26,946 149,982 669,280 2,541,434 1,444,011 5,155,718 Sales and marketing..... 12,945 229,912 765,156 9,607,603 3,603,238 31,293,668 General and administrative......... 28,712 180,573 563,593 1,953,078 1,266,296 2,781,334 Dispute settlement...... -- -- 1,024,030 -- -- -- --------- ---------- ----------- ------------ ----------- ------------ Total operating expenses............... 68,603 560,467 3,022,059 14,102,115 6,313,545 39,230,720 --------- ---------- ----------- ------------ ----------- ------------ Operating loss.......... (58,449) (199,665) (1,795,852) (10,577,093) (4,193,750) (32,276,477) Interest income (expense), net......... -- (1,248) (14,556) (170,312) 64,084 1,452,160 --------- ---------- ----------- ------------ ----------- ------------ Net loss................ (58,449) (200,913) (1,810,408) (10,747,405) (4,129,666) (30,824,317) Accretion of preferred stock to redemption value.................. -- -- -- (410,103) (263,748) (115,542) --------- ---------- ----------- ------------ ----------- ------------ Net loss applicable to common shareholders.... $ (58,449) $ (200,913) $(1,810,408) $(11,157,508) $(4,393,414) $(30,939,859) ========= ========== =========== ============ =========== ============ Net loss per common share.................. $ (0.01) $ (0.03) $ (0.29) $ (1.42) $ (0.56) $ (2.10) ========= ========== =========== ============ =========== ============ Weighted average number of common shares outstanding............ 6,000,000 6,000,000 6,139,072 7,845,684 7,845,684 14,764,870 ========= ========== =========== ============ =========== ============
December 31, ----------------------------------------- September 30, 1994 1995 1996 1997 1998 ------- -------- --------- ------------ ------------- Balance Sheet Data: Cash and cash equivalents............ $ 2,008 $ 43,812 $ 775,865 $ 10,686,001 $59,563,026 Working capital (deficit).............. (42,206) (235,478) 231,455 (1,218,005) 56,663,989 Total assets............ 25,765 268,468 1,575,459 16,448,425 77,571,386 Long-term debt, excluding current portion................ -- 9,519 91,133 962,144 1,130,484 Redeemable convertible preferred stock........ -- -- -- 9,492,594 -- Total shareholders' equity (deficit)....... (18,449) (99,362) 514,017 (9,752,450) 63,398,975
-5- Summary Selected Historical Financial Information of N2K N2K provides the following financial information to aid you in your analysis of the financial aspects of the merger. Read the following summary selected historical financial information of N2K in conjunction with the Consolidated Financial Statements of N2K and the notes, "Selected Historical Financial Information of N2K" and "N2K Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this joint proxy statement/prospectus. N2K previously maintained a record label referred to as the "Encoded Music Division." The Encoded Music Division created, produced and licensed recorded music. In December 1998, N2K management approved a plan for the disposal of the Encoded Music Division. Accordingly, the operating results and assets and liabilities of these businesses as discontinued operations and reflected them separately from continuing operations. N2K incurred an extraordinary charge to its statement of operations equal to the unamortized portion of the discount associated with the fair value of the warrants that N2K issued in connection with the management and senior notes. N2K incurred the extraordinary charge when noteholders repaid the outstanding balance on the management and senior notes prior to maturity at N2K's initial public offering in October 1997.
Nine Months Ended Year Ended December 31, September 30, ---------------------------------------------------- -------------------------- 1994 1995 1996 1997 1997 1998 ----------- ----------- ------------ ------------ ------------ ------------ Statement of Operations Data: Net revenues............ $ -- $ 96,505 $ 1,655,704 $ 8,108,449 $ 4,115,458 $ 24,890,121 Cost of revenues........ -- 85,176 1,447,888 6,212,741 3,284,672 19,888,878 ----------- ----------- ------------ ------------ ------------ ------------ Gross profit........... -- 11,329 207,816 1,895,708 830,786 5,001,243 Operating expenses...... 1,327,436 2,983,933 17,500,614 21,924,135 12,820,320 49,268,153 ----------- ----------- ------------ ------------ ------------ ------------ Operating loss.......... (1,327,436) (2,972,604) (17,292,798) (20,028,427) (11,989,534) (44,266,910) Income (loss): Continuing operations.. (1,302,475) (2,884,471) (16,992,548) (19,988,001) (12,307,708) (41,875,727) Discontinued operations............ 1,444,885 1,289,671 (1,915,361) (8,108,973) (3,232,186) (12,307,531) Extraordinary item...... -- -- -- (639,262) -- -- Net income (loss)....... 142,410 (1,594,800) (18,907,909) (28,736,236) (15,539,894) (54,183,258) Basic and diluted income (loss) per common share: Continuing operations.. $ (0.83) $ (1.84) $ (6.15) $ (4.09) $ (4.11) (3.12) Discontinued operations............ 0.92 0.82 (0.70) (1.66) (1.08) (0.91) Extraordinary item..... -- -- -- (0.13) -- -- ----------- ----------- ------------ ------------ ------------ ------------ Basic and diluted net income (loss) per common share........... $ 0.09 $ (1.02) $ (6.85) $ (5.88) $ (5.19) $ (4.03) =========== =========== ============ ============ ============ ============ Shares used in computing basic and diluted net income (loss) per common share........... 1,566,936 1,566,955 2,760,948 4,885,556 2,994,770 13,434,772 =========== =========== ============ ============ ============ ============
Year Ended December 31, ------------------------------------------------------- September 30, 1993 1994 1995 1996 1997 1998 ---------- ---------- ---------- ---------- ----------- ------------- Balance Sheet Data: Cash and cash equivalents............ $ 858,272 $1,469,764 $ 547,624 $4,483,450 $36,831,748 $54,277,085 Working capital......... 543,947 1,756,815 3,960 1,910,864 50,859,351 57,722,701 Total assets............ 1,645,275 2,685,317 1,973,332 9,329,922 64,021,556 80,802,343 Stockholders' equity.... 542,130 2,243,704 648,984 4,908,379 53,147,935 61,125,543
-6- Summary Selected Pro Forma Combined Financial Information Summary Selected Pro Forma Combined Financial Information The following table contains selected pro forma combined data for CDnow and N2K. The pro forma amounts included in the table below assume the merger will be accounted for as a purchase where CDnow is considered the accounting acquiror. Please read the following table in conjunction with the historical consolidated financial statements of CDnow and N2K and the unaudited pro forma combined financial information included elsewhere in this joint proxy statement/prospectus. These pro forma amounts are not necessarily indicative of the results of operations of the combined company that would have actually occurred had we completed the merger as of January 1, 1997 or of the financial condition of the combined company had we completed the merger as of September 30, 1998 or of the future results of operations or financial condition of the combined company. The unaudited pro forma statements of operations and the unaudited pro forma combined balance sheet do not reflect: . the operating results of N2K and CDnow from October 1, 1998 through the consummation date of the merger or . any cost savings we expect to achieve as a result of the merger, in particular the elimination of costs associated with duplicative operating and administrative activities. We cannot assure that we will realize any cost savings from the merger. In addition, we expect that the operating results of N2K from October 1, 1998 through the consummation date of the merger will materially increase the excess of purchase price over the fair value of net assets acquired and, therefore, will increase the amount of pro forma amortization in each of the periods presented.
For the Nine Months For the Ended Year Ended September December 31, 30, 1997 1998 ------------ ------------ Pro Forma Statement of Operations Data: Net sales......................................... $ 25,481,244 $ 60,393,926 Loss from continuing operations................... (40,429,255) (79,720,430) Net loss per share from continuing operations applicable to common shareholders................ $ (3.43) $ (3.08) ============ ============ Weighted average number of common shares outstanding...................................... 11,900,695 25,915,731 ============ ============
September 30, 1998 ------------ Pro Forma Balance Sheet Data: Cash and cash equivalents......................................... $113,840,111 Working capital................................................... 104,386,690 Total assets...................................................... 219,112,214 Long-term debt, excluding current portion......................... 1,441,944 Total shareholders' equity........................................ 175,263,003
-7- Recent Developments Recent Developments N2K On February 3, 1999, N2K announced its financial results for the fourth quarter and year ended December 31, 1998. N2K's net revenues for the fourth quarter ended December 31, 1998 was $17,190,000, a 331% increase from net revenues of $3,993,000 reported for the fourth quarter of 1997. N2K reported a loss for the fourth quarter of 1998, from continuing operations of $17,698,000, or $1.24 per share, compared to a loss from continuing operations of $7,681,000, or $0.73 per share, for the fourth quarter of 1997. The loss from continuing operations for the fourth quarter of 1998 excludes transaction fees of $2,378,000 related to the merger. The fourth quarter 1998 net loss was $1.59 per share, compared to a net loss of $1.26 per share for the fourth quarter of 1997. For the year ended December 31, 1998, N2K reported net revenues of $42,080,000, a 419% increase from net revenues of $8,108,000 reported for the year ended December 31, 1997. The loss for the year from continuing operations was $59,574,000, or $4.37 per share, compared to a loss from continuing operations of $19,988,000, or $4.09 per share, reported for the prior year. The 1998 loss from continuing operations excludes transaction fees of $2,378,000 related to the merger. The net loss for 1998 was $5.64 per share, compared to a net loss of $5.88 per share for 1997. At December 31, 1998, N2K's Music Boulevard had approximately 720,000 customers who have ordered and received products, of which 275,000 were first time customers added in the fourth quarter. This represents an increase in customer acquisition of over 60%. Approximately 51% of net revenue, in the fourth quarter of 1998 came from existing customers. For 1998, N2K has added approximately 603,000 new customers. CDnow On February 3, 1999, CDnow announced its financial results for the fourth quarter and year ended December 31, 1998. Net sales for the fourth quarter ended December 31, 1998 was $20,891,000, a 164% increase from net sales of $7,920,000 for the fourth quarter of 1997. On a quarter to quarter basis, net sales in the fourth quarter of 1998 increased by 51% over net sales of $13,880,000 for the third quarter of 1998. Approximately 56% of net sales in the fourth quarter came from existing customers. CDnow's net loss for the fourth quarter of 1998 was $12,945,000 or $0.73 compared to a net loss of $6,618,000, or $0.86 per share, for the fourth quarter of 1997. Included in general and administrative expenses in the fourth quarter of 1998 was a charge to expense of approximately $500,000, or $0.03 per share, related to moving CDnow's headquarters to Fort Washington, Pennsylvania, of which approximately $400,000 was an accrual for the expected loss on the lease of CDnow's former headquarters. CDnow's net loss for the fourth quarter compares to a loss in the third quarter of 1998 of $0.74 per share. Net sales for the year ended December 31, 1998 increased 225% to $56,395,000 from $17,373,000 million for the year ended December 31, 1997. CDnow's net loss for the twelve months ended December 31, 1998 was $43,769,000, or $2.79 per share, compared to a net loss of $10,747,000 or $1.42 per share, for the twelve months ended December 31, 1997. As of December 31, 1998, a total of 983,000 customers had purchased from CDnow since inception, of which 245,000 new customers were added in the fourth quarter. CDnow added a total of 686,000 new customers during 1998. -8- Summary Comparative Per Share Information The following summarizes the per share information for our companies on a historical, pro forma combined and equivalent basis. We calculated the N2K Per Share Equivalents by multiplying the Unaudited Pro Forma Combined per share amounts by .83 because the N2K shareholders will receive .83 shares of CDnow/N2K common stock in exchange for each share of N2K common stock. The calculations exclude common stock equivalents. You should refer to the pro forma unaudited combined financial statements, the Consolidated Financial Statements of CDnow, and the Consolidated Financial Statements of N2K for information about common stock equivalents and information about the number of shares used in computing net loss from continuing operations per common share.
At or for the At or for the Year Ended Nine Months Ended December 31, 1997 September 30, 1998 ----------------- ------------------ Unaudited Pro Forma Combined Loss from continuing operations per common share........................... $ (3.43) $(3.08) Dividends............................... -- -- Book value per common share............. Not computed 5.94 N2K Per Share Equivalents Loss from continuing operations per common share........................... $ (2.85) $(2.56) Dividends............................... -- -- Book value per common share............. Not computed 4.93 N2K - Historical Loss from continuing operations per common share........................... $ (4.09) $(3.12) Dividends............................... -- -- Book value per common share............. 4.39 4.30 CDnow - Historical Net loss per common share............... $ (1.42) $(2.10) Dividends............................... -- -- Book value (deficit) per common share... (1.24) 3.59
-9- Risk Factors Risk Factors Risks Relating to the Merger Our inability to successfully integrate our operations may effect our ability to realize the anticipated benefits of the merger. The success of the merger will depend on our ability to unite our business strategies and technologies. We cannot assure that we will realize the anticipated benefits of our merger. If we are unable to successfully unite our operations, we will be materially adversely affected. The joining of our operations will present significant challenges. The combining of management from our companies will result in changes affecting all employees and the operations of both companies. Differences in management approach and corporate culture may strain employee relations. The shares of CDnow/N2K common stock you actually receive in the merger may be less valuable than the shares on the day you make your decision about the merger. The value of the CDnow/N2K shares you receive will vary based on fluctuations in the price of the common stock of the two companies prior to the merger. This is because it is unlikely that the value of the CDnow/N2K shares will be the same on the date of the effective time of the merger as the prices of either CDnow stock or N2K stock on the date of this joint proxy statement/prospectus. In the merger, each share of N2K will convert into .83 of a share of CDnow/N2K, and each share of CDnow common stock will convert into one share of CDnow/N2K. Both of these exchange ratios are fixed. We will not adjust the exchange ratios in the event of any increase or decrease in the price of CDnow or N2K common stock. Our stock option agreements and termination fees may deter third parties from making bids to acquire CDnow or N2K which may be more beneficial to you. The existence of options and the termination fee between CDnow and N2K may make it more difficult for a third party to acquire either company and therefore may deter third parties from making competing bids for either company. CDnow and N2K each granted to the other an option to acquire up to 19.9% of its outstanding common stock. CDnow and N2K may only exercise their respective options upon termination of the merger agreement in connection with specified types of transactions or proposed transactions with third parties. In addition, under these circumstances, the merger agreement requires CDnow or N2K to pay to the other a termination fee. Together, the maximum amount that CDnow or N2K may receive in cash or stock of the other company is $3.75 million. Executive officers and directors who are asking you to approve the merger have potential conflicts of interest because they will receive additional benefits in the merger. Shareholders should be aware of a potential conflict of interest and the benefits available to executive officers and directors when considering the CDnow and N2K board of directors determinations to approve the merger. As discussed below under "Interests of CDnow and N2K Executive Officers and Directors in the Merger," a number of executive officers and directors of CDnow and N2K have employment or severance agreements or benefit plans that provide them with interests in the merger that are different from, or in addition to, your interests as shareholders. Each of these persons could receive significant compensation if the merger is completed. Risks Relating to CDnow/N2K We have a history of losses and we expect future losses which could decrease the value of your shares. Both CDnow and N2K have incurred significant losses since inception. We cannot assure that we will ever be profitable. CDnow had net losses of $10.7 million for the year ended December 31, 1997 and $30.8 -10- Risk Factors million for the nine months ended September 30, 1998. N2K had net losses from continuing operations of $20.0 million for the year ended December 31, 1997 and $41.9 million for the nine months ended September 30, 1998. As of September 30, 1998, CDnow had accumulated losses of $43.6 million and N2K had accumulated losses of $110.2 million. We anticipate that we will continue to incur substantial expenses for the following purposes: . marketing and promotion, including agreements with internet content and service providers; . web site development and enhancement; and . reorganization and development of our combined administrative organization. We hope that the combination of our businesses will enable us to reduce our combined expenses so that they are significantly less than the sum of the expenses we would incur if we continue as separate entities. However, we cannot assure that we will be successful in our effort to reduce our combined expenses. Even if we are able to realize these cost savings as a result of the merger, we expect to incur substantial operating losses for the foreseeable future. Moreover, because our products have low gross margins, we must generate substantially increased net sales to achieve profitability. If customers do not accept electronic commerce, we will be materially adversely affected. Customers may not accept the use of electronic commerce. If electronic commerce does not continue to grow or grows more slowly than expected, we will be materially adversely affected. Our long term success is dependent on widespread consumer acceptance of electronic commerce. There are a number of factors that could prevent or delay consumer acceptance, including the following: .electronic commerce is at an early stage of acceptance; . the necessary network infrastructure for substantially increased purchase volumes may not be adequately developed; . increased government regulation may adversely impact the viability of electronic commerce; . insufficient availability of telecommunications services or changes in telecommunication services could result in slower response times, which could adversely impact electronic commerce; and . adverse publicity and consumer concern about the security of electronic commerce transactions could discourage its acceptance and growth. We compete with Amazon.com and other online retailers and traditional music retailers who may be more successful than we are in attracting and retaining customers. Competition in our business is intense. We will be materially adversely affected if we cannot compete successfully. Barriers to entry in our business are minimal and a competitor can launch a new site at relatively low cost. We have always confronted a large number of online competitors. In June 1998, Amazon.com launched an online music business and, based on its announced third quarter 1998 revenue, became the largest online retailer of music and music related products although our combined revenues would have made us larger for this period. Other large entities, including Tower Records, Columbia House and Best Buy, have launched online music retailing efforts. Moreover, competition in the broader retail music industry also affects our business. Among our competitors are the following: . online vendors of music, music videos and other related products; . online service providers that offer music directly or in cooperation with other retailers; . traditional retailers of music products, including specialty music retailers; . other retailers that offer music products, including mass merchandisers, superstores, discount stores and consumer electronic stores; . non-store retailers such as music clubs; and . record companies and other entities who may make available digitally downloaded music. -11- Risk Factors Many of our competitors have much greater financial, marketing and other resources than ours. This may place us at a disadvantage in responding to our competitors' pricing strategies, technological advances, advertising campaigns and other initiatives. In addition, recently developed technologies have increased competitive pressures on CDnow and N2K. For example, applications that can indicate which online site has the lowest price for a particular title could direct customers to our competitors' sites. We cannot assure that we will compete successfully in this environment. We rely on marketing agreements and online and traditional advertising which may not generate the anticipated number of new customers even though we must make substantial payments under these agreements. If we are unable to further develop and successfully administer our marketing agreements and advertising campaigns, we will be materially adversely affected. To attract customers, we entered into agreements with online search and other internet service providers. We also utilize online advertising and traditional advertising. If these alliances and advertising campaigns, in which we make significant investments, do not generate the expected number of new customers or if we are unable to renew on successful terms marketing agreements, we will be materially adversely affected. As of September 30, 1998, our combined minimum obligations under marketing agreements and advertising arrangements are approximately $18.2 million in the remaining three months of 1998, $41.8 million in 1999, $36.7 million in 2000 and $10.1 million in 2001. We may enter into additional marketing agreements in the future. The success of these relationships depends on the amount of increased traffic we receive from the internet sites of these online search and other internet service providers. We cannot assure that these arrangements will generate the expected number of new customers. Moreover, we may not be able to renew on successful terms marketing agreements or enter into new agreements with others. In addition, we cannot assure that our advertising campaigns will be successful. We may need additional funds which, if available, could substantially increase our interest expense or dilute your shareholdings. If these additional funds are unavailable, we will be materially adversely affected. We may need additional funding which may not be available. Both of our companies have been spending and expect for the foreseeable future to spend more cash than we generate from continuing operations. Although we hope to realize some cost savings as a result of the combination of the CDnow and N2K businesses, we will continue to have substantial capital requirements. As a result, we expect to continue to utilize our cash reserves to fund operations. We may need to raise additional funding to provide sufficient cash reserves which may not be available. If we issue equity securities in connection with a financing, your shareholdings will be diluted. If we raise additional funds through a debt financing, we will incur interest charges and will likely become subject to restrictions on our operations and finances. We believe that the resources available to us following the merger will be sufficient to fund operations for at least the next 12 months. However, various factors, including an unanticipated decline in revenues or increased expenses, could cause us to require financing at an earlier time. For additional details, please see "CDnow Management's Discussion and Analysis of Financial Condition-- Liquidity and Capital Resources" and "N2K Management's Discussion and Analysis of Financial Condition--Liquidity and Capital Resources." We both rely on Valley Media, Inc. to fill our customers' orders. If we are unable to maintain this relationship or find a replacement on the same or better terms, then our ability to distribute to our customers in a cost efficient manner will be impeded. If our relationship with Valley Media, Inc. is unexpectedly terminated, we could be materially adversely affected, particularly if the termination occurs during the fourth quarter of the calendar year, a period when a high percentage of music sales are made. Orders for recorded music items for both CDnow and N2K are primarily filled by Valley Media. We cannot fill customers' orders on our own. Therefore, our business is dependent on maintaining the relationship with Valley Media or on establishing new relationships with companies who provide similar services. We cannot assure that we will maintain the relationship with Valley Media or find a replacement vendor capable of filling our customers' orders on satisfactory terms. -12- Risk Factors CDnow's agreement with Valley Media terminates in June 1999 and N2K's agreement with Valley Media terminates in February 2000. Also, if Valley Media decides to stop providing services to all of its online customers, Valley Media may terminate its agreements with us on 30 days' written notice. To date, Valley Media has satisfied our requirements on a timely basis. However, if Valley Media is unable to satisfy our increasing requirements on a timely basis, or terminates or chooses not to renew its current agreements with us, we will be materially adversely affected. We also rely on single vendors to fill orders with respect to internationally manufactured recorded music items and other product lines that we carry. If we lose any one vendor, our sales of the product line serviced by the vendor could be materially adversely affected. While we attempt to negotiate multi-year contracts with vendors to ensure the availability of merchandise, we cannot assure that our vendors will continue to sell merchandise to us on acceptable terms. Moreover, we cannot assure that, if necessary, we could establish relationships with suitable vendors on a timely basis and on acceptable commercial terms. If we are unable to maintain suitable relationships with vendors, we will be materially adversely affected. We could experience system failures and capacity constraints which would interfere with access to our online store. Any system interruptions that cause our online stores to be unavailable or that reduce our ability to process transactions could materially adversely affect us. Further, if we do not appropriately expand and upgrade our systems and infrastructure, we will suffer a material adverse affect. Our business depends on the efficient and uninterrupted operation of our computer and communications hardware systems. Interruptions could result from natural disasters as well as power loss, telecommunications failure and similar events. We have had system interruptions in the past and expect further interruptions in the future. We do not have fully redundant systems or a formal disaster recovery plan. Additionally, we may not carry sufficient business interruption insurance to compensate us for losses that may occur. As traffic in our online stores continues to increase, we must expand and upgrade our technology, transaction processing systems, network infrastructure and customer service capabilities. We may not be able to accurately project the rate of increase in our online stores. In addition, we may not be able to expand and upgrade our systems and infrastructure and customer service capabilities to accommodate increased use of our online stores. We may be negatively affected by security breaches which could affect our ability to maintain security of our customers' information and our ability to attract and retain customers. If security breaches of our customer information or other information occurs, we may be materially adversely affected. The security of proprietary information is a concern in our business. If we are unable to protect our customer or other information, concern regarding the security of confidential information may deter consumers from shopping with us or engaging in online commerce, and we could be materially adversely affected. We believe that concern regarding the security of confidential information transmitted over the internet, such as credit card numbers, prevents many potential customers from engaging in online transactions. To protect confidential information, we rely on encryption technology, which transforms information into a "code" designed to be unreadable by third parties and authentication technology which utilizes passwords and other information to prevent unauthorized persons from accessing a customer's information. These measures cannot guarantee that physical or electronic break-ins, viruses or similar problems will not occur. If a person circumvents our security measures, he or she could misappropriate proprietary information or cause interruptions in our operations. Security breaches that result in access to confidential information could damage our reputation and expose us to a risk of loss or liability. We may be required to make significant expenditures and expend considerable personnel effort to protect against security breaches or remedy problems caused by these breaches. We cannot assure that our security measures will prevent such breaches. -13- Risk Factors We rely on internally and externally developed software, which if not continually updated will materially adversely affect our ability to retain and attract customers. If we do not continually improve our internally and externally developed software, we will be materially adversely affected because our competitors may provide superior services to our current and potential customers. We use internally and externally developed software for our online stores, search engines and almost all aspects of our transaction processing and order management systems. As our business grows, we will have to modify internally developed software and upgrade or acquire externally developed software to accommodate increased traffic in our online stores or increased volume in our transaction processing order management systems. If we fail to make modifications when needed, we may experience any one or more of the following undesirable effects: . unanticipated system disruptions; . slower response time; . impaired quality and speed of filling orders; . degradation in customer service; or . delays in reporting accurate financial information. Any of these events could have a material adverse effect on us. Fluctuations in our quarterly operating results may result in a failure to meet analysts' and investors' expectations, causing our share price to decline or fluctuate widely. We expect that our quarterly operating results will fluctuate significantly due to many factors, a number of which are beyond our control. We believe that period-to-period comparisons of our historical results are not necessarily meaningful. You should not rely on these historical results as an indication of future results. Our results of operations in future periods may not meet the expectations of analysts and investors, in which case the price of our common stock would likely be materially adversely affected. Factors which may also have a longer term impact on our operating results may include one or more of the following: . our ability to retain existing customers and attract new customers; . the introduction of new or enhanced online features, services and products by us and our competitors; . price competition or higher wholesale prices; . the level of use of online commerce for the purchase of recorded music; . seasonality of recorded music sales; . our ability to upgrade and develop our systems and infrastructure and attract qualified personnel; . technical difficulties, system downtime or internet brownouts; . operating costs and capital expenditures needed for expansion of our business, operations and infrastructure; . timing of our promotions and sales programs; . the level of merchandise returns that we experience; . government regulation; and . general economic conditions or economic conditions specific to online commerce and the music industry. We expect to experience seasonality in our business resulting from fluctuations in online usage as well as traditional retail seasonality in the sale of recorded music. Sales in the traditional music retail business are much greater in the fourth quarter of each year than in the preceding three quarters. However, we have had difficulty in ascertaining the effect of seasonality on our business because of our limited operating history and the rapid growth of our businesses. -14- Risk Factors Our stock price may fluctuate which may make it difficult to resell your shares when you want to at prices you find attractive. The market prices of our common stock have been highly volatile. This volatility may adversely effect the price of our common stock in the future. You may not be able to resell your shares of common stock following periods of volatility because of the market's adverse reaction to this volatility. We anticipate that this volatility, which frequently affects the stock of online commerce companies, will continue. Factors that could cause such volatility include: . our quarterly operating results; . deviations in results of operations from estimates of securities analysts; . general economic conditions or economic conditions specific to online commerce and the music retailing industry; and . other developments affecting us or our competitors. On occasion, the equity markets and in particular the markets for internet stocks, have experienced significant price and volume fluctuations. These fluctuations have affected the market price for many companies' securities even though the fluctuations are often unrelated to the companies' operating performance. We may be materially adversely affected by rapid technological change if we are unable to respond timely and effectively. If we are not able to successfully respond to online commerce's rapid technological change, we will be materially adversely affected. Our success will depend upon our ability to respond to such developments in a timely and cost-effective manner. For example, new technology which could be used for the illegal electronic distribution of recordings and other material could have a detrimental effect on our business by reducing the market for our products. Although the Recording Industry Association of America, in concert with various recording and technology companies, has launched an initiative to develop a technology for the digital distribution of music, this initiative may not succeed in reducing the risk of illegal distribution of recordings in digital form or in any form. Similarly, technological developments could provoke significant changes to the way in which recorded music is produced and distributed, thereby requiring us to acquire, implement and adopt new technology and distribution systems. We may not be able to protect our proprietary rights and may infringe on the proprietary rights of others, both of which would have a material adverse effect on our business. Our efforts to establish and protect our proprietary rights may be inadequate to prevent misappropriation or infringement of our proprietary property. Some of our proprietary rights are licensed to third parties. There is a risk that these licensees will take actions that materially adversely affect the value of our proprietary rights or reputation. It is possible that we may be the subject of infringement claims because of our relationship with the CDnow Cosmic Credit sites and use of unlicensed information. CDnow established a network of links with numerous small online sites through its Cosmic Credit program. These online sites, which typically are fan sites devoted to popular musical artists, permit customers to connect to CDnow's site through an embedded hyperlink. CDnow gives Cosmic Credit participants commissions in store credit or cash based upon the dollar amount of purchases made by persons using the link. Many of the Cosmic Credit sites are not officially sanctioned by the artists on whom the sites are focused. Moreover, many of the sites do not have licenses for the use of any proprietary intellectual property which they display on their sites. In addition, CDnow's primary provider of artist and music-related information, including photographs, articles and reviews advised CDnow that it may not have a license to distribute some of this information. From time to time, we have been subject to claims alleging infringement of intellectual property of others. To date, we have not suffered material harm from these claims. However, such claims could have a material adverse effect on us in the future, particularly if we are unsuccessful in defending against them. -15- Risk Factors Various organizations such as Broadcast Music, Inc., the American Society of Composers, Authors and Publishers and the Harry Fox Agency, representing composers and owners of the copyrights in music compositions, have asserted that N2K is required to obtain licenses from them with respect to N2K's use of music on its various web sites. Though N2K believes that statutory exemptions to the rights asserted by these organizations apply to the types of uses made of the music by N2K, there are few, if any, legal precedents applicable to such internet uses. In the meantime, N2K is continuing to have discussions with these organizations to establish whether there might be a license acceptable to N2K, what the form and scope of such a license would be and what rates would apply. If the licences are required and the terms for licenses for the use of music are onerous, or if we were unsuccessful in defending against claims that we used such music without appropriate licenses and we were ordered to pay damages, we could suffer a material adverse effect. We are subject to government regulation and legal liabilities which may be costly and may interfere with our ability to conduct business. If we become subject to claims that we have violated U.S. or foreign laws, we could be materially adversely affected even if we successfully defend against these claims. Moreover, new laws that impose restrictions on our ability to follow current business practices or increase our costs of doing business could also materially adversely affect us. Laws and regulations directly applicable to online commerce or internet communications are becoming more prevalent. These laws and regulations could expose us to substantial liability. The most recent session of Congress and the European Union have recently enacted laws and regulations concerning the internet, and there is uncertainty regarding their marketplace impact. In addition, various jurisdictions already have enacted laws covering intellectual property, privacy, libel and taxation that are not specifically directed to online commerce but that could impact our business. Legal rights to use some content on the internet are not clearly settled. Our ability to rely on exemptions or defenses under copyright law is uncertain. We believe that our use of third party material in our online stores is permitted under current provisions of copyright law. It is possible that the law could develop in a fashion that would prohibit us from having rights to downloadable music samples as well as artist, record and other information. We could be materially adversely affected if we are no longer able to use this information. In addition, the growth of the internet, coupled with publicity regarding internet fraud, may lead to the enactment of more stringent consumer protection laws. These laws may impose additional burdens on our business. We may be negatively affected by the pending N2K litigation. If one or more of the lawsuits pending against N2K result in a large judgment, we could be materially adversely affected. N2K is a party to several pending lawsuits, which we describe in the section entitled "Description of N2K-- Litigation." While N2K does not believe that any of these lawsuits are likely to have a materially adverse effect on it, litigation presents inherent risks and uncertainties. We may be subject to legal liability for publishing or distributing content over the internet which may be costly for us to defend. We may be subject to legal claims relating to the content in our online stores, or the downloading and distribution of the content. For example, persons may bring claims against us if material deemed inappropriate for viewing by young children can be accessed from our online stores. Claims could also involve matters such as defamation, invasion of privacy and copyright infringement. Online services have been sued in the past (sometimes successfully) based on the content of material on the internet. Our insurance may not cover claims of this type, or may not provide sufficient coverage. We could suffer a material adverse effect if costs resulting from these claims are not covered or significantly exceed our coverage. -16- Risk Factors We may be subject to liability for sales and other taxes. We could suffer a material adverse effect if sales and similar taxes are imposed on our business, or if penalties are assessed on us for past nonpayment of these taxes. We do not collect sales or other similar taxes in most states. Recently adopted legislation provides that, prior to October 2001, a state cannot impose sales taxes on products sold on the internet unless such taxes could be charged on non-internet transactions involving these products. During this moratorium, it is possible that taxing mechanisms may be developed that would, following the moratorium, impose increasing sales and similar tax burdens on us. If these burdens are placed on us, we could suffer a material adverse effect. In addition, foreign jurisdictions may claim that we are subject to taxation because we conduct transactions with their citizens. Our success is dependent on our key personnel, who may decide not to continue to work for CDnow/N2K, and we may not be able to hire enough qualified personnel to meet our hiring needs. We will be materially adversely affected if we cannot hire and retain suitable executive management team members and personnel. We believe that our success will depend on continued employment of the executive management team designated to serve following the merger. If one or more members of our management team become unable or unwilling to continue in their present positions, we could be materially adversely affected. In addition, our success also depends upon continued service by key sales, marketing and support personnel and our ability to hire additional personnel as our business grows. Management will control 37% of CDnow/N2K and their interests may be different from and conflict with yours. The interests of management could conflict with the interests of our other shareholders. Following the merger, CDnow/N2K executive officers and directors will beneficially own a total of approximately 37% of the outstanding CDnow/N2K common stock. Accordingly, if they act together, they will have the power to significantly influence the election of directors and the approval of actions for which the approval of our shareholders is required. Our computer systems and those of our key suppliers and service providers may not be Year 2000 compliant which may cause system failures and disruptions of operations. The Year 2000 issue could result in system failures or miscalculations causing disruptions of operations, including, among others, a temporary inability to process transactions, send invoices or engage in similar normal business activities which may materially adversely affect us. To date, we have experienced very few problems related to Year 2000 problems and we do not believe that we have material exposure to the Year 2000 issue with respect to our information systems as these systems correctly define the Year 2000. We are currently conducting an analysis to determine the extent to which the systems of third parties raise Year 2000 issues may affect us. However, we cannot assure that the primary provider we use to fill our orders for direct- to-consumer music products, Valley Media, will, in fact be year 2000 compliant on a timely basis. Generally, we are unable to predict the extent to which the Year 2000 issue will effect our suppliers, or the extent to which we would be vulnerable to our suppliers' failure to remediate any Year 2000 issues on a timely basis. The failure of a major supplier subject to the Year 2000 issue to convert its systems on a timely basis or a conversion that is incompatible with our systems could have a material adverse effect on us, which is not currently quantifiable. In addition, most of the purchases from our online stores are made with credit cards, and our operations may be materially adversely affected to the extent our customers are unable to use their credit cards due to Year 2000 issues that are not rectified by credit card providers. Anti-takeover provisions and our right to issue preferred stock could make it difficult for a third-party to acquire us even if the change in control is more beneficial to you. Pennsylvania corporate law under which CDnow/N2K is incorporated could make it difficult for a third party to acquire control of us, even if the change in control would be beneficial to shareholders. The -17- Risk Factors articles of incorporation provide that our board of directors may issue preferred stock without shareholder approval. In addition, our bylaws provide for a classified board, with each board member serving a staggered three year term. The issuance of preferred stock and the existence of a classified board could make it difficult for a third party to acquire us, discourage bids for our common stock at a premium, and adversely affect the market price of our common stock. -18- The Merger The Merger We are furnishing this joint proxy statement/prospectus to holders of common stock of CDnow, Inc., a Pennsylvania corporation, and holders of common stock of N2K Inc., a Delaware corporation. The CDnow and N2K boards of directors are soliciting proxies for use at the special meetings of their shareholders, and at any adjournment or postponement of the meetings. At the CDnow special meeting, the CDnow shareholders will be asked to: . approve and adopt the Agreement and Plan of Merger dated as of October 22, 1998 and amended as of January 29, 1999, among CDnow, N2K and CDnow/N2K, Inc., a Pennsylvania corporation, and the transactions contemplated by the merger agreement; and . approve and adopt the CDnow/N2K 1999 Equity Compensation Plan. At the N2K special meeting, the N2K shareholders will be asked to: . approve and adopt the merger agreement and the transactions contemplated by the merger agreement; and . approve and adopt the equity plan. We attached the merger agreement as Appendix I. The merger agreement provides for two separate mergers. The CDnow Merger The N2K Merger . A wholly-owned subsidiary . A wholly-owned subsidiary of CDnow/N2K will merge of CDnow/N2K will merge with and into CDnow. CDnow with and into N2K. N2K will be the surviving will be the surviving company in the CDnow company in the N2K merger. merger. . Each issued and . Each issued and outstanding share of N2K outstanding share of CDnow common stock converts into common stock converts into the right to receive .83 the right to receive one of a share of CDnow/N2K share of CDnow/N2K common common stock. stock. On February 8, 1999 the closing price of CDnow common stock was $19.56 and the closing price of N2K common stock was $14.81. If we closed the merger on February 8, 1999, and CDnow/N2K common stock traded at the same value as the CDnow common stock, a CDnow shareholder would receive CDnow/N2K common stock with a value of $19.56 per share of CDnow common stock and an N2K shareholder would receive CDnow/N2K common stock with a value of $16.23 per share of N2K common stock. Upon completion of these mergers, CDnow and N2K will be wholly-owned subsidiaries of CDnow/N2K. You will no longer own shares of CDnow or N2K, instead you will own shares of CDnow/N2K. We anticipate that the CDnow merger and the N2K merger will become effective at the same time. We expect the mergers will become effective the day of our shareholder meetings. On December 31, 1998, there were approximately 17,842,979 shares of CDnow common stock issued and outstanding and approximately 14,419,060 shares of N2K common stock outstanding. Based on the number of shares of CDnow and N2K outstanding on December 31, 1998, we expect that after the merger there will be approximately 29,810,799 shares of CDnow/N2K common stock outstanding. The following table sets forth the CDnow and N2K options and warrants outstanding as of December 31, 1998 and the number of CDnow/N2K options and warrants we expect will be outstanding after the merger. -19- The Merger Options and Warrants Outstanding as of December 31, 1998
Post-Merger (after application of Combined Pre-Merger exchange ratio) post-merger ---------------------- ------------------------- ----------- N2K CDnow N2K CDnow --------- --------- ---------- ----------- Stock options 2,210,613 1,043,730 1,834,809 1,043,730 2,878,539 Warrants 599,554 294,562 497,630 294,562 792,192 --------- --------- ---------- ---------- --------- Total 2,810,167 1,338,292 2,332,439 1,338,292 3,670,731 ========= ========= ========== ========== =========
Background of the Merger On several occasions between early 1996 and March 1997, Jason Olim, the President and Chief Executive Officer of CDnow, and Larry Rosen, the Chairman and Chief Executive Officer of N2K, discussed a possible merger of the companies. On each occasion, the parties determined not to pursue such discussions. In March 1998, Mr. Olim and Mr. Rosen met again while attending an industry conference in San Francisco. At that time, Messrs. Olim and Rosen discussed a possible merger of the companies. The parties did not pursue these discussions any further. At about the same time, N2K, with the assistance of its financial advisor, Allen & Company, was having discussions with three major music/entertainment companies who were interested in an alliance with an online music retailer to aid in the distribution of their products. The discussions focused on a potential significant joint investment in N2K by the three companies. These discussions did not result in any definitive proposals. In addition, at about that time, N2K and two other large media and communications companies discussed a possible acquisition of N2K that also did not lead to any definitive proposals. Messrs. Olim and Rosen met on June 24 and 25, 1998 while attending an industry conference in London. The parties again discussed the possibility of a merger between the companies. Messrs. Olim and Rosen agreed to meet at a future date. On July 16, 1998, Messrs. Olim and Rosen met in New York. At this meeting, Messrs. Olim and Rosen discussed some general features that would accompany a merger of the companies' businesses. However, they reached no agreement or understanding on any proposed terms or structure, and Messrs. Olim and Rosen decided that they would not continue their discussions at this time. They acknowledged that there might be an opportunity to resume talks at a future date. Over the course of the summer of 1998, the members of N2K's board of directors continued to evaluate different corporate strategies for N2K with a view to strengthening N2K's business and growth and ensuring N2K's position in the online commerce sector. The possible strategies they considered included merging with another online retailer, selling N2K to a traditional retailer or another entity that would be interested in developing or strengthening a presence in the sector and continuing to operate N2K on an independent basis. N2K did not pursue the sale alternative because the N2K board considered it to be less attractive than remaining independent or pursuing a merger with CDnow. Consequently, during this period, N2K's board of directors authorized its management to continue discussions with CDnow's management regarding a possible transaction. On August 6, 1998, the CDnow board first decided to pursue a merger transaction with N2K. Mr. Olim briefed the CDnow board of directors concerning his discussions with Mr. Rosen about a possible transaction with N2K. The CDnow board requested Mr. Olim continue his discussions with Mr. Rosen. To maintain CDnow's presence as a leading internet music retailer and to capitalize on the growth of electronic commerce, the CDnow board considered a merger transaction with N2K or remaining independent. -20- The Merger Because of numerous factors, including N2K's business alliances, the CDnow board pursued a merger with N2K. The CDnow board did not consider potential transactions with companies other than N2K. In early August 1998, Messrs. Olim and Rosen discussed possible transaction structures and potential merits of a combination, as well as other details of such a transaction. Over the course of the discussions, the respective boards of directors of N2K and CDnow met from time to time and were briefed on developments regarding the discussions. Each board authorized its respective management to continue their discussions. N2K formally engaged Allen & Company to act as its exclusive financial advisor with respect to the merger under an engagement letter dated August 6, 1998. Prior to its engagement in connection with the merger, Allen & Company had been engaged by N2K beginning in 1996 in connection with several private financings and had acted as a managing underwriter for N2K's secondary public offering completed in April 1998. Because of its ongoing relationship and familiarity with N2K, Allen & Company also provided general financial advisory services from time to time during the preceding periods with respect to various matters affecting N2K. On August 16, 1998, CDnow invited BT Alex. Brown to act as its financial advisor with respect to a potential transaction with N2K. CDnow formally engaged BT Alex. Brown to act as its exclusive financial advisor. On August 17, 1998, after executing a mutual confidentiality and standstill agreement, senior management of both companies, along with their financial advisers and legal representatives, met in New York. The parties discussed possible transaction and organizational structures, as well as other facets of a "merger of equals" type transaction. These discussions also included preliminary negotiations regarding a range of possible exchange rates and a board of the new company that would contain equal representation from N2K and CDnow. During the following several weeks, CDnow held numerous discussions with BT Alex. Brown, its financial advisor, Morgan, Lewis & Bockius LLP, its outside legal counsel, and Arthur Andersen LLP, its accounting firm, and N2K met with Allen & Company, its financial advisor, Dewey Ballantine LLP, its outside legal counsel, and Arthur Andersen LLP, its accounting firm, regarding various matters relating to the proposed transaction. On September 17, 1998, Messrs. Olim and Rosen met to discuss the status of the proposed transaction. At that meeting, Messrs. Olim and Rosen reached an understanding that they would each recommend to their board that Mr. Olim serve as President and Chief Executive Officer and Mr. Rosen serve as Chairman of the combined company. On September 29, 1998, members of the senior management of each company and representatives of their respective financial advisors and outside legal counsel met to discuss a proposed transaction schedule. The parties also exchanged confidential documents at this meeting. On October 7, 1998, The Wall Street Journal and The New York Times published articles that the companies were engaged in merger discussions. In response to these reports, on that date N2K and CDnow issued a joint press release in which they acknowledged these discussions but stated no assurance that an agreement between the two companies would be reached. On October 9, 1998, the CDnow board held a special meeting that was also attended by representatives of its financial advisor and outside legal counsel. At this meeting, representatives of BT Alex. Brown made a presentation regarding the financial terms of the proposed transaction. The board considered a transaction in which CDnow shareholders would receive 60% of the outstanding stock of a new entity and N2K shareholders would receive 40% of the outstanding stock of the new entity. In addition, the board considered -21- The Merger that CDnow would have greater board representation. Representatives of Morgan, Lewis & Bockius made presentations regarding various aspects of the proposed transaction. The CDnow board expressed concern over the need for assurance relating to the status of N2K's material agreements and N2K's cash balance upon closing the proposed transaction. After extensive discussion, the board authorized management to continue negotiations. During the next week, each company continued discussions. In addition, management of the companies and their respective advisors met several times and the parties negotiated definitive agreements. Between October 5 and October 22, 1998, N2K's stock price declined on a disproportionate basis compared to CDnow's stock price. As a result, during this period the aggregate market value of N2K would have represented between 31% and 36% of the combined company and the aggregate market value of CDnow would have represented between 69% and 64% of the combined company. On or about October 13, 1998, N2K advised CDnow that it would not accept a combination on the basis of these market valuations. Despite the decline in the N2K stock price, following further discussions between the parties' advisers, it was proposed that N2K shareholders would receive approximately 40% of the combined company while CDnow shareholders would receive approximately 60%. Under such proposal, CDnow would have a greater board representation in the new entity. The board of the new company would be comprised of four persons designated by CDnow, three persons designated by N2K and two independent directors. Finally, N2K proposed that Mr. Diamond, the acting Chief Executive Officer of N2K following Mr. Rosen's recent heart surgery, would become chairman of the new entity as N2K's senior representative in the combined company. On October 16, 1998, the N2K board met to discuss developments regarding, and consider approval of, the proposed transaction with CDnow. At this meeting, Allen & Company summarized the financial analyses performed with respect to the proposed transaction. Management also presented the results of their due diligence review and described the proposed terms of the transaction. In addition, representatives of N2K's outside legal counsel, Dewey Ballantine, discussed various aspects of the proposed transaction. After extensive discussion, the board expressed concern over certain elements of the transaction and a number of provisions in the proposed merger agreement and instructed management to continue negotiating with CDnow over such matters. On October 16, 1998, the CDnow board met to discuss the status of the proposed transaction. At this meeting, management briefed the board on the status of the negotiations and representatives of Morgan, Lewis & Bockius apprised the board on numerous items. The board authorized management to continue negotiations. Over the next week, the parties continued discussions and negotiations on these and other issues. The N2K board met two additional times. The CDnow board met on one occasion. Various compromise proposals were considered at these meetings. On October 22, 1998, the N2K board met again to consider the approval of the merger agreement and the related transactions. At that meeting, Allen & Company reviewed the financial terms of the merger and recent stock trading levels, and rendered its oral opinion that, the terms of the merger were fair, from a financial point of view, to the shareholders of N2K. The N2K board discussed a number of issues, including the previously expressed concerns relating to the level of participation of N2K management in the combined company and the need for certainty of closure of the transaction. Following this discussion and upon consideration of the factors described under "--N2K Reasons for the Merger; Recommendation of the N2K Board" the N2K board concluded that the merger was fair to, and in the best interest of, N2K and its shareholders and unanimously approved and adopted the merger agreement, the N2K stock option agreement granting CDnow an option to purchase shares of N2K, and the transactions contemplated by these agreements. Allen & Company subsequently delivered a written opinion to the effect that the terms of the merger were fair, from a financial point of view, to the shareholders of N2K. -22- The Merger Following each company's respective board meetings, representatives of N2K and CDnow executed and delivered the merger agreement and the stock option agreement. In addition, shareholders holding 16.6% of the outstanding shares of N2K and a shareholder who owns 16.6% of the outstanding shares of CDnow executed and delivered the shareholder support agreements pursuant to which they agreed to vote their shares in favor of the merger. On the morning of October 23, 1998, we issued a joint press release announcing the transaction. In addition to Allen & Company, which N2K retained for purposes of serving as its principal financial advisor and to issue a fairness opinion in connection with the merger, N2K retained the services of PaineWebber Incorporated during this period to identify and facilitate possible transactions, including the transaction with CDnow. CDnow Reasons for the Merger; Recommendation of the CDnow Board The CDnow board unanimously determined that the terms of the merger are fair to, and in the interest of, CDnow and its shareholders. The CDnow board recommends that the shareholders of CDnow vote FOR approval and adoption of the merger proposal. In reaching its determination to recommend approval of the merger, the CDnow board considered the following material factors: . the strength and depth of the combined management teams; . a common vision of operating a premier online music store; . that the combined company would be nearly double that of CDnow in terms of revenues and will have served a total of 1.6 million customers; . N2K's relationship with America Online and other business partners; . the opportunity to obtain cost and operating efficiencies; . the opportunity that a larger combined company may have to establish better relationships with record labels, artists and distributors; . the opportunity to achieve more efficient utilization of assets, management and personnel; and . N2K's experience in sales of online advertising, development of proprietary content and relationships with record labels. The CDnow board also evaluated the following positive and negative factors: . presentations from, and discussions with, senior management, representatives of its outside legal counsel and its independent accounting firm, and representatives of BT Alex. Brown regarding the business, financial, accounting and legal due diligence, including existing N2K litigation; . current industry, economic and market conditions, including the increased competition in the online retail music industry; . the competitive importance of market position, size and adequacy of financial resources; . the significant operating losses incurred by CDnow and the anticipation that the losses of the combined company might be greater and of a longer duration than on a stand alone basis, which the board considered a negative factor; . the challenges of combining the businesses of two dynamic corporations and the risk of diverting management resources from other opportunities and operational matters for an extended period of time, which the board considered negative factors; . the ability of CDnow to achieve meaningful cost savings and efficiencies on its own; . the possibility that the combined company might require additional financing, which the board considered a negative factor; -23- The Merger . the terms of the merger agreement; . current and historical market valuations of the two companies; . the financial opinion of BT Alex. Brown. As a result of the foregoing considerations, CDnow's board determined that the potential advantages of the merger outweighed the benefits of remaining alone. The CDnow board believes that the combined company would have a far greater opportunity than CDnow alone to compete in the online music retailing industry. In view of the variety of factors considered in connection with its evaluation of the merger, the CDnow board did not find it practicable to and did not quantify or otherwise assign relative weights to the specific factors considered in reaching its determination. In addition, many of the factors contain elements which may affect the fairness of the merger in both a positive and negative way. Except as described above, the CDnow board, as a whole, did not attempt to analyze each individual factor separately to determine how it impacted the fairness of the merger. Consequently, individual members of the CDnow board may have given different weights to different factors and may have viewed different factors as affecting the determination of fairness differently. N2K Reasons for the Merger; Recommendation of the N2K Board The N2K board unanimously determined that the terms of the merger are fair to, and in the best interest of, N2K and its shareholders. The N2K board recommends that the N2K shareholders vote FOR approval and adoption of the merger proposal. The N2K board believes that the merger represents the best business opportunity for N2K. The N2K board also believes the merger will create a powerful new online music retailer by combining N2K's greater access to content with CDnow's longer retailing history. The N2K board further believes that the combined entity presents opportunities to build shareholder value. In reaching its determination to recommend approval of the merger, the N2K board considered the following material positive and negative factors: . the N2K board's review of presentations from, and discussions with, senior executives of N2K, representatives of Allen & Company, and representatives of its outside legal counsel regarding the business, financial, accounting and legal due diligence; . a general review of information concerning the financial condition, results of operations, prospects, businesses and stock price performance of N2K, including their then current cash reserves and prospects for raising additional amounts; . an analysis of and consideration of different transactions involving N2K, including the possibility of remaining an independent company, selling itself or entering into a business combination, such as the merger; . the belief that the two companies share the same vision of the growth and the internet retailing industry, specifically the role, attitude and strategy of an online music retailer within those industries; . the view that the combined company would be better positioned in the online music retail industry; . the belief that the combined company's consolidated online store with a single brand name will strengthen its brand presence; . the belief that the merger would allow the combined company to improve operating efficiencies and reduce costs; -24- The Merger On October 22, 1998, the CDnow board met again to consider the approval of the merger agreement and the related transactions. At this meeting, BT Alex. Brown reviewed the financial terms of the merger and recent stock trading levels, and rendered its oral opinion that the transaction was fair, from a financial point of view, to the shareholders of CDnow. After further discussion and upon consideration of the factors described under "--CDnow Reasons for the Merger; Recommendation of the CDnow Board," the CDnow board concluded that the merger was fair to, and in the best interest of, the CDnow shareholders and unanimously approved and adopted the merger agreement, the CDnow stock option agreement granting N2K an option to purchase shares of CDnow, and the transactions contemplated by these agreements. . the belief that the management team of the combined company would be stronger than that of either company alone; . the fact that the fixed exchange ratio provided the shareholders of N2K with a premium which varied from 25.4% to 56.8%, depending upon the then current market price of CDnow and N2K common stock, which the N2K board determined was fair to, and in the best interest of, the shareholders of N2K; . the transaction structure and the fact that the exchange ratio is fixed and will not be adjusted in the event there are increases or decreases in the price of either the N2K common stock or the CDnow common stock; . the agreed upon composition of the board of directors of the new company; . the financial opinion of Allen & Company; . the terms and conditions of the merger agreement, including the termination fee, as well as the stock option agreements and the shareholder support agreements; . that the merger will be structured so that no gain or loss generally will be recognized for federal income tax purposes on the shares of N2K and CDnow common stock exchanged for CDnow/N2K common stock in the merger except for tax payable because of cash received in lieu of fractional shares by N2K shareholders; and . the possibility that the combined company will not be able to integrate the operations of CDnow and N2K without encountering difficulties, the likelihood of staff reductions and the possibility that the benefits expected from integration will not be realized, which the N2K board considered as negative factors. The discussion above of the information and factors considered and given weight by the N2K board is believed to include all material factors considered by the N2K board. In view of the variety of factors considered in connection with its evaluation of the merger, the N2K board did not find it practicable to and did not quantify or otherwise assign relative weights to the specific factors considered in reaching its determination. In addition, as many of the factors contain elements which may affect the fairness of the merger in both a positive and negative way, except as described above, the N2K board, as a whole, did not attempt to analyze each individual factor separately to determine how it affected the fairness of the merger. Consequently, individual members of the N2K board may have given different weights to different factors and may have viewed different factors as affecting the determination of fairness differently. Cautionary Statement Concerning Forward-Looking Statements This document contains forward-looking statements including the information concerning possible or assumed future results of operations of our companies and CDnow/N2K that appear in this joint proxy statement/prospectus and those preceded by, followed by or that include the words "believes," "expects," "hopes," "estimates," "anticipates" or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed elsewhere in -25- The Merger this document particularly under "Risk Factors" could affect the future results of CDnow/N2K, CDnow and N2K, and could cause those results to differ materially from those expressed in our forward-looking statements: . changes in internet usage and online commerce; . future online music retailing environment on the internet; . CDnow/N2K's business strategies, including sales and marketing plans; . expectation of continuing losses; . competitive factors; . reliance on online and traditional advertising and business alliances; . reliance on vendors; . liquidity needs; . changes in business relationships with other online service providers; . possible effects of changes in government regulation; . dependence on key personnel; . exposure to Year 2000 issues; and . changes in pricing policies. Accounting Treatment We expect that we will account for the merger under the purchase method of accounting. For accounting purposes only, we will treat CDnow as the acquiror of N2K. On the closing date, we will allocate the purchase price, based on the value of stock, options and cash issued to N2K shareholders, to the assets and liabilities of N2K based on their fair market values. We will assign the excess of purchase price over net assets acquired to identifiable intangibles. See "Unaudited Pro Forma Financial Information" for a more detailed description of the purchase accounting method. We will include N2K's results of operations in the combined company's financial statements from the date of closing. Material Federal Income Tax Consequences The following discussion describes the material federal income tax consequences of the CDnow and N2K mergers, assuming the mergers are completed as contemplated in this joint proxy statement/prospectus and in the merger agreement. The discussion below, and the opinions of Dewey Ballantine LLP and Morgan, Lewis & Bockius LLP referred to below, are based upon current provisions of the tax code, currently applicable Treasury regulations, and judicial and administrative decisions and rulings. Future legislative, judicial or administrative changes or interpretations which changes or alterations could be retroactive could alter or modify the statements and conclusions below and could affect the tax consequences to the shareholders of N2K and CDnow. Tax Opinions. The obligation of CDnow to consummate the CDnow merger is conditioned upon the receipt of confirmation by Morgan, Lewis & Bockius LLP and the obligation of N2K to consummate the N2K merger is conditioned upon the receipt of confirmation by Dewey Ballantine LLP, each dated the closing date of the tax opinions described below. No ruling from the IRS with respect to the mergers has been or will be sought, however, and the tax opinions do not prevent the IRS from adopting a contrary position. An opinion of counsel represents counsel's legal judgment as to a particular matter, but has no binding effect or official status of any kind. The IRS may assert contrary positions. Moreover, contrary positions may be adopted by a court, if the positions are litigated. The tax opinions described below will assume the absence of changes in existing facts and rely on assumptions, representations and covenants, including those contained in certificates of officers of CDnow, N2K and others. N2K and CDnow may waive the condition that they receive the confirmation of the tax opinions prior to the consummation of the mergers. N2K and CDnow do not anticipate waiving the condition that they receive these confirmations. If these confirmations can not be issued, however, and the material -26- The Merger federal income tax consequences of the mergers are materially different than those described in this joint proxy statement/prospectus, N2K and CDnow will resolicit their shareholders before proceeding with the mergers. Tax Implications to CDnow Shareholders. Based in part on representations contained in certificates of officers of N2K and CDnow which will be confirmed prior to the closing of the mergers, Morgan, Lewis & Bockius LLP, counsel to CDnow, has provided an opinion to CDnow that, except as limited by the matters discussed below under "--Assumption and Limitations" and assuming the mergers are completed in the manner contemplated in the joint proxy statement/prospectus and in accordance with the merger agreement: . The CDnow merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the tax code and/or, taken together with the N2K merger, as a transfer of property to CDnow/N2K by holders of CDnow common stock described in Section 351 of the tax code; . Holders of CDnow common stock who exchange their CDnow common stock solely for CDnow/N2K common stock in the CDnow merger will not recognize gain or loss for federal income tax purposes with respect to the exchange; . The aggregate tax basis of CDnow/N2K common stock received by a CDnow shareholder as a result of the CDnow merger will be the same as the shareholder's aggregate tax basis in the CDnow common stock surrendered in the exchange; . The holding period of the CDnow/N2K common stock held by former CDnow shareholders as a result of the exchange will include the period during which the shareholder held the CDnow common stock exchanged; and . A CDnow shareholder who exercises dissenters' rights of appraisal with respect to CDnow common stock and who receives payment for that stock in cash should generally recognize capital gain or loss measured by the difference between the amount of cash received and the shareholder's tax basis in the share. Tax Implications to N2K Shareholders. Based in part on representations contained in certificates of officers of N2K and CDnow which will be confirmed prior to the closing of the mergers, Dewey Ballantine LLP, counsel to N2K, has provided an opinion to N2K that, except as limited by the matters discussed below under "--Assumption and Limitations" and assuming the closing date tax opinions are issued and the mergers are completed in the manner contemplated in the joint proxy statement/prospectus and in accordance with the merger agreement: . The N2K merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the tax code and/or, taken together with the CDnow merger, as a transfer of property to CDnow/N2K by holders of N2K common stock described in Section 351 of the tax code; . Holders of N2K common stock who exchange their N2K common stock solely for CDnow/N2K common stock in the N2K merger will not recognize gain or loss for federal income tax purposes with respect to the exchange, except with respect to cash received in lieu of fractional shares; . The aggregate tax basis of CDnow/N2K common stock received by an N2K shareholder as a result of the N2K merger will be the same as the shareholder's aggregate tax basis in the N2K common stock surrendered in the exchange, reduced by any tax basis allocable to fractional shares for which cash is received; . The holding period of the CDnow/N2K common stock held by former N2K shareholders as a result of the exchange will include the period during which the shareholder held the N2K common stock exchanged; and -27- The Merger . A holder of N2K common stock who receives cash in lieu of a fractional share interest in CDnow/N2K common stock should be treated as having received the fractional shares in the N2K merger and then as having exchanged such fractional shares for cash in a redemption by CDnow/N2K. The cash payment should be treated as a distribution in payment for the fractional interest deemed redeemed under Section 302 of the tax code, with the result that the holder should generally recognize gain or loss for federal income tax purposes on the deemed redemption in an amount equal to the difference between the amount of cash received and the portion of the tax basis of the share of N2K common stock allocable to the fractional share interest. This gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if the share of N2K common stock exchanged has been held for more than one year at the closing of the merger. Tax Implications to CDnow and N2K. Neither CDnow nor N2K will recognize any gain or loss for federal income tax purposes on the mergers. Reporting Requirements and Backup Withholding. Each shareholder receiving CDnow/N2K common stock as a result of the mergers will be required to retain records and file with the shareholder's federal income tax return a statement containing facts relating to the mergers. Backup withholding at the rate of 31% may apply with respect to payments unless the recipient (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (b) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A shareholder who does not provide CDnow/N2K with its correct taxpayer identification number may have to pay penalties imposed by the IRS. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against the shareholder's federal income tax liability provided that any required information is furnished to the IRS. CDnow/N2K will report to shareholders of CDnow/N2K and to the IRS the amount of "reportable payments" and any amount withheld with respect to CDnow/N2K common stock during each calendar year. CDnow/N2K will report to shareholders of CDnow/N2K and to the IRS the amount of "reportable payments" and any amount withheld with respect to CDnow/N2K common stock during each calendar year. Assumptions and Limitations. The above discussion and the tax opinions of Morgan, Lewis and Bockius and Dewey Ballantine assume that you hold your shares of CDnow or N2K stock as capital assets and do not address all aspects of federal income taxation that may be important to you in light of your particular circumstances. Further, the discussion and the tax opinions do not address all aspects of federal income taxation that may be applicable to holders covered by special rules, such as: . holders who are not United States persons; . financial institutions; . tax-exempt organizations; . insurance companies; . dealers or brokers in securities; . holders who held their stock as part of a hedge, appreciated financial position, straddle or conversion transaction; or . holders who acquired their CDnow or N2K shares upon the exercise of employee stock options or otherwise as compensation. Further, the discussion and the tax opinions do not address the federal income tax consequences of the mergers to holders of N2K common stock that also hold a contractual right to require N2K to repurchase their stock. -28- The Merger The discussion above and the tax opinions address the material federal income tax consequences of the mergers to holders not covered by special rules, but does not purport to be a complete analysis or description of all potential federal income tax consequences of the mergers. In addition, the discussion above and the tax opinions do not address tax consequences which may vary with, or are contingent on, individual circumstances. Moreover, this discussion and the tax opinions do not address any non-income tax or any foreign, state or local tax consequences of the mergers. This discussion and the tax opinions do not address the tax consequences of any transaction other than the mergers. We strongly urge you to consult with your tax advisor to determine the particular United States federal, state, local or foreign income or other tax consequence of the mergers to you. Dissenters' Rights N2K Shareholders The holders of N2K common stock are not entitled to appraisal rights in connection with respect to the approval and adoption of the N2K merger proposal. CDnow Shareholders The Pennsylvania corporate law grants CDnow shareholders dissenters' rights in the CDnow merger. A CDnow shareholder may object to the CDnow merger proposal and demand in writing that CDnow pay the fair value of their shares. We attached a copy of Subchapter 15D of the Pennsylvania corporate law as Appendix IV to the joint proxy statement/prospectus. Subchapter 15D describes the required procedure a CDnow shareholder wishing to dissent must follow. Failure to comply with the procedure may cause a termination of your dissenters' rights. We are providing you only a summary of your rights and the procedure. Please review subchapter 15D for the complete procedure. CDnow will not give you any notice other than as described in this joint proxy statement/prospectus and as required by the Pennsylvania corporate law. Note that the Pennsylvania corporate law grants these dissenters' rights. Therefore, N2K shareholders are not entitled to such rights. What Are Dissenters' Rights? CDnow shareholders who follow the procedures of Subchapter 15D will be entitled to receive from CDnow the fair value of their shares, immediately before the effective time of the CDnow merger. Fair value takes into account all relevant factors but excludes any appreciation or depreciation in anticipation of the merger. CDnow shareholders who elect to exercise their dissenters' rights must comply with all of the procedures to preserve those rights. Shares Eligible for Dissenters' Rights. Generally, if you chose to assert your dissenters' rights, you must dissent as to all of the shares you own. The Pennsylvania corporate law distinguishes between record holders and beneficial owners. You may assert dissenters' rights as to fewer than all the shares registered in your name only if you are not the beneficial owner of all shares according to the following instructions: . Record Holder Who is Not the Beneficial Owner. A record holder may assert dissenters' rights on behalf of the beneficial owner. If you are a registered owner and you wish to exercise dissenters' rights on behalf of the beneficial owner, you must disclose the name and address of the person or persons on whose behalf you dissent. In that event, your rights shall be determined as if the dissenting shares and the other shares were registered in the names of different holders. -29- The Merger . Beneficial Owner Who is Not the Record Holder. A beneficial owner of CDnow common stock who is not also the record holder, may assert dissenters' rights. If you are a beneficial owner who is not the record holder and you wish to assert your dissenters' rights you must submit a written consent of the record holder to the Secretary of CDnow prior to the vote, but in no event later than the CDnow special meeting. You may not dissent with respect to some but less than all shares you own. Dissenters' Rights Procedures: Notice of Intention to Dissent. If you wish to exercise your dissenters' rights, you must follow procedures and refrain from taking actions, including: . file a written notice of intention to demand the fair value of your shares; . file your notice of intention to dissent with the Secretary of CDnow prior to the vote, but in no event later than the CDnow special meeting; . not make any change in your beneficial ownership of CDnow shares from the date you file the notice until the effective time of the merger; and . refrain from voting your shares for the adoption of the merger proposal. Neither a proxy nor a vote against the merger proposal will constitute the giving of the notice of intention to dissent. Shareholders who return signed, unvoted proxy cards will be deemed to have voted for the CDnow proposal and will not be entitled to dissenters' rights. Even if you file a notice of intention to dissent, the return of a proxy that does not indicate a vote against the merger proposal will invalidate your notice. Notice of Approval. If the CDnow shareholders approve the merger proposal, CDnow will mail a notice to all dissenters' who filed a notice of intention to dissent prior to the vote on the merger proposal and who refrained from voting for the adoption of the merger proposal. CDnow expects to mail the notice of approval promptly after the merger. The notice of approval will: . state where and when a demand for payment must be sent and certificates for eligible shares must be deposited in order to obtain payment; and . supply a form for demanding payment which includes a request for certification of the date on which the holder, or the person on whose behalf the holder dissents, acquired beneficial ownership of the shares. The demand form will be accompanied by a copy of Subchapter 15D. If you assert your dissenters' rights, you must ensure that CDnow receives your demand form and your certificates on or before the demand deadline. All mailings to CDnow are at your risk. Accordingly, CDnow recommends that your notice of intention to dissent, demand form and stock certificates be sent by certified mail. If you fail to file a notice of intention to dissent, fail to complete and return the demand form, or fail to deposit stock certificates with CDnow, each within the time periods provided above, you will lose your dissenters' rights under Subchapter 15D. You will retain all rights of a shareholder, or beneficial owner, until those rights are modified by effectuation of the merger. Payment of Fair Value by CDnow. Upon timely receipt of the completed demand form, the Pennsylvania corporate law requires CDnow to either: . remit to dissenters who complied with the procedures, the amount CDnow estimates to be the fair value for such dissenting shares; or . give written notice that no such remittance will be made. -30- The Merger CDnow will determine whether to make such a remittance or to defer payment for such shares until completion of the necessary appraisal proceedings. CDnow may consider the number of shares, if any, with respect to which shareholders dissented and any objections that may be raised with respect to the standing of the dissenting shareholder. The remittance or notice will be accompanied by: . the closing balance sheet and statement of income of CDnow for the fiscal year ended December 31, 1997, together with the latest available interim financial statements; . a statement of CDnow's estimate of the fair value of the shares; and . notice of the right of the dissenter to demand payment or supplemental payment, as the case may be, accompanied by a copy of Subchapter 15D. Return of Deposited Certificates. If CDnow does not remit the amount of its estimate of the fair value of the shares, it will return any deposited certificates with a notation that a demand for payment in accordance with Subchapter 15D has been made. If shares carrying this notation are transferred after that, each new certificate issued may bear a similar notation, together with the name of the original dissenting holder or owner of such shares. A transferee of such shares will not acquire by this transfer any rights in CDnow other than those which the original dissenter had after making demand for payment of their fair value. Dissenting Shareholders Estimate of Fair Value. If CDnow gives notice of its estimate of the fair value of your shares, without remitting this amount, or remits payment of its estimate of the fair value of your shares and you believe that the amount remitted or stated is less than the fair value of such shares, you may send to CDnow your own estimate of the fair value of the shares. Such estimate shall be deemed a demand for payment of the amount of the deficiency. If you do not file a holder's estimate within 30 days after the mailing by CDnow of its remittance or notice, you will only be entitled to the amount stated in the notice or remitted to you by CDnow. Resort to the Court of Common Pleas. If, after the later of, 60 days after the effective time of the merger or after the timely receipt of any holder's estimate, demands remain unpaid, CDnow may file an application for relief in the Court of Common Pleas of Montgomery County, Pennsylvania, requesting the court determine the fair value of the shares. We cannot assure you that CDnow will file this application. In the court proceeding: . all dissenters, wherever residing, whose demands have not been settled will be made parties to any such appraisal proceeding; . the court may appoint an appraiser to receive evidence and recommend a decision on the issue of fair value; and . each dissenter made a party will be entitled to recover an amount equal to the fair value of the dissenter's shares, plus interest, or if CDnow previously remitted any amount to the dissenter, any amount by which the fair value of the dissenter's shares is found to exceed the amount previously remitted, plus interest. If CDnow fails to file an application for relief, any dissenter who made a demand and who has not already settled his or her claim against CDnow may do so in the name of CDnow at any time within 30 days after the expiration of the 60- day period. If a dissenter does not file an application within the 30-day period, each dissenter entitled to file an application shall be paid CDnow's estimate of the fair value of the shares and no more, and may bring an action to recover any amount not previously remitted. Costs and Expenses of Court Proceedings. The costs and expenses of the court proceedings, including the reasonable compensation and expenses of the appraiser appointed by the court, will be determined by the court and assessed against CDnow. The court may, however, apportion and assess any part of the costs and expenses of court proceedings as it deems appropriate against all or some of the dissenters who are -31- The Merger parties and whose action in demanding supplemental payment the court finds to be in bad faith. If CDnow fails to comply substantially with the requirements of Subchapter 15D, the court may assess fees and expenses of counsel and of experts for the parties as it deems appropriate against CDnow and in favor of any or all dissenters. The court may assess fees and expenses of counsel and experts against either CDnow or a dissenter, if the court finds that a party acted in bad faith. If the court finds that the services of counsel for any dissenter substantially benefitted other dissenters similarly situated and should not be assessed against CDnow, it may award counsel reasonable fees to be paid out of the amounts awarded to the dissenters who benefitted. No Right to an Injunction. Under Pennsylvania corporate law, a CDnow shareholder has no right to obtain, in the absence of fraud or fundamental unfairness, an injunction against the merger proposal, nor any right to valuation and payment of the fair value of the holder's shares because of the merger proposal, except to the extent provided by the dissenters' rights provisions of Subchapter 15D. Pennsylvania corporate law also provides that, absent fraud or fundamental unfairness, the rights and remedies provided by Subchapter 15D are exclusive. -32- Comparative Per Share Market Price and Dividend Information Comparative Per Share Market Price and Dividend Information CDnow common stock and N2K common stock are listed for quotation on the Nasdaq National Market System. The Nasdaq symbol for CDnow is CDNW. The N2K Nasdaq symbol is NTKI. The following table reports the high and low sale prices of CDnow common stock and N2K common stock.
Market Price of Market Price of CDnow Common Stock N2K Common Stock ---------------------------------------------------------------- High Sale Low Sale High Sale Low Sale 1997 Fourth Quarter(1) N/A N/A $30.75 $13.06 1998 First Quarter(2) $27.25 $18.25 $32.50 $16.00 Second Quarter $39.00 $16.00 $34.63 $14.75 Third Quarter $27.50 $ 7.00 $22.31 $ 7.19 Fourth Quarter $39.25 $ 7.06 $20.06 $ 4.50 1999 First Quarter (through February 8, 1999) $24.94 $17.75 $17.88 $12.38
On October 22, 1998, the last full trading day prior to the public announcement of the merger, the last reported sale price was $9.44 per share for CDnow common stock and $5.50 per share for N2K common stock. The stock prices on the above table may reflect the impact of several news articles published on October 7, 1998 that reported the merger discussions between CDnow and N2K as well as the subsequent press release issued by CDnow and N2K, also on October 7, 1998, acknowledging those discussions. See "The Merger-- Background of the Merger" and "Opinions of Financial Advisors--Opinions of N2K's Financial Advisor." On February 8, 1999, the last reported sale price was $19.56 per share for CDnow common stock and $14.81 per share for N2K common stock. We urge shareholders to obtain current market quotations prior to making any decision with respect to the merger. Neither CDnow nor N2K has paid any cash dividends on their common stock. We do not anticipate paying any cash dividends on the CDnow/N2K common stock in the foreseeable future. Any determination to pay cash dividends will be at the discretion of our board and will depend upon our financial condition, operating results, capital requirements and other factors as our board deems relevant. -33- The Special Meetings The Special Meetings CDnow and N2K will each hold a special meeting of its shareholders. Our boards of directors provide you this joint proxy statement/prospectus in order to solicit your proxy for use at the special meetings. We mailed this joint proxy statement/prospectus and accompanying form of proxy to you on or about February 16, 1999. Times and Places; Purposes CDnow Special Meeting CDnow will hold its special meeting at: CDnow, Inc. corporate headquarters 1005 Virgina Drive Fort Washington, Pennsylvania March 17, 1999, 9:00 a.m., local time. At the CDnow special meeting, the shareholders of CDnow will consider and vote upon . the CDnow merger proposal; . the equity plan proposal; and . such other matters as may properly come before the CDnow special meeting. N2K Special Meeting N2K will hold its special meeting at: N2K Inc., corporate headquarters 55 Broad Street, New York, New York, March 17, 1999, 9:00 a.m. local time. At the N2K special meeting, the shareholders of N2K will consider and vote upon: . the N2K merger proposal; . the equity plan proposal; and . such other matters as may properly come before the N2K special meeting. Voting Rights; Votes Required for Approval CDnow. The CDnow board fixed the close of business on January 26, 1999, as the CDnow record date. Only holders of record of shares of CDnow common stock on January 26, 1999 are entitled to notice of and to vote at the CDnow special meeting. On the CDnow record date, there were approximately 17,875,064 shares of CDnow common stock outstanding and entitled to vote at the CDnow special meeting held by approximately 167 shareholders of record. At the CDnow special meeting: . each record holder is entitled to one vote per share; . the presence in person or by proxy, of the holders of a majority of the outstanding shares is necessary to constitute a quorum; . adoption and approval of the CDnow merger proposal and the equity plan proposal requires the affirmative vote, in person or by proxy, of a majority of the shares cast at the meeting; and . the CDnow shareholder support agreement obligates Jason Olim to vote his shares in favor of the CDnow merger proposal. Jason Olim holds 16.7% of the issued and outstanding shares of CDnow. N2K. The N2K board fixed the close of business on January 26, 1999, as the N2K record date. Only holders of record of shares of N2K common stock on January 26, 1999 are entitled to notice of and to vote at the N2K special meeting. On the N2K record date, there were approximately 14,434,653 shares of N2K common stock outstanding and entitled to vote at the N2K special meeting held by approximately 232 shareholders of record. -34- The Special Meetings At the N2K special meeting: . each record holder is entitled to one vote per share; . the presence in person, or by proxy, of the holders of a majority of the shares entitled to vote is necessary to constitute a quorum; . adoption and approval of the N2K merger proposal requires the affirmative vote, in person or by proxy, of a majority of the shares outstanding; . adoption and approval of the equity plan proposal requires the affirmative vote, in person or by proxy, of a majority of the shares entitled to vote and present in person or by proxy at the special meeting; and . the N2K shareholder support agreement obligates Lawrence L. Rosen, Jonathan V. Diamond, R. David Grusin, Bruce Johnson and James E. Coane to vote their shares in favor of the N2K merger proposal. These shareholders hold 16.6% of the issued and outstanding shares of N2K. Proxies . Completed Proxies. If you sign, complete and return a proxy and your company receives the proxy prior to or at your special meeting, your proxy will be voted as you instructed. . Proxies with No Instructions. If you sign and return a proxy but you do not provide instructions as to your vote, a CDnow shareholder's proxy will be voted FOR the CDnow merger proposal and equity plan proposal, and an N2K shareholder's proxy will be voted FOR the N2K merger proposal and the equity plan proposal. . Proxies Marked Abstain--The Merger Proposals. If you execute and return a proxy marked ABSTAIN, your proxy will count for purposes of determining whether there is a quorum and for purposes of determining the voting power and number of shares entitled to vote at the special meetings but your proxy will not be voted. Due to differences in the corporate laws of Pennsylvania and Delaware, proxies marked ABSTAIN will be treated differently with respect to the CDnow merger proposal and the N2K merger proposal as follows: CDnow Shareholder Proxy Marked ABSTAIN: N2K Shareholder Proxy Marked ABSTAIN: Under Pennsylvania law, a proxy marked ABSTAIN is not Under Delaware law, approval of considered a cast vote. the N2K merger proposal Approval of the CDnow merger requires the affirmative vote proposal requires the of a majority of the shares affirmative vote of a outstanding. Accordingly, majority of the votes cast proxies marked ABSTAIN will at the meeting. Accordingly, have the effect of a vote proxies marked ABSTAIN will against the N2K merger have no effect on the proposal. approval of the CDnow merger proposal. . Broker Non-Votes--The Merger Proposals. New York Stock Exchange broker- dealer rules generally preclude brokers and nominees from exercising their voting discretion. Absent specific instructions from the beneficial owner of shares, brokers and nominees these rules do not give them the power to vote on the merger proposal. We will count shares represented by broker non-votes for purposes of determining whether there is a quorum at the special meetings. Broker non-votes will have the same effect as a proxy marked ABSTAIN as follows: CDnow Broker Non-Votes: N2K Broker Non-Votes: Broker non-votes will have Broker non-votes will have the no effect on the approval of effect of a vote against the the CDnow merger proposal. N2K merger proposal. -35- The Special Meetings . Proxies Marked Abstain--The Equity Plan Proposal. CDnow Shareholder Proxy Marked ABSTAIN: N2K Shareholder Proxy Marked ABSTAIN: Under Pennsylvania law, a proxy marked ABSTAIN is not Under Delaware law, approval of considered a cast vote. the equity plan proposal Approval of the equity plan requires the affirmative vote of proposal requires the a majority of the shares present affirmative vote of a in person or represented by majority of the votes cast proxy at the special meeting and at the meeting. Accordingly, entitled to vote. Accordingly, proxies marked ABSTAIN will proxies marked ABSTAIN will have have no effect on the the effect of a vote against the approval of the equity plan equity plan proposal. proposal. . Broker Non-Votes--The Equity Plan Proposal. Shares represented by "broker non-votes" will have the same effect as a proxy marked ABSTAIN as follows: CDnow Broker Non-Votes: N2K Broker Non-Votes: Broker non-votes will have Broker non-votes will have the no effect on the approval of effect of a vote against the N2K the CDnow equity plan equity plan proposal. proposal. . Other Business. We are not aware of any business for consideration at the special meetings other than as described in this joint proxy/statement prospectus. However, if matters are properly brought before the special meetings or any adjournments or postponements, then the person appointed as proxies will have the discretion to vote or act thereon according to their best judgment. . Adjournments. We may adjourn our special meetings in order to solicit additional proxies. Proxies marked AGAINST approval and adoption of the CDnow merger proposal or the N2K merger proposal will vote against a proposal to adjourn the meeting(s) for the purpose of soliciting additional proxies. Neither company intends to seek an adjournment of its special meeting. . Revocation. You may revoke your proxy at any time prior to its use. In order to revoke your proxy, you must deliver to Matthew Olim, Secretary of CDnow, or Bruce Johnson, Secretary of N2K, a signed notice of revocation or you must deliver a later dated proxy changing your vote. In addition, you may choose to attend your special meeting and vote in person. Please realize that simply attending the meeting will not in itself constitute the revocation of your proxy. . Confidentiality of Proxies. It is our policy to keep confidential proxy cards, ballots and voting tabulations that identify individual shareholders. Realize that disclosure may be required by law and in other limited circumstances. . Costs of Solicitation. Each company will pay the costs associated with soliciting proxies from its shareholders. In addition to solicitation by mail, CDnow retained D.F. King & Co. to aid in the solicitation of proxies for a fee of $4,500 plus expenses. N2K has not retained a proxy solicitation firm. In order to ensure sufficient representation at our meetings, we may request by telephone or telegram the return of your proxy card. Please assist us by promptly returning your proxy card without delay. . CDnow Shareholder Proxies and Dissenters' Rights. If you are a CDnow shareholder and you plan to assert your dissenter's rights please review "The Merger--Dissenters' Rights" for a review of how your proxy may affect your rights. Please do not send your stock certificates with your proxy card. We will mail you a separate transmittal form with instructions for the surrender of your certificates as soon as practicable after the consummation of the merger. -36- Directors and Management of CDnow/N2K Following the Merger Directors and Management of CDnow/N2K Following the Merger Directors The CDnow/N2K bylaws address the number and classification of the CDnow/N2K board of directors. The CDnow/N2K bylaws provide that: . the board of directors will consist of nine persons divided among three classes; . four members of the board of CDnow/N2K will be CDnow directors, namely persons serving as a director of CDnow on October 22, 1998 or any person replacing such director who is designated by the remaining CDnow Directors; . three members of the board of CDnow/N2K will be N2K directors, namely persons serving as N2K directors on October 22, 1998 or any person replacing such director who is designated by the remaining N2K Directors; and . initially, two members of the board of CDnow/N2K will be independent directors jointly selected by the CDnow directors and the N2K directors. Only persons who did not have on October 22, 1998 or on the date such person is elected as a director of CDnow/N2K, and have not had within the three year period prior to the date of his/her election, any material employment, business affiliation or association, or immediate family relationship with either CDnow or N2K, or any person or entity controlling, controlled by or under common control with either N2K or CDnow may be independent directors. The classes of the board of directors shall be as follows:
Class I Class II Class III . one CDnow director; . one CDnow director; . two CDnow directors; . one N2K director; and . one N2K director; and and . one independent . one independent . one N2K director. director. director.
Until December 31, 2002, the CDnow/N2K bylaws obligate the board of CDnow/N2K, subject to their fiduciary duties, to nominate for election as directors the designees of the N2K directors or the CDnow directors as may be necessary to ensure that there will be four CDnow directors and three N2K directors. The foregoing provisions of the bylaws of CDnow/N2K will be effective until further amended by an 80% vote of the entire board of CDnow/N2K. We expect the CDnow/N2K directors to include: CDnow Directors Jason Olim, 29 years old, co-founded CDnow in February 1994 and has been its President since its inception and its Chief Executive Officer since November 1997. Previously, Mr. Olim was employed in the Professional Services group of Soft-Switch, Inc. where he designed and built software systems for routing mail and documents for domestic and international clients. Mr. Olim received a Bachelor of Arts degree in Computer Science from Brown University. Mr. Olim is expected to serve as President and Chief Executive Officer of CDnow/N2K. Jason Olim and Matthew Olim are brothers. Matthew Olim, 29 years old, co-founded CDnow in February 1994 and has been responsible for the development of its system architecture and transactions systems. Mr. Olim received a Bachelor of Arts degree in Astrophysics from Columbia University. Jason Olim and Matthew Olim are brothers. Patrick Kerins, 43 years old, has been a director of CDnow since August 1997. Mr. Kerins has been Managing Director of Grotech Capital Group IV, LLC since 1997. From 1987 to March 1997, he served in the Investment Banking Division of Alex. Brown & Sons Incorporated, most recently as a Managing Director from January 1994 until March 1997. -37- Directors and Management of CDnow/N2K Following the Merger John Regan, 39 years old, has been a director of CDnow since July 1997. Since February 1995, Mr. Regan has been a Vice President of Keystone Venture IV Management Company, L.P., which is the general partner of Keystone Venture IV, L.P. From 1989 to February 1995, he was an associate and then general partner of Apex Management Partnership, a venture capital partnership. N2K Directors Lawrence L. Rosen, 58 years old, has served as Chief Executive Officer and Chairman of the Board of N2K since February 1996. From June 1995 until February 1996, Mr. Rosen was Co-Chairman of New York N2K. (On February 13, 1996 New York N2K merged into Telebase Systems, Inc. and then changed its name to N2K.) In 1976, Mr. Rosen and Robert David Grusin, also a director of both N2K and CDnow/N2K, formed Grusin/Rosen Productions to produce artists' recordings for major record labels. Between 1978 and 1982, Mr. Rosen served as producer, recording engineer and as President of Arista/GRP Records under a global label distribution agreement with Arista Records. In 1982, Messrs. Rosen and Grusin co-founded GRP as an independent record company. In 1990, GRP was acquired by MCA Inc. and Mr. Rosen served as President and Chief Executive Officer of GRP which became a division of the MCA Music Entertainment Group until 1995. Mr. Rosen attended the Manhattan School of Music. In 1997, Mr. Rosen was named Entrepreneur of the Year by Ernst & Young LLP in the Entertainment and News Media category. Jonathan V. Diamond, 39 years old, has served as a Vice Chairman and a director of N2K since February 1996. From June 1995 to February 1996, Mr. Diamond served as Co-Chairman of New York N2K. Mr. Diamond was an investor in and director of Telebase Systems, Inc. from September 1994 to February 1996. Mr. Diamond founded and was Chairman, from 1991 to 1995, of the J. Diamond Group, a holding company which acquired and launched six media and entertainment companies in the U.S. and the U.K. From 1984 to 1990, Mr. Diamond served as a director and Executive Vice President of GRP, where he was responsible for its business and financial strategy. Prior to his association with GRP, Mr. Diamond founded Diamond Investments, which acquired or launched companies in the media, entertainment and broadcasting areas. Mr. Diamond holds a B.A. in Economics and Music from the Honors College of the University of Michigan and an M.B.A. from Columbia University's Graduate School of Business. Mr. Diamond has been serving as the Acting CEO of N2K since October 1998. Mr. Diamond is expected to serve as Chairman of the Board of CDnow/N2K. Robert David Grusin, 64 years old, has served as a Vice Chairman and director of N2K since February 1996. From June 1995 to February 1996, Mr. Grusin served as a director of New York N2K. In 1976, Mr. Grusin and Mr. Rosen, also a director of both CDnow/N2K and N2K, formed Grusin/Rosen Productions to produce artists' recordings for major record labels. In 1982, Messrs. Grusin and Rosen co-founded GRP as an independent record company. In 1990, GRP was acquired by MCA Inc. and Mr. Grusin served as Executive Vice President of GRP, which became a division of the MCA Music Entertainment Group, until 1995. Mr. Grusin, a composer, producer and musician, is the recipient of ten Grammy Awards and one Academy Award. Mr. Grusin serves on the College of Music Advisory Board at the University of Colorado, and has received honorary doctorates from both Berklee College of Music and the University of Colorado. Committees of the Board of Directors From the closing of the merger until successors are elected or appointed, we expect the members of the committees of the board of directors of CDnow/N2K to be as follows: Executive Committee . Jonathan Diamond . Jason Olim . two independent directors -38- Directors and Management of CDnow/N2K Following the Merger Audit Committee . John Regan . an independent director (or Patrick Kerins, if an independent director has not been selected by the date we close the merger, but once an independent director is selected, that person will replace Mr. Kerins.) Compensation Committee . Patrick Kerins . John Regan . an independent director Nominating Committee . Jonathan Diamond . Jason Olim . an independent director (or Patrick Kerins, if an independent director has not been selected by the date we close the merger, but once an independent director is selected, that person will replace Mr. Kerins.) Compensation of Directors Directors who are employees of CDnow/N2K will not receive any compensation for service on the CDnow/N2K board. We have not yet determined the specific terms of the compensation to be paid to non-employee directors of CDnow/N2K. Management and Executive Officers of CDnow/N2K In addition to Jonathan Diamond and Jason Olim, we expect the senior management team and executive officers of CDnow/N2K to include the following individuals from CDnow and N2K: Rod Parker, age 55, Senior Vice President of Marketing. Mr. Parker has been the Senior Vice President of Product Management and Marketing for CDnow since June 1997. Mr. Parker served as the Vice President of Interactive Merchandising at Time Warner Cable Programming, from September 1995 to June 1997; General Manager of Catalog I, a joint venture between Time Warner and Spiegel, Inc., from October 1993 to September 1995; and in various other positions with Spiegel, Inc. (including Vice President, New Media and Vice President, Creative Division) from April 1987 to September 1995. Prior to joining CDnow Mr. Parker spent more than twenty years in the advertising industry, including service as a Senior Vice President in account management with Ogilvy and Mather. J.J. Rosen, age 30, Senior Vice President of International. Mr. Rosen has served as President, Music Boulevard Network, a division of N2K, since January 1998. From February 1996 to January 1998, Mr. Rosen served as Senior Vice President and General Manager, Music Boulevard Network. From June 1995 to the merger, Mr. Rosen served as President of New York N2K. From 1988 to 1992, Mr. Rosen served in various capacities at GRP, including serving as head of its music licensing department. Mr. Rosen holds a B.A. in Political Economics from Tulane University and a M.B.A. in Finance from Rutgers University. J.J. Rosen is the son of Lawrence L. Rosen. David Capozzi, age 43, Vice President, General Counsel and Secretary. Mr. Capozzi has been a Vice President and the General Counsel of CDnow since April 1998. From February 1996 to April 1998, Mr. Capozzi was an attorney with the law firm of Morgan, Lewis & Bockius LLP. Mr Capozzi also has over 14 years of experience in varying capacities in software design and development, including seven years with Marriott Corporation. Mr. Capozzi holds a Juris Doctorate from The American University, Washington College of Law, a Masters in Business Administration from the Katz Graduate School of Business of the University of Pittsburgh and a Bachelor of Science in Computer Science from the University of Pittsburgh. -39- Directors and Management of CDnow/N2K Following the Merger Steve Dong, age 39, Vice President of Operations. Mr. Dong has been the Vice President of Operations of CDnow since May 1998. Mr. Dong served as the Director of Operations at Egghead Computer from July 1995 to May 1998. From January 1994 to July 1995, Mr. Dong was Chief Operating Officer of Mac's Place, a wholly owned subsidiary of Egghead Computer. From 1987 to 1994, Mr. Dong held various management positions with Egghead Software including Director of Distribution and Transportation. Michael Krupit, age 34, Vice President of Technology. Mr. Krupit has been the Vice President of Technology of CDnow since October 1997 and was the Director of Technology from April 1997 to October 1997. From February 1994 to March 1997, Mr. Krupit was the Director of Technology and Product Development at Infonautics, Inc., a provider of searching, viewing, and retrieval applications for the internet. Mr. Krupit was Development Manager at Verity, Inc., a provider of online information and archive services, from October 1989 to November 1993. David Pakman, age 30, Vice President of Business and Product Development. Mr. Pakman has served as Vice President of Business and Product Development for N2K since October 1998. From December 1997 to October 1998, Mr. Pakman served as the Vice President of Business Development for N2K. Mr. Pakman joined N2K in April 1997 as the Senior Director of Business Development. From December 1994 to March 1997, Mr. Pakman served as the Music Evangelist and Interactive Music Manager of Apple Computer Inc.'s Music Group, which he co-founded. Mr. Pakman is a graduate of the University of Pennsylvania's School of Engineering and Applied Science. Some of the significant accomplishments of Mr. Pakman's career are his co-founding of the Macintosh New York Music Festival, his role as co- producer of the industry's first music-oriented webcast as well as many later webcasts, including the then-largest webcast of the 1997 GRAMMY Awards. He currently manages N2K's relationships with major business partners and artists. Robert Saltzman, age 46, Vice President of Sales. Mr. Saltzman has been the Vice President of Strategic Business Development of CDnow since December 1997. Mr. Saltzman served as the Director of Business Development at Bell Atlantic Network Integration from November 1995 to December 1997. From 1987 to November 1995, Mr. Saltzman held various sales and marketing positions with Unisys Corporation. Joel Sussman, age 50, Vice President and Chief Financial Officer. Mr. Sussman has been Vice President and Chief Financial Officer of CDnow since September 1997. From June 1995 to September 1997, Mr. Sussman was an independent financial management consultant and served as Interim Chief Financial Officer of a number of companies, including CDnow. From July 1994 to June 1995, Mr. Sussman was Vice President, Finance and Administration, and Chief Financial Officer of Personnel Data Systems, Inc. From January 1991 to December 1994, Mr. Sussman was Vice President of Finance and Chief Financial Officer of The Devereux Foundation. Prior to January 1991, Mr. Sussman served for 10 years as Treasurer of Decision Data, Inc. and six years in commercial banking and leasing. Mr. Sussman is a Certified Public Accountant and Certified Management Accountant and holds a Masters in Business Administration from the Wharton School of the University of Pennsylvania. Executive Compensation The CDnow/N2K board will rely on its compensation committee, composed of non- employee directors, to recommend the form and amount of compensation to be paid to CDnow/N2K's executive officers. For information regarding employment agreements with the executive officers that will be in effect following the merger, see "Interests of CDnow and N2K Executive Officers and Directors in the Merger." -40- Interests of CDnow and N2K Executive Officers and Directors in the Merger Interests of CDnow and N2K Executive Officers and Directors in the Merger In considering the respective recommendations of the CDnow board and the N2K board with respect to the merger, you should be aware that officers of CDnow and N2K, including some officers who are also directors, have interests in the merger that are different from, or in addition to yours. Jason Olim and Matthew Olim, executive officers of CDnow, were also members of CDnow's board of directors when the CDnow board approved the CDnow merger. Five executive officers of N2K, Lawrence Rosen, Jonathan Diamond, Robert David Grusin, James Coane, and Bruce Johnson, were also members of N2K's board of directors when the N2K board approved the N2K merger. Employment Agreements with CDnow/N2K Jonathan Diamond Employment Agreement. Jonathan Diamond will serve as the Chairman of the Board and as a director of CDnow/N2K after the closing of the merger, under an employment agreement to be dated as of the closing of the merger. Mr. Diamond's employment will begin, and he will be elected Chairman of the Board of CDnow/N2K board, as of the closing of the merger. The initial term of Mr. Diamond's employment is three years. Mr. Diamond's employment term will automatically renew for consecutive one year terms unless notice is delivered, by Mr. Diamond or CDnow/N2K, 120 days prior to the expiration of such term. Mr. Diamond's base compensation during his employment term will be at least $250,000. The compensation committee of the CDnow/N2K board of directors will review Mr. Diamond's compensation at least annually. The CDnow/N2K board may increase but not decrease his compensation. Each year, Mr. Diamond will also receive an annual bonus in an amount to be determined by the compensation committee of the CDnow/N2K board. Mr. Diamond will be entitled to participate in any employee benefit plans of CDnow/N2K and to receive other incentive compensation, including stock option grants. The Diamond employment agreement may be terminated by either party. Mr. Diamond's employment may only be terminated by a vote of 80% of the members of the CDnow/N2K board of directors at a meeting of the CDnow/N2K board called and held for that purpose. However, this 80% requirement shall not apply to the board's decision as to whether to renew the employment agreement at its expiration date. Mr. Diamond is entitled to severance benefits, including continued salary, bonus, benefits and the vesting of unvested options, if his employment is terminated by CDnow/N2K or if he terminates employment by reason of CDnow/N2K's material breach of the employment agreement. If there is a change in control of CDnow/N2K, and Mr. Diamond's employment terminates for any reason, he will receive the severance benefits described above and vesting of his options. Mr. Diamond will serve as a member of the CDnow/N2K board of directors and currently serves as an N2K director. See "Directors and Management of CDnow/N2K Following the Merger--Directors". The Diamond employment agreement provides that at the closing of the N2K merger his existing agreement with N2K, dated February 13, 1996, will terminate, except that Mr. Diamond's option to purchase 127,726 shares of CDnow/N2K common stock will be fully vested and exercisable. Jason Olim Employment Agreement. Jason Olim will serve as the Chief Executive Officer, President and as a director of CDnow/N2K after the closing of the merger under an employment agreement to be dated as of the closing of the merger. Mr. Olim does not currently have an employment agreement with CDnow. Mr. Olim's employment and director position will begin at the closing of the merger. The initial term of Mr. Olim's employment is three years. Mr. Olim's employment term will automatically renew for consecutive one year terms unless notice is delivered, by Mr. Olim or CDnow/N2K, 120 days prior to the expiration of such term. -41- Interests of CDnow and N2K Executive Officers and Directors in the Merger Mr. Olim's base salary during his employment term will be at least $250,000. The compensation committee of the CDnow/N2K board of directors will review Mr. Olim's salary at least annually. The CDnow/N2K board may increase but not decrease Mr. Olim's base salary. Each year, Mr. Olim will also receive an annual bonus in an amount to be determined by the compensation committee of the CDnow/N2K board. Mr. Olim shall be entitled to participate in employee benefit plans of CDnow/N2K and to receive other incentive compensation, including stock option grants. Mr. Olim's participation in CDnow/N2K's incentive plans provide him the opportunity to earn, in the aggregate on a year-to-year basis, short- term and long-term incentive compensation at least equal to the aggregate incentive compensation that is earned by any other executive officer of CDnow/N2K or an affiliated company. The Olim employment agreement may be terminated by either party. Mr. Olim's employment may only be terminated by a vote of 80% of the members of the CDnow/N2K board of directors at a meeting of the CDnow/N2K board called and held for that purpose. However, this 80% requirement shall not apply to the board's decision as to whether to renew the employment agreement at its expiration date. Mr. Olim is entitled to severance benefits including continued salary, bonus, benefits and the vesting of unvested stock options, if his employment is terminated by CDnow/N2K or if he terminates employment for good reason. If there is a change in control of CDnow/N2K, half of Mr. Olim's unvested stock options will become fully vested. Mr. Olim will serve as a member of the CDnow/N2K board of directors and currently serves as a CDnow Director. See "--Directors and Management of CDnow/N2K Following the Merger--Directors". Interests of N2K Directors and Executive Officers Under an employment agreement between N2K and Lawrence L. Rosen dated February 13, 1996, the merger will constitute a change in control entitling Mr. Lawrence Rosen to payments and benefits as described below. If, after the closing of the merger, Mr. Lawrence Rosen's employment terminates, he will be entitled to: . a lump sum payment equal to 18 months of salary at the time of the merger and bonus; . health care and disability benefits for 18 months; and . the immediate vesting of all options granted under his employment agreement. If the merger closes during the first quarter of 1999, the lump sum payment that Mr. Lawrence Rosen is entitled to receive is approximately $375,000, and options to purchase 127,726 shares of CDnow/N2K common stock at a weighted average exercise price of $9.48 will immediately vest and be exercisable. We do not expect that Mr. Lawrence Rosen will continue to be employed by CDnow/N2K after the merger. Under an employment agreement between N2K and Robert David Grusin dated February 13, 1996, the merger will constitute a change in control entitling Mr. Grusin to payments and benefits as described below. If, after the closing Mr. Grusin's employment terminates, he will be entitled to: . a lump sum payment equal to 18 months of salary at the time of the merger and bonus; . health care and disability benefits for 18 months; and . the immediate vesting of all options granted under his employment agreement. If the merger closes during the first quarter of 1999, the lump sum payment that Mr. Grusin is entitled to receive is approximately $150,000 and options to purchase 127,726 shares of CDnow/N2K common stock at a weighted average exercise price of $9.48 would immediately vest and be exercisable. -42- Interests of CDnow and N2K Executive Officers and Directors in the Merger We do not expect that Mr. Grusin will continue to be employed by CDnow/N2K after the merger. Under an employment agreement between Telebase Systems, Inc. and James E. Coane dated May 1, 1987, if Mr. Coane's employment is terminated as a result of the merger, Mr. Coane will be entitled to: . continuation of salary payments over an 18 month period; and . continuation of benefits over an 18 month period. . Mr. Coane's annual salary is $175,000. We do not expect that Mr. Coane will continue to be employed by CDnow/N2K after the merger. Under an employment agreement between Telebase Systems, Inc. and Bruce Johnson dated February 8, 1988, if Mr. Johnson's employment is terminated as a result of the merger, Mr. Johnson will be entitled to: . continuation of salary payments over a 12 month period; and . continuation of benefits over a 12 month period. . Mr. Johnson's annual salary is $150,000. We do not expect that Mr. Johnson will continue to be employed by CDnow/N2K after the merger. Under an employment agreement between N2K and Jerold Rosen dated January 13, 1996, as amended on October 14, 1998, if Mr. Jerold Rosen's employment is terminated as a result of the merger, he will be entitled to: . continuation of salary payments over a 12 month period; and . continuation of benefits over a 12 month period. . Mr. Jerold Rosen's salary is currently $140,000. After the merger, we expect that Mr. Jerold Rosen will continue to be employed by CDnow/N2K and will serve as Senior Vice President of International. Under an employment agreement between N2K and Arthur S. Weiner dated October 1, 1997, options that were granted Mr. Weiner under his employment agreement will vest upon a change in control. As a result of the merger, options to purchase 22,134 shares of CDnow/N2K common stock at a weighted average exercise price of $23.80 per share will vest and be exercisable. As Mr. Weiner will not serve as general counsel of CDnow/N2K following the merger, N2K believes that under his employment agreement with N2K, Mr. Weiner is entitled to terminate his employment and receive the following: (a) until December 31, 2000, his annual salary and any performance bonuses; and (b) continuation of benefits until December 31, 2000. Mr. Weiner's annual salary is currently $200,000. Beginning January 1, 2000, Mr. Weiner's annual salary will increase to $225,000. Under an employment agreement between N2K and David Pakman dated July 10, 1998, if Mr. Pakman's employment is terminated as a result of the merger, Mr. Pakman will be entitled to: . continuation of his salary over a 12 month period; and . continuation of benefits over a 12 month period. . Mr. Pakman's annual salary is currently $110,000. After the merger, we expect that Mr. Pakman will be employed as Vice President of Business and Product Development. -43- Interests of CDnow and N2K Executive Officers and Directors in the Merger Vesting of Options--N2K Executive Officers. The terms of the various stock option plans of N2K and employment agreements and other arrangements, provide that the options and warrants to purchase shares which have been granted to various parties will automatically vest upon the merger. We agreed to a one- year extension of a portion of Messrs. Grusin's and Rosen's options. The following table identifies executive officers of N2K and the options that vest as a result of the merger. The information in the following table assumes that options for N2K common stock were converted into options for an equivalent amount of CDnow/N2K common stock at the exchange ratio of one share of N2K common stock for .83 of a share of CDnow/N2K common stock. Value is based on the closing price of N2K common stock on the Nasdaq on February 1, 1999 less the exercise price per share of N2K options.
Number of Value of Number of options which Value of options all options vested options become vested exercisable as exercisable as of at the closing a result of the at closing Name February 1, 1999 of the merger merger of the merger ---- ---------------- -------------- ---------------- ------------- Lawrence Rosen 206,883 127,726 $896,535.52 $3,450,056.20 Jonathan Diamond 207,920 127,726 $896,636.52 $3,467,431.20 Robert David Grusin 206,883 127,726 $896,636.52 $3,450,056.20 James E. Coane 60,632 3,890 $52,737.00 $875,755.00 Arthur S. Weiner 11,067 22,134 $0.00 $0.00 Bruce Johnson 35,765 2,594 $34,500.20 $497,885.00
Interest of CDnow Executive Officer Under the severance agreement between CDnow and David A. Capozzi dated September 4, 1998, if as a result of the merger Mr. Capozzi's employment is terminated or Mr. Capozzi determines to resign because he is not offered a position that is the equivalent of the General Counsel position he held at CDnow prior to the merger, then Mr. Capozzi will be entitled, with some limitations, to: . receive twelve months severance pay (Mr. Capozzi's current annual salary is $140,000); . receive twelve months continuation of health care and disability benefits; . have the right to exercise his vested stock options for ninety days from last date of his employment with CDnow; and . receive $10,000 in relocation expenses should Mr. Capozzi relocate outside the Philadelphia metropolitan area while Mr. Capozzi is receiving payments pursuant to this agreement. We expect that Mr. Capozzi will serve as CDnow/N2K's General Counsel. Indemnification and Insurance The merger agreement requires CDnow/N2K to provide indemnification and liability insurance arrangements for officers and directors of CDnow and N2K. See "The Merger Agreement--Material Covenants--Director and Officer Indemnification." -44- The Merger Agreement The Merger Agreement The following summarizes the material terms of the merger agreement, a copy of which we have attached as Appendix I to this joint proxy statement/prospectus and is incorporated herein by reference. We urge you to read the merger agreement in its entirety for a more complete description of the terms and conditions of the merger. The Merger Following shareholder approval and the satisfaction of the other conditions to the merger, N2K and CDnow will become wholly-owned subsidiaries of CDnow/N2K. Current CDnow and N2K shareholders will become holders of CDnow/N2K common stock. On the date the merger closes, CDnow and N2K will file a certificate of merger and articles of merger with the Secretaries of State of Pennsylvania and Delaware. See "--Conditions to Obligations to Effect the Merger." Conversion of Shares The N2K Merger . Each share of N2K common stock will be converted into .83 of a share of CDnow/N2K common stock. . Under Delaware law, N2K shareholders are not entitled to appraisal rights. The CDnow Merger . Each share of CDnow common stock will be converted into one share of CDnow/N2K common stock. . Under Pennsylvania law, CDnow shareholders are entitled to dissenters' rights. See "The Merger--Dissenters' Rights." Exchange of Stock Certificates After the closing of the merger, an exchange agent will mail you a letter of transmittal and instructions for exchanging your CDnow or N2K stock certificates for your shares of CDnow/N2K common stock. N2K shareholders will also receive cash in lieu of any fractional shares. Upon surrender of a stock certificate to the exchange agent, together with the executed letter of transmittal, you will be entitled to receive shares of CDnow/N2K common stock and any cash payable in lieu of fractional shares. The surrendered CDnow or N2K stock certificates will promptly be canceled. The certificates representing shares of CDnow/N2K common stock to be issued in the exchange will be held by CDnow/N2K's Registrar and Transfer Agent, Stock Trans, Inc. No Further Ownership Rights in N2K common stock or CDnow common stock. All shares of CDnow/N2K common stock and cash in lieu of fractional shares issued in exchange for certificates of N2K common stock or CDnow common stock will be considered to have been exchanged in full payment for your shares. After the closing of the merger CDnow and N2K's transfer agents will not register transfers of shares that were outstanding prior to the closing. If shares of N2K common stock or CDnow common stock are presented to N2K, CDnow or CDnow/N2K after the mergers for any reason, the certificates will be canceled and exchanged for shares of CDnow/N2K. Fractional Shares. CDnow/N2K will not issue fractional shares of common stock in the merger. Instead of fractional shares, CDnow/N2K will pay cash without interest to holders of N2K common stock who -45- The Merger Agreement would otherwise have received a fraction of a share of CDnow/N2K common stock. The Nasdaq sales price of the CDnow/N2K common stock the day after the merger closes will determine the amount of cash paid by CDnow/N2K. Failure to Exchange. If you have not exchanged your N2K or CDnow common stock certificates within 180 days after the closing of the merger, you will have to contact the office of the General Counsel of CDnow/N2K in order to exchange your N2K or CDnow common stock for CDnow/N2K common stock and cash in lieu of fractional shares. No Liability. N2K, CDnow, CDnow/N2K and the exchange agent will not be liable to any N2K or CDnow shareholder for any shares of CDnow/N2K common stock, or cash in lieu of fractional shares, delivered to a public official pursuant to abandoned property, escheat or similar laws. Dividends and Distributions. CDnow/N2K will not pay any dividends it declared or any cash payable in lieu of fractional shares to a shareholder until the shareholder has exchanged the N2K or CDnow share certificates for shares of CDnow/N2K, as described above under "--Failure to Exchange." Following surrender of any N2K or CDnow certificates you may hold, CDnow/N2K will pay to you, without interest, the amount of any dividends declared by CDnow/N2K to which you are entitled and any cash payable in lieu of fractional shares of CDnow/N2K common stock as described under "--Fractional Shares" above. Lost Certificates. If your stock certificates of N2K or CDnow are lost, stolen, or destroyed prior to the closing of the merger, you must submit an affidavit of that fact to the office of the General Counsel of CDnow or N2K. Also, if required by CDnow/N2K, N2K or CDnow, you must post a bond in a reasonable amount as determined by CDnow/N2K, N2K or CDnow as indemnity against any potential claim regarding the lost certificates. In exchange for lost, stolen or destroyed stock certificates, after you have made the affidavit and posted the bond, the exchange agent will issue to you shares of CDnow/N2K common stock and any cash in lieu of fractional shares due. The exchange agent will also pay any unpaid dividends and distributions on shares of CDnow/N2K common stock that are deliverable upon the CDnow/N2K common stock. Representations and Warranties The merger agreement contains representations and warranties made by N2K and CDnow. These are assumptions upon which each company relied when agreeing to the merger. These representations and warranties deal with issues such as: . the organization, valid existence and good standing of N2K, CDnow and their subsidiaries, and similar corporate matters; . the capital structure of N2K and CDnow; . the authorization, execution, delivery and enforceability of the merger agreement and the stock option agreements; . the consummation of the transactions contemplated by the merger agreement and the stock option agreements and related matters; . the conflicts under charters or bylaws; . the required consents or approvals of the merger; -46- The Merger Agreement . the violations of any instruments or law; . the documents and financial statements filed by N2K and CDnow with the Securities and Exchange Commission and the accuracy of information contained in them; . the absence of undisclosed liabilities; . the absence of material adverse events or changes; . taxes and tax returns; . properties; . intellectual property; . agreements, contracts and commitments; . litigation; . environmental matters and hazardous materials; . employee benefit plans; . compliance with laws; . tax matters relating to the merger; . the accuracy of information supplied by N2K and CDnow in connection with this joint proxy statement/prospectus; . labor matters; . insurance; . opinions of financial advisors; . the absence of existing discussions with other parties; and . the inapplicability to the merger of certain provisions of the Delaware General Corporation Law and the Pennsylvania Business Corporation Law. Material Covenants The merger agreement includes a number of covenants, most of which provide parameters within which each company will operate until the merger either closes or the merger agreement is terminated. Conduct of Business From the date of the merger agreement until the closing, N2K and CDnow will: . continue to operate their respective businesses according to their customary course of business; . pay their debts and taxes when due; . pay or perform other obligations when due; and . use reasonable efforts to preserve their business organization, management team and business relationships. This conduct is subject to exceptions included in the merger agreement disclosure schedules. Additional Covenants The merger agreement also provides that, from the date of the merger agreement until the closing, N2K and CDnow will not: . accelerate, amend or change the exercise period of options or restricted stock granted under employee stock plans or authorize cash payments in exchange for options granted under employee stock plans; . declare or pay dividends on or make distributions on any of its stock, make other changes in its capitalization, or purchase or acquire any shares of their stock except from former employees, directors and consultants in accordance with termination of service agreements; -47- The Merger Agreement . issue or sell any stock or securities convertible into shares of their stock, or any subscriptions, rights, warrants or options, with some exceptions; . make any material acquisitions; . sell, lease, sell/leaseback, license or otherwise dispose of material properties or assets outside the ordinary course of business; . increase the compensation of officers or employees, other than increases to non-officer employees consistent with past practices, grant additional severance or termination pay or enter into employment or severance agreements, or take actions regarding benefit plans for its directors, officers, or employees; . amend their certificates of incorporation or bylaws, except as contemplated by the merger agreement; . incur debt for borrowed money; . take any action that is likely to result in a material breach of the merger agreement or the stock option agreements; . make or rescind any material tax elections, settle any tax claims or make a material change in their methods of reporting income or deductions for tax purposes; . settle any material litigation relating to the merger; . settle any litigation referred to on the disclosure schedules to the merger agreement that would require payment over $50,000 above the amount covered by insurance, excluding the deductible to this insurance; . enter into any agreement or contract involving an amount in excess of $250,000; . authorize or make capital expenditures in excess of $250,000 individually or as part of a series of related transactions; . make any material change in their accounting policies; . take or omit to take any action likely to result in a breach of any contract or commitment if the result would have a material adverse effect; . take any action which could adversely affect or delay the ability of the parties to obtain approval by any governmental or regulatory body required to consummate the merger; . permit their working capital to be less than specified amounts; or . take, or agree in writing to take, or have any affiliate or other third party take any of the actions described above. No Solicitation From the date of the merger agreement until the closing, we will not, directly or indirectly: . solicit or encourage any inquiries or proposals that are or could lead to a proposal for a merger, business combination or similar transaction involving the party or any of its subsidiaries, other than the merger; . engage in negotiations or discussions concerning a proposal for a merger or similar transaction; . provide public information to any person or entity relating to a proposal for a merger or similar transaction; or . agree to or recommend any proposal for a merger or similar transaction. However, we or our boards of directors may either: . furnish non-public information to or enter into discussions or negotiations with a person or entity that has made an unsolicited proposal for a merger or similar transaction; or -48- The Merger Agreement . modify or withdraw its recommendation regarding the merger or recommend an unsolicited bona fide written acquisition proposal to the shareholders of such party, if: - the board of directors believes in good faith after consultation with its financial advisor, that the proposal is reasonably capable of being completed on the terms proposed; - taking into account the strategic benefits and the prospects of CDnow and N2K as a combined company, the directors believe the proposal would result in a transaction more favorable to its shareholders over the long term than the transaction contemplated by the merger agreement; - the board of directors determines in good faith after consultation with outside legal counsel that the action is required for the board to comply with its fiduciary duties to shareholders under applicable law; - prior to furnishing non-public information to, or entering into discussions or negotiations with, the entity making the proposal for a merger or similar transaction, the board of directors receives from the entity an executed confidentiality agreement. The confidentiality agreement must have terms no less favorable to the party than those contained in the Confidentiality and Standstill agreement dated August 17, 1998 and September 25, 1998 between N2K and CDnow; or - the board is voting in compliance with Rule 14e-2 under the Securities Exchange Act of 1934 with regard to a proposal for a merger or similar transaction. We also agreed not to release a third party from, or waive a provision of, a standstill agreement or confidentiality agreement between it and another person who has made or is likely to make a proposal for a merger or similar transaction. However, the board of directors may grant a release from a standstill or confidentiality agreement if it determines that the action is required to comply with its fiduciary duties to shareholders. The merger agreement requires us to notify the other within 24 hours upon receipt of a proposal for a merger or similar transaction by a third party or upon receipt of a request for non-public information or access to its properties, books or records in connection with a proposal for a merger or similar transaction by a third party. The party providing notice is required to indicate the identity of the third party making the proposal and the terms and conditions of the proposal. The party providing notice must also continue to keep the other party informed of the status of any discussions or negotiations and the terms being discussed or negotiated. Shareholders' Meetings We agreed to call separate meetings of our shareholders to be held as promptly as practicable to vote on the merger. Subject to the discussion above under "-- No Solicitation," we each agreed to: . recommend to our shareholders adoption and approval of the merger; and . coordinate and cooperate with respect to the timing of our shareholders' meeting, and to use our best efforts to hold the meeting on the same day as the other party's shareholders' meeting and as soon as possible after the signing of the merger agreement. We each agreed to use all reasonable efforts to solicit from our shareholders proxies in favor of the merger, subject to the fiduciary duties of the board of directors. Stock Plans After the closing of the merger, each outstanding option to purchase N2K common stock or CDnow common stock will become an option to acquire CDnow/N2K common stock. The terms and conditions of the replacement CDnow/N2K option will be the same as the pre-existing N2K or CDnow option it replaces. The option will be for the number of shares of CDnow/N2K common stock the option holder would have been entitled to receive in the merger if the holder had exercised the option immediately before the merger. -49- The Merger Agreement The exercise price per share of each option after the merger will be equal to: (x) the exercise price immediately prior to the closing of the merger divided by (y) the number of whole shares of CDnow/N2K common stock the option holder would have received in the merger if the holder had exercised the option immediately before the merger (rounded up to the nearest whole cent). As of the record date for the shareholders' meetings, respectively, options to acquire 2,210,613 shares of N2K common stock and 1,043,730 shares of CDnow common stock were outstanding. As soon as practicable after the closing of the merger, CDnow/N2K will deliver to the participants in the N2K stock plans and CDnow stock plans notices of the participants' rights pursuant to the stock plans. The grants under those stock plans will continue on the same terms and conditions as they had before. CDnow/N2K will reserve for issuance a sufficient number of shares of CDnow/N2K common stock for delivery under the N2K stock plans and the CDnow stock plans. As soon as practicable after the closing of the merger, CDnow/N2K will file a registration statement on Form S-8 for the shares of CDnow/N2K common stock subject to the options and will use reasonable efforts to maintain the effectiveness of that registration statement for as long as the options remain outstanding. Director and Officer Indemnification After the closing of the merger, CDnow/N2K, N2K and/or CDnow will indemnify our present and former directors and officers. The directors and officers will be indemnified against costs or expenses (including attorneys' fees), liabilities or amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation pertaining to any matter existing at or prior to the closing of the merger. The officers and directors will be indemnified whether the claim is asserted or claimed prior to, at or after the closing of the merger. The indemnification will be to the fullest extent that we would have been permitted under Delaware or Pennsylvania law, their respective certificate or articles of incorporation or their respective bylaws in effect on the date of the merger agreement. We will also be obligated to advance expenses as incurred to the fullest extent permitted. However, the person to whom expenses are advanced must provide an undertaking to repay the advances if it is ultimately determined that the person is not entitled to indemnification. For six years after the closing of the merger, CDnow/N2K will cause us to maintain, to the extent available in the market, a directors' and officers' liability insurance policy covering those persons who are covered as of the date of the merger agreement by our directors' and officers' liability insurance policy. The coverage will be at least as favorable as our existing coverage. However, the companies will not be required to spend over twice the annual premium paid by us for coverage. If the premium would at any time exceed twice the current premium, then CDnow/N2K, N2K or CDnow will maintain insurance policies which provide the maximum coverage available at an annual premium equal to twice the current premium of N2K and CDnow together. Post-Merger Corporate Governance See "Directors and Management of CDnow/N2K Following the Merger." The corporate governance provisions, with the exception of the provision for the initial officers of CDnow/N2K, will become part of the bylaws of CDnow/N2K after the merger. These bylaws can be amended only with the approval of 80% of the members of the board of directors of CDnow/N2K. Warrants; Registration Rights Agreement At the closing of the merger, CDnow/N2K will assume all obligations under the warrants set forth in both parties' disclosure schedules to the merger agreement. The holders of the warrants will have the right to acquire the same number of shares of CDnow/N2K common stock as they would have been entitled to receive had each holder exercised the warrant in full immediately prior to the closing of the merger. However, warrants -50- The Merger Agreement held by N2K shareholders will be adjusted according to the exchange ratio. This exchange will be on the same pricing and payment terms and conditions as are currently applicable under the warrants. The price per share will be calculated as follows: (x) the aggregate exercise price immediately prior to the closing of the merger divided by (y) the number of full shares of CDnow/N2K common stock as the holders would have been entitled to receive had each holder exercised the warrant in full immediately prior the closing of the merger. At the closing of the merger, CDnow/N2K will offer to enter into registration rights agreements with parties to registration rights agreements with N2K. CDnow/N2K will offer to enter similar agreements with any party who is entitled to benefit from the registration rights created in those existing agreements as a result of being a party to the initial agreement or by virtue of transfers from the initial or listed holders. The provisions of the new registration rights agreements will be substantially similar to the provisions of the existing registration rights agreements identified on N2K's disclosure schedules to the merger agreement. These new registration rights agreements will apply to all shares of CDnow/N2K issued in exchange for shares of N2K common stock covered by registration rights immediately prior to the N2K merger. Employee Benefits; Severance CDnow/N2K will continue to maintain the existing N2K and CDnow annual bonus plans for management employees for the 1998 fiscal year. It will also calculate the amounts payable to participants of these plans on a basis consistent with the terms of each plan and the past practices of N2K or CDnow. For purposes where length of service is relevant, except for pension benefit accruals, under any employee benefit plan, CDnow/N2K's plans will recognize credit for service with N2K or CDnow and any of their subsidiaries to the same extent that that service was recognized before the merger. N2K may provide for stay bonuses and/or other arrangements to retain the services of key personnel prior to the closing of the merger. Personnel who have employment agreements with N2K are not eligible for stay bonuses. The aggregate value of the bonuses and arrangements will not exceed $250,000 unless otherwise agreed by CDnow and N2K. Other Covenants Under the merger agreement, each of N2K and CDnow has also agreed to: . confer on a regular basis regarding ongoing operations; . promptly provide the other party with copies of all filings made with governmental entities in connection with the merger; . to give prompt notice to the other of, and use reasonable efforts to cure, any circumstance which causes a breach of any representation, warranty, covenant or agreement; . file this joint proxy statement/prospectus and the registration statement; . obtain all necessary state securities laws, permits or approvals; . continue the quotation and listing of N2K common stock and CDnow common stock on Nasdaq up to the closing of the merger; . give the other party access to all its personnel, properties, books, contracts, commitments and records, and to furnish related information reasonably requested by the other; . use best efforts to consummate the merger as promptly as practical; . obtain any consents, licenses, permits, waivers, approvals, authorizations or orders from governmental entities or other third parties in connection with the merger; . make all necessary filings and submissions with respect to the merger under federal, state and foreign securities laws, antitrust laws and other applicable laws; -51- The Merger Agreement . consult with the other party, and use reasonable efforts to agree upon press releases or other public statements concerning the merger; . not take any action reasonably likely to jeopardize the tax treatment of the merger; . use reasonable efforts to obtain and deliver to the other party the affiliate agreements; . use all reasonable efforts to cause the CDnow/N2K common stock issued in the merger to be approved for listing on the Nasdaq, prior to the closing of the merger; . use all reasonable efforts to obtain "comfort" letters of the party's independent public accountants with respect to the registration statement; . fully perform their obligations under the stock option agreements; . work together to coordinate all aspects of transition, planning and implementation relating to the merger; . cooperate in the preparation and filing of all returns and other documents regarding the merger; . pay real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes; . pay any transfer, recording, registration and other fees or any similar taxes which become payable in connection with the merger; . pay, on behalf of each company's shareholders, any New York State Real Estate Transfer Tax, New York City Real Property Transfer Tax, New York State Stock Transfer Tax and any similar taxes imposed on the shareholders of N2K and CDnow by any other state which become payable in connection with the merger; . give the other party the opportunity to participate in the defense of shareholder litigation against N2K or CDnow or their directors relating to the merger; . consult with each other prior to making its financial results for any period publicly available, and consult with the other prior to making filings, and to timely file, with the SEC; . consult with respect to business practices and policies and make modifications or changes to practices or policies as mutually agreed upon; and . consult with respect to the character, amount and timing of restructuring charges as may be mutually agreed upon. Conditions to Obligations to Effect the Merger The obligations of N2K and CDnow to effect the merger do not arise until the following conditions have been satisfied or waived: . approval of the N2K merger by the N2K shareholders and the CDnow merger by the CDnow shareholders; . expiration or termination of any applicable anti-trust waiting period; . receipt of approvals and completion of filings with government entities or regulatory bodies necessary to avoid a material adverse effect on the merger; . effectiveness of the registration statement which this joint proxy statement/prospectus forms a part; . no government entity or regulatory body action which has the effect of making the merger illegal or otherwise prohibits the merger; . the shares of CDnow/N2K common stock to be issued in the merger and upon exercise of N2K options and CDnow options will have been approved for listing on the Nasdaq; and . N2K and CDnow will have taken all actions necessary so that not later than the closing of the merger, the articles of incorporation and bylaws of CDnow/N2K will have been amended as contemplated by the merger agreement, and at the closing of the merger, the board of directors of CDnow/N2K and of each committee of the board of directors of CDnow/N2K will be as described "The Merger Agreement--Material Covenants--Post-Merger Corporate Governance." -52- The Merger Agreement In addition to the obligation described above, the obligation of N2K to complete the merger is subject to the satisfaction or waiver of the following conditions: . the representations and warranties of CDnow in the merger agreement will be true and correct as of the date of the merger agreement and as of the closing of the merger, except for, (a) changes contemplated by the merger agreement and (b) inaccuracies which, have not had and are not likely to have a CDnow material adverse effect, as defined below, on CDnow or on the merger, and N2K shall have received a certificate signed on behalf of CDnow by the chief executive officer and the chief financial officer of CDnow to that effect; . CDnow will have materially performed all obligations required to be performed by it under the merger agreement at or prior to the closing of the merger, and N2K will have received a certificate signed on behalf of CDnow by the chief executive officer and the chief financial officer of CDnow to that effect; . N2K will have received the opinion of Dewey Ballantine LLP, counsel to N2K, that: (a) the N2K merger will be treated as a reorganization described in Section 368(a) of the Code and/or (b) taken together with the CDnow merger, the N2K merger will be treated as a transfer of property to CDnow/N2K by holders of N2K common stock described in Section 351 of the tax code; and . from the date of the merger agreement through the closing of the merger, there shall not have occurred a CDnow material adverse effect, as defined below, on the business of CDnow. For purposes of this section, CDnow material adverse effect means a material adverse effect on the business of CDnow that does not include the effect of any changes resulting from general conditions applicable to the online music retailing industry and not specifically relating to CDnow, or from general business or United States economic conditions that do not have a disproportionate effect on CDnow or caused by: . the transactions contemplated by the merger agreement and public announcement of those transactions; . any steps taken or proposed to be taken in connection with changes to CDnow's business practices and policies or in connection with restructuring measures and decisions, all of which will be made in accordance with Section 5.30 of the merger agreement; or . any actions taken or omissions by CDnow with the prior written consent of CDnow in effecting the transactions contemplated by the merger agreement. Similarly, the obligation of CDnow to complete the merger are subject to the satisfaction or waiver of the following conditions: . the representations and warranties of N2K in the merger agreement will be true and correct as of the date of the merger agreement and as of the closing of the merger, except for: (a) changes contemplated by the merger agreement and (b) inaccuracies which have not had and are not likely to have a N2K material adverse effect, and CDnow shall have received a certificate signed on behalf of N2K by the chief executive officer and the chief financial officer of N2K to that effect; . N2K will have materially performed all obligations required to be performed by it under the merger agreement at or prior to the closing of the merger, and CDnow will have received a certificate signed on behalf of N2K by the chief executive officer and the chief financial officer of N2K to that effect; . CDnow will have received the opinion of Morgan, Lewis & Bockius LLP, counsel to CDnow, that: (a) the CDnow merger will be treated as a reorganization described in Section 368(a) of the tax code and/or (b) taken together with the N2K merger, the CDnow merger will be treated, as a transfer of property to CDnow/N2K by holders of CDnow common stock described in Section 351 of the tax code; and -53- The Merger Agreement . from the date of the merger agreement through the closing of the merger there will have not occurred a N2K material adverse effect, as defined below, on the business of N2K. For the purposes of this section, N2K material adverse effect means a material adverse effect upon the business of N2K that does not include the effect of any changes resulting from general conditions applicable to the online music retailing industry and not specifically relating to N2K, or from general business or United States economic conditions that do not have a disproportionate effect on N2K, or caused by . the transactions contemplated by the merger agreement and public announcement of those transactions; . any steps taken or proposed to be taken in connection with changes to CDnow's business practices and policies or in connection with restructuring measures and decisions, all of which will be made in accordance with Section 5.30 of the merger agreement, or . any actions taken or omission by N2K with the prior written consent of CDnow in effecting the transactions contemplated by the merger agreement. Termination; Termination Fees and Expenses The merger agreement may be terminated at any time before the closing of the merger. This termination may occur before or after approval of the merger by the shareholders of N2K and CDnow in the following manner: . By mutual written consent of N2K and CDnow. . By either N2K or CDnow if the merger has not been consummated by March 31, 1999, however, the right to terminate under this clause is not available to a party whose failure to fulfill an obligation under the merger agreement is the cause of the failure of the merger to occur. . By either N2K or CDnow if a court of competent jurisdiction or other governmental entity has issued a nonappealable final order or taken any other nonappealable final action permanently restraining, enjoining or prohibiting the merger. . By N2K or CDnow, if the CDnow shareholders have not approved the merger as required. . By CDnow or N2K, if the N2K shareholders have not approved the merger as required. . By N2K, if any of the following occurs. - the CDnow board has withdrawn or modified its recommendation of the merger; - after CDnow receives from an outside party a proposal for a merger or similar transaction, N2K requests that the board of directors of CDnow reconfirm its recommendation of the merger to the shareholders of CDnow and the board of directors of CDnow fails to do so within 10 business days after it receives N2K's request; - the CDnow board recommended to the shareholders of CDnow a merger or similar transaction with another entity; - anyone other than N2K or an affiliate of N2K commences a tender offer or exchange offer for 20% or more of the outstanding shares of CDnow common stock and the board of directors of CDnow recommends that the shareholders of CDnow tender their shares in this tender or exchange offer; or - for any reason CDnow fails to call and hold the CDnow shareholders' meeting by March 31, 1999. . By CDnow, if any of the following occurs: - the board of directors of N2K has withdrawn or modified its recommendation of the merger; -54- The Merger Agreement - after N2K receives from an outside party a proposal for a merger or similar transaction, CDnow requests in writing that the board of directors of N2K reconfirm its recommendation of the merger to the shareholders of N2K and the board of directors of N2K fails to do so within 10 business days after it receives CDnow's request; - the board of directors of N2K has recommended to the shareholders a merger or similar transaction with another entity; - anyone other than CDnow or an affiliate of CDnow commences a tender offer or exchange offer for 20% or more of the outstanding shares of N2K common stock and the board of directors of N2K recommends that the shareholders of N2K tender their shares in such tender or exchange offer; or - for any reason N2K fails to call and hold the N2K shareholders' meeting by March 31, 1999. . By N2K or CDnow, prior to the approval of the merger by the shareholders of that party, if the board of directors of that party determines that accepting a proposal for a merger or similar transaction received from a third party is required for the board of directors to comply with its fiduciary duties to shareholders. This determination must be made in good faith after consultation with outside legal counsel. However, no such termination will be effective under this clause unless any termination fee payable by that party is paid. . By N2K or CDnow, if there has been a breach of any representation, warranty, covenant or agreement by the other party, which: - will cause the CDnow representation bringdown condition, or the N2K representation bringdown condition, not to be satisfied, and - has not been cured within 20 business days following receipt of written notice of the breach from the other party. . By N2K or CDnow if an event has occurred which makes it impossible for the conditions to the obligations to effect the merger, as described above, with certain exceptions, to be satisfied. However, any termination under this clause will not be effective until 20 business days after notice of the termination is delivered by the terminating party to the other party. The termination will be automatically rescinded if the condition breached is solely for the benefit of the party receiving notice of termination and that party, prior to the 20th business day after the breach, waives the condition. . By N2K or CDnow if there has been a breach of the representations, warranties, covenants or agreements set out in Section 3.10(c), 3.11(b) or 5.1(l) of the merger agreement in the case of a termination by CDnow; which would have a material adverse effect on the business of N2K or in Section 4.10(c) of the merger agreement in the case of a termination by N2K which would have a material adverse effect on the business of CDnow. . By CDnow if there has been a material adverse effect on the business of N2K not cured within 20 business days. . By N2K if there has been a material adverse effect on the business of CDnow not cured within 20 business days. In the event of termination of the merger agreement by N2K or CDnow as provided above, the merger agreement will become void. In that case there will be no liability or obligation, with limited exceptions, on the part of N2K, CDnow, CDnow/N2K or their respective officers, directors, shareholders or affiliates. There are exceptions to the limitation of liability with respect to termination fees, and termination will not limit liability for a willful breach of the merger agreement. The indemnification provisions described above under "Interests of CDnow and N2K Executive Officers and Directors in the Merger-- Indemnification and Insurance" and the termination fee provisions described below will remain in full force and effect and survive any termination of the merger agreement. -55- The Merger Agreement Except as described below, whether or not the merger is consummated, all fees, costs and expenses incurred in connection with the merger will be paid by the party incurring the expenses. N2K will pay CDnow a termination fee of $3.75 million upon the earliest to occur of the following events: . the termination of the merger agreement by either CDnow or N2K because of the other party's failure to receive shareholder approval of the N2K shareholders as described above, if a proposal for a merger or similar transaction with a third party involving N2K has been publicly announced prior to the N2K shareholders' meeting and either a definitive agreement for a merger or similar transaction with a third party is entered into, or a merger or similar transaction with a third party is consummated, within eighteen months of such termination; . the termination of the merger agreement by CDnow under the other circumstances described above; or . the termination of the merger agreement by N2K under the other circumstances described above. CDnow will pay N2K a termination fee of $3.75 million upon the earliest to occur of the following events: . the termination of the merger agreement by either N2K or CDnow because of the other party's failure to receive shareholder approval of the CDnow shareholders as described above, if a proposal for a merger or similar transaction with a third party involving CDnow has been publicly announced prior to the CDnow shareholders' meeting and either a definitive agreement for a merger or similar transaction with a third party is entered into, or a merger or similar transaction with a third party is consummated, within eighteen months of such termination; . the termination of the merger agreement by N2K under the other circumstances described above; or . the termination of the merger agreement by CDnow under the other circumstances described above. Either party's payment of the termination fee will be the sole remedy of the other against it and any of its subsidiaries and their respective directors, officers, employees, agents, advisors or other representatives with respect to the occurrences giving rise to the payment. This limitation will not apply in the event of a willful breach of the merger agreement by either party. The amount of the termination fee will be reduced to the extent that the total profit exceeds $3.75 million. Amendment and Waiver The merger agreement may be amended by CDnow and N2K by their respective boards of directors. Amendments may be made at any time before or after approval of the merger by the shareholders of N2K or CDnow. However, some amendments may by law require further shareholder approval. Amendments must be in a written document signed by each of the parties. However, the merger agreement may be amended in writing without obtaining the signatures of N2K, CDnow or CDnow/N2K if the amendment is solely to add the N2K merger subsidiary and CDnow merger subsidiary as parties to the merger agreement. At any time prior to the closing of the merger, CDnow and N2K may: . extend the time for performing any of the obligations or other acts of the other parties; . waive any inaccuracies in the representations and warranties in the merger agreement or in any of the other documents for the merger; and . waive compliance with any of the agreements or conditions contained in any of the documents relating to the merger. The above actions must be properly approved or authorized by the respective boards of directors of CDnow and N2K and must be in writing. -56- Other Agreements Other Agreements The following summarizes the material terms of the N2K stock option agreement, the CDnow stock option agreement, the N2K shareholder support agreement and the CDnow shareholder support agreement. We have filed copies of these agreements as exhibits to the registration statement that includes this joint proxy statement/prospectus. N2K Stock Option Agreement Description of the Agreement. The N2K stock option agreement grants N2K the right under the circumstances described below to acquire up to 3,517,207 shares CDnow common stock. With regard to the N2K stock option agreement: . 3,517,207 represents 19.9% of the outstanding share of CDnow common stock on the date we signed the merger agreement; and . the exercise price shall equal the lesser of (a) $ 9.4375 per share, or (b) the average closing price of CDnow common stock during the period from October 19 through October 23, 1998. The N2K stock option agreement may make an acquisition of CDnow by a third party more costly. A third party seeking to acquire CDnow must also acquire the shares underlying the N2K option. In addition, by exercising its option, N2K could jeopardize the ability of a third party to account for an acquisition of CDnow as a pooling of interests. Exercise of the N2K Option. N2K may exercise its option, in whole or in part, after the occurrence of an event which would entitle N2K, upon termination of the merger agreement by CDnow, to payment of the N2K termination fee. The N2K option may not be exercised if N2K is in material breach of any of its material representations, warranties, covenants or agreements contained in the N2K stock option agreement or in the merger agreement. N2K may exercise the N2K option by either: . paying the option price, as described above, and receive the shares; or . electing to receive a cash payment in lieu of the shares from CDnow. The cash payment is to be the amount by which (a) the higher of the price paid by a third party in an acquisition of CDnow or the then current market price of the CDnow common stock exceeds (b) the N2K option price set forth above. CDnow Repurchase Right. CDnow may repurchase the shares that N2K obtained by exercising the N2K option. If a change in control event, as defined in the N2K stock option agreement, with respect to CDnow has not occurred prior to the first anniversary of the termination of the merger agreement, CDnow may, during the 30-day period beginning on the anniversary, elect to purchase all, but not less than all, of the N2K option shares. The purchase price will be equal to the greater of (a) the N2K option price or (b) the average of the closing sales prices for shares of CDnow common stock on the 20 trading days ending five days prior to the date CDnow gives notice of its intention to exercise the repurchase right. Registration. If N2K exercises this option, it will receive unregistered shares of CDnow common stock. N2K may require CDnow to register the shares so that N2K may sell the shares. N2K is only allowed two registration requests. Maximum Payments to N2K. In no event will the N2K total profit exceed $3.75 million. N2K total profit includes: . termination fees paid to N2K; . the amount received by N2K for the repurchase of the N2K option shares by CDnow in""--CDnow Repurchase Right" above, less the purchase price paid by N2K for the shares; and -57- Other Agreements . the amount received by N2K in the sale of N2K option shares, less the purchase price paid by N2K for such shares. Termination of the Option. The N2K option terminates upon the earlier of: . the closing of the merger; . the date on which N2K realizes a N2K total profit of $3.75 million; . the date on which the merger agreement is terminated, provided that the N2K option is not exercisable at such time and does not become exercisable simultaneously with the termination; or . 90 days after the date the N2K option becomes exercisable, provided that if the N2K option cannot be exercised, or the N2K option shares cannot be delivered to N2K upon exercise, because of a preliminary or permanent injunction or other court order. This date will be extended until 30 days after the impediment to exercise has been removed. CDnow Stock Option Agreement Description of the Agreement. The CDnow stock option agreement grants CDnow the right under the circumstances described below to acquire up to 2,827,299 shares of authorized but unissued N2K common stock. With regard to the CDnow stock option agreement: . 2,827,299 represents 19.9% of the outstanding shares of N2K common stock on the date we signed the merger agreement; and . the exercise price shall equal the lesser of (a)$ 5.50 per share or (b) the average closing price of N2K common stock during the period from October 19 through October 23, 1998. The CDnow stock option agreement may make an acquisition of N2K by a third party more costly. A third party seeking to acquire N2K must also acquire the shares underlying the CDnow option. In addition, by exercising its option, CDnow could jeopardize the ability of a third party to account for an acquisition of N2K as a pooling of interests. Exercise of the CDnow Option. CDnow may exercise its option, in whole or in part, after the occurrence of an event which would entitle CDnow, upon termination of the merger agreement by N2K, to payment of the CDnow termination fee. The CDnow option may not be exercised if CDnow is in material breach of any of its material representations, warranties, covenants or agreements contained in the CDnow stock option agreement or in the merger agreement. CDnow may exercise the CDnow option by either: . paying the option price, as described above, and receive the shares; or . electing to receive a cash payment in lieu of the shares from N2K. The cash payment will be the amount by which (a) the higher of the price paid by a third party in an acquisition of N2K or the then current market price of the N2K common stock exceeds (b) the CDnow option price described above. N2K Repurchase Right. N2K may repurchase the shares that CDnow obtained by exercising the CDnow option. If a change in control event, as defined in the CDnow stock option agreement, with respect to N2K has not occurred prior to the first anniversary of the termination of the merger agreement, N2K may, during the 30-day period beginning on such anniversary, elect to purchase all, but not less than all, of the CDnow option shares. The purchase price will be equal to the greater of (a) the CDnow option price or (b) the average of the closing sales prices for shares of N2K common stock on the 20 trading days ending five days prior to the date N2K gives notice of its intention to exercise the repurchase right. Registration. If CDnow exercises this option, it will receive unregistered shares of N2K common stock. CDnow may require N2K to register the shares so that CDnow may sell the shares. CDnow is only allowed two registration requests. -58- Other Agreements Maximum Payments to CDnow. In no event will the CDnow total profit exceed $3.75 million. The CDnow total profit includes: . termination fees paid to CDnow; . the amount received by CDnow for the repurchase of the CDnow option shares by N2K pursuant to "--N2K Repurchase Right" above, less the purchase price paid by CDnow for the shares; and . the amount received by CDnow in the sale of N2K option shares, less the purchase price paid by CDnow for the shares. Termination of the Option. The CDnow option terminates upon the earlier of: . the closing of the merger; . the date on which CDnow realizes a CDnow total profit of $3.75 million; . the date on which the merger agreement is terminated, provided that the N2K option is not exercisable at the time and does not become exercisable simultaneously upon termination; or . 90 days after the date the CDnow option becomes exercisable, except that if the CDnow option cannot be exercised, or the CDnow option shares cannot be delivered to CDnow upon exercise, because of a preliminary or permanent injunction or other court order. This date will be extended until 30 days after the impediment to exercise has been removed. N2K Shareholder Support Agreement Lawrence L. Rosen, Jonathan V. Diamond, R. David Grusin, Bruce Johnson and James E. Coane entered into the N2K shareholder support agreement. These shareholders collectively hold approximately 16.6% of the combined voting power of the outstanding capital stock of N2K. Together, these shareholders are able to significantly influence the vote on the approval and adoption of the merger proposal. At the N2K special meeting or at any other shareholders' meeting and in any action by written consent of the shareholders of N2K, each signing shareholder must vote all of his shares of N2K common stock . in favor of the adoption of the merger agreement and the approval of the N2K merger and the other transactions contemplated by the merger agreement and . in favor of any other action required for the consummation of the transactions contemplated by the merger agreement and considered and voted upon by the N2K shareholders. In addition, each signing shareholder agreed that, upon request by CDnow, he will furnish written confirmation, in form and substance reasonably satisfactory to CDnow, of his support for the merger agreement and the merger. Pursuant to the N2K shareholder support agreement, each signing shareholder agreed not to .sell assign, transfer or otherwise dispose of any of his respective shares, . deposit any of his respective shares into a voting trust or enter into a voting agreement or arrangement inconsistent with the N2K shareholder support agreement, or . enter any contract, option or other arrangement for the sale, assignment, transfer or other disposition of any N2K stock. Each shareholder agreed . that he will not, nor will he authorize or permit any of N2K's officers, directors, employees, agents or representatives to, directly or indirectly, initiate or solicit any inquiries or the making of any proposal for the acquisition of N2K and . that he will notify CDnow as soon as possible, and in any event within 48 hours, if any such inquiries or proposals are received by, any information or documents are requested from, or any negotiations or discussions are sought to be initiated or continued with, him or her or any of his affiliates. -59- Other Agreements The N2K shareholder support agreement will terminate upon the earliest to occur of the closing of the merger or any termination of the merger agreement in accordance with the terms thereof. Messrs. Johnson and Coane obligations under this agreement terminate upon the termination of their employment with N2K or if they cease to be members of N2K's board of directors. CDnow Shareholder Support Agreement Jason Olim entered into the CDnow shareholder support agreement. Mr. Olim holds approximately 16.7% of the combined voting power of the outstanding capital stock of CDnow. Therefore, he is able to significantly influence the vote on the merger proposal. At the CDnow special meeting or at any other CDnow shareholders' meeting, and in any action by written consent of the shareholders of CDnow, Mr. Olim must vote all of his shares of CDnow common stock . in favor of the adoption of the merger agreement and the approval of the CDnow merger and the other transactions contemplated by the merger agreement, and . in favor of any other matter necessary to the consummation of the transactions contemplated by the merger agreement and considered and voted upon by the shareholders of CDnow. In addition, Mr. Olim agreed that, upon request by N2K, he will furnish written confirmation, in form and substance reasonably satisfactory to N2K, of his support for the merger agreement and the merger. Pursuant to the CDnow shareholder support agreement, Mr. Olim agreed not to . sell assign, transfer or otherwise dispose of any of his shares, . deposit any of his shares into a voting trust or enter a voting agreement or arrangement inconsistent with the CDnow shareholder support agreement, or . enter any contract, option or other arrangement for the sale, assignment, transfer or other disposition of any shares. Mr. Olim agreed . that he will not, nor will he authorize or permit any of CDnow's officers, directors, employees, agents representatives to, directly or indirectly, initiate or solicit any inquiries or the making of any proposal for the acquisition of CDnow and . that he will notify N2K as soon as possible, and in any event within 48 hours, are any such inquiries or proposals are received by, any information or documents is requested from, or any negotiations or discussions are sought to be initiated or continued with, him or any of his affiliates. The CDnow shareholder support agreement will terminate upon the earlier of the closing of the merger or any termination of the merger. -60- Opinions of Financial Advisors Opinions of Financial Advisors Opinion of CDnow's Financial Advisor CDnow engaged BT Alex. Brown, on August 24, 1998, to act as its exclusive financial advisor in connection with the merger. On October 22, 1998, at a meeting of the CDnow board held to evaluate the proposed merger, BT Alex. Brown rendered to the CDnow board an oral opinion, subsequently confirmed by delivery of a written opinion dated October 22, 1998, to the effect that, as of the date and based upon and subject to the assumptions made, matters considered and limitations stated in this opinion, the CDnow exchange ratio was fair, from a financial point of view, to the holders of CDnow common stock. The full text of BT Alex. Brown's written opinion dated October 22, 1998, which states, among other things, the assumptions made, matters considered and limitations of the review undertaken, is attached as Appendix V to this joint proxy statement/prospectus and is incorporated herein by reference. BT Alex. Brown's opinion is directed to the CDnow board, addresses only the fairness of the CDnow exchange ratio from a financial point of view, and does not constitute a recommendation to any shareholder as to how that shareholder should vote at the CDnow special meeting. CDnow shareholders should carefully read the entire BT Alex. Brown written opinion. This section is only a summary of the written opinion, and as a summary is qualified and not a substitute for the written opinion. In connection with its opinion, BT Alex. Brown: . reviewed publicly available financial information and other information concerning CDnow and N2K and internal analyses and other information furnished to it by CDnow and N2K; . held discussions with the members of the senior managements of CDnow and N2K regarding the business and prospects of their respective companies and the prospects of a combined company; . reviewed the reported prices and trading activity for CDnow common stock and N2K common stock; . compared financial and stock market information for CDnow and N2K with similar information for a number of other selected companies whose securities are publicly traded; . reviewed the financial terms of a number of recent business combinations which it deemed comparable in whole or in part; . reviewed the terms of the merger agreement and related documents; and . performed other studies and analyses and considered other factors as it deemed appropriate. In preparing its opinion, BT Alex. Brown did not assume responsibility for the independent verification of, and did not independently verify, any information concerning CDnow or N2K, including any financial information, forecasts or projections, considered in connection with the rendering of its opinion. Accordingly, for purposes of its opinion, BT Alex. Brown assumed and relied upon the accuracy and completeness of all information concerning CDnow and N2K. BT Alex. Brown has not conducted a physical inspection of any of the properties or assets of CDnow or N2K, and has not prepared or obtained any independent evaluation or appraisal of any of the assets or liabilities of CDnow or N2K. -61- Opinions of Financial Advisors With respect to the financial forecasts and projections made available to BT Alex. Brown and used in its analysis, including the analyses and forecasts of potential transaction benefits arising from cost savings, operating efficiencies, and revenue effects and which are expected to be achieved as a result of the merger: . BT Alex. Brown assumed that these financial forecasts and projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of CDnow or N2K, as the case may be; . these financial forecasts and projections also included, with the consent of the CDnow board, assumptions pertaining to any potential liability which may arise from the litigation currently pending against N2K and; . in rendering its opinion, BT Alex. Brown expressed no view as to the reasonableness of such forecasts and projections, including the potential transaction benefits, or the assumptions on which they were based. BT Alex. Brown's opinion was necessarily based upon economic, market and other conditions as in effect on, and the information made available to it as of October 22, 1998. BT Alex. Brown did not express an opinion as to the price at which CDnow common stock or CDnow/N2K common stock actually might trade following the announcement or consummation of the merger. The CDnow board informed BT Alex. Brown, and in rendering its opinion BT Alex. Brown assumed, that the merger will be free of federal tax to each of CDnow, N2K and their respective shareholders. BT Alex. Brown also assumed that, in all respects material to its analysis, . the representations and warranties of CDnow and N2K contained in the merger agreement were true and correct, . CDnow and N2K will each perform all of the covenants and agreements to be performed by it under the merger agreement and all conditions to the obligations of each of CDnow and N2K to consummate the merger will be satisfied without any waiver thereof. . all material governmental regulatory or other approvals and consents required in connection with the consummation of the merger will be obtained; . and in connection with obtaining any necessary governmental, regulatory or other approvals and consents, or any amendments, modifications or waivers to any agreements, instruments or orders to which either CDnow or N2K is a party or is subject or by which it is bound, no limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would have a material adverse effect on CDnow or N2K or materially reduce the completed benefits of the merger to CDnow. In connection with its engagement, BT Alex. Brown was not authorized to, and did not, solicit third party indications of interest with respect to the acquisition of all or a part of CDnow, nor did BT Alex. Brown review with CDnow or the CDnow board any potential transactions in lieu of the merger. -62- Opinions of Financial Advisors Below is a summary of the material financial analyses performed and factors considered by BT Alex. Brown in connection with its opinion and reviewed with the CDnow board at its meeting on October 22, 1998: Contribution Analysis. BT Alex. Brown analyzed the relative contributions of CDnow and N2K to, among other things, the estimated revenues, gross profit, earnings before interest and taxes, and net loss of the pro forma combined company, excluding potential transaction benefits, for the latest three months and nine months as of September 30, 1998, and for calendar years 1998, 1999 and 2000 based on internal estimates of the management of CDnow and N2K, and compared these contributions to the pro forma ownership of the current holders of CDnow common stock in the pro forma combined company. This analysis indicated that, based upon the projected results for CDnow and N2K, CDnow would contribute to the pro forma combined company:
CDnow Contribution ----------------------------------------------------------------------------------------------------------------- Historical for the Period Ended September 30, 1998 Projected for the Year Ended December 31, ----------------------------------------------------------- --------------------------------------------- Latest 3 Months Latest 9 Months 1998 1999 2000 ------------------------- ------------------------- ------------- ------------- ------------- Revenues 56.9% 56.2% 55.2% 52.4% 48.3% Gross Profit 55.4% 54.1% 53.3% 53.0% 48.7% EBIT 39.4%* 38.2%* 38.4%* 45.1%* 49.6%* Net Loss 39.3%* 38.2%* 37.7%* 45.0%* 48.5%*
- -------- * Indicates contribution of a loss. BT Alex. Brown also reviewed the historical and current financial conditions of each of CDnow and N2K, respectively, and analyzed the relative contributions of CDnow and N2K to the assets, liabilities and shareholders' equity of the pro forma combined company. BT Alex. Brown noted that, based on the CDnow exchange ratio, current holders of CDnow common stock would own approximately 60% of the pro forma combined company upon consummation of the merger. This ownership percentage compares favorably with CDnow's contribution to the pro forma combined company and supports BT Alex. Brown's opinion. Historical Market Capitalization Analysis. BT Alex. Brown also analyzed the relative contributions of CDnow and N2K to the estimated equity market capitalization of the pro forma combined company over the 10 day, 15 day, 30 day, 60 day, 90 day, 120 day, 150 day periods (trading days) prior to October 22, 1998 and during the period February 10, 1998, the date of CDnow's initial public offering of CDnow common stock, to October 22, 1998. The average market capitalization contributions for CDnow during these periods were:
CDnow As of October 22, 1998 Contribution -------------------------------- ------------ Latest 10 Trading Day Average... 65.6% Latest 15 Trading Day Average... 65.8% Latest 30 Trading Day Average... 60.5% Latest 60 Trading Day Average... 58.2% Latest 90 Trading Day Average... 56.6% Latest 120 Trading Day Average.. 55.8% Latest 150 Trading Day Average.. 55.2% Average Since CDnow IPO (February 10, 1998)............ 55.0%
BT Alex. Brown noted that analyst reports warning of weaker than expected revenue and earnings results at N2K for the three months ended September 30, 1998 were released by two investment banks on September 30, 1998 and October 2, 1998. The market capitalization contribution for CDnow subsequently rose from 52.0% on September 28, 1998 to 66.4% on October 5, 1998. While no similar reports were released regarding CDnow, BT Alex. Brown had been provided by CDnow management with estimated results for the three months ended September 30, 1998 that were also below analyst expectations. BT Alex. Brown also noted -63- Opinions of Financial Advisors that news reports regarding merger discussions between CDnow and N2K and a press release from CDnow and N2K confirming that merger discussions were ongoing were published on October 7, 1998, 11 trading days prior to the public announcement of the merger. On October 7, 1998, the market capitalization contribution for CDnow based upon closing prices was 64.8%. BT Alex. Brown noted that, based on the CDnow exchange ratio, current holders of CDnow common stock would own approximately 60% of the pro forma combined company upon consummation of the merger. In consideration of information publicly available with respect to CDnow and N2K prior to September 30, 1998, this ownership percentage compares favorably with CDnow's contribution to the estimated equity market capitalization of the pro forma combined company and supports BT Alex. Brown's opinion. Pro Forma Earnings Analysis. BT Alex. Brown analyzed the pro forma effects of the merger on the revenue per share and earnings per share of CDnow in calendar years 1999 and 2000 based on internal estimates of the management of CDnow and N2K. BT Alex. Brown noted that the managements of CDnow and N2K had agreed to use their best efforts to seek pooling of interests accounting treatment but that the merger might be accounted for under the purchase method of accounting. Accordingly, BT Alex. Brown provided analyses of the transaction merger based upon pooling and purchase accounting to the CDnow board. After taking into account potential transaction benefits related to the merger as provided by the managements of CDnow and N2K, the effect on the revenue and earnings per share to CDnow shareholders would be:
Projected Accretion/ (Dilution) for Fiscal Year Ending December 31, ----------------------- 1999 2000 ---------- ---------- Revenue per Share................................. 10.7 % 23.8% Earnings per Share Pooling of Interests Accounting................ (0.8)% 54.3% Purchase Accounting............................ (11.0)% 40.7%
This analysis suggests that holders of CDnow common stock may be subject to a minor amount of earnings dilution in 1999, but could benefit from material earnings accretion in 2000. In addition, for both 1999 and 2000, holders of CDnow common stock would benefit from material accretion in revenue per share, which is another valuation parameter for internet-related companies. While this analysis supports BT Alex. Brown's opinion, this analysis also relies significantly upon the financial projections provided by the managements of CDnow and N2K. The actual operating or financial results achieved by the pro forma combined company may vary from projected results and variations may be material as a result of business and operational risks, the timing and amount of potential transaction benefits, the costs associated with achieving those potential transaction benefits and other factors. Comparative Stock Price Performance. BT Alex. Brown reviewed and analyzed recent and historical market prices for CDnow common stock and N2K common stock and compared their respective stock price performance with the stock price performance of the Nasdaq Index and an index of other selected internet retailers comprised of Amazon.com, Inc., Cyberian Outpost, Inc., E*Trade Group, Inc., ONSALE, Inc., Preview Travel, Inc. and Beyond.com Corporation for the period February 10, 1998 to October 22, 1998. BT Alex. Brown noted that, in relative terms, CDnow's common stock and N2K's common stock reacted similarly in the market and, generally, traded consistently together. BT Alex. Brown further noted that, in absolute terms, the market prices of CDnow common stock and N2K common stock had deteriorated relative to the other internet retailers and the Nasdaq Index due primarily, in its opinion, to concerns about increasing competition and the ability to meet research analyst earnings expectations in the future. BT Alex. Brown also noted that no company used in this analysis is identical to CDnow, N2K or CDnow/N2K and that this analysis must take into account differences in the financial and operating characteristics of the respective companies. The generally consistent relative and absolute trends in and between CDnow's common stock and N2K's common stock supports BT Alex. Brown's opinion. Analysis of Other Selected Publicly Traded Companies. This analysis examines a company's valuation in the public market as compared to the valuation in the public market of other selected publicly -64- Opinions of Financial Advisors traded companies. BT Alex. Brown compared financial information relating to CDnow and N2K including, among other things, common equity market valuation and the ratios of common equity market value to estimated revenues for 1998 and 1999, based upon estimates derived from analyst reports, to corresponding information from two separate groups. One group consisted of publicly traded business-to-business internet industry related companies. This business-to- business group was comprised of Beyond.com Corporation, Digital River, Inc. and DoubleClick, Inc. The other group consisted of transaction-based internet companies serving consumers. This transaction based group was comprised of Amazon.com, Inc., CDnow, Inc., Cyberian Outpost, Inc., Egghead.com, Inc., E*Trade Group, Inc., N2K Inc., ONSALE, Inc., Preview Travel, Inc.
Equity Value as a Multiple of Projected Revenues for the Year Ending December 31, ------------------------------- 1998 1999 --------- --------- CDnow................................. 2.7x 1.1x N2K................................... 1.6x 0.6x Business-to-Business Internet Selected Companies............................ 7.6x 3.4x Transaction-Based Internet Selected Companies............................ 4.7x 2.8x
BT Alex. Brown also noted that estimated results for CDnow and N2K for the three months ended September 30, 1998 were below analyst expectations, limiting the utility of the analysis. BT Alex. Brown also noted that all of the selected companies provided products and services not marketed by CDnow or N2K. Analysis of Selected Merger of Equals Transactions. BT Alex. Brown reviewed the financial terms, to the extent publicly available, of 18 proposed, pending or completed merger of equal transactions since October 23, 1994. BT Alex. Brown calculated various financial multiples and the premiums over market value based on publicly available information for each of the selected transactions and compared them to corresponding financial multiples and the premiums over market for the merger, based on the exchange ratio of .83.
Premium (Deficit) to N2K at Premium (Deficit) of Negotiated Exchange Ratio to Market Exchange a .83 Exchange Ratio Ratio Based on Precedent Merger of Equals Transactions --------------------------- --------------------------------------------------------------------- As of As of October 7, October 22, 1998 1998 Mean High Low ---------------- ---------- ---------------------- ---------------------- ----------------------- One Day Prior 42.4% 22.6% 7.3% 64.4% (10.0%) Four Week Average 15.5% (10.8%) 9.6% 94.5% (16.3%)
Accordingly, the premiums to N2K, one day prior and for a four week average, at an 0.83 exchange ratio were within the range of the premiums calculated for the selected transactions. This analysis supports BT Alex. Brown's opinion. BT Alex. Brown noted, however, that the companies involved in the selected transactions were not in the internet industry. In addition, all multiples for the selected transactions were based on public information available at the time of announcement of each transaction, and the accuracy thereof, without taking into account differing market and other conditions during the four year period during which the selected transactions occurred. Other Factors. In rendering its opinion, BT Alex. Brown also reviewed and considered, among other things: . historical and projected financial data and operating data for CDnow and N2K; . selected mergers and acquisitions transactions announced in the internet industry; . the current shareholder profiles of CDnow and N2K; and . the existing senior management and board composition of CDnow and N2K and the proposed senior management and board composition of CDnow/N2K. -65- Opinions of Financial Advisors The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances. Fairness opinions are not readily susceptible to summary description. The analyses and the summary stated above must be considered as a whole. Selecting portions of the analyses, without considering all analyses, or selecting portions of the above summary, without considering all factors and analyses, could create a misleading or incomplete view of the processes underlying the analyses and opinion. In performing its analyses, BT Alex. Brown made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of CDnow and N2K. No company, transaction or business used in the analyses as a comparison is identical to CDnow, N2K, CDnow/N2K or the proposed merger, nor is an evaluation of the results of the analyses entirely mathematical; rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the merger, public trading or other values of the companies, business segments or transactions being analyzed. The estimates contained in the analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the analyses and estimates are inherently subject to substantial uncertainty. The type and amount of consideration payable in the merger were determined through negotiations between CDnow and N2K and were approved by the CDnow board. Although BT Alex. Brown provided advice to CDnow during the course of these negotiations, the decision to enter into the merger was solely that of the CDnow board. BT Alex. Brown's opinion and financial analyses were only one of a number of factors taken into consideration by the CDnow board in its evaluation of the proposed merger and should not be viewed as determinative of the views of the CDnow board or management of CDnow with respect to the CDnow exchange ratio or the merger. Based on the terms of BT Alex. Brown's engagement, CDnow agreed to pay $450,000 to BT Alex. Brown for rendering the BT Alex. Brown Opinion, which will be credited against an aggregate financial advisory fee of $1,750,000 payable upon consummation of the merger. In addition, CDnow agreed to reimburse BT Alex. Brown for its reasonable travel and other out-of-pocket expenses, including reasonable fees and disbursements of counsel, and to indemnify BT Alex. Brown and related parties against liabilities, including a number of liabilities under the federal securities laws, relating to, or arising out of, its engagement. CDnow selected BT Alex. Brown based on BT Alex. Brown's reputation, expertise and familiarity with CDnow and its business. BT Alex. Brown is an internationally recognized investment banking firm and, as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. BT Alex. Brown has, from time to time, provided investment banking and other financial services to CDnow or its affiliates, BT Alex. Brown acted as lead managing underwriter in connection with CDnow's public offerings of CDnow common stock in February 1998 and July 1998 for which it received customary compensation. At the time its opinion was rendered, BT Alex. Brown owned warrants to purchase 154,817 shares of CDnow common stock at a price of $3.63 per share. BT Alex. Brown maintains a market in CDnow common stock and regularly publishes research reports regarding the internet commerce industry and the businesses and securities of CDnow and other publicly owned companies in the internet commerce industry. In the ordinary course of business, BT Alex. Brown may actively trade or hold the securities of both of CDnow and N2K for its own account and the account of customers and, accordingly, may at any time hold a long or short position in securities of CDnow and N2K. -66- Opinions of Financial Advisors Opinion of N2K's Financial Advisor At the meeting of the N2K board on October 22, 1998, Allen & Company Incorporated delivered its opinion to the effect that, as of such date, the terms of the merger were fair to the holders of N2K common stock from a financial point of view. The full text of the written opinion of Allen & Company, dated October 22, 1998, is set forth as Appendix VI to this joint proxy statement/prospectus and describes the assumptions made, matters considered and limits on the review undertaken. N2K shareholders are urged to read the opinion carefully and in its entirety. Allen & Company's opinion is directed only to the fairness, from a financial point of view, of the terms of the merger to the holders of N2K common stock and does not constitute a recommendation of the merger over other courses of action that may be available to N2K or constitute a recommendation to any holder of N2K common stock concerning how such holder should vote with respect to the merger. In arriving at its opinion, Allen & Company: . reviewed the terms and conditions of the merger, including the draft merger agreement and the draft agreements ancillary thereto in substantially final form; . analyzed publicly available historical business and financial information relating to N2K and CDnow, as presented in documents filed with the SEC; . reviewed certain financial, operating and budgetary data provided to Allen & Company by N2K and CDnow relating to their respective businesses; . conducted discussions with certain members of the senior management of N2K and CDnow with respect to the financial condition, business, operations, objectives and prospects of N2K and CDnow, respectively, as well as industry trends prevailing in their businesses; . reviewed and analyzed public information, including certain stock market data and financial information relating to selected public companies in lines of business which Allen & Company believed to be comparable to N2K's and CDnow's, as well as equity research analysts' reports and estimates for N2K and CDnow; . reviewed the trading history of the N2K common stock and the CDnow common stock, including their performance in comparison to market indices and to selected companies in comparable businesses; . reviewed public financial and transaction information relating to business combination transactions which Allen & Company deemed to be comparable to the merger; and . conducted such other financial analyses and investigations as Allen & Company deemed necessary or appropriate for the purposes of the opinion expressed therein. In connection with its review, Allen & Company assumed and relied on the accuracy and completeness of the information it reviewed for the purpose of its opinion. Allen & Company did not assume any responsibility for independent verification of such information or for any independent evaluation or appraisal of the assets of N2K or CDnow. With respect to N2K's and CDnow's financial, operating and budgetary data referred to above, Allen & Company assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of N2K and CDnow. Allen & Company expressed no opinion with respect to such financial, operating and budgetary data or the assumptions on which they were based. Allen & Company's based its opinion upon business, market, economic and other conditions as they existed on, and could be evaluated as of, the date of its opinion. Allen & Company's opinion does not imply any conclusion as to the likely trading range of the CDnow/N2K common stock following the consummation of the merger, which may vary depending on, among other factors, changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. -67- Opinions of Financial Advisors In connection with its analysis, Allen & Company assumed that, in all material respects, . the representations and warranties of N2K and CDnow contained in the merger agreement were true and correct, N2K and CDnow will perform all of the covenants to be performed by them under the merger agreement and all conditions to the consummation of the merger by N2K and CDnow will be satisfied, . the merger will be free from federal tax for each of N2K and CDnow and their respective shareholders, . all material governmental, regulatory or other approvals and consents required in connection with the consummation of the merger will be obtained, . in connection with obtaining any such approvals or consents or any amendments, modifications or waivers to any agreements to which either N2K or CDnow is a party, no restrictions will be imposed or modifications made that would have a material adverse effect on N2K or CDnow or materially reduce the contemplated benefits of the merger to N2K. The following is a summary of the presentations made by Allen & Company to the N2K board of directors and of all of its material financial analyses performed in connection with the rendering of Allen & Company's fairness opinion: Transaction Summary. Prior to delivering its opinion to N2K's board, Allen & Company reviewed information with the board relating to N2K and CDnow including the information reviewed and analyzed in connection with rendering its opinion, the financial terms of the merger and the financial analyses summarized below. Allen & Company described an analysis of the pro forma ownership of the combined company resulting from the merger, noting that such analysis indicated that N2K and CDnow would own the following percentages of the combined company on a primary basis and fully-diluted basis:
Fully- Primary Diluted ------- ------- N2K...................................................... 40.05% 40.03% CDnow.................................................... 59.95% 59.97%
Allen & Company's fully-diluted calculations were based on approximately 991,000 N2K options and 546,000 CDnow options and 182,000 CDnow warrants outstanding as of October 15, 1998. Allen & Company also reviewed with the board the profile of each of N2K's and CDnow's respective shareholder bases, as well as the profile of the shareholder base of the combined company on a pro forma basis. Allen & Company noted that the per share value of the N2K common stock implied by the merger of $7.159 was 31.6% greater than the closing price of the N2K common stock on October 21, 1998 ($5.438) and 32.6% greater than the average price of the N2K common stock over the 10 trading days preceding October 22, 1998 ($5.400). Allen & Company also compared the total enterprise value of N2K as of October 21, 1998, calculated according to the recent value of all equity securities plus long- term debt and capitalized leases less cash, without giving effect to the merger, to the total enterprise value implied by the merger and compared the total equity value of N2K as of October 21, 1998, calculated based on the recent value of all equity securities to the total equity value implied by the merger on a primary and fully-diluted basis. These analyses resulted in the following comparisons:
N2K value on N2K value October 21, 1998 implied by the merger ---------------- --------------------- Enterprise Value................... $24.3 million $49.8 million Equity Value....................... $77.4 million $101.8 million Fully-Diluted Equity Value......... $78.6 million $104.0 million
-68- Opinions of Financial Advisors Comparative Review. Allen & Company reviewed for the N2K board various historical financial, operating and stock market data for each of N2K and CDnow, including the current number of customers for each company. Allen & Company noted that N2K's and CDnow's percentages of pro forma year-to-date revenues from music sales of the combined company would be 39.1% and 60.9%, respectively, and their percentages of the pro forma number of current customers of the combined company would be 41.6% and 58.4%, respectively. Allen & Company commented that such percentages were in line with the N2K and CDnow exchange ratios offered in the merger. Allen & Company provided the N2K board an overview of the current state of the music online retail market. Allen & Company noted that several larger players with greater resources than either N2K and CDnow have entered the market in recent months. Allen & Company commented that the entry of these new participants has made the market increasingly competitive and has a direct effect on the increasing sales and marketing spending by industry retailers and on the availability of financing for such retailers. Allen & Company compared the historical and estimated operating performances of N2K and CDnow. Allen & Company noted that N2K's compounded revenue growth rate of 52.2% during the two-year period beginning with the first quarter of 1997 exceeded CDnow's compounded revenue growth rate of 34.5% for the same period, although N2K's growth rate reflected a lower revenue base for N2K at the beginning of the period. Allen & Company further noted that as a result of this growth, N2K's share of revenues and customers vis-a-vis CDnow has increased during the two-year period. However, Allen & Company commented that N2K's growth has been fueled by higher customer acquisition costs, both on a cumulative and on a per customer basis. Allen & Company discussed the fact that the companies' low gross margins have had a negative effect on the availability of capital necessary to support increasing sales and marketing costs. As a result, Allen & Company noted that each company's accumulated loss has grown rapidly, with N2K's accumulated loss roughly 40% greater than CDnow's. Allen & Company also compared the operating performances of N2K and CDnow as projected by their respective management teams for the remainder of 1998 and for 1999. Allen & Company noted that N2K's projected growth rate for 1999 is greater than CDnow's projected growth rate with respect to both revenues and customers. Allen & Company commented that such projections showed a market share increase in customers for N2K despite expanded sales and marketing expenditures projected by CDnow. Allen & Company also noted, however, that N2K's projected 1998 and 1999 operating performance as compared to consensus analyst estimates varied to a greater extent than CDnow's projected 1998 and 1999 operating performance as compared to consensus analyst estimates. For instance, Allen & Company noted that the variance of projected 1998 third quarter revenues and net income to consensus analyst estimates was (21.4%) and (16.0%), respectively, for N2K and (8.5%) and 4.4%, respectively, for CDnow. Allen & Company reviewed the historical stock price and trading volume data for the N2K common stock and CDnow common stock and compared the historical trading patterns of these securities to the trading patterns of certain market indices (H&Q Internet Index and Nasdaq Composite Index) and for a selected group of companies which Allen & Company deemed to be comparable based upon their participation in the internet retailing industry (Amazon.com, Ameritrade, Beyond.com, Cybershop, Cyberian Outpost, eBay, Egghead, E*trade, ONSALE, Peapod and Preview Travel; hereinafter referred to as the "Comparable Company Group"). Allen & Company noted that the historical market value of the N2K has generally been between 40% and 50% of the combined market value of the N2K common stock and CDnow common stock and that this historical range was in line with the N2K and CDnow exchange ratios offered in the merger. Allen & Company also analyzed the historical trading patterns of the N2K common stock and CDnow common stock in relation to selected public announcements regarding the companies and reviewed the perspective of certain Wall Street equity research analysts on the N2K common stock and CDnow common stock. Transaction Analysis. Allen & Company discussed with the N2K board competitive advantages resulting from the merger as expressed to Allen & Company by management of N2K and CDnow, including the expectation that the market share of the combined company would give it an improved competitive position -69- Opinions of Financial Advisors against its larger rivals as compared with either company's standalone position. Allen & Company also commented that, according to the respective management teams of N2K and CDnow, the merger could reasonably be expected to produce various operating cost savings and revenue enhancements for the combined company, including cost savings with respect to marketing costs and operating and development overhead costs and potential higher advertising revenues arising from increased pricing and greater advertising space sell- through. Allen & Company also provided the N2K board with a comparison of N2K's projected financial statements as an independent company, as provided by N2K's management, with the pro forma projected financial statements of the combined company resulting from the merger as provided by the respective management teams of N2K and CDnow. Allen & Company noted that this comparison revealed several benefits for the combined company, including various revenue enhancements and other cost efficiencies. Allen & Company commented that while there were no directly comparable transactions involving internet retailing companies, it reviewed the merger in light of selected recent acquisition transactions which it deemed could be characterized as merger of equals transactions. Allen & Company noted that, despite wide variances with respect to terms of specific transactions, the financial terms of the merger fall within the historical parameters of the terms of the comparable transactions Allen & Company reviewed. Allen & Company also analyzed the merger by comparing various financial performance criteria and stock market data for each of N2K and CDnow to financial performance criteria and stock market data for the Comparable Company Group. Allen & Company noted N2K and CDnow traded at a discount to their peers in the Comparable Company Group, which in Allen & Company's opinion, was due to concerns about N2K's and CDnow's business model and capital resources and concerns about increasing industry competition. Allen & Company highlighted, for instance, the following multiples of adjusted market value (AMV: market capitalization adjusted for the impact of dilutive securities) to estimated 1998 revenues and estimated 1999 revenues:
AMV Multiple of Revenues ------------- Company 1998 E 1999 E ------- ------ ------ N2K 1.6x 0.6x CDnow 2.7x 1.0x Comparable Company Group: Average 8.0x 4.0x Median 3.0x 1.5x
In addition, Allen & Company commented that N2K's and CDnow's multiples based on their respective enterprise values, calculated based on the recent value of all equity securities plus long-term debt and capitalized leases less cash, are considerably lower than their multiples based on adjusted market value due to the higher percentage of cash relative to their respective market values. For instance, Allen & Company highlighted the following multiples of enterprise value to estimated 1998 revenues and estimated 1999 revenues for N2K, CDnow and the Comparable Company Group:
EV Multiple of Revenues ----------- Company 1998E 1999E ------- ----- ----- N2K 0.5x 0.2x CDnow 1.8x 0.7x Comparable Company Group: Average 6.9x 3.5x Median 2.0x 1.0x
-70- Opinions of Financial Advisors Allen & Company also performed an analysis of various internet sectors (online brokers, auctions, software retailing, music retailing, portals and overall internet retailing), which demonstrated that the recognized leader in each sector generally traded at premium multiples as compared to secondary sector participants. Allen & Company noted, for instance, the multiples of adjusted market value to estimated 1998 revenues for the following leaders and secondary participants, respectively, in the following sectors:
Industry Leader Secondary Participant Sector and Multiple and Multiple ------ ----------------- ---------------------- Online brokers E*trade (4.1x) Ameritrade (2.6x) Software retailing Beyond.com (5.6x) Egghead (1.1x) Music retailing CDnow (2.7x) N2K (1.6x) Portals Yahoo! (68.8x) Excite (12.5x) Overall internet retailing Amazon.com (11.9x) Average retailer (4.1x)
Allen & Company commented that, based upon its review of recent stock market activity and its analysis of the stock market performance of internet sector market leaders, sector leaders have generally retained their values relative to market peaks to a greater extent than other internet portals and retailers. No company used in the comparable company analyses summarized above is identical to N2K or CDnow, and no transaction used in the comparable transaction analysis summarized above is identical to the merger. Accordingly, any such analysis of the fairness of the terms of the merger to the holders of N2K common stock involves complex considerations and judgments concerning differences in the potential financial and operating characteristics of the comparable companies and transactions and other factors in relation to the trading and acquisition values of the comparable companies. The preparation of a fairness opinion is not susceptible to partial analysis or summary description. Allen & Company believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, could create an incomplete view of the processes underlying the analysis set forth in its opinion. Allen & Company has not indicated that any of the analyses which it performed had a greater significance than any other. In determining the appropriate analyses to conduct and when performing those analyses, Allen & Company made numerous assumptions with respect to industry performance; general business, financial, market and economic conditions; and other matters, many of which are beyond the control of N2K or CDnow. The analyses which Allen & Company performed are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by these analyses. Such analyses were prepared solely as part of Allen & Company's analysis of the fairness, from a financial point of view, of the terms of the merger to the holders of N2K common stock. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities may trade at the present time or at any time in the future. Allen & Company is a nationally recognized investment banking firm that is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwriting, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. N2K retained Allen & Company based on such qualifications as well as its familiarity with N2K. As of the date of its opinion, Allen & Company and certain of its officers, directors and affiliates beneficially owned approximately 205,000 shares of N2K common stock and Allen & Company held warrants to acquire 196,110 shares of N2K common stock. In addition, as a part of its investment banking and securities trading business, Allen & Company may hold positions in and trade in the securities of N2K and CDnow from time to time. -71- Opinions of Financial Advisors N2K entered into a letter agreement with Allen & Company as of August 6, 1998, according to which Allen & Company agreed to act as N2K's financial advisor in connection with the merger and to render an opinion as to the fairness from a financial point of view of the terms of the merger to the N2K shareholders. Under the engagement letter, N2K is required to pay Allen & Company a fee equal to $1,250,000 which became due upon the delivery of the Allen & Company fairness opinion. In addition, N2K agreed to pay to Allen & Company, upon consummation of the merger, a fee equal to 1% of the total consideration received by N2K's stockholders in connection with the merger valued as of the date this joint proxy statement/prospectus is mailed to N2K's stockholders, less the fee paid to Allen & Company upon the delivery of its opinion. If the joint proxy statement/prospectus had been mailed on January 15, 1999, this 1% of the consideration would have been approximately $2,880,000. The actual amount will depend on the market value of the CDnow common stock on the mailing date of this joint proxy statement/prospectus. Whether or not the merger is consummated, N2K has agreed, according to the engagement letter, to reimburse Allen & Company for all its reasonable out-of-pocket expenses, including the fees and disbursements of its counsel, incurred in connection with its engagement by N2K, and to indemnify Allen & Company against certain liabilities and expenses in connection with its engagement. -72- Ownership of CDnow, N2K and CDnow/N2K Ownership of CDnow, N2K and CDnow/N2K The following tables contain information about the beneficial ownership of the CDnow common stock and the N2K common stock of: . Each person known . The chief executive . Each director of to us to own officer and four CDnow and N2K. beneficially more other most highly than 5% of the compensated executive outstanding shares officers of each of of the CDnow common CDnow and N2K. stock or N2K common stock. . All directors and executive officers of N2K as a group. . All directors and executive officers of CDnow as a group. Each table also contains information regarding the beneficial ownership of CDnow/N2K common stock, on a pro forma basis as if the merger has been completed, by the persons identified above based on their ownership of CDnow common stock and N2K common stock as of December 31, 1998. Unless otherwise indicated, to our knowledge, all persons listed below have sole voting and investment power over their shares of common stock, unless they share ownership with spouse.
Pro forma Beneficial Ownership Beneficial Ownership of CDnow of CDnow/N2K common stock common stock ------------------------------------ ------------------------------------ Options/ Options/ Name of Beneficial Owner Shares Warrants Total Percent Shares Warrants Total Percent - ------------------------ --------- -------- --------- ------- --------- -------- --------- ------- Executive Officers and Directors Jason Olim(1)........... 2,960,025 -- 2,960,025 16.6% 2,960,025 -- 2,960,025 9.9% Matthew Olim(1)......... 2,960,025 -- 2,960,025 16.6 2,960,025 -- 2,960,025 9.9 Rod Parker(2)........... -- 30,000 30,000 * -- 30,000 30,000 * Patrick Kerins(3)....... 1,000 1,569 2,569 * 1,000 1,569 2,569 * John Regan(4)........... -- -- -- -- -- -- -- * Joel Sussman(5)......... -- 20,500 20,500 -- -- 20,500 20,500 * All executive officers and directors of CDnow as a group (7 persons)............. 5,921,050 91,069 6,012,119 33.5 5,921,050 91,069 6,012,119 20.1 Five Percent Holders Grotech Partners IV, L.P.(6)................ 1,638,258 8,403 1,646,661 9.2 1,638,258 8,403 1,646,661 5.5
- -------- * Less than one percent. (1) Excludes 41,244 shares owned by Dave Olim, the father of Jason and Matthew Olim. Jason and Matthew Olim each disclaim beneficial ownership of these shares. The address of Jason and Matthew Olim is 1005 Virginia Drive, Fort Washington, Pennsylvania 19034. (2) Includes shares presently obtainable, or obtainable within the next 60 days, upon the exercise of stock options. (3) Excludes 1,646,661 shares held by Grotech Partners IV, L.P., of which Mr. Kerins is a managing director. Mr. Kerins disclaims beneficial ownership of any shares owned by Grotech Partners IV, L.P. (4) Excludes 181,873 shares held by Keystone Ventures IV, L.P., a partnership of which Mr. Regan is a Vice President of the general partner. Mr. Regan disclaims beneficial ownership of any shares owned by Keystone Ventures IV, L.P. (5) Includes shares presently obtainable, or obtainable within the next 60 days, upon the exercise of stock options. (6) The address of Grotech Partners IV, L.P. is 9690 Deereco Road, Timonium, Maryland 21093. Grotech Partners IV, L.P. disclaims beneficial ownership of any shares beneficially owned by Patrick Kerins. -73- Ownership of CDnow, N2K and CDnow/N2K
Pro forma Beneficial Ownership Beneficial Ownership of CDnow/N2K of N2K common stock common stock ------------------------------------- ----------------------------------- Options/ Options/ Name of Beneficial Owner Shares Warrants Total Percent Shares Warrants Total Percent - ------------------------ --------- --------- --------- ------- ------- --------- --------- ------- Executive Officers and Directors Jonathan V. Diamond..... 799,526 305,575 1,105,101 7.5% -- 917,233 917,234 3.0% Lawrence L. Rosen(1).... 723,650 304,325 1,027,975 7.0 600,629 252,590 853,219 2.8 Robert David Grusin..... 704,420 304,325 1,008,745 6.9 -- 837,258 837,258 2.7 Susanne Harrison(2)..... 2,264 16,393 18,687 * 1,879 13,606 15,485 * James E. Coane(3)....... 100,000 80,862 180,862 1.2 83,000 67,115 150,115 * Robert C. Harris........ -- 71,875 71,875 * -- 59,656 59,656 * Bruce Johnson........... -- 80,490 80,490 1.0 -- 66,806 66,806 * All executive officers and directors of N2K as a group (10 persons)............ 2,568,607 1,153,160 3,721,767 -- 685,508 3,089,067 3,774,575 11.2
- -------- * Less than one percent. (1) Includes 187,500 shares of N2K common stock (corresponding to 155,625 shares of CDnow/N2K common stock) held by the Lawrence L. Rosen Family Trust. Mr. Rosen disclaims beneficial ownership of the shares owned by the Lawrence L. Rosen Family Trust. (2) Includes 1,338 shares of N2K common stock held by Ms. Harrison's spouse (corresponding to 1,110 shares of CDnow/N2K common stock). Ms. Harrison disclaims beneficial ownership of any shares owned by her spouse. (3) Includes 25,000 shares of N2K common stock (corresponding to 20,750 shares of CDnow/N2K common stock) owned by Mr. Coane's spouse. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires a company's directors and executive officers and persons who beneficially own more than 10% of that company's common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. These directors, executive officers and greater than 10% stockholders are required by SEC regulation to furnish to the company copies of all Section 16(a) forms they file. N2K believes that for fiscal year 1998, all Section 16(a) filing requirements were satisfied on a timely basis, except that Robert C. Harris, Jr. was late with one report and Susan Harris was late with two reports. N2K believes that for fiscal year 1997, all Section 16(a) filing requirements were satisfied on a timely basis except that James E. Coane III, Bruce Johnson and Jerold R. Rosen each failed to file one report. N2K believes that all late filings noted were inadvertent. CDnow believes that for fiscal year 1998, all Section 16(a) filing requirements were satisfied on a timely basis. -74- Comparison of Shareholders' Rights Comparison of Shareholders' Rights The rights of CDnow shareholders are currently governed by the Pennsylvania corporate law and the articles of incorporation and bylaws of CDnow. The rights of N2K shareholders are currently governed by the Delaware General Corporation Law and the certificate of incorporation and bylaws of N2K. In accordance with the merger agreement, at the closing of the merger, the shareholders of CDnow and the shareholders of N2K will become shareholders of CDnow/N2K. Accordingly, upon consummation of the merger, the rights of CDnow shareholders and N2K shareholders who become shareholders of CDnow/N2K will be governed by the Pennsylvania corporate law, the CDnow/N2K Articles of Incorporation and the CDnow/N2K bylaws. The following are summaries of material differences between current rights of CDnow and N2K shareholders and those of CDnow/N2K shareholders following the merger. The following discussions are not intended to be complete. You should also refer to the Delaware corporate law, the CDnow/N2K charter and the CDnow/N2K bylaws. Copies of the CDnow/N2K charter and the CDnow/N2K bylaws as currently proposed, are attached to this joint proxy statement/prospectus as Appendices II and III. Copies of the CDnow charter, the CDnow bylaws, the N2K Charter and the N2K bylaws will be sent to the holders of shares of CDnow common stock and N2K common stock, respectively, upon request. See "Where You Can Find More Information." Comparison of Rights of Current CDnow Shareholders with CDnow/N2K Shareholders Following the Merger CDnow and CDnow/N2K are both organized under the laws of Pennsylvania and are subject to the Pennsylvania corporate law. Any differences, therefore, in the rights of the holders of CDnow/N2K common stock and CDnow common stock arise solely from the differences in their respective articles of incorporation and bylaws and are described below. Number and Election of Directors The CDnow bylaws and the CDnow/N2K bylaws each establish three classes of directors and each provide that the total number of directors and the number of directors within each class shall be as determined by the CDnow/N2K board. The CDnow/N2K bylaws, however, contain special provisions regarding the composition of the board of directors prior to December 31, 2001. See "Directors and Management of CDnow/N2K Following the Merger." Action by Shareholders Without a Meeting Under the Pennsylvania corporate law, unless the bylaws of a corporation provide otherwise, any corporate action may be taken without a meeting by unanimous written consent, or if the bylaws provide for it, by partial written consent. The CDnow bylaws provide that action required or permitted to be taken at a shareholders' meeting may be taken without a meeting if consents thereto are delivered by shareholders possessing a majority of the outstanding shares of CDnow common stock to the secretary of the board. The CDnow/N2K bylaws allow shareholders to take action without a meeting only by unanimous written consent. Shareholder's Proposals The CDnow bylaws do not require advance notice for shareholder proposals. The CDnow/N2K bylaws provide that nominations by shareholders of persons for election to the board of directors at the annual meeting and for the proposal of other business to be considered at an annual meeting must be received not less than 60 days prior to the meeting. This 60 day deadline is decreased to 15 days if less than 75 days' notice or prior public disclosure of the date of the meeting is given or made to the shareholders. -75- Comparison of Shareholders' Rights Amendments to Bylaws Under the Pennsylvania corporate law, bylaws may be adopted, amended and repealed by the shareholders entitled to vote thereon. This authority may be expressly vested in the board of directors by the bylaws, subject to the power of the shareholders to change this action, unless the subject of the amendment is solely within the decision power of the shareholders. The CDnow bylaws and CDnow/N2K bylaws may be amended or repealed or new bylaws may be adopted, either (a) by vote of the shareholders at any annual or special meeting, or (b) with respect to matters not committed to the shareholders by statute, by a vote of a majority of the board of directors. The provisions in the CDnow/N2K bylaws relating to the election of directors prior to December 31, 2001 and to the employment agreements of Jonathan V. Diamond and Jason Olim, however, may be amended only upon action by an 80% majority of the entire CDnow/N2K board. Anti-Takeover Provisions The Pennsylvania corporate law contains provisions applicable to publicly-held Pennsylvania corporations that may be deemed to have an anti-takeover effect. Pennsylvania corporations may expressly opt-out of one or all of these provisions. CDnow has opted out of all but one of these provisions and CDnow/N2K has opted out of all but two of these provisions. Under Section 1715 of the Pennsylvania corporate law, directors of a corporation are not required to regard the interests of the shareholders as being dominant or controlling in considering the best interests of the corporation. The directors may consider, to the extent they deem appropriate, such factors as the effects of any action upon any group affected by such action, including, shareholders, employees, suppliers, customers and creditors of the corporation and upon communities in which offices or other establishments of the corporation are located. The directors may also consider the short term and long term interests of the corporation. This may include benefits that may accrue to the corporation from its long term plans and the possibility that these interests may be best served by the continued independence of the corporation. In addition, the directors may consider the resources, intent and conduct of any person seeking to acquire control of the corporation and all other pertinent factors. The Pennsylvania corporate law provisions also provide directors with broad discretion with respect to actions that may be taken in response to acquisitions or proposed acquisitions of corporate control. Section 1715 is applicable to each of CDnow/N2K and CDnow. Subchapter F of Subchapter 25 of the Pennsylvania corporate law is designed to regulate certain "business combinations" between Exchange Act companies and "interested shareholders." In general, Subchapter F prohibits the consummation of enumerated business combination transactions, such as mergers and stock acquisitions, during a five year moratorium period unless either the stock purchase through which the interested shareholder became an interested shareholder receives the prior approval of a corporation's board of directors or such business combination transaction received the prior approval of a corporation's board or the approval of specified classes of shareholders or all shareholders. In some instances the interested shareholder must also comply with specified "fair price" valuation and payment requirements. The moratorium period runs from the date on which the interested shareholder becomes an "interested shareholder." Generally, a shareholder becomes an interested shareholder on the date the shareholder first acquires beneficial ownership of 20% or more of the corporation's voting shares. After the moratorium period, a corporation can undertake a business combination with the interested shareholder only upon shareholder approval as specified in Subchapter F and, in some cases, upon payment of a specified "fair price" to shareholders. Section F is applicable to CDnow/N2K and inapplicable to CDnow. Section 1715 and Subchapter F of the Pennsylvania corporate law may discourage open market purchases or a non-negotiated tender or exchange offer for common stock and, accordingly, may be considered disadvantageous by a shareholder who would desire to participate in any such transactions. In addition, Section 1715 and Subchapter F may have a depressive effect on the price of common stock. -76- Comparison of Shareholders' Rights Comparison of Rights of Current N2K Shareholders and CDnow/N2K Shareholders Following the Merger Dividend Rights N2K. Under the Delaware corporate law, a corporation may pay dividends out of surplus or, if no such surplus exists, out of net profits for the fiscal year in which such dividends are declared and/or for its preceding fiscal year, provided, however, that dividends may not be paid out of net profits if the capital of such corporation is less than the aggregate amount of capital represented by the outstanding stock of all classes having a preference upon the distribution of assets. CDnow/N2K. Under the Pennsylvania corporate law, a corporation is prohibited from making a distribution to shareholders if, after giving effect thereto: . that corporation would be unable to pay its debts as they become due in the usual course of business; or . the total assets of that corporation would be less than the sum of its total liabilities plus the amount that would be needed, if that corporation were then dissolved, to satisfy the rights of shareholders having superior preferential rights upon dissolution to the shareholders receiving such distribution. For the purpose of clause (b), the board of directors may base its determination on one or more of the following: the book value, or the current value, of the corporation's assets and liabilities, unrealized appreciation and depreciation of the corporation's assets and liabilities or any other method that is reasonable in the circumstances. The CDnow/N2K bylaws provide that, subject to the Pennsylvania corporate law and the CDnow/N2K charter, the board of directors may declare dividends in cash or property other than its own shares. The CDnow/N2K bylaws state that if at the time CDnow/N2K has no earned surplus and is not insolvent, the board of directors may distribute to holders of CDnow/N2K shares having a cumulative preferential right to receive dividends in discharge of their cumulative dividend rights, dividends payable in cash out of the unrestricted capital surplus if CDnow/N2K would not thereby be rendered insolvent. These payments shall be identified as a payment of cumulative dividends out of capital surplus. Number and Election of Directors N2K. Under the Delaware corporate law, cumulative voting in the election of directors is only permitted if expressly authorized in a corporation's certificate of incorporation. The N2K charter does not provide for cumulative voting in the election of directors. The N2K bylaws provide that the number of directors shall be fixed from time to time by resolution of the board of directors. There are currently seven members of the N2K board. Under the Delaware corporate law and the N2K bylaws, any director or the entire board of directors may be removed, with or without cause, by the owners of a majority of the shares then entitled to vote at an election of directors or by consent of the holders of a majority of the outstanding stock. The N2K charter does not provide for a classified board. CDnow/N2K. Under the Pennsylvania corporate law, cumulative voting is required unless otherwise provided in the articles of incorporation. The CDnow/N2K charter provides that shareholders shall not have the right to cumulate their votes for the election of directors. Under the Pennsylvania corporate law, the board of directors may be removed at any time with or without cause by the vote of shareholders entitled to vote thereon. Furthermore, the articles of a corporation may not prohibit the removal of directors by the shareholders for cause. The CDnow/N2K bylaws state that the entire board of directors or any individual directors may be removed only for cause by a vote of a majority of the shareholders entitled to vote thereon. The CDnow/N2K bylaws will provide for a board of directors consisting of nine persons divided among three classes. The CDnow/N2K bylaws further provide that, until December 31, 2001, four members of the board of CDnow/N2K will be CDnow directors and three members of the board of CDnow/N2K will be N2K directors. Initially, two members of the board of CDnow/N2K will be independent directors jointly selected by the CDnow directors and the N2K directors. The Class I directors will consist of one CDnow director, one N2K director and one -77- Comparison of Shareholders' Rights independent director. The Class II directors will consist of one CDnow director, one N2K director and one independent director. The Class III directors will consist of two CDnow directors and one N2K director. Until December 31, 2001, the board of CDnow/N2K is obligated by the CDnow/N2K bylaws to nominate at each shareholders' meeting such designees, nominated by the N2K directors or the CDnow directors, as may be necessary to ensure that there will be four CDnow directors and three N2K directors. Fiduciary Duties of Directors N2K. Under the Delaware corporate law, the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders. Under the Delaware corporate law, the duty of care requires that the directors act in an informed and deliberative manner and to inform themselves, prior to making a business decision, of all material information reasonably available to them. The duty of care also requires that directors exercise care in overseeing and investigating the conduct of corporate employees. The duty of loyalty may be summarized as the duty to act in good faith, not out of self-interest, and in a manner which the directors reasonably believe to be in the best interests of the shareholders. A party challenging the propriety of a decision of a board of directors bears the burden of rebutting the applicability of the presumptions afforded to directors by the "business judgment rule." If the presumption is not rebutted, the business judgment rule attaches to protect the directors and their decisions, and their business judgments will not be second guessed. Where, however, the presumption is rebutted, the directors bear the burden of demonstrating the entire fairness of the relevant transaction. Notwithstanding the foregoing, Delaware courts subject directors' conduct to enhanced scrutiny in respect of defensive actions taken in response to a threat to corporate control and approval of a transaction resulting in a sale of control of the corporation. CDnow/N2K. The fiduciary duties of directors are similar under the Pennsylvania corporate law to the duties prescribed under the Delaware corporate law. Under the Pennsylvania corporate law, directors are required to discharge their duties in good faith and in a manner reasonably believed to be in the best interests of the corporation. They are required to use such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. Unlike the Delaware corporate law, however, the Pennsylvania corporate law includes a provision specifically permitting directors, in discharging their duties, to consider the effects of any action taken by them upon any or all groups affected by such action, including shareholders, employees, suppliers, customers and creditors of such corporation, and upon communities in which offices or other establishments of such corporation are located. Furthermore, unlike the Delaware corporate law, the Pennsylvania corporate law also makes clear that directors have no greater obligation to justify their activities and need not meet any higher burden of proof in the context of a potential or proposed acquisition of control than in any other context. Liability of Directors N2K. The Delaware corporate law permits a corporation to include in its certificate of incorporation a provision limiting or eliminating the liability of its directors to such corporation or its shareholders for monetary damages arising from a breach of fiduciary duty, except for: . a breach of the duty of loyalty to the corporation or its shareholders; . acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . a declaration of a dividend or the authorization of the repurchase or redemption of stock in violation of the Delaware corporate law; or . any transaction from which the director derived an improper personal benefit. The N2K charter contains such a provision eliminating the liability of its directors to such extent. -78- Comparison of Shareholders' Rights CDnow/N2K. Under the Pennsylvania corporate law, a corporation may include in its bylaws a provision, adopted by a vote of its shareholders, which eliminates the personal liability of its directors, as such, for monetary damages for any action taken or the failure to take any action unless . such directors have breached or failed to perform their duties; and . the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. A Pennsylvania corporation is not empowered, however, to eliminate personal liability where the responsibility or liability of a director is pursuant to any criminal statute or is for the payment of taxes pursuant to any federal, state or local law. Indemnification of Directors and Officers N2K. Under the Delaware corporate law, a corporation may indemnify any person involved in a third party action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of being a director, officer, employee or agent of the corporation, against expenses (including attorneys' fees), judgments, fines and settlement amounts actually and reasonably incurred in connection with such action, suit or proceeding or incurred by reason of such persons being or having been a representative of such corporation, if such person acted in good faith and reasonably believed that his actions were in or not opposed to the best interests of such corporation and, with respect to any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. Under the Delaware corporate law, a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust of other enterprise against expenses, including attorney's fees, actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The Delaware corporate law also provides that a corporation may advance to a director or officer expenses incurred by him in defending any action, upon receipt of an undertaking by the present or former director or officer to repay the amount advanced if it is ultimately determined that he is not entitled to indemnification. A determination as to the amount of the indemnification to be made by the corporation shall be made, with respect to a person who is a director or officer at the time of that determination by a majority vote of the directors who are not parties to that action, even though less than a quorum, or by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or if there are no such directors, or, if these directors so direct, by independent legal counsel, or by the shareholders. If, however, a present or former director or officer is successful in defending a third party or derivative action, indemnification for expenses incurred is mandatory. The Delaware corporate law provides further that the provisions for indemnification contained therein are nonexclusive of any other rights to which the party may be entitled under any bylaw, agreement, vote of shareholders, disinterested directors or otherwise. The N2K bylaws provide for indemnification of any person to the fullest extent permitted by law and authorize N2K to purchase and maintain insurance on behalf of any such person. CDnow/N2K. The provisions of the Pennsylvania corporate law regarding indemnification are substantially similar to those of the DGCL. Unlike the Delaware corporate law, however, the Pennsylvania corporate law expressly permits indemnification in connection with any action, including a derivative action, unless a court determines that the acts or omissions giving rise to the claim constituted willful misconduct or recklessness. The CDnow/N2K bylaws provide for indemnification of representatives against liability incurred by reason of the fact that such representative was serving in an indemnified capacity except (a) where -79- Comparison of Shareholders' Rights indemnification is expressly prohibited by applicable law, or (b) where a determination is made that the representative's conduct constituted willful misconduct or recklessness within the Pennsylvania corporate law, was based upon or attributable to the receipt by the representative of a personal benefit to which the representative is not legally entitled or was otherwise unlawful. Annual Meetings N2K. Under the Delaware corporate law, if the annual meeting for the election of directors is not held on the designated date, or action by written consent to elect directors in lieu of an annual meeting has not been taken, the directors are required to cause that meeting to be held as soon as is convenient. If there is a failure to hold the annual meeting or to take action by written consent to elect directors in lieu of an annual meeting for a period of 30 days after the designated date for the annual meeting, or if no date has been designated for a period of 13 months after latest to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of an annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any shareholder or director. CDnow/N2K. Under the Pennsylvania corporate law, if the annual meeting for election of directors is not held within six months after the designated date, any shareholder may call the meeting at any time thereafter. Special Meetings N2K. Under the Delaware corporate law, a special meeting of the shareholders may be called by the board of directors or any other person as may be authorized by the certificate of incorporation or the bylaws. The N2K bylaws state that the special meetings of the shareholders for any purpose may be called by the board of directors, the President or the Secretary. The N2K bylaws also state that a special meeting of the shareholders shall be called by the President or the Secretary whenever shareholders owning a majority of the shares of N2K entitled to vote on matters to be submitted to the shareholders shall make application therefore in writing. CDnow/N2K. Under the Pennsylvania corporate law, special meetings of shareholders may be called by the board of directors, by any officers or by any other persons as provided in the bylaws, and, unless otherwise provided in the articles, by shareholders entitled to cast at least 20% of the votes that all shareholders are entitled to cast at a particular meeting. The CDnow/N2K bylaws, however, provide that special meetings of the shareholders may only be called at any time by the Chief Executive Officer or a majority of the board of directors and may not be called by shareholders. Action by Shareholders Without a Meeting N2K. The Delaware corporate law permits the shareholders of a corporation to consent in writing to any action without a meeting, unless the certificate of incorporation of that corporation provides otherwise, provided this consent is signed by shareholders having at least the minimum number of votes required to authorize that action at a meeting of shareholders at which all shares entitled to vote thereon were present and voted. The N2K charter does not restrict the ability of N2K shareholders to act by written consent. CDnow/N2K. Under the Pennsylvania corporate law, unless the bylaws of a corporation provide otherwise, any corporate action may be taken without a meeting, by partial or unanimous written consent. The CDnow/N2K Bylaws allow shareholders to take action without a meeting only by unanimous written consent. Shareholder Proposals N2K. The Delaware corporate law does not include a provision restricting the manner in which nominations for directors may be made by shareholders or the manner in which business may be brought before a meeting. The N2K bylaws permit shareholders to call a special meeting but require that such request be in writing, state the purpose thereof and be delivered to the President or Secretary. -80- Comparison of Shareholders' Rights CDnow/N2K. The Pennsylvania corporate law, like the Delaware corporate law, does not include a provision restricting the manner in which nominations for directors may be made by shareholders or the manner in which business may be brought before a meeting. The CDnow/N2K bylaws provide that nominations by shareholders of persons for election to the board of directors at the annual meeting and for the proposal of other business to be considered at an annual meeting must be received not less than 60 days prior to the meeting. This 60 day deadline is decreased to 15 days if less than 75 days' notice or prior public disclosure of the date of the meeting is given or made to the shareholders. Charter Amendments N2K. Under the Delaware corporate law, an amendment or change to the certificate of incorporation generally requires the approval of the board of directors, followed by the approval of such amendment by the affirmative vote of the owners of a majority of the shares entitled to vote thereon. When an amendment of the certificate would adversely affect the rights of a class of stock or the rights of a series of a class, the Delaware corporate law provides that the enactment of the amendment also requires the affirmative vote of the owners of a majority of the outstanding shares of such class or series. CDnow/N2K. Under the Pennsylvania corporate law, unlike the Delaware corporate law, an amendment to the articles only requires the approval of the board of directors followed by the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon and, if any class or series of shares is entitled to vote thereon as a class, the affirmative vote of a majority of the votes cast in each such class vote. Furthermore, the Pennsylvania corporate law provides that, unless otherwise provided in the articles, an amendment of the articles of a corporation need not be adopted by the board of directors prior to its submission to the shareholders for approval if it is proposed by a petition of shareholders entitled to cast at least 10% of the votes that all shareholders are entitled to cast thereon. The CDnow/N2K charter may be amended as provided by the Pennsylvania corporate law. Amendments to Bylaws N2K. Under the Delaware corporate law, bylaws may be adopted, amended or repealed by the shareholders entitled to vote thereon, provided, however, that any corporation may, in its certificate of incorporation, confer this power upon the directors, provided the power vested in the shareholders shall not be divested or limited where the board of directors also has such power. The N2K charter vests the board of directors with the authority to adopt, amend or repeal bylaws. The N2K bylaws provide that the bylaws may be amended or repealed, and new bylaws may be made, by an affirmative majority of the votes cast at any annual or special meeting of shareholders, or by an affirmative vote of a majority of the directors present at a meeting of the board of directors. CDnow/N2K. Under the Pennsylvania corporate law, bylaws may be adopted, amended and repealed by the shareholders entitled to vote thereon. This authority may be expressly vested in the board of directors by the bylaws, subject to the power of the shareholders to change such action, unless the subject of the amendment is solely within the province of the shareholders. The provisions in the CDnow/N2K bylaws relating to the election of directors prior to December 31, 2001 and amendments to the employment agreements of Jonathan V. Diamond and Jason Olim, however, require the approval of an 80% vote of the entire CDnow/N2K board. Mergers and Major Transactions N2K. Under the Delaware corporate law, whenever the approval of the shareholders of a corporation is required for an agreement of merger or consolidation or for a sale, lease or exchange of all or substantially all of its assets, such agreement, sale, lease or exchange must be approved by the affirmative vote of the owners of a majority of the outstanding shares entitled to vote thereon. Notwithstanding the foregoing, unless required by its certificate of incorporation, no vote of the shareholders of a constituent corporation surviving a merger is necessary to authorize a merger if: (a) the agreement of merger does not amend in any respect the certificate of incorporation of such constituent corporation, -81- Comparison of Shareholders' Rights (b) each share of stock of such constituent corporation outstanding immediately prior to such merger is to be an identical outstanding or treasury share of the surviving corporation after such merger and (c) either no shares of common stock of the surviving corporation and no shares, securities or obligations convertible into such common stock are to be issued under such agreement of merger, or the number of shares of common stock issued or so issuable does not exceed 20% of the number thereof outstanding immediately prior to such merger. In addition, the Delaware corporate law provides that a parent corporation that is the record holder of at least 90% of the outstanding shares of each class of stock of a subsidiary may merge such subsidiary into such parent corporation without the approval of such subsidiary's shareholders or board of directors and without the approval of the parent's shareholders. CDnow/N2K. Under the Pennsylvania corporate law, shareholder approval is required for the sale, lease, exchange or other disposition of all, or substantially all, of the property and assets of a corporation when not made in the usual and regular course of the business of such corporation or for the purpose of relocating the business of such corporation or in connection with the dissolution or liquidation of the corporation. Unlike the Delaware corporate law, however, in cases where shareholder approval is required, a merger, consolidation, sale, lease, exchange or other disposition must be approved by a majority of the votes cast by all shareholders entitled to vote thereon. Under the Pennsylvania corporate law, unless required by the bylaws of a constituent corporation, shareholder approval is not required for a plan of merger or consolidation if: (a) the surviving or new corporation is a domestic corporation whose articles are identical to the articles of such constituent corporation, (b) each share of such constituent corporation outstanding immediately prior to the merger or consolidation will continue as or be converted into, except as otherwise agreed to by the holder thereof, an identical share of the surviving or new corporation and (c) such equity plan provides that the shareholders of such constituent corporation will hold in the aggregate shares of the surviving or new corporation having a majority of the votes entitled to be cast generally in an election of directors. In addition, the Pennsylvania corporate law provides that no shareholder approval is required if, prior to the adoption of such equity plan, another corporation that is a party to such equity plan owns 80% or more of the outstanding shares of each class of such constituent corporation. Dissenters' Rights of Appraisal N2K. Under the Delaware corporate law, unless the certificate of incorporation of a corporation provides otherwise, there are no appraisal rights provided in the case of certain mergers, a sale or transfer of all or substantially all of its assets or an amendment to the corporation's certificate of incorporation. Moreover, the Delaware corporate law does not provide appraisal rights in connection with a merger or consolidation, unless the certificate of incorporation provides otherwise, to the owners of shares of a corporation that, at the record date fixed to determine the shareholders entitled to receive notice of and to vote at the meeting of shareholders to act upon the merger or consolidating agreements, is either: . listed on a national securities exchange or designated as a national market system security by the NASD, or . held of record by more than 2,000 shareholders, unless the applicable agreement of merger or consolidation requires the owners of these shares to receive, in exchange for these shares, anything other than: . shares of stock of the resulting or surviving corporation; . shares of stock of any other corporation listed on a national securities exchange; and, or designated as described above, or held of record by more than 2,000 holders; or . cash in lieu of fractional shares or any combination of the foregoing. -82- Comparison of Shareholders' Rights In addition, the Delaware corporate law denies appraisal rights to the shareholders of the surviving corporation in a merger if that merger did not require for its approval, the vote of the shareholders of the surviving corporation. CDnow/N2K. The Pennsylvania corporate law provides that shareholders of a corporation have a right of appraisal with respect to specified corporate actions, including: . a plan of merger, consolidation, division, as defined in Section 1951 of the Pennsylvania corporate law share exchange or conversion, as defined in Section 1961 of the Pennsylvania corporate law; . certain other plans or amendments to its articles in which disparate treatment is accorded to the holders of shares of the same class or series; and . a sale, lease, exchange or other disposition of all or substantially all of the corporation's property and assets, except if, such sale, lease, exchange or other disposition is: . made in connection with the dissolution or liquidation of the corporation; . the acquiring corporation owns all of the outstanding shares of the acquired corporation or the voting rights, preferences, limitations or relative rights of the acquired corporation are not altered thereby; or . the assets sold, leased, exchanged or otherwise disposed of are simultaneously leased back to the corporation. Under the Pennsylvania corporate law, appraisal rights are not provided, however, to the holders of shares of any class that is either listed on a national securities exchange or held of record by more than 2,000 shareholders unless: . such shares are not converted solely into shares of the acquiring, surviving, new or other corporation and cash in lieu of fractional shares; . such shares constitute a preferred or special class of stock, and the articles of such corporation, the corporate action under consideration or the express terms of the transaction encompassed in such corporate action do not entitle all holders of the shares of such class to vote thereon and the transaction requires for the adoption thereof the affirmative vote of a majority of the votes cast by all shareholders of such class; or . such shares constitute a group of a class or series which are to receive the same special treatment in the corporate action under consideration, and the holders of such group are not entitled to vote as a special class in respect of such corporate action. Anti-Takeover Provisions N2K. Under the Delaware corporate law, a corporation is prohibited from engaging in any business combination with an interested shareholder who, together with his affiliates or associates owns, or within a three-year period did own, 15% or more of the corporation's voting stock, unless . prior to the time the shareholder became an interested shareholder, the board of directors approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder; . the interested shareholder owned at least 85% of the voting stock of the corporation, excluding specified shares, upon consummation of the transaction which resulted in the shareholder becoming an interested shareholder; or . on or subsequent to the time the shareholder became an interested shareholder, the business combination is approved by the board of directors of the corporation and authorized by the affirmative vote, at an annual or special meeting and not by written consent, by at least 66 2/3% of the outstanding voting shares of that corporation, excluding shares held by that interested shareholder. A business combination generally includes: -83- Comparison of Shareholders' Rights . mergers, consolidations and sales or other dispositions of 10% or more of the assets of a corporation to or with an interested shareholder; . certain transactions resulting in the issuance or transfer to an interested shareholder of any stock of the corporation or its subsidiaries; and . other transactions resulting in a disproportionate financial benefit to an interested shareholder. This provision of the Delaware corporate law does not apply to a corporation if, subject to certain requirements, the certificate of incorporation or bylaws contain a provision expressly electing not to be governed by this provision or the corporation does not have voting stock either listed on a national securities exchange, authorized for quotation on an inter-dealer quotation system of a registered national securities association or held of record by more than 2,000 shareholders. CDnow/N2K. The Pennsylvania corporate law contains provisions applicable to publicly-held Pennsylvania corporations that may be deemed to have an anti- takeover effect. CDnow/N2K has opted out of all but two of these provisions. Under Section 1715 of the Pennsylvania corporate law, directors of a corporation are not required to regard the interests of the shareholders as being dominant or controlling in considering the best interests of the corporation. The directors may consider, to the extent they deem appropriate, such factors as: . the effects of any action upon any group affected by that action, including shareholders, employees, suppliers, customers and creditors of the corporation and upon communities in which offices or other establishments of the corporation are located; . the short term and long term interests of the corporation, including benefits that may accrue to the corporation from its long term plans and the possibility that these interests may be best served by the continued independence of the corporation; . the resources, intent and conduct of any person seeking to acquire control of the corporation; and . all other pertinent factors. The Pennsylvania corporate law provisions also provide directors with broad discretion with respect to actions that may be taken in response to acquisitions or proposed acquisitions of corporate control. Subchapter F of Subchapter 25 of the Pennsylvania corporate law is designed to regulate certain business combinations between Exchange Act companies and interested shareholders. In general, Subchapter F prohibits the consummation of enumerated business combination transactions, such as mergers and stock acquisitions, during a five year moratorium period unless either the stock purchase through which the interested shareholder became an interested shareholder receives the prior approval of a corporation's board of directors or such business combination transaction received the prior approval of a corporation's board or the approval of specified classes of shareholders or all shareholders. In some instances, the interested shareholder must comply with specified fair price valuation and payment requirements. The moratorium period runs from the date on which the interested shareholder becomes interested shareholder. Generally, a shareholder becomes an interested shareholder on the date the shareholder first acquires beneficial ownership of 20% or more of the corporation's voting shares). After the moratorium period, a corporation can undertake a business combination with the interested shareholder only upon shareholder approval as specified in Subchapter F and, in some cases, upon payment of a specified fair price to shareholders. Section 1715 and Subchapter F of the Pennsylvania corporate law may discourage open market purchases or a non-negotiated tender or exchange offer for common stock and, accordingly, may be considered disadvantageous by a shareholder who would desire to participate in any such transactions. In addition, Section 1715 and Subchapter F may have a depressive effect on the price of common stock. Section 1715 and Subchapter F are applicable to CDnow/N2K. -84- Comparison of Shareholders' Rights Dissolution N2K. Under the Delaware corporate law, if the board of the directors of the corporation deems it advisable that the corporation should be dissolved and a majority of the outstanding stock of the corporation entitled to vote thereon votes in favor of the proposed dissolution, the corporation shall be dissolved upon the filing of a certificate of dissolution with the Secretary of State of the State of Delaware. The corporation shall continue after dissolution for the purposes of defending suits and settling its affairs for a three-year period. The Delaware corporate law sets forth certain payment and distribution procedures a dissolving corporation must follow in connection with winding up its affairs. Such procedures include certain notification requirements and, under certain circumstances, obtaining the approval of the Delaware Court of Chancery. Under the Delaware corporate law, directors of a dissolved corporation that comply with the payment and distribution procedures provided therein shall not be personally liable to the claimants of the dissolved corporation. CDnow/N2K. Under the Pennsylvania corporate law, if the board of directors adopts a resolution recommending to dissolve the corporation, the shareholders must adopt the resolution by the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon. Unlike the Delaware corporate law, the Pennsylvania corporate law provides two different procedures for the corporation to provide for the winding up and distribution of the corporation's assets. The board of directors of the corporation may elect that the dissolution shall proceed under Subchapter H or under Section 1975 of the Pennsylvania corporate law. Under Section 1975, the corporation must provide for the liabilities of the corporation prior to filing the articles of dissolution in the Pennsylvania Department of State. Directors of corporations that elect to follow this procedure are held to the standard of care that applies to all of their other duties. The Subchapter H provision is largely analogous to the procedure under the Delaware corporate law. Under the Pennsylvania corporate law, however, the corporation only continues to exist for the purpose of settling its affairs for a period of two years. Furthermore, the court in determining the amount of security that shall be posted by the dissolved corporation shall consider the amount that would be reasonably likely to be sufficient to provide compensation for claims that are unknown but that are likely to arise or become known for a period of only two years after the dissolution of the corporation. -85- Description of CDnow/N2K Capital Stock Following the Merger Description of CDnow/N2K Capital Stock Following the Merger The following summarizes the terms of the CDnow/N2K common stock you will receive in the merger. Please read the Amended and Restated Articles of Incorporation and the bylaws which are attached hereto as Appendices II and III. Authorized Capital Stock CDnow/N2K Capital Stock . 200 million shares of common stock, no par value authorized. . 50 million shares of preferred stock, no par value authorized. . Following the merger, approximately 29.5 million shares of common stock will be outstanding. Common Stock Voting . One vote for each share held of record. . No cumulative voting rights. . Election of directors by plurality of votes cast; and all other matters by majority of votes cast, except as otherwise required by law. Dividends . Subject to preferred stock rights, entitled to receive ratably declared dividends. . The board may only declare dividends out of legally available funds. Additional Rights . Subject to the preferred stock rights, entitled to receive ratably net assets which are available after payment of debts, upon liquidation, dissolution or winding up of CDnow/N2K. . No preemptive rights. . No subscription rights. . No redemption rights. . No sinking fund rights. . No conversion rights. The rights and preferences of common shareholders are subject to the rights of any series of preferred stock CDnow/N2K may issue. Preferred Stock By resolution of the board, CDnow/N2K may, without any further vote by its shareholders, authorize and issue an aggregate of 50 million shares of preferred stock. The preferred stock may be issued in one or more classes or series. With respect to each class or series, the board may determine the designation and the number of shares, voting rights, preferences, limitations and special rights, including any dividend rights, conversion rights, redemption rights and liquidation preferences. Because of the rights that may be granted, the issuance of preferred stock may delay or prevent a change of control. -86- Description of CDnow/N2K Capital Stock Following the Merger Pennsylvania Anti-Takeover Laws The Pennsylvania corporate law contains provisions applicable to publicly held Pennsylvania corporations that may be deemed to have an anti-takeover effect. CDnow/N2K specifically opted out of all of these provisions, except for those described below. Under Section 1715 of the Pennsylvania corporate law, directors of the corporation are not required to regard the interests of the shareholders as being dominant or controlling in considering the best interests of the corporation. The directors may consider, to the extent they deem appropriate, such factors, including: . the effects of any action upon any group affected by such actions including shareholders, employees, suppliers, customers and creditors of the corporation and upon communities in which offices or other establishments of the corporation are located; . the short term and long term interests of the corporation, including benefits that may accrue to the corporation from its long term plans and the possibility that these interests may be best served by the continued independence of the corporation; . the resources, intent and conduct of any person seeking to acquire control of the corporation; and . all other pertinent factors. Section 1715 further provides that any act of the board of directors, a committee of the board or an individual director relating to or affecting an acquisition or potential or proposed acquisition of control to which a majority of disinterested directors have assented will be presumed to satisfy the standard of care set forth in the Pennsylvania corporate law, unless it is proven by clear and convincing evidence that the disinterested directors did not consent to such act in good faith after reasonable investigation. As a result of this and the other provisions of the Pennsylvania corporate law, directors are provided with broad discretion with respect to actions that may be taken in response to acquisitions or proposed acquisitions of corporate control. Chapter 25, Subchapter F of the Pennsylvania corporate law is designed to regulate certain business combinations between most publicly traded Pennsylvania corporations and interested shareholders. In general, Subchapter F prohibits the consummation of enumerated business combination transactions during a five year moratorium period. The moratorium period does not apply to: . business combinations with persons who became interested shareholders with the approval of the board of directors; . business combinations that were approved prior to the date on which the shareholder became an interested shareholder; . business combinations approved by a majority of disinterested shareholders at a meeting at least three months after the interested shareholder acquires at least 80% of the outstanding voting stock if the consideration paid to other holders of the corporation's outstanding securities satisfies fair price requirements set forth in Subchapter F of the Pennsylvania corporate law; . business combinations approved by all of the holders of the outstanding shares. The moratorium period runs from the date on which the interested shareholder becomes an interested shareholder. Generally, a shareholder becomes an interested shareholder the date the shareholder first acquires beneficial ownership of 20% or more of the corporation's voting shares. After the moratorium period, the corporation can undertake a business combination with an interested shareholder only upon approval of disinterested shareholders holding a majority of the voting shares or in a transaction approved by shareholders that satisfies the fair price provisions referred to above. Section 1715 and Subchapter F may discourage open market purchases of common stock or a non-negotiated tender or exchange offer for the common stock of a corporation and, accordingly, may be considered disadvantageous by a shareholder who would desire to participate in any such transactions. In addition, Section 1715 and Subchapter F may have a depressive effect on the price of the common stock. -87- Description of CDnow/N2K Capital Stock Following the Merger Transfer Agent and Registrar The Transfer Agent and Registrar with respect to the CDnow/N2K common stock is Stock Trans, Inc., Ardmore, Pennsylvania. Nasdaq National Market Listing; Delisting and Deregistration of CDnow and N2K Common Stock It is a condition to the merger that the shares of CDnow/N2K common stock issuable in connection with the merger be approved for listing on the Nasdaq National Market. If we close the merger, the CDnow common stock and the N2K common stock will each cease to be listed on the Nasdaq National Market. Federal Securities Laws Consequences; Stock Transfer Restriction Agreements Unless you are an affiliate, the shares of CDnow/N2K common stock you receive in the merger will be freely transferable. Generally, an affiliate is someone who is controlled by or controls CDnow or N2K. Affiliates generally include certain officers, directors and principal shareholders of CDnow or N2K. The Securities Act of 1933, as amended and Rules 144 and 145 restrict the ability of affiliates to resell their shares of CDnow/N2K common stock. The merger agreement requires us to use reasonable efforts to obtain written agreements with our affiliates to the effect that they will not sell or otherwise dispose their shares in violation of the Securities Act or the rules. The joint proxy statement/prospectus does not cover any resales of the CDnow common stock to be received by the shareholders of CDnow or the shareholders of N2K upon consummation of the merger, and no person is authorized to make any use of this joint proxy statement/prospectus in connection with any such resale. -88- Industry Overview Industry Overview We believe that a significant opportunity exists for the online retail sale of music on the internet. According to the International Federation of the Phonographic Industry, worldwide sales of pre-recorded music and music videos in 1997 were approximately $38.1 billion, of which one-third was in North America. Online music retailers currently account for a small but growing portion of total sales. Jupiter Communications estimates that sales of pre- recorded music over the internet will grow on a worldwide basis from approximately $47 million in 1997 to $1.6 billion in 2002. A number of characteristics of online music retailing make the online sale of pre-recorded music particularly attractive relative to traditional retail stores. The online environment offers many data management and multimedia features which enable consumers to listen to sound samples, search for music by genre, title or artist and access a wealth of information and events, including reviews, related articles, music history, news and recommendations. Online retailers can more easily obtain extensive demographic and behavioral data about their customers, providing them with greater direct marketing opportunities and the ability to offer a more personalized shopping experience. In addition, online retailers can also offer consumers significantly broader product selection, the convenience of home shopping and 24-hour-a-day, seven- day-a-week operations, available to any location, foreign or domestic, that has access to the internet. While physical store-based music retailers must make significant investments in inventory, real estate and personnel for each store location, online retailers incur a fraction of these costs, generally use centralized distribution, and have virtually unlimited merchandising space. Traditional retailers are compelled to limit the amount of inventory they carry at each store and focus on a smaller selection of faster-selling hit releases. As a result, we believe that a typical music store may carry up to 12,000 merchandise units and a megastore may carry up to 50,000 merchandise units compared to the more than 390,000 merchandise units offered by the CDnow or N2K store. According to Jupiter, approximately 80% of unit sales at traditional retail stores come from approximately 20% of the available titles. Online retailers can offer consumers a broader range of titles and information and can also offer products from a wider range of music labels, including smaller independent labels which account for an increasing percentage of new titles. According to Soundscan, independent labels accounted for 21% of the total music market in 1996 versus 12% in 1992. While independent labels released 66% of new titles in 1996, traditional music stores often lack the capacity to stock or promote the vast majority of these titles. We also believe that online retailers will benefit from the changing demographic profile of music consumers. According to the Recording Industry Association of America, domestic purchases of recorded music by persons age 30 and over have increased from approximately 34% of total U.S. sales in 1996 to approximately 48% of sales, or approximately $5.9 billion, in 1997. We believe that the internet represents a particularly attractive medium for retailing to customers in this age group as they are typically less hits-driven than younger age groups and are more likely to purchase a wide variety of titles. These customers generally can afford to buy more titles at one time, have access to computers and use the internet and have credit cards with which to make electronic payments. -89- Description of CDnow Description of CDnow Business CDnow is a leading retailer of CDs and other music-related products. CDnow's online store offers broad selection, information, easy-to-use navigation and search capabilities, a high level of customer service, competitive pricing and personalized merchandising. Customers may choose from more than 390,000 CDs and other merchandise. CDnow believes that it offers customers an online selection of readily available products that is five to ten times greater than a typical music retailer maintains in store. The CDnow store also assists music buyers with approximately 345,000 music samples and 160,000 product notes, reviews, editorials and related articles, including reviews and articles from Rolling Stone, MTV/VH1, CMJ and CDnow's editorial staff. The CDnow store is open 24 hours a day, seven days a week and offers its customers convenient and timely product delivery, including an overnight delivery option. CDnow has grown rapidly since its launch in 1994. More than 738,000 customers have made purchases from 1994 through September 30, 1998. More than 442,000 of these customers made their first purchases during the nine month period ended September 30, 1998. Average daily visits to the CDnow store increased from approximately 12,000 in January 1996 to approximately 215,000 in September 1998. CDnow's net sales grew to $13.9 million for the third quarter of 1998 compared to $11.6 million for the second quarter of 1998 and $3.9 million for the third quarter of 1999. CDnow believes it has a significant number of loyal customers. Despite the rapid increase in new customers, sales to existing customers accounted for approximately 59% of net sales in the third quarter of 1998. CDnow began as a sole proprietorship in February 1994 and became a Pennsylvania corporation in April 1995. CDnow's principal offices are located at CDnow, Inc. 1005 Virginia Avenue Fort Washington, Pennsylvania 19034 (215) 619-9900 The CDnow Online Retail Store CDnow strives to make the CDnow store informative and authoritative. Customers may easily learn about, discover and purchase CDs and other music-related products. CDnow designed its store to be intuitive and easy to use. CDnow's store, allows customers to find and order a CD with a minimum of effort. CDnow offers many attractive features for music shoppers. Customers can focus their searches, browse among top sellers and other featured titles, read reviews, listen to music samples, participate in promotions and check order status. New users may access an information page that CDnow specifically designed to give shoppers a quick understanding of the site and its many features. Merchandising CDnow currently offers: more than: additional products, including . 325,000 CDs, . T-shirts, . 40,000 movies, . music books, . 10,000 music videos and . DVDs and . CD-Roms. -90- Description of CDnow To encourage purchases, CDnow features various promotions on a rotating basis throughout the store. CDnow adjusts pricing strategies and tactics as necessary to maintain competitiveness. CDnow generally prices recent releases and popular titles aggressively. CDnow reduces shipping costs for larger orders to encourage customers to purchase multiple titles. Personalization. CDnow launched its My CDnow service in September 1998 to provide customers with customized and personalized features. CDnow believes that these features will increase customer retention, likelihood of purchases and average order sizes. CDnow provides customers with: . recommendations using artificial intelligence technology; . the ability to rate albums the customer owns; . a "wish list" capability to keep track of albums the customer intends to purchase at a later date; . a "gift registry" that allows visitors to purchase albums as gifts for participating customers; . automatic login; one-click order feature; . a "favorite artists" list; . order history; and . frequent buyer points and credit information. Searching. Through CDnow's "FastFind" search engine, customers can quickly and easily navigate the store to find CDs and other products of interest. Customers can search for products based on artist, album title, song title, record label, musical genre or release date for new releases. CDnow recently upgraded its search engine using Verity, Inc.'s K2 search technology. This technology helps customers make successful searches even with incomplete or misspelled artists' names. By clicking on the album title, a visitor can browse among CDnow's database of reviews, cover art, sound samples and album notes. Through CDnow's "Lexicon" feature, customers can browse alphabetical lists based on artists, types of products, record labels and album cover art. Content and Music Discovery. CDnow believes that effective use of content encourages purchases by customers who may be browsing the site without a specific title in mind. CDnow's online store contains music samples, extensive information with regard to titles, reviews, editorials, ratings and articles on music topics and other information. To help customers browse and discover CDs, the CDnow store is organized into six music spaces: . Country/Folk . Rock/Pop . World/New Age . Jazz/Blues . Classical . Urban/Electronic The main page of each space features links to genre-specific lists, articles, reviews and contests. Within each space, customers can browse sale items, new releases, advance orders and charts, read exclusive CDnow reviews, listen to music samples and purchase CDs recommended by CDnow. Since February 1998, to enhance the attractiveness of its online store to customers, CDnow has entered into agreements with: . MTV/VH1--CDnow may use the MTV and VH1 brand names in conjunction with the display of MTV and VH1 content, music reviews and music news. . Rolling Stone Network--CDnow may use Rolling Stone's brand name in conjunction with the display of cover art and excerpts of feature stories, record reviews, artist biographies and music news from current and past editions of Rolling Stone magazine. . the CMJ New Music Report and CMJ New Music Monthly--CDnow has access to more than 25,000 reviews from CMJ. . Billboard magazine top seller music charts. -91- Description of CDnow Custom Compilations. CDnow offers customized CDs through its stores as a result of its acquisition of superSonic Boom, Inc. Customers can build full-length CDs from a collection of individual songs from major artists. CDnow manufactures and ships each custom CD from its Fort Washington facility. The customer can choose from a catalogue of more than 60,000 songs to build his or her custom CD. CDnow is currently offering a Valentine's Day collection, and intends to offer more collections in the future. In addition, CDnow sells custom CDs in volume to other companies for use by such companies in promotions they run from time to time. Purchasing. Once a customer selects a CD, he or she simply clicks on the price to add products, including advance orders of yet-to-be released products, to their virtual shopping carts. Customers can add and remove products from their shopping carts as they browse, prior to making a final purchase. The shopping cart page displays each item that has been placed in the cart, including title, price and any applicable discount. To purchase, customers select the shipping and payment methods, if desired, gift wrapping and a personalized message. Then the customer clicks on the "Place Order" button. Customers can also create a wish list of products they may want to purchase on future visits. The wish list is a special section of the My CDnow service where items may be stored between visits. Payment. Customers may pay for orders with credit cards, personal checks or money orders. For convenience, CDnow enables customers to store credit card information on CDnow's secure server, thereby avoiding the need to re-enter this information when making future purchases. CDnow offers customers a variety of shipping options, including overnight delivery. CDnow automatically confirms each order by e-mail within minutes after the final order is placed and subsequently confirms shipment of each order by e-mail. CDnow offers a money- back return policy. Distribution and Filling Orders. CDnow's inventory is owned and held by outside vendors who ship directly to CDnow's customers. The breadth of the inventory maintained by these vendors provides CDnow with the ability to maintain high order fill rates. CDnow updates its site daily with inventory information received from its vendors, which enables customers to check the availability of products before ordering. CDnow electronically transmits orders to its outside vendors at least once daily. These vendors ship orders using a CDnow label and invoice, in most cases within a day after an order is placed with CDnow. Multilingual Capabilities. CDnow generated approximately 22% of its net sales from international markets for the quarter ended September 30, 1998. CDnow offers foreign language versions of its Web site that contain translation of account registration and ordering instructions and supports its international sales efforts with customer service representatives fluent in these languages. CDnow currently offers versions of its online store in the following foreign languages: . Spanish . Portuguese . French . Japanese . German . Dutch . Italian Marketing and Promotion CDnow designed its marketing and promotion strategy to broaden awareness of the CDnow brand, increase customer traffic to CDnow's Web site and encourage new and repeat purchases. CDnow markets and promotes its brand using marketing agreements, online and traditional advertising, CDnow's Cosmic Credit Program, and direct marketing. CDnow believes that using these multiple marketing channels reduces reliance on any one source of customers, maximizes brand awareness and lowers average customer acquisition cost. -92- Description of CDnow Marketing Agreements .CDnow believes that marketing agreements with major internet service and content providers and global music-oriented media companies can be a significant source of new customers. CDnow has the following marketing agreements and arrangements: Yahoo! On September 2, 1998, the CDnow entered into a global merchant agreement with Yahoo! Inc., extending and expanding upon earlier agreements with Yahoo! of August 1997 and March 1998. Under the Yahoo! agreement: . CDnow continues to be granted music-retail exclusivity on music- related search results pages on Yahoo!'s main directory, www.yahoo.com; . CDnow is integrated into other areas of the Yahoo! Service, including Yahoo! Mail; . CDnow becomes the premier music retailer on many of Yahoo!'s international sites; . the term of the Yahoo! agreement ends on December 31, 2000. CDnow may terminate the Yahoo! agreement earlier upon payment of a specified termination fee; and . coincident with the Yahoo! agreement, Yahoo! agreed to purchase up to $2 million in newly issued shares of CDnow common stock, of which $1 million was invested in September 1998, and the remainder is to be invested as of December 31, 1999. WebCrawler. CDnow and Excite have entered into an agreement under which CDnow is designated as the exclusive online music retailer within Excite's WebCrawler service. Excite has granted CDnow the exclusive right to sponsor targeted links, advertising banners and specific keywords for online retail music purchases within WebCrawler. The agreement also requires Excite to deliver a minimum number of links and banners on the WebCrawler service during each year of the agreement and limits Excite's ability to include advertising for other music retailers on the WebCrawler service. GeoCities. CDnow and GeoCities, Inc. have entered into an agreement under which CDnow is designated as the exclusive retailer of music and video products and one of the four key commerce partners that will occupy a premier position on certain portions of the GeoCities Web site. The agreement requires GeoCities to deliver a minimum number of impressions per month, with each impression consisting of a user's viewing of a page on the GeoCities site containing a link to CDnow's Web site. The initial term of the agreement expired in February 1999, and has been extended for two months while the companies discuss the terms renewal of the agreement. Lycos. CDnow and Lycos have entered into an agreement designating CDnow as the exclusive music retailer for the Lycos and Tripod Web sites. Lycos has granted CDnow the exclusive right to sponsor targeted links, relevant content and promotions throughout the Lycos and Tripod Web sites. In addition, CDnow has a right-of-first-refusal regarding any music retail opportunities on the Lycos and Tripod Web sites. The agreement requires Lycos and Tripod to deliver a minimum number of CDnow-branded page views during each year of the term, and precludes Lycos and Tripod from entering into new agreements regarding advertising for other music retailers throughout the Lycos and Tripod Web sites. The agreement expires in August 2001. Lycos Bertelsmann. CDnow and Lycos Bertelsmann have entered into an agreement designating CDnow as the exclusive music retailer for Lycos Bertelsmann's Web services in various European countries, and CDnow has been granted the exclusive right to sponsor targeted Links, advertising banners, specific keywords, and relevant content on the Lycos Bertelsmann sites. In addition, CDnow has a right-of-first-refusal regarding any opportunities that Lycos Bertelsmann offers to any other entity that principally sells music products. The agreement requires Lycos Bertelsmann to deliver a minimum number of page views during each year of the term. The term of the agreement expires in April 2001. -93- Description of CDnow Rolling Stone Network. CDnow and Rolling Stone Network have entered into an agreement designating CDnow as the only World Wide Web-based music retailer that may use the Rolling Stone brand name in conjunction with the display of cover art and excerpts of feature stories, record reviews, artist biographies and music news from current and past editions of Rolling Stone magazine. In addition, CDnow is the exclusive online music retailer on the JAMtv and Rolling Stone Network Web sites with the exclusive right to sponsor targeted links, relevant content and promotions. The agreement also requires the delivery of a minimum number of page views on the JAMtv and Rolling Stone Network Web sites during each year of the agreement. CDnow has also agreed to purchase targeted print, radio broadcast and other promotional advertising from JAMtv and Straight Arrow, the publisher of Rolling Stone magazine. MTV/VH1. Under the MTV/VH1 alliance, CDnow is the premier online retailer of recorded music on the MTV and VH1 cable television channels with preferred advertising rights with respect to special events and promotions, including exclusive online sponsorship of the 1998 Video Music Awards. The alliance with MTV/VH1 entitles CDnow to use the MTV and VH1 brand names in conjunction with the display of MTV and VH1 content, music reviews and music news and provides CDnow with integrated links from the MTV and VH1 Web sites. CDnow also has certain rights of first refusal to be the exclusive online music retailer of the 1999 and 2000 Video Music Awards with a portion of its minimum annual payments applicable, at CDnow's option, to such sponsorship. Online and Traditional Advertising CDnow promotes its brand using a combination of online and traditional advertising. CDnow advertises on the sites of major internet content and service providers, including Alta Vista, Microsoft Network and targeted music- related sites such as Billboard Magazine's online site. As part of these arrangements, CDnow typically purchases banner advertisements, often in conjunction with specified search keywords or on contextually appropriate pages, that allow consumers to immediately click through to the CDnow site. The significant flexibility of online advertising allows CDnow to quickly adjust its advertising plans in response to seasonal and promotional activities. CDnow believes that traditional advertising is a key ingredient in building brand recognition and promoting the benefits of online retail shopping. Traditional advertising can be an effective means of promoting widespread brand awareness and attracting traditional retail consumers to CDnow's online store including consumers with little or no history of online purchases. CDnow's traditional advertising efforts have included radio advertising in major markets, print advertising in music-related publications and television advertising. CDnow has purchased television advertising on such programs as MTV's 1998 Video Music Awards, VH1's Flashback Week and the 1998 and 1999 Grammy Awards. Cosmic Credit Program Through its Cosmic Credit Program, as of September 30, 1998, CDnow has arrangements with over 118,000 small Web sites, typically fan sites devoted to particular music artists. Approximately 108,000 of these sites have enrolled since December 31, 1997. CDnow provides Cosmic Credit sites with embedded hyperlinks through which potential customers can immediately be connected to the CDnow site. CDnow pays Cosmic Credit participants commissions in store credit or cash based upon the dollar amount of purchases made by persons using the link. These highly focused, music-oriented sites are a significant source of traffic and new customers for CDnow. Cosmic Credit participants sign up online and are listed inside the CDnow store to assist CDnow's customers in finding these sites. CDnow rewards the best Cosmic Credit sites with special incentives. Direct Marketing CDnow uses direct marketing techniques to target new and existing customers with communications and promotions. CDnow sends a personalized e-mail newsletter, The CDnow Update, to its customers. This e-mail newsletter includes purchase recommendations based on demonstrated customer preferences and prior purchases. The newsletter also includes more general information concerning new releases and promotions. In -94- Description of CDnow addition, CDnow targets e-mail communications to persons who have registered at the CDnow store but have not made purchases, to new customers and to customers who have not made recent purchases. Through these customized programs, CDnow hopes to further stimulate demand, increase repeat purchases, build customer loyalty, and better understand customer preferences. Customer Service CDnow believes that a high level of customer service and support is critical to retaining and expanding its user base. CDnow customer service representatives are available 24 hours a day on weekdays and from 10:00 am to 6:00 PM Eastern Time on weekends to provide assistance via e-mail, phone or fax. CDnow strives to answer all inquiries within 24 hours. CDnow currently has approximately 45 customer service representatives, including representatives fluent in nine foreign languages. Customer service representatives handle questions about orders, assist customers in finding CDs and other music-related products and register a customer's credit card information over the telephone. Customer service representatives are a valuable source of feedback regarding user satisfaction. Distribution and Filling Orders CDnow does not carry an inventory and relies exclusively on third party vendors for distribution and filling orders. CDnow believes that this distribution strategy allows it to offer extensive selection while avoiding the high fixed costs and capital requirements associated with owning and warehousing product inventory and the significant operational effort associated with same-day shipment. CDnow has experienced a return rate of approximately one percent of all merchandise sold. Since August 1994, CDnow has primarily used Valley Media to fill orders for CDs, cassettes and vinyl records produced in the U.S. CDnow transmits data to Valley through a secure network to ensure customer security and data integrity. Valley picks, packs and ships customer orders and charges CDnow for merchandise, shipping and handling. In most cases, products are shipped within two business days after an order is placed with CDnow. CDnow performs customer billing through a third-party credit card processor. To date, Valley has satisfied CDnow's requirements on a timely basis. For the nine months ended September 30, 1998, payments to Valley accounted for approximately 85% of CDnow's cost of sales. For the year ended December 31, 1997, payments to Valley accounted for approximately 81% of CDnow's cost of sales. CDnow's agreement with Valley expires in June 1999. Valley may terminate its existing agreement with CDnow upon 30 days' written notice, if Valley discontinues filling orders for all of its online service customers. Since May 1997, CDnow has used MSI to fill orders for CDs produced by non-U.S. labels. Beginning in July 1998, CDnow has also utilized MSI to provide an additional 60,000 international titles from a fulfillment center in the Netherlands servicing primarily European markets. Technology CDnow has developed technologies and implemented systems to support distributed, reliable and scalable online retailing in a secure and easy-to-use format. Using a combination of proprietary solutions and commercially available, licensed technologies, CDnow has deployed systems for online content dissemination, online transaction processing, customer service, market analysis and electronic data interchange. Multimedia and User Database. CDnow has developed a database management system to index, retrieve and manipulate product information, content, product catalog, orders and transactions, and customer information. This system allows for rapid searching, sorting, viewing and distribution of a large volume of content including audio samples, music reviews, track lists, cover art and photos. CDnow uses Oracle 7.3 as the technology for database management. In December 1997, CDnow deployed a data warehouse that enables it to access detailed transaction and customer interaction data and perform sophisticated market analysis and predictive modeling. -95- Description of CDnow Store Architecture. CDnow's hardware and software systems are based upon a distributed transaction processing model that allows applications to be distributed among multiple parallel servers. Many of the software components, and the pages of the CDnow online store, are developed using a proprietary technology that extends HTML with product, transaction, retail, and advanced programming constructs. This technology results in the separation of the page look and feel from the individual data elements and their associated database lookups thus reducing software updates for changes to the CDnow online store and minimizing the engineering required to maintain a growing amount of items and content. CDnow's technology also enables other internet sites with different formats to integrate CDnow store elements such as search, artist and album pages. Interfaces. CDnow has developed technologies and tools for managing interfaces with internet service and content providers. A switchboard system and linking interface are made available to businesses with which CDnow has developed marketing arrangements and to Cosmic Credit sites. These technologies and tools and the switchboard system and linking interface allow the linking of external internet sites, banners, and promotions to items and functions contained in the CDnow store. CDnow's Online Marketing group uses proprietary tools to manage the marketing and Cosmic Credit relationships in an efficient manner. CDnow has developed similar systems and tools for its Customer Service department. The ability to manage customer accounts and orders enables CDnow's Customer Service department to add capacity effectively and communicate efficiently, thereby responding to most inquiries within 24 hours. These systems automate many routine communications and allow customers to better manage their accounts and orders. Fault Tolerance and Scalability. CDnow's hardware servers, storage systems, internet connections and networks allow its online systems to operate continuously and enable it to maintain a 24-hour-a-day, seven-day-a-week retail store. CDnow runs its Oracle databases and Web servers on a series of Sun Enterprise 4000 servers which are able to respond to software or hardware failure. CDnow maintains dedicated connections to the internet lines provided by multiple internet service providers. This technology, combined with the architecture of the systems, allows CDnow to increase capacity by adding new components or servers while maintaining performance and cost effectiveness. CDnow uses both proprietary and commercially available tools to monitor and manage these systems with minimal operator participation. Security. CDnow employs both commercial and proprietary firewalls integrated into the architecture of its system to keep its internet connections secure. CDnow uses the Netscape SSL Commerce Server for secure electronic transactions over the internet and uses proprietary electronic data interchange interfaces and private networks to ensure the security of customer order information and credit card transactions shared with its vendors and credit card processor. Advanced Technologies. CDnow continually evaluates emerging technologies and new developments in many areas including electronic commerce, database management and networking. CDnow is currently evaluating technologies that allow for the digital distribution of music recordings. Since April 1997, CDnow has been using collaborative filtering to make personal music recommendations in its customer newsletter, The CDnow Update. CDnow makes online recommendation technology available to its shoppers through the Album Advisor feature, which was introduced in January 1998. Competition The online commerce market is new, rapidly evolving and intensely competitive. CDnow expects competition to further intensify. Barriers to entry are minimal, and a competitor can launch a new site at a relatively low cost. In addition, the broader retail music industry is intensely competitive. CDnow currently competes with a variety of companies, including: . online vendors of music, music videos and other related products; . online service providers which offer music products directly or in cooperation with other retailers; . traditional retailers of music products, including specialty music retailers; -96- Description of CDnow . other retailers that offer music products, including mass merchandisers, superstores and consumer electronic stores; and . non-store retailers such as music clubs. Many of these traditional retailers also support dedicated Web sites that compete directly with CDnow. CDnow believes that the principal competitive factors in its online market are brand recognition, selection, price, effectiveness of advertising and other customer acquisition efforts, variety of value-added services, ease of use, site content, quality of service and technical expertise. Many of CDnow's current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than CDnow. CDnow is aware that certain of its competitors have adopted and may continue to adopt aggressive pricing or inventory availability policies and devote substantially more resources to Web site and systems development than CDnow. Increased competition may result in reduced operating margins, loss of market share and a diminished brand franchise. There can be no assurance that CDnow will be able to compete successfully against current and future competitors. New technologies and the expansion of existing technologies may increase the competitive pressures of CDnow. For example, applications that select specific titles from a variety of Web sites based on factors such as price may channel customers to online retailers that compete with CDnow. In addition, many companies that allow access to transactions through network access or Web browsers promote CDnow's competitors and could charge CDnow a substantial fee for inclusion. Intellectual Property CDnow regards its trademarks, trade secrets and similar intellectual property as valuable to its business, and CDnow relies on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with its employees, partners and third parties to protect its proprietary rights. There can be no assurance that the steps taken by CDnow will be adequate to prevent misappropriation or infringement of its intellectual property. CDnow has licensed in the past, and expects that it may license in the future, some of its proprietary rights, such as trademarks or copyrighted material, to third parties. While CDnow attempts to ensure that the quality of its brand is maintained by such licensees, there can be no assurance that such licensees will not take actions that might materially adversely affect the value of CDnow's proprietary rights or reputation, which could have a material adverse effect on CDnow. "Risk Factors--We may not be able to protect our proprietary rights and may infringe on the proprietary rights of others, both of which would have a material adverse effect on our business." Employees As of October 31, 1998, CDnow had 183 full-time and 19 part-time employees. CDnow also employs independent contractors and other temporary employees in its editorial, operations and administrative functions. None of CDnow's employees is represented by a labor union under a collective bargaining agreement. CDnow considers its employee relations to be good. Competition for qualified personnel in CDnow's industry is intense, particularly among software development and other technical staff. CDnow believes that its future success will depend in part on its continued ability to attract, hire and retain qualified personnel. "Risk Factors--Our success is dependent on our key personnel, who may decide not to continue to work for CDnow/N2K, and we may not be able to hire enough qualified personnel to meet our hiring needs." Facilities CDnow's executive offices are located in, and substantially all of its operating activities are conducted from, leased office space located in Fort Washington, Pennsylvania. CDnow has leased this facility, which contains approximately 60,000 square feet, under a lease that expires in 2006. CDnow does not own any real estate. -97- Description of CDnow Legal Proceedings CDnow has been named a party in an action entitled Rubin v. Rosen et al. (Docket No. 16743 NC, filed in the Chancery Court of Delaware for the County of New Castle). CDnow believes that the claims are without merit and intends to defend the action vigorously. As of the date hereof, CDnow has not been served with notice that it will appear in court to defend the action. See "Description of N2K--Litigation." From time-to-time, CDnow may be involved in litigation relating to claims arising out of its ordinary course of business. -98- Selected Historical Financial Information of CDnow Selected Historical Financial Information of CDnow CDnow provides the following financial information to aid you in your analysis of the financial aspects of the merger. The statement of operations data for the years ended December 31, 1995, 1996 and 1997 and the balance sheet data as of December 31, 1996 and 1997 have been derived from the Consolidated Financial Statements, which have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this joint proxy statement/prospectus. The statement of operations data for the period from inception (February 12, 1994) to December 31, 1994 and the selected balance sheet data as of December 31, 1994 and 1995 have been derived from consolidated financial statements audited by Arthur Andersen LLP, independent public accountants, not included in this joint proxy statement/prospectus. The statement of operations data for the nine months ended September 30, 1997 and 1998 and the balance sheet data as of September 30, 1998 have been derived from unaudited consolidated financial statements of CDnow that, in the opinion of the Company, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the period in accordance with generally accepted accounting principles. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for any interim period or for the full year. This information is only a summary and you should read it in conjunction with "CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations" and CDnow's historical financial statements and related notes thereto contained elsewhere in this joint proxy statement/prospectus and other documents CDnow has filed with the SEC. In addition, see Note 2 to Notes to CDnow's Consolidated Financial Statements for an explantation of the computation of the net loss per common share amounts. See Note 7 to Notes to CDnow's Consolidated Financial Statements for an explanation of the dispute settlement. See "Where You Can Find More Information."
Period from Inception (February 12, Nine Months Ended 1994) to Year Ended December 31, September 30, December 31, ------------------------------------- ------------------------- 1994 1995 1996 1997 1997 1998 ------------- ---------- ----------- ------------ ----------- ------------ Statement of Operations Data: Net sales............... $ 103,116 $2,176,474 $ 6,300,294 $ 17,372,795 $ 9,452,864 $ 35,503,805 Cost of sales........... 92,962 1,815,672 5,074,087 13,847,773 7,333,069 28,549,562 --------- ---------- ----------- ------------ ----------- ------------ Gross profit............ 10,154 360,802 1,226,207 3,525,022 2,119,795 6,954,243 Operating expenses: Operating and development............ 26,946 149,982 669,280 2,541,434 1,444,011 5,155,718 Sales and marketing..... 12,945 229,912 765,156 9,607,603 3,603,238 31,293,668 General and administrative......... 28,712 180,573 563,593 1,953,078 1,266,296 2,781,334 Dispute settlement...... -- -- 1,024,030 -- -- -- --------- ---------- ----------- ------------ ----------- ------------ Total operating expenses............... 68,603 560,467 3,022,059 14,102,115 6,313,545 39,230,720 --------- ---------- ----------- ------------ ----------- ------------ Operating loss.......... (58,449) (199,665) (1,795,852) (10,577,093) (4,193,750) (32,276,477) Interest income (expense), net......... -- (1,248) (14,556) (170,312) 64,084 1,452,160 --------- ---------- ----------- ------------ ----------- ------------ Net loss................ (58,449) (200,913) (1,810,408) (10,747,405) (4,129,666) (30,824,317) Accretion of preferred stock to redemption value.................. -- -- -- (410,103) (263,748) (115,542) --------- ---------- ----------- ------------ ----------- ------------ Net loss applicable to common shareholders.... $ (58,449) $ (200,913) $(1,810,408) $(11,157,508) $(4,393,414) $(30,939,859) ========= ========== =========== ============ =========== ============ Net loss per common share(3)............... $ (0.01) $ (0.03) $ (0.29) $ (1.42) $ (0.56) $ (2.10) ========= ========== =========== ============ =========== ============ Weighted average number of common shares outstanding(3)......... 6,000,000 6,000,000 6,139,702 7,845,684 7,845,684 14,764,870 ========= ========== =========== ============ =========== ============
-99- Selected Historical Financial Information of CDnow
December 31, ------------------------------------------- September 30, 1994 1995 1996 1997 1998 -------- --------- ---------- ----------- ------------- Balance Sheet Data: Cash and cash equivalents... $ 2,008 $ 43,812 $ 775,865 $10,686,001 $59,563,026 Working capital (deficit)... (42,206) (235,478) 231,455 (1,218,005) 56,663,989 Total assets................ 25,765 268,468 1,575,459 16,448,425 77,571,386 Long-term debt, excluding current portion............ -- 9,519 91,133 962,144 1,130,484 Redeemable convertible preferred stock............ -- -- -- 9,492,594 -- Total shareholders' equity (deficit).................. (18,449) (99,362) 514,017 (9,752,450) 63,398,975
-100- CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations Overview CDnow believes that the key factors affecting its long-term financial success include its ability to obtain new customers at reasonable costs, retain customers and encourage repeat purchases. CDnow continuously seeks to expand its customer base through multiple marketing channels, which include: . pursuing an aggressive marketing campaign using a combination of online and traditional marketing; . establishing marketing agreements with major internet and proprietary online content and service providers; . entering into linking arrangements with other Web sites as part of its Cosmic Credit Program; and . using direct marketing techniques to target new and existing customers with personalized communications. CDnow entered into marketing agreements and business alliances with Yahoo!, Excite and GeoCities in August 1997, September 1997 and January 1998, respectively, and has accelerated its marketing campaign since CDnow's initial public offering in February 1998 by expanding its relationship with Yahoo! and entering into additional alliances with Lycos, Lycos Bertelsmann, Rolling Stone Network, CMJ and MTV/VH1. Since its inception, CDnow has incurred significant net losses and, as of September 30, 1998, had accumulated losses of $43.6 million. As it seeks to expand aggressively, CDnow believes that its operating expenses will significantly increase as a result of the financial commitments related to the development of marketing channels, future business relationships, and improvements to its Web site and other capital expenditures. CDnow expects that it will continue to incur losses and generate negative cash flow from operations for the foreseeable future as it continues to develop its business. As CDnow has relatively low product gross margins, the ability of CDnow to generate and enhance profitability depends upon its ability to substantially increase its net sales. To the extent that significantly higher net sales do not result from CDnow's marketing efforts, CDnow will be materially adversely affected. There can be no assurance that CDnow will be able to generate sufficient revenues from the sale of CDs and other music-related products to achieve or maintain profitability on a quarterly or annual basis. For the nine months ended September 30, 1998 and the year ended December 31, 1997, international sales accounted for approximately 22% and 29%, respectively, of net sales. While CDnow expects that net sales from international markets will continue to represent a significant portion of total net sales, CDnow believes that the percentage of its net sales from international markets may decrease in future periods due to the substantial increase in CDnow's domestic marketing and advertising expenditures. -101- CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth statement of operations data as a percentage of net sales for the periods indicated:
Nine Months Ended Year Ended September December 31, 30, --------------------- ------------- 1995 1996 1997 1997 1998 ----- ----- ----- ----- ----- Net sales.............................. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales.......................... 83.4 80.5 79.7 77.6 80.4 ----- ----- ----- ----- ----- Gross profit......................... 16.6 19.5 20.3 22.4 19.6 Operating Expenses: Operating and development............ 6.9 10.6 14.6 15.3 14.5 Sales and marketing.................. 10.6 12.1 55.3 38.1 88.1 General and administrative........... 8.3 9.0 11.3 13.4 7.9 Dispute settlement................... -- 16.3 -- -- -- ----- ----- ----- ----- ----- Total operating expenses............. 25.8 48.0 81.2 66.8 110.5 ----- ----- ----- ----- ----- Operating loss....................... (9.2) (28.5) (60.9) (44.4) (90.9) Interest income (expense), net......... -- ( 0.2) ( 1.0) 0.7 4.1 ----- ----- ----- ----- ----- Net loss............................... (9.2)% (28.7)% (61.9)% (43.7)% (86.8)% ===== ===== ===== ===== =====
Reclassifications Information Royalties This year, CDnow determined to include Information Royalties in operating and development expenses rather than in cost of sales, as was previously the case. Information Royalties are royalties paid on CD sales in return for licensing of ratings, reviews and other information. In addition, CDnow determined to include credit card processing fees in sales and marketing expenses, rather than in costs of sales as was previously the case. CDnow made these changes based on management's determination that the changes are consistent with the treatment of these expenses generally. We have restated CDnow's results of operations to reflect this change for all periods. The table below shows the amount of Information Royalties and Credit Card Processing Fees for the years ended December 31, 1995, 1996 and 1997, and the nine months ended September 30, 1997 and 1998.
Year Ended Nine Months Ended December 31, September 30, ------------------------- ----------------- 1995 1996 1997 1997 1998 ------- -------- -------- -------- -------- Information Royalties $ -- $146,200 $225,737 $151,027 $269,041 Credit Card Processing Fees 28,940 143,702 468,225 246,879 952,991
If CDnow included Information Royalties and Credit Card Processing Fees in costs of sales, gross profit margins would have been:
Year Ended Nine Months Ended December 31, September 30, ------------------------------------------- ------------------------------------------ 1995 1996 1997 1997 1998 ----- ---- ---- -------- -------- 15.2% 14.9% 16.3% 18.2% 16.1%
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September 30, 1997. Net Sales. Net sales primarily reflect the sales of CDs and related merchandise, net of estimated returns, and include outbound shipping and handling charges. Net sales were $35.5 million for the nine months ended September 30, 1998, representing an increase of 276% over the nine months ended September 30, 1997. The increase is attributable to continued growth of CDnow's customer base and repeat purchases from existing -102- CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations customers who have typically purchased more units per order than new customers. Net sales were favorably affected by increased advertising and promotional activities, including CDnow's purchase of advertising during the 1998 Grammy Awards and 1998 MTV Video Music Awards, as well as the continued implementation of its strategic alliances. For the nine months ended September 30, 1998, CDnow added approximately 442,000 new customers, bringing the total number of customers since inception to 738,000 as of September 30, 1998, compared to 100,000 new customers that were added during the nine months ending September 30, 1997. International sales represented 22% of net sales for the nine months ended September 30, 1998 compared to 33% for the nine months ended September 30, 1997. CDnow believes that the decrease in international sales as a percentage of net sales is due to a proportionally larger increase in domestic sales resulting from the substantial increase in domestic marketing and advertising expenditures. Nevertheless, international sales increased to $7.6 million for the nine months ended September 30, 1998, from $3.2 million in the nine months ended September 30, 1997. Cost of Sales. Cost of sales consists primarily of the cost of merchandise sold to customers, including filling orders and outbound shipping and handling. Cost of sales increased by $21.2 million, or 289%, to $28.5 million for the nine months ended September 30, 1998, compared to $7.3 million for the nine months ended September 30, 1997. CDnow's gross profit decreased to 19.6% for the nine months ended September 30, 1998 from 22.4% for the nine months ended September 30, 1997. The decline in gross margin was attributable to more aggressive pricing of recent releases and popular titles, as well as increased sales discounts offered by CDnow. Gross margin for the three months ended September 30, 1998 was 20.9% compared to 20.0% for the three months ended June 30, 1998, with such increase attributable to selective price increases implemented late in the second quarter and an increase in revenues from advertising which has a higher margin than product sales. Operating and Development Expense. Operating and development expense consists primarily of payroll and related expenses for store management, design, development and network operations personnel, systems and telecommunications infrastructure and royalties paid by CDnow on CD sales in return for licensing of ratings, reviews, sound samples and other information. Store development costs are charged to expense as incurred. Operating and development expense increased by $3.8 million or 257% to $5.2 million for the nine months ended September 30, 1998 compared to $1.4 million for the nine months ended September 30, 1997. The increase is attributable to increased staffing and associated costs related to enhancing the features and functionality of CDnow's Web site and transaction-processing systems, as well as increased investment in store content, systems and telecommunications infrastructure. As a percentage of net sales, operating and development expense decreased to 14.5% for the nine months ended September 30, 1998, compared to 15.3% for the nine months ended September 30, 1997, as operating development expenses were spread over a larger revenue base. Sales and Marketing Expense. Sales and marketing expense consists primarily of payments related to advertising, promotion and marketing agreements as well as payroll and related expenses for personnel engaged in marketing, selling and customer service activities and credit card fees. Sales and marketing expense increased by $27.7 million to $31.3 million for the nine months ended September 30, 1998 compared to $3.6 million for the nine months ended September 30, 1997. As a percentage of net sales, sales and marketing expense grew to 88.1% for the nine months ended September 30, 1998 compared to 38.1% for the nine months ended September 30, 1997. The increase in both absolute dollars and as a percentage of net sales was primarily attributable to increased online and traditional advertising, including CDnow's purchase of advertising during the 1998 Grammy Awards and the 1998 MTV Video Music Awards, costs associated with CDnow's marketing agreements and promotional and public relations expenditures. CDnow increased its advertising expense to $23.7 million for the nine months ended September 30, 1998, compared to $2.1 million for the nine months ended September 30, 1997. In addition, CDnow incurred increased staffing and related costs in connection with the implementation of its marketing strategy and customer service activities necessary to support its increased customer base and increased credit card processing fees related to the growth of revenues. CDnow expects the dollar amount of sales and marketing expense generally and advertising expense in particular to continue to increase in future periods. While CDnow is hopeful that its net sales will also increase in future periods so that -103- CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations its sales and marketing expense will not continue to represent an increasing percentage of net sales, CDnow is not able to predict whether its net sales will increase by a sufficient amount for this to occur. No assurance can be given that CDnow will achieve increased net sales or that sales and marketing expense will not increase as a percentage of net sales. General and Administrative Expense. General and administrative expense consists of payroll and related expenses for executive, accounting and administrative personnel, insurance, professional fees and other general and corporate expenses. General and administrative expense increased by $1.5 million, or 120% to $2.8 million for the nine months ended September 30, 1998 compared to $1.3 million for the nine months ended September 30, 1997. The increase in general and administrative expense was primarily due to the hiring of additional personnel and increases in professional fees as well as the costs associated with becoming a public company. As a percentage of net sales, general and administrative expense decreased to 7.9% for the nine months ended September 30, 1998 compared to 13.4% for the nine months ended September 30, 1997 as general and administrative expenses were spread over a large revenue base. Net Loss. CDnow's net loss was $30.8 million for the nine months ended September 30, 1998 compared to $4.1 million for the nine months ended September 30, 1997. Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996 Net Sales. Net sales increased by $11.1 million or 176% to $17.4 million for the year ended December 31,1997 from $6.3 million for the year ended December 31, 1996. This increase is primarily attributable to the significant growth of CDnow's customer base and repeat purchases from CDnow's existing customers who have typically purchased more units per order than new customers. International sales represented approximately 29% and 40% of net sales for the years ended December 31, 1997 and December 31, 1996, respectively. CDnow believes that this decrease in international sales as a percentage of net sales is due to the substantial increase in CDnow's domestic marketing and advertising expenditures. At December 31, 1997, CDnow had approximately 296,000 customer accounts compared to approximately 88,000 customer accounts at December 31, 1996. Cost of Sales. Cost of sales increased by $8.7 million or 173% to $13.8 million for the year ended December 31, 1997 from $5.1 million for the year ended December 31, 1996. This increase is primarily attributable to CDnow's increased sales volume. CDnow's gross profit margin was 20.3% for the year ended December 31, 1997 compared to 19.5% for the year ended December 31, 1996. The increase in gross margin as a percentage of net sales was primarily due to price reductions from CDnow's suppliers and a change to a lower-price supplier for imported music and music-related products. CDnow's gross profit margin declined in the fourth quarter of 1997 due to increased sales promotions during the holiday season. Operating and Development Expense. Operating and development expense increased by $1.9 million to $2.5 million for the year ended December 31, 1997 from $669,000 for the year ended December 31, 1996. As a percentage of net sales, these expenses were 14.6% for the year ended December 31, 1997 and 10.6% for the year ended December 31, 1996. This increase was due to increased staffing and associated costs related to enhancing the features, content and functionality of CDnow's online store and transaction-processing systems, as well as increased investments in systems and telecommunications infrastructure. Sales and Marketing Expense. Sales and marketing expense increased by $8.8 million to $9.6 million for the year ended December 31, 1997 from $765,000 for the year ended December 31, 1996 with $6.0 million of this expense incurred in the fourth quarter. As a percentage of net sales, these expenses increased to 55.3% for the year ended December 31, 1997 from 12.1% for the year ended December 31, 1996. This increase was due to the significant expansion of CDnow's advertising expenditures, costs associated with marketing agreements with Yahoo! and Excite and the increased staffing and associated costs related to implementing CDnow's marketing strategy and supporting CDnow's increased customer base. CDnow increased its advertising expense to $6.8 million for the year ended December 31, 1997 compared to $61,000 for the year ended December 31, 1996. -104- CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations General and Administrative Expenses. General and administrative expense increased by $1.4 million to $2.0 million for the year ended December 31, 1997 from $564,000 for the year ended December 31, 1996. As a percentage of net sales, these expenses increased to 11.3% for the year ended December 31, 1997 compared to 9.0% for the year ended December 31, 1996. This increase was primarily due to the recruitment and hiring of additional personnel and increases in professional fees and travel expenses. Net Loss. CDnow's net loss increased by $8.9 million to a loss of $10.7 million for the year ended December 31, 1997 from a net loss of $1.8 million for the year ended December 31, 1996. Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995 Net Sales. Net sales increased 189% to $6.3 million for the year ended December 31, 1996 from $2.2 million for the year ended December 31, 1995 as a result of the significant growth of CDnow's customer base and repeat purchases from existing customers. International sales represented approximately 40% and 22% of net sales for the year ended December 31, 1996 and the year ended December 31, 1995, respectively. At December 31, 1996, CDnow had approximately 88,000 customer accounts compared to approximately 27,000 customer accounts at December 31, 1995. Cost of Sales. Cost of sales increased 179% to $5.1 million for the year ended December 31, 1996 from $1.8 million for the year ended December 31, 1995, reflecting CDnow's increased sales volume. CDnow's gross profit margin increased to 19.5% for the year ended December 31, 1996 from 16.6% for the year ended December 31, 1995. Operating and Development Expense. Operating and development expense increased to $669,000 for the year ended December 31, 1996 from $150,000 for the year ended December 31, 1995. As a percentage of net sales, operating and development expense grew to 10.6% for the year ended December 31, 1996 from 6.9% for the year ended December 31, 1995. This increase in both absolute dollars and as a percentage of net sales was primarily attributable to increased staffing and associated costs related to enhancing the features, content and functionality of CDnow's online store as well as increased investment in systems and telecommunications infrastructure. Sales and Marketing Expense. Sales and marketing expense increased to $765,000 for the year ended December 31, 1996 from $230,000 for the year ended December 31, 1995. As a percentage of net sales, sales and marketing expense was 12.1% for the year ended December 31, 1996 from 10.6% for the year ended December 31, 1995. This increase in both absolute dollars and as a percentage of net sales was primarily attributable to increased staffing and associated costs related to implementing CDnow's marketing strategy and supporting CDnow's increased customer base, as well as to expansion of CDnow's online advertising, promotional and public relations expenditures. General and Administrative Expense. General and administrative expense increased to $564,000 for the year ended December 31, 1996 from $181,000 for the year ended December 31, 1995. As a percentage of net sales, general and administrative expense grew to 9.0% for the year ended December 31, 1996 from 8.3% for the year ended December 31, 1995. This increase in both absolute dollars and as a percentage of net sales was primarily due to the hiring of additional personnel and increases in professional fees and travel expenses. Dispute Settlement. In December 1996, as part of a settlement of a dispute related to certain business arrangements and discussions among CDnow and certain persons who are now shareholders of CDnow, CDnow issued common stock valued at approximately $1.0 million to the three shareholders of MBL Entertainment Inc. See "Certain Relationships and Related TransactionsStock Purchase and Shareholders' Agreement" and Note 7 to Note to Financial Statements. Net Loss. CDnow's net loss increased by $1.6 million to a loss of $1.8 million for the year ended December 31, 1996 from a net loss of $201,000 for the year ended December 31, 1995. -105- CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources At September 30, 1998 CDnow's cash and cash equivalents were $59.6 million compared to $7.2 million at September 30, 1997. In July 1998, CDnow consummated a follow-on public offering, selling an aggregate of 1,250,000 shares of common stock and raising net proceeds of approximately $21.7 million. In February 1998, CDnow consummated its initial public offering, selling an aggregate of 4,561,250 shares of common stock which included 461,250 shares sold in March 1998 upon the exercise of the underwriters' overallotment option and raising net proceeds of approximately $67.0 million. Prior to February 1998, CDnow primarily financed its operations through: . private sales of capital stock, which, through December 31, 1997, totaled $10.5 million, including $9.3 million raised in July and August of 1997, . the private sale of $5.8 million of the Series A Notes in November 1997, . internally-generated cash flow, advances from related parties and . certain other short-term loans. Net cash used in operating activities of $32.2 million for the nine months ended September 30, 1998 was primarily attributable to a net loss of $30.8 million and an increase of $5.0 million in prepaid expenses partially offset by a $2.2 million increase in accounts payable, accrued expenses and depreciation and amortization of $1.6 million. Net cash used by investing activities was $1.7 million for the nine months ended September 30, 1998, and consisted of purchases of equipment of $2.3 million and $424,000 for the acquisition of superSonicBoom, Inc., partially offset by the sale of short-term investments of $1.0 million. Net cash used in investing activities of $2.0 million for the nine months ended September 30, 1997 was attributable to purchases of equipment of $1.3 million and to purchases of short-term investments of $984,000, partially offset by sales and maturities of short-term investments of $246,000. Net cash provided by financing activities was $82.8 million for the nine months ended September 30, 1998, and consisted largely of net proceeds of approximately $88.7 million from CDnow's 1998 public offerings, offset by the retirement of $5.8 million of CDnow's Series A Notes. CDnow is required to pay aggregate minimum fixed fees of $9.3 million, $27.4 million, $26.7 million and $3.6 million during the remaining three months of 1998 and the years ending December 31, 1999, 2000 and 2001, respectively, under CDnow's marketing agreements. CDnow expects to fund its future payment obligations under its marketing agreements and strategic alliances from its cash and cash equivalents and from cash generated from future operations and financing activities. As of September 30, 1998, CDnow had $59.6 million of cash and cash equivalents. As of that date, CDnow's principal commitments consisted of obligations under its marketing agreements as well as obligations outstanding under capital and operating leases. Although CDnow has no material commitments for capital expenditures, it anticipates substantial increases in its capital expenditures and lease commitments consistent with anticipated growth in operations, infrastructure and personnel. Seasonality CDnow expects that it will experience seasonality in its business, reflecting a combination of seasonal fluctuations in sales via electronic commerce and traditional retail seasonality patterns affecting sales of recorded music. Sales in the traditional retail music industry are significantly higher in the fourth calendar quarter of each year than in the preceding three-quarters. However, to date, CDnow's limited operating history and rapid growth make it difficult to ascertain the effects of seasonality on its business. CDnow believes that period-to-period comparisons of CDnow's historical results are not necessarily meaningful and should not be relied upon as an indication of future results. -106- CDnow Management's Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting CDnow's Business and Prospects CDnow expects to experience significant fluctuations in its future quarterly operating results due to a variety of factors, many of which are outside CDnow's control. Factors that may affect CDnow's quarterly operating results include: . ability to retain existing customers, attract new customers and maintain customer satisfaction; . introduction of new or enhanced Web pages, services, products and marketing agreements by CDnow and its competitors; . price competition or higher wholesale prices; . level of use of the internet and consumer acceptance of the internet for the purchase of recorded music; . seasonality of recorded music sales; . ability to upgrade and develop its systems and infrastructure and attract qualified personnel; . technical difficulties, system downtime or internet blackouts and brownouts; . amount and timing of operating costs and capital expenditures relating to expansion of CDnow's business, operations and infrastructure; . timing of Company promotions and sales programs; . level of merchandise returns experienced by CDnow; . government regulation; and . general economic conditions and economic conditions specific to electronic commerce and the music industry. Risks Associated with the Year 2000. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. In other words, date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among others, a temporary inability to process transactions, send invoices or engage in similar normal business activities. To date, we have experienced very few problems related to Year 2000 testing and those requiring immediate modification have been fixed in our day to day operating environment. CDnow does not believe that there is material exposure to the Year 2000 issue with respect to its electronic commerce transaction processing and online store systems since these systems correctly define the Year 2000. CDnow is currently conducting an analysis to determine the extent to which others have Year 2000 issues. These include CDnow's major suppliers' systems, including the systems of credit card processors, telecommunications providers, product distributors and companies with whom CDnow has marketing agreements. CDnow's primary distributor for direct-to-consumer music products, Valley Media, has indicated that it has begun its remediation efforts and expects to be in compliance before the year 2000. CDnow is currently unable to predict the extent to which the Year 2000 issue will affect Valley's suppliers, or the extent to which Valley would be vulnerable to its suppliers' failure to remediate any Year 2000 issues on a timely basis. The failure of a major supplier subject to the Year 2000 issue to convert its systems on a timely basis or a conversion that is incompatible with CDnow's systems could have a material adverse effect on CDnow. In addition, most of the purchases from CDnow's online stores are made with credit cards, and our operations may be materially adversely affected to the extent customers are unable to use their credit cards due to Year 2000 issues that are not rectified by their credit card providers. CDnow did not incur any expenses related to Year 2000 compliance during the nine months ended September 30, 1998. CDnow incurred $20,000 of expense related to Year 2000 compliance during the three months ended December 31, 1998 and expects to expend $55,000 in 1999 to support Year 2000 compliance initiatives. CDnow intends to actively work with and encourage its suppliers to minimize the risks of business disruptions resulting from Year 2000 issues and develop contingency plans where necessary. Such plans may -107- include, but are not limited to, using alternative suppliers and establishing contingent supply arrangements. CDnow expects to have such plans in place by June 30, 1999. Recently Issued Accounting Pronouncements See Note 2 "Recently Issued Accounting Pronouncements" on page F-18 to Consolidated Financial Statements of CDnow. -108- Description of N2K Description of N2K Business N2K is one of the leading online music entertainment companies using the internet and other proprietary online services to promote, market and sell music and related merchandise. N2K's strategy is to build loyal customer communities around Web sites that provide music and genre-specific content and enable consumers to purchase CDs, cassettes and related merchandise. N2K believes that as its customer base continues to grow, it will be able to increase revenues from sales of music, related merchandise, advertising and sponsorship programs. N2K's online music retail store is Music Boulevard (musicblvd.com), around which N2K organizes its genre-specific music Web sites, Rocktropolis (rocktropolis.com), Jazz Central Station (jazzcentralstation.com) and Classical Insites (classicalinsites.com). In addition to these genre Web sites, N2K also operates Web sites for artists including Miles Davis, The Rolling Stones and Leonard Bernstein. N2K's Web sites allow customers to view current music news and reviews, artist biographies and discographies, musicians' favorite artist recordings and historical and educational information. In addition, customers may hear and view cybercasts, recording and video samples. On each of these sites, consumers may search for artists, songs and compositions, browse and purchase music recordings from a database of over 250,000 CDs, cassettes, LPs, videos and related music items, digitally access 30-second music samples from a selection of over 350,000 songs, read from over 60,000 reviews and related articles and view music video clips. In July 1997, N2K introduced the emod system. This system allows consumers to purchase and digitally download from a collection of music singles. All product purchases are coordinated through Music Boulevard. N2K believes that by providing a wealth of information in a highly personalized, interactive context, it creates an entertaining environment that attracts traffic to its online stores and Web sites, fosters brand awareness and encourages purchases of music and related merchandise. As part of its business strategy, N2K establishes business alliances with global online, music and media companies to attract additional customers to, and increase brand awareness of, N2K's Web sites and online stores. For example, N2K benefits from a business alliance with America Online, Inc. under an interactive marketing agreement. The material elements of this alliance are: . Music Boulevard is featured as the exclusive online music retailer within AOL's MusicSpace channel; . Music Boulevard receives a featured position on AOL's Shopping Channel; . Music Boulevard participates in a variety of banner advertising opportunities; . Music Boulevard is assigned specific keywords within the AOL service; and . Music Boulevard benefits from promotional and featured buttons on aol.com's home and principal shopping pages. Similarly, N2K has entered into agreements with Excite, Infoseek and Netscape, pursuant to which visitors to the Excite online marketing, Infoseek and Netscape Web sites may access a co-branded Music Boulevard service. From this service, visitors may purchase music and related products and access music content and related information. In addition, N2K has an exclusive agreement with CBS Cable, owner and operator of TNN and CMT, to create and promote country music retailing through its Web site, country.com, and to create Country Music Boulevard, a special co-branded area in the Music Boulevard Network. Under this agreement, Country Music Boulevard became the exclusive online country music store on country.com and Music Boulevard. In addition, during April 1998, N2K signed agreements to form exclusive business alliances with AOL Bertelsmann (for Europe) and Disney Online and a non-exclusive agreement with Microsoft Corporation. N2K intends to capitalize on the global nature of the internet to build an international customer base by creating local language versions of, and localized content for, N2K's Web sites and online stores. N2K has established a wholly-owned subsidiary in Japan, the world's second largest market for recorded music sales, -109- Description of N2K and has launched Japanese versions of Music Boulevard (musicblvd.com/jp) and Jazz Central Station (jp.jazzcentralstation.com). N2K expanded the number of titles offered in Japan and has provided more localized product to international markets by creating alliances with international order filling operations. N2K has entered into an exclusive agreement with Shinseido Inc., the leading music retail chain in Japan, to add approximately 150,000 new local-language music titles to the Japanese version of Music Boulevard which launched in October 1998. N2K has entered into an agreement with MSI of Miami Corp. under which MSI provides over 60,000 international titles to Music Boulevard's catalog of offerings. N2K has an agreement with MTV Networks, on behalf of MTV International Networks, to create localized MTV-Music Boulevard sites for Europe, Brazil, Japan and Asia. In addition, N2K has established business alliances with entities such as AOL Japan, AOL Europe, Yahoo! Japan and Infoseek Europe. N2K offers registration and ordering instructions on Music Boulevard in English, Japanese, German, French and Spanish. N2K Web Sites N2K's online music retail store is Music Boulevard (musicblvd.com). N2K organizes its genre-specific music Web sites, Rocktropolis (rocktropolis.com), Jazz Central Station (jazzcentralstation.com) and Classical Insites (classicalinsites.com) around Music Boulevard. In addition to these genre Web sites, N2K also hosts Web sites for such artists as Miles Davis (milesdavis.com), The Rolling Stones (stonesworld.com) and Leonard Bernstein (leonardbernstein.com). As part of its multiple Web site strategy, N2K assigns, whenever possible, a separate universal resource locator or URL to each of its genre and artist Web sites. N2K continually reviews and revises these Web sites to provide both an interesting and easy to use on-line experience. N2K believes that both customers and advertisers prefer Web sites with distinct URLs designed for specific audiences. All of the genre and artist specific sites provide information about recordings and the opportunity to purchase from Music Boulevard. Music Retail and Genre Web sites. N2K believes that by providing a wealth of information in a highly personalized interactive context it is able to create an entertaining environment that attracts traffic to its online stores, fosters brand awareness and encourages purchases of music and related merchandise. N2K's existing online music retail stores and genre Web sites include the following: musicblvd.com Music Boulevard is N2K's flagship online store, featuring a rich graphical and musical environment containing over 75,000 graphic images and offering over 250,000 CDs, cassettes, LPs, videos and related music items. The Music Boulevard URL leads to a home page containing site navigation, featured store specials, site features, search capability and links to genre-specific store departments. Users may choose desired locations by clicking on a navigation bar or hyperlinked text allowing them to: . purchase music items online and check their order status; . search for artists, titles, songs or compositions; . access specials and sales promotions; . link to genre departments including Rock/Pop, Alternative, R&B/Hip-Hop, Jazz, Classical, Country, World Music, Shows & Soundtracks and Various & Family; . access features such as --music news, --a pre-release ordering section --Billboard and Music Boulevard charts, --over 60,000 reviews and features from allstar, our online music magazine, --Jazz Central Station news on Jazz Central Station news on Jazz Track and --CI Classical Review which contains news from Classical Insites, and articles from SPIN, JazzTimes, Puncture, Fanfare, Dirty Linen, Relix, Blues Access and IAJE Jazz Educators Journal magazines; . join the Music Boulevard Frequent Buyer's Club; . link to the area containing the most recently purchased albums in each genre; and . listen to sound samples in MPEG, RealAudio or Liquid Audio formats. A personal shopping cart allows the customer to select merchandise while navigating through Music Boulevard. Items can be added to or subtracted from a shopping cart at any time. As a customer completes a -110- Description of N2K search, similar or complementary artists and titles are suggested. By pressing the "buy" button, the customer completes the ordering process. See "--Sales and Marketing--Ordering, Filling Orders and Customer Service." Music Boulevard customers can join the Music Boulevard Frequent Buyers Club and receive a free CD after purchasing a certain quantity of CDs. To join the Frequent Buyers Club, customers complete a brief survey which provides valuable demographic data. N2K currently uses the Frequent Buyers Club data to analyze customer shopping trends and demographics. N2K is currently evaluating ways in which it may utilize this data to customize marketing programs. Each Music Boulevard department contains new releases, on sale items, daily and weekly featured reviews, a sales promotion billboard and virtual endcaps with sale pricing, icons for audio samples and short editorial copy. rocktropolis.com The Rocktropolis Web site is an in-depth, multimedia entertainment and information resource for the global rock and pop music communities. Rocktropolis offers a comprehensive guide to the world of rock and pop music, enabling customers to listen to live performances, discuss their favorite artists and access music reviews online. Each area of Rocktropolis has a unique design, advanced multimedia elements and engaging content. Rocktropolis' primary areas include: Events, Talk, Search, Rocktropolis Radio and News. Events features live and archived cybercasts of artist concerts and interviews. Featured artists have included David Bowie, Sting, Beck, the Sex Pistols, Porno for Pyros, Bush, The Tragically Hip, Chemical Brothers, Motley Crue, Los Lobos and Sheryl Crow. Talk features special-event chats, 24-hour chat rooms and bulletin boards. Search enables customers to retrieve news stories, gossip items, album reviews and other information about their favorite artists. Search also features links to N2K's artist Web sites, including the Rolling Stones Web site. Rocktropolis Radio features four separate pre-selected streaming audio stations covering Rock, Electronic, Punk and College genres. News is the home of the award-winning allstar online music magazine, which provides daily music news and gossip, allstar feature albums and live reviews, as well as in-depth interviews with some of rock music's most important musicians. jazzcentralstation.com Jazz Central Station is an in-depth jazz multimedia music entertainment and information resource bringing together jazz fans, musicians, educators and industry leaders from around the globe. Jazz Central Station features live chats with renowned artists, in-depth information, artist interviews, sound clips and educational resources for music students. The site spotlights a rotating roster of jazz artists as well as listings of current and upcoming album releases, tour schedules, concerts and festivals worldwide. Jazz Central Station is home to the Chick Corea Web site and the official site for Miles Davis (milesdavis.com). N2K has also agreed to develop a site devoted to Wynton Marsalis (wyntonmarsalis.com), which will be linked to Jazz Central Station. Jazz Central Station also hosts artist sites for Joshua Redman and Gerry Mulligan. Additionally, Jazz Central Station is the only Web site to offer a continuous audio stream of WBGO 88.3 FM, a leading jazz radio station. Jazz Central Station is the official Web site for the International Association of Jazz Educators or IAJE, the Playboy Jazz Festival, the North Sea Jazz Festival and George Wein's Festival Productions, which is the producer of the JVC Jazz Festival. In 1996, Jazz Central Station inaugurated the first annual JCS Global Jazz Poll. Jazz Central Station has an acclaimed Board of Advisors, including Chick Corea, Quincy Jones, Ramsey Lewis, Bruce Lundvall, Dan Morgenstern and George Wein. classicalinsites.com Classical Insites is an in-depth multimedia music entertainment and information resource for the global classical music community. The site is designed to enable customers to explore the history of classical music and important personalities in the field, listen to performances and discussions by legendary artists, seek out -111- Description of N2K worldwide classical music events and purchase music and related merchandise on- line. In addition to text, features are enhanced by graphic and multimedia elements. Classical Insites' primary areas include: . the Hall of Fame, a gallery of composers and performers including recent inductees Luciano Pavarotti, Leontyne Price, Yo-Yo Ma and Pierre Boulez; and . the Performance Center, which includes a concert hall which features broadcasts, performances and other events, a spotlight area which introduces the work of important, lesser-known composers and performers, an information booth which provides links to performing organizations around the world and a screening room which features exciting new films and great film scores. Other highlights of Classical Insites include the official Web site of Leonard Bernstein (leonardbernstein.com). Classical Insites also hosts the official Web site of WQXR (96.3 FM), one of the country's leading classical music radio stations. This site offers music listings and program information, as well as a live audio stream which allows customers worldwide to hear WQXR's classical programming. Classical Insites' customers can enjoy online editions of Fanfare Magazine and CI Classical Review. Classical Insites will soon announce the winners of its first Global Classical Music Poll, in which customers voted for their favorite artists. The Lifetime Achievement category of this award is being voted on by Classical Insites' distinguished Board of Advisors. The Board of Advisors is composed of artists and industry leaders that collectively represent the various aspects of the diverse classical music community, including Betty Allen, Marilyn Bergman, Nina Bernstein, John Corigliano, Peter Gelb, Charles Hamlen, Omus Hirschbein, Bobby McFerrin, Arnold Steinhardt, Michael Tilson Thomas and Charles Webb. Artist Web sites. N2K's artist Web sites provide customers with access to interviews, discographies, sound and video samples, artists' best recordings, artists' recommended listening and touring and biographical information. These artist Web sites each have a separate URL. stonesworld.com Stones World is a Rolling Stones Web site that features an extensive overview of the band. The Web site features a comprehensive catalog of the Rolling Stones' music, comprised of five separate sections: Discography, Down on the Corner, Mile Stones, Index and a welcome message from Mick Jagger and Keith Richards. This Web site incorporates sound samples, live concert clips, band and concert information, interviews, archival photos, full lyrics and an interactive poker game. Stones fans can communicate with each other via the Web site's Message Board. leonardbernstein.com The Leonard Bernstein Web site is the official Web site celebrating Leonard Bernstein's life and legacy. This Web site was developed in conjunction with the Bernstein family and estate. Drawing primarily on the vast archive of Bernstein materials left to the Library of Congress, this Web site presents a multifaceted portrait of Leonard Bernstein through an extensive collection of rare documents, photographs, interview excerpts, audio samples and video material. Visitors to the Leonard Bernstein Web site enter a virtual rendition of Bernstein's actual studio and can explore "themes" that offer unique insight into this great American musician's creative mind. The Web site offers customers the opportunity to read from a selection of Leonard Bernstein's private letters and peruse his manuscript scores, working notes, rare photographs, programs and more. Among some of the Web site's offerings are exhibits featuring West Side Story (including documentation of its long and complicated genesis), The Young People's Concerts with the New York Philharmonic (including letters from devoted fans of all ages whose lives were changed by these ground-breaking educational programs) and Bernstein's 1943 debut with the New York Philharmonic. Many of the elements featured on the Web site have never before been available to the public. Special Leonard Bernstein recordings and related merchandise are available exclusively through Music Boulevard. -112- Description of N2K International Web sites. Another element of N2K's business strategy involves capitalizing on the global nature of the internet. N2K is working to build an international customer base by creating local language versions of, and localized content for, N2K's Web site. See "Description of N2K--Business" for a more complete description of N2K's international Web sites. Encoded Music In January 1997, N2K launched its own record label, Encoded Music, to create, produce, license, acquire and market high-quality recorded music. The recordings were to be distributed through N2K's online store, record stores and other traditional retail and distribution channels. Encoded Music produces recordings across several music genres, including rock, pop, jazz, classical and blues. In building and expanding the record label, Encoded Music licenses master recordings from other record labels, acquires master recordings and publishing catalogs and signs artists to the record label. Encoded Music has entered into a letter agreement with Sony's RED Distribution under which RED Distribution will be the exclusive distribution agent in the United States for the Encoded Music label. The agreement has a three-year term which expires on October 15, 1999. According to the agreement, RED Distribution is paid a distribution fee calculated in accordance with a graduated percentage of net sales. The agreement also provides that Encoded Music will deliver at least 12 newly compiled or recorded, previously unreleased studio albums during each year of the term of the agreement. For each artist recording, Encoded Music creates a tailored marketing plan. In conjunction with a recording's release, Encoded Music employs traditional marketing efforts, including coordination of radio advertisements, distribution of CDs to radio syndicates to encourage air-time play, distribution of point- of-purchase displays to retail locations and organization of live performances and appearances for the artist. Users of N2K's Web sites are directed to an artist's Web site or featured area of a Web site or online store for editorial content, sound and video samples, digital downloading of singles and samples and artist cybercasts. N2K has negotiated the material terms of an agreement with Warlock Records Inc. for the formation of a joint venture limited liability corporation, N-Coded Music, LLC, which will operate a record label specializing in jazz and related recorded music. Warlock will provide 100% of the venture's capital requirements during an initial three (3) year period. N2K will assign to the joint venture most of the master recordings and artist recording agreements from Encoded Music. Accordingly, Warlock will hold 80.1% of the equity in the joint venture and N2K will hold the remaining 19.9%. In addition, N2K will receive a royalty of 6% of the retail selling price of products sold by the joint venture against which N2K will be paid a non-refundable advance in the amount of $334,000 with possible subsequent advances amounting to an additional $666,000. These royalties are subject to adjustments and reductions for certain categories of sale, in accordance with record industry practice. Advertising Sales and Sponsorships N2K has positioned its Web sites as an interconnected online music network, offering advertisers and marketers the ability to reach highly targeted communities of music fans worldwide. Advertisers on N2K's online store have included MCA Records, Intel, Microsoft Corp., Sony Online Ventures, IBM and Visa, among others. Advertisers are offered a variety of advertising options, which can be combined in different percentages to reach the desired advertising mix. N2K has implemented NetGravity's software for advertising space management, tracking of page impressions and reporting to advertisers. N2K utilizes various advertising models to allow a high degree of flexibility in responding to individual advertisers' needs. It has implemented a graduated cost per thousand rate structure, charging a higher cost per thousand for its more highly targeted audiences. N2K intends to reserve a portion of its available advertising inventory in order to promote the sale of merchandise and to feature content and events on its Web sites. The forms of advertising currently offered on N2K's Web sites include banners, featured content presentations and integrated page icons. Advertisements are displayed on home pages, store departments, search results, artist discographies and on sale and new release listings, among other high traffic Music Boulevard -113- Description of N2K locations. These advertising spaces can be dynamically served through the use of the NetGravity software to rotate, change or target existing messages or increase the number of advertisements delivered in a given space. N2K also offers advertisers and marketers alternative forms of Web site advertising. N2K's advertising model includes sponsorship packages to encourage customers to associate specific content with an identified sponsor. Sponsorship fees are fixed according to time-based arrangements. N2K utilizes a combination of internal direct sales personnel and external agencies to solicit and service advertisers on N2K's Web sites. Marketing and Promotion Business Alliances The significant elements of each of N2K's material business alliances include the following: . Under the terms of an interactive marketing agreement with AOL, N2K and AOL share revenues generated from the sale of advertising, sponsorships, CDs and related merchandise. Music Boulevard is featured as the exclusive on-line music retailer within AOL's MusicSpace channel, receives a featured position on AOL's Shopping Channel, participates in a variety of banner advertising opportunities and is assigned specific keywords within the AOL service. The contract with AOL has a term of three years and is renewable at the option of AOL for additional one-year terms. The AOL contract also provides for promotional and featured buttons on aol.com's home and principal shopping pages for a one-year term. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." . Under the terms of an agreement with Excite, Inc. N2K and Excite share the gross margins realized by N2K on revenues generated from transactions, advertising, sponsorship and promotions on Music Boulevard as a result of customers referred from the excite.com Web site. The Excite contract provides for N2K to pay Excite an initiation fee and an annual exclusivity fee, as well as an annual sponsorship fee for on-going programming, links, placements, advertisements and promotions. The Excite contract has an initial term which expires on April 1, 2000. Pursuant to this agreement, Excite must offer N2K the right of first refusal to negotiate with Excite for renewal of the Excite contract. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." . In July 1998, N2K signed a three-year agreement with Infoseek to become the exclusive online music retailer on Infoseek and the related Infoseek international sites. The agreement requires N2K to make payments totaling $15.0 million, of which $500,000 has been paid and $500,000, $1.5 million, $6.0 million and $6.5 million are to be paid during the fourth quarter 1998, and the years ended 1999, 2000 and 2001, respectively. In exchange for the payments, Infoseek is required to deliver a minimum of approximately 3.6 billion impressions and 36.0 million click- throughs to Music Boulevard. In addition, Infoseek can receive additional compensation if pre-established new customer acquisition targets are achieved. . Under the Netscape license agreement, N2K has agreed to pay Netscape a one-time license fee of $4.0 million, $3.0 million of which was paid by December 31, 1997 and the remainder of which was paid in April of 1998. The agreement was amended in July of 1998, effectively eliminating the remaining $1.0 million payment scheduled on December 18, 1998 and $1.0 million payment scheduled in June 1999. The terms of the existing agreements were extended to May 30, 2000. The revenue share arrangement was also adjusted to become effective after N2K exceeded certain minimum revenue levels from purchases by customers referred from the Netscape.com Web site. . N2K has an agreement with CBS Cable, owner and operator of TNN, CMT, and the country.com Web site. Under the agreement, N2K must share (a) net revenues with CBS Cable from the sale of both music products and non-music product, such as apparel, video tapes and other music related products and (b) any net fees or net advertising revenues -114- Description of N2K generated from advertising placed on any of the co-branded pages on both Country Music Boulevard and country.com. The agreement expires five years following the launch date of Country Music Boulevard, a co-branded site developed by CBS Cable and N2K, and can be terminated earlier by either party in the event that certain revenue targets are not achieved. . The agreement between N2K and AOL Bertelsmann gives Music Boulevard a featured position on AOL Europe. The agreement has a one-year term from the date of launch with a one-year option to renew. . The agreement with Disney Online calls for N2K to pay marketing and sponsorship fees and to pay a royalty on merchandise purchases consummated through links with Music Boulevard. The agreement has a one-year term from the launch of the Disney Boutique with an option for an additional one-year term on mutually acceptable terms. The Disney Boutique is a co-branded Music Boulevard which is linked to Disney online and features Disney-branded products. . The agreement with Microsoft Corporation calls for N2K to pay a monthly fee and a royalty on gross revenue generated by customers linking to Music Boulevard from Microsoft Plaza. The agreement has a one-year term from the launch of the link between Music Boulevard and Microsoft Plaza. Continuous six-month extensions are available unless either party terminates the agreement. . N2K's agreement with Virgin Records requires N2K to pay to Virgin Records a royalty on sales of all products sold by N2K to those customers who were linked from the Virgin Records Web site prior to making a purchase with N2K. The agreement with Virgin Records had an initial term of one year, was extended for one year on October 27, 1997 and has automatic renewal terms. . N2K has an agreement with MTV Networks, on behalf of MTV International Networks, to create localized MTV-Music Boulevard sites for Europe, Brazil, Japan and Asia. The agreement involves the payment of a royalty on sales of all products coming through the local MTV-Music Boulevard sites. N2K has one year from the date of the agreement (July 29, 1997) to launch each local Music Boulevard site. The agreement has a one-year term from the launch date of each site. . N2K receives an administration fee based on a percent of gross advertising revenues, and shares net advertising revenues with WBGO. N2K is required to incur certain non-material development and maintenance expenses for the related Web site during the contract term. The agreement expires in September 1999, with automatic one-year renewals. Sales and Marketing N2K's overall sales and marketing strategy is designed to effectively merchandise music and related products sold through Music Boulevard by building brand awareness, attracting repeat customers and driving traffic to N2K's online store. N2K utilizes a combination of traditional advertising and promotion, online promotion and product merchandising and on-line partnering programs, including the Affiliate program, to accomplish these objectives. N2K currently employs approximately 19 people in its sales and marketing department. N2K utilizes business alliances to increase brand awareness and drive traffic to Music Boulevard. In addition, the N2K Affiliate program enables operators of independent Web sites to offer their customers the ability to purchase CDs, cassettes and music-related merchandise through a link to Music Boulevard, earning a commission on items sold through their Web sites. N2K also employs a combination of online and off-line advertising and promotion campaigns to stimulate traffic to its online store. N2K purchases targeted keyword -115- Description of N2K keyword advertising on search engines and directories who target customers with demographic profiles similar to those of N2K's customers, including services such as Hot Bot and selected destination Web sites such as E!Online and Billboard.com. In addition, N2K attracts customers through negotiated cost-per- lead and cost-per-click arrangements with such sites as AudioNet, Preview Travel, Big Yellow and the DoubleClick Direct network. Generally, these advertisements are in the form of interactive banners. Finally, N2K establishes hyperlinks between N2K's Web sites and artist and fan club Web sites, posts notices in music-related news groups and secures reviews and event notices in appropriate directory Web sites. N2K is building its brand awareness through television and print advertising. N2K expects to spend between $5.0 million and $6.0 million in traditional advertising during the 1998 calendar year. N2K has a proactive public relations program and participates in trade shows and conferences and sends representatives on speaking engagements. N2K also promotes its Music Boulevard Web site through hyperlinks from record label Web sites and through its relationship with SoundScan. N2K believes that hyperlinks between Music Boulevard and record label Web sites are attractive to record companies who do not sell to consumers directly on their own Web sites because of conflicts with retailers. In its relationship with SoundScan, N2K reports the weekly recorded music transactions taking place on its Music Boulevard Web site. SoundScan uses this information along with data from the vast majority of music retail locations nationwide to tally U.S. music sales. This data is the exclusive criteria for compiling the Billboard charts and qualifies the N2K network of Web sites as a potential advertising medium for record labels. On November 2, 1998, N2K launched MyMusicBoulevard, a personalized music service forming the basis of N2K's relationship management strategy with its customers and a core component of N2K's customer retention strategy. MyMusicBoulevard allows customers to build their own electronic newsletter filled with music information and entertainment culled from N2K's vast content offering. In exchange, N2K receives detailed information regarding the music tastes and preferences of customers N2K hopes that with this information it will be better able to serve its present and future customers. A key part of N2K's merchandising and customer acquisition and retention strategies is its ability to link its music genre, artist and title-specific content, such as record reviews, artist profiles and special promotions, to the music ordering section of Music Boulevard. Pricing. N2K adjusts pricing strategies and tactics as necessary to maintain competitiveness. N2K's strategy is to aggressively price all recent releases and popular titles. N2K seeks to encourage the purchase of multiple titles by capping shipping costs and guaranteeing two-day delivery within the U.S. for purchases of five titles or more. In-Store Merchandising. N2K utilizes numerous merchandising features to encourage and enhance a consumer's buying experience. N2K believes that the customer's ability to listen to audio samples from a selection of over 350,000 songs is a significant incentive to purchase. Prior to making a purchase on Music Boulevard, a consumer can also access a variety of information about an artist, music group, album or music genre. N2K regularly creates artist and sales programs on its music Web sites to maximize visibility and sell-through. N2K contracts with Billboard to display the top selling music charts on the Music Boulevard Web site. N2K believes these charts provide consumers with an effective resource for locating samples and sale pricing. Also, N2K has enabled its customers to purchase upcoming popular album releases that do not yet appear in conventional retail stores. These titles are delivered to Music Boulevard customers on their respective titles' release dates. N2K promotes these types of sales events via ad banners both on N2K Web sites and other Web sites. -116- Description of N2K Exclusive Product Distribution. Through its relationships with music artists and their business representatives, N2K has arranged with several well-known artists in the past to sell selected recordings exclusively through the Music Boulevard distribution channel. N2K intends to continue to pursue similar arrangements in the future. In addition to generating a higher profit margin, these exclusive releases are not available through any other music retailers. N2K hopes that these arrangements give Music Boulevard a significant competitive advantage. Push Marketing. N2K has created virtual listening posts, which consist of CD covers prominently displayed and accompanied by audio samples in multiple formats, competitive sale pricing and "Order Now" buttons on Music Boulevard and in the individual music genre department storefronts. N2K believes that record labels find the virtual listening posts attractive for promoting new CD releases. Customer Acquisition and Conversion. N2K collects customer information through a variety of programs which require registration on both Music Boulevard and the genre Web sites. These programs enable N2K to collect demographic data which can be used to market directly to N2K's customers. These programs include sweepstakes, contests, coupon giveaways, free shipping and other sales promotions to generate new business. Customer Retention. N2K has implemented a Frequent Buyers Club membership program. This program allows members to receive a free CD after a certain number of purchases. N2K believes that a major benefit of this program is the ability to collect customer demographics and attempt to capture all or a greater portion of a member's online music purchases. N2K uses an existing technology, known as "cookies," to track basic customer actions and sessions on the Music Boulevard Web site. The Music Boulevard cookie is able to restore a customer's shopping basket and online session, even if the customer leaves the Web site and returns later. N2K believes the use of this technology facilitates and encourages customers to spontaneously visit N2K's Web sites. One-to-One Marketing. N2K believes that one-to-one marketing enhances its ability to know its customers' music and lifestyle preferences. Also, N2K believes that these programs provide customers with a more personal and enhanced experience. After collecting consumer data, N2K uses e-mail to send customers compelling messages that are tailored to each customer's previous purchasing and browsing behavior. These messages typically contain announcements regarding discount coupons, new releases and special sales. N2K is implementing software developed by Net Perceptions Inc. to personalize the Music Boulevard Web site to each individual customer and provide CD recommendations derived from past buying behavior and buying patterns among the entire Music Boulevard community of customers. Ordering, Filling Orders and Customer Service. N2K has designed its ordering system to be easy-to-use and simple to understand. In order to maintain high customer satisfaction and price competitiveness, N2K places an emphasis on reliable product delivery. At any time during a visit to Music Boulevard, a customer can click on the "Add CD to Cart" button to place an item in his or her personal shopping basket. The customer can continue to shop the online store, adding chosen items. When a customer is ready to submit an order, he or she simply returns to the order page to choose a shipping method, such as U.S. Mail, 2-Day Federal Express or Federal Express Overnight to customers from the U.S. and air mail and DHL Express to non-U.S. customers, and the form of payment. At this point, if the particular customer is not previously registered with Music Boulevard, he or she is prompted to register, enter his or her name and address and select a password. The customer then has the option of securely submitting credit card information on-line or calling or faxing the information to the Music Boulevard Customer Service Department. Music Boulevard also provides the option of payment by check or money order. By assigning a password to every buyer, the Music Boulevard ordering process facilitates repeat purchases by eliminating the need to re-submit credit card and shipping information for subsequent orders. N2K keeps customers informed regarding the status of their orders by sending e-mail messages which, among other things, notify the customer regarding the receipt and shipment of each order and whether an item is back-ordered. -117- Description of N2K N2K primarily uses Valley Media, Inc. to ship CDs, cassettes, LPS, videos and related music items. All inventory is owned and stored by Valley. Four times daily, N2K batches customer orders and electronically transmits them to Valley. N2K uses a secure network through which it transmits data to Valley, thereby helping to ensure customer security and data integrity. Valley assembles, packs and ships customer orders and charges N2K for merchandise, shipping and handling. Customer billing is performed for N2K by a third-party credit card processor, First USA, Inc. If any particular customer selection is not in stock, Music Boulevard sends the affected customer an e-mail to notify him or her that the item is backlogged. To date, N2K has experienced a return rate of approximately 2% of all CDs and cassettes sold. With regard to international markets, N2K has expanded the number of titles it offers and has provided more localized product in those markets by creating alliances with companies to fill international orders. N2K has entered into an exclusive agreement with Shinseido Inc., a leading music retail chain in Japan, to add approximately 150,000 new local-language music titles to the Japanese version of Music Boulevard, which launched in October 1998. N2K has entered into an agreement with MSI of Miami Corp., whereby MSI will provide over 60,000 international titles to Music Boulevard's catalog of offerings. N2K also offers registration and ordering instructions on Music Boulevard in English, Japanese, German, French and Spanish. N2K believes that high levels of customer service and support are critical to the value of its services and to retaining and expanding its customer base. Accordingly, N2K has significantly increased its staffing levels in the Customer Service Department and currently employs 45 representatives on a full- time basis and 22 representatives on a part-time basis. Music Boulevard Customer Service representatives are available 24 hours a day on weekdays, and 10:00 AM to 6:00 PM EST on weekends for customer service through a combination of e-mail, fax and a toll-free telephone number. Customer service is assisted by automated e-mail notifications which greatly assist in keeping customers up- to-date on the status of their orders. Company representatives handle general questions about the service as well as register customers' credit card information over the phone. N2K believes that these representatives are a valuable source of feedback regarding customer satisfaction. N2K intends to use this information to improve its services. Customers of N2K are not charged for service and support. Technology N2K has developed sophisticated information services delivery and customer tracking systems. It has done this by joining third-party systems, when available, and by developing its own proprietary tools. N2K's systems and tools provide functionality in six primary areas: . Web site development, .audio encoding and online delivery, .fault tolerance, .security, .scalability and .advanced technologies. The systems and tools provide scalability which allows N2K to maintain performance as there are increases in the number of customers using the system and the amount of data processed, and also to add new functionality as new needs and technologies emerge. Web site Development. N2K's catalog of CDs and cassettes is stored in an Oracle database. This catalog forms the core of the music entertainment content collection and contains links to related content such as audio samples, images, editorial content and charts. Each individual page of N2K's Music Boulevard online store is built dynamically from these elements and uses a proprietary web page template technology. This template technology results in the separation of a page's look and feel from the individual data elements. This -118- Description of N2K separation eliminates software updates for page layout changes and greatly reduces the programming required to maintain a growing amount of content. Templates also enable online stores with different formats to seamlessly integrate Music Boulevard store elements such as search and discography pages. N2K has developed proprietary software specifically to enable its editorial and creative staff to design content that is tightly integrated into this environment. As a result, N2K can efficiently import editorial content from third-party sources like magazines. For high-volume, non-secure Web transactions, N2K uses the Apache web server, a modular, high-performance system. Audio Encoding and Delivery. N2K uses a variety of audio compression technologies for its audio samples and downloads. These technologies are tailored to specific applications. In light of current customer patterns, N2K uses the popular RealNetworks' RealAudio format for delivering real-time streaming 30-second audio previews and feature-length web broadcasts. The Liquid Audio streaming format, which employs high quality DOLBY Digital compression, is used for real-time preview samples for those tracks which are available for digital distribution. Thirty-second downloadable preview samples are also available in the industry standard MPEG format. Each of N2K's audio formats has certain minimum system requirements for hardware and software. In order for a customer to listen to the audio samples on Music Boulevard, a customer must have a multimedia-equipped personal computer and must download software for each format. For example, the minimum system PC requirements for a customer desiring to play an audio sample in the MPEG audio format are an MPEG Audio Player and a 386/40mhz CPU on a Windows 3.1 operating system with eight megabytes of random access memory. N2K is also actively pursuing new and emerging audio compression technologies for the digital distribution of music. Full-length downloadable master recordings, available via N2K's emod system, are available as DOLBY Digital downloads suitable for transfer to standard audio CDs. Emod is N2K's audio delivery system which makes it possible to deliver high quality audio online to consumers. Fault Tolerance. N2K has operated a 24-hour a day, seven-day a week computing facility in the online information industry for over ten years. Drawing on this experience, N2K's Web site and online store architecture use redundant servers and a redundant array of independent drive storage systems so that downtime due to system outages or maintenance is minimized. N2K is deploying an architecture in which all components of the online systems are redundant, allowing continuous operation even in the event of occasional component failures. N2K runs its Oracle database on the Sun Enterprise 10000 server because of its scalability and fault tolerant characteristics, including redundant components which can be changed without causing system downtime. Security. N2K employs commercially available firewalls to keep its internet connections secure. N2K uses the Apache SSL Server for secure electronic transactions over the internet. It uses proprietary electronic data interchange interfaces and private networks to ensure the security of customer credit card transactions and other order information shared with N2K's fulfillment partners and third party billing company. N2K plans to implement standardized electronic transaction mechanisms, such as Secure Electronic Transaction technology, the standard being developed by major credit card companies, as they become commercially available. Scalability. The structure of N2K's hardware and software is built upon a distributed transaction processing model that allows software to be distributed among multiple parallel servers. This architecture allows N2K to scale by either adding new servers or increasing the capacity of existing servers. The current system is designed to scale from 6,000 concurrent customer sessions currently to at least 20,000 concurrent customer sessions while maintaining customer performance. In the rapidly changing internet environment, the ability to update the application system to stay current with new technologies is important. The system's template technology and modular database design allow the addition or replacement of server-based applications such as multimedia formats and delivery systems, additional electronic data interchange-based fulfillment partners and search and retrieval engines. This architecture also enables low-cost, rapid deployment of additional Web sites and online stores that integrate with the shopping and genre sites. -119- Description of N2K Advanced Technologies. N2K continually evaluates emerging technologies, new developments in web technologies and CD/DVD multimedia advances. N2K is currently working with technologies such as Sun's Java language, Apple's Web Objects tools and electronic payment and transaction systems for an international multiple fulfillment distribution system and Real Time Streaming Protocol for the orderly delivery of multimedia content over the internet. N2K and BMI, Inc. are involved in on-going discussions in connection with BMI's view that N2K needs a license in order to publicly perform any BMI-affiliated music on N2K's web sites or otherwise. N2K has informed BMI that it is willing to enter into a license agreement with respect to some uses of BMI-affiliated music by N2K, including cybercasts and re-transmission of radio broadcasts over the internet. N2K has also informed BMI of its view that under the U.S. copyright laws it is not required to take a license from BMI or any other party with respect to other uses of BMI-affiliated music. The parties continue to discuss these issues. Competition The market for internet content providers is highly competitive and rapidly changing. Since the internet's commercialization in the early 1990's, the number of internet Web sites which compete for consumers' attention and spending has proliferated. With low barriers to entry, N2K expects that competition will continue to intensify. Currently, there are more than 100 music retailing Web sites on the internet. In addition to intense competition from internet content providers, N2K also faces competition from traditional media such as radio, television and print with respect to competing for consumers' attention. N2K Encoded Music competes with the major and other independent record labels. With respect to recorded music sales, N2K competes with numerous internet retailers, including traditional music retail chains, record labels and independents with Web sites on the internet. In addition, N2K competes with traditional retail stores, including chains and megastores, mass merchandisers, consumer electronics stores and music clubs. N2K believes that the primary competitive factors involved in providing music entertainment products and services via the internet are name recognition, variety of value-added services, ease of use, price, quality of service, availability of customer support, reliability, technical expertise and experience. N2K's success in this market will depend heavily upon its ability to provide high quality, entertaining content, along with cutting-edge technology and value-added internet services. Other factors that will affect N2K's success include its continued ability to attract experienced marketing, sales and management talent. In addition, the competition for advertising revenues both on internet sites and in more traditional media is intense. N2K believes that its high-quality music-related content, offered free of charge, is an important differentiation from other music-related and music- merchandising Web sites. Many of N2K's current and potential competitors in the internet and music entertainment businesses have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and larger existing customer bases than N2K. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and to devote greater resources to the development, promotion and sale of their products or services than N2K. Employees As of December 31, 1998, N2K had 244 full-time employees, including 192 in operations and development, 19 in sales and marketing and 197 in general and administrative. As of the same date, N2K also had 28 part-time employees, primarily focused on customer service and 8 consultants, primarily focused on N2K's music entertainment business. N2K's future success depends, in significant part, upon the continued service of its key technical, editorial, sales, product development and senior management personnel and on its ability to attract and retain highly qualified employees. There is no assurance that N2K will continue to attract and retain high-caliber employees. Competition for such personnel is intense. N2K's employees are not represented by any collective bargaining organization. N2K has never experienced a work stoppage and considers relations with its employees to be good. -120- Description of N2K Trademarks and Patents Music Boulevard and its related logo are registered service marks of N2K. N2K has also applied for trademark and/or service mark registrations for Music Blvd.(TM), N2K Encoded(TM) and Rocktropolis(TM). In addition, N2K is using allstar(TM), Classical Insites(TM), emod(TM), Jazz Central Station(TM) and its related logo, N2K(TM), Need To Know(TM) and RAM(TM) as trademarks and/or service marks. Facilities N2K Inc. is located in the New York Information Technology Center at 55 Broad Street in New York, New York. N2K leases its facilities and other equipment under operating and capital lease agreements. N2K leases approximately 55,400 square feet of office space at these facilities. The agreements for approximately 44,000 square feet, 6,000 square feet, 2,000 square feet and 2,000 square feet expire on August 31, 2002, December 31, 2002, January 31, 2003 and July 31, 2003, respectively. An additional 1,400 square feet is leased on a month-to-month basis. These facilities offer advanced technology amenities including state-of-the-art voice, video and data transmission and advanced telecom and data security. N2K leases an additional 25,000 square foot facility in Wayne, Pennsylvania which houses N2K's main computer operations. The leases for approximately 23,000 square feet and 2,000 square feet expire on August 31, 2001 and February 28, 2002, respectively. There can be no assurance that a system failure at this location would not adversely affect the performance of N2K's services. N2K leases approximately 2,000 square feet of office space in Los Angeles, California. N2K believes that its existing facilities are adequate for its current requirements and that additional space can be obtained to meet its requirements for the foreseeable future. Litigation N2K and its directors are defendants in a consolidated purported class action in the U.S. District Court for the Southern District of New York entitled In re N2K Inc. Securities Litigation (Docket No. 98 CIV 3304 (HB)). The consolidated action consolidates two purported class actions, entitled Bender v. Rosen et al. (Docket No. 98 CIV 3304 (HB)) and Kuhn v. N2K Inc. et al. (Docket No. 98 CIV 4360 (HB)), that were filed in the United States Court for the Southern District of New York in May 1998 and June 1998, respectively. The consolidated action is a purported class action on behalf of common shareholders and seeks to recover unspecified damages and other relief, as well as recovery of costs and expenses, stemming from alleged violations of the Securities Act of 1933 in connection with the public offering of the shares of N2K's common stock in April 1998. The consolidated action alleges that, among other things, the defendants failed to disclose N2K's first quarter financial results in the registration statement for the April 1998 public offering. N2K believes that the claims in the consolidated action are without merit and is vigorously defending the action. The defendants moved to dismiss the complaint on August 21, 1998 for failure to state a claim and/or for failure to plead fraud with the requisite particularity. The motion to dismiss has been fully briefed and is awaiting decision. In October 1998, an action entitled Rubin v. Rosen et al. (Docket No. 16743NC) was filed against N2K, N2K's directors and CDnow in the Chancery Court of Delaware for the County of New Castle. The Rubin action is a purported class action on behalf of all common shareholders of N2K, alleging that the consideration to be received by the purported class in connection with the proposed merger between N2K and CDnow is unfair and grossly inadequate and that the individual defendants breached their fiduciary duties in connection with the merger. The Rubin action alleges that the consideration for N2K shareholders is inadequate because (1) the value of N2K stock materially exceeds the consideration to be received by N2K shareholders in the merger, (2) the individual defendants did not value N2K through a bidding or market check mechanism and (3) the merger agreement does not protect the N2K shareholders from a decline in the price of CDnow stock. The plaintiffs seek injunctive relief and unspecified damages, as well as costs and expenses. N2K believes that the claims are without merit and intends to defend the action vigorously. N2K and its directors moved to dismiss the complaint on December 30, 1998, for failure to state a claim. No briefing schedule on the motion has been set. -121- Description of N2K In November 1998, an action entitled Ticketmaster Ticketing Co. v. N2K Inc. (Docket No. BC200194) was filed against N2K in California Superior Court for the County of Los Angeles. The Ticketmaster action alleges that N2K breached a marketing and advertising contract dated April 23, 1998 between Ticketmaster and N2K, which N2K terminated effective October 31, 1998 due to alleged breaches of the agreement by Ticketmaster as well as other tortious conduct. Ticketmaster seeks damages in an amount not less than $8 million, plus pre- and post-judgment interest, as well as fees and costs. N2K has not yet answered the complaint. N2K believes that it has substantial defenses to the claim asserted, intends to defend the action vigorously and intends to file a cross-complaint for affirmative relief. In November 1998, an action entitled Metallica v. N2K Inc. et al. (Docket No. 98-9122 GHK(ANx)) was filed in the United States District Court for the Central District of California against N2K, Metro Independent Records, Richard Driscoll, Dutch East India Trading, and ten unnamed persons or entities. The Metallica action alleges that N2K and the other defendants have infringed copyrights and trademarks owned by Metallica and the other plaintiff, Creeping Death Music, and have violated California state law by manufacturing, distributing, advertising and selling a compact disc entitled "Metallica, Bay Area Thrashers, The Early Years." Plaintiffs seek injunctive relief including, but not limited to, an order requiring defendants to cease their alleged copyright and trademark infringements, damages, including but not limited to treble plaintiffs' damages and defendants' profits attributable to the alleged infringements, other damages and injunctive relief, as well as fees and costs. N2K has not yet answered or responded to the complaint. N2K believes that the claims against it are without merit and expects such claims will be resolved through negotiation with plaintiffs and without material adverse effect to N2K. N2K and 17 other entities have been named as defendants in a civil action captioned Interactive Gift Express v. Compuserve, Inc., et al., which is pending in the U.S. District Court, Southern District of New York, Docket 95 CV 6871 (BSJ). N2K has also been named as defendant in a civil action captioned Parsec Sight/Sound, Inc. v. N2K Inc., which is pending in the U.S. District Court of Pennsylvania, Western District, Docket 98 CV 0118. The plaintiffs in each of these actions allege infringement of certain intellectual property rights, and each seeks treble damages and costs in an unspecified amount, as well as other declaratory and injunctive relief. In the Interactive Gift action, the court has issued a preliminary ruling favorable to defendants. Plaintiffs have stated that they will consent to entry of judgment against them in order to speed their appeal of the court's ruling. In the Parsec action, N2K has answered the complaint and discovery is ongoing. N2K believes that the claims against it in each action are without merit and intends to vigorously defend against each of them. Moreover, N2K believes that these lawsuits, even if adversely determined, will not have a material adverse effect on N2K's business, financial condition or results of operations. -122- Selected Historical Financial Information of N2K Selected Historical Financial Information of N2K N2K provides the following financial information to aid you in your analysis of the financial aspects of the merger. The statement of operations data for the years ended December 31, 1995, 1996 and 1997 and the balance sheet data as of December 31, 1996 and 1997 have been derived from the Consolidated Financial Statements, which have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this joint proxy statement/prospectus. The statement of operations data for the years ended December 31, 1993 and 1994 and the selected balance sheet data as of December 31, 1993, 1994 and 1995 have been derived from consolidated financial statements audited by Arthur Andersen LLP, independent public accountants, not included in this joint proxy statement/prospectus. The statement of operations data for the nine months ended September 30, 1997 and 1998 and the balance sheet data as of September 30, 1998 have been derived from unaudited consolidated financial statements of N2K that, in the opinion of the N2K, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of operations for the period in accordance with generally accepted accounting principles. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for any interim period or for the full year. In December 1998, N2K management approved a plan for the disposal of its Encoded Music Division. Accordingly, the operating results and assets and liabilities of these businesses have been accounted for as discontinued operations and are reflected separately from continuing operations. N2K incurred an extraordinary charge to its statement of operations equal to the unamortized portion of the discount associated with the fair value of the warrants that were issued in connection with the management and senior notes. The extraordinary charge was incurred when the outstanding balance on the management and senior notes was satisfied prior to maturity upon consummation of N2K's initial public offering in October 1997. This information is only a summary and you should read it in conjunction with "N2K Management's Discussion and Analysis of Financial Condition and Results of Operations" and N2K's historical financial statements and related notes thereto contained elsewhere in this joint proxy statement/prospectus and other documents N2K has filed with the SEC. See "Where You Can Find More Information."
Nine Months Ended Year Ended December 31, September 30, ------------------------------------------------------------ ------------------------ 1993 1994 1995 1996 1997 1997 1998 --------- ----------- ---------- ----------- ----------- ----------- ----------- Statement of Operations Data: Net revenues............ $ -- $ -- $ 96,505 $ 1,655,704 $ 8,108,449 $ 4,115,458 $24,890,121 Cost of revenues........ -- -- 85,176 1,447,888 6,212,741 3,284,672 19,888,878 --------- ----------- ---------- ----------- ----------- ----------- ----------- Gross profit........... -- -- 11,329 207,816 1,895,708 830,786 5,001,243 Operating expenses: Operating and development........... -- 257,826 1,034,617 7,007,929 10,585,441 7,082,806 16,092,108 Sales and marketing.... -- 173,41j5 1,077,649 2,772,167 6,690,884 2,612,009 29,818,641 General and administrative........ 541,241 896,195 871,667 2,477,995 4,647,810 3,125,505 3,357,404 Charge for purchased research and development........... -- -- -- 5,242,523 -- -- -- --------- ----------- ---------- ----------- ----------- ----------- ----------- Operating loss......... (541,241) (1,327,436) (2,972,604) (17,292,798) (20,028,427) (11,989,534) (44,266,910) Interest and other income................. 43,761 73,359 106,370 352,531 693,881 166,312 2,446,254 Interest expense........ (82,890) (48,398) (18,237) (52,281) (653,455) (484,486) (55,071) --------- ----------- ---------- ----------- ----------- ----------- ----------- Loss from continuing operations............. (580,370) (1,302,475) (2,884,471) (16,992,548) (19,988,001) (12,307,708) (41,875,727) Income (loss) from discontinued operations............. 1,085,256 1,444,885 1,289,671 (1,915,361) (9,683,466) (4,806,679) (12,307,531) Gain on disposal of discontinued operations............. -- -- -- -- 1,574,493 1,574,493 -- --------- ----------- ---------- ----------- ----------- ----------- ----------- Income (loss) before extraordinary item..... 504,886 142,410 (1,594,800) (18,907,909) (28,096,974) (15,539,894) (54,183,258)
-123- Selected Historical Financial Information of N2K
Nine Months Ended Year Ended December 31, September 30, ------------------------------------------------------------- -------------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- ----------- ------------ ------------ ------------ ------------ Extraordinary item...... -- -- -- -- (639,262) -- -- --------- --------- ----------- ------------ ------------ ------------ ------------ Net income (loss)....... $ 504,886 $ 142,410 $(1,594,800) $(18,907,909) $(28,736,236) $(15,539,894) $(54,183,258) ========= ========= =========== ============ ============ ============ ============ Basic and diluted income (loss) per common share: Continuing operations.. $ (0.37) $ (0.83) $ (1.84) $ (6.15) $ (4.09) $ (4.11) $ (3.12) Discontinued operations............ 0.69 0.92 0.82 (0.70) (1.98) (1.61) (0.91) Gain on disposal of discontinued operations............ -- -- -- -- 0.32 0.53 -- Extraordinary item..... -- -- -- -- (0.13) -- -- --------- --------- ----------- ------------ ------------ ------------ ------------ Basic and diluted net income (loss) per common share........... $ 0.32 $ 0.09 $ (1.02) $ (6.85) $ (5.88) $ (5.19) $ (4.03) ========= ========= =========== ============ ============ ============ ============ Shares used in computing basic and diluted net income (loss) per common share........... 1,566,917 1,566,936 1,566,955 2,760,948 4,885,556 2,994,770 13,434,772 ========= ========= =========== ============ ============ ============ ============
Year Ended December 31, ------------------------------------------------------- September 30, 1993 1994 1995 1996 1997 1998 ---------- ---------- ---------- ---------- ----------- ------------- Balance Sheet Data: Cash and cash equivalents............ $ 858,272 $1,469,764 $ 547,624 $4,483,450 $36,831,748 $54,277,085 Working capital......... 543,947 1,756,815 3,960 1,910,864 50,859,351 57,722,701 Total assets............ 1,645,275 2,685,317 1,973,332 9,329,922 64,021,556 80,802,343 Stockholders' equity.... 542,130 2,243,704 648,984 4,908,379 53,147,935 61,125,543
-124- N2K Management's Discussion and Analysis of Financial Condition and Results of Operations N2K Management's Discussion and Analysis of Financial Condition and Results of Operations Overview N2K is an online music entertainment company using the internet as a global platform for promoting, marketing and selling music and related merchandise. N2K's strategy is to build loyal customer communities around genre-specific Web sites that provide music content and enable consumers to purchase CDs, cassettes, LPs, videos and related music items. N2K had its own record label, N2K Encoded Music, that used N2K's online store, as well as record stores and other traditional distribution channels, to promote, distribute and sell original and licensed artist recordings. In December 1998, N2K decided to focus exclusively on its online music store and, accordingly, approved a formal plan of disposal for its record label. See "--Recent Events" and "--Discontinued Operations." N2K was founded as Telebase, Inc. in 1984 as a provider of online information services. In 1994, recognizing increasing opportunities in the consumer entertainment market, Telebase expanded its online business strategy to include music entertainment and began expending significant resources to enter this market. Telebase launched its Music Boulevard online store and began selling recorded music and related merchandise in 1995. In February 1996, Telebase merged with N2K Inc., a New York corporation, founded in 1995 as a developer of online music entertainment content, and the merged entity changed its name to N2K Inc. In April 1997, N2K decided to focus exclusively on its music entertainment business and, accordingly, the board of directors approved a formal plan of disposal for its online information services business. In August 1997, N2K sold substantially all of the net assets of this business. See "-- Discontinued Operations." In October 1997, N2K, which had previously been incorporated in Pennsylvania, was reincorporated as a Delaware corporation and consummated an initial public offering. On April 20, 1998, N2K closed on the sale of 2,000,000 shares of common stock in a follow-on public offering. N2K launched its first internet site, Music Boulevard, in August 1995, and introduced its first music genre site, Jazz Central Station, in January 1996. N2K revenues have grown significantly while N2K incurred net losses for 1995, 1996, 1997 and the nine months ended September 30, 1998 as it built its business. N2K is currently generating revenues from the sale of CDs and cassettes produced by others, the sale of advertising on its Web sites and online stores and the sale of related merchandise. N2K believes that increased sales of advertising on its Web sites and online stores will contribute to higher margins in the future. The margins from the sale of CDs and cassettes produced by others are affected by product costs, shipping and handling fees and promotional discounts, such as discounted selling prices and reduced or free shipping and handling. N2K believes that frequent promotional discounts will be necessary to build repeat customer traffic to its Web sites and online stores, which will reduce its gross margins. N2K believes that its future financial performance will be determined by its success in improving margins on the sale of CDs and cassettes produced by others, expanding and improving customer service operations, introducing new products and services and selling advertising and sponsorship programs on its Web sites and online stores. Management has increased the resources within N2K to support these functions. N2K's strategy to develop products and services for the music entertainment business was primarily responsible for the decline in net income and increase in net loss for the years ended December 31, 1994, 1995, 1996 and 1997. N2K has only a limited operating history in its continuing operations upon which an evaluation of N2K and its prospects can be based. Accordingly, N2K believes that the results of its operations for the past five years, during which time N2K had minimal revenues, are not meaningful indications of future performance. N2K incurred losses from continuing operations of $2.9 million for the year ended December 31, 1995 and $17.0 million for the year ended December 31, 1996, of which $5.2 million represented aggregate one-time charges in connection with the write-off of purchased research and development. N2K incurred losses from continuing operations of $20.0 million and $41.9 million for the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively. -125- N2K Management's Discussion and Analysis of Financial Condition and Results of Operations N2K currently intends to increase its operating expenses as a result of N2K's strategic alliances, to fund increased sales and marketing, to enhance existing Web sites and online stores and to complete business relationships important to the success of N2K. To the extent that such expenses precede or are not subsequently followed by increased revenues, N2K's business, results of operations and financial condition will be materially adversely affected. There can be no assurance that N2K will be able to generate sufficient revenues from the sale of music recordings, related merchandise, advertising and sponsorship programs to achieve or maintain profitability on a quarterly or annual basis in the future. N2K expects negative cash flow from operations to continue for the foreseeable future as it continues to develop and market its business. Pursuant to the Telebase merger in February 1996, the shareholders of the old N2K received an aggregate of 1,684,819 shares of common stock valued at $4.2 million. The Telebase merger was accounted for as a purchase transaction with a total purchase price, including transaction costs, of approximately $4.4 million. In connection with the Telebase merger, $4.1 million was charged to expense as of the date of the transaction as it represented purchased research and development. N2K allocated the remainder of the purchase price ($280,000) to acquired technology costs, which is being amortized over five years on a straight-line basis. The results of the acquired business and the shares issued in connection with the transaction have been included in N2K's financial statements since February 13, 1996. On June 21, 1996, N2K acquired the rock Web site, rocktropolis.com, from Rocktropolis Enterprises, LLC, for $633,000 in cash and 44,790 shares of common stock. The acquisition was accounted for as a purchase. N2K incurred a one-time charge of $1.1 million for purchased research and development associated with this transaction. N2K also recorded an intangible asset (the Rocktropolis tradename) of $100,000 that is being amortized over five years on a straight- line basis. Recent Events Encoded Music N2K had its own record label, N2K Encoded Music, which used N2K's Web sites, as well as record stores and other traditional distribution channels, to promote, distribute and sell original and licensed artist recordings. In December 1998, N2K approved a formal plan of disposal for N2K Encoded Music. N2K Encoded Music has been accounted for as a discontinued operation with a measurement date of December 22, 1998. See "-- Discontinued Operations." CDnow Merger On October 23, 1998, N2K and CDnow issued a joint press release with N2K announcing the execution of a definitive merger agreement. CDnow is an online retailer of CDs and other music related products. The merger will be effected through the formation of a new publicly traded company, initially to be called CDnow/N2K, Inc. The agreement provides for each existing N2K shareholder to receive 0.83 shares of common stock in the new company for each N2K share owned by such party, and each existing CDnow shareholder to receive 1.00 share of common stock in the new company for each CDnow share owned by such party. The merger agreement and press release are filed as exhibits to N2K's Current Report on Form 8-K dated October 22, 1998 and filed October 29, 1998. Results of Operations N2K expects to experience significant fluctuations in future quarterly operating results that may be caused by a variety of factors, including, without limitation: . N2K's ability to retain existing customers, attract new customers at a steady rate and maintain customer satisfaction; . the announcement or introduction of new or enhanced Web sites and online stores; products and business alliances by N2K and its competitors; . the mix of products sold by N2K; . seasonality of the recorded music industry; -126- N2K Management's Discussion and Analysis of Financial Condition and Results of Operations . seasonality of advertising sales; . N2K promotions and sales programs, price competition or higher recorded music prices in the industry; . the level of use of the internet and increasing consumer acceptance of the internet for the purchase of consumer products such as those offered by N2K; . N2K's ability to upgrade and develop its systems and infrastructure in a timely and effective manner; . the level of traffic on N2K's online store; . technical difficulties, system downtime or internet brownouts; . the amount and timing of operating costs and capital expenditures relating to expansion of N2K's business, operations and infrastructure and the implementation of marketing programs, key agreements and business alliances; . the level of merchandise returns experienced by N2K; and . general economic conditions and economic conditions specific to the internet, online commerce and the recorded music industry. While N2K has a limited operating history in the music entertainment business, it anticipates that revenues will eventually track traditional music purchase and advertising sales patterns. As a result, N2K believes that period-to-period comparisons of its results of operations are not and will not necessarily be meaningful and should not be relied upon as an indication of future performance. Nine Months Ended September 30, 1998 Compared with Nine Months Ended September 30, 1997. N2K incurred losses from continuing operations of $41.9 million and $20.0 million and net losses of $54.2 million and $15.5 million for the nine months ended September 30, 1998 and 1997, respectively. Net Revenues. Net revenues for the nine months ended September 30, 1998 totaled $24.9 million compared to $4.1 million for the nine months ended September 30, 1997. Net revenues for the nine months ended September 30, 1998 and 1997 consisted primarily of sales of CDs and cassettes produced by others. Net revenues from the sale of merchandise sold via the internet include shipping and handling charges. Net sales derived from advertising sold on N2K's online store totaled $2.8 million for the nine months ended September 30, 1998 compared to $421,000 for the nine months ended September 30, 1997. Cost of Revenues. Cost of revenues totaled $19.9 million for the nine months ended September 30, 1998 compared to $3.3 million for the nine months ended September 30, 1997. Cost of revenues consists of payments to third parties for the cost and distribution of CDs and cassettes and fulfillment of customer orders (including the costs incurred to ship merchandise sold via the internet to its customers). N2K's gross profit as a percentage of revenues remained relatively constant. N2K expects revenues from the sale of advertising and other music related merchandise, which generate higher gross profit, to increase in future periods. Operating and Development Expenses. Operating and development expenses increased from $7.1 million for the nine months ended September 30, 1997 to $16.1 million for the nine months ended September 30, 1998, primarily due to increased staffing and related overhead expenses as N2K expanded its operations. Specifically, N2K had dedicated resources to the expansion of customer service operations. Operating and development personnel totaled 202 full-time employees as of September 30, 1998 compared to 100 full-time employees as of September 30, 1997. Operating and development expenses consist primarily of software engineering, multimedia production, graphic design, customer service, telecommunications charges and computer operations. This infrastructure is sufficient to support higher revenues and, accordingly, N2K expects that, as revenues increase, operating and development expenses will decrease as a percentage of revenues. Sales and Marketing Expenses. Sales and marketing expenses increased from $2.6 million for the nine months ended September 30, 1997 to $29.8 million for the nine months ended September 30, 1998. The -127- N2K Management's Discussion and Analysis of Financial Condition and Results of Operations increase in sales and marketing expenses was primarily attributable to the amortization of the costs associated with N2K's new business alliances and the expansion of N2K's online advertising and off-line media campaign. Sales and marketing expenses consist primarily of the amortization of the costs associated with N2K's various business alliances, external advertising, credit card processing charges, profit participations payable to business alliance partners, promotions, trade shows, advertising sales and personnel expenses. N2K expects that levels of sales and marketing expenditures will increase in future periods due to the execution of new advertising and promotional programs designed to acquire new customers and retain existing customers, but total sales and marketing expenses will decline as a percentage of revenues. General and Administrative Expenses. General and administrative expenses increased from $3.1 million for the nine months ended September 30, 1997 to $3.4 million for the nine months ended September 30, 1998. General and administrative expenses consist of executive management, accounting and human resources personnel and expenditures for applicable overhead costs. N2K expects general and administrative expenses to continue to increase in absolute dollars as N2K incurs additional costs related to the growth of its business. Interest and Other Income and Interest Expense. Interest and other income and interest expense primarily consists of interest income on short-term liquid investments of N2K's excess cash and interest expense incurred as a result of the financing of equipment through capital leases and the use of N2K's former revolving credit line. Interest and other income increased from $166,000 for the nine months ended September 30, 1997 to $2.4 million for the nine months ended September 30, 1998 primarily due to N2K investing the proceeds of the initial public offering which occurred in the fourth quarter of 1997 and the proceeds of its secondary public offering which occurred in the second quarter of 1998. Interest expense decreased from $484,000 for the nine months ended September 30, 1997 to $55,000 for the nine months ended September 30, 1998 primarily attributable to interest in 1997 relating to certain Management and Senior Notes which did not exist in 1998. Fiscal 1997 Compared with Fiscal 1996. Net Revenues. Net revenues for 1997 totaled $8.1 million compared to $1.7 million for 1996. Net revenues for 1997 and 1996 consisted primarily of sales of CDs and cassettes produced by others. Net revenues from the sale of merchandise via the internet include shipping and handling charges. Cost of Revenues. Cost of revenues totaled $6.2 million for 1997 compared to $1.4 million for 1996. Cost of revenues consists of payments to third parties for the cost and distribution of CDs and cassettes and fulfillment of customer orders (including the costs incurred to ship merchandise sold via the internet to its customers). N2K's gross profit as a percentage of revenues increased due to the sale of advertising, which typically generates a higher gross margin. Operating and Development Expenses. Operating and development expenses increased from $7.0 million for 1996 to $10.6 million for 1997 due to increased staffing as N2K expanded its operations. Operating and development personnel totaled 122 full-time employees as of December 31, 1997 compared to 97 full- time employees as of December 31, 1996. Operating and development expenses consist primarily of software engineering, multimedia production, graphic design, customer service, telecommunications charges and computer operations. Sales and Marketing Expenses. Sales and marketing expenses increased from $2.8 million for 1996 to $6.7 million for 1997. The increase in sales and marketing expenses was primarily attributable to the amortization of the costs associated with N2K's various business alliances, the expansion of N2K's online and print advertising, public relations and other promotional expenditures, as well as increased personnel and related expenses required to implement N2K's marketing strategy. Sales and marketing personnel totaled 15 full-time employees as of December 31, 1997 compared to 24 full-time employees as of December 31, 1996. Sales and marketing expenses consist primarily of the amortization of the costs associated with N2K's various business alliances, external advertising, credit card processing charges, profit participations payable to strategic alliance partners, promotions, trade shows, advertising sales and personnel expenses. -128- N2K Management's Discussion and Analysis of Financial Condition and Results of Operations General and Administrative Expenses. General and administrative expenses increased from $2.5 million for 1996 to $4.6 million for 1997, primarily due to increased staffing and overhead expenses. General and administrative personnel totaled 27 full-time employees as of December 31, 1997 compared to 18 full-time employees as of December 31, 1996. General and administrative expenses consist of executive management, accounting and human resources personnel, and expenditures for applicable overhead costs. Interest and Other Income and Interest Expense. Interest and other income and interest expense consists of interest income on short-term liquid investments of N2K's excess cash and interest expense incurred as a result of the financing of equipment through capital leases, the use of N2K's former revolving credit line and interest incurred on the management and senior notes. Interest income for 1997 and 1996 related to N2K investing the proceeds of equity financings received in 1997 and 1996. Extraordinary Item. N2K incurred an extraordinary charge to its statement of operations equal to the unamortized portion of the discount associated with the fair value of the warrants that were issued in connection with the management and senior notes. The extraordinary charge was incurred when the outstanding balance on the management and senior notes was satisfied prior to maturity upon consummation of N2K's IPO. Fiscal 1996 Compared with Fiscal 1995. Net Revenues. Net revenues for 1996 totaled $1.7 million compared to $97,000 for 1995. Net revenues in 1996 and 1995 consisted primarily of sales of CDs and cassettes produced by others and a limited amount of advertising revenues. N2K did not have any revenues from continuing operations prior to August 1995 when N2K launched Music Boulevard. Cost of Revenues. Cost of revenues totaled $1.4 million for 1996 compared to $85,000 for 1995. Cost of revenues consists of payments to a third-party fulfillment operation for the shipment to N2K's customers of music CDs and cassettes produced by others. Operating and Development Expenses. Operating and development expenses increased from $1.0 million for 1995 to $7.0 million for 1996 due to increased staffing resulting from the Telebase merger in February 1996 and an increased development effort for N2K's music Web sites and its online stores. Operating and development personnel increased from 26 as of December 31, 1995 to 97 as of December 31, 1996. Sales and Marketing Expenses. Sales and marketing expenses increased from $1.1 million for 1995 to $2.8 million for 1996 due to increased staffing and supporting higher levels of sales. Sales and marketing personnel increased from two as of December 31, 1995 to 24 as of December 31, 1996. Advertising and promotional costs increased from $389,000 for the year ended December 31, 1995 to $1.8 million for the year ended December 31, 1996. General and Administrative Expenses. General and administrative expenses increased from $872,000 for 1995 to $2.5 million for 1996 due to the addition of personnel as a result of the Telebase merger in February 1996. General and administrative personnel increased from 11 as of December 31, 1995 to 18 as of December 31, 1996. Interest and Other Income and Expense. Interest income increased from $106,000 for 1995 to $353,000 for 1996 due to N2K investing the proceeds of equity financings received in 1996. Interest expense increased from $18,000 for 1995 to $52,000 for 1996 due to the addition of capital leases from the merger and the use of N2K's former revolving credit line in 1996 to fund working capital. Liquidity and Capital Resources N2K has financed its operations and capital expenditures primarily from equity financings, lease financings, a revolving bank credit line and short-term loans described herein. At September 30, 1998, N2K -129- N2K Management's Discussion and Analysis of Financial Condition and Results of Operations had a cash balance of $54.3 million. N2K believes that its current cash balance will be sufficient to finance N2K's planned operations and capital expenditures through September 1999. N2K expects negative cash flow from operations to continue for the foreseeable future, as it continues to develop and market its operations. Inflation has not had any material impact on N2K's operations. Net cash of $874,000, $10.7 million, $40.7 million and $37.8 million was used for operating activities for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1998, respectively, primarily as a result of the net losses generated during those periods. During 1997, N2K made payments of $18.3 million to AOL, Excite and Netscape under the AOL, Excite and Netscape contracts which are reflected in the increase in prepaid expenses. N2K financed these activities through the private placement of three series of preferred stock, which yielded net proceeds of $19.0 million in 1996 and $7.2 million in 1997. In July and August 1997, N2K received $7.8 million from the issuance of the management and senior notes. In August 1997, N2K also sold substantially all of the net assets of its discontinued operations and received $3.0 million, which was paid in cash at closing. In October 1997, N2K received net proceeds of $65.3 million from the IPO. N2K also borrowed $400,000 under its revolving line of credit in 1995 to fund operating activities, which was repaid in 1996 with the proceeds of the sale of preferred stock. N2K borrowed $850,000 under its revolving credit line in the first half of 1997 to fund operating activities, the outstanding balance of which was repaid with the proceeds of the IPO. Purchases of property and equipment totaled $339,000, $2.9 million, $4.3 million and $6.3 million for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1998, respectively. N2K projects that total purchases of property and equipment will be approximately $8.4 million in 1998, which includes $1.5 million for the creation of a redundant system and $6.9 million to support the expansion of facilities and operating systems for its Web sites and online stores and obtain computer-related equipment to support increased personnel. N2K also invested cash of $672,000 to acquire the rock Web site, Rocktropolis, in June 1996. In July 1997, N2K issued $1.75 million aggregate principal amount of promissory notes to Lawrence L. Rosen, Jonathan V. Diamond and Robert David Grusin, each of whom loaned N2K $583,333. These notes bore interest at 14% per annum and were due on the earlier of (a) a change of control of N2K, as defined, and (b) March 31, 1998. These notes, including interest, converted into an aggregate of 95,354 shares of common stock upon the consummation of the IPO in October 1997. In consideration for these loans, N2K issued an aggregate of 48,609 warrants to purchase 48,609 shares of common stock, representing 16,203 warrants to each of Messrs. Rosen, Diamond and Grusin. The warrants are exercisable at a price of $12.00 per share and expire in July 2004. The notes were recorded net of the value ($150,000) associated with these warrants. This discount was being amortized over the term of the debt through March 31, 1998. When the notes were converted into common stock in October 1997, N2K recorded an extraordinary charge to its statement of operations which was equal to the unamortized portion of the discount or approximately $102,000. In August 1997, N2K issued $6,021,600 aggregate principal amount of Senior Notes to a group of five institutional investors affiliated with an insurance company and one existing shareholder of N2K in return for loans in that amount to N2K. The senior notes bore interest at 14% per annum and were due on the earlier of (a) consummation of N2K's initial public offering, (b) a change of control of N2K and (c) March 31, 1998. In consideration for these loans, N2K issued an aggregate of 167,266 warrants to purchase 167,266 shares of common stock. The warrants are exercisable at a price of $12.00 per share and expire in August 2004. The senior notes were recorded net of the value ($800,000) associated with these warrants. This discount was being amortized over the term of the debt through March 31, 1998. In connection with the early repayment of the senior notes upon the consummation of the IPO, N2K recorded an extraordinary charge to its statement of operations equal to the unamortized portion of the discount or approximately $537,000. In addition, N2K issued warrants to purchase 83,389 shares of common stock at an exercise price of $12.00 per share as a placement fee relating to this transaction. -130- N2K Management's Discussion and Analysis of Financial Condition and Results of Operations N2K has entered into a number of business alliance agreements, including agreements with America Online Inc., Excite Inc., Netscape Communications Corporation, Ticketmaster Ticketing Company, Inc., AOL Bertelsmann Online, Disney Online, Microsoft Corporation and Infoseek Corporation. N2K's minimum commitments as of September 30, 1998 under all of its business alliance agreements include cash payments of approximately $8.9 million, $14.4 million, $10.0 million and $6.5 million for 1998, 1999, 2000, and 2001, respectively. Payments totaling $7.9 million were made under N2K's business alliances during the nine months ended September 30, 1998. Subsequent to September 30, 1998, $4.5 million was paid under N2K's business alliances. Note that payments due to Ticketmaster Ticketing Company, Inc. are included in the above amounts. See "Description of N2K--Litigation" section of this joint proxy statement/prospectus. In addition, in connection with certain of its business alliances, N2K is required to pay royalties. These royalties are based upon a percentage of net revenues and do not begin until certain levels of net revenues have been derived form the alliance. N2K had a commitment for a $2.0 million revolving line of credit with CoreStates Bank, N.A., which expired on June 30, 1998. N2K currently does not have a credit facility. From-time to-time, in the ordinary course of business, N2K evaluates possible acquisitions of, or investments in, businesses, products and technologies that are complementary to those of N2K. A portion of N2K's cash resources may therefore be used to fund acquisitions or investments. Discontinued Operations Online Information Services Beginning in 1984, N2K operated an online information services business. In 1994, N2K expanded its business strategy to include music entertainment. In April 1997, N2K decided to focus exclusively on its music entertainment business, and, as such, elected to discontinue its online information services business. At that time, the board of directors approved a formal plan of disposal for its online information services business. In August 1997, N2K sold substantially all of the net assets of this business. The online information services business has been accounted for as a discontinued operation. Accordingly, the operating results and assets and liabilities of this business have been reflected separately from continuing operations. The sale of the online information services business in August 1997 resulted in a gain of approximately $1.6 million, which was recorded in the period ended September 30, 1997. See Note 3 of Notes to Consolidated Financial Statements. For the years ended December 31, 1995, 1996 and 1997, the discontinued operations generated revenues of $11.0 million, $7.9 million, and $2.4 million, respectively. The discontinued operations generated net income of $1.3 million in 1995, and net losses of $969,000 in 1996 and $416,000 in 1997. N2K Encoded Music N2K had its own record label, N2K Encoded Music, which used N2K's Web sites, as well as record stores and other traditional channels, to promote, distribute and sell original and licensed artist recordings. In August 1998, management announced a restructuring of its record label, N2K Encoded Music. The restructuring was done in an effort to streamline the cost structure of Encoded Music as well as create efficiencies that will leverage N2K's strengths in the internet music space. Historically, N2K focused on two genres of music: Rock/Pop and Jazz. Through this restructuring, N2K will no longer produce or license artist recordings in the Rock/Pop genre. N2K immediately ceased all of its operations in the Rock/Pop genre. Accordingly, N2K recorded a restructuring charge of $4.3 million. This charge is included in loss form discontinued operations in the accompanying financial information. This charge represented (i) certain costs relating to severance due to a reduction in Encoded Music's workforce ($2.0 million); (ii) costs associated with the termination of certain of its contractual commitments ($1.4 million); and (iii) non-cash costs associated with the write-down of certain assets and other miscellaneous costs ($860,000). The reduction in Encoded Music's workforce represented 21 individuals, or all of its employees who worked in the Rock/Pop genre and included individuals in promotions, sales and marketing and management. The contractual commitments terminated primarily relate to contracts -131- N2K Management's Discussion and Analysis of Financial Condition and Results of Operations which N2K had with various artists/projects. Pursuant to these contracts, N2K was obligated to provide the funding and support of each of these artists' projects. As a result of N2K exiting the Rock/Pop genre, N2K no longer supported these projects. Accordingly, the costs incurred represented the costs that N2K was required to pay, or is expected to pay to settle its obligation under its original artist recording agreements for each of these projects. These arrangements should be settled and paid by June 1999. N2K's management believes that this provision is adequate based upon the decisions currently made by management. However, the amount N2K ultimately incurs could be different from these estimates. At September 30, 1998, $3.8 million of restructuring charges remained in accrued liabilities. The balance was comprised of $1.9 million for severance costs, $1.1 million to terminate certain of its existing contracts, and $844,000 for other miscellaneous costs. Cash expenditure related to this restructuring, for the three months ended September 30, 1998 were $499,000. Other than the amounts paid, there were not any changes to this liability since the initial charge. Cash expenditures related to this restructuring for the fourth quarter of 1998 and the years ended December 31, 1999 and 2000 are expected to be approximately $445,000, $2.1 million and $644,000, respectively. Actual costs incurred are charged against the accrued Encoded Music restructuring account when paid. In December 1998, N2K approved a formal plan of disposal for N2K Encoded Music. N2K Encoded Music has been accounted for as a discontinued operation with a measurement date of December 22, 1998. N2K has negotiated the material terms of an agreement to sell the majority of Encoded Music to an unrelated third party. N2K expects that the disposal of N2K Encoded Music will result in a loss on the disposal of the segment's net assets. Accordingly, as of December 22, 1998, N2K has accrued the expected loss on the disposal, as well as the expected losses of the segment from the measurement date to the anticipated disposal date. As these accruals were recorded on December 22, 1998, the accompanying financial information does not reflect such amounts. These accruals will be recorded in the quarter ended December 31, 1998. However, the accompanying financial information reflects the operating results and balance sheet items of the discontinued operations separately from continuing operations. See Note 3 of "N2K's Notes to Consolidated Financial Statements." For the years ended December 31, 1996, 1997 and the nine months ended September 30, 1998, N2K Encoded Music generated revenues of $0, $3.2 million and $2.8 million, respectively. N2K Encoded Music incurred net losses of $947,000 in 1996, $9.3 million in 1997 and $12.3 million for the nine months ended September 30, 1998. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." This standard establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is required to be adopted for N2K's 1998 year-end financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. N2K believes that SFAS No. 133 will not have any impact on its financial statements and results of operations. Risks Associated with the Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. In other words, date- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among others, a temporary inability to process transactions, send invoices or engage in -132- N2K Management's Discussion and Analysis of Financial Condition and Results of Operations similar normal business activities. N2K has appointed a Year 2000 Program Coordinator to perform an audit to assess the scope of N2K's risks and bring its applications into compliance. The coordinator is undertaking an assessment of N2K's compliance and has begun to develop a plan for ensuring compliance for N2K's corporate business and information systems. To date, N2K has experienced very few problems related to Year 2000 testing and those problems requiring immediate modification have been fixed in N2K's day to day operating environment. N2K does not believe that it has material exposure to the Year 2000 issue with respect to its own information systems since its existing systems correctly define the Year 2000. The Program Coordinator has begun to conduct an analysis to determine the extent to which major suppliers' systems insofar as they relate to N2K's business are subject to the Year 2000 issue. N2K's primary provider of order fulfillment for direct-to-consumer music products, Valley Media, Inc., has indicated that it has begun its remediation efforts and expects to be in compliance before the Year 2000. N2K is currently unable to predict the extent to which the Year 2000 issue will affect its suppliers, or the extent to which it would be vulnerable to its suppliers' failure to remediate any Year 2000 issues on a timely basis. The failure of a major supplier subject to the Year 2000 issue to convert its systems on a timely basis or a conversion that is incompatible with N2K's systems could have a material adverse effect on N2K. In addition, most of the purchases from Music Boulevard are made with credit cards, and N2K's operations may be materially adversely affected to the extent its customers are unable to use their credit cards due to Year 2000 issues that are not rectified by their credit card providers. The costs incurred by N2K during the nine months ended September 30, 1998 to address Year 2000 compliance were approximately $50,000. N2K estimates that it will incur up to approximately $75,000 for the three months ended December 31, 1998 and approximately $435,000 during fiscal 1999 to support its compliance initiatives. Currently, N2K has not adopted a contingency plan to address possible risks to its system. However, N2K expects to have one adopted by the second quarter of 1999. -133- 1999 Equity Compensation Plan Adoption Of The CDnow/N2K, Inc 1999 Equity Compensation Plan Proposal The CDnow and N2K board of directors propose and recommend that you approve and adopt the CDnow/N2K, Inc 1999 Equity Compensation Plan. Purposes and Effects The CDnow board, the N2K board and the CDnow/N2K board approved the equity plan. The equity plan gives certain employees, consultants, and advisors of CDnow/N2K and its subsidiaries and non-employee members of CDnow/N2K's board, the opportunity to receive grants of incentive stock options, also referred to as ISOs, nonqualified stock options, also referred to as NQSOs, and or restricted stock. The equity plan encourages participants to contribute to CDnow/N2K's growth. This benefits CDnow/N2K shareholders because it aligns the participant's economic interests with CDnow/N2K shareholder interests. If the equity plan is approved by the CDnow shareholders and N2K shareholders, it will become effective on the effective date of the merger. The equity plan criteria are described below: . A grant can include ISOs, NQSOs or restricted stock; . No more than 10% of the outstanding shares of CDnow/N2K common stock at the time of grant may be issued; . The maximum number of shares of CDnow/N2K common stock which may be issued or transferred under the equity plan is 2,500,000,; . The maximum limit may increase or decrease if: a stock dividend, spinoff, recapitalization, split, combination, exchange, reclassification, merger or other corporate change occurs; . Shares previously granted as CDnow stock options and N2K stock options will be assumed by CDnow/N2K and will not be added to the maximum limit; . The maximum number of shares that may be covered by grants to an individual during a calender year is 800,000 shares; . Shares subject to grants which have options that are later terminated, expired, canceled, forfeited, exchanged or surrendered without being exercised or shares of restricted stock that are forfeited, will again be available for purposes of the equity plan. Administration. A committee, appointed by the CDnow/N2K board, will administer and interpret the equity plan. Non-employee directors and outside directors may be on the committee. Rule 16b-3 under the Securities Exchange Act of 1934, and section 162(m) of the tax code, define non-employee director and outside director, respectively. The committee determines: . Persons (employees, consultants, non-employee directors) who may receive grants under the equity plan; . Number of shares of CDnow/N2K common stock subject to each grant; . Time the grants will be made; . Duration of any applicable exercise or restriction period, this includes the criteria for vesting and the acceleration of vesting; and . Any other matters that arise under the equity plan. The committee's determinations are binding. However, the CDnow/N2K board may ratify or approve any grants. -134- 1999 Equity Compensation Plan Eligibility. All employees of CDnow/N2K and its subsidiaries, CDnow/N2K board members, officers, non-employee directors and consultants may participate in the equity plan pursuant to its terms: . Employees are eligible to receive ISOs, NQSOs and restricted stock. . Consultants are eligible to receive NQSOs and restricted stock. . Non-employee directors are eligible receive NQSOs and restricted stock. No options or other awards have been granted under the equity plan. Options. At the time of each grant under the equity plan, the committee determines the option price per share of CDnow/N2K common stock. The option price per share for any ISO may not be less than the fair market value of the CDnow/N2K common stock at the time of the grant. The exercise price may be greater than, less than or equal to the fair market value of the CDnow/N2K common stock on the date of grant. However, the exercise price must be at least 110% of the fair market value on the date of the grant, for a person granted an ISO owning more than 10% of CDnow/N2K's common stock. The committee determines the term of each stock option, not to exceed ten years. The term may not exceed five years, for an ISO granted to a person owning more than 10% of CDnow/N2K common stock. The committee determines when options are exercisable and may accelerate the exercisability of any or all outstanding options at any time for any reason. Payment for the exercise of an option may be made in cash or, with committee approval, by tendering shares of CDnow/N2K common stock owned by the grantee. Other methods are permitted if approved by the committee, including payment through a broker. Options may be exercised while the grantee is an employee, consultant or CDnow/N2K director or within a specified time after termination of employment or service. Restricted Stock. Shares may be issued for cash consideration or for no cash consideration. The committee may condition or restrict grants of restricted stock. Unless the committee determines otherwise, an employee, non-employee director or consultant who ceases employment or providing services, forfeits any restricted stock as to which restrictions or conditions have not lapsed. Tax Code Restriction. Under section 162(m) of the tax code, CDnow/N2K may be unable to claim a federal income tax deduction for total renumeration in excess of $1,000,000 paid to the chief executive officer or to any of the other four officers most highly compensated in any year. Total remuneration includes amounts received upon the exercise of stock options granted under the equity plan and the value of shares received when shares of restricted stock became transferable or such other time when income is recognized. However, an exception is available for qualified performance-based compensation if certain requirements are met. Stock options granted under the equity plan will meet the qualified performance-based compensation requirements. Restricted stock grants, generally, will not meet the requirements of qualified performance-based compensation. Transferability. Generally, grants are not transferable by the participant, except in the event of death. The committee may permit a transfer of NQSOs or restricted stock, pursuant to a domestic relations order. The committee may also grant NQSOs that allow transfers of the NQSOs to family members or trusts or partnerships for family members, provided the grantee does not receive consideration and the option continues to be subject to the same terms and conditions after the transfer. Amendment and Termination. The CDnow/N2K board may amend or terminate the equity plan at any time. However, the CDnow/N2K board must obtain shareholder approval, when required under sections 422 and 162(m) of the tax code to exempt compensation under the equity plan from the deduction limit. The equity plan will terminate immediately prior to the tenth anniversary of its effective date, unless terminated earlier by the CDnow/N2K board or extended by the CDnow/N2K board with shareholder approval. When the equity plan is terminated, the committee's power and authority over the outstanding grants does not change. -135- 1999 Equity Compensation Plan Change of Control of CDnow/N2K. The following rule may be changed by the committee. If CDnow/N2K is a party before a change of control occurs, but is not a party after the change of control occurs, non-exercised stock options will be treated differently. Non-exercised stock options will be assumed by or substituted by whatever corporation exists in place of CDnow/N2K. The committee, in addition to having the power to change the above rule, may also: . Allow the option holders to exercise the stock options immediately, removing all restrictions and conditions on the options. . Require the options be surrendered for cash or CDnow/N2K common stock, in which case, the price will be the stock price of CDnow/N2K common stock minus the exercise price of the option. . Terminate any unexercised options if the option holder does not want to surrender the options. . Do nothing, in which case, the terms of the options remain unchanged. A change of control means one of the following: . Any person, other than CDnow/N2K or certain related entities, acquires 30% of CDnow/N2K voting common stock or more of the voting power of the outstanding CDnow/N2K securities; this does not include a situation where CDnow/N2K becomes a subsidiary of another corporation entitling CDnow/N2K shareholders to receive shares representing more than 50% of all votes which the other corporation's shareholders hold with the right to elect directors; . CDnow/N2K board of directors or shareholders approve: a) A merger or consolidation of CDnow/N2K with another corporation (this only applies if CDnow/N2K shareholders, prior and subsequent to the merger, do not own more than 50% of votes to which the shareholders of the surviving corporation would be able to elect directors); b) A sale of substantially all of CDnow/N2K's assets; c) A liquidation or dissolution of CDnow/N2K; d) A person attempts to purchase 30% or more of outstanding CDnow/N2K voting stock; or e) After a predetermined date, the CDnow/N2K board of directors does not consist of individuals who were elected, or nominated for election, by the directors in the office at the time of such election or nomination. The committee has the power to alter CDnow/N2K common stock, and the CDnow/N2K common stock that may be issued under the equity plan, with respect to number, kind, or option price. This power is subject to outstanding options and restricted stock grants. Federal Income Tax Treatment. The current federal income tax treatment of grants under the equity plan is generally described below. Local and state tax authorities may also tax incentive compensation awarded under the equity plan, and tax laws are subject to change. Participants are urged to consult with the personal tax advisors concerning the application of the general principles discussed below to their own situations and the application of state and local tax laws. There are no federal income tax consequences to a participant or to CDnow/N2K upon the grant of an NQSO under the equity plan. Upon the exercise of an NQSO, a participant will recognize ordinary compensation income in an amount equal to the excess of the fair market value of the shares at the time of exercise over the exercise price of the NQSO, and CDnow/N2K generally will be entitled to a corresponding federal income tax deduction. Upon the sale of shares acquired by the exercise of an NQSO, a participant will have a capital gain or loss in an amount equal to the difference between the amount realized upon the sale and the participant's adjusted tax basis in the shares. The adjusted tax basis is the exercise price plus the amount of ordinary income recognized by the participant at the time of exercise of the NQSO. The capital gain tax rate will depend on the length of time the shares are held and other factors. -136- 1999 Equity Compensation Plan A participant who is granted an ISO will not recognize taxable income for purposes of the regular federal income tax, upon either the grant or exercise of the ISO. However, for purposes of the alternative minimum tax imposed under the tax code, in the year in which an ISO is exercised, the amount by which the fair market value of the shares acquired upon exercise exceeds the exercise price will be treated as an item of adjustment and included in the computation of the recipient's alternative minimum taxable income. A participant who disposes of the shares acquired upon exercise of an ISO after two years from the date the ISO was granted and after one year from the date such shares were transferred upon exercise of the ISO will recognize capital gain or loss in the amount of the difference between the amount realized on the sale and the exercise price or the participant's other tax basis in the shares, and CDnow/N2K will not be entitled to any tax deduction by reason of the grant or exercise of the ISO. Generally, if a participant disposes of the shares acquired upon exercise of an ISO before satisfying both holding period requirements, his gain recognized on such a disposition will be taxed as ordinary income to the extent of the difference between the fair market value of such shares on the date of exercise and the exercise price, and CDnow/N2K will be entitled to a deduction in that amount. The gain, if any, in excess of the amount recognized as ordinary income on such a disqualifying disposition will be capital gain. A participant normally will not recognize taxable income upon receiving restricted stock, and CDnow/N2K will not be entitled to a deduction, until such stock is transferable by the participant or no longer subject to a substantial risk of forfeiture for federal tax purposes, whichever occurs earlier. When the stock is either transferable or no longer subject to a substantial risk of forfeiture, the participant will recognize ordinary compensation income in an amount equal to the fair market value of the shares at that time less any amount paid for such shares, and CDnow/N2K generally will be entitled to a deduction in the same amount. A participant may, however, elect to recognize ordinary compensation income in the year the restricted stock is awarded in an amount equal to the fair market value of the shares subject to the restricted stock grant at that time, less any amount paid for such shares, determined without regard to the restrictions. In such event, CDnow/N2K generally will be entitled to a corresponding deduction in the same year. Any gain or loss recognized by the participant upon subsequent disposition of the shares will be capital gain or loss. CDnow/N2K's income tax deduction in any of the foregoing cases may be limited by the $1,000,000 limit of tax code section 162(m) if the grant does not qualify as "qualified performance-based compensation" under tax code section 162(m) See "Section 162(m)" above. Grants Under the Equity Plan. Because grants will be made from time to time by the committee in its discretion, the grants that may be received in the future by persons eligible to participate in the equity plan are not presently determinable. Vote Required for Approval Adoption and approval of the equity plan requires the affirmative vote of the majority of the votes cast by CDnow shareholders and the affirmative vote of the majority of the shares entitled to vote and present in person or represented by proxy at the N2K special meeting. The CDnow and N2K boards of directors recommend a vote for approval and adoption of the equity plan proposal -137- Legal Matters Legal Matters The validity of the CDnow/N2K common stock to be issued in connection with the merger will be passed upon by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. -138- Experts Experts The financial statements of CDnow as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997, included in this joint proxy statement/prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The financial statements of N2K as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997, included in this joint proxy statement/prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The financial statements of N2K Inc., a New York corporation, as of December 31, 1995 included in this joint proxy statement/prospectus have been audited by Richard A. Eisner & Company, LLP, independent auditors, as set forth in their report thereon appearing elsewhere in this joint proxy statement/prospectus and have been included in reliance upon such report given upon the authority of such firm as experts in auditing and accounting. -139- Future Shareholder Proposals Future Shareholder Proposals Any CDnow/N2K shareholder who intends to submit a proposal for inclusion in the proxy materials for the 2000 annual meeting of CDnow/N2K must submit such proposal to the Secretary of CDnow/N2K by November 19, 1999. SEC rules set forth standards as to what shareholder proposals are required to be included. In addition, the CDnow/N2K bylaws provide that any shareholder wishing to make a nomination for director, or wishing to introduce a proposal or other business, at the 2000 annual meeting of CDnow/N2K must give at least 60 days advance notice, subject to exceptions, and that notice must meet other requirements set forth in the CDnow/N2K bylaws. If the merger is not completed by the first quarter of 1999, CDnow expects to hold an annual meeting of shareholders in the second quarter of 1999. SEC rules set forth standards as to what stockholder proposals are required to be included in a proxy statement. The CDnow bylaws provide that any CDnow shareholder wishing to make a nomination for director, or wishing to introduce a proposal on other business, at the 1999 annual meeting of CDnow must notify the Secretary of CDnow sixty days prior to the meeting, of the shareholder's intentions and provide certain other information in advance of such meeting, in accordance with the procedures detailed in the CDnow bylaws. In the event the merger is not consummated, the 1999 annual meeting of shareholders of N2K is expected to be held on or about April 30, 1999 and the only shareholder proposals eligible to be considered for inclusion in the proxy materials for the 1999 annual meeting of N2K will be those which were duly submitted to the Secretary of N2K, by December 17, 1998, as provided in the 1998 Annual Meeting Proxy Statements of N2K. -140- Where You Can Find More Information Where You Can Find More Information CDnow and N2K file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information we file at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1- 800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from commercial document retrieval services and at the Web site maintained by the SEC at "http://www.sec.gov." CDnow/N2K filed a Registration Statement on Form S-4 to register with the SEC the CDnow/N2K common stock to be issued to CDnow and N2K shareholders in the merger and this joint proxy statement/prospectus constitutes a prospectus of CDnow/N2K in addition to being a joint proxy statement of CDnow and N2K. As allowed by SEC rules, this joint proxy statement/prospectus does not contain all the information you can find in the registration statement or the exhibits to the registration statement. If you are a shareholder, we may have sent you some of the documents referenced above, but you can obtain any of them through us or the SEC. You may obtain documents incorporated by reference without charge by writing or calling the appropriate party at the following addresses: CDnow, Inc. N2K Inc. Investor Relations Investor Relations 1005 Virginia Drive 55 Broad Street Fort Washington, PA 19034 New York, NY 10004 Tel: 215/619-9900 Tel: 212/378-5555 If you would like to request documents from us, please do so by February 22, 1999 to receive them before the special meetings. You should rely only on the information contained in this joint proxy statement/prospectus to vote on the merger. We have not authorized anyone to provide you with information that is different from what is contained in this joint proxy statement/prospectus. This joint proxy statement/prospectus is dated February 16, 1999. You should not assume that the information contained in the joint proxy statement/prospectus is accurate as of any date other than such date, and neither the mailing of the joint proxy statement/prospectus to shareholders nor the issuance of CDnow/N2K common stock in the merger shall create any implication to the contrary. -141- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED PRO FORMA FINANCIAL INFORMATION - ----------------------------------------- Basis of Presentation.................................................... F-2 Unaudited Pro Forma Statement of Operations--Year Ended December 31, 1997.................................................................... F-3 Unaudited Pro Forma Statement of Operations--Nine Months Ended September 30, 1998................................................................ F-4 Unaudited Pro Forma Balance Sheet--September 30, 1998.................... F-5 Notes to Unaudited Pro Forma Financial Information....................... F-6 CDNOW, INC. AND SUBSIDIARIES - ---------------------------- Report of Independent Public Accountants................................. F-9 Consolidated Balance Sheets.............................................. F-10 Consolidated Statements of Operations.................................... F-11 Consolidated Statements of Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit).......................................... F-12 Consolidated Statements of Cash Flows.................................... F-13 Notes to Consolidated Financial Statements............................... F-14 N2K INC. AND SUBSIDIARIES - ------------------------- Report of Independent Public Accountants................................. F-29 Consolidated Balance Sheets.............................................. F-30 Consolidated Statements of Operations.................................... F-31 Consolidated Statements Stockholders' Equity............................. F-32 Consolidated Statements of Cash Flows.................................... F-33 Notes to Consolidated Financial Statements............................... F-35 OLD N2K - ------- Independent Auditors' Report............................................. F-57 Balance Sheet............................................................ F-58 Statement of Operations.................................................. F-59 Statement of Stockholders' Equity........................................ F-60 Statement of Cash Flows.................................................. F-61 Notes to Financial Statements............................................ F-62
Financial Statements F-1 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION Basis of Presentation On October 22, 1998, CDnow and N2K entered into the Merger Agreement whereby the stockholders of CDnow and N2K will exchange their respective Common Stock for an 60% and 40% interest in CDnow/N2K, respectively. The Merger will be accounted for as a purchase by CDnow pursuant to Accounting Principles Board Opinion No. 16 "Business Combinations" ("APB 16"). The following unaudited pro forma combined consolidated financial information combines the historical consolidated statements of operations of CDnow with the historical consolidated statements of operations of N2K (CDnow and N2K are collectively referred to as the "Combined Company") after giving effect to the Merger, as if the Merger had occurred on January 1, 1997, and the historical balance sheet of CDnow with the historical balance sheet of N2K as if the merger had occurred on September 30, 1998. We present the pro forma amounts below for informational purposes only. These pro forma amounts are not necessarily indicative of the results of operations of the combined company that would have actually occurred had the Merger been consummated as of January 1, 1997 or of the financial condition of the combined company had the Merger been consummated as of September 30, 1998 or of the future results of operations or financial condition of the combined company. The unaudited pro forma statements of operations and the unaudited pro forma combined balance sheet do not reflect: . the operating results of N2K and CDnow from October 1, 1998 through the consummation date of the merger or . any synergies we expect to realize as a result of the Merger, in particular the elimination of costs associated with duplicative operating and administrative activities. We cannot assure that such synergies will be realized. In addition, it is expected that the operating results of N2K from October 1, 1998 through the consummation date of the Merger will materially increase the excess of purchase price over the fair value of net assets acquired and, therefore, will increase the amount of pro forma amortization in each of the periods presented. Financial Statements F-2 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
CDnow N2K Pro Forma Pro Forma Historical Historical Adjustments Combined ------------- ------------- ----------- ------------- NET SALES............... $ 17,372,795 $ 8,108,449 $ 25,481,244 COST OF SALES........... 13,847,773 6,212,741 20,060,514 ------------- ------------- ------------- Gross Profit.......... 3,525,022 1,895,708 5,420,730 ------------- ------------- ------------- OPERATING EXPENSES: Operating and development.......... 2,541,434 10,585,441 13,126,875 Sales and marketing... 9,607,603 6,690,884 16,298,487 General and administrative....... 1,953,078 4,647,810 9,693,849 (5c) 16,294,737 ------------- ------------- ------------- 14,102,115 21,924,135 45,720,099 ------------- ------------- ------------- Operating loss...... (10,577,093) (20,028,427) (40,299,369) INTEREST AND OTHER INCOME................. 201,650 693,881 895,531 INTEREST EXPENSE........ (371,962) (653,455) (1,025,417) ------------- ------------- ------------- LOSS FROM CONTINUING OPERATIONS............. $ (10,747,405) $ (19,988,001) $ (40,429,255) ============= ============= ============= Loss from continuing operations per common share (Note 4)......... $ (1.42) $ (4.09) $ (3.43) ============= ============= ============= Weighted average number of common shares outstanding (Note 4)... 7,845,684 4,885,556 (830,545)(3) 11,900,695 ============= ============= =============
See accompanying Notes to Unaudited Pro Forma Financial Statements. Financial Statements F-3 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998
CDnow N2K Pro Forma Pro Forma Historical Historical Adjustments Combined ------------- ------------- ----------- ------------- NET SALES............... $ 35,503,805 $ 24,890,121 $ 60,393,926 COST OF SALES........... 28,549,562 19,888,878 48,438,440 ------------- ------------- ------------- Gross Profit.......... 6,954,243 5,001,243 11,955,486 ------------- ------------- ------------- OPERATING EXPENSES: Operating and development.......... 5,155,718 16,092,108 21,247,826 Sales and marketing... 31,293,668 29,818,641 61,112,309 General and administrative....... 2,781,334 3,357,404 7,020,386 (5c) 13,159,124 ------------- ------------- ------------- 39,230,720 49,268,153 95,519,259 ------------- ------------- ------------- Operating loss...... (32,276,477) (44,266,910) (83,563,773) INTEREST AND OTHER INCOME................. 2,015,234 2,446,254 4,461,488 INTEREST EXPENSE........ (563,074) (55,071) (618,145) ------------- ------------- ------------- LOSS FROM CONTINUING OPERATIONS............. $ (30,824,317) $ (41,875,727) $ (79,720,430) ============= ============= ============= Loss from continuing operations per common share (Note 4)......... $ (2.10) $ (3.12) $ (3.08) ============= ============= ============= Weighted average number of common shares outstanding (Note 4)... 14,764,870 13,434,772 (2,283,911)(3) 25,915,731 ============= ============= =============
See accompanying Notes to Unaudited Pro Forma Financial Statements. Financial Statements F-4 UNAUDITED PRO FORMA BALANCE SHEET SEPTEMBER 30, 1998
CDnow N2K Pro Forma Pro Forma Historical Historical Adjustments Combined ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents.......... $ 59,563,026 $ 54,277,085 $113,840,111 Accounts receivable, net of reserve....... 811,175 1,694,649 2,505,824 Receivable for Common Stock subject to put rights............... -- 2,999,995 2,999,995 Prepaid expenses and other................ 9,170,725 9,651,836 18,822,561 ------------ ------------- ------------ Total current assets............. 69,544,926 68,623,565 138,168,491 ------------ ------------- ------------ PROPERTY AND EQUIPMENT, NET.................... 4,129,299 10,741,354 (1,200,000)(5b) 13,670,653 INTANGIBLES, NET........ 920,735 187,148 61,938,485 (5a) 63,046,368 OTHER ASSETS............ 2,976,426 1,250,276 4,226,702 ------------ ------------- ------------ $ 77,571,386 $ 80,802,343 $219,112,214 ============ ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt....... 635,160 303,415 938,575 Accounts payable...... 9,324,304 1,577,119 10,901,423 Accrued expenses...... 2,661,178 6,304,265 10,000,000 (5a,5c) 18,965,443 Accrued compensation and benefits......... 160,000 1,246,808 1,406,808 Accrued merchandise costs................ -- 1,469,257 1,469,257 Deferred revenues..... 100,295 -- 100,295 ------------ ------------- ------------ Total current liabilities........ 12,880,937 10,900,864 33,781,801 ------------ ------------- ------------ NET LIABILITIES OF DISCONTINUED OPERATIONS............. -- 5,139,973 5,139,973 ------------ ------------- ------------ LONG-TERM DEBT.......... 1,130,484 311,460 1,441,944 ------------ ------------- ------------ DEFERRED RENT AND OTHER LONG TERM LIABILITIES.. 160,990 324,508 485,498 ------------ ------------- ------------ COMMON STOCK SUBJECT TO PUT RIGHTS............. -- 2,999,995 2,999,995 ------------ ------------- ------------ SHAREHOLDERS' EQUITY: Common stock.......... 101,482,736 14,229 98,893,404 (5c) 200,390,369 Additional paid-in capital.............. 4,325,817 171,356,553 (158,400,158)(5c) 17,282,212 Deferred compensation......... (246,679) -- (246,679) Accumulated deficit... (42,162,899) (110,245,239) 110,245,239 (5c) (42,162,899) ------------ ------------- ------------ Total shareholders' equity............. 63,398,975 61,125,543 175,263,003 ------------ ------------- ------------ $ 77,571,386 $ 80,802,343 $219,112,214 ============ ============= ============
See accompanying Notes to Unaudited Pro Forma Financial Statements. Financial Statements F-5 NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION 1. SIGNIFICANT ACCOUNTING POLICIES There are currently no material differences in the Companies significant accounting policies, therefore, no consideration has been given to conforming the Companies significant accounting policies in this pro forma presentation. The Companies do not expect to have material changes to current accounting policies in connection with the transaction. For further information on the Companies significant accounting policies, see notes to the consolidated financial statements of the Companies, included elsewhere in this proxy statement. 2. RECLASSIFICATIONS Certain reclassifications have been made to the unaudited historical balance sheets of CDnow and N2K to conform to the presentation expected to be used by the Combined Company. These reclassifications relate to the presentation of current liabilities and long term assets. 3. EXCHANGE RATIO Under the Merger Agreement, each outstanding share of CDnow Common Stock will be converted into one share of CDnow/N2K Common Stock and each share of N2K Common Stock will be converted into 0.83 shares of CDnow/N2K Common Stock. This exchange ratio was used in computing share and per share amounts in the accompanying unaudited pro forma financial statements. 4. LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE The Combined Company has presented its loss from continuing operations per common share for 1997 and for the nine months ended September 30, 1998 pursuant to Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share". Basic loss per common share was computed by dividing the loss from continuing operations applicable to common shareholders by the weighted average number of shares of Common Stock outstanding during 1997 and the nine months ended September 30, 1998. The loss from continuing operations applicable to common shareholders is equal to the loss from continuing operations less the accretion of CDnow Preferred stock to redemption value of $410,103 and $115,542 for the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively. Diluted loss per common share has not been presented, since the impact on loss per share using the treasury stock method is anti-dilutive due to the Combined Company's losses. 5. PRO FORMA ADJUSTMENTS (a) The Pro Forma Balance Sheet reflects the application of the purchase method pursuant to APB 16 for the acquisition of N2K. The estimated purchase price is $118,864,000 (based on a value of one CDnow share of $8.375) including transaction costs of approximately $7,000,000. The estimated purchase price included the consideration to be issued for N2K shares which was calculated by multiplying the 14,228,755 shares of N2K Common Stock outstanding as of September 30, 1998 by Financial Statements F-6 NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION--(Continued) the exchange ratio and multiplying the result by $8.375, which resulted in a value of $98,907,633. Additionally, the estimated purchase price includes the value of the equivalent options and warrants to purchase CDnow Common stock to be issued to holders of options and warrants to purchase N2K Common stock. These options and warrants were valued using the Black-Scholes method. This computation resulted in a value of $12,956,395 for the options and warrants. Based on a preliminary allocation of the purchase price, the application of the purchase method would have resulted in approximately $62,000,000 in excess of purchase price over net tangible assets acquired as of September 30, 1998. Based on a preliminary analysis done by CDnow this amount is expected to be allocated as follows (i) value associated with specific contracts of $5,000,000 which will be amortized over 20 months (ii) other intangibles, primarily customer list and strategic alliances of $10,000,000 which will be amortized over 5 years, and (iii) goodwill of $46,938,485 which will be amortized over 10 years. The final allocation of the purchase price is subject to change and may include a write-off of in-process research and development. (b) The Pro Forma Balance Sheet reflects charges expected to be incurred relating to the restructuring of N2K's operations by CDnow after the closing of the merger. The Companies have been working together in regards to the restructuring plan and expect to have a final plan in place prior to the consummation of the merger. The Companies expect the plan to include costs associated with the termination of N2K employees, consolidation of facilities and the disposal of property and equipment. The companies expect to record the following liabilities and asset reduction in connection with the restructuring: . N2K employee termination liability including severance and other benefits.......................................................... $2,500,000 . Remaining lease commitment liability for certain of N2K's offices, net of expected sublease rentals.................................. 500,000 . Estimated loss on disposal of N2K property and equipment.......... 1,200,000 ---------- $4,200,000 ==========
The estimated liabilities and loss on disposal of property and equipment related to N2K will be recorded in accordance with Emerging Issues Task Force ("ETTF") 95-3-"Recognition of Liabilities in Connection with a Purchase Business Combination" ("ETTF 95-3") and will be reflected in purchase accounting. (c) The Pro Forma Statements of operations reflect the amortization of the contracts, other intangibles and goodwill of $9,693,849 for the year ended December 31, 1997 and $7,020,386 for the nine months ended September 30, 1998 based on expected estimated useful lives of 20 months, 5 years and 10 years for the contracts, other intangibles and goodwill, respectively. Financial Statements F-7 NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION--(Continued) Computation of Pro Forma Price: Issuance of 11,809,867 share of CDnow common stock....... $ 98,907,633 Issuance of options and warrants to purchase CDnow common stock................................................... 12,956,395 Transaction costs (including those to be borne by N2K)... 7,000,000 EITF 95-3 merger related restructuring charge............ 4,200,000 -------------- Pro Forma Purchase Price............................... 123,064,028 Less value of N2K at September 30, 1998................ (61,125,543) -------------- Excess of pro forma purchase price over value acquired.............................................. $ 61,938,485 ============== Preliminary Allocation of Excess Purchase Price Strategic alliances (up to 20 month life).............. $ 5,000,000 Customer list (5 year life)............................ 10,000,000 Goodwill (10 year life)................................ 46,938,485 -------------- Total allocated...................................... $ 61,938,485 ============== Summary of Pro Forma Entries Impacting Shareholders' Equity Common stock Issuance of 11,809,867 shares of CDnow Common stock.... $ 98,907,633 Elimination of N2K Common stock........................ (14,229) -------------- Pro forma increase in Common stock................... $ 98,893,404 ============== Additional paid in capital Issuance of options and warrants to purchase CDnow Common stock.......................................... $ 12,956,395 Elimination of N2K additional paid in capital.......... (171,356,553) -------------- Pro forma decrease in additional paid in capital..... $ (158,400,158) ============== Accumulated deficit Elimination of N2K accumulated deficit................. $ (110,245,239) -------------- Pro forma decrease in accumulated deficit............ $ (110,245,239) ==============
Financial Statements F-8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CDnow, Inc.: We have audited the accompanying consolidated balance sheets of CDnow, Inc. (a Pennsylvania Corporation) and Subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, redeemable convertible preferred stock and shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CDnow, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Philadelphia, Pa., January 14, 1998 (except for the stock split discussed in Note 2, as to which the date is February 3, 1998) Financial Statements F-9 CDNOW, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------ September 30, 1996 1997 1998 ---------- ------------ ------------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents............ $ 775,865 $ 10,686,001 $ 59,563,026 Short-term investments............... 245,641 1,003,045 -- Accounts receivable, net of reserve of $12,000, $77,000 and $119,732.... 130,437 324,411 811,175 Prepaid expenses and other........... 49,821 2,457,958 9,170,725 ---------- ------------ ------------ Total current assets............... 1,201,764 14,471,415 69,544,926 PROPERTY AND EQUIPMENT, net............ 362,035 1,884,296 4,129,299 OTHER ASSETS........................... 11,660 92,714 3,897,161 ---------- ------------ ------------ $1,575,459 $ 16,448,425 $ 77,571,386 ========== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Notes payable........................ $ 200,000 $ 5,575,288 $ -- Current portion of long-term debt.... 35,942 361,562 635,160 Accounts payable..................... 435,682 8,981,430 9,324,304 Accrued expenses..................... 129,317 579,413 2,821,178 Other current liabilities............ 169,368 191,727 100,295 ---------- ------------ ------------ Total current liabilities.......... 970,309 15,689,420 12,880,937 ---------- ------------ ------------ LONG-TERM DEBT......................... 91,133 962,144 1,130,484 ---------- ------------ ------------ DEFERRED RENT LIABILITY................ -- 56,717 160,990 ---------- ------------ ------------ REDEEMABLE SERIES A AND B CONVERTIBLE PREFERRED STOCK....................... -- 9,492,594 -- ---------- ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 10) SHAREHOLDERS' EQUITY (DEFICIT): Preferred stock, no par value, 20,000,000 shares authorized, 254,582 Redeemable Series A Convertible shares and 1,605,505 Redeemable Series B Convertible shares issued and outstanding at December 31, 1997................... -- -- -- Common stock, no par value, 50,000,000 shares authorized, 7,845,684, 7,845,684, and 17,674,336 shares issued and outstanding at December 31, 1996, 1997 and September 30, 1998.................. 579,549 579,549 101,482,736 Additional paid-in capital........... -- 1,325,817 4,325,817 Deferred compensation................ -- (434,776) (246,679) Accumulated deficit.................. (65,532) (11,223,040) (42,162,899) ---------- ------------ ------------ Total shareholders' equity (deficit)......................... 514,017 (9,752,450) 63,398,975 ---------- ------------ ------------ $1,575,459 $ 16,448,425 $ 77,571,386 ========== ============ ============
The accompanying notes are an integral part of these statements. Financial Statements F-10 CDNOW, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended Year Ended December 31, September 30, ------------------------------------- ------------------------- 1995 1996 1997 1997 1998 ---------- ----------- ------------ ----------- ------------ (unaudited) NET SALES............... $2,176,474 $ 6,300,294 $ 17,372,795 $ 9,452,864 $ 35,503,805 COST OF SALES........... 1,815,672 5,074,087 13,847,773 7,333,069 28,549,562 ---------- ----------- ------------ ----------- ------------ Gross profit.......... 360,802 1,226,207 3,525,022 2,119,795 6,954,243 ---------- ----------- ------------ ----------- ------------ OPERATING EXPENSES: Operating and development.......... 149,982 669,280 2,541,434 1,444,011 5,155,718 Sales and marketing... 229,912 765,156 9,607,603 3,603,238 31,293,668 General and administrative....... 180,573 563,593 1,953,078 1,266,296 2,781,334 Dispute settlement (Note 7)............. -- 1,024,030 -- -- -- ---------- ----------- ------------ ----------- ------------ 560,467 3,022,059 14,102,115 6,313,545 39,230,720 ---------- ----------- ------------ ----------- ------------ Operating loss...... (199,665) (1,795,852) (10,577,093) (4,193,750) (32,276,477) INTEREST INCOME......... -- -- 201,650 94,045 2,015,234 INTEREST EXPENSE........ (1,248) (14,556) (371,962) (29,961) (563,074) ---------- ----------- ------------ ----------- ------------ NET LOSS................ (200,913) (1,810,408) (10,747,405) (4,129,666) (30,824,317) ACCRETION OF PREFERRED STOCK TO REDEMPTION VALUE.................. -- -- (410,103) (263,748) (115,542) ---------- ----------- ------------ ----------- ------------ NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.... $ (200,913) $(1,810,408) $(11,157,508) $(4,393,414) $(30,939,859) ========== =========== ============ =========== ============ NET LOSS PER COMMON SHARE.................. $ (0.03) $ (0.29) $ (1.42) $ (0.56) $ (2.10) ========== =========== ============ =========== ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............ 6,000,000 6,139,702 7,845,684 7,845,684 14,764,870 ========== =========== ============ =========== ============
The accompanying notes are an integral part of these statements. Financial Statements F-11 CDNOW, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
Shareholders Equity (Deficit) Redeemable ---------------------------------------------------------------------------- Convertible Common Stock Additional Preferred ----------------------- Paid-in Deferred Accumulated Stock Shares Amount Capital Compensation Deficit Total ----------- ---------- ------------ ---------- ------------ ------------ ------------ BALANCE, DECEMBER 31, 1995................... $ -- 6,000,000 $ -- $ 160,000 $ -- $ (259,362) $ (99,362) Sale of common stock and warrants.......... -- 921,834 1,069,250 130,750 -- -- 1,200,000 Issuance of common stock in settlement of a dispute (Note 7).... -- 882,606 1,024,030 -- -- -- 1,024,030 Issuance of common stock to repay advances due to a related party......... -- 41,244 81,923 -- -- -- 81,923 Services contributed by the founders (Note 9).................... -- -- -- 117,834 -- -- 117,834 Termination of S Corporation status.... -- -- (1,595,654) (408,584) -- 2,004,238 -- Net loss............... -- -- -- -- -- (1,810,408) (1,810,408) ----------- ---------- ------------ ---------- --------- ------------ ------------ BALANCE, DECEMBER 31, 1996................... -- 7,845,684 579,549 -- -- (65,532) 514,017 Sale of Redeemable Series A and B Convertible Preferred Stock, net of expenses and value of warrants issued................ 9,082,491 -- -- 170,000 -- -- 170,000 Value of warrants issued with Series A Convertible Notes..... -- -- -- 404,425 -- -- 404,425 Grant of common stock option below deemed fair value for accounting purposes... -- -- -- 751,392 (751,392) -- -- Amortization of deferred compensation.......... -- -- -- -- 316,616 -- 316,616 Accretion of preferred stock to redemption value................. 410,103 -- -- -- -- (410,103) (410,103) Net loss............... -- -- -- -- -- (10,747,405) (10,747,405) ----------- ---------- ------------ ---------- --------- ------------ ------------ BALANCE, DECEMBER 31, 1997................... 9,492,594 7,845,684 579,549 1,325,817 (434,776) (11,223,040) (9,752,450) Accretion of preferred stock to redemption value (unaudited)..... 115,542 -- -- -- -- (115,542) (115,542) Mandatory conversion of Redeemable Series A Convertible Preferred Stock to Common Stock (unaudited)........... (9,608,136) 2,790,131 9,608,136 -- -- -- 9,608,136 Issuance of common stock from consummation of IPO, net of offering costs (unaudited)........... -- 4,561,250 67,077,862 -- -- -- 67,077,862 Issuance of common stock from secondary offering, net of offering costs (unaudited)........... -- 1,250,000 21,654,300 -- -- -- 21,654,300 Issuance of common stock (unaudited)..... -- 222,956 3,634,198 -- -- -- 3,634,198 Cashless exercise of warrants (unaudited).. -- 905,996 -- -- -- -- -- Exercise of warrants (unaudited)........... -- 32,727 59,890 -- -- -- 59,890 Exercise of options (unaudited)........... -- 65,592 128,820 -- -- -- 128,820 Remeasurement of value of shares issued to Lycos (Note 10) (unaudited)........... -- -- (1,260,019) -- -- -- (1,260,019) Amortization of Deferred Compensation (unaudited)........... -- -- -- -- 188,097 -- 188,097 Issuance of warrants... 3,000,000 3,000,000 Net Loss (unaudited)... -- -- -- -- -- (30,824,317) (30,824,317) ----------- ---------- ------------ ---------- --------- ------------ ------------ BALANCE, SEPTEMBER 30, 1998 (unaudited)....... $ -- 17,674,336 $101,482,736 $4,325,817 $(246,679) $(42,162,899) $ 63,398,975 =========== ========== ============ ========== ========= ============ ============
The accompanying notes are an integral part of these statements. Financial Statements F-12 CDNOW, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Year Ended December 31, September 30, ------------------------------------ ------------------------- 1995 1996 1997 1997 1998 --------- ----------- ------------ ----------- ------------ (unaudited) OPERATING ACTIVITIES: Net loss.............. $(200,913) $(1,810,408) $(10,747,405) $(4,129,666) $(30,824,317) Adjustments to reconcile net loss to net cash provided by (used in) operating activities-- Depreciation and amortization......... 32,999 105,439 1,066,815 438,503 1,566,344 Provision for returns and doubtful accounts............. -- 12,000 65,000 5,000 121,732 Common stock issued in settlement of a dispute.............. -- 1,024,030 -- -- -- Services contributed by the founders...... 120,000 117,834 -- -- -- Increase in operating assets and liabilities-- Accounts receivable... (56,127) (86,310) (258,974) (54,875) (603,416) Prepaid expenses and other................ (26,994) (34,487) (2,401,794) (490,824) (4,966,500) Accounts payable...... 109,386 326,296 8,545,748 3,194,675 264,972 Accrued expenses...... 58,124 68,139 450,096 254,117 2,241,765 Deferred revenue...... 4,952 161,155 22,359 44,602 (88,171) Deferred rent liability............ -- -- 56,717 -- 104,273 --------- ----------- ------------ ----------- ------------ Net cash provided by (used in) operating activities.......... 41,427 (116,312) (3,201,438) (738,468) (32,183,318) --------- ----------- ------------ ----------- ------------ INVESTING ACTIVITIES: Purchases of short- term investments..... -- (245,641) (1,005,501) (983,600) -- Sales and maturities of short-term investments.......... -- -- 248,097 245,641 1,003,045 Purchases of property and equipment........ (135,777) (198,985) (912,560) (1,287,956) (2,320,232) Acquisition of a business............. -- -- -- -- (423,694) --------- ----------- ------------ ----------- ------------ Net cash used in investing activities.......... (135,777) (444,626) (1,669,964) (2,025,915) (1,740,881) --------- ----------- ------------ ----------- ------------ FINANCING ACTIVITIES: Borrowings on term loans payable........ -- -- 218,563 218,563 4,871 Payments on term loans payable.............. -- -- (28,179) (14,548) (47,433) Borrowings on notes payable.............. 100,000 200,000 -- -- -- Payments on notes payable.............. -- (100,000) (200,000) (200,000) -- Proceeds from sale of common stock and warrants............. -- 1,200,000 -- -- -- Proceeds from issuance (repayment of) of Series A Notes and warrants............. -- -- 5,602,706 -- (5,777,500) Proceeds from sale of preferred stock...... -- -- 9,252,491 9,252,491 -- Proceeds from (repayment of) advances due to related parties...... 37,683 6,341 -- -- (3,261) Payments on capitalized lease obligations.......... (1,529) (13,350) (64,043) (29,742) (296,325) Proceeds from issuance of common stock, net.................. -- -- -- -- 88,732,162 Proceeds from warrants exercised............ -- -- -- -- 59,890 Proceeds from options exercised............ -- -- -- -- 128,820 --------- ----------- ------------ ----------- ------------ Net cash provided by financing activities.......... 136,154 1,292,991 14,781,538 9,226,764 82,801,224 --------- ----------- ------------ ----------- ------------ INCREASE IN CASH AND CASH EQUIVALENTS...... 41,804 732,053 9,910,136 6,462,381 48,877,025 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 2,008 43,812 775,865 775,865 10,686,001 --------- ----------- ------------ ----------- ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 43,812 $ 775,865 $ 10,686,001 $ 7,238,246 $ 59,563,026 ========= =========== ============ =========== ============
The accompanying notes are an integral part of these statements. Financial Statements F-13 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information as of September 30, 1998 and for the nine months ended September 30, 1997 and 1998 is unaudited) 1. THE COMPANY CDnow, Inc. and Subsidiaries (the "Company") is an online retailer of compact discs ("CDs") and other music-related products. The Company's revenues are almost entirely derived from the sale of pre-recorded music and music-related products. The Company contracts with outside vendors for fulfillment services to deliver its products to customers. Therefore, the Company maintains no inventories. Since inception (February 12, 1994), the Company has incurred significant losses, and as of September 30 , 1998 had accumulated losses of $43.6 million. For the year ended December 31, 1997, and the nine months ended September 30, 1998 the Company's net loss was $10.7 million and $30.8 million, respectively. The Company intends to invest heavily in marketing and promotion, strategic alliances, Web site development and technology, and development of its administration organization. As a result, the Company believes that it will incur substantial operating losses for the foreseeable future, and that the rate at which such losses will be incurred will increase significantly from current levels. Because the Company has relatively low product gross margins, achieving profitability given planned investment levels depends upon the Company's ability to generate and sustain substantially increased revenue levels. There can be no assurance that the Company will be able to generate sufficient revenues to achieve or sustain profitability in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Prospectus. On October 23, 1998, the Company and N2K, Inc. ("N2K") issued a joint press release announcing the execution of a definitive merger agreement. N2K is an online retailer of CDs and other music related products. The merger will be effected through the formation of a new publicly traded company, initially to be called CDnow/N2K, Inc. ("Newco"). The agreement provides for each existing Company shareholder to receive one share of common stock in Newco for each Company share owned by such party and for each existing N2K stockholder to receive 0.83 shares of common stock in Newco for each N2K share owned by such party. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of CDnow, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Interim Financial Statements The consolidated financial statements for the nine month periods ended September 30, 1997 and 1998 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of results for these interim Financial Statements F-14 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) periods. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the results expected for the entire year. Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Net Loss Per Common Share The Company has presented net loss per common share pursuant to Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share" and the Securities and Exchange Commission Staff Accounting Bulletin No. 98. Basic loss per common share was computed by dividing net loss applicable to common shareholders by the weighted average number of shares of Common Stock outstanding. Diluted loss per common share has not been presented, since the impact on loss per share using the treasury stock method is anti-dilutive due to the Company's losses. Cash and Cash Equivalents Cash equivalents are carried at cost plus accrued interest, which approximates fair value. The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. Cash equivalents of $742,784, $10,005,132, and $58,389,597 at December 31, 1996 and 1997 and September 30, 1998, respectively, included money market funds, government mortgage-backed bonds and highly rated corporate securities. Short-Term Investments At December 31, 1996 and 1997, short-term investments represented government mortgage-backed bonds maturing in less than a year and each was classified as available-for-sale. Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," available-for-sale securities are carried at fair value, based on quoted market prices, with unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. At December 31, 1996 and 1997, amortized cost approximated fair value and unrealized gains and losses were immaterial. Gross unrealized holding gains and losses were immaterial in 1995, 1996 and 1997. The gross proceeds from sales and maturities of short-term investments were $248,097 in 1997. No short-term investments were sold or matured prior to 1997. Gross realized gains and losses were immaterial. For the purpose of determining gross realized gains and losses, the cost of the securities sold is based upon specific identification. Financial Statements F-15 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Prepaid Expenses At December 31, 1997 prepaid expenses included $87,397 of net deferred financing costs related to the Series A Notes. Amortization of deferred financing costs was $87,397 in 1997 and $87,397 in the nine month period ended September 30, 1998 and is included in interest expense. Prepaid expenses included $2,000,000 and $6,860,000 at December 31, 1997 and September 30, 1998, respectively, related to linking agreements and strategic alliances (see Note 10). At September 30, 1998, Other Assets included $2,093,000 related to linking agreements and strategic alliances. The Company follows the American Institute of Certified Public Accountants Statement of Position 93-7 "Reporting for Advertising Costs" (SOP 93-7) to account for its linking agreements. Under SOP 93-7, the Company amortizes the costs associated with its linking agreements over the contract terms, with the amortization method primarily based on the rate of delivery of a guaranteed number of impressions to be received during the contract term. To the extent additional payments are required to be made based on factors such as click- throughs and new customers generated such payments will be charged to expense as incurred. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line basis over the estimated useful lives of the assets or the lease term, whichever is shorter. Internally Developed Systems and Software The costs to develop internal systems and software, primarily payroll and related expenses for development and design of software, are charged to expense as incurred. Revenue Recognition Net sales, which consist primarily of recorded music sold via the Internet, include shipping and handling charged to customers and are recognized when the products are shipped. The Company records a reserve for estimated returns, which is based on historical return rates. Operating and Development Operating and development expenses consist principally of payroll and related expenses for development, editorial, and network operations personnel and consultants and expenses for systems and telecommunications infrastructure. Sales and Marketing Advertising costs are included in sales and marketing expenses and are charged to expense as incurred. Such costs were $40,523, $61,432, $6,834,000, $2,136,187, and $23,695,757 for the years ended December 31, 1995, 1996, and 1997 and for the nine months ended September 30, 1997 and 1998, respectively. The Company gives merchandise credit to the providers of various small Web Financial Statements F-16 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) sites through its Cosmic Credit Program. Expenses related to this program are included in sales and marketing expenses and, to date, have been immaterial. The Company estimates the amount of unused credits and includes this amount in accrued expenses. Gift Certificates and Coupons Gift certificates are included in deferred revenues in the accompanying balance sheets and are recognized as net sales when they are redeemed. The Company estimates the amount of outstanding coupons which will be redeemed and includes that amount in accrued expenses. This accrual is immaterial for all periods presented. Coupon expense is included in sales and marketing expenses. Supplemental Cash Flow Information The Company paid interest of $2,329, $19,467, $284,565, $29,961, and $563,074 for the years ended December 31, 1995, 1996 and 1997, and the nine months ended September 30, 1997 and 1998, respectively. In addition, the Company incurred $15,000, $126,954, $1,070,290, $9,845, and $780,825 in capitalized lease obligations for the years ended December 31, 1995, 1996 and 1997, and the nine months ended September 30, 1997 and 1998, respectively. In 1996 the Company issued 41,244 shares of common stock to retire $81,923 of advances due to a related party (see Note 9). Recapitalization In April 1996, the Company amended its Articles of Incorporation to effect a 10,000-for-1 split of its common shares and to change the number of authorized common shares to 5,000,000. In July 1997, the Company amended its Articles of Incorporation to effect a 4-for-1 split of its common shares, to change the number of authorized common shares to 50,000,000, and to authorize 20,000,000 shares of preferred stock. In January 1998, the Company amended its Articles of Incorporation to effect a 1.5-for-1 split of its common shares. All references in the consolidated financial statements to the number of shares and to per share amounts have been retroactively restated to reflect all of these changes. Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company has adopted SFAS 130 in the first quarter of 1998. The Company has had no other comprehensive income items to report. Public Offerings On February 13, 1998 the Company consummated an initial public offering of its Common Stock (the "Initial Public Offering"). The company sold 4,561,250 shares of its common stock, no par Financial Statements F-17 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) value, at an initial public offering price of $16.00 per share. After deducting the underwriters' discount and other offering expenses, the net proceeds to the company were approximately $67,077,862. On July 28, 1998 the Company consummated a secondary public offering of its Common Stock (the "Secondary Offering"). The company sold 1,250,000 shares of its common stock, no par value, at a public offering price of $18.50 per share. After deducting the underwriters' discount and other offering expenses, the net proceeds to the company were $21,654,300. Recently Issued Accounting Pronouncements In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"). This statement establishes additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. Management believes that SFAS 131 will not have an effect on the Company's consolidated financial statements. In June 1998, the FASB issues SFAS No. 133," Accounting for Derivative Instruments and Hedging Activities" (SFAS 133"). This Statements establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contacts and for hedging activities and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management believes that SFAS 133 will have no impact on the Company's consolidated financial statements. Reclassifications The statement of operations for 1995, 1996 and 1997 and the nine months ended September 30, 1997 have been reclassified to conform with the presentation of September 30, 1998. Beginning in 1998, the Company determined to include royalties paid on CD sales in return for licensing of ratings, reviews, sound samples and other information ("Information Royalties") in operating and development expenses rather than in cost of sales, as was previously the case. This change was made based on Management's determination that including Information Royalties in operating and development expense was more consistent with the treatment of such expenses by retailers generally. The financial information for periods prior to 1998 has been restated to reflect this change. Information Royalties were $146,200, $225,737, $151,027, and $269,041 during the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, respectively. There were no Information Royalties paid in 1995. During the three months ended September 30, 1998, the Company determined to include credit card processing fees ("Credit Card Fees") in sales and marketing expenses rather than in cost of sales, as was previously the case. This change was made based on Management's determination that including Credit Card Fees in sales and marketing expense was more consistent with the treatment of such Financial Statements F-18 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) expenses by retailers generally. The financial information for periods prior to the quarter ended September 30, 1998 has been restated to reflect this change. Credit Card Fees were $28,940, $143,702, $468,255, $246,879 and $952,991 during the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, respectively. 3. RISKS AND UNCERTAINTIES The Company's future results of operations involve a number of risks and uncertainties. Factors that could affect the Company's future operating results and cause actual results to vary materially from expectations include, but are not limited to, dependence on key personnel, uncertain growth of online commerce, reliance on suppliers of entertainment products, government regulation, online commerce security risks, substantial competition, reliance on certain vendors, risk of system failure, absence of redundant facilities, risks associated with the Year 2000, and capacity constraints. See "Risk Factors" in the Prospectus. Dependence on Suppliers The Company's primary provider of order fulfillment for recorded music titles is Valley Media, Inc. ("Valley"). The Company has no fulfillment operation or facility of its own and, accordingly, is dependent upon maintaining its existing relationship with Valley or establishing a new fulfillment relationship with one of the few other fulfillment operations. There can be no assurance that the Company will maintain its relationship with Valley beyond the term of its existing two year agreement, which expires in June 1999, or that it will be able to find an alternative, comparable vendor capable of providing fulfillment services on terms satisfactory to the Company should its relationship with Valley terminate. Valley accounted for 71%, 76%, 81%, 78% and 85% of the cost of sales for the years ended 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, respectively. Additionally, the Company purchased all of its import music titles from another vendor. This vendor accounted for 21% and 14% of the cost of sales in 1995 and 1996, respectively. The Company replaced this vendor during the year ended December 31, 1997 and neither the current nor the former vendor accounted for more than 10% of cost of sales in the year ended December 31, 1997 and the nine months ended September 30, 1997 and 1998. International Sales The Company derived 22%, 40%, 29%, 33% and 22% of revenues for the years ended 1995, 1996 and 1997, and for the nine months ended September 30, 1997 and 1998, respectively, from customers outside the United States. All international sales are paid in U.S. dollars. Financial Statements F-19 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. PROPERTY AND EQUIPMENT
December 31, Useful Life/ --------------------- September Lease Term 1996 1997 30, 1998 ------------ --------- ---------- ----------- (unaudited) Computers and equipment.... 3 years $ 387,348 $2,090,144 $4,759,855 Office furniture and equipment................. 5 years 117,876 397,930 922,963 --------- ---------- ---------- 505,224 2,488,074 5,682,818 Less--Accumulated depreciation and amortization.............. (143,189) (603,778) (1,553,519) --------- ---------- ---------- $ 362,035 $1,884,296 $4,129,299 ========= ========== ==========
Depreciation and amortization expense for the years ended 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998 was $32,999, $105,439, $460,589, $219,349 and $972,838, respectively. Total property and equipment under capital leases at December 31, 1996 and 1997 and at September 30, 1998 was $141,954, $1,217,130 and $1,997,955 less accumulated amortization of $25,659, $252,988, and $654,874, respectively. 5. INCOME TAXES The Company records income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. From inception (February 12, 1994) until April 25, 1995, the Company operated as an unincorporated entity. From April 25, 1995 until December 5, 1996, the Company was incorporated and elected to be taxed under Subchapter S of the Internal Revenue Code. As a result, the Company was not subject to federal or state income taxes, and the taxable loss of the Company was included in the shareholders' individual tax returns. On December 6, 1996, the Company terminated its status as an S corporation and is now subject to federal and state income taxes. At December 31, 1997, the Company had a net operating loss carryforward for federal income tax purposes of approximately $9,700,000. The net operating loss carryforward will begin to expire in 2011. The Company's utilization of its loss carryforward will be limited pursuant to the Tax Reform Act of 1986, due to cumulative changes in ownership in excess of 50%. Financial Statements F-20 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The approximate income tax effect of each type of temporary difference and the loss carryforward is as follows:
December 31, ---------------------- 1996 1997 --------- ----------- Accruals and reserves not currently deductible....... $ 6,275 $ 38,590 Benefit of net operating loss carryforward........... 1,592 3,240,322 Development expenses not currently deductible........ 160,062 476,736 Depreciation methods................................. 12,134 37,634 Deferred revenues.................................... 42,500 64,078 --------- ----------- 222,563 3,857,360 Valuation allowance.................................. (222,563) (3,857,360) --------- ----------- $ -- $ -- ========= ===========
Due to the Company's history of operating losses the realization of the deferred tax asset is uncertain. The Company has, therefore, provided a full valuation allowance against the deferred tax asset. 6. DEBT On December 31, 1995, the Company issued a note for $100,000 to a private investor who at the time was also a member of the Company's Board of Directors. The note plus accrued interest of 10% was repaid on December 31, 1996. From November 16, 1996 through January 31, 1997, the Company received short- term loans of $250,000 from certain unrelated investors. The investors received warrants as part of the consideration for the loans (see Note 8). These loans bore interest at 6% per year. On May 15, 1997, the Company repaid $110,000 of the loans and, on July 16, 1997, the remaining unpaid balance plus accrued interest was paid. In 1997, the Company obtained three term loans from a bank for an aggregate of $218,563. The proceeds from the loans were used to purchase equipment, which equipment collateralizes the loans. The two founders of the Company have personally guaranteed the loans. The loans bear interest at rates ranging from 8.0% to 9.0% and are repayable in installments over 36 to 48 months. Annual principal repayments are $57,351 in 1998, $62,300 in 1999, $45,676 in 2000 and $25,061 in 2001. In November 1997, the Company sold $5,777,500 of Series A Convertible Notes (Series A Notes) to certain investors, including $1,000,000 to an existing shareholder. The notes bear interest at an annual rate of 12% and are due upon consummation of the Initial Public Offering. In connection with the sale of the Series A Notes, the Company issued warrants to these investors. The warrants allow the investors to purchase 48,550 shares of common stock at an exercise price of $11.90 per share. The warrants were valued using the Black-Scholes model, and the Series A Notes were recorded net of the value of $404,425 assigned to the warrants. The notes were amortized to their face amount Financial Statements F-21 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) over their estimated term, with $202,213 of amortization included in interest expense for the year ended December 31, 1997 and $202,212 in the nine months ended September 30, 1998. The notes were repaid in February 1998. 7. DISPUTE SETTLEMENT In May 1995, MILO Productions, Inc. ("MILO"), which was owned by the Company's then shareholders, entered into a partnership with MBL Entertainment, Inc. ("MBL") called Music Now. In December 1995, MBL, an investor and the Company's then shareholders entered into nonbinding discussions for the purpose of creating a new company ("NewCo") which would merge with Music Now. These discussions contemplated, among other things, that the private investor would make a significant cash investment in, and the Company's then shareholders would contribute all of the outstanding capital stock of both MILO and the Company, to NewCo. The parties abandoned these discussions in August 1996, and MBL and the private investor subsequently instituted a legal action against the Company, MILO and the Company's then shareholders. On December 6, 1996, the Company and all parties involved in this dispute negotiated a settlement pursuant to which (i) the private investor made an investment in the Company (see Note 8) and (ii) the shareholders of MBL were issued an aggregate of 882,606 shares of common stock. The shares issued to the shareholders of MBL were valued at $1,024,030 based on the sale of common stock to the investor, which valued the common stock at $1.16 per share (see Note 8), with the related charge recorded as an expense in the accompanying statement of operations for the year ended December 31, 1996. At the time of the settlement, MBL and Music Now were inactive and had no assets or liabilities. 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY Common Stock In December 1996, the Company sold to an investor 921,834 shares of common stock and a warrant to purchase an additional 871,710 common shares at $1.15 per share, for aggregate consideration of $1,200,000. Using the Black-Scholes model, the warrants were valued at $130,750. The remaining amount of the proceeds of $1,069,250 was allocated to common stock, resulting in a value per share of $1.16. The investor received the right to appoint two members of the Company's Board of Directors, each having one-half vote. This right terminated upon the consummation of the Company's Initial Public Offering. The investor, who is a director of the Company, exercised the warrant upon consummation of the Initial Public Offering, by tendering to the Company 62,473 shares received upon exercise to satisfy the $999,561 exercise price. This cashless exercise resulted in 809,237 net shares of common stock being received by the investor. Preferred Stock As of December 31, 1997, the Company had 20,000,000 shares of preferred stock authorized, of which 254,582 were designated, issued and outstanding as no par value Redeemable Series A Financial Statements F-22 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Convertible Preferred Stock ("Series A Preferred") and 1,605,505 were designated, issued and outstanding as no par value Redeemable Series B Convertible Preferred Stock ("Series B Preferred"). The Series A Preferred was sold to an investor in July 1997 for $4.91 per share, resulting in proceeds to the Company of $1,152,186, net of expenses. The Series B Preferred was sold to investors in August 1997 for $5.45 per share, resulting in proceeds to the Company of $8,100,305, net of expenses. Each share of Series A and B Preferred converted into shares of the Company's common stock upon the consummation of the Initial Public Offering in February 1998, on a 1.5-for-1 basis. Beginning January 1, 2003, the Series A and B Preferred would have been redeemable at the option of a majority of the holders at $4.91 per share and $5.45 per share, respectively, plus accrued but unpaid dividends, if any. The Series A and B Preferred were being accreted to their redemption values for accounting purposes. The holders of Series A and B Preferred were entitled to receive cumulative dividends of 8% per share per year, when and if declared by the Company; no dividends could have been declared or paid on common stock unless all cumulative dividends were declared and paid on the preferred stock. The Series A and Series B Preferred had liquidation preferences equal to $4.91 per share and $5.45 per share, respectively, plus any accrued and unpaid dividends. Equity Compensation Plan On June 1, 1996, the Company adopted the Equity Compensation Plan (the "Plan"). Under the Plan, incentive and nonqualified stock options, restricted stock and stock appreciation rights may be granted to employees, officers, employee directors and independent contractors and consultants. An aggregate of 1,600,000 shares of common stock have been reserved for issuance under the Plan. No stock options, restricted stock or stock appreciation rights were granted in 1996. Information relative to the Plan is as follows:
Weighted Range of Aggregate Average Exercise Exercise Exercise Shares Prices Price Price --------- ------------- ----------- -------- Outstanding January 1, 1997................... -- -- -- -- Granted................. 721,914 $1.33-$ 10.00 $ 2,157,680 $ 2.99 --------- ------------- ----------- ------ Outstanding December 31, 1997................... 721,914 $1.33-$ 10.00 2,157,680 $ 2.99 Granted................. 409,389 $8.50-$ 35.50 8,866,814 $21.66 Exercised............... (65,592) $ 1.33-$ 3.00 (128,820) $ 1.96 Cancelled............... (27,348) $1.33-$ 17.50 (169,705) $ 6.21 --------- ------------- ----------- ------ Outstanding September 30, 1998............... 1,038,363 $1.33-$ 35.50 $10,725,969 $16.33 ========= ============= =========== ======
As of September 30, 1998, there were options to purchase 202,710 shares of common stock exercisable with a weighted average exercise price of $2.37 per share. In addition, as of September 30, 1998, there were options to purchase and 496,045 shares of common stock available for grant under the Plan. Financial Statements F-23 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company accounts for its option grants under APB Opinion No. 25 and related interpretations. Accordingly, compensation has been recorded for the Plan based on the intrinsic value of the stock option at the date of grant (i.e., the difference between the exercise price and the fair value of the Company's stock). Compensation, if any, is deferred and recorded as expense over the vesting period. For the year ended December 31, 1997, deferred compensation of $751,392 was recorded for options granted, of which $316,616 and $188,097 was charged to compensation expense for the year ended December 31, 1997 and the nine months ended September 30, 1998 respectively. In 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based Compensation" (SFAS 123). SFAS 123 establishes a fair value based method of accounting for stock-based compensation plans. This statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. SFAS 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for the plan. Had the Company recognized compensation cost for its stock option plan consistent with the provisions of SFAS 123, the Company's pro forma net loss and net loss per common share for the year ended December 31, 1997 would have been as follows:
Year Ended December 31, 1997 ------------ Net loss applicable to common shareholders: As reported................................................. $(11,157,508) ============ Pro forma................................................... $(11,265,003) ============ Net loss per common share: As reported................................................. $ (1.42) ============ Pro forma................................................... $ (1.45) ============
The weighted average fair value of the stock options granted during the year ended December 31, 1997 was $2.63. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with the following weighted average assumptions: risk free interest rates ranging from 6.4% to 6.8% based on the rates in effect on the date of grant, a volatility of 60% for options granted subsequent to the filing date of the Company's registration statement, no expected dividend yield, and an expected life of eight years for the options. Warrants In August 1997, the Company issued warrants to purchase 121,560 shares of Series B Preferred at an exercise price of $5.45 per share in connection with the Series B Preferred financing. The warrants were issued to one of the investors in the Series B Preferred and to the agent who represented the Company in that financing. These warrants expire in August 2002. Upon the closing of the Initial Public Offering, the warrants converted to warrants to purchase 182,341 shares of common stock at $3.63 per share. Using the Black- Scholes model, the warrants were valued at $170,000. This amount Financial Statements F-24 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) was recorded as a reduction in the carrying value of the preferred stock and was amortized and included in the accretion to the redemption value of the preferred stock recorded in each period. As consideration for certain loans, the lenders received warrants to purchase 59,997 and 76,365 shares of common stock at a price of $1.83 per share until May 16, 1998 and July 16, 1998, respectively (see Note 6). Based on the warrants' 18-month term and exercise price, the Black-Scholes model calculated a minimal value for the warrants.
Exercise Grant Date Shares Price Fair Value ---------- ------------- ---------- Outstanding warrants, January 1, 1996.... -- -- Warrants granted to investor (see Note 6)...................................... 871,710 $ 1.83 $ 130,750 Warrants granted to lenders.............. 59,997 $ 1.83 -- ---------- ------------- Outstanding warrants, December 31, 1996.. 931,207 $ 1.83 Warrants granted to lenders.............. 76,365 $ 1.83 -- Warrants granted to holders of Series B Preferred Stock......................... 182,341 $ 3.63 $ 170,000 Warrants granted to Series A Note Holders (See Note 6)............................ 48,550 $11.90-$16.00 $ 404,425 ---------- ------------- Outstanding warrants, December 31, 1997.. 1,238,962 $ 1.83-$16.00 Warrants exercised including 975,345 shares on a cashless basis.............. (1,008,072) $ 1.83 Warrants granted on connection MTV Networks (see Note 10).................. 226,892 $ 23.28 $3,000,000 ---------- ------------- Outstanding warrants, September 30, 1998.................................... 457,782 $ 3.63-$23.28 ========== =============
9. RELATED-PARTY TRANSACTIONS Additional paid-in capital represents the deemed fair value of services contributed to the Company by the founders in 1994, 1995 and 1996. During this period, one of the founders served as President and the other was responsible for the development of the Company's system architecture and transactions systems. In 1994 and 1995, the founders were paid no compensation and in 1996 the founders' compensation was below market. The fair value of services contributed by the founders was determined by the Company's Board of Directors. In determining the value, the Board considered the founders' level of experience, position in the Company, the compensation level of other employees, the Company's financial resources and the status of the Company's development. The Company had a $3,261 advance due to a founder at December 31, 1996 and 1997. This advance was repaid in the nine months ended September 30, 1998. At December 31, 1995 the Company had advances due to a founder and his father of $4,103 and $74,740, respectively. During 1996, the father advanced additional funds to the Company and, on August 16, 1996, in consideration of the cancellation of $81,923 debt due to the father, the Company issued 41,244 shares of the Company's common stock. The exchange ratio used to convert the debt into shares of common stock was negotiated between the founders and their father and cannot be considered arms-length. Financial Statements F-25 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. COMMITMENTS AND CONTINGENCIES Marketing Agreements and Strategic Alliances Yahoo! Agreement. On September 2, 1998, the Company entered into a global merchant agreement with Yahoo! Inc. (the "Yahoo! Agreement"), extending and expanding upon earlier agreements with Yahoo! of August 1997 and March 1998. Under the Yahoo! Agreement: (i) the Company continues to be granted music- retail exclusivity on music-related search-results pages on Yahoo!'s main directory, www.yahoo.com, (ii) is integrated into other areas of the Yahoo! Service, including Yahoo! Mail and (iii) becomes the premier music retailer on many of Yahoo!'s international sites. The term of the Yahoo! Agreement ends on December 31, 2000, except for presence on the international sites, which ends in March, 2000. The Company may terminate the Yahoo! Agreement earlier upon payment of a specified termination fee. Coincident with the Yahoo! Agreement, Yahoo! agreed to purchase up to $2 million in newly-issued common shares of the Company at market price, of which $1 million was invested in September 1998, and the remainder is to be invested on December 31, 1999. Excite Agreement. On September 30, 1997, the Company entered into a two-year agreement with Excite, Inc. (the "Excite Agreement"), pursuant to which the Company became the exclusive retail music store sponsor of the Webcrawler.com Web site. The Excite Agreement requires the Company to pay Excite a set-up fee, an annual exclusivity fee and an annual sponsorship fee for ongoing programming, links, placements, advertisements and promotions. The Excite Agreement will expire in January 2000. Lycos Agreement. On March 26, 1998, the Company entered into an agreement with Lycos, Inc. (the "Lycos Agreement"), pursuant to which the Company became the exclusive retail music store sponsor of the www.lycos.com and www.tripod.com Web sites. The Lycos Agreement has a term of three years and will expire in August 2001. The Company has issued 82,224 shares (the "Lycos Shares") of common stock to Lycos. The Lycos Shares vest as Lycos delivers certain required minimum page views, as defined in the Lycos Agreement. The Company has the right to repurchase any of the Lycos shares that do not become vested at a price of $0.01 per share. The Company will measure the stock granted as it vests. If Lycos is unable to deliver a number of guaranteed minimum impressions, some of the Lycos shares may not vest. Lycos Bertelsmann Agreement. On April 2, 1998, the Company entered into an agreement with Lycos Bertelsmann GMBH & Co. KG (the "Lycos Bertelsmann Agreement"), pursuant to which the Company became the exclusive music retailer on certain Lycos Bertelsmann branded Web services in Europe, as defined in the Lycos Bertelsmann Agreement. The Lycos Bertelsmann Agreement has a three year term expiring in April 2001. MTV Agreement. On May 18, 1998, the Company entered into a binding memorandum of terms for a three year advertising and promotion agreement with MTV Networks, a subsidiary of Viacom International, Inc., pursuant to which the Company committed to purchase advertising on the MTV Financial Statements F-26 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and VH1 cable television channels and obtained the right to use certain MTV and VH1 content. The Company has granted MTV Networks a warrant to purchase 226,892 shares of the Company's common stock at an exercise price of $23.28 per share. The warrant will vest annually over the three years of the contract term. Other Agreements. On January 5, 1998 the Company entered into a strategic alliance with GeoCities pursuant to which the Company has been designated as the exclusive music retailer as well as one of four key commerce partners that occupy a premier position on certain pages of the GeoCities Web site. The Company also has committed to make payments under advertising and linking agreements with Rolling Stone Network, America Online with respect to the Love@AOL service, and with certain other parties. The Company is required to pay aggregate minimum fixed fees of $9.3 million, $27.4 million, $26.7 million and $3.6 million during the remaining three months of 1998 and the years ending December 31, 1999, 2000 and 2001, respectively, under the Company's marketing agreements and strategic alliances. The Company expects to amortize the costs associated with its marketing agreements and strategic alliances over the contract terms, with the amortization method primarily based on the rate of delivery of a guaranteed number of impressions to be received during the contract term. Many of the Company's agreements, including the Yahoo!, Excite, Lycos and Lycos Bertelsmann Agreements, contain provisions which may require additional payments to be made by the Company based on factors such as click-throughs and new customers generated. To date, the amount of such payments has not been material. Such payments are charged to expense as incurred. The Company will continue to evaluate the realizability of assets recorded, if any, related to the Yahoo!, Excite, Lycos, Lycos Bertelsmann and other agreements, and, if necessary, write down the assets to realizable value. Leases The Company has entered into various noncancelable operating and capital leases for office space, telephones and other equipment. Future minimum lease payments under operating and capital leases as of December 31, 1997 are as follows:
Operating Capital ---------- ---------- 1998.................... $ 291,033 $ 464,103 1999.................... 302,044 453,629 2000.................... 343,784 388,761 2001.................... 316,775 146,407 2002.................... 226,037 -- ---------- ---------- Total minimum lease payments............... $1,479,673 1,452,900 ========== Less--Amount representing interest.. (319,578) ---------- Present value of minimum capitalized lease payments............... $1,133,322 ==========
Financial Statements F-27 CDNOW, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Rent expense under operating leases was $51,836, $16,905, $207,724, $119,176 and $399,336 for the years ended 1995, 1996 and 1997 and for the nine months ended September 30, 1997 and 1998, respectively. Legal Actions From time-to-time, the Company may be involved in litigation relating to claims arising out of its ordinary course of business. The Company believes that there are no claims or actions pending or threatened against the Company, the ultimate disposition of which, would have a materially adverse effect on the Company. Financial Statements F-28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To N2K Inc.: We have audited the accompanying consolidated balance sheets of N2K Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of N2K Inc. and subsidiaries as of December 31, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Philadelphia, Pa., February 12, 1998 (except with respect to the matter discussed in Note 1, as to which the date is December 22, 1998) Financial Statements F-29 N2K INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, -------------------------- September 30, 1996 1997 1998 ------------ ------------ ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents......... $ 4,483,450 $ 36,831,748 $ 54,277,085 Accounts receivable, net.......... 63,549 713,386 1,694,649 Receivable for Common stock subject to put rights............ -- 2,999,995 2,999,995 Prepaid expenses.................. 703,657 16,645,294 9,651,836 ------------ ------------ ------------- Total current assets............ 5,250,656 57,190,423 68,623,565 ------------ ------------ ------------- NET ASSETS OF DISCONTINUED OPERA- TIONS.............................. 158,247 -- -- ------------ ------------ ------------- PROPERTY AND EQUIPMENT: Computer equipment................ 2,289,944 4,638,311 10,328,407 Office furniture and equipment.... 491,942 1,079,960 1,606,041 Leasehold improvements............ 486,877 1,213,174 1,569,240 Property and equipment under capital leases................... 868,436 1,591,387 1,591,387 ------------ ------------ ------------- 4,137,199 8,522,832 15,095,075 Less-Accumulated depreciation and amortization..................... (1,002,435) (2,241,059) (4,353,721) ------------ ------------ ------------- Net property and equipment...... 3,134,764 6,281,773 10,741,354 ------------ ------------ ------------- OTHER ASSETS: Intangible assets, net............ 320,162 244,154 187,148 Restricted cash................... 167,000 167,000 167,000 Other............................. 299,093 138,206 1,083,276 ------------ ------------ ------------- Total other assets.............. 786,255 549,360 1,437,424 ------------ ------------ ------------- $ 9,329,922 $ 64,021,556 $ 80,802,343 ============ ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of capital lease obligations...................... $ 182,868 $ 394,055 $ 303,415 Accounts payable.................. 1,068,657 1,290,474 1,577,119 Accrued merchandise costs......... 24,740 1,169,898 1,469,257 Accrued compensation.............. 492,515 1,259,165 1,246,808 Accrued royalties................. -- 28,289 33,105 Other accrued liabilities......... 1,571,012 2,189,191 6,271,160 ------------ ------------ ------------- Total current liabilities....... 3,339,792 6,331,072 10,900,864 ------------ ------------ ------------- NET LIABILITIES OF DISCONTINUED OPERATIONS......................... -- 705,756 5,139,973 ------------ ------------ ------------- CAPITAL LEASE OBLIGATIONS........... 235,153 519,215 311,460 ------------ ------------ ------------- OTHER LONG-TERM LIABIILTIES......... 309,100 317,583 324,508 ------------ ------------ ------------- COMMON STOCK SUBJECT TO PUT RIGHTS.. 537,498 2,999,995 2,999,995 ------------ ------------ ------------- COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 40,000,000 shares authorized, 15,397,088 shares and none issued and outstanding.................. 15,397 -- -- Common stock, $.001 par value, 100,000,000 shares authorized, 2,923,216, 12,118,000 and 14,228,755 shares issued and outstanding actual............... 2,923 12,118 14,229 Additional paid-in capital........ 31,694,385 109,197,798 171,356,553 Accumulated deficit............... (26,804,326) (56,061,981) (110,245,239) ------------ ------------ ------------- Total stockholders' equity...... 4,908,379 53,147,935 61,125,543 ============ ============ ============= $ 9,329,922 $ 64,021,556 $ 80,802,343 ============ ============ =============
The accompanying notes are an integral part of these statements. Financial Statements F-30 N2K INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended Year Ended December 31 September 30 ------------------------------------------ -------------------------- 1995 1996 1997 1997 1998 ------------ ------------- ------------- ------------ ------------ (Unaudited) NET REVENUES............ $ 96,505 $ 1,655,704 $ 8,108,449 $ 4,115,458 $ 24,890,121 COST OF REVENUES........ 85,176 1,447,888 6,212,741 3,284,672 19,888,878 ------------ ------------- ------------- ------------ ------------ Gross profit........... 11,329 207,816 1,895,708 830,786 5,001,243 OPERATING EXPENSES: Operating and development........... 1,034,617 7,007,929 10,585,441 7,082,806 16,092,108 Sales and marketing.... 1,077,649 2,772,167 6,690,884 2,612,009 29,818,641 General and administrative........ 871,667 2,477,995 4,647,810 3,125,505 3,357,404 Charge for purchased research and development........... -- 5,242,523 -- -- -- ------------ ------------- ------------- ------------ ------------ Operating loss......... (2,972,604) (17,292,798) (20,028,427) (11,989,534) (44,266,910) INTEREST AND OTHER INCOME................. 106,370 352,531 693,881 166,312 2,446,254 INTEREST EXPENSE........ (18,237) (52,281) (653,455) (484,486) (55,071) ------------ ------------- ------------- ------------ ------------ Loss from continuing operations............ (2,884,471) (16,992,548) (19,988,001) (12,307,708) (41,875,727) INCOME (LOSS) FROM DISCONTINUED OPERATIONS............. 1,289,671 (1,915,361) (9,683,466) (4,806,679) (12,307,531) GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS............. -- -- 1,574,493 1,574,493 -- ------------ ------------- ------------- ------------ ------------ LOSS BEFORE EXTRAORDINARY ITEM..... (1,594,800) (18,907,909) (28,096,974) (15,539,894) (54,183,258) EXTRAORDINARY ITEM...... -- -- (639,262) -- -- ------------ ------------- ------------- ------------ ------------ NET LOSS................ $ (1,594,800) $ (18,907,909) $ (28,736,236) $(15,539,894) $(54,183,258) ============ ============= ============= ============ ============ BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE: Loss from continuing operations............ $ (1.84) $ (6.15) $ (4.09) $ (4.11) $ (3.12) Income (loss) from discontinued operations............ 0.82 (0.70) (1.98) (1.61) (0.91) Gain on disposal of discontinued operations............ -- -- 0.32 0.53 -- Extraordinary item..... -- -- (0.13) -- -- ------------ ------------- ------------- ------------ ------------ Net loss per Common share................. $ (1.02) $ (6.85) $ (5.88) $ (5.19) $ (4.03) ============ ============= ============= ============ ============ SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS PER COMMON SHARE.. 1,566,955 2,760,948 4,885,556 2,994,770 13,434,772 ============ ============= ============= ============ ============
The accompanying notes are an integral part of these statements. Financial Statements F-31 N2K INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Preferred Common Paid-in Accumulated Stock Stock Stock Deficit Total --------- ------- ------------ ------------- ------------ BALANCE, DECEMBER 31, 1994................... $ 4,057 $ 1,567 $ 8,539,697 $ (6,301,617) $ 2,243,704 Common stock options exercised............. -- -- 80 -- 80 Net loss............... -- -- -- (1,594,800) (1,594,800) -------- ------- ------------ ------------- ------------ BALANCE, DECEMBER 31, 1995................... 4,057 1,567 8,539,777 (7,896,417) 648,984 Issuance of Common stock and Series E Preferred stock in connection with purchase of New York N2K................... 1,348 1,348 4,148,708 -- 4,151,404 Issuance of Series E Preferred stock....... 4,659 -- 3,722,701 -- 3,727,360 Issuance of Series F Preferred stock, net.. 5,333 -- 15,262,951 -- 15,268,284 Issuance of Common stock for services rendered.............. -- 6 14,244 -- 14,250 Common stock options exercised............. -- 2 6,004 -- 6,006 Net loss............... -- -- -- (18,907,909) (18,907,909) -------- ------- ------------ ------------- ------------ BALANCE, DECEMBER 31, 1996................... 15,397 2,923 31,694,385 (26,804,326) 4,908,379 Issuance of Series G Preferred stock, net.. 2,480 -- 7,213,051 -- 7,215,531 Warrants issued in connection with Management and Senior notes................. -- -- 950,000 -- 950,000 Warrants issued in connection with AOL Contract.............. -- -- 775,000 -- 775,000 Issuance of Common stock, net............ -- 3,830 65,320,929 -- 65,324,759 Conversion of Preferred stock to Common stock................. (17,877) 5,020 12,857 -- -- Management Note Conversion............ -- 95 1,811,637 -- 1,811,732 Rocktropolis Put expiration............ -- 45 537,453 -- 537,498 Common stock purchase and retirement........ -- (41) -- (521,419) (521,460) Issuance of Common stock for services rendered.............. -- 3 52,496 -- 52,499 Issuance of Common stock options for services rendered..... -- -- 31,463 -- 31,463 Common stock options exercised............. -- 243 798,527 -- 798,770 Net loss............... -- -- -- (28,736,236) (28,736,236) -------- ------- ------------ ------------- ------------ BALANCE, DECEMBER 31, 1997................... -- 12,118 109,197,798 (56,061,981) 53,147,935 Issuance of Common stock under employee stock purchase plan (unaudited)........... -- 10 94,732 -- 94,742 Issuance of Common stock, net (unaudited)........... -- 2,000 61,405,188 -- 61,407,188 Common stock options and warrants exercised (unaudited)........... -- 98 366,418 -- 366,516 Issuance of Common stock for services rendered (unaudited).. -- 3 62,497 -- 62,500 Issuance of Common stock options for services rendered (unaudited)........... -- -- 229,920 -- 229,920 Net loss (Unaudited)... -- -- -- (54,183,258) (54,183,258) -------- ------- ------------ ------------- ------------ BALANCE, SEPTEMBER 30, 1998 (unaudited)....... $ -- $14,229 $171,356,553 $(110,245,239) $ 61,125,543 ======== ======= ============ ============= ============
The accompanying notes are an integral part of these statements. Financial Statements F-32 N2K INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Year Ended December 31 September 30 ------------------------------------------ ---------------------------- 1995 1996 1997 1997 1998 ------------ ------------- ------------- ------------- ------------- (Unaudited) OPERATING ACTIVITIES: Net loss............... $ (1,594,800) $ (18,907,909) $ (28,736,236) $ (15,539,894) $ (54,183,258) Adjustments to reconcile net loss to net cash used in operating activities-- Depreciation and amortization.......... 238,558 767,357 1,437,541 959,312 2,307,834 Amortization of marketing advances.... -- -- 2,769,741 158,000 14,926,452 Gain on disposal of discontinued operations............ -- -- (1,574,493) (1,574,493) -- Encoded Music restructuring charge.. -- -- -- -- 4,304,249 Loss on disposal of property and equipment............. -- -- 79,620 79,620 -- Extraordinary loss from early extinguishment of debt............... -- -- 639,262 -- -- Amortization of discount on Management and Senior Notes...... -- -- 310,738 227,000 -- Provision for future returns............... -- -- 1,816,238 447,641 192,000 Provision for doubtful accounts.............. -- 18,000 64,045 56,574 99,793 Charge for purchased research and development........... -- 5,242,523 -- -- -- Issuance of Common stock for services rendered.............. -- 14,250 52,499 -- 62,500 Issuance of Common stock options for services rendered..... -- -- 31,463 -- 229,920 Decrease (increase) in-- Restricted cash........ -- 500,000 -- (300,000) -- Accounts receivable.... 485,839 461,356 (1,022,882) (1,135,991) (684,250) Prepaid expenses....... (30,225) (610,365) (18,065,728) (3,804,769) (7,818,065) Inventory.............. -- (113,824) 23,785 23,697 (224,320) Advances and recoupable costs................. -- (86,525) (116,825) (1,149,660) 32,444 Other assets........... (229) (49,144) (45,945) (24,501) (1,259,910) Increase (decrease) in-- Accounts payable....... (30,951) 1,177,839 (61,680) (90,250) 395,160 Accrued merchandise costs................. 33,300 (8,560) 1,145,158 539,621 299,359 Accrued compensation... 44,335 484,819 625,084 (119,340) 52,923 Accrued royalties...... -- -- 629,989 259,151 (45,436) Accrued Encoded Music restructuring......... -- -- -- -- (499,316) Other accrued liabilities........... 821 317,418 (733,858) 763,000 3,993,372 Other long-term liabilities........... (20,671) 59,073 60,641 3,036 23,945 ------------ ------------- ------------- ------------- ------------- Net cash used in operating activities........... (874,023) (10,733,692) (40,671,843) (20,222,246) (37,794,604) ------------ ------------- ------------- ------------- ------------- INVESTING ACTIVITIES: Purchases of and deposits on property and equipment......... (338,721) (2,933,196) (4,313,916) (2,636,803) (6,277,541) Acquisition of New York N2K, net of cash acquired.............. -- (224,077) -- -- -- Purchase of Rocktropolis website.. -- (671,744) -- -- -- Proceeds from disposal of discontinued operations............ -- -- 3,000,000 3,000,000 -- ------------ ------------- ------------- ------------- ------------- Net cash (used in) provided by investing activities........... (338,721) (3,829,017) (1,313,916) 363,197 (6,277,541) ------------ ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these statements. Financial Statements F-33 N2K INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine Months Ended Year Ended December 31 September 30 ------------------------------------- ------------------------- 1995 1996 1997 1997 1998 ---------- ----------- ------------ ----------- ------------ (Unaudited) FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit....... $ 400,000 $ (400,000) $ -- $ 650,000 $ -- Proceeds from Management and Senior Notes................ -- -- 7,771,600 7,771,600 -- Repayment of Senior Notes................ -- -- (6,021,600) -- -- Payments on capital lease obligations.... (109,476) (103,115) (233,543) (158,229) (350,964) Proceeds from issuance of Preferred stock, net.................. -- 18,995,644 7,215,531 7,215,531 -- Proceeds from issuance of Common stock, net.................. -- -- 65,324,759 -- 61,407,188 Proceeds from issuance of Common stock under the employee stock purchase plan........ -- -- -- -- 94,742 Proceeds from exercise of Common stock options and warrants............. 80 6,006 277,310 75,663 366,516 ---------- ----------- ------------ ----------- ------------ Net cash provided by financing activities.......... 290,604 18,498,535 74,334,057 15,554,565 61,517,482 ---------- ----------- ------------ ----------- ------------ INCREASE (DECREASE) IN CASH AND EQUIVALENTS.. (922,140) 3,935,826 32,348,298 (4,304,484) 17,445,337 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 1,469,764 547,624 4,483,450 4,483,450 36,831,748 ---------- ----------- ------------ ----------- ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 547,624 $ 4,483,450 $ 36,831,748 $ 178,966 $ 54,277,085 ========== =========== ============ =========== ============
The accompanying notes are an integral part of these statements. Financial Statements F-34 N2K INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information as of September 30, 1998 and for the nine months ended September 30, 1997 and 1998 is unaudited) 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Company: Background and Recent Events N2K Inc. (the "Company" or "N2K"), formerly Telebase Systems, Inc., was formed as a result of the merger in February 1996, of N2K Inc., a New York corporation ("New York N2K") which was founded in 1995, and Telebase Systems, Inc. ("Telebase"), which was founded in 1984 as a provider of on-line information services (see Note 2). In 1994, recognizing increasing opportunities in the entertainment market, Telebase expanded its strategy to include music entertainment. In April 1997, the Company discontinued its on-line information services business and in August 1997, the Company sold substantially all of the net assets of this business. The operations of the on-line information services business have been accounted for as discontinued operations (see Note 3). The Company is an online music entertainment company using the Internet as a global platform for promoting, marketing and selling music and related merchandise. The Company's strategy is to build loyal user communities around genre-specific websites that provide music content and enable consumers to purchase compact discs ("CDs"), cassettes, LPs, videos and related merchandise. The Company has incurred significant losses and expects to continue to incur significant losses on a quarterly and annual basis for the foreseeable future. As of September 30, 1998, the Company had an accumulated deficit of $110,245,239. The Company has incurred losses from continuing operations of $16,992,548, $19,988,001 and $41,875,727 for the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1998, respectively. Since its inception, the Company has incurred costs to develop and enhance its technology, to create, introduce and enhance its websites, to establish marketing and distribution relationships and to build its administrative organization. The Company currently intends to increase its operating expenses as a result of the Company's strategic alliances, to fund increased sales and marketing, to enhance existing websites and to complete strategic relationships important to the success of the Company. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, results of operations and financial condition will be materially adversely affected. There can be no assurance that the Company will be able to generate sufficient revenues from the sale of music recordings, related merchandise, advertising and sponsorship to achieve or maintain profitability on a quarterly or annual basis in the future. The Company expects negative cash flow from operations to continue for the foreseeable future as it continues to develop and market its business. Financial Statements F-35 N2K INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company had also established its own record label, N2K Encoded Music, which used the Company's websites, as well as record stores and other traditional distribution channels, to promote, distribute and sell original and licensed artist recordings. In August 1998, management announced a restructuring of its record label, N2K Encoded Music. The restructuring was done in an effort to streamline the cost structure of Encoded Music. Historically, the Company focused on two genres of music: Rock/Pop and Jazz. Through this restructuring, the Company will no longer produce or license artist recordings in the Rock/Pop genre. The Company immediately ceased all of its operations in the Rock/Pop genre. Accordingly, the Company recorded a restructuring charge of $4,304,249. This charge is included in loss from discontinued operations in the accompanying consolidated statements of operations. This charge represented (i) certain costs relating to severance due to a reduction in Encoded Music's workforce ($2,006,360); (ii) costs associated with the termination of certain of its contractual commitments ($1,437,845); and (iii) non-cash costs associated with the write-down of certain assets and other miscellaneous costs ($860,044). The reduction in Encoded Music's workforce represented 21 individuals, or all of its employees who worked in the Rock/Pop genre and included individuals in promotions, sales and marketing and management. The contractual commitments terminated primarily relate to contracts which N2K had with various artists/projects. Pursuant to these contracts, N2K was obligated to provide the funding and support for each of these artists' projects. As a result of N2K exiting the Rock/Pop genre, N2K no longer supported these projects. Accordingly, the costs incurred represented the costs that N2K was required to pay, or is expected to pay to settle its obligation under its original artist recording agreements for each of these projects. These arrangements should be settled and paid by June 1999. The Company's management believes that this provision is adequate based upon the decisions currently made by management. However, the amount the Company ultimately incurs could be different from these estimates. At September 30, 1998, $3,804,933 of restructuring charges remained in accrued liabilities. The balance was comprised of $1,894,245 for severance costs, $1,066,845 to terminate certain of its existing contracts, and $843,843 for other miscellaneous costs. Other than the amounts paid, there were not any changes to this liability since the initial charge. Cash expenditures related to this restructuring for the three months ended September 30, 1998 were $499,316. Cash expenditures for the fourth quarter of 1998 and the years ended December 31, 1999 and 2000 are expected to be approximately $445,000, $2,059,000 and $644,000, respectively. Actual costs incurred are charged against the accrued Encoded Music restructuring account when paid. In December 1998, the Company approved a formal plan of disposal for N2K Encoded Music. N2K Encoded Music has been accounted for as a discontinued operation with a measurement date of December 22, 1998. N2K has negotiated the material terms of an agreement to sell the majority of Encoded Music to an unrelated third party. The Company expects that the disposal of N2K Encoded Music will result in a loss on the disposal of the segment's net assets. Accordingly, as of December 22, 1998, the Company has accrued the expected loss on the disposal, as well as the expected losses of the segment from the measurement date to the anticipated disposal date. As these accruals were recorded on December 22, 1998, the accompanying consolidated financial statements do not reflect such amounts. These accruals will be recorded in the quarter ended December 31, 1998. However, the accompanying consolidated financial statements reflect the operating results and Financial Statements F-36 N2K INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) balance sheet items of the discontinued operations separately from continuing operations. See Note 3 for more information on the N2K Encoded Music discontinued operation. On October 23, 1998, the Company and CDnow, Inc. ("CDnow") issued a joint press release announcing the execution of a definitive merger agreement. CDnow is an online retailer of CDs and other music related products. The merger will be effected through the formation of a new publicly traded company, initially to be called CDnow/N2K, Inc. The agreement provides for each existing N2K stockholder to receive 0.83 shares of common stock in the new company for each N2K share owned by such party, and each existing CDnow shareholder to receive 1.00 share of common stock in the new company for each CDnow share owned by such party. The merger agreement and press release are filed as exhibits to the Company's Current Report on Form 8-K dated October 22, 1998 and filed October 29, 1998. Management and Senior Notes In July 1997, the Company issued $1,750,000 aggregate principal amount of promissory notes to Lawrence L. Rosen, Jonathan V. Diamond and Robert David Grusin (the "Management Notes"), each of whom loaned the Company $583,333. The Management Notes bore interest at 14% per annum and were due on the earlier of (i) a change of control of the Company, as defined, and (ii) March 31, 1998. The Management Notes, including interest, converted into an aggregate 95,354 shares of Common stock upon the consummation of the initial public offering in October 1997 (the "Management Note Conversion"). In consideration for these loans, the Company issued an aggregate of 48,609 warrants to purchase 48,609 shares of Common stock, representing 16,203 warrants to each of Messrs. Rosen, Diamond and Grusin. The warrants are exercisable at a price of $12 per share and expire in July 2004. The Management Notes were recorded net of the value ($150,000) associated with these warrants. This discount was being amortized over the term of the debt through March 31, 1998. When the Management Notes were converted into Common stock, the Company recorded an extraordinary charge to its consolidated statement of operations, which was equal to the unamortized portion of the discount (approximately $102,000). In August 1997, the Company issued $6,021,600 aggregate principal amount of Senior Notes (the "Senior Notes") to a group of five institutional investors affiliated with an insurance company and one existing stockholder of the Company in return for loans in that amount to the Company. The Senior Notes bore interest at 14% per annum and were due on the earlier of (i) consummation of the Company's initial public offering, (ii) a change of control of the Company, as defined, and (iii) March 31, 1998. In consideration for these loans, the Company issued an aggregate of 167,266 warrants to purchase 167,266 shares of Common stock. The warrants are exercisable at a price of $12 per share and expire in August 2004. The Senior Notes were recorded net of the value ($800,000) associated with these warrants. This discount was being amortized over the term of the debt through March 31, 1998. In connection with the early repayment of the Senior Notes upon the consummation of the initial public offering, the Company recorded an extraordinary charge to its consolidated statement of operations which was equal to the unamortized portion of the discount Financial Statements F-37 N2K INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (approximately $537,000). In addition, the Company issued warrants to purchase 83,389 shares of Common stock at an exercise price of $12 per share as a placement fee relating to this transaction. Initial Public Offering On October 22, 1997, the Company completed its initial public offering of 3,330,221 shares of Common stock at a price of $19 per share. Additionally, on October 22, 1997, the underwriter exercised their overallotment option for the purchase of 499,533 shares at a price of $19 per share. The Company received net cash proceeds of approximately $65,300,000 from the initial public offering. In addition, on October 22, 1997, the following events occurred: (i) the automatic conversion of all outstanding shares of the Company's Preferred stock; $0.001 par value, into an aggregate of 4,986,778 shares of Common stock upon the consummation of the initial public offering; (ii) the automatic expiration upon the consummation of the initial public offering of the put rights associated with 44,790 shares of Common stock issued in connection with purchase of the rock website, Rocktropolis; (iii) the Management Note Conversion; (iv) the AOL Purchase; and (v) the repayment of the Senior Notes. Secondary Offering On April 20, 1998, the Company completed its secondary public offering (the "Secondary Offering") of 3,125,722 shares of Common stock at a price of $33 per share. Of the 3,125,722 shares of Common stock offered, 2,000,000 were offered by the Company, and 1,125,722 were offered by selling stockholders. The Company received net proceeds of approximately $61,560,000. Stock Split and Reorganization On October 15, 1997, the Company effected a one-for-four reverse stock split of each outstanding share of Common stock in N2K Inc., a Pennsylvania corporation, prior to the reorganization of N2K Inc. as a Delaware corporation, which occurred on October 16, 1997. All share, stock option and warrant data have been restated to reflect the reverse stock split. Summary of Significant Accounting Policies: Interim Financial Statements The consolidated financial statements as of September 30, 1998 and for the nine months ended September 30, 1997 and 1998 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of results for these interim periods. The results of operations for the nine months ended September 30, 1997 and 1998 are not necessarily indicative of the results to be expected for the entire year. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Financial Statements F-38 N2K INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers investment instruments with an original maturity of three months or less to be cash equivalents. Cash equivalents are comprised of investments in various mutual and money market funds, as well as short-term notes. Supplemental Disclosures of Cash Flow Information For the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, the Company paid interest of $18,237, $52,281, $277,528, $77,030 and $64,277, respectively. Income taxes paid in 1995, 1996, 1997 and 1998 were immaterial. The Company incurred $99,454, $933,227 and $208,226 of capital lease obligations during 1995, 1997 and the nine months ended September 30, 1997, respectively. There were no capital lease obligations incurred during 1996 or 1998. The following table displays the noncash assets and liabilities that were consolidated as a result of the New York N2K acquisition on February 13, 1996 (see Note 2): Noncash assets (liabilities): Accounts receivable........................................... $ 78,090 Prepaid expenses.............................................. 3,540 Property and equipment........................................ 557,455 Other assets.................................................. 36,612 Goodwill...................................................... 280,000 Charge for purchased research and development................. 4,133,281 Accounts payable and other accrued liabilities................ (405,118) Capital lease obligations..................................... (308,379) ----------- Net noncash assets acquired................................. 4,375,481 Less--Preferred stock issued................................ (1,078,286) Common stock issued...................................... (3,073,118) ----------- Cash paid, net of cash acquired............................... $ 224,077 ===========
Financial Statements F-39 N2K INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Additionally, the following table displays the noncash assets that were acquired as a result of the Rocktropolis website acquisition on June 21, 1996 (see Note 2): Noncash assets : Charge for purchased research and development.................. $1,109,242 Intangible assets.............................................. 100,000 ---------- Net noncash assets acquired.................................. 1,209,242 Less--Common stock issued.................................... (537,498) ---------- Cash paid...................................................... $ 671,744 ==========
Property and Equipment Property and equipment are stated at cost. Depreciation is calculated on a straightline basis over the estimated useful lives of the assets. Computer equipment is depreciated primarily over an estimated useful life of 4 years and office furniture and equipment is depreciated over an estimated useful life of 4 to 8 years. Leasehold improvements are amortized over the shorter of the estimated useful life or the lease term. Improvements and betterments are capitalized, and maintenance and repair costs are charged to expense as incurred. Upon retirement or disposition, the applicable property amounts are relieved from the accounts, and any gain or loss is recorded in the consolidated statement of operations. Intangible Assets Intangible assets consist of acquired technology costs and the Rocktropolis tradename and are being amortized over 5 years on a straightline basis. The Company evaluates the realizability of intangible assets based on estimates of undiscounted future cash flows over the remaining useful life of the asset. If the amount of such estimated undiscounted future cash flow is less than the net book value of the asset, the asset is written down to its net realizable value. As of September 30, 1998, no such writedown was required. Common Stock Subject to Put Rights America Online, Inc. ("AOL") and the Company entered into an agreement, pursuant to which AOL agreed to purchase from the Company at the initial public offering price per share of $19.00 (less underwriting discounts and commissions) an aggregate amount of $3,000,000 or 169,779 shares of the Company's Common stock (the "AOL Purchase"). The Company has granted AOL certain shelf and other registration rights with respect to the shares purchased by AOL in the AOL Purchase, including the right to require the Company to register such shares for resale, to have such registration statement declared effective on or before April 16, 1998 and to maintain the effectiveness of such registration statement for a period of two years from the consummation of the AOL Purchase. Accordingly, the value of these shares is not included in Stockholders' equity. As the Company has failed to cause such registration statement to be declared effective by April 16, 1998, AOL has the right to require the Company to repurchase such shares for cash at a price equal to the greater of the original purchase price therefor (which was being held by AOL in a segregated account) and the Financial Statements F-40 N2K INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) then-current fair market value. On December 16, 1998, the Company and AOL agreed to offset $3,000,000 in marketing advances which the Company owed to AOL as of November 1, 1998 against the $3,000,000 AOL owed to the Company under this agreement. The current fair market value of the Company's Common stock as of January 20, 1999 was $14.31 per Common share. As of January 20, 1999, these shares had not been registered and AOL had not exercised its put right. If the Company is required to purchase the AOL shares, the Common subject to put rights on the Company's consolidated balance sheets will be accreted to its fair value based upon the price of the Company's stock at each reporting date. The fair value will be recorded as a charge to retained earnings at each reporting date and will reduce earnings available to Common shareholders. As of January 20, 1999, there is no charge as the market value of the Company's Common stock is below $19.00 per Common share. The Company's repurchase obligation is secured by an escrow in the form of cash and/or letter of credit in an amount to be agreed upon by the Company and AOL, which amount shall not be less than $3,000,000 nor more than $7,500,000. In addition, the Company granted AOL a warrant for the future purchase of up to 184,736 additional shares of Common stock (the "AOL Warrant") at an exercise price equal to the initial public offering price per share. The AOL Warrant is exercisable as to one-half of the total number of shares on the first anniversary of the date of issuance and as to the balance of the shares on the second anniversary of the date of issuance. The AOL Warrant expires in October 2004. The fair value of these warrants ($775,000) has been included in prepaid expenses and is being amortized over the term of the AOL Contract, which is three years. Revenue Recognition Revenues from the sale of music CDs and cassettes sold via the Internet include shipping and handling charges and are recognized at the time of shipment. The Company records the estimated gross profit which will be lost due to current period shipments being returned in future periods as a reduction of revenues and cost of revenues in the period of shipment. The Company has numerous agreements with other companies in the entertainment business which provide for, among other things, the Company to pay a percentage of revenues, as defined, derived from customers entering the Company's website via the websites of these other companies. The Company records these amounts in sales and marketing expenses in the accompanying consolidated statements of operations. Advertising revenues are derived from the sale of advertising on the Company's websites. Advertising revenues are recognized in the period the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable. Company obligations typically include guarantees of minimum number of "impressions", or times that any advertisement is viewed by users on the Company's websites. To the extent minimum guaranteed impressions are not met, the Company defers recognition of the corresponding revenues until guaranteed impression levels are achieved. Revenues from the sale of certain advertising on the Company's websites are shared with third parties under the terms of certain agreements. The Company records such advertising revenues gross and records amounts allocable to third parties Financial Statements F-41 N2K INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) under the terms of such agreements in sales and marketing expenses. To date, amounts allocable to third parties have not been significant. For the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, advertising revenues were $3,000, $222,680, $965,954, $420,988 and $2,845,136, respectively. The Company recognizes advertising revenue as a result of barter transactions. Such revenue is recognized based on the fair value received or sold, whichever clearly estimates the fair value of the transaction, which generally consists of advertising or merchandise. Barter revenue and the corresponding expenses are recognized in the period the advertising is displayed. For the year ended December 31, 1997 and the nine months ended September 30, 1997 and 1998, $340,000, $242,945 and $1,718,354, respectively, of advertising revenue was recognized related to barter transactions. Prior to 1997, the Company had no barter transactions. International net revenues were $25,570, $650,258, $2,104,399, $1,307,794 and $3,829,103 for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, respectively. Operating and Development Expenses Operating and development expenses consist of software engineering, multimedia production, graphic design, telecommunications charges and computer operations which support the Company's products. For the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, the Company incurred costs of $724,326, $3,051,174, $4,128,249, $2,989,307 and $5,432,386, respectively, relating to research and development. These amounts are included in operating and development expenses as shown in the accompanying consolidated statements of operations. Advertising Expenses Advertising and promotional costs incurred by the Company are expensed the first time the advertising takes place. Advertising and promotion expense, excluding the amortization of the Company's marketing advances (see Note 4), was $388,748, $1,759,515, $3,156,173, $1,852,361 and $12,785,091 for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, respectively, and is included in sales and marketing expenses in the accompanying consolidated statements of operations. Charge for Purchased Research and Development In connection with the acquisition of New York N2K in February 1996 and the rock website, Rocktropolis, in June 1996 (see Note 2), $5,242,523 of the aggregate purchase price was allocated to incomplete research and development projects. Accordingly, these costs were charged to expense as of the acquisition dates. The development of these projects had not yet reached technological feasibility and the technology had no alternative future use. The acquired technology required substantial additional development by the Company. Financial Statements F-42 Loss per Common Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which superseded Accounting Principles Board Opinion No. 15. SFAS No. 128 requires dual presentation of basic and diluted earnings (loss) per share for complex capital structures on the face of the statements of operations. According to SFAS No. 128, basic earnings (loss) per share, which replaced primary earnings (loss) per share, is calculated by dividing net income (loss) available to Common stockholders by the weighted average number of Common shares outstanding for the period. Diluted earnings (loss) per share, which replaced fully diluted earnings (loss) per share, reflects the potential dilution from the exercise or conversion of securities into Common stock, such as stock options. The Company adopted SFAS No. 128 during the period ended December 31, 1997, as earlier application was not permitted. As required by SFAS No. 128, all prior- period loss per Common share data has been restated to conform with the provisions of this statement. The following is a summary of the numerators and denominators of the basic and diluted net loss per Common share computations:
Nine Months Ended Year Ended December 31 September 30 --------------------------------------- -------------------------- 1995 1996 1997 1997 1998 ----------- ------------ ------------ ------------ ------------ Loss (numerator)........ $(1,594,800) $(18,907,909) $(28,736,236) $(15,539,894) $(54,183,258) Shares (denominator).... 1,566,955 2,760,948 4,885,556 2,994,770 13,434,772 Per share amount........ $ (1.02) $ (6.85) $ (5.88) $ (5.19) $ (4.03)
Diluted net loss per share is the same as basic net loss per share as no additional shares for the potential dilution from the exercise or conversion of securities into Common stock are included in the denominator as the result is antidilutive due to the Company's losses. Therefore, options to purchase 2,195,905 shares of Common stock at a weighted average exercise price of $10.56 per share, warrants to purchase 599,554 shares of Common stock at a weighted average exercise price of $14.16 per share and the AOL Purchase were outstanding as of September 30, 1998, but were not included in the computation of diluted net loss per Common share. Major Supplier and Distribution Agreement The Company had a contract with Valley Media, Inc. ("Valley"), which was renegotiated in January 1998. Valley is currently the Company's primary provider of order fulfillment for direct-to-consumer music products. The Company has no fulfillment operation or facility of its own and, accordingly, is dependent upon maintaining its existing relationship with Valley or establishing a new fulfillment relationship with one of the few other fulfillment operations. There can be no assurance that the Company will maintain its relationship with Valley or that it will be able to find an alternative, comparable supplier capable of providing fulfillment services on terms satisfactory to the Company should its relationship with Valley terminate. An unanticipated termination of the Company's relationship with Valley, particularly during the fourth quarter of the calendar year in which a high percentage of recorded music sales are made, could materially adversely affect the Company's results of operations for the quarter in which such termination occurred even if the Company was able to establish a relationship with an alternative fulfillment house. The renegotiated contract expires in Financial Statements F-43 February 2000. Valley may terminate its existing agreement with the Company upon 30 days' written notice, in the event that Valley decides to discontinue providing services to all of Valley's online service customers. To date, Valley has satisfied the Company's requirements on a timely basis. However, to the extent that Valley does not have sufficient capacity and is unable to satisfy on a timely basis increasing requirements of the Company, such capacity constraint would have a material adverse effect on the Company's business, results of operations and financial condition. For the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, the Company incurred costs related to this relationship of approximately $83,000, $1,439,000, $5,941,000, $3,262,000 and $18,395,000, respectively, which are included in cost of revenues on the accompanying consolidated statements of operations. As of December 31, 1996 and 1997 and September 30, 1998, relative to this relationship, Valley was due approximately $25,000, $1,037,000 and $1,256,000, respectively, from the Company, which is included in accrued merchandise costs on the accompanying consolidated balance sheets. Reclassifications The consolidated financial statements for prior periods have been reclassified to conform with the current period's presentation. 2. ACQUISITIONS: Acquisition of New York N2K On February 13, 1996, New York N2K merged with and into Telebase in a transaction accounted for as a purchase. Telebase issued 1,347,857 shares of Common stock valued at $3,073,118 and 1,347,860 shares of Series E Preferred stock valued at $1,078,286 in exchange for all of the outstanding Common stock of New York N2K. The fair value assigned to the Common stock was determined based upon an independent appraisal. Telebase is the surviving corporation; however, the corporate name of the surviving corporation was changed to N2K Inc. Telebase was the acquirer in this purchase. The results of the acquired business have been included in the consolidated financial statements from the date of acquisition. The total purchase price of $4,375,481, including transaction costs, was allocated to the assets acquired and liabilities assumed based on their respective fair values. The Company recorded $4,133,281 of the purchase price as a charge to the consolidated statements of operations on the acquisition date as it was related to the fair value of incomplete research and development projects. The remaining balance of the purchase price of $280,000 was allocated to acquired technology costs and is being amortized over 5 years on a straightline basis. If the acquisition of New York N2K had occurred on January 1, 1995, the unaudited pro forma information, after giving effect to the pro forma adjustments described below, would have been as follows:
Year Ended December 31 ------------------------- 1995 1996 ----------- ------------ Unaudited pro forma revenues.................... $ 240,131 $ 1,724,331 =========== ============ Unaudited pro forma loss from continuing operations..................................... $(4,129,250) $(13,243,155) =========== ============ Unaudited pro forma net loss.................... $(2,839,579) $(15,158,516) =========== ============ Unaudited pro forma basic and diluted net loss per Common share............................... $ (1.81) $ (5.49) =========== ============
Financial Statements F-44 The unaudited pro forma information does not purport to be indicative of the results that would have been attained if the operations had actually been combined for the periods presented and is not necessarily indicative of the operating results to be expected in the future. The pro forma adjustments consist of compensation charges for certain executive officers who did not receive any compensation from New York N2K prior to the merger and the amortization of the acquired technology costs. The amount of the compensation pro forma adjustment was $500,000 and $75,000 for the years ended December 31, 1995 and 1996, respectively. The amount of the acquired technology cost amortization pro forma adjustment was $46,667 and $7,000 for the years ended December 31, 1995 and 1996, respectively. Additionally, the above unaudited pro forma information excludes the one-time charge of $4,133,281 associated with the writeoff of purchased research and development costs in connection with the New York N2K acquisition and includes the writeoff of purchased research and development costs associated with the purchase of the Rocktropolis website for the year ended December 31, 1996. This one-time charge would have increased the unaudited pro forma basic and diluted net loss per Common share for the year ended December 31, 1996 by $1.50. On February 13, 1996, the Company sold 3,750,000 shares of Series E Preferred stock at $.80 per share and received gross proceeds of $3,000,000 (see Note 7). Acquisition of Rocktropolis Website On June 21, 1996, the Company acquired the assets that relate to the rock website known as Rocktropolis, from Rocktropolis Enterprises, LLC for $633,000 in cash and 44,790 shares of Common stock valued at $537,498. The total purchase price of $1,209,242, including transaction costs, was allocated to the assets acquired based on their respective fair values. The Company recorded $1,109,242 of the purchase price as a charge to the consolidated statements of operations on the acquisition date as it was related to the fair value of incomplete research and development projects. The remaining balance of the purchase price was allocated to the Rocktropolis tradename and is being amortized on a straightline basis over 5 years. The Common stock issued in connection with the acquisition of the Rocktropolis website could have been "put" back to the Company at a price of $12 per share at any time beginning 366 days after the issuance date if there was not at that time a public market for shares of the Company's Common stock. Accordingly, the value of these shares ($537,498) was not included in Stockholders' equity in the accompanying consolidated balance sheets prior to the consummation of the initial public offering. The "put" rights expired upon the consummation of the initial public offering. 3. DISCONTINUED OPERATIONS: Online Information Services Business In April 1997, the Company's Board of Directors approved a formal plan of disposal for its online information services business. The online information services business was accounted for as a discontinued operation with a measurement date of April 4, 1997. The Company expected that the sale of the online information services business would result in a gain on the disposal of the segment's net assets which would be sufficient to offset the losses of the segment from the measurement date to the disposal date. As a result, no amounts were accrued in the accompanying Financial Statements F-45 consolidated financial statements relating to the disposal of the segment. The net losses from discontinued operations from the measurement date to the disposal date were recorded as an adjustment to the net assets of the discontinued operations in the accompanying consolidated balance sheets. The accompanying consolidated financial statements reflect the operating results and balance sheet items of the discontinued operations separately from continuing operations. Effective August 1, 1997, the Company entered into an agreement for the sale of all of the net assets of the on-line information services business, except its accounts receivable and accounts payable. The total purchase price of $6,000,000 consisted of $3,000,000 which was paid in cash at closing, and up to an additional $3,000,000 pursuant to an earn-out which, if and to the extent earned, is payable at the purchaser's sole discretion on March 31, 1999 and September 30, 1999, either in cash or that number of shares of its Common stock having a market value equal to the amount to be paid. The earn-out is based upon the revenues of the business which are generated from July 1, 1997 through December 31, 1998. If revenues during the above period do not meet the specified target, the earn-out is reduced. If revenues during the above period exceed the specified target, the earn-out is increased, up to a maximum of $1,000,000. The Company will record the earn-out as a gain on the sale of discontinued operations when realized. At closing, the Company recorded a gain on the sale of discontinued operations of $1,574,493. The gain was net of a provision for certain disposal costs including accruals for future commitments relating to severance and doubtful accounts relating to the on-line information services business's accounts receivable. These costs are reflected in accrued discontinued operations disposal costs (see Note 5). In connection with the sale, the Company entered into a services agreement under which it will provide certain services and support personnel to the purchaser through September 1999 for a fixed monthly fee. N2K Encoded Music See Note 1, The Company--Background and Recent Events Revenues and income (loss) from the discontinued operations in the accompanying consolidated statements of operations were:
Nine Months Ended Year Ended December 31 September 30, ------------------------------------ ------------------------- 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ------------ Revenues: Online information services............. $10,976,711 $7,855,758 $2,411,057 $2,411,057 $ -- N2K Encoded Music..... -- -- 3,154,339 2,391,406 2,754,375 ----------- ----------- ----------- ----------- ------------ $10,976,711 $7,855,758 $5,565,396 $4,802,463 $ 2,754,375 =========== =========== =========== =========== ============ Income (loss) before income taxes: Online information services............. $ 1,289,971 $ (968,674) $ (415,970) $ (415,970) $ -- N2K Encoded Music..... -- (946,687) (9,267,496) (4,390,709) (12,307,531) ----------- ----------- ----------- ----------- ------------ 1,289,971 (1,915,361) (9,683,466) (4,806,679) (12,307,531) Income taxes............ 300 -- -- -- -- ----------- ----------- ----------- ----------- ------------ Income (loss)........... $ 1,289,671 $(1,915,361) $(9,683,466) $(4,806,679) $(12,307,531) =========== =========== =========== =========== ============
Financial Statements F-46 The assets and liabilities of the online information services business have been reclassified in the accompanying consolidated balance sheets to separately identify them as net assets of discontinued operations. A summary of these net assets of discontinued operations as of December 31, 1996 is as follows: Current assets, excluding accounts receivable................... $ 11,891 Accounts receivable, net........................................ 1,033,734 Property and equipment, net..................................... 278,875 Current liabilities............................................. (1,310,054) ----------- Net assets of discontinued operations........................... $ 14,446 ===========
The assets and liabilities of N2K Encoded Music have been reclassified in the accompanying consolidated balance sheets to separately identify them as net assets (liabilities) of discontinued operations. A summary of these net assets (liabilities) of discontinued operations as of December 31, 1996 and 1997 and September 30, 1998 is as follows:
December 31, December 31, September 30, 1996 1997 1998 ------------ ------------ ------------- Current assets, excluding accounts receivable....................... $ 200,349 $ 434,630 $ 511,577 Accounts receivable, net.......... -- 178,634 111,828 Property and equipment, net....... -- 897,535 779,507 Current liabilities............... (56,548) (2,030,054) (6,391,933) Non-current liabilities........... -- (186,501) (150,952) --------- ----------- ----------- Net assets (liabilities) of discontinued operations.......... $ 143,801 $ (705,756) $(5,139,973) ========= =========== ===========
4. PREPAID EXPENSES: Prepaid expenses as of December 31, 1996 and 1997 and September 30, 1998 consist of the following:
December 31 -------------------- September 30, 1996 1997 1998 -------- ----------- ------------- Marketing Advances: AOL.................................. $ -- $12,775,000 $ 12,775,000 Excite, Inc. ("Excite").............. -- 3,300,000 4,300,000 Netscape Communications Corporation ("Netscape")........................ -- 3,000,000 3,185,837 Ticketmaster Ticketing Company, Inc. ("Ticketmaster").................... -- -- 4,000,000 Disney Online........................ -- -- 833,334 AOL Bertelsmann Online............... -- -- 825,000 Infoseek Corporation ("Infoseek").... -- -- 250,000 Other.................................. 703,657 340,035 1,178,858 -------- ----------- ------------ 703,657 19,415,035 27,348,029 Less--Accumulated amortization of marketing advances.................... -- (2,769,741) (17,696,193) -------- ----------- ------------ $703,657 $16,645,294 $ 9,651,836 ======== =========== ============
Financial Statements F-47 The Company is amortizing the costs associated with its marketing advances over the contractual terms of the strategic alliance which is primarily one to three years and the amortization method is primarily on a straight-line basis or as impressions are received. Amortization expense for the year ended December 31, 1997 and the nine months ended September 30, 1997 and 1998 was $2,769,741, $158,000 and $14,926,452, respectively. These amounts are included in sales and marketing expenses in the accompanying financial statements. The Company continually evaluates the realizability of the marketing advances, and if necessary, will write-down the asset to its net realizable value based on estimates of undiscounted future cash flows from each advance over the remaining useful life of the asset. As of September 30, 1998, no such write- down was required. As of September 30, 1998, the net book value of the marketing advances relating to Ticketmaster is approximately $2,387,000. In November 1998, a legal action was filed which may affect the realizability of this net asset (see legal proceedings elsewhere in this Joint Proxy/Prospectus and Note 10). As a result, the Company may be required to write down the net book value relating to the Ticketmaster marketing advance in the fourth quarter of 1998. As of September 30, 1998, long-term marketing advances were $814,163 and are classified as other assets on the accompanying consolidated balance sheet. 5. OTHER ACCRUED LIABILITIES: Other accrued liabilities as of December 31, 1996 and 1997 and September 30, 1998 consist of the following:
December 31 --------------------- September 30, 1996 1997 1998 ---------- ---------- ------------- Accrued advertising.................... $ -- $ 652,138 $3,769,484 Accrued discontinued operations disposal costs (Note 3)............... -- 671,407 65,778 Other.................................. 1,571,012 865,646 2,435,898 ---------- ---------- ---------- $1,571,012 $2,189,191 $6,271,160 ========== ========== ==========
6. CREDIT AGREEMENTS: The Company had a line of credit with a bank of $2,000,000 which expired on June 30, 1998. The Company currently does not have a line of credit. There were no borrowings on the line of credit during 1998. For the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997, the maximum amount outstanding was $400,000, $600,000, $850,000 and $850,000, respectively. For the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997, the weighted average interest rate was 8.7%, 8.7%, 8.5% and 8.5%, respectively. Interest expense for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 was $7,360, $14,992, $54,711 and $48,672, respectively. Financial Statements F-48 7. PREFERRED STOCK: At December 31, 1996, Preferred stock consisted of the following: Preferred stock, $.001 par value, 40,000,000 shares authorized and designated as follows-- Series A, 500,000 shares authorized, 488,838 shares issued and outstanding..................................................... $ 489 Series B, 625,000 shares authorized, issued and outstanding...... 625 Series C, 2,857,143 shares authorized, 2,142,857 shares issued and outstanding................................................. 2,143 Series D, 1,000,000 shares authorized, 800,000 shares issued and outstanding..................................................... 800 Series E, 6,007,060 shares authorized, issued and outstanding.... 6,007 Series F, 5,333,333 shares authorized, issued and outstanding.... 5,333 Series G, 15,000,000 shares authorized in 1997................... -- ------- $15,397 =======
In January 1988, the Company issued 488,838 shares of Series A Preferred stock at $1.25 per share upon the conversion of certain liabilities. The Series A Preferred shares were converted into 171,276 shares of Common stock upon the consummation of the initial public offering. In March 1988, the Company sold 625,000 shares of Series B Preferred stock for $1,000,000. In August 1988, the Company sold 2,142,857 shares of Series C Preferred stock for $3,000,000. In 1993, the Series C Preferred stockholder sold all of its shares to various outside investors, as well as to certain officers of the Company. In June 1997, certain officers converted 120,000 shares of their Series C Preferred shares into 33,600 shares of Common stock. The Series B and Series C Preferred shares were converted into 178,569 and 566,399 shares of Common stock, respectively, upon the consummation of the initial public offering. In September 1994, the Company sold 800,000 shares of Series D Preferred stock at $2 per share and received net proceeds of $1,559,084. The Series D Preferred shares were converted into 615,381 shares of Common stock upon the consummation of the initial public offering. On February 13, 1996, the Company issued 1,347,860 shares of Series E Preferred stock in connection with the acquisition of New York N2K (see Note 2). Also, on February 13, 1996, the Company sold 3,750,000 shares of Series E Preferred stock for $.80 per share and received proceeds of $3,000,000. In April and May 1996, the Company sold 909,200 shares of Series E Preferred stock at $.80 per share and received proceeds of $727,360. The number of shares of Series E Preferred stock sold to certain officers and directors of the Company at $.80 per share was 3,299,992. The Series E Preferred shares were converted into 1,501,755 shares of Common stock upon the consummation of the initial public offering. In May and June 1996, the Company sold 5,333,333 shares of Series F Preferred stock at $3 per share and received net proceeds of $15,268,284. The Series F Preferred shares were converted into 1,333,321 shares of Common stock upon the consummation of the initial public offering. In April 1997, the Company sold 2,480,329 shares of Series G Preferred stock at $3 per share, including 17,000 shares issued as a finder's fee, and received gross proceeds of $7,389,987 and net proceeds of $7,215,531. The Series G Preferred shares were converted into 620,077 shares of Common stock upon the consummation of the initial public offering. The number of shares of Series G Preferred stock sold to certain officers and directors of the Company at $3 per share was 333,333. Financial Statements F-49 Additionally, the Company issued warrants to purchase 48,555 shares of Common stock at an exercise price of $12 per share as a placement fee relating to this transaction. 8. STOCKHOLDERS' EQUITY: Common Stock Options Under the Company's 1987 Incentive Stock Option Plan, options to purchase 775,000 shares of Common stock could have been granted to certain officers, directors and employees. The options expire ten years from the date of grant and vest over four years. Expiration dates range from 1998 to 2005. As of September 30, 1998, there are 162,273 options outstanding and no additional grants will be made under this plan. Additionally, the Company has 24,132 nonqualified stock options outstanding as of September 30, 1998, with expiration dates ranging from March 2001 to January 2005. Currently, these options are fully vested. In February 1996, the Company established the 1996 Stock Option Plan, which authorized options to purchase 1,650,000 shares of Common stock, as amended and restated on June 20, 1996. On May 7, 1998, the Company increased the number of shares available to 2,150,000. Under the 1996 Stock Option Plan, options may be granted to officers, directors and other key employees. The options expire ten years from the date of grant and vest over four years, unless specifically agreed to otherwise. The exercise price is fixed at the grant date and equals at least 100% of the fair market value of the Common stock on the date of grant. As of September 30, 1998, there were 1,067,940 options outstanding and 498,272 options available for grant under the 1996 Stock Option Plan. Subsequent to September 30, 1998, under the 1996 Stock Option Plan, 47,200 options were granted, no options were exercised and 10,572 options were terminated. In July 1997, the Company granted 324,999 stock options to Lawrence L. Rosen, Jonathan V. Diamond and Robert David Grusin. The options expire seven years from the date of grant and vest over four years. The exercise price is equal to the fair market value of the Common stock on the date of grant. These options were not granted under any of the Company's plans. In December 1996, the Company granted 4,050 nonqualified stock options to individuals who were neither employees or directors of the Company. The options expire ten years from the date of grant and vested immediately upon grant. The exercise price is equal to the fair market value of the Common stock on the date of grant. These options were not granted under any of the Company's plans. In April 1997, the Company's Board of Directors approved the issuance of options to purchase 15,000 shares of Common stock, which were not granted pursuant to any of the Company's option plans, to nonemployees of the Company. These options were granted at the time of the initial public offering and at an exercise price equal to the price for shares sold in the initial public offering ($19.00 per share). In accordance with SFAS No. 123, the Company recorded a charge for the fair value of these options in the accompanying consolidated statement of operations. In April 1997, the Board of Directors adopted and the stockholders of the Company approved, the 1997 Directors' Stock Option Plan (the "Directors' Plan") pursuant to which each member of the Board of Directors, who is not an employee of the Company, who is elected or continues as a member of the Board of Directors is entitled to receive annually, options to purchase 12,500 shares Financial Statements F-50 of Common stock at an exercise price equal to fair market value; provided, however, that no director may receive under the Directors' Plan, options to purchase an aggregate of more than 125,000 shares of Common stock. Each option grant under the Directors' Plan vests after the first anniversary of the date of grant and expires three years thereafter. The maximum number of shares of Common stock reserved for issuance under the Directors' Plan is 500,000 shares (subject to adjustment for certain events such as stock splits and stock dividends). In April 1997, the Board of Directors authorized the issuance of 25,000 options under the Directors' Plan at an exercise price equal to the price for shares sold in the initial public offering ($19.00 per share). Additionally, in May 1998, the Board of Directors authorized the issuance of 25,000 options under the Directors' Plan at an exercise price per share equal to $23.38. Information relative to all of the Company's stock option activity is as follows:
Weighted Average Exercise Exercise Price Price Aggregate Options (Per Share) (Per Share) Proceeds --------- ------------- ----------- ----------- Balance as of December 31, 1994....................... 396,891 $ 2.50-$ 5.00 $ 3.52 $ 1,398,884 Granted................... 231,375 2.60- 3.20 2.63 608,325 Exercised................. (25) 3.20 3.20 (80) Terminated................ (5,850) 3.20 3.20 (18,720) --------- ------------- ------ ----------- Balance as of December 31, 1995....................... 622,391 2.50- 5.00 3.19 1,988,409 Granted................... 1,020,169 3.20- 12,00 4.83 4,922,483 Exercised................. (2,145) 2.60- 3.20 2.80 (6,006) Terminated................ (102,363) 2.50- 5.00 3.05 (311,994) --------- ------------- ------ ----------- Balance as of December 31, 1996....................... 1,538,052 2.50- 12.00 4.29 6,592,892 Granted................... 866,194 12.00- 21.00 16.59 14,374,381 Exercised................. (242,417) 2.60- 12.00 3.30 (798,770) Terminated................ (102,463) 2.60- 21.00 6.89 (706,120) --------- ------------- ------ ----------- Balance as of December 31, 1997....................... 2,059,366 2.50- 21.00 9.45 19,462,383 Granted................... 378,900 9.94- 32.50 21.10 7,996,089 Exercised................. (60,794) 2.60- 12.00 4.05 (246,515) Terminated................ (148,367) 2.60- 32.50 21.69 (3,217,581) --------- ------------- ------ ----------- Balance as of September 30, 1998....................... 2,229,105 $ 2.50- 32.50 $10.76 $23,994,376 ========= ============= ====== ===========
The following table summarizes information relating to all of the Company's stock option activity based upon each exercise price.
Weighted Weighted Weighted Average Average Average Exercise Exercise Range of Options Remaining Price of Options Price of Exercise Outstanding Contractual Outstanding Exercisable Exercisable Prices at September 30, Life Options at September 30, Options (Per Share) 1998 (Years) (Per Share) 1998 (Per Share) ----------- ---------------- ----------- ----------- ---------------- ----------- $ 2.50-$ 3.52........... 988,152 7.1 $ 3.29 552,314 $ 3.26 5.00............ 3,000 3.2 5.00 3,000 5.00 9.94- 14.63........... 510,077 6.1 11.83 380,900 12.00 19.00- 21.00........... 658,176 9.1 19.60 32,500 19.00 23.58- 32.50........... 69,700 7.7 25.73 15,000 25.00 --------- --- ------- ------ 2,229,105 7.5 983,714 $ 7.45 ========= === ======= ======
Financial Statements F-51 The Company accounts for all of its option plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized. In 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation plans. This statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. SFAS No. 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for the plan. Had the Company recognized compensation cost for its stock option plans consistent with the provisions of SFAS No. 123, the Company's net loss in 1995, 1996 and 1997 and the basic and diluted net loss per Common share in 1995, 1996 and 1997 would have been increased to the following pro forma amounts:
1995 1996 1997 ----------- ------------ ------------ Net Loss: As reported..................... $(1,594,800) $(18,907,909) $(28,736,236) =========== ============ ============ Pro Forma....................... $(2,218,800) $(21,681,909) $(32,061,236) =========== ============ ============ Basic and Diluted Net Loss per Common share: As reported..................... $ (1.02) $ (6.85) $ (5.88) =========== ============ ============ Pro forma....................... $ (1.42) $ (7.85) $ (6.56) =========== ============ ============
Since the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the pro forma compensation cost disclosed above may not be representative of that to be expected in future years. The weighted average fair value of the stock options granted during 1995, 1996 and 1997 was $9.93, $8.62 and $8.40, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
1995 1996 1997 ------- ------- ------- Risk-free interest rate........................... 6.5% 5.5% 6.1% Expected dividend yield........................... 0.0% 0.0% 0.0% Expected life..................................... 6 Years 6 Years 6 Years Expected volatility............................... 0.0% 0.0% 33.1%
Common Stock Warrants In February 1996, the Company issued warrants to purchase 37,500 shares of Common stock at an exercise price of $3.20 per share. In January 1998, these warrants were exercised. In May and June 1996, the Company issued warrants to purchase 66,999 shares of Common stock at an exercise price of $12 per share. These warrants expire in 2003. In April 1997, the Company issued warrants to purchase 48,555 shares of Common stock at an exercise price of $12 per share in connection with the Series G Preferred stock financing. These warrants expire in April 2004. In July and August 1997, the Company issued warrants to purchase an aggregate of 299,264 shares of Common stock at an exercise price of $12 per share in connection with the issuance of the Management Notes and Senior Notes (see Note 1). Additionally, in connection with the AOL agreements, discussed in Note 1, the Company granted AOL a warrant for the future purchase of up to 184,736 shares of Common stock Financial Statements F-52 at an exercise price equal to the initial public offering price per share, which was $19.00 per share. The AOL Warrant is exercisable as to one-half of the total number of shares on the first anniversary of the date of issuance and as to the balance of the shares on the second anniversary of the date of issuance. The AOL Warrant expires in October 2004. Employee Stock Purchase Plan In June 1996, the Company established the 1996 Employee Stock Purchase Plan (the "ESP Plan"). The number of shares available to purchase under the ESP Plan is 1,500,000 shares of Common stock. The ESP Plan was effective on February 1, 1998. As of September 30, 1998, the Company has issued 9,861 shares under the ESP Plan. The employee's purchase price is the lower of (a) 85% of the fair market value of a share of the Company's Common stock on the first day of the Purchase period (as defined) and (b) 85% of the fair market value of a share of the Company's Common stock on the last day of the Purchase period (as defined). 9. INCOME TAXES: The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires an asset-and-liability approach in accounting for income taxes. Under this method, deferred income taxes are computed based on the differences between financial reporting and income tax reporting of assets and liabilities using enacted tax rates. As of December 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $40,225,000, which begin to expire in 2001. Significant components of deferred income taxes consist of the following:
Year Ended December 31 ------------------------- 1996 1997 ----------- ------------ Gross deferred tax assets: Net operating loss carryforwards.............. $ 8,534,000 $ 16,238,000 Depreciation and amortization................. 13,000 -- Research and development expenses not currently deductible......................... -- 2,463,000 Accruals not currently deductible............. 413,000 1,503,000 ----------- ------------ 8,960,000 20,204,000 ----------- ------------ Gross deferred tax liabilities: Depreciation and amortization................. -- (183,000) Other deferred tax liabilities................ (17,000) (1,000) ----------- ------------ (17,000) (184,000) ----------- ------------ Less-Valuation allowance........................ (8,943,000) (20,020,000) ----------- ------------ $ -- $ -- =========== ============
The net deferred tax asset increased $11,077,000 during 1997 due principally to net operating loss carryforwards and research and development expenses which will be deductible in future years. Based on changes in ownership of the Company, utilization of the net operating loss carryforwards may be subject to annual limitations. The Company has recorded a valuation allowance for the net deferred tax asset as the Company concluded that the net deferred tax asset did not meet the recognition criteria under SFAS No. 109. Financial Statements F-53 10. COMMITMENTS AND CONTINGENCIES: The Company has entered into various operating and capital leases for office space, computer equipment and office equipment. Assets acquired under capital leases at a cost of $868,436, $1,591,387 and $1,591,387, less accumulated amortization of $477,535, $707,587 and $967,570, are included in property and equipment in the accompanying consolidated balance sheets as of December 31, 1996 and 1997 and September 30, 1998, respectively. Certain capital leases are secured by certificates of deposit totaling $167,000, which are shown as restricted cash in other assets in the accompanying consolidated balance sheets. Interest rates on these capital leases range from 6.0% to 19.0%. Future minimum lease payments under operating and capital leases as of September 30, 1998, are as follows:
Operating Capital ---------- -------- 1998.................................................... $ 307,469 $107,104 1999.................................................... 1,222,406 293,291 2000.................................................... 1,202,269 206,321 2001.................................................... 1,023,501 48,290 2002.................................................... 558,476 8,048 ---------- -------- Total minimum lease payments............................ $4,314,121 663,054 ========== Less--Amount representing interest...................... (48,179) -------- Present value of minimum capital lease payments......... $614,875 ========
Rent expense under the operating leases for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, was $100,870, $529,186, $654,595, $557,738 and $852,461, respectively. The Company has entered into agreements with various content providers, vendors and recording artists. The remaining terms of these agreements range from one to five years. These agreements provide for the payment of royalties, bounties and certain guaranteed amounts. Other than the payments that the Company is required to make for its strategic alliances (discussed below), minimum guaranteed payments required under such agreements are insignificant. The Company has entered into a number of strategic alliance agreements, including agreements with AOL, Excite, Netscape, Infoseek, Ticketmaster, AOL Bertelsmann Online, Disney Online and Microsoft Corporation. The Company's commitments, as of September 30, 1998, under all of its strategic alliance agreements include cash payments of approximately $8,900,000, $14,400,000, $10,000,000 and $6,500,000 for the remaining three months of 1998, and the years ending December 31, 1999, 2000 and 2001, respectively. Payments totaling $7,900,000 were made under the Company's strategic alliances during the nine months ended September 30, 1998. Subsequent to September 30, 1998, $4,500,000 was paid under the Company's strategic alliances. The Company has employment agreements with certain officers that provide for, among other things, salary, bonus, severance and change in control provisions. Upon closing of the merger with CDnow, several executives will be entitled to certain payments and benefits based upon change of control provisions in their employment agreements. These entitlements are approximately $1,300,000. The Company is party to various claims arising in the ordinary course of business. Although the ultimate outcome of these matters is presently not determinable, management believes that the Financial Statements F-54 resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. The Company and its directors are defendants in a consolidated purported class action in the U.S. District Court for the Southern District of New York entitled In re N2K Inc. Securities Litigation (Docket No. 98 CIV 3304 (HB)) (the "Consolidated Action"). The Consolidated Action consolidates two purported class actions, entitled Kuhn v. N2K Inc. et al. (Docket No. 98 CIV 4360 (HB)) and Bender v. Rosen et al. (Docket No. 98 CIV 3304 (HB)) that were previously discussed in the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 and March 31, 1998, respectively. The Consolidated Action is a purported class action on behalf of Common stockholders and seeks to recover unspecified damages and other relief, as well as recovery of costs and expenses, stemming from alleged violations of the Securities Act of 1933, as amended, in connection with the public offering of the shares of the Company's Common stock in April 1998. The Consolidated Action alleges that, among other things, the defendants failed to disclose N2K's first quarter financial results in the registration statement for the April 1998 public offering. The Company believes that the claims in the Consolidated Action are without merit and is vigorously defending the action. The defendants moved to dismiss the compliant on August 31, 1998 for failure to state a claim and/or for failure to plead fraud with the requisite particularity. The motion to dismiss has been fully briefed and is awaiting decision. On or about October 27, 1998, an action entitled Rubin v. Rosen et al. (Docket No. 16743NC) was filed against the Company, the Company's directors and CDnow Inc. ("CDnow") in the Chancery Court of Delaware for the County of New Castle. The Rubin action is a purported class action on behalf of all Common stockholders of N2K, alleging, inter alia, that the consideration to be received by the purported class in connection with the proposed merger transaction between the Company and CDnow (the "Merger") is unfair and grossly inadequate and that the individual defendants breached their fiduciary duties in connection with the Merger. The Rubin action alleges that the consideration for the Company's stockholders is inadequate because (1) the value of the Company's stock materially exceeds the consideration to be received by the Company's stockholders in the Merger, (2) the individual defendants did not value the Company through a bidding or "market check" mechanism, and (3) the merger agreement does not protect the Company's stockholders from a decline in the price of CDnow stock. Plaintiffs seek, inter alia, injunctive relief, and unspecified damages, as well as costs and expenses. The Company believes that the claims are without merit and intends to defend the action vigorously. The Company and its directors moved to dismiss the complaint on December 30, 1998, for failure to state a claim. No briefing schedule on the motion has been set. On or about November 4, 1998, an action entitled Ticketmaster Ticketing Co. v. N2K Inc. (Docket No. BC200194) was filed against the Company in California Superior Court for the County of Los Angeles. The Ticketmaster action alleges that the Company breached a marketing and advertising contract dated April 23, 1998 between Ticketmaster and the Company, which the Company terminated effective October 31, 1998, based on alleged breaches of the agreement by Ticketmaster as well as other tortious conduct. Ticketmaster seeks damages in an amount not less than $8,000,000, plus pre- and post-judgment interest, as well as fees and costs. The Company has not yet answered the complaint. The Company believes that it has substantial defenses to the claim asserted, intends to defend the action vigorously and intends to file a cross-compliant for affirmative relief. Financial Statements F-55 On or about November 12, 1998, an action entitled Metallica v. N2K Inc. et al. (Docket No. 98-9122 GHK (ANx)) was filed in the United States District Court for the Central District of California against N2K, Metro Independent Records, Richard Driscoll, Dutch East India Trading, and ten unnamed persons or entities. The Metallica action alleges that N2K and the other defendants have infringed copyrights and trademarks owned by Metallica and the other plaintiff, Creeping Death Music, and have violated California state law by manufacturing, distributing, advertising and selling a compact disc entitled "Metallica, Bay Area Thrashers, The Early Years." Plaintiffs seek, inter alia, injunctive relief including, but not limited to, an order requiring defendants to cease their alleged copyright and trademark infringements, damages, including but not limited to treble plaintiffs' damages and defendants' profits attributable to the alleged infringements, other damages and injunctive relief, as well as fees and costs. N2K has not yet answered or responded to the complaint. N2K believes that the claims against it are without merit and expects such claims will be resolved through negotiation with plaintiffs and without material adverse effect to N2K. N2K and 17 other entities have been named as defendants in a civil action captioned Interactive Gift Express v. Compuserve, Inc., et al., which is pending n the U.S. District Court, Southern District of New York, Docket 95 CV 6871 (BSJ). N2K has also been named as defendant in a civil action captioned Parsec Sight/Sound, Inc. v. N2K Inc., which is pending in the U.S. District. Court of Pennsylvania, Western District, Docket 98 CV 0118. The plaintiffs in each of these actions allege infringement of certain intellectual property rights, and each seeks treble damages and costs in an unspecified amount, as well as other declaratory and injunctive relief. In the Interactive Gift action, the court has issued a preliminary ruling favorable to defendants. Plaintiffs have stated that they will consent to entry of judgment against them in order to speed their appeal of the court's ruling. In the Parsec action, N2K has answered the complaint and discovery is ongoing. N2K believes that the claims against it in each action are without merit and intends to vigorously defend against each of them. Moreover, N2K believes that these lawsuits, even if adversely determined, will not have a material adverse effect on N2K's business, financial condition or results of operations. Due to the fact that material may be downloaded from websites and may be subsequently distributed to others, there is potential that claims will be made against the Company for defamation, negligence, copyright or trademark infringement or other theories based on the nature and content of such material. Although the Company carries general liability insurance, the Company's insurance may not cover potential claims of this type or may not be adequate to cover all costs incurred in defense of potential claims or to indemnify the Company for all liability that may be imposed. Any costs or imposition of liability that is not covered by insurance or in excess of insurance coverage could have a material adverse effect on the Company's business, results of operations and financial condition. The Company is currently not aware of any such claims. 11. DEFINED CONTRIBUTION PLAN: The Company maintains a Matched Savings Plan (the "Plan") in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The Plan covers substantially all fulltime employees of the Company. Participants may contribute up to 15% of their total compensation to the Plan, with the Company matching 30% of the participant's contribution, limited to 6% of the participant's total compensation. For the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, the Company contributed $18,200, $52,400, $70,927, $65,234 and $97,173 , respectively, to the Plan. Financial Statements F-56 INDEPENDENT AUDITORS' REPORT To the Board of Directors N2K Inc. New York, New York We have audited the balance sheet of N2K Inc. (a New York corporation) as of December 31, 1995, and the related statements of operations, stockholders' equity and cash flows for the period beginning March 7, 1995 (date of inception) through December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of N2K Inc. as of December 31, 1995 and the results of its operations and its cash flows for the period beginning March 7, 1995 through December 31, 1995 in conformity with generally accepted accounting principles. As described in Note F, on February 13, 1996, the Company effected a business combination in which it merged with a company formerly known as Telebase Systems, Inc. New York, New York January 31, 1996 With respect to Note F February 13, 1996 RICHARD A. EISNER & COMPANY, LLP Financial Statements F-57 N2K INC. BALANCE SHEET DECEMBER 31, 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents.......................................... $245,423 Accounts receivable................................................ 57,281 Prepaid expenses................................................... 2,057 -------- Total current assets............................................. 304,761 Property and equipment, net........................................ 311,812 Goodwill........................................................... 4,467 Deposits........................................................... 101,621 -------- TOTAL............................................................ $722,661 ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of capital lease obligations.................... $ 57,407 Accounts payable and accrued expenses.............................. 207,144 -------- Total current liabilities........................................ 264,551 Capital lease obligations.......................................... 136,184 Deferred rent payable.............................................. 20,038 -------- Total liabilities................................................ 420,773 -------- Commitments and contingencies Stockholders' equity: Common stock, $.01 par value, 2,000,000 authorized, 1,000,000 shares issued and outstanding..................................... 10,000 Additional paid-in capital......................................... 990,000 Accumulated (deficit).............................................. (698,112) -------- Total stockholders' equity....................................... 301,888 -------- TOTAL............................................................ $722,661 ========
The accompanying notes to financial statements are an integral part hereof. Financial Statements F-58 N2K INC. STATEMENT OF OPERATIONS FOR THE PERIOD BEGINNING MARCH 7, 1995 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
Revenues: Consulting revenue................................................ $ 132,626 Network revenue................................................... 11,000 --------- Total revenue................................................... 143,626 --------- Expenses: Selling, general and administrative expenses...................... 767,628 Purchased research and development................................ 56,262 Depreciation and amortization..................................... 16,575 --------- Total expense................................................... 840,465 --------- Operating loss...................................................... (696,839) Interest expense, net of interest income of $185.................... (1,273) --------- Net loss............................................................ $(698,112) =========
The accompanying notes to financial statements are an integral part hereof. Financial Statements F-59 N2K INC. STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD BEGINNING MARCH 7, 1995 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995
Additional Common Paid in Accumulated Stock Capital Deficit Total -------- ---------- ----------- ---------- Sale of common stock............... $ 10,000 $990,000 -- $1,000,000 Net loss........................... -- -- $(698,112) $ (698,112) -------- -------- --------- ---------- Balance--December 31, 1995......... $ 10,000 $990,000 $(698,112) $ 301,888 ======== ======== ========= ==========
The accompanying notes to financial statements are an integral part hereof. Financial Statements F-60 N2K INC. STATEMENT OF CASH FLOWS FOR THE PERIOD BEGINNING MARCH 7, 1995 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995 Cash flows from operating activities: Net loss.......................................................... $(698,112) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................... 16,575 Changes in assets and liabilities: Increase in: Accounts receivable......................................... (48,543) Prepaid expenses............................................ (2,057) Deposits.................................................... (101,621) Accounts payable and accrued expenses....................... 207,144 Deferred rent payable....................................... 20,038 --------- Net cash used in operating activities...................... (606,576) --------- Cash flows from investing activities: Assets acquired in purchase transaction........................... (43,738) Purchase of property and equipment................................ (101,612) --------- Net cash used in investing activities......................... (145,350) --------- Cash flows from financing activities: Principal payments on capital lease obligations................... (2,651) Sale of common stock.............................................. 1,000,000 --------- Net cash provided by financing activities....................... 997,349 --------- Increase in cash and cash equivalents............................... 245,423 Cash and cash equivalents, beginning of period...................... -- --------- Cash and cash equivalents, end of period............................ $ 245,423 ========= Supplemental disclosures of cash flow information: Cash paid during the period for interest........................ $ 1,458 Noncash investing and financing activity: The Company entered into capital leases for equipment valued at $196,242.......................................................
The accompanying notes to financial statements are an integral part hereof. Financial Statements F-61 N2K INC. NOTES TO FINANCIAL STATEMENTS NOTE A--Organization and Acquisition: N2K Multimedia Company, Inc. (the "Company") was incorporated on March 7, 1995 for the purpose of developing interactive on-line web sites and technology, with 200 shares of authorized common stock of which 100 shares were issued in exchange for $100,000 paid in cash. On October 10, 1995 the authorized common stock was increased to 2,000,000 shares of $.01 par value and the outstanding shares were split 10,000 for 1. All references to shares in these financial statements give retroactive effect to the stock split. On June 13, 1995 the Company purchased substantially all the assets of N2K Inc. a company engaged primarily in computer systems consulting and its name was changed to N2K Inc. The purchase price was $100,000 which was allocated in accordance with fair values as follows: Fixed Assets $30,000; Accounts Receivable $8,738; Research and Development Costs $56,262, and Goodwill $5,000. Because computer systems consulting is not the focus of the Company, the acquiree is not a predecessor company. After the acquisition the Company developed an on-line site called Jazz Central Station that provides a comprehensive history of Jazz. The site was launched on the Microsoft Network on August 24, 1995 and is in beta testing on the World Wide Web. NOTE B--Summary of Significant Accounting Policies: [1] Use of estimates: These financial statements were prepared by management using generally accepted accounting principles which require the use of estimates. [2] Property and equipment: Property and equipment are stated at cost. Depreciation is calculated on a straight-line basis over estimated useful lives of the assets, primarily 5 years. Upon retirement or disposition, the applicable property amounts are relieved from the accounts, and any gain or loss is recorded in the statement of operations. When assets become fully depreciated, the applicable asset and accumulated depreciation amounts are relieved. [3] Goodwill: Goodwill, which represents the excess purchase price of N2K Inc. over the fair value of the identifiable assets acquired, is being amortized on a straight- line basis over five years. [4] Statement of Cash Flows: Highly liquid investments with an original maturity of three months or less are considered cash equivalents for purposes of the statement of cash flows. Financial Statements F-62 [5] Capital Leases: The Company capitalizes assets acquired under capital leases and records the related capital lease obligations. [6] Income Taxes: The Company is an S corporation for Federal and State income tax purposes. No provision for these taxes is required. NOTE C--Property and Equipment: Property and equipment consists of the following: Computer equipment............................................. $249,726 Furniture and fixtures......................................... 16,796 Leasehold improvements......................................... 61,332 -------- 327,854 Less accumulated depreciation.................................. (16,042) -------- $311,812 ========
Included in property and equipment is property acquired under capital leases with an aggregate cost of $196,242 and accumulated depreciation of $9,569. NOTE D--Equipment Lease Financing: The Company has a line of credit to finance its acquisition of furniture, office and computer equipment in the amount of $350,000. Under the terms of the master agreement, acquired assets are financed pursuant to capital leases with a three year term and interest rate of 8.75%. At December 31, 1995 $175,424 of the line of credit was available. The Company is also obligated under two other capital leases with interest rates of approximately 14% and aggregating $18,167 at December 31, 1995. NOTE E--Commitments, Contingencies and Risks: The Company is obligated under operating and capital leases for office space, computers and office equipment. Future annual minimum lease payments under leases in effect at December 31, 1995 are as follows:
Operating Capital --------- -------- 1996................................................... $120,456 $ 72,233 1997................................................... 196,088 75,795 1998................................................... 195,356 68,132 1999................................................... 219,550 5,522 2000................................................... 213,155 0 -------- 221,682 Less amount representing interest........................ 28,091 -------- Present value of capital lease obligations............... $193,591 ========
Financial Statements F-63 The Company maintains its accounts at one institution insured by the Federal Deposit Insurance Corporation up to a maximum of $100,000. The Company is committed to purchase furniture and equipment aggregating approximately $125,000 which it expects to finance under the equipment lease financing commitment described in Note D. Two of the Company's consulting customers individually accounted for 59% and 27% of the Company's consulting revenues for the period ended December 31, 1995 and 76% and 22% of the accounts receivable at December 31, 1995. NOTE F--Subsequent Event: The Company merged with Telebase Systems, Inc. on February 13, 1996. Pursuant to the merger the Company's shares were exchanged for common and preferred shares of Telebase Systems, Inc. which changed its name to N2K Inc. Financial Statements F-64 APPENDIX I AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER Dated as of January 29, 1999 among N2K Inc., CDnow, Inc. and Exit 8 Holding Company APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER TABLE OF CONTENTS ARTICLE I. THE MERGERS............................................................. I-2 Section 1.1. Articles of Incorporation and Bylaws of NewCo............. I-2 Section 1.2. The N2K Merger............................................ I-2 Section 1.3. The CDnow Merger.......................................... I-2 Section 1.4. Effective Time of the Mergers............................. I-2 Section 1.5. Closing................................................... I-2 Section 1.6. Effect of the Mergers..................................... I-2 Section 1.7. Certificate of Incorporation and Bylaws of the Surviving Corporations........................................................... I-3 Section 1.8. Directors and Officers of the Surviving Corporations...... I-3 ARTICLE II. CONVERSION OF SECURITIES................................................ I-3 Section 2.1. Conversion of N2K Capital Stock........................... I-4 Section 2.2. Conversion of CDnow Capital Stock......................... I-4 Section 2.3. Cancellation of NewCo Stock............................... I-4 Section 2.4. Exchange of Certificates.................................. I-4 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF N2K................................... I-7 Section 3.1. Organization of N2K....................................... I-7 Section 3.2. N2K Capital Structure..................................... I-7 Section 3.3. Authority; No Conflict; Required Filings and Consents..... I-8 Section 3.4. SEC Filings; Financial Statements......................... I-9 Section 3.5. No Undisclosed Liabilities................................ I-9 Section 3.6. Absence of Certain Changes or Events...................... I-9 Section 3.7. Taxes..................................................... I-9 Section 3.8. Properties................................................ I-10 Section 3.9. Intellectual Property..................................... I-11 Section 3.10. Agreements, Contracts and Commitments..................... I-11 Section 3.11. Litigation................................................ I-11 Section 3.12. Environmental Matters..................................... I-12 Section 3.13. Employee Benefit Plans.................................... I-12 Section 3.14. Compliance With Laws...................................... I-14 Section 3.15. Tax Matters............................................... I-14 Section 3.16. Registration Statement; Joint Proxy Statement/Prospectus.. I-14 Section 3.17. Labor Matters............................................. I-14 Section 3.18. Insurance................................................. I-14 Section 3.19. Opinion of Financial Advisor.............................. I-15 Section 3.20. No Existing Discussions................................... I-15 Section 3.21. Section 203 of the DGCL Not Applicable.................... I-15 ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF CDnow................................. I-15 Section 4.1. Organization of CDnow..................................... I-15 Section 4.2. CDnow Capital Structure................................... I-15 Section 4.3. Authority; No Conflict; Required Filings and Consents..... I-16 Section 4.4. SEC Filings; Financial Statements......................... I-17 Section 4.5. No Undisclosed Liabilities................................ I-17
APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER i Section 4.6. Absence of Certain Changes or Events.............................................. I-17 Section 4.7. Taxes............................................................................. I-18 Section 4.8. Properties........................................................................ I-18 Section 4.9. Intellectual Property............................................................. I-19 Section 4.10. Agreements; Contracts and Commitments............................................. I-19 Section 4.11. Litigation........................................................................ I-19 Section 4.12. Environmental Matters............................................................. I-19 Section 4.13. Employee Benefit Plans............................................................ I-20 Section 4.14. Compliance With Laws.............................................................. I-21 Section 4.15. Tax Matters....................................................................... I-21 Section 4.16. Registration Statement; Joint Proxy Statement/Prospectus.......................... I-22 Section 4.17. Labor Matters..................................................................... I-22 Section 4.18. Insurance......................................................................... I-22 Section 4.19. Opinion of Financial Advisor...................................................... I-22 Section 4.20. No Existing Discussions........................................................... I-22 Section 4.21. Section 1715 of the PBCL Not Applicable........................................... I-22 ARTICLE V. COVENANTS....................................................................................... I-23 Section 5.1. Conduct of Business............................................................... I-23 Section 5.2. Cooperation; Notice; Cure......................................................... I-24 Section 5.3. No Solicitation................................................................... I-25 Section 5.4. Joint Proxy Statement/Prospectus; Registration Statement.......................... I-26 Section 5.5. Nasdaq Quotation.................................................................. I-26 Section 5.6. Access to Information............................................................. I-26 Section 5.7. Stockholders' Meetings............................................................ I-26 Section 5.8. Legal Conditions to Merge......................................................... I-27 Section 5.9. Public Disclosure................................................................. I-27 Section 5.10. Nonrecognition Exchange........................................................... I-27 Section 5.11. Pooling Accounting................................................................ I-28 Section 5.12. Affiliate Agreements.............................................................. I-28 Section 5.13. Nasdaq Listing.................................................................... I-28 Section 5.14. Stock Plans....................................................................... I-28 Section 5.15. Brokers or Finders................................................................ I-29 Section 5.16. Indemnification................................................................... I-29 Section 5.17. Letter of CDnow's Accountants..................................................... I-30 Section 5.18. Letter of N2K's Accountants....................................................... I-30 Section 5.19. Stock Option Agreements........................................................... I-30 Section 5.20. Transition Planning............................................................... I-30 Section 5.21. Post-Merger Corporate Governance; Employment Arrangements......................... I-30 Section 5.22. Name of NewCo..................................................................... I-31 Section 5.23. Warrants; Registration Rights Agreement........................................... I-32 Section 5.24. Conveyance Taxes.................................................................. I-32 Section 5.25. Transfer Taxes.................................................................... I-32 Section 5.26. Stockholder Litigation............................................................ I-32 Section 5.27. Employee Benefits; Severance...................................................... I-33 Section 5.28. Subsequent Financial Statements................................................... I-33 Section 5.29. Control of Operations............................................................. I-33 Section 5.30. Certain Modifications; Restructuring Charges...................................... I-33
APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER ii ARTICLE VI. CONDITIONS TO MERGERS................................................... I-34 Section 6.1. Conditions to Each Party's Obligation to Effect the Mergers................................................................ I-34 Section 6.2. Additional Conditions to Obligations of N2K............... I-34 Section 6.3. Additional Conditions to Obligations of CDnow............. I-35 ARTICLE VII. TERMINATION AND AMENDMENT............................................... I-36 Section 7.1. Termination............................................... I-36 Section 7.2. Effect of Termination..................................... I-37 Section 7.3. Fees and Expenses......................................... I-37 Section 7.4. Amendment................................................. I-39 Section 7.5. Extension; Waiver......................................... I-39 ARTICLE VIII. MISCELLANEOUS........................................................... I-40 Section 8.1. Nonsurvival of Representations, Warranties and Agreements............................................................. I-40 Section 8.2. Notices................................................... I-40 Section 8.3. Interpretation............................................ I-41 Section 8.4. Counterparts.............................................. I-41 Section 8.5. Entire Agreement; No Third Party Beneficiaries............ I-41 Section 8.6. Governing Law............................................. I-41 Section 8.7. Assignment................................................ I-41 EXHIBITS Exhibit A Stock Option Agreement (N2K) Exhibit B Stock Option Agreement (CDnow) Exhibit C Stockholder Support Agreement (N2K) Exhibit D Shareholder Support Agreement (CDnow) Exhibit E Form of Articles of Incorporation of NewCo Exhibit F Form of Bylaws of NewCo Exhibit G Form of N2K Affiliate Agreement Exhibit H Form of CDnow Affiliate Agreement Exhibit I Employment Agreement for Jason Olim Exhibit J Employment Agreement for Jonathan Diamond
APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER iii TABLES OF DEFINED TERMS Acquisition Proposal........................................................ 25 Affiliate................................................................... 28 Affiliate Agreement......................................................... 28 Affiliate Agreements........................................................ 28 Agreement................................................................... 1 Alternative Transaction..................................................... 38 Bankruptcy and Equity Exception............................................. 8 CDnow....................................................................... 1 CDnow Balance Sheet......................................................... 17 CDnow Common Stock.......................................................... 4 CDnow Director.............................................................. 29 CDnow Disclosure Schedule................................................... 15 CDnow Employees............................................................. 33 CDnow Exchange Ratio........................................................ 4 CDnow Material Adverse Effect............................................... 15 CDnow Material Contracts.................................................... 19 CDnow Merger................................................................ 2 CDnow SEC Reports........................................................... 17 CDnow Stock Option.......................................................... 28 CDnow Stock Option Agreement................................................ 1 CDnow Stock Plans........................................................... 16 CDnow Stockholder Support Agreement......................................... 1 CDnow Stockholders' Meeting................................................. 14 CDnow Sub................................................................... 2 CDnow Surviving Corporation................................................. 2 Certificate of Merger....................................................... 2 Certificates................................................................ 5 Certificates of Merger...................................................... 2 Closing..................................................................... 2 Closing Date................................................................ 2 Code........................................................................ 1 Confidentiality Agreements.................................................. 25 DGCL........................................................................ 2 Effective Time.............................................................. 2 Environmental Law........................................................... 12 Exchange Act................................................................ 8 Exchange Agent.............................................................. 4 Exchange Fund............................................................... 4 Fee Payment Date............................................................ 38 Governmental Entity......................................................... 8 Hazardous Substance......................................................... 12 HSR Act..................................................................... 8 Indemnified Parties......................................................... 29 IRS......................................................................... 10 Joint Proxy Statement/Prospectus............................................ 14 Material Contract........................................................... 11 Mergers..................................................................... 2 N2K......................................................................... 1 N2K Balance Sheet........................................................... 9 N2K Common Stock............................................................ 3
APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER iv N2K Director................................................................ 29 N2K Disclosure Schedule..................................................... 7 N2K Employees............................................................... 33 N2K Exchange Ratio.......................................................... 3 N2K Material Adverse Effect................................................. 7 N2K Material Contracts...................................................... 11 N2K Merger.................................................................. 2 N2K Preferred Stock......................................................... 7 N2K SEC Reports............................................................. 9 N2K Stock Option............................................................ 28 N2K Stock Option Agreement.................................................. 1 N2K Stock Plans............................................................. 7 N2K Stockholder Support Agreement........................................... 2 N2K Stockholders' Meeting................................................... 14 N2K Sub..................................................................... 2 N2K Surviving Corporation................................................... 2 Nasdaq...................................................................... 6 NewCo....................................................................... 1 NewCo Common Stock.......................................................... 3 Order....................................................................... 27 Outside Date................................................................ 35 PBCL........................................................................ 2 Registration Statement...................................................... 14 SEC......................................................................... 8 Securities Act.............................................................. 6 Stock Option Agreements..................................................... 1 Superior Proposal........................................................... 25 Surviving Corporations...................................................... 2 Tax......................................................................... 9 Taxes....................................................................... 9 Taxes....................................................................... 9 Third Party................................................................. 25 Transfer Taxes.............................................................. 32
APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER v AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of January 29, 1999, by and among N2K Inc., a Delaware corporation ("N2K"), CDnow, Inc., a Pennsylvania corporation ("CDnow"), and Exit 8 Holding Company, a newly-formed Pennsylvania corporation with nominal capitalization, one-half of the issued and outstanding capital stock of which is owned by each of N2K and CDnow ("Newco"), amending and restating in its entirety the Agreement and Plan of Merger, dated as of October 22, 1998 among, N2K, CDnow and Newco. WHEREAS, the Boards of Directors of N2K and CDnow deem it advisable and in the best interests of each corporation and its respective stockholders that N2K and CDnow combine in a "merger of equals" in order to advance the interests of N2K and CDnow and their respective stockholders; WHEREAS, the combination of N2K and CDnow shall be effected by the terms of this Agreement through (i) a merger of a wholly-owned subsidiary of Newco with and into N2K and (ii) a merger of another wholly-owned subsidiary of Newco with and into CDnow, such that N2K and CDnow become wholly-owned subsidiaries of Newco and the stockholders of N2K and CDnow become stockholders of Newco; WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition and inducement to each of N2K's and CDnow's willingness to enter into this Agreement, N2K and CDnow have entered into (i) a Stock Option Agreement dated as of the date of this Agreement and attached hereto as Exhibit A (the "N2K Stock Option Agreement"), pursuant to which CDnow has granted N2K an option to purchase shares of common stock of CDnow under certain circumstances, and (ii) a Stock Option Agreement dated as of the date of this Agreement and attached hereto as Exhibit B (the "CDnow Stock Option Agreement" and, together with the N2K Stock Option Agreement, the "Stock Option Agreements"), pursuant to which N2K has granted CDnow an option to purchase shares of common stock of N2K under certain circumstances; WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition and inducement to N2K's willingness to enter into this Agreement, a stockholder of CDnow has entered into a Stockholder Support Agreement with N2K, dated as of the date of this Agreement and attached hereto as Exhibit C (the "CDnow Stockholder Support Agreement"), pursuant to which such stockholder has agreed, among other things, to vote all voting securities of CDnow beneficially owned by him in favor of approval and adoption of the Agreement and the CDnow Merger (as defined in Section 1.3); WHEREAS, concurrently with the execution and delivery of this Agreement and as a condition and inducement to CDnow's willingness to enter into this Agreement, certain stockholders of N2K have entered into a Stockholder Support Agreement with CDnow, dated as of the date of this Agreement and attached hereto as Exhibit D (the "N2K Stockholder Support Agreement"), pursuant to which such stockholders have agreed, among other things, to vote all voting securities of N2K beneficially owned by them in favor of approval and adoption of the Agreement and the N2K Merger (as defined in Section 1.2); WHEREAS, for Federal income tax purposes, it is intended that (i) the N2K Merger (as defined in Section 1.2) shall qualify as a reorganization described in Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and/or, taken together with the CDnow Merger (as defined in Section 1.3), as a transfer of property to Newco by holders of N2K Common Stock (as defined in Section 2.1) described in Section 351 of the Code and (ii) the CDnow Merger shall qualify as a reorganization described in Section 368(a) of the Code and/or, taken together with the N2K Merger, as a transfer of property to Newco by holders of CDnow Common Stock described in Section 351 of the Code; and WHEREAS, the Boards of Directors of N2K and CDnow have approved this Agreement, the Stock Option Agreements and the Stockholder Support Agreements. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-1 NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, and intending to be legally bound hereby, the parties agree as follows: ARTICLE I. THE MERGERS Section 1.1. Articles of Incorporation and Bylaws of Newco. N2K and CDnow shall cause the Articles of Incorporation and Bylaws of Newco to be amended prior to the Effective Time (as defined in Section 1.4) to be substantially in the forms of Exhibit E and Exhibit F hereto, respectively. From the date hereof until the Effective Time, N2K and CDnow shall consult with each other prior to causing or permitting Newco to take any action and neither shall cause or permit Newco to take any action inconsistent with the provisions of this Agreement without the written consent of the other. Section 1.2. The N2K Merger. N2K and CDnow shall cause Newco to form a wholly- owned subsidiary named N2K Acquisition Corp. ("N2K Sub") under the laws of the State of Delaware. N2K and CDnow will cause Newco to cause N2K Sub to execute and deliver a joinder to this Agreement. Upon the terms and subject to the provisions of this Agreement, and in accordance with the General Corporation Law of the State of Delaware (the "DGCL"), N2K Sub will merge with and into N2K (the "N2K Merger") at the Effective Time (as defined in Section 1.4). N2K Sub will be formed solely to facilitate the N2K Merger and will conduct no business or activity other than in connection with the N2K Merger. Section 1.3. The CDnow Merger. N2K and CDnow shall cause Newco to form a wholly-owned subsidiary named CDnow Acquisition Corp. ("CDnow Sub") under the laws of the Commonwealth of Pennsylvania. N2K and CDnow will cause Newco to cause CDnow Sub to execute and deliver a joinder to this Agreement. Upon the terms and subject to the provisions of this Agreement, and in accordance with the Pennsylvania Business Corporation Law of 1988, as amended (the "PBCL"), CDnow Sub will merge with and into CDnow (the "CDnow Merger" and together with the N2K Merger, the "Mergers") at the Effective Time (as defined in Section 1.4). CDnow Sub will be formed solely to facilitate the CDnow Merger and will conduct no business or activity other than in connection with the CDnow Merger. Section 1.4. Effective Time of the Mergers. Subject to the provisions of this Agreement, a certificate or articles of merger with respect to each Merger in such form as is required by the relevant provisions of the DGCL and the PBCL, as the case may be, (individually, a "Certificate of Merger" with respect to one of the Mergers, and collectively with respect to both Mergers, the "Certificates of Merger") shall be duly prepared, executed and acknowledged and thereafter delivered to the secretaries of state of the State of Delaware and the Commonwealth of Pennsylvania, as the case may be, for filing, as provided in the DGCL and the PBCL, as early as practicable on the Closing Date (as defined in Section 1.5). Each Merger shall become effective at such time as is specified in the Certificate of Merger (the time at which both Mergers have become fully effective being hereinafter referred to as the "Effective Time"). Section 1.5. Closing. The closing of the Mergers (the "Closing") will take place at such time and place to be agreed upon by the parties hereto, on a date to be specified by CDnow and N2K, which shall be no later than the second business day after satisfaction or, if permissible, waiver of the conditions set forth in Article VI (the "Closing Date"), unless another date is agreed to in writing by CDnow and N2K. Section 1.6. Effect of the Mergers. As a result of the N2K Merger, the separate corporate existence of N2K Sub shall cease and N2K shall continue as the surviving corporation (the "N2K Surviving Corporation"). As a result of the CDnow Merger, the separate corporate existence of CDnow Sub shall cease and CDnow shall continue as the surviving corporation (the "CDnow Surviving Corporation" and together with the N2K Surviving Corporation, the "Surviving Corporations"). Upon becoming effective, the Mergers shall have the effects set forth in the DGCL and the PBCL. Without limiting the generality of the foregoing, APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-2 and subject thereto, at the Effective Time, (i) all properties, rights, privileges, powers and franchises of N2K and N2K Sub shall vest in the N2K Surviving Corporation, and all debts, liabilities and duties of N2K and N2K Sub shall become the debts, liabilities and duties of the N2K Surviving Corporation and (ii) all properties, rights, privileges, powers and franchises of CDnow and CDnow Sub shall vest in the CDnow Surviving Corporation, and all debts, liabilities and duties of CDnow and CDnow Sub shall become the debts, liabilities and duties of the CDnow Surviving Corporation. Section 1.7. Certificate of Incorporation and Bylaws of the Surviving Corporations. At the Effective Time, (i) the Certificate of Incorporation and Bylaws of the N2K Surviving Corporation shall be amended to be identical to the Certificate of Incorporation and Bylaws, respectively, of N2K Sub as in effect immediately prior to the Effective Time (except that the name of the N2K Surviving Corporation shall be N2K Inc.), in each case until duly amended in accordance with applicable law, and (ii) the Articles of Incorporation and Bylaws of the CDnow Surviving Corporation shall be amended to be identical to the Articles of Incorporation and Bylaws, respectively, of CDnow Sub as in effect immediately prior to the Effective Time (except that the name of the CDnow Surviving Corporation shall be CDnow Inc.), in each case until duly amended in accordance with applicable law. Section 1.8. Directors and Officers of the Surviving Corporations. (a) N2K Surviving Corporation. The directors of N2K Sub immediately prior to the Effective Time shall be the initial directors of the N2K Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the N2K Surviving Corporation. The officers of N2K immediately prior to the Effective Time shall be the initial officers of the N2K Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and Bylaws of the N2K Surviving Corporation. (b) CDnow Surviving Corporation. The directors of CDnow Sub immediately prior to the Effective Time shall be the initial directors of the CDnow Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and Bylaws of the CDnow Surviving Corporation. The officers of CDnow immediately prior to the Effective Time shall be the initial officers of the CDnow Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and Bylaws of the CDnow Surviving Corporation. ARTICLE II. CONVERSION OF SECURITIES Section 2.1. Conversion of N2K Capital Stock. At the Effective Time, by virtue of the N2K Merger and without any action on the part of any of the parties hereto or the holders of any shares of Common Stock, par value $.001 per share, of N2K ("N2K Common Stock") or common stock of N2K Sub: (a) Capital Stock of N2K Sub. Each issued and outstanding share of the common stock, par value $.01 per share, of N2K Sub shall be converted into and become one fully paid and nonassessable share of Common Stock, par value $.01 per share, of the N2K Surviving Corporation. (b) Cancellation of Treasury Stock and CDnow-Owned Stock. All shares of N2K Common Stock that are owned by N2K as treasury stock and any shares of N2K Common Stock owned by CDnow or any wholly-owned Subsidiary (as defined in Section 3.1) of CDnow shall be canceled and retired and shall cease to exist and no stock of Newco or other consideration shall be delivered in exchange therefor. (c) Exchange Ratio for N2K Common Stock. Subject to Section 2.4(e), each issued and outstanding share of N2K Common Stock (other than shares to be canceled in accordance with Section 2.1(b)) shall be converted into the right to receive 0.83 of a share (the "N2K Exchange Ratio") of Common Stock, no par value per share, of Newco ("Newco Common Stock"). All such shares of N2K Common Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-3 exist, and each holder of a certificate representing any such shares shall cease to have any ownership or other rights with respect thereto, except the right to receive the shares of Newco Common Stock and any cash in lieu of fractional shares of Newco Common Stock to be issued or paid in consideration therefor, in each case upon the surrender of such certificate in accordance with Section 2.4 and without interest. Section 2.2. Conversion of CDnow Capital Stock. At the Effective Time, by virtue of the CDnow Merger and without any action on the part of any of the parties hereto or the holders of any shares of Common Stock, no par value per share, of CDnow ("CDnow Common Stock") or common stock of CDnow Sub: (a) Capital Stock of CDnow Sub. Each issued and outstanding share of the common stock, no par value, of CDnow Sub shall be converted into and become one fully paid and nonassessable share of Common Stock, no par value, of the CDnow Surviving Corporation. (b) Cancellation of Treasury Stock and N2K-Owned Stock. All shares of CDnow Common Stock that are owned by CDnow as treasury stock and any shares of CDnow Common Stock owned by N2K or any wholly-owned Subsidiary (as defined in Section 3.1) of N2K shall be canceled and retired and shall cease to exist and no stock of Newco or other consideration shall be delivered in exchange therefor. (c) Exchange Ratio for CDnow Common Stock. Subject to Section 2.4(e), each issued and outstanding share of CDnow Common Stock (other than shares to be canceled in accordance with Section 2.2(b) and shares held by holders who exercise dissenters' rights as described below) shall be converted into the right to receive one share (the "CDnow Exchange Ratio") of Newco Common Stock. All such shares of CDnow Common Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such shares shall cease to have any ownership or other rights with respect thereto, except the right to receive the shares of Newco Common Stock, in each case upon the surrender of such certificate in accordance with Section 2.4 and without interest. (d) Dissenters' Rights. To the extent of holders of shares of CDnow Common Stock exercise dissenters' rights pursuant to applicable provisions of the PBCL, the shares of CDnow Common Stock of such holder shall not be converted into the right to receive the CDnow Exchange Ratio but the Newco shares such holder would be entitled to shall be held by Newco subject to the provisions of such law. If any such holder fails to protect or withdraws or loses its dissenters' rights, such shares of Newco Common Stock shall then be treated as if they had been converted as of the Effective Time into a right to receive Newco Common Stock. Section 2.3. Cancellation of Newco Stock. At the Effective Time, by virtue of the Mergers and without any action on the part of any holder of any capital stock of N2K, CDnow or Newco, each share of Newco Common Stock issued and outstanding immediately prior to the Effective Time shall be surrendered and canceled, and the amount paid by N2K and CDnow for the shares of Newco Common Stock held by them shall be returned by Newco to them. Section 2.4. Exchange of Certificates. The procedures for exchanging certificates which prior to the Effective Time represented shares of N2K Common Stock and CDnow Common Stock for certificates representing Newco Common Stock pursuant to the Mergers are as follows: (a) Exchange Agent. As of the Effective Time, Newco shall deposit with a bank or trust company designated by CDnow and N2K (the "Exchange Agent"), for the benefit of the holders of shares of N2K Common Stock and shares of CDnow Common Stock outstanding immediately prior to the Effective Time, for exchange in accordance with this Section 2.4, through the Exchange Agent, certificates representing the shares of Newco Common Stock and, with respect to shares of N2K Common Stock, cash in lieu of fractional shares (such shares of Newco Common Stock and cash in lieu of fractional shares, together with any dividends or distributions with respect thereto, being hereinafter referred to as the "Exchange Fund"), issuable pursuant to Sections 2.1 and 2.2 in exchange for shares of N2K Common Stock and CDnow Common Stock, respectively, outstanding immediately prior to the Effective Time. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-4 (b) Exchange Procedures. As soon as reasonably practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of N2K Common Stock or CDnow Common Stock (collectively, the "Certificates") whose shares were converted pursuant to Section 2.1 or Section 2.2 into the right to receive shares of Newco Common Stock (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as N2K and CDnow may reasonably specify) and (ii) instructions for effecting the surrender of the Certificates in exchange for certificates representing shares of Newco Common Stock (plus cash in lieu of fractional shares, if any, of Newco Common Stock as provided below). Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Newco, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing that number of whole shares of Newco Common Stock, the amount of any cash payable in lieu of fractional shares of Newco Common Stock (with respect to shares of N2K Common Stock), and the Certificate so surrendered shall immediately be canceled. In the event of a transfer of ownership of N2K Common Stock or CDnow Common Stock prior to the Effective Time which is not registered in the transfer records of N2K or CDnow, respectively, a certificate representing the number of shares of Newco Common Stock issuable and any amounts payable in accordance with this Agreement may be issued and paid to a transferee if the Certificate representing such N2K Common Stock or CDnow Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. (c) Distributions With Respect to Unexchanged Shares. No amount in respect of dividends or other distributions declared or made after the Effective Time with respect to Newco Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Newco Common Stock the holder thereof is entitled to receive in respect thereof and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to subsection (e) below until the holder of record of such Certificate shall surrender such Certificate to Newco in accordance herewith. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Newco Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of any cash payable in lieu of a fractional share of Newco Common Stock to which such holder is entitled pursuant to subsection (e) below. (d) No Further Ownership Rights in N2K Common Stock and CDnow Common Stock. All shares of Newco Common Stock issued upon the surrender for exchange of Certificates in accordance with the terms hereof (including any cash paid pursuant to subsection (c) or (e) of this Section 2.4) shall be deemed to have been issued in full satisfaction of all rights pertaining to the shares of N2K Common Stock or CDnow Common Stock theretofore represented by such Certificates. Immediately prior to and all times after the Effective Time there shall be no further registration of transfers on the stock transfer books of the N2K Surviving Corporation or the CDnow Surviving Corporation, as the case may be, of the shares of N2K Common Stock or CDnow Common Stock, respectively, which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to one of the Surviving Corporations or Newco for any reason, such Certificates shall be canceled and exchanged as provided in this Section 2.4. (e) No Fractional Shares. No certificate or scrip representing fractional shares of Newco Common Stock shall be issued upon the surrender for exchange of Certificates representing shares of N2K Common Stock, and such fractional share interests will not entitle the owner thereof to vote or to any other rights of a stockholder of Newco. Notwithstanding any other provision of this Agreement, each record holder of shares of N2K Common Stock outstanding immediately prior to the Effective Time exchanged pursuant to the N2K Merger who would otherwise have been entitled to receive a fraction of a share of Newco Common Stock (after taking into account all Certificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of Newco Common Stock multiplied by APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-5 the last per share sales price of Newco Common Stock (as reported on the Nasdaq National Market (the "Nasdaq")) on the closing of the first day of regular-way trading of Newco Common Stock on the Nasdaq after the Effective Time. (f) Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the former stockholders of N2K or CDnow for 180 days after the Effective Time shall be delivered to Newco upon demand, and any former stockholder of N2K or CDnow who has not previously complied with this Section 2.4 shall thereafter look only to Newco for payment of such former stockholder's claim for Newco Common Stock, any cash in lieu of fractional shares of Newco Common Stock and any amounts in respect of dividends or distributions with respect to Newco Common Stock. (g) No Liability. None of N2K, CDnow, Newco or the Exchange Agent shall be liable to any holder of shares of N2K Common Stock or CDnow Common Stock, as the case may be, for any shares of Newco Common Stock (or cash in lieu of fractional shares of Newco Common Stock) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (h) Withholding Rights. Newco and each of the Surviving Corporations shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of Certificates which prior to the Effective Time represented shares of N2K Common Stock or CDnow Common Stock such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Newco or one of the Surviving Corporations, as the case may be, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of N2K Common Stock or CDnow Common Stock, as the case may be, in respect of which such deduction and withholding was made. (i) Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact in form and substance satisfactory to Newco and the Exchange Act by the person claiming such Certificate to be lost, stolen or destroyed and, if required by Newco or one of the Surviving Corporations, the posting by such person of a bond in such reasonable amount as Newco or such Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Newco Common Stock and any cash in lieu of fractional shares, and unpaid dividends and distributions on shares of Newco Common Stock deliverable in respect thereof pursuant to this Agreement. (j) Affiliates. Notwithstanding anything herein to the contrary, Certificates surrendered for exchange by any Affiliate (as defined in Section 5.12) of N2K or CDnow shall not be exchanged until (i) Newco has received an Affiliate Agreement (as defined in Section 5.12) from such Affiliate or (ii) until the date as such shares of Newco Common Stock are freely tradable without violating the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (collectively, the "Securities Act"). APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-6 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF N2K N2K represents and warrants to CDnow that the statements contained in this Article III are true and correct except as set forth herein and in the disclosure schedule delivered by N2K to CDnow on or before the date of this Agreement (the "N2K Disclosure Schedule"). Section 3.1. Organization of N2K. Each of N2K and its Subsidiaries (as defined below) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power to own, lease and operate its property and to carry on its business as now being conducted and as proposed to be conducted, and is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the business, properties, financial condition or results of operations of N2K and its Subsidiaries, taken as a whole (a "N2K Material Adverse Effect"). A true and correct copy of the Certificate of Incorporation and Bylaws of N2K and each of its Subsidiaries has been delivered to CDnow. Except as set forth in N2K SEC Reports (as defined in Section 3.4) filed prior to the date hereof, neither N2K nor any of its Subsidiaries directly or indirectly owns (other than ownership interests in N2K or in one or more of its Subsidiaries) any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any corporation, partnership, joint venture or other business association or entity, excluding (i) securities in any publicly traded company held for investment by N2K and comprising less than five percent (5%) of the outstanding stock of such company and (ii) any investment or series of related investments with a book value of less than $1 million. As used in this Agreement, the word "Subsidiary" means, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner (excluding partnerships the general partnership interests of which held by such party or any Subsidiary of such party do not have a majority of the economic interests in such partnership) or (ii) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and one or more of its Subsidiaries. Section 3.2. N2K Capital Structure. (a) The authorized capital stock of N2K consists of 100,000,000 shares of N2K Common Stock and 40,000,000 shares of preferred stock, par value $.001 per share ("N2K Preferred Stock"). As of the date hereof, (i) 14,207,179 shares of N2K Common Stock were issued and outstanding, all of which are validly issued, fully paid and nonassessable, (ii) no shares of N2K Common Stock were held in the treasury of N2K or by Subsidiaries of N2K and (iii) no shares of N2K Preferred Stock were issued and outstanding. Section 3.2(a) of the N2K Disclosure Schedule shows the number of shares of N2K Common Stock reserved for future issuance pursuant to stock options granted and outstanding as of the date hereof and the plans under which such options were granted (collectively, the "N2K Stock Plans"). There are no obligations, contingent or otherwise, of N2K or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of N2K Common Stock or the capital stock of any Subsidiary or to provide funds to or make any material investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity other than guarantees of bank obligations or indebtedness for borrowed money of Subsidiaries entered into in the ordinary course of business and other than any obligation the failure of which to perform or satisfy would not have a N2K Material Adverse Effect. All of the outstanding shares of capital stock or other ownership interests of each of N2K's Subsidiaries are duly authorized, validly issued, fully paid and nonassessable and all such shares (other than directors' qualifying shares in the case of foreign Subsidiaries) are owned by N2K or another Subsidiary of N2K free and clear of all security interests, liens, claims, pledges, agreements, limitations in N2K's voting rights, charges or other encumbrances of any nature. (b) Except as set forth in this Section 3.2 or as reserved for future grants of options under the N2K Stock Plans or the CDnow Stock Option Agreement and the options and warrants described in Section APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-7 3.2(b) of the N2K Disclosure Schedule, (i) there are no shares of capital stock of any class of N2K, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding; (ii) there are no options, warrants, equity securities, calls, rights, commitments or agreements of any character to which N2K or any of its Subsidiaries is a party or by which it is bound obligating N2K or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other ownership interests of N2K or any of its Subsidiaries or obligating N2K or any of its Subsidiaries to grant, extend, accelerate the vesting of, or enter into any such option, warrant, equity security, call, right, commitment or agreement; and (iii) to the best knowledge of N2K, there are no voting trusts, proxies or other voting agreements or understandings with respect to the shares of capital stock of N2K. All shares of N2K Common Stock subject to issuance as specified in this Section 3.2 are duly authorized and, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be validly issued, fully paid and nonassessable. Section 3.3. Authority; No Conflict; Required Filings and Consents. (a) N2K has all requisite corporate power and authority to enter into this Agreement and the Stock Option Agreements and, subject to obtaining any necessary stockholder approval of this Agreement, to consummate the transactions contemplated by this Agreement and the Stock Option Agreements. The execution and delivery of this Agreement and the Stock Option Agreements and the consummation of the transactions contemplated by this Agreement and the Stock Option Agreements by N2K have been duly authorized by all necessary corporate action on the part of N2K, subject only to the approval and adoption of this Agreement and the N2K Merger by N2K's stockholders under the DGCL. This Agreement and the Stock Option Agreements have been duly executed and delivered by N2K and constitute the valid and binding obligations of N2K, enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (the "Bankruptcy and Equity Exception"). (b) The execution and delivery of this Agreement and the Stock Option Agreements by N2K does not, and the consummation of the transactions contemplated by this Agreement and the Stock Option Agreements will not, (i) conflict with, or result in any violation or breach of, any provision of the Certificate of Incorporation or Bylaws of N2K or any of its Subsidiaries, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which N2K or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or (iii) conflict with or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to N2K or any of its Subsidiaries or any of its or their properties or assets, except in the case of (ii) and (iii) for any such conflicts, violations, defaults, terminations, cancellations or accelerations which (x) are not, individually or in the aggregate, reasonably likely to have a N2K Material Adverse Effect or (y) would not substantially impair or delay the consummation of the N2K Merger. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality ("Governmental Entity") is required by or with respect to N2K or any of its Subsidiaries in connection with the execution and delivery of this Agreement and the Stock Option Agreements or the consummation of the transactions contemplated hereby or thereby, except for (i) any required filing of a pre-merger notification report under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the expiration or termination of any applicable waiting period under the HSR Act, (iii) the filing of a Certificate of Merger with respect to the N2K Merger with the Delaware Secretary of State, (iv) the filing of the Joint Proxy Statement/Prospectus (as defined in Section 3.16 below) with the Securities and Exchange Commission (the "SEC") in accordance with the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder (collectively, the "Exchange Act"), and the Securities Act, (v) such consents, APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-8 approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the laws of any foreign country and (vi) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not (x) be reasonably likely to have a N2K Material Adverse Effect or (y) substantially impair or delay the consummation of the N2K Merger. Section 3.4. SEC Filings; Financial Statements. (a) N2K has filed and made available to CDnow all forms, reports and documents required to be filed by N2K with the SEC since October 17, 1997 (collectively, the "N2K SEC Reports"). The N2K SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such N2K SEC Reports or necessary in order to make the statements in such N2K SEC Reports, in the light of the circumstances under which they were made, not misleading. None of N2K's Subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes) of N2K contained in the N2K SEC Reports complied as to form in all material respects with the applicable published rules and regulations of the SEC with respect thereto, was prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q under the Exchange Act) and fairly presented the consolidated financial position of N2K and its Subsidiaries as of the dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. The balance sheet of N2K as of June 30, 1998 is referred to herein as the "N2K Balance Sheet." Section 3.5. No Undisclosed Liabilities. Except as disclosed in the N2K SEC Reports filed prior to the date hereof, and except for normal or recurring liabilities incurred since June 30, 1998 in the ordinary course of business consistent with past practices, N2K and its Subsidiaries do not have any liabilities, either accrued, contingent or otherwise, of the type required to be reflected in financial statements in accordance with generally accepted accounting principles, and whether due or to become due, which individually or in the aggregate are reasonably likely to have a N2K Material Adverse Effect. Section 3.6. Absence of Certain Changes or Events. Except as disclosed in the N2K SEC Reports filed prior to the date hereof, since the date of the N2K Balance Sheet, N2K and its Subsidiaries have conducted their businesses only in the ordinary course and in a manner consistent with past practice and, since such date, there has not been (i) any event, development, state of affairs or condition, or series or combination of events, developments, states of affairs or conditions, which, individually or in the aggregate, has had or is reasonably likely to have a N2K Material Adverse Effect (other than events, developments, states of affairs or conditions that are the effect or result of actions taken by CDnow or economic factors affecting the economy as a whole or the industry in which N2K competes); (ii) any damage, destruction or loss (whether or not covered by insurance) with respect to N2K or any of its Subsidiaries which is reasonably likely to have a N2K Material Adverse Effect; (iii) any material change by N2K in its accounting methods, principles or practices to which CDnow has not previously consented in writing; (iv) any revaluation by N2K of any of its assets which is reasonably likely to have a N2K Material Adverse Effect; or (v) any other action or event that would have required the consent of CDnow pursuant to Section 5.1 of this Agreement had such action or event occurred after the date of this Agreement other than such actions or events that, individually or in the aggregate, have not had or are not reasonably likely to have a N2K Material Adverse Effect. Section 3.7. Taxes. (a) For the purposes of this Agreement, a "Tax" or, collectively, "Taxes," means any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-9 liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, gains, franchise, withholding, payroll, recapture, employment, excise, unemployment insurance, social security, business license, occupation, business organization, stamp, environmental and property taxes, together with all interest, penalties and additions imposed with respect to such amounts. For purposes of this Agreement, "Taxes" also includes any obligations under any agreements or arrangements with any other person with respect to Taxes of such other person (including pursuant to Treas. Reg. (S) 1.1502-6 or comparable provisions of state, local or foreign tax law) and including any liability for Taxes of any predecessor entity. (b) N2K and each of its Subsidiaries have (i) filed all federal, state, local and foreign Tax returns and reports required to be filed by them prior to the date of this Agreement (taking into account all applicable extensions), (ii) paid or accrued all Taxes due and payable, and (iii) paid or accrued all Taxes for which a notice of assessment or collection has been received (other than amounts being contested in good faith by appropriate proceedings), except in the case of clauses (i), (ii) or (iii) for any such filings, payments or accruals that are not reasonably likely, individually or in the aggregate, to have a N2K Material Adverse Effect. Neither the Internal Revenue Service (the "IRS") nor any other taxing authority has asserted any claim for Taxes, or to the actual knowledge of the executive officers of N2K, is threatening to assert any claims for Taxes, which claims, individually or in the aggregate, are reasonably likely to have a N2K Material Adverse Effect. N2K and each of its Subsidiaries have withheld or collected and paid over to the appropriate governmental authorities (or are properly holding for such payment) all Taxes required by law to be withheld or collected, except for amounts that are not reasonably likely, individually or in the aggregate, to have a N2K Material Adverse Effect. Neither N2K nor any of its Subsidiaries has made an election under Section 341(f) of the Code, except for any such election that shall not have a N2K Material Adverse Effect. There are no liens for Taxes upon the assets of N2K or any of its Subsidiaries (other than liens for Taxes that are not yet due or delinquent or that are being contested in good faith by appropriate proceedings), except for liens that are not reasonably likely, individually or in the aggregate, to have a N2K Material Adverse Effect. (c) Neither N2K nor any of its Subsidiaries is or has been a member of an affiliated group of corporations filing a consolidated federal income tax return (or a group of corporations filing a consolidated, combined or unitary income tax return under comparable provisions of state, local or foreign tax law) other than a group the common parent of which is or was N2K or any Subsidiary of N2K. (d) Neither N2K nor any of its Subsidiaries has any obligation under any agreement or arrangement with any other person with respect to Taxes of such other person (including pursuant to Treas. Reg. (S) 1.1502-6 or comparable provisions of state, local or foreign tax law) and including any liability for Taxes of any predecessor entity, except for obligations that are not reasonably likely, individually or in the aggregate, to have a N2K Material Adverse Effect. (e) Neither N2K nor any of its subsidiaries (i) has agreed to or is required to make any adjustments pursuant to Section 481 of the Code; (ii) has knowledge that the IRS has proposed any such adjustment or a change in accounting method with respect to such entity; or (iii) has an application pending with the IRS or any other taxing authority requesting permission for any change in accounting method. (f) Neither N2K nor any of its subsidiaries was, at any time during the period specified in Section 897(c)(1)(A)(ii) of the Code, a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code. Section 3.8. Properties. (a) Neither N2K nor any of its Subsidiaries is in default under any leases for real property leased by N2K or any of its Subsidiaries, except where the existence of such defaults, individually or in the aggregate, is not reasonably likely to have a N2K Material Adverse Effect. (b) With respect to each item of real property that N2K or any of its Subsidiaries owns, except for such matters that, individually or in the aggregate, are not reasonably likely to have a N2K Material APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-10 Adverse Effect: (i) N2K or its Subsidiary has good and clear record and marketable title to such property, insurable by a recognized national title insurance company at standard rates, free and clear of any security interest, easement, covenant or other restriction, except for recorded easements, covenants and other restrictions which do not materially impair the current uses or occupancy of such property; and (ii) the improvements constructed on such property are in good condition, and all mechanical and utility systems servicing such improvements are in good condition, free in each case of material defects. Section 3.9. Intellectual Property. N2K (or one or more of its Subsidiaries) owns, or is licensed or otherwise possesses legally enforceable rights to use, all trademarks, trade names, service marks, copyrights, and any applications for such trademarks, trade names, service marks and copyrights, know-how, computer software programs or applications and tangible or intangible proprietary information or material that are presently employed by N2K or necessary to conduct the business of N2K as currently conducted, subject to such exceptions that, individually and in the aggregate, would not be reasonably likely to have a N2K Material Adverse Effect. Neither N2K nor any of its Subsidiaries has received any written notice or otherwise has actual knowledge of any infringement of or conflict with asserted rights of others or any other claims with respect to any patent and proprietary rights, or of any basis for rendering any patent and proprietary rights invalid or inadequate to protect the interest of N2K or any of its Subsidiaries. Section 3.10. Agreements, Contracts and Commitments. (a) Neither N2K nor any of its Subsidiaries has breached, or received in writing any claim or notice that it has breached, any of the terms or conditions of any Material Contract ("N2K Material Contracts") in such a manner as, individually or in the aggregate, are reasonably likely to have a N2K Material Adverse Effect. Each N2K Material Contract that has not expired by its terms is in full force and effect. For purposes of this Agreement, the term "Material Contract" means, in the case of N2K or CDnow, any contract, agreement or commitment that (i) provides for the cash payment, equivalent equity outlay or provision of services (A) in an amount greater than $50,000 per annum (or, in the case of contracts, agreements or commitments related to N2K's Encoded Music Business, $10,000) or (B) $150,000 over the term of the agreement or (ii) establishes any form of exclusivity restriction on such party for the calendar year 1999 and/or thereafter. Each N2K Material Contract is listed on Section 3.10 of the N2K Disclosure Schedule and each N2K Material Contract that relates to N2K's Encoded Music business is separately identified on Section 3.10 of the N2K Disclosure Schedule. (b) Without limiting Section 3.10(a), each of the N2K Material Contracts to which N2K or any of its Subsidiaries is a party (i) is valid and binding in accordance with its terms and is in full force and effect, (ii) neither N2K nor any of its Subsidiaries is in default in any material respect thereof, nor does any condition exist that with notice or lapses of time or both would constitute a material default thereunder, and (iii) no party has given any written or (to the knowledge of N2K) oral notice of termination or cancellation thereof or that such party intends to assert a breach thereof, or seek to terminate or cancel, any such agreement, contract or lease, in each case as a result of the transactions contemplated hereby, subject to such exceptions that, individually and in the aggregate, would not be reasonably likely to have a N2K Material Adverse Effect. (c) The execution and delivery of this Agreement by N2K does not, and the consummation of the transactions contemplated by this Agreement will not, result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require the consent or waiver under, any of the material terms, conditions or provisions of the N2K Material Contracts identified on Section 3.10(c) of the N2K Disclosure Schedule. Section 3.11. Litigation. (a) Except as described in the N2K SEC Reports filed prior to the date hereof, there is no action, suit or proceeding, claim, arbitration or investigation against N2K or any of its Subsidiaries pending or as to which N2K or any of its Subsidiaries has received any written notice of assertion, which, individually or in the APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-11 aggregate, is reasonably likely to have a N2K Material Adverse Effect or a material adverse effect on the ability of N2K to consummate the transactions contemplated by this Agreement. (b) The litigation referred to on Section 3.11(b) of the N2K Disclosure Schedule is covered (subject to deductibles, limitations, retentions and restrictions contained therein) by N2K's director and officer insurance policies. N2K has provided to CDnow copies of all correspondence with the insurance carriers with respect to such litigation. Section 3.12. Environmental Matters. (a) To the knowledge of N2K and except as disclosed in the N2K SEC Reports filed prior to the date hereof and except for such matters that, individually or in the aggregate, are not reasonably likely to have a N2K Material Adverse Effect: (i) N2K and its Subsidiaries have complied with all applicable Environmental Laws (as defined in Section 3.12(b)); (ii) the properties currently owned or operated by N2K and its Subsidiaries (including soils, groundwater, surface water, buildings or other structures) are not contaminated with any Hazardous Substances (as defined in Section 3.12(c)); (iii) the properties formerly owned or operated by N2K or any of its Subsidiaries were not contaminated with Hazardous Substances during the period of ownership or operation by N2K or any of its Subsidiaries; (iv) neither N2K nor its Subsidiaries are subject to liability for any Hazardous Substance disposal or contamination on any third party property; (v) neither N2K nor any of its Subsidiaries has been associated with any release or threat of release of any Hazardous Substance; (vi) neither N2K nor any of its Subsidiaries has received any notice, demand, letter, claim or request for information alleging that N2K or any of its Subsidiaries may be in violation of or liable under any Environmental Law; (vii) neither N2K nor any of its Subsidiaries is subject to any orders, decrees, injunctions or other arrangements with any Governmental Entity or is subject to any indemnity or other agreement with any third party relating to liability under any Environmental Law or relating to Hazardous Substances; and (viii) there are no circumstances or conditions involving N2K or any of its Subsidiaries that could reasonably be expected to result in any claims, liability, investigations, costs or restrictions on the ownership, use or transfer of any property of N2K or any of its Subsidiaries pursuant to any Environmental Law. (b) As used herein, the term "Environmental Law" means any federal, state, local or foreign law, regulation, order, decree, permit, authorization, opinion, common law or agency requirement relating to: (A) the protection, investigation or restoration of the environment, health and safety, or natural resources, (B) the handling, use, presence, disposal, release or threatened release of any Hazardous Substance or (C) noise, odor, wetlands, pollution, contamination or any injury or threat of injury to persons or property. (c) As used herein, the term "Hazardous Substance" means any substance that is: (A) listed, classified or regulated pursuant to any Environmental Law; (B) any petroleum product or by-product, asbestos-containing material, lead-containing paint or plumbing, polychlorinated biphenyls, radioactive materials or radon; or (C) any other substance which is the subject of regulatory action by any Governmental Entity pursuant to any Environmental Law. Section 3.13. Employee Benefit Plans. (a) Section 3.13 of the N2K Disclosure Schedule contains a complete list of all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all employment and severance agreements, and all bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar employee benefit plans, programs, policies and agreements, written or otherwise, in each case that is sponsored, maintained, contributed to or required to be contributed to by N2K or any of its Subsidiaries or any trade or business (whether or not incorporated) which, together with N2K or any of its Subsidiaries, would be deemed a "single employer" under Section 4001(b) of ERISA (an "ERISA Affiliate"), or to which N2K, any of its Subsidiaries or any ERISA Affiliate is a party for the benefit of any current or former employee, consultant, director or independent contractor of N2K or any of its Subsidiaries (together, the "N2K Employee Plans"). APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-12 (b) N2K has delivered or made available to CDnow: (i) accurate and complete copies of all N2K Employee Plan documents and any summary plan descriptions, summary annual reports and insurance contracts relating thereto, (ii) accurate and complete detailed summaries of all unwritten N2K Employee Plans, (iii) accurate and complete copies of the most recent financial statements and actuarial reports with respect to all N2K Employee Plans for which financial statements or actuarial reports are required or have been prepared and (iv) accurate and complete copies of all annual reports for all N2K Employee Plans (for which annual reports are required) prepared within the last two years. (c) All N2K Employee Plans conform in all material respects to, and are being administered and operated in all material respects in compliance with, the requirements of ERISA, the Code and all other applicable laws, including applicable laws of foreign jurisdictions. There have not been any "prohibited transactions," as such term is defined in Section 4975 of the Code or Section 406 of ERISA, involving any of the N2K Employee Plans that could subject N2K or any of its Subsidiaries to any penalties or taxes imposed under the Code or ERISA. (d) Except as set forth in the N2K Disclosure Schedule, any N2K Employee Plan that is intended to be qualified under Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code has been determined by the Internal Revenue Service to be so qualified, and such determination remains in effect and has not been revoked. Nothing has occurred since the date of any such determination that is reasonably likely to affect adversely such qualification or exemption in any material respect, or result in the imposition of material excise taxes or income taxes on unrelated business income under the Code or ERISA with respect to any N2K Employee Plan. (e) Except as set forth in the N2K Disclosure Schedule, neither N2K, any of its Subsidiaries nor any ERISA Affiliate (i) has or at any time in the past has had a current or contingent obligation to contribute to any multiemployer plan (as defined in Section 3(37) of ERISA) or (ii) has or at any time in the past has had any liability, contingent or otherwise, under Title IV of ERISA or Section 412 of the Code. (f) There are no pending or, to the knowledge of N2K or any of its Subsidiaries, threatened claims by or on behalf of any N2K Employee Plan, or by or on behalf of any individual participants or beneficiaries of any N2K Employee Plan, alleging any breach of fiduciary duty on the part of N2K or any of its Subsidiaries or any of the officers, directors or employees of N2K or any of its Subsidiaries under ERISA or any other applicable Regulations, or claiming benefit payments other than those made in the ordinary operation of such plans, or alleging any violation of any other applicable Laws. To the knowledge of N2K or any of its Subsidiaries, the N2K Employee Plans are not the subject of any investigation, audit or action by the Internal Revenue Service, the Department of Labor or the Pension Benefit Guaranty Corporation ("PBGC"). (g) With respect to any N2K Employee Plan that is an employee welfare benefit plan (within the meaning of Section 3(1) of ERISA) (a "N2K Welfare Plan"), (i) each N2K Welfare Plan for which contributions are claimed as deductions under any provision of the Code is in compliance in all material respects with all applicable requirements pertaining to such deduction and (ii) any N2K Employee Plan that is a group health plan (within the meaning of Section 4980B(g)(2) of the Code) complies, and in each and every case has complied in all material respects, with all of the requirements of ERISA and Section 4980B of the Code. No welfare benefit fund (within the meaning of Section 419(e)(1) of the Code) or voluntary employees' beneficiary association (within the meaning of 501(c)(9) of the Code) has been established or maintained in connection with a N2K Welfare Plan. (h) Except as disclosed in the N2K Disclosure Schedule or N2K SEC Reports filed prior to the date of this Agreement, and except as provided for in this Agreement, the execution of this Agreement and the performance of the transactions contemplated hereunder will not (either alone or in combination with the occurrence of any additional or subsequent events) constitute an event under any N2K Employee Plan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any current or former employee, director or consultant of N2K or any of its Subsidiaries. No payments or benefits under any N2K Employee Plan or other agreement of N2K would result in an "excess parachute payment" under Section 280G of the Code that would cause a loss of tax deduction that would be material. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-13 Section 3.14. Compliance With Laws. N2K has complied with, is not in violation of, and has not received any notices of violation with respect to, any federal, state or local statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for failures to comply or violations which, individually or in the aggregate, have not had and are not reasonably likely to have a N2K Material Adverse Effect. Section 3.15. Tax Matters. (a) To the best knowledge of N2K, after consulting with its tax advisors, neither N2K nor any of its Affiliates (as defined in Section 5.12) has taken or agreed to take any action which would prevent the N2K Merger from qualifying as a reorganization described in Section 368(a) of the Code and/or, taken together with the CDnow Merger, as a transfer of property to Newco by holders of N2K Common Stock described in Section 351 of the Code. Except as contemplated by the N2K Option Agreement, neither N2K nor any of its Subsidiaries owns any shares of CDnow Common Stock or other securities convertible into shares of CDnow Common Stock (exclusive of any shares owned by N2K's employee benefit plans). (b) To the best knowledge of N2K, the stockholders of N2K as a group have no present plan, intention or arrangement to sell or otherwise dispose of such number of the shares of Newco Common Stock received in the N2K Merger as would reduce their ownership in Newco Common Stock to a number of shares having a value, as of the date of the N2K Merger, of less than eighty percent (80%) of the value of all the formerly outstanding stock of N2K as of the same date. Section 3.16. Registration Statement; Joint Proxy Statement/Prospectus. The information to be supplied by N2K for inclusion or incorporation by reference in the registration statement on Form S-4 pursuant to which shares of Newco Common Stock issued in the Mergers will be registered under the Securities Act (the "Registration Statement"), shall not at the time the Registration Statement is declared effective by the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated in the Registration Statement or necessary in order to make the statements in the Registration Statement, in light of the circumstances under which they were made, not misleading. The information supplied by N2K for inclusion or incorporation by reference in the joint proxy statement/prospectus to be sent to the stockholders of CDnow and N2K in connection with the meeting of N2K's stockholders (the "N2K Stockholders' Meeting") and the meeting of CDnow's stockholders (the "CDnow Stockholders' Meeting") to consider this Agreement and the Mergers (the "Joint Proxy Statement/Prospectus") shall not, on the date the Joint Proxy Statement/Prospectus is first mailed to stockholders of N2K or CDnow, at the time of the N2K Stockholders' Meeting and the CDnow Stockholders' Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, omit to state any material fact necessary in order to make the statements made in the Joint Proxy Statement/Prospectus not false or misleading, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the N2K Stockholders' Meeting or the CDnow Stockholders' Meeting which has become false or misleading. Section 3.17. Labor Matters. Except as disclosed in the N2K SEC Reports filed prior to the date hereof, neither N2K nor any of its Subsidiaries is a party to or otherwise bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor, as of the date hereof, is N2K or any of its Subsidiaries the subject of any material proceeding asserting that N2K or any of its Subsidiaries has committed an unfair labor practice or is seeking to compel it to bargain with any labor union or labor organization nor, as of the date of this Agreement, is there pending or, to the knowledge of the executive officers of N2K, threatened, any material labor strike, dispute, walkout, work stoppage, slow-down or lockout involving N2K or any of its Subsidiaries. Section 3.18. Insurance. All material fire and casualty, general liability, business interruption, product liability, and sprinkler and water damage insurance policies maintained by N2K or any of its Subsidiaries are with reputable insurance carriers, provide full and adequate coverage for all normal risks APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-14 incident to the business of N2K and its Subsidiaries and their respective properties and assets, and are in character and amount at least equivalent to that carried by persons engaged in similar businesses and subject to the same or similar perils or hazards, except for any such failures to maintain insurance policies that, individually or in the aggregate, are not reasonably likely to have a N2K Material Adverse Effect. N2K has maintained such policies on a continuous basis since January 1996. Section 3.19. Opinion of Financial Advisor. The financial advisor of N2K, Allen & Company, Incorporated, has delivered to N2K an opinion dated the date of this Agreement to the effect that the N2K Exchange Ratio is fair to the holders of N2K Common Stock from a financial point of view. Section 3.20. No Existing Discussions. As of the date hereof, N2K is not engaged, directly or indirectly, in any discussions or negotiations with any other party with respect to an Acquisition Proposal (as defined in Section 5.3). Section 3.21. Section 203 of the DGCL Not Applicable. The restrictions contained in Section 203 of the DGCL applicable to a "business combination" (as defined in DGCL Section 203) will not apply to the authorization, execution, delivery and performance of this Agreement or the Stock Option Agreements by N2K or the Stockholder Support Agreement by the parties thereto or the consummation of the N2K Merger by N2K. No other "fair price," "moratorium," "control share acquisition" or other similar anti-takeover statute or regulation is applicable to N2K or (by reason of N2K's participation therein) the N2K Merger or the other transactions contemplated by this Agreement. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF CDNOW CDnow represents and warrants to N2K that the statements contained in this Article IV are true and correct, except as set forth in the disclosure schedule delivered by CDnow to N2K on or before the date of this Agreement (the "CDnow Disclosure Schedule"). Section 4.1. Organization of CDnow. Each of CDnow and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power to own, lease and operate its property and to carry on its business as now being conducted and as proposed to be conducted, and is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the business, properties, financial condition or results of operations of CDnow and its Subsidiaries, taken as a whole (a "CDnow Material Adverse Effect"). A true and correct copy of the Certificate of Incorporation and Bylaws of CDnow and each of its Subsidiaries has been delivered to N2K. Except as set forth in the CDnow SEC Reports (as defined in Section 4.4) filed prior to the date hereof, neither CDnow nor any of its Subsidiaries directly or indirectly owns (other than ownership interests in CDnow or in one or more of its Subsidiaries) any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any corporation, partnership, joint venture or other business association or entity, excluding (i) securities in any publicly traded company held for investment by CDnow and comprising less than five percent (5%) of the outstanding stock of such company and (ii) any investment or series of related investments with a book value of less than $1 million. Section 4.2. CDnow Capital Structure. (a) The authorized capital stock of CDnow consists of 50,000,000 shares of CDnow Common Stock and 20,000,000 shares of preferred stock, no par value ("CDnow Preferred Stock"). As of the date hereof, (i) 17,674,405 shares of CDnow Common Stock were issued and outstanding, all of which are validly issued, fully paid and nonassessable, (ii) no shares of CDnow Common Stock were held in the treasury of CDnow or by Subsidiaries of CDnow and (iii) no shares of CDnow Preferred Stock were issued and APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-15 outstanding. Section 4.2(a) of the CDnow Disclosure Schedule shows the number of shares of CDnow Common Stock reserved for future issuance pursuant to stock options granted and outstanding as of the date hereof and the plans under which such options were granted (collectively, the "CDnow Stock Plans"). There are no obligations, contingent or otherwise, of CDnow or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of CDnow Common Stock or the capital stock of any Subsidiary or to provide funds to or make any material investment (in the form of a loan, capital contribution or otherwise) in any such Subsidiary or any other entity other than guarantees of bank obligations or indebtedness for borrowed money of Subsidiaries entered into in the ordinary course of business and other than any obligation the failure of which to perform or satisfy would not have a CDnow Material Adverse Effect. All of the outstanding shares of capital stock or other ownership interests of each of CDnow's Subsidiaries are duly authorized, validly issued, fully paid and nonassessable and all such shares (other than directors' qualifying shares in the case of foreign Subsidiaries) are owned by CDnow or another Subsidiary of CDnow free and clear of all security interests, liens, claims, pledges, agreements, limitations in CDnow's voting rights, charges or other encumbrances of any nature. (b) Except as set forth in this Section 4.2 or as reserved for future grants of options under the CDnow Stock Plans or the N2K Stock Option Agreement and the options and warrants described in Section 4.2(b) of the CDnow Disclosure Schedule, (i) there are no shares of capital stock of any class of CDnow, or any security exchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding; (ii) there are no options, warrants, equity securities, calls, rights, commitments or agreements of any character to which CDnow or any of its Subsidiaries is a party or by which it is bound obligating CDnow or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock or other ownership interests of CDnow or any of its Subsidiaries or obligating CDnow or any of its Subsidiaries to grant, extend, accelerate the vesting of or enter into any such option, warrant, equity security, call, right, commitment or agreement; and (iii) to the best knowledge of CDnow, there are no voting trusts, proxies or other voting agreements or understandings with respect to the shares of capital stock of CDnow. All shares of CDnow Common Stock subject to issuance as specified in this Section 4.2 are duly authorized and, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be validly issued, fully paid and nonassessable. Section 4.3. Authority; No Conflict; Required Filings and Consents. (a) CDnow has all requisite corporate power and authority to enter into this Agreement, the Stock Option Agreements and, subject to obtaining any necessary stockholder approval of this agreement to consummate the transactions contemplated by this Agreement, the Stock Option Agreements. The execution and delivery of this Agreement, the Stock Option Agreements and the consummation of the transactions contemplated by this Agreement, the Stock Option Agreements by CDnow have been duly authorized by all necessary corporate action on the part of CDnow, subject only to the approval and adoption of this Agreement and the CDnow Merger by CDnow's stockholders under the PBCL and the DGCL. This Agreement, the Stock Option Agreements and the Stockholder Support Agreement have been duly executed and delivered by CDnow and constitute the valid and binding obligations of CDnow, enforceable in accordance with their terms, subject to the Bankruptcy and Equity Exception. (b) The execution and delivery of this Agreement and the Stock Option Agreements by CDnow does not, and the consummation of the transactions contemplated by this Agreement, the Stock Option Agreements and the Stockholder Support Agreement will not, (i) conflict with, or result in any violation or breach of, any provision of the Certificate of Incorporation or Bylaws of CDnow or any of its Subsidiaries, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require a consent or waiver under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which CDnow or any of its Subsidiaries is a party or by which any of them or any of their properties or assets may be bound or (iii) conflict with or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to CDnow or any of its Subsidiaries or any of its or their properties or APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-16 assets, except in the case of (ii) and (iii) for any such conflicts, violations, defaults, terminations, cancellations or accelerations which (x) are not, individually or in the aggregate, reasonably likely to have a CDnow Material Adverse Effect or (y) would not substantially impair or delay the consummation of the CDnow Merger. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to CDnow or any of its Subsidiaries in connection with the execution and delivery of this Agreement and the Stock Option Agreements or the consummation of the transactions contemplated hereby or thereby, except for (i) the filing of the pre-merger notification report under the HSR Act, (ii) the expiration or termination of the waiting period under the HSR Act, (iii) the filing of Articles of Merger with respect to the CDnow Merger with the Pennsylvania Secretary of State, (iv) the filing of the Joint Proxy Statement/Prospectus with the SEC in accordance with the Exchange Act and the Securities Act, (v) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the laws of any foreign country and (vi) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not (x) be reasonably likely to have a CDnow Material Adverse Effect or (y) substantially impair or delay the consummation of the CDnow Merger. Section 4.4. SEC Filings; Financial Statements. (a) CDnow has filed and made available to N2K all forms, reports and documents required to be filed by CDnow with the SEC since February 9, 1998 (collectively, the "CDnow SEC Reports"). The CDnow SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Securities Act and the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such CDnow SEC Reports or necessary in order to make the statements in such CDnow SEC Reports, in the light of the circumstances under which they were made, not misleading. None of CDnow's Subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes) of CDnow contained in the CDnow SEC Reports complied as to form in all material respects with the applicable published rules and regulations of the SEC with respect thereto, was prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unaudited statements, as permitted by Form 10-Q under the Exchange Act) and fairly presented the consolidated financial position of CDnow and its Subsidiaries as of the dates and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. The balance sheet of CDnow as of June 30, 1998 is referred to herein as the "CDnow Balance Sheet." Section 4.5. No Undisclosed Liabilities. Except as disclosed in the CDnow SEC Reports filed prior to the date hereof, and except for normal or recurring liabilities incurred since June 30, 1998 in the ordinary course of business consistent with past practices, CDnow and its Subsidiaries do not have any liabilities, either accrued, contingent or otherwise, of the type required to be reflected in financial statements in accordance with generally accepted accounting principles, and whether due or to become due, which individually or in the aggregate, are reasonably likely to have a CDnow Material Adverse Effect. Section 4.6. Absence of Certain Changes or Events. Except as disclosed in the CDnow SEC Reports filed prior to the date hereof, since the date of the CDnow Balance Sheet, CDnow and its Subsidiaries have conducted their businesses only in the ordinary course and in a manner consistent with past practice and, since such date, there has not been (i) any event, development, state of affairs or condition, or series or combination of events, developments, states of affairs or conditions, which, individually or in the aggregate, has had or which is reasonably likely to have a CDnow Material Adverse Effect (other than events, APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-17 developments, states of affairs or conditions that are the effect or result of actions taken by N2K or economic factors affecting the economy as a whole or the industry in which CDnow competes); (ii) any damage, destruction or loss (whether or not covered by insurance) with respect to CDnow or any of its Subsidiaries which is reasonably likely to have a CDnow Material Adverse Effect; (iii) any material change by CDnow in its accounting methods, principles or practices to which N2K has not previously consented in writing; (iv) any revaluation by CDnow of any of its assets which is reasonably likely to have a CDnow Material Adverse Effect; or (v) any other action or event that would have required the consent of N2K pursuant to Section 5.1 of this Agreement had such action or event occurred after the date of this Agreement, other than such actions or events that, individually or in the aggregate, have not had or are not reasonably likely to have a CDnow Material Adverse Effect. Section 4.7. Taxes. (a) CDnow and each of its Subsidiaries have (i) filed all federal, state, local and foreign Tax returns and reports, required to be filed by them prior to the date of this Agreement (taking into account all applicable extensions), (ii) paid or accrued all Taxes due and payable, and (iii) paid or accrued all Taxes for which a notice of assessment or collection has been received (other than amounts being contested in good faith by appropriate proceedings), except in the case of clauses (i), (ii) or (iii) for any such filings, payments or accruals that are not reasonably likely, individually or in the aggregate, to have a CDnow Material Adverse Effect. Neither the IRS nor any other taxing authority has asserted any claim for Taxes, or to the actual knowledge of the executive officers of CDnow, is threatening to assert any claims for Taxes, which claims, individually or in the aggregate, are reasonably likely to have a CDnow Material Adverse Effect. CDnow and each of its Subsidiaries have withheld or collected and paid over to the appropriate governmental authorities (or are properly holding for such payment) all Taxes required by law to be withheld or collected, except for amounts that are not reasonably likely, individually or in the aggregate, to have a CDnow Material Adverse Effect. Neither CDnow nor any of its Subsidiaries has made an election under Section 341(f) of the Code, except for any such election that shall not have a CDnow Material Adverse Effect. There are no liens for Taxes upon the assets of CDnow or any of its Subsidiaries (other than liens for Taxes that are not yet due or delinquent or that are being contested in good faith by appropriate proceedings), except for liens that are not reasonably likely, individually or in the aggregate, to have a CDnow Material Adverse Effect. (b) Neither CDnow nor any of its Subsidiaries is or has been a member of an affiliated group of corporations filing a consolidated federal income tax return (or a group of corporations filing a consolidated, combined or unitary income tax return under comparable provisions of state, local or foreign tax law) other than a group the common parent of which is or was CDnow or any Subsidiary of CDnow. (c) Neither CDnow nor any of its Subsidiaries has any obligation under any agreement or arrangement with any other person with respect to Taxes of such other person (including pursuant to Treas. Reg. (S) 1.1502-6 or comparable provisions of state, local or foreign tax law) and including any liability for Taxes of any predecessor entity, except for obligations that are not reasonably likely, individually or in the aggregate, to have an CDnow Material Adverse Effect. (d) Neither CDnow nor any of its subsidiaries (i) has agreed to or is required to make any adjustments pursuant to Section 481 of the Code; (ii) has knowledge that the IRS has proposed any such adjustment or a change in accounting method with respect to such entity; or (iii) has an application pending with the IRS or any other taxing authority requesting permission for any change in accounting method. (e) Neither CDnow nor any of its subsidiaries was, at any time during the period specified in Section 897(c)(1)(A)(ii) of the Code, a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code. Section 4.8. Properties. (a) Neither CDnow nor any of its Subsidiaries is in default under any leases for real property leased by CDnow or any of its Subsidiaries, except where the existence of such defaults, individually or in the aggregate, is not reasonably likely to have a CDnow Material Adverse Effect. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-18 (b) With respect to each item of real property that CDnow or any of its Subsidiaries owns, except for such matters that, individually or in the aggregate, are not reasonably likely to have a CDnow Material Adverse Effect: (i) CDnow or its Subsidiary has good and clear record and marketable title to such property, insurable by a recognized national title insurance company at standard rates, free and clear of any security interest, easement, covenant or other restriction, except for recorded easements, covenants and other restrictions which do not materially impair the current uses or occupancy of such property; and (ii) the improvements constructed on such property are in good condition, and all mechanical and utility systems servicing such improvements are in good condition, free in each case of material defects. Section 4.9. Intellectual Property. CDnow (or one or more of its Subsidiaries) owns, or is licensed or otherwise possesses legally enforceable rights to use, all trademarks, trade names, service marks, copyrights, and any applications for such trademarks, trade names, service marks and copyrights, know-how, computer software programs or applications, and tangible or intangible proprietary information or material that are necessary to conduct the business of CDnow as currently conducted, subject to such exceptions that, individually and in the aggregate, would not be reasonably likely to have a CDnow Material Adverse Effect. Neither CDnow nor any of its Subsidiaries has received any written notice or otherwise has actual knowledge of any infringement of or conflict with asserted rights of others or any other claims with respect to any patent and proprietary rights, or of any basis for rendering any patent and proprietary rights invalid or inadequate to protect the interest of CDnow or any of its Subsidiaries. Section 4.10. Agreements; Contracts and Commitments. (a) Neither CDnow nor any of its Subsidiaries has breached, or received in writing any claim or notice that it has breached, any of the terms or conditions of any Material Contract ("CDnow Material Contracts") in such a manner as, individually or in the aggregate, are reasonably likely to have a CDnow Material Adverse Effect. Each CDnow Material Contract that has not expired by its terms is in full force and effect. Each CDnow Material Contract is listed on Section 4.10 of the CDnow Disclosure Schedule. (b) Without limiting Section 4.10(a), each of the CDnow Material Contracts to which CDnow is a party (i) is valid and binding in accordance with its terms and is in full force and effect, (ii) neither CDnow nor any of its Subsidiaries is in default in any material respect thereof, nor does any condition exist that with notice or lapses of time or both would constitute a material default thereunder, and (iii) no party has given any written or (to the knowledge of CDnow) oral notice of termination or cancellation thereof or that such party intends to assert a breach thereof, or seek to terminate or cancel, any such agreement, contract or lease, in each case as a result of the transactions contemplated hereby, subject to such exceptions that, individually and in the aggregate, would not be reasonably likely to have a CDnow Material Adverse Effect. (c) The execution and delivery of this Agreement by CDnow does not, and the consummation of the transactions contemplated by this Agreement will not, result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any material benefit) under, or require the consent or waiver under, any of the material terms, conditions or provisions of the CDnow Material Contracts identified on Section 4.10(c) of the CDnow Disclosure Schedule. Section 4.11. Litigation. Except as described in the CDnow SEC Reports filed prior to the date hereof, there is no action, suit or proceeding, claim, arbitration or investigation against CDnow pending or as to which CDnow has received any written notice of assertion, which, individually or in the aggregate, is reasonably likely to have a CDnow Material Adverse Effect or a material adverse effect on the ability of CDnow to consummate the transactions contemplated by this Agreement. Section 4.12. Environmental Matters. To the knowledge of CDnow and except as disclosed in the CDnow SEC Reports filed prior to the date hereof and except for such matters that, individually or in the aggregate, are not reasonably likely to have a CDnow Material Adverse Effect: (i) CDnow and its Subsidiaries have complied with all applicable Environmental Laws; (ii) the properties currently owned or operated by APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-19 CDnow and its Subsidiaries (including soils, groundwater, surface water, buildings or other structures) are not contaminated with any Hazardous Substances; (iii) the properties formerly owned or operated by CDnow or any of its Subsidiaries were not contaminated with Hazardous Substances during the period of ownership or operation by CDnow or any of its Subsidiaries; (iv) neither CDnow nor its Subsidiaries are subject to liability for any Hazardous Substance disposal or contamination on any third party property; (v) neither CDnow nor any of its Subsidiaries has been associated with any release or threat of release of any Hazardous Substance; (vi) neither CDnow nor any of its Subsidiaries has received any notice, demand, letter, claim or request for information alleging that CDnow or any of its Subsidiaries may be in violation of or liable under any Environmental Law; (vii) neither CDnow nor any of its Subsidiaries is subject to any orders, decrees, injunctions or other arrangements with any Governmental Entity or is subject to any indemnity or other agreement with any third party relating to liability under any Environmental Law or relating to Hazardous Substances; and (viii) there are no circumstances or conditions involving CDnow or any of its Subsidiaries that could reasonably be expected to result in any claims, liability, investigations, costs or restrictions on the ownership, use or transfer of any property of CDnow or any of its Subsidiaries pursuant to any Environmental Law. Section 4.13. Employee Benefit Plans. (a) Section 4.13 of the CDnow Disclosure Schedule contains a complete list of all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all employment and severance agreements, and all bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance and other similar employee benefit plans, programs, policies and agreements, written or otherwise, in each case that is sponsored, maintained, contributed to or required to be contributed to by CDnow or any of its Subsidiaries or any trade or business (whether or not incorporated) which, together with CDnow or any of its Subsidiaries, would be deemed a "single employer" under Section 4001(b) of ERISA (an "ERISA Affiliate"), or to which CDnow, any of its Subsidiaries or any ERISA Affiliate is a party for the benefit of any current or former employee, consultant, director or independent contractor of CDnow or any of its Subsidiaries (together, the "CDnow Employee Plans"). (b) CDnow has delivered or made available to N2K: (i) accurate and complete copies of all CDnow Employee Plan documents and any summary plan descriptions, summary annual reports and insurance contracts relating thereto, (ii) accurate and complete detailed summaries of all unwritten CDnow Employee Plans, (iii) accurate and complete copies of the most recent financial statements and actuarial reports with respect to all CDnow Employee Plans for which financial statements or actuarial reports are required or have been prepared and (iv) accurate and complete copies of all annual reports for all CDnow Employee Plans (for which annual reports are required) prepared within the last two years. (c) All CDnow Employee Plans conform in all material respects to, and are being administered and operated in all material respects in compliance with, the requirements of ERISA, the Code and all other applicable laws, including applicable laws of foreign jurisdictions. There have not been any "prohibited transactions," as such term is defined in Section 4975 of the Code or Section 406 of ERISA, involving any of the CDnow Employee Plans that could subject CDnow or any of its Subsidiaries to any penalties or taxes imposed under the Code or ERISA. (d) Except as set forth in the CDnow Disclosure Schedule, any CDnow Employee Plan that is intended to be qualified under Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code has been determined by the Internal Revenue Service to be so qualified, and such determination remains in effect and has not been revoked. Nothing has occurred since the date of any such determination that is reasonably likely to affect adversely such qualification or exemption in any material respect, or result in the imposition of excise taxes or income taxes on unrelated business income under the Code or ERISA with respect to any CDnow Employee Plan. (e) Except as set forth in the CDnow Disclosure Schedule, neither CDnow, any of its Subsidiaries nor any ERISA Affiliate (i) has or at any time in the past has had a current or contingent APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-20 obligation to contribute to any multiemployer plan (as defined in Section 3(37) of ERISA) or (ii) has or at any time in the past has had any liability, contingent or otherwise, under Title IV of ERISA or Section 412 of the Code. (f) There are no pending or, to the knowledge of CDnow or any of its Subsidiaries, threatened claims by or on behalf of any CDnow Employee Plan, or by or on behalf of any individual participants or beneficiaries of any CDnow Employee Plan, alleging any breach of fiduciary duty on the part of CDnow or any of its Subsidiaries or any of the officers, directors or employees of CDnow or any of its Subsidiaries under ERISA or any other applicable Regulations, or claiming benefit payments other than those made in the ordinary operation of such plans, or alleging any violation of any other applicable Laws. To the knowledge of CDnow or any of its Subsidiaries, the CDnow Employee Plans are not the subject of any investigation, audit or action by the Internal Revenue Service, the Department of Labor or the PBGC. (g) With respect to any CDnow Employee Plan that is an employee welfare benefit plan (within the meaning of Section 3(1) of ERISA) (a "CDnow Welfare Plan"), (i) each CDnow Welfare Plan for which contributions are claimed as deductions under any provision of the Code is in compliance in all material respects with all applicable requirements pertaining to such deduction and (ii) any CDnow Employee Plan that is a group health plan (within the meaning of Section 4980B(g)(2) of the Code) complies, and in each and every case has complied in all material respects, with all of the requirements of ERISA and Section 4980B of the Code. No welfare benefit fund (within the meaning of Section 419(e)(1) of the Code) or voluntary employees' beneficiary association (within the meaning of 501(c)(9) of the Code) has been established or maintained in connection with a CDnow Welfare Plan. (h) Except as disclosed in the CDnow Disclosure Schedule or CDnow SEC Reports filed prior to the date of this Agreement, and except as provided for in this Agreement, the execution of this Agreement and the performance of the transactions contemplated hereunder will not (either alone or in combination with the occurrence of any additional or subsequent events) constitute an event under any CDnow Employee Plan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any current or former employee, director or consultant of CDnow or any of its Subsidiaries. No payments or benefits under any CDnow Employee Plan or other agreement of CDnow would result in an "excess parachute payment" under Section 280G of the Code that would cause a loss of tax deduction that would be material. Section 4.14. Compliance With Laws. CDnow has complied with, is not in violation of, and has not received any notices of violation with respect to, any federal, state or local statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for failures to comply or violations which, individually or in the aggregate, have not had and are not reasonably likely to have a CDnow Material Adverse Effect. Section 4.15. Tax Matters. (a) To the best knowledge of CDnow, after consulting with tax advisors, neither CDnow nor any of its Affiliates (as defined in Section 5.12) has taken or agreed to take any action which would prevent the CDnow Merger from qualifying as a reorganization described in Section 368(a) of the Code and/or, taken together with the N2K Merger, as a transfer of property to Newco by holders of CDnow Common Stock described in Section 351 of the Code. Except as contemplated by the CDnow Option Agreement, neither CDnow nor any of its Subsidiaries owns any shares of N2K Common Stock or other securities convertible into shares of N2K Common Stock (exclusive of any shares owned by CDnow's employee benefit plans). (b) To the best knowledge of CDnow, the stockholders of CDnow as a group have no present plan, intention or arrangement to sell or otherwise dispose of such number of the shares of Newco Common Stock received in the CDnow Merger as would reduce their ownership in Newco Common Stock to a number of shares having a value, as of the date of the CDnow Merger, of less than eighty percent (80%) of the value of all the formerly outstanding stock of CDnow as of the same date. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-21 Section 4.16. Registration Statement; Joint Proxy Statement/Prospectus. The information to be supplied by CDnow for inclusion or incorporation by reference in the Registration Statement shall not at the time the Registration Statement is declared effective by the SEC contain any untrue statement of a material fact or omit to state any material fact required to be stated in the Registration Statement or necessary in order to make the statements in the Registration Statement, in light of the circumstances under which they were made, not misleading. The information to be supplied by CDnow for inclusion or incorporation by reference in the Joint Proxy Statement/Prospectus shall not, on the date the Joint Proxy Statement/Prospectus is first mailed to stockholders of CDnow or N2K, at the time of the CDnow Stockholders' Meeting and the N2K Stockholder's Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, omit to state any material fact necessary in order to make the statements made in the Joint Proxy Statement/Prospectus not false or misleading, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the CDnow Stockholders' Meeting or the N2K Stockholders' Meeting which has become false or misleading. Section 4.17. Labor Matters. Except as disclosed in the CDnow SEC Reports filed prior to the date hereof, neither CDnow nor any of its Subsidiaries is a party to or otherwise bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor, as of the date hereof, is CDnow or any of its Subsidiaries the subject of any material proceeding asserting that CDnow or any of its Subsidiaries has committed an unfair labor practice or is seeking to compel it to bargain with any labor union or labor organization nor, as of the date of this Agreement, is there pending or, to the knowledge of the executive officers of CDnow, threatened, any material labor strike, dispute, walkout, work stoppage, slow- down or lockout involving CDnow or any of its Subsidiaries. Section 4.18. Insurance. All material fire and casualty, general liability, business interruption, product liability, and sprinkler and water damage insurance policies maintained by CDnow or any of its Subsidiaries are with reputable insurance carriers, provide full and adequate coverage for all normal risks incident to the business of CDnow and its Subsidiaries and their respective properties and assets, and are in character and amount at least equivalent to that carried by persons engaged in similar businesses and subject to the same or similar perils or hazards, except for any such failures to maintain insurance policies that, individually or in the aggregate, are not reasonably likely to have a CDnow Material Adverse Effect. CDnow has maintained such policies on a continuous basis since January 1996. Section 4.19. Opinion of Financial Advisor. The financial advisor of CDnow, BT Alex. Brown Incorporated, has delivered to CDnow an opinion dated the date of this Agreement to the effect that the CDnow Exchange Ratio is fair to holders of CDnow Common Stock from a financial point of view. Section 4.20. No Existing Discussions. As of the date hereof, CDnow is not engaged, directly or indirectly, in any discussions or negotiations with any other party with respect to an Acquisition Proposal. Section 4.21. Section 1715 of the PBCL Not Applicable. Other than with respect to the "shareholder constituency" provision of Section 1715 of the PBCL, the restrictions contained in Section 1715 of the PBCL applicable to acquisitions or proposed acquisitions of corporate control will not apply to the authorization, execution, delivery or performance of this Agreement or the Stock Option Agreements by CDnow or the consummation of the CDnow Merger by CDnow. No other "fair price," "moratorium," "control share acquisition" or other similar anti-takeover statute or regulation is applicable to CDnow or (by reason of CDnow's participation therein) the CDnow Merger or the other transactions contemplated by this Agreement. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-22 ARTICLE V. COVENANTS Section 5.1. Conduct of Business. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, except as permitted pursuant to Section 5.30 hereof, N2K and CDnow each agrees as to itself and its respective Subsidiaries (except to the extent that the other party shall otherwise consent in writing) to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and taxes when due subject to good faith disputes over such debts or taxes, to pay or perform its other obligations when due, and, to the extent consistent with such business, use all commercially reasonable efforts consistent with past practices and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers, distributors, and others having business dealings with it. Without limiting the foregoing, except as expressly contemplated by this Agreement or the Stock Option Agreements or as set forth in Section 5.1 of the Disclosure Schedule, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, N2K and CDnow each shall not (and shall not permit any of its respective Subsidiaries to), without the written consent of the other party: (a) Accelerate, amend or change the period of exercisability of options or restricted stock granted under any employee stock plan of such party or authorize cash payments in exchange for any options granted under any of such plans except as required by the terms of such plans or any related agreements (including severance agreements) in effect as of the date of this Agreement; (b) Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or purchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares in connection with any termination of service to such party; (c) Issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, any shares of its capital stock or securities convertible into shares of its capital stock, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than (i) the grant of options consistent with past practices to employees (other than senior officers) or directors, which options represent in the aggregate the right to acquire no more than 100,000 shares (net of cancellations) of N2K Common Stock or 100,000 shares (net of cancellation) CDnow Common Stock, as the case may be and (ii) the issuance of shares of N2K Common Stock or CDnow Common Stock, as the case may be, pursuant to the exercise of options or warrants outstanding on the date of this Agreement or granted pursuant to (i) above; provided, however, that in the event N2K and CDnow shall agree to treat the Mergers as a pooling of interests for accounting purposes, neither N2K nor CDnow shall take any action that would be reasonably likely to jeopardize such accounting treatment; (d) Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in or substantial portion of the assets of, or by any other manner, any business or any corporation, partnership or other business organization or division, or otherwise acquire or agree to acquire any assets (other than assets acquired in the ordinary course of business); (e) Sell, lease, sell/leaseback, license or otherwise dispose of any of its material properties or assets, except in the ordinary course of business; (f) (i) Increase or agree to increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of employees (other than officers) in accordance with past practices, (ii) grant any additional severance or termination pay to, or enter into or amend any employment or severance agreements with, any employees or officers, (iii) establish, adopt, enter into or amend any bonus, APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-23 profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, trust, fund, policy or arrangement for the benefit of any directors, officers or employees; (g) Amend or propose to amend its Certificate or Articles of Incorporation or Bylaws except as contemplated by this Agreement; (h) Incur any indebtedness for borrowed money; (i) Take any action that would, or is reasonably likely to, result in a material breach of any provision of this Agreement or the Stock Option Agreements or in any of its representations or warranties set forth in this Agreement or Stock Option Agreements being untrue on and as of the Closing Date; (j) Make or rescind any material express or deemed election relating to Taxes, settle or compromise any material claim, action, suit, litigation, proceeding, arbitration, investigation, audit or controversy relating to Taxes, or make any material change to any of its methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of its federal income tax return for the taxable year ending December 31, 1997, except as may be required by applicable law; (k) Settle any litigation relating to the transactions contemplated hereby other than any settlement which would not (i) have a N2K Material Adverse Effect (if settled by N2K), a CDnow Material Adverse Effect (if settled by CDnow) or a material adverse effect on the business, properties, financial condition or results of operations of Newco following consummation of the Mergers (if settled by either N2K or CDnow) or (ii) adversely effect the consummation of the transactions contemplated hereby; (l) Settle any litigation referred to on Schedule 5.1(l) if such settlement would obligate the party to pay more than $50,000 over and above the amount covered by insurance (excluding any deductible on such insurance policy); (m) Enter into any agreement, contract or commitment which involves an amount in excess of $250,000 individually or as part of a series of related transactions; (n) Authorize or make capital expenditures which are in excess of $250,000 individually or as part of a series of related transactions; (o) Change in any material respect its accounting policies, methods or procedures except as required by generally accepted accounting principles; (p) Take or omit to take any action that is reasonably likely to result in a breach of any contract, commitment or obligation if the result would, individually or in the aggregate, have a Material Adverse Effect; (q) Take any action which could reasonably be expected to adversely affect or delay the ability of any of the parties to obtain any approval of any governmental or regulatory body required to consummate the transactions contemplated hereby; or (r) Permit its working capital to be less than the amounts set forth on Schedule 5.1(r). (s) Take, or agree in writing or otherwise to take or have any affiliate, director, officer, employee, agent, consultant or other third party take or otherwise agree to take, any of the actions described in Sections (a) through (r) above. N2K and CDnow agree that any written approval obtained under this Section 5.1 may be relied upon by the other party if signed by the Chairman or President of the other party providing such written approval. Section 5.2. Cooperation; Notice; Cure. Subject to compliance with applicable law, from the date hereof until the Effective Time, each of N2K and CDnow shall confer on a regular and frequent basis with one or more representatives of the other party to report on the general status of ongoing operations and shall APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-24 promptly provide the other party or its counsel with copies of all filings made by such party with any Governmental Entity in connection with this Agreement, the Mergers and the transactions contemplated hereby and thereby. Each of N2K and CDnow shall promptly notify the other in writing of, and will use all commercially reasonable efforts to cure before the Closing Date, any event, transaction or circumstance, as soon as practical after it becomes known to such party, that causes or will cause any covenant or agreement of N2K or CDnow under this Agreement to be breached or that renders or will render untrue any representation or warranty of N2K or CDnow contained in this Agreement. No notice given pursuant to this paragraph shall have any effect on the representations, warranties, covenants or agreements contained in this Agreement for purposes of determining satisfaction of any condition contained herein. If at any time prior to the Effective Time any event relating to N2K or any of its Affiliates, officers or directors should be discovered by N2K which should be set forth in an amendment to the Registration Statement or a supplement to the Joint Proxy Statement/Prospectus, N2K shall promptly inform CDnow. If at any time prior to the Effective Time any event relating to CDnow or any of its Affiliates, officers or directors should be discovered by CDnow which should be set forth in an amendment to the Registration Statement or a supplement to the Joint Proxy Statement/Prospectus, CDnow shall promptly inform N2K. Section 5.3. No Solicitation. (a) From and after the date hereof, neither N2K nor CDnow shall, directly or indirectly, through any officer, director, employee, financial advisor, representative or agent of such party (i) solicit, initiate, or encourage (including by way of furnishing information) or take any other action to facilitate knowingly any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of substantial assets, sale of shares of capital stock (including without limitation by way of a tender or exchange offer) or similar transaction involving such party or any of its Subsidiaries, other than the transactions contemplated by this Agreement (any of the foregoing inquiries or proposals being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or discussions with any person (or group of persons) other than N2K or CDnow or their respective affiliates (a "Third Party") concerning, or provide any non-public information to any person or entity relating to, any Acquisition Proposal, or (iii) agree to or recommend any Acquisition Proposal; provided, however, that nothing contained in this Agreement shall prevent N2K or CDnow, or their respective Board of Directors, from (A) furnishing non-public information to, or entering into discussions or negotiations with, any person or entity in connection with an unsolicited bona fide written Acquisition Proposal by such person or entity or modifying or withdrawing its recommendation with respect to the transactions contemplated hereby or recommending an unsolicited bona fide written Acquisition Proposal to the stockholders of such party, if and only to the extent that (1) the Board of Directors of such party believes in good faith (after consultation with its financial advisor) that such Acquisition Proposal is reasonably capable of being completed on the terms proposed and, after taking into account the strategic benefits anticipated to be derived from the Mergers and the prospects of N2K and CDnow as a combined company, would, if consummated, result in a transaction more favorable to the stockholders of such party over the long term than the transaction contemplated by this Agreement (a "Superior Proposal") and the Board of Directors of such party determines in good faith after consultation with outside legal counsel that such action is required for such Board of Directors to comply with its fiduciary duties to stockholders under applicable law and (2) prior to furnishing such non-public information to, or entering into discussions or negotiations with, such person or entity, such Board of Directors receives from such person or entity an executed confidentiality and standstill agreement with terms no less favorable to such party than those contained in the Confidentiality and Standstill Agreement, dated August 17, 1998 between CDnow and N2K, as amended by Amendment No. 1 dated September 25, 1998 (the "Confidentiality Agreement"); or (B) complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. Each of N2K and CDnow agrees not to release any third party from, or waive any provision of, any standstill agreement to which it is a party or any confidentiality agreement between it and another person who has made, or who may reasonably be considered likely to make, an Acquisition Proposal, unless its Board of Directors determines in good faith after consultation with outside legal counsel that such action is required for such Board of Directors to comply with its fiduciary duties to stockholders under applicable law. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-25 (b) N2K and CDnow shall each notify the other party within 24 hours after receipt by N2K or CDnow (or any of their advisors) of any Acquisition Proposal or any request for nonpublic information in connection with an Acquisition Proposal or for access to the properties, books or records of such party by any person or entity that informs such party that it is considering making, or has made, an Acquisition Proposal. Such notice shall be made orally and in writing and shall indicate in reasonable detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contact. Such party shall continue to keep the other party hereto informed, on a current basis, of the status of any such discussions or negotiations and the terms being discussed or negotiated. Section 5.4. Joint Proxy Statement/Prospectus; Registration Statement. (a) As promptly as practical after the execution of this Agreement, N2K and CDnow shall prepare and file with the SEC the Joint Proxy Statement/Prospectus and the Registration Statement in which the Joint Proxy Statement/Prospectus will be included as a prospectus, provided that N2K and CDnow may delay the filing of the Registration Statement until approval of the Joint Proxy Statement/Prospectus by the SEC. N2K and CDnow shall use all reasonable efforts to cause the Registration Statement to become effective as soon after such filing as practical. The Joint Proxy Statement/Prospectus shall include the recommendation of the Board of Directors of N2K in favor of adoption of this Agreement and the N2K Merger and the recommendation of the Board of Directors of CDnow in favor of adoption of this Agreement and the CDnow Merger; provided, that the Board of Directors of either party may modify or withdraw such recommendation if such Board of Directors believes in good faith after consultation with outside legal counsel that the modification or withdrawal of such recommendation is required for such Board of Directors to comply with its fiduciary duties under applicable law. (b) N2K and CDnow shall make all necessary filings with respect to the Mergers under the Securities Act, the Exchange Act, applicable state blue sky laws and the rules and regulations thereunder. Section 5.5. Nasdaq Quotation. Each of N2K and CDnow agrees to continue the quotation and listing of N2K Common Stock and CDnow Common Stock, respectively, on Nasdaq during the term of this Agreement and remain in compliance with all applicable rules and regulations of Nasdaq. Section 5.6. Access to Information. Upon reasonable notice, N2K and CDnow shall each (and shall cause each of their respective Subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of the other, access, during normal business hours during the period prior to the Effective Time, to all its management, properties, books, contracts, commitments and records and, during such period, each of N2K and CDnow shall, and shall cause each of their respective Subsidiaries to, furnish promptly to the other (a) copies of monthly financial reports and development reports, (b) a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of federal securities laws and (c) all other information concerning its business, properties and personnel as such other party may reasonably request. The parties will hold any such information which is nonpublic in confidence in accordance with the Confidentiality Agreements. No information or knowledge obtained in any investigation pursuant to this Section 5.6 shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the parties to consummate the Mergers. Section 5.7. Stockholders' Meetings. N2K and CDnow each shall call a meeting of its respective stockholders to be held as promptly as practicable for the purpose of voting, in the case of N2K, upon this Agreement and the N2K Merger and, in the case of CDnow, upon this Agreement and the CDnow Merger. Subject to Sections 5.3 and 5.4, N2K and CDnow shall, through their respective Boards of Directors, recommend to their respective stockholders adoption of this Agreement and approval of such matters and shall coordinate and cooperate with respect to the timing of such meetings and shall use their best efforts to hold such meetings on the same day and as soon as practicable after the date hereof. Unless otherwise required to comply with the applicable fiduciary duties of the respective directors of N2K and CDnow, as determined by such directors in good faith after consultation with outside legal counsel, each party shall use all reasonable efforts to solicit from stockholders of such party proxies in favor of such matters. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-26 Section 5.8. Legal Conditions to Merge. (a) N2K and CDnow shall each use all reasonable efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary and proper under applicable law to consummate and make effective the transactions contemplated hereby as promptly as practicable, (ii) obtain from any Governmental Entity or any other third party any consents, licenses, permits, waivers, approvals, authorizations, or orders required to be obtained or made by N2K or CDnow or any of their Subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby including, without limitation, the Mergers, and (iii) as promptly as practicable, make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Mergers required under (A) the Securities Act and the Exchange Act, and any other applicable federal or state securities laws, (B) if applicable, the HSR Act and any related governmental request thereunder, and (C) any other applicable law. N2K and CDnow shall cooperate with each other in connection with the making of all such filings, including providing copies of all such documents to the non-filing party and its advisors prior to filing and, if requested, to accept all reasonable additions, deletions or changes suggested in connection therewith. N2K and CDnow shall use their reasonable efforts to furnish to each other all information required for any application or other filing to be made pursuant to the rules and regulations of any applicable law (including all information required to be included in the Joint Proxy Statement/Prospectus and the Registration Statement) in connection with the transactions contemplated by this Agreement. (b) N2K and CDnow agree, and shall cause each of their respective Subsidiaries, to cooperate and to use their respective reasonable efforts to obtain any government clearances required for Closing (including through compliance with the HSR Act and any applicable foreign government reporting requirements), to respond to any government requests for information, and to contest and resist any action, including any legislative, administrative or judicial action, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent) (an "Order") that restricts, prevents or prohibits the consummation of the Mergers or any other transactions contemplated by this Agreement. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another, in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to the HSR Act or any other federal, state or foreign antitrust or fair trade law. N2K and CDnow shall cooperate and work together in any proceedings or negotiations with any Governmental Entity relating to any of the foregoing. Notwithstanding anything to the contrary in this Section 5.8, neither N2K nor CDnow, nor any of their respective Subsidiaries, shall be required to take any action that would reasonably be expected to substantially impair the overall benefits expected, as of the date hereof, to be realized from the consummation of the Mergers. (c) Each of N2K and CDnow shall give (or shall cause their respective Subsidiaries to give) any notices to third parties, and use, and cause their respective Subsidiaries to use, all reasonable efforts to obtain any third party consents related to or required in connection with the Mergers. Section 5.9. Public Disclosure. N2K and CDnow shall agree on the form and content of the initial joint press release regarding the transactions contemplated hereby and thereafter shall receive approval from the General Counsel or Vice Chairman (in the case of N2K) and the General Counsel or Chief Executive Officer (in the case of CDnow) before issuing, and use all reasonable efforts to agree upon, any press release or other public statement with respect to any of the transactions contemplated hereby and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law. Section 5.10. Nonrecognition Exchange. From and after the date hereof and until the Effective Time, neither N2K nor CDnow, nor any of their respective Subsidiaries or other Affiliates shall knowingly take any action, or knowingly fail to take any action, that is reasonably likely to jeopardize the treatment of either of the Mergers as a reorganization described in Section 368(a) of the Code and/or, taken together with the other of the Mergers, as a transfer of property to Newco by holders of N2K Common Stock or CDnow Common Stock, as applicable, described in Section 351 of the Code. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-27 Section 5.11. Pooling Accounting. N2K and CDnow agree to use their reasonable best efforts to account for the Mergers as a pooling of interests unless N2K and CDnow mutually agree to account for the Mergers other than as a pooling of interest. The parties hereto agree that it shall not be a condition to the consummation of the transactions contemplated by this Agreement that the transactions be accounted for as a pooling of interests. From and after the date hereof and until the earlier of the Effective Time or such time as the parties hereto agree to account for the transaction other than as a pooling of interests, neither N2K nor CDnow, nor any of their respective Subsidiaries or other Affiliates shall, without the consent of the other party, knowingly take any action that is reasonably likely to jeopardize the treatment of the Mergers as a pooling of interests for accounting purposes, or knowingly fail to take any commercially reasonable action that is necessary to permit the treatment of the Mergers as a pooling of interest for accounting purposes. Section 5.12. Affiliate Agreements. Upon the execution of this Agreement, N2K and CDnow will provide each other with a list of those persons who are, in N2K's or CDnow's respective reasonable judgment, "affiliates" of N2K or CDnow, respectively, within the meaning of Rule 145 promulgated under the Securities Act ("Rule 145") (each such person who is an "affiliate" of N2K or CDnow within the meaning of Rule 145 is referred to as an "Affiliate"). N2K and CDnow shall provide each other such information and documents as the other party shall reasonably request for purposes of reviewing such list and shall notify the other party in writing regarding any change in the identity of its Affiliates prior to the Closing Date. N2K and CDnow shall each use all reasonable efforts to deliver or cause to be delivered to each other by November 30, 1998 (and in any case prior to the Effective Time) from each of its Affiliates, an executed Affiliate Agreement, in substantially the form of Exhibit G (with respect to affiliates of N2K) or Exhibit H (with respect to affiliates of CDnow) attached hereto (each, an "Affiliate Agreement," and together, the "Affiliate Agreements"). Section 5.13. Nasdaq Listing. N2K and CDnow shall cause Newco to promptly prepare and submit to the Nasdaq a listing application covering the shares of Newco Common Stock to be issued in the Mergers and upon exercise of N2K Stock Options and CDnow Stock Options, and shall use all reasonable efforts to cause such shares to be approved for listing on the Nasdaq, prior to the Effective Time, subject to official notice of issuance. Section 5.14. Stock Plans. (a) At the Effective Time, each outstanding option to purchase shares of N2K Common Stock (an "N2K Stock Option") under the N2K Stock Plans and each outstanding option to purchase shares of CDnow Common Stock (a "CDnow Stock Option") under the CDnow Stock Plans, in each case whether vested or unvested, shall be deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such N2K Stock Option or CDnow Stock Option, as the case may be, the same number of shares of Newco Common Stock as the holder of such N2K Stock Option or CDnow Stock Option, as the case may be, would have been entitled to receive pursuant to the N2K Merger or the CDnow Merger, respectively, had such holder exercised such option in full immediately prior to the Effective Time (rounded downward to the nearest whole number), at a price per share (rounded upward to the nearest whole cent) equal to (y) the aggregate exercise price for the shares of N2K Common Stock or CDnow Common Stock, as the case may be, purchasable pursuant to such N2K Stock Option or such CDnow Stock Option immediately prior to the Effective Time divided by (z) the number of full shares of Newco Common Stock deemed purchasable pursuant to such N2K Stock Option or CDnow Stock Option, as the case may be, in accordance with the foregoing; provided, however, that the foregoing adjustment for any N2K Stock Option or CDnow Stock Option which is intended to qualify as an "incentive stock option" (as defined under Section 422 of the Code) shall be affected in a manner consistent with Section 424(a) of the Code. (b) As soon as practicable after the Effective Time, Newco shall deliver to the participants in the N2K Stock Plans and the CDnow Stock Plans appropriate notice setting forth such participants' rights pursuant thereto and the grants pursuant to N2K Stock Plans or CDnow Stock Plans, as the case may be, shall continue in effect on the same terms and conditions (subject to the adjustments required by this Section 5.14 after giving effect to the Mergers). APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-28 (c) Newco shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Newco Common Stock for delivery under N2K Stock Plans and CDnow Stock Plans assumed in accordance with this Section 5.14. As soon as practicable after the Effective Time, Newco shall file a registration statement on Form S-8 (or any successor or other appropriate forms), or another appropriate form with respect to the shares of Newco Common Stock subject to such options and shall use its reasonable efforts to maintain the effectiveness of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such options remain outstanding. (d) The Board of Directors of each of N2K and CDnow shall, prior to or as of the Effective Time, take all necessary actions, pursuant to and in accordance with the terms of the N2K Stock Plans and the instruments evidencing the N2K Stock Options, or the CDnow Stock Plans and the instruments evidencing the CDnow Stock Options, as the case may be, to provide for the conversion of the N2K Stock Options and the CDnow Stock Options into options to acquire Newco Common Stock in accordance with this Section 5.14 without obtaining consent of the holders of the N2K Stock Options or CDnow Stock Options in connection with such conversion. (e) The Board of Directors of each of N2K and CDnow shall, prior to or as of the Effective Time, take appropriate action to approve the deemed cancellation of the N2K Stock Options or CDnow Stock Options, as the case may be, for purposes of Section 16(b) of the Exchange Act. The Board of Directors of Newco shall, prior to or as of the Effective Time, take appropriate action to approve the deemed grant of options to purchase Newco Common Stock under the N2K Stock Options and the CDnow Stock Options (as converted pursuant to this Section 5.14) for purposes of Section 16(b) of the Exchange Act. Section 5.15. Brokers or Finders. Each of N2K and CDnow represents, as to itself, its Subsidiaries and its Affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement except Allen & Company, Incorporated and PaineWebber Incorporated, each of whose fees and expenses will be paid by N2K in accordance with N2K's agreements with such firms (a copy of which has been delivered by N2K to CDnow prior to the date of this Agreement), and BT Alex. Brown, whose fees and expenses will be paid by CDnow in accordance with CDnow's agreement with such firm (a copy of which has been delivered by CDnow prior to the date of this Agreement). Each of CDnow and N2K agrees to indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any such fees, commissions or expenses asserted by any person on the basis of any act or statement alleged to have been made by such party or any of its Affiliates. Section 5.16. Indemnification. (a) From and after the Effective Time, Newco agrees that it will, and will cause the Surviving Corporations to, indemnify and hold harmless each present and former director and officer of N2K and CDnow (the "Indemnified Parties"), against any costs or expenses (including attorneys' fees), judgments, fines, losses, claims, damages, liabilities or amounts paid in settlement incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent that N2K or CDnow, as the case may be, would have been permitted under Delaware or Pennsylvania law and its certificate or articles of incorporation or bylaws in effect on the date hereof to indemnify such Indemnified Party (and Newco and the Surviving Corporation shall also advance expenses as incurred to the fullest extent permitted under applicable law, provided the Indemnified Party to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such Indemnified Party is not entitled to indemnification). (b) For a period of six years after the Effective Time, Newco shall maintain or shall cause the Surviving Corporations to maintain (to the extent available in the market) in effect a directors' and officers' liability insurance policy covering those persons who are currently covered by N2K's or CDnow's directors' and officers' liability insurance policy (copies of which have been heretofore delivered by N2K and CDnow to APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-29 each other) with coverage in amount and scope at least as favorable as N2K's or CDnow's existing coverage; provided, that, in no event shall Newco or the Surviving Corporations be required to expend in the aggregate in excess of 200% of the annual premium currently paid by N2K and CDnow for such coverage; and if such premium would at any time exceed 200% of the such amount, then the Newco or the Surviving Corporations shall maintain insurance policies which provide the maximum and best coverage available at an annual premium equal to 200% of such amount. (c) The provisions of this Section 5.16 are intended to be an addition to the rights otherwise available to the current officers and directors of N2K and CDnow by law, charter, statute, bylaw or agreement, and shall operate for the benefit of, and shall be enforceable by, each of the Indemnified Parties, their heirs and their representatives. Section 5.17. Letter of CDnow's Accountants. CDnow shall use all reasonable efforts to cause to be delivered to N2K and CDnow a letter of Arthur Andersen LLP, CDnow's independent auditors, dated a date within two business days before the date on which the Registration Statement shall become effective and addressed to N2K, in form reasonably satisfactory to N2K and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement. Section 5.18. Letter of N2K's Accountants. N2K shall use all reasonable efforts to cause to be delivered to CDnow and N2K a letter of Arthur Andersen LLP, N2K's independent auditors, dated a date within two business days before the date on which the Registration Statement shall become effective and addressed to CDnow, in form reasonably satisfactory to CDnow and customary in scope and substance for letters delivered by independent public accountants in connection with registration statements similar to the Registration Statement. Section 5.19. Stock Option Agreements. CDnow and N2K each agree to fully perform their respective obligations under the Stock Option Agreements. Section 5.20. Transition Planning. N2K and CDnow agree that they shall work together to coordinate all aspects of transition planning and implementation relating to the Mergers and the other transactions contemplated hereby. During the period between the date hereof and the Effective Time, N2K and CDnow shall jointly examine various alternatives regarding the manner in which to best organize and manage the businesses of N2K and CDnow after the Effective Time. The members of the joint transition planning team are identified on Schedule 5.20 (the "Transition Planning Committee"). Section 5.21. Post-Merger Corporate Governance; Employment Arrangements. (a) At the Effective Time, the total number of persons serving on the Board of Directors of Newco shall be nine (unless otherwise agreed in writing by N2K and CDnow prior to the Effective Time), four of whom shall be CDnow Directors, three of whom shall be N2K Directors and two of whom shall be Independent Directors (as such terms are defined below). The persons to serve initially on the Board of Directors of Newco at the Effective Time who are N2K Directors and the persons to serve initially on the Board of Directors of Newco at the Effective Time who are CDnow Directors shall be the persons identified on Schedule 5.21(a). The persons to serve initially on the Board of Directors of Newco at the Effective Time who are Independent Directors shall be selected by the Board of Directors of both CDnow and N2K and shall be mutually acceptable to both CDnow and N2K. In the event that, prior to the Effective Time, any person so selected to serve on the Board of Directors of Newco after the Effective Time is unable or unwilling to serve in such position, the Board or Boards of Directors which selected such person shall designate another person to serve in such person's stead in accordance with the provisions of the immediately preceding sentence. From and after the Effective Time and until December 31, 2001, (a) the Board of Directors of Newco shall consist of four CDnow Directors, three N2K Directors and two Independent Directors and (b) the size of the Board of Directors of Newco and each Committee of the Board of Directors of Newco shall not be increased unless such APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-30 increase is approved by 80% of the members thereof. If, at any time during the period referenced in the second preceding sentence, the number of CDnow Directors and N2K Directors serving, or that would be serving following the next stockholders' meeting at which Directors are to be elected, as Directors of Newco, would fall below four and three, respectively, then, subject to the fiduciary duties of the Directors of Newco, the Board of Directors and the Nominating Committee thereof shall nominate for election at the next stockholders' meeting at which Directors are to be elected, such person or persons as may be requested by the remaining CDnow Directors (if the number of CDnow Directors is, or would otherwise become, less than four) or by the remaining N2K Directors (if the number of N2K Directors is, or would otherwise become, less than three) to ensure that there shall be four CDnow Directors and three N2K Directors. The provisions of the preceding sentence shall not apply in respect of any stockholders' meeting which takes place after December 31, 2001. The term "N2K Director" means (i) any person serving as a Director of N2K or any of its Subsidiaries on the date hereof who becomes a Director of Newco at the Effective Time and (ii) any person who becomes a Director of Newco pursuant to the second preceding sentence and who is designated by the N2K Directors; the term "CDnow Director" means (i) any person serving as a Director of CDnow or any of its Subsidiaries on the date hereof who becomes a Director of Newco at the Effective Time and (ii) any person who becomes a Director of Newco pursuant to the second preceding sentence and who is designated by the CDnow Directors; and the term "Independent Director" means a person who becomes a Director of Newco who does not have on the date hereof or on the date such person is elected to become a Director, and who has not had within the three year period prior to the date of his election, any material employment, business affiliation or association, or immediate family relationship with either CDnow or N2K, any of their directors or officers, any Subsidiaries or predecessors of CDnow or N2K, or any other person or entity controlling, controlled by or under common control with either N2K or CDnow. (b) At the Effective Time, pursuant to the terms of the employment contracts referred to in Section 5.21(c) hereof, (i) Jason Olim shall hold the position of President and Chief Executive Officer of Newco and (ii) Jon Diamond shall hold the position of Chairman of Newco. If any of the persons identified above in this Section 5.21(b) is unable or unwilling to hold such offices as set forth above, his successor shall be selected by the Board of Directors of Newco in accordance with the Bylaws of Newco. The authority, duties and responsibilities of the Chairman and the President and Chief Executive Officer shall be as set forth in Bylaws of Newco and the employment contracts entered into pursuant to Section 5.21(c) hereof, which employment contracts shall also set forth in their entirety the rights and remedies of Messrs. Olim and Diamond with respect to employment by Newco, and none of them shall have any right, remedy or cause of action under this Section 5.21, nor shall they be third party beneficiaries of this Section 5.21. (c) Prior to the Closing, Newco shall offer to enter into employment agreements with Jason Olim and Jon Diamond in the forms attached hereto as Exhibits I and J. (d) From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with applicable law, the officers of Newco shall be as designated in accordance with Schedule 5.21(d). If any officer set forth or designated in accordance with Schedule 5.21(d) ceases to be a full-time employee of either N2K or CDnow at or before the Effective Time, then the parties will agree upon another person to serve in such person's stead. (e) From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with applicable law, the members of the Executive, Audit, Compensation and Nominating committees of the Board of Directors of Newco shall be as designated in accordance with Schedule 5.21(e), subject to such persons being members of the Board of Directors of Newco at the Effective Time. (f) Each of N2K and CDnow shall cause Newco to incorporate the provisions contained in Section 5.21(a), (b), (e) and (f) into the Bylaws of Newco in effect at the Effective Time, which provisions shall thereafter be amended only with the approval of 80% of the members of the Board of Directors of Newco. Section 5.22. Name of Newco. At the Effective Time, Newco shall change its corporate name to CDnow/N2K, Inc. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-31 Section 5.23. Warrants; Registration Rights Agreement. (a) At the Effective Time, Newco shall assume all obligations under the warrants set forth in Section 3.2(b) to the N2K Disclosure Schedule and Section 4.2 (b) to the CDnow Disclosure Schedule (the "Warrants"), and the holders of the Warrants thereafter shall have the right to acquire, on the same pricing and payment terms and conditions as are currently applicable under the Warrants, the same number of shares of Newco Common Stock as the holder(s) of the Warrants would have been entitled to receive pursuant to the N2K Merger or the CDnow Merger, as the case may be, had each such holder exercised such holder's Warrant in full immediately prior to the Effective Time (rounded downward to the nearest whole number), at the price per share (rounded downward to the nearest whole cent) equal to (i) the aggregate exercise price for the shares of N2K Common Stock or CDnow Common Stock, as the case may be, purchasable pursuant to such Warrant immediately prior to the Effective Time divided by (ii) the number of full shares of Newco Common Stock deemed purchasable pursuant to such Warrant in accordance with the foregoing. (b) At the Effective Time, N2K and CDnow shall cause Newco to offer to enter into registration rights agreements (the "Newco Registration Rights Agreements") with the various parties listed on Section 5.23(b) of the N2K Disclosure Schedule or, in lieu thereof, with any parties who are entitled to benefit from the registration rights created in such agreements as a result of transfers from the initial or listed holders. The various Newco Registration Rights Agreements to be entered into with such parties shall be substantially similar (to the extent practicable) in effect to those provisions of the agreements which are identified on Section 5.23(b) of the N2K Disclosure Schedule and which relate to registration rights affecting the N2K Common Stock of such parties. Pursuant to the Newco Registration Rights Agreements, Newco will provide registration rights to the shareholders who are parties to such agreements with respect to all shares of Newco issued in the N2K Merger on account of the shares of N2K Common Stock covered by registration rights immediately prior to the N2K Merger. (c) At the Effective Time, CDnow and N2K shall cause Newco to enter into a Registration Rights Agreement (the "Newco Registration Rights Agreement") substantially similar (to the extent practicable) to the Investor Rights Agreement dated as of July 15, 1997 by and among CDnow and certain CDnow shareholders who are parties thereto (the "CDnow Registration Rights Agreement") pursuant to which Newco will provide registration rights to parties to the CDnow Registration Rights Agreement (other than CDnow) with respect to all shares of Newco issued in the CDnow Merger on account of the shares of CDnow Common Stock covered by the CDnow Registration Rights Agreement. Section 5.24. Conveyance Taxes. N2K and CDnow shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees or any similar taxes which become payable in connection with the transactions contemplated by this Agreement that are required or permitted to be filed on or before the Effective Time. Section 5.25. Transfer Taxes. Newco shall pay any New York State Real Estate Transfer Tax, New York City Real Property Transfer Tax, New York State Stock Transfer Tax and any similar taxes imposed on the stockholders of N2K and CDnow, respectively, by any other State of the United States (and any interest with respect to such taxes) (the "Transfer Taxes"), which become payable in connection with the transactions contemplated by this Agreement. N2K and CDnow shall cooperate in the preparation, execution and filing of any required returns with respect to such Transfer Taxes (including returns on behalf of the stockholders of N2K and CDnow) and in the determination of the portion of the consideration allocable to the real property of N2K and the N2K Subsidiaries and CDnow and the CDnow Subsidiaries in New York State and City (or in any other jurisdiction, if applicable). Section 5.26. Stockholder Litigation. Each of N2K and CDnow shall give the other the reasonable opportunity to participate in the defense of any stockholder litigation against N2K or CDnow, as applicable, and its directors relating to the transactions contemplated hereby. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-32 Section 5.27. Employee Benefits; Severance. (a) Newco shall cause to continue to be maintained the N2K and CDnow annual bonus plans for management employees for the 1998 fiscal year and shall calculate the amounts payable to participants thereunder on a basis consistent with the terms of each such plan and the past practice of N2K or CDnow, as applicable. (b) For purposes of determining eligibility to participate, vesting, entitlement to benefits and in all other respects where length of service is relevant (except for pension benefit accruals) under any employee benefit plan or arrangement covering employees of N2K and its Subsidiaries ("N2K Employees") or employees of CDnow and its Subsidiaries ("CDnow Employees") following the Effective Time, Newco shall cause such plans or arrangements to recognize service with N2K or CDnow (as applicable) and any of their respective Subsidiaries to the same extent such service was recognized under the applicable employee benefit plans immediately prior to the Effective Time. (c) At the Effective Time, Newco shall assume and honor in accordance with their terms the employment agreements, severance agreements and severance pay policies identified in Sections 5.1 or 5.27 of the N2K Disclosure Schedule and Sections 5.1 or 5.27 of the CDnow Disclosure Schedule. Section 5.28. Subsequent Financial Statements. Prior to the Effective Time, each of N2K and CDnow (a) will consult with the other prior to making publicly available its financial results for any period and (b) will consult with the other prior to the filing of, and will timely file with the SEC, each Annual Report on Form 10-K, Quarterly Report on Form 10-Q and Current Report on Form 8-K required to be filed by such Party under the Exchange Act and will promptly deliver to the other copies of each such report filed with the SEC. As of their respective dates, none of such reports shall contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The respective audited financial statements and unaudited interim financial statements of each of N2K and CDnow, as the case may be, included in such reports will fairly present the financial position of such party and its subsidiaries as at the dates thereof and the results of their operations and cash flows for the periods then ended in accordance with generally accepted accounting principles applied on a consistent basis and, subject, in the case of unaudited interim financial statements, to normal year-end adjustments and any other adjustments described therein. Section 5.29. Control of Operations. Nothing contained in this Agreement shall give N2K, directly or indirectly, the right to control or direct CDnow's operations prior to the Effective Time. Nothing contained in this Agreement shall give CDnow, directly or indirectly, the right to control or direct N2K's operations prior to the Effective Time. Prior to the Effective Time, each of N2K and CDnow shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision over its respective operations. Section 5.30. Certain Modifications; Restructuring Charges. N2K and CDnow shall consult with respect to business practices and policies and shall make such modifications or changes to its practices or policies, if any, and at such date prior to the Effective Time, as may be mutually agreed upon and approved by the Transition Planning Committee. N2K and CDnow shall also consult with respect to the character, amount and timing of restructuring charges to be taken by each of them in connection with the transactions contemplated hereby and shall take such charges in accordance with generally accepted accounting principles, as may be mutually agreed upon and approved by the Transition Planning Committee. No party's representations, warranties and covenants contained in this Agreement shall be deemed to be untrue or breached in any respect for any purpose as a consequence of any modifications or changes to such policies or practices which may be undertaken in accordance with this Section 5.30. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-33 ARTICLE VI. CONDITIONS TO MERGERS Section 6.1. Conditions to Each Party's Obligation to Effect the Mergers. The respective obligations of each party to this Agreement to effect the Mergers shall be subject to the satisfaction or waiver by each party prior to the Effective Time of the following conditions: (a) Stockholder Approval. This Agreement, the N2K Merger and the CDnow Merger shall have been approved in the manner required under the DGCL and the PBCL, by the respective holders of the issued and outstanding shares of capital stock of N2K and CDnow. (b) HSR Act. Any applicable waiting period applicable to the consummation of the Mergers under the HSR Act shall have expired or been terminated. (c) Approvals. Other than the filing provided for by Section 1.4, all authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any Governmental Entity the failure of which to file, obtain or occur is reasonably likely to have a N2K Material Adverse Effect or a CDnow Material Adverse Effect shall have been filed, been obtained or occurred. (d) Registration Statement. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings seeking a stop order. (e) No Injunctions. No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any order, executive order, stay, decree, judgment or injunction or statute, rule, regulation which is in effect and which has the effect of making the Mergers illegal or otherwise prohibiting consummation of the Mergers. (f) Nasdaq Listing. The shares of Newco Common Stock to be issued in the Merger and upon exercise of N2K Options and CDnow Options shall have been approved for listing on the Nasdaq, subject to official notice of issuance. (g) Corporate Governance. N2K and CDnow shall have taken all actions necessary so that (i) not later than the Effective Time, the Articles of Incorporation and Bylaws of Newco shall have been amended to be substantially in the form of Exhibit E and Exhibit F hereto; and (ii) at the Effective Time, the composition of the Board of Directors of Newco and of each Committee of the Board of Directors of Newco shall comply with Section 5.21 hereof (assuming N2K has designated the N2K Directors, CDnow has designated the CDnow Directors, and N2K and CDnow together have designated the Independent Directors, in each case as contemplated by Section 5.21(a) hereof). Section 6.2. Additional Conditions to Obligations of N2K. The obligation of N2K to effect the N2K Merger is subject to the satisfaction of each of the following conditions prior to the Effective Time, any of which may be waived in writing exclusively by N2K: (a) Representations and Warranties. The representations and warranties of CDnow set forth in this Agreement shall be true and correct as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except for, (i) changes contemplated by this Agreement and (ii) inaccuracies which, individually or in the aggregate, have not had and are not reasonably likely to have a CDnow Material Adverse Effect, as such term is defined in Section 6.2(d), or a material adverse effect upon the consummation of the transactions contemplated hereby; and N2K shall have received a certificate signed on behalf of CDnow by the chief executive officer and the chief financial officer of CDnow to such effect. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-34 (b) Performance of Obligations of CDnow. CDnow shall have performed in all materials respects (and with respect to Section 5.1(r) in all respects) all obligations required to be performed by it under this Agreement at or prior to the Closing Date shall have received a certificate signed on behalf of CDnow by the chief executive officer and the chief financial officer of CDnow to such effect. (c) Tax Opinion. N2K shall have received the opinion of Dewey Ballantine LLP, counsel to N2K, based upon reasonably requested representation letters and dated the Closing Date, to the effect that the N2K Merger will be treated as a reorganization described in Section 368(a) of the Code and/or, taken together with the CDnow Merger, as a transfer of property to Newco by holders of N2K Common Stock described in Section 351 of the Code. (d) CDnow Material Adverse Effect. From the date of this Agreement through the Effective Time there shall not have occurred a CDnow Material Adverse Effect. For the purposes of this Section 6.2(d), a CDnow Material Adverse Effect shall not include the effect of any changes (i) resulting from general conditions applicable to the online music retailing industry and not specifically relating to CDnow, or from general business or United States economic conditions which do not have a disproportionate effect on CDnow, or (ii) caused by (a) the transactions contemplated by this Agreement and the public announcement thereof, (b) any steps taken or proposed to be taken in connection with Section 5.30 or (c) any actions taken or omissions by CDnow with the prior written consent of N2K in contemplation of the transactions contemplated hereby. Section 6.3. Additional Conditions to Obligations of CDnow. The obligations of CDnow to effect the CDnow Merger are subject to the satisfaction of each of the following conditions prior to the Effective Time, any of which may be waived in writing exclusively by CDnow: (a) Representations and Warranties. The representations and warranties of N2K set forth in this Agreement shall be true and correct as of the date of this Agreement and (except to the extent such representations and warranties speak as of an earlier date) as of the Closing Date as though made on and as of the Closing Date, except for, (i) changes contemplated by this Agreement and (ii) inaccuracies which, individually or in the aggregate, have not had and are not reasonably likely to have a N2K Material Adverse Effect, as such term is defined in Section 6.3(d), or a material adverse effect upon the consummation of the transactions contemplated hereby; and CDnow shall have received a certificate signed on behalf of N2K by the chief executive officer and the chief financial officer of N2K to such effect. (b) Performance of Obligations of N2K. N2K shall have performed in all material respects (and with respect to Section 5.1(r) in all respects) all obligations required to be performed by it under this Agreement at or prior to the Closing Date; and CDnow shall have received a certificate signed on behalf of N2K by the chief executive officer and the chief financial officer of N2K to such effect. (c) Tax Opinion. CDnow shall have received the opinion of Morgan, Lewis & Bockius LLP, counsel to CDnow, based upon reasonably requested representation letters and dated the Closing Date, to the effect that the CDnow Merger will be treated as a reorganization described in Section 368(a) of the Code and/or, taken together with the N2K Merger, as a transfer of property to Newco by holders of CDnow Common Stock described in Section 351 of the Code. (d) N2K Material Adverse Effect. From the date of this Agreement through the Effective Time there shall not have occurred an N2K Material Adverse Effect. For the purposes of this Section 6.3(d), a N2K Material Adverse Effect shall not include the effect of any changes resulting from (i) general conditions applicable to the online music retailing industry and not specifically relating to N2K, or from general business or United States economic conditions which do not have a disproportionate effect on N2K, or (ii) (a) the transactions contemplated by this Agreement and the public announcement thereof, (b) any steps taken or proposed to be taken in connection with Section 5.30 or (c) any actions taken or omissions by N2K with the prior written consent of CDnow in contemplation of the transactions contemplated hereby. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-35 ARTICLE VII. TERMINATION AND AMENDMENT Section 7.1. Termination. This Agreement may be terminated at any time prior to the Effective Time (with respect to Sections 7.1(b) through 7.1(h), by written notice by the terminating party to the other party), whether before or after approval of the matters presented in connection with the Mergers by the stockholders of N2K or CDnow: (a) by mutual written consent of N2K and CDnow; or (b) by either N2K or CDnow if the Mergers shall not have been consummated by March 31, 1999 (the "Outside Date") (provided that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Mergers to occur on or before such date); or (c) by either N2K or CDnow if a court of competent jurisdiction or other Governmental Entity shall have issued a nonappealable final order, decree or ruling or taken any other nonappealable final action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Mergers; or (d) (i) by N2K or CDnow, if, at the CDnow Stockholders' Meeting (including any adjournment or postponement), the requisite vote of the stockholders of CDnow in favor of the approval and adoption of this Agreement and the CDnow Merger shall not have been obtained; or (ii) by CDnow or N2K if, at the N2K Stockholders' Meeting (including any adjournment or postponement), the requisite vote of the stockholders of N2K in favor of the approval and adoption of this Agreement and the N2K Merger shall not have been obtained; or (e) by N2K, if (i) the Board of Directors of CDnow shall have withdrawn or modified its recommendation of this Agreement or the CDnow Merger (provided that N2K's right to terminate this Agreement under such clause (i) shall not be available if at such time CDnow would be entitled to terminate this Agreement under Section 7.1(h) without giving effect to the cure period); (ii) after the receipt by CDnow of an Acquisition Proposal, N2K requests in writing that the Board of Directors of CDnow reconfirm its recommendation of this Agreement and the CDnow Merger to the stockholders of CDnow and the Board of Directors of CDnow fails to do so within 10 business days after its receipt of N2K's request; (iii) the Board of Directors of CDnow shall have recommended to the stockholders of CDnow an Alternative Transaction (as defined in Section 7.3(e)); (iv) a tender offer or exchange offer for 20% or more of the outstanding shares of CDnow Common Stock is commenced (other than by N2K or an Affiliate of N2K) and the Board of Directors of CDnow recommends that the stockholders of CDnow tender their shares in such tender or exchange offer; or (v) for any reason CDnow fails to call and hold the CDnow Stockholders' Meeting by the Outside Date (provided that N2K's right to terminate this Agreement under such clause (v) shall not be available if at such time CDnow would be entitled to terminate this Agreement under Section 7.1(h) without giving effect to the cure period); or (f) by CDnow, if (i) the Board of Directors of N2K shall have withdrawn or modified its recommendation of this Agreement or the N2K Merger (provided that CDnow's right to terminate this Agreement under such clause (i) shall not be available if at such time N2K would be entitled to terminate this Agreement under Section 7.1(h) without giving effect to the cure period); (ii) after the receipt by N2K of an Acquisition Proposal, CDnow requests in writing that the Board of Directors of N2K reconfirm its recommendation of this Agreement and the N2K Merger to the stockholders of CDnow and the Board of Directors of N2K fails to do so within 10 business days after its receipt of CDnow's request; (iii) the Board of Directors of N2K shall have recommended to the stockholders of N2K an Alternative Transaction (as defined in Section 7.3(e)); (iv) a tender offer or exchange offer for 20% or more of the outstanding shares of N2K Common Stock is commenced (other than by CDnow or an Affiliate of CDnow) and the Board of Directors of APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-36 N2K recommends that the stockholders of N2K tender their shares in such tender or exchange offer; or (v) for any reason N2K fails to call and hold the N2K Stockholders' Meeting by the Outside Date (provided that CDnow's right to terminate this Agreement under such clause (v) shall not be available if at such time N2K would be entitled to terminate this Agreement under Section 7.1(h) without giving effect to the cure period); or (g) by N2K or CDnow, prior to the approval of this Agreement by the stockholders of such party, if, as a result of a Superior Proposal received by such party from a Third Party, the Board of Directors of such party determines in good faith after consultation with outside legal counsel that accepting such Superior Proposal is required for such Board of Directors to comply with its fiduciary duties to stockholders under applicable law; provided, however, that no termination shall be effective pursuant to this Section 7.1(g) under circumstances in which a termination fee is payable by the terminating party pursuant to Section 7.3(b)(iii) or (c)(iii), unless concurrently with such termination, such termination fee is paid in full by the terminating party in accordance with Section 7.3(b)(iii) or (c)(iii), as applicable; or (h) by N2K or CDnow, if (A) there has been a breach of any representation, warranty, covenant or agreement on the part of the other party set forth in this Agreement, which breach (i) will cause the conditions set forth in Section 6.2(a) or (b) (in the case of termination by N2K) or 6.3(a) or (b) (in the case of termination by CDnow) not to be satisfied, and (ii) shall not have been cured within 20 business days following receipt by the breaching party of written notice of such breach from the other party; or (B) any event shall have occurred which makes it impossible for the conditions set forth in Article VI hereof (other than Section 6.1(a), 6.1(e), 6.2(a), 6.2(b), 6.2(d), 6.3(a), 6.3(b) and 6.3(d)) to be satisfied, provided that any termination pursuant to this clause (B) shall not be effective until 20 business days after notice thereof is delivered by the party seeking to terminate to the other party, and shall be automatically rescinded if (1) such condition is solely for the benefit of the party receiving such notice and (2) such party, prior to such 20th business day, irrevocably waives satisfaction of such condition based on such event; (C) there has been a breach of the representation, warranty, covenant or agreement set forth in Section 3.10(c), 3.11(b) or 5.1(l) (in the case of a termination by CDnow) which would have a N2K Material Adverse Effect or in Section 4.10(c) (in the case of a termination by N2K) which would have a CDnow Material Adverse Effect; or (D) by CDnow if there has been a N2K Material Adverse Effect under Section 6.3(d), or by N2K if there has been a CDnow Material Adverse Effect under Section 6.2(d), in either case which shall not have been cured within 20 business days following receipt by the breaching party of written notice of such breach from the other party. Section 7.2. Effect of Termination. In the event of termination of this Agreement as provided in Section 7.1, this Agreement shall immediately become void and there shall be no liability or obligation on the part of N2K, CDnow, Newco or their respective officers, directors, stockholders or Affiliates, except as set forth in Sections 5.15 and 7.3 and except that such termination shall not limit liability for a willful breach of this Agreement; provided that, the provisions of Sections 5.15 and 7.3 of this Agreement, the Stock Option Agreements and the Confidentiality Agreement shall remain in full force and effect and survive any termination of this Agreement. Section 7.3. Fees and Expenses. (a) Except as set forth in this Section 7.3, all fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, whether or not the Mergers are consummated. (b) N2K shall pay CDnow a termination fee of $3.75 million upon the earliest to occur of the following events: (i) the termination of this Agreement by either CDnow or N2K pursuant to Section 7.1(d)(ii), if a proposal for an Alternative Transaction (as defined below) involving N2K shall have been publicly announced prior to the N2K Stockholders' Meeting and either a definitive agreement APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-37 for an Alternative Transaction is entered into, or an Alternative Transaction is consummated, within eighteen months of such termination; (ii) the termination of this Agreement by CDnow pursuant to Section 7.1(f); or (iii) the termination of this Agreement by N2K pursuant to Section 7.1(g). If and to the extent that CDnow has purchased shares of N2K Common Stock pursuant to the CDnow Stock Option Agreement prior to the payment of the $3.75 million fee provided for herein (the "Fee Payment Date"), the amount payable to CDnow under this Section 7.3(b), together with (i)(x) the net cash amount received by CDnow prior to the Fee Payment Date pursuant to N2K's repurchase of Shares (as defined in the CDnow Stock Option Agreement) pursuant to Section 7 of the CDnow Stock Option Agreement, less (y) CDnow's purchase price for such Shares, and (ii)(x) the amounts received by CDnow prior to the Fee Payment Date pursuant to the sale of Shares (or any other securities into which such Shares are converted or exchanged), less (y) CDnow's purchase price for such Shares, shall not exceed $3.75 million. N2K's payment of a termination fee pursuant to this subsection and any applicable payments under the CDnow Stock Option Agreement shall be the sole and exclusive remedy of CDnow against N2K and any of its Subsidiaries and their respective directors, officers, employees, agents, advisors or other representatives with respect to the occurrences giving rise to such payments; provided that this limitation shall not apply in the event of a willful breach of this Agreement by N2K. (c) CDnow shall pay N2K a termination fee of $3.75 million upon the earliest to occur of the following events: (i) the termination of this Agreement by either N2K or CDnow pursuant to Section 7.1(d)(i), if a proposal for an Alternative Transaction (as defined below) involving CDnow shall have been publicly announced prior to the CDnow Stockholders' Meeting and either an Alternative Transaction is entered into, or an Alternative Transaction is consummated, within eighteen months of such termination; (ii) the termination of this Agreement by N2K pursuant to Section 7.1(e); or (iii) the termination of this Agreement by CDnow pursuant to Section 7.1(g). If and to the extent that N2K has purchased shares of CDnow Common Stock pursuant to the N2K Stock Option Agreement prior to the Fee Payment Date, the amount payable to N2K under this Section 7.3(c), together with (i)(x) the net cash amount received by N2K prior to the Fee Payment Date pursuant to CDnow's repurchase of Shares (as defined in the N2K Stock Option Agreement) pursuant to Section 7 of the N2K Stock Option Agreement, less (y) N2K's purchase price for such Shares, and (ii)(x) the amounts received by N2K prior to the Fee Payment Date pursuant to the sale of Shares (or any other securities into which such Shares are converted or exchanged), less (y) N2K's purchase price for such Shares, shall not exceed $3.75 million. CDnow's payment of a termination fee pursuant to this subsection and any applicable payments under the N2K Stock Option Agreement shall be the sole and exclusive remedy of N2K against CDnow and any of its Subsidiaries and their respective directors, officers, employees, agents, advisors or other representatives with respect to the occurrences giving rise to such payments; provided that this limitation shall not apply in the event of a willful breach of this Agreement by CDnow. (d) The fees payable pursuant to Section 7.3(b) or 7.3(c) shall be paid concurrently with the first to occur of the events described in Section 7.3(b)(i), (ii) or (iii) of 7.3(c)(i), (ii) or (iii), respectively. (e) As used in this Agreement, "Alternative Transaction" means either (i) a transaction pursuant to which any Third Party acquires more than 20% of the outstanding shares of N2K Common Stock or CDnow Common Stock, as the case may be, pursuant to a tender offer or exchange offer or otherwise, (ii) a merger or other business combination involving N2K or CDnow pursuant to which any Third Party (or the stockholders of a Third Party) acquires more than 20% of the outstanding shares of N2K Common Stock or CDnow Common Stock, as the case may be, or the entity surviving such merger or business combination, (iii) any other APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-38 transaction pursuant to which any Third Party acquires control of assets (including for this purpose the outstanding equity securities of Subsidiaries of N2K or CDnow, and the entity surviving any merger or business combination including any of them) of N2K or CDnow having a fair market value (as determined by the Board of Directors of N2K or CDnow, as the case may be, in good faith) equal to more than 20% of the fair market value of all the assets of N2K or CDnow, as the case may be, and their respective Subsidiaries, taken as a whole, immediately prior to such transaction, or (iv) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. (f) N2K and CDnow shall share equally (i) the filing fees in connection with the filing of the Registration Statement and the Joint Proxy Statement/Prospectus, (ii) the expenses incurred in connection with printing and mailing the Registration Statement and the Joint Proxy Statement/Prospectus, and (iii) any expenses incurred in connection with the formation of Newco. Section 7.4. Amendment. This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Mergers by the stockholders of N2K or CDnow, but, after any such approval, no amendment shall be made which by law requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto; provided, however, that this Agreement may be amended in writing without obtaining the signatures of N2K, CDnow or Newco solely for the purpose of adding N2K Sub and CDnow Sub as parties to this Agreement. Section 7.5. Extension; Waiver. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained here. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-39 ARTICLE VIII. MISCELLANEOUS Section 8.1. Nonsurvival of Representations, Warranties and Agreements. None of the representations, warranties and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time, except for the agreements contained in Sections 1.6, 2.1, 2.2, 2.4, 5.14, 5.16, 5.19, 5.21 and 5.26 and Article VIII, and the agreements of the Affiliates delivered pursuant to Section 5.12. The Confidentiality Agreements shall survive the execution and delivery of this Agreement. Section 8.2. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to N2K, to N2K Inc. 55 Broad Street, 26th Floor New York, NY 10004 Attn: General Counsel Telecopy: (212) 742-1778 with a copy to Dewey Ballantine LLP 1301 Avenue of the Americas New York, NY 10019-6092 Attn: Frank E. Morgan, II, Esq. Telecopy: (212) 295-6333 (b) if to CDnow, to CDnow, Inc. Jenkins Court, Suite 300 610 Old York Road Jenkinstown, PA 19046 Attn: David Capozzi, General Counsel Telecopy: (215) 517-5745 *485 Delaware Ave. Fort Washington, PA (effective 11/6/98) with a copy to: Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103-6993 Attn: James W. McKenzie, Jr., Esq. Telecopy: (215) 963-5299 *1701 Market Street Philadelphia, PA 19103-2921 (effective 11/23/98) APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-40 Section 8.3. Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The phrases "the date of this Agreement", "the date hereof," and terms of similar import, unless the context otherwise requires, shall be deemed to refer to October 22, 1998. Section 8.4. Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Section 8.5. Entire Agreement; No Third Party Beneficiaries. This Agreement and all documents and instruments referred to herein (a) constitute the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) except as provided in Section 5.16 are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder; provided that the Confidentiality Agreements shall remain in full force and effect until the Effective Time. Each party hereto agrees that, except for the representations and warranties contained in this Agreement, neither N2K nor CDnow, makes any other representations or warranties, and each hereby disclaims any other representations and warranties made by itself or any of its officers, directors, employees, agents, financial and legal advisors or other representatives, with respect to the execution and delivery of this Agreement or the transactions contemplated hereby, notwithstanding the delivery or disclosure to the other or the other's representatives of any documentation or other information with respect to any one or more of the foregoing. Section 8.6. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware without regard to any applicable conflicts of law. Section 8.7. Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-41 IN WITNESS WHEREOF, N2K, CDnow and Newco have caused this agreement to be signed by their respective duly authorized officers as of the date first written above. N2K INC. By: /s/ Jonathan V. Diamond ---------------------------------- Name: Jonathan V. Diamond Title: Vice Chairman and Chief Executive Officer CDnow, INC. By: /s/ Jason Olim ---------------------------------- Name: Jason Olim Title: Chairman and Chief Executive Officer EXIT 8 HOLDING COMPANY By: /s/ Jonathan V. Diamond ---------------------------------- Name: Jonathan V. Diamond Title: Vice President, Treasurer and Secretary APPENDIX I - AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER I-42 APPENDIX II FORM OF RESTATED ARTICLES OF INCORPORATION OF CDNOW/N2K, INC. 1.The name of the corporation is CDnow/N2K, Inc. (the "Corporation"). 2.The name of the Commercial Registered Office Provider is Corporation Service Company. 3. The Corporation is incorporated under the provisions of the Business Corporation Law of 1988, as amended. 4.Capital Stock. The aggregate number of shares which the Corporation shall have authority to issue is 200,000,000 common shares, no par value (the "Common Shares"), and 50,000,000 preferred shares, no par value (the "Preferred Shares"). The Corporation's Board of Directors (the "Board of Directors") may authorize the issuance from time to time of Preferred Shares in one or more classes or series and with designations, voting rights, preferences, and special rights, if any, as the Board of Directors may fix by resolution. Without limiting the foregoing, the Board of Directors is authorized to fix with respect to each series: (a) the number of shares which shall constitute the series and the name of the series; (b) the rate and times at which, and the preferences and conditions under which, dividends shall be payable on shares of the series, and the status of such dividends as cumulative or non-cumulative and as participating or non-participating; (c) the prices, times and terms, if any, at or upon which shares of the series shall be subject to redemption; (d) the rights, if any, of holders of shares of the series to convert such shares into, or to exchange such shares for, shares of any other class of stock of the Corporation; (e) the rights and preferences, if any, of the holders of shares of the series upon any liquidation, dissolution or winding up of the affairs of, or upon any distribution of the assets of, the Corporation; (f) the limitations, if any, applicable while such series is outstanding, on the payment of dividends or making of distributions on, or the acquisition of, the Common Stock or any other class of stock which does not rank senior to the shares of the series; and (g) the voting rights, if any, to be provided for shares of the series. 5.Duties and Liabilities of Directors and Officers. (a)Directors and officers as fiduciaries. A director or officer of the Corporation shall stand in a fiduciary relation to the Corporation and shall perform his or her duties as a director or officer, including his or her duties as a member of any committee of the Board of Directors upon which he or she may serve, in good faith, in a manner he or she reasonably believes to be in the best interests of the Corporation, and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his or her duties, a director or officer shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by: (a) one or more officers or employees of the Corporation whom the director or officer reasonably believes to be reliable and competent with respect to the matters presented, (b) counsel, public accountants or APPENDIX II - AMENDED AND RESTATED ARTICLES OF INCORPORATION OF NEWCO II-1 other persons as to matters that the director or officer reasonably believes to be within the professional or expert competence of such person, or (c) a committee of the Board of Directors upon which the director or officer does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director or officer reasonably believes to merit confidence. A director or officer shall not be considered to be acting in good faith if he or she has knowledge concerning the matter in question that would cause his or her reliance to be unwarranted. Absent breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or officer of the Corporation or any failure to take any action shall be presumed to be in the best interests of the Corporation. (b)Personal liability of directors. A director of the Corporation shall not be personally liable for monetary damages as such (including, without limitation, any judgment, amount paid in settlement, penalty, punitive damages or expense of any nature (including, without limitation, attorneys' fees and disbursements)) for any action taken, or any failure to take any action, unless the director has breached or failed to perform the duties of his or her office under these Articles of Incorporation, the By-laws of the Corporation or applicable provisions of law and the breach or failure to perform constitutes self- dealing, willful misconduct or recklessness. (c)Personal liability of officers. An officer of the Corporation shall not be personally liable, as such, to the Corporation or its shareholders for monetary damages (including, without limitation, any judgment, amount paid in settlement, penalty, punitive damages or expense of any nature (including, without limitation, attorneys' fees and disbursements)) for any action taken, or any failure to take any action, unless the officer has breached or failed to perform the duties of his or her office under these Articles of Incorporation, the By-laws of the Corporation or applicable provisions of law and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. 6. The shareholders of the Corporation shall not have the right to cumulate their votes for the election of directors of the Corporation. 7. An action may not be authorized by the shareholders without a meeting by less than unanimous written consent. 8. Subchapters E, G, H, I and J of Section 25 of the Business Corporation Law of 1988, as amended, shall not be applicable to the Corporation. 9. The Corporation reserves the right, from time to time, to amend, alter or repeal any provision contained in these Articles of Incorporation in the manner now or hereafter provided by statute for the amendment of Articles of Incorporation. APPENDIX II - AMENDED AND RESTATED ARTICLES OF INCORPORATION OF NEWCO II-2 APPENDIX III FORM OF AMENDED AND RESTATED BYLAWS OF CDNOW/N2K, INC. ARTICLE I Name and Seal Section 1.01. Name. The name of the corporation is CDnow/N2K, Inc. Section 1.02. State of Incorporation. The Corporation is incorporated under the laws of the Commonwealth of Pennsylvania. Section 1.03. Seal. The corporate seal of the Corporation shall have inscribed thereon the name of the Corporation, the year of its organization, the words "Corporate Seal," and the name of the State of Incorporation. The seal may be used by any person authorized by the Corporation's board of directors (the "Board of Directors") or by these bylaws by causing the seal or a facsimile thereof to be impressed or affixed, or in any manner reproduced. ARTICLE II Offices and Fiscal Year Section 2.01. Registered Office. The registered office of the Corporation in the Commonwealth of Pennsylvania shall be at c/o Corporation Service Company, 319 Market Street, Harrisburg, PA 17101 until otherwise established by an amendment of the Articles of Incorporation (the "Articles") or by the Board of Directors and a record of such change is filed with the Pennsylvania Department of State in the manner provided by law. Section 2.02. Other Offices. The Corporation may also have offices at such other places within or without the Commonwealth of Pennsylvania as the Board of Directors may from time to time appoint or the business of the Corporation may require. Section 2.03. Fiscal Year. The fiscal year of the Corporation shall begin on the first day of January in each year. ARTICLE III Notice--Waivers--Meetings Generally Section 3.01. Manner of Giving Notice. (a) General Rule. Whenever written notice is required to be given to any person under the provisions of the Pennsylvania Business Corporation Law of 1988, as amended (the "BCL"), or by the Articles or these bylaws, it may be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answer back received) or courier service, charges prepaid, or by facsimile transmission, to the address (or to the telex, TWX, facsimile or telephone number) of the person appearing on the books of the Corporation or, in the case of directors, supplied by the director to the Corporation for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-1 the case of telex or TWX, when dispatched or, in the case of facsimile transmission, when received. A notice of meeting shall specify the place, day and hour of the meeting and any other information required by any other provision of the BCL, the Articles or these bylaws. (b) Bulk Mail. If the Corporation has more than 30 shareholders, notice of any regular or special meeting of the shareholders, or any other notice required by the BCL or by the Articles or these bylaws to be given to all shareholders or to all holders of a class or series of shares, may be given by any class of postpaid mail if the notice is deposited in the United States mail at least 20 days prior to the day named for the meeting or any corporate or shareholder action specified in the notice. (c) Adjourned Shareholder Meetings. When a meeting of shareholders is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which the adjournment is taken, unless the Board of Directors fixes a new record date for the adjourned meeting in which event notice shall be given in accordance with Section 3.03. Section 3.02. Notice of Meetings of Board of Directors. Notice of a regular meeting of the Board of Directors need not be given. Notice of every special meeting of the Board of Directors shall be given to each director by telephone or in writing at least 24 hours (in the case of notice by telephone, telex, TWX or facsimile transmission) or 48 hours (in the case of notice by telegraph, courier service or express mail) or five days (in the case of notice by first class mail) before the time at which the meeting is to be held. Every such notice shall state the time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in a notice of the meeting. Section 3.03. Notice of Meetings of Shareholders. (a) General Rule. Except as otherwise provided in Section 3.01(b), written notice of every meeting of the shareholders shall be given by, or at the direction of, the secretary or other authorized person to each shareholder of record entitled to vote at the meeting at least (i) ten days prior to the day named for a meeting (and, in case of a meeting called to consider a merger, consolidation, share exchange or division, to each shareholder of record not entitled to vote at the meeting) called to consider a fundamental change under 15 Pa.C.S. Chapter 19 or (ii) five days prior to the day named for the meeting in any other case. If the secretary neglects or refuses to give notice of a meeting, the person or persons calling the meeting may do so. In the case of a special meeting of shareholders, the notice shall specify the general nature of the business to be transacted. (b) Notice of Action by Shareholders on Bylaws. In the case of a meeting of shareholders that has as one of its purposes action on the bylaws, written notice shall be given to each shareholder that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of the bylaws. There shall be included in, or enclosed with, the notice a copy of the proposed amendment or a summary of the changes to be effected thereby. (c) Notice of Action by Shareholders on Fundamental Change. In the case of a meeting of the shareholders that has as one of its purposes action with respect to any fundamental change under 15 Pa.C.S. Chapter 19, each shareholder shall be given, together with written notice of the meeting, a copy or summary of the amendment or plan to be considered at the meeting in compliance with the provisions of Chapter 19. (d) Notice of Action by Shareholders Giving Rise to Dissenters Rights. In the case of a meeting of the shareholders that has as one of its purposes action that would give rise to dissenters rights under the provisions of 15 Pa.C.S. Subchapter 15D, each shareholder shall be given, together with written notice of the meeting: (1) statement that the shareholders have a right to dissent and obtain payment of the fair value of their shares by complying with the provisions of Subchapter 15D (relating to dissenters rights); and APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-2 (2) copy of Subchapter 15D. Section 3.04. Waiver of Notice. (a) Written Waiver. Whenever any written notice is required to be given under the provisions of the BCL, the Articles or these bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting. (b) Waiver by Attendance. Attendance of a person at any meeting shall constitute a waiver of notice of the meeting except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Section 3.05. Modification of Proposal Contained in Notice. Whenever the language of a proposed resolution is included in a written notice of a meeting required to be given under the provisions of the BCL or the Articles or these bylaws, the meeting considering the resolution may without further notice adopt it with such clarifying or other amendments as do not enlarge its original purpose. Section 3.06. Exception to Requirement of Notice. (a) General Rule. Whenever any notice or communication is required to be given to any person under the provisions of the BCL or by the Articles or these bylaws or by the terms of any agreement or other instrument or as a condition precedent to taking any corporate action and communication with that person is then unlawful, the giving of the notice or communication to that person shall not be required. (b) Shareholders Without Forwarding Addresses. Notice or other communications need not be sent to any shareholder with whom the Corporation has been unable to communicate for more than 24 consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the Corporation with a current address. Whenever the shareholder provides the Corporation with a current address, the Corporation shall commence sending notices and other communications to the shareholder in the same manner as to other shareholders. Section 3.07. Use of Conference Telephone and Similar Equipment. Any director may participate in any meeting of the Board of Directors, and the Board of Directors may provide by resolution with respect to a specific meeting or with respect to a class of meetings that one or more persons may participate in a meeting of the shareholders of the Corporation, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at the meeting. ARTICLE IV Shareholders Section 4.01. Place of Meeting. All meetings of the shareholders of the Corporation shall be held at such place, within or without the Commonwealth of Pennsylvania, as shall be determined by the Board of Directors from time to time. Section 4.02. Annual Meeting. The Board of Directors may fix and designate the date and time of the annual meeting of the shareholders, but if no such date and time is fixed and designated by the Board of Directors, the meeting for any calendar year shall be held on the third Tuesday in May in such year, if not a legal holiday under the laws of Pennsylvania, and, if a legal holiday, then on the next succeeding business day, APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-3 not a Saturday, at 10 o'clock A.M. and at said meeting the shareholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting. If the annual meeting shall not have been called and held within six months after the designated time, any shareholder may call the meeting at any time thereafter. Section 4.03. Special Meetings. Special meetings of the shareholders may be called at any time by the Chief Executive Officer or a majority of the board of directors. At any time, upon the written request of any person or persons who have duly called a special meeting, which written request shall state the purpose or purposes of the meeting, it shall be the duty of the secretary to fix the date of the meeting which shall be held at such date and time as the secretary may fix, not less than 10 or more than 60 days after the receipt of the request, and to give due notice thereof. If the secretary shall neglect or refuse to fix the time and date of such meeting and give notice thereof, the person or persons calling the meeting may do so. Section 4.04. Quorum and Adjournment. (a) General Rule. A meeting of shareholders of the Corporation duly called shall not be organized for the transaction of business unless a quorum is present. The presence of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for the purposes of consideration and action on the matter. Shares of the Corporation owned, directly or indirectly, by it and controlled, directly or indirectly, by the Board of Directors of this Corporation, as such, shall not be counted in determining the total number of outstanding shares for quorum purposes at any given time. (b) Withdrawal of a Quorum. The shareholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. (c) Adjournments Generally. Any regular or special meeting of the shareholders, including one at which directors are to be elected and one which cannot be organized because a quorum has not attended, may be adjourned for such period and to such place as the shareholders present and entitled to vote shall direct. (d) Electing Directors at Adjourned Meeting. Those shareholders entitled to vote who attend a meeting called for the election of directors that has been previously adjourned for lack of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of electing directors. (e) Other Action in Absence of Quorum. Those shareholders entitled to vote who attend a meeting of shareholders that has been previously adjourned for one or more periods aggregating at least 15 days because of an absence of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the notice of the meeting if the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter. Section 4.05. Action by Shareholders. Any action required or permitted to be taken at a meeting of the shareholders or a class of shareholders of the Corporation may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the shareholders who would be entitled to vote at a meeting for such purpose shall be filed with the secretary of the Corporation. Section 4.06. Shareholder Proposals. Nominations by shareholders of persons for election to the board of directors of the Corporation may be made at an annual meeting in compliance with Section 5.02(b) hereof. The proposal of other business to be considered by the shareholders at an annual meeting of shareholders may be made (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the board of directors, or (iii) by any shareholder of the Corporation pursuant to timely notice in writing to the secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-4 at the principal executive offices of the Corporation not less than 60 days prior to the meeting; provided, however, that in the event that less than 75 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice to the secretary shall set forth (a) as to the shareholder giving notice and the beneficial owner, if any on whose behalf the proposal is made, (i) their name and record address, and (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by each of them, and (b) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder giving notice and the beneficial owner, if any, on whose behalf the proposal is made. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this section. The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that any nomination made at the meeting was not made in accordance with the foregoing procedures and, in such event, the nomination shall be disregarded. Any decision by the chairman of the meeting shall be conclusive and binding upon all shareholders of the Corporation for any purpose. Section 4.07. Organization. At every meeting of the shareholders, the chairman of the Board of Directors, if there be one, or, in the case of vacancy in office or absence of the chairman of the Board of Directors, one of the following persons present in the order stated: the vice chairman of the Board of Directors, if there be one, the chief executive officer, the president, the vice presidents in their order of rank and seniority, or a person chosen by vote of the shareholders present, shall act as chairman of the meeting. The secretary or, in the absence of the secretary, an assistant secretary, or, in the absence of both the secretary and assistant secretaries, a person appointed by the chairman of the meeting, shall act as secretary of the meeting. Section 4.07. Voting Rights of Shareholders. Unless otherwise provided in the Articles, every shareholder of the Corporation shall be entitled to one vote for each full share having voting power standing in the name of the shareholder on the books of the Corporation. Section 4.08. Voting and Other Action by Proxy. (a) General Rule. (1) every shareholder entitled to vote at a meeting of shareholders may authorize another person to act for the shareholder by proxy. (2) The presence of, or vote or other action at a meeting of shareholders by a proxy of a shareholder shall constitute the presence of, or vote or action by the shareholder. (3) Where two or more proxies of a shareholder are present, the Corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. (b) Execution and Filing. Every proxy shall be executed in writing by the shareholder or by the duly authorized attorney-in-fact of the shareholder and filed with the secretary of the Corporation. A telegram, telex, cablegram, datagram or similar transmission from a shareholder or attorney-in-fact, or a photographic, facsimile or similar reproduction of a writing executed by a shareholder or attorney-in-fact: (1) may be treated as properly executed for purposes of this subsection; and (2) shall be so treated if it sets forth a confidential and unique identification number or other mark furnished by the Corporation to the shareholder for the purposes of a particular meeting or transaction. APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-5 (c) Revocation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the secretary of the Corporation. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the secretary of the Corporation. (d) Expenses. The Corporation shall pay the reasonable expenses of solicitation of votes, proxies or consents of shareholders by or on behalf of the Board of Directors or its nominees for election to the Board of Directors, including solicitation by professional proxy solicitors and otherwise. Section 4.09. Voting by Fiduciaries and Pledgees. Shares of the Corporation standing in the name of a trustee or other fiduciary and shares held by an assignee for the benefit of creditors or by a receiver may be voted by the trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged shall be entitled to vote the shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee, but nothing in this section shall affect the validity of a proxy given to a pledgee or nominee. Section 4.10. Voting by Joint Holders of Shares. (a) General Rule. Where shares of the Corporation are held jointly or as tenants in common by two or more persons, as fiduciaries or otherwise: (1) if only one or more of such persons is present in person or by proxy, all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum and the Corporation shall accept as the vote of all the shares the vote cast by a joint owner or a majority of them; and (2) if the persons are equally divided upon whether the shares held by them shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among the persons without prejudice to the rights of the joint owners or the beneficial owners thereof among themselves. (b) Exception. If there has been filed with the secretary of the Corporation a copy, certified by an attorney at law to be correct, of the relevant portions of the agreement under which the shares are held or the instrument by which the trust or estate was created or the order of court appointing them or of an order of court directing the voting of the shares, the persons specified as having such voting power in the document latest in date of operative effect so filed, and only those persons, shall be entitled to vote the shares but only in accordance therewith. Section 4.11. Voting by Corporations. (a) Voting by Corporate Shareholders. Any Corporation that is a shareholder of this Corporation may vote at meetings of shareholders of this Corporation by any of its officers or agents, or by proxy appointed by any officer or agent, unless some other person, by resolution of the Board of Directors of the other Corporation or a provision of its Articles or bylaws, a copy of which resolution or provision certified to be correct by one of its officers has been filed with the secretary of this Corporation, is appointed its general or special proxy in which case that person shall be entitled to vote the shares. (b) Controlled Shares. Shares of this Corporation owned, directly or indirectly, by it and controlled, directly or indirectly, by the Board of Directors of this Corporation, as such, shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares for voting purposes at any given time. APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-6 Section 4.12. Determination of Shareholders of Record. (a) Fixing Record Date. The Board of Directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Corporation after any record date fixed as provided in this subsection. The Board of Directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date for the adjourned meeting. (b) Determination When a Record Date is Not Fixed. If a record date is not fixed: (1) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given. (2) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (c) Certification by Nominee. The Board of Directors may adopt a procedure whereby a shareholder of the Corporation may certify in writing to the Corporation that all or a portion of the shares registered in the name of the shareholder are held for the account of a specified person or persons. Upon receipt by the Corporation of a certification complying with the procedure, the persons specified in the certification shall be deemed, for the purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification. Section 4.13. Voting Lists. (a) General Rule. The officer or agent having charge of the transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof except that, if the Corporation has 5,000 or more shareholders, in lieu of the making of the list the Corporation may make the information therein available at the meeting by any other means. (b) Effect of List. Failure to comply with the requirements of this section shall not affect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. The original share register or transfer book, or a duplicate thereof kept in the Commonwealth of Pennsylvania, shall be prima facie evidence as to who are the shareholders entitled to examine the list or share register or transfer book or to vote at any meeting of shareholders. Section 4.14. Judges of Election. (a) Appointment. In advance of any meeting of shareholders of the Corporation, the Board of Directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint judges of election at the meeting. The number of judges shall be one or three. A person who is a candidate for an office to be filled at the meeting shall not act as a judge. (b) Vacancies. In case any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof. APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-7 (c) Duties. The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with nominations by shareholders or the right to vote, count and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. (d) Report. On request of the presiding officer of the meeting or of any shareholder, the judges shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein. Section 4.15. Minors as Security Holders. The Corporation may treat a minor who holds shares or obligations of the Corporation as having capacity to receive and to empower others to receive dividends, interest, principal and other payments or distributions, to vote or express consent or dissent and to make elections and exercise rights relating to such shares or obligations unless, in the case of payments or distributions on shares, the corporate officer responsible for maintaining the list of shareholders or the transfer agent of the Corporation or, in the case of payments or distributions on obligations, the treasurer or paying officer or agent has received written notice that the holder is a minor. ARTICLE V Board of Directors Section 5.01. Powers. (a) General Rule. Unless otherwise provided by statute, all powers vested by law in the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors. (b) Notation of Dissent. A director of the Corporation who is present at a meeting of the Board of Directors, or of a committee of the Board of Directors, at which action on any corporate matter is taken on which the director is generally competent to act, shall be presumed to have assented to the action taken unless his or her dissent is entered in the minutes of the meeting or unless the director files his or her written dissent to the action with the secretary of the meeting before the adjournment thereof or transmits the dissent in writing to the secretary of the Corporation immediately after the adjournment of the meeting. The right to dissent shall not apply to a director who voted in favor of the action. Nothing in this section shall bar a director from asserting that minutes of the meeting incorrectly omitted his or her dissent if, promptly upon receipt of a copy of such minutes, the director notifies the secretary, in writing, of the asserted omission or inaccuracy. Section 5.02. Qualifications, Nomination and Election of Directors. (a) Qualifications. Each director of the Corporation shall be a natural person of full age who need not be a resident of the Commonwealth of Pennsylvania or a shareholder of the Corporation. (b) Nomination. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of shareholders by or at the direction of the board of directors, which shall, until December 31, 2001, follow the method for the selection of directors set forth in Section 5.13 of the Bylaws. Nominations of persons for election to the board of directors of the Corporation may also be made by any shareholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 5.02 (b). Such nominations, other than those made by or at the direction of the board, shall be made pursuant to timely notice in writing to the secretary of the Corporation. To APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-8 be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days prior to the meeting; provided, however, that in the event that less than 75 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice to the secretary shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to the rules and regulations promulgated under the Securities Exchange Act of 1934, as amended; and (b) as to the shareholder giving the notice (i) the name and record address of the shareholder and (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the shareholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director by the shareholders of the Corporation unless nominated in accordance with the procedures set forth herein. The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that any nomination made at the meeting was not made in accordance with the foregoing procedures and, in such event, the nomination shall be disregarded. Any decision by the chairman of the meeting shall be conclusive and binding upon all shareholders of the Corporation for any purpose. (b) Election of Directors. In elections for directors, voting need not be by ballot, unless required by vote of the shareholders before the voting for the election of directors begins. The nominees receiving the highest number of votes shall be elected to the Board of Directors. Section 5.03. Number and Term of Office. (a) Number. Subject to the provisions of Section 5.13 of these Bylaws, the board of directors and any class of the board of directors shall consist of such number of directors as may be determined from time to time by resolution adopted by a vote of a majority of the entire board of directors. (b) Term of Office. The directors shall be divided into three classes, each of which shall serve for a three year term. The Class I directors shall hold office initially for a term expiring at the 1999 annual meeting of shareholders, the Class II directors shall hold office initially for a term expiring at the 2000 annual meeting of shareholders and the Class III directors shall hold office initially for a term expiring at the 2001 annual meeting of shareholders. At each annual meeting of shareholders, the successors to the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election and until their successors have been duly elected and qualified, unless sooner removed as provided in Section 5.05. Each class of directors shall be as nearly equal in number as possible. (c) Resignation. Any director may resign at any time upon written notice to the Corporation. The resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as shall be specified in the notice of resignation and, unless otherwise specified in the notice, the acceptance of the resignation shall not be necessary to make it effective. Section 5.04. Vacancies (a) Subject to the provisions of Section 5.13 hereto, vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and a director so chosen shall hold office until the next annual election of any class of directors and until a successor is duly elected and qualified. If there are no directors in office, then an election of directors may be held in the manner provided by statute. APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-9 (b) Subject to the provisions of Section 5.13 hereto, whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Articles, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Section 5.05. Removal of Directors. (a) Removal by the Shareholders. Subject to the provisions of Section 5.13 hereto, the entire Board of Directors, an entire class of the Board of Directors or any individual director may be removed from office only for cause by vote of a majority of the shareholders entitled to vote thereon. In case the Board of Directors, an entire class of the Board of Directors or any one or more directors are so removed, new directors may be elected at the same meeting. The repeal of a provision of the Articles or bylaws prohibiting, or the addition of a provision to the Articles or bylaws permitting, the removal by the shareholders of the Board of Directors or any individual director without assigning any cause shall not apply to any incumbent director during the balance of the term for which the director was selected. (b) Removal by the Board of Directors. The Board of Directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year or if, within 60 days after notice of his or her selection, the director does not accept the office either in writing or by attending a meeting of the Board of Directors. Section 5.06. Place of Meetings. Meetings of the Board of Directors may be held at such place within or without the Commonwealth of Pennsylvania as the Board of Directors may from time to time appoint or as may be designated in the notice of the meeting. Section 5.07. Organization of Meetings. At every meeting of the Board of Directors, the chairman of the Board of Directors, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the Board of Directors, one of the following officers present in the order stated: the vice chairman of the Board of Directors, if there be one, the chief executive officer, the president, the vice presidents in their order of rank and seniority, or a person chosen by a majority of the directors present, shall act as chairman of the meeting. The secretary or, in the absence of the secretary, an assistant secretary, or, in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary of the meeting. Section 5.08. Regular Meetings. Regular meetings of the Board of Directors shall be held at such time and place as shall be designated from time to time by resolution of the Board of Directors. Section 5.09. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the chief executive officer or by a majority of the directors. Section 5.10. Quorum of and Action by Directors. (a) General Rule. A majority of the board of directors of the Corporation shall be necessary to constitute a quorum for the transaction of business and the acts of a majority of the directors present and voting at a meeting at which a quorum is present shall be the acts of the Board of Directors. (b) Action by Unanimous Written Consent. Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the secretary of the Corporation. Section 5.11. Executive and Other Committees. (a) Establishment and Powers. Subject to Section 5.13 the Board of Directors may, by resolution adopted by a majority of the directors in office, establish one or more committees to consist of one APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-10 or more directors of the Corporation. Any committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all of the powers and authority of the Board of Directors except that a committee shall not have any power or authority as to the following: (1) The submission to shareholders of any action requiring approval of shareholders under the BCL. (2) The creation or filling of vacancies in the Board of Directors. (3) The adoption, amendment or repeal of these bylaws. (4) The amendment or repeal of any resolution of the Board of Directors that by its terms is amendable or repealable only by the Board of Directors. (5) Action on matters committed by a resolution of the Board of Directors to another committee of the Board of Directors. (b) Alternate Committee Members. The Board of Directors may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. (c) Term. Each committee of the Board of Directors shall serve at the pleasure of the Board of Directors. (d) Committee Procedures. The term "Board of Directors," when used in any provision of these bylaws relating to the organization or procedures of or the manner of taking action by the Board of Directors, shall be construed to include and refer to any executive or other committee of the Board of Directors. (e) Members of the Committees. Until their successors are duly elected or appointed and qualified, the members of the Executive, Audit, Compensation and Nomination Committees of the Board of Directors shall be as set forth on Schedule 5.21(e) of the Agreement and Plan of Merger dated as of October 22, 1998 among N2K Inc., CDnow, Inc. and the Corporation. Section 5.12. Compensation. The Board of Directors shall have the authority to fix the compensation of directors for their services as directors and a director may be a salaried officer of the Corporation. Section 5.13. Representation on Board of Directors. Until December 31, 2001 the total number of persons serving on the board of directors shall be nine, of whom four shall be CDnow Directors (as defined below) and three shall be N2K Directors (as defined below). Initially, two persons serving on the board of directors shall be Independent Directors (as defined below) jointly selected by the CDnow Directors and the N2K Directors. Until December 31, 2001, Class I shall contain one CDnow Director, one N2K Director and one Independent Director; Class II shall contain one CDnow Director, one N2K Director and one Independent Director and; Class III shall contain two CDnow Directors and one N2K Director. If, at any time during the period referred to in the immediately preceding sentence, the number of CDnow Directors and N2K Directors serving, or that would be serving following the next shareholders' meeting at which directors are to be elected as directors, would not be equal to four in the case CDnow Directors and three in the case of N2K Directors, then, subject to the fiduciary duties of the directors, the board of directors and any nominating committee thereof shall nominate for election at the next shareholders' meeting at which directors are to be elected, such person or persons as may be requested by the remaining CDnow Directors (if the number of CDnow Directors is, or would otherwise become, less than four) or by the remaining N2K Directors (if the number of N2K Directors is, or would otherwise become, less than three) to ensure that there shall be four CDnow Directors APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-11 and three N2K Directors. The term "CDnow Director" means (i) any person serving as a director of CDnow, Inc., a Pennsylvania corporation ("CDnow"), on October 22, 1998 who becomes a director of the Corporation and (ii) any person who becomes a director pursuant to the second preceding sentence and who is designated by the CDnow Directors; the term "N2K Director" means (i) any person serving as a Director of N2K Inc., a Delaware corporation ("N2K"), on October 22, 1998 who becomes a director of the Corporation and (ii) any person who becomes a director pursuant to the second preceding sentence and who is designated by the N2K Directors; and the term "Independent Director" means a person who becomes a Director of the Corporation who did not have on October 22, 1998 or on the date such person is elected as a Director of the Corporation, and has not had within the three year period prior to the date of his election, any material employment, business affiliation or association, or immediate family relationship with either CDnow or N2K, or any person or entity controlling, controlled by or under common control with either N2K or CDnow. Any amendment to or modification of this Section 5.13 or of any provision of these Bylaws which refers to this Section 5.13 shall require an 80% vote of the entire board of directors. ARTICLE VI Officers Section 6.01. Officers Generally. (a) Number, Qualifications and Designation. The officers of the Corporation shall be a chief executive officer and/or a president, one or more vice presidents, a secretary, a treasurer, and such other officers as may be elected in accordance with the provisions of Section 6.03. Officers may but need not be directors or shareholders of the Corporation. The president and secretary shall be natural persons of full age. The treasurer may be a Corporation, but if a natural person shall be of full age. The Board of Directors may elect from among the members of the Board of Directors a chairman of the Board of Directors and a vice chairman of the Board of Directors who shall be officers of the Corporation. Any number of offices may be held by the same person. (b) Bonding. The Corporation may secure the fidelity of any or all of its officers by bond or otherwise. Section 6.02. Election, Term of Office and Resignations. (a) Election and Term of Office. The officers of the Corporation, except those elected by delegated authority pursuant to Section 6.03, shall be elected annually by the Board of Directors, and each such officer shall hold office for a term of one year and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. (b) Resignations. Any officer may resign at any time upon written notice to the Corporation. The resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as may be specified in the notice of resignation. Section 6.03. Subordinate Officers, Committees and Agents. The Board of Directors may from time to time elect such other officers and appoint such committees, employees or other agents as the business of the Corporation may require, including one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws, or as the Board of Directors may from time to time determine. The Board of Directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents. Section 6.04. Removal of Officers and Agents. Any officer or agent of the Corporation may be removed by the Board of Directors with or without cause. The removal shall be without prejudice to the APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-12 contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 6.05. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or any other cause, may be filled by the Board of Directors or by the officer or committee to which the power to fill such office has been delegated pursuant to Section 6.03, as the case may be, and if the office is one for which these bylaws prescribe a term, shall be filled for the unexpired portion of the term. Section 6.06. Authority. All officers of the Corporation, as between themselves and the Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided by or pursuant to resolutions or orders of the Board of Directors or, in the absence of controlling provisions in the resolutions or orders of the Board of Directors, as may be determined by or pursuant to these bylaws. Section 6.07. The Chairman and Vice Chairman of the Board of Directors. The chairman of the Board of Directors or in the absence of the chairman, the vice chairman of the Board of Directors, if there is one, or in the absence of the chairman and the vice chairman (if any) the chief executive officer shall preside at all meetings of the shareholders and of the Board of Directors, and shall perform such other duties as may from time to time be requested by the Board of Directors. Section 6.08. The Chief Executive Officer. The chief executive officer shall be the chief executive officer of the Corporation and shall have general supervision over the business and operations of the Corporation, subject however, to the control of the Board of Directors. The chief executive officer shall sign, execute, and acknowledge, in the name of the Corporation, deeds, mortgages, bonds, contracts or other instruments, authorized by the Board of Directors, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors, or by these bylaws, to some other officer or agent of the Corporation; and, in general, shall perform all duties incident to the office of president and such other duties as from time to time may be assigned by the Board of Directors. The chief executive officer shall from time to time make such reports of the affairs of the Corporation (including, without limitation, capital and operating budgets of the Corporation not less than annually) as the Board of Directors may require and shall annually present to the annual meeting of the shareholders a report of the business of the Corporation for the preceding fiscal year. Section 6.09. The President. The president, if a person other than the chief executive officer, shall perform the duties of the chief executive officer in the absence of such officer and such other duties as may from time to time be assigned to the president by the Board of Directors or the chief executive officer. Section 6.10. The Vice Presidents. The vice presidents shall perform the duties of the president in the absence of the president and such other duties as may from time to time be assigned to them by the Board of Directors, the chief executive officer or the president and if there is more than one vice president, their seniority in performing such duties and exercising such powers shall be determined by the order in which they were first elected or appointed, or as determined by the Board of Directors. Section 6.11. The Secretary. The secretary or an assistant secretary shall attend all meetings of the shareholders and of the Board of Directors and all committees thereof and shall record all the votes of the shareholders and of the directors and the minutes of the meetings of the shareholders and of the Board of Directors and of committees of the Board of Directors in a book or books to be kept for that purpose; shall see that notices are given and records and reports properly kept and filed by the Corporation as required by law; shall be the custodian of the seal of the Corporation and see that it is affixed to all documents to be executed on behalf of the Corporation under its seal; and, in general, shall perform all duties incident to the office of secretary, and such other duties as may from time to time be assigned by the Board of Directors, the chief executive officer or the president. APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-13 Section 6.12. The Treasurer. The treasurer shall be the chief financial officer and shall have or provide for the custody of the funds or other property of the Corporation; shall collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or received by the Corporation; shall deposit all funds in his or her custody as treasurer in such banks or other places of deposit as the Board of Directors may from time to time designate; shall, whenever so required by the Board of Directors, render an account showing all transactions as treasurer, and the financial condition of the Corporation; and, in general, shall discharge such other duties as may from time to time be assigned by the Board of Directors, the chief executive officer or the president. Section 6.13. Salaries. The salaries of the officers elected by the Board of Directors shall be fixed from time to time by the Board of Directors or by such officer as may be designated by resolution of the Board of Directors. The salaries or other compensation of any other officers, employees and other agents shall be fixed from time to time by the Board of Directors, or by the officer or committee to which the power to elect such officers or to retain or appoint such employees or other agents has been delegated pursuant to Section 6.03. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that the officer is also a director of the Corporation. Section 6.14. Employment Agreements. (a) Except as to the election to positions specifically provided for in the employment agreements between the Corporation and Jason Olim and the Corporation and Jonathan Diamond (each an "Employment Agreement," and collectively, the "Employment Agreements"), which are expressly contemplated by Section 5.21 of the Agreement and Plan of Merger dated as of October 22, 1998 by and among the Corporation, CDnow and N2K, and until December 31, 2001, (i) the election of any other person to such positions, or (ii) the removal or replacement of Mr. Olim and Mr. Diamond from one or more of those positions, shall require an 80% vote of the entire board of directors. Thereafter, such vote as is provided by Section 5.10 of these Bylaws shall be required. (b) Any amendment to or modification of any of the Employment Agreements or of this Section 6.14 shall require an 80% vote of the entire board of directors. ARTICLE VII Certificates of Stock, Transfer, Etc. Section 7.01. Share Certificates. (a) Form of Certificates. Certificates for shares of the Corporation shall be in such form as approved by the Board of Directors, and shall state that the Corporation is incorporated under the laws of the Commonwealth of Pennsylvania, the name of the person to whom issued, and the number and class of shares and the designation of the series (if any) that the certificate represents. If the Corporation is authorized to issue shares of more than one class or series, certificates for shares of the Corporation shall set forth upon the face or back of the certificate (or shall state on the face or back of the certificate that the Corporation will furnish to any shareholder upon request and without charge), a full or summary statement of the designations, voting rights, preferences, limitations and special rights, if any, of the shares of each class or series authorized to be issued so far as they have been fixed and determined and the authority of the Board of Directors to fix and determine the designations, voting rights, preferences, limitations and special rights of the classes and series of shares of the Corporation. (b) Share Register. The share register or transfer books and blank share certificates shall be kept by the secretary or by any transfer agent or registrar designated by the Board of Directors for that purpose. Section 7.02. Issuance. The share certificates of the Corporation shall be numbered and registered in the share register or transfer books of the Corporation as they are issued. They shall be executed in such APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-14 manner as the Board of Directors shall determine. In case any officer, transfer agent or registrar who has signed or authenticated, or whose facsimile signature or authentication has been placed upon, any share certificate shall have ceased to be such officer, transfer agent or registrar because of death, resignation or otherwise, before the certificate is issued, the certificate may be issued with the same effect as if the officer, transfer agent or registrar had not ceased to be such at the date of its issue. The provisions of this Section 7.02 shall be subject to any inconsistent or contrary agreement in effect at the time between the Corporation and any transfer agent or registrar. Section 7.03. Transfer. Transfers of shares shall be made on the share register or transfer books of the Corporation upon surrender of the certificate therefor, endorsed by the person named in the certificate or by an attorney lawfully constituted in writing. No transfer shall be made inconsistent with the provisions of the Uniform Commercial Code, 13 Pa.C.S. (S)(S) 8101 et seq., and its amendments and supplements. Section 7.04. Record Holder of Shares. The Corporation shall be entitled to treat the person in whose name any share or shares of the Corporation stand on the books of the Corporation as the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person. Section 7.05. Lost, Destroyed or Mutilated Certificates. The holder of any shares of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the Board of Directors may, in its discretion, cause a new certificate or certificates to be issued to such holder, in case of mutilation of the certificate, upon the surrender of the mutilated certificate or, in case of loss or destruction of the certificate, upon satisfactory proof of such loss or destruction and, if the Board of Directors shall so determine, the deposit of a bond in such form and in such sum, and with such surety or sureties, as it may direct. Section 7.06. Agreements Restricting Transfer of Shares. The Board of Directors may authorize the Corporation to become party to agreements with shareholders and others relating to transfer, repurchase and issuance of shares of stock of the Corporation; provided, however, that such agreement must be filed with the Corporation and all share certificates affected thereby shall have clearly imprinted thereon a legend containing such agreement or referring thereto. ARTICLE VIII Indemnification of Directors, Officers and Other Authorized Representatives Section 8.01. Scope of Indemnification. (a) General Rule. The Corporation shall indemnify an indemnified representative against any liability incurred in connection with any proceeding in which the indemnified representative may be involved as a party or otherwise by reason of the fact that such person is or was serving in an indemnified capacity, including, without limitation, liabilities resulting from any actual or alleged breach or neglect of duty, error, misstatement or misleading statement, negligence, gross negligence or act giving rise to strict or products liability, except: (1) where such indemnification is expressly prohibited by applicable law; (2) where the conduct of the indemnified representative has been finally determined pursuant to Section 8.06 or otherwise: (i) to constitute willful misconduct or recklessness within the meaning of 15 Pa.C.S. (S) 1746(b) or any superseding provision of law sufficient in the circumstances to bar indemnification against liabilities arising from the conduct; or APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-15 (ii) to be based upon or attributable to the receipt by the indemnified representative from the Corporation of a personal benefit to which the indemnified representative is not legally entitled; or (3) to the extent such indemnification has been finally determined in a final adjudication pursuant to Section 8.06 to be otherwise unlawful. (b) Partial Payment. If an indemnified representative is entitled to indemnification in respect of a portion, but not all, of any liabilities to which such person may be subject, the Corporation shall indemnify such indemnified representative to the maximum extent for such portion of the liabilities. (c) Presumption. The termination of a proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the indemnified representative is not entitled to indemnification. (d) Definitions. For purposes of this Article VIII: (1) "indemnified capacity" means any and all past, present and future service by an indemnified representative in one or more capacities as a director, officer, employee or agent of the Corporation, or, at the request of the Corporation, as a director, officer, employee, agent, fiduciary or trustee of another Corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise; (2) "indemnified representative" means any and all directors and officers of the Corporation and any other person designated as an indemnified representative by the Board of Directors of the Corporation (which may, but need not, include any person serving at the request of the Corporation, as a director, officer, employee, agent, fiduciary or trustee of another Corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise); (3) "liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damages, excise tax assessed with respect to an employee benefit plan, or cost or expense of any nature (including, without limitation, attorneys' fees and disbursements); and (4) "proceeding" means any threatened, pending or completed action, suit, appeal or other proceeding of any nature, whether civil, criminal, administrative or investigative, whether formal or informal, and whether brought by or in the right of the Corporation, a class of its security holders or otherwise. Section 8.02. Proceedings Initiated by Indemnified Representatives. Notwithstanding any other provision of this Article VIII, the Corporation shall not indemnify under this Article VIII an indemnified representative for any liability incurred in a proceeding initiated (which shall not be deemed to include counter claims or affirmative defenses) or participated in as an intervenor or amicus curiae by the person seeking indemnification unless such initiation of or participation in the proceeding is authorized, either before or after its commencement, by the affirmative vote of a majority of the directors in office. This section does not apply to reimbursement of expenses incurred in successfully prosecuting or defending an arbitration under Section 8.06 or otherwise successfully prosecuting or defending the rights of an indemnified representative granted by or pursuant to this Article VIII. Section 8.03. Advancing Expenses. The Corporation shall pay the expenses (including attorneys' fees and disbursements) incurred in good faith by an indemnified representative in advance of the final disposition of a proceeding described in Section 8.01 or the initiation of or participation in which is authorized pursuant to Section 8.02 upon receipt of an undertaking by or on behalf of the indemnified representative to repay the amount if it is ultimately determined pursuant to Section 8.06 that such person is not entitled to be indemnified by the Corporation pursuant to this Article VIII. The financial ability of an indemnified representative to repay an advance shall not be a prerequisite to the making of such advance. APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-16 Section 8.04. Securing of Indemnification Obligations. To further effect, satisfy or secure the indemnification obligations provided herein or otherwise, the Corporation may maintain insurance, obtain a letter of credit, act as self- insurer, create a reserve, trust, escrow, cash collateral or other fund or account, enter into indemnification agreements, pledge or grant a security interest in any assets or properties of the Corporation, or use any other mechanism or arrangement whatsoever in such amounts, at such costs, and upon such other terms and conditions as the Board of Directors shall deem appropriate. Absent fraud, the determination of the Board of Directors with respect to such amounts, costs, terms and conditions shall be conclusive against all security holders, officers and directors and shall not be subject to voidability. Section 8.05. Payment of Indemnification. An indemnified representative shall be entitled to indemnification within 30 days after a written request for indemnification has been delivered to the secretary of the Corporation. Section 8.06. Arbitration. (a) General Rule. Any dispute related to the right to indemnification, contribution or advancement of expenses as provided under this Article VIII, except with respect to indemnification for liabilities arising under the Securities Act of 1933 that the Corporation has undertaken to submit to a court for adjudication, shall be decided only by arbitration in the metropolitan area in which the principal executive offices of the Corporation are located at the time, in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, before a panel of three arbitrators, one of whom shall be selected by the Corporation, the second of whom shall be selected by the indemnified representative and the third of whom shall be selected by the other two arbitrators. In the absence of the American Arbitration Association, or if for any reason arbitration under the arbitration rules of the American Arbitration Association cannot be initiated, and if one of the parties fails or refuses to select an arbitrator or the arbitrators selected by the Corporation and the indemnified representative cannot agree on the selection of the third arbitrator within 30 days after such time as the Corporation and the indemnified representative have each been notified of the selection of the other's arbitrator, the necessary arbitrator or arbitrators shall be selected by the presiding judge of the court of general jurisdiction in such metropolitan area. (b) Qualifications of Arbitrators. Each arbitrator selected as provided herein is required to be or have been a director or executive officer of a Corporation whose shares of common stock were listed during at least one year of such service on the New York Stock Exchange or the American Stock Exchange or quoted on the National Association of Securities Dealers Automated Quotations System. (c) Burden of Proof. The party or parties challenging the right of an indemnified representative to the benefits of this Article VIII shall have the burden of proof. (d) Expenses. The Corporation shall reimburse an indemnified representative for the expenses (including attorneys' fees and disbursements) incurred in successfully prosecuting or defending such arbitration. (e) Effect. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by any party in accordance with applicable law in any court of competent jurisdiction, except that the Corporation shall be entitled to interpose as a defense in any such judicial enforcement proceeding any prior final judicial determination adverse to the indemnified representative under Section 8.01(a)(2) in a proceeding not directly involving indemnification under this Article VIII. This arbitration provision shall be specifically enforceable. Section 8.07. Contribution. If the indemnification provided for in this Article VIII or otherwise is unavailable for any reason in respect of any liability or portion thereof, the Corporation shall contribute to the liabilities to which the indemnified representative may be subject in such proportion as is appropriate to reflect the intent of this Article VIII or otherwise. APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-17 Section 8.08. Mandatory Indemnification of Directors, Officers, etc. To the extent that an authorized representative of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1741 or 1742 of the BCL or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees and disbursements) actually and reasonably incurred by such person in connection therewith. Section 8.09. Contract Rights; Amendment or Repeal. All rights under this Article VIII shall be deemed a contract between the Corporation and the indemnified representative pursuant to which the Corporation and each indemnified representative intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not affect any rights or obligations then existing. Section 8.10. Scope of Article VIII. The rights granted by this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification, contribution or advancement of expenses may be entitled under any statute, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an indemnified capacity and as to action in any other capacity. The indemnification, contribution and advancement of expenses provided by or granted pursuant to this Article VIII shall continue as to a person who has ceased to be an indemnified representative in respect of matters arising prior to such time, and shall inure to the benefit of the heirs, executors, administrators and personal representatives of such a person. Section 8.11. Reliance on Provisions. Each person who shall act as an indemnified representative of the Corporation shall be deemed to be doing so in reliance upon the rights of indemnification, contribution and advancement of expenses provided by this Article VIII. Section 8.12. Interpretation. The provisions of this Article VIII are intended to constitute bylaws authorized by 15 Pa.C.S. (S) 1746. Section 8.13. Changes in Pennsylvania Law. References in this Article VIII to Pennsylvania law or to any provision thereof shall be to such law (including without limitation to the Directors' Liability Act) as it existed on the date this Article VIII was adopted or as such law thereafter may be changed; provided that (a) in the case of any change which expands the liability of directors or limits the indemnification rights or the rights to advancement of expenses which the Corporation may provide, the rights to limited liability, to indemnification and to the advancement of expenses provided in this Article VIII shall continue as theretofore to the extent permitted by law; and (b) if such change permits the Corporation without the requirement of any further action by shareholders or Directors to limit further the liability of directors (or limit the liability of officers) or to provide broader indemnification rights or rights to the advancement of expenses than the Corporation was permitted to provide prior to such change, then liability thereupon shall be so limited and the rights to indemnification and the advancement of expenses shall be so broadened to the extent permitted by law. ARTICLE IX Dividends and Other Distributions to Shareholders Section 9.01. Dividends. Subject to applicable law of the State of Incorporation and the Articles, and in accordance with the provisions thereof at the pertinent applicable time, the Board of Directors of the Corporation may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in cash or property other than its own shares, except when the Corporation is insolvent, or when the payment thereof would render the Corporation insolvent, or when the declaration or payment thereof would be contrary to any restriction contained in the Articles, but: (1) Dividends may be declared and paid in cash or property only out of unreserved and unrestricted earned surplus of the Corporation, except as otherwise provided by statute; and (2) No dividends shall be paid which would reduce the remaining net assets of the Corporation below the aggregate preferential amount payable in the event of voluntary liquidation to the APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-18 holders of shares having preferential rights to the assets of the Corporation in the event of liquidation. The Board of Directors may also, from time to time, distribute to the holders of the Corporation's outstanding shares having a cumulative preferential right to receive dividends in discharge of their cumulative dividend rights, dividends payable in cash out of the unrestricted capital surplus of the Corporation, if at the time the Corporation has no earned surplus and is not insolvent and would not thereby be rendered insolvent. Each such distribution, when made, shall be identified as a payment of cumulative dividends out of capital surplus. Section 9.02 Distributions of Shares of the Corporation. Subject to the Articles, the Board of Directors of the Corporation may, from time to time, distribute pro rata to holders of any class or classes of its issued shares, treasury shares and authorized but unissued shares, but (1) If distribution is made, in the Corporation's authorized but unissued shares having a par value, there shall be transferred to stated capital at the time of such distribution an amount of surplus at least equal to the aggregate par value of the shares so issued; (2) If a distribution is made in the Corporation's authorized but unissued shares without par value, the Board of Directors may fix a stated value for the shares so issued, and there shall be transferred to stated capital, at the time of such distribution, an amount of surplus equal to the aggregate stated value, if any, so fixed; (3) The amount per share so transferred to stated capital, or the fact that there was no such transfer, shall be disclosed to the shareholders receiving such distribution concurrently with the distribution thereof; (4) No distribution of shares of any class shall be made to holders of shares of any other class unless the Articles so provide or such distribution is authorized by the affirmative vote or written consent of the holders of a majority of the outstanding shares of the class in which the distribution is to be made. In lieu of issuing fractional shares in any such distribution, the Corporation may pay in cash the fair value thereof, as determined by the Board of Directors, to shareholders entitled thereto. Section 9.03. Reserves. Subject to the Articles, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors, from time to time, in their absolute discretion determine as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for the purchase of additional property, or for such other purpose as the Board of Directors shall think conducive to the interests of the Corporation. The Board of Directors may abolish or modify any such reserve. Section 9.04 Distributions in Partial Liquidation. Subject to the Articles, the Board of Directors of the Corporation may, from time to time, distribute to the shareholders in partial liquidation, out of unrestricted capital surplus of the Corporation, a portion of its assets in cash or property, subject to the following conditions: (1) No such distribution shall be made at a time when the Corporation is insolvent or when such distribution would render the Corporation insolvent; (2) No such distribution shall be made unless such distribution shall have been authorized by the prior affirmative vote, obtained within one (1) year of such distribution, of the holders of at least a majority of the outstanding shares of each class, whether or not entitled to vote thereon by the provisions of the Articles; (3) No such distribution shall be made to the holders of any class of shares unless all cumulative dividends accrued on all classes of shares entitled to preferential dividends, prior to APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-19 dividends on the shares to the holders of which such distribution is to be made, shall have been fully paid; (4) No such distribution shall be made to the holders of any class of shares which would reduce the remaining net assets of the Corporation below the aggregate preferential amount payable in the event of voluntary liquidation to the holders of shares having preferential rights to the assets of the Corporation in the event of liquidation; (5) Each such distribution, when made, shall be identified as a distribution in partial liquidation and the amount per share disclosed to the shareholders receiving the same concurrently with the distribution thereof. ARTICLE X Miscellaneous Section 10.01. Checks. All checks, notes, bills of exchange or other similar orders in writing shall be signed by such one or more officers or employees of the Corporation as the Board of Directors may from time to time designate. Section 10.02. Contracts. (a) General Rule. Except as otherwise provided in the BCL in the case of transactions that require action by the shareholders, the Board of Directors may authorize any officer or agent to enter into any contract or to execute or deliver any instrument on behalf of the Corporation, and such authority may be general or confined to specific instances. (b) Statutory Form of Execution of Instruments. Any note, mortgage, evidence of indebtedness, contract or other document, or any assignment or endorsement thereof, executed or entered into between the Corporation and any other person, when signed by one or more officers or agents having actual or apparent authority to sign it, or by the president or vice president and secretary or assistant secretary or treasurer or assistant treasurer of the Corporation, shall be held to have been properly executed for and in behalf of the Corporation, without prejudice to the rights of the Corporation against any person who shall have executed the instrument in excess of his or her actual authority. Section 10.03. Interested Directors or Officers; Quorum. (a) General Rule. A contract or transaction between the Corporation and one or more of its directors or officers or between the Corporation and another Corporation, partnership, joint venture, trust or other enterprise in which one or more of its directors or officers are directors or officers or have a financial or other interest, shall not be void or voidable solely for that reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors that authorizes the contract or transaction, or solely because his, her or their votes are counted for that purpose, if: (1) the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors and the Board of Directors authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors even though the disinterested directors are less than a quorum; (2) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of those shareholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors or the shareholders. APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-20 (b) Quorum. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors which authorizes a contract or transaction specified in subsection (a). Section 10.04. Deposits. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board of Directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees of the Corporation as the Board of Directors shall from time to time designate. Section 10.05. Corporate Records. (a) Required Records. The Corporation shall keep complete and accurate books and records of account, minutes of the proceedings of the incorporators, shareholders and directors and a share register giving the names and addresses of all shareholders and the number and class of shares held by each. The share register shall be kept at either the registered office of the Corporation in the Commonwealth of Pennsylvania or at its principal place of business wherever situated or at the office of its registrar or transfer agent. Any books, minutes or other records may be in written form or any other form capable of being converted into written form within a reasonable time. (b) Right of Inspection. Every shareholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register, books and records of account, and records of the proceedings of the incorporators, shareholders and directors and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a shareholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the shareholder. The demand shall be directed to the Corporation at its registered office in the Commonwealth of Pennsylvania or at its principal place of business wherever situated. Section 10.06. Amendment of Bylaws. Except as otherwise provided herein, these bylaws may be amended or repealed, or new bylaws may be adopted, either (i) by vote of the shareholders at any duly organized annual or special meeting of shareholders, or (ii) with respect to those matters that are not by statute committed expressly to the shareholders and regardless of whether the shareholders have previously adopted or approved the bylaw being amended or repealed, by vote of a majority of the Board of Directors of the Corporation in office at any regular or special meeting of directors. Any change in these bylaws shall take effect when adopted unless otherwise provided in the resolution effecting the change. See Section 3.03(b) (relating to notice of action by shareholders on bylaws). ARTICLE XI Adoption of Bylaws--Record of Amendment Section 11.1. Adoption. These Amended and Restated Bylaws have been adopted and filed with the undersigned on the day of , 199 , and shall be effective as of this date. APPENDIX III - AMENDED AND RESTATED BYLAWS OF NEWCO III-21 APPENDIX IV PENNSYLVANIA BUSINESS CORPORATION LAW SUBCHAPTER D: DISSENTERS RIGHTS (S) 1571. Application and effect of subchapter. (a)General rule. Except as otherwise provided in subsection (b), any shareholder of a business corporation shall have the right to dissent from, and to obtain payment of the fair value of his shares in the event of, any corporate action, or to otherwise obtain fair value for his shares, where this part expressly provides that a shareholder shall have the rights and remedies provided in this subchapter. See: Section 1906(c) (relating to dissenters rights upon special treatment). Section 1930 (relating to dissenters rights). Section 1931(d) (relating to dissenters rights in share exchanges). Section 1932(c) (relating to dissenters rights in asset transfers). Section 1952(d) (relating to dissenters rights in division). Section 1962(c) (relating to dissenters rights in conversion). Section 2104(b) (relating to procedure). Section 2324 (relating to corporation option where a restriction on transfer of a security is held invalid). Section 2325(b) (relating to minimum vote requirement). Section 2704(c) (relating to dissenters rights upon election). Section 2705(d) (relating to dissenters rights upon renewal of election). Section 2907(a) (relating to proceedings to terminate breach of qualifying conditions). Section 7104(b)(3) (relating to procedure). (b)Exceptions. (1)Except as otherwise provided in paragraph (2), the holders of the shares of any class or series of shares that, at the record date fixed to determine the shareholders entitled to notice of and to vote at the meeting at which a plan specified in any of section 1930, 1931(d), 1932(c) or 1952(d) is to be voted on, are either: (i) listed on a national securities exchange; or (ii) held of record by more than 2,000 shareholders; shall not have the right to obtain payment of the fair value of any such shares under this subchapter. (2)Paragraph (1) shall not apply to and dissenters rights shall be available without regard to the exception provided in that paragraph in the case of: (i)Shares converted by a plan if the shares are not converted solely into shares of the acquiring, surviving, new or other corporation or solely into such shares and money in lieu of fractional shares. (ii)Shares of any preferred or special class unless the articles, the plan or the terms of the transaction entitle all shareholders of the class to vote thereon and require for the APPENDIX IV - PENNSYLVANIA CORPORATE LAW - DISSENTERS' RIGHTS IV-1 adoption of the plan or the effectuation of the transaction the affirmative vote of a majority of the votes cast by all shareholders of the class. (iii)Shares entitled to dissenters rights under section 1906(c) (relating to dissenters rights upon special treatment). (3)The shareholders of a corporation that acquires by purchase, lease, exchange or other disposition all or substantially all of the shares, property or assets of another corporation by the issuance of shares, obligations or otherwise, with or without assuming the liabilities of the other corporation and with or without the intervention of another corporation or other person, shall not be entitled to the rights and remedies of dissenting shareholders provided in this subchapter regardless of the fact, if it be the case, that the acquisition was accomplished by the issuance of voting shares of the corporation to be outstanding immediately after the acquisition sufficient to elect a majority or more of the directors of the corporation. (c) Grant of optional dissenters rights. The bylaws or a resolution of the board of directors may direct that all or a part of the shareholders shall have dissenters rights in connection with any corporate action or other transaction that would otherwise not entitle such shareholders to dissenters rights. (d) Notice of dissenters rights. Unless otherwise provided by statute, if a proposed corporate action that would give rise to dissenters rights under this subpart is submitted to a vote at a meeting of shareholders, there shall be included in or enclosed with the notice of meeting: (1) A statement of the proposed action and a statement that the shareholders have a right to dissent and obtain payment of the fair value of their shares by complying with the terms of this subchapter; and (2) A copy of this subchapter. (e) Other statutes. The procedures of this subchapter shall also be applicable to any transaction described in any statute other than this part that makes reference to this subchapter for the purpose of granting dissenters rights. (f) Certain provisions of articles ineffective. This subchapter may not be relaxed by any provision of the articles. (g) Cross references. See sections 1105 (relating to restriction on equitable relief), 1904 (relating to de facto transaction doctrine abolished) and 2512 (relating to dissenters rights procedure). (S) 1572. Definitions. The following words and phrases when used in this subchapter shall have the meanings given to them in this section unless the context clearly indicates otherwise: "Corporation." The issuer of the shares held or owned by the dissenter before the corporate action or the successor by merger, consolidation, division, conversion or otherwise of that issuer. A plan of division may designate which of the resulting corporations is the successor corporation for the purposes of this subchapter. The successor corporation in a division shall have the sole responsibility for payments to dissenters and other liabilities under this subchapter except as otherwise provided in the plan of division. "Dissenter." A shareholder or beneficial owner who is entitled to and does assert dissenters rights under this subchapter and who has performed every act required up to the time involved for the assertion of those rights. APPENDIX IV - PENNSYLVANIA CORPORATE LAW - DISSENTERS' RIGHTS IV-2 "Fair value." The fair value of shares immediately before the effectuation of the corporate action to which the dissenter objects taking into account all relevant factors, but excluding any appreciation or depreciation in anticipation of the corporate action. "Interest." Interest from the effective date of the corporate action until the date of payment at such rate as is fair and equitable under all the circumstances, taking into account all relevant factors including the average rate currently paid by the corporation on its principal bank loans. (S) 1573. Record and beneficial holders and owners. (a)Record holders of shares. A record holder of shares of a business corporation may assert dissenters rights as to fewer than all of the shares registered in his name only if he dissents with respect to all the shares of the same class or series beneficially owned by any one person and discloses the name and address of the person or persons on whose behalf he dissents. In that event, his rights shall be determined as if the shares as to which he has dissented and his other shares were registered in the names of different shareholders. (b)Beneficial owners of shares. A beneficial owner of shares of a business corporation who is not the record holder may assert dissenters rights with respect to shares held on his behalf and shall be treated as a dissenting shareholder under the terms of this subchapter if he submits to the corporation not later than the time of the assertion of dissenters rights a written consent of the record holder. A beneficial owner may not dissent with respect to some but less than all shares of the same class or series owned by the owner, whether or not the shares so owned by him are registered in his name. (S) 1574. Notice of intention to dissent. If the proposed corporate action is submitted to a vote at a meeting of shareholders of a business corporation, any person who wishes to dissent and obtain payment of the fair value of his shares must file with the corporation, prior to the vote, a written notice of intention to demand that he be paid the fair value for his shares if the proposed action is effectuated, must effect no change in the beneficial ownership of his shares from the date of such filing continuously through the effective date of the proposed action and must refrain from voting his shares in approval of such action. A dissenter who fails in any respect shall not acquire any right to payment of the fair value of his shares under this subchapter. Neither a proxy nor a vote against the proposed corporate action shall constitute the written notice required by this section. (S) 1575. Notice to demand payment. (a)General rule. If the proposed corporate action is approved by the required vote at a meeting of shareholders of a business corporation, the corporation shall mail a further notice to all dissenters who gave due notice of intention to demand payment of the fair value of their shares and who refrained from voting in favor of the proposed action. If the proposed corporate action is to be taken without a vote of shareholders, the corporation shall send to all shareholders who are entitled to dissent and demand payment of the fair value of their shares a notice of the adoption of the plan or other corporate action. In either case, the notice shall: (1)State where and when a demand for payment must be sent and certificates for certificated shares must be deposited in order to obtain payment. (2)Inform holders of uncertificated shares to what extent transfer of shares will be restricted from the time that demand for payment is received. (3)Supply a form for demanding payment that includes a request for certification of the date on which the shareholder, or the person on whose behalf the shareholder dissents, acquired beneficial ownership of the shares. (4)Be accompanied by a copy of this subchapter. APPENDIX IV - PENNSYLVANIA CORPORATE LAW - DISSENTERS' RIGHTS IV-3 (b)Time for receipt of demand for payment. The time set for receipt of the demand and deposit of certificated shares shall be not less than 30 days from the mailing of the notice. (S) 1576. Failure to comply with notice to demand payment, etc. (a)Effect of failure of shareholder to act. A shareholder who fails to timely demand payment, or fails (in the case of certificated shares) to timely deposit certificates, as required by a notice pursuant to section 1575 (relating to notice to demand payment) shall not have any right under this subchapter to receive payment of the fair value of his shares. (b) Restriction on uncertificated shares. If the shares are not represented by certificates, the business corporation may restrict their transfer from the time of receipt of demand for payment until effectuation of the proposed corporate action or the release of restrictions under the terms of section 1577(a) (relating to failure to effectuate corporate action). (c) Rights retained by shareholder. The dissenter shall retain all other rights of a shareholder until those rights are modified by effectuation of the proposed corporate action. (S) 1577. Release of restrictions or payment for shares. (a) Failure to effectuate corporate action. Within 60 days after the date set for demanding payment and depositing certificates, if the business corporation has not effectuated the proposed corporate action, it shall return any certificates that have been deposited and release uncertificated shares from any transfer restrictions imposed by reason of the demand for payment. (b) Renewal of notice to demand payment. When uncertificated shares have been released from transfer restrictions and deposited certificates have been returned, the corporation may at any later time send a new notice conforming to the requirements of section 1575 (relating to notice to demand payment), with like effect. (c) Payment of fair value of shares. Promptly after effectuation of the proposed corporate action, or upon timely receipt of demand for payment if the corporate action has already been effectuated, the corporation shall either remit to dissenters who have made demand and (if their shares are certificated) have deposited their certificates the amount that the corporation estimates to be the fair value of the shares, or give written notice that no remittance under this section will be made. The remittance or notice shall be accompanied by: (1) The closing balance sheet and statement of income of the issuer of the shares held or owned by the dissenter for a fiscal year ending not more than 16 months before the date of remittance or notice together with the latest available interim financial statements. (2) A statement of the corporation's estimate of the fair market value of the shares. (3) A notice of the right of the dissenter to demand payment or supplemental payment, as the case may be, accompanied by a copy of this subchapter. (d) Failure to make payment. If the corporation does not remit the amount of its estimate of the fair value of the shares as provided by subsection (c), it shall return any certificates that have been deposited and release uncertificated shares from any transfer restrictions imposed by reason of the demand for payment. The corporation may make a notation on any such certificate or on the records of the corporation relating to any such uncertificated shares that such demand has been made. If shares with respect to which notation has been so made shall be transferred, each new certificate issued therefor or the records relating to any transferred uncertificated shares shall bear a similar notation, together with the name of the original dissenting holder or owner of such shares. A transferee of such shares shall not acquire by such transfer any rights in the APPENDIX IV - PENNSYLVANIA CORPORATE LAW - DISSENTERS' RIGHTS IV-4 corporation other than those that the original dissenter had after making demand for payment of their fair value. (S) 1578. Estimate by dissenter of fair value of shares. (a) General rule. If the business corporation gives notice of its estimate of the fair value of the shares, without remitting such amount, or remits payment of its estimate of the fair value of a dissenter's shares as permitted by section 1577(c) (relating to payment of fair value of shares) and the dissenter believes that the amount stated or remitted is less than the fair value of his shares, he may send to the corporation his own estimate of the fair value of the shares, which shall be deemed a demand for payment of the amount or the deficiency. (b) Effect of failure to file estimate. Where the dissenter does not file his own estimate under subsection (a) within 30 days after the mailing by the corporation of its remittance or notice, the dissenter shall be entitled to no more than the amount stated in the notice or remitted to him by the corporation. (S) 1579. Valuation proceedings generally. (a) General rule. Within 60 days after the latest of: (1) Effectuation of the proposed corporate action; (2) Timely receipt of any demand for payment under section 1575 (relating to notice to demand payment); or (3) Timely receipt of any estimates pursuant to section 1578 (relating to estimate by dissenter of fair value of shares); if any demands for payment remain unsettled, the business corporation may file in court an application for relief requesting that the fair value of the shares be determined by the court. (b) Mandatory joinder of dissenters. All dissenters, wherever residing, whose demands have not been settled shall be made parties to the proceeding as in an action against their shares. A copy of the application shall be served on each such dissenter. If a dissenter is a nonresident, the copy may be served on him in the manner provided or prescribed by or pursuant to 42 Pa.C.S. Ch. 53 (relating to bases of jurisdiction and interstate and international procedure). (c) Jurisdiction of the court. The jurisdiction of the court shall be plenary and exclusive. The court may appoint an appraiser to receive evidence and recommend a decision on the issue of fair value. The appraiser shall have such power and authority as may be specified in the order of appointment or in any amendment thereof. (d) Measure of recovery. Each dissenter who is made a party shall be entitled to recover the amount by which the fair value of his shares is found to exceed the amount, if any, previously remitted, plus interest. (e) Effect of corporation's failure to file application. If the corporation fails to file an application as provided in subsection (a), any dissenter who made a demand and who has not already settled his claim against the corporation may do so in the name of the corporation at any time within 30 days after the expiration of the 60-day period. If a dissenter does not file an application within the 30-day period, each dissenter entitled to file an application shall be paid the corporation's estimate of the fair value of the shares and no more, and may bring an action to recover any amount not previously remitted. APPENDIX IV - PENNSYLVANIA CORPORATE LAW - DISSENTERS' RIGHTS IV-5 (S) 1580. Costs and expenses of valuation proceedings. (a) General rule. The costs and expenses of any proceeding under section 1579 (relating to valuation proceedings generally), including the reasonable compensation and expenses of the appraiser appointed by the court, shall be determined by the court and assessed against the business corporation except that any part of the costs and expenses may be apportioned and assessed as the court deems appropriate against all or some of the dissenters who are parties and whose action in demanding supplemental payment under section 1578 (relating to estimate by dissenter of fair value of shares) the court finds to be dilatory, obdurate, arbitrary, vexatious or in bad faith. (b) Assessment of counsel fees and expert fees where lack of good faith appears. Fees and expenses of counsel and of experts for the respective parties may be assessed as the court deems appropriate against the corporation and in favor of any or all dissenters if the corporation failed to comply substantially with the requirements of this subchapter and may be assessed against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted in bad faith or in a dilatory, obdurate, arbitrary or vexatious manner in respect to the rights provided by this subchapter. (c) Award of fees for benefits to other dissenters. If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated and should not be assessed against the corporation, it may award to those counsel reasonable fees to be paid out of the amounts awarded to the dissenters who were benefited. APPENDIX IV - PENNSYLVANIA CORPORATE LAW - DISSENTERS' RIGHTS IV-6 APPENDIX V October 22, 1998 Board of Directors CDNOW, Inc. 610 Old York Road, Suite 300 Jenkintown, Pennsylvania 19046 Members of the Board: BT Alex. Brown Incorporated ("BT Alex. Brown") has acted as financial advisor to CDNOW, Inc. a Pennsylvania corporation ("CDNW"), in connection with the proposed merger of CDNW and N2K Inc., a Delaware corporation ("NTKI"), pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated October 22, 1998, by and among NTKI, CDNW and Exit 8 Holding Company, a newly- formed Pennsylvania corporation with nominal capitalization ("NewCo"), one- half of the issued and outstanding capital stock of which is owned by each of CDNW and NTKI. The Merger Agreement, the implementation of which is contingent on approval by the shareholders of CDNW and NTKI, provides, among other things, that (i) N2K Acquisition Corp., a Delaware corporation and wholly- owned subsidiary of NewCo, will be merged with and into NTKI (the "NTKI Merger"), (ii) CDNOW Acquisition Corp., a Pennsylvania corporation and wholly- owned subsidiary of NewCo, will be merged with and into CDNW (together with the NTKI Merger, the "Merger") (iii) each outstanding share of the common stock, par value of $0.001 per share, of NTKI (the "NTKI Common Stock") will be converted into the right to receive 0.83 shares of the common stock, no par value per share, of NewCo (the "NewCo Common Stock"), and (iv) each outstanding share of the common stock, no par value per share, of CDNW (the "CDNW Common Stock") will be converted into the right to receive 1.00 share (the "Exchange Ratio") of NewCo Common Stock. The terms and conditions of the Merger are more fully set forth in the Merger Agreement. You have requested BT Alex. Brown's opinion, as investment bankers, as to whether the Exchange Ratio is fair, from a financial point of view, to the holders of CDNW Common Stock. In connection with this opinion, BT Alex. Brown has reviewed certain publicly available financial and other information concerning NTKI and CDNW and certain internal analyses and other information furnished to it by NTKI and CDNW. BT Alex. Brown also has held discussion with members of the senior managements of NTKI and CDNW regarding the businesses and prospects of their respective companies and the prospects of a combined company. In addition, BT Alex. Brown has (i) reviewed the reported prices and trading activity for NTKI Common Stock and CDNW Common Stock, (ii) compared certain financial and stock market information for NTKI and CDNW with similar information for certain other companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which it deemed comparable in whole or in part, (iv) reviewed the terms of the Merger Agreement and certain related documents, and (v) performed such other studies and analyses and considered such other factors as it deemed appropriate. BT Alex. Brown has not assumed responsibility for independent verification of, and has not independently verified, any information, whether publicly available or furnished to it, concerning NTKI or CDNW, including, without limitation, any financial information, forecasts or projections considered in connection with the rendering of this opinion. Accordingly, for purposes of this opinion, BT Alex. Brown has assumed and relied upon the accuracy and completeness of all such information, and BT Alex. Brown has not conducted a physical inspection of any of the properties or assets, and has not prepared or obtained any independent evaluation or appraisal of any of the assets or liabilities of NTKI or CDNW. With respect to the financial forecasts and projections, including the analyses and forecasts of certain cost savings, operating efficiencies, revenue effects and financial synergies expected by CDNW and NTKI to be achieved as a result of the Merger (collectively, the "Synergies"), made available to BT Alex. Brown and used in its analyses, BT Alex. Brown has assumed that such financial forecasts and projections have been reasonably prepared on bases APPENDIX V - OPINION OF BT ALEX, BROWN V-1 CDNOW, Inc. October 22, 1998 Page 2 reflecting the best currently available estimates and judgments of the management of NTKI or CDNW, as the case may be, as to the matters covered thereby including, with your consent, any potential liability that may arise from the litigation currently pending against NTKI. In rendering this opinion, BT Alex. Brown expresses no view as to the reasonableness of such forecasts and projections, including the Synergies, or the assumptions on which they are based. This opinion is necessarily based upon economic, market and other conditions as in effect on, and the information made available to it as of, the date hereof. BT Alex. Brown expresses no opinion as to the price at which CDNW Common Stock or NewCo Common Stock will trade following the announcement or the consummation of the Merger. For purposes of rendering this opinion, BT Alex. Brown has assumed that, in all respects material to its analysis, the representations and warranties of CDNW and NTKI contained in the Merger Agreement are true and correct, CDNW and NTKI will each perform all of the covenants and agreements to be performed by it under the Merger Agreement and all conditions to the obligations of each of CDNW and NTKI to consummate the Merger will be satisfied without any waiver thereof. In particular, you have informed BT Alex. Brown, and accordingly for purposes of rendering this opinion BT Alex. Brown has assumed, that the Merger will be free of federal tax to each of CDNW and NTKI and their respective shareholders. BT Alex. Brown has also assumed that all material governmental, regulatory or other approvals and consents required in connection with the consummation of the Merger will be obtained and that in connection with obtaining any necessary governmental, regulatory or other approvals and consents, or any amendments, modifications or waivers to any agreements, instruments or orders to which either CDNW or NTKI is a party or is subject or by which it is bound, no limitations, restrictions or conditions will be imposed or amendments, modifications or waivers made that would have a material adverse effect on CDNW or NTKI or materially reduce the contemplated benefits of the Merger to CDNW. This opinion is addressed to, and for the use and benefit of, the Board of Directors of CDNW and is not a recommendation to the shareholders of CDNW as to how they should vote with respect to matters relating to the proposed Merger. This opinion is limited to the fairness, from a financial point of view, to CDNW of the Exchange Ratio, and BT Alex. Brown expresses no opinion as to the merits of the underlying decision by CDNW to engage in the Merger. In connection with our engagement, BT Alex. Brown was not authorized to, and did not, solicit third party indications of interest with respect to the acquisition of all or a part of CDNW, nor have we reviewed with CDNW or its Board of Directors any potential transactions in lieu of the Merger. BT Alex. Brown is a registered broker-dealer and member of the New York Stock Exchange. BT Alex. Brown will be paid a fee for its services as financial advisor to CDNW in connection with the Merger, a significant portion of which is contingent upon consummation of the Merger and a portion of which is payable upon delivery of this opinion. BT Alex. Brown has, from time to time, provided investment banking and other financial services to CDNW or its affiliates (including, acting as lead managing underwriter in connection with CDNW's public offerings of CDNW Common Stock in February 1998 and in July 1998), for which it has received customary compensation. BT Alex. Brown also currently owns warrants to purchase 154,817 shares of CDNW Common Stock at a price of $3.63 per share. BT Alex. Brown maintains a market in CDNW Common Stock and regularly publishes research reports regarding the internet commerce industry and the businesses and securities of CDNW and other publicly owned companies in such industry. In the ordinary course of business, BT Alex. Brown and its affiliates may actively trade or hold the securities of both CDNW and NTKI for their own account and the account of customers and, accordingly, may at any time hold a long or short position in securities of CDNW and NTKI. APPENDIX V - OPINION OF BT ALEX, BROWN V-2 CDNOW, Inc. October 22, 1998 Page 3 Based upon and subject to the foregoing, it is BT Alex. Brown's opinion as investment bankers that the Exchange Ratio is fair, from a financial point of view, to the holders of CDNW Common Stock. Very truly yours, BT Alex. Brown Incorporated APPENDIX V - OPINION OF BT ALEX, BROWN V-3 APPENDIX VI October 22, 1998 Members of the Board of Directors N2K, Inc. 55 Broad Street New York, NY 10004 Ladies and Gentlemen: You have requested our opinion, as of this date, as to the fairness, from a financial point of view, to the holders of the outstanding shares of Common Stock, par value $0.001 per share (the "Company's Common Stock"), of N2K, Inc., a Delaware corporation (the "Company"), of the terms of the Proposed Transaction hereinafter referred to. Pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), to be entered into on or about the date hereof, by and among the Company, CDnow, Inc., a Pennsylvania corporation ("CDnow"), and a newly-formed Delaware corporation owned by the Company and CDnow ("Newco"), the Company will enter into a business combination transaction with CDnow. The combination of the Company and CDnow will be effected through (i) the merger of a wholly-owned subsidiary of Newco with and into the Company and (ii) the merger of another wholly-owned subsidiary of Newco with and into CDnow, such that the Company and CDnow become wholly-owned subsidiaries of Newco and the stockholders of the Company and CDnow become stockholders of Newco (the "Proposed Transaction"). Unless otherwise specifically defined herein, all capitalized terms used herein shall have the meanings ascribed to such terms in the Merger Agreement. Pursuant to the terms, and subject to the conditions contained in, the Merger Agreement, among other things, (i) each share of the Company's Common Stock issued and outstanding as of the Effective Time will be converted into the right to receive 0.83 shares of common stock of Newco ("Newco Common Stock") and (ii) each share of CDnow's common stock ("CDnow's Common Stock") issued and outstanding as of the Effective Time will be converted into the right to receive one share of Newco Common Stock. We understand that all approvals required for the consummation of the Proposed Transaction have been or, prior to consummation of the Proposed Transaction, will be obtained. As you know, Allen & Company Incorporated ("Allen") will receive a fee for preparing and rendering this opinion pursuant to the engagement letter agreement by and between the Company and Allen. We note that Allen and certain of its officers, directors and affiliates beneficially own approximately 205,000 shares of the Company's Common Stock and Allen holds warrants to acquire 196,110 shares of the Company's Common Stock. From time to time in the ordinary course of its business as a broker-dealer, Allen may also hold positions and trade in securities of the Company. In arriving at our opinion, we have among other things: (i) reviewed the terms and conditions of the Proposed Transaction, including the draft Merger Agreement and the draft agreements ancillary thereto (none of which prior to the delivery of our opinion has been executed by the parties); (ii) analyzed publicly available historical business and financial information relating to the Company and CDnow, as presented in documents filed with the Securities and Exchange Commission; (iii) reviewed certain financial, operating and budgetary data provided to us by the Company and CDnow relating to their respective businesses; (iv) conducted discussions with certain members of the senior management of the Company and CDnow with respect to the financial condition, business, operations, strategic objectives and prospects of the Company and CDnow, respectively, as well as industry trends prevailing in their businesses; APPENDIX VI - OPINION OF ALLEN & COMPANY VI-1 (v) reviewed and analyzed public information, including certain stock market data and financial information relating to selected public companies in lines of business which we believe to be comparable to the Company's and CDnow's, as well as analysts' reports and estimates for the Company and CDnow; (vi) reviewed the trading history of the Company's Common Stock and CDnow's Common Stock, including their performance in comparison to market indices and to selected companies in comparable businesses; (vii) reviewed public financial and transaction information relating to business combination transactions we deemed to be comparable to the Proposed Transaction; and (viii) conducted such other financial analyses and investigations as we deemed necessary or appropriate for the purposes of the opinion expressed herein. In rendering our opinion, we have assumed and relied upon the accuracy and completeness of the financial and other information respecting the Company and CDnow and any other information provided to us, and we have not assumed any responsibility for any independent verification of such information or any independent valuation or appraisal of any of the assets of the Company or CDnow. With respect to the financial, operating and budgetary data referred to above, we have assumed that they have been reasonably prepared on a basis reflecting the best currently available judgments of the management of the Company and CDnow as to the future financial performance of the Company and CDnow, respectively. In addition to our review and analysis of the specific information set forth above, our opinion herein reflects and gives effect to our assessment of general economic, monetary and market conditions existing as of the date hereof as they may affect the business and prospects of the Company and CDnow. We have prepared this opinion at the request and for the benefit of the Board of Directors of the Company, and consent to its inclusion in filings the Company may be required to make with the Securities and Exchange Commission. The opinion rendered herein does not constitute a recommendation that the Company pursue the Proposed Transaction or that any stockholder of the Company vote to approve the Proposed Transaction. Based on and subject to the foregoing, we are of the opinion that, as of this date, the terms of the Proposed Transaction are fair to the holders of the Company's Common Stock from a financial point of view. Very truly yours, ALLEN & COMPANY INCORPORATED By: _________________________________ Nancy B. Peretsman Managing Director APPENDIX VI - OPINION OF ALLEN & COMPANY VI-2 APPENDIX VII CDNOW/N2K, INC. 1999 EQUITY COMPENSATION PLAN The purpose of the CDnow/N2K, Inc. 1999 Equity Compensation Plan (the "Plan") is to provide (i) designated employees of CDnow/N2K, Inc. (the "Company") and its subsidiaries, (ii) certain consultants and advisors who perform services for the Company or its subsidiaries and (iii) non-employee members of the Board of Directors of the Company (the "Board") with the opportunity to receive grants of incentive stock options, nonqualified stock options and restricted stock. The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefitting the Company's shareholders, and will align the economic interests of the participants with those of the shareholders. 1. Administration (a) Committee. The Plan shall be administered by a committee (the "Committee") appointed by the Board, which may consist of "outside directors" as defined under section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and related Treasury regulations and "non-employee directors" as defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). However, the Board may ratify or approve any grants as it deems appropriate. If the Board administers the Plan, references in the Plan to the "Committee" shall be deemed to refer to the Board. (b) Committee Authority. The Committee shall have the sole authority to (i) determine the individuals to whom grants shall be made under the Plan, (ii) determine the type, size and terms of the grants to be made to each such individual, (iii) determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability and (iv) deal with any other matters arising under the Plan. (c) Committee Determinations. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. 2. Grants Awards under the Plan may consist of grants of incentive stock options as described in Section 5 ("Incentive Stock Options"), nonqualified stock options as described in Section 5 ("Nonqualified Stock Options") (Incentive Stock Options and Nonqualified Stock Options are collectively referred to as "Options") and restricted stock as described in Section 6 ("Restricted Stock") (hereinafter collectively referred to as "Grants"). All Grants shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument or an amendment to the grant instrument (the "Grant Instrument"). The Committee shall approve the form and provisions of each Grant Instrument. Grants under a particular Section of the Plan need not be uniform as among the grantees. 3. Shares Subject to the Plan (a) Shares Authorized. Subject to adjustment as described below, the aggregate number of shares of common stock of the Company ("Company Stock") that may be issued or transferred under the Plan is 2,500,000 shares, subject to adjustment as described below. The maximum aggregate number of shares of APPENDIX VII - 1999 EQUITY COMPENSATION PLAN VII-1 Company Stock that may be subject to Grants made under the Plan to any individual during any calendar year shall be 800,000 shares, subject to adjustment as described below. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent Options granted under the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised or if any shares of Restricted Stock are forfeited, the shares subject to such Grants shall again be available for purposes of the Plan. (b) Adjustments. If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spinoff, recapitalization, stock split, or combination or exchange of shares, (ii) by reason of a merger, reorganization or consolidation in which the Company is the surviving corporation, (iii) by reason of a reclassification or change in par value, or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spinoff or the Company's payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Grants, the maximum number of shares of Company Stock that any individual participating in the Plan may be granted in any year, the number of shares covered by outstanding Grants, the kind of shares issued under the Plan, and the price per share or the applicable market value of such Grants may be appropriately adjusted by the Committee to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to preclude, to the extent practicable, the enlargement or dilution of rights and benefits under such Grants; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. Any adjustments determined by the Committee shall be final, binding and conclusive. 4. Eligibility for Participation (a) Eligible Persons. All employees of the Company and its subsidiaries ("Employees"), including Employees who are officers or members of the Board, and members of the Board who are not Employees ("Non-Employee Directors") shall be eligible to participate in the Plan. Consultants and advisors who perform services for the Company or any of its subsidiaries ("Key Advisors") shall be eligible to participate in the Plan if the Key Advisors render bona fide services and such services are not in connection with the offer or sale of securities in a capital-raising transaction. (b) Selection of Grantees. The Committee shall select the Employees, Non- Employee Directors and Key Advisors to receive Grants and shall determine the number of shares of Company Stock subject to a particular Grant in such manner as the Committee determines. Employees, Key Advisors and Non-Employee Directors who receive Grants under this Plan shall hereinafter be referred to as "Grantees." 5. Granting of Options (a) Number of Shares. The Committee shall determine the number of shares of Company Stock that will be subject to each Grant of Options to Employees, Non- Employee Directors and Key Advisors. (b) Type of Option and Price. (i) The Committee may grant Incentive Stock Options that are intended to qualify as "incentive stock options" within the meaning of section 422 of the Code or Nonqualified Stock Options that are not intended so to qualify or any combination of Incentive Stock Options and Nonqualified Stock Options, all in accordance with the terms and conditions set forth herein. Incentive Stock Options may be granted only to Employees. Nonqualified Stock Options may be granted to Employees, Non-Employee Directors and Key Advisors. APPENDIX VII - 1999 EQUITY COMPENSATION PLAN VII-2 (ii) The purchase price (the "Exercise Price") of Company Stock subject to an Option shall be determined by the Committee and may be equal to, greater than, or less than the Fair Market Value (as defined below) of a share of Company Stock on the date the Option is granted; provided, however, that (x) the Exercise Price of an Incentive Stock Option shall be equal to, or greater than, the Fair Market Value of a share of Company Stock on the date the Incentive Stock Option is granted and (y) an Incentive Stock Option may not be granted to an Employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, unless the Exercise Price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant. (iii) If the Company Stock is publicly traded, then the Fair Market Value per share shall be determined as follows: (x) if the principal trading market for the Company Stock is a national securities exchange or the Nasdaq National Market, the last reported sale price thereof on the relevant date or (if there were no trades on that date) the latest preceding date upon which a sale was reported, or (y) if the Company Stock is not principally traded on such exchange or market, the mean between the last reported "bid" and "asked" prices of Company Stock on the relevant date, as reported on Nasdaq or, if not so reported, as reported by the National Daily Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Committee determines. If the Company Stock is not publicly traded or, if publicly traded, is not subject to reported transactions or "bid" or "asked" quotations as set forth above, the Fair Market Value per share shall be as determined by the Committee. (c) Option Term. The Committee shall determine the term of each Option. The term of any Option shall not exceed ten years from the date of grant. However, an Incentive Stock Option that is granted to an Employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, or any parent or subsidiary of the Company, may not have a term that exceeds five years from the date of grant. (d) Exercisability of Options. Options shall become exercisable in accordance with such terms and conditions, consistent with the Plan, as may be determined by the Committee and specified in the Grant Instrument. The Committee may accelerate the exercisability of any or all outstanding Options at any time for any reason. (e) Termination of Employment, Disability or Death. (i) Except as provided below, an Option may only be exercised while the Grantee is employed by, or providing service to, the Company as an Employee, Key Advisor or member of the Board. In the event that a Grantee ceases to be employed by, or provide service to, the Company for any reason other than a Disability (as defined below), death, or termination for Cause (as defined below), any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within 90 days after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall terminate as of such date. (ii) In the event the Grantee ceases to be employed by, or provide service to, the Company on account of a termination for Cause by the Company, any Option held by the Grantee shall terminate as of the date the Grantee ceases to be employed by, or provide service to, the Company. In addition, notwithstanding any other provisions of this Section 5, if the Committee determines that the Grantee has engaged in conduct that constitutes Cause at any time while the Grantee is employed by, or providing service to, the Company or after the Grantee's termination of employment or service, any Option held by the Grantee shall immediately terminate and the Grantee shall automatically forfeit all shares underlying any exercised portion of an Option for which the Company has not yet delivered the share certificates, upon refund by the Company of the Exercise Price paid by the Grantee for such shares. APPENDIX VII - 1999 EQUITY COMPENSATION PLAN VII-3 (iii) In the event the Grantee ceases to be employed by, or provide service to, the Company because the Grantee is Disabled, any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's Options which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall terminate as of such date. (iv) If the Grantee dies while employed by, or providing service to, the Company or within 90 days after the date on which the Grantee ceases to be employed or provide service on account of a termination specified in Section 5(e)(i) above (or within such other period of time as may be specified by the Committee), any Option that is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by, or provide service to, the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Except as otherwise provided by the Committee, any of the Grantee's Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by, or provide service to, the Company shall terminate as of such date. (v) For purposes of this Section 5(e) and Section 6: (A) The term "Company" shall mean the Company and its parent and subsidiary corporations. (B) "Employed by, or provide service to, the Company" shall mean employment or service as an Employee, Key Advisor or member of the Board (so that, for purposes of exercising Options and satisfying conditions with respect to Restricted Stock, a Grantee shall not be considered to have terminated employment or service until the Grantee ceases to be an Employee, Key Advisor and member of the Board), unless the Committee determines otherwise. (C) "Disability" shall mean a Grantee's becoming disabled within the meaning of section 22(e)(3) of the Code. (D) "Cause" shall mean, except to the extent specified otherwise by the Committee, a finding by the Committee that the Grantee (i) has breached his or her employment or service contract with the Company, (ii) has been engaged in disloyalty to the Company, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of his or her employment or service, (iii) has disclosed trade secrets or confidential information of the Company to persons not entitled to receive such information or (iv) has engaged in such other behavior detrimental to the interests of the Company as the Committee determines. (f)Exercise of Options. A Grantee may exercise an Option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company with payment of the Exercise Price. The Grantee shall pay the Exercise Price for an Option as specified by the Committee (x) in cash, (y) with the approval of the Committee, by delivering shares of Company Stock owned by the Grantee (including Company Stock acquired in connection with the exercise of an Option, subject to such restrictions as the Committee deems appropriate) and having a Fair Market Value on the date of exercise equal to the Exercise Price or (z) by such other method as the Committee may approve, including payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board. Shares of Company Stock used to exercise an Option shall have been held by the Grantee for the requisite period of time to avoid adverse accounting consequences to the Company with respect to the Option. The Grantee shall pay the Exercise Price and the amount of any withholding tax due (pursuant to Section 7) at the time of exercise. (g)Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of the grant with respect to which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other APPENDIX VII - 1999 EQUITY COMPENSATION PLAN VII-4 stock option plan of the Company or a parent or subsidiary, exceeds $100,000, then the Option, as to the excess, shall be treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any person who is not an Employee of the Company or a parent or subsidiary (within the meaning of section 424(f) of the Code). 6.Restricted Stock Grants The Committee may issue or transfer shares of Company Stock to an Employee, Non-Employee Director or Key Advisor under a Grant of Restricted Stock, upon such terms as the Committee deems appropriate. The following provisions are applicable to Restricted Stock: (a) General Requirements. Shares of Company Stock issued or transferred pursuant to Restricted Stock Grants may be issued or transferred for consideration or for no consideration, and may be subject to restrictions or no restrictions, as determined by the Committee. The Committee may establish conditions under which restrictions on shares of Restricted Stock shall lapse over a period of time or according to such other criteria as the Committee deems appropriate. The period of time during which the Restricted Stock will remain subject to restrictions will be designated in the Grant Instrument as the "Restriction Period." (b) Number of Shares. The Committee shall determine the number of shares of Company Stock to be issued or transferred pursuant to a Restricted Stock Grant and the restrictions applicable to such shares. (c) Requirement of Employment or Service. If the Grantee ceases to be employed by, or provide service to, the Company (as defined in Section 5(e)) during a period designated in the Grant Instrument as the Restriction Period, or if other specified conditions are not met, the Restricted Stock Grant shall terminate as to all shares covered by the Grant as to which the restrictions have not lapsed, and those shares of Company Stock must be immediately returned to the Company. The Committee may, however, provide for complete or partial exceptions to this requirement as it deems appropriate. (d) Restrictions on Transfer and Legend on Stock Certificate. During the Restriction Period, a Grantee may not sell, assign, transfer, pledge or otherwise dispose of the shares of Restricted Stock except to a Successor Grantee under Section 8(a). Each certificate for a share of Restricted Stock shall contain a legend giving appropriate notice of the restrictions in the Grant. The Grantee shall be entitled to have the legend removed from the stock certificate covering the shares subject to restrictions when all restrictions on such shares have lapsed. The Committee may determine that the Company will not issue certificates for shares of Restricted Stock until all restrictions on such shares have lapsed, or that the Company will retain possession of certificates for shares of Restricted Stock until all restrictions on such shares have lapsed. (e) Right to Vote and to Receive Dividends. Unless the Committee determines otherwise, during the Restriction Period, the Grantee shall have the right to vote shares of Restricted Stock and to receive any dividends or other distributions paid on such shares, subject to any restrictions deemed appropriate by the Committee. (f) Lapse of Restrictions. All restrictions imposed on Restricted Stock shall lapse upon the expiration of the applicable Restriction Period and the satisfaction of all conditions imposed by the Committee. The Committee may determine, as to any or all Restricted Stock Grants, that the restrictions shall lapse without regard to any Restriction Period. 7. Withholding of Taxes (a) Required Withholding. All Grants under the Plan shall be subject to applicable federal (including FICA), state and local tax withholding requirements. The Company may require that the Grantee or other person receiving or exercising Grants pay to the Company the amount of any federal, state or local taxes that the Company is required to withhold with respect to such Grants, or the Company may deduct from other wages paid by the Company the amount of any withholding taxes due with respect to such Grants. APPENDIX VII - 1999 EQUITY COMPENSATION PLAN VII-5 (b) Election to Withhold Shares. If the Committee so permits, a Grantee may elect to satisfy the Company's income tax withholding obligation with respect to a Grant by having shares withheld up to an amount that does not exceed the Grantee's minimum applicable withholding tax rate for federal (including FICA), state and local tax liabilities. The election must be in a form and manner prescribed by the Committee and shall be subject to the prior approval of the Committee. 8. Transferability of Grants (a) Nontransferability of Grants. Except as provided below, only the Grantee may exercise rights under a Grant during the Grantee's lifetime. A Grantee may not transfer those rights except by will or by the laws of descent and distribution or, with respect to Grants other than Incentive Stock Options, if permitted in any specific case by the Committee, pursuant to a domestic relations order (as defined under the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the regulations thereunder). When a Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee ("Successor Grantee") may exercise such rights. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee's will or under the applicable laws of descent and distribution. (b) Transfer of Nonqualified Stock Options. Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to family members, one or more trusts for the benefit of family members, or one or more partnerships of which family members are the only partners, according to such terms as the Committee may determine; provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer. 9. Change of Control of the Company As used herein, a "Change of Control" shall be deemed to have occurred if: (a) Any person, entity or group, within the meaning of Section 13(d) or 14(d) of the Exchange Act (excluding for this purpose (A) the Company or its subsidiaries and (B) any employee benefit plan of the Company or its subsidiaries which acquires beneficial ownership of voting securities of the Company) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the voting power of the then outstanding securities of the Company; provided that a Change of Control shall not be deemed to occur as a result of a transaction in which the Company becomes a subsidiary of another corporation and in which the shareholders of the Company, immediately prior to the transaction, will beneficially own, immediately after the transaction, shares entitling such shareholders to more than 50% of all votes to which all shareholders of the parent corporation would be entitled in the election of directors; (b) The shareholders of the Company approve (or, if shareholder approval is not required, the Board approves) an agreement providing for (i) the merger or consolidation of the Company with another corporation where the shareholders of the Company, immediately prior to the merger or consolidation, will not beneficially own, immediately after the merger or consolidation, shares entitling such shareholders to more than 50% of all votes to which all shareholders of the surviving corporation would be entitled in the election of directors, (ii) the sale or other disposition of all or substantially all of the assets of the Company, or (iii) a liquidation or dissolution of the Company; or (c) Any person has commenced a tender offer or exchange offer for 30% or more of the voting power of the then outstanding shares of the Company. 10. Consequences of a Change of Control (a) Assumption of Grants. Upon a Change of Control where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), unless the Committee determines APPENDIX VII - 1999 EQUITY COMPENSATION PLAN VII-6 otherwise, all outstanding Options that are not exercised shall be assumed by, or replaced with comparable options by the surviving corporation. (b) Other Alternatives. Notwithstanding the foregoing, subject to subsection (c) below, in the event of a Change of Control, the Committee may take any of the following actions with respect to any or all of the outstanding Grants: the Committee may (i) determine that outstanding Options shall automatically accelerate and become fully exercisable and that the restrictions and conditions on outstanding Restricted Stock shall immediately lapse, (ii) require that Grantees surrender their outstanding Options in exchange for a payment by the Company, in cash or Company Stock as determined by the Committee, in an amount equal to the amount by which the then Fair Market Value of the shares of Company Stock subject to the Grantee's unexercised Options exceeds the Exercise Price of the Options or (iii) after giving Grantees an opportunity to exercise their outstanding Options, terminate any or all unexercised Options at such time as the Committee deems appropriate. Such surrender or termination shall take place as of the date of the Change of Control or such other date as the Committee may specify. The Committee shall have no obligation to take any of the foregoing actions, and, in the absence of any such actions, outstanding Options and Restricted Stock shall continue in effect according to their terms (subject to any assumption pursuant to Subsection (a)). (c) Limitations. Notwithstanding anything in the Plan to the contrary, in the event of a Change of Control, the Committee shall not have the right to take any actions described in the Plan (including without limitation actions described in Subsection (b) above) that would make the Change of Control ineligible for pooling of interests accounting treatment or that would make the Change of Control ineligible for desired tax treatment if, in the absence of such right, the Change of Control would qualify for such treatment and the Company intends to use such treatment with respect to the Change of Control. 11. Requirements for Issuance or Transfer of Shares No Company Stock shall be issued or transferred in connection with any Grant hereunder unless and until all legal requirements applicable to the issuance or transfer of such Company Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Grant made to any Grantee hereunder on such Grantee's undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Company Stock as the Committee shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof, and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Company Stock issued or transferred under the Plan will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations, including any requirement that a legend be placed thereon. 12. Amendment and Termination of the Plan (a) Amendment. The Board may amend or terminate the Plan at any time; provided, however, that the Board shall not amend the Plan without shareholder approval if such approval is required in order for Incentive Stock Options granted or to be granted under the Plan to meet the requirements of section 422 of the Code or such approval is required in order to exempt compensation under the Plan from the deduction limit under section 162(m) of the Code. (b) Termination of Plan. The Plan shall terminate on the day immediately preceding the tenth anniversary of its effective date, unless the Plan is terminated earlier by the Board or is extended by the Board with the approval of the shareholders. (c) Termination and Amendment of Outstanding Grants. A termination or amendment of the Plan that occurs after a Grant is made shall not materially impair the rights of a Grantee unless the Grantee consents or unless the Committee acts under Section 18(b). The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant may be terminated or amended under Section 18(b) or may be amended by agreement of the Company and the Grantee consistent with the Plan. APPENDIX VII - 1999 EQUITY COMPENSATION PLAN VII-7 (d) Governing Document. The Plan shall be the controlling document. No other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns. 13. Funding of the Plan This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant, including unpaid installments of Grants. 14. Rights of Participants Nothing in this Plan shall entitle any Employee, Key Advisor, Non-Employee Director or other person to any claim or right to be granted a Grant under this Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any individual any rights to be retained by or in the employ of the Company or any other employment rights. 15. No Fractional Shares No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Grant. The Committee shall determine whether cash, other awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 16. Headings Section headings are for reference only. In the event of a conflict between a title and the content of a Section, the content of the Section shall control. 17. Effective Date of the Plan. (a) The Plan shall be effective as of the effective date of the mergers contemplated by the Agreement and Plan of Merger dated as of October 22, 1998 by and among N2K Inc., CDnow, Inc. and the Company, subject to approval by the shareholders. 18. Miscellaneous (a) Grants in Connection with Corporate Transactions and Otherwise. Nothing contained in this Plan shall be construed to (i) limit the right of the Committee to make Grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Grants to employees thereof who become Employees of the Company, or for other proper corporate purposes, or (ii) limit the right of the Company to grant stock options or make other awards outside of this Plan. Without limiting the foregoing, the Committee may make a Grant to an employee of another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company or any of its subsidiaries in substitution for a stock option or Restricted Stock grant made by such corporation. The terms and conditions of the substitute grants may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives. The Committee shall prescribe the provisions of the substitute grants. (b) Compliance with Law. The Plan, the exercise of Options and the obligations of the Company to issue or transfer shares of Company Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. In addition, it is the intent of the Company that the Plan and applicable Grants under the Plan comply with the applicable provisions of section 162(m) of the Code and section 422 of the Code. To the extent that any legal requirement APPENDIX VII - 1999 EQUITY COMPENSATION PLAN VII-8 of section 16 of the Exchange Act or section 162(m) or 422 of the Code as set forth in the Plan ceases to be required under section 16 of the Exchange Act or section 162(m) or 422 of the Code, that Plan provision shall cease to apply. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Grantees. The Committee may, in its sole discretion, agree to limit its authority under this Section. (c) Governing Law. The validity, construction, interpretation and effect of the Plan and Grant Instruments issued under the Plan shall be governed and construed by and determined in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to the conflict of laws provisions thereof. APPENDIX VII - 1999 EQUITY COMPENSATION PLAN VII-9 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers Section 1741 of the Pennsylvania Business Corporation Law permits indemnification of directors, officers, agents and controlling persons of a corporation under certain conditions and subject to certain limitations. Article VIII of the Registrant's Amended and Restated Bylaws, requires the Registrant to indemnify directors and officers of the Registrant or any other authorized representative against expenses, judgments and any settlement amounts incurred in a third party proceeding brought by reason of the fact that the person is an authorized representative of the Registrant. The Bylaws also permit indemnification of expenses incurred by an authorized representative in connection with a proceeding brought in the name of the corporation. The Bylaws further specify procedures for such indemnification. Section 1741 also empowers the Registrant to purchase and maintain insurance that protects its officers, directors, employees and agents against any liabilities incurred in connection with their service in such positions. Item 21. Exhibits and Financial Statement Schedules (a) Exhibits:
Exhibit Number Description ------- ----------- 2.1* Agreement and Plan of Merger dated as of October 22, 1998, as amended, among the Registrant, CDnow, Inc. and N2K Inc. 2.2** Stock Option Agreement between N2K Inc and CDnow, Inc. dated as of October 22, 1998 2.3** Stock Option Agreement between CDnow, Inc and N2K dated as of October 22, 1990 2.4** Stockholder Support Agreement 2.5** Shareholder Support Agreement by Jason Olim dated as of October 22, 1998 3.1* Amended and Restated Articles of Incorporation 3.2* Amended and Restated Bylaws 5.1 Opinion of Morgan, Lewis & Bockius LLP regarding legality of the shares of common stock being registered 8.1 Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters 8.2 Opinion of Dewey Ballantine LLP regarding certain tax matters 10.1*** Stock Purchase Agreement dated as of July 15, 1997 by CDnow, Inc. and certain shareholders of CDnow, Inc. 10.2*** Amendment No. 1 to Stock Purchase Agreement dated as of August 5, 1997 by CDnow, Inc. and certain shareholders of CDnow, Inc. 10.3*** Investors' Rights Agreement dated as of July 15, 1997 by CDnow and certain shareholders of CDnow 10.4* CDnow/N2K, Inc. 1999 Equity Compensation Plan 10.5*** CDnow, Inc. 1996 Equity Compensation Plan 10.6*** Amendment 1997-1 to the CDnow, Inc. 1996 Equity Compensation Plan 10.7*** Warrant dated August 5, 1997 issued by CDnow to Grotech Capital Group, IV, LLP 10.8 Lease Agreement between CDnow, Inc. and Jenkins Court Pennsylvania, dated June 18, 1997 10.9 Lease Agreement between CDnow, Inc. and Delaware Avenue Associates, dated June 12, 1998
II-1
Exhibit Number Description --------- ----------- 10.10 Amendment Number 1 to Lease Agreement between CDnow, Inc. and Delaware Avenue Associates, dated October 17, 1998 10.11**** Agreement of Lease between 55 Broad Street Company and N2K Inc., dated September 7, 1995 10.12**** First Additional Space Agreement dated April 1, 1996 between 55 Broad Street Company and N2K Inc. 10.13**** Second Additional Space Agreement dated April 2, 1996 between 55 Broad Street Company and N2K Inc. 10.14**** Third Additional Space Agreement dated April 3, 1996 between 55 Broad Street Company and N2K Inc. 10.15**** Fourth Additional Space Agreement dated October 15, 1996 between 55 Broad Street Company and N2K Inc. 10.16 Fifth Additional Space Agreement dated May 13, 1997 between 55 Broad Street Company and N2K Inc. 10.17 Sixth Additional Space Agreement dated January 5, 1998 between 55 Broad Street Company and N2K Inc. 10.18 Seventh Additional Space Agreement dated January 5, 1998 between 55 Broad Street Company and N2K Inc. 10.19 Eighth Additional Space Agreement dated April 16, 1998 between 55 Broad Street Company and N2K Inc. 10.20 Agreement to Form L.L.C. between N2K Inc. and Warlock Records Inc. dated January 1, 1999. 10.21 License Agreement between 55 Broad Street and N2K Inc. dated August 1, 1998 10.22**** Lease dated April 26, 1991 between BEBOB Associates and N2K Inc. 10.23 Agreement of Lease Between FMOB Associates and N2K Inc 10.24 N2K Inc. Order Fulfillment Agreement with Valley Record Distributors, Inc. dated February 1, 1998 10.25**** Interactive Marketing Agreement dated as of September 1, 1997, between America Online, Inc. and N2K Inc. 10.26 Form of Employment Agreement between Jason Olim and CDnow/N2K Inc. 10.27 Form of Employment Agreement between Jonathan V. Diamond and CDnow/N2K Inc. 10.28 Warrant Agreement dated June 23, 1998 between Disney Online and N2K Inc. to commence March 1, 1998 10.29**** 1987 Employee Incentive Stock Option Plan of N2K Inc. 10.30**** 1996 Stock Option Plan of N2K Inc. 10.31**** 1996 Employee Stock Purchase Plan of N2K Inc. 23.1 Consent of Allen & Company Incorporated (included in its opinion which is filed as an Appendix to Joint Proxy Statement/Prospectus) 23.2 Consent of Arthur Andersen LLP 23.3 Consent of Arthur Andersen LLP
II-2
Exhibit Number Description - ------- ----------- 23.4 Consent of BT Alex. Brown Incorporated 23.5 Consent of Richard A. Eisner & Company, LLP 23.6 Consent of Dewey Ballantine LLP (included in its opinion filed as Exhibit 8.2 hereto) 23.7 Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed as Exhibits 5.1 and 8.1 hereto) 24 Powers of Attorney (included on the signature page) 27.1 Financial Data Schedule of N2K Inc. 27.2 Financial Data Schedule of N2K Inc. 27.3 Financial Data Schedule of N2K Inc. 27.4 Financial Data Schedule of N2K Inc. 99.1 Form of Proxy--CDnow 99.2 Form of Proxy--N2K 99.3 Consent of Robert David Grusin to be named as a Director 99.4 Consent of Patrick Kerins to be named as a Director 99.5 Consent of Matthew Olim to be named as a Director 99.6 Consent of John Regan to be named as a Director 99.7 Consent of Lawrence L. Rosen to be named as a Director
- -------- *Filed as an Appendix to the Joint Proxy Statement/Prospectus. **Filed as an Exhibit to CDnow, Inc.'s Form 8-K on October 23, 1998 *** Filed as an Exhibit to CDnow, Inc.'s Registration Statement on Form S-1 (File No. 333-41241) ****Filed as an Exhibit to N2K Inc.'s Registration Statement on Form S-1 (File No. 333-33105) Item 22. Undertakings (1) The undersigned registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 (2) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (3) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (4) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (6) The undersigned registrant hereby undertakes that: (a) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (b) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Ft. Washington, Pennsylvania on February 16, 1999. CDNOW/N2K, Inc. /s/ Jason Olim By:---------------------------------- Jason Olim President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Each person whose signature appears below in so signing also makes, constitutes and appoints Jason Olim, his true and lawful attorney-in-fact, with full power of substitution, for him in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any or all amendments and post-effective amendments to this Registration Statement, with exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- /s/ Jonathan Diamond Chairman of the - ----------------------------------- Board of Directors February 16, 1999 Jonathan Diamond /s/ Jason Olim President, Chief - ----------------------------------- Executive Officer February 16, 1999 Jason Olim and Director (principal executive officer) /s/ Joel Sussman Chief Financial - ----------------------------------- Officer (principal February 16, 1999 Joel Sussman financial and accounting officer)
S-1 CDnow, Inc. PROXY/VOTING INSTRUCTION CARD - -------------------------------------------------------------------------------- This Proxy is Solicited by the Board of Directors for the Special Meeting of Shareholders March 17, 1999, 9:00 a.m. Local Time, at CDnow, Inc., 1005 Virginia Drive, Fort Washington, Pennsylvania, 19034. The undersigned hereby appoints Jason Olim and David Capozzi, and each of them, proxies, with the powers the undersigned would possess if personally present, and with full power of substitution, to vote all common shares held of record by the undersigned in CDnow, Inc., upon all subjects that may properly come before the meeting, including the matters described in the proxy statement furnished herewith, subject to any directions indicated on the reverse side of this card. If no directions are given, the proxies will vote in accord with the Directors' recommendations on the subjects listed on the reverse side of this card and at their discretion on any other matter that may properly come before the meeting or any adjournment thereof. If you do not sign and return a proxy, or attend the meeting and vote by ballot, your shares cannot be voted, nor your instructions followed. Please sign on the reverse side and return this proxy in the enclosed envelope. Directors recommend a vote "FOR"; 1. Approval of an agreement and Plan of Merger, dated as of October 22, 1998, among N2K Inc., CDnow, Inc. and CDnow/N2K, Inc. as amended, providing for the issuance of shares of CDnow/N2K, Inc. Common Stock to shareholders of CDnow, Inc. and N2K Inc. in consideration for the shares of CDnow and N2K Common Stock held by such shareholders. FOR [_] AGAINST [_] ABSTAIN [_] 2. Approval of the CDnow/N2K, Inc. 1999 Equity Compensation Plan. FOR [_] AGAINST [_] ABSTAIN [_] 2. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the Special Meeting. Please sign exactly as name or names appear on this proxy. If stock is held jointly, each holder should sign. If signing as attorney, trustee, executor, administrator, custodian, guardian or corporate officer, please give full title. DATE ______________________ , 1999 SIGNATURE: _______________________ SIGNATURE: _______________________ Votes must be indicated (X) in Black. N2K, INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS SPECIAL MEETING OF STOCKHOLDERS--MARCH 1, 1999 - -------------------------------------------------------------------------------- THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned hereby appoints Lawrence L. Rosen, Jonathan V. Diamond and Bruce Johnson, and each of them, as proxies of the undersigned, each with full power to act without the other and with full power of substitution and re-substitution, to vote all the shares of Common Stock of N2K Inc. that the undersigned is entitled to vote at the Special Meeting of Stockholders to be held March 17, 1999, at 9:00 a.m. (local time), and at any postponements or adjournments thereof, with all the powers the undersigned would have if personally present, as follows: THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING ITEMS: - -------------------------------------------------------------------------------- (continued, and to be signed, on other side) (continued from other side) - -------------------------------------------------------------------------------- 1. Approval of an Agreement and Plan of Merger, dated as of October 22, 1998, among CDnow, Inc., N2K Inc. and CDnow/N2K, Inc., as amended, pursuant to which shares of CDnow/N2K, Common Stock will be issued to the shareholders of CDnow and N2K in consideration for the shares of CDnow and N2K Common Stock held by such shareholders. FOR [_] AGAINST [_] ABSTAIN [_] - -------------------------------------------------------------------------------- 2. Approval of the CDnow/N2K, Inc. 1999 Equity Compensation Plan. FOR [_] AGAINST [_] ABSTAIN [_] - -------------------------------------------------------------------------------- In their discretion, the proxies are authorized to vote upon such other matters as may properly come before the meeting, all in accordance with the accompanying joint proxy statement/prospectus, receipt of which is hereby acknowledged. IF THIS PROXY IS PROPERLY EXECUTED AND RETURNED, THE SHARES REPRESENTED THEREBY WILL BE VOTED. IF A CHOICE IS SPECIFIED BY THE STOCKHOLDER, THE SHARES WILL BE VOTED ACCORDINGLY. IF NOT OTHERWISE SPECIFIED, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR ITEMS 1 AND 2. Sign exactly as name appears hereon. When signing in a representative capacity, please give full title. Joint Owners (if any) should each sign. DATED _________________________ , 1999 SIGNATURE: ___________________________ THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS - -------------------------------------------------------------------------------- EXHIBIT INDEX
Exhibit Number Description --------- ----------- 2.1* Agreement and Plan of Merger dated as of October 22, 1998, as amended, among the Registrant, CDnow, Inc. and N2K Inc. 2.2** Stock Option Agreement between N2K Inc and CDnow, Inc. dated as of October 22, 1998 2.3** Stock Option Agreement between CDnow, Inc and N2K dated as of October 22, 1990 2.4** Stockholder Support Agreement 2.5** Shareholder Support Agreement by Jason Olim dated as of October 22, 1998 3.1* Amended and Restated Articles of Incorporation 3.2* Amended and Restated Bylaws 5.1 Opinion of Morgan, Lewis & Bockius LLP regarding legality of the shares of common stock being registered 8.1 Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters 8.2 Opinion of Dewey Ballantine LLP regarding certain tax matters 10.1*** Stock Purchase Agreement dated as of July 15, 1997 by CDnow, Inc. and certain shareholders of CDnow, Inc. 10.2*** Amendment No. 1 to Stock Purchase Agreement dated as of August 5, 1997 by CDnow, Inc. and certain shareholders of CDnow, Inc. 10.3*** Investors' Rights Agreement dated as of July 15, 1997 by CDnow and certain shareholders of CDnow 10.4* CDnow/N2K, Inc. 1999 Equity Compensation Plan 10.5*** CDnow, Inc. 1996 Equity Compensation Plan 10.6*** Amendment 1997-1 to the CDnow, Inc. 1996 Equity Compensation Plan 10.7*** Warrant dated August 5, 1997 issued by CDnow to Grotech Capital Group, IV, LLP 10.8 Lease Agreement between CDnow, Inc. and Jenkins Court Pennsylvania, dated June 18, 1997 10.9 Lease Agreement between CDnow, Inc. and Delaware Avenue Associates, dated June 12, 1998 10.10 Amendment Number 1 to Lease Agreement between CDnow, Inc. and Delaware Avenue Associates, dated October 17, 1998 10.11**** Agreement of Lease between 55 Broad Street Company and N2K Inc., dated September 7, 1995 10.12**** First Additional Space Agreement dated April 1, 1996 between 55 Broad Street Company and N2K Inc. 10.13**** Second Additional Space Agreement dated April 2, 1996 between 55 Broad Street Company and N2K Inc. 10.14**** Third Additional Space Agreement dated April 3, 1996 between 55 Broad Street Company and N2K Inc. 10.15**** Fourth Additional Space Agreement dated October 15, 1996 between 55 Broad Street Company and N2K Inc.
Exhibit Number Description --------- ----------- 10.16 Fifth Additional Space Agreement dated May 13, 1997 between 55 Broad Street Company and N2K Inc. 10.17 Sixth Additional Space Agreement dated January 5, 1998 between 55 Broad Street Company and N2K Inc. 10.18 Seventh Additional Space Agreement dated January 5, 1998 between 55 Broad Street Company and N2K Inc. 10.19 Eighth Additional Space Agreement dated April 16, 1998 between 55 Broad Street Company and N2K Inc. 10.20 Agreement to Form L.L.C. between N2K Inc. and Warlock Records Inc. dated January 1, 1999. 10.21 License Agreement between 55 Broad Street and N2K Inc. dated August 1, 1998 10.22**** Lease dated April 26, 1991 between BEBOB Associates and N2K Inc. 10.23 Agreement of Lease Between FMOB Associates and N2K Inc 10.24 N2K Inc. Order Fulfillment Agreement with Valley Record Distributors, Inc. dated February 1, 1998 10.25**** Interactive Marketing Agreement dated as of September 1, 1997, between America Online, Inc. and N2K Inc. 10.26 Form of Employment Agreement between Jason Olim and CDnow/N2K Inc. 10.27 Form of Employment Agreement between Jonathan V. Diamond and CDnow/N2K Inc. 10.28 Warrant Agreement dated June 23, 1998 between Disney Online and N2K Inc. to commence March 1, 1998 10.29**** 1987 Employee Incentive Stock Option Plan of N2K Inc. 10.30**** 1996 Stock Option Plan of N2K Inc. 10.31**** 1996 Employee Stock Purchase Plan of N2K Inc. 23.1 Consent of Allen & Company Incorporated (included in its opinion which is filed as an Appendix to Joint Proxy Statement/Prospectus) 23.2 Consent of Arthur Andersen LLP 23.3 Consent of Arthur Andersen LLP 23.4 Consent of BT Alex. Brown Incorporated 23.5 Consent of Richard A. Eisner & Company, LLP 23.6 Consent of Dewey Ballantine LLP (included in its opinion filed as Exhibit 8.2 hereto) 23.7 Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed as Exhibits 5.1 and 8.1 hereto) 24 Powers of Attorney (included on the signature page) 27.1 Financial Data Schedule of N2K Inc. 27.2 Financial Data Schedule of N2K Inc. 27.3 Financial Data Schedule of N2K Inc. 27.4 Financial Data Schedule of N2K Inc.
Exhibit Number Description ------- ----------- 99.1 Form of Proxy--CDnow 99.2 Form of Proxy--N2K 99.3 Consent of Robert David Grusin to be named as a Director 99.4 Consent of Patrick Kerins to be named as a Director 99.5 Consent of Matthew Olim to be named as a Director 99.6 Consent of John Regan to be named as a Director 99.7 Consent of Lawrence L. Rosen to be named as a Director
- -------- *Filed as an Appendix to the Joint Proxy Statement/Prospectus. **Filed as an Exhibit to CDnow, Inc.'s Form 8-K on October 23, 1998 *** Filed as an Exhibit to CDnow, Inc.'s Registration Statement on Form S-1 (File No. 333-41241) ****Filed as an Exhibit to N2K Inc.'s Registration Statement on Form S-1 (File No. 333-33105) EX-5.1 2 OPINION OF MORGAN, LEWIS & BOCKIUS LLP/LEGALITY EXHIBIT 5.1 February 15, 1999 CDnow/N2K, Inc. 1005 Virginia Drive Fort Washington, PA 19034 Ladies and Gentlemen: We have acted as counsel to CDnow/N2K, Inc., a Pennsylvania corporation (the "Company"), in connection with the registration of up to 33,481,529 shares (the "Shares") of its Common Stock, no par value (the "Common Stock"), on a registration statement on Form S-4 (the "Registration Statement") filed pursuant to the Securities Act of 1933, as amended (the "Act"). We have examined the Registration Statement and such corporate records, documents, statutes and decisions as we have deemed relevant in rendering this opinion. Based on the foregoing, it is our opinion that the Shares will be, when issued in the manner and for the consideration contemplated in the Registration Statement validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules or regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Morgan, Lewis & Bockius LLP EX-8.1 3 OPINION OF MORGAN, LEWIS & BOCKIUS LLP/TAX MATTER EXHIBIT 8.1 February 16, 1999 CDnow, Inc. 1005 Virginia Drive Ft. Washington, Pennsylvania 19034 Ladies and Gentlemen: Pursuant to an Agreement and Plan of Merger dated as of October 22, 1998 as amended as of January 29, 1999 (the "Merger Agreement") among N2K, a Delaware corporation ("N2K"), CDnow, Inc., a Pennsylvania corporation ("CDnow") and Exit 8 Holding Company, a Pennsylvania corporation ("CDnow/N2K"), CDnow Acquisition Corp., a wholly owned subsidiary of CDnow/N2K will merge with and into CDnow (the "CDnow Merger") and N2K Acquisition Corp., a separate wholly owned subsidiary of CDnow/N2K will merge with and into N2K (the "N2K Merger" and together with the N2K Merger the "Mergers"). We have acted as counsel to CDnow in connection with the CDnow Merger and in that connection, you have requested our opinion as to the material federal income tax consequences to holders of shares of CDnow common stock ("CDnow Common Stock"). Our opinion only addresses holders of CDnow Common Stock that hold their shares as capital assets and does not address all aspects of federal income taxation that may be important to such holders in light of their particular circumstances. Further, our opinion does not address all aspects of federal income taxation that may be applicable to holders subject to special rules, such as: (i) holders who are not United States persons; (ii) financial institutions; (iii) tax- exempt organizations; (iv) insurance companies; (v) dealers or brokers in securities; (vi) holders who held their CDnow stock as part of a hedge, appreciated financial position, straddle, or conversion transaction; or (vii)holders who acquired their CDnow stock pursuant to the exercise of employee stock options or otherwise as compensation. In rendering our opinion, we have examined the Merger Agreement, the Registration Statement, the Proxy CDnow, Inc. February 16, 1999 Page 2 Statement and such other documents and corporate records as we have deemed necessary representation letters of CDnow and N2K dated today which have been delivered to us for purposes of this opinion (the "Officer's Certificates"), and such other documents and corporate records as we have deemed necessary or appropriate for purposes of this opinion or appropriate. In addition, we have assumed: (i) the Mergers will be consummated in the manner contemplated in the Proxy Statement and in accordance with the provisions of the Merger Agreement, (ii) the statements concerning the Mergers set forth in the Proxy Statement are accurate and complete, (iii) the representations set forth in the Officer's Certificates are accurate and complete and (iv) any representations in the Officer's Certificates that are qualified by the phrases "to the best of the knowledge," "has no knowledge," or similar such phrases are, in each case, correct without such qualification. Under current law, and on the basis and subject to (i) the accuracy of the statements and representations contained in the materials referred to above and the above assumptions and (ii) our considerations of such other matters as we have deemed necessary, our opinion of the material federal income tax consequences to certain holders of CDnow Common Stock is as follows: . The CDnow Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code and/or, taken together with the N2K Merger, as a transfer of property to CDnow/N2K by holders of CDnow common stock described in Section 351 of the Code; . Holders of CDnow Common Stock who exchange their CDnow Common Stock solely for CDnow/N2K Common Stock in the CDnow Merger will not recognize gain or loss for federal income tax purposes with respect to this exchange; . The aggregate tax basis of CDnow/N2K Common Stock received by a CDnow shareholder as a result of the CDnow Merger will be the same as the shareholder's aggregate tax basis in the CDnow Common Stock surrendered in the exchange; CDnow, Inc. February 16, 1999 Page 3 . The holding period of the CDnow/N2K Common Stock held by former CDnow shareholders as a result of the exchange will include the period during which the shareholder held the CDnow Common Stock exchanged; and . A CDnow shareholder who exercises dissenters' rights of appraisal with respect to CDnow Common Stock and who receives payment for such stock in cash should generally recognize capital gain or loss measured by the difference between the amount of cash received and the SHAREHOLDER'S basis in the share. You have not requested, and we do not express, an opinion concerning any other tax consequences of the Mergers. Our opinion expresses our views only as to U.S. federal income tax laws in effect as of the date hereof. It represents our best legal judgment as to the matters addressed in our opinion, but is not binding on the Internal Revenue Service or the courts. Accordingly, no assurance can be given that our opinion, if contested, would be sustained by a court. Furthermore, the authorities upon which we rely are subject to change either prospectively or retroactively, and any change in such authorities or variation or difference in the facts from those on which we rely and assume as correct, as set forth above, might affect the conclusions stated. Our opinion is not to be used, circulated, quoted or otherwise referred to for any purpose without our express written permission. We hereby consent to the filing of our opinion as an exhibit to the Registration Statement and to the reference to us in the section captioned "The Merger -- Material Federal Income Tax Consequences" in the Proxy Statement constituting a part of the Registration Statement. In giving this consent we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, /s/ Morgan, Lewis & Bockius LLP EX-8.2 4 OPINION OF DEWEY, BALLANTINE LLP Exhibit 8.2 DEWEY BALLANTINE LLP 1301 Avenue of the Americas New York, New York 10019-6092 February 16, 1999 N2K Inc. 55 Broad Street New York, NY 10004 Ladies and Gentlemen: We have acted as special counsel to N2K Inc., a Delaware corporation ("N2K") in connection with the proposed transaction (the "Merger") contemplated by the Agreement and Plan of Merger dated as of October 22, 1998 (the "Merger Agreement") among N2K, CDnow, Inc., a Pennsylvania corporation ("CDnow"), and Exit 8 Holding Company, a newly-formed Pennsylvania corporation ("CDnow/N2K"). In the proposed transaction, a wholly-owned first-tiered subsidiary of CDnow/N2K (the "CDnow Merger Sub") will be merged with and into CDnow (the "CDnow Merger") and a wholly-owned first-tiered subsidiary of CDnow/N2K (the "N2K Merger Sub") will be merged with and into N2K (the "N2K Merger"). In that connection, we have participated in the preparation of a registration statement under the Securities Act of 1933 on Form S-4 (the "Registration Statement"), including a Joint Proxy Statement/Prospectus of N2K and CDnow dated February 16, 1999 (the "Proxy Statement"). You have requested our opinion as to the material federal income tax consequences to holders of shares of N2K common stock ("N2K Common Stock"). Our opinion only addresses holders of N2K Common Stock that hold their shares as capital assets and does not address all aspects of federal income taxation that may be important to such holders in light of their particular circumstances. Further, our opinion does not address all aspects of federal income taxation that may be applicable to holders subject to special rules, such as: (i) holders who are not United States persons; (ii) financial institutions; (iii) tax-exempt organizations; (iv) insurance companies; (v) dealers or brokers in securities; (vi) holders who held their stock as part of a hedge, appreciated financial position, straddle or conversion transaction; or (vii) holders who acquired their N2K shares pursuant to the exercise of employee stock options or otherwise as compensation. Further, our opinion does not address the federal income tax consequences of the Mergers to holders of N2K Common Stock that also hold a contractual right to require N2K to repurchase their stock. In rendering our opinion, we have examined the Merger Agreement, the Registration Statement, the Proxy Statement, representation letters of CDnow and N2K dated today which have been delivered to us for purposes of this opinion (the "Officer's Certificates"), and such other documents and corporate records as we have deemed necessary or appropriate for purposes of this opinion. In addition, we have assumed (i) the Mergers will be consummated in the manner contemplated in the Proxy Statement and in accordance with the provisions of the Merger Agreement, (ii) the statements concerning the Mergers set forth in the Proxy Statement are accurate and complete, (iii) the representations set forth in the Officer's Certificates are accurate and complete and (iv) any representations in the Officer's Certificates that are qualified by the phrases "to the best of the knowledge," "has no knowledge," or similar such phrases are, in each case, correct without such qualification. On the basis of and subject to (i) the accuracy of the statements and representations contained in the materials referred to above and the above assumptions and (ii) our considerations of such other matters as we have deemed necessary, our opinion of the material federal income tax consequences to certain holders of N2K Common Stock under present law is as follows: . The N2K Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code and/or, taken together with the CDnow Merger, as a transfer of property to CDnow/N2K by holders of N2K Common Stock described in Section 351 of the Code; . Holders of N2K Common Stock who exchange their N2K Common Stock solely for NewCo common stock in the N2K Merger will not recognize gain or loss for federal income tax purposes with respect to the exchange, except with respect to cash received in lieu of fractional shares; . The aggregate tax basis of CDnow/N2K Common Stock received by an N2K shareholder as a result of the N2K Merger will be the same as the shareholder's aggregate tax basis in the N2K common stock surrendered in the exchange reduced by any such tax basis allocable to fractional shares for which cash is received; . The holding period of the CDnow/N2K Common Stock held by former N2K shareholders as a result of the exchange will include the period during which the shareholder held the N2K Common Stock exchanged; and . A holder of N2K Common Stock who receives cash in lieu of a fractional share of interest in CDnow/N2K common stock should be treated as having received such fractional shares pursuant to the N2K Merger and then as having exchanged such fractional shares for cash in a redemption by CDnow/N2K. The cash payment should be treated as a distribution in payment for the fractional interest deemed redeemed under Section 302 of the Code, with the result that the holder should generally recognize gain or loss for federal income tax purposes on the deemed redemption in an amount equal to the difference between the amount of cash received and the portion of the tax basis of the share of N2K Common Stock allocable to the fractional share interest. This gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if the share of N2K Common Stock exchanged has been held for more than one year at the closing of the Mergers. You have not requested, and we do not express, an opinion concerning any other tax consequences of the Mergers. Our opinion expresses our views only as to U.S. federal income tax laws in effect as of the date hereof. It represents our best legal judgment as to the matters addressed in our opinion, but is not binding on the Internal Revenue Service or the courts. Accordingly, no assurance can be given that our opinion if contested, would be sustained by a court. Furthermore, the authorities upon which we rely are subject to change either prospectively or retroactively, and any change in such authorities, or any variation or difference in the facts from those on which we rely and assume as correct, as set forth above, might affect the conclusions stated in our opinion. Our opinion is not to be used, circulated, quoted or otherwise referred to for any purposes without our express written permission. We hereby consent to the filing of our opinion as an exhibit to the Registration Statement and to the reference to us in the section captioned "The Merger -- Material Federal Income Tax Consequences" in the Proxy Statement constituting a part of the Registration Statement. In giving this consent we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, \s\ DEWEY BALLANTINE LLP EX-10.8 5 LEASE AGMT. CDNOW, INC.- JENKINS COURT PENNSYLVANI EXHIBIT 10.8 OFFICE LEASE between JENKINS COURT PENNSYLVANIA, L.P. as Landlord and CDNOW, INC as Tenant for Suites 320, 330, 350 and 360 Third Floor Jenkins Court 610 Old York Road Jenkintown, Pennsylvania TABLE OF CONTENTS -----------------
SECTION: PAGE 1. Reference Data............................................... 1 2. Premises..................................................... 2 3. Term......................................................... 3 4. Rent......................................................... 5 5. Operating Costs; Taxes....................................... 6 6. Late Charges................................................. 9 7. Use of Premises.............................................. 9 8. Common Areas................................................. 10 9. Alterations and Trade Fixtures; Removal...................... 10 10. Mechanics' Liens............................................. 12 11. Condition of Premises........................................ 12 12. Building Services............................................ 12 13. Assignment and Subletting.................................... 14 14. Access to Premises........................................... 16 15. Repairs...................................................... 17 16. Indemnification of Insurance................................. 18
i 17. Waiver of Claims............................................ 19 18. Quiet Employment............................................ 19 19. Negative Covenants of Tenant................................ 20 20. Fire or Other Casualty...................................... 20 21. Subordination............................................... 21 22. Condemnation................................................ 22 23. Estoppel Certificate........................................ 22 25. Remedies.................................................... 24 26. Requirement of Strict Performance........................... 28 27. Relocation of Tenant........................................ 28 28. Surrender of Premises; Holding Over......................... 28 29. Compliance With Laws and Ordinances......................... 29 30. Waiver of Trial by Jury..................................... 30 31. Notices..................................................... 30 32. Real Estate Brokers......................................... 31 33. Force Majeure............................................... 31 34. Landlord's Obligations...................................... 31 35. Landlord's Liability........................................ 31 36. Successors.................................................. 32
ii 37. Governing Law............................................... 32 38. Severability................................................ 32 39. Captions.................................................... 32 40. Gender...................................................... 32 41. Execution................................................... 32 42. Exhibits and Rider.......................................... 32 43. Entire Agreement............................................ 32 44. Corporate Authority......................................... 33 45. Landlord's Construction..................................... 36 47. Additional Damages.......................................... 38 48. Financial Statements........................................ 38 EXHIBITS: A - Floor Plan of Premises B - Rules and Regulations C - Tenant Finish Work D - Building Standard Improvements E - Consent to Suite 320 Sublease
iii O F F I C E L E A S E ---------------------- THIS LEASE is made this ____ day of ___________, 1997, by and between JENKINS COURT PENNSYLVANIA, L.P., a Pennsylvania limited partnership ("Landlord"), and CDNOW, INC., a Pennsylvania corporation ("Tenant"). 1. Reference Data. As used in this Lease, the following terms shall have -------------- the indicated meanings and refer to the data set forth in this Section: Landlord's Address: c/o Oaktree Capital Management, LLC 550 South Hope Street, 22nd Floor Los Angeles, California 90071 Tenant's Address: prior to the 401 Old Pennllyn Pke Commencement Date: Pennllyn, Pennsylvania 19422 after the Jenkins Court, Suite 330 Commencement Date: 610 Old York Road Jenkintown, Pennsylvania 19046 Building: Jenkins Court 610 Old York Road Jenkintown, Montgomery County, Pennsylvania Premises: Suites 330, 350 and 360, containing 5,250 rentable square feet on the third floor of the Building, shown outlined in black on the floor plan attached hereto as Exhibit "A". From and after May 1, 2000, the Premises ---------- shall include Suite 320, for a total of 16,785 rentable square feet. Term: Five (5) years Commencement Date: July 15, 1997 Base Rent:
Lease Year Annual Monthly ---- ------ ------- 1 $100,012.56 $ 8,334.38 2 $101,062.56 $ 8,421.88 3 $102,112.56 $ 8,509.38 4 $329,825.28 $27,485.44 5 $333,182.28 $27,765.19
Tenant's Percentage: 7.8%, determined by dividing the rentable area of the Premises by the aggregate rentable area of the Office Space within the Building, deemed to be 67,000 rentable square feet After the Suite 320 Commencement Date (as defined in Section 3), Tenant's Percentage will be 25% Base Year: 1997 Security Deposit: $16,668.76 2. Premises. In the event that Exhibit "Al" shows as being within the ------------ Premises, hallways, passageways, stairways, elevators, or other means of access to and from the Premises or the upper and lower portions of the Building, the space occupied by the said hallways, passageways, stairways, elevators and other means of access, although within the Premises as described hereinabove, shall be taken to be excepted therefrom and reserved to Landlord or to the other lessees of the Building and the same shall not be considered a portion of the Premises. All ducts, pipes, wires or other equipment used in the operation of the Building, or any part thereof, and any space occupied thereby, whether or not within the Premises as described hereinabove, shall likewise be excepted and reserved from the Premises, and Tenant shall not remove or 2 tamper with or use the same and will permit Landlord to enter the Premises to service, replace, remove or repair the same. 3. Term. (a) Subject to the conditions set forth in Section 3(c), the ---- Term shall commence on the Commencement Date specified in Section 1 and continue for the period specified as the Term in Section 1, unless sooner terminated as herein provided. (b) In the event the Premises are not ready for Tenant's occupancy on the Commencement Date due to the failure or refusal of the present occupant of the Premises to vacate and surrender up the same in a timely manner, or because the Premises are not Substantially Completed (as defined in Section 45) before the Commencement Date, this Lease and the Term hereof shall not be affected thereby, nor shall Tenant be entitled to make any claim for or receive any damages whatsoever from Landlord, but Tenant's obligation to pay the Base Rent and Additional Rent hereunder shall not commence to accrue until the Premises are Substantially Completed and delivered to Tenant. (c) (1) The obligation of Landlord to lease Suite 360 to Tenant under the terms set forth in this Lease are subject to Landlord's receiving an executed lease termination agreement from the current tenant of Suite 360, in form and substance satisfactory to Landlord, no later than sixty (60) days after the date of this Lease. If the foregoing condition is not satisfied by such date, Landlord shall so notify Tenant and Landlord will lease Suite 340 to Tenant. Landlord and Tenant shall thereafter modify this Lease to reflect the reduced square footage of the Premises in accordance with the following: Premises 5,180 square feet After Suite 320 Commencement Date: 16,715 square feet Tenant's Percentage 7.7% After Suite 320 Commencement Date: 25% Security Deposit $15,540 Construction Allowance (per Exhibit "C") $93,240 or $18.00 per square foot 3 Base Rent:
Lease Year Annual Monthly ---- ------ ------- 1 $ 93,240.00 $ 7,770.00 2 $ 94,276.00 $ 7,856.33 3 $ 95,312.00 $ 7,942.67 4 $310,899.00 $25,908.25 5 $314,242.00 $26,186.83
Landlord will refund to Tenant any Base Rent and security deposit paid by Tenant in advance with respect to Suite 360. Tenant will not be entitled to terminate this Lease because of the failure of the foregoing conditions. (2) If, pursuant to the preceding paragraph (1), Tenant leases Suite 340 from Landlord,.Landlord agrees that, for a period through and including May 15, 1999, Landlord will endeavor to make Suite 360 available to Tenant when and if the current lease for Suite 360 is terminated, provided that (A) no event of default under this Lease shall have occurred and be continuing and (B) Tenant shall have notified Landlord that Tenant remains interested in Suite 360. Any lease for Suite 360 shall be on substantially the same terms and conditions as this Lease, for the then remaining term of this Lease, except that the Base Rent and Construction Allowance (as defined in Exhibit "C" hereto) shall be appropriately modified to reflect the shorter term for Suite 360 Landlord's obligation to lease Suite 360 pursuant to this Section 3(c) (2) are subject to Landlord and Tenant executing an amendment to this Lease within thirty (30) days after Landlord notifies Tenant that the then-current tenant of Suite 360 has executed or is about to execute a lease termination agreement. (d) Commencing with May 1, 2000 (the "Suite 320 Commencement Date"), the terms and conditions of this Lease shall become effective as to Suite 320 of the third floor of the Building, as shown on Exhibit "A". Landlord and Tenant ----------- acknowledge that Tenant will be entering into a sublease for Suite 320 with the current Tenant of Suite 320 on or about the date of this Lease. Until the Suite 320 Commencement Date, the terms of that sublease will govern Tenant's occupancy 4 of Suite 320. Tenant's obligations under this Lease are conditioned on Landlord's consent to such sublease, a copy of which consent is attached hereto as Exhibit E. --------- 4. Rent. ---- (a) Base Rent. During the Term of this Lease, Tenant shall pay to --------- Landlord the Base Rent, in equal monthly installments in advance on the first day of each calendar month, without setoff or deduction, provided that the installment of Base Rent for the first full year of the Term shall be paid by Tenant upon execution of this Lease. In the event the Term of this Lease commences on a day other than the first day of a calendar month, then on the Commencement Date Tenant shall pay to Landlord a pro rata portion of the monthly installment of Base Rent for such partial month. (b) Additional Rent. Whenever under the terms of this Lease any sum --------------- of money is required to be paid by Tenant in addition to the Base Rent herein reserved, and said additional sum is not designated as "Additional Rent", then if not paid when due, said sum shall nevertheless be deemed "Additional Rent" and be collectible as such with any installment of Base Rent thereafter falling due hereunder, but nothing herein contained shall be deemed to suspend or delay the payment of any such sum at the time the same becomes due and payable hereunder, or limit any other remedy of Landlord. (c) Electric Charges. In addition to the Base Rent and other charges ---------------- set forth in this Lease, Tenant shall pay all metered charges for electricity consumed in the Premises (which shall mean all electricity other than that consumed by central air-conditioning, heating and ventilating equipment, the cost of which, together with electricity consumed in the operation of the Building common areas, shall be included in the Operating Costs) directly to the providing utility as and when billed. (d) Payment. All payments of Base Rent and Additional Rent shall be ------- paid when due, without demand, at Landlord's Address, or at such other place as Landlord may from time to time direct. All checks shall be made payable to Landlord or such other person as Landlord may direct from time to time. (e) Security Deposit. Landlord acknowledges receipt from Tenant of ---------------- the Security Deposit to be held as collateral security for the payment of Base Rent, Additional Rent and all other sums of money payable by Tenant under this Lease, and for the faithful performance of all other covenants and agreements of Tenant under this Lease. The Security Deposit, without interest, shall be repaid to Tenant within ninety (90) days after the expiration or sooner termination of this Lease, 5 provided Tenant shall have made all such payments and performed all such covenants and agreements. Upon any default by Tenant hereunder, at Landlord's sole option, Landlord may apply all or part of the Security Deposit on account of such default, and thereafter Tenant shall promptly restore the original amount of the Security Deposit. 5. Operating Costs; Taxes. ---------------------- (a) Operating Costs. "Operating Costs" shall mean that portion of the --------------- costs and expenses of the operation, maintenance and repair of the Building and the complex of which it is a part which is allocable to the 67,000 rentable square feet of space located above the first floor of the Building (the "Office Space"), as reasonably determined by Landlord. Such costs of operation, maintenance and repair shall include, without limitation, the cost and expense to Landlord of the following items: (1) All wages, salaries and fees of all employees and agents engaged in the management, operation, repair, replacement, maintenance and security of the Building, including taxes, insurance and all other employee benefits relating thereto; (2) All supplies and materials used in the management, operation, repair, replacement, maintenance and security of the Building; (3) All utilities consumed by the Building and the servicing thereof, including, without limitation, gas, water, sewer and electricity for common area lighting and heating, ventilating and air-conditioning; (4) All maintenance and service contracts for the operation, repair, replacement, maintenance, and security of the Building, including, without limitation, window cleaning, security system, heating, ventilating and air-conditioning system, fire sprinkler system, elevators, parking lot maintenance, landscaping and snow removal; (5) All property, liability and other insurance for the Building (including all common areas) and Landlord's personal property and fixtures used in connection therewith; (6) All repairs (including necessary replacements) and general maintenance of the Building; (7) All cleaning and janitorial services for the Building; 6 (8) The cost of any capital improvements, which cost shall be amortized over the expected useful life of the capital improvement as reasonably determined by Landlord, together with interest on the unamortized balance at a rate equal to one percent (1%) in excess of the Prime Rate reported from time to time in the Wall Street Journal or such higher rate as may have been paid by ------------------- Landlord on funds borrowed for the purpose of constructing such capital improvements; (9) All Real Estate Taxes, as hereinafter defined, and all other permit and license fees and taxes (other than income taxes) payable in connection with the ownership and operation of the Building; and (10) All other costs and expenses necessarily and reasonably incurred by Landlord in the proper operation and maintenance of a first-class office building; provided, however, that the following shall be excluded from the term "Operating costs": (i) expenses for repairs or other work occasioned by fire, windstorm or other insured casualty, to the extent covered by such insurance; (ii) expenses incurred in leasing or procuring new tenants (e.g., for lease commissions, advertising and renovating space); (iii) legal expenses in enforcing the terms of any lease; (iv) interest and amortization payments on any mortgage or mortgages; and (v) any services which are provided to another tenant in such tenant's premises and which are not made available to Tenant. Tenant acknowledges that the first floor and ground floor of the Building contain retail uses and that the Building is part of a complex containing another building. Landlord shall allocate the costs and expenses of operating, maintaining and repairing the Building and complex between such buildings and among such uses in accordance with sound accounting and management practices. (b) Real Estate Taxes. "Real Estate Taxes" shall mean all gross real ----------------- property taxes, charges and assessments (including any special assessments, whether voluntary or involuntary) which are levied, assessed or imposed by any governmental authority with respect to the land and the Building and any improvements, fixtures and equipment and all other property of Landlord, real or personal, located in or on the Building and used in connection with the operation of the Building and any tax which shall be levied or assessed in addition to and/or in lieu of such real or personal property taxes (including, without limitation, any municipal income tax, any license fees, tax measured by or imposed upon rents, or other tax or charge upon Landlord's business of leasing the Building), but shall not include any federal or state income tax, or any franchise, capital stock, estate or inheritance taxes. 7 (c) Payments. For each calendar year (or part thereof) following the -------- Base Year and included in the Term of this Lease (each, a "Comparison Year"), Tenant shall pay Landlord, as Additional Rent, Tenant's Percentage of any increase in Operating Costs for each Comparison Year over the Operating Costs for the Base Year. If the portion of the first Comparison Year included in the Term of this Lease is less than a full calendar year, Tenant's Percentage of the excess Operating Costs with respect to such Operating Year shall be pro rated for the portion of the year in which this lease was in force. In the event that this Lease shall expire at any time other than at the end of a calendar year, then within thirty (30) days after statements reflecting the actual Operating Costs for the year in which such expiration occurs are submitted by Landlord to Tenant, either Landlord or Tenant shall pay to the other party the adjustment sum due, pro rated for the portion of the year in which this Lease was in force. The provisions of this subsection (c) shall survive the expiration of this Lease. (d) Monthly Installments. Commencing on January 1, 1999 and -------------------- thereafter on the first day of each month during each Comparison Year, Landlord and Tenant agree that Tenant shall pay monthly, in advance, an amount equal to one-twelfth of Tenant's Percentage of the amount by which Operating Costs for such Comparison Year were in excess of the operating Costs for the Base Year. With respect to calendar year 1998, Tenant shall pay the Tenant's Percentage of the amount by which Operating Costs for 1998 were in excess of the Operating Costs for the Base Year within (30) days after Landlord submits a statement to Tenant setting forth the actual Operating Costs for the Building for 1998 and Tenant's Percentage of the increase thereof above the Operating Costs for the Base Year. (e) Reconciliation. On or about May 1 of each Comparison Year -------------- commencing with the second Comparison Year, Landlord shall submit to Tenant a statement setting forth the actual operating Costs for the Building for the preceding Comparison Year and Tenant's Percentage of the increase thereof above the Operating Costs for the Base Year. Within thirty (30) days after delivery of such statement to Tenant, an adjustment shall thereupon be made between Landlord and Tenant to reflect any difference between Tenant's estimated payments under paragraph (d) above and Tenant's Percentage of the increase in the actual Operating Costs for the preceding Comparison Year above the Operating Costs for the Base Year. In no event, however, shall the monthly rent paid by Tenant be less than the Base Rent set forth in Section 4(a) above, and no decrease in Operating Costs shall result in a reduction of the Base Rent. Each statement furnished by Landlord to Tenant shall be conclusive and binding upon Tenant unless, within ninety (90) days after receipt of such statement, Tenant shall notify Landlord 8 in writing that it disputes the correctness of such statement, stating the reason for such dispute. Pending the determination of such dispute, Tenant shall pay the full amount of the Additional Rent payable by Tenant in accordance with each such statement that Tenant is disputing without delay. (f) Occupancy Adjustment. If the Building is less than 95% occupied -------------------- during any portion or all of the Base Year or any Comparison Year, then Landlord shall adjust those Operating Costs which vary with the occupancy level of the Building for any such Year to an amount which reflects what such Operating Costs would have been for such Year had the Building been 95!k occupied throughout such Year. In no event shall such calculation yield a profit to Landlord. (g) Lease Taxes. Tenant shall pay before delinquency any and all ----------- taxes assessed against Tenant's leasehold interest and personal property, as well as any sales or use taxes on the rentals under this Lease. Tenant shall not be responsible for any income taxes of Landlord. If Landlord is required pursuant to applicable law to collect from Tenant any such sales or use taxes on behalf of any governmental authority, Tenant shall pay the same to Landlord in accordance with Landlord's written demand therefor. 6. Late Charges. In the event that Tenant shall fail to pay Base Rent or ------------ any Additional Rent within five (5) days after its due date, Tenant shall pay an automatic late charge to Landlord of five cents $.05 for each dollar overdue. In addition, in the event that Tenant shall fail to pay Base Rent or any Additional Rent within thirty (30) days after its due date, then from and after the thirty-first (31st) day until the date Tenant finally pays Base Rent or Additional Rent, Tenant shall pay Landlord interest at the rate of fourteen (14) percent per annum (the "Overdue Interest Rate") with respect to the delinquent amount. Such late charges and interest shall be deemed Additional Rent for all purposes under this Lease. 7. Use of Premises. Tenant shall use and occupy the Premises for --------------- purposes of executive and general offices and operation of a facility for the sale of compact discs, records, recordings, audiotapes and other general merchandise items primarily through the Internet or other on-line computer network and for provision of computer-related services. Such sales facility shall not involve "walk-in" retail sales to Tenant's customers. Tenant shall not sell or disseminate, as a primary use, (whether digitally or otherwise) pornographic material or host a computer "chat line" or similar service which is primarily devoted to the dissemination of pornographic material. Tenant shall not use or occupy the Premises for any other purpose or business, without the prior written consent of Landlord. Tenant and its employees, agents, licensees, invitees, subtenants and contractors shall observe and comply with the rules and regulations set forth on Exhibit "B" attached ----------- 9 hereto and made a part hereof (the "Rules and Regulations"), as such Rules and Regulations may be modified from time to time by Landlord. 8. Common Areas. All walkways, parking areas, elevators, stairs, alleys, ------------ public corridors, fire escapes, and other areas, facilities and improvements which may be provided by Landlord from time to time for the general use, in common, of Tenant and other Building tenants and their employees, agents, invitees and licensees, shall at all times be subject to the exclusive control and management of Landlord. Landlord shall have the right from time to time to establish, modify and enforce reasonable rules and regulations with respect to all such common areas, facilities and improvements. Without limiting the scope of Landlord's right to establish rules and regulations for the common areas, Tenant acknowledges that Landlord will from time to time designate specific areas for parking by tenants of the Office Space. Tenant and Tenant's employees shall park their cars in those portions of the parking area designated for that purpose by Landlord. Landlord shall provide sufficient unreserved parking to comply with applicable code requirements. 9. Alterations and Trade Fixtures; Removal. --------------------------------------- (a) During the Term of this Lease, Tenant shall not make any alterations or additions to the Premises which are structural in nature, are visible from the exterior of the Premises or which affect the Building systems, without the prior written consent of Landlord. In the event that Tenant shall desire to perform any such alterations or additions in or about the Premises, Tenant shall deliver to Landlord detailed, professionally prepared plans and specifications prepared at the expense of Tenant. Landlord shall review such plans and specifications and return same to Tenant either marked approved, marked to show the corrections required (in which event such marked-up plans and specifications shall be deemed approved as marked-up), or marked disapproved with the reasons therefor. If Landlord disapproves Tenant's plans and specifications, Tenant shall have twenty (20) days from the date of such disapproval to submit revised plans and specifications subject to subsequent mark-ups or disapprovals and corrections in the above manner. Upon approval by Landlord of Tenant' s plans and specifications, Tenant shall proceed with due diligence to commence the work to be performed by Tenant and shall complete such work in a diligent manner. All such work consented to by Landlord, to be done or performed in or about the Premises by Tenant, shall be performed (1) at Tenant's sole cost and expense, and (2) by contractors and subcontractors approved by Landlord. Upon completion of any such work, Tenant shall pay to Landlord an amount equal to 10%of the first $10,000 of the total cost of such work and an amount equal to 5% of the remainder of the total cost to reimburse Landlord for review of such plans and 10 specifications and the coordination and final inspection of the work. Landlord shall require a guarantee by each of Tenant's prime contractors for the benefit of Landlord and Tenant that all work performed and materials and equipment furnished by such contractors will conform to the requirements of the plans and specifications as to the kind, quality, function of the equipment and characteristics of material and workmanship and will remain so for a period of at least one (1) year from the date that the work has been completed. In the event any defects in materials, equipment or workmanship shall appear prior to the expiration of such period, upon receiving written notice thereof from Landlord or Tenant, the contractor will immediately correct and repair the same at the expense of such (b) Any consent by Landlord permitting Tenant to do any alteration work in or about the Premises shall be and hereby is conditioned upon Tenant's work being performed by workers and mechanics working in harmony and not interfering with labor employed by Landlord, Landlord's contractors or by any other tenants or their contractors. If at any time any of the workers or mechanics performing any of Tenant's work shall be unable to work in harmony or shall interfere with any labor employed by Landlord, other tenants or their respective mechanics and contractors, then the permission granted by Landlord to Tenant permitting Tenant to do any work in or about the Premises, may be withdrawn by Landlord upon written notice to Tenant. (c) All alterations, interior decorations, improvements or additions made to the Premises by Tenant, except for movable furniture, equipment and trade fixtures, shall become Landlord's property upon expiration or sooner termination of this Lease, unless Landlord gives Tenant written notice to remove any such alteration, interior decoration, improvement or addition prior to, or within ten (10) days following, the expiration or termination of this Lease, in which case Tenant shall remove the designated alteration, decoration, improvement or addition and repair any damage caused thereby. Tenant shall also remove all movable furniture, equipment and trade fixtures installed by Tenant in the Premises, except lighting fixtures and air-conditioning equipment, and repair any damage caused to the Premises by said removal. All of said movable furniture, equipment and trade fixtures remaining in the Premises after the Lease expiration date, or any sooner termination of this Lease, shall be deemed to be abandoned property and may be disposed of by Landlord or, at Landlord's option, stored, in either case at Tenant's risk and expense. Any costs incurred by Landlord in removing, storing and/or disposing of Tenant's property and repairing any damage caused thereby, plus interest thereon at the Overdue Interest Rate, shall be paid by Tenant to Landlord on demand. 10. Mechanics' Liens. Prior to Tenant performing any alterations, ---------------- additions or construction work in or about the Premises for which a lien could be filed against the Premises or 11 the Building, Tenant shall have its contractor execute and file in the appropriate public office a Waiver of Mechanics' Lien, in form satisfactory to Landlord, and provide Landlord with the original copy thereof. Notwithstanding the foregoing, if any mechanics' or other lien shall be filed against the Premises or the Building purporting to be for labor or materials furnished or to be furnished at the request of Tenant, then at its expense, Tenant shall cause such lien to be removed of record by payment, bond or otherwise, within twenty (20) days after the filing thereof. If Tenant shall fail to cause such lien to be removed of record within such twenty (20) day period, Landlord may cause such lien to be removed of record by Payment, bond or otherwise, without investigation as to the validity thereof or as to any offsets or defenses thereto, in which event Tenant shall reimburse Landlord in the amount paid by Landlord, including expenses, within ten (10) days after Landlord's billing therefor. Tenant shall indemnify and hold Landlord harmless from and against any and all claims, costs, damages, liabilities and expenses (including attorney fees) which may be brought or imposed against or incurred by Landlord by reason of any such lien or removal of record. 11. Condition of Premises. Tenant acknowledges and agrees that, except --------------------- for the Tenant Finish Work to be constructed by Landlord as set forth in Section 45 of the Rider, Landlord has not agreed to make any improvements to the Premises and there have been no representations or warranties made by or on behalf of Landlord with respect to the Premises or the Building or with respect to the suitability of either for the conduct of Tenant's business. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Building were in satisfactory condition, order and repair at such time. 12. Building Services. ----------------- (a) Landlord shall provide, within its Building standards, the following services and facilities: (1) Heating, ventilating and air conditioning, seven (7) days per week, twenty-four (24) hours per day, except on holidays observed by the governments of the United States or the Commonwealth of Pennsylvania (Holidays). Tenant agrees to cooperate fully with Landlord and to abide by all the rules and regulations which Landlord may reasonably prescribe for the proper functioning and protection of the heating, ventilating and air conditioning systems. If Tenant requires heating, ventilation and air conditioning service on Holidays, Landlord shall supply the same upon reasonable prior notice, to be paid for by Tenant, within thirty (30) days of billing, at a rate to be determined from time to time by Landlord. 12 (2) Subject to payment of the charges therefor by Tenant, electricity f or normal office use, including normal office equipment and lighting, in the Premises (4 watts per rentable square foot per day is deemed normal office use). (3) Cleaning and maintenance of common areas in the Building, including bathroom facilities. (4) Continuous passenger elevator service via at least one (1) car at all times, including Holidays; freight elevator service from 8:00 A.M. to 4:00 P.M., Monday through Friday, except Holidays. (5) Janitorial services, including cleaning of Premises, in accordance with Landlord's Building Standard schedule. Landlord shall not be required to furnish cleaning services to any kitchens, lunchrooms or non- Building standard lavatories in the Premises (other than cleaning of floors and surfaces). (6) Water for lavatory and drinking purposes. Tenant shall reimburse Landlord for all additional cleaning expenses incurred by Landlord, including but not limited to, garbage and trash removal expense over and above the normal cleaning provided by Landlord, due to the presence of a lunchroom or kitchen or food and beverage dispensing machines within the Premises. No food or beverage dispensing machines shall be installed by Tenant in the Premises without the prior written consent of Landlord. (b) Without Landlord's prior written consent Tenant shall not install any equipment in the Premises which shall cause the connected electrical load to exceed the electrical capacity provided by Landlord as set forth above, affect the temperature otherwise maintained by the air-conditioning system or overload any other system servicing the Premises. Should Landlord grant such consent, all additional risers or other equipment required therefor shall be provided by Landlord and the cost thereof (including Landlord's construction management fee) shall be paid by Tenant upon Landlord's demand. (c) Landlord does not warrant that the services provided for in Section 12(a) above shall be free from any slowdown, interruption or stoppage due to the order of any governmental bodies and regulatory agencies, or caused by the maintenance, repair, replacement or improvement of any of the equipment involved in the furnishing of any such services, or caused by changes of services, alterations, strikes, lockouts, labor controversies, fuel shortages, accidents, acts 13 of God or the elements or any other cause beyond the reasonable control of Landlord. No such slowdown, interruption or stoppage of any such services shall ever be construed as an eviction, actual or constructive, of Tenant, nor shall same cause any abatement of Base Rent or Additional Rent or in any manner or for any purpose relieve Tenant from any of its obligations under this Lease unless Tenant is unable to use the Premises for the regular conduct of its business for more than five (5) consecutive business days. For purposes of this Lease, the term "business days" shall mean Monday through Friday, inclusive, except Holidays. In such event and provided (1) Tenant or any of its employees, agents or contractors did not cause the interruption and (2) Tenant provided Landlord with prompt notice of the service interruption, Base Rent and Additional Rent shall be abated on a daily basis until occupancy is restored. Landlord agrees to use best efforts to resume the service upon any such slowdown, interruption or stoppage. Landlord will provide Tenant, wherever possible, advance notice of any service slowdowns, interruptions or stoppages. 13. Assignment and Subletting. ------------------------- (a) Except as expressly permitted pursuant to this Section, Tenant shall not assign or mortgage this Lease or any interest therein or sublet the Premises or any part thereof, without the prior written consent of Landlord. Any of the foregoing acts without Landlord's consent shall be voidable and shall, at the option of Landlord, be an Event of Default under this Lease. Neither this Lease nor any interest therein shall be assignable as to the interest of Tenant by operation of law, without the prior written consent of Landlord. Unless Tenant is a company whose shares are publicly traded or become publicly traded, any transfer of the ownership or control of Tenant, whether by transfers of stock or partnership interests, merger, consolidation or otherwise, however such transfer of ownership or control is accomplished, shall constitute an assignment of Tenant's interest in this Lease and as such shall be subject to this Section 13. Notwithstanding the foregoing, Tenant may assign this Lease without the consent of, but with prior notice to Landlord, any entity which is the surviving corporation of a merger with Tenant or any entity which is wholly controlled by or under common control with Tenant, provided that such entity conducts business at the Premises in substantially the same manner as Tenant and has a net worth equal to or greater than that of Tenant (each, a "Permitted Assignment"). Tenant shall provide Landlord with reasonable documentation evidencing such net worth. Landlord may require the assignee to execute an assignment and assumption agreement satisfactory to Landlord. (b) Except with respect to a Permitted Assignment, if at any time or from time to time during the Term of this Lease, Tenant desires to assign this Lease or sublet all or a portion of the Premises, Tenant shall give Landlord written notice of such intent, which notice must be accompanied by (1) a written description of the proposed assignment or subletting and financial and 14 business information for the proposed assignee or sublessee, including bank and general references, and (2) an administrative fee of $250 to defray Landlord's expenses in reviewing such request. Landlord shall have the option, exercisable by notice given to Tenant at least thirty (30), but not more than sixty (60), days after receipt of Tenant's notice, of reacquiring the Premises or portion thereof proposed to be sublet or assigned and terminating the Lease with respect thereto, effective on a date selected by Landlord which shall be no sooner than sixty (60) days and no later than one hundred twenty (120) days after Landlord's receipt of Tenant's notice. If Landlord does not exercise such option, Tenant may assign this Lease or sublet such space to any third party, subject to the following terms and conditions: (1) Tenant shall obtain the consent of Landlord, which consent shall not be unreasonably withheld; Landlord shall base its decision upon the uses of other Building tenants (whether or not exclusive were granted), the financial condition and character of the proposed assignee or subtenant and the proposed use of the Premises; (2) Tenant may not sublease the Premises or any portion thereof or assign this Lease to an existing tenant in the Building; (3) No sublease or assignment shall be valid and no subtenant or assignee shall take possession of the premises subleased or assigned until a fully executed original of such sublease or assignment of this Lease has been delivered to Landlord, and Tenant and such assignee or sublessee have executed such additional documentation as Landlord may reasonably require; (4) Any options granted to Tenant in this Lease to renew the Term, expand the Premises or lease additional space shall be deemed void and of no further effect, it being understood that all such options are personal to Tenant. (5) No subtenant shall have a further right to sublet; (6) No assignee shall have a further right to assign the Lease, except in accordance with the provisions of this Section 13; and (7) In no event shall Tenant be entitled to have more than two (2) subtenants simultaneously in the Premises. (c) Tenant shall pay Landlord, as Additional Rent, 50% of any subrents, other sums or other economic consideration received by Tenant as a result of any subletting or assignment, 15 whether denominated as rentals under the sublease or otherwise, which exceed, in the aggregate, the aggregate of (1) the total sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to that portion of the Premises subject to a sublease) plus (2) an amortization over the term of any such sublease of the cost of leasehold improvements made to the Premises by Tenant for the subtenant or assignee, and other reasonable expenses incident to the subletting or assignment, including legal fees and standard leasing commissions. If such subleasing or assignment has been made without the consent of Landlord as provided herein, Landlord shall be entitled to all economic consideration received by Tenant in accordance with the provisions of this Section 13(c), but the receipt of such monies shall not be deemed to be a waiver of the provisions of this Section 13 with respect to assignment and subletting, or the acceptance of such assignee or subtenant as Tenant hereunder. This provision shall not apply to any assignment or sublease by any entity or person other than Tenant. (d) Whether or not Landlord's consent is required or obtained hereunder, no subletting or assignment shall release Tenant of Tenant's obligations or alter the primary liability of Tenant to pay Base Rent and Additional Rent and to perform all other obligations to be performed by Tenant under this Lease. The acceptance of rental by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one (1) assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms of this Lease, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee or successor. (e) In the event that the Premises or any part thereof have been sublet by Tenant and an Event of Default under this Lease has occurred and is continuing, then Landlord may collect rent from the subtenant and apply the amount collected to the Base Rent and Additional Rent herein reserved but no such collection shall be deemed a waiver of the provisions of this Section 13 with respect to subletting or the acceptance of such subtenant as Tenant hereunder or a release of Tenant under the Lease. 14. Access to Premises. Landlord, its employees and agents shall have the ------------------ right to enter the Premises at all reasonable times during business hours upon prior notice to Tenant (and at any time in case of an emergency) for the purpose of examining or inspecting the Premises, showing the Premises to prospective purchasers, mortgagees and (during the last year of the Term only) prospective tenants of the Building, and making such alterations, repairs, improvements or additions to the Premises or to the Building as Landlord may determine to be necessary or desirable. Landlord shall use reasonable efforts during any such entry into the Premises to minimize the disruption to 16 Tenant's business activities. If representatives of Tenant shall not be present to open and permit entry into the Premises at anytime when such entry by Landlord is necessary or permitted hereunder, Landlord may enter by means of a master key (or forcibly in the event of an emergency) without liability to Tenant and without such entry constituting an eviction of Tenant or termination of this Lease. If Tenant has relocated from the Premises, the entry of Landlord into the Premises to retrofit the same or a portion thereof for a subsequent tenant shall not be deemed the acceptance of surrender, eviction or a termination of this Lease with respect to the Premises or such portion thereof unless or until a successor tenant has occupied the same and begun paying rent thereon. 15. Repairs. ------- (a) At its cost (which cost shall be an Operating Cost under Section 5 above), Landlord shall make all repairs necessary to maintain the plumbing, heating, ventilating, air conditioning and electrical systems serving the Premises, windows, floors (except carpeting) and all other structural portions of the Premises, provided, however, that Landlord shall not be obligated to make any of such repairs until Landlord has received written notice from Tenant that such repair is needed. Landlord shall be responsible for the maintenance and repair of all common areas and facilities in the Building provided that Tenant shall be responsible for the repair of any damage to the Premises or the Building common areas and facilities caused by the negligence or willful misconduct of Tenant or its agents, servants, employees, invitees, licensees, subtenants, or contractors. (b) Except for Landlord's repairs under subsection (a) above, at its sole cost and expense, Tenant shall make all other repairs necessary to maintain and keep the Premises and the fixtures therein in neat and orderly condition. If Tenant refuses or neglects to make such repairs, or fails to diligently prosecute the same to completion, after written notice from Landlord of the need therefor, Landlord may make such repairs at the expense of Tenant and such expense, along with a 15% service charge, shall be collectible as Additional Rent. At Tenant's expense, Landlord shall make all repairs to the light fixtures in the Premises, including installation of replacement bulbs and ballasts. (c) Landlord shall not be liable for any interference with Tenant's business arising from the making of any repairs in the Premises under subsection (a) above. Landlord shall interfere as little as reasonably practicable with the conduct of Tenant's business. No such repairs by Landlord shall ever be construed as an eviction, actual or constructive, of Tenant, nor shall same cause any abatement of Base Rent or Additional Rent or in any manner or for any purpose relieve 17 Tenant from any of its obligations under this Lease unless Tenant is unable to use the Premises for the regular conduct of its business for more than five (5) consecutive business days. In such event and provided (1) Tenant or any of its employees, agents or contractors did not cause the need for repairs and (2) Tenant provided Landlord with prompt notice of its inability to use the Premises, Base Rent and Additional Rent shall be abated on a daily basis until occupancy is restored. 16. Indemnification of Insurance. ---------------------------- (a) Tenant shall indemnify, defend and hold Landlord harmless from and against any and all costs, expenses (including reasonable counsel fees), liabilities, losses, damages, suits, actions, fines, penalties, claims or demands of any kind and asserted by or on behalf of any person or governmental authority, arising out of or in any way connected with (1) any failure by Tenant to perform any of the agreements, terms, covenants or conditions of this Lease required to be performed by Tenant, (2) any failure by Tenant to comply with any statutes, ordinances, regulations or orders of any governmental authority, or (3) any accident, bodily injury (including death resulting therefrom), or damage to or loss or theft of property, which shall occur in or about the Premises occasioned wholly or in part by reason of any act or omission of Tenant, or any of its agents, contractors, licensees, invitees, employees or subtenants, except to the extent caused by the gross negligence or willful misconduct of Landlord. (b) During the Term of this Lease and any renewal thereof, Tenant shall obtain and promptly pay all premiums for Commercial General Liability Insurance with broad form extended coverage, including Contractual Liability, covering claims for bodily injury (including death resulting therefrom) and loss or damage to property occurring upon, in or about the Premises, with a minimum combined single limit of at least $2,000,000. All such policies and renewals thereof shall name Landlord and Landlord's Building managing agent as additional insureds. All policies of insurance shall provide (1) that no material change or cancellation of said policies shall be made without at least thirty (30) days prior written notice to Landlord and Tenant, and (2) that any loss shall be payable notwithstanding any act or negligence of Tenant or Landlord which might otherwise result in the forfeiture of said insurance. On or before the Commencement Date of the Term of this Lease, and thereafter not less than thirty (30) days prior to the expiration dates of said policy or policies, Tenant shall furnish Landlord with renewal certificates of the policies of insurance required under this paragraph. Tenant's insurance policies shall be issued by insurance companies authorized to do business in the Commonwealth of Pennsylvania with a financial rating of at least A as rated in the most recent edition of Best's Insurance Reports and have been in business for the past five (5) years. The aforesaid insurance limits may be reasonably increased by Landlord from time to time during the Term of this Lease. 18 (c) Tenant and Landlord, respectively, hereby release each other from any and all liability or responsibility to the other for all claims of anyone claiming by, through or under them by way of subrogation or otherwise for any loss or damage to property owned by Landlord and Tenant respectively in the Premises and covered by insurance maintained by the other party. (d) Landlord acknowledges that as of the Commencement Date it will maintain all-risk fire and casualty and liability insurance with respect to the Building and the Premises. 17. Waiver of Claims. Landlord and its affiliates, and their respective ---------------- agents, partners, advisors, fiduciaries and employees shall not be liable for, and Tenant waives all claims for, damage, including but not limited to consequential damages, to person, property or otherwise, sustained by Tenant or any person claiming through Tenant resulting from any accident or occurrence in or upon any part of the Building or the complex of which it is a part including, but not limited to claims for damage resulting from: (a) any equipment or appurtenances becoming out of repair; (b) Landlord's failure to keep any part of the Building in repair; (c) injury done or caused by wind, water or other natural element; (d) any defect in or failure of plumbing, heating, sprinkler, or air conditioning equipment, electric wiring or installation thereof, gas, water and steam pipes, stairs, porches, railings or walks; (e) broken glass; (f) the backing up of any sewer pipe or downspout; (g) the bursting, leaking, or running of any tank, tub, washstand, water closet, waste pipe, drain or any other pipe or tank in, upon or about the Building or Premises; (h) the escape of steam or hot water; (i) water, snow or ice upon the Premises or in the Building; (j) the falling of any fixture, plaster or stucco; (k) damage to or loss by theft or otherwise of property of Tenant or others; (1) acts or omissions of persons in the Premises, other tenant in the Building, occupants of nearby properties, or any other persons; and (m) any act or omission of owners of adjacent or contiguous property, or of Landlord, its agents or employees. All property of Tenant kept in the Premises shall be so kept at Tenant's risk only and Tenant shall save Landlord harmless from claims arising out of damage to the same, including subrogation claims by Tenant's insurance carrier, unless the claim arises from the gross negligence or willful misconduct of Landlord. 18. Quiet Employment. Landlord covenants and agrees with Tenant that upon ---------------- Tenant paying the Base Rent and Additional Rent and observing and performing all the terms, covenants and conditions on Tenant's part to be observed and performed under this Lease, Tenant may peaceably and quietly enjoy the Premises hereby demised, subject to the terms and conditions of this Lease and to the ground leases, underlying leases and mortgages referred to in Section 21 below. 19 19. Negative Covenants of Tenant. Tenant agrees that it will not do or ---------------------------- suffer to be done, any act, matter or thing objectionable to Landlord's fire insurance companies whereby the fire insurance or any other insurance now in force or hereafter placed on the Premises or any part thereof or on the Building by Landlord shall become void or suspended, or whereby the same shall be rated as a more hazardous risk than at the date when Tenant took possession of the Premises. In case of a breach of this covenant, in addition to all other remedies of Landlord hereunder, Tenant agrees to pay to Landlord, as Additional Rent, any and all increases in premiums on insurance carried by Landlord on the Premises or any part thereof or on the Building caused in any way by the occupancy of Tenant. 20. Fire or Other Casualty. ---------------------- (a) If the Premises are damaged by fire or other casualty, the damages shall be repaired by and at the expense of Landlord and restored to the condition which existed immediately prior to such damage and provided that the fire and casualty was not caused by Tenant or any employee, agent or contractor of Tenant, Base Rent and Additional Rent shall be apportioned from the date of such fire or other casualty until substantial completion of the repairs, according to the part of the Premises which is usable by Tenant. Subject to Section 20(d), Landlord agrees to repair such damage within a reasonable period of time after receipt from Tenant of written notice of such damage, subject to any delays caused by Acts of God, labor strikes or other events beyond Landlord's control. Landlord shall not be liable for any inconvenience to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof. Tenant hereby acknowledges that (1) Landlord shall not be obligated to obtain insurance of any kind on Tenant's furniture or furnishings, equipment, trade fixtures, alterations, improvements and additions, (2) it is Tenant's obligation to obtain such insurance at Tenant's sole cost and expense, and (3) Landlord shall not be obligated to repair any damage thereto or replace the same. (b) If, in the reasonable opinion of Landlord, (1) the Premises are substantially damaged (i.e. more than 50%) by reason of such fire or other casualty, or (2) 20% or more of the Premises is damaged by said fire or other casualty and less than one (1) year would remain in the current Lease Term upon substantial completion of the repairs and restoration, either Landlord or Tenant shall have the right, upon written notice to the other party within sixty (60) days after said occurrence, to terminate this Lease. Upon such termination, the tenancy hereby created shall cease as of the date of said occurrence, Base Rent and Additional Rent to be adjusted and apportioned as of said date. 20 (c) If, in the reasonable opinion of Landlord, the Building shall be substantially damaged by fire or other casualty, regardless of whether or not the Premises were damaged by such occurrence, Landlord shall have the right, upon written notice to Tenant within sixty (60) days after said occurrence, to terminate this Lease, and in such event, this Lease and the tenancy hereby created shall cease and Base Rent and Additional Rent shall be adjusted and apportioned as of the date of said termination. (d) If the Premises are damaged by f ire or other casualty, and in Landlord's reasonable opinion, Landlord will not be able to restore the Premises within three hundred (300) days from the date of the casualty, Landlord shall so notify Tenant within one hundred twenty (120) days from the date of the casualty. If Landlord so notifies Tenant, Tenant may elect to terminate this Lease within thirty (30) days after Landlord's notice to Tenant. Such termination notice shall be in writing and shall be effective not less than thirty (30) days after delivery of the notice. 21. Subordination. This Lease is and shall be subject and subordinate to ------------- all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which the Premises are a part, and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. Landlord acknowledges that, as of the date of execution of the Lease, there are no mortgages affecting the Premises. This clause shall be self-operative and no further instrument of subordination shall be required by any ground or underlying lessor or lessee or by any mortgagee, but in confirmation of such subordination, Tenant shall execute any certificate that Landlord may reasonably require acknowledging such subordination, within fifteen (15) business days after Landlord's request. Tenant agrees that in the event any person, firm, corporation or other entity acquires the right to possession of the real property of which the Premises are a part including any mortgagee or holder of any estate or interest having priority over this Lease, Tenant shall, if requested by such person, firm, corporation or other entity, attorn to and become the tenant of such person, firm, corporation or other entity, upon the same terms and conditions as are set forth herein for the balance of the Term. Notwithstanding the foregoing, any mortgagee may, at any time, subordinate its mortgage to this Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery, and in that event, such mortgagee shall have the same rights with respect to this Lease as though it had been executed prior to the execution and delivery of the mortgage. Landlord shall use reasonable efforts to obtain a nondisturbance agreement from any mortgagee of the Premises upon written request from Tenant and provided Tenant is not then in default under this Lease. 21 22. Condemnation. ------------ (a) If the entire Premises shall be condemned or taken permanently for any public or quasi-public use or purpose, under any statute or by right of eminent domain, or by private purchase in lieu thereof (each, a "Taking"), then in that event, at the option of either Landlord or Tenant exercised by notice to the other within thirty (30) days after the date when possession is taken, the Term of this Lease shall cease and terminate as of the date when possession is taken pursuant to such Taking. Base Rent and Additional Rent shall be adjusted and apportioned as of the time of such termination and any Base Rent and Additional Rent paid for a period thereafter shall be refunded. In the event a material portion of the Building shall be so taken (even though the Premises may not have been affected by the taking), Landlord may elect to terminate this Lease as of the date when possession is taken pursuant to such Taking or Landlord may elect to repair and restore the portion not taken at its own expense. If, as a result of any such Taking, Tenant is unable to use the Premises for the regular conduct of its business for a period of sixty (60) days from the date of when possession of the Premises is taken pursuant to such Taking, Tenant may terminate this Lease upon thirty (30) days written notice to Landlord. (b) in the event of any total or partial Taking of the Premises, Landlord shall be entitled to receive the entire award in any such proceeding and Tenant hereby assigns any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof and Tenant hereby waives all rights against Landlord. Tenant shall have the right to make a claim and prove damages in a separate proceeding and to receive any award which may be made to Tenant under the Pennsylvania Eminent Domain Code, if any, provided that no such award shall reduce any award payable to Landlord with respect to the Premises. 23. Estoppel Certificate. At any time and from time to time and within -------------------- ten (10) business days after written request by Landlord, Tenant shall execute, acknowledge and deliver to Landlord a statement in writing duly executed by Tenant certifying that (a) this Lease is in full force and effect, without modification or amendment (or, if there have been any modifications or amendments, that this Lease is in full force and effect as modified and amended and setting forth the dates of the modifications and amendments), (b) the dates to which annual Base Rent and Additional Rent have been paid, and (c) to the knowledge of Tenant no default exists under this Lease or specifying each such default; it being the intention and agreement of Landlord and Tenant that any such statement by Tenant may be relied upon by a prospective purchaser or a prospective mortgagee of the Building, or by others, in any matter affecting the Premises. 22 24. Default. The occurrence of any of the following events (each, an ------- "Event of Default") shall constitute a material default and breach of this Lease by Tenant: (a) The failure of Tenant to take possession of the Premises within thirty (30) days after the Commencement Date of this Lease; (b) The vacation or abandonment of the Premises by Tenant (except pursuant to a sublease or assignment approved by Landlord); (c) The assignment of this Lease or subletting of the Premises or any part thereof in violation of Section 13; (d) A failure by Tenant to pay, when due, any installment of Base Rent, Additional Rent or any other sum required to be paid by Tenant under this Lease, where such failure continues for more than ten (10) days after Tenant has received written notice of the delinquent payment from or on behalf of Landlord; provided, however, Landlord need not give any such written notice, and Tenant shall not be entitled to any such period of grace, more than twice in any twelve (12) month period; (e) A failure by Tenant to observe and perform any other provision or covenant of this Lease to be observed or performed by Tenant, where such failure continues for thirty.(30) days after Tenant receives written notice thereof from or on behalf of Landlord; provided, however, that if the nature of the default is such that the same cannot reasonably be cured within such thirty (30) day period, Tenant shall not be deemed to be in default if Tenant shall commence the cure of the default within such thirty (30) day period and thereafter diligently prosecute the same to completion within sixty (60) days after Tenant receives written notice thereof; or (f) The filing of a petition by or against Tenant for adjudication as a bankrupt or insolvent or for its reorganization or for the appointment of a receiver or trustee of Tenant's property pursuant to any local, state or federal bankruptcy or insolvency law; or an assignment by Tenant for the benefit of creditors; or the seizure of Tenant's property by any local, state or federal governmental officer or agency or court-appointed official for the dissolution or liquidation of Tenant or for the operating, either temporary or permanent, of Tenant's business, provided, however, that if any such action is commenced against Tenant the same shall not constitute a default if Tenant causes the same to be dismissed within sixty (60) days after the filing thereof. 23 25. Remedies. Upon the occurrence of any Event of Default set forth in -------- Section 24 above: (a) Landlord may perform for the account of Tenant the cure of any such default of Tenant and immediately recover as Additional Rent any expenditures made and the amount of any obligations incurred in connection -- therewith, plus interest at the Overdue Interest Rate from the date of any such expenditures. (b) Landlord may accelerate all Base Rent and Additional Rent due for the balance of the Term of this Lease and declare the same, along with all sums past due, to be immediately due and payable. In determining the amount of any future Additional Rent payments due Landlord as a result of increases in Operating Costs, Landlord may make such determination based upon the amount of Additional Rent paid by Tenant with respect to Operating Costs for the entire Comparison Year immediately prior to such default. (c) Landlord may immediately proceed to distrain, collect or bring action for such Base Rent and Additional Rent, as well as for liquidated damages provided for hereinafter, as being rent in arrears, or may enter judgment therefor by confession as herein elsewhere provided for in case of rent in arrears, or may file a Proof of Claim in any bankruptcy or insolvency proceeding for such Base Rent and Additional Rent, or Landlord may institute any other proceedings, whether similar to the foregoing or not, to enforce payment thereof. (d) Landlord may re-enter and repossess the Premises breaking open locked doors, if necessary, and may use as much force as necessary to effect such entrance without being liable to any action or prosecution for such entry or the manner thereof, and Landlord shall not be liable for the loss of any property in the Premises. Landlord may remove all of Tenant's goods and property from the Premises. Landlord shall have no liability for any damage to such goods and property and Landlord shall not be responsible for the storage or protection of the same upon removal. (e) Landlord may (but shall be under no obligation to) attempt to relet all or any part of the Premises for and upon such terms and to such persons, firms or corporations and for such period or periods as Landlord, in its sole discretion, shall determine, including a term beyond the termination of this Lease. Landlord need not consider any tenant offered by Tenant in connection with such reletting. For the purpose of such reletting, Landlord may decorate or make reasonable repairs, changes, alterations or additions in or to the Premises to the extent deemed by Landlord desirable or convenient and the cost of such repairs, changes, alterations or additions shall be 24 charged to and be payable by Tenant as Additional Rent hereunder, as well as any reasonable brokerage and legal fees expended by Landlord. Any sums collected by Landlord from any new tenant obtained for the Premises shall be credited against the balance of Base Rent and Additional Rent due hereunder as aforesaid. (f) At its option, Landlord may serve notice upon Tenant that this Lease and the then unexpired Term hereof shall cease and expire and become absolutely void on the date specified in such notice, to be not less than five (5) days after the date of such notice, without any right on the part of Tenant to save the forfeiture by payment of any sum due or by the performance of any term, provision, covenant, agreement or condition broken; and, thereupon and at the expiration of the time limit in such notice, this Lease and the Term hereof granted, as well as the entire right, title and interest of Tenant hereunder, shall wholly cease and expire and become void in the same manner and with the same force and effect (except as to Tenant's liability) as if the date fixed in such notice were the expiration date of the Term of this Lease. Thereupon, Tenant shall immediately quit and surrender the Premises to Landlord and Landlord may enter into and repossess the Premises by summary proceedings, detainer, ejectment or otherwise and remove all occupants thereof and, at Landlord's option, any property therein, without being liable to indictment, prosecution or damages therefor. (g) No expiration or termination of the Term pursuant to Section 25 (f), by operation of law or otherwise, and no repossession of the Leased Premises or any part thereof pursuant to Section 25(d), or otherwise, and no reletting of the Premises or any part thereof pursuant to Section 25(e) shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such expiration, termination, repossession or reletting. (h) In the event of any expiration or termination of this Lease or repossession of the Premises or any part thereof by reason of an occurrence of an Event of Default, and Landlord has not elected to accelerate rent pursuant to Section 25(b), Tenant shall pay to Landlord the Base Rent, Additional Rent and other sums required to be paid by Tenant to and including the date of such expiration, termination or repossession; and, thereafter, Tenant shall, until the end of what would have been the expiration of the Term in the absence of such expiration, termination or repossession, and whether or not the Premises or any part thereof shall have been relet, be liable to Landlord for, and shall pay to Landlord, as liquidated and agreed current damages, the Base Rent, Additional Rent and other sums which would be payable under this Lease by Tenant in the absence of such expiration, termination or repossession, less the net proceeds, if any, of any reletting effected for the account of Tenant pursuant to Section 25(e), after deducting from such proceeds all of Landlord's reasonable expenses in connection with such reletting (including, without limitation, all 25 related repossession costs, brokerage commissions, legal expenses, attorneys' fees, employees' expenses, alteration costs and expenses of preparation for such reletting). Tenant shall pay such current damages on the days on which the Base Rent would have been payable under this Lease in the absence of such expiration, termination or repossession, and Landlord shall be entitled to recover the same from Tenant on each such day. (i) Any time after such expiration or termination of this Lease or repossession of the Leased Premises or any part thereof by reason of the occurrence of an Event of Default, whether or not Landlord shall have collected any current damages pursuant to Section 25(h), Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord on demand, unless Tenant has paid the whole of accelerated rent pursuant to Section 25(b), as and for liquidated and agreed final damages for Tenant's default and in lieu of all current damages beyond the date of such demand (it being agreed that it would be impracticable or extremely difficult to fix the actual damages), an amount equal to the excess, if any, of (i) Base Rent, Additional Rent and other sums which would be payable under this Lease for the remainder of the Term from the date of such demand (or, if it be earlier, the date to which Tenant shall have satisfied in full its obligations under Section 25(h) to pay current damages) for what would have been the then unexpired term of this Lease in the absence of such expiration, termination or repossession, discounted at the rate of three percent (3%) per annum, over (ii) the then fair rental value of the Premises for the same period, discounted at a like rate. If any statute or rule of law shall validly limit the amount of such liquidated final damages to less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such statute or rule of law. (j) In the event of a breach or threatened breach by Tenant of any of the agreements, conditions, covenants or terms of this Lease, Landlord shall have the right to seek an injunction to restrain the same and the right to invoke any remedy allowed by law or in equity, whether or not other remedies, indemnities or reimbursements are herein provided. The rights and remedies given to Landlord in this Lease are distinct, separate and cumulative remedies, and no one of them, whether or not exercised by Landlord, shall be deemed to be in exclusion of any of the others. (k) TENANT, IN CONSIDERATION FOR THE EXECUTION OF THIS LEASE BY LANDLORD AND FOR THE COVENANTS AND AGREEMENTS ON THE PART OF LANDLORD HEREIN CONTAINED, AND FULLY COMPREHENDING THE RELINQUISHMENT OF CERTAIN RIGHTS INCLUDING RIGHTS OF PRE-JUDGMENT NOTICE AND HEARING PRIOR TO ENTRY OF JUDGMENT AND EXECUTION ON SUCH JUDGMENT, HEREBY EXPRESSLY AUTHORIZES AND EMPOWERS (WHICH POWER IS 26 COUPLED WITH AN INTEREST) ANY PROTHONOTARY OR ATTORNEY OF ANY COURT OF RECORD TO ACCEPT SERVICE OF PROCESS FOR, TO APPEAR FOR, AND TO CONFESS JUDGMENT AGAINST TENANT (1) TO RECOVER POSSESSION FROM TIME TO TIME OF THE PREMISES (AND TENANT AGREES THAT UPON THE ENTRY OF EACH JUDGMENT FOR SAID POSSESSION A WRIT OF POSSESSION OR OTHER APPROPRIATE PROCESS MAY ISSUE FORTHWITH), AND/OR (2) TO ENFORCE PAYMENT FROM TIME TO TIME FOR BASE RENT, ADDITIONAL RENT, OR OTHER CHARGES OR EXPENSES PAYABLE UNDER THIS LEASE, INCLUDING, AT LANDLORD'S OPTION, THE ACCELERATED BASE RENT AND ADDITIONAL RENT FOR THE ENTIRE UNEXPIRED BALANCE OF THE TERM OF THIS LEASE AS PROVIDED IN PARAGRAPH (B) ABOVE OR FOR LIQUIDATED DAMAGES AS PROVIDED IN PARAGRAPH (I) ABOVE, IN EITHER CASE, TOGETHER WITH ANY OTHER CHARGES, PAYMENTS, COSTS AND EXPENSES AGREED TO BE PAID BY TENANT AND INTEREST AND COSTS TOGETHER WITH AN ATTORNEY'S COMMISSION OF 5% THEREOF. (l) In any action by confession for ejectment or for rent due and owing, Landlord shall first cause to be filed in such action an affidavit made by it or someone acting for it setting forth the facts necessary to authorize the entry of judgment, of which facts such affidavit shall be conclusive evidence, and if a true copy of this Lease be filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of court, custom or practice to the contrary notwithstanding. The authority to confess judgment against Tenant hereunder shall not be exhausted by one (1) exercise thereof, but judgment may be confessed as provided herein from time to time as often as any Event of Default occurs under this Lease, and such authority may be exercised as well after the expiration of the Term of this Lease and/or during or after the expiration of any Renewal Term, by Landlord or any successor Landlord. (m) Tenant shall pay upon demand all of Landlord's reasonable costs, charges and expenses, including the fees and out-of-pocket expenses of legal counsel, agents and others retained by Landlord incurred in enforcing Tenant's obligations hereunder or incurred by Landlord in any litigation, negotiation or transaction in which Tenant causes Landlord, without Landlord's fault, to become involved or concerned, together with interest at the Overdue Interest Rate from the date incurred by Landlord to the date of payment by Tenant. (n) Tenant agrees that this Lease sets forth all notices that Landlord may be required to give in connection with the exercise of remedies and waives any and all further notices of default, termination, to quit or otherwise that may be required under any present or future laws. 27 26. Requirement of Strict Performance. The failure or delay on the part --------------------------------- of Landlord to enforce or exercise at any time any of the provisions, rights or remedies in the Lease shall in no way be construed to be a waiver thereof, or in any way to affect the validity of this Lease or any part thereof, or the right of Landlord to thereafter enforce each and every such provision, right or remedy. No waiver of any breach of this Lease shall be held to be a waiver of any other or subsequent breach. The receipt by Landlord of Base Rent or Additional Rent at a time when Base Rent or Additional Rent is in default under this Lease shall not be construed as a waiver of such default. The receipt by Landlord of a lesser amount than Base Rent or Additional Rent due shall not be construed to be other than a payment on account of Base Rent or Additional Rent then due, and any statement on Tenant's check or any letter accompanying Tenant's check to the contrary shall not be deemed an accord and satisfaction, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of Base Rent or Additional Rent due or to pursue any other remedies provided in this Lease. No act or thing done by Landlord or Landlord's agents or employees during the Term of this Lease shall be deemed an acceptance of a surrender of the Premises and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. 27. Relocation of Tenant. Intentionally omitted. -------------------- 28. Surrender of Premises; Holding Over. ----------------------------------- (a) The Lease shall terminate and Tenant shall deliver up and surrender possession of the Premises to Landlord on the last day of the Term hereof, and Tenant hereby waives the right to any notice of termination or notice to quit. Upon the expiration or sooner termination of this Lease, Tenant covenants to deliver up and surrender possession of the Premises in the same condition in which Tenant has agreed to maintain and keep the same during the Term of this Lease in accordance with the provisions of this Lease, normal wear and tear excepted. (b) Upon the failure of Tenant to surrender possession of the Premises to Landlord upon the expiration or sooner termination of this Lease, Tenant shall pay to Landlord, as liquidated damages, an amount equal to 150k of the then current Base Rent and Additional Rent required to be paid by Tenant under this Lease, applied to any period in which Tenant shall remain in possession after the expiration or sooner termination of this Lease. Acceptance by Landlord of Base Rent or Additional Rent after such expiration or earlier termination shall not constitute a consent to a holdover hereunder or result in a renewal. The foregoing provisions of this paragraph are in addition to and do not affect Landlord's right of reentry or any other rights of Landlord hereunder or otherwise provided by law. 28 29. Compliance With Laws and Ordinances. ----------------------------------- (a) In General. At its sole cost and expense, Tenant shall promptly ---------- fulfill and comply with all laws, ordinances, regulations and requirements of the municipal, county, state and federal governments and any and all departments thereof having jurisdiction over the Building, and of the National Board of Fire Underwriters or any other similar body now or hereafter constituted, affecting Tenant's occupancy of the Premises or the business conducted therein. (b) Environmental Matters. Tenant represents and warrants that --------------------- Tenant's use does not, and its use of the Premises will not, involve the use, maintenance, storage or discharge of hazardous or toxic materials or substances (collectively, "Hazardous Substances") other than materials of the type and in the quantities customarily found in general office use, such as cleaning supplies and copier and printer toner fluids ("Permitted Substances"). Tenant shall comply with all federal, state and municipal statutes, ordinances, laws, rules and regulations relating to the storage, use, discharge and disposal of such Permitted Substances. In the event any present or future federal, state or municipal statute, ordinance, law, rule or regulation requires Landlord or Tenant to obtain a clearance certificate or declaration of non-applicability, similar or dissimilar to those required by the New Jersey Industrial Site Recovery Act, upon the expiration or sooner termination of this Lease and/or any transfer of title to the Building, Tenant shall apply therefor, or execute and deliver an application therefor to Landlord without delay, and take such action as may be necessary under such applicable statute, ordinance, law, rule or regulation to obtain such clearance certificate or declaration. (c) Recycling. Tenant agrees to comply with all laws, ordinances, --------- rules and regulations regarding the removal of solid waste, including but not limited to voluntary or mandatory recycling of paper, cardboard, glass, metal and plastic containers. Tenant shall be responsible for and shall reimburse Landlord upon demand for all surcharges, fines and other costs and expenses incurred by Landlord by reason of Tenant's failure to comply with all recycling requirements. (d) ADA Compliance. The parties acknowledge that the Americans With -------------- Disabilities Act of 1990 (42 U.S.C. (S) 12101 et seq.) and regulations and guidelines promulgated thereunder, as all of the same may be amended and supplemented from time to time (collectively referred to herein as the "ADA") establish requirements for business operations, accessibility and barrier removal, and that such requirements may or may not apply to the Premises and Building depending on, among other-things: (i) whether Tenant's business is deemed a "public 29 accommodation" or commercial facility", (2) whether such requirements are "readily achievable", and (3) whether a given alteration affects a "primary function areas or triggers "path of travel" requirements. The parties hereby agree that: (i) Landlord shall perform any required ADA Title III compliance in the common areas, except as provided below, (ii) after the Commencement Date, Tenant shall perform any required ADA Title III compliance in the Premises including any leasehold improvements or other work to be performed in the interior areas of the Premises and (iii) Landlord may perform and/or require that Tenant perform and Tenant shall be responsible for the costs of, ADA Title III "path of travel" compliance in the common areas triggered by alterations in the Premises. As of the Commencement Date, the Premises shall be in compliance with the ADA, except to the extent of special requirements, if any, of Tenant's employees of which Landlord is not notified in writing prior to commencement of construction of the Premises. Tenant shall be solely responsible for requirements under Title I of the ADA relating to Tenant's employees. 30. Waiver of Trial by Jury. It is mutually agreed by and between ----------------------- Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use of or occupancy of the Premises and/or any claim of injury or damage. It is further mutually agreed that in the event Landlord commences any summary proceeding for non-payment of rent, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding. 31. Notices. All notices or demands under this Lease shall be in writing ------- and shall be given or served by either Landlord or Tenant to or upon the other, either personally, by Registered or Certified Mail, Return Receipt Requested, postage prepaid, or by Fed Ex or other nationally recognized overnight delivery service, delivery charges prepaid. Such notices and demands shall be addressed, if to Landlord, to Landlord at Landlord's address, and if to Tenant, to Tenant at Tenant's Address. All notices and demands shall be deemed given or served upon the date of receipt or refusal of delivery thereof, if delivered personally, or three (3) business days after the date deposited with the United States Postal Service, or one (1) business day after the date delivered to the overnight delivery service, even if the recipient shall fail or refuse to accept delivery of such notice or demand. Either Landlord or Tenant may change its address to which notices and demands shall be delivered or mailed by giving written notice of such change to the other as herein provided. 30 32. Real Estate Brokers. Tenant warrants to Landlord that Tenant dealt ------------------- and negotiated solely and only with GEIS Realty Group, Inc. and Jackson-Cross Company and Landlord for this Lease and with no other broker, firm, company or person. Tenant hereby agrees to indemnify, defend and hold Landlord harmless from and against any and all claims, suits, proceedings, damages, obligations, liabilities, counsel fees, costs, losses, expenses, orders and judgments imposed upon, incurred by or asserted against Landlord by reason of the falsity or error of Tenant's warranty. 33. Force Majeure. Landlord shall be excused for the period of any delay ------------- in the performance of any of its obligations under this Lease, when prevented from so doing by any cause or causes beyond Landlord's reasonable control, which shall include, without limitation, delay in obtaining possession of the Premises due to the holdover by an existing occupant, all labor disputes, inability to obtain any materials or services, civil commotion, restrictions, limitations or delays caused by governmental regulations or governmental agencies, or acts of God, each of which shall be an event of "Force Majeure". 34. Landlord's Obligations. Landlord's obligations hereunder shall be ---------------------- binding upon Landlord only for the period of time that Landlord is in ownership of the Building, and upon termination of that ownership, except as to any obligations which have then matured, Tenant shall look solely to Landlord's successor in interest in the Building for the satisfaction of each and every obligation of Landlord hereunder. If any Security Deposit has been made by Tenant, Landlord shall transfer such Security Deposit to the purchaser and thereupon Landlord shall be discharged from any further liability with respect thereto. 35. Landlord's Liability. It is expressly understood and agreed that -------------------- notwithstanding anything in this Lease to the contrary, and notwithstanding any applicable law to the contrary, the liability of Landlord and its partners, subpartners, officers, directors, employees and agents (collectively, "Landlord Parties") to Tenant hereunder and any recourse by Tenant against Landlord or the Landlord Parties shall be limited solely and exclusively to an amount which is equal to the lesser of (i) the interest of the Landlord Parties in the Building, or (ii) the equity interest the Landlord Parties would have in the Building if the Building were encumbered by third-party debt in an amount equal to eighty percent (80%) of the value of the Building (as such value is reasonably determined by Landlord) , and neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. 31 36. Successors. The respective rights and obligations of Landlord and ---------- Tenant under this Lease shall bind and shall inure to the benefit of Landlord and Tenant and their legal representatives, heirs, successors and assigns, provided, however, that no rights shall inure to the benefit of any successor of Tenant unless Landlord's written consent to the transfer to such successor has first been obtained as provided in Section 13 above. 37. Governing Law. This Lease shall be construed, governed and enforced ------------- in accordance with the laws of the Commonwealth of Pennsylvania. 38. Severability. If any provisions of this Lease shall be held to be ------------ invalid, void or unenforceable, the remaining provisions of this Lease shall in no way be affected or impaired and such remaining provisions shall continue in full force and effect. 39. Captions. Any headings preceding the text of the several Sections of -------- this Lease are inserted solely for convenience of reference and shall not constitute a part of this Lease or affect its meaning, construction or effect. 40. Gender. As used in this Lease, the word "person" shall mean and ------ include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular f or the plural, where appropriate; and words of any gender shall mean and include any other gender. 41. Execution. The submission and negotiation of this Lease by Landlord --------- shall not be deemed an offer to lease by Landlord, but merely the solicitation of such an offer from Tenant. Tenant's execution and delivery of this Lease constitutes a firm offer which may not be withdrawn for a period of thirty (30) days after delivery to Landlord. This Lease shall only become effective when it has been signed by a duly authorized officer or representative of both Landlord and Tenant. 42. Exhibits and Rider. Attached to this Lease and made part hereof are ------------------ Exhibits "A", "B", "C", "D" "E"and Rider Sections 45 to 48 inclusive. - -------- 43. Entire Agreement. This Lease, including the Exhibits and the Rider, ---------------- -------- contains all the agreements, conditions, understandings, representations and warranties made between Landlord and Tenant with respect to the subject matter hereof, and may not be modified orally or in any manner other than by an agreement in writing signed by both Landlord and Tenant or their respective successors in interest. 32 44. Corporate Authority. If Tenant is a corporation, each individual ------------------- executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with the duly adopted resolution of the Board of Directors of said corporation or in accordance with the By-Laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. THIS LEASE CONTAINS WARRANTS TO CONFESS JUDGMENT AGAINST TENANT. TENANT UNDERSTANDS THAT IN GRANTING THESE WARRANTS TO CONFESS JUDGMENT TENANT WAIVES RIGHTS TO NOTICE AND HEARING BEFORE ENTRY OF JUDGMENT AND EXECUTION ON THAT JUDGMENT. TENANT HAS DISCUSSED THE MEANING AND AFFECT OF THESE CONFESSION OF JUDGMENT PROVISIONS WITH ITS OWN INDEPENDENT COUNSEL, OR HAS HAD REASONABLE OPPORTUNITY TO DO SO. 33 IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease the day and year first above written. LANDLORD: JENKINS COURT PENNSYLVANIA, L.P. By JENKINS COURT PENNSYLVANIA CORP., its general partner By /s/ illegible ---------------------------- Name: Title: By /s/ illegible ---------------------------- Name: Title: 34 TENANT: CDNOW, INC. (CORPORATE SEAL) ATTEST: By /s/ Jason Olim ---------------------------- Name: Jason Olim Title: President By /s/ Michael Norton --------------------------- Name: Michael Norton Title: Comptroller 35 Rider Annexed to and made Part of Office Lease Dated ___________, 1997 Between JENKINS COURT PENNSYLVANIA, L.P., as Landlord, and CDNOW, INC., as Tenant 45. Landlord's Construction. ----------------------- (a) Tenant Finish Work. Landlord shall construct Tenant Finish Work ------------------ in the Premises other than Suite 320 in accordance with Exhibit "C" attached ----------- hereto. Landlord shall use diligent efforts to have the Tenant Finish Work in Suite 330 and Suite 350 Substantially Completed by a date which is ninety (90) days from Landlord's receipt of an executed Lease from Tenant and final approval of Tenant's Construction Documents (as defined in Exhibit "C" (the "Scheduled ----------- Commencement Date,,), subject to delays due to Tenant Delays (as defined in Exhibit "IC"), or an event or events of Force Majeure, any of which shall extend - ------------ the date for delivery of the Premises for a period equal to the total of the duration of each such delay. Landlord will pay the entire cost of construction of the Premises (as described in Exhibit "C" hereto) up to the aggregate amount ----------- of the Construction Allowance set forth in Exhibit "C" hereto. Tenant shall be ----------- responsible for payment of the cost of improvements in excess of the Construction Allowance. Tenant shall also pay to Landlord as Additional Rent on the date of Substantial Completion an amount equal to the aggregate number of days of delay due to Tenant Delays, multiplied by the annual Base Rent for the first year of the Term of the Lease, divided by three hundred sixty five (365) days. (b) Substantial Completion. The terms "Substantially Completed" and ---------------------- "Substantial Completion" shall mean: (1) Landlord has completed the Tenant Finish Work so that (i) Tenant can use the Premises for its business purposes and (ii) the only incomplete items are Long Lead items and minor or insubstantial details of construction, mechanical adjustments, or finishing touches like touch-up plastering or painting. As used herein, "Long Lead Items" are items of construction which require longer than eight (8) weeks to order and install in the Premises and which are not necessary for Tenant's use and occupancy of the Premises; (2) Landlord has secured a Certificate of Occupancy from the local municipality or the local municipality has otherwise authorized the use and occupancy of the Premises; 36 (3) Tenant, its employees, agents, and invitees, have ready access to the Building and Premises through the lobby, entranceways, elevators, and hallways; (4) the Premises are ready for the installation of Tenant's Property (as defined below), or any decoration that Tenant will install; (5) The following items are installed and in good operating order: (i) hallways on any partial floor on which Premises are located (including walls, flooring, ceiling, lighting, etc.), (ii) elevators, HVAC, utilities, and plumbing serving the Premises, and (iii) the doors and hardware (which may be temporary doors and hardware if the items specified are Long Lead Items); and (6) the Premises are broom clean. (c) Advance Notice. Landlord shall give Tenant at least twenty (20) -------------- days advance notice of the estimated date of Substantial Completion if different from the Scheduled Commencement Date. If the estimated date of Substantial Completion changes at any time after Landlord gives such notice, then Landlord shall give ten (10) days advance notice of the new estimated date of Substantial Completion. (d) Inspection and Punchlists. Prior to or within thirty (30) days ------------------------- following the date of Substantial Completion, Landlord and Tenant shall inspect the Premises, and prepare a punchlist. The punchlist shall list incomplete, minor, or insubstantial details of construction; necessary mechanical adjustments; and needed finishing touches. Landlord will use reasonable efforts to complete the correction of punchlist items within thirty (30) days after such inspection. (e) Installation of Tenant's Property. During the last twenty (20) --------------------------------- days prior to the estimated date of Substantial Completion, Tenant and Tenant's contractors may place and install Tenant's furniture, trade fixtures, equipment and other personal property (together "Tenant'` Property") in the Premises without incurring liability on the part of Tenant for Base Rent or Additional Rent, provided, however (1) prior to any such installation, Tenant shall provide Landlord with evidence of Tenant's insurance as provided in Section 16 hereof, (2) all of the other terms and conditions of the Lease shall apply during the installation of Tenant's Property, (3) all work shall be done by labor who can work in harmony with Landlord's contractors, (4) Tenant and Tenant's contractors shall not interfere with the completion of the Tenant Finish Work and (5) in the event of a work stoppage in the Tenant Finish Work caused by 37 the installation of Tenant's Property or in the event of the interference by Tenant or Tenant's contractors installing Tenant's Property with Landlord's construction, Tenant or Tenant's contractors, as the case may be, shall immediately cease work and suspend the installation of Tenant's Property until the completion by Landlord of the Tenant Finish Work. (f) Landlord's Delays. If Landlord is unable to Substantially ----------------- Complete the Tenant Finish Work in Suite 330 and Suite 350 by a date which is thirty (30) days from the Scheduled Commencement Date for reasons other than an event or events of Force Majeure or Tenant Delays, Tenant shall be entitled to an abatement of Base Rent with respect to Suite 330 and Suite 350 equal to one (1) day's rent for each day between the Scheduled Commencement Date and the date of Substantial Completion which abatement shall begin on the Commencement Date. 46. Intentionally Deleted 47. Additional Damages. Upon the occurrence of an Event of Default and ------------------ the termination of the Lease pursuant to Section 25 hereof, Tenant shall pay to Landlord, upon demand, as Additional Rent hereunder, the full unamortized amount of Landlord' s Construction Allowance based on an amortization period of five (5) years and including interest at 11.00% per annum on the outstanding principal balance. Notwithstanding the foregoing, in no event shall Landlord's recovery under this Section 47 and Landlord's recovery under Section 25(b) entitle Landlord to a windfall or excess damages. 48. Financial Statements. Within thirty (30) days following Landlord's -------------------- written request therefore but no more than once in any twelve-month period, Tenant shall deliver to Landlord a copy of Tenant's most recent financial statements (consisting, at a minimum, of Tenant's balance sheet and income statement) for Tenant's fiscal year just ended, certified by an independent certified public accountant as presenting fairly, in all material respects, the financial position of Tenant and the results of its operations in accordance with generally accepted accounting principles. If requested by Tenant, such statements may be submitted subject to a reasonable confidentiality agreement. In addition, Tenant shall provide from time to time, on request of Landlord, bank references necessary to verify Tenant's continued good credit. 38 CONSENT TO SUBLEASE AGREEMENT ----------------------------- THIS AGREEMENT is made the 15th day of May, 1997 by and among JENKINS COURT PENNSYLVANIA, L.P., successor-in-interest to JENKINS COURT ASSOCIATES LIMITED PARTNERSHIP ("Landlord"); GRANT THORNTON, LLP, assignee of A.G. EPSTEIN COMPANY ("Tenant"); and CDNOW, INC. ("Subtenant"). RECITALS -------- A. Landlord's predecessor in interest entered into a lease dated December 27, 1989 with A.G. Epstein Company (the "Original Lease") for Suite No. 300 in the building known as Jenkins Court, located on Old York Road in Jenkintown, Montgomery County, Pennsylvania (the "Premises"). Such lease has been amended by Amendment No. 1 to Agreement of Lease dated May 22, 1992 (the "First Amendment") and by Assignment and Assumption of Lease and Second Amendment to Lease dated May 31, 1996 (the "Second Amendment"; the Original Lease, as amended by the First Amendment and the Second Amendment, the "Prime Lease"). B. Tenant desires to sublease part of the Premises to Subtenant pursuant to a sublease in the form attached hereto as Exhibit "A" (the "Sublease"), and Subtenant desires to sublease the part of the Premises described in the Sublease (the "Subleased Space") from Tenant. C. As required by the Prime Lease, Tenant has requested Landlord's consent to the Sublease. Landlord is willing to consent to the Sublease, subject to the terms of this Agreement. TERMS AND CONDITIONS -------------------- NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree as follows: 1. Subject to the provisions of this Agreement, Landlord hereby consents to the Sublease and the use by Subtenant of the Subleased Space for the purposes set forth in the Office Lease, dated ________, 1997, between Landlord and Subtenant (the "Subtenant Lease"). Landlord agrees to provide HVAC to the Subleased space in a manner consistent with the provision of HVAC in the Subtenant Lease. Landlord's consent shall not in any way be construed to relieve Tenant from obtaining the express consent, in writing, of Landlord to any further assignment or sublease of the tenant's interest under the Prime Lease (including but not limited to any assignment or sublease by Subtenant under its Sublease). 2. As security for its obligations under the Prime Lease, Tenant hereby assigns, transfers and sets over to Landlord all of the rents due and to become due from Subtenant to Tenant under the Sublease. At any time during the continuance of an Event of Default under the Prime Lease, Landlord shall have the right, but no obligation, to collect rents payable by Subtenant under the Sublease and apply such rents as may be collected to the obligations of Tenant under the Prime Lease, in such order as Landlord may elect. Any such collection and application shall not constitute a waiver of any Event of Default or any of Landlord's rights under the Prime Lease, nor shall it create or imply any direct relationship between Landlord and Subtenant. Subtenant agrees that, upon receipt of written notice from Landlord to do so, Subtenant shall pay all rents thereafter falling due under the Sublease directly to Landlord. Tenant hereby irrevocably authorizes and directs Subtenant to comply with any such notice from Landlord, without any obligation to determine whether in fact an Event of Default has occurred or is continuing under the Prime Lease. 3. Neither Landlord's consent to the Sublease nor the collection of any rentals payable by Subtenant under the Sublease shall constitute an assumption by Landlord of any obligation to Subtenant under the Sublease or otherwise, except as expressly set forth in this Consent. Subtenant agrees that it will look solely to Tenant for the performance of any obligations of Tenant under the Sublease. 4. To induce Landlord to consent to the Sublease, Subtenant represents, warrants and agrees with Landlord that: the Sublease is in all respects subject and subordinate to the Prime Lease, as it currently exists or may hereafter be modified or amended, whether or not Subtenant has notice of or consents to such modification or amendment; Landlord's consent to the Sublease does not imply Landlord's approval of the terms thereof or confirmation that the terms of the Sublease are consistent with the Prime Lease; it is Subtenant's obligation to obtain and review a copy of the Prime Lease and confirm that its operations in and about the Premises comply with the terms thereof, including the rules and regulations attached to the Prime Lease. Nothing herein is intended to waive or limit, as between Tenant and Subtenant, any obligation Tenant 2 may have to Subtenant under the Sublease regarding the amendment or modification of the Prime Lease. 5. Tenant shall be responsible, at its sole cost and expense, for the construction of any improvements required by the Sublease or otherwise required by applicable law (including but not limited to the building, fire, health and safety codes) as a result of the sublease of the Subleased Space separate and apart from the balance of the Premises and/or the change in occupancy from Tenant to Subtenant. Tenant shall prepare and submit to Landlord for its approval plans and specifications for all such improvements, which approval shall not be unreasonably withheld or delayed. Such improvements shall be constructed in a good and workmanlike manner and otherwise in accordance with the requirements of the Prime Lease. 6. Tenant and Subtenant represent and warrant to Landlord that Landlord is not responsible for any broker's commission or fees with respect to the Sublease. Tenant shall indemnify and hold Landlord harmless against and from any claims by any broker or other party with respect to any commissions or fees with respect to the Sublease. 7. Tenant and Subtenant represent and warrant that the copy of the Sublease attached hereto as Exhibit "A" is the entire agreement between Tenant and Subtenant; there are no other documents, instruments or agreements or any other or further understandings, oral or in writing, with respect to the Subleased Space. Landlord and Tenant represent and warrant that the copies of the Original Lease, First Amendment and Second Amendment that are attached as exhibits to the Sublease collectively constitute the Prime Lease and are the entire agreement between Landlord and Tenant; there are no other documents, instruments or agreements or any further understandings, oral or in writing, with respect to the Premises. 8. Landlord, for the benefit of Subtenant, represents that to Landlord's actual knowledge, no Event of Default exists under the Prime Lease and no event exists, with the giving of notice or passage of time, or both, would constitute an Event of Default under the Prime Lease. 9. Landlord agrees that, for as long as no event of default shall have occurred under of the Prime Lease or the Sublease, Subtenant shall peaceably hold and enjoy the Subleases Space, without interference from Landlord or anyone claiming through Landlord. After written request therefor, and provided that Subtenant is not then in default under the Sublease, or Tenant is not then in default under the Prime Lease, Landlord will use reasonable efforts to obtain a nondisturbance agreement from any future mortgagee of the Subleased Space. 3 10. Landlord, for the benefit of Subtenant, agrees to use good faith efforts to send to Subtenant, addressed to the Subleased Space, a duplicate copy of any default notice sent by Landlord to Tenant. Landlord's failure to send Subtenant a duplicate copy of any such default notice shall not result in any liability to landlord or in any way affect the validity or effectiveness of any such default notice or the exercise by Landlord of remedies with respect to any default referred to in such default notice. 11. This Agreement may be amended or modified only by a written instrument. This Agreement constitutes the entire understanding among the parties with respect to Landlord's consent to the Sublease. This Agreement shall bind and benefit the parties hereto and their respective successors and permitted assigns. 12. This Agreement may be executed in one or more counterparts, and shall become binding only when one or more counterparts, individually or taken together, shall bear the signatures of all parties reflected hereon as signatories. The parties agree that a facsimile transmission of an executed counterpart of this Agreement shall have the same binding effect upon the signatory as an executed and delivered original hereof. The parties further agree, for confirmatory purposes only, to exchange copies of executed counterpart originals promptly after said facsimile transmission. 4 IN WITNESS WHEREOF the parties hereto have caused this Agreement to be duly executed the day and year first above written. Tenant: ------ GRANT THORNTON, LLP By:___________________________ Name: Title: Subtenant: --------- CDNOW, INC. By:___________________________ Name: Title: Landlord: -------- JENKINS COURT PENNSYLVANIA, L.P. By:___________________________ Name: Title: By:___________________________ Name: Title: 5 SUBLEASE THIS SUBLEASE, made as of the __ day of May, 1997 between GRANT THORNTON LLP, having an address at Suite 3100,2001 Market Square, Philadelphia, PA 19103- 7080 (hereinafter referred to as "Sublessor") and CDNOW, INC., a Pennsylvania corporation, having an address at ________________________________________, PA ______ until occupancy of the Sublease Premises (defined below) and after commencing occupancy at Jenkins Court, 610 Old York Road, Suite 300, Jenkintown, PA 19046 (hereinafter referred to as "Subtenant"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Sublessor is the assignee of the lessee under a certain office lease dated December 27,1989 and amended by Amendment No. 1 to Agreement of Lease dated May 22, 1992 ("Amendment No. 1") and Assignment and Assumption of Lease and Second Amendment to Lease dated May 31, 1996 (said lease as amended is herein referred to as the "Prime Lease"), with Jenkintown Court Pennsylvania, L.P., as successor in interest to Jenkins Court Associates Limited Partnership (herein referred to as "Prime Landlord"), of the space described in the Principle Lease and commonly known as Suite 3 00 (the "Premises") in the building commonly known as Jenkins Court (the "Building") in Jenkintown, Pennsylvania for a term expiring on April 30, 2000; a copy of the Prime Lease as in effect on the date hereof is attached hereto and made a part hereof as Exhibit A; and WHEREAS, Subtenant desires to sublease from Sublessor, and Sublessor desires to sublease to Subtenant, the entire Premises consisting of approximately 11,535 rentable square feet (being all of the space leased to Sublessor under the Prime Lease) as depicted on the sketch of the Premises attached as an exhibit to the Prime Lease in accordance with the terms and conditions of this Sublease. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties agree as follows: 1. Premises and Term. ----------------- a. Sublessor hereby subleases to Subtenant the Sublease Premises for a term commencing on the date Subtenant takes possession of the Sublease Premises or June 11, 1997, whichever occurs first (the "Commencement Date") and expiring on April 30, 2000 (the "Expiration Date"). b. Under no circumstances shall the term of this Sublease extend beyond tire expiration, surrender or termination of the Prime Lease, whether the Prime Lease expires by its own terms, is terminated for Sublessor's default, is terminated or surrendered by agreement of Prime Landlord and Sublessor, or is terminated for any other reason. c. Sublessor shall attempt to obtain Prime Landlord's consent hereto. Sublessor shall not be required to (i) take any act which would authorize or permit Prime Landlord to terminate the Prime Lease or sublease the Premises (other than attempting to obtain Prime Landlord's consent hereto) or (ii) make any payment to Prime Landlord or (iii) commence any litigation in order to obtain Prime Landlord's consent, and Sublessor shall incur no liability if Sublessor does not obtain Prime Landlord's consent; provided, however, if Sublessor does not obtain in writing Prime Landlord's consent within thirty (30) days after receipt by Sublessor's legal counsel of an executed counterpart of this Sublease signed by Subtenant, this Sublease shall thereupon be null and void and neither party hereto shall have any obligation to the other under this Sublease and any and all such executed counterparts shall be immediately returned to Subtenant. d. Subtenant shall use the Sublease Premises for general office use and for no other use. 2. Rent. Commencing on the Commencement Date and thereunder throughout ---- the term of this Sublease. Subtenant shall pay to Sublessor, without notice or demand, in lawful money of the United States and without abatement, deduction or set-off (except as provided below), fixed rent (the "Rent") per month for each month of the term of this Sublease the amounts set forth below:
Period Annual Rent Per Sq. Ft Total Annual Rent Monthly Rent ------ ---------------------- ----------------- ------------ 1st year $11.50 $132,652.50 $11,054.37 2nd year 14.50 167,257.50 13,938.12 3rd year 16.00 184,560.00 15,380.00
Rent shall be payable in monthly installments as provided above in advance on the first (1st) day of each month during the term of this Sublease; provided, however, that if the term of this Sublease shall commence on a day other than the first (1st) day of a month, the Rent shall be payable on the date of such commencement, and Rent for such month shall be prorated on a per 2 them basis. If the term of this Sublease shall end other than on the last day of a calendar month, Rent for the final partial month shall be prorated on a per them basis. It is understood and agreed by Sublessor and Subtenant that the Rent is a "net rent" and that additional rent shall be payable by Subtenant in an amount equal to any and all additional rent that Sublessor is obligated to pay to the Prime Landlord under the Prime Lease and additional rent payable by Subtenant shall be paid by Subtenant as and when Sublessor is obligated to pay the same to the Prime Landlord under the Prime Lease. In addition, Subtenant shall reimburse Sublessor for the cost of electricity used by Subtenant in the Sublease Premises payable by Sublessor pursuant to the Prime Lease or directly to the utility supplying the electricity. Until such time as there is an Event of Default under this Sublease or an event which with the giving of notice or passage of time, would constitute an Event of Default under this Sublease, Subtenant shall have the right to pay Rent and any additional rent that Subtenant is obligated to pay hereunder directly to the Prime Landlord, provided Subtenant send to Sublessor, simultaneously with the payment to the Prime Landlord of any monthly installment of Rent or additional rent payable hereunder, written evidence, in form satisfactory to Sublessor, that such payment has been made. Anything in this Paragraph to the contrary notwithstanding, if Sublessor is entitled to an abatement of, or deduction or set-off against, rent under the Prime Lease, then Subtenant shall be entitled to a pro rata share of such abatement, deduction, or set-off or, if less than all of the Sublease Premises are affected, then Subtenant shall be entitled to an abatement, deduction, or set-off based on the ratio of the square footage of the Sublease Premises. In the event Subtenant fails to make any rent payment to the Prime Landlord as and when due, Sublessor may (but shall not be obligated to) make such payment an behalf of Subtenant and Sublessor shall have the right to exercise any and all rights and remedies against Subtenant (including and late charges and penalties) as may be available to the Prime Landlord under the Prime Lease. 3. Condition of the Sublease Premises ---------------------------------- a. Failure to deliver possession. A portion of the Sublease ----------------------------- Premises is presently occupied by a subtenant whom Sublessor expects to vacate the Sublease Premises by the Commencement Date. However, if for any reason Sublessor cannot deliver possession of the Sublease Premises to Subtenant on the Commencement Date, (i) this Lease will not be void or voidable, unless such inability to deliver possession of the Sublease Premises continues for more than forty-five (45) days after the Commencement Date, in which event either party shall have the right to terminate whereupon this Sublease shall be null and void and neither party hereto shall have any obligation to the other; (ii) Sublessor will not be liable to Subtenant for any loss or damage caused by such failure; and (iii) unless Sublessor is unable to deliver possession of the Sublease Premises to Subtenant on the Commencement Date because of Subtenant's delays, rent 3 will be waived for the period between the Commencement Date and the date on which Sublessor delivers possession of the Sublease Premises to Subtenant. Delay in delivery of possession of the Sublease Premises will not extend the Term. b. Condition. Subtenant acknowledges and represents to Sublessor --------- (1) that Subtenant has thoroughly inspected and examined the Sublease Premises, (2) that Subtenant is fully familiar with the physical conditions and state of repair of the Sublease Premises, (3) that Subtenant hereby accepts the Sublease Premises in their "as is" condition, and that, except as provided in subparagraph 3 (c) below, Sublessor shall have no obligation to perform any work in correction with this Sublease, it being acknowledged by Subtenant that the Sublessor Improvements (as defined below) may not be completed at the time that Subtenant takes possession of the Sublease Premises and that such possession shall be at Subtenant's risk, and (4) that except as provided in the following sentence and in subparagraph 3 (c) below neither Sublessor nor any agent of Sublessor has made any representation or warranty with respect to the Sublease Premises or the Building including without limitation, any representation or warranty with respect to the suitability or fitness of the Sublease Premises or the Building for the conduct of Subtenant's business. Notwithstanding the foregoing, Sublessor shall cause to be repaired any damage to the Sublease Premises caused by the cur-rent subtenant after the date of this Sublease. Sublessor represents (1) that it has received no notice from Prime Landlord concerning (a) any default under the Prime Lease or (b) any repairs or maintenance required in respect of the Sublease Premises and (2) that it has no actual knowledge (a) of any default existing under the Prime Lease or (b) of any condition existing on the Sublease Premises which would constitute a violation of Sublessor's repair and maintenance obligations under the Prime Lease. c. Installation of Doorway within Sublease Premises. Sublessor ------------------------------------------------- agrees to install a doorway through an existing wall that had served as a demising wall between the portion of the Sublease Premises occupied by a prior subtenant and the balance of the Sublease Premises (such doorway being shown on the floor plan attached hereto as Exhibit B as initialed and exchanged by the parties hereto)(the "Sublessor Improvements") within fifteen (15) days after the Sublease Premises have been vacated by the current subtenant. 4. End of Term. At the end of the term hereof, or upon the sooner ----------- termination of this Sublease, Subtenant shall surrender and deliver the Sublease Premises to Sublessor in as good condition as the condition in which they existed at the commencement of the term hereof, excepting only ordinary wear and tear, damage by fire or other casualty, and down age arising from any cause not required by the terms of this Sublease to be repaired by Subtenant; provided, 4 however, that Subtenant shall have no responsibility for structural or mechanical repairs unless the same are necessitated by Subtenant's negligence or to remove the Sublessor Improvements. 5. Lease. ----- a. Subordination. This Sublease and all the rights of Subtenant ------------- hereunder are expressly subject and subordinate to the Prime Lease and all leases and mortgages to which the Prime Lease is subordinate. In the event of the foreclosure of any underlying mortgage against which Sublessor has nondisturbance protection, Subtenant shall enjoy the same nondisturbance protection as Sublessor. b. Incorporation by Reference. Except as otherwise provided in this -------------------------- Article 5 or elsewhere in this Sublease, all of the terms, covenants, conditions and definitions of the Prime Lease (except such as by their nature or purport do not relate to the Sublease Premises or are inapplicable or inappropriate to the subleasing of the Sublease Premises pursuant to this Sublease or are inconsistent with any of the provisions of this Sublease) are hereby incorporated ill and made part of this Sublease with the same force and effect as though set forth at length herein. The foregoing incorporation by reference is subject to the provisions of this Article 5, including the following: (1) For the purposes of this Sublease, (a) references in the Prime Lease to "Lessor" (other than in provisions of the Prime Lease which impose or relate to obligations of Prime Landlord to repair or restore, or to perform or furnish utilities, work or services with respect to, the Premises or the Building) shall be deemed to refer to Sublessor under this Sublease unless the context requires that such reference be deemed to refer to both Prime Landlord and Sublessor; (b) references in the Prime Lease to "Lessee", shall be deemed to refer to Subtenant under this Sublease including, without limitations in regard to the right to notice of, and the right to cure within a stated period of time, purported defaults hereunder; provided, however, that such right to notice and cure shall be subject to time delays inherent in the process of delivering copies of notices received by Sublessor to Subtenant, it being understood, however, that Sublessor shall use its best efforts to deliver any such notice to Subtenant by facsimile transmission or by overnight courier service (e.g., Federal Express); (c) where reference is made in the Prime Lease to "the Lease" or "this Lease", such reference shall be deemed to refer to this Sublease; (d) where reference is made in the Prime Lease to specific terms or provisions of the Prime Lease, such reference shall be deemed to be to the provisions of the Prime Lease incorporated herein; (e) references in the Prime Lease to the "term" of the Prime Lease shall be deemed to refer to the term of this Sublease; and (f) references in the Prime Lease to "Base Rent" or "rent" or "rental" shall be deemed to refer to the Rent payable under this Sublease. (2) The provisions of the Prime Lease and the provisions of Article 5b(l)(b) above notwithstanding, the only Rent to be paid by Subtenant is as provided in Article 2 of this Sublease. (3) Whenever a provision of the Prime Lease incorporated herein by reference obliges Sublessor to perform some act for the benefit of Prime Landlord, including by way of example providing insurance or indemnity or making repairs or permitting access, such provisions as incorporated herein shall oblige Subtenant to perform such act to the extent applicable to the Sublease Premises for the benefit of Prime Landlord and Sublessor. Whenever a provision of the Prime Lease incorporated herein by reference affords the Prime Landlord some right against Sublessor, such provision as incorporated herein shall afford Prime Landlord and Sublessor such right against Subtenant. (4) Whenever a provision of the Prime Lease incorporated herein by reference requires or refers to Prime Landlord's consent and approval, such provision as incorporated herein shall be deemed to require or refer to both Prime Landlord's and Sublessor's consent and approval. In such a case, Subtenant shall submit its request for consent or approval to Sublessor and Sublessor shall immediately submit such request for consent or approval to Prime Landlord. Sublessor shall notify Subtenant of Sublessor's determination to grant or deny its consent or approval within the time period, if any, set forth in the Prime Lease. (5) Whenever pursuant to a provision of the Prime Lease incorporated herein by reference Sublessor is required to take some action by a date certain or within a certain time period, Subtenant shall take such action not less than three (3) days prior to the date or time for Sublessor's performance provided that in any instance, other than scheduled or regularly recurring obligations, Subtenant shall have had at least seven (7) days' prior written notice of the date and time performance is required. Immediately upon receipt or delivery thereof, as the case may be, Sublessor shall provide Subtenant with copies of any default notices under the Prime Lease given by Sublessor or received by Sublessor. Immediately upon receipt thereof, Sublessor also shall provide Subtenant with copies of any other notices under the Prime Lease relating to the Sublease Premises received by Sublessor. (6) Paragraphs 7 and 9 of Amendment No. 1 are not incorporated into this Sublease. 6 c. Protection of Prime Lease. Subtenant shall not do suffer or ------------------------- permit any act or thing which would constitute a default under the Prime Lease or cause the Prime Lease or the rights of Sublessor as lessee thereunder to be terminated or which would cause Sublessor to become liable for any damages, costs, claims or penalties or would increase the Basic Rent or additional rent or other charges or obligations of sublessor as lessee under the Prime Lease, or would adversely affect or reduce any of Sublessor's rights or benefits under the Prime Lease. Sublessor agrees that it shall not do or cause to be done, or suffer or permit to be done, any act or thing which would constitute a default under the Prime Lease or cause the Prime Lease to be terminated. d. Indemnification. Subtenant shall indemnify and hold Sublessor --------------- harmless from and against any and all claims, actions, liabilities, losses, damages, costs, and expenses (including, without limitation, reasonable attorneys, fees) arising (1) from the use or occupancy by Subtenant of the Sublease Premises or the Building or any business conducted therein by Subtenant, or (2) from any work or thing done or any condition created by or any other act or omission of Subtenant or its employees, agents, contractors, visitors or licensees, in or about the Sublease Premises or any other part of the Building, or (3) from Subtenant's failure to perform any of the obligations imposed on it hereunder (through incorporation of the Prime Lease or otherwise) or (4) from a termination of the Prime Lease resulting from a default by Subtenant under this Sublease. Sublessor shall indemnify and hold Subtenant harmless from and against any and all claims, actions, liabilities, losses, damages, costs, and expenses (including, without limitation, reasonable attorneys' fees) suffered or incurred by Subtenant as a result of (X) the negligent or intentional (and unauthorized) act of Sublessor or (Y) Sublessor's failure to perform any of the obligations imposed on it under the Prime Lease provided such failure is unrelated to any action or omission of Subtenant or any failure by Subtenant to perform any obligations under this Sublease. e. Limitation on Prime Landlord's Obligation. Notwithstanding ----------------------------------------- anything contained in this Sublease (including any provisions of the Prime Lease which are incorporated by reference into this Sublease), Subtenant acknowledges and agrees that except as specifically provided below Sublessor shall have no obligation, liability or responsibility whatsoever to Subtenant to provide or perform any work, service, utility, repair, alteration, restoration or other obligation as such items pertain to the Sublease Premises which Prime Landlord is obliged to provide or perform pursuant to the provisions of the Prime Lease. If Prime Landlord shall default or delay in providing or performing, any such work, service, utility, repair, alteration, restoration or other obligation as such items pertain to the Sublease Premises, Sublessor's only obligations to Subtenant on account thereof shall be (1) to permit Subtenant, at its expense, to 7 prosecute an action against Prime Landlord for damages or specific performance for Subtenant's benefit in Sublessor's name, and (2) to make a good faith effort, and to reasonably cooperate with Subtenant (at Subtenant's expense) in attempting, to cause Prime Landlord to provide or perform such service or obligation. Any condition resulting from such default or delay by Prime Landlord shall not constitute an eviction, actual or constructive, of Subtenant. No such default or delay shall excuse Subtenant from the performance or observance of any of its obligations to be performed or observed under this Sublease or shall entitle Subtenant to terminate this Sublease or to any reduction in or abatement of the fixed rent or other charges provided for in this Sublease; provided, however, if Sublessor is entitled to a reduction or abatement in the rent due under the Prime Lease, then Subtenant shall be entitled to a pro-rata share of such reduction or abatement or, if less than all of the Sublease Premises are affected, then Subtenant shall be entitled to an abatement, deduction, or set- off based on the ratio of the square footage of the area of the Sublease Premises affected by such default or delay to the square footage of the Sublease Premises. In furtherance of the foregoing, to the extent permitted by law, Subtenant does hereby waive any cause of action and any right to bring an action against Sublessor by reason of any act or omission of Prime Landlord under the Prime Lease. If Subtenant shall undertake any action against Prime Landlord pursuant to clause (1) of the second (2nd) sentence of this Article 5(c), then (1) all papers, pleadings and other aspects of such action shall be subject to Sublessor's approval, not to be unreasonably withheld and (2) Sublessor may participate in such action. f. Sublessor's Obligations under the Prime Lease. Sublessor agrees --------------------------------------------- that it shall pay all amounts due and perform all obligations required of it under the Prime Lease in a timely manner. Sublessor agrees that it shall not amend, modify, terminate, or otherwise change the Prime Lease in any manner which affects Subtenant or this Sublease without first obtaining the approval of Subtenant, which approval shall not be unreasonably withheld unless the change in the Prime Lease results in a modification of the term of this Sublease or in the imposition of an increased monetary burden on Subtenant. 6. Assignment, etc. Subtenant shall not assign, mortgage or encumber --------------- this Sublease or sublet all or any part of the Sublease Premises, or permit the Sublease Premises to be used by others not in the employ of Subtenant and the Prime Landlord under the Prime Lease. 7. Fire and Other Casualty. Either party shall have the right to ----------------------- terminate this Sublease in the event of fire or other casualty which renders all or substantially all of the Sublease Premises untenantable, provided however that Subtenant shall have no right to terminate this Sublease in the case of any fire or other casualty in any way caused by Subtenant. 8 Sublessor shall have the right to terminate this Sublease in the event of the termination of the Prime Lease. 8. Miscellaneous. ------------- a. Quiet Enjoyment. Provided Subtenant complies with its covenants, --------------- duties and obligations hereunder after any applicable notice and the expiration of any applicable cure period, Sublessor period, Sublessor shall not disturb Subtenant's quiet enjoyment of the Sublease Premises, subject to the terms of this Sublease. b. Limitation of Liability. The term "Sublessor" shall refer only ----------------------- to the owner from time to time of the lessee's interest in the Prime Lease so that if Sublessor shall assign its interest in the Prime Lease, then the assignor shall be entirely freed from all obligations, covenants and duties hereunder thereafter accruing, provided that the assignee assumes the liability of Sublessor for all such obligations, covenants and duties hereunder thereafter accruing. Notwithstanding the foregoing, the assignor SIWI remain bound by the terms of this Sublease with respect to any claims arising prior to the assignment. c. Sublessor Consent or Approval. Whenever under any provision of ----------------------------- this Sublease (including any provision of the Prime Lease incorporated herein by reference) Sublessor's consent or approval is required or referred to, Sublessor may grant or deny such consent or approval arbitrarily, except in those instances in which, Pursuant to law or pursuant to a provision of this Sublease, Sublessor is required not to unreasonably withhold its consent or approval. Sublessor shall not be deemed to have unreasonably withheld its consent if Sublessor is required to obtain the consent of Prime Landlord and, despite Sublessor's good faith efforts, Prime Landlord does not give such consent. d. Sublessor Right to Cure. Except in the case of an emergency when ----------------------- no notice or cure period is applicable, if Subtenant fails to perform any of its obligations hereunder in accordance with the terms hereof and any applicable cure period has elapsed, then after notice to Subtenant Sublessor may, but shall not be obligated to, cure such failure for the account of and at the expense of Subtenant, and the amount of any costs, payments or expenses incurred by Sublessor m connection with such cure (including reasonable counsel fees) shall be deemed additional rent and payable by Subtenant on demand hereunder. e. Security Deposit. Subtenant has simultaneously herewith ---------------- delivered to Sublessor the amount of $22,108.75 to be held by Sublessor as a security deposit (the "Security 9 Deposit") for the full and faithful performance by Subtenant of all of the terms and conditions of this Sublease. The Security Deposit shall be held by Sublessor in an interest bearing account with the interest accruing thereon to be for the benefit of Subtenant. If an event of default occurs and remains uncured after notice and the expiration of the applicable cure period, if any, then Sublessor shall have the right to apply the Security Deposit (including any interest) or any portion thereof to the cost of curing the event of default and if this Sublease is terminated as a result of such event of default, to any damages that Sublessor is entitled to under this Sublease. 10 c. Signage. Subtenant, at Subtenant's sole cost and expense, shall ------- have the right to erect signage upon the Sublease Premises and to be included on the Building directory subject to the rules, guidelines, and approval of Prime Landlord. Sublessor agrees that it shall make a good faith effort to cause Prime Landlord to include Subtenant's business name in the Building directory. g. Sublessor's Warranty Regarding the Prime Lease. Sublessor ---------------------------------------------- represents and warrants that: (i) attached hereto as Exhibit A is a true, correct, and complete copy of the Prime Lease including all amendments and modifications thereof, (ii) no Event of Default has occurred under the Prime Lease, (iii) Sublessor has not, and during the term of this Sublease will not, enter into any agreements or contracts affecting the Sublease Premises that are binding on Subtenant, other than the Prime Lease; and (iv) to the best of Sublessor's knowledge the Prime Landlord is not in default under any of the terms of the Prime Lease. h. Notices, Requests, and Demands. Sublessor agrees that it shall ------------------------------ promptly provide Subtenant with copies of any notices, requests, or demands related to the Sublease Premises or the continuation of the Prime Lease that are given or received by Sublessor. i. Counterparts. This Sublease may be executed in counterparts, ------------ which taken together shall constitute a single document. j. Coterminous Lease Contingency. This Sublease shall be contingent ----------------------------- upon Subtenant entering into a conterminous lease with the Prime Landlord for approximately 16,785 square feet by May 23, 1997 (the "Lease Contingency Date"). If Subtenant has not entered into such a lease by the Lease Contingency Date, Subtenant shall have the right to terminate this Sublease by written notice to Sublessor no later than five (5) days after the Lease Contingency Date. 9. Notices. All notices to be given hereunder shall be by (i) Federal ------- Express or other nationally recognized overnight courier service, (ii) personal delivery, or (iii) certified or registered mail, return receipt requested, at the addresses set forth herein. Either party, by notice similarly given, may change the address to which future notices shall be sent. Notices given hereunder shall be effective on the date of receipt by the addressees, if delivery is refused, on the date delivery is first attempted. 10. Broker. Sublessor and Subtenant each represent and warrant to the ------ other that it has not dealt with any broker or agent other than Cushman & Wakefield and Jackson-Cross 11 Company (the "Brokers"). Subtenant and Sublessor agree to indemnify and hold the other harmless for, from and against any claims for brokerage commission with respect to this Sublease made by any broker or agent other than Brokers with whom Subtenant or Sublessor may have dealt with respect to this Sublease. The foregoing indemnification shall include the reasonable attorneys' fees of the party being indemnified. Sublessor alone shall be responsible to pay Brokers any fee or commission due in connection with this Sublease, and Sublessor shall indemnify and hold Subtenant harmless of, from, and against any claims arising out of Sublessor's failure so to do. 11. Entire Agreement. This Sublease contains the entire agreement between ---------------- the parties and this agreement shall be binding upon the parties hereto, their respective successors and permitted assigns. SUBLESSOR SUBTENANT GRANT THORNTON LLP CD NOW, INC. By /s/ illegible By /s/ Jason Olim --------------------------- ---------------------------- 12 ASSIGNMENT AND ASSUMPTION OF LEASE AND SECOND AMENDMENT TO LEASE ------------------------- AGREEMENT made as of the 31 day of May, 1996, to be effective the 1st day -- of November, 1995, among JENKINS COURT PENNSYLVANIA, L.P., successor-in-interest to JENKINS COURT ASSOCIATES LIMITED PARTNERSHIP ("Landlord"); A.G. EPSTEIN COMPANY, as tenant (referred to herein as "Tenant-Assignor"), and GRANT THORNTON, LLP (referred to herein as "Assignee"). RECITALS: --------- A. Landlord's predecessor in interest entered into a lease dated December 27, 1989 with Tenant-Assignor for Suite No. 300 in the building known as Jenkins Court, located on Old York Road in Jenkintown, Montgomery County, Pennsylvania. B. The term demised in said lease is fixed to expire on April 30, 2000 unless sooner terminated or extended pursuant to any of the terms, covenants or conditions of said lease or pursuant to law (the aforesaid lease, as modified by Amendment No. 1 to Agreement of Lease dated May 21, 1992, is referred to as the "Lease"; and the premises demised therein, together with all appurtenances, fixtures, additions and other property attached thereto or installed therein are referred to herein as the "Premises"). C. Tenant-Assignor now desires to assign its interest as Tenant under the Lease to Assignee and Assignee desires to succeed to the interest of Tenant- Assignor as Tenant under the Lease and is willing to assume the observance and performance of the obligations of Tenant under the Lease. D. Landlord is willing to consent to the proposed assignment, subject to the terms of this Agreement. TERMS AND CONDITIONS -------------------- NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree as follows: 1. Tenant-Assignor hereby assigns, transfers and sets over unto Assignee all of Tenant-Assignor's right, title and interest as the tenant under the Lease as of the date of this Agreement. 2. Assignee, for the benefit of Landlord and Tenant-Assignor, hereby agrees to assume, keep, observe and perform each and every one of the terms, covenants and conditions of the Lease on the tenant's part to be observed or performed including, but not limited to, all obligations of the Tenant under the Lease originating or accruing before the date of this Agreement, all with the same force and effect as if Assignee had executed the Lease as the tenant originally named therein. Assignee hereby agrees that the Premises will be used solely for the Permitted Use set forth in the Lease and for no other purpose or use. 3. Tenant-Assignor and Assignee represent and warrant to Landlord that the Lease and Premises are not encumbered by any prior transfer, assignment, mortgage, sublease or encumbrance of whatever nature and Tenant-Assignor and Assignee represent and warrant to Landlord that Landlord is not responsible for any broker's commission or fees with respect to this transaction and Tenant- Assignor and Assignee shall jointly and severally indemnify and hold Landlord harmless against and from any claims by any broker or other party with respect to any commissions or fees brought by any broker or any other party for this transaction. 4. To induce Landlord to consent to the assignment of the tenant's interest under the Lease by Tenant-Assignor to Assignee, the parties hereto amend the Lease as follows: (a) Sections 42 and 43 of the Lease are hereby deleted and shall have no further force or effect. (b) New subsections 12(c)(iv) and (v) are hereby added to the Lease, to read as follows: "(iv) With respect to a proposed assignment of this Lease or subletting of the entire Premises, the right to terminate this Lease on the Effective Date as if it were the scheduled expiration date of the Term (the "Expiration Date"). (v) with respect to a proposed subletting of less than the entire Premises, the right to terminate this Lease as to the portion of the Premises affected by such subletting on the Effective Date, as if it were the 2 Expiration Date, in which case Tenant shall promptly execute and deliver to Landlord an appropriate modification of this Lease in form satisfactory to Landlord in all respects." 5. Tenant-Assignor and Assignor acknowledge and agree that (i) as of the date hereof Landlord holds no security deposit under the Lease; (ii) the Term of the Lease expires on April 30, 2000, and (iii) the Rent payable under the Lease includes Annual Fixed Rent of $213,974.28, payable in monthly installments of $17,831.19, reimbursement for Special Tenant work in the amount of $2,859.24 per month and Additional Rent as defined in Article 5(b) of the Lease (currently billed in estimated monthly installments of $750.00). 6. Subject to the provisions of this Agreement, Landlord hereby consents to the foregoing assignment. Landlord's consent shall not in any way be construed to relieve Assignee from obtaining the express consent, in writing, of Landlord to any further assignment of the tenant's interest under the Lease or sublease of any portion of the Premises. 7. Tenant-Assignor, for the benefit of Landlord, (a) waives all notices of default which may be given to Assignee and all other notices of every kind or description now or hereafter provided in the Lease, by statute or rule of law, and (b) agrees that, notwithstanding the foregoing assignment and Landlord's consent thereto, Tenant-Assignor's obligations with respect to the Lease shall not be discharged, released or impaired by (i) this assignment, (ii) any amendment or modification of the Lease, whether or not the obligations of the tenant are increased thereby, (iii) any further assignment or transfer of the tenant's interest in the Lease (iv) any exercise, non-exercise, or waiver by Landlord of any right, remedy, power or privilege under or with respect to the Lease, (v) any waiver, consent, extension, indulgence or other act or omission with respect to any other obligations to the tenant under the Lease, (vi) any insolvency, bankruptcy, liquidation, reorganization, arrangement, dissolution, or similar proceeding involving or affecting Assignee or any further assignee, or (vii) any act or thing which, but for the provisions of this assignment, might be deemed a legal or equitable discharge of a surety or assignor, to all of which Tenant-Assignor hereby consents in advance, and (c) Tenant-Assignor expressly waives and surrenders any defenses as assignor which may now or hereafter exist to its liability under the Lease, it being the purpose and intent of Landlord and Tenant-Assignor that the obligations of Tenant-Assignor hereunder as assignor shall be absolute and unconditional under any and all circumstances. 8. Landlord claims that pursuant to the Lease $76,638.09 of Rent accrued through December 31, 1995 was not paid. Tenant-Assignor and Assignee dispute Landlord's calculation 3 of the accrued but unpaid Rent. To settle this dispute, upon the execution of this Agreement Tenant-Assignor or Assignee shall pay Landlord Twenty Five Thousand Dollars ($25,000) plus legal fees incurred by Landlord in connection with this transaction of $4,250.00, for a total settlement amount of $29,250.00 (the "Settlement Amount"), and Landlord shall accept the Settlement Amount in full satisfaction for the accrued but unpaid Rent due as of December 31, 1995. 9. Subject to payment of the Settlement Amount, Landlord, for the benefit of Assignee, represents that to Landlord's actual knowledge, no Event of Default exists under the Lease and no event exists which, with the giving of notice or passage of time, or both, would constitute an Event of Default under the Lease. 10. For the purposes of the Lease and this Agreement, notices shall be sent to each party at the following places: If the Landlord: Jenkins Court Pennsylvania, L.P. c/o Oaktree Capital Management, LLC 550 South Hope Street 22nd Floor Los Angeles, CA 90071 Attention: Scott Chernoff If the Assignee: Grant Thornton, LLP Suite 3100 Two Commerce Square 2001 Market Street Philadelphia, PA 19103-7080 Attention: Kenneth W. Banet All notices to be given hereunder by either party shall be written and sent by (a) registered or certified mail, return receipt requested, postage prepaid, addressed to the party intended to be notified at the address set forth above (b) Federal Express or other overnight courier, or (c) personal delivery. Either party may, at any time, or from time to time, notify the other in writing 4 of a substitute address for that above set forth, and thereafter notices shall be directed to such substitute address. Notice given as aforesaid shall be sufficient service thereof and shall be deemed given as of the earlier of (a) the date occurring three (3) business days after the date of mailing the same, or (b) the day of delivery shown on the receipt. 11. Except as expressly modified by the foregoing provisions of this Agreement, the Lease is hereby ratified and confirmed in all respects by each of the parties to this Agreement. 12. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. IN WITNESS WHEREOF, the parties hereto have set their hands and seals of the day and year first above written. Assignor: -------- A.G. EPSTEIN & CO. Witness: Melody A. Fraleck By: /s/ illegible -------------------------- -------------------------- Name: /s/ illegible ------------------------ Title: Partner ----------------------- Assignee: -------- GRANT THORNTON, LLP Witness: Melody A. Fraleck By: /s/ Kenneth W. Banet -------------------------- -------------------------- Name: Kenneth W. Banet ------------------------ Title: Partner ----------------------- 5 Landlord: -------- JENKINS COURT PENNSYLVANIA, L.P. By: JENKINS COURT PENNSYLVANIA CORPORATION By: /s/ Russel S. Bernard ----------------------------------------- Name: Russel S. Bernard --------------------------------------- Title: Senior Managing Director -------------------------------------- By: /s/ Kenneth Liang ----------------------------------------- Name: Kenneth Liang --------------------------------------- Title: Managing Director & General Counsel --------------------------------------- 6 EX-10.9 6 LEASE AGMT. /CDNOW, INC.-DELAWARE AVE. ASSOCIATES EXHIBIT 10.9 OFFICE SPACE LEASE FOR 485 DELAWARE AVENUE, FORT WASHINGTON, PENNSYLVANIA BY AND BETWEEN 485 DELAWARE AVENUE ASSOCIATES, L.P. (AS LANDLORD) AND CDNOW A PENNSYLVANIA CORPORATION (AS TENANT) Date: June 12, 1998 THIS LEASE (the "Lease") is made as of June 12, 1998 between 485 DELAWARE AVENUE ASSOCIATES, L.P., a Pennsylvania limited partnership (herein referred to as "Landlord") whose address is 1710 Walton Road, Suite 301, Blue Bell, Pennsylvania 19422 and CDNOW, a Pennsylvania corporation (herein referred to as "Tenant") whose address, prior to the Commencement Date, is Jenkins Court, Suite 300, 610 Old York Road, Jenkintown, PA 19046. PREAMBLE -------- BASIC LEASE PROVISIONS AND DEFINITIONS In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease shall have only the meanings set forth in this section, unless such meanings are expressly modified, limited or expanded elsewhere herein. 1. ADDITIONAL RENT shall mean all sums in addition to Fixed Basic Rent payable --------------- by Tenant to Landlord or to third parties pursuant to the provisions of the Lease. 2. BROKER(S) shall mean Jackson Cross Company and Kelley and Associates, Inc. --------- 3. BUILDING shall mean the building located at 485 Delaware Avenue a/k/a 1005 -------- Virginia Drive, Fort Washington, Pennsylvania, as described on Exhibit A --------- attached hereto. 4. BUILDING HOLIDAYS shall be those shown on Exhibit D. ----------------- --------- 5. RENT COMMENCEMENT DATE is the later of (i) March 1, 1999, or (ii) that date ---------------------- which is six (6) months next following the Occupancy Date, as such date may be delayed in accordance with Section 3 of the Lease. 6. DEMISED PREMISES OR PREMISES shall be approximately sixty thousand (60,000) ---------------------------- gross rentable square feet, subject to confirmation based upon Tenant's final space plan as prepared by Bergman & Associates (the "Bergman Plans"). The Premises as-built square footage shall be subject to final measurement and adjustment in accordance with 1996 BOMA Standards for multi-tenant buildings. If the actual measured square footage shall be less than that which is depicted on the Bergman Plans, the Fixed Basic Rent herein below stated shall be reduced accordingly. If the actual measured square footage shall be greater than that which is depicted on the Bergman Plans, there shall be no corresponding adjustment in the square footage of the Premises for purposess of calculating the Fixed Basic Rent or other charges, in the absence of a corresponding change order signed by Tenant increasing the size of the Premises. i the Fixed Basic Rent herein below stated shall be reduced accordingly. If the actual measured square footage shall be greater than that which is depicted on the Bergman Plans, there shall be no corresponding adjustment in the square footage of the Premises for purposess of calculating the Fixed Basic Rent or other charges, in the absence of a corresponding change order signed by Tenant increasing the size of the Premises. 7. EXHIBITS shall be the following, attached to this Lease and incorporated -------- herein and made a part hereof: Exhibit A Location of Premises Exhibit A-1 Site Plan Exhibit B Rules and Regulations Exhibit C Work Letter Exhibit D Building Holidays Exhibit E Tenant Estoppel Certificate Exhibit F Commencement Date Agreement 8. EXPIRATION DATE shall be the day before the eighty fourth (84th) calendar --------------- month next following the Rent Commencement Date. 9. FIXED BASIC RENT shall be calculated and payable as follows: ---------------- Period Rental Rate per ------ rentable square foot (net of utilities) ------------------------ 9/1/98-2/28/99 0 3/1/99-2/29/00* $18.00 3/1/00-2/28/01 $18.50 3/1/01-2/28/02 $19.00 3/1/02-2/28/03 $19.50 3/1/03-2/29/04 $20.00 3/1/04-2/28/05 $20.50 3/1/05-2/28/06 $21.00 *For the first six (6) months next following the Rent Commencement Date the Tenant shall be entitled to a credit against the Fixed Basic Rent equal to the $22,625.00 per month. Thereafter, Tenant's Fixed Basic Rent shall be based upon the final square ii footage reflected on the Bergman Plan subject to reduction as provided in Paragraph 6 above. 10. OFFICE BUILDING AREA is 86,000 gross rentable square feet. -------------------- 11. PERMITTED USE shall be general office use, data center and marketing ------------- service center and for such other use as may be permitted under applicable code. There shall be not fewer than 462 spaces located at the Property which shall be available for use by Tenant along with other tenants of the Building on a non- exclusive basis. The number of parking spaces shall be subject to final approval of Landlord's site plan by the Township but shall not be reduced by more than five percent (5%). Tenant shall be entitled to ten (10) reserved parking spaces as designated on Exhibit A-1 for use only by Tenant, its ----------- employees and invitees. 12. PROPORTIONATE SHARE shall mean the percentage calculated as a fraction the ------------------- numerator of which is the rentable area of the Premises and the denominator of which is 86,000 (being the rentable area of the Building). 13. SECURITY DEPOSIT shall mean the sum equal to One Hundred Fifty Seven ---------------- Thousand Four Hundred and 00 Dollars ($157,400.00), subject to reduction as expressed in Section 38 hereof. 14. TERM shall mean seven and one-half (7 1/2) years commencing on the ---- Occupancy Date, with two (2) five (5)- year extension options as provided in Rider A. - -------- 15. BASE YEAR COSTS shall mean the Annual Operating Costs, as set forth in --------------- Section 6(b)(i), for the calendar year ending December 31, 1999 provided, however, that if the Building is not fully occupied during all or a portion of such calendar year, in order to increase the variable Annual Operating Costs to a level corresponding to ninety-five percent (95%) occupancy, Landlord shall, in accordance with sound accounting and management practices, determine the amount of variable Annual Operating Costs (i.e., those items which vary according to occupancy levels) that would have been paid had the Building been fully occupied and the amount so determined shall be deemed to have been the amount of variable Annual Operating Costs for such calendar year and the Landlord shall make the appropriate upward adjustment to the Base Year Costs. 16. OCCUPANCY DATE shall be September 1, 1998; provided that Tenant shall not -------------- be required to accept possession of the Premises until the Landlord Work is substantially iii complete in accordance with Section 3 hereof, in which event the Occupancy Date as referred to herein shall be deemed to be the date of substantial completion if later than September 1, 1998; provided, further, that the Occupancy Date may be extended pursuant to Section 3 hereof. iv TABLE OF CONTENTS
Section Page ------- ---- 1. Definitions......................................................... 1 2. Premises............................................................ 1 3. Completion of Premises.............................................. 1 4. Term................................................................ 3 5. Use of Premises..................................................... 3 6. Rent................................................................ 3 7. Insurance........................................................... 8 8. Repairs and Maintenance............................................. 9 9. Utilities and Services.............................................. 10 10. Governmental Regulations............................................ 12 11. Signs............................................................... 13 12. Alterations, Additions and Fixtures................................. 14 13. Mechanic's Liens.................................................... 15 14. Landlord's Right of Entry........................................... 16 15. Damage by Fire or Other Casualty.................................... 17 16. Non-Abatement of Rent............................................... 18 17. Indemnification..................................................... 19 18. Condemnation........................................................ 20 19. Quiet Enjoyment..................................................... 22 20. Rules and Regulations............................................... 22 21. Assignment and Sublease............................................. 22 22. Tenant's Relocation................................................. 26 23. Subordination....................................................... 26 24. Non-Disturbance..................................................... 27 25. Curing Tenant's Defaults............................................ 27 26. Surrender........................................................... 28 27. Defaults-Remedies................................................... 29 28. Condition of Premises............................................... 33 29. Hazardous Substances................................................ 33 30. Recording........................................................... 35 31. Broker's Commission................................................. 35 32. Notices............................................................. 35 33. Irrevocable Offer, No Option........................................ 36 34. Inability to Perform................................................ 37 35. Survival............................................................ 37 36. Corporate Tenants................................................... 37 37. Waiver of Invalidity of Lease....................................... 37
i 38. Security Deposit....................................................... 37 39. Tenant Estoppel Certificate............................................ 38 40. Rights Reserved by Landlord............................................ 39 41. Miscellaneous.......................................................... 40 42. Additional Definitions................................................. 42 43. Tenant's Right of First Refusal........................................ 43 44. Tenant's Right of Expansion............................................ 44 45. Payment and Performance Under Protest.................................. 45 46. Interior Design Allowance.............................................. 45
ii For and in consideration of the covenants herein contained, and upon the terms and conditions herein set forth, Landlord and Tenant, intending to be legally bound, agree as follows: 1. DEFINITIONS. The definitions set forth in the preceding Preamble shall apply to the same capitalized terms appearing in this Lease Agreement. Additional definitions are contained in Section 42 and throughout this Lease. 2. PREMISES. Landlord hereby demises and leases the Premises to Tenant for Tenant's sole and exclusive use and Tenant hereby leases and takes the Premises from Landlord for the Term (as defined in Section 4) and upon the terms, covenants, conditions, and provisions set forth in this Lease Agreement, including the Preamble (this "Lease"). The Tenant's interest in the Premises as tenant shall include the exclusive right to use the dedicated parking spaces enumerated in the Preamble at Section 11 and shown on Exhibit A-1, the right, in ----------- common with Landlord and other occupants of the Building, to use driveways, sidewalks, loading and all remaining parking areas, lobbies, hallways and other facilities which are located within the Property (defined in Section 6) and which are designated by Landlord from time to time for the use of all of the tenants of the Building (the "Common Facilities"). Landlord shall not impose any fee or charge on Tenant's use of the parking areas or any other Common Facilities or grant any other tenant in the Building or any other person reserved or preferential rights to use the parking areas or any other Common Facility. 3. COMPLETION OF PREMISES. The Building and the Premises shall be completed in accordance with the Work Letter attached hereto as Exhibit C --------- (herein called the "Work Letter") at Landlord's expense. All necessary work shall be commenced promptly following Landlord's execution of this Lease and shall be substantially completed on the Occupancy Date set forth in the Preamble; provided, however, that the time for substantial completion of the Building and the Premises shall be extended for additional periods of time equal to the time lost by Landlord or Landlord's contractors, subcontractors or suppliers due to strikes or other labor troubles; Tenant Delay (as defined in Exhibit C); governmental restrictions and limitations; unavailability or delays - --------- in obtaining fuel, labor or materials; war or other national emergency; accidents; floods; defective materials; fire damage or other casualties; adverse weather conditions; the inability to obtain building or use and occupancy permits; or any cause similar or dissimilar to the foregoing which is beyond the reasonable control of Landlord or Landlord's contractors, subcontractors or suppliers ("Force Majeure"); provided further, 1 however, that for Landlord to claim that a Force Majeure prevented timely achievement of substantial completion (i) Landlord must provide written notice of the applicable event to Tenant within 48 hours of its occurrence, which notice shall specify the Force Majeure event and the anticipated effect on the date of substantial completion, and (ii) an actual delay in substantial completion must have occurred which but for the Force Majeure event would not have occurred. The Building and the Premises shall be deemed substantially completed when (i) all of the work and installations required to improve the Building and Premises as delineated in the Work Letter ("Landlord Work") are completed in conformity with such Work Letter (subject, in the case of the Premises Work (as defined in Exhibit C) to minor dimensional variations due to --------- construction being carried out within an existing structure and "punch list" items as described below), and the HVAC (and all building utilities) shall be in good working order and be functioning in accordance with operating standards described in the Lease or in the Work Letter but in all events and in all aspects necessary to permit Tenant to occupy and fully utilize the Building and the Premises for its intended use, and (ii) Tenant has received from Landlord all permits required for lawful use and occupancy of the Premises by the Tenant (punchlist items alone excepted). Landlord shall notify Tenant in writing approximately forty-five (45) days in advance and again not later than ten (10) days prior to the date Landlord believes it will achieve substantial completion of the Landlord's Work and will be prepared to deliver the Premises to Tenant in the condition required hereunder. Landlord shall promptly correct all work properly rejected by Tenant for failing to conform to the requirements of the Work Letter, whether or not fabricated, installed or completed and whether or not set forth on the punchlist. If within one year after the date of substantial completion of the Landlord Work any of such work is found to be not in conformity with the requirements of the Work Letter, Landlord shall correct it promptly after receipt of written notice from Tenant to do so. Landlord's obligations under the immediately preceding sentence shall survive Tenant's occupancy of the Premises upon substantial completion. Tenant shall give Landlord notice promptly after discovery of any such condition. No failure to deliver the Premises by the September 1, 1998 Occupancy Date shall in any respect affect the validity or continuance of this Lease or any obligation of Tenant hereunder or extend the Term of the Lease provided, however, that for every day of delay after September 15, 1998, Tenant shall be entitled to two (2) days abatement of Rent under this Lease in addition to the abatement period already provided in the Preamble hereto, at Paragraph 9, which rent abatement shall run for six (6) consecutive months from the date of substantial completion (the designated "Rent Commencement Date" notwithstanding), and shall be subject to extension as otherwise 2 provided in this sentence. Notwithstanding the foregoing, in the event Landlord fails to substantially complete the Landlord Work and deliver the Premises to Tenant on or before October 15, 1998, then at Tenant's option, the Occupancy Date specified in the Preamble at Paragraph 16 shall be extended to January 15, 1999. Lastly, in the event the Landlord Work is not substantially completed and delivered by Landlord to Tenant on or before November 15, 1998, the Tenant may terminate this Lease with no further obligations to Landlord and Tenant shall receive the immediate return of any monies theretofore paid by Tenant to Landlord. The aforesaid November 15, 1998 date shall be subject to extension by reason of Tenant Delay as provided in the Work Letter, but otherwise shall not be subject to delay by reason of Force Majeure. 4. TERM. The term of this Lease shall commence on the Occupancy Date or, if later, the date Landlord substantially completes the Landlord Work and delivers the Premises to Tenant in conformity with Section 3 (including, specifically, the 45 day and 10 day notices from Landlord to Tenant) above. Following the Occupancy Date or date of substantial completion, as applicable, the term of this Lease, unless sooner terminated as expressly provided in this Lease or extended pursuant to the provisions of Rider A hereto, shall continue ------- until the date of expiration of the term specified as the Term of Lease in the Preamble plus the number of days which remain in the calendar month in which such Term expires and by the number of days of abatement of Rent Tenant received due to delays in completion of the Landlord Work, if any, (the "Term"). 5. USE OF PREMISES. Tenant shall occupy the Premises throughout the Term and shall use the same for, and only for, the Permitted Use specified in the Preamble. Tenant shall not use the Premises in such ways which, in Landlord's reasonable judgment, exceed building load limits. 6. RENT. Unless otherwise specifically requested by Landlord at any time, Fixed Basic Rent, Additional Rent and any other rent or other sums due under this Lease (hereunder collectively referred to as "Rent") shall be paid and delivered to Landlord, in the amounts, time and manner more particularly provided in this Lease. a. FIXED BASIC RENT. Tenant shall pay, commencing on the Rent Commencement Date and continuing throughout the Term, Fixed Basic Rent in the amount specified in the Preamble, without notice or demand and, except as expressly provided herein, without setoff or deduction, in equal monthly installments equal to one-twelfth of the Yearly Rate (specified as Monthly Installments in the Preamble), in 3 advance, on the first day of each calendar month during the Term. If the Rent Commencement Date falls on a day other than the first day of a calendar month, the Fixed Basic Rent shall be apportioned on a per diem basis for the period between the Rent Commencement Date and the first day of the first full calendar month in the Term and such apportioned sum shall be paid on the Rent Commencement Date. b. ADDITIONAL RENT. Commencing on and as of January 1, 2000, Tenant shall pay to Landlord, as Additional Rent, in the manner more particularly set forth below, Tenant's Proportionate Share of Annual Operating Costs (as defined below) for the Property to the extent Tenant's Proportionate Share of Annual Operating Costs exceeds the Base Year costs (as adjusted pursuant to Preamble, Paragraph 15). i) ANNUAL OPERATING COSTS. Except as expressly provided in the immediately following sentence, the term "Annual Operating Costs" shall mean all actual and necessary costs Landlord incurs from owning, operating and maintaining the Building and the lot or tract of land on which it is situated (the "Property"). Annual Operating Costs shall include, by way of example rather than limitation: insurance costs, including premiums; fees; Impositions (defined below); costs for repairs, maintenance and service contracts; management fees (consistent with market rates for management fees, but not to exceed 3% of the gross rent for the Building); landscaping; snow removal; governmental permits fees; costs of compliance with governmental orders and regulations first enacted after the Occupancy Date; administrative and overhead expenses; costs of furnishing water, sewer, electricity, gas, fuel, and other utility services, for use in common areas of the Building and Property; and the cost of janitorial service and trash removal; excluding, however, from Annual --------- Operating Costs the following: costs which are treated as capital expenditures under generally accepted accounting principles (except as provided in Sections 9(d) and 10(b) below), costs incurred to cause the Premises, the Building or the Common Facilities to comply with applicable law or code (except to the extent necessitated by Tenant's particular method or manner of use (or misuse) of the Premises and except as permitted by Section 10 (b), below), Landlord warranty work; costs associated with compliance with Environmental Laws and removal and remediation of Hazardous Substances; mortgage debt or ground rents incurred by Landlord as owner of the Property; income, excess profits, corporate capital stock or franchise tax imposed or assessed upon Landlord, unless such tax or any similar tax is levied or assessed, in lieu of all or any part of any currently existing Imposition or an increase in any currently existing Imposition; leasing commissions, accountants', consultants' or attorneys' fees, 4 costs and disbursement and other expenses incurred in connection with financings, negotiations or disputes with tenants or prospective tenants or associated with the enforcement of any leases or the defense of Landlord's title to or interest in the Building in connection with any proceedings involving real property taxes other than disputes regarding tax assessment and reduction of real property taxes; costs of construction of the Building and related facilities and correction of defects in construction of the Building (including permit, license and inspection fees); costs of any items or services sold or provided to tenants (including Tenant) for which Landlord is entitled to be reimbursed by such tenants or which are not generally provided to all tenants of the Building; fees and higher interest charges caused by Landlord's refinancing the Building; all repairs to the roof during the term of the roof warranty and all repairs to the Building of a structural nature (not made necessary by unusual use by Tenant); costs incurred due to violation by Landlord or any tenant of the terms and conditions of any lease; overhead and profit increment paid to subsidiaries or affiliates of Landlord, or to any party as a result of a noncompetitive selection process, for management or other services on or to the Building or for supplies or other materials, to the extent that the costs of such services, supplies or materials exceed the costs that would have been paid had the services, supplies or materials been provided by unaffiliated parties on a competitive basis; general overhead and administrative expenses except salaries of on-site property manager, management secretary and maintenance man; any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord, rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be for a capital nature, except equipment which is used in providing janitorial services and which is not affixed to the Building; all items and services for which Tenant reimburses Landlord or pays third persons or which Landlord provides selectively to one or more tenants or occupants of the Building (other than Tenant) without reimbursement; commissions, advertising, and promotional expenditures; costs incurred in managing or operating any parking facilities; nor any other expense which under generally accepted accounting principles and practice would not be considered a normal maintenance or repair expense. "Impositions" shall mean all levies, taxes, assessments, charges, imposts, and burdens, of whatever kind and nature, ordinary and extraordinary, which are assessed or imposed during the Term by any federal, state or municipal government or public authority or under any law, ordinance or regulation thereof or pursuant to any recorded covenants or agreements upon or with respect to the Property or any part thereof, any improvements thereto, any personal property necessary to the operation thereof and owned by Landlord or this Lease. 5 ii) ANNUAL OPERATING COSTS - EXPENSE STATEMENT AND RECONCILIATION. Commencing on January 1, 2000 and with respect to each remaining calendar year of the Term (and any renewals or extensions thereof) there shall accrue, as Additional Rent payable hereunder, an amount equal to the product of Tenant's Proportionate Share and the amount, if any, by which the Annual Operating Costs for such year (appropriately pro-rated for any partial calendar year included within the beginning or end of the Term) exceed the Base Year Costs, adjusted pursuant to Preamble, Paragraph 15. (1) Landlord shall submit to Tenant a statement as soon as reasonably possible after the beginning of each calendar year of the Term, but not later than April 1 of each calendar year of the Term commencing April 1, 2000, the following: (a) a statement setting forth (i) the Annual Operating Costs for the previous calendar year of the Term and effective April 1, 2001 (ii) a calculation of Tenant's Proportionate Share of the Annual Operating Costs for the previous calendar year (the "Expense Statement") which shall equal zero for the 1999 calendar year; and (b) a statement setting forth (i) Landlord's good faith estimate of the Annual Operating Costs for the current calendar year and (ii) a calculation of Tenant's Proportionate Share of the Annual Operating Costs for the current calendar year ("Tenant's Estimated Share"). (2) Beginning with the next installment of Fixed Basic Rent due after the delivery of the aforesaid statements to Tenant, Tenant shall pay to Landlord, on account of its Proportionate Share of the Annual Operating Costs, the following: (a) a sum equal to the product of one-twelfth (1/12) of Tenant's Estimated Share and the number of calendar months elapsed during the current calendar year up to and including the month payment is made, plus any amounts due from Tenant to Landlord on account of Annual Operating Costs for any prior period(s) of time, less (b) a sum equal to the amount, if any, by which the sum of all payments made by Tenant to Landlord on account of Annual Operating Costs for the previous calendar year exceed those actually specified in the Expense Statement. 6 (3) On the first day of each succeeding calendar month until such time as Tenant receives a new Expense Statement and statement of Tenant's Estimated Share, Tenant shall pay to Landlord, on account of its Proportionate Share of Annual Operating Costs, one-twelfth (1/12) of the then current Tenant's Estimated Share. Any payment due from Tenant to Landlord, or any refund due from Landlord to Tenant, on account of Annual Operating Costs not yet determined as of the expiration of the Term shall be made within thirty (30) days after submission to Tenant of the next Expense Statement. c) DISPUTES. Unless Tenant, within one hundred eighty (180) days after the Expense Statement is furnished, shall give notice to Landlord that Tenant disputes said statement, specifying in detail the basis for such dispute, each statement furnished to Tenant by Landlord under any provision of this Section shall be conclusively binding upon Landlord and Tenant as to the particular Additional Rent due from Tenant for the period represented thereby. Tenant shall have the right at reasonable times to examine the records used in making the aforestated determinations, upon written notice in advance; provided, however, such disputed amount shall have been paid by Tenant to Landlord. In the event any such examination shall reveal an adverse variance in excess of 5% of the total operating expenses of which Tenant is required to pay its Proportionate Share, Landlord shall reimburse Tenant for the reasonable cost of such examination within thirty (30) days after demand plus the total amount of any variance. Tenant shall make all payments of Additional Rent without delay and regardless of any pending dispute over the amount of Additional Rent that is due in accordance with the statements furnished by Landlord. Landlord shall have the right to retain Tenant's security deposit, if any, until all Additional Rent payable by Tenant is determined and paid. d) INDEPENDENT COVENANT; SURVIVAL. Tenant's covenant to pay Rent is independent of any other covenant, agreement, term or condition of this Lease. Without limitation of any obligation of Tenant under this Lease which shall survive the expiration of the Term, the obligation of Tenant to pay Rent shall survive the expiration of the Term. 7 7. INSURANCE. a) LIABILITY. Tenant, at Tenant's sole cost and expense, shall maintain and keep insurance in effect throughout the Term against liability for bodily injury (including death) and property damage in or about the Premises or the Property under a policy of comprehensive general public liability insurance, with such limits as to each as may be reasonably required by Landlord from time to time, but not less than $1,000,000.00 for each occurrence and $2,000,000.00 in the annual aggregate for bodily injury (including death) to more than one (1) person, and $1,000,000.00 for property damage. The policies of comprehensive general public liability insurance shall name Landlord (and if requested, any mortgagee of Landlord) as additional insured parties. Each such policy shall provide that it shall not be cancelable without at least ten (10)) days prior written notice to Landlord and to any mortgagee named in an endorsement thereto and shall be issued by an insurer and in a form satisfactory to Landlord. At least ten (10) days prior to the Occupancy Date, and thereafter upon Landlord's request, a certificate of insurance shall be delivered to Landlord proving compliance with the foregoing requirements. If Tenant shall fail, refuse or neglect to obtain or to maintain any insurance that it is required to provide or to furnish Landlord with satisfactory evidence of coverage on any such policy upon demand, Landlord, after three (3) days prior written notice to Tenant, shall have the right to purchase such insurance. All payments made by Landlord for such insurance shall be recoverable by Landlord from Tenant, together with interest thereon, as Additional Rent promptly upon demand. Notwithstanding anything contained herein to the contrary, Tenant may self-insure all or any portion of its personal property situated within the Premises against property damage and destruction. b) MUTUAL WAIVER OF SUBROGATION. Any provision of this Lease to the contrary notwithstanding, Landlord and Tenant hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise (a) from any and all liability for any loss or damage to the property of the releasing party, (b) for any loss or damage that may result, directly or indirectly, from the loss or damage to such property (including rental value and business interruption), and (c) from legal liability for any loss or damage to property (no matter who the owner of the property may be), all to the extent that the releasing party's loss or damage is insured or, if not insured, was insurable under commercially available "all risk" property insurance policies, including additional coverages typically obtained by owners and tenants of comparable office buildings in the vicinity of the Building, even if such loss or damage or legal liability shall be caused by or result from the fault or 8 negligence of the other party or anyone for whom such party may be responsible and even if the releasing party is self insured in whole or in part or the amount of the releasing party's insurance is inadequate to cover the loss or damage or legal liability. It is the intention of the parties that Landlord and Tenant shall look solely to their respective insurance carries for recovery against any such property loss or damage or legal liability, without such insurance carriers having any rights of subrogation against the other party. c) INCREASE OF PREMIUMS. Tenant will not do anything or fail to do anything or permit anything to be done (which is within Tenant's control) which will cause the cost of Landlord's insurance to increase or which will prevent Landlord from procuring insurance (including but not limited to public liability insurance) from companies, and in a form, satisfactory to Landlord. If any breach of this subsection (c) by Tenant shall cause the rate of fire or other insurance to be increased, Tenant shall pay the amount of such increase as Additional Rent promptly upon demand. If any other tenant of the Building does anything or fails to do anything or permits any thing to be done (which is within such tenant's control) which causes the cost of insurance for Tenant to increase, then Tenant shall be entitled to reimbursement either directly from such tenant or from the Landlord for the additional costs incurred by Tenant. If Tenant does anything or fails to do anything or permits anything to be done which is within its control for which insurance cannot be obtained, Landlord may terminate this Lease upon written notice to Tenant. Notwithstanding the foregoing, Tenant shall not be in default of its obligations expressed in the Section unless Tenant has been furnished with written notice regarding the requirements of Landlord's insurers, shall have been notified of any violation or of non-compliance with such requirements and shall have failed to take and accomplish corrective action within thirty (30) days of receipt of such notice. Landlord acknowledges that as of Occupancy Date the Permitted Use will not violate Section 7(c) of this Lease. 8. REPAIRS AND MAINTENANCE. a) Tenant shall, throughout the Term and at Tenant's sole cost and expense, keep and maintain the Premises in a neat and orderly condition; and, upon expiration of the Term, Tenant shall leave the Premises in good order and condition, ordinary wear and tear, damage by fire or other casualty and repairs and improvements which are the responsibility of the Landlord alone excepted, and for that purpose and except as stated, Tenant will make all necessary repairs and replacements to the Premises 9 not otherwise the responsibility of Landlord hereunder. Tenant shall not permit any waste, damage or injury to the Premises. Tenant shall not use or permit the use of any portion of the Common Facilities for other than their intended use as specified by the Landlord from time to time. b) Landlord shall, throughout the Term, make all necessary repairs and replacements to the mechanical, electrical, HVAC, plumbing and other systems serving the Premises, the roof, the exterior elements and structural elements of the Premises, the parking areas, and all other improvements located on the Property in a reasonably prompt fashion; provided, however, that Landlord shall have no responsibility to make any repairs unless and until Landlord receives written notice of the need for such repair. Landlord shall keep and maintain all Common Facilities and access ways adjoining the Property in a clean and orderly condition, free of accumulation of dirt and rubbish and snow and ice, and shall keep and maintain all landscaped areas within the Property in a neat and orderly condition. Landlord's obligations under this Section 8(b) shall be undertaken and prosecuted in a manner consistent with other class A suburban office buildings in the greater Philadelphia metropolitan area. c) Notwithstanding the foregoing, except as expressly provided in Section 7(b), repairs and replacements to the Premises and the Property arising out of or caused by Tenant's use, manner of use or occupancy of the Premises (other than normal wear and tear), by Tenant's installation of alterations, additions, improvements, trade fixtures or equipment in or upon the Premises or by any act or omission of Tenant or any employee, agent, contractor or invitee of Tenant shall be made at Tenant's sole cost and expense and Tenant shall pay Landlord the actual cost of any such repair or replacement, as Additional Rent, upon demand. 9. UTILITIES AND SERVICES. a) Landlord shall furnish the Premises with electricity, heating and air conditioning (as specified in the Work Letter attached as Exhibit C) --------- for the normal use and occupancy of the Premises as general offices to provide interior conditions of 74 degrees dry bulb when the outside conditions are 95 degrees dry bulb for summer and 70 degrees dry bulb when the outside conditions are 8 degrees dry bulb for winter, twenty-four (24) hours per day, three hundred sixty five (365) days a year during the Term. The Building air conditioning system will provide fresh air in a quantity not less than .20 cubic feet per minute per square foot of floor area. Commencing on the Occupancy Date 10 and continuing throughout the Term, Tenant agrees to pay as Additional Rent all charges for electricity, light, or other utility used by Tenant at the Premises based upon its metered usage. Tenant shall pay its Proportionate Share of any utility charges covering the Demised Premises and the common areas of the Building which are not separately metered. Tenant shall pay all bills for separately metered utility usage by the due date thereof. Any non-payment of such utility bills shall be deemed a default under the terms of this Lease. All charges for installation of any necessary meters shall be paid for by the Landlord. All charges for installation and repairs of any meters servicing the Premises shall be payable by Landlord. If Tenant shall require electricity or install electrical equipment using current in excess of 110 volts or which will in any way increase the amount of electricity furnished by Landlord for general office use (including but not limited to electrical heating or refrigeration equipment or electronic data processing machines), Tenant will obtain prior written approval from Landlord and will pay, as Additional Rent, for the resulting additional direct expense to Landlord. Landlord's obligations under this Section 9(a) shall be undertaken and prosecuted in a manner consistent with other class A suburban office buildings in the greater Philadelphia metropolitan area. b) Within the common areas of the Building and consistent with sound management practices of class A suburban office buildings in the greater Philadelphia metropolitan area, Landlord shall furnish twenty-four (24) hours per day, three hundred sixty five (365) days a year during the Term, reasonably: (i) adequate electricity, (ii) hot and cold water, (iii) lavatory supplies, (iv) automatically operated elevator service, (v) normal and customary cleaning services (on a five-day a week basis, except on Building Holidays) after business hours, (vi) heat and air conditioning in season, (vii) landscaping, (viii) parking lot maintenance, (ix) common area maintenance, (x) snow removal and (xi) replacement of light bulbs. Tenant shall be responsible for its Proportionate Share of such services in accordance with Section 6(b) hereof. Landlord shall provide janitorial service to the Premises, five days per week except on Building Holidays, after regular business hours, and the costs of such service will be passed through to Tenant as set forth in Section 6. Notwithstanding the foregoing, upon thirty (30) days prior written notice to Landlord, Tenant may undertake the janitorial service for the Premises, and, so long as Tenant is the only tenant in the Building, Tenant shall be permitted to undertake other services otherwise designated to be the responsibility of the Landlord, upon thirty (30) days prior written notice. In the event Tenant elects to undertake any such service, Tenant's Proportionate Share of Annual Operating Costs and the Base Year Costs shall 11 be adjusted accordingly. Landlord shall be permitted, upon written notice to Tenant, to perform these services should Landlord be determined in its reasonable discretion that such services are not being adequately performed. c) Landlord shall not be liable for any damages to Tenant resulting from the quality, quantity, failure, unavailability or disruption of any services unless (i) directly caused by the negligence of Landlord, its representatives or agents or (ii) directly caused by the failure to satisfy the design or construction standards established in this Lease or the Work Letter and, subject to such qualification, the same shall not constitute a termination of this Lease or an actual or constructive eviction or entitle Tenant to an abatement of rent. Landlord shall not be responsible for providing any services not specifically provided for in this Lease. Notwithstanding the foregoing, in the event that Landlord is unable or fails to provide the services described or referenced in this Section 9 and such failure (a "Basic Service Failure") continues for a period in excess of three (3) consecutive days, Tenant shall receive a full abatement of Rent, retroactive back to the first day of such failure, due under this Lease until such Basic Service is restored. d) Tenant shall pay its Proportionate Share of the cost of capital improvements which Landlord shall install or construct after Tenant's written approval for energy saving devices. Tenant's pro rata share shall be determined based upon the estimated life of the capital investment item, determined by Landlord in accordance with generally accepted accounting principles, and shall include a cost of capital funds adjustment equal to ten percent (10%) per year on the unamortized portion of all such costs. Tenant shall only have to pay its Proportionate Share of the portion of the useful life of the capital improvement which falls within the Term. Tenant shall thus make payments in equal annual installments for such capital improvements until the Term expires or until the cost of the improvement has been fully paid for, whichever first occurs; such payments shall be computed by Landlord at the time of installation of the capital improvement in the same manner as Landlord makes computations of Tenant's share of the annual operating costs pursuant to Section 6(b)(ii). 10. GOVERNMENTAL REGULATIONS. a) Landlord and Tenant shall comply with all laws, ordinances, notices, orders, rules, regulations and requirements of all federal, state and municipal government or any department, commission, board of officer thereof, or of the National Board of Fire 12 Underwriters or any other body exercising similar functions, relating to the Premises or to the use or manner of use of the Property. Tenant shall not knowingly do or commit, or suffer to be done or committed anywhere in the Building, any act or thing contrary to any of the laws, ordinances, regulations and requirements referred to in this Section. Tenant shall give Landlord prompt written notice of any accident in the Premises and of any breakage, defect or failure in any of the systems or equipment servicing the Premises or any portion of the Premises. b) Tenant shall pay its Proportionate Share of the cost of capital improvements which Landlord shall install or construct in compliance with governmental requirements which first take effect after the Occupancy Date. Tenant's pro rata share shall be determined based upon the estimated life of the capital investment item, determined by Landlord in accordance with generally accepted accounting principles, and shall include a cost of capital funds adjustment equal to ten percent (10%) per year on the unamortized portion of all such costs. Tenant shall only have to pay its pro rata share of the portion of the useful life of the capital improvement which falls within the Term. Tenant shall thus make payments in equal annual installments for such capital improvements until the Term expires or until the cost of the improvement has been fully paid for, whichever first occurs. c) Landlord represents and warrants, that as of the Occupancy Date and except as set forth in the Report (as defined below), the Premises and the Building comply with all applicable laws, regulations and requirements of all federal state and municipal governments having jurisdiction thereof. 11. SIGNS. Tenant shall be entitled , at its sole cost and expenses, to place a sign on the roof line of the Building and monument sign at the entrance to the Property, provided such signs comply with all Fort Washington Township and other applicable governmental rules, regulations, ordinances or other statutes. Tenant shall be solely responsible for all costs and expenses associated with the erection of any signs upon the Premises and shall be obligated to obtain and provide to Landlord any and all necessary permits prior to the placement or erection of such signs and to comply with all other terms and conditions of this Lease. Tenant shall also be permitted to place, at its sole cost and expense, its name and logo on the directory in the lobby of the Building. 13 12. ALTERATIONS, ADDITIONS AND FIXTURES. a) Tenant shall have the right to install in the Premises any trade fixtures; provided, however, that no such installation and no removal thereof shall be permitted which affects any structural component of the Building or Premises and that Tenant shall repair and restore any damage or injury to the Premises or the Property caused by installation or removal. b) Following the Occupancy Date, Tenant shall not make or permit to be made any alterations, improvements or additions to the Premises or Property without on each occasion first presenting plans and specifications to Landlord and obtaining Landlord's prior written consent, which shall not be unreasonably withheld or delayed and shall be communicated to Tenant by Landlord within ten (10) business days after Landlord's receipt of Tenant's proposed plans and specifications. Notwithstanding the foregoing, Landlord's consent may be conditioned upon compliance with reasonable requirements of Landlord including, without limitation, the filing of mechanics' lien waivers by Tenant's contractors and the submission of written evidence of adequate insurance coverage naming Landlord as an additional insured thereunder. If Landlord consents to any proposed alterations, improvements or additions or Tenant's contractor performs any of the work identified in Section 3 of this Lease Agreement, then Tenant shall make the proposed alterations, improvements and additions at Tenant's sole cost and expense provided that: (i) Tenant supplies any necessary permits; (ii) such alterations and improvements do not, in Landlord's reasonable judgment, impair the structural strength of the Building or any other improvements or reduce the value of the Property; (iii) Tenant takes or causes to be taken all steps that are otherwise required by Section 13 of this Lease and that are required or permitted by law in order to avoid the imposition of any mechanic's, laborer's or materialman's lien upon the Premises or the Property; (iv) the alterations, improvements or additions shall be installed in accordance with the approved plans and specifications and completed according to a construction schedule submitted by Tenant and approved by Landlord which approval shall not be unreasonably withheld; and (v) Tenant provides insurance of the types and coverage amounts required by Landlord. Any and all alterations, improvements and additions to the Premises which are constructed, installed or otherwise made by Tenant shall be the property of Tenant until the expiration or sooner termination of this Lease; at that time all such alterations and additions shall remain on the Premises and become the property of Landlord without payment by Landlord unless, upon the termination of this Lease, Tenant elects, at its sole 14 discretion to remove the same in which event Tenant will remove such alterations, improvements and additions, and repair and restore any damage to the Property caused by the installation or removal. Notwithstanding the foregoing, Tenant shall not be required to obtain the prior written consent of Landlord to perform alterations to the interior of the Premises that are non- structural and normal for office use if the total cost of such work in any single instance shall be less than $50,000.00, provided, however, Tenant shall provide written notice thereof to Landlord and Tenant shall provide plans of such alterations to Landlord for its records if Tenant produced plans in connection with the construction of such alterations. Notwithstanding anything to the contrary contained in this Lease, Landlord may withhold its approval to any proposed alterations, additions or improvements to the Premises in its reasonable discretion with respect to any such alteration, addition or improvement which Landlord determines involves any modification to the Building's exterior or its structural, electrical, mechanical or plumbing systems, or any components thereof in a manner which detrimentally affects the Property. 13. MECHANIC'S LIENS. Except with respect to the Landlord Work, Tenant shall promptly pay any contractors and materialmen who supply labor, work or materials to Tenant at the Premises or the Property so as to minimize the possibility of a lien attaching to the Premises or the Property. Tenant shall take all steps permitted by law in order to avoid the imposition of any mechanic's, laborer's or materialman's lien upon the Premises or the Property. Should any such lien or notice of lien be filed for work performed for Tenant other than by Landlord, Tenant shall cause such lien or notice of lien to be discharged of record by payment, deposit, bond or otherwise within thirty (30) days after the filing thereof or after Tenant's receipt of written notice thereof, whichever is later, regardless of the validity of such lien or claim. If Tenant shall fail to cause such lien or claim to be discharged and removed from record within such thirty (30) day period, then, without obligation to investigate the validity thereof and in addition to any other right or remedy Landlord may have, Landlord may, but shall not be obligated to, contest the lien or claim or discharge it by payment, deposit, bond or otherwise; and Landlord shall be entitled to compel the prosecution of an action for the foreclosure of such lien by the lienor and to pay the amount of the judgment in favor of the lienor with interest and costs. Any amounts so paid by Landlord and all costs and expenses including, without limitation, attorneys' fees incurred by Landlord in connection therewith, together with interest at a rate of twelve percent (12%) per annum from the respective dates of Landlord's making such payment or incurring such cost or expense, which shall 15 constitute Additional Rent payable hereunder promptly upon demand therefor. Nothing in this Lease is intended to authorize Tenant to do or cause any work or labor to be done or any materials to be supplied for the account of Landlord, all of the same to be solely for Tenant's account and at Tenant's risk and expense. Further, notwithstanding anything to the contrary contained in this Lease, nothing contained in or contemplated by this Lease shall be deemed or construed in any way to constitute the consent or request by Landlord for the performance of any work or services or the furnishing of any materials for which any lien could be filed against the Premises or the Building or the Property or any part of any thereof, nor as giving Tenant any right, power or authority to contract or permit the performance of any work or services or the furnishing of any materials for which any lien could be filed against the Premises, the Building, the Property or any part of any thereof. Throughout this Lease the term "mechanic's lien" is used to include any lien, encumbrance or charge levied or imposed upon the Premises or the Property or any interest therein or income therefrom on account of any mechanic's, laborer's or materialman's lien or arising out of any debt or liability to or any claim or demand of any contractor, mechanic, supplier, materialman or laborer and shall include without limitation any mechanic's notice of intention given to Landlord or Tenant, any stop order given to Landlord or Tenant, any notice of refusal to pay naming Landlord or Tenant and any injunctive or equitable action brought by any person entitled to any mechanic's lien. 14. LANDLORD'S RIGHT OF ENTRY. a) Tenant shall permit Landlord and the authorized representatives of Landlord and of any mortgagee or any prospective mortgagee to enter the Premises at all reasonable times, with forty eight (48) hour prior notice (except in the case of emergency) to Tenant and at a mutually agreeable time (except in the instance of an emergency, as aforesaid), for the purpose of (i) inspecting the Premises or (ii) making any necessary repairs to the Premises or to the Building and performing any work therein. During the progress of any work on the Premises or the Building, Landlord will take all reasonable measures not to inconvenience Tenant, but shall not be liable for inconvenience, annoyance, disturbance, loss of business or other damage to Tenant by reason of making any repair or by bringing or storing materials, supplies, tools and equipment in the Premises during the performance of any work, and the obligations of Tenant under this Lease shall not be thereby affected in any manner whatsoever. b) Landlord shall have the right at all reasonable times to, with twenty four (24) hours prior notice to Tenant and at a mutually agreeable time, enter and to 16 exhibit the Premises for the purpose of inspection or showing the Premises in connection with a sale or mortgage and, during the last nine (9) months of the Term, to enter upon and to exhibit the Premises to any prospective tenant. 15. DAMAGE BY FIRE OR OTHER CASUALTY. a) If the Premises or Building is damaged or destroyed by fire or other casualty, Tenant shall promptly notify Landlord whereupon Landlord shall, subject to the consent of Landlord's present or future mortgagee and to the conditions set forth in this Section 15, repair, rebuild or replace such damage and restore the Building and the Premises to substantially the same condition as they were in immediately prior to such damage or destruction. Within thirty (30) days of such casualty, Landlord shall determine whether such damage can be repaired within one hundred eighty (180) days after such casualty and shall give Tenant notice of such determination. Notwithstanding the foregoing, if the Premises is destroyed or damaged to the extent that the Building and the Premises cannot reasonably be repaired or restored within one hundred eighty (180) days after such casualty, Landlord or Tenant may terminate this Lease by written notice to the other within thirty (30) days after the date of Landlord's Notice. b) Unless the Lease is terminated as aforesaid, the repair, rebuilding or replacement work shall be commenced promptly and completed within one hundred eighty (180) days after the date of Landlord's notice. In the event such repair, rebuilding or replacement work is not completed within two hundred ten (210) days after the date of casualty, then Tenant shall be permitted to terminate this Lease upon three (3) days prior written notice to Landlord, in which event Tenant shall receive the prompt return of its Security Deposit (to the extent not theretofore returned to Tenant), with accrued interest.. c) The net amount of any insurance proceeds recovered by reason of the damage or destruction of the Building (meaning the gross insurance proceeds excluding proceeds received pursuant to a rental coverage endorsement and the cost of adjusting the insurance claim and collecting the insurance proceeds) shall be applied towards the cost of restoration. Notwithstanding anything to the contrary in this Lease Agreement, if the net insurance proceeds will not be adequate to complete such restoration, Landlord shall have the right to terminate this Lease and all the unaccrued obligations of the parties hereto by sending a written notice of such termination to Tenant specifying a termination date no less then ten (10) days after its transmission if Tenant is not in possession of the Premises at the time of such notice or not less than one hundred twenty (120) days after 17 its transmission if Tenant remains in possession of all or a portion of the Premises at the time of such notice; provided, however, that Tenant may require Landlord, except during the last two (2) years of the Term, to withdraw the notice of termination by agreeing to pay the cost of restoration in excess of the net insurance proceeds. If the net insurance proceeds are more than adequate, the amount by which the net insurance proceeds exceed the cost of restoration will be retained by Landlord or applied to repayment of any mortgage secured by the Premises. d) Landlord's obligation or election to restore the Premises under this Section shall be subject to the terms of any present or future mortgage affecting the Premises and to the mortgagee's consent if required in the mortgage and shall not, in any event, include the repair, restoration or replacement of the fixtures, improvements, alterations, furniture or any other property owned, installed, made by, or in the possession of Tenant unless coverage therefor is provided in the claim adjustment. e) Landlord shall maintain insurance against loss or damage to the Building by fire and such other casualties in an amount equal to or greater than the replacement cost of the Building as may be included within fire and extended coverage insurance or all-risk insurance, together with a rental coverage endorsement or other comparable form of coverage. If Tenant is dispossessed of the Premises due to fire or other casualty, Tenant will receive an abatement of its Fixed Basic Rent and Additional Rent and any other rent or payment which may be due hereunder during the period from the date of the casualty to the date possession it redelivered to Tenant following reconstruction. 16. NON-ABATEMENT OF RENT. Except as otherwise expressly provided in Subsection 9(c), Subsection 15(e) and as to condemnation in subsections 18(a) and (b) there shall be no abatement or reduction of the Fixed Basic Rent, Additional Rent or other sums payable hereunder for any cause whatsoever and this Lease shall not terminate, nor shall Tenant be entitled to surrender the Premises, in the event of fire, casualty or condemnation or any default by Landlord under this Lease. 18 17. INDEMNIFICATION a) Unless such loss, costs or damages were caused by negligence or willful act of Landlord, its employees, agents or contractors, Tenant hereby agrees to indemnify, defend and hold the Landlord and its employees, agents and contractors harmless from any loss, costs and damages (including reasonable attorney's fees and costs) suffered by Landlord, its agents, employees or contractors, as a result of any claim by a third party, its agents, employees or contractors arising from Tenant's occupancy of the Premises. Tenant shall have the right to designate counsel acceptable to Landlord, such approval not be unreasonably withheld, to assume the defense of any such third party claim on behalf of itself and Landlord. Tenant shall not have the right to settle any claim arising under this Section without the consent of Landlord which shall not be unreasonably withheld. This indemnity shall survive the expiration of termination of this Lease. b) If Landlord brings any action under this Lease Agreement, Tenant agrees in each case to pay Landlord's reasonable attorney's fees and other costs and expenses incurred by Landlord in connection therewith; provided, however, the Landlord prevails in such action. c) Unless such loss, costs or damages were caused by negligence or willful act of Tenant, its employees, agents or contractors, Landlord hereby agrees to indemnify, defend and hold the Tenant and its employees, agents and contractors harmless from any loss, costs and damages (including reasonable attorney's fees and costs) suffered by Tenant, its agents, employees or contractors, as a result of any claim by a third party, its agents, employees or contractors arising from the operation of the Building and Property by Landlord or its agents, servants, employees or business invitees. Landlord shall have the right to designate counsel acceptable to Tenant, such approval not to be unreasonably withheld, to assume the defense of any such third party claim on behalf of itself and Tenant. Landlord shall not have the right to settle any claim arising under this Section without the consent of Tenant which shall not be unreasonably withheld. This indemnity shall survive the expiration or termination of this Lease. d) If Tenant brings any action under this Lease Agreement, Landlord agrees in each case to pay Tenant's reasonable attorney's fees and other costs and 19 expenses incurred by Tenant in connection therewith; provided, however, the Tenant prevails in such action. e) All indemnity obligations of Landlord and Tenant arising under this Lease, and all claims, demands, damages and losses assertable by Landlord and Tenant against the other in any suit or cause of action arising out of or relating to this Lease, the Premises or the Building, or the use and occupancy thereof, are limited as follows: (i) By the releases and waivers expressed herein, including, without limitation, the mutual releases and waivers of rights set forth in Section 7(b); (ii) All claims for indemnification and other recoveries shall be limited to direct, proximately caused damages and exclude all consequential or indirect damages, including, but not limited to, business loss or interruption, suffered by the party asserting the claim or seeking the recovery; and (iii) In the event that Landlord and Tenant (or the persons for whom they are liable as expressly set forth herein) are determined to be contributorily responsible for the indemnified injury or loss, each indemnitor's obligation is limited to the indemnitor's equitable share of the losses, costs or expenses to be indemnified against based on the relative culpability of each indemnifying person whose negligence or willful acts or omissions contributed to the injury or loss. 18. CONDEMNATION. a) TERMINATION. If (i) all of the Premises are covered by a condemnation; or (ii) any of the Premises is covered by a condemnation and the remaining part is insufficient for the reasonable operation therein of Tenant's business; or (iii) subject to the provisions of subsection 18(b)(i) hereof, any of the Property is covered by a condemnation and the condemnation proceeds are insufficient to restore the remainder of the Property; then, in any such event, this Lease shall terminate and all obligations hereunder shall cease as of the date upon which possession is required by the condemnor. Upon such termination the Fixed Basic Rent and all Additional Rent herein reserved shall be apportioned and paid in full by Tenant to Landlord to that date and all such rent prepaid for periods beyond that date shall forthwith be repaid by Landlord to Tenant. 20 b) PARTIAL CONDEMNATION. i) If there is a partial condemnation and Landlord decides to terminate pursuant to subsection 18(a)(iii) hereof then Tenant may require Landlord, except during the last two (2) years of the Term, to withdraw its notice of termination by: [A] giving Landlord written notice thereof within ten (10) days from transmission of Landlord's notice to Tenant of Landlord's intention to terminate, [B] agreeing to pay the cost of restoration in excess of the condemnation proceeds reduced by those out of pocket costs reasonably expended by Landlord in collecting the condemnation proceeds, and [C] giving Landlord adequate security for such payment within such ten (10) day period. ii) If there is a partial condemnation and this Lease has not been terminated pursuant to subsection (a) hereof, Landlord shall restore the Building and the improvements which are part of the Premises to a condition and size as nearly comparable as reasonably possible to the condition and size thereof immediately prior to the date upon which possession shall have been taken by the condemnor. If the condemnation proceeds are adequate to cover the cost of restoration and the Landlord's expenses in collecting the condemnation proceeds, any excess proceeds shall be retained by Landlord or applied to repayment of any mortgage secured by the Premises. iii) If there is a partial condemnation and this Lease has not been terminated by the date upon which the condemnor requires possession, the obligations of Landlord and Tenant under this Lease shall be unaffected by such condemnation except that there shall be an equitable abatement for the balance of the Term of the Fixed Basic Rent according to the value of the Premises before and after the date upon which the condemnor takes possession. In the event that the parties are unable to agree upon the amount of such abatement, either party may submit the issue to arbitration. c) AWARD. In the event of a condemnation affecting Tenant, Tenant shall have the right to make a claim against the condemnor for removal expenses and moving expenses, the unamortized costs of Tenant leasehold improvements, if any, loss of business and any other claims Tenant may have; provided and to the extent, however, that such claims or payments do not reduce the sums otherwise payable by the condemnor to Landlord. Except as aforesaid, Tenant hereby waives all claims against Landlord and against the condemnor, and Tenant hereby assigns to Landlord all claims against the condemnor including, without limitation, all claims for leasehold damages and diminution in value of Tenant's leasehold interest. 21 d) TEMPORARY TAKING. If the condemnor should take only the right to possession for a fixed period of time or for the duration of an emergency or other temporary condition then, notwithstanding anything hereinabove provided, this Lease shall continue in full force and effect without any abatement of rent, but the amounts payable by the condemnor with respect to any period of time prior to the expiration or sooner termination of this Lease shall be paid by the condemnor to Landlord and the condemnor shall be considered a subtenant of Tenant. Landlord shall apply the amount received from the condemnor applicable to the rent due hereunder, net of costs, to Landlord for the collection thereof, or as much thereof as may be necessary for the purpose, toward the amount due from Tenant as rent for that period. 19. QUIET ENJOYMENT. Tenant, upon paying the Fixed Basic Rent, Additional Rent and other charges herein required and observing and keeping all covenants, agreements and conditions of this Lease, shall quietly have and enjoy the Premises during the Term without hindrance or molestation by anyone claiming by or through Landlord, subject, however, to the exceptions, reservations and conditions of this Lease. 20. RULES AND REGULATIONS. The Landlord hereby reserves the right to prescribe, from time to time, reasonable rules and regulations (herein called the "Rules and Regulations") attached hereto as Exhibit B governing --------- the use and enjoyment of the Premises. The Rules and Regulations shall not materially interfere with the Tenant's use and enjoyment of the Premises in accordance with the provisions of this Lease for the Permitted Use and shall not increase or modify Tenant's obligations under this Lease. In the event of a conflict between the Lease Agreement, the Work Letter and such rules and regulations, the Lease Agreement and Work Letter shall control. The Tenant shall comply at all times with the Rules and Regulations and shall cause its agents, employees, invitees, visitors, and guests to do so. The Rules and Regulations shall be enforced in an uniform and nondiscriminatory manner. 21. ASSIGNMENT AND SUBLEASE. Tenant may assign or sublease all or a part of the Premises to any party subject to the following: a) In the event Tenant desires to assign this Lease or sublease all of the Premises to any other party, Tenant shall provide written notice of the terms and conditions of such assignment or sublease to Landlord prior to the effective date of any such assignment or sublease, and, except as provided in Section 21(c) hereof, the Landlord shall have the option, exercisable by written notice to Tenant within ten (10) business days of 22 Landlord's receipt of written notice from Tenant, to recapture the Premises for Landlord's own use, whereupon Tenant shall be fully released from any and all obligations hereunder, and any and all Security Deposits, together with accrued interest, shall be promptly refunded to Tenant. b) In the event that the Landlord elects not to recapture the Lease as hereinabove provided, the Tenant may nevertheless assign this Lease or sublet the whole of the Premises, without the Landlord's consent subject to the following terms and conditions: i) The assignee shall assume, by written instrument, all of the obligations of this Lease thereafter accruing, and a copy of such assumption agreement shall be furnished to the Landlord within ten (10) days of its execution. Any sublease shall expressly acknowledge that said subtenant's rights against Landlord shall be no greater than those of Tenant. ii) The Tenant and each assignee shall be and remain liable for the observance of all the covenants and provisions of this Lease, including, but not limited to, the payment of Fixed Basic Rent and Additional Rent reserved herein, through the entire Term of this Lease, as the same may be renewed, extended or otherwise modified provided, however, that Tenant shall not be obligated for the payment of Rent or any other obligation herein during any renewal option or extension hereof of this Lease without Tenant's prior written consent. Notwithstanding anything to the contrary herein contained, Landlord, in its sole and absolute discretion shall be permitted to withhold its consent to the assignment or sublet of the whole or any portion of the Premises which includes any renewal option or extension hereof of this Lease without Tenant's prior written agreement to be bound for the full payment of Rent reserved herein for the renewal option or extension hereof. iii) Except with respect to transactions with affiliates, the Tenant shall promptly pay to Landlord fifty percent (50%) of the net profit attributable to the rent component received from any subleasing of the entire Premises or assignment of the Lease. Net profit will be calculated after deducting the Tenant's direct costs of implementing the sublease or assignment, including all reasonable and actual legal, brokerage, fit-out and other leasing costs incurred by Tenant. 23 iv) In any event, the acceptance by the Landlord of any rent from the assignee or from any of the subtenants or the failure of the Landlord to insist upon a strict performance of any of the terms, conditions and covenants herein shall not release the Tenant herein, nor any assignee assuming this Lease, from any and all of the obligations herein during and for the entire Term of this Lease. v) Landlord shall require a Ten Dollar ($10.00) payment to cover its handling charges for each request for consent to any sublet or assignment prior to its consideration of the same. c) If Tenant is a corporation other than a corporation whose stock is listed and traded on a nationally recognized stock exchange ("Listed Company"), the provisions of subsection (a) hereof shall apply to a transfer (however accomplished, whether in a single transaction or in a series of related or unrelated transactions) of stock (or any other mechanism such as, by way of example, the issuance of additional stock, a stock voting agreement or change in class(es) of stock) which results in a change of control of Tenant as if such transfer of stock (or other mechanism) which results in a change of control of Tenant were an assignment of this Lease, and if Tenant is a partnership or joint venture, said provisions shall apply with respect to a transfer (by one or more transfers) of an interest in the distributions of profits and losses of such partnership or joint venture (or other mechanism, such as, by way of example, the creation of additional general partnership or limited partnership interests) which results in a change of control of such a partnership or joint venture, as if such transfer of an interest in the distributions of profits and losses of such partnership or joint venture which results in a change of control of such partnership or joint venture were an assignment of this Lease; but the foregoing provisions of this subsection (c) shall not apply to transactions with a corporation or other entity into or with which Tenant is merged or consolidated or to which all or substantially all of Tenant's assets or stock are transferred, or to any corporation or other entity which controls or is controlled by Tenant or is under common control with Tenant, provided that in the event of such merger, consolidation or transfer of all or substantially all of Tenant's assets or stock (i) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the net worth of Tenant herein named on the date of this Lease, and (ii) evidence reasonably satisfactory to Landlord of such net worth shall have been delivered to Landlord on or before the effective date of any such transaction. So long as Tenant is a Listed Company, however, none of the foregoing limitations of this Subsection (c) shall apply. 24 d) Notwithstanding anything to the contrary set forth herein, Tenant shall be permitted from time to time, without Landlord's consent to sublease less than the entire Premises for a term not in excess of the remaining Term of this Lease. Tenant shall give Landlord written notice of all subleases it enters into with unaffiliated third parties. e) In the event that any or all of Tenant's interest in the Premises and/or this Lease is transferred by operation of law to any trustee, receiver, or other representative or agent of Tenant, or to Tenant as a debtor in possession, and subsequently any or all of Tenant's interest in the Premises and/or this Lease is offered or to be offered by Tenant or any trustee, receiver, or other representative or agent of Tenant as to its estate or property (such person, firm or entity being hereinafter referred to as the "Grantor", for assignment, conveyance, lease, or other disposition to a person, firm or entity other than Landlord (each such transaction being hereinafter referred to as a "Disposition"), it is agreed that Landlord has and shall have a right of first refusal to purchase, take, or otherwise acquire, the same upon the same terms and conditions as the Grantor thereof shall accept upon such Disposition to such other person, firm, or entity; and as to each such Disposition the Grantor shall give written notice to Landlord in reasonable detail of all of the terms and conditions of such Disposition within twenty (20) days next following its determination to accept the same but prior to accepting the same, and Grantor shall not make the Disposition until and unless Landlord has failed or refused to accept such right of first refusal as to the Disposition, as set forth herein. Landlord shall have sixty (60) days next following its receipt of the written notice as to such Disposition in which to exercise the option to acquire Tenant's interest by such Disposition, and the exercise of the option by Landlord shall be effected by notice to that effect sent to the Grantor; but nothing herein shall require Landlord to accept a particular Disposition or any Disposition, nor does the rejection of any one such offer of first refusal constitute a waiver or release of the obligation of the Grantor to submit other offers hereunder to Landlord. In the event Landlord accept such offer of first refusal, the transaction shall be consummated pursuant to the terms and conditions of the Disposition described in the notice to Landlord. In the event Landlord rejects such offer of first refusal, Grantor may consummate the Disposition with such other person, firm, or entity; but any decrease in price of more than two percent (2%) of the price sought from Landlord or any change in the terms of payment for such Disposition shall constitute a new transaction requiring a further option of first refusal to be given to Landlord hereunder. 25 f) Without limiting any of the provisions of this Section 21, if pursuant to the United States Bankruptcy Code (herein referred to as the "Code"), or any similar law hereafter enacted having the same general purpose, Tenant is permitted to assign this Lease notwithstanding the restrictions contained in this Lease, adequate assurance of future performance by an assignee expressly permitted under such Code shall be deemed to mean the deposit of cash security in an amount equal to the sum of one year's Fixed Basic Rent plus an amount equal to the Additional Rent for the calendar year preceding the year in which such assignment is intended to become effective, which deposit shall be held by Landlord for the balance of the Term, without interest, as security for the full performance of all of Tenant's obligations under this Lease, to be held and applied in the manner specified for any security deposit required hereunder. g) Except as specifically set forth above, no portion of the Premises or of Tenant's interest in this Lease may be acquired by any other person or entity, whether by assignment, mortgage, sublease, transfer, operation of law or act of the Tenant, nor shall Tenant pledge its interest in this Lease or in any security deposit required hereunder. 22. TENANT'S RELOCATION. [Intentionally Deleted] 23. SUBORDINATION. This Lease and Tenant's rights hereunder shall be subject and subordinate at all times in lien and priority to any first mortgage or other primary encumbrance now or hereafter placed upon or affecting the Property or the Premises, and to any second mortgage or encumbrance with the consent of the first mortgagee, and to all renewals, modifications, consolidations and extensions thereof, provided, however, that any holder of such lien or mortgage agrees not to disturb the use and occupancy of the Premises in accordance with the terms of this Lease Agreement upon any foreclosure. Tenant shall execute and deliver upon demand any further instrument or instruments confirming the subordination of this Lease to the lien of any such first mortgage or to the lien of any other mortgage, if requested to do so by Landlord with the consent of the first mortgagee, and any further instrument or instruments of attornment that may be desired by any such mortgagee or Landlord, provided, however, that any holder of such lien or mortgage agrees in such instrument not to disturb the use and occupancy of the Premises in accordance with the terms of this Lease Agreement upon any foreclosure. Notwithstanding the foregoing, any mortgagee may at any time subordinate its mortgage to this Lease, without Tenant's consent, by giving notice in writing to Tenant and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery. In that event such mortgagee shall have the 26 same rights with respect to this Lease as though this Lease had been executed prior to the execution and delivery of the mortgage and had been assigned to such mortgagee. Landlord agrees that it will use best efforts to obtain and deliver to Tenant a subordination, nondisturbance and attornment agreement in form reasonably satisfactory to Tenant from the holder(s) of any mortgage or other security interest from time to time affecting the Premises or Building. 24. NON-DISTURBANCE. The provisions of Paragraph 23 notwithstanding, Landlord shall deliver to Tenant upon execution of the Lease a non- disturbance and attornment agreement from all present mortgagees or prime ground lease lessors. The subordination of the Lease to future mortgagees shall be conditioned upon each future mortgagee delivering a non- disturbance and attornment agreement to Tenant. Each non-disturbance and attornment agreement shall assure to Tenant its continued occupancy of the Premises upon all of the terms and conditions of the Lease, shall specifically recognize the Tenant's right to cure defaults by Landlord in properly operating, maintaining and making necessary or required repairs, replacements or additions, and its right to deduct the cost plus interest from Fixed Basic Rent and Additional Rent or to terminate the Lease upon such default by Landlord; and shall specifically provide that any successor Landlord by reason of foreclosure or deed in lieu of foreclosure or other sale or transfer shall be responsible for any continuing defaults of Landlord under the Lease, including the completion of the work set forth in the Work Letter. 25. CURING DEFAULTS. a) If Tenant defaults in the performance of any of its obligations hereunder, Landlord may, without any obligation to do so and in addition to any other rights it may have in law or equity, elect to cure such default on behalf of Tenant after written notice (except in the case of emergency) to Tenant. Tenant shall reimburse Landlord upon demand for any sums paid or costs incurred by Landlord in curing such default, including interest thereon from the respective dates of Landlord's making the payments and incurring such costs, which sums and costs together with interest thereon shall be deemed Additional Rent payable within ten (10) days of demand. b) Should Landlord default in the performance of any terms, covenants and conditions of this Lease, Tenant may give written notice of such default to Landlord as provided herein and Landlord shall cure any such default in respect to which it has 27 been given notice without delay. Should Landlord fail to cure (or begin to cure and diligently pursue such cure) any default within thirty (30) days after written notice has been given, Tenant may cure the same at the cost and expense of Landlord. Landlord shall reimburse Tenant upon demand for any sums paid or costs incurred by Tenant in curing such default, including interest thereon from the respective dates of Tenant's making the payments or incurring such costs. In the event Landlord fails to timely reimburse Tenant within ten (10) days of demand, then Tenant, upon written notice to Landlord, may deduct such expense from the payment(s) of Rent next falling due, until such amount has been fully reimbursed. The parties acknowledge and agree that in the event of an emergency presenting a threat of damage or harm to persons or property, Tenant shall attempt to contact Landlord if time permits, but shall not be required to provide Landlord with notice or an opportunity to make repairs or to take other remedial measures before exercising the self help and (if Landlord fails to make payment within ten (10) days of demand , as aforesaid) the offset remedies hereinabove provided. 26. SURRENDER. a) At the expiration or earlier termination of the Term Tenant shall promptly yield up the Premises and all improvements, alterations and additions thereto, and all fixtures and equipment servicing the Premises in a condition which is clean of garbage and debris and broom clean and in the same condition, order and repair in which they are required to be kept throughout the Term, ordinary wear and tear, casualty and condemnation and repairs and improvements which are the obligation of the Landlord, alone excepted. b) If Tenant, or any person claiming through Tenant, continues to occupy the Premises after the expiration or earlier termination of the Term or any renewal thereof without prior written consent of Landlord, the tenancy under this Lease shall become a month-to-month tenancy, terminable by Landlord or Tenant on thirty (30) days prior written notice, under the same terms and conditions set forth in this Lease; except, however, that the Fixed Basic Rent during such continued occupancy shall be 150% of the amount set forth in subsection 6(a). Anything to the contrary notwithstanding, any holding over by Tenant without Landlord's prior written consent shall constitute a default hereunder and shall be subject to all the remedies set forth in subsection 27(b) hereof. 28 27. DEFAULTS-REMEDIES. a) DEFAULTS. It shall be an event of default under this Lease if any one or more of the following events occurs: i) Tenant fails to pay in full, within ten (10) days after written notice by Landlord, any and all installments of Fixed Basic Rent or Additional Rent or any other charges or payments due and payable under this Lease whether or not herein included as rent. ii) Tenant violates or fails to perform or otherwise breaches any agreement, term, covenant or condition contained in this Lease after thirty (30) days prior written notice provided, however, that of Tenant commences to cure such default within such thirty (30) day period and diligently pursues such cure, then Tenant shall be granted such additional time as is reasonably necessary to cure such breach. iii) Tenant becomes insolvent or bankrupt in any sense or makes an assignment for the benefit of creditors or if a petition in bankruptcy or for reorganization or for an arrangement with creditors under any federal or state law is filed by or against Tenant, or a bill in equity or other proceeding for the appointment of a receiver or similar official for any of Tenant's assets is commenced, or if any of the real or personal property of Tenant shall be levied upon by any sheriff, marshal or constable; provided, however, that any proceeding brought by anyone other than the parties to this Lease under any bankruptcy, reorganization arrangement, insolvency, readjustment, receivership or similar law shall not constitute an event of default until such proceeding, decree, judgment or order has continued unstayed for more than sixty (60) consecutive days. b) REMEDIES. Upon the occurrence of an event of default under this Lease, Landlord shall have all of the following rights: i) Landlord may charge a non-cumulative late payment charge of one (1%) percent of any amount owed to Landlord pursuant to this Lease which is not paid within seven (7) days following written notice to Tenant that the same is past due or, if a due date is not specified in this Lease, within thirty (30) days of the mailing of a bill therefor by Landlord. If Landlord incurs a late charge in connection with any payment which Tenant has failed to make within the times required in this Lease, Tenant shall pay 29 Landlord, in addition to such payment due, the full amount of such late charge incurred by Landlord. Nothing in this Lease shall be construed as waiving any rights of Landlord arising out of any default of Tenant, by reason of Landlord's imposing or accepting any such late charge(s) and/or interest; the right to collect such late charge(s) and/or interest is separate and apart from any rights relating to remedies of Landlord after default by Tenant including, without limitation, the rights and remedies of Landlord provided herein. ii) Landlord may terminate this Lease and the Term without any right on the part of Tenant to waive the forfeiture by payment of any sum due or by other performance of any condition, term or covenant broken. If the event of default is monetary default in an amount equal to or greater than the amount of Fixed Basic Rent due for two months, then, upon three (3) business days' notice to Tenant, if such event of default shall remain uncured, Landlord may collect from Tenant an amount equal to the Accelerated Rent Component, which shall be held and applied by Landlord, not as liquidated damages, bust as security and/or payment against damages and other payments that Landlord is entitled to recover under this Lease, at law or in equity on account of Tenant's default hereunder. The term "Accelerated Rent Component" shall mean an amount equal to Landlord's reasonable estimate of the Rent and all other charges due and payable by Tenant for the next succeeding 12 months of the Term, all determined at the time of Landlord's election to recover the Accelerated Rent Component. In the event that the amount collected by Landlord as the Accelerated Rent Component shall not fully satisfy the damages judicially determined to be due and owing by Tenant to Landlord, Landlord may, form time to time until the amount of Landlord's judicially determined damages against Tenant are fully and finally determined, but not more frequently than once each 12 months, by praecipe or motion filed in the court having jurisdiction over the action brought by Landlord against Tenant or otherwise, cause the Accelerated Rent Component to be increased by the following amounts. If the amount of Landlord's judicially determined damages against Tenant have not been fully and finally determined, Landlord may cause the Accelerated Rent Component to be increased by an amount equal to Landlord's reasonable estimate of the Rent and all other charges due and payable by Tenant for the next succeeding 12 months of the Term. If the amount of Landlord's judicially determined damages against Tenant have been fully and finally determined, Landlord may cause the Accelerated Rent Component to be increased by an amount equal to the difference between (a) the amount of such judicially determined damages and (b) 30 the aggregate amount, including any previously entered Accelerated Rent Component, of any judgment previously entered against Tenant. iii) Landlord may re-enter the Premises and, at the option of Landlord, remove all persons and all or any property therefrom, either by summary dispossess proceedings or by any suitable action or proceeding at law or by force or otherwise, without being liable for prosecution or damages therefor, and Landlord may repossess and enjoy the Premises. Upon recovering possession of the Premises by reason of or based upon or arising out of a default on the part of Tenant, Landlord may, at Landlord's option, either terminate this Lease or make such alterations and repairs as may be necessary in order to relet the Premises and shall use its reasonable efforts to relet the Premises or any part or parts thereof, either in Landlord's name or otherwise, for a term or terms which may, at Landlord's option, be less than or exceed the period which would otherwise have constituted the balance of the Term of this Lease and at such rent or rents and upon such other terms and conditions as in Landlord's sole discretion may seem advisable and to such person or persons as may in Landlord's discretion seem best; upon each such reletting all rents received by Landlord from such reletting shall be applied as follows: first, to the payment of any actual and reasonable costs and expenses of such reletting, including all costs of alterations and repairs; second, to the payment of any indebtedness other than Fixed Basic Rent, Additional Rent or other charges due hereunder from Tenant to Landlord; third, to the payment of Fixed Basic Rent, Additional Rent and other charges due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as it may become due and payable hereunder. If rentals received from reletting during any month are less than that to be paid during that month by Tenant, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No such re- entry or taking possession of the Premises or the making of alterations or improvements thereto or the reletting thereof shall be construed as an election on the part of Landlord to terminate this Lease unless written notice of termination is given to Tenant. Landlord shall use commercially reasonable efforts to mitigate its damages and relet the Premises, but in no event be liable in any way whatsoever for failure to relet the Premises despite such commercially reasonable efforts, or in the event that the Premises or any part or parts thereof are relet, for failure to collect the rent thereof under such reletting, provided, however, Landlord shall use commercially reasonable efforts to do so. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. 31 iv) WHEN THIS LEASE AND THE TERM OR ANY EXTENSION OR RENEWAL THEREOF SHALL HAVE BEEN TERMINATED ON ACCOUNT OF ANY DEFAULT BY TENANT, OR WHEN THE TERM HAS EXPIRED, AND AFTER TEN (10) DAYS PRIOR WRITTEN NOTICE FROM LANDLORD TO TENANT OF ITS INTENTION TO DO SO, IT SHALL BE LAWFUL FOR ANY ATTORNEY OF ANY COURT OF RECORD TO APPEAR AS ATTORNEY FOR TENANT AS WELL AS FOR ALL PERSONS CLAIMING BY, THROUGH OR UNDER TENANT, AND TO FILE AN AGREEMENT FOR ENTERING IN ANY COMPETENT COURT AN AMICABLE ACTION FOR JUDGMENT IN EJECTMENT AGAINST TENANT AND ALL PERSONS CLAIMING BY, THROUGH OR UNDER TENANT FOR THE RECOVERY BY LANDLORD OF POSSESSION OF THE PREMISES, FOR WHICH THIS LEASE SHALL BE A SUFFICIENT WARRANT; WHEREUPON, IF LANDLORD SO DESIRES, AN APPROPRIATE WRIT OF POSSESSION MAY ISSUE FORTHWITH, WITHOUT ANY PRIOR WRIT OR PROCEEDING WHATSOEVER, AND PROVIDED THAT IS FOR ANY REASON AFTER SUCH ACTION SHALL HAVE BEEN COMMENCED IT SHALL BE DETERMINED AND POSSESSION OF THE PREMISES REMAIN IN OR BE RESTORED TO TENANT, LANDLORD SHALL HAVE THE RIGHT FOR THE SAME DEFAULT AND UPON ANY SUBSEQUENT DEFAULT OR DEFAULTS, OR UPON THE TERMINATION OF THIS LEASE OR TENANT'S RIGHT OF POSSESSION AS HEREINBEFORE SET FORTH, TO BRING ONE OR MORE FURTHER ACTIONS IN EJECTMENT AS HEREINBEFORE SET FORTH TO CONFESS JUDGMENT FOR THE RECOVERY OF POSSESSION OF THE PREMISES. c) WAIVER OF JURY TRIAL. IT IS MUTUALLY AGREED BY AND BETWEEN LANDLORD AND TENANT THAT (A) THEY HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTER-CLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OF OCCUPANCY OF THE PREMISES OR CLAIM OF INJURY OR DAMAGE, AND (B) IN ANY LEGAL ACTION BY EITHER PARTY AGAINST THE OTHER UNDER THIS LEASE, THE LEGAL FEES OF THE PREVAILING PARTY WILL BE PAID BY THE NON-PREVAILING PARTY TO THE ACTION. 32 d) NON-WAIVER. No waiver by Landlord of any breach by Tenant of any of Tenant's obligations, agreements or covenants herein shall be a waiver of any subsequent breach or of any other obligation, agreement or covenant, nor shall any forbearance by Landlord to seek a remedy for any event of default by Tenant be a waiver by Landlord of any rights and remedies with respect to such or any subsequent event of default. e) RIGHTS AND REMEDIES CUMULATIVE. No right or remedy herein conferred upon or reserved to either party is intended to be exclusive of any other right or remedy provided herein or by law, but each shall be cumulative and in addition to every other right or remedy given herein or now or hereafter existing at law or in equity or by statute. 28. CONDITION OF PREMISES. Tenant's occupancy of the Premises shall constitute acceptance of the Work performed by Landlord pursuant to Section 3 except as stated in Section 3 or in the Work Letter. Landlord shall warrant all labor and materials used in connection with the Landlord Work for a period of one (1) year from the Occupancy Date and thereafter Landlord will cooperate with Tenant to enforce any and all manufacturer warranties which Landlord obtained in connection with the Landlord Work. 29. HAZARDOUS SUBSTANCES. a) Landlord and Tenant shall not cause or allow the generation, treatment, storage or disposal of Hazardous Substances on or near the Premises or Property. "Hazardous Substances" shall mean any substance the presence of which requires investigation or remediation under any statute, regulation, ordinance, order, action, policy or common law; or which is or becomes defined as a hazardous pollutant, substance or waste under any statute, regulation, ordinance, order, action or any amendments thereto; or which is toxic, corrosive, explosive, flammable, or threatening to human health and the environment and is or becomes regulated by any governmental authority; or the presence of which on the Premises causes or threatens to cause a nuisance upon the Premises or to adjacent properties. b) Landlord and Tenant agree to indemnify, defend and hold harmless the other, its employees, agents, successors, and assigns, from and against any and all damage, claim, liability, or loss, including reasonable attorneys' and other fees, arising out of or in any way connected to the generation, treatment, storage or disposal of 33 Hazardous Substances by Landlord or Tenant, its employees, agents, contractors, or invitees, on or near the Premises or Property. Such duty of indemnification shall include, but not be limited to damage, liability, or loss pursuant to all Federal, state and local environmental laws, rules and ordinances, strict liability and common law. c) Landlord and Tenant agree to notify each other immediately of any disposal of Hazardous Substances in the Premises or Property, of any discovery of Hazardous Substances in the Premises, or of any notice by a governmental authority or private party alleging or suggesting that a disposal of Hazardous Substances on or near the Premises or Property may have occurred. Furthermore, Landlord and Tenant agree to provide the other with full and complete access to any documents or information in its possession or control relevant to the question of the generation, treatment, storage, or disposal of Hazardous Substances on or near the Premises. d) Landlord has delivered to Tenant the Phase 1 Site Assessment Report prepared in connection with its purchase of the Property in May, 1997 (the "Report"). Landlord represents and warrants that to the best of its knowledge there are no Hazardous Substances in, under or about the Building other than as disclosed in the Report. Landlord represents and warrants that all asbestos containing materials contained within the Building, if any, have been removed in accordance with applicable law. Tenant acknowledges that a prior owner of the Property is currently operating an air sparging/soil vapor extraction facility (the "Facility") at the Property pursuant to that certain Remedial Action Plan: Lehigh Valley Dairies, Inc. dated November 18, 1995. In the event that the said prior owner ceases to operate the Facility to the completion of such remediation activities, Landlord agrees to take such steps as may be necessary to cause such prior owner to operate the Facility to completion, or to engage at such prior owner's (or at Landlord's) expense, the services of a qualified third party professional to operate the Facility to completion in accordance with the Remedial Action Plan. Notwithstanding any other provisions of this Section, Landlord agrees to indemnify, defend and hold harmless Tenant, its employees, agents, successors, and assigns from and against any and all damage, claim, liability, or loss, including reasonable attorneys' and other fees, arising out of or in any way related to Hazardous Substances existing in, on or under the Premises or the Property on or before the date of this Lease, including, but not limited to, the Hazardous Substances and conditions identified in the Report. 34 30. RECORDING. Tenant shall be permitted to record a memorandum of this Lease at Tenant's cost, in form prepared by Tenant and mutually agreed by and executed by the parties promptly following the execution of this Lease. 31. BROKERS' COMMISSION. Tenant and Landlord represent and warrant to each other that the Brokers (as defined in the Preamble) are the sole brokers with whom each has negotiated in bringing about this Lease and Tenant and Landlord agree to indemnify and hold the other harmless and Tenant agrees to indemnify Landlord's mortgagee from any claim or loss arising from Tenant's misrepresentation hereunder. In the event the transactions contemplated herein are consummated, Landlord agrees to pay the Brokers a commission as previously agreed between Landlord and Brokers and Landlord agrees to indemnify Tenant from any claim arising from Landlord's failure to pay such commission as aforesaid. In the event that no broker was involved as aforesaid, then Tenant represents and warrants to the Landlord that no broker brought about this transaction, and Tenant agrees to indemnify and hold Landlord harmless from any and all claims of any broker arising out of or in connection with the negotiations of, or entering into of, this Lease by Tenant and Landlord. 32. NOTICES. All notices, demands, requests, consents, certificates, and waivers required or permitted hereunder from either party to the other shall be in writing and sent by United States certified mail, return receipt requested, postage prepaid, or by recognized overnight courier, addressed as follows: 35 If to Tenant: CDNow Jenkins Court, Suite 300 610 Old York Road Jenkintown, PA 19046 Attn.: General Counsel with a copy to: Stephen M. Goodman, Esquire Morgan Lewis & Bockius, LLP 2000 One Logan Square Philadelphia, PA 19103 If to Landlord: Mr. Richard Heany 485 Delaware Drive Associates, L.P. c/o O'Neill Properties Group 1710 Walton Road, Suite 301 Blue Bell, PA 19422 with a copy to: Kevin W. Walsh, Esquire Adelman Lavine Gold and Levin 1900 Two Penn Center Plaza Philadelphia, PA 19102 Either party may at any time, in the manner set forth for giving notices to the other, specify a different address to which notices to it shall thereafter be sent. 33. NO OPTION. The submission of this Lease by Landlord to Tenant for examination shall not constitute a reservation of or option for the Premises. This Lease 36 shall become effective only upon execution thereof by both parties and delivery thereof to Tenant. 34. INABILITY TO PERFORM. If Landlord or Tenant is delayed or prevented from performing any of their respective obligations under this Lease (except Tenant's obligation to pay Rent) by reason of strike, labor troubles, or any cause whatsoever beyond such party's reasonable control, the period of such delay or such prevention shall be deemed added to the time herein provided for the performance of any such obligation by Tenant or Landlord (except Landlord's obligations to deliver the Premises to Tenant as and when set forth in Section 3 of this Lease). 35. SURVIVAL. Notwithstanding anything to the contrary contained in this Lease, the expiration of the Term of this Lease, whether by lapse of time or otherwise, shall not relieve either Landlord or Tenant from its respective obligations accruing prior to the expiration of the Term. 36. CORPORATE TENANTS. If Tenant is a corporation, the person(s) executing this Lease on behalf of Tenant hereby covenant(s) and warrant(s) that: Tenant is a duly formed corporation qualified to do business in the state in which the Property is located; Tenant will remain qualified to do business in said state throughout the Term and any renewals thereof; and such persons are duly authorized by such corporation to execute and deliver this Lease on behalf of the corporation. 37. WAIVER OF INVALIDITY OF LEASE. Each party agrees that it will not raise or assert as a defense to any obligation under the Lease or this or make any claim that the Lease is invalid or unenforceable due to any failure of this document to comply with ministerial requirements including, without limitation, requirements for corporate seals, attestations, witnesses, notarizations or other similar requirements and each party hereby waives the right to assert any such defenses or make any claim of invalidity or unenforceability due to any of the foregoing. 38. SECURITY DEPOSIT. As additional security for the full and prompt performance by Tenant of the terms and covenants of this Lease, Tenant has deposited with Landlord on or before the Occupancy Date, the Security Deposit, as set forth in the Preamble. The Security Deposit shall not constitute rent for any month (unless so applied by Landlord on account of Tenant's default hereunder). The Security Deposit shall accrue interest for the account of Tenant at a rate of five percent (5%) per annum, compounding daily. 37 Tenant shall, upon demand, restore any portion of the Security Deposit which may be applied by Landlord to cure any default by Tenant hereunder. To the extent that Landlord has not applied the Security Deposit or any portion thereof on account of a default, the Security Deposit, or such remaining portion of the Security Deposit, with interest, shall be returned to Tenant, promptly following the termination of this Lease. $67,500 of the Security Deposit (together with interest accrued to date) shall be refunded to Tenant within thirty (30) days next following the first quarter of profitability after the first (1st ) year anniversary of the Occupancy Date. 39. TENANT ESTOPPEL CERTIFICATE. Tenant shall from time to time, within ten (10) days after Landlord's request or that of any mortgagee of Landlord, execute, acknowledge and deliver to Landlord a written instrument in recordable form, substantially in the form attached hereto as Exhibit E --------- (a "Tenant Estoppel Certificate"), certifying (i) that this Lease is in full force and effect and has not been modified, supplemented or amended (or, if there have been modifications, supplements or amendments, that it is in full force and effect as modified, supplemented or amended, and stating such modifications, supplements and amendments); (ii) the dates to which Fixed Basic Rent and Additional Rent and any other charges arising hereunder have been paid; (iii) the amount of any prepaid rents or credits due Tenant, if any; (iv) if applicable, that Tenant has accepted possession and has entered into occupancy of the Premises, and certifying the Occupancy Date and the Rent Commencement Date and the Termination Date; (v) whether or not, to the best of the Tenant's knowledge, all conditions under the Lease to be performed by Landlord prior thereto have been satisfied and whether or not Landlord is then in default in the performance of any covenant, agreement or condition contained in this Lease and specifying each, if any, unsatisfied condition and each, if any, default of which Tenant may have knowledge; and (vi) any other fact or condition not otherwise determinable from the text of the Lease reasonably requested. Any certification delivered pursuant to the provisions of this Article shall be intended to be relied upon by Landlord and any mortgagee or prospective mortgagee or purchaser of the Property or of any interest therein. Notwithstanding the foregoing, Tenant's failure to furnish a Tenant Estoppel Certificate within said ten (10) day period shall constitute a default under this Lease. Tenant shall only be obligated to provide one (1) Tenant Estoppel Certificate in any twelve (12) month period except in the case of a sale of the Property or a financing in connection with the Property in which case Tenant shall be obligated to deliver such Tenant Estoppel Certificates as it may be requested irrespective of the number of times so requested in any twelve (12) month period. 38 40. RIGHTS RESERVED BY LANDLORD. Landlord waives no rights, except those that may be specifically waived herein, and explicitly retains all other rights including, without limitation, the following rights, each of which Landlord may exercise without notice to Tenant and without liability to Tenant for damage or injury to property, person or business on account of the exercise thereof, and the exercise of any such rights shall not be deemed to constitute an eviction or disturbance of Tenant's use or possession of the Premises and shall not give rise to any claim for set-off or abatement of Rent or any other claim: a) To install, affix and maintain any and all signs on the exterior and on the interior of the Building at any time during the last six (6) months of the Term. b) To decorate (outside of the Premises) or to make repairs, alterations, additions, or improvements, whether structural or otherwise, in and about the Building, or any part thereof, and for such purposes to enter upon the Premises and during the continuance of any of such work, to temporarily close doors, entry ways, public space and corridors in the Building and to interrupt or temporarily suspend services or use of facilities, all without affecting any of Tenant's obligations hereunder, so long as the Premises are at all times accessible and usable for their intended purpose. c) To furnish door keys for the entry door(s) in the Premises on the Commencement Date and to retain at all times, and to use in appropriate instances, keys to all doors within and into the Premises. Tenant agrees to purchase only from Landlord additional duplicate keys as required, to change no locks, and not to affix locks on doors without the prior written consent of the Landlord which consent shall not be unreasonably withheld, delayed or conditioned. Upon the expiration of the Term or Tenant's right to possession, Tenant shall return all keys to Landlord and shall disclose to Landlord the combination of any safes, cabinets or vaults left in the Premises. d) To designate or approve all window coverings used in the Building such approval not to be unreasonably withheld, delayed or conditioned. e) To approve the weight, size and location of safes, vaults and other heavy equipment and articles in and about the Premises and the Building so as not to exceed the legal load per square foot designated by the structural engineers for the Building, and to require all such items and furniture and similar items to be moved into or 39 out of the Building and Premises only at such times and in such manner as Landlord shall approve. Tenant shall not install or operate machinery or any mechanical devices of a nature not directly related to Tenant's ordinary use, as limited by the Permitted Use, of the Premises without the prior written consent of Landlord. The movement of Tenant's property into or out of the Building or the Premises and within the Building are entirely at the risk and responsibility of Tenant, and Landlord reserves the right to require written authorization from Tenant, in form and content satisfactory to Landlord, before allowing any property to be moved into or out of the Building or Premises. f) To erect, use and maintain pipes, ducts, wiring and conduits, and appurtenances thereto, above the finished ceiling, behind the finished walls, beneath the floor slab and within existing columns in the Premises, provided that Landlord shall promptly repair and restore any Tenant finishes or other property disturbed in the process. 41. MISCELLANEOUS. a) CAPTIONS. The captions in this Lease are for convenience only and are not a part of this Lease and do not in any way define, limit, describe or amplify the terms and provisions of this Lease or the scope or intent thereof. b) ENTIRE AGREEMENT. This Lease and the Exhibits hereto represent the entire agreement between the parties hereto and there are no collateral or oral agreements or understandings between Landlord and Tenant with respect to the Premises or the Property. No rights, easements or licenses are acquired in the Property or any land adjacent to the Property by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease. c) MODIFICATION. This Lease shall not be modified in any manner except by an instrument in writing executed by the parties. Notwithstanding the foregoing, Tenant shall not unreasonably withhold or delay its consent to modify this Lease if so requested by Landlord, if and to the extent that Landlord shall be advised by its counsel that all or any portion of the monies paid by Tenant to Landlord hereunder are or may be deemed to be unrelated business income within the meaning of the United States Internal Revenue Code or the regulations issued thereunder; provided that (i) Tenant's execution thereof shall not result in Tenant having to pay in the aggregate any greater sum of money on account of its occupancy of the Premises under the terms of this Lease as so amended, or Tenant suffering any adverse tax consequences as a result of such amendment, (ii) no 40 such amendment(s) shall diminish in any manner Tenant's rights or Landlord's obligations under this Lease, and (iii) Landlord agrees to pay all reasonable attorneys' fees and costs paid or incurred by Tenant in connection with the review of any such request by Landlord including, specifically, the review and negotiation of any such documentation as may be proposed by Landlord for Tenant's signature. d) INTERPRETATION. The masculine (or neuter) pronoun, singular number, shall include the masculine, feminine and neuter genders and the singular and plural number. e) EXHIBITS. Each writing or plan referred to herein as being attached as an Exhibit or otherwise designated herein as an Exhibit hereto is hereby made a part hereof. f) CAPTIONS AND HEADINGS. The captions and headings of sections, subsections and the table of contents herein are for convenience only and are not intended to indicate all of the subject matter in the text and they shall not be deemed to limit, construe, affect or alter the meaning of any provisions of this Lease and are not to be used in interpreting this Lease or for any other purpose in the event of any controversy. g) INTEREST. Wherever interest is required to be paid hereunder, such interest shall be at the highest rate permitted by law but not in excess of ten percent (10%) per annum. h) SEVERABILITY. If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. i) JOINT AND SEVERAL LIABILITY. [Intentionally deleted] j) NO REPRESENTATIONS BY LANDLORD. Landlord and Landlord's agents have made no representations, agreements, conditions, warranties, understandings or 41 promises, either oral or written, with respect to this Lease, the Premises and/or the Building except as set forth herein or in the Exhibits hereto. k) RELATIONSHIP OF PARTIES. This Lease shall not create any relationship between the parties other than that of Landlord and Tenant. l) CHOICE OF LAW. The terms of this Lease shall be construed under the laws of the Commonwealth of Pennsylvania, and both parties agree to submit to the non-exclusive jurisdiction and venue of the Court of Common Pleas of the County in which the Property is located. 42. ADDITIONAL DEFINITIONS. a) "Date of this Lease" or "date of this Lease" shall mean the date of acceptance of this Lease by the Landlord, following execution and delivery thereof to Landlord by Tenant and that date shall be inserted in the space provided in the Preamble. b) "Landlord" as used herein includes the Landlord named above as well as its successors and assigns, each of whom shall have the same rights, remedies, powers, authorities and privileges as he would have had he originally signed this lease as Landlord. Any such person, whether or not named herein, shall have no liability hereunder after ceasing to hold title to the Premises. Neither Landlord nor any principal of Landlord nor any owner of the Building or the Lot, whether disclosed or undisclosed, shall have any personal liability with respect to any of the provisions of this Lease or the Premises, and if Landlord is in breach or default with respect to Landlord's obligations under this Lease or otherwise, Tenant shall look solely to the equity of Landlord in the Premises for the satisfaction of Tenant's remedies. c) "Tenant" as used herein includes the Tenant named above as well as its heirs, successors and assigns, each of which shall be under the same obligations, liabilities and disabilities and each of which shall have the same rights, privileges and powers as it would have possessed had it originally signed this Lease as Tenant. Each and every person named above as Tenant shall be bound formally and severally by the terms, covenants and agreements contained herein. However, no such rights, privileges or powers shall inure to the benefit of any assignee of Tenant, immediate or remote, unless the assignment to such assignee is permitted or deemed permitted by this Lease, or has been approved in writing by Landlord. Any notice required or permitted by the terms 42 of this Lease may be given by or to any one of the persons named above as Tenant, and shall have the same force and effect as if given by or to all of them. d) "Mortgage" and "Mortgagee" as used herein includes any lien or encumbrance on the Premises or the Property or on any part of or interest in or appurtenance to any of the foregoing, including without limitation any ground rent or ground lease if Landlord's interest is or becomes a leasehold estate. The word "mortgagee" is used herein to include the holder of any mortgage, including any ground Landlord if Landlord's interest is or becomes a leasehold estate. Wherever any right is given to a mortgagee, that right may be exercised on behalf of such mortgagee by any representative or servicing agent of such mortgagee. e) "Person" as used herein includes a natural person, a partnership, a corporation, an association, and any other form of business association or entity. f) "Property" as used herein shall mean the Building and the lot, tract or parcel of land on which the Building is situated. g) "Rent" or "rent" as used herein shall mean all Fixed Basic Rent and Additional Rent reserved under this Lease. 43. TENANT'S RIGHT OF FIRST REFUSAL. a) Tenant shall have a right of first refusal ("Right of Refusal") to lease any additional space which becomes available during the Term ("Additional Space"). If Landlord has Additional Space available and receives a bona fide offer (the "Offer") to lease the Additional Space from a third party ("Offeror") which Landlord is willing to accept, Landlord shall send written notice to Tenant (a "Landlord Notification"), which Landlord Notification shall set forth the terms of the third party offer. Within ten (10) days after receipt of the Landlord Notification, Tenant shall reply by written notice either accepting the Additional Space on the same terms and conditions of the third party offer, or rejecting the same. Failure to respond within the ten (10) day period shall constitute a rejection of the Additional Space. If Tenant accepts the Additional Space, the Additional Space shall be added to the Premises by amendment to this Lease, which shall include an adjustment of Tenant's Proportionate Share and such other changes as may be appropriate. In the event Tenant rejects the Offer, then Landlord 43 may proceed to enter into a lease for such Additional Space with the Offeror on terms no more favorable than contained in the Offer provided such lease is executed by the Landlord and the Offeror and the Offeror takes possession of the Additional Space within six (6) months from the date of the Offer . In the event a new offer is tendered or received by Landlord, Landlord must again submit such new offer to Tenant in accordance with this Section 43. b) All of the terms and conditions of this Lease will apply to any Additional Space leased by Tenant, except as otherwise provided in Landlord's Notification. The rental rate for the Additional Space and the available tenant improvement allowance shall be established in accordance with the following schedule.
Tenant Improvement Rental Rate per Year Allowance per square foot rentable square foot ---- ------------------------- -------------------- 1 $19.28 $18.00 2 $16.53 $18.50 3 $13.78 $19.00 4 $11.03 $19.50 5 $ 8.28 $20.00 6 $ 5.53 $20.50 7 $ 2.78 $21.00
In the event Tenant does not fully utilize the Tenant Improvement Allowance associated with an Additional Space, such excess amounts will be credited against Tenant's obligation to pay Fixed Basic Rent for such Additional Space. Tenant's Proportionate Share of Annual Operating Costs shall be increased in proportion to the square footage of any Additional Space leased by Tenant. The term of this Lease with respect to the Additional Space shall be coterminous with the Term of this Lease with respect to the original Premises. Landlord will have no liability to Tenant if any tenant of the Additional Space wrongfully holds over. In the event such tenant wrongfully holds over, Landlord will attempt in good faith to cause such tenant to vacate the Additional Space. c) During the term hereof (or until the entire Building is leased) Landlord shall not enter into any other lease for space in the Building which is for a term in excess of three (3) years or which grants such tenants right to review for any period beyond three (3) years without first obtaining Tenant's written consent. 44 44. MOVING ALLOWANCE. Landlord shall pay to Tenant the sum of Fifty Thousand Dollars ($50,000.00) (the "Moving Allowance") for Tenant's moving costs. The Moving Allowance shall be payable by wire transfer to Tenant within thirty (30) days after the Rent Commencement Date. 45. PAYMENT AND PERFORMANCE UNDER PROTEST. It is agreed that if at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said party to institute suit for the recovery of such sum, and of it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of the Lease, and if at any time a dispute shall arise between the parties hereto as to any work to be performed by either of then under the provisions herein, the party against whom the obligation to perform the work is asserted may perform such work and pay the cost thereof "under protest" and the performance of such work and payment therefor shall in no event be regarded as a voluntary performance or payment, and there shall survive the right on the part of said party to institute suit for the recovery of the cost of such work, and if it shall be adjudged that there was no legal obligation on the part of said party to perform or pay for the same or any part thereof, said party shall be entitled to recover the cost of such work or the cost of so much thereof as said party was not legally required to perform or pay for under the provisions of the Lease. 46. INTERIOR DESIGN ALLOWANCE. Landlord shall pay to Tenant the sum of One and 10/100 Dollars ($1.10) per rentable square foot of the Premises (the "Interior Design Allowance") for Tenant's interior design. The Interior Design Allowance shall be payable by wire transfer to Tenant within thirty (30) days after the Rent Commencement Date. SECTION 27(b) PROVIDES FOR THE CONFESSION OF JUDGMENT AGAINST TENANT FOR EJECTMENT. IN CONNECTION THEREWITH, TENANT, KNOWINGLY, VOLUNTARILY, INTENTIONALLY, UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE 45 RESPECTIVE CONSTITUTIONS AND LAWS OF THE UNITED STATES AND THE COMMONWEALTH OF PENNSYLVANIA. WITHOUT LIMITATION OF THE FOREGOING, TENANT HEREBY SPECIFICALLY WAIVES ALL RIGHTS TENANT HAS OR MAY HAVE TO NOTICE AND OPPORTUNITY FOR A HEARING PRIOR TO EXECUTION UPON ANY JUDGMENT CONFESSED AGAINST TENANT BY LANDLORD HEREUNDER. TENANT (I) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF LANDLORD HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT LANDLORD WILL NOT SEEK TO EXERCISE OR ENFORCE ITS RIGHTS TO CONFESS JUDGMENT HEREUNDER, AND (II) ACKNOWLEDGES THAT THE EXECUTION OF THIS LEASE BY LANDLORD HAS BEEN MATERIALLY INDUCED BY, AMONG OTHER THINGS, THE INCLUSION IN THIS LEASE OF SAID RIGHTS TO CONFESS JUDGMENT AGAINST TENANT. TENANT FURTHER ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS SAID PROVISIONS WITH TENANT'S INDEPENDENT LEGAL COUNSEL AND THAT THE MEANING AND EFFECT OF SUCH PROVISIONS HAVE BEEN FULLY EXPLAINED TO TENANT BY SUCH COUNSEL, AND AS EVIDENCE OF SUCH FACT AN AUTHORIZED OFFICER OF TENANT SIGNS HIS OR HER INITIALS IN THE SPACE PROVIDED BELOW. __________ Initials IN WITNESS WHEREOF, and in consideration of the mutual entry into this Lease and for other good and valuable consideration, and intending to be legally bound, 46 each party hereto has caused this agreement to be duly executed under seal. LANDLORD: - -------- Date Signed: 485 DELAWARE AVENUE ASSOCIATES, L.P. a Pennsylvania limited partnership By: 485 DELAWARE AVENUE ASSOCIATES ACQUISITION CORPORATION, a Pennsylvania corporation, its General Partner By:__________________________________________ Richard Heany, President, Duly Authorized TENANT: - ------ Date Signed: CDNOW, a Pennsylvania corporation By:______________________________ Name: Title: Duly Authorized 47 EX-10.10 7 AMENDMENT #1 TO LEASE AGREEMENT Exhibit 10.10 AMENDMENT NO. 1 TO OFFICE SPACE LEASE ------------------------------------- THIS AMENDMENT NO. 1 ("Amendment No. 1") to the Lease (as defined below) is made the 12 day of October, 1998 is by and between 485 DELAWARE AVENUE ASSOCIATES, L.P., a Pennsylvania limited partnership (hereinafter "Landlord") whose address is 1710 Walton Road, Suite 301, Blue Bell, Pennsylvania 19422 and CDNOW, INC., a Pennsylvania corporation (hereinafter "Tenant"). STATEMENT OF FACTS ------------------ A. Landlord and Tenant entered into an Office Space Lease dated June 12, 1998 (hereinafter "Lease") setting forth the terms of occupancy by Tenant of space in the building located at 485 Delaware Avenue, Fort Washington, Pennsylvania 19034 (hereinafter "Building"). B. Tenant and Landlord desire to extend certain dates, periods, measurements and other adjustable items set forth in the Lease on the terms and conditions set forth herein. C. All terms not defined herein shall have the meaning ascribed to such terms in the Lease. STATEMENT OF TERMS ------------------ NOW, THEREFORE, in consideration of the Premises and the covenants hereinafter set forth, and intending to be legally bound hereby, it is mutually agreed as follows: 1 Article 6 of the Preamble is hereby amended to read in its entirety as follows: 5. DEMISED PREMISES OR PREMISES shall be sixty three thousand ---------------------------- nine hundred thirty five (63,935) gross rentable square feet as measured in accordance with 1996 BOMA Standards for multi-tenant buildings which measurement includes a loss factor of 3.45%. 2 Section 3 of the Lease is hereby amended to read in its entirety as follows: 3. COMPLETION OF PREMISES. The Building and the Premises shall be completed in accordance with the Work Letter attached hereto as Exhibit C (herein called the "Work Letter") at Landlord's expense. --------- All necessary work shall be commenced promptly following Landlord's execution of this Lease and shall be substantially completed on the Occupancy Date set forth in the Preamble; provided, however, that the time for substantial completion of the Building and the Premises shall be extended for additional periods of time equal to the time lost by Landlord or Landlord's contractors, subcontractors or suppliers due to strikes or other labor troubles; Tenant Delay (as defined in Exhibit C); governmental restrictions and limitations; unavailability or delays in obtaining fuel, labor or materials; ware or other national emergency; accidents; floods; defective materials; fire damage or other casualties; adverse weather conditions; the inability to obtain building or use and occupancy permits; or any cause similar or dissimilar to the foregoing which is beyond the reasonable control of Landlord or Landlord's contractors, subcontractors or suppliers ("Force Majeure"); provided further, however, that for Landlord to claim that a Force Majeure prevented timely achievement of substantial completion (i) Landlord must provide written notice of the applicable event to Tenant within 48 hours of its occurrence, which notice shall specify the Force Majeure event and the anticipated effect on the date of substantial completion, and (ii) an actual delay in substantial completion must have occurred which but for the Force Majeure event would not have occurred. The Building and the Premises shall be deemed substantially completed when (i) all of the work and installations required to improve the Building and Premises as delineated in the Work Letter ("Landlord Work") are completed in conformity with such Work Letter (subject, in the case of the Premises Work (as defined in Exhibit C) to minor dimensional variations due to construction being carried out within an existing structure and "punch list" items as described below), and the HVAC (and all building utilities) shall be in good working order and be functioning in accordance with operating standards described in the Lease or in the Work Letter but in all events and in all aspects necessary to permit Tenant to occupy and fully utilize the Building and the Premises for its intended use, and (ii) Tenant has received from Landlord all permits required for lawful use and occupancy of the Premises by the Tenant (punch list items alone excepted). Landlord shall notify Tenant in writing approximately forty-five (45) days in advance and again not later than ten (10) days prior to the date Landlord believes it will achieve substantial completion of the Landlord's Work and will be prepared to deliver the Premises to Tenant in the condition required hereunder. Landlord shall promptly correct all work properly rejected by Tenant for failing to conform to the requirements of the Work Letter, whether or not fabricated, installed or completed and whether nor not set forth on the punch list. If within one year after the date of substantial completion of the Landlord Work any of such work is found to be not in conformity with the requirements of the Work Letter, Landlord shall correct it promptly after receipt of written notice from Tenant to do so. Landlord's obligations under the immediately preceding sentence shall survive Tenant's occupancy of the Premises upon substantial completion. Tenant shall give Landlord notice promptly after discovery of any such condition. No failure to deliver the Premises by the September 1, 1998 Occupancy Date shall in any respect affect the validity or continuance of this Lease or any obligation of Tenant hereunder or extend the Term of the Lease -2- provided, however, that for every day of delay after November 6, 1998, Tenant shall be entitled to two (2) days abatement of Rent under this Lease in addition to the abatement period already provided in the Preamble hereto, at Paragraph 9, which rent abatement shall run for six (6) consecutive months from the date of substantial completion (the designated "Rent Commencement Date") notwithstanding), and shall be subject to extension as otherwise provided in this sentence. Notwithstanding the foregoing, in the event Landlord fails to substantially complete the Landlord Work and deliver the Premises to Tenant on or before November 20, 1998, then at Tenant's option, the Occupancy Date specified in the Preamble at Paragraph 16 shall be extended to January 15, 1999. Lastly, the event the Landlord Work is not substantially completed and delivered by Landlord to Tenant on or before December 23, 1998, the Tenant may terminate this Lease with no further obligations to Landlord and Tenant shall receive the immediate return of any monies theretofore paid by Tenant to Landlord. The aforesaid December 23, 1998 date shall be subject to extension by reason of Tenant Delay as provided in the Work Letter, but otherwise shall not be subject to delay by reason of Force Majeure. 3 Article 9 of the Preamble is amended to include the following provisions: 9. "In addition to any other credit to which Tenant may be entitled as stated above, Tenant shall be entitled to a one-time Fixed Basic Rent Credit equal to $80,000.00 (the "Credit") which shall be applied against Fixed Basic Rent due hereunder until such credit is fully utilized. Commencing on September 1, 2000, Tenant shall pay Landlord, in addition to any and all other Fixed Basic Rent obligations, the sum of $80,000.00 together with interest at the rate of five percent (5%) per annum from the date the Credit was applied by Tenant through the date of payment in four (4) equal [quarterly installments. Once extended, Tenant may prepay all or any portion of the Credit at any time and from time to time with no prepayment fee or penalty." 4 The Improvement Allowance set forth in the Work Letter shall be equal to $1,232,666.80 which is $19.28 per square foot multiplied by 63,935 rentable square feet. The agreed to contract amount for the Premises Work Costs is $1,413,000.00 plus the Landlord's construction management fee of $35,325.00 (2.5% of $1,413,000.00) the sum of which is $1,448,325.00. The difference between $1,448,325.00 and $1,232,666.80 is $215,658.20 which amount shall be due and payable by Tenant within thirty (30) days following the date Landlord delivers possession of the Premises to Tenant as provided in Paragraph 2 above. 5 Landlord shall undertake commercially reasonable efforts to deliver the Premises to Tenant before November 6, 1998 as stated in Section 3 of the Lease, but Landlord's failure to deliver the Premises prior to such date shall not give Tenant any further rights except as expressly set forth in Section 3 of the Lease. In order to keep Tenant apprised of Landlord's -3- progress, the parties shall attend weekly meetings at a time and place which is mutually agreeable which meeting shall be attended by Mr. J. Brian O'Neill. In no event shall Landlord request further extensions of the November 6, 1998 deliver date set forth in Section 3 except in the case of an express Tenant Delay (as defined in the Work Letter). 6 Tenant had through September 17, 1998 to determine whether it desired to lease the approximately 6,100 gross rentable square feet as set forth in that certain letter dated August 11, 1998 from David A. Capozzi, Esquire to Mr. Patrick J. Kelley. Tenant had determined not to lease such space. Accordingly, Tenant's exercise of its right of refusal, as set forth in such letter, shall be deemed void and of no effect; provided, however, that Tenant's right of first refusal (as set forth in Section 43 of the Lease) shall remain in full force and effect as therein provided. 7 Landlord shall be responsible to pay for any services it requests Bergman & Associates to perform in measuring the rentable square footage of the Building and the Premises and those services which are reasonably deemed by Tenant outside of the scope of services specified in the current services agreement between Tenant and Bergman & Associates. 8 Except as modified herein, the Lease covering the Demised Premises shall remain in full force and effect as if the same sere set forth in full herein and Landlord and Tenant hereby ratify and confirm all the terms and conditions thereof. 9 This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and permitted assigns. 10 Each party agrees that it will not raise or assert as a defense to any obligation under the Lease or this Amendment or make any claim that the Lease or this Amendment is invalid or unenforceable due to any failure of this document to comply with ministerial requirements including, but not limited to, requirements for corporate seals, attestations, witnesses, notarizations, or other similar requirements, and each party hereby waives the right to assert any such defense or make any claim of invalidity or unenforceability due to any of the foregoing. -4- IN WITNESS WHEREOF, Landlord and Tenant have hereunto set their hands and seals the date and year first above written and acknowledge one to the other they possess the requisite authority to enter into this transaction and to sign this Amendment No. 1. LANDLORD: - -------- Date Signed:_____________ 485 DELAWARE AVENUE ASSOCIATES, L.P. a Pennsylvania limited partnership By: 485 DELAWARE AVENUE ASSOCIATES ACQUISITION CORPORATION, a, Pennsylvania corporation, its sole general partner By: /s/ ---------------------------------- Name:_____________________________ Title:____________________________ TENANT: - ------ Date Signed: 10/12/98 CDNOW, INC. ----------- By: /s/ Jason Olim --------------------------------------- Name: Jason Olim ----------------------------- Title: President ---------------------------- Attest: David A. Capozzi ----------------------------------- -5- EX-10.16 8 FIFTH ADDITIONAL SPACE AGREEMENT EXHIBIT 10.16 FIFTH ADDITIONAL SPACE AGREEMENT -------------------------------- AGREEMENT made as of the 13th day of May, 1997 between 55 BROAD STREET COMPANY, a New York partnership having its principal office at 345 Park Avenue, Borough of Manhattan, City, County and State of New York, as landlord (referred to herein as "Owner"), and N2K INC., a Pennsylvania corporation authorized to transact business in the State of New York, having an office at 55 Broad Street, Borough of Manhattan, City, County and State of New York, as tenant (referred to herein as "Tenant"). W I T N E S S E T H : ------------------- WHEREAS: (1) Under date of September 7, 1995, Owner and N2K Inc., a New York corporation, Tenant's predecessor in interest, entered into a lease affecting portions of the tenth (10th) and eleventh (11th) floors in the building -------------------------------- (referred to herein as the "Building") known as 55 Broad Street, Borough of Manhattan, City, County and State of New York; and (2) N2K Inc. a New York corporation, merged into Tenant by statutory merger effective February 13, 1996; and (3) Said lease, as modified by written agreements dated December 31, 1995, April 1, 1996 (said agreement dated April 1, 1996 is referred to as the "First Additional Space Agreement"), April 2, 1996 (said agreement dated April 2, 1996 is referred to as the "Second Additional Space Agreement"), April 3, 1996 (said agreement dated April 3, 1996 is referred to as the "Third Additional Space Agreement"), and October 15, 1996 (said agreement dated October 15, 1996 is referred to as the "Fourth Additional Space Agreement") is for a term (referred to herein as the "Demised Term") which shall end on January 31, 2002, unless extended pursuant to the provisions of Article SECOND of the First, Second, Third and/or Fourth Additional Space Agreements or sooner terminated or extended pursuant to any of the terms, covenants or conditions of said lease or pursuant to law, and is referred to herein as the "Lease"; and the premises so leased to Tenant pursuant to the provisions of the Lease, together with all appurtenances, fixtures, improvements, additions and other property attached thereto or installed therein at any time during the Demised Term other than Tenant's Personal Property (as defined in the Lease), are referred to herein, collectively, as the "Demised Premises"; and (4) Tenant now desires to lease and add to the Demised Premises a portion of the street level floor of the Building and Owner is willing to lease ------------ said portion of the street level floor to Tenant, subject to the provisions of ------------ this Agreement (said portion of the street level floor of the Building, ------------ initialled by the parties, annexed hereto and made part hereof as Exhibit "1", together with all appurtenances, fixtures, improvements, additions and other property attached thereto or installed therein at any time during the Demised Term, other than Tenant's Personal Property as defined in the Lease, is referred to herein as the "Fifth Additional Space"); and (5) The Demised Term of the Lease applicable to the Fifth Additional Space shall commence on a date (referred to as the "Fifth Additional Space Commencement Date") fixed by Owner in a notice to Tenant, not sooner than ten (10) days next following the date of the giving of such notice, which notice shall state that Owner has, or prior to the Fifth Additional Space Commencement Date will have, substantially completed Owner's Fifth Additional Construction (as more fully described in Addendum A, which is annexed hereto and made part hereof); and 2 (6) All capitalized terms shall have the same meanings ascribed to them in the Lease, unless otherwise set forth herein; and (7) The parties desire to record herein their understandings with respect to the foregoing. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties agree as follows: FIRST: The Lease is hereby modified as follows: ----- A. Owner hereby leases to Tenant and Tenant hereby hires from Owner the Fifth Additional Space for a term to commence upon the Fifth Additional Space Commencement Date and to end on the Expiration Date (as it may have been extended pursuant to the First, Second, Third, and/or Fourth Additional Space Agreements or the Lease and pursuant to the provisions of this Agreement), unless the Demised Term shall sooner terminate pursuant to any of the terms, covenants or conditions of the Lease or pursuant to law. B. Owner agrees to perform work and make installations in the Fifth Additional Space as set forth in Addendum A. Such work and installations are referred to as "Owner's Fifth Additional Construction". All of the terms, covenants and conditions of Addendum A are incorporated in this Agreement by reference and shall be deemed a part of this Agreement as though fully set forth in the body of this Agreement. Owner acknowledges that Tenant shall have the right to use the existing two (2) three ton supplemental air conditioning units, which units shall be in working order as of the date hereof, and the existing dedicated 400 Amp feed and 400 Amp distribution panel serving the Fifth Additional Space, at Tenant's expense, subject to the provisions of the Lease and this Agreement. 3 C. From and after the Fifth Additional Space Commencement Date, the Lease shall be deemed modified, as follows: (1) a. The Demised Premises shall include the Fifth Additional Space for all purposes of the Lease; b. Section 2.01 of the Lease shall be modified to the extent that, in addition to the use set forth in said Section 2.01, the Fifth Additional Space may also be used as a recording studio by Tenant and others under Tenant's supervision as incidental to Tenant's use, but otherwise upon all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, with the express understanding that noise or vibration from the Fifth Additional Space shall not reach outside the Fifth Additional Space, it being further agreed by Tenant that the provisions of subsection H of Section 3.01 shall expressly apply to the intended use of the Fifth Additional Space. (2) a. The Fixed Rent reserved in the Lease shall be increased by the sum of ONE HUNDRED FIFTEEN THOUSAND THREE HUNDRED SIXTY-EIGHT and 00/100 ($115,368.00) DOLLARS per annum with respect to the period from the Fifth Additional Space Commencement Date to and including February 28, 2001 and the sum of ONE HUNDRED TWENTY-SEVEN THOUSAND FIVE HUNDRED TWELVE and 00/100 ($127,512.00) DOLLARS per annum with respect to the remainder of the Demised Term applicable to the Fifth Additional Space and the monthly installments of Fixed Rent shall be increased accordingly. b. In the event that the Fifth Additional Space Commencement Date shall occur on a date other than the first (1st) day of any calendar month, then the increase in the Fixed Rent for the month in which the Fifth Additional Space Commencement Date shall occur shall be prorated. 4 c. Fifth Additional Space Rent Holiday. ----------------------------------- Provided Tenant is not then in default in the observance and performance of any of the terms, covenants and conditions of the Lease on Tenant's part to be observed and performed, Tenant shall be entitled to a rent holiday and shall not be required to pay any portion of the Fixed Rent applicable to the Fifth Additional Space with respect to the period from the Fifth Additional Space Commencement Date to and including February 28, 1998 but, during such period, Tenant shall otherwise be required to comply with all of the other terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, including, but not limited to, the provisions of Article 23 and Article 29. In the event the Fifth Additional Space Commencement does not occur until March 1, 1998 or thereafter, Tenant shall not be entitled to any Rent Holiday with respect to the Fifth Additional Space, it being understood and agreed that such Rent Holiday shall apply only until February 28, 1998, unless Owner causes any delay in the occurrence of the Fifth Additional Space Commencement Date and, in such event, the Rent Holiday shall be extended by the number of days of any such delay. (3) The Demised Premises Area, as set forth in Section 23.01, shall be further increased by 3,036 square feet and Article 29. (4) With respect to the Fifth Additional Space only, the following new Section 29.10 entitled "Electricity: Fifth Additional Space" ------------------------------------ shall be deemed added to the Lease as of the date hereof: "A. Owner shall redistribute or furnish electrical energy to or for the use of Tenant in the Fifth Additional Space for the operation of the lighting fixtures and the electrical receptacles installed in the Fifth Additional Space on the Commencement Date and the operation of the Building heating, ventilating and air conditioning system unit serving the floors of the Building on which the Fifth Additional Space is located. If either the quantity or character of electrical service is changed by the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building or 5 is no longer available or suitable for Tenant's requirements, or if any equipment supplementing or ancillary to such electrical service which is installed in the Building by or on behalf of said corporation(s) and/or other entity(ies) malfunctions or fails to operate for any reason while Tenant has made any connections to said equipment, no such change, unavailability, unsuitability, malfunction or failure to operate shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner, or its agents, by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business or otherwise, unless such change, unavailability or unsuitability is caused by Owner's negligence or willful misconduct or the negligence or willful misconduct of Owner's agents, employees or contractors. In the event the corporation(s) and/or other entity(ies) selected by Owner shall be different from such corporation(s) and/or other entity(ies) presently providing electrical service to the Building as of the date hereof, any such new or replacement corporation(s) and/or other entity(ies) selected by Owner shall be reputable and provide competitive rates. B. Owner shall provide for an electrical load of six (6) watts per square foot of usable area demand load other than during any period it is prohibited from doing so by any laws, orders, rules and/or regulations of any applicable governmental authorities (including, but not limited to, the New York State Energy Conversation Construction Code) in which event the reference to six (6) watts hereinabove set forth shall, during such period, be decreased to the maximum number of watts per usable square foot which is permitted by any such laws, orders, rules and/or regulations. The foregoing shall be exclusive of the electrical power for the Building HVAC systems. Solely for the proposes of this section, the Fifth Additional Space shall be deemed to contain 3,036 square feet. Any additional feeders or risers to supply Tenant's additional electrical requirements, and all other equipment proper and necessary in connection with such feeders or risers shall be installed by Owner upon Tenant's request, at the sole cost and expense of Tenant, provided, that, in Owner's judgment, such additional feeders or 6 risers are necessary and are permissible under applicable laws and insurance regulations and the installation of such feeders or riders will not cause permanent damage or injury to the Building or the Fifth Additional Space or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations or repairs to or interfere with or disturb other tenants or occupants of the Building. Tenant covenants that at no time shall the use of electrical energy in the Fifth Additional Space exceed the capacity of the existing feeders or risers or wiring installations then serving the Fifth Additional Space. C. Prior to the Fifth Additional Space Commencement Date Owner, at Owner's expense, shall have installed a submeter or submeters in the Fifth Additional Space to measure Tenant's actual consumption of electricity in the entire Fifth Additional Spare including, but not limited to, all electricity required for the operation of the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Fifth Additional Space are located. Tenant shall pay to Owner, from time to time, upon demand, for the electricity consumed in the Fifth Additional Space, as determined by such submeter or submeters, the actual cost to Owner of purchasing electricity for the Fifth Additional Space (as such actual cost is hereinafter defined) plus all applicable taxes thereon. Owner's actual cost for Tenant's KW and KWH shall be determined by the application of the Building's electric rate schedule per month from the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building to Tenant's usage. With respect to any period when any such submeter is not in good working order, Tenant shall pay Owner for electricity consumed in the portion of the Fifth Additional Space served by such submeter at the rate paid by Tenant to Owner during the most recent comparable period when such submeter was in good working order. Tenant shall take good care of any such submeter and all submetering installation equipment, at Tenant's sole cost and expense, and make all repairs thereto occasioned by any acts, omissions or negligence of Tenant or any person claiming through or under Tenant as and when necessary to insure that any such submeter is, at all times 7 during the Demised Term, in good working order. With respect to the period (referred to as the "Interim Period"), if any, from the Fifth Additional Space -------------- Commencement Date through the date immediately prior to the date upon which the submeter or submeters shall be operable, Tenant shall pay to Owner monthly on demand of Owner, for the electricity consumed in the Fifth Additional Space, a sum equal to one-twelfth (1/12th) of the product of (x) $1.50 multiplied by (y) 3,036. With respect to any period during the Interim Period constituting less than a full calendar month, the monthly payment referred to in the preceding sentence shall be appropriately prorated. D. (1) Owner may, at any time, elect to discontinue the redistribution or furnishing of electrical energy. In the event of any such election by Owner, (i) Owner agrees to give reasonable advance notice of any such discontinuance to Tenant, (ii) Owner agrees to permit Tenant to receive electrical service directly from the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building and to permit the existing feeders, risers, wiring and other electrical facilities serving the Fifth Additional Space to be used by Tenant for such purpose to the extent they are suitable and safely capable, (iii) Owner agrees to pay such charges and costs, if any, as such corporation(s) and/or other entity(ies) may impose in connection with the installation of Tenant's meters, (iv) the provisions of Subsection C of this Section 29.10 shall be deemed deleted from this Lease, and (v) this Lease shall remain in full force and effect and such discontinuance shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. (2) Notwithstanding anything to the contrary contained in subsection D(1) of this Section 29.10, Owner agrees that Owner shall not voluntarily discontinue the redistribution or furnishing of electrical energy until Owner shall have made or paid for all installations required to 8 provide Tenant with electrical service similar to the electrical service which Tenant had in the Fifth Additional Space immediately prior to such discontinuance and the public utility corporation(s) and/or other entity(ies) supplying electrical service to the Building has agreed to furnish such service so that Tenant shall immediately upon such discontinuance be able to receive electrical service directly from such public utility corporation(s) and/or other entity(ies). Unless a shorter time is required by the public utility corporation(s) and/or other entity(ies) supplying electrical service to the Building, Owner shall give Tenant at least ninety (90) days' prior notice of any such discontinuance. E. Notwithstanding anything to the contrary set forth in this Lease, any sums payable or granted in any way by the corporation(s) and/or other entity(ies) selected by Owner to supply electricity to the Building resulting from the installation in the Fifth Additional Space of energy efficient lighting fixtures, lamps, special supplemental heating, ventilation and air conditioning systems or any other Alterations, which sums are paid or given by way of rebate, direct payment, credit or otherwise, shall be and remain the property of Owner, and Tenant shall not be entitled to any portion thereof, unless such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations were installed by Tenant, solely at Tenant's expense, without any contribution, credit or allowance by Owner, in accordance with all of the provisions of this Lease. For the purposes of the preceding sentence any such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations comprising part of Owner's Fifth Additional Construction shall be deemed installed solely at Tenant's expense. Nothing contained in the foregoing sentence, however, shall be deemed to obligate Owner to supply or install in the Fifth Additional Space any such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations. F. Tenant acknowledges that the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Demised Premises are located (referred to herein as the "Floor HVAC Unit") shall not be connected to the submeter(s) serving the 9 Demised Premises, but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor HVAC Unit. Accordingly, Tenant agrees that during the Demised Term, Tenant shall pay to Owner, from time to time upon demand of Owner and submission by Owner to Tenant of invoices or bills therefor, forty-five and 97/100 (45.97%) percent (hereinafter "Tenant's Electrical Share") of all amounts shown on said separate meter(s) for such Floor HVAC Unit. G. In no event will any of the costs for the light, power or HVAC system serving the lobby, or other public areas of the floor of which the Demised Premises are a part, be included in Tenant's Electric Share." SECOND: a. From and after the Fifth Additional Space Commencement ------ Date, the date August 31, 2002 shall be deemed to be the Expiration Date and the Demised Term shall expire on August 31, 2002, unless sooner terminated pursuant to the provisions of the Lease or pursuant to law, and all of the then applicable executory terms, covenants and conditions set forth in the Lease (including, but not limited to, the provisions of Articles 23 and 29) shall apply with respect to the remainder of the Demised Term as herein and hereby extended. b. Supplementing the provisions of subsection D of Section 1.02, after the determination of the Fifth Additional Space Commencement Date, each party agrees, upon demand of the other, to execute, acknowledge and deliver to each other, an instrument, in form reasonably satisfactory to Owner, setting forth said Fifth Additional Space Commencement Date and the Expiration Date, which instrument shall include the amounts of the annual and monthly Fixed Rent for the remainder of the Demised Term. 10 THIRD: Owner and Tenant each represent and warrant to the other that ----- Schlesinger & Company, L.L.C. is the sole broker with whom either party has negotiated or otherwise dealt with in connection with the Fifth Additional Space or in bringing about this Agreement. Owner and Tenant shall indemnify each other from all loss, cost, liability, damage and expenses, including, but not limited to, reasonable counsel fees and disbursements, arising from any breach of the foregoing representation and warranty. Owner shall pay any commission or compensation due hereunder pursuant to a separate agreement with such broker. FOURTH: A. Notwithstanding the provisions of Paragraph (5) of the ------ WHEREAS provision of the Fourth Additional Space Agreement, the Fourth Additional Space Commencement Date and the Fourth Additional Space Rent Commencement Date applicable to the twenty-fifth (25th) floor portion of the ------------------- Fourth Additional Space is fixed at June 1, 1997. B. Notwithstanding the provisions of Paragraph (5) of the WHEREAS provision of the Fourth Additional Space Agreement, the Fourth Additional Space Commencement Date and the Fourth Additional Space Rent Commencement Date applicable to the twenty-sixth (26th) floor portion of the Fourth Additional Space is fixed at March 21, 1997. C. Effective as of the date hereof, Paragraph FIRST C.(2)a. of the Fourth Additional Space Agreement, shall be deleted and a new Paragraph FIRST C.(2)a. and b. shall be inserted in lieu thereof as follows: "(2) a. With respect to the twenty-sixth (26th) floor portion of the Fourth Additional Space, effective as of March 21, 1997 to and including February 28, 1998 the Fixed Rent reserved in the Lease shall be increased by the sum of ONE HUNDRED FORTY THOUSAND and 00/100 ($140,000.00) DOLLARS per annum, and effective as of March 1, 1998 to and including February 28, 1999, the Fixed Rent reserved in the Lease shall be increased by the sum of TWO HUNDRED FORTY THOUSAND and 00/100 ($240,000.00) DOLLARS per annum and, effective as of March 1, 1999 to and including August 31, 2002, the Fixed Rent reserved in the Lease shall be increased by 11 the sum of TWO HUNDRED SIXTY THOUSAND and 00/100 ($260,000.00) DOLLARS per annum and the monthly installments of Fixed Rent with respect thereto shall be increased accordingly; and b. With respect to the twenty-fifth (25th) floor portion of the Fourth Additional Space, effective as of June 1, 1997 to and including March 14, 1998, the Fixed Rent reserved in the Lease shall be increased by the sum of ONE HUNDRED FORTY and 00/100 ($140,000.00) DOLLARS per annum and, effective as of March 15, 1998 to and including March 14, 1999, the Fixed Rent reserved in the Lease shall be increased by the sum of TWO HUNDRED AND FORTY THOUSAND and 00/100 ($240,000.00) DOLLARS per annum and, effective as of March 15, 1999 to and including August 31, 2002, the Fixed Rent reserved in the Lease shall be increased by the sum of TWO HUNDRED SIXTY THOUSAND and 00/100 ($260,000.00) DOLLARS per annum and the monthly installments of Fixed Rent with respect thereto shall be increased accordingly." D. The use of the two (2) existing supplemental air conditioning units and any future supplemental air conditioning unit serving the Fifth Additional Space shall be governed by the provisions of the Lease and the following paragraph: "Tenant's Supplemental A/C Units/Cooling Tower: A. Supplementing the provisions of Section 29.06, Owner agrees, subject to the provisions of Article 26 and Section 29.08, to supply condenser water to any separate air conditioning system to serve the Fifth Additional Space installed by or on behalf of Tenant in accordance with the provisions of this Lease (referred to herein as "Tenant's Supplemental A/C Unit") and Tenant agrees that (i) Tenant shall pay to Owner, promptly after demand, all reasonable costs and expenses incurred by Owner in connection with the hookup of any such Unit to any Building cooling tower and associated piping (referred to herein as the "Cooling Tower"), including, but not limited to, the Building standard hookup fee then charged by Owner, which fee shall be waived for the existing two (2) three (3) ton units, and (ii) from and after the date the hookup is completed, if applicable, the Fixed Rent reserved in this Lease shall be increased by a sum (referred to herein as the "Tenant's Cooling Tower Use Charge") equal to (x) the standard per ton charge then in effect in the Building, which is presently $75.00 per ton per annum multiplied by (xx) the number of tons of Tenant's Supplemental A/C Units. B. If the regular hourly wage rate of operating engineers employed in the Building shall be increased in any Escalation Year (as defined in Article 23) over the rate in effect on the January 1st immediately preceding such hookup, the Tenant's Cooling Tower Use Change for such Escalation Year shall be increased by an amount equal to that proportion of Tenant's Cooling Tower Use Charge which such increase in said hourly wage rate bears to the hourly wage rate in effect on the January 1st immediately preceding such hookup. Any such increase for any Escalation Year pursuant to the provisions of the immediately preceding sentence shall be shown on the Owner's Operating Expense Statement with respect to such Escalation Year rendered by Owner pursuant to the provisions of said Article 23, and shall be payable by Tenant as if it were an increase in the Fixed Rent pursuant to the provisions of said Article 23. 12 C. Any increase in Fixed Rent for Tenant's Cooling Tower Use Charge shall be effective as of the date Tenant's Supplemental A/C Unit is hooked up to the Cooling Tower and shall be retroactive to such date if necessary. D. Tenant's Supplemental A/C Unit shall be repaired and maintained by Tenant at Tenant's cost and expense, pursuant to a service contract. E. In the event Tenant elects to discontinue its use of either or both of such Tenant's Supplemental A/C Units and remove either or both of same, such removal shall be performed in accordance with the applicable provisions of this Lease and thereafter Tenant's Cooling Tower Use Charge therefor shall be reduced accordingly and Tenant thereafter shall not be required to replace said Unit(s)." FIFTH: Except to the extent expressly modified by the foregoing ----- provisions of this Agreement, the Lease is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals as of the day and year first above written. 53 BROAD STREET COMPANY, Owner BY: /s/ [SIGNATURE ILLEGIBLE] ----------------------------- N2K INC., Tenant BY: /s/ Jonathan V. Diamond ---------------------------------- Jonathan V. Diamond, Vice Chairman 13 STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On the day of April, 1997, before me personally came Jonathan V. Diamond to me known, who, being by me duly sworn, did depose and say that he resides at that he is the Vice Chairman of N2K INC., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by authority of the Board of Directors of said corporation. /s/ Richard J. Harris ---------------------- Notary Public RICHARD J. HARRIS Notary Public State of New York No. 01HA5063401 Qualified in New York County Commission Expires July 22, 1998 14 EX-10.17 9 SIXTH ADDITIONAL SPACE AGREEMENT Exhibit 10.17 SIXTH ADDITIONAL SPACE AGREEMENT -------------------------------- AGREEMENT made as of the 5th day of January, 1998 between 55 BROAD STREET COMPANY, a New York partnership having its principal office at 345 Park Avenue, Borough of Manhattan, City, County and State of New York, as landlord (referred to herein as "Owner"), and N2K INC., a Delaware corporation authorized to transact business in the State of New York, having an office at 55 Broad Street, Borough of Manhattan, City, County and State of New York, as tenant (referred to herein as "Tenant"). W I T N E S S E T H: ------------------- WHEREAS: (1) Under date of September 7, 1995, Owner and N2K Inc., a New York corporation, Tenant's predecessor in interest, entered into a lease affecting portions of the tenth (10th) and eleventh (11th) floors in the building -------------------------------- (referred to herein as the "Building") known as 55 Broad Street, Borough of Manhattan, City, County and State of New York; and (2) N2K Inc., a New York corporation, merged into N2K Inc., a Pennsylvania corporation by statutory merger effective February 13, 1996 and, thereafter, N2K Inc., said Pennsylvania corporation, merged into Tenant by statutory merger effective June 5, 1996 as amended and restated as of October 16, 1997; and (3) Said lease, as modified by written agreements dated December 31, 1995, April 1, 1996 (said agreement dated April 1, 1996 is referred to as the "First Additional Space Agreement"), April 2, 1996 (said agreement dated April 2, 1996 is referred to as the "Second Additional Space Agreement"), April 3, 1996 (said agreement dated April 3, 1996 is referred to as the "Third Additional Space Agreement"), October 15, 1996 (said agreement dated October 15, 1996 is referred to as the "Fourth Additional Space Agreement"), and May 13, 1997 (said agreement dated May 13, 1997 is referred to as the "Fifth Additional Space Agreement") is for a term (referred to herein as the "Demised Term") which shall now end on August 31, 2002, unless further extended pursuant to the provisions of Article SECOND of the First, Second, Third, Fourth and/or Fifth Additional Space Agreements or sooner terminated pursuant to any of the terms, covenants or conditions of said lease or pursuant to law, and is referred to herein as the "Lease"; and the premises so leased to Tenant pursuant to the provisions of the Lease, together with all appurtenances, fixtures, improvements, additions and other property attached thereto or installed therein at any time during the Demised Term other than Tenant's Personal Property (as defined in the Lease), are referred to herein, collectively, as the "Demised Premises"; and (4) Tenant now desires to lease and add to the Demised Premises that portion of the thirteenth (13th) floor of the Building known as Unit 13-E which ----------------- is indicated by outlining and diagonal markings on the floor plan, identified as Exhibit 1, initialled by the parties, annexed hereto and made a part hereof, and Owner is willing to lease said portion of the thirteenth (13th) floor to Tenant, ----------------- subject to the provisions of this Agreement (said portion of the thirteenth (13th) floor of the Building, together with all appurtenances, fixtures, improvements, additions and other property attached thereto or installed therein at any time during the Demised Term, other than Tenant's Personal Property as defined in the Lease, is referred to herein as the "Sixth Additional Space"); and 2 (5) Subject to the provisions of this Agreement, the Demised Term of the Lease applicable to the Sixth Additional Space shall commence on a date fixed by Owner in a notice to Tenant, not sooner than ten (10) days next following the date of the giving of such notice, which notice shall state that Owner has, or prior to the Sixth Additional Space Commencement Date will have, substantially completed Owner's Sixth Additional Work (as defined herein); and (6) All capitalized terms shall have the same meanings ascribed to them in the Lease, unless otherwise set forth herein; and (7) The parties desire to record herein their understandings with respect to the foregoing. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties agree as follows: FIRST: The Lease is hereby modified as follows: ----- A. Owner hereby leases to Tenant and Tenant hereby hires from Owner the Sixth Additional Space for a term to commence upon the Sixth Additional Space Commencement Date and to end on the Expiration Date (as it may have been extended pursuant to the First and/or Second and/or Third and/or Fourth and/or Fifth Additional Space Agreements or the Lease or pursuant to the provisions of this Agreement), unless the Demised Term shall sooner terminate pursuant to any of the terms, covenants or conditions of the Lease or pursuant to law. 3 B. (1) Tenant acknowledges that Owner has made no representations to Tenant as to the condition of the Sixth Additional Space and Tenant agrees to accept possession of the Sixth Additional Space in the condition which shall exist on the Sixth Additional Space Commencement Date "as is" and further agrees that Owner shall have no obligation to perform any work or make any installations in order to prepare the Sixth Additional Space for Tenant's occupancy except that on or about the Sixth Additional Space Commencement Date, Owner agrees to perform the following work in the Sixth Additional Space (referred to herein as the "Sixth Additional Work"): (i) demise the Sixth Additional Space and (ii) clean the existing carpeting, where necessary, and (iii) paint the painted surfaces in the Sixth Additional Space with a single coat of paint, in a flat finish, in colors selected by Tenant from Building standard colors (but not more than one (1) color in any room or area); (2) The work and installations required to be performed and made by Owner pursuant to the provisions of paragraph (1) shall be equal to the standards adopted by Owner for the Building. The Sixth Additional Work shall constitute a single non-recurring obligation on the part of Owner. In the event this Lease is renewed or extended for a further term by agreement or operation of law, Owner's obligation to perform the Sixth Additional Work shall not apply to any such renewal or extension; and (3) At any time after substantial completion of the Sixth Additional Work, Owner may enter the Sixth Additional Space to complete unfinished details of the Sixth Additional Work, and entry by Owner, its agents, servants, employees or contractors for such purposes shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement, or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or his agents by reason of inconvenience or annoyance to Tenant or injury to or interruption of Tenant's business or otherwise. 4 C. From and after the Sixth Additional Space Commencement Date, the Lease shall be deemed modified, as follows: (1) The Demised Premises shall include the Sixth Additional Space for all purposes of the Lease; (2) a. The Fixed Rent reserved in the Lease shall be increased by the sum of FORTY-EIGHT THOUSAND ONE HUNDRED EIGHTY-FIVE and 00/100 ($48,185.00) DOLLARS per annum with respect to the first year of the Demised Term applicable to the Sixth Additional Space (i.e., from the Sixth Additional Space Commencement Date to the last day of the calendar month in which occurs the first (1st) anniversary of the Sixth Additional Space Commencement Date), FIFTY THOUSAND TWO HUNDRED EIGHTY and 00/100 ($50,280.00) DOLLARS per annum with respect to the next year of the Demised Term applicable to the Sixth Additional Space, and FIFTY-TWO THOUSAND THREE HUNDRED SEVENTY-FIVE ($52,375.00) DOLLARS per annum with respect to the remainder of the Demised Term applicable to the Sixth Additional Space and the monthly installments of Fixed Rent shall be increased accordingly. b. In the event that the Sixth Additional Space Commencement Date shall occur on a date other than the first (1st) day of any calendar month, then the increase in the Fixed Rent for the month in which the Sixth Additional Space Commencement Date shall occur shall be prorated. (3) The Demised Premises Area, as set forth in Section 23.01, shall be further increased by 2,095 square feet, except that the provisions of Article 23 solely insofar as said provisions relate to the Sixth Additional Space shall be modified to provide for Base Operating Expenses with respect to the Sixth Additional Space shall mean a sum equal to Operating Expenses for the calendar year 1998 solely with respect to such Sixth Additional Space. 5 (4) With respect to the Sixth Additional Space only, the following new Section 29.11 entitled "Electricity: Sixth Additional Space" shall be deemed ------------------------------------ added to the Lease as of the date hereof, and Section 29.05 shall continue to apply to the previously leased portions of the Building by Tenant: A. "Owner shall redistribute or furnish electrical energy to or for the use of Tenant in the Sixth Additional Space for the operation of the lighting fixtures and the electrical receptacles installed in the Sixth Additional Space on the Sixth Additional Space Commencement Date and the operation of the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Sixth Additional Space is located. If either the quantity or character of electrical service is changed by the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building or is no longer available or suitable for Tenant's requirements, or if any equipment supplementing or ancillary to such electrical service which is installed in the Building by or on behalf of said corporation(s) and/or other entity(ies) malfunctions or fails to operate for any reason while Tenant has made any connections to said equipment, no such change, unavailability, unsuitability, malfunction or failure to operate shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner, or its agents, by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business or otherwise, unless such change, unavailability or unsuitability is caused by Owner's negligence or willful misconduct or the negligence or willful misconduct of Owner's agents, employees or contractors. In the event the corporation(s) and/or other entity(ies) selected by Owner shall be different from such corporation(s) and/or other entity(ies) presently providing electrical service to the Building as of the date hereof, any such new or replacement corporation(s) and/or other entity(ies) selected by Owner shall be reputable and provide competitive rates. 6 B. Owner represents that the electrical feeder or riser capacity serving the Sixth Additional Space on the Sixth Additional Space Commencement Date shall be adequate to serve the lighting fixtures and electrical receptacles installed in the Sixth Additional Space on the Sixth Additional Space Commencement Date. Any additional feeders or risers to supply Tenant's additional electrical requirements, and all other equipment proper and necessary in connection with such feeders or risers shall be installed by Owner upon Tenant's request, at the sole cost and expense of Tenant, provided, that, in Owner's judgment, such additional feeders or risers are necessary and are permissible under applicable laws and insurance regulations and the installation of such feeders or risers will not cause permanent damage or injury to the Building or the Sixth Additional Space or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations or repairs to or interfere with or disturb other tenants or occupants of the Building. Tenant covenants that at no time shall the use of electrical energy in the Sixth Additional Space exceed the capacity of the existing feeders or risers or wiring installations then serving the Sixth Additional Space. C. Prior to the Sixth Additional Space Commencement Date Owner, at Owner's expense, shall have installed a submeter or submeters in the Sixth Additional Space to measure Tenant's actual consumption of electricity in the entire Sixth Additional Space. Tenant shall pay to Owner, from time to time, upon demand, for the electricity consumed in the Sixth Additional Space, as determined by such submeter or submeters, the actual cost to Owner of purchasing electricity for the Sixth Additional Space (as such actual cost is hereinafter defined) plus all applicable taxes thereon. Owner's actual cost for Tenant's KW and KWH shall be determined by the application of the Building's electric rate schedule per month from the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building to Tenant's usage. With respect to any period when any such submeter is not in good working order, Tenant shall pay Owner for electricity consumed in the portion 7 of the Sixth Additional Space served by such submeter at the rate paid by Tenant to Owner during the most recent comparable period when such submeter was in good working order. Tenant shall take good care of any such submeter and all submetering installation equipment, at Tenant's sole cost and expense, and make all repairs thereto occasioned by any acts, omissions or negligence of Tenant or any person claiming through or under Tenant as and when necessary to insure that any such submeter is, at all times during the Demised Term, in good working order. With respect to the period (referred to as the "Interim Period"), if any, -------------- from the Sixth Additional Space Commencement Date through the date immediately prior to the date upon which the submeter or submeters shall be operable, Tenant shall pay to Owner monthly on demand of Owner, for the electricity consumed in the Sixth Additional Space, a sum equal to one-twelfth (1/12th) of the product of (x) $1.50 multiplied by (y) 2,095. With respect to any period during the Interim Period constituting less than a full calendar month, the monthly payment referred to in the preceding sentence shall be appropriately prorated. D. (1) Owner may, at any time, elect to discontinue the redistribution or furnishing of electrical energy. In the event of any such election by Owner, (i) Owner agrees to give reasonable advance notice of any such discontinuance to Tenant, (ii) Owner agrees to permit Tenant to receive electrical service directly from the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building and to permit the existing feeders, risers, wiring and other electrical facilities serving the Sixth Additional Space to be used by Tenant for such purpose to the extent they are suitable and safely capable, (iii) Owner agrees to pay such charges and costs, if any, as such corporation(s) and/or other entity(ies) may impose in connection with the installation of Tenant's meters, (iv) the provisions of Subsection C of this Section 29.11 shall be deemed deleted from this Lease, and (v) this Lease shall remain in full force and effect and such discontinuance shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or 8 diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. (2) Notwithstanding anything to the contrary contained in subsection D(l) of this Section 29.11, Owner agrees that Owner shall not voluntarily discontinue the redistribution or furnishing of electrical energy until Owner shall have made or paid for all installations required to provide Tenant with electrical service similar to the electrical service which Tenant had in the Sixth Additional Space immediately prior to such discontinuance and the public utility corporation(s) and/or other entity(ies) supplying electrical service to the Building has agreed to furnish such service so that Tenant shall immediately upon such discontinuance be able to receive electrical service directly from such public utility corporation(s) and/or other entity(ies). Unless a shorter time is required by the public utility corporation(s) and/or other entity(ies) supplying electrical service to the Building, Owner shall give Tenant at least ninety (90) days prior notice of any such discontinuance. E. Notwithstanding anything to the contrary set forth in this Lease, any sums payable or granted in any way by the corporation(s) and/or other entity(ies) selected by Owner to supply electricity to the Building resulting from the installation in the Sixth Additional Space of energy efficient lighting fixtures, lamps, special supplemental heating, ventilation and air conditioning systems or any other Alterations, which sums are paid or given by way of rebate, direct payment, credit or otherwise, shall be and remain the property of Owner, and Tenant shall not be entitled to any portion thereof, unless such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations were installed by Tenant, solely at Tenant's expense, without any contribution, credit or allowance by Owner, in accordance with all of the provisions of this Lease. 9 Nothing contained in the foregoing sentence, however, shall be deemed to obligate Owner to supply or install in the Sixth Additional Space any such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations. F. Tenant acknowledges that the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Sixth Additional Space is located (referred to herein as the "Floor HVAC Unit") shall not be connected to the submeter(s) serving the Sixth Additional Space, but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor HVAC Unit. Accordingly, Tenant agrees that during the Demised Term, Tenant shall pay to Owner, from time to time upon demand of Owner and submission by Owner to Tenant of invoices or bills therefor, twenty and 95/100 (20.95%) percent (hereinafter "Tenant's Electrical Share") of all amounts shown on said separate meter(s) for such Floor HVAC Unit. G. Tenant acknowledges that the light and power systems serving the public areas of the floor of the Building on which the Sixth Additional Space is located (referred to herein as the "Floor Public Light and Power") shall not be connected to the submeter(s) serving the Sixth Additional Space but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor Public Light and Power. Accordingly, Tenant agrees that during the Demised Term, Tenant shall pay to Owner, from time to time upon demand of Owner and submission by Owner to Tenant of invoices or bills therefor, Tenant's Electrical Share of all amounts shown on said separate meter(s) for such Floor Public Light and Power." 10 SECOND: Present Occupant: Tenant acknowledges that Owner has advised ------ ---------------- Tenant that the Sixth Additional Space is presently affected by a letting agreement with Studio Archetype, Inc. (referred to as the "Present Occupant") for a term to expire on December 31, 1997, unless sooner terminated pursuant to any of the terms, covenants or conditions of the lease with the Present Occupant or pursuant to law. Notwithstanding anything to the contrary contained herein, if the Present Occupant does not vacate and surrender the Sixth Additional Space to Owner on or prior to December 31, 1997, then (i) the Demised Term applicable to the Sixth Additional Space shall not commence on January 1, 1998, but shall, instead, commence on the date next following the date that the Present Occupant has vacated and surrendered the Sixth Additional Space to Owner and Owner has --- substantially completed the Sixth Additional Space Construction, (ii) the Demised Term shall end in accordance with the provisions of the Lease and this Agreement, unless sooner terminated pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law, (iii) except as set forth in this sentence, neither the validity of this Lease nor the obligations of Tenant under this Lease shall be affected thereby, (iv) Tenant waives any right under Section 223-a of the Real Property or any successor law of like import to rescind the Lease or this Agreement or rescind its obligations with respect thereto and (v) Tenant further waives the right to recover any damages which may result from the failure of Owner to deliver possession of the Sixth Additional Space to Tenant on January 1, 1998. THIRD: Sixth Additional Space Rent Holiday: Provided Tenant is not ----- ----------------------------------- then in default in the observance and performance of any of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Tenant, with respect to the Sixth Additional Space only, shall be entitled to a conditional rent holiday and shall not be required to pay any portion of the Fixed Rent applicable to the Sixth Additional Space with respect to the period (the "Sixth Additional Space Rent Holiday Period") from the Sixth Additional ------------------------------------------ Space Commencement Date to and including the date which 11 is sixty (60) days next following the Sixth Additional Space Commencement Date, but during such period, Tenant shall otherwise be required to comply with all of the other terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, other than the obligation to make any payments pursuant to the provisions of Article 23 applicable to the Sixth Additional Space. If, at any time during the Demised Term, Tenant shall be in default in the observance and performance of any of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, then the total sum of the Fixed Rent so conditionally excused by operation of the foregoing provisions hereof shall become immediately due and payable by Tenant to Owner. If, as of the Expiration Date, Tenant shall not then be in default in the observance and performance of any of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Owner shall waive payment of all such Fixed Rent so conditionally excused. FOURTH: Owner and Tenant each represent and warrant to the other ------ that Schlesinger & Company, LLC. is the sole broker with whom either party has negotiated or otherwise dealt with in connection with the Sixth Additional Space or in bringing about this Agreement. Owner and Tenant shall indemnify each other from all loss, cost, liability, damage and expenses, including, but not limited to, reasonable counsel fees and disbursements, arising from any breach of the foregoing representation and warranty. Owner shall pay any commission or compensation due hereunder pursuant to a separate agreement with such broker. FIFTH : As of the date hereof, the thirteenth (13th) floor of the ----- Building contains an Americans with Disabilities Act-compliant core toilet. 12 SIXTH: Except to the extent expressly modified by the foregoing ----- provisions of this Agreement, the Lease is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals as of the day and year first above written. 55 BROAD STREET COMPANY, Owner BY: /s/ SIGNATURE ILLEGIBLE ---------------------------- Partner N2K INC., Tenant BY: /s/ SIGNATURE ILLEGIBLE ---------------------------- its Vice Chairman 13 STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On the 5/th/ day of January 1998, before me personally came Jon Diamond to me known, who, being by me duly sworn, did depose and say that he/she resides at 1 West 67/th/ Street, New York, New York 10023, that he/she is the Vice Chairman of N2K INC., the corporation described in and which executed the foregoing instrument; and that he/she signed his/her name thereto by authority of the Board of Directors of said corporation. /s/ Arthur Weiner -------------------------- Notary Public ARTHUR WEINER Notary Public, State of New York No. 02WE5070317 Qualified in New York County Commission Expires December 9, 1998 14 EX-10.18 10 SEVENTH ADDITIONAL SPACE AGREEMENT EXHIBIT 10.18 SEVENTH ADDITIONAL SPACE AGREEMENT ---------------------------------- AGREEMENT made as of the 5th day of January, 1998 between 55 BROAD STREET COMPANY, a New York partnership having its principal office at 345 Park Avenue, Borough of Manhattan, City, County and State of New York, as landlord (referred to herein as "Owner"), and N2K INC., a Delaware corporation authorized to transact business in the State of New York, having an office at 55 Broad Street, Borough of Manhattan, City, County and State of New York, as tenant (referred to herein as "Tenant"). W I T N E S S E T H : ------------------- WHEREAS: (1) Under date of September 7, 1995, Owner and N2K Inc., a New York corporation, Tenant's predecessor in interest, entered into a lease affecting portions of the tenth (10th) and eleventh (11th) floors in the building -------------------------------- (referred to herein as the "Building") known as 55 Broad Street, Borough of Manhattan, City, County and State of New York; and (2) N2K Inc., a New York corporation, merged into N2K Inc., a Pennsylvania corporation, by statutory merger effective February 13, 1996 and thereafter, N2K Inc., said Pennsylvania corporation, merged into Tenant by statutory merger effective June 5, 1996 as amended and restated as of October 16, 1997; and (3) Said lease, as modified by written agreements dated December 31, 1995, April 1, 1996 (said agreement dated April 1, 1996 is referred to as the "First Additional Space Agreement"), April 2, 1996 (said agreement dated April 2, 1996 is referred to as the "Second Additional Space Agreement"), April 3, 1996 (said agreement dated April 3, 1996 is referred to as the "Third Additional Space Agreement"), October 15, 1996 (said agreement dated October 15, 1996 is referred to as the "Fourth Additional Space Agreement"), May 13, 1997 (said agreement dated May 13, 1997 is referred to as the "Fifth Additional Space Agreement") and January 5, 1998 (said agreement dated January 5, 1998 is referred to as the "Sixth Additional Space Agreement") is for a term (referred to herein as the "Demised Term") which shall now end on August 31, 2002, unless further extended pursuant to the provisions of the First, Second, Third, Fourth and/or Fifth Additional Space Agreements, or sooner terminated pursuant to any of the terms, covenants or conditions of said lease or pursuant to law, and is referred to herein as the "Lease"; and the premises so leased to Tenant pursuant to the provisions of the Lease, together with all appurtenances, fixtures, improvements, additions and other property attached thereto or installed therein at any time during the Demised Term other than Tenant's Personal Property (as defined in the Lease), are referred to herein, collectively, as the "Demised Premises"; and (4) Tenant now desires to lease and add to the Demised Premises that portion of the seventh (7th) floor of the Building known as Units 7D and 7E, ------------ which is indicated by outlining and diagonal markings on the floor plan, identified as Exhibit "I", initialled by the parties, annexed hereto and made a part hereof, and Owner is willing to lease said portion of the seventh (7th) ------------- floor to Tenant, subject to the provisions of this Agreement (said portion of the seventh (7th) floor of the Building, together with all appurtenances, fixtures, improvements, additions and other property attached thereto or installed therein at any time during the Demised Term, other than Tenant's Personal Property as defined in the Lease, is referred to herein as the "Seventh Additional Space"); and 2 (5) Subject to the provisions of this Agreement, the Demised Term of the Lease applicable to the Seventh Additional Space shall commence on January 1, 1998 (referred to as the "Seventh Additional Space Commencement Date"); and (6) All capitalized terms shall have the same meanings ascribed to them in the Lease, unless otherwise set forth herein; and (7) The parties desire to record herein their understandings with respect to the foregoing. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties agree as follows: FIRST: The Lease is hereby modified as follows: ----- A. Owner hereby leases to Tenant and Tenant hereby hires from Owner the Seventh Additional Space for a term to commence upon the Seventh Additional Space Commencement Date and to end on December 31, 2002, unless the Demised Term shall sooner terminate or be extended pursuant to any of the terms, covenants or conditions of this Agreement, the Lease or pursuant to law. B. Tenant acknowledges that Owner has made no representations to Tenant as to the condition of the Seventh Additional Space and Tenant agrees to accept possession of the Seventh Additional Space in the condition which shall exist on the Seventh Additional Space Commencement Date "as is" and further agrees that Owner shall have no obligation to perform any work or make any installations in order to prepare the Seventh Additional Space for Tenant's occupancy. 3 C. From and after the Seventh Additional Space Commencement Date, the Lease shall be deemed modified, as follows: (1) The Demised Premises shall include the Seventh Additional Space for all purposes of the Lease; (2) a. The Fixed Rent reserved in the Lease shall be further increased by the sum of ONE HUNDRED THIRTY-THREE THOUSAND THREE HUNDRED THIRTY-ONE and 00/100 ($133,331.00) DOLLARS per annum from the Seventh Additional Space Commencement Date to the last day of the calendar month three hundred sixty-five (365) days next following the Seventh Additional Space Commencement Date, both dates inclusive, ONE HUNDRED THIRTY-NINE THOUSAND ONE HUNDRED TWENTY-EIGHT and 00/100 ($139,128.00) DOLLARS per annum with respect to the next year of the Demised Term applicable to the Seventh Additional Space, both dates inclusive, and ONE HUNDRED FORTY-FOUR THOUSAND NINE HUNDRED TWENTY- FIVE and 00/100 ($144,925.00) DOLLARS per annum with respect to the remainder of the Demised Term applicable to the Seventh Additional Space, both dates inclusive, and the monthly entailments of Fixed Rent shall be increased accordingly. b. In the event that the Seventh Additional Space Commencement Date shall occur on a date other than the first (1st) day of any calendar month, then the increase in the Fixed Rent for the month in which the Seventh Additional Space Commencement Date shall occur shall be prorated. (3) The Demised Premises Area, as set forth in Section 23.01, shall be further increased by 5,797 square feet, except that the provisions of Article 23 solely insofar as said provisions relate to the Seventh Additional Space shall be modified to provide for Base Operating Expenses with respect to the Seventh Additional Space shall mean a sum equal to Operating Expenses for the calendar year 1998 solely with respect to such Seventh Additional Space. 4 (4) With respect to the Seventh Additional Space only, the following new Section 29.12 entitled "Electricity: Seventh Additional Space" -------------------------------------- shall be deemed added to the Lease as of the date hereof, and Section 29.05 shall continue to apply to the previously leased portions of the Building by Tenant: "A. Owner shall redistribute or furnish electrical energy to or for the use of Tenant in the Seventh Additional Space for the operation of the lighting fixtures and the electrical receptacles installed in the Seventh Additional Space on the Seventh Additional Space Commencement Date and the operation of the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Seventh Additional Space is located. If either the quantity or character of electrical service is changed by the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building or is no longer available or suitable for Tenant's requirements, or if any equipment supplementing or ancillary to such electrical service which is installed in the Building by or on behalf of said corporation(s) and/or other entity(ies) malfunctions or fails to operate for any reason while Tenant has made any connections to said equipment, no such change, unavailability, unsuitability, malfunction or failure to operate shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner, or its agents, by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business or otherwise, unless such change, unavailibity or unsuitability is caused by Owner's negligence or willful misconduct or the negligence or willful misconduct of Owner's agents, employees or contractors. In the event the corporation(s) and/or other entity(ies) selected by Owner shall be different from such corporation(s) and/or other entity(ies) presently providing electrical service to the Building as of the date hereof, any such new or replacement corporation(s) and/or other entity(ies) selected by Owner shall be reputable and provide competitive rates. 5 B. Owner represents that the electrical feeder or riser capacity serving the Seventh Additional Space on the Seventh Additional Space Commencement Date shall be adequate to serve the lighting fixtures and electrical receptacles installed in the Seventh Additional Space on the Seventh Additional Space Commencement Date. Any additional feeders or risers to supply Tenant's additional electrical requirements, and all other equipment proper and necessary in connection with such feeders or risers shall be installed by Owner upon Tenant's request, at the sole cost and expense of Tenant, provided, that, in Owner's judgment, such additional feeders or risers are necessary and are permissible under applicable laws and insurance regulations and the installation of such feeders or risers will not cause permanent damage or injury to the Building or the Seventh Additional Space or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations or repairs to or interfere with or disturb other tenants or occupants of the Building. Tenant covenants that at no time shall the use of electrical energy in the Seventh Additional Space exceed the capacity of the existing feeders or risers or wiring installations then serving the Seventh Additional Space. C. Prior to the Seventh Additional Space Commencement Date Owner, at Owner's expense, shall have installed a submeter or submeters in the Seventh Additional Space to measure Tenant's actual consumption of electricity in the entire Seventh Additional Space. Tenant shall pay to Owner, from time to time, upon demand, for the electricity consumed in the Seventh Additional Space, as determined by such submeter or submeters, the actual cost to Owner of purchasing electricity for the Seventh Additional Space (as such actual cost is hereinafter defined) plus all applicable taxes thereon. Owner's actual cost for Tenant's KW and KWH shall be determined by the application of the Building's electric rate schedule per month from the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building to Tenant's usage. With respect to any period when any such submeter is not in good working order, Tenant shall pay Owner for electricity consumed in the 6 portion of the Seventh Additional Space served by such submeter at the rate paid by Tenant to Owner during the most recent comparable period when such submeter was in good working order. Tenant shall take good care of any such submeter and all submetering installation equipment, at Tenant's sole cost and expense, and make all repairs thereto occasioned by any acts, omissions or negligence of Tenant or any person claiming through or under Tenant as and when necessary to insure that any such submeter is, at all times during the Demised Term, in good working order. With respect to the period (referred to as the "Interim Period"), -------------- if any, from the Seventh Additional Space Commencement Date through the date immediately prior to the date upon which the submeter or submeters shall be operable, Tenant shall pay to Owner monthly on demand of Owner, for the electricity consumed in the Seventh Additional Space, a sum equal to one-twelfth (1/12th) of the product of (x) $1.50 multiplied by (y) 5,797. With respect to any period during the Interim Period constituting less than a full calendar month, the monthly payment referred to in the preceding sentence shall be appropriately prorated. D. (1) Owner may, at any time, elect to discontinue the redistribution or furnishing of electrical energy. In the event of any such election by Owner, (i) Owner agrees to give reasonable advance notice of any such discontinuance to Tenant, (ii) Owner agrees to permit Tenant to receive electrical service directly from the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building and to permit the existing feeders, risers, wiring and other electrical facilities serving the Seventh Additional Space to be used by Tenant for such purpose to the extent they are suitable and safely capable, (iii) Owner agrees to pay such charges and costs, if any, as such corporation(s) and/or other entity(ies) may impose in connection with the installation of Tenant's meters, (iv) the provisions of Subsection C of this Section 29.12 shall be deemed deleted from this Lease, and (v) this Lease shall remain in full force and effect and such discontinuance shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or 7 diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. (2) Notwithstanding anything to the contrary contained in subsection D(l) of this Section 29.12, Owner agrees that Owner shall not voluntarily discontinue the redistribution or furnishing of electrical energy until Owner shall have made or paid for all installations required to provide Tenant with electrical service similar to the electrical service which Tenant had in the Seventh Additional Space immediately prior to such discontinuance and the public utility corporation(s) and/or other entity(ies) supplying electrical service to the Building has agreed to furnish such service so that Tenant shall immediately upon such discontinuance be able to receive electrical service directly from such public utility corporation(s) and/or other entity(ies). Unless a shorter time is required by the public utility corporation(s) and/or other entity(ies) supplying electrical service to the Building, Owner shall give Tenant at least ninety (90) days prior notice of any such discontinuance. E. Notwithstanding anything to the contrary set forth in this Lease, any sums payable or granted in any way by the corporation(s) and/or other entity(ies) selected by Owner to supply electricity to the Building resulting from the installation in the Seventh Additional Space of energy efficient lighting fixtures, lamps, special supplemental heating, ventilation and air conditioning systems or any other Alterations, which sums are paid or given by way of rebate, direct payment, credit or otherwise, shall be and remain the property of Owner, and Tenant shall not be entitled to any portion thereof, unless such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations were installed by Tenant, solely at Tenant's expense, without any contribution, credit or allowance by Owner, in accordance with all of the provisions of this Lease. 8 Nothing contained in the foregoing sentence, however, shall be deemed to obligate Owner to supply or install in the Seventh Additional Space any such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations. F. Tenant acknowledges that the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Seventh Additional Space is located (referred to herein as the "Floor HVAC Unit") shall not be connected to the submeter(s) serving the Seventh Additional Space, but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor HVAC Unit. Accordingly, Tenant agrees that during the Demised Term, Tenant shall pay to Owner, from time to time upon demand of Owner and submission by Owner to Tenant of invoices or bills therefor, thirty-six and 68/100 (36.68%) percent (hereinafter "Tenant's Electrical Share") of all amounts shown on said separate meter(s) for such Floor HVAC Unit. G. Tenant acknowledges that the light and power systems serving the public areas of the floor of the Building on which the Seventh Additional Space is located (referred to herein as the "Floor Public Light and Power") shall not be connected to the submeter(s) serving the Seventh Additional Space but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor Public Light and Power. Accordingly, Tenant agrees that during the Demised Term, Tenant shall pay to Owner, from time to time upon demand of Owner and submission by Owner to Tenant of invoices or bills therefor, Tenant's Electrical Share of all amounts shown on said separate meter(s) for such Floor Public Light and Power." 9 SECOND: Present Occupant: Tenant acknowledges that Owner has advised ------ ---------------- Tenant that the Seventh Additional Space is presently affected by a letting agreement with K2 Design, Inc. (referred to as the "Present Occupant") for a term to expire on December 31, 1997, unless sooner terminated pursuant to any of the terms, covenants or conditions of the lease with the Present Occupant or pursuant to law. Notwithstanding anything to the contrary contained herein, if the Present Occupant does not vacate and surrender the Seventh Additional Space to Owner on or prior to December 31, 1997, then (i) the Demised Term applicable to the Seventh Additional Space shall not commence on January 1, 1998, but shall, instead, commence on the date next following the date that the Present Occupant has vacated and surrendered the Seventh Additional Space to Owner, (ii) the Demised Term shall end in accordance with the provisions of this Agreement, unless sooner terminated pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law, (iii) except as set forth in this sentence, neither the validity of this Lease nor the obligations of Tenant under this Lease shall be affected thereby, (iv) Tenant waives any right under Section 223- a of the Real Property or any successor law of like import to rescind the Lease or this Agreement or rescind its obligations with respect thereto and (v) Tenant further waives the right to recover any damages which may result from the failure of Owner to deliver possession of the Seventh Additional Space to Tenant on January 1, 1998. THIRD: Owner and Tenant each represent and warrant to the other ----- that Schlesinger & Company, LLC is the sole broker with whom either party has negotiated or otherwise dealt with in connection with the Seventh Additional Space or in bringing about this Agreement. Owner and Tenant shall indemnify each other from all loss, cost, liability, damage and expenses, including, but not limited to, reasonable counsel fees and disbursements, arising from any breach of the foregoing representation and warranty. Owner shall pay any commission or compensation due hereunder pursuant to a separate agreement with such broker. 10 FOURTH: As of the date hereof, the seventh (7th) floor of the ------ Building contains an Americans with Disabilities Act-compliant core toilet. FIFTH: Except to the extent expressly modified by the foregoing ----- provisions of this Agreement, the Lease is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals as of the day and year first above written. 55 BROAD STREET COMPANY, Owner BY: /s/ SIGNATURE ILLEGIBLE --------------------------- Partner N2K INC., Tenant BY: /s/ SIGNATURE ILLEGIBLE --------------------------- its Vice Chairman 11 STATE OF NEW YORK ) ss.: COUNTY OF NEW YORK ) On the 5/th/ day of January, 1998, before me personally came Jon Diamond to me known, who, being by me duly sworn, did depose and say that he/she resides at 1 West 67 St., NY, NY 10023, that he/she is the Vice Chairman of N2K INC., the corporation described in and which executed the foregoing instrument; and that he/she signed his/her name thereto by authority of the Board of Directors of said corporation. /s/ Arthur Weiner ------------------------------- Notary Public ARTHUR WEINER Notary Public, State of New York No. 02WE5070317 Qualified in New York, County Commission Expires December 9, 1998 12 EX-10.19 11 EIGHTH ADDITIONAL SPACE AGREEMENT EXHIBIT 10.19 EIGHTH ADDITIONAL SPACE AGREEMENT --------------------------------- AGREEMENT made as of the 16th day of April, 1998 between 55 BROAD STREET COMPANY, a New York partnership having its principal office at 345 Park Avenue, Borough of Manhattan, City, County and State of New York, as landlord (referred to herein as "Owner"), and N2K INC., a Delaware corporation authorized to transact business in the State of New York, having an office at 55 Broad Street, Borough of Manhattan, City, County and State of New York, as tenant (referred to herein as "Tenant"). W I T N E S S E T H : - - - - - - - - - - WHEREAS: (1) Under date of September 7, 1995, Owner and N2K Inc., a New York corporation, Tenant's predecessor in interest, entered into a lease affecting portions of the tenth (10th) and eleventh (11th) floors in the building ------------ ------------------- (referred to herein as the "Building") known as 55 Broad Street, Borough of Manhattan, City, County and State of New York; and (2) N2K Inc., a New York corporation, merged into N2K Inc., a Pennsylvania corporation, by statutory merger effective February 13, 1996 and, thereafter, N2K Inc., said Pennsylvania corporation, merged into Tenant by statutory merger effective June 5, 1996 as amended and restated as of October 16, 1997; and (3) Said lease, as modified by written agreements dated December 31, 1995, April 1, 1996 (said agreement dated April 1, 1996 is referred to as the "First Additional Space Agreement"), April 2, 1996 (said agreement dated April 2, 1996 is referred to as the "Second Additional Space Agreement"), April 3, 1996 (said agreement dated April 3, 1996 is referred to as the "Third Additional Space Agreement"), October 15, 1996 (said agreement dated October 15, 1996 is referred to as the "Fourth Additional Space Agreement"), May 13, 1997 (said agreement dated May 13, 1997 is referred to as the "Fifth Additional Space Agreement"), January 5, 1998 (said agreement dated January 5, 1998 is referred to as the "Sixth Additional Space Agreement") and January 5, 1998 (said agreement dated January 5, 1998 is referred to as the "Seventh Additional Space Agreement") is for a term (referred to herein as the "Demised Term") which shall now end on August 31, 2002, unless said Demised Term with respect to any Additional Space affected by any such Additional Space Agreement expires sooner or is further extended pursuant to the provisions of the First, Second, Third, Fourth, Fifth, Sixth and/or Seventh Additional Space Agreements, or sooner terminated pursuant to any of the terms, covenants or conditions of said lease or pursuant to law, and is referred to herein as the "Lease"; and the premises so leased to Tenant pursuant to the provisions of the Lease, together with all appurtenances, fixtures, improvements, additions and other property attached thereto or installed therein at any time during the Demised Term other than Tenant's Personal Property (as defined in the Lease), are referred to herein, collectively, as the "Demised Premises"; and (4) Tenant now desires to lease and add to the Demised Premises that portion of the seventeenth (17th) floor of the Building known as Unit F, ------------------ which is indicated by outlining and diagonal markings on the floor plan, identified as Exhibit "1," initialed by the parties, annexed hereto and made a part hereof, and Owner is willing to lease said portion of the seventeenth ----------- (17th) floor to Tenant, subject to the provisions of this Agreement (said - ------ portion of the seventeenth (17th) floor of the Building, together with all appurtenances, fixtures, improvements, additions and other property attached thereto or installed therein at any time during the Demised Term, other than Tenant's Personal Property as defined in the Lease, is referred to herein as the "Eighth Additional Space"); and 2 (5) Subject to the provisions of this Agreement, the Demised Term of the Lease applicable to the Eighth Additional Space shall commence on a date (referred to as the "Eighth Additional Space Commencement Date") fixed by Owner in a notice to Tenant, not sooner than two (2) business days next following the date of the giving of such notice, which notice shall state that Owner has, or prior to the Eighth Additional Space Commencement Date will have, substantially completed the Eighth Additional Space Initial Work (as hereinafter defined); and (6) All capitalized terms shall have the same meanings ascribed to them in the Lease, unless otherwise set forth herein; and (7) The parties desire to record herein their understandings with respect to the foregoing. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties agree as follows: FIRST : The Lease is hereby modified as follows: ----- A. Owner hereby leases to Tenant and Tenant hereby hires from Owner the Eighth Additional Space for a term to commence upon the Eighth Additional Space Commencement Date and to end on the last day of the calendar month which is five (5) years and two (2) months next following the Eighth Additional Space Commencement Date, unless the Demised Term shall sooner terminate or be extended pursuant to any of the terms, covenants or conditions of this Agreement, the Lease or pursuant to law. 3 B. (1) Tenant acknowledges that Owner has made no representations to Tenant as to the condition of the Eighth Additional Space and Tenant agrees to accept possession of the Eighth Additional Space in the condition which shall exist on the Eighth Additional Space Commencement Date "as is" and further agrees that Owner shall have no obligation to perform any work or make any installations in order to prepare the Eighth Additional Space for Tenant's occupancy, except that, prior to the Eighth Additional Space Commencement Date, Owner agrees, at Owner's expense, to perform and make the following work and installations in the Additional Space (referred to herein as the "Eighth Additional Space Initial Work"): (i) Paint the painted surfaces in the Eighth Additional Space, with a single coat of paint in flat finish, in colors selected by Tenant from Building standard colors, but not more than one color in any room or area; and (ii) Clean existing carpeting; and (iii) Broom clean Eighth Additional Space. (2) Said Eighth Additional Space Initial Work shall be equal to standards adopted by Owner for the Building and shall constitute a single non-recurring obligation on the part of Owner. In the event this Lease is renewed or extended for a further term by agreement or operation of law, Owner's obligation to perform such work shall not apply to such renewal or extension. 4 (3) At any time after the Eighth Additional Space Commencement Date, Owner may enter the Eighth Additional Space to perform said work, and entry by Owner, its agents, servants, employees or contractors for such purpose shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner, or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business or otherwise. Owner agrees to employ reasonable diligence to avoid such inconvenience or annoyance to Tenant in the performance of such work without an obligation, however, to employ labor at overtime or other premium pay rates. C. From and after the Eighth Additional Space Commencement Date, the Lease shall be deemed modified, as follows: (1) The Demised Premises shall include the Eighth Additional Space for all purposes of the Lease; (2) a. The Fixed Rent reserved in the Lease shall be further increased by the sum of FORTY-FIVE THOUSAND NINE HUNDRED EIGHT and 00/100 ($45,908.00) DOLLARS per annum from the Eighth Additional Space Commencement Date to the last day of the calendar month three hundred sixty-five (365) days next following the Eighth Additional Space Commencement Date, both dates inclusive, FORTY-SEVEN THOUSAND NINE HUNDRED FOUR and 00/100 ($47,904.00) DOLLARS per annum with respect to the next year of the Demised Term applicable to the Eighth Additional Space, both dates inclusive, and FORTY-NINE THOUSAND NINE HUNDRED and 00/100 ($49,900.00) DOLLARS per annum with respect to the remainder of the Demised Term applicable to the Eighth Additional Space, both dates inclusive, and the monthly installments of Fixed Rent shall be increased accordingly. 5 b. In the event that the Eighth Additional Space Commencement Date shall occur on a date other than the first (1st) day of any calendar month, then the increase in the Fixed Rent for the month in which the Eighth Additional Space Commencement Date shall occur shall be prorated. (3) The Demised Premises Area, as set forth in Section 23.01, shall be further increased by 1,996 square feet, except that the provisions of Article 23 solely insofar as said provisions relate to the Eighth Additional Space shall be modified to provide for Base Operating Expenses with respect to the Eighth Additional Space shall mean a sum equal to Operating Expenses for the calendar year 1998 solely with respect to such Eighth Additional Space. (4) With respect to the Eighth Additional Space only, the following new Section 29.13 entitled "Electricity: Eighth Additional Space" ------------------------------------ shall be deemed added to the Lease as of the date hereof, and Section 29.05 shall continue to apply to the previously leased portions of the Building by Tenant: "A. Owner shall redistribute or furnish electrical energy to or for the use of Tenant in the Eighth Additional Space for the operation of the lighting fixtures and the electrical receptacles installed in the Eighth Additional Space on the Eighth Additional Space Commencement Date and the operation of the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Eighth Additional Space is located. If either the quantity or character of electrical service is changed by the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building or is no longer available or suitable for Tenant's requirements, or if any equipment supplementing or ancillary to such electrical service which is installed in the Building by or on behalf of said corporation(s) and/or other entity(ies) malfunctions or fails to operate for any reason while Tenant has made any connections to said equipment, no such change, unavailability, unsuitability, malfunction or failure to operate shall constitute an actual or constructive eviction, in whole or in part, 6 or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner, or its agents, by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business or otherwise, unless such change, unavailability or unsuitability is caused by Owner's negligence or willful misconduct or the negligence or willful misconduct of Owner's agents, employees or contractors. In the event the corporation(s) and/or other entity(ies) selected by Owner shall be different from such corporation(s) and/or other entity(ies) presently providing electrical service to the Building as of the date hereof, any such new or replacement corporation(s) and/or other entity(ies) selected by Owner shall be reputable and provide competitive rates. B. Owner represents that the electrical feeder or riser capacity serving the Eighth Additional Space on the Eighth Additional Space Commencement Date shall be adequate to serve the lighting fixtures and electrical receptacles installed in the Eighth Additional Space on the Eighth Additional Space Commencement Date. Any additional feeders or risers to supply Tenant's additional electrical requirements, and all other equipment proper and necessary in connection with such feeders or risers shall be installed by Owner upon Tenant's request, at the sole cost and expense of Tenant; provided that, in Owner's judgment, such additional feeders or risers are necessary and are permissible under applicable laws and insurance regulations and the installation of such feeders or risers will not cause permanent damage or injury to the Building or the Eighth Additional Space or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations or repairs to or interfere with or disturb other tenants or occupants of the Building. Tenant covenants that at no time shall the use of electrical energy in the Eighth Additional Space exceed the capacity of the existing feeders or risers or wiring installations then serving the Eighth Additional Space. 7 C. Prior to the Eighth Additional Space Commencement Date, Owner, at Owner's expense, shall have installed a submeter or submeters in the Eighth Additional Space to measure Tenant's actual consumption of electricity in the entire Eighth Additional Space. Tenant shall pay to Owner, from time to time, upon demand, for the electricity consumed in the Eighth Additional Space, as determined by such submeter or submeters, the actual cost to Owner of purchasing electricity for the Eighth Additional Space (as such actual cost is hereinafter defined) plus all applicable taxes thereon. Owner's actual cost for Tenant's KW and KWH shall be determined by the application of the Building's electric rate schedule per month from the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building to Tenant's usage. With respect to any period when any such submeter is not in good working order, Tenant shall pay Owner for electricity consumed in the portion of the Eighth Additional Space served by such submeter at the rate paid by Tenant to Owner during the most recent comparable period when such submeter was in good working order. Tenant shall take good care of any such submeter and all submetering installation equipment, at Tenant's sole cost and expense, and make all repairs thereto occasioned by any acts, omissions or negligence of Tenant or any person claiming through or under Tenant as and when necessary to insure that any such submeter is, at all times during the Demised Term, in good working order. With respect to the period (referred to as the "Interim Period"), if any, -------------- from the Eighth Additional Space Commencement Date through the date immediately prior to the date upon which the submeter or submeters shall be operable, Tenant shall pay to Owner monthly on demand of Owner, for the electricity consumed in the Eighth Additional Space, a sum equal to one-twelfth (1/12th) of the product of (x) $1.50 multiplied by (y) 1,996. With respect to any period during the Interim Period constituting less than a full calendar month, the monthly payment referred to in the preceding sentence shall be appropriately prorated. 8 D. (1) Owner may, at any time, elect to discontinue the redistribution or furnishing of electrical energy. In the event of any such election by Owner, (i) Owner agrees to give reasonable advance notice of any such discontinuance to Tenant, (ii) Owner agrees to permit Tenant to receive electrical service directly from the corporation(s) and/or other entity(ies) selected by Owner to supply electrical service to the Building and to permit the existing feeders, risers, wiring and other electrical facilities serving the Eighth Additional Space to be used by Tenant for such purpose to the extent they are suitable and safely capable, (iii) Owner agrees to pay such charges and costs, if any, as such corporation(s) and/or other entity(ies) may impose in connection with the installation of Tenant's meters, (iv) the provisions of Subsection C of this Section 29.13 shall be deemed deleted from this Lease, and (v) this Lease shall remain in full force and effect and such discontinuance shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Owner or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. (2) Notwithstanding anything to the contrary contained in subsection D(1) of this Section 29.13, Owner agrees that Owner shall not voluntarily discontinue the redistribution or furnishing of electrical energy until Owner shall have made or paid for all installations required to provide Tenant with electrical service similar to the electrical service which Tenant had in the Eighth Additional Space immediately prior to such discontinuance and the public utility corporation(s) and/or other entity(ies) supplying electrical service to the Building has agreed to furnish such service so that Tenant shall immediately upon such discontinuance be able to receive electrical service directly from 9 such public utility corporation(s) and/or other entity(ies). Unless a shorter time is required by the public utility corporation(s) and/or other entity(ies) supplying electrical service to the Building, Owner shall give Tenant at least ninety (90) days prior notice of any such discontinuance. E. Notwithstanding anything to the contrary set forth in this Lease, any sums payable or granted in any way by the corporation(s) and/or other entity(ies) selected by Owner to supply electricity to the Building resulting from the installation in the Eighth Additional Space of energy efficient lighting fixtures, lamps, special supplemental heating, ventilation and air conditioning systems or any other Alterations, which sums are paid or given by way of rebate, direct payment, credit or otherwise, shall be and remain the property of Owner, and Tenant shall not be entitled to any portion thereof, unless such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations were installed by Tenant, solely at Tenant's expense, without any contribution, credit or allowance by Owner, in accordance with all of the provisions of this Lease. Nothing contained in the foregoing sentence, however, shall be deemed to obligate Owner to supply or install in the Eighth Additional Space any such lighting fixtures, lamps, supplemental heating, ventilation and air conditioning systems or other Alterations. F. Tenant acknowledges that the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Eighth Additional Space is located (referred to herein as the "Floor HVAC Unit") shall not be connected to the submeter(s) serving the Eighth Additional Space, but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor HVAC Unit. Accordingly, Tenant agrees that, during the 10 Demised Term, Tenant shall pay to Owner, from time to time upon demand of Owner and submission by Owner to Tenant of invoices or bills therefor, nineteen and 96/100 (19.96%) percent (hereinafter, "Tenant's Electrical Share") of all amounts shown on said separate meter(s) for such Floor HVAC Unit. G. Tenant acknowledges that the light and power systems serving the public areas of the floor of the Building on which the Eighth Additional Space is located (referred to herein as the "Floor Public Light and Power") shall not be connected to the submeter(s) serving the Eighth Additional Space, but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor Public Light and Power. Accordingly, Tenant agrees that, during the Demised Term, Tenant shall pay to Owner, from time to time upon demand of Owner and submission by Owner to Tenant of invoices or bills therefor, Tenant's Electrical Share of all amounts shown on said separate meter(s) for such Floor Public Light and Power. SECOND: Present Occupant: Tenant acknowledges that Owner has ------ ---------------- advised Tenant that the Eighth Additional Space is presently affected by a letting agreement with Warp 10 Technologies, Inc. (referred to as the "Present Occupant") for a term to expire on April 30, 1998, unless sooner terminated pursuant to any of the terms, covenants or conditions of the lease with the Present Occupant or pursuant to law. Notwithstanding anything to the contrary contained herein, if the Present Occupant does not vacate and surrender the Eighth Additional Space to Owner on or prior to April 30, 1998, then (i) the Demised Term applicable to the Eighth Additional Space shall not commence on May 1, 1998, but, instead, shall commence in accordance with paragraph (5) of the WHEREAS provisions hereof after the Present Occupant has vacated and surrendered - ------- possession of the Eighth Additional Space, (ii) the Demised Term shall end in accordance with the provisions of this Agreement, unless sooner terminated pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law, (iii) except as set 11 forth in this sentence, neither the validity of this Lease nor the obligations of Tenant under this Lease shall be affected thereby, (iv) Tenant waives any right under Section 223-a of the Real Property or any successor law of like import to rescind the Lease or this Agreement or rescind its obligations with respect thereto and (v) Tenant further waives the right to recover any damages which may result from the failure of Owner to deliver possession of the Eighth Additional Space to Tenant on May 1, 1998. THIRD: Owner and Tenant each represent and warrant to the other ----- that Schlesinger & Company, LLC is the sole broker with whom either party has negotiated or otherwise dealt with in connection with the Eighth Additional Space or in bringing about this Agreement. Owner and Tenant shall indemnify each other from all loss, cost, liability, damage and expenses, including, but not limited to, reasonable counsel fees and disbursements, arising from any breach of the foregoing representation and warranty. Owner shall pay any commission or compensation due hereunder pursuant to a separate agreement with such broker. FOURTH: Eighth Additional Space Rent Holiday: Provided Tenant is ------ ------------------------------------ not then in default in the observance and performance of any of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Tenant, with respect to the Eighth Additional Space only, shall be entitled to a conditional rent holiday and shall not be required to pay any portion of the Fixed Rent applicable to the Eighth Additional Space with respect to the period (the "Eighth Additional Space Rent Holiday Period") from the -------------------------------------------- Eighth Additional Space Commencement Date to and including the date which is sixty (60) days next following the Eighth Additional Space Commencement Date, but, during such period, Tenant shall otherwise be required to comply with all of the other terms, covenants and conditions of this Lease on Tenant's part to be observed and performed (including the provisions of Article 29 as modified hereby), other than the obligation to make any payments pursuant to the provisions of 12 Article 23 applicable to the Eighth Additional Space. If, at any time during the Demised Term, Tenant shall be in default in the observance and performance of any of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, then the total sum of the Fixed Rent so conditionally excused by operation of the foregoing provisions hereof shall become immediately due and payable by Tenant to Owner. If, as of the Expiration Date, Tenant shall not then be in default in the observance and performance of any of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Owner shall waive payment of all such Fixed Rent so conditionally excused. FIFTH: A. The parties agree that the Demised Term shall expire on ----- August 31, 2002 with respect to the entire Demised Premises, other than the Sixth Additional Space and the Seventh Additional Space and, with respect thereto, the Demised Term shall expire, with respect to the Sixth Additional Space, on January 31, 2003 and, with respect to the Seventh Additional Space, on December 31, 2002. Accordingly, on or prior to August 31, 2002, Tenant shall vacate and surrender to Owner the original Demised Premises and the First, Second, Third, Fourth and Fifth Additional Spaces, free of all tenancies and occupancies, and Tenant shall fully comply with the provisions of Article 21 of this Lease with respect to the original Demised Premises and such Additional Spaces on or prior to the applicable dates upon which the Demised Term applicable thereto shall expire. Tenant acknowledges that the Lease shall continue to apply to the Sixth, Seventh and Eighth Additional Spaces thereafter. Tenant hereby expressly waives any rights which Tenant may have under the provisions of Section 2201 of the New York Civil Practice Law and Rules and of any successor law of like import then in force in connection with any holdover proceedings which Owner may institute to enforce the foregoing provisions of this Article FIFTH. If requested by either party, the parties agree to execute and deliver to each other after August 31, 2002 a further agreement, in form reasonably satisfactory to both parties, 13 evidencing the surrender of the original Demised Premises and such Additional Spaces to Owner; however, neither the failure of either party to request such execution of such instrument nor the failure of either party to execute and deliver such instrument shall vitiate the provisions of this Article FIFTH. As of September 1, 2002, the Fixed Rent shall be reduced by that portion thereof allocable to the original Demised Premises and the First, Second, Third, Fourth and Fifth Additional Spaces and Tenant's Proportionate Share shall be reduced by that portion thereof allocable to all remaining portions of the Demised Premises other than the original Demised Premises and such Additional Spaces. From and after August 31, 2002, notwithstanding anything contained in Section 11.03C to the contrary, at no time shall there be more than one (1) occupant, including Tenant, in the Sixth, Seventh or Eighth Additional Spaces. SIXTH: As of the date hereof, the seventeenth (17th) floor of the ----- Building contains an Americans with Disabilities Act-compliant core toilet. SEVENTH: Except to the extent expressly modified by the foregoing ------- provisions of this Agreement, the Lease is hereby ratified and confirmed in all respects. 14 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals as of the day and year first above written. 55 BROAD STREET COMPANY, Owner BY:_______________________________ Partner N2K INC., Tenant BY: /s/ Arthur Weiner ------------------------------- its General Counsel 15 STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 17/th/ day of April, 1998, before me personally came Arthur Weiner to me known, who, being by me duly sworn, did depose and say that he resides at 153 W. 82/nd/ Street, New York, NY, that he/she is the General Counsel of N2K INC., the corporation described in and which executed the foregoing instrument; and that he/she signed his/her name thereto by authority of the Board of Directors of said corporation. EDWARD H. SHARPIO /s/ [SIGNATURE ILLEGIBLE] --------------------------- Notary Public, State of New York Notary Public No. 30-5010106 Qualified in Nassau County Commission Expires March 29, 1999 16 EX-10.20 12 AGREEMENT EXHIBIT 10.20 A G R E E M E N T ----------------- THIS AGREEMENT, is made and entered on this 1st day of January, 1999, by, and between N2K Inc. ("N2K"), whose address is 55 Broad Street, New York, New York 10004, and Warlock Records Inc. ("WRI"), whose address is 122 East 25th Street, New York, New York 10010; WHEREAS, the parties hereto have determined that it is in their best interests to jointly pursue their common goals, as defined and set forth herein, through doing business as a limited liability company ("L.L.C."), and to formalize their mutual rights and obligations in this Agreement; NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and conditions set forth herein, the parties hereto agree as follows: 1. FORMATION, NAME, PRINCIPAL PLACE OF BUSINESS. -------------------------------------------- 1.1. FORMATION. The parties hereby form and enter into an L.L.C. under --------- and pursuant to the laws of the state of Delaware, subject to the terms and conditions contained in this Agreement. The actual formation of the company constituting the L.L.C. and filing of documents effectuating such formation shall be provided by N2K on behalf of the L.L.C. (and costs relating thereto shall be charged to the L.L.C. ), and such company and its formation shall be governed by the terms and conditions of this agreement. In addition, the parties hereto shall create a board of directors (the "Board"), consisting of five members to be chosen by WRI. It is understood that WRI has selected Bud Katzel as a member of the Board. Should Bud Katzel resign or ask to leave, WRI shall select a substitute. 1.2. NAME. The parties hereby adopt the name Encoded Music and shall ---- conduct the L.L.C. using such name or such other name or such assumed or trade name as may be adopted by the L.L.C. in consultation with the Board. 1.3. PRINCIPAL PLACE OF BUSINESS. The principal place of business of the --------------------------- L.L.C. shall be at 122 East 25th Street, in New York, New York, or at such other or additional place or places as may be designated by the Board. 2. PURPOSE, SCOPE, POWERS. ---------------------- 2.1. PURPOSE. The purpose and business of the L.L.C. shall be the ------- creation of a record label primarily (though not necessarily exclusively) focused upon the manufacture, distribution and exploitation of music in the genres of jazz, so-called "smooth jazz" and related genres of music and special products. 1 2.2. POWER. In furtherance of the foregoing purpose, the L.L.C. has the ----- power and authority, expressly subject to the terms of this Agreement, to: (a) Acquire, by purchase, lease or otherwise, personal property or any interest therein, exclusive of real property. (b) Encumber assets of the L.L.C. (c) Sell, assign, lease or convey all or any part of its property. (d) Lend its received funds or make guarantees of obligations of others upon such terms as the L.L.C. shall determine. (e) Retain counsel, accountants, financial advisers, and other professional personnel. (f) Engage in such other activities and incur such other expenses as may be necessary or appropriate for the furtherance of the L.L.C., and execute, acknowledge and deliver any and all instruments necessary to the foregoing. 2.3. AUTHORITY. The parties intend that the powers set forth in paragraph --------- 2.2 above be exercised only in furtherance of the business of the L.L.C. to act on behalf of the L.L.C. only to accomplish the above stated purpose. Notwithstanding anything to the contrary contained herein, decisions requiring Board approval are set forth in Schedule A1 (a copy of which is attached hereto and made a part hereof). 3. CAPITAL, DISTRIBUTIONS AND OWNERSHIP. ------------------------------------ 3.1. CAPITAL CONTRIBUTIONS AND OTHER INCOME. The parties agree to make -------------------------------------- contributions to the L.L.C. as follows: (a) WRI shall fund one hundred percent (100%) of all costs and other resources necessary to the operation of the L.L.C. and as is customary in the recording industry, for a period of no less than a three year period commencing upon the date hereof (the "Initial Term"), including without limitation: costs related to the production, manufacture, sale and distribution of master recordings and all other recording agreement payments to artists and/or third parties; mechanical royalty payments in connection with the sale of musical product; and overhead. The L.L.C. shall, within ten (10) days following execution of this agreement, reimburse N2K for any monies advanced by N2K in connection with the production of or acquisition of unreleased product to be assigned to the L.L.C. as provided herein. (A schedule of such costs are attached hereto as Schedule 2 A2.) For the purpose of this paragraph, "unreleased product" means master recordings recorded or currently being recorded by the recording artists known as Inner Shade, T.S. Monk and Jonathan Butler. With respect to T.S. Monk, the L.L.C.'s obligation to reimburse N2K for such production costs shall be Thirty Thousand Dollars ($30,000). (b) N2K hereby assigns to the L.L.C. and the L.L.C. assumes the following assets and liabilities of N2K Encoded Music related to certain master recordings, agreements and current outstanding foreign license advances (if any) (a schedule of which is attached hereto as Schedule B and incorporated herein by reference): (i) all rights, title and interest to those certain existing master recordings owned by N2K (the "N2K Masters") (Schedule B1); (ii) the assignment of all remaining N2K owned inventory of product derived from the N2K Masters and previously distributed by N2K (Schedule B2); (iii) the right to receivables derived from product currently in distribution (subject to the L.L.C.'s assumption of obligations with respect to third party payments such as artist and copyright royalty payments, etc.) (Schedule B3); (iv) the assignment of artist recording, licensing and any other agreements granting rights for the production of and/or distribution of audio and audiovisual recordings (the "Agreements") (including the benefit of any applicable unrecouped advances and outstanding advance payments currently due N2K) (Schedule B4); (v) N2K hereby provides the L.L.C. a gratis perpetual license granting it the rights necessary to take control of and operate the existing N2K Encoded Music label and Encoded Music Artist web sites (the cost of maintaining such sites being the responsibility of the L.L.C. ) provide that such sites continue to link exclusively (i.e., to no other record retailer) to N2K's online music retail website Music Boulevard, located at http://www.musicblvd.com, or any successor site, it being understood, however, that N2K shall have no obligation to continue to maintain the Encoded Music Artist websites, and provided further, that N2K may discontinue such websites in its sole discretion without providing the L.L.C. with replacement services, without any liability to the L.L.C or WRI. It is understood that N2K hereby transfers and assigns its rights in and to such Encoded Music Artist web sites and the N2K Encoded Music label web sites. (The assets described in sections 3.1(b)(i) through (v) above are sometimes hereinafter collectively referred to as the "N2K Assets"). N2K shall execute all documentation necessary to effectuate the transfer and assignment of the N2K Assets (e.g., copyright registrations, etc.). 3 (vi) N2K hereby agrees not to use the name N2K Encoded Music or any similar name which may be confused with the name Encoded Music L.L.C. (c) Notwithstanding anything to the contrary contained herein, it is understood that the L.L.C. shall not require N2K, nor shall N2K be obligated to make any capital contributions to the L.L.C. during the term of this agreement. In the event the L.L.C. determines that a capital contribution by N2K and WRI would otherwise be required to acquire or purchase products and/or assets for the benefit of the L.L.C., and N2K refuses to make any such capital contribution to effectuate such acquisition or purchase of such products or assets, WRI's concurrent or subsequent good faith acquisition or purchase of such products or assets shall be not be deemed contrary to or in conflict with WRI's obligations to the L.L.C. as provided herein. 3.2. OTHER CONTRIBUTIONS. The parties agree to contribute to the L.L.C. the ------------------- required talent and expertise as follows: (a) Commencing on the date hereof, N2K shall furnish to the L.L.C. the employment services of Carl Griffin ("Griffin"). For so long as Carl Griffin works full time for the L.L.C., the L.L.C. agrees that it shall reimburse N2K for all salary payments (including without limitation, bonuses, A&R and producer points') and health benefit payments made to Carl Griffin pursuant to N2K's employment agreement with Carl Griffin, dated as of January 1, 1997 (the "Griffin Agreement") (a copy of which is attached hereto as Exhibit A1), for the balance of the Griffin Agreement, as that agreement may be amended, modified or supplemented, except that N2K's obligation to furnish Griffin's services to the L.L.C., shall in any event, end upon (i) termination of Griffin's employment; (ii) expiration of the term of the Griffin Agreement; or (iii) when Griffin voluntarily ceases to provide his employment services to N2K, whichever is earlier. Griffin will be reimbursed for his travel and entertainment expenses directly by the L.L.C. No amendment, modification or supplement to the Griffin Agreement shall obligate the L.L.C. to any such additional terms and conditions unless the L.L.C. has approved such changes. (b) The L.L.C. shall use its best efforts to secure the employment services of Eulis Cathey during the Initial Term of the Agreement. (c) N2K shall furnish to the L.L.C. the employment services of Sandra Trim-DaCosta ("DaCosta") for a period of six (6) months commencing as of the date of formation of the L.L.C. During such six (6) month period, the L.L.C. shall reimburse N2K in the amount of Three Thousand Dollars ($3,000) per month for DaCosta's services. In the event the L.L.C. wishes to continue to utilize the employment services of DaCosta after such six (6) month period, the L.L.C. agrees it shall reimburse N2K for all salary payments (including, without limitation, bonuses) and health benefit payments made to DaCosta pursuant to N2K's employment agreement with DaCosta, dated as of December 9, 1996 4 (the "DaCosta Agreement") (a copy of which is attached hereto as Exhibit A2), for the balance of the DaCosta Agreement, as that agreement may be amended, modified or supplemented, except that N2K's obligation to furnish DaCosta's services to the L.L.C., shall in any event, end upon (i) termination of DaCosta's employment; (ii) expiration of the term of the DaCosta Agreement; or (iii) when DaCosta voluntarily ceases to provide her employment services to N2K, whichever is earlier. DaCosta will be reimbursed for her travel and entertainment expenses directly by the L.L.C. No amendment, modification or supplement to the DaCosta Agreement shall obligate the L.L.C. to any such additional terms and conditions unless the L.L.C. has approved such changes. (d) WRI shall contribute the services of Adam Levy ("Levy"). Notwithstanding the preceding sentence, it is understood that it is the essence of the agreement between the parties that Levy is principally involved in performing his personal services for the L.L.C. (e) N2K will cooperate with the L.L.C. to provide promotional opportunities on Music Boulevard for the sale of the L.L.C. products online, subject to its reasonable business judgment. WRI will utilize its existing operations and its third party relationships to enhance the promotion of the products of the L.L.C., subject to its reasonable business judgment. 3.3 ADDITIONAL CONSIDERATION TO N2K. In consideration of N2K's ------------------------------- contribution of the N2K Assets to the L.L.C., the L.L.C. shall pay N2K, in addition to the consideration described in 4.4 below, the following: (a) With respect to the sale of product sold by the L.L.C. in the United States: a royalty of six (6%) percent of the retail selling price of each unit of all products sold or licensed by the L.L.C. N2K Royalties payable hereunder shall be subject to the same proportionate reductions, deductions and configurational, territorial, category and other variations contained in the applicable artist agreement for which the N2K Royalty is being earned (but not subject to artist's recoupment). Subject to the recoupment of the then applicable installment of the N2K Advance (as defined in subparagraph 3.3(b) below), the L.L.C. shall pay to N2K the N2K Royalty earned by N2K hereunder retroactive to the first record sold. With respect to (i) exploitations of products sold by the L.L.C. whereby the L.L.C. is paid on a flat-fee basis (e.g., where an artist is paid on a net receipts basis pursuant to their recording agreement with N2K), or (ii) sale of product by the L.L.C. outside the United States, the L.L.C. shall pay to N2K, in lieu of the N2K Royalty, a sum equal to ten percent (10%) of the L.L.C.'s net receipts with respect to such exploitations. (Any monies payable to N2K pursuant to this subparagraph 3.3(a) shall be referred to as the "N2K Royalty(ies)".) "Net receipts" as used herein shall mean amounts received by the L.L.C. less any costs or expenses or amounts which the L.L.C. is obligated to pay to the artist, performers, producers or others for the performance production or use of the musical works or their performances. Notwithstanding anything to the contrary contained herein, 5 the L.L.C. shall not be obligated to pay the N2K Royalty on any product sold or licensed by the L.L.C. until sales for such product exceed ten thousand (10,000) units. Upon obtaining such 10,000 unit for the product concerned, the L.L.C. shall pay the N2K Royalty retroactive to the first unit sold, in accordance with the provisions of this agreement. (b) (i) A non-refundable advance (the "N2K Advance") in the amount of Three Hundred Thirty-Four Thousand Dollars ($334,000) which advance shall be recoupable from the N2K Royalty payable to N2K during the Initial Term, provided that such N2K Royalties shall first be applied to any expense incurred by the L.L.C. in connection with Excess Inventory Expense (as set forth under Section 3.3(c) below). The N2K Advance shall be paid in equal quarterly installments at the commencement of each of the four quarters of the first year of the Initial Term. i. An additional advance in the amount of Three Hundred Thirty-Three Thousand Dollars ($333,000) ("2nd Advance") which shall be paid upon the recoupment of the N2K Advance and the Expected Returns (less the Returns Credit, as defined below). ii. An additional advance in the amount of Three Hundred Thirty-Three Thousand Dollars ($333,000) ("Third Advance") which shall be paid upon the recoupment of the N2K Advance and the 2nd Advance, if any. (The N2K Advance, the 2nd Advance and the Third Advance are hereinafter referred to as the "Advance(s)".) Notwithstanding anything to the contrary contained herein, if all the Advances are recouped prior to the end of the Initial Term, then within thirty (30) days after the recoupment of such Advances, an additional advance will also be paid in an amount reflecting the accelerated rate at which the previous Advance had been recouped during the Initial Term. The payment procedure of such additional advance shall be determined by the Board. (c) For purposes of this subparagraph, the following definitions shall apply: "Retail Inventory Units" is the number of units at the retail level of each title as set forth on the attached Schedule C. "Expected Sales" is the projected number of units of N2K inventory which are expected to be sold by the L.L.C., on a title by title basis, for a 52 week period (based on Sound scans report for the week ending January 3, 1999), as indicated on the attached Schedule C Column "JV/Warlock". The "Expected Returns" is the difference between Retail Inventory Units and Expected Sales and appears as Column "N2K" in Schedule C. The L.L.C. shall recoup as against the N2K Advance and the N2K Royalty up to $1,000,000 in Expected Returns less the Returns Credit (the "Excess Inventory Expense"). "Returns Credit" shall mean any credit yielded to the L.L.C. from the non-payment of royalties and other sums on such actual returns (i.e., artist royalties, 6 producer royalties, mechanical royalties union payments, etc.) (It is understood that all units returned or credited shall be valued at the actual price sold less any applicable discount on such unit.) N2K Royalties shall first be applied to recoup the Excess Inventory Expense before recoupment of the N2K Advances set forth in Section 3.3(b) above). Any returns of product in excess of the Expected Returns for the applicable title and any product shipped by the L.L.C. from inventory shall be solely an L.L.C. liability. [By way of illustration: the Expected Sales contained on Schedule C with respect to Jonathan Butler are 24,076 units. The Expected Returns for Jonathan Butler is 6,287 units. The L.L.C. shall have the right to apply such 6,287 units against the N2K Advance and N2K Royalty payable to N2K hereunder. Any units returned in excess of the Expected Returns shall be the L.L.C.'s liability.] 3.4. DISTRIBUTION OF AVAILABLE CASH TO THIRD PARTIES. The Board shall ----------------------------------------------- determine disbursements of cash and/or profits to the members of the L.L.C. 3.5. OWNERSHIP OF THE L.L.C. PROPERTY. All property of the L.L.C. shall -------------------------------- be registered or cause to be registered, in the name of the L.L.C., including the copyright in all materials created and produced in connection with the L.L.C. which contain the requisite degree of creativity and originality. All such materials shall be registered in the United States under the Berne Convention of 1986, as revised, and the requisite copyright notice shall be included on each copy or phonorecord of the materials. All tangible and intangible property generated or produced in furtherance of the purposes of the L.L.C. shall be the property of the L.L.C. subject to the terms hereof. Except as otherwise provided herein, upon termination of the L.L.C., all copyrights of the L.L.C. will be jointly owned by N2K and WRI in the percentages hereinafter indicated. Ownership of the L.L.C. and all derivative works shall be in the following percentages: WRI: eighty and one-tenth percent (80.1%) N2K: nineteen and nine-tenths percent (19.9%) Derivative works or Products owned on a different percentage basis, and any change of ownership of the L.L.C., will be evidenced by a separate document, signed by each party. 3.6. SECURITY AGREEMENT. Simultaneously upon the execution of this ------------------ agreement, WRI and the L.L.C. shall execute the Security Agreement, a copy of which is attached hereto as Exhibit B, and is incorporated herein by reference. 4. MANAGEMENT. ---------- 4.1. MANAGEMENT OF L.L.C. The overall management and control of the day- -------------------- to-day business and affairs of the L.L.C. shall determined by the Board and carried out by the Officers appointed by the Board. The L.L.C. may make any payment to any member or 7 any business owned, operated or controlled by such member so long as such payments are mutually approved payments to the person or entity for services rendered or approved expenses incurred on behalf of the L.L.C.; provided also, that no salaries to employees of the Parties hereto or their owned, operated or controlled business, or any general overhead expenses shall be deducted from gross receipts in determining net profits, except as otherwise set forth in the applicable operating budget, or as otherwise agreed upon by the Board. For avoidance of doubt, it is understood that during the Initial Term, no payments shall be made to any member or any related party of such member in connection with any agreements or transactions with such member or any related party of such member without the prior written approval of the Board. 4.2. MARKETING. It is anticipated that the L.L.C. may enter into --------- additional marketing and distribution agreements with respect to the Products. The terms of such agreements shall be subject to Board approval. 4.3. DUTIES OF THE PARTIES; BUDGET AND MEETINGS. WRI shall use its best ------------------------------------------ efforts to carry out the purposes of the L.L.C.; shall devote such time to the L.L.C. business as shall be reasonably required to carry out such purposes; and shall use its best efforts to assure the efficient management and operation of the L.L.C.'s business. To the extent deemed necessary, the Board shall establish a budget for the activities of the L.L.C., which shall set forth the categories of expenses of the L.L.C., the amounts of WRI's capital contributions with respect thereto, and the timing of the making of such expenditures and contributions. It is agreed that the Board shall meet no less frequently than quarterly to discuss the business of the L.L.C. and the progress thereof. 4.4. COMPENSATION OF PARTIES. The net profits of the L.L.C., less such ----------------------- amounts as may be deemed by the L.L.C. to be necessary to meet the anticipated cash flow and capital needs of the L.L.C., will be distributed to the Parties hereto, proportionate with their ownership interest in the L.L.C., within thirty (30) days after the end of each calendar year and shall be accompanied by statements of account setting forth the calculation of such net profits. For purposes of distribution hereunder, "net profits" shall be net profits calculated by the L.L.C.'s accountants employing G.A.A.P and in accordance with the applicable provisions of this agreement. 4.5. WARRANTIES AND REPRESENTATIONS. ------------------------------ WRI warrants and represents: (a) WRI is authorized, empowered and able to enter into and fully perform its obligations under this agreement. Neither this agreement nor the fulfillment thereof by WRI infringes upon the rights of any third party. WRI has no knowledge of any claim or purported claim which would interfere with N2K's rights hereunder or create any liability on the part of N2K or on behalf of the L.L.C. 8 (b) WRI is a duly organized and existing under the laws of the State of New York. (c) The master recordings and other product (if any), to be released by the L.L.C. hereunder and the recorded performances embodied thereon shall be produced in accordance with the rules and regulations of any union(s) having jurisdiction herein. (d) The L.L.C. shall be solely responsible for and shall pay all sums due any artist, producers and all other parties entitled to receive royalties in connection with the master recordings (including audiovisual recordings, if any). N2K shall provide the L.L.C. a schedule (attached hereto as Schedule D) of current royalty liability and the recouped/unrecouped status of each such project. 4.6. INDEMNIFICATION. --------------- (a) WRI shall indemnify and hold harmless N2K and the L.L.C. from and against all claims, demands, actions or rights of action (including costs of defense and settlement and reasonable attorneys' fees) arising as a result of WRI's conduct in breach of the warranties, representations, covenants and terms of this L.L.C. Agreement. Upon the assertion of any such claim, demand, action or right of action, N2K or the L.L.C. shall notify WRI and provide WRI with the opportunity to participate in the defense thereof at WRI's sole cost and expense; provided that any failure to give such notice shall not affect N2K's right of indemnity provided as part of this L.L.C. Agreement. (b) N2K shall indemnify and hold harmless WRI and the L.L.C. from and against all claims, demands, actions or rights of action (including costs of defense and settlement and reasonable attorneys' fees) arising solely in connection with the N2K Assets and rights and obligations associated therewith. Upon the assertion of any such claim, demand, action or right of action, WRI or the L.L.C. shall notify N2K and provide N2K with the opportunity to participate in the defense thereof at N2K's sole cost and expense; provided that any failure to give such notice shall not affect WRI's right of indemnity provided as part of this L.L.C. Agreement. 5. FISCAL MATTERS. -------------- 5.1. BOOKS AND RECORDS. Accurate books of the L.L.C. shall be maintained ----------------- on 9 behalf of the L.L.C., at the principal place of business of the L.L.C. showing all receipts and expenditures, assets and liabilities, profits and losses, and all other records necessary for recording the L.L.C.'s business and affairs in accordance with policies established by the Board of Directors. The Parties shall have access at all reasonable times to the books and records of the L.L.C. Each Party may, at its sole cost and election, employ or utilize the services of a third party to conduct an audit and examine all of the books and records of the L.L.C. no more than once per calendar year, and make copies of such books and records for its own use. Any claims generated by the said audit must be made in writing within one (1) year from the date said audit commences. 5.2. ACCOUNTING FOR EXPENSES. As a general guideline, the Parties agree ----------------------- that the L.L.C. budget shall be approved by the Board. Out-of-pocket expenses expended by a Party but not approved by the Board (or not previously approved by the Board as part of the L.L.C. budget) shall be absorbed by the Party incurring such expenses. 5.3. BANK ACCOUNTS. All funds of the L.L.C. shall be accounted for in its ------------- name in such checking accounts, savings accounts, time deposits, certificates of deposit or internal accounts as shall be designated by the L.L.C.. 6. TERM AND GENERAL PROVISIONS. --------------------------- 6.1. TERM. The term of the L.L.C. shall consist of the Initial Term (as ---- defined in subparagraph 3.1(a) above), and shall continue thereafter until terminated by mutual agreement, as provided by law, or as otherwise provided herein. 6.2. NOTICES. All notices shall be in writing, and shall be deemed ------- properly given when personally delivered or when mailed, first class mail, certified, return receipt requested, all charges prepaid, as follows (subject to change by notice): To N2K: N2K Inc. 55 Broad Street New York, New York 10004 Attn: Jon Diamond With courtesy copy to: N2K Inc. 55 Broad Street New York, New York 10004 Attn: General Counsel To WRI: Warlock Records Inc. 122 East 25th Street New York, New York 10010 10 Attn: Adam Levy with courtesy copy to: Borstein & Sheinbaum 420 Lexington Ave., Suite 2920 New York, New York 10170 Attn: Leon Borstein, Esq. 6.3. DISSOLUTION. ----------- (a) In the event of WRI's dissolution or the liquidation of WRI's assets, or the filing by or against WRI of a petition for liquidation or reorganization under Title 11 of the United States Code as now or hereafter in effect or under any similar statute relating to insolvency, bankruptcy, liquidation or reorganization and the same is not dismissed within ninety (90) days of the date of said petition, or in the event of the appointment of a trustee, receiver or custodian for WRI or for any of its property, or in the event that WRI shall make an assignment for the benefit of creditors or in the event WRI shall fail to fulfill any of its material obligations in this agreement, then in addition to any other remedies which may be available, N2K shall have the option by notice to WRI to either: (a) terminate this agreement; or (b) require WRI to assign all of its voting interest in the L.L.C. holdings to N2K. In the event that N2K elects Termination, the L.L.C. shall be liquidated in an orderly manner. All of the assets shall be sold in the best interest of the L.L.C., except for the N2K Masters which shall be reassigned to N2K along with all of the inventory of the N2K Masters. All returns of N2K merchandise after liquidation shall be the asset and liability of N2K. All other rights and liabilities related to the N2K Masters likewise shall belong to N2K. In the event that N2K elects assignment, WRI may require a reassignment of voting rights only upon discharge from bankruptcy. An election to terminate by either Party before the end of the Initial Term shall act as a waiver of all rights to receive and make further payments pursuant to (S)3.3(b) above. (b) In the event of N2K's dissolution or the liquidation of N2K's assets, or the filing by or against N2K of a petition for liquidation or reorganization under Title 11 of the United States Code as now or hereafter in effect or under any similar statute relating to insolvency, bankruptcy, liquidation or reorganization, or in the event of the appointment of a trustee, receiver or custodian for N2K or for any of its property, or in the event that N2K shall make an assignment for the benefit of creditors, then in addition to any other remedies which may be available, WRI shall have the option by notice to N2K to terminate this agreement. 6.4. EVENTS OF TERMINATION. --------------------- 11 (a) In the event WRI breaches any of its warranties or representations hereunder, or in the event of the death, or incapacity of Levy lasting for a period of sixty (60) days or more and/or in the event that Levy shall cease for whatever reason to be actively engaged in WRI's management in a controlling capacity, N2K shall have the right, without liability of any kind whatsoever, by giving WRI written notice thereof ("N2K Option"), to terminate the Term of this L.L.C., as of the date of such notice. If any breach of warranty or representation is curable, the notice of breach shall contain a thirty (30) day cure provision allowing the recipient to cure. In the event N2K exercises the N2K Option to terminate this L.L.C., N2K may require the L.L.C. to either: (a) assign to N2K all of the N2K Assets, and neither the L.L.C. nor WRI shall have any further interest therein; associated accounts receivable and the returns, if any. In the event N2K exercises its option to terminate this agreement pursuant to this subparagraph, N2K shall pay WRI an amount equal to 80% of the fair market value of the L.L.C. as of the date of N2K's exercise of its option to terminate this agreement. The L.L.C.'s "fair market value" shall be determined by an independent certified public accountant mutually selected by both parties. (b) Notwithstanding anything to the contrary contained in this paragraph, solely in the event of Levy's death or incapacity occurring no earlier than one (1) year following the date hereof ("Occurrence Date"), N2K may at its option buy WRI's interest in the L.L.C. by paying WRI (or its heirs or assigns) an amount equal to 80% of the fair market value of the L.L.C. as of the date of death or incapacity. Such payment shall be made before the end of the fiscal year in which the Occurrence Date occurs. The L.L.C.'s "fair market value" shall be determined by an independent certified public accountant mutually selected by both parties. (c) In the event WRI exercises its option to terminate this agreement pursuant to subparagraph 6.3(b) above, WRI shall pay N2K an amount equal to 19.9% of the fair market value of the L.L.C. as of the date of WRI's exercise of its option to terminate this agreement, under same terms and conditions specified. in subparagraph 6.4(a) above. The L.L.C.'s "fair market value" shall be determined by an independent certified public accountant mutually selected by both parties. 6.5. BUY-OUT. Notwithstanding anything to the contrary contained in this ------- agreement: (a) on or after the first anniversary of the term of this agreement, N2K may give notice to WRI of its interest to buy WRI's interest in the L.L.C. (the "N2K Buyout Offer"). The Buyout Offer shall contain a price, a schedule of payment dates, security, if any, and penalty clauses, if any, to be valid. Within sixty 60 days following receipt of the N2K Buyout Offer, WRI may (I) elect to accept the N2K Buyout 12 Offer; in which case N2K will pay WRI the amount equal to the N2K Buyout Offer in accordance its terms, or (ii) purchase N2K's interest in the L.L.C. for an amount equal to 19.9% of the N2K Buyout Offer upon the same terms and conditions as contained in the Buyout Offer. If WRI does not respond within such sixty (60) day period, then WRI must sell its interest in the L.L.C. to N2K at the N2K Buyout Offer. (b) on or after the first anniversary of the term of this agreement, WRI may give notice to N2K of its interest to buy N2K's interest in the L.L.C. (the "WRI Buyout Offer"). The Buyout Offer shall contain a price, a schedule of payment dates, security, if any, and penalty clauses, if any, to be valid. Within 60 days following receipt of the WRI Buyout Offer, N2K may (I) elect to accept the WRI Buyout Offer; in which case WRI will pay N2K the amount equal to the WRI Buyout Offer in accordance with its terms, or (ii) purchase WRI's interest in the L.L.C. for an amount equal to 400% of the WRI Buyout Offer upon the same terms and conditions as contained in the Buyout Offer. If N2K does not respond within such sixty (60) day period, then N2K must sell its interest in the L.L.C. to WRI at the WRI Buyout Offer. 6.6. ASSIGNMENT. No Party hereto shall assign its interest in this ---------- Agreement or the L.L.C. without the prior written consent of the other Parties hereto, except to an entity acquiring all or substantially all of the assets of a Party or to an entity created as a result of merger with a Party. It is contemplated that N2K will merge with CDNow Inc. (the "Merger"). WRI hereby consents to N2K's assignment of its interest contained in this agreement (i) directly to the newly merged business entity resulting from such Merger; or (ii) to N2K as a wholly owned subsidiary of such newly merged business entity, such determination shall be made by such newly merged business entity in its sole discretion. 6.7. BINDING EFFECT. Except as herein otherwise provided to the contrary -------------- above, this Agreement shall be binding upon, and inure to the benefit of, the Parties and their respective heirs, executors, administrators, successors, transferees and assigns. 6.8. CHOICE OF LAW. This agreement will be governed and construed ------------- pursuant to the laws of the state of New York applicable to contracts entered into and performed entirely within the State of New York. 6.9. JURISDICTIONAL VENUE. Any disputes or controversies arising -------------------- hereunder shall be subject to the jurisdiction of Courts of the State of New York or of the U.S. District Court for the Southern District of New York. 6.10. SERVICE OF PROCESS. Any process in any action or proceeding arising ------------------ under or relating to this agreement may, among other methods, be served upon either Party by 13 delivering or mailing the same by registered or certified mail, directed to the address first written above or such other address as designated by notice to such other party. Any such delivery or mail service shall be deemed to have the same force and effect as personal service within the State of New York. 6.13. CONFIDENTIALITY/PRESS RELEASE. The Parties hereto acknowledge and ----------------------------- agree that the terms of this agreement are confidential and shall not be disclosed to any third party without the prior approval of the other Party, except as may be required by law or as necessary to disclose to such Party's board of directors, management or shareholders. Arrangements made in connection with any press release concerning the signing of this agreement must be mutually approved by the Parties hereto, and any such press release itself must be mutually approved. 14 IN WITNESS WHEREOF, the Parties have executed this L.L.C. Agreement, or have caused it to be executed by their duly authorized representatives, as of the day and year first above written. N2K INC. By:____________________________ Date: ________________________ WARLOCK RECORDS INC. By:____________________________ Date: ________________________ 15 EX-10.21 13 LICENSE AGREEMENT EXHIBIT 10.21 LICENSE AGREEMENT ----------------- LICENSE AGREEMENT (referred to herein as the "Agreement" or "License Agreement") made as of the 1st day of August, 1998, between 55 Broad Street Company, a New York partnership having an office at 345 Park Avenue, New York, New York, as Licensor (referred to herein as "Licensor"), and N2K, Inc., a -------- Delaware corporation, having an office at 55 Broad Street, New York, New York, as Licensee (referred to herein as "Licensee"). -------- WITNESSETH: WHEREAS: 1. Licensor is the owner of the Building (referred to herein as the "Building") known as 55 Broad Street located in the Borough of Manhattan, City, -------- County and State of New York; 2. Licensee desires to license and use a portion of the seventh ------- (7th) floor of the Building as general offices; and - ----- 3. Licensor is willing to license such space to License and Licensee is willing to enter into such license all under the terms, covenants and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants contained herein the parties agree as follows: FIRST: (A) Licensor does hereby grant to Licensee upon the terms ----- and conditions of this License Agreement a license to use a portion of the seventh (7th) floor in the Building known as Unit 7A which is delineated by the - ------------- outlining and crosshatched markings on the floor plan annexed hereto and made a part hereof as Exhibit 1 (referred to as "Licensed Space"). The license granted --------- -------------- hereunder shall be on a month to month basis (referred to herein as the "License ------- Term") to commence on August 1, 1998 (such date is referred to herein as the - ---- "License Commencement Date") and to end on the last day of any calendar month, - -------------------------- unless such License Term shall sooner cease and expire pursuant to any of the terms or conditions of this License Agreement or pursuant to law (the date on which the License Term shall end is sometimes referred to herein as the "License ------- Termination Date"). Licensee waives any right to recover any damages which may - ---------------- result from Licensor's failure to deliver possession of the Licensed Space to Licensee on the License Commencement Date. The License granted to Licensee hereunder shall only apply to the Licensed Space, and Licensee shall have no rights to or in any part of the Building except the Licensed Space. (B) (1) MUTUAL TERMINATION OPTION: Either party hereto shall have the right to terminate this License as of the last day (which day is referred to as the "Earlier Termination Date") of any calendar month by notice ------------------------ to the other party exercising such right at least thirty (30) days prior to the Earlier Termination Date. Time is of the essence with respect to the giving of such notice. Neither party shall have the right to give such notice less than thirty (30) days prior to the proposed Earlier Termination Date, and any notice given less than thirty (30) days prior to the proposed Earlier Termination Date purporting to exercise such option shall be void and of no force or effect. Such notice of termination shall be given in accordance with the provisions of Article EIGHTEENTH. Notwithstanding the giving of such notice of termination, both parties shall comply with all of the terms, covenants and conditions of this License on such party's part to be observed and performed, including, without limitation, the covenant by Licensee to pay the License Fee and all other charges and sums due under the License, for all periods through and including the Earlier Termination Date. In the event either party shall give any such notice of termination pursuant to the provisions hereof and shall otherwise comply with the conditions of the exercise of such party's right to terminate this License, this License shall come to an end and expire on the Earlier Termination Date, unless sooner terminated pursuant to any other term, covenant or condition of this License or pursuant to law. (2) Upon request of either party, from time to time, the other party will execute and deliver to the requesting party an instrument, in form reasonably satisfactory to such requesting party, stating that the other party has not exercised the right of termination contained herein or that either party has exercised the right of termination contained herein, as the case may be. Failure of either party to request the execution and delivery of such instrument or failure of either party to execute such instrument, however, shall not vitiate the foregoing provisions hereof. SECOND: LICENSE FEE: (1) Licensee shall pay to Licensor an annual ------ minimum license fee of Sixty-six Thousand Eight Hundred Fifty-two and 00//100 ($66,852.00) Dollars (referred to herein as the "License Fee"). Such License ----------- Fee shall be payable in equal installments each in the sum of Five Thousand Five Hundred Seventy-one and 00/100 ($5,571.00) Dollars in advance on the first (1st) day of each month of the License Term without prior demand therefor and without any offset of deduction whatsoever. The License Fee if applicable, shall be collectable in the same manner as rent and Licensor shall have all of the rights and remedies at law to collect same and shall be paid in lawful money of the United States. (2) Upon execution and delivery of this License Agreement, Licensee shall pay to Licensor the sum of Five Thousand Five Hundred Seventy-one and 00/100 ($5,571.00) Dollars as the License Fee for the first (1st) full month of the License Term. -2- THIRD: LICENSED SPACE USE: (A) The Licensed Space shall be used ----- ------------------ by Licensee solely for general offices and for no other purpose. Licensee acknowledges and agrees that no representations have been made to Licensee with respect to the use, if any, to which the License Space may be put. (B) Licensee shall not use or occupy, or permit the use or occupancy of the Licensed Space or any part thereof, for any purpose other than the purpose specifically set forth in Paragraph A of this Article THIRD, or in any manner which, in Licensor's judgment, (a) shall adversely affect or interfere with (i) any services required to be furnished by Licensor to Licensee or to any other tenant or occupant of the Building, or (ii) the proper and economical rendition of any such service, or (iii) the use or enjoyment or any part of the Building by any other tenant or occupant, or (b) tend to impair the character or dignity of the Building. Without limiting the aforesaid, Licensee shall conduct its business and control its agents, employees, invitees and visitors in such manner as not to create any nuisance, or interfere with, annoy or disturb Licensor or any tenant, Licensee, user or occupant of the Building. FOURTH: ALTERATIONS. Licensee shall not make any changes, ------ ----------- additions, improvements, alterations or other physical changes to the Licensed Space, the Building or any portions thereof, or any of the systems therein or thereon (referred to collectively as "Alterations" and singly as an ----------- "Alteration") without the prior written consent of Licensor in each instance, ---------- and in the event that Licensor grants such consent, such Alteration shall be made in compliance with all Legal Requirements and performed in a manner and at such times as Licensor reasonably designates and such Alterations or installations shall not, in any event, interfere with the use and operation of the Building by Licensor or any tenant, licensee, occupant or user thereof. Without limiting the aforesaid, Licensee agrees that (a) prior to any Alterations by Licensee or the installation of any of Licensee's equipment in the Licensed Space, Licensee shall submit detailed plans and specifications of the planned Alteration or installation to Licensor for Licensor's approval, provided that in no event will Licensor's approval of such plans be deemed a representation that they comply with applicable Legal Requirements, and will not cause interference with communication operations of Licensor, or any tenant, licensee, user or occupant of the Building and any such Alterations shall be made only in accordance with the plans and specifications approved by Licensor, (b) all contractors performing any Alterations, modification or maintenance work on behalf of Licensee at the Licensed Space or in the Building shall be subject to the prior written approval of Licensor prior to the commencement of such work, which approval shall not be unreasonably withheld. In the event Licensor or its agents employ any independent architect or engineer to examine any plans or specifications submitted by Licensee to Licensor in connection with any proposed Alteration, Licensee agrees to pay to Licensor a sum equal to any reasonable fees incurred by Licensor in connection therewith. Nothing in this License Agreement shall be construed in any way as constituting the consent or request of Licensor, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer or materialmen, for the performance of any labor or the furnishing of any material for any specific Alteration to, or repair of, the Licensed Space, the Building, or any part thereof. Any mechanic's or other lien filed against the Building, or the real property on which the Building is situated, for work claimed to have been done for, or materials claimed to have been furnished to, Licensee or any person claiming through or under -3- Licensee or based upon any act or omission or alleged act or omission of Licensee or any such person shall be discharged by Licensee (by bond or otherwise) at Licensee's sole cost and expense, within twenty (20) days after the filing of such lien. FIFTH: REPAIRS AND MAINTENANCE: Licensee shall, at its sole cost ----- ----------------------- and expense, maintain and take good care of (i) the Licensed Space and all fixtures, installations and appurtenances contained therein and (ii) Licensee's personal property and equipment, personal property and all replacements and additions thereto and Licensee shall make all repairs, structural or otherwise, foreseen or unforeseen as and when needed to keep the Licensed Space, and Licensee's personal property and equipment in good order and repair. Licensor shall have no obligation to maintain, repair, operate or safeguard Licensee's equipment. SIXTH: UTILITIES AND SERVICES: (A) Except as hereinafter expressly ----- ---------------------- provided, Licensor shall have no obligation to provide any utilities, including electrical service, to the Licensed Space or for the operation of Licensee's equipment and Licensor makes no representation as to the availability of such utilities. (B) (1) Prior to the License Commencement Date, Licensor, at Licensor's expense, shall have installed a submeter or submeters in the Licensed Space to measure Licensee's actual consumption of electricity in the entire Licensed Space. Licensee shall pay to Licensor, from time to time, upon demand, for the electricity consumed in the Licensed Space, as determined by a submeter or submeters installed herein, the actual cost to Licensor of purchasing electricity for the Licensed Space (as such actual cost is hereinafter defined) plus all applicable taxes thereon. Licensor's actual cost for Licensee's KW and KWH shall be determined by the application of the Building's electric rate schedule per month from the corporation(s) and/or other entity(ies) selected by Licensor to supply electrical service to the Building to Licensee's usage. With respect to any period when any such submeter is not in good working order, Licensee shall pay Licensor for electricity consumed in the portion of the Licensed Space served by such submeter at the rate paid by Licensee to Licensor during the most recent comparable period when such submeter was in good working order. Licensee shall take good care of any such submeter and all submetering installation equipment, at Licensee's sole cost and expense, and make all repairs thereto occasioned by any acts, omissions or negligence of Licensee or any person claiming through or under Licensee as and when necessary to insure that any such submeter is, at all times during the License Term, in good working order. (2) With respect to the period (referred to as the "Interim ------- Period"), if any, from the License Commencement Date through the date - ------ immediately prior to the date upon which the submeter or submeters shall be operable, Licensee shall pay to Licensor monthly, on demand of Licensor, for the electricity consumed in the Licensed Space, a sum equal to one-twelfth (1/12th) of the product of (x) $1.50 multiplied by (y) 2,476. With respect to any period during the Interim Period constituting less than a full calendar month, the monthly payment referred to in the preceding sentence shall be approximately prorated. -4- (3) Licensee acknowledges that the Building heating, ventilating and air conditioning system unit serving the floor of the Building on which the Licensed Space is located (referred to herein as the "Floor HVAC Unit") shall not be connected to the submeter(s) serving the Licensed Space, but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor HVAC Unit. Accordingly, Licensee agrees that during the License Term, Licensee shall pay to Licensor, from time to time upon demand of Licensor and submission by Licensor to Licensee of invoices or bills therefor 10.44% percent (hereinafter "Licensee's Electrical Share") of all amounts shown on said separate meter(s) for such Floor HVAC Unit. (4) Licensee acknowledges that the light and power system serving the public areas of the floor of the Building on which the Licensed Space is located (referred to herein as the "Floor Public Light and Power") shall not be connected to the submeter(s) serving the Licensed Space but, instead, shall be connected to a separate meter(s) measuring the electrical energy consumed by such Floor Public Light and Power. Accordingly, Licensee agrees that during the License Term, Licensee shall pay to Licensor, from time to time upon demand of Licensor and submission by Licensor to Licensee of invoices or bills therefor, Licensee's Electrical Share of all amounts shown on said separate meter(s) for such Floor Public Light and Power. (5) If either the quantity or character of electrical service is changed by the corporation(s) and/or other entity(ies) selected by Licensor to supply electrical service to the Building or is no longer available or suitable for Licensee's requirements, no such change, unavailability or unsuitability shall constitute an actual or constructive eviction, in whole or in part, or entitle Licensee to any abatement or diminution of any fees or sums due Licensor from Licensee under this License Agreement, or relieve Licensee from any of its obligations under this License Agreement, or impose any liability upon Licensor, or its agents, by reason of inconvenience or annoyance to Licensee, or injury to or interruption of Licensee's business or otherwise. Licensee covenants that at no time shall the use of the electrical energy in the Licensed Space exceed the capacity of the existing feeders or risers or wiring installations then serving the Licensed Space. (6) Licensor shall provide an electrical load of four (4) watts per square foot of rentable area demand load to the Licensed Space. The foregoing shall be exclusive of the electrical power for the Building HVAC systems. (C) As long as Licensee is not in default under any of the terms, covenants or conditions of this Agreement on Licensee's part to be observed and performed, Licensor, at Licensor's expense, shall furnish heat to the Licensed Space, as and when required by law, from 8:00 A.M. to 6:00 P.M. on business days and on Saturdays from 8:00 A.M. to 1:00 P.M. (D) As long as Licensee is not in default under any of the terms, covenants or conditions of this Agreement on Licensee's part to be observed or performed, Licensor, at Licensor's expense, shall furnish and distribute to the Licensed Space (i) conditioned air at reasonable temperatures, pressures and degrees of humidity and in reasonable volumes and velocities, from 8:00 A.M. to 6:00 P.M. on business days and on -5- Saturdays from 8:00 A.M. to 1:00 P.M. during the months of May, June, July, August, September and October when required for the comfortable occupancy of the Licensed Space; and (ii) mechanical ventilation through the Building air conditioning system on 8:00 A.M. to 6:00 P.M. on business days and on Saturdays from 8:00 A.M. to 1:00 P.M. throughout the year, except when conditioned air or heat is being furnished. Notwithstanding the foregoing provisions of this Article SIXTH, Licensor shall not be responsible if the normal operation of the Building air conditioning system shall fail to provide conditioned air at reasonable temperatures, pressures or degrees of humidity or in reasonable volumes or velocities in any portions of the Licensed Space (a) which, by reason of any machinery or equipment installed by or on behalf of Licensee or any person claiming through or under Licensee, shall have an electrical load in excess of four (4) watts per square foot of usable area for all purposes (including lighting and power), or which shall have a human occupancy factor in excess of one person per 100 square feet of usable area (the average electrical load and human occupancy factors for which the Building air conditioning system is designed) or (b) because of any rearrangement of partitioning or other Alterations made or performed by or on behalf of Licensee or any person claiming through or under Licensee. Whenever said air conditioning system is in operation, Licensee agrees to cause all the windows in the Licensed Space to be kept closed and to cause the venetian blinds in the Licensed Space to be kept closed if necessary because of the position of the sun. Licensee agrees to cause all the windows in the Licensed Space to be closed whenever the Licensed Space is not occupied. Licensee shall cooperate fully with Licensor at all times and abide by all regulations and requirements which Licensor may reasonably prescribe for the proper functioning and protection of the air conditioning and ventilating system. In addition to any and all other rights and remedies which Licensor may invoke for a violation or breach of any of the foregoing provisions of this Paragraph (D), Licensor may discontinue heating, air conditioning and ventilating service during the period of such violation or breach, and such discontinuance shall not constitute an actual or constructive eviction, in whole or in part, or entitle Licensee to any abatement or diminution of rent, or relieve Licensee from any of its obligations under this Agreement, or impose any liability upon Licensor, or its agents, by reason of inconvenience or annoyance to Licensee, or injury to or interruption of Licensee's business, or otherwise. (E) (1) As long as this License Agreement is in full force and effect and provided Licensee shall keep the Licensed Space in order, Licensor, at Licensor's expense, shall cause the office areas of the Licensed Space to be cleaned in a manner consistent with the standards and practices adopted by Licensor for the Building, and shall cause Licensee's ordinary office waste paper refuse to be removed. Licensee shall cooperate with any waste and garbage recycling program of the Building and shall comply with all reasonable rules and regulations of Licensor with respect thereto. Licensee acknowledges that Licensor's obligation to cause the office areas of the Licensed Space to be cleaned excludes any portion of the Licensed Space not used as office areas (e.g., storage, mail and computer areas, private lavatories and areas used for the storage, preparation service or consumption of food or beverages). Licensee shall pay Licensor at Building standard rates or, if there are no such rates, at reasonable rates, for the removal of any of Licensee's refuse or rubbish, other than ordinary office waste paper refuse, from the Building, and Licensee, at Licensee's expense, shall cause all portions of the Licensed Space used for the storage, preparation service or consumption of food or beverages to be cleaned daily in a manner -6- satisfactory to Licensor, and to be exterminated against infestation by vermin, roaches or rodents regularly and, in addition, whenever there shall be evidence of any infestation. (2) Licensee acknowledges and is aware that the cleaning services required to be furnished by Licensor pursuant to this Section may be furnished by a contractor or contractors employed by Licensor and agrees that Licensor shall not be deemed in default of any of its obligations under this Agreement unless such default shall continue for an unreasonable period of time after notice from Licensee to Licensor setting forth the specific nature of such default. (F) As long as Licensee is not in default under any of the terms, covenants or conditions of this Agreement on Licensee's part to be observed and performed, Licensor, at Licensor's expense, shall furnish necessary passenger elevator facilities twenty-four (24) hours per day on business days and on from Saturdays 8:00 A.M. to 6:00 P.M. and shall have a passenger elevator subject to call at all other times. Licensee shall be entitled to the non- exclusive use of the freight elevator in common with other tenants and occupants of the Building from 8:00 A.M. to 6:00 P.M. on business days, subject to such reasonable rules as Licensor may adopt for the use of the freight elevator. At any time or times all or any of the elevators in the Building may, at Licensor's option, be automatic elevators, and Licensor shall not be required to furnish any operator service for automatic elevators. If Licensor shall, at any time, elect to furnish operator service for any automatic elevators, Licensor shall have the right to discontinue furnishing such service with the same effect as if Licensor had never elected to furnish such service. SEVENTH: CONDITION OF THE LICENSEE SPACE. Licensee shall take the Licensed ------- ------------------------------- Space in the condition that the Licensed Space shall be in on the License Commencement Date "as is". Licensor shall have no obligation to do any work or perform any installations in order to prepare the Licensed Space for Licensee's occupancy. EIGHTH: END OF LICENSE TERM. Licensee shall vacate the Licensed Space ------ ------------------- upon the License Termination Date broom clean and in good order and in the same condition that the Licensed Space existed on the License Commencement Date, ordinary wear excepted, and Licensee shall, on or prior to the License Termination Date, remove all of Licensee's personal property and all other property and effects of Licensee and all persons claiming through or under Licensee from the Licensed Space and the Building and Licensee shall repair all damage to the Licensed Space and the Building occasioned by such removal. Licensor shall have the right to retain any property and effects of Licensee or such person which shall remain in the Licensed Space after the License Termination Date and any net proceeds from the sale thereof, without waiving any of Licensor's rights with respect to any "Event of Default" (as hereinafter defined) by Licensee. Licensee hereby expressly waives for itself and for any person claiming through or under Licensee any rights which Licensee or any such person may have under the provisions of Section 2201 of the New York Civil Practice Law and Rules or any successor law of like import then in force in connection with any holdover summary proceedings which Licensor may institute to enforce the -7- foregoing provisions of this Article EIGHTH. If the date upon which the License Term shall expire, terminate or end shall fall on a Sunday or holiday, then Licensee's obligations under the first sentence of this Article EIGHTH shall be performed on or prior to the Saturday or business day immediately preceding such Sunday or holiday. Licensee's obligations under this Article EIGHTH shall survive the License Termination Date. NINTH: ASSIGNMENT AND SUBLETTING: (1) Licensee may not assign or ----- ------------------------- transfer this License Agreement, or the License granted hereunder, without the prior written consent of Licensor in each instance, which consent Licensor may withhold in its sole discretion. The sale, pledge, transfer or other alienation of (a) any of the issued and outstanding capital stock of any corporate Licensee (unless such stock is publicly traded on a recognized security exchange or over- the-counter market) or (b) any interest in any partnership or joint venture of Licensee, however accomplished, and whether in a single transaction or in a series of related and/or unrelated transactions, resulting in a change of more than forty-nine (49%) percent of the then issued and outstanding capital stock of any corporate Licensee (unless such stock is publicly traded on a recognized security exchange or over-the-counter market) or any interest in any partnership or joint venture of Licensee, however accomplished, and whether in a single transaction or in a series of related/unrelated transactions, shall be deemed, for the purposes of this Article NINTH, as an assignment of this License and Licensee's rights granted hereunder which shall require the prior consent of Licensor in each instance. Licensee shall not be permitted to sublicense the Licensed Space without the prior written consent of Licensor which consent Licensor may withhold at its sole discretion. (2) As long as Licensee is not in default under any of the terms, covenants or conditions of this License on Licensee's part to be observed and performed beyond applicable notice and cure periods, Licensee shall have the right without the prior consent of Licensor, to permit the use or occupancy of, all or any part of the Licensed Space by any subsidiary or affiliate of Licensee named herein for the use permitted in this License only for such period as it shall remain such subsidiary or affiliate. For the purposes of this Article: (a) a "subsidiary" of Licensee named herein shall mean any corporation not less than fifty-one (51 %) percent of whose outstanding voting stock at the time shall be owned by Licensee named herein, and (b) an "affiliate" of Licensee named herein shall mean any corporation, partnership or other business entity which controls or is controlled by, or is under common control with Licensee named herein. For the purpose of the definition of "affiliate" the word "control" (including, "controlled by" and "under common control with") as used with respect to any corporation, partnership or other business entity, shall mean the possession of the power to direct or cause the direction of the management and policies of such corporation, partnership or other business entity, whether through the ownership of voting securities or contract. However, no such use and occupancy shall be valid unless, Licensee shall give prompt notice to Licensor of any such use or occupancy of all or any part of the Licensed Space and such use or occupancy shall be subject and subordinate to all of the terms, covenants and conditions of this License. No such use or occupancy shall operate to vest in the user or occupant any right or interest in this License or the Licensed Space. -8- (3) Licensor shall have the right to freely transfer and assign, in whole or in part, all its rights and obligations hereunder and in the Building and no further liability or obligation shall thereafter accrue against Licensor. TENTH: LICENSOR ACCESS. (A) (1) Licensor and its agents shall have ----- --------------- the following rights in and about the Licensed Space: (i) to enter the Licensed Space at all times to examine the Licensed Space or for any of the purposes set forth in this Article TENTH or for the purpose of performing any obligation of Licensor under this License Agreement or exercising any right or remedy reserved to Licensor in this License Agreement, or complying with any Legal Requirement which Licensor is obligated to comply with hereunder, and if Licensee, its officers, partners, agents or employees shall not be personally present or shall not open and permit an entry into the Licensed Space at any time when such entry shall be necessary or permissible, to use a master key or to forcibly enter the Licensed Space; (ii) to erect, install, use and maintain pipes, ducts and conduits in and through the Licensed Space; (iii) to exhibit the Licensed Space to others; (iv) to make such decorations, repairs, alterations, improvements or additions, or to perform such maintenance, including, but not limited to, the maintenance of all heating, air conditioning, ventilating, elevator, plumbing, electrical, telecommunication and other mechanical facilities, as Licensor may deem necessary or desirable; (v) to take all materials into and upon the Licensed Space that may be required in connection with any such decorations, repairs, alterations, improvements, additions or maintenance; and (vi) to alter, renovate and decorate the Licensed Space at any time during the License Term if Licensee shall have removed all or substantially all of Licensee's property from the Licensed Space. The lessors under any superior lease and the holders of any mortgage shall have the right to enter the Licensed Space from time to time through their respective employees, agents, representatives and architects to inspect the same or to cure any default of Licensor or Licensee relating thereto. Licensor shall have the right, from time to time, to change the name, number or designation by which the Building is commonly known which right shall include, without limitation, the right to name the Building after any tenant of the Building. (2) Supplementing the provisions of this Paragraph A above, Licensor, agrees that, except in cases of emergency, any entry upon the Licensed Space shall be made at reasonable times, and only after reasonable advance notice (which may be mailed, delivered or left at the Licensed Space, notwithstanding any contrary provisions of this Agreement), and any work performed or installations made by Licensor shall be made with reasonable diligence and any such entry, work or installations shall be made in a manner designed to minimize interference with Licensee's normal business operations (however, nothing contained in this Section shall be deemed to impose upon Licensor any obligation to employ contractors or labor at so-called overtime or other premium pay rates). (B) LICENSOR'S RESERVATION OF RIGHTS TO PORTIONS OF THE --------------------------------------------------- BUILDING: All parts (except surfaces facing the interior of the Licensed Space) - -------- of all walls, windows and doors bounding the Licensed Space (including exterior Building walls, core corridor walls, doors and entrances), all balconies, terraces and roofs adjacent to the Licensed Space, all space in or adjacent to the Licensed Space used for shafts, stacks, stairways, -9- chutes, pipes, conduits, ducts, fan rooms, heating, air conditioning, ventilating, plumbing, electrical, telecommunication and other mechanical facilities, closets, service closets and other Building facilities, and the use thereof, as well as access thereto through the Licensed Space for the purposes of operation, maintenance, alteration and repair, are hereby reserved to Licensor. Licensor also reserves the right at any time to change the arrangement or location of entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets and other public parts of the Building, provided any such change does not permanently and unreasonably obstruct Licensee's access to the Licensed Space. Nothing contained in this Article TENTH shall impose any obligation upon Licensor with respect to the operation, maintenance, alteration or repair of the Licensed Space or the Building. (C) ACCESS TO THIRD PARTIES: Licensor and its agents shall have ----------------------- the right to permit access to the Licensed Space, whether or not Licensee shall be present, to any receiver, trustee, assignee for the benefit of creditors, sheriff, marshal or court officer entitled to, or reasonably purporting to be entitled to, such access for the purpose of taking possession of, or removing, any property of Licensee or any other occupant of the Licensed Space, or for any other lawful purpose, or by any representative of the fire, police, building sanitation or other department of the City, State or Federal Governments. Neither anything contained in this Article TENTH, nor any action taken by Licensor under this Paragraph (C), shall be deemed to constitute recognition by Licensor than any person other than Licensee has any right or interest in this License Agreement or the Licensed Space. (D) NO ACTUAL OR CONSTRUCTIVE EVICTION: The exercise by ---------------------------------- Licensor or its agents or by the lessor under any superior lease or by the holder of any mortgage of any right reserved to Licensor in this Article TENTH shall not constitute an actual or constructive eviction, in whole or in part, or entitle Licensee to any abatement or diminution of rent, or relieve Licensee from any of its obligations under this License Agreement, or impose any liability upon Licensor, or its agents, or upon any lessor under any superior lease or upon the holder of any such mortgage, by reason of inconvenience or annoyance to Licensee, or injury to or interruption of Licensee's business, or otherwise. ELEVENTH: LEGAL COMPLIANCE: (A) Licensee agrees that its use of the -------- ---------------- Licensed Space and the installation, operation and maintenance of its Licensee's personal property and equipment shall at all times, at Licensee's expense, strictly comply with all applicable "Legal Requirements", and the orders and requirements of all "Government Authorities". The term "Legal Requirements" ------------------ shall mean all present and future laws, codes, ordinances, statutes, requirements, orders and regulations, ordinary and extraordinary, foreseen and unforeseen, of any Governmental Authority (hereinafter defined) and all directions, requirements, orders and notices of violations thereof. The term "Governmental Authority" shall mean the United States of America, the State of ---------------------- New York, the County of New York, the Borough of Manhattan, the City of New York, any political subdivision thereof and any agency, department, commission, board, bureau of instrumentality of any of the foregoing, now existing or hereafter created, having jurisdiction over Licensor, Licensee, the use of the Licensed Space or the Building. -10- (B) In addition to the aforesaid, Licensee shall (i) not generate, store, install, dispose of or otherwise handle any substance, waste or material which is deemed hazardous, toxic, a pollutant or contaminant, under any Legal Requirement now or hereinafter in effect (referred to herein as "Hazardous --------- Substances") in the Licensed Space, or in or around the Building, in any manner - ---------- contrary to any applicable Legal Requirements; (ii) not install or place in the Licensed Space any asbestos or asbestos-containing materials (iii) at Licensee's cost and expense remove, clean-up and remedy any Hazardous Substance in the Licensed Space or the Building to the extent and in the manner required by any applicable Legal Requirements, if the presence of such Hazardous Substances resulted from the action or inaction of Licensee, its employees, contractors, subcontractors, agents, licensees or invitees. Licensee shall not remove, clean up, abate, or disturb any asbestos or asbestos-containing material in or about the Licensed Space except as Licensor shall direct. TWELFTH: CASUALTY AND CONDEMNATION. (A) In the event that the ------- ------------------------- Licensed Space shall be damaged by fire or other casualty, Licensor shall have no obligation to repair such damage provided that if Licensor gives Licensee notice that it intends to repair such damage within ninety (90) days of such damage or casualty then, this License Agreement shall remain in full force and effect provided that Licensor shall undertake such repairs with reasonable diligence. If the Licensee shall be unable to use all or substantially all of the Licensed Space or Licensee's equipment by reason of a fire or casualty which was not the result of the act or negligence of Licensee, then, during such period of inability the License Fee or other sums payable by Licensee to Licensor shall abate until the earlier of the date (i) such damage is repaired or (ii) Licensee begins to use Licensed Space or this License Agreement and the License Term shall end as provided in this Article TWELFTH; provided, however, that in the event that only a portion of the Licensed Space is so rendered unusable then, the Licensed Fee shall be abated in the same portion that the usable portion of the Licensed Space bears the total amount of the Licensed Space. In the event that Licensor shall not give notice that it intends to repair such damage, then, Licensee shall have the option, by notice to Licensor within thirty (30) days after the initial ninety (90) day period, to cancel this License Agreement and the License Term in which event this License Agreement and the License Term shall terminate and be of no further force and effect as of the date of such notice and except for those obligations which survive expiration of the License Term, neither party shall have any further obligation or liability under this License Agreement for any period after such effective termination date. (B) Notwithstanding anything contained in this License Agreement to the contrary, in the event that any of the following listed events shall occur (sometimes referred to herein as the "License Termination Events"), then -------------------------- this License and the License Term shall terminate and be of no further force and effect as of the effective date that this License shall so terminate. For the purposes hereof the License Termination Events shall be any of the following: (I) if (a) the Licensed Space or (b) the Building shall be damaged by fire or other casualty (whether or not in such instance the Licensed Space shall be so damaged) and Licensor shall decide not to repair or restore such damage in which event the License Term shall terminate on a date set forth -11- in a notice by Licensor to Licensee terminating this License and the License Term (i) as of the date of such fire a casualty, if the Licensed Space was damaged thereby, or (ii) a date set forth in Licensor's notice; (II) the Licensed Space or a substantial part of the Building shall be acquired or condemned by any legal authority or for public use or purpose in which event the License granted hereunder shall terminate upon a notice by Licensor to Licensee terminating this License Agreement and the License Term as of the date of such taking. (C) Licensee acknowledges that it has been advised that Licensor's insurance policies do not cover Licensee's personal property or any other property of Licensee in the Licensed Space; accordingly, it shall be Licensee's obligation to obtain and maintain insurance covering its property in the Licensed Space. Licensee shall attempt to obtain and maintain, throughout the License Term, in Licensee's casualty and other insurance policies covering Licensee's personal property and other property of Licensee in the Licensed Space, so-called "waiver subrogation" provisions to the effect that such policies shall not be invalidated should the insured waive, in writing, prior to a loss, any or all right of recovery against any party for loss occasioned by fire or other casualty. If Licensee is unable to obtain such provisions in Licensee's property and other insurance policies, Licensee shall name Licensor as an additional insured but not as a loss payee under such policies, it being understood and agreed that Licensor shall have no right whatsoever to any of the proceeds of such insurance. As long as such or similar provisions are included in such insurance policies then in force, Licensee hereby waives (and agrees to cause any other permitted occupants of the Licensed Space to execute and deliver to Licensor written instruments waiving) any right of recovery against Licensor, any lessors under any ground or underlying lease, the holders of any mortgage, and all other tenants or occupants of the Building, and any servants, employees, agents or contractors of Licensor, or of any such lessor, or holder or any such other tenants or occupants, for any loss occasioned by fire or other casualty. In the event that at any time such insurance carriers shall not include such or similar provisions in any such insurance policy, the waiver set forth in the foregoing sentence (or in any written instrument executed by any other permitted occupant of the Licensed Space) shall, upon notice given by Licensee to Licensor, be deemed of no further force or effect from and after the giving of such notice. During any period while any such waiver of right of recovery is in effect, Licensee, or any other permitted occupant of the Licensed Space, as the case may be, shall look solely to the proceeds of such policies to compensate Licensee or such other permitted occupant for any loss occasioned by fire or other casualty. THIRTEENTH: INDEMNITY AND INSURANCE. (A) Licensee covenants and ---------- ----------------------- agrees to defend, protect, indemnify and hold harmless Licensor, and its agents (including its managing agents, Rudin Management Company, Inc.), and the agents, servants and employees of each of the foregoing and such other entities as may be designated by the Licensor (individually, "Indemnitee" and collectively the ---------- "Indemnitees") from and against each and every claim, demand, cause of action, ----------- liability, cost, damage, loss, penalty, fine, judgment -12- or expense (including, but not limited to, attorneys' fees and expenses incurred in defense of the Indemnitees) which (i) may be made, asserted, brought or recovered by any person, firm or corporation arising out of any death or bodily or personal injury (including sickness or disease) or any damage to property to the extent caused by, resulting from or in any way directly or indirectly incidental to or in connection with the use of the Licensed Space or the operation of the Licensee's equipment, and/or any act, omission or negligence of Licensee and its agents contractors or employees and (ii) shall arise or result from or be incurred in connection with or in any way be incidental to (1) any breach by Licensee of its obligations under this License Agreement or (2) any violation of any Legal Requirement or any fine, penalty or governmental order issued to or enforced against Licensor or any Indemnitee by any relevant Governmental Authority with regard to such violation; the term "expense" shall ------- include, but not be limited to, any attorneys' fees or expenses incurred by Licensor in connection with the aforesaid and attorneys' fees or expenses incurred in connection with any action to recover such attorneys' fees or expenses. The obligations of Licensee hereunder shall survive the expiration, cancellation or termination of this License Agreement and the License Term. (B) Without limiting the aforesaid, Licensee agrees to be responsible for any damage caused to the Building, and/or any other property owned by Licensor or any tenant, licensee, user or occupant of the Building which may be caused by Licensee or any of its agents or representatives. (1) Throughout the License Term and for so long as Licensee (or any person through or under Licensee ) shall use or occupy the Licensed Space, Licensee shall, at Licensee's cost and expense, obtain and maintain throughout the License Term comprehensive public liability and water legal liability insurance against any claims by reason of personal injury, death and property damage occurring in or about the Licensed Space covering, without limitation, the operation of any private air conditioning equipment and any private elevators, escalators or conveyors in or serving the Licensed Space or any part thereof, whether installed by Licensor, Licensee or others, and shall furnish to Licensor duplicate original policies of such insurance at least ten (10) days prior to the License Commencement Date and at least ten (10) days prior to the expiration of the term of any such policy previously furnished by Licensee, in which policies Licensor, and Licensor's Indemnitees shall be named as parties insured, which policies shall be issued by companies, and shall be in form and amounts, satisfactory to Licensor. (2) Licensee shall comply with the "waiver of subrogation" provisions referred to in Paragraph (C) of Article THIRTEENTH hereof. FOURTEENTH: SUBORDINATION. This License Agreement and License and all of ---------- ------------- Licensee's rights hereunder shall remain, subject and subordinate in all respects to all ground or underlying leases now or hereafter in effect and to all mortgages which may now or hereafter affect such leases and/or the Building and/or the plot of land upon which it stands, and to all advances made or hereafter to be made under such mortgages, and to all renewals, modifications, consolidations, correlations, replacements and extensions of, and substitutions for, such leases and mortgages. For the purposes hereof the word "mortgage" and the words "ground or underlying lease" -13- as used herein shall be deemed to mean and include: (i) all existing ground or underlying leases and mortgages, and all renewals, modifications, consolidations, correlations, replacements and extensions of, and substitutions for, said mortgages, and (ii) one or more new such underlying or ground leases or mortgages given to or made or assigned to one or more savings banks, commercial banks, trust companies, insurance companies, universities, pension funds, or similar first mortgage lending institutions (referred to, collectively, as "Institutional Lenders") and, if there shall be more than one --------------------- such mortgage, all of such mortgages which shall be consolidated or correlated in a single instrument setting forth the manner of payment of the total indebtedness secured thereby, it being intended that such mortgage or mortgages as so consolidated or correlated, shall be of the character commonly known as "first mortgage", and (iii) any other such ground or underlying lease or mortgage or mortgages whether or not of the character commonly known as "first mortgage" held by a person or entity which is not an Institutional Lender provided that any such other ground or underlying lease or other mortgage shall contain a provision, or the holder thereof shall deliver an agreement to Licensee, in either case to the effect that any steps or proceedings taken by reason of default in any such underlying lease or mortgage shall not cut off this License Agreement, nor shall Licensee's possession be disturbed by virtue of such steps or proceedings, so long as there shall be no default by Licensee under any of the terms, covenants or conditions of this License Agreement however, Licensee agrees that Licensee shall have no right of set-off or other claim against the holder of such underlying lease or mortgage (if such holder should become Licensee's "licensor" under this License Agreement), based upon any act of Licensor or any other circumstance or act occurring prior to the date when such holder shall become Licensee's licensor under this License Agreement. FIFTEENTH: LICENSOR LIABILITY LIMITATION. Licensor shall incur no ---------- ----------------------------- liability of any kind whatsoever to Licensee or to any person, firm or corporation claiming by, through or under Licensee in connection with this License or the revocation thereof, or the use by Licensee of all or any portions of the Licensed Space or the Building. Licensor shall have no responsibility or liability for any loss or damage that may occur to Licensee's property or effects while located in the Licensed Space or the Building unless such damage is due to the negligence of Licensor. No general or limited partner, officer, director, employee or shareholder of Licensor or any agent thereof shall be personally liable for the performance of Licensor's obligation under this License Agreement. The liability of Licensor for any Licensor's obligation under this License Agreement shall be limited to Licensor's interest in the Building, and Licensee shall not look to any of Licensor's other assets for enforcement or satisfaction of any such obligation, nor shall Licensee seek recourse for such enforcement or satisfaction against any general or limited partner, officer, director, employee or shareholder of Licensor or any agent thereof. Licensee acknowledges and agrees that (i) Licensor shall not be obligated to provide security or any other type of protection for any equipment, personal property or installation in the Licensed Space, (ii) neither Licensor nor its agents shall be liable or responsible to Licensee for any loss or damage to any property or person occasioned by theft, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition or other order of governmental body or authority, or for any damage or inconvenience which may arise through maintenance, repair or alteration of any part of the Building. Licensor and Licensee agree that neither party shall be liable to the other for any special or consequential damages, including lost profits or revenues, as a result of such parties default of -14- its obligations under this License Agreement, provided that nothing contained herein shall otherwise limit, modify or violate any claim or remedy in law or equity by one party hereof against the other by reason of a breach or default in the other's obligations under this License Agreement. SIXTEENTH: DEFAULT/REMEDIES (A) If at any time prior to or during --------- ---------------- the License Term, any one or more of the following events (referred to as "Events of Default") shall occur: (i) if Licensee shall default in the payment ----------------- when due of any installment of License Fee or in the payment when due of any other sums due Licensor hereunder, and such default shall continue for a period of ten (10) days after notice by Licensor to Licensee of such default, or (ii) if Licensee shall default in the observance or performance of any term, covenant or condition (other than the covenants to make payment of License Fee or other sums due Licensor) of this License Agreement granted hereunder on Licensee's part to be observed or performed and Licensee shall fail to remedy such default within thirty (30) days after notice by Licensor to Licensee of such default; or (iii) if Licensee shall file a voluntary petition in bankruptcy or insolvency, or such proceeding shall be commenced against Licensee or Licensee shall be adjudicated a bankrupt or insolvent, or Licensee shall file or there shall be filed against Licensee any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under present or any future federal bankruptcy act or any other present or future applicable federal, state or other statute or law, or Licensee shall make an assignment for the benefit of creditors, or Licensee shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator for Licensee or of all or any part of Licensee's property; or (iv) if Licensee shall default in the observance or performance of any term, covenant or condition on the part of Licensee to be observed or performed under any other agreement with Licensor and such default shall continue beyond any grace period set forth in such other agreement for the remedying of such default; or (v) if Licensee shall desert or abandon the Licensed Space or Licensee's equipment; or (vi) if Licensee's interest in this License shall devolve upon or pass to any person, whether by operation of law or otherwise except as provided in Article NINTH hereof then, upon the occurrence, at any time prior to or during the License Term, of any one or more of such Events of Default, Licensor, at any time thereafter, at Licensor's option, may give to Licensee a five (5) days' notice of termination of this License and, in the event such notice is given, this License and the License Term shall come to an end and expire upon the expiration of said five (5) days with the same effect as if the date of expiration of said five (5) days were the expiration date of the License Term and this License Agreement, but Licensee shall remain liable for damages and all other sums payable pursuant to law. Any notice given by Licensor to Licensee under this Article SIXTEENTH shall be deemed a "ten day notice to quit" under the provisions of Section 713 of the Real Property Actions and Proceedings Law. (B) In the event that this License shall end, Licensor and its agents and servants may immediately, or at any time after such default or after the date upon which this License Agreement and the License Term shall expire and come to an end, re-enter the Licensed Space or any part thereof, without notice, either by summary proceedings or by any other applicable action or proceeding, or by force or otherwise (without being liable to indictment, prosecution or damages therefor), and may repossess the Licensed Space and dispossess Licensee and any other persons from the Licensed Space and remove any and all of their property and effects from the Licensed Space including Licensee's equipment and Licensor, at Licensor's option, may relicense or lease the whole or any -15- part or parts of the Licensed Space, from time to time, either in the name of Licensor or otherwise, to such tenant or tenants, Licensee or Licensees for such term or terms ending before, on or after the expiration date of the License Term, at such rental or rental fees or otherwise and upon such other conditions, which may include concessions and free rent periods, as Licensor, in its sole discretion, may determine. Licensee hereby waives the service of any notice of intention to re-enter or to institute legal proceedings to that end which may otherwise be required to be given under any present or future law. Licensee, on its own behalf and on behalf of all persons claiming through or under Licensee, including all creditors, does further hereby waive any and all rights which Licensee and all such persons might otherwise have under any present or future law to redeem the Licensed Space, or to re-enter or repossess the Licensed Space, or to restore the operation of this License Agreement, after (i) Licensee shall have been dispossessed by a judgment or by warrant of any court or judge, or (ii) any re-entry by Licensor, or (iii) any expiration or termination of this License Agreement and the Licensed Term, whether such dispossess, re-entry, expiration or termination shall be by operation of law or pursuant to the provisions of this License Agreement. SEVENTEENTH: INABILITY TO PERFORM. If, by reason of strikes or ----------- -------------------- other labor disputes, fire or other casualty (or reasonable delays in adjustment of insurance), accidents, Legal Requirement or any orders of any Government Authority, or any other cause beyond Licensor or Licensee's reasonable control, whether or not such other cause shall be similar in nature to those herein before enumerated, Licensor or Licensee, as the case may be, is unable to perform, fulfill or is delayed in fulfilling any of their respective obligations under this Agreement or any instrument collateral thereto, then the performance or observance of such obligation shall be suspended to the extent of and during the duration of such inability and (i) no such inability or delay shall constitute an actual or constructive eviction of Licensee, in whole or in part, or entitle Licensee to any abatement or diminution of any of the License Fee or any other sum due Licensor from Licensee hereunder, or (ii) no such inability or delay shall relieve Licensor or Licensee, as the case may be, from any of their respective obligations under this Agreement which are not affected by such inability or delay, or impose any liability upon Licensor, or Licensee, as the case may be, or their agents, by reason of inconvenience or annoyance to the other party, or injury to or interruption of Licensee's business, or otherwise. The provisions of this Paragraph 21 shall not apply to the obligations of either Licensor or Licensee, to pay any monies due the other party. Licensor and Licensee, as the case may be applicable, each agrees to employ reasonable diligence to eliminate the cause of any inability or delay referred to in this Paragraph, however, the provisions of this sentence shall not apply in the event of any strike or labor dispute and neither party shall be required to employ labor at overtime or any other premium pay rates unless there is a danger or threatened danger to the health or safety of any occupant of the Building or the environmental condition thereof. EIGHTEENTH: NOTICES. Any bills, statements, notices, demands, requests ---------- ------- or other communications given or required to be given pursuant to this License Agreement shall be effective only if rendered or given in writing, sent by registered or certified mail, return receipt requested, or (i) by a nationally recognized courier service such as Federal Express or UPS, addressed (a) to Licensee, Att.: J.J. Diamond (i) at the address set -16- forth above, or (ii) at any place where Licensee or any agent or employee of Licensee may be found if mailed subsequent to Licensee's vacating, abandoning or surrendering the Licensed Space, or (b) to Licensor at the address set forth above, with a copy to Goldfarb & Fleece, 345 Park Avenue, New York, New York 10154, Att.: Phillip A. Glantz, Esq. Any such bill, statement, notice, demand, request or other communication shall be deemed to have been rendered or given on the date when it shall have been mailed as provided herein. NINETEENTH: MISCELLANEOUS. (A) This License Agreement embodies and ---------- ------------- constitutes the entire understanding between the parties with respect to the transaction contemplated herein. This License Agreement may not be modified, amended or terminated, and Licensee's obligations hereunder shall in no way be discharged, except as expressly provided in this License Agreement or by written instrument executed by the parties hereto. If for any reason this License shall be construed as a tenancy of any kind, such tenancy shall be on a month-to-month basis only and shall be terminable by either Licensor or Licensee upon sixty (60) days' prior written notice to the other party. This License Agreement shall be governed by and construed in accordance with the laws of the State of New York. This License Agreement shall not be binding or effective until this License Agreement is executed and delivered by Licensor and Licensee. This License Agreement may be executed in several counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument. (B) The term "business days" as used in this Agreement shall exclude ------------- Saturdays, Sundays and holidays, the term "Saturdays" as used in this Agreement --------- shall exclude holidays and the term "holidays" as used in this Agreement shall -------- mean all days observed as legal holidays by either the New York State Government or the Federal Government. The terms "Person" and "persons" as used in this ------ ------- Agreement shall be deemed to include natural persons, firms, corporations, associations and any other private or public entities, whether any of the foregoing are acting on their own behalf or in a representative capacity. If any term, covenant or condition of this Agreement or any application thereof shall be invalid or unenforceable, the remainder of this Agreement and any other application of such term, covenant or condition shall not be affected thereby. This Agreement shall be construed without regard to any presumption or other rule requiring construction against the party causing this Agreement to be drafted. In the event of any action, suit, dispute or proceeding affecting the terms of this Agreement, no weight shall be given to any deletions or striking out of any of the terms of this Agreement contained in any draft of this Agreement and no such deletion or strike out shall be entered into evidence in any such action, suit or dispute or proceeding given any weight therein. (C) Licensor and Licensee mutually represent and warrant to the other that they had no dealings with any brokers, consultants, individuals or any other entities in the negotiation and/or consummation of this License Agreement other than Schlesinger & Company, LLC. Licensor and Licensee hereby mutually agree to indemnify and hold the other party harmless from and against any claims, costs, expenses (including, without limitation, legal fees) and other liabilities incurred by the other party by reason of any claim or action for a commission or fee or other compensation by any person or broker other than Schlesinger & Company, LLC in -17- connection with this License Agreement with whom the indemnifying party may have dealt. The provisions of this Paragraph (C) shall survive the expiration or earlier termination of the License Term and this License Agreement. (D) This License Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. (E) Licensee shall have no right to record this License Agreement or any memorandum thereof. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals as of the day and year first above written. 55 BROAD STREET COMPANY, Licensor By: By: _____________________________________ Name: Title: N2K, INC., Licensee By: _____________________________________ Name: Title: -18- STATE OF ) : ss.: COUNTY OF ) On the ____________ day of ____________ 1998, before me personally came ____________, to me known, who, being by me duly sworn, did depose and say that he resides at ____________, that he is the ____________ of ____________, the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by authority of the Board of Directors of said corporation. ________________________________ Notary Public -19- EX-10.23 14 AGREEMENT OF LEASE BETWEEN FMOB AND N2K INC. EXHIBIT 10.23 AGREEMENT OF LEASE ------------------ BETWEEN ------- FMOB ASSOCIATES --------------- AND --- N2K, INC -------- FOR --- 950 WEST VALLEY ROAD -------------------- SUITE 3104 ---------- WAYNE, PA 19087 --------------- WEST VALLEY BUSINESS CENTER WAYNE, PENNSYLVANIA LEASE AGREEMENT --------------- THIS LEASE AGREEMENT, made as of ____, 1998, by and between FMOB ASSOCIATES, a Pennsylvania limited partnership, (hereinafter called "Landlord"), and N2K, Inc., a Delaware corporation (hereinafter called "Tenant"). WITNESSETH: ----------- 1. DEMISED PREMISES. Landlord, subject to the terms and conditions ---------------- hereof, hereby leases to Tenant and Tenant hereby leases from Landlord the Demised Premises to be used by Tenant for the Permitted use and for no other purpose. The Demised Premises is located within the building known as 950 West Valley Road ("Building"), being one of the buildings located in the West Valley Business Center, as more particularly set forth in Exhibit "C" attached hereto (the "Complex"), which is in the legal form of a condominium known as the West Valley Business Center Condominium (the "Condominium"). The Complex and Condominium, together with the common areas therein, and the land on which the aforementioned are situated, are sometimes collectively referred to herein as the "Property". 2. COMPLETION BY LANDLORD. ---------------------- a. Tenant agrees to lease the Demised Premises in its "as-is" condition, without the need of any alteration, repair or restoration by Landlord; unless there is any Landlord's work stated on the Term Sheet (hereinafter, the "Landlord's Work"), in which event Landlord shall perform each work prior to the Commencement of this Lease. Landlord shall provide Tenant with notice of Landlord's substantial completion of Landlord's Work. The Demised Premises shall not be deemed incomplete or unavailable for Tenant's possession or occupancy if only minor or insubstantial details of construction, decoration or mechanical adjustments remain to be completed. Except as hereinafter provided, the Commencement Date of this Lease shall be five (5) days after landlord's providing of such notice. b. Landlord's work shall be substantially completed to allow occupancy within ninety (90) days from the date this Lease is fully executed. If Landlord fails to provide possession within ninety (90) days, as described above, Tenant may terminate this Lease Agreement. If Landlord shall be unable to give possession of the Demised Premises on the Commencement Date by reason of any changes to Landlord's Work requested by Tenant, Landlord shall not be subject to any liability for the failure to give possession on said date. Instead, Landlord shall use reasonable efforts to provide possession of the Demised Premises as soon as possible after the Commencement Date and shall provide Tenant with written notice of the date on which the Demised Premises shall be available for occupancy by Tenant, in which case the commencement Date shall be five (5) days after Landlord's providing such notice. No such failure to give possession on the Commencement date shall in any other respect affect the validity of this Lease or the obligation of Tenant hereunder. If Landlord is unable to give possession of the Demised Premises on the Commencement Date by reason of alterations being done by Tenant or Tenant's contractor or by any other delay caused by Tenant, Landlord shall not be subject to any liability for the failure to give possession on said date and there shall be no suspension or probation of Base Rent or additional rent resulting therefrom. In such event, the Commencement Date shall be as stated on the Term Sheet. c. By taking possession of the Demised Premises, Tenant shall be deemed to have accepted the Demised Premises as being in good sanitary order, conditions and repair, Tenant shall, at Tenant's sole cost and expense, keep the Demised Premises and every part thereof in good condition and repair, damage thereto from causes beyond the reasonable control of Tenant and ordinary wear and tear excepted. Landlord shall have no obligation whatsoever to alter, remodel, improve, repair, decorate or paint the Demised Premises or any part thereof (unless agreed upon in writing by Landlord) and the parties hereto affirm that Landlord has made no representations to Tenant respecting the condition of the Demised Premises or the Building except as specifically herein set forth in writing. 3. TERM. Tenant shall use and occupy the Demised Premises for the ---- Initial Term which shall begin on the Commencement Date and shall, subject to any Renewal Options as provided for on the Term Sheet and any earlier termination as provided for in this Lease, end on the Expiration Date. 4. BASE RENT. Tenant shall pay the Base Rent for the Demised Premises in --------- equal monthly installments, without notice or demand and in advance. The first installment shall be payable simultaneously with the execution of this lease by Landlord and Tenant and the remaining installments shall be payable in advance of the first day of each and every calendar month during the Term hereof. If the Term of this Lease begins on a date other than on the first day of a month, Base Rent and additional rent (as hereinafter defined) from such date until the first day of the following month shall be pro-rated at the rate of one-thirtieth (1/30) of the fixed monthly rental for each day payable in advance. Tenant shall pay said Base Rent and additional rent to Landlord, at the office of Landlord indicated on the Term Sheet, or to such other party or to such other address as Landlord may designate from time to time by written notice to Tenant, without notice or demand and without abatement, deduction, set-off or counterclaim (all of which rights Tenant hereby expressly waives). If Landlord shall at any time or times accept said rent after it shall become due and payable, such acceptance shall be treated as a payment on account of sums then due, and shall not excuse delay upon subsequent occasions, or constitute, or be construed as a waiver of any or all of Landlord's rights hereunder. 5. ADDITIONAL RENT. --------------- a. DEFINITIONS: OPERATION AND MAINTENANCE COSTS --------------------------------------------- ("OMC"); AND ELECTRIC CHARGES. ----------------------------- In this Lease, the following terms shall have the meanings hereinafter provided: -2- (i) "Operation and Maintenance Costs" ("OMC") shall mean all sums paid or incurred in connection with the operation and maintenance of the Complex and Property as deemed by Landlord to be reasonable, appropriate and in the best of interests of the Complex and Property, including, without limitation, sums incurred for the following terms: (1) charges or fees for, and taxes on, the furnishing to the Property of water and sewer service, electric energy (excluding the supply of electric energy included in Tenant's Electric Charge) and, if the Building systems should be converted to receive the same, steam or fuel and other utility services; (2) charges or fees for maintenance of the Property, janitorial service, trash removal, policing, cleaning, restriping, resurfacing, maintaining and repairing all walkways, roadways, parking areas forming part of the Property, maintaining all landscaped areas of the Property; (3) charges or fees for any necessary governmental permits; (4) wages, salaries and benefits of employees of Landlord or any management company engaged by Landlord in connection with the Property, management fees, overhead and expenses (5) the cost of premiums for hazard, rent, liability, workmen's compensation and other insurance upon the Property or portions thereof, (6) costs arising under service contracts with independent contractors; (7) professional and consulting fees including, without limit, legal and auditing fees; (8) repairs, replacements and improvements to the Property which are appropriate for the continued operation as a first-class office Complex; (9) all "Taxes" (as defined in subsection (ii) below); (10) assessments imposed against the Property by the Condominium Association of the Condominium of which the Property is a part for common expenses and other lawful purposes in connection with the operation, maintenance, repair or replacement of the common elements of such Condominium; (11) the cost of all other items which, under standard accounting practices, constitute operating or maintenance costs which are attributable to the Complex or any portion thereof; and (12) the depreciation taken in any calendar year on capital purchases which are made with the intention of lowering the operating costs of the Building, Complex or Property, in order to increase the value off the Building, Complex or Property, or to keep the Building, Complex and the Property in compliance with all laws and governmental rule and regulations applicable from time to time thereto. The costs of capital equipment or capital expenditures shall be included in OMC for the calendar year in which the costs shall have been incurred and subsequent calendar years, on a straight line basis, to the extent that such items are amortized or reductions in annual OMC are expected to equal Landlord's costs for such capital equipment or capital expenditure, with an interest factor equal to the prime rate at the time of Landlord's having incurred said costs. If Landlord shall have leased any such items of capital equipment designed to result in savings of reductions in annual OMC, then the rental and other costs paid pursuant to such leasing shall be included in annual OMC for the calendar year in which they shall have been incurred. The operating and maintenance costs of the Complex and Property shall not include leasing commissions or payments of principal and interest on any mortgages, deeds of trust or other encumbrances upon the Complex or Property. If all or any of the items defined above as constituting the OMC are charged or assessed not specifically on the Building but on the entirety of Landlord's interest in the Complex, Landlord shall reasonably allocate such items among the entirety of Landlord's interest in such Complex. (ii) "Taxes" (or "Tax") shall mean all real property taxes and personal property taxes (without discounts), charges and assessments which are -3- levied, assessed upon or imposed by any governmental authority during any calendar year of the Term and any extensions thereof with respect to the Complex and Property and any improvements, fixtures and equipment and all other property of Landlord, real or personal, located in or around the Complex and Property and any tax which shall be levied or assessed in addition to or in lieu of such real or personal property taxes together with the reasonable costs and expenses (including attorneys' fees, expenses and court costs) of contesting by appropriate proceedings the amount or validity of any of the aforementioned taxes or assessments. In addition, Taxes shall include, without limitation, any capital levy or other tax on this Lease or the value thereof or on the gross rents or gross receipts with respect to the Property, or a federal, state, county, municipal or other local income, franchise, business privilege, profit, excise or similar tax, assessment, levy or charge measured by or based, in whole or in part, upon any such gross rents or gross receipts. If at any time during the Term the present system of taxation of property shall be changed or supplemented so that in lieu of or in addition to the tax on property there shall be assessed on Landlord or the Property any tax of any nature which is imposed in whole or in part, in substitution for or in lieu of any tax which would otherwise constitute a Tax, such shall be deemed to be included within the term Taxes, but only to the extent that the same would be payable if the Property were the only property of Landlord. If all or any of the Taxes defined above are levied not specifically on the Building but on the entirety of Landlord's interest in the Complex and/or Property of which the Building is a part, Landlord shall reasonably allocate such levy among the entirety of Landlord's interest in such Complex and/or Property. (iii) "Tenant's OMC" means the OMC for a calendar year included within the Term or any portion thereof and any extension thereof less the Expense Stop, multiplied by Tenant's Proportionate share set forth on the Term Sheet. (iv) the "Expense Stop" is specified on the Term Sheet. (v) "Tenant's Electric Charge" means all charges shown on separate meters installed to measure the electricity used at the Demised Premises for each calendar year. b. TENANT'S OMC., AND TENANT'S ELECTRIC CHARGE. During each calendar ------------------------------------------- year or portion thereof included in the Term and any extension thereof, Tenant shall pay Landlord as additional rent, Tenant's OMC (and for all Demised Premises located in Phase I of the Complex, Tenant's Electric Charge), as follows: (i) PROCEDURES. ---------- (A) Tenant's OMC. During April of each calendar year, or ------------ as soon thereafter as practicable, Landlord shall give Tenant written notice of its estimate of the amounts of Tenant's OMC payable for the ensuing calendar year. On or before the first day of each month during each calendar year, Tenant shall pay to Landlord one-twelfth (1/12) of the amounts estimated as aforesaid, provided that if such notice is not given in April, Tenant shall continue to pay Tenant's OMC on a monthly basis as provided hereunder, on the basis of one hundred five percent (105%) of the then -4- applicable sums of Tenant's OMC until the month after such notice is given. If at any time or times it appears to Landlord that the sums payable hereunder for the current calendar year will vary from its estimate by more than five percent (5%), Landlord shall, by notice to Tenant, revise its estimate for such year, and subsequent payments by Tenant for such year shall be based upon such revised estimate. If less than a full twelve (12) month period of a Calendar Year is included within the Term of this Lease, Tenant's OMC shall be prorated on a per diem basis for such partial Calendar Year. Landlord, at Tenant's request, shall make available the back-up data that supports the OMC calculations, available to Tenant in Chester County within thirty (30) days of Tenant's written notice of its estimate of the amounts of Tenant's OMC payable for the ensuing calendar year. (B) Tenant's Electric Charge. For all Demised Premises ------------------------ located in Phases II or III of the Complex (which are separately metered by Philadelphia Electric Company), Tenant shall be billed by and shall timely pay PECO for all electricity used by Tenant in the Demised Premises. For all Demised Premises located in Phase I of the Complex (which are submetered by Landlord), Tenant shall be billed by and shall promptly pay Landlord for all electricity used by Tenant in the Demised Premises. Adjustments shall be made, as and when necessary, according to the procedures set forth in Section (C) below, except that such adjustments shall be made on a quarterly basis. (C) Excesses/Deficiencies. Within one hundred twenty --------------------- (120) days after the close of each calendar year (or quarterly, for Tenant's Electric Charges, as the case may be) or as soon after such one hundred twenty (120) day period as practicable, Landlord shall deliver to Tenant a statement of the adjustments to be made to the Tenant's OMC (or Tenant's electric charges) pursuant to Subparagraph 5(b)(i)(A) and (B). If on the basis of such statement(s) Tenant owes sums less than the payments for such calendar year )(or quarter-year, as the case may be) previously made by Tenant on account of Tenant's OMC or Tenant's Electric Charge, Landlord shall credit such excess to Tenant. If on the basis of such statement Tenant owes sums more than the estimated payments for such calendar year (or quarter-year) previously made by Tenant on account of Tenant's OMC or Tenant's Electric Charge, Tenant shall pay the deficiency to Landlord within fifteen (15) days after delivery of the statement. c. OTHER CHARGES DUE AS RENT. Tenant shall pay as additional rent ------------------------- any and all sums of money or charges (other than Base Rent) required to be paid by Tenant under this Lease, whether or not the same be designated "additional rent". This shall include all charges for any miscellaneous services, goods or materials furnished by Landlord at Tenant's request which are not required to be furnished by Landlord under this Lease. Tenant shall also pay as additional rent any and all sums which may become due by reason of the failure of Tenant to comply with each and every covenant, term or condition of this Lease, and any and all damages; costs and expenses which Landlord may suffer or incur by reason of any default by Tenant or failure on Tenant's part to comply with the terms, covenants and conditions of this Lease and with any obligation under the law. If such amounts or charges are not paid when due, they shall, nevertheless, be collectible as additional rent with any installment of rent thereafter falling due. For the purposes of this Lease, all Base Rent plus all additional rent are sometimes hereinafter referred to collectively as "Rent". d. LATE CHARGE. Landlord may charge a late charge of five percent ----------- (5%) of any amounts owed to Landlord pursuant to this Lease which are not paid within -5- ten (10) days of the date when such payment is due. Such late charge is designed to compensate Landlord for expenses incurred in handling such delinquencies, and is not to be deemed a penalty. Landlord's failure to impose such a late charge in any particular case shall not be deemed a waiver of Landlord's right to do so in any future case. e. DEFAULT RATE. In addition to the late charge, until the ------------ delinquency is paid in full, Tenant shall pay interest at the rate of 15% per annum (the "Default Rate") on all payments of Base Rent or additional rent which are delinquent for more than ten (10) days, or at such other maximum allowable interest rate should the aforesaid Default Rate violate any applicable laws or regulations. If Landlord imposes a late charge on any amounts owed to Landlord pursuant to Subparagraph 5(d), such delinquent amounts shall not begin to accrue interest at the Default Rate until they are delinquent for more than five (5) days. Landlord's failure to impose such an interest charge in any particular case shall not be deemed a waiver of Landlord's right to do so in any future case. f. ACCOUNTING. For the purposes of this Paragraph 5 and elsewhere ---------- as relevant, Landlord shall use any generally accepted accounting practices or methods it chooses, so long as consistently applied, and Landlord shall have the right, at Landlord's option, to choose either a cash or accrual method of accounting. g. SURVIVAL OF OBLIGATION. The obligation to make any payments ---------------------- pursuant to this Paragraph 5 shall survive the expiration of the Term or other termination of this Lease. In applying the provisions of this Paragraph 5 to the final year of the Term of this Lease, an appropriate adjustment shall be made so that allowance is made for any part of such final year which is subsequent to the termination of this Lease and Tenant agrees to pay such prorated additional rent on demand even though the Term may have expired before the demand is made. 6. [Intentionally Omitted]. 7. SERVICES. Provided that Tenant has not committed an Event of Default -------- hereunder, Landlord will provide the services listed in EXHIBIT "A" attached hereto and made a part hereof. 8. CARE OF DEMISED PREMISES. Tenant agrees: ------------------------ a. To, prior to the Commencement Date, apply for and secure, at Tenant's sole cost and expense, any and all licenses, permits and approvals, of any nature whatsoever as may be required by any governmental body, agency or authority for the operation and maintenance of the Permitted Use at the Demised Premises (excepting the Township Use and Occupancy Permit, State Labor & Industry Certificate of Occupancy and construction building permits, if any), and shall secure, maintain and comply with all such licenses, permits and approvals at all times during the Term of this Lease, including any Renewal Term. b. To comply with any and all requirements of any public authority; and with the terms of any State or Federal statute or local ordinance or regulation or other -6- legal requirements applicable to Tenant or its use of the Demised Premises, including any equipment installed by Tenant. c. To give Landlord access to the Demised Premises at all reasonable times, without charge or deduction of rent, to enable Landlord to examine same and to make such repairs, additions and alterations as Landlord may deem advisable. d. To keep the Demised Premises in good order and condition, replace all broken glass with glass of the same quality as that broken, save only glass broken by fire and extended coverage type risk, and commit no waste on the Demised Premises. Tenant shall provide Landlord with prompt written notice (e.g. within 48 hours) of any (a) accident or breakage or defects in the window glass, wires, plumbing or heating, ventilating or cooling apparatus, or other systems or apparatus, walls or ceiling tiles, (b) fire or other casualty, or (c) theft. e. That all improvements attached to the Demised Premises become the property of the Building and may not be removed without approval of Landlord, which approval shall be at Landlord's sole discretion, except computer network and telephone wiring equipment. f. To, upon the termination of this Lease in any manner whatsoever, remove Tenant's property and those of any other person claiming by, through or under Tenant, and quit and deliver the Demised Premises to Landlord peaceably and quietly in as good order and condition as the same are now in or hereafter may be put in by Landlord or Tenant, reasonable use and wear thereof alone excepted. Property not removed by Tenant at the termination of this Lease, however terminated, shall be considered abandoned and Landlord may dispose of the same as it deems expedient with reasonable cost of such disposal and repairs and/or restoration caused or necessitated by such removal, to be billed to Tenant. g. Not to overload, damage or deface the Demised Premises or any other part of the Building or any of its systems or equipment, or do any act which may make void or voidable any insurance on the Demised Premises or the Building or which may render an increased or extra premium payable for insurance. h. Not to install or operate in the Demised Premises any electrically operated equipment which requires electrical power in excess of the Building Standard set forth on Exhibit "A", without first obtaining the prior written consent of Landlord, which consent shall be at the sole discretion of Landlord and which consent may be conditioned upon the payment by Tenant of additional rent as compensation for such excess consumption of electricity and/or water as may be occasioned by the use of such equipment or machinery. i. Not to install any equipment of any kind or nature whatsoever which may by itself or in combination with other equipment already in the Demised Premises affect or necessitate any changes, replacements or additions to or require the use of the water system, plumbing system, heating system, air conditioning system or -7- electrical system of the Demised Premises without the prior written consent of Landlord, which consent shall be at the sole discretion of Landlord and which consent may be conditioned upon the payment by Tenant of specific installation costs and/or special monthly charges. Landlord may condition its consent for the installation of equipment which may cause the usage of excess electricity or water upon the agreement of Tenant to the installation of utility meters, at Tenant's sole cost and expense, whereby Landlord may determine the additional charges to be paid by Tenant with regard thereto. j. To observe the Building Rules and Regulations described in EXHIBIT "B", which are incorporated into this Lease by this reference, and which may be modified by Landlord from time to time after receiving notice of such modifications from Landlord. k. Not use or occupy, or suffer or permit the use or occupancy of, the Demised Premises or any part thereof in any manner or by anything, which in any way, in the sole judgement of Landlord, could impair the appearance, character or reputation of the Building or cause the discharge of objectionable fumes, vapors or odors into the Building or the mechanical facilities thereof or impair the appearance, character or reputation of the Building or tend to impair or interfere with the use of any of the other areas of the Building or result in discomfort or annoyance or inconvenience to Landlord or any other tenants or occupants of the Building, or increase the risk of fire or other casualty to the Demised Premises or to the Building. l. To, if Tenant is an entity such as a partnership or corporation, maintain its existence in good standing in the Commonwealth of Pennsylvania throughout the Term of this Lease. 9. ASSIGNMENT AND SUBLETTING. ------------------------- a. General Restriction. Tenant shall not mortgage, pledge or ------------------- encumber this Lease, nor assign or sublet this Lease or underlet the Demised Premises or any part thereof, or permit any other person or entity to occupy the Demised Premises or any part thereof, without on each occasion first obtaining the written consent thereto of Landlord. An assignment within the meaning of this Lease is intended to comprehend not only the voluntary action of Tenant, but also any levy or sale on execution or other legal process against Tenant's goods or other property, or the leasehold, and every assignment of assets for the benefit of creditors, and the filing of any petition or order of any adjudication in bankruptcy or under any insolvency, reorganization or other voluntary or compulsory procedure, and the calling of a meeting of creditors, and the filing by or against Tenant of any petition or notice for a composition with creditors, and any assignment by operation of law. For purposes of the foregoing, a transfer by any person or persons controlling the Tenant on the date hereof of such control to a person or persons not controlling the Tenant on the date hereof shall be deemed to be an assignment of this Lease. b. Landlord's Rights. If Tenant proposes to assign this Lease or ----------------- sublet all or any portion of the Demised Premises, Tenant shall, prior to the proposed -8- effective date thereof (the "Effective Date"), deliver to Landlord a copy of the proposed agreement and all ancillary agreements with the proposed assignee or subtenant, as applicable. Landlord shall then have all the following rights, any of which Landlord may exercise by written notice to Tenant given within thirty (30) days after Landlord receives the foregoing documents: (i) with respect to a proposed assignment of this Lease, the right to terminate this Lease on the Effective Date as if it were the scheduled expiration date of the Term (the "Expiration Date"); (ii) with respect to a proposed subletting of the entire Demised Premises, the right to terminate this Lease on the Effective Date as if it were the Expiration Date; (iii) with respect to a proposed subletting of less than the entire Demised Premises, the right to terminate this Lease as to the portion of the Demised Premises affected by such subletting on the Effective Date, as if it were the Expiration Date, in which case Tenant shall promptly execute and deliver to Landlord an appropriate modification of this Lease in form satisfactory to Landlord in all respects; or (iv) Landlord may consent to the proposed assignment or sublease on such terms and conditions as Landlord may reasonably require, including, without limitation, as to any assignment, the execution and delivery to Landlord by the assignee of an assumption of liability agreement in form satisfactory to Landlord, including an assumption by the assignee of all of the obligations of Tenant and the assignee's ratification of an agreement to be bound by all of the provisions of this Lease, including the warrants of attorney to confess judgment in assumpsit and in ejectment; or, in the case of a sublease, the execution and delivery by the subtenant of a written agreement with Landlord, in such form and with such term, covenants and conditions as may be required by Landlord; or (v) Landlord may withhold its consent to the proposed assignment or sublease; provided, however, that if Landlord declines to exercise -------- ------- one of the options set forth in items (i) through (iii) above, Landlord will not unreasonably withhold its consent so long as (A) the identity and reputation of the proposed assignee or subtenant, and the proposed use of the Leased Premises, are reasonably acceptable to Landlord; (B) Tenant is not in default under this Lease at the time of such proposed assignment or sublease; (C) the financial strength of the proposed assignee or subtenant is, in Landlord's reasonable discretion, at least equal to the financial strength of Tenant as of the date of this Lease; and (D) the balance of the Term (or any exercised Renewal Term, if any) is at least one year. (vi) In the event that Landlord does consent to the assignment or subletting, Tenant shall have thirty (30) days from receipt of Landlord's notice thereof to enter into the proposed assignment or sublease with the prospective assignee or subtenant described in Tenant's notice to Landlord. If such assignment or -9- sublease has not been executed within such time period and with such identified assignee or subtenant, the consent given by Landlord shall be considered to have been withdrawn. (vii) If, pursuant to the exercise of the Landlord's option in 9(b)(iii) above, this Lease terminates as to only a portion of the Demised Premises, the Base Rent and additional rent shall be adjusted in proportion to the portion of the Demised Premises affected by such termination, as determined by Landlord. (viii) If Landlord exercises any of its options under section 9(b)(i), (ii), or (iii), Landlord may then lease the Demised Premises or any portion thereof to Tenant's proposed assignee or subtenant, as the case may be, without liability whatsoever to Tenant. (ix) In the event of a transfer by any person or persons controlling the Tenant on the date hereof of such control to a person or persons not controlling the Tenant on the date hereof, such transfer shall be deemed an assignment for purposes of this Lease if and only if such transfer results in a change of the control group of the Tenant and a negative change in the financial condition of the Tenant. c. No Release of Liability. Future Compliance. No assignment or ------------------------------------------ sublease, whether with or without the Landlord's consent, shall in any way relieve or release the Tenant from liability for the performance of all terms, covenants and conditions of this Lease. Consent to one assignment or subletting shall not be deemed consent to any other assignment or sublease. In the event of a default by any assignee or subtenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against any such assignee, subtenant, or successor. Landlord may consent to any subsequent assignments or sublets and/or may execute amendments or modifications to this Lease with assignees or successors of Tenant, without notifying Tenant, and without its consent thereto. Such action shall not relieve Tenant of liability under this Lease. d. Proceeds. The Landlord shall be entitled to and the Tenant shall -------- promptly remit and hereby assigns to the Landlord, any profit Tenant receives from an assignee or subtenant as a result of an assignment or sublease of the Demised Premises. e. Unauthorized Assignments/Subleases. In addition to, and not in ---------------------------------- lieu of, any other rights and remedies available to Landlord therefor, Landlord shall have the right to terminate this Lease if Tenant seeks to assign, sublet or underlet the Demised Premises without first obtaining Landlord's written consent. In the event that Landlord exercises said right to terminate, said termination shall become effective on the date set forth in Landlord's written notice. f. Exclusive Broker. Tenant agrees, in the event that (i) all or any ---------------- part of the Demised Premises are to be sublet by Tenant, or (ii) this Lease is to be assigned by Tenant, that a broker selected by Tenant shall (aa) have the exclusive right to act as agent of the Tenant in any such subletting or assignment, and (bb) be entitled to -10- collect from Tenant the customary commissions for such services; provided, -------- however, that in no such event shall Landlord be liable for the payment of any - ------- such commissions. g. Delivery of Agreement. No assignment or sublease shall be valid and no assignee or subtenant shall take possession of the space assigned or subleased until a certified true and correct executed counterpart of agreement of sublease or assignment has been delivered to Landlord; h. No Further Rights. No assignee or subtenant shall have a right ----------------- further to assign or sublet nor exercise any of Tenant's rights set forth in Paragraph 9 hereof; and i. No Waiver. Receipt by Landlord of rent from any assignee, --------- sublessee or occupant of the Demised Premises shall not be deemed a waiver of the covenant in this Lease contained against assignments or sublettings, or a release of Tenant under this Lease or any provision hereof. 10. FIRE OR OTHER CASUALTY. ---------------------- a. GENERAL. Subject to the provisions of this Paragraph 10, if the ------- Demised Premises are damaged by fire or other casualty, the damaged areas shall be repaired by and at the expense of Landlord to at least substantially as good a condition as that which existed immediately prior to such damage, it being understood that under no circumstance shall Landlord be liable or responsible for or under any obligation to repair any alterations or improvements made or installed on the Demised Premises by Tenant, and in no event shall Landlord be obligated to repair or restore any part of the Demised Premises to a condition in excess of that which existed prior to such fire or other casualty. Rent until such repairs are completed shall be apportioned from the date of such fire or other casualty according to the part of the Demised Premises which is usable by Tenant. Landlord agrees to repair such damage within a reasonable period of time after receipt from Tenant of written notice of such damage. Landlord's obligation to repair as aforesaid is subject to items defined as force majeure in Paragraph 27(a), as well as other events beyond Landlord's control, including without limitation, the failure of any mortgagee of release insurance proceeds to Landlord sufficient to pay the costs of any such repairs. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof. Tenant acknowledges notice that (i) Landlord shall not obtain insurance of any kind on Tenant's furniture, furnishings, equipment or fixtures, alterations, improvements and additions, and (ii) it is Tenant's obligation to obtain such insurance at Tenant's sole cost and expense. b. RECONSTRUCTION. If, in the sole opinion of Landlord, (i) -------------- insurance proceeds are unavailable to Landlord in sufficient amount to fully reconstruct the Demised Premises; (ii) Landlord's mortgagee or any underlying lessor objects to the rebuilding of the Demised Premises or the use of the proceeds for the rebuilding thereof; (iii) there exists any legal or administrative impediment to the rebuilding of the Demised Premises (e.g., a change in the applicable building codes, etc.); or (iv) Landlord, in its -11- sole discretion, determines that it shall be uneconomical to rebuild the Demised Premises, Landlord shall have the right, to be exercised by notice in writing delivered to Tenant within sixty (60) days from and after such occurrence, to elect not to rebuild the Demised Premises and, in such event, this Lease, the Term and the tenancy hereby created shall cease as of the date of such occurrence, the rent to be adjusted as of such date. 11. LIABILITY. --------- a. DAMAGE IN GENERAL. Neither Landlord nor Landlord's agents, ----------------- servants, or employees shall be liable for, and Tenant hereby releases and relieves Landlord and Landlord's agents, servants, and employees from, any and all liability in connection with any and all damage to or loss of property, loss or interruption of business occurring to Tenant, subtenants, invitees or any other person in or about or arising out of (i) Landlord's negligence or misconduct, and/or (ii) the Demised Premises from, without limitation, (A) any fire, other casualty, accident, occurrence or condition in or upon the Demised Premises or the Building; (B) any defect in or failure of: (1) plumbing, sprinkling, electrical, HVAC systems, or any other equipment or systems of the Demised Premises or the Building, and (2) the stairways, railings or walkways of the Building; (C) any steam, fuel, oil, water, rain or snow that may leak into, issue or flow from any part of the Demised Premises or the Building or Property from the drains, pipes or plumbing, sewer or other installation of same, or from any other place or quarter; (D) the breaking or disrepair of any installations, equipment and other systems; (E) the falling of any fixture or wall or ceiling materials; (F) broken glass; (G) latent or patent defects; (H) the exercise of any rights by Landlord under the terms and conditions of this lease; (1) any acts or omissions of the other tenants or occupants of the Building or of nearby buildings; (J) any acts or omissions of other persons; or (K) theft, Acts of God, public enemy, injunction, riot, strike, insurrection, war, court order, or any order of any governmental authorities having jurisdiction over the Demised Premises. b. INDEMNITY. Tenant shall defend, indemnify and hold harmless and --------- defend Landlord from and against any and all costs, expenses (including reasonable counsel fees), liabilities, losses, damages, suits, actions, fines, penalties, claims or demands of any kind and asserted by or on behalf of any person or governmental authority arising out of or in any way connected with, and Landlord shall not be liable to Tenant on account of: (1) any failure by Tenant to perform any of the agreements, terms, covenants or conditions of this Lease required to be performed by Tenant, (2) any failure by Tenant to comply with any statutes, ordinances, regulations or orders of any governmental authority, or (3) any accident, death or personal and bodily injury, damage to, loss or theft of property, which shall occur in or about the Demised Premises. 12. INSURANCE. --------- a. INSURANCE REQUIREMENTS. During the Term and any extension ---------------------- thereof, Tenant shall obtain and maintain and promptly pay all premiums for the following types of insurance in the amounts specified and in the form heretofore provided: -12- (i) LIABILITY AND PROPERTY DAMAGE. General Public Liability ----------------------------- Insurance on an occurrence basis covering the Demised Premises and Tenant's use thereof against claims for bodily or personal injury or death, and property damage occurring upon, in or about the Demised Premises, such insurance to afford protection to the limit of not less than $1,000,000 combined single limit in respect of injury or death to any number of persons arising out of any one occurrence. The insurance coverage required under this Paragraph shall, in addition, extend to any liability of Tenant arising out of the indemnities provided for in Paragraph 11. (ii) TENANT'S PROPERTY. Insurance covering all trade fixtures, ----------------- merchandise and personal property from time to time in, on or upon the Demised Premises. All such insurance coverage shall be in amounts not less than one hundred percent (100%) of the full replacement cost from time to time during the Term, providing protection against perils included within the standard state form of fire and extended coverage insurance policy, together with insurance against sprinkler damage, vandalism and malicious mischief. All other policy proceeds from insurance coverage carried by Tenant pursuant to this Subparagraph shall be held in trust by Tenant's insurance company for the repair, reconstruction and restoration or replacement of the property damaged or destroyed unless this Lease shall cease and terminate under the provisions of Paragraph 10. (iii) WORKERS' COMPENSATION AND EMPLOYER'S LIABILITY. Workers' ---------------------------------------------- Compensation and Employer's Liability insurance affording statutory coverage and containing statutory limits. b. ADDITIONAL REQUIREMENTS. All policies of insurance provided for in this ----------------------- Paragraph 12 shall be issued in form and by insurance companies with a financial size acceptable to Landlord and qualified to do business in the state in which the Building is located. Each and every such policy: (i) except for Worker's Compensation, Employer's Liability and Tenant's Contents insurance, shall name Landlord and any other parties in interest from time to time designated in writing by notice from Landlord to Tenant as additional insureds; (ii) shall be for the mutual and joint benefit and protection of Landlord and Tenant and any such other parties in interest; (iii) shall (or a certificate thereof shall) be delivered to each of Landlord and any such other parties in interest within ten (10) days after delivery of possession of the Demised Premises to Tenant and thereafter within thirty (30) days prior to the expiration of each such policy, and, as often as any such policy shall expire or terminate. Renewal or additional policies shall be procured and maintained by Tenant in like manner and to like extent; (iv) shall contain a provision that the insurer will give to Landlord and such other parties in interest at least thirty (30) days notice in writing in -13- advance of any material change, cancellation, termination or lapse, or the effective date of any reduction in the amounts of insurance; and (v) shall be written as a primary policy which does not contribute to and is not in excess of coverage which Landlord may carry. c. BLANKET INSURANCE. Any insurance provided for in this Paragraph ----------------- may be maintained by means of a policy or policies of blanket insurance, covering additional items or locations or insureds; provided, however, that: -------- ------- (i) Landlord and any other parties in interest from time to time designated by Landlord to Tenant shall be named as an additional insured thereunder as its interest may appear; (ii) the coverage afforded Landlord and any such other parties in interest will not be reduced or diminished by reason of the use of such blanket policy of insurance; (iii) any such policy or policies (except any covering the risks referred to in Paragraph 12(a) (i)) shall specify therein (or Tenant shall furnish Landlord with a written statement from the insurers under such policy specifying) the amount of the total insurance allocated to Tenant's improvements and property more specifically detailed in Paragraph 12 (a) (ii); and (iv) the requirements set forth in this Paragraph are otherwise satisfied. d. INSPECTION OF POLICIES. Tenant agrees to permit Landlord at all ---------------------- reasonable times to inspect the policies of insurance of Tenant with respect to the Demised Premises for which policies or copies thereof are not delivered to Landlord. e. WAIVER. Tenant and Landlord hereby release each other from any ------ and all liability or responsibility to the other, even if such loss shall be brought about by the fault or negligence of the other party for all claims or anyone claiming by, through or under it or them, by way of subrogation or otherwise, for any loss or damage to property which is coverable by insurance, whether or not such insurance is maintained by the releasing party or the releasing party self-insures perils covered thereby; provided, however, that this release shall be effective only with respect to loss or damage occurring during such time as the appropriate policy of insurance shall contain or is obtainable with a clause to the effect that this release shall not affect said policy or the right of the insured to recover thereunder. 13. EMINENT DOMAIN. -------------- a. TOTAL OR PARTIAL TAKING. If the whole of the Demised Premises ------------------------ shall be condemned or taken either permanently or temporarily for any public or quasi-public use or purpose, under any statute or by right of eminent domain, or by private purchase in lieu thereof, then, in such event, the Term shall cease and terminate from the -14- date when possession is taken thereunder pursuant to such proceeding or purchase. The Rent shall be adjusted as of the time of such termination and any Rent paid for the period thereafter shall be refunded. If a portion only of the Demised Premises or a portion of the Building containing same shall so be taken (even though the Demised Premises may not have been affected by the taking of some other portion of the Building containing same), Landlord may elect to terminate this Lease from the date when possession is taken thereunder pursuant to such proceeding or purchase or Landlord may elect to repair and restore, at its own expense, the portion not taken and thereafter the Rent shall be reduced proportionate to the portion of the Demised Premises taken. If the portion taken renders the Demised Premises untenantable, in the reasonable judgment of Tenant and Landlord, then Tenant may terminate the Lease by providing Landlord with written notice thereof within thirty (30) days of receipt of notice of the existence and extent of the taking; whereupon the termination shall take effect on the date when possession is taken thereunder pursuant to such proceeding or purchase. Should Tenant fail to timely provide such notice, then this Lease shall remain in full force and effect, notwithstanding the taking. b. AWARD. In the event of any total or partial taking of the Demised ----- Premises or the Building, Landlord shall be entitled to receive the entire award in any such proceeding and Tenant hereby assigns any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof and hereby waives all rights against Landlord and the condemning authority, except that Tenant shall have the right to claim and prove in a completely separate proceeding and to receive any award which may be made to Tenant, if any, specifically for damages for loss of good will, movable trade, fixtures, equipment and moving expenses, provided that such award in no way diminishes or adversely affects Landlord's award. c. UNSAFE CONDITIONS. If the Demised Premises or the Building are ----------------- declared unsafe by any duly constituted authority having the power to make such determination, or are the subject of a violation notice or notices requiring work, Landlord, at its option, may do the required work or may terminate this Lease and in the latter event, Tenant shall immediately surrender the Demised Premises to Landlord, whereupon this Lease shall terminate and the Rent shall be apportioned as of the date of such termination. 14. DEFAULT AND REMEDIES. a. EVENTS OF DEFAULT. The occurrence of any of the following shall ----------------- constitute material breach of this Lease by Tenant and an event of default: (i) the failure of Tenant to accept possession of the Demised Premises within fifteen (15) days after written notice to Tenant that the same are substantially completed; (ii) the vacation or abandonment of the Demised Premises by Tenant, or the removal of Tenant's assets other than in the usual and normal course of business; -15- (iii) a failure by Tenant to pay, when due, any installment of Base Rent; (iv) a failure by Tenant to pay, when due, any installment of additional rent hereunder, or any such other sum herein required to be paid by Tenant; (v) a failure by Tenant to observe and perform any other provision or covenant of this Lease to be observed or performed by Tenant, where such failure continues for ten (10) days after written notice thereof to Tenant; provided, however, that if the nature of the default is such that the same - -------- ------- cannot reasonably be cured within such ten (10) day period, Tenant shall not be deemed to be in default if Tenant shall within such period commence such cure and thereafter diligently prosecute the same to completion, but in no event for longer than thirty (30) days after written notice to Tenant; (vi) any representation or warranty made by Tenant hereunder is or becomes materially false or inaccurate; and (vii) a default by Tenant or any parent, subsidiary or other affiliate of Tenant under any other lease(s) any of them may have with Landlord; (viii) the filing of a petition by or against Tenant for relief as a bankruptcy or insolvency or for its reorganization or for the appointment pursuant to any local, state or federal bankruptcy or insolvency law of a receiver or trustee of any part of Tenant's property; or, an assignment by Tenant for the benefit of creditors; or, the taking possession of the property of Tenant by any local, state or federal governmental officer or agency or court-appointed official for the dissolution or liquidation of Tenant or for the operating, either temporary or permanent, of Tenant's business; provided, -------- however, that if any such action is commenced against Tenant the same shall not - ------- constitute a default if Tenant causes the same to be dismissed or discharged within sixty (60) days after the filing of same. b. REMEDIES OF LANDLORD. -------------------- (i) Upon the occurrence of any event of default set forth in Subparagraph 14(a) or elsewhere in this Lease Landlord, at its option, may take all or any of the following actions: (A) With or without terminating the Lease, accelerate the whole or any part of the Rent for the entire unexpired balance of the Term, as well as all other charges, payments, costs and expenses herein agreed to be paid by Tenant, and any Rent or other charges, payments, costs and expenses if so accelerated shall, in addition to any and all installments of Rent already due and payable and in arrears, and any other charge or payment herein reserved, included or agreed to be treated or collected as Rent and any other charge, expense or cost herein agreed to be paid by Tenant which may be due and payable and in arrears, be deemed due and payable as if, by the terms and provisions of this Lease, such accelerated Rent and other charges, payments, costs and expenses were on that date payable in advance. Such sum is hereinafter referred to as the -16- "Accelerated Rent". For the purpose of calculating all items of the additional rent component of the Accelerated Rent, Landlord may make a determination based upon such sums for the full year immediately prior to the event of default, or otherwise in Landlord's reasonable judgement; or Landlord shall have the right to insist upon and obtain specific performance of any and all terms of this Lease Agreement; and/or (B) Landlord may, at any time after the occurrence of any event of default, whether or not this Lease has been terminated, re-enter and repossess the Demised Premises and any part thereof with or without process of law, provided no undue force shall be used, and shall have the option, but not the obligation (either in its own name, as agent for Tenant if this Lease has not been terminated, or for its own behalf if this Lease has been terminated), to relet all or any part of the Demised Premises; provided that Landlord shall -------- not be required to accept any tenant proposed by Tenant or observe any instruction given by Tenant about such reletting. The failure of Landlord to relet the Demised Premises or any part or parts thereof shall not release or affect Tenant's liability hereunder, nor shall Landlord be liable for failure to relet, or in the event of reletting, for failure to collect the rent thereof, and in no event shall Tenant be entitled to receive any excess of net rents collected over sums payable by Tenant to Landlord hereunder. No such re-entry or taking possession of the Demised Premises shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such election by Landlord is given to Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for any previous breach and default. For the purpose of such reletting, Landlord may decorate or make repairs, changes, alterations or additions in or to the Demised Premises to the extent deemed by Landlord desirable or convenient, and the cost of such decoration, repairs, changes, alterations or additions shall be charged to and payable by Tenant as additional rent hereunder, as well as any reasonable brokerage and legal fees expended by Landlord; and any sums collected by Landlord from any new tenant obtained on account of Tenant shall be credited against the balance of the Rent due hereunder as aforesaid. Tenant shall pay to Landlord monthly, on the days when Rent would have been payable under this Lease, the amount due hereunder less the amount obtained by Landlord from such new tenant, if any; and/or (C) Landlord shall have the right to insist upon and obtain specific performance of any and all terms of this Lease. (ii) On the occurrence of any event of default as set forth in subparagraph 14 a. and as described therein, Landlord may elect to terminate this Lease, in which event Landlord, at its option, may serve notice upon Tenant that this Lease and the then unexpired Term hereof shall cease and expire and become absolutely void on the date specified in such notice, to be no less than five (5) days after the date of such notice, without any right on the part of Tenant thereafter to save the forfeiture by payment of any sum due or by the performance of any term, provision, covenant, agreement or condition broken; and, thereupon and at the expiration of the time limit in such notice, this Lease and the Term hereof granted, as well as the right, title and interest of Tenant hereunder, shall wholly cease and expire and become void in the same manner and with the same force and effect (except as to Tenant's liabilities under this Paragraph 14) as if the date -17- fixed in such notice were the date herein stated for expiration of the Term. Thereupon, Tenant shall immediately quit and surrender to Landlord the Demised Premises by summary proceedings, detainer, ejectment or otherwise and remove itself and all other occupants thereof and, at Landlord's option, any property thereon without being liable to indictment, prosecution or damages therefor. No such expiration or termination of this Lease shall relieve Tenant of its liability and obligations under this Lease, whether or not the Demised Premises shall be relet, all of which shall survive such expiration or termination; and/or (iii) Tenant hereby expressly authorizes and empowers (which power is coupled with an interest) Landlord, upon the occurrence of an event of default, to exercise the remedy of self-help and to enter upon the Demised Premises, distrain (pursuant to this contract) upon and remove therefrom all inventory, equipment, machinery, trade fixtures and personal property of whatsoever kind or nature, whether owned by Tenant or by others, and to proceed without judicial decree, writ of execution or assistance or involvement of constables or Landlord and Tenant officers, to conduct a private sale, by auction or sealed bid without restriction. Tenant hereby waives the benefit of all laws, whether now in force or hereafter enacted, exempting any personal property on the Demised Premises from sale or levy, whether execution thereon is had by order of any court or assistance or involvement of constables or Landlord and Tenant officer, or through self-help, private sale hereinabove authorized; and/or (iv) Landlord shall have the right of injunction, in the event of a breach or default or threat thereof by Tenant of any of the agreements, conditions, covenants or terms hereof, to restrain the same and the right to invoke any remedy allowed by law or in equity, whether or not other remedies, indemnity or reimbursements are herein provided. The rights and remedies given to Landlord in this Lease are distinct, separate and cumulative remedies; and no one of them, whether or not exercised by Landlord, shall be deemed to be in exclusion of any other. (A) Tenant expressly waives the benefits of all laws, now or hereafter in force, exempting any of Tenant's property on the Demised Premises or elsewhere from distraint, levy or sale in any legal proceedings taken by Landlord to enforce any rights under this Lease. Tenant further waives the right of inquisition and appraisement on any real estate that may be levied upon to collect any amount which may become due under the terms and conditions of this Lease, and does hereby voluntarily condemn the same and authorize the Prothonotary to enter a Writ of Execution or other process upon Tenant's voluntary condemnation, and further agrees that said real estate may be sold on a Writ of Execution or other process. If proceedings shall be commenced by Landlord to recover possession under the Acts of Assembly, either at the end of the Term or any extension thereof or on sooner termination thereof, or for non- payment of rent or any other reason, Tenant specifically waives the right to the three (3) months notice and/or the fifteen (15) or thirty (30) days notice required by the Act of April 5, 1957, No. 20, and agrees that five (5) days notice shall be sufficient in either or any such case. The right to enter judgment against Tenant and to enforce all of the other provisions of this Lease hereinabove provided for may be exercised by any assignee of Landlord's right, title and interest in this Lease, in such assignee's own name, notwithstanding the -18- fact that any or all assignments of said right, title and interest may not be executed and/or witnessed in accordance with the Act of Assembly and any and all laws regulating the manner and/or form in which such assignments shall be executed and witnessed. (B) If there is an event of default, Tenant hereby empowers any prothonotary or attorney of any court of record within the United States or elsewhere to appear for Tenant in any and all actions which may be brought for Rent and to sign for Tenant an agreement for entering into any competent court an amicable action or actions, for the recovery or Rent and, in such suits or in such amicable action or actions, to confess judgment against tenant for all or any part of such Rent including, at Landlord's option, the Rent for the entire unexpired balance of the Term, computed as aforesaid, and any other charges, payments, costs and expenses reserved as Rent or agreed to be paid by Tenant, and for interest and costs together with an attorney's commission of five percent (5%) thereof. Tenant hereby waives all errors, defects and imperfections in entering any such judgments or in any writs, or process, or proceedings therein or thereto or in any wise concerning same, and for the confession and entry of such judgments, this Lease or a true and correct copy thereof shall be sufficient warrant and authority. The foregoing authority and power of attorney shall not be exhausted by any one exercise thereof, but judgment may be confessed as aforesaid from time to time and as often as there is an event of default hereunder or any of the Rent shall fall due or be in arrears, and such authority and power may be exercised during the Term or any extension thereof, as well as after the expiration or other termination of this Lease. (C) When this Lease shall be determined broken by condition, either during the Term or any extension thereof, and also when and as soon as the Term hereby created or any extension thereof shall have expired, it shall be lawful for any attorney as attorney for Tenant to file an agreement for entering in any competent court an amicable action and to confess judgment in ejectment against tenant and all persons or entities claiming under Tenant for the recovery by Landlord of possession of the Demised Premises, for which this Lease shall be sufficient warrant; whereupon, if Landlord so desires, a writ of possession may issue forthwith, without any prior writ or proceeding whatsoever, and provided that, if for any reason after such action shall have been commenced the same shall be determined and the possession of the Demised Premises shall remain in or be restored to Tenant, Landlord shall have the right, upon any subsequent default or defaults or upon the termination or expiration of this Lease, to bring one or more amicable action or actions as hereinbefore set forth to recover possession of the Demised Premises as aforesaid. In any amicable action of ejectment, Landlord shall first cause to be filed in such action an affidavit made by it or someone acting for it setting forth the facts necessary to authorize the entry of judgment, and, if a true copy of this Lease (and of the truth of the copy of such affidavit shall be sufficient evidence) shall be filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of court, custom or practice to the contrary notwithstanding. (D) Tenant, for itself and on behalf of any and all persons claiming through or under it (including creditors of all kinds), does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Demised Premises or to have a -19- continuance of this Lease for the Term, as it may have been extended, after having been dispossessed or ejected therefrom by process of law or under the terms of this Lease or after the termination of this Lease as herein provided. (E) Neither this Lease nor any rights or privileges hereunder shall be an asset of Tenant in any bankruptcy, insolvency or reorganization proceeding. If Landlord shall not be permitted to terminate this Lease because of the provisions of the United States Bankruptcy Code, Tenant or any trustee for it shall, within fifteen (15) days upon request by Landlord to the Bankruptcy Court, assume or reject this Lease unless all defaults hereunder shall have been cured, Landlord shall have been compensated or any monetary loss resulting from such default, and Landlord shall be provided with reasonably adequate assurance of full and timely performance of all provisions, terms and conditions of this Lease on the part of Tenant to be performed. Towards this purpose, Tenant agrees and consents to hereby waive any otherwise applicable stay of proceedings authorized or ordered by any competent court exercising jurisdiction over such proceedings, as such stay would apply to Landlord's exercise of its rights under this Lease. (F) The failure or delay on the part of either party to enforce or exercise at any time any of the provisions, rights or remedies in this Lease shall in no way be construed to be a waiver thereof, nor in any way to affect the validity of this Lease or any act hereof, or the right of the party to thereafter enforce each and every such provisions, right or remedy. No waiver or any breach or default of this Lease shall be held to be a waiver of any other or subsequent breach or default. The receipt by Landlord of Rent at a time when the Rent is in default under this Lease shall not be construed as a waiver of such default. The receipt by Landlord of a lesser amount than the Rent due shall not be construed to be other than a payment on account of the Rent then due, nor shall any statement on Tenant's check or any letter accompanying Tenant's check be deemed an accord and satisfaction, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of the Rent due or to pursue any other remedies provided in this Lease. No act or thing done by Landlord or Landlord's agents or employees during the Term and any extension thereof shall be deemed an acceptance of a surrender of the Demised Premises, and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. c. LANDLORD'S RIGHT TO PERFORM. Landlord may perform, in whole or in --------------------------- part, any obligation of which Tenant is in default, either prior to or following the maturation of such default into an event of default, and Tenant shall pay on demand as additional rent any reasonable expenditures made pursuant hereto and the amount of any obligations incurred in connection herewith, plus per annum interest at the Default Rate from the date of any such expenditure, and Landlord's performance shall not constitute a cure of such default by Tenant. d. LANDLORD'S EXPENSES. Tenant shall be responsible for all of ------------------- Landlord's costs and expenses, including attorneys' fees, in enforcing any and all provisions of this Lease, as well as all costs and expenses, including attorneys' fees, incurred arising from any default of Tenant under this Lease. All such costs and expenses -20- shall constitute additional rent and shall accrue interest at the Default Rate from the date of such expenditure. e. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy herein ------------------------------ conferred upon or reserved to Landlord herein or by law is intended to be exclusive of any other right or remedy provided herein or by law, but each shall be cumulative and in addition to every other right or remedy given herein or now or hereafter existing by law or in equity or by statute. f. LANDLORD'S DAMAGES. The damages which Landlord shall be entitled ------------------ to recover from Tenant shall be the sum of: (1) All Minimum Annual Rent and additional rent accrued and unpaid as of the termination date; and (2) (i) the costs and expenses incurred by Landlord in recovering possession of the Premises, including removal and storage of Tenant's property, improvements and alterations therefrom, (ii) the costs and expenses of restoring the Premises to the condition in which the same were to have been surrendered by Tenant as of the expiration of the Term, or, in lieu thereof, the costs and expenses of reletting the sale, (iii) the costs of re-letting (exclusive of those covered by the foregoing (ii), including brokerage fees and reasonable counsel fees, and (iv) any special overhead expenses related to the vacancy of the Premises not in excess of ten percent (10%) of the total Fixed Rent otherwise to be paid by Tenant over the remainder of the Term, for each month or part between the date of termination and the re-letting the entire Premises; and (3) All Minimum Annual Rent and additional rent (to the extent that the amount(s) of additional rent has (have) been then determined) otherwise payable by Tenant over the remainder of the Term. Less (deducting from the total determined under subparagraphs (1), (2) and ---- (3)) all rent and all other additional rent to the extent determinable as aforesaid, (to the extent that like charges would have been payable by Tenant) which Landlord receives from other tenant(s) by reason of the leasing of the Premises or part thereof during or attributable to any period falling within the otherwise remainder of the Term. The damage sums payable by Tenant under the preceding provisions of this section shall be payable on demand from time to time as the amounts are determined; and if from Landlord's subsequent receipt of rent as aforesaid from reletting, there by any excess payment(s) by Tenant by reason of the crediting of such rent thereafter received, the excess payment(s) shall be refunded by Landlord to Tenant. 15. SUBORDINATION. ------------- a. GENERALLY. This Lease shall be subject and subordinate at all --------- times to the lien of any mortgages and/or ground leases and/or other encumbrances now or hereafter placed on the Demised Premises, the Building or the Property without the necessity of any further instrument or act on the part of Tenant to effectuate such -21- subordination, but Tenant covenants and agrees to execute and deliver upon demand such further instrument or instruments evidencing such subordination of this Lease to the lien of any such mortgage or mortgages and/or ground rent and/or other encumbrances as shall be desired by any mortgagee or proposed mortgagee or by any person. In the event Tenant fails to execute and deliver to Landlord any such instrument(s) within fifteen (15) days from Landlord's request for same, Tenant shall be deemed to have hereby appointed Landlord attorney-in- fact of Tenant, irrevocably, to execute and deliver any such instrument(s) for and in the name of Tenant. Notwithstanding the foregoing, the party secured by any such mortgage, ground lease or encumbrance (the "Secured Party") shall have the right to recognize this Lease and, in the event of any foreclosure sale or other possession by a Secured Party, this Lease shall continue in full force and effect at the option of the Secured Party, and Tenant shall execute, acknowledge and deliver any instrument that has for its purpose and effect a subordination to the lien of this Lease. b. RIGHTS OF MORTGAGEE. In the event of any act or omission of ------------------- Landlord which would give Tenant the right, immediately or after lapse of a period of time, to cancel or otherwise terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise such right: (i) Until it has given written notice of such act or omission to the holder of each such mortgage or ground lease whose name and address shall previously have been furnished to Tenant in writing; and (ii) Until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice (which reasonable period shall in no event be less than the period to which Landlord would be entitled under this Lease or otherwise, after similar notice, to effect such remedy). 16. SURRENDER AND HOLDING OVER. -------------------------- a. SURRENDER. The Lease shall terminate and Tenant shall deliver up --------- and surrender possession of the Demised Premises on the last day of the Term hereof, and Tenant waives the right to any notice of termination or notice to quit. Tenant covenants that upon the expiration or sooner termination of this Lease, Tenant shall deliver up and surrender possession of the Demised Premises in the same condition in which Tenant has agreed to keep the same during the continuance of the Lease and in accordance with the terms hereof, normal wear and tear excepted. b. HOLD OVER. Upon the failure of Tenant to surrender possession of the Demised Premises upon the expiration or sooner termination of this Lease, Tenant shall pay to Landlord an amount equal to one hundred fifty percent (150%) of the Rent required to be paid under this Lease immediately prior to the expiration or termination of the Term as applied to any period in which Tenant shall remain in possession after expiration or sooner termination of this Lease. Otherwise, such holding over shall constitute a month-to-month tenancy at sufferance and shall be on the terms and conditions set forth in this Lease as far as applicable. Landlord may, but shall not be required to, and only on written notice to Tenant after the expiration of the Term hereof, -22- elect to treat such holding over as an extension of the Term for an additional period of up to one (1) year (as Landlord shall so elect), to be on the terms and conditions set forth in this Lease and at the rental as specified in this Paragraph 16(b). Tenant shall be responsible for all damages, including consequential, suffered by Landlord as a result of Tenant's holding over. 17. LIEN: SECURITY INTEREST. Landlord waives its lien pursuant to the ----------------------- Waiver of Liens, attached hereto as Exhibit "D" and incorporated herein. 18. ESTOPPEL CERTIFICATES. Tenant shall, from time to time, upon written --------------------- request of Landlord, execute, acknowledge and deliver to Landlord or its designee a written statement stating (i) the date this Lease was executed and the date it expires; (ii) the date Tenant entered into occupancy of the Demised Premises; (iii) the amount of Rent and the date to which such Rent has been paid; (iv) certifying that this Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (or stating otherwise); (v) that this Lease represents the entire agreement between the parties and to this leasing (or stating otherwise); (vi) that all conditions under this Lease to be performed by Landlord have been satisfied (or stating otherwise); (vii) that on the specified date there are no existing defenses or offsets which Tenant has against the enforcement of this Lease by Landlord (or stating otherwise); (viii) that no Rent has been paid in advance; (ix) that any concession or payment given Tenant by Landlord has been fully performed as of the date of such certificate; and (x) any other requested matter affecting this Lease and any statements by Tenant affecting the correctness of the requested statements. It is intended that any such statement delivered pursuant to this Paragraph may be relied upon by a prospective purchaser of Landlord's interest or a mortgagee of Landlord's interest or assignee of any mortgage upon Landlord's interest in the Building. If Tenant shall fail to respond within ten (10) days of receipt by Tenant of a written request by Landlord as herein provided, Tenant shall be deemed to have given such certificate as above provided without modification and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee and that this Lease is in full force and effect, that there are no uncured defaults in Landlord's performance, that the Security Deposit is as stated in this Lease, and that not more than one month's Rent has been paid in advance. 19. INSTALLATIONS AND ALTERATIONS BY TENANT. --------------------------------------- a. Tenant shall make no alterations, additions (including, for the purpose hereof, wall-to-wall carpeting), or improvements in or to the Demised Premises without Landlord's prior written consent in each instance obtained. Any such alterations, additions or improvements shall (i) be in accordance with complete plans and specifications approved by Landlord (ii) be performed using new materials in a good and workmanlike manner in accordance with sound building practices and in compliance with all applicable laws, (iii) be made only by contractors or mechanics approved by Landlord and who (A) carry general liability and property damage insurance in type and amount acceptable to Landlord and (B) have filed lien bonds, lien waivers or the like in such form as is acceptable to Landlord in Landlord's sole discretion, (iv) be made at Tenant's sole expense and at such times and in such manner as Landlord may from time to time -23- designate; (v) be subject to Landlord's construction management charge equal to ten percent (10%) of the total costs of such alterations, additions or improvements; and (vi) become part of the Demised Premises and the property of Landlord. Unless otherwise stated in Landlord's consent, Landlord reserves the right to require such alterations, additions or improvements placed in or upon the Demised Premises by Tenant, or portions thereof, to be removed by Tenant, and to replace previously removed improvements, all at Tenant's expense, prior to the expiration of the Term. b. All articles of personal property and all business fixtures, machinery and equipment and furniture owned or installed by Tenant or solely at its expense in the Demised Premises ("Tenant's Removable Property") shall remain the property of Tenant and may be removed by Tenant at any time prior to the expiration of this Lease, provided that Tenant, at its expense, shall repair any damage to the Demised Premises and the Building caused by any such installation or removal. c. In no event shall Landlord be liable for any labor or materials furnished or to be furnished to Tenant upon credit, and no mechanic's or other lien for any such labor or materials shall attach to or affect the reversion or other estate or interest of Landlord in or to the Demised Premises. Whenever and as often as any mechanic's lien shall have been filed against the Property based upon any act or interest of Tenant or of anyone claiming through Tenant, Tenant shall forthwith take such action by bonding, deposit or payment as will remove or satisfy the lien within thirty (30) days from the filing of such lien. No work which Landlord permits Tenant to perform shall be deemed to be for the immediate use and benefit of Landlord. d. In the course of any work being performed by Tenant, including without limitation the "field installation" of any Tenant's Removable Property, Tenant agrees to use labor compatible with that being employed by Landlord for work in or to the Building or other buildings owned by Landlord or its affiliates, and not to employ or permit to use any labor or otherwise take any action which might result in a labor dispute involving personnel providing services in the Building or other properties owned or managed by Landlord or its affiliates. e. If Tenant shall make or cause to be made at its own expense any alteration, addition or improvement to the Demised Premises which shall result in an increase in the Taxes, then Tenant shall pay, in addition to the Base Rent and other charges, the entire increase in such Taxes attributable to such alteration, addition or improvement. f. Landlord shall have the right at any time to alter, repair or improve any portion of the Demised Premises, the Building or the Property. Landlord and its representatives or any such purpose may enter on or about the Demised Premises, the Building or the Property with all such material and erect scaffolding and all other necessary structures. Tenant waives any claim for any damage or inconvenience which may arise unless caused solely by Landlord's negligence. -24- 20. COMPLIANCE WITH LAWS. In its use and occupancy of the Demised -------------------- Premises, Tenant shall comply with the requirements of all applicable governmental laws, codes, ordinances, rules and regulations of Boards of Fire Underwriters, rating Boards or the like (or successor agencies). 21. ENVIRONMENTAL MATTERS. --------------------- a. COMPLIANCE WITH LAW: RESTRICTED ACTIVITIES. ------------------------------------------- (i) Tenant shall conduct all of its operations at the Property in compliance with all statutes, ordinances, regulations, and orders now existing or hereafter enacted and requirements of common law in any way pertaining to the environment and concerning (A) its operations, (B) construction of any improvements, (C) handling of any materials and substances including but not limited to chemical, pharmaceutical and radioactive materials and substances, (D) discharges and emissions, and (E) storage, treatment, or disposal of any waste at or connected with Tenant's operations at the Property ("Environmental Statutes"). Tenant shall obtain all permits, licenses, and approvals and shall make all notifications as required by Environmental Statutes. Tenant shall at all times comply with the terms and conditions of any and all such permits, licenses, approvals, and notifications. In addition, Tenant shall take similar precautions in connection with materials and substances used in Tenant's operations at the Property which even if not regulated by law or requirements as aforesaid, may or could pose a hazard to the health or safety of the current or future occupants of the Property, or to owners or occupants of property adjacent to or in the vicinity of the Property. (ii) Tenant shall immediately provide to Landlord copies of: (A) applications or other materials submitted to any governmental agency in compliance with Environmental Statutes except for proprietary information which might be contained in such applications or other materials which may be inspected at the Property; (B) any notification submitted to any person pursuant to Environmental Statutes with respect to the existence of a potentially adverse environmental condition on the Property. (C) any permit, license, approval, and amendment or modification thereto granted pursuant to Environmental Statutes; (D) upon Landlord's request at reasonable times and from time to time any record or manifest required to be maintained pursuant to Environmental Statutes; and (E) any notice letters, notice of violation, summons, order, complaint, request for information and any correspondence relating to any of the foregoing received by Tenant pertaining to compliance with Environmental Statutes or in -25- connection with Restricted Activities (as defined in Subparagraph 21(a) (i)) or otherwise pursuant to Environmental Statutes. b. SITE CONTAMINATION. Tenant shall not cause contamination of the Property arising from Restricted Activities or by "hazardous substances." "Hazardous Substances" means: (a) any "hazardous substance," "pollutant" or "contaminant" (as defined in Section 101(14) and (33) of the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499, 100 Stat. 1613 (Oct. 17, 1986), (CERCLA), 42 U.S.C. 9601 (14) and (33) or 40 C.F.R. Part 302; (b) any "regulated substance" within the meaning of subtitle I of the Resource Conservation and Recovery Act, 42 U.S.C. 6991-6991i, as amended by the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499, 100 Stat. 1613 (Oct. 17, 1986), (c) any substance containing petroleum, as that term is defined in Section 9001(8) of the Resource Conservation and Recovery Act, as amended, 42 U.S. C. 6991(8) or 40 C. F. R. 280. 1; (d) any " hazardous waste " as defined pursuant to the Pennsylvania Solid Waste Management Act, Pa. Stat. Ann. tit. 35, 6018. 101 to .1003 (Purdon Supp. 1987); (e) any other substance which may be the subject of liability pursuant to Sections 316 or 401 of the Pennsylvania Clean Streams Law, Pa. Stat. Ann. tit. 35 691.1 to .1001 (Purdon 1977 and Supp. 1987); (f) any " hazardous substance" as defined pursuant to Section 103 of the Pennsylvania Hazardous Sites Cleanup Act ("HSCA"), 35 P.S. (S)6021. 101 et seq.; (g) any "hazardous substance or hazardous waste" as -- --- defined pursuant to the New Jersey Environmental Cleanup Responsibility Act ("ECRA"), N.J. Stat. Ann. 13:IK-6 to -13 (West Supp. 1987); (h) any hazardous waste or solid waste, as those terms are defined in applicable state or local law; (i) words of similar meaning as defined in any federal, state or local laws now in effect or which may be enacted in the future concerning protection of the environment; and (j) any amendments to the laws enumerated in (a) through (i) above. Tenant shall at all times handle hazardous substances and materials and substances used in connection with Restricted Activities in a manner which will not cause an undue risk of contamination of the Property. For purposes of this Paragraph 21, the term "contamination" shall mean the uncontained presence of hazardous substances and materials and substances used in connection with Restricted Activities at the Property or arising from the Property, which may require remediation or result in liability under applicable law. c. INDEMNIFICATION. --------------- Tenant hereby agrees to indemnify, defend and hold harmless Landlord of, from, and against any and all expense, loss, or liability suffered by Landlord by reason of Tenant's breach of any of the provisions of this Paragraph whether direct or indirect, foreseen or unforeseen including (but not limited to) (i) any and all expenses that Landlord may incur in complying with any Environmental Statutes, (ii) any and all costs that Landlord may incur in studying or remedying any contamination, (iii) any and all fines or penalties assessed upon Landlord by reason of failure of Tenant to comply with the provisions of this Paragraph, (iv) any and all loss of value of the Property by reason of such failure to comply, and (v) any and all legal fees and costs incurred by Landlord in connection with any of the foregoing. Landlord hereby agrees to indemnify, defend and hold harmless Tenant of, from, any liability for any expense or clean-up caused by another Tenant or Landlord. -26- d. INSPECTION. Landlord may, at reasonable times, enter the Demised ---------- Premises to conduct inspections, tests, samplings, or other investigations in connection with Tenant's obligations under the provisions of this Paragraph. e. STORAGE TANKS. Tenant shall not install any storage tanks, above ------------- or underground, without the prior written approval of Landlord, which approval shall be at Landlord's sole discretion. Tenant shall provide Landlord with all information concerning such proposed installation as Landlord may request. f. REMEDIES. -------- (i) Upon breach by Tenant of any provision of this Paragraph that is not cured by Tenant through its best efforts within a reasonable time, Landlord may at its sole discretion terminate Tenant's tenancy by written notice to Tenant, whereupon Tenant shall immediately vacate and Landlord may immediately reenter the Demised Premises. (ii) The parties recognize that no adequate remedy at law may exist for a breach of this Paragraph 21. Accordingly, Landlord may obtain specific performance of any provision of this Paragraph. (iii) This Paragraph 21 shall not be construed to limit any remedies which Landlord may have against Tenant at law or equity for a breach of this Paragraph. g. SURVIVAL. The provisions of this Paragraph 21 shall survive the -------- expiration or other termination of Tenant's tenancy or of this Lease. No subsequent modification or termination of this Lease by agreement of the parties or otherwise shall be construed to waive or to modify any provision of this Paragraph 21 unless the termination or modification agreement or other document so states in writing. 22. TENANT'S REPRESENTATIONS AND WARRANTIES. Tenant represents and --------------------------------------- warrants to Landlord that: a. Tenant is a corporation duly formed, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. b. Neither the execution by Tenant of this Lease nor the performance by Tenant of the terms hereof will conflict with or violate any other agreement or instrument or any writ, order or decree to which Tenant is a party or by which Tenant is bound. c. There is no litigation currently pending or threatened against Tenant or any owner, shareholder, partner or affiliate of Tenant which could adversely affect Tenant's ability to perform any of its obligations hereunder. 23. QUIET ENJOYMENT. Upon payment by Tenant of Base Rent and all --------------- additional rent and upon the observance and performance by Tenant of all the terms, -27- covenants, conditions, provisions and agreements of this Lease on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the Demised Premises for the Term of this Lease without hindrance or interruption by Landlord or by any person or persons lawfully claiming or holding by, through or under Landlord, subject, nevertheless, to the terms, covenants, conditions and provisions of this Lease, to all other agreements, conditions, restrictions and encumbrances of record and to all mortgages, installment sale agreements and underlying leases of record to which this Lease is, or shall become subject and subordinate. 24. BROKERAGE. Tenant represents and warrants that Tenant has dealt with --------- no broker or agent in connection with the consummation of this Lease other than the "Broker" named on the Term Sheet, and Tenant agrees to indemnify and hold Landlord harmless from and against any and all claims, suits, proceedings, damages, obligations, liabilities, attorneys' fees, costs, losses, expenses, orders and judgments imposed upon, incurred by or asserted against Landlord pertaining to brokers or agents. 25. LANDLORD STATUS. Landlord's obligations hereunder shall be binding --------------- upon Landlord only for a period of time that Landlord is in ownership of the Building; and, upon termination of that ownership, Tenant, except as to any obligations which have then matured, shall look solely to Landlord's successor in interest in the Building for the satisfaction of each and every obligation of Landlord hereunder. Landlord shall have no personal liability under any of the terms, conditions or covenants of this Lease and Tenant shall look solely to the equity of the Landlord in the Building of which the Demised Premises form a part and no other assets for the satisfaction of any claim, remedy or cause of action accruing to Tenant. 26. NOTICES. Wherever in this Lease it shall be required or permitted that ------- notice or demand be given or served by either party to this Lease to or on the other party, such notice or demand shall be in writing and shall be deemed to have been given or served if sent by Registered or Certified Mail (postage prepaid), or by courier guaranteeing overnight delivery (e.g., Federal Express), or by personal delivery addressed in accordance with the notice addresses specified on the Term Sheet. Each notice not personally delivered shall be deemed to have been given to or served upon the party to which addressed three (3) days after the date the same is deposited in the United States Registered or Certified Mail (postage prepaid), or the day delivered by said courier or by personal delivery, and either party hereto may change its address to which any notice shall be delivered or sent by giving written notice of such change to the other party hereto in the manner herein provided. 27. MISCELLANEOUS PROVISIONS. ------------------------ a. FORCE MAJEURE. Landlord shall be excused for the period of any ------------- delay in the performance of any obligations hereunder when prevented from so doing by cause or causes beyond Landlord's control which shall include, without limitation, all strikes and other labor troubles, governmental restrictions and limitations, scarcity, unavailability or delays in obtaining fuel, services, labor or materials, war or other -28- national emergency, civil commotion, accident, defective materials, fire damage or other casualty, adverse weather condition, or floods or other Acts of God. b. COMMON AREAS. All parking areas, walkways, vertical ------------ transportation, stairs, driveways, alleys, public corridors and fire escapes, and other areas, facilities and improvements as may be provided by Landlord from time to time for the general use in common of Tenant and other tenants, which may be extended to their employees, agents, invitees and licensees, shall at all times be subject to the exclusive control and management of Landlord, and Landlord shall have the right from time to time to establish, modify and enforce reasonable rules and regulations with respect to all such areas, facilities and improvements, and to change the location or size of or otherwise alter or modify any or all of the aforementioned common areas, facilities, and improvements so long as Landlord continues to provide adequate passageways to the Demised Premises. c. NO RECORDATION. This Lease shall not be filed or recorded in any -------------- office of public record. If this Lease is so recorded, Tenant hereby appoints Landlord as Tenant's irrevocable attorney-in-fact for the purpose of executing such documents and performing such acts as are necessary to remove this Lease from any office of public record. d. SUCCESSORS. The respective rights and obligations provided in ---------- this Lease shall bind and shall inure to the benefit of the parties hereto, their legal representatives, heirs, successors and assigns, provided, however, that no rights shall inure to the benefit of any successors of Tenant unless Landlord's written consent for the transfer to such successor has first been obtained as provided in Paragraph 9. e. GOVERNING LAW. This Lease shall be construed, governed and ------------- enforced in accordance with the laws of the state in which the Demised Premises is located. f. SEVERABILITY. If any provisions of this Lease or portions thereof ------------ shall be held to be invalid, void or unenforceable, the remaining provisions of this Lease or portions thereof shall in no way be affected or impaired and such remaining provisions or portions thereof shall remain in full force and effect. g. CAPTIONS. Any heading preceding the text of the several -------- Paragraphs and Subparagraphs hereof are inserted solely for the convenience of reference and shall not constitute a part of this Lease, nor shall they affect its meaning, construction or effect. h. CERTAIN DEFINITION. As used in this Lease, the word "person" ------------------ shall mean and include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular for the plural where appropriate; and words of any gender shall mean and include any other gender. i. EXECUTION. This Lease shall become effective when it has been --------- signed by a duly authorized officer or representative of each of the parties and delivered to the other party. -29- j. JURISDICTION, SERVICE, WAIVER OF JURY TRIAL. Tenant hereby consents ------------------------------------------- to the jurisdiction of the courts of the Commonwealth of Pennsylvania or of the United States Eastern District Court. Tenant hereby waives the requirements of service pursuant to the applicable rules of such court, and consents to accept service by certified mail, return receipt requested, to the address set forth on the Term Sheet, or such other address as Tenant may notify Landlord in accordance with Paragraph 26 hereof. It is mutually agreed that Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other as to any matters arising out of or in any way connected with this Lease. k. [Intentionally Omitted]. l. TENANT'S CONTEST. In the event Tenant contests any figures or charges ---------------- of Landlord pursuant to Paragraph 5 or any other provision of this Lease, Tenant shall make such contest within six (6) months of the date of determination of any such figures or charges. Notwithstanding such contest, Tenant shall pay the full amount demanded by Landlord within the time periods stated in this Lease. Following Tenant's notifying Landlord of such contest, Tenant and Landlord shall arbitrate the dispute pursuant to Paragraph 27(o). m. TENANT'S FINANCIAL STATEMENTS. Tenant shall, within ninety (90) days ----------------------------- of the end of each fiscal year of Tenant, deliver to Landlord a current balance sheet and statement of profit and loss for the preceding year prepared and certified by an independent certified public accountant in accordance with generally accepted accounting principles consistently applied. Landlord agrees to keep all financial statements of Tenants confidential, other than disclosing same to Landlord's lender or prospective lender, or prospective purchaser. n. ENTIRE AGREEMENT. This Lease (including the Exhibits and any ---------------- Schedules or Riders hereto) contains all the agreements, conditions, understandings, representations and warranties made between the parties hereto with respect to the subject matter hereof 'and supersedes all prior negotiations and proposals (either written or oral). This Lease may not be modified or terminated orally or in any manner other than by an agreement in writing signed by both parties hereto or their respective successors in interest. o. ARBITRATION. For disputes subject to arbitration under subsection ----------- (iii) below, such disputes shall be settled by binding arbitration by the American Arbitration Association ("AAA") in accord with its then prevailing Commercial Arbitration Rules, and subject to the following: (i) Selection of Arbitrators. Within five (5) business days after a ------------------------ party has demanded arbitration, the parties shall attempt to agree on one arbitrator who shall be a real estate attorney actively engaged in the practice of law in the Greater Philadelphia area for at least the last ten (10) years. If the parties are unable to agree on one arbitrator then on the fifth business day each party shall select one arbitrator and on or before the tenth business day after demand for arbitration, the two arbitrators shall -30- select a third arbitrator, who shall be designated as the chairperson and who shall meet the qualifications set forth above. All demands for arbitration under this Lease shall be made during the Term of the Lease (as extended or renewed, as the case may be) or within six (6) months thereafter. (ii) Hearing, Award. The parties hereto and the arbitrators shall -------------- use their best efforts to complete the arbitration process in not less than thirty (30) days after the selection of the arbitrator(s). The arbitrators shall have the discretion to order a prehearing exchange of information by the parties including, without limitation, production of requested documents, exchange of summaries of testimony and proposed witnesses, and examination by deposition of parties. The hearing shall be held in Center City, Philadelphia, Pennsylvania, or such other location as mutually acceptable to the parties. In rendering the award, the arbitrators shall determine the rights and obligations of the parties according to the substantive and procedural laws of the Commonwealth of Pennsylvania. The arbitrators shall have the authority to award any remedy or relief that a Court of the Commonwealth of Pennsylvania could order or grant, including, without limitation, specific performance of any obligation created under this Lease or the issuance of an injunction. The arbitrators shall have no power to change the Lease provisions. The parties hereto shall be bound by the decision of the arbitrators and their decision shall be final and binding and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction. The arbitrators shall award the prevailing party reasonable expenses and costs, including reasonable attorney's fees plus interest on any amount due at the Default Rate (as defined in the Lease), from the date payment is due through the date payment is made. Payment shall be made within ten (10) days after the date of the arbitration award. (iii) Subject Disputes. Only the following disputes are subject to ---------------- arbitration: (A) any dispute that both parties agree to submit to arbitration, or that the initiating party has submitted for arbitration; (B) at Landlord's option, any dispute pertaining to the amount of Additional Rent due under this Lease; (C) at Landlord's option, any dispute pertaining to a nonmonetary default, or a misrepresentation, or breach of a non-monetary covenant, by either party, excepting only alleged violations or breaches of Section 21 of this Lease; (D) whether Landlord has reasonably or unreasonably withheld consent, where appropriate; (E) whether either party is entitled to terminate this Lease pursuant to Sections 10 or 13; and (F) at Landlord's option, upon any dispute in which Tenant threatens to or actually does withhold any payment of any Rent otherwise due Landlord under the Lease, but for the alleged default by Landlord. -31- p. RELOCATION OF TENANT. Landlord, in its sole expense, on at least -------------------- sixty (60) days prior written notice, may require Tenant on the date specified in said notice to move from the Premises to another location of comparable size and decor in the Complex in order to permit Landlord to consolidate the Premises with other space leased or to be leased to another tenant in the Building; and Landlord shall pay (i) all expenses of preparing, decorating and wiring of computers and phones, the new location so that it will be substantially similar to the premises and (ii) the expense of moving Tenant's furniture and equipment to the new location. Thereafter, the term Premises as and when used in this Lease shall be deemed to refer to such new location. q. SUBMISSION OF LEASE TO TENANT. The submission by Landlord to Tenant ----------------------------- of this Lease shall have no binding force or effect, shall not constitute an option for the leasing of the Demised Premises, shall not constitute a lease or agreement to enter in to a lease (even if such term is less than three (3) years in duration), nor confer any rights or impose any obligations upon either party until the execution thereof by Landlord and the delivery of an executed original copy thereof by Landlord to Tenant or Tenant's representative. r. RELATIONSHIP BETWEEN THE PARTIES. Each and every right, duty, -------------------------------- obligation and responsibility herein contained is subject to a duty of good faith and commercial reasonableness by each party in the exercise thereof. Without limiting the generality foregoing, no consent or approval shall be unreasonably withheld, delayed or conditional, and no remedy shall be pursued or exercised in any unreasonable manner. 28. [Intentionally Omitted]. -32- IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed by their duly authorized officers or representatives as of the day and year first above written. LANDLORD: FMOB ASSOCIATES a Pennsylvania limited partnership by WEST VALLEY, INC. its general partner BY:__________________________ Jack R. Loew, President TENANT: N2K, INC BY: /s/ Bruce Johnson ----------------------------------------- Name: Bruce Johnson ----------------------------------- Title: SR VICE PRESIDENT --------------------------------- ATTEST:______________________ -33- EX-10.24 15 ORDER FULFILLMENT AGREEMENT EXHIBIT 10.24 ORDER FULFILLMENT AGREEMENT This Order Fulfillment Agreement (this "Agreement") is entered into effective as of February 1, 1998, by and between N2K Inc. ("N2K"), and Sound Delivery ("Sound Delivery"), a division of Valley Record Distributors, Inc. ("VRD"). BACKGROUND A. VRD has created a database known as "Audiofile" which contains information regarding pre-recorded music and music related products ("Music Products"). B. Sound Delivery provides to various retailers direct-to-consumer order fulfillment services, pursuant to which Sound Delivery provides, packs and ships such products to the retailer's customers. C. N2K maintains on the World Wide Web an "online music store" presently known as "Music Boulevard" through which it sells Music Products to consumers. AGREEMENT Subject to the terms and conditions set forth below, the parties agree as follows: 1. Audiofile. Upon execution and delivery of this Agreement, the parties will --------- execute and deliver a license agreement substantially in the form attached hereto as Exhibit A (the "Audiofile License"), pursuant to which Sound Delivery, for the term of this Agreement, shall provide to N2K a full copy of the Audiofile database, including updates thereto, as provided in and subject to the Audiofile license. 2. Electronic Data Interchange ("EDI"). ----------------------------------- (a) Sound Delivery Obligations. Sound Delivery shall: -------------------------- (1) make commercially reasonable efforts to provide a daily status file reporting "Stock on Hand" in electronic format on the VRD bulletin board system; (2) provide and maintain reasonable access to its database, ordering and other systems and provide technical support and assistance so as to maintain -1- substantially uninterrupted, reasonable and efficient interfaces for support of the services described herein; (3) provide reasonable technical and operational support for N2K's development and operation of N2K's EDI interface for fulfillment services under this Agreement; (4) notify N2K promptly in advance of any planned changes to the EDI Reference Specifications (as defined in Section 2(b)(1) below); (5) refrain from disclosing any transaction information regarding N2K except as necessary to perform its obligations under this Agreement; and (6) retain EDI order information for at least four (4) months after receipt thereof. (b) N2K Obligations. N2K shall: --------------- (1) use commercially reasonable efforts to comply in all respects with the EDI specifications and guidelines previously provided by Sound Delivery to N2K (the "EDI Reference Specifications"), as may be amended by Sound Delivery from time to time pursuant to Section 2(a)(4) above; and (2) use commercially reasonable efforts to maintain its modes of electronic access and transmission as necessary for each party to perform its obligations under this Agreement. (c) Mutual Obligations. Each party shall use commercially reasonable ------------------ efforts to maintain the security of EDI and other transaction related information. 3. Exclusive Services. ------------------ (a) Exclusivity. Except as set forth in Sections 3(b), 5(e)(4) and 8 ----------- below, during the term of this Agreement, Sound Delivery shall be the exclusive provider to N2K of Music Products and related order fulfillment services; provided, however, that N2K may utilize third parties as sources for Music Products not available through Audiofile or otherwise through Sound Delivery, provided that N2K has given Sound Delivery 30 days notice of its intention to do so and Sound Delivery fails to make the specified Music Product available by the end of such period. (b) Limitation on Exclusivity. Notwithstanding Section 2(a) above, N2K ------------------------- may purchase up to twenty percent (20%) of its music products (based on the price paid for such purchases) during any quarter from third parties. Prior to purchasing music products from a third party under this Section 3(b), N2K first will inform -2- Sound Delivery of its intent to purchase any particular SKUs from a third party and the price to be paid for each SKU and related fulfillment services. In the event that Sound Delivery offers to sell such products to N2K at the same or lesser price than that offered by the third party, N2K shall purchase such products from Sound Delivery pursuant to the terms and conditions (other than price) of this Agreement. 4. Music Product Pricing. --------------------- (a) Music Product Prices. Sound Delivery agrees to sell and N2K agrees -------------------- to purchase Music Products at the rates set forth on Exhibit B attached hereto (the "Base Price"). Music Product prices may be updated by VRD from time to time, effective upon written notice to N2K of such changes; provided, however, that the revised Base Prices shall reflect at least an eight percent (8%) discount from VRD's then published base wholesale cost. (b) One-Time Rebate. Upon execution of this Agreement, VRD will pay or --------------- credit to N2K the sum of $250,000; provided, however, that such rebate shall be repaid to VRD in the event that N2K breaches its obligations regarding exclusivity under Section 3 above. The parties acknowledge and agree that the foregoing provision regarding repayment of the rebate is reasonable under the circumstances in existence at the time of execution of this Agreement. 5. Order Placement and Fulfillment. ------------------------------- (a) Transmission. N2K will transmit all orders for products under this ------------ Agreement in compliance with the EDI Reference Specifications. In addition, N2K will use commercially reasonable efforts to aggregate and transmit its orders to Sound Delivery in batches. (b) Fulfillment. ----------- (1) "Priority Orders" are those orders being shipped domestically via Federal Express or Airborne Express. Priority Orders received on any business day by 8:00 am Pacific Time will be shipped on the same day. On any business day that Sound Delivery receives Priority Orders from N2K at both 8:00 am Pacific Time (or earlier) and 11:00 am Pacific Time (or earlier), it will use commercially reasonable efforts to ship both batches of orders that same business day. In all other cases, Priority Orders received after 11:00 am Pacific Time will shipped the following business day. (2) "Standard Orders" are those orders being shipped domestically via carriers other than Federal Express or Airborne Express and orders being -3- shipped internationally. On any business day that Sound Delivery receives Standard Orders from N2K by 1:00 p.m. Pacific Time (or earlier), it will use commercially reasonable efforts to process the orders the same business day. Standard Orders received after 1:00 p.m. Pacific time will be deemed received the next day and Sound Delivery will use commercially reasonable efforts to ship these orders the next business day. (c) Reporting. Sound Delivery shall provide N2K with reports and --------- information regarding order status as set forth in the EDI Reference Specifications. (d) Pre-Orders. ---------- (1) N2K shall collect pre-orders until four days prior to the date that a Music Product is first to be made available to consumers (the "street date"), at which point such pre-orders will be forwarded in a separate batch to Sound Delivery on the date and time of day required by Sound Delivery. (2) Sound Delivery shall ship all pre-orders no later than street date minus one day, provided Sound Delivery has received the new release title(s) from the label/distributor of such new release(s) in time for processing. (3) If a street date is delayed, N2K will be responsible for holding the pre-orders until four (4) days before the new street date. (e) Back-Orders. ----------- (1) Sound Delivery shall ship the in-stock items of an order as set forth in this Agreement and, except as set forth in this Section 5(e), will cancel the out of stock items. (2) N2K may elect to have Sound Delivery hold an order that has one or more items out of stock until it is completely fulfilled by typing a "Y" in the ship "complete" field of the EDI inbound specifications. N2K may inform Sound Delivery from time to time of the number of days, up to a maximum of 25 days (the "Hold Period"), that Sound Delivery is to hold such "ship complete" orders before shipping the available products and canceling the out of stock products. (3) In the event that all products included in an order are out of stock, Sound Delivery will hold the order for the Hold Period before canceling the order (subject to prior cancellation of such order by N2K). (4) In the event that any ordered product remains out of stock for more than 25 consecutive days, N2K may have such order filled by a third party. -4- 6. Shipping. -------- (a) Risk of Loss. All shipments under this Agreement shall be F.O.B. ------------ VRD's shipping facility. Title and risk of loss with respect to all orders and products shipped by Sound Delivery or VRD under this Agreement shall pass to N2K or its customers upon delivery of the products to the carrier at the point of shipment. (b) Choice of Carrier. Sound Delivery will use commercially reasonable ----------------- efforts to ship the order with the requested carrier and will cancel any order for which the delivery address is not serviced by the indicated carrier. (c) Shipping Costs. Sound Delivery will invoice N2K customers at such -------------- rates as are requested by N2K. N2K will pay Sound Delivery shipping costs per the shipping tables previously provided by Sound Delivery to N2K (as amended from time to time by Sound Delivery). Sound Delivery will provide N2K written notice of shipping rate changes and the effective date of such changes. (d) Damaged and Lost Shipments. In the event of shipping damage or -------------------------- orders lost in shipment, Sound Delivery will assist in filing a claim on behalf of N2K for those orders shipped with an insured carrier, and will credit N2K with any amounts actually received by or credited to Sound Delivery in connection with such claim. 7. Fulfillment Fees. ---------------- (a) Packing and Handling Fees. N2K will pay Sound Delivery the following ------------------------- fees for each order fulfilled hereunder: All Products: $.65 per order including the first unit, plus $.25 per unit after the first unit. International Surcharge: $0.45 per order shipped to an international destination (any order shipped to any non- U.S. or U.S. territory destination). (b) Paper Inserts. N2K will pay a fee of $.03 per paper insert packed by ------------- Sound Delivery in products shipped under this Agreement. N2K shall supply required paper inserts at no cost to Sound Delivery. For purposes of this paragraph, paper inserts must be lightweight, paper-based, promotional items the same size or smaller than a standard single CD, or pre-folded to such size. (c) Merchandise Inserts. If N2K desires to include promotional inserts ------------------- -5- other than the paper inserts described in the preceding paragraph ("Merchandise Inserts") in its orders, N2K shall supply, at no cost to Sound Delivery, such Merchandise Inserts to be included in N2K orders. Sound Delivery will receive, warehouse, inventory and pack merchandise inserts for a mutually agreed upon fee after a sample of the Merchandise Insert is received and reviewed for packing and shipping requirements. (d) Bar Codes on Inserts. A unique UPC bar-code is required for each -------------------- paper or merchandise insert. N2K should purchase and apply a proprietary barcode on all inserts. At N2K's request, Sound Delivery will create and apply a barcode for a fee of $.08 per applied bar-code. (e) Custom Box Stickers. At N2K's request, Sound Delivery will attach ------------------- custom stickers to the outside of the shipping box at a cost of $.05 per sticker per order. N2K shall supply required stickers at no cost to Sound Delivery. (f) Promotional CDs. Any CDs packaged in paper sleeves that are shipped --------------- free of charge to customers at N2K's direction will be inserted into N2K shipments for a fee of $.03 per unit. The fees for any such CD packaged in a jewel box shall be as otherwise set forth in this Agreement for non-promotional merchandise. 8. Segregated Inventory. Products held in inventory on N2K's behalf and at -------------------- its request pursuant to this Section 8 are referred to in this Agreement as "Segregated Inventory." Risk of loss and ownership of Segregated Inventory shall remain with N2K or its customers at all times. N2K will pay a product management fee of $.50 per Segregated Inventory unit received by Sound Delivery in addition to any applicable fulfillment and other fees under this Agreement with respect to such products and Sound Delivery's services in connection therewith. At no time may Segregated Inventory exceed 50 SKUs or a two month supply of any particular SKU. (a) N2K Encoded Music. N2K will provide Sound Delivery with Segregated ----------------- Inventory of product owned or distributed by N2K's "Encoded Music" label for Sound Delivery to fulfill orders for such product under this Agreement. VRD will continue to purchase any Encoded Music product required for its one-stop and distribution business from N2K's designated Encoded Music distributor. N2K may audit Encoded Music Segregated Inventory up to two times per calendar year, such audit to be performed at N2K's expense, on reasonable notice and without undue disruption to Sound Delivery's or VRD's business. N2K will be credited for any inventory discrepancy found in such audit to the extent such discrepancy exceeds one percent (1%) of the aggregate Encoded Music Segregated Inventory held by VRD during the twelve (12) month period preceding -6- such audit, such credit to be at a price not to exceed VRD's cost for such product from the designated distributor of Encoded Music products. (b) Standard Product. At N2K's request, Sound Delivery will inventory a ---------------- reasonable amount of "standard product" (i.e., single or full length CDs or cassettes, or single VHS) for N2K as Segregated Inventory. (c) Direct Purchases. N2K may purchase product direct from manufacturers ---------------- which is available direct through Audiofile or otherwise through Sound Delivery and treat such product as Segregated Inventory; provided such product is "standard product" as defined above; and provided further that Direct Purchases must be purchased by N2K in minimum lots of 3,500 units per SKU and the price paid by N2K for any Direct Purchase must be at least $1.00 per disc (i.e., $2.00 for a CD containing two discs) less than the price then paid by Sound Delivery for the same product. VRD shall be entitled to purchase from N2K any Direct Purchase product that N2K would otherwise return to the applicable supplier, at the price N2K would have received from such supplier for the returns. If, from time to time, N2K desires to make a Direct Purchase of any SKU in a quantity of less than 3,500, the parties will attempt in good faith to negotiate a mutually acceptable business arrangement in connection with such purchase. (d) Bar Codes on Segregated Inventory. A UPC bar-code is required for --------------------------------- each item of Segregated Inventory. N2K should purchase and apply a proprietary bar-code on all Segregated Inventory. At N2K's request, Sound Delivery will create and apply a bar-code for a fee of $.08 per applied bar-code. 9. Co-op Advertising. In the event that N2K secures co-op advertising ----------------- commitments from manufacturers for products purchased or to be purchased by Sound Delivery or VRD under this Agreement, N2K will remit thirty percent (30%) of such advertising funds to Sound Delivery. Neither Sound Deliver nor VRD will be entitled to share in any co-op advertising commitments N2K secures from manufacturers if Sound Delivery (or VRD) does not (1) participate in the securing of such advertising, or (2) make a special purchase of product in conjunction with the securing of such co-op advertising commitment. 10. Imperfect Shipments and Product Returns. --------------------------------------- (a) Sound Delivery Obligations. Under the following circumstances, Sound -------------------------- Delivery will reship orders at no additional cost or credit N2K the appropriate invoice cost less earned discount, as applicable: (1) except as otherwise herein provided, upon the return of defective CDs and cassettes; -7- (2) in the event that items are listed on the applicable invoice and reported by customers as not received; and (3) in the event of returns due to items shipped that do not correspond to the applicable N2K order (i.e., product received by customer but not ordered for such customer. Provided, however, that with respect to orders to reship under this Section 10(a), N2K must properly include in such order the replacement order "source" code specified by Sound Delivery from time to time. (b) N2K Obligations: Under the following circumstances, N2K may elect to --------------- reorder at its own expense or return the order for a credit equal to the Base Price paid, excluding fulfillment and other fees. (1) "buyers remorse" (i.e., customer does not want item or ordered wrong item); (2) returns due to an address supplied incorrectly to Sound Delivery; and (3) returns due to refused delivery. (c) Restocking and Refurbishment Fees. Except as set forth in Section --------------------------------- 10(a) above, Music Retailer will pay a fifteen percent (15%) re-stocking fee for all returned items. In addition, Music Retailer will pay a $0.35 per unit refurbishment fee for all returned items that have been opened. (d) Restricted Returns. Sound Delivery will not accept for return: ------------------ accessories, blank tape, any vinyl Products (including, without limitation, LPs and 12" singles), Imports, Limited Editions, Products identified in Audiofile as nonreturnable, Record Club, Promotional (free product give-a-ways), Counterfeit Product and product without the original artwork or liner notes or Product with a Last Customer Return Date (as defined in the Audiofile documentation) prior to the date the returned Product is received by Sound Delivery from N2K. In addition, Sound Delivery does not accept returns of defective Sony, UNI, WEA or PGD Cds, or defective PGD cassettes, or any PGD cassettes that do not have their original wrapper intact. For purposes hereof, "defective" means Product returned with the top spine label or original manufacturer's "dog-bone" holographic sticker removed or cut in any way. (e) Rejected Returns. Non-returnable merchandise (i.e., items described ---------------- in Section 10(d) above) received by Sound Delivery will be shipped to N2K at N2K's -8- expense as rejected returns. N2K will be charged a processing fee of $1.00 per rejected return. (f) Returns Policy. Sound Delivery reserves the right, from to time, to -------------- modify its return policies, which modifications shall be effective upon receipt by N2K of written notice thereof; provided, however, that any such modification shall be applicable to Sound Delivery's similarly situated customers generally and imposed in response to modifications to the return policies of Sound Delivery's suppliers. 11. Billing and Payment. ------------------- (a) Invoices and Account Reconciliation. Sound Delivery will provide N2K ----------------------------------- with a monthly invoice and account reconciliation by the 15th of the fiscal month following the fiscal month in which the transaction occurred and are due and payable on the 25th of the such fiscal month. (b) Timely Payment Discounts. Amounts invoiced as owed by N2K to Sound ------------------------ Delivery include a two percent (2%) discount for timely payment. This discount will be revoked and charged back to N2K for invoices not paid by the due date. (c) Past-due Amounts. N2K agrees to pay interest on amounts more than 30 ---------------- days past due at the lesser of 1.5% per month or the highest rate allowed by law, such interest to accrue from the invoice date. Sound Delivery in its sole discretion may refer to an agency or an attorney for collection any past due amount, and N2K will be liable for the payment thereof and all costs and expenses incident thereto, including reasonable attorneys' fees. 12. Proprietary Rights. ------------------ (a) Confidential Information. Each party acknowledges that, in the course ------------------------ of dealings between the parties, each party may acquire information, identified as confidential, about the other party or the other party's customers, their business activities and operations, and their technical information and trade secrets, of a highly confidential and proprietary nature. The party that acquires such information will hold it in strict confidence and will not use such information except as reasonably necessary to perform its obligations under this Agreement or disclose the same to third parties except for any information generally available to or known to the public, independently developed outside the scope of this Agreement, lawfully disclosed by a third party, or required to be disclosed to a tribunal, provided that in the case of required disclosures to tribunals, the party will use commercially reasonable efforts to obtain protective orders maintaining the confidentiality of such information. -9- (b) Audiofile Database. The rights to intellectual property related to ------------------ the Audiofile database are governed by the Audiofile License. (c) No Rights to Marks. Each party is hereby granted no right in or to ------------------ the other party's Marks. "Marks" means the trademarks, service marks, trade names or other marks, registered or otherwise, used by either Sound Delivery or N2K, as applicable. 13. Termination. ----------- (a) Term. Except as set forth in Section 15(a) below, the term of this ---- Agreement begins on the date this Agreement is executed and delivered by both parties and expires two years after such date; provided, however, that this Agreement shall automatically be renewed for subsequent one year terms unless one party notifies the other at least 90 days prior to the expiration of the initial term or any subsequent one year term of its intent not to renew this Agreement upon the expiration of such term. (b) Early Termination. This Agreement may be terminated upon thirty (30) ----------------- days' written notice under the following conditions: (1) by Sound Delivery, if it discontinues fulfillment services to on-line services; (2) by N2K, if it discontinues the sale of pre-recorded music; or undergoes a change of control; (3) by N2K, if VRD, or any wholly-owned subsidiary of VRD, enters into the business of marketing music product directly to consumers through the Internet, or makes an equity investment in any direct competitor of N2K. Notwithstanding the foregoing, VRD may own 5% or less of any class of outstanding securities of an entity whose securities are listed on a national securities exchange or traded on NASDAQ. (4) by either Sound Delivery or N2K, if such party delivers to the other party a 30-day written notice of termination for a material breach of this Agreement, provided such breach was previously identified in a written notice and the other party did not cure such breach within 30 days. (5) For purposes of this Section 13(b), a "change of control" shall mean: (i) the acquisition by any person, or two or more persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) of 25% or more of the outstanding voting shares of N2K; or (ii) the failure of Larry -10- Rosen, Dave Grusin and Jon Diamond collectively to beneficially own, free and clear of liens or other encumbrances, at least 20% of the outstanding voting shares of N2K on a fully diluted basis; or (iii) a consolidation or merger or N2K with or into another corporation or corporations (in any transaction in which (A) the stockholders of N2K are to receive cash., securities or other consideration in exchange for the shares of capital stock of N2K then held by them and (B) the stockholders of N2K do not maintain control of the corporation or corporations which, survive such consolidation or merger) or the sale of all or substantially all of the assets of N2K to a third party or parties. 14. Limitation of Remedies and Exclusion of Warranties. IN NO EVENT SHALL -------------------------------------------------- EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR LOST PROFITS, OR FOR CONSEQUENTIAL, SPECIAL, EXEMPLARY, PUNITIVE, INCIDENTAL, OR INDIRECT DAMAGES, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THEIR POSSIBILITY AND REGARDLESS OF THE FORM OF ACTION. NEITHER SOUND DELIVERY NOR VRD MAKES ANY EXPRESS OR IMPLIED WARRANTIES WITH RESPECT TO PRODUCTS SOLD UNDER THIS AGREEMENT AND DISCLAIMS ANY SUCH WARRANTIES, INCLUDING ANY REAPPLIED WARRANTY OF MERCHANTABILITY AND FITNESS FOR PURPOSE. 15. GENERAL ------- (a) Annual Review. Commencing February 1999 and each January ------------- thereafter during the term of this Agreement, VRD shall review in good faith the fees set forth in this Agreement to assess whether such fees are competitive with those charged by Sound Delivery to similarly situated customers for services similar to those provided under this Agreement. In the event that VRD determines that during the preceding year it entered into any agreement for such services on terms more favorable to a customer than those provided to N2K hereunder, VRD will adjust the applicable fees charged hereunder retroactive to the date it commenced rendering services at the more favorable rate to the other customer; provided, however that as a condition to availing itself of the more favorable terms, N2K must agree to assume any additional obligations imposed upon such third party customer, including, without limitation, volume commitments, exclusivity, etc. (b) Survival. Sections 12 and 14 hereof will survive any expiration or -------- termination of this Agreement. (c) Notice. All notices, other than those related to product pricing, ------ ordering and fulfillment, shall be in writing and delivered by certified mail, postage prepaid and return receipt requested, or transmitted either by facsimile or electronic mail if confirmed by such mailing, to the addresses provided in writing from time to time by the parties. -11- (d) Entire Agreement; Amendments. This Agreement constitutes the entire ---------------------------- agreement of the parties concerning the subject matter hereof, superseding all prior proposals, negotiations and agreements concerning the subject matter of this Agreement. No representation or promise relating to and no amendment of this Agreement will be binding unless it is in writing and signed by authorized representatives of both parties. (e) Assignment. This Agreement may not be assigned or otherwise ---------- transferred by N2K to a third party without the prior written consent of Sound Delivery. Subject to the foregoing, this Agreement will bind and inure to the benefit of the successors and permitted assigns of Sound Delivery and N2K. (f) Relationship of the Parties. Sound Delivery and N2K are independent --------------------------- parties, and nothing in this Agreement shall be construed as constituting Sound Delivery and N2K as partners, joint venturers, or as creating the relationships of employer and employee, franchiser and franchisee, master and servant, principal and agent, or any other form of legal association that would impose liability on one party for the act or failure to act of the other party. (g) Governing Law; Captions; Waiver; Etc. This Agreement will be ------------------------------------ governed by and construed in accordance with the laws (excluding the laws of choice or conflicts of laws) of the State of California. The captions appearing in this Agreement are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or interpretation of this Agreement. No waiver by a party of any breach of any provision of this Agreement will constitute a waiver of any other breach of that or any other provision of this Agreement. In the event that any of the provisions contained in this Agreement are held to be unenforceable, such provisions will be narrowed (or deleted if necessary) to the minimum extent necessary to make them enforceable. (h) Attorneys' Fees. In the event of any dispute or controversy arising --------------- out of this Agreement, the prevailing party shall be entitled to reimbursement of its costs, including court and arbitration costs and reasonable attorneys' fees and expert witnesses' fees and costs. The parties hereto have executed this Agreement on January 23,1998. SOUND DELIVERY, a division of N2K INC. VALLEY RECORD DISTRIBUTORS, INC. By: [SIGNATURE ILLEGIBLE] By: [SIGNATURE ILLEGIBLE] ------------------------- ------------------------- Its: C.E.O. Its: Pres. ---------------------- ---------------------- -12- EX-10.26 16 FORM OF EMPLOYMENT AGMT. EXHIBIT 10.26 FORM OF EMPLOYMENT AGREEMENT This AGREEMENT is made effective as of ________________, 1999 by and between CDnow/N2K, Inc. (the "Company"), a corporation organized under the laws of Pennsylvania, and Jason Olim (the "Executive"). WHEREAS, the Company wishes to assure itself of the services of the Executive for the period provided in this Agreement; and WHEREAS, the Executive is willing to serve in the employ of the Company on a full-time basis for such period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES. (a) During the period of his employment hereunder, the Executive will be the Chief Executive Officer and President of the Company and a member of the Board of Directors of the Company (the "Board"). The Executive shall serve as a full time employee of the Company and shall perform such duties as the Board may from time to time reasonably direct. The Executive's responsibilities will include overall management of the Company commensurate with his position as Chief Executive Officer and President. During the period of employment hereunder, the Executive also agrees to serve, if elected, as an officer and director of any subsidiary of the Company. The Board shall propose the Executive for re-election to the Board, and shall elect the Executive to the positions specified above, throughout the period of the Executive's employment hereunder. The Executive shall report directly to the Board, and all senior executive officers will report directly to the Executive. The Executive shall not be required to reside in the area of the Company's headquarters. (b) Notwithstanding the foregoing, the Executive may maintain his interests existing as of the date of this Agreement in the entities set forth on Exhibit A hereto (the "Permitted Interests") and may accept one or more directorships in other companies and engage in various charitable and educational activities as described in Section 3(b). 2. TERM. (a) The period of the Executive's employment under this Agreement shall commence on the date hereof, and shall continue for a period of 36 full calendar months thereafter (the last day of the 36-month period or any renewal period is referred to as the "Expiration Date"). Unless written notice shall have been delivered by the party desiring to terminate this Agreement, which written notice shall have been delivered not later than 120 days prior to the Expiration Date (including the Expiration Date with respect to any renewed term), this Agreement shall be renewed for consecutive one year periods after each Expiration Date. 1-of-12 (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, and reasonable vacation periods, the Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder, including activities and services related to the organization, operation and management of the Company; provided, however, that, with the approval of the Board, as evidenced by a resolution of the Board, from time to time, the Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in the Board's judgment, will not present any conflict of interest with the Company, or materially affect the performance of the Executive's duties pursuant to this Agreement. (c) Except as set forth in Section 2(d), notwithstanding anything herein contained to the contrary: (i) the Executive's employment with the Company may be terminated by the Company or the Executive during the term of this Agreement, subject to the terms and conditions of this Agreement; and (ii) nothing in this Agreement shall mandate or prohibit a continuation of the Executive's employment following the expiration of the term of this Agreement upon such terms and conditions as the Board and the Executive may mutually agree. (d) Notwithstanding anything in this Agreement to the contrary, the Executive's employment may not be terminated except by a vote of 80% of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Executive and an opportunity for him, together with counsel, to be heard before the Board); provided that a vote of 80% of the Board shall not be required with respect to the Company's decision whether or not to renew the Agreement at the Expiration Date pursuant to Section 2(a). Any Notice of Termination must be accompanied by a copy of such resolution of the Board. 3. COMPENSATION AND REIMBURSEMENT. (a) The Company shall pay the Executive as compensation a salary of not less than $250,000 per year ("Base Salary"). Such Base Salary shall be payable in accordance with the Company's payroll practices in effect from time to time. During the period of this Agreement, the Executive's Base Salary shall be reviewed at least annually by the Compensation Committee of the Board; the first such review will be made no later than one year from the date of this Agreement. The Board may increase (but not reduce) the Executive's Base Salary. An increase shall become the "Base Salary" for purposes of this Agreement. (b) The Executive shall also receive each year an annual bonus in an amount to be determined by the Board (the "Annual Bonus"). The Executive shall be eligible for an Annual Bonus as long as the Executive remains an employee of the Company. (c) The Executive will be entitled to four weeks paid vacation annually. The Executive will be entitled to participate in or receive benefits under any employee benefit plans (including, but not limited to, retirement plans (i.e., 401(k) plans), supplemental retirement plans, pension plans, profit-sharing plans, health and accident plan, medical coverage, term life insurance plans and any other employee benefit plans or arrangements) generally made available by the Company currently or in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. 2-of-12 (d) The Executive will be entitled to incentive compensation (including without limitation stock option grants) and bonuses as provided in any plan of the Company in which the Executive is eligible to participate. Any stock options or other incentive compensation shall be granted without regard to the Executive's ownership of substantial stock of the Company. The Executive's participation in bonus plans and incentive compensation plans shall provide him with the opportunity to earn, in the aggregate, on a year-by-year basis, short- term and long-term incentive compensation at least equal to the aggregate incentive compensation that is similarly earned by any other executive officer of the Company or an affiliated company. Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (e) The Company shall pay or reimburse the Executive for all reasonable travel and other expenses incurred by the Executive in performing his obligations under this Agreement, pursuant to the Company's expense reimbursement policy generally applicable to its senior executives and key management employees. (f) In addition to the foregoing, the Company shall reimburse the Executive for all reasonable costs of travel and living expenses when the Executive travels to New York for Company business while the Company's headquarters is in New York. The expenses shall include, but not be limited to, the rental costs and related expenses of an apartment or hotel accommodations in New York satisfactory to the Executive, and other related living expenses. (g) In addition to the foregoing, if the Executive moves his principal residence to New York, the Company will reimburse the Executive for the closing costs and any financial loss on the sale of his principal residence in the Philadelphia area and all other relocation costs (other than a new residence or the cost of a mortgage on a new residence) resulting from the move to New York. All payments under this Section 3(g) and Section 3(f) above shall be accompanied by a payment from the Company that covers all taxes payable by the Executive on the reimbursement and tax payments under Sections 3(f) and 3(g). 4. PAYMENTS TO THE EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement, the provisions of this Section 4 shall apply. As used in this Agreement, an "Event of Termination" shall mean a termination of employment, other than upon Retirement (as defined in Section 6), death or Disability (as defined in Section 6), or for Cause (as defined in Section 7), for either of the following reasons: (i) the termination by the Company of the Executive's employment hereunder, including, without limitation, as a result of the Company's failure to renew this Agreement or (ii) the Executive's resignation from the Company's employ for "Good Reason." For purposes of this Agreement, "Good Reason" means a (A) failure to elect or reelect or to appoint or reappoint the Executive as Chief Executive Officer and President, (B) unless consented to by the Executive, a material change in the Executive's functions, duties, or responsibilities, which change would cause the Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 above (and any such material change shall be deemed a continuing breach of this Agreement), or (C) a material breach of this Agreement by the Company. Upon the occurrence of an event described in clause (ii) above, the Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon not less than 30 3-of-12 days prior written notice given within a reasonable period of time not to exceed, except in case of a continuing breach, three calendar months after the event giving rise to such right to terminate. The Company shall have the right to cure the event giving rise to the Executive's resignation within 30 days of receiving such notice. If the Company does not cure such event during the 30-day period, the Executive's termination under this Section 4 shall be effective immediately. (b) Upon the occurrence of an Event of Termination, the Company shall be obligated to pay the Executive (or, in the event of his subsequent death, his beneficiary or estate, as the case may be), as severance pay or liquidated damages, or both, severance compensation for the Separation Period. The Separation Period is the period beginning on the date of the Executive's termination of employment and ending on the later to occur of (i) 12 months after the date of termination or (ii) the Expiration Date described in Section 2(a) above. During the Separation Period, the Company shall pay to the Executive monthly an amount equal to the sum of (i) 1/12 of the Executive's Base Salary at the time of the occurrence of the Event of Termination plus (ii) 1/12 of the average of the Executive's Annual Bonus amount for the three prior years after the date of this Agreement (or such lesser number of years in which the Executive has been employed by the Company, in the event that the Executive has been employed by the Company for less than three years after the date of this Agreement). If a Change in Control (as defined in Section 5(a)) has occurred, the salary and bonus described in this Section 4(b) shall be paid in a lump sum payment on the date of the Executive's termination of employment, and not in monthly payments. (c) Upon the occurrence of an Event of Termination, the Company will cause to be continued for the Separation Period life, medical, dental and disability coverage (to the extent available) substantially identical to the coverage maintained by the Company for the Executive and his dependents prior to his termination; provided that, in lieu of continuing the Executive in the Company's benefit plans, the Company may pay to the Executive a lump sum cash payment equal to the cost to the Executive of maintaining such coverage for the Separation Period; and further provided that the COBRA health continuation coverage period under Section 4980B of the Code shall run concurrently with the Separation Period. (d) Upon the occurrence of an Event of Termination, the Executive will be entitled to receive vested benefits due him under or contributed by the Company on his behalf pursuant to any retirement, incentive, profit sharing, bonus, performance, disability or other employee benefit plan maintained by the Company on the Executive's behalf to the extent that such benefits are not otherwise paid to the Executive under a separate provision of this Agreement. (e) Upon the occurrence of an Event of Termination, any unexercised stock options held by the Executive shall immediately vest and become fully exercisable upon the Executive's termination of employment. 5. CHANGE IN CONTROL. (a) No benefit shall be payable under this Section 5 unless there shall have been a Change in Control of the Company as set forth below. For purposes of this Agreement, a "Change in Control" of the Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1 (a) of the current report on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") if the Company were (or is) required to file reports pursuant 4-of-12 to the Exchange Act; or (ii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) individuals who constitute the Board on the date hereof (the "Incumbent Board")cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least a majority of the directors comprising the Incumbent Board, shall be, for purposes of this clause (A), considered as though he were a member of the Incumbent Board; or (B) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Company or similar transaction occurs in which the Company is not the resulting entity, provided that a Change in Control shall not be deemed to occur under this item (B) as a result of a transaction in which the shareholders of the Company immediately prior to the transaction, will beneficially own, immediately after the transaction, directly or indirectly, shares entitling such shareholders to more than 50% of all votes to which all shareholders in the resulting entity would be entitled in the election of directors; or (C) a proxy statement shall be distributed soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Company shall be distributed; or (D) a tender offer is made for 20% or more of the voting securities of the Company then outstanding. (b) If any of the events described in Section 5(a) hereof constituting a Change in Control have occurred or the Board has determined that a Change in Control has occurred, the Executive shall be entitled to the benefits provided in paragraphs (c) and (d) of this Section 5 upon his subsequent termination of employment at any time during the term of this Agreement (regardless of whether such termination results from his dismissal or his resignation), unless such termination is because of his death, or Termination for Cause. (c) Upon the occurrence of a Change in Control followed by the Executive's termination of employment (as described above), then the Executive shall be entitled to the payments and benefits set forth in Sections 4(b), (c) and (d) hereof as if an Event of Termination had occurred. If the termination meets the requirements of an Event of Termination under Section 4(e), the provisions of Section 4(e) shall also apply. (d) Upon the occurrence of a Change in Control, one-half of any unvested, unexercised stock options held by the Executive shall immediately vest and be immediately exercisable. 6. TERMINATION UPON RETIREMENT, DEATH, AND DISABILITY. (a) Termination by the Company of the Executive based on "Retirement" shall mean termination in accordance with the Company's retirement policy or in accordance with any retirement arrangement established with the Executive's consent with respect to him. Upon termination of the Executive upon Retirement, the Executive shall be entitled to all benefits owed to the Executive under any retirement plan of the Company and other plans in which the Executive is a participant, and this Agreement shall terminate. (b) This Agreement shall automatically terminate upon the death of the Executive. 5-of-12 (c) If the Executive is Disabled (as defined below) for a continuous period of six months, the Company may terminate this Agreement upon written notice to the Executive. Upon termination of the Executive on account of Disability, the Executive shall be entitled to all benefits owed to the Executive on account of Disability under any retirement and disability plans of the Company and other plans in which the Executive is a participant. In addition, if the Executive's employment terminates on account of Disability, the Company shall, for a period of 12 months from the date of termination, provide the Executive and his dependents with life, medical and dental coverage substantially identical to the coverage maintained by the Company for the Executive and his dependents prior to his termination; provided that, in lieu of continuing the Executive in the Company's benefit plans, the Company may pay to the Executive a lump sum cash payment equal to the cost to the Company of maintaining such coverage for the 12-month period; and further provided that the COBRA health continuation coverage period under Section 4980B of the Code shall run concurrently with the 12-month period. The Executive, for purposes hereof, shall be deemed to be "Disabled" when, as a result of bodily injury or disease or mental disorder, he is so disabled that he is prevented from performing the principal duties of his employment and is under the regular care of a currently licensed physician or surgeon for such bodily injury, disease or mental disorder. 7. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of (i) any act, or failure to act, by the Executive involving fraud or willful malfeasance in the performance of his duties under this Agreement, including, but not limited to, the Executive's willful failure to serve as an employee of the Company pursuant to the terms and provisions of Section 1 of this Agreement, or (ii) the Executive's unlawful appropriation of a corporate opportunity or other breach of fiduciary duty or other obligation to the Company, or (iii) the conviction of the Executive of a felony under federal or state law. For purposes of this Section 7, no act, or the failure to act, on the Executive's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interest of the Company or its affiliates. Notwithstanding the foregoing, the Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of 80% of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any unexercised stock options held by the Executive shall become null and void effective upon the Executive's receipt of Notice of Termination for Cause, and such options shall not be exercisable by or delivered to the Executive at any time subsequent to such Termination for Cause. 8. NOTICE. (a) Any purported termination of employment by the Company or by the Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 6-of-12 (b) "Date of Termination" shall mean (A) if the Executive's employment is terminated for Disability, ten days after a Notice of Termination is given (provided that he shall not have returned to the performance of his duties on a full-time basis during such ten day period), and (B) if his employment is terminated for any other reason, the date specified in the Notice of Termination, subject to the Company's right to cure pursuant to Section 4(a). 9. CONFIDENTIALITY AND NON-COMPETITION AGREEMENT. Notwithstanding anything in this Agreement to the contrary, as a condition to the Company's obligations under this Agreement, the Executive agrees to execute and be bound by the Confidentiality and Non-Competition Agreement attached as Exhibit B hereto. 10. PARACHUTE PAYMENTS. (a) Notwithstanding the foregoing, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and that it would be economically advantageous to the Executive to reduce the payment to avoid imposition of an excise tax under Section 4999 of the Code, the aggregate present value of amounts payable or distributable to or for the benefit of the Executive pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced (but not below zero) to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be subject to the imposition of an excise tax under Section 4999 of the Code. The reduction described in this Section 10 shall only be made if the net after-tax amount to be received by the Executive after giving effect to the reduction will be greater than the net after-tax amount that would be received by the Executive without the reduction. (b) For purposes of this Section 10, "present value" shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations to be made under this Section 10 shall be made by the Company's independent public accountant immediately prior to the change of control (the "Accounting Firm"), which firm shall provide its determinations and any supporting calculations both to the Company and the Executive within ten days of the Executive's termination date. Any such determination by the Accounting Firm shall be binding upon the Company and the Executive. The Executive shall in his sole discretion determine which and how much of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 10. Within five days after the Executive's determination, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement. (c) All of the fees and expenses of the Accounting Firm in performing the determinations referred to above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm of and from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to this Paragraph, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Accounting Firm. 7-of-12 11. NO MITIGATION; NO OFFSET. In the event of any termination of the Executive's employment under the Agreement, he shall be under no obligation to seek other employment, and there shall be no offset against amounts due him under the Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. 12. SOURCE OF PAYMENTS; WITHHOLDING All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Company. The Company may use insurance proceeds especially obtained therefore as partial payment in the event of disability. All payments shall be subject to all applicable federal, state, local and other tax withholding requirements. 13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Company or any predecessor of the Company and the Executive. No provision of this Agreement shall be interpreted to mean that the Executive is subject to receiving fewer benefits than those available to him under the Company's benefit plans without reference to this Agreement. 14. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, the Executive and the Company and their respective successors and assigns. 15. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 8-of-12 16. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 17. BYLAWS OF THE COMPANY. The Company shall cause to be maintained during the period of the Executive's employment hereunder Section [___] of the Bylaws of the Company, which requires a vote of 80% of the entire Board in order to remove the Executive from the positions described in this Agreement (other than at the Expiration Date of this Agreement if the Company elects not to renew the Agreement pursuant to Section 2(a)) or otherwise to amend or modify the terms of this Agreement. 18. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 19. GOVERNING LAW. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania without regard to conflicts of laws principles, unless otherwise specified herein. 20. PAYMENT OF LEGAL FEES; INTEREST. All reasonable legal fees paid or incurred by the Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Company, if the Executive is successful pursuant to a legal judgment, arbitration or settlement. If the Company fails to make any payments owed under this Agreement when due, the unpaid amounts shall bear interest at the prime rate of PNC Bank plus 1%. 21. INDEMNIFICATION. The Company shall provide the Executive (including his heirs, executors and administrators) with coverage under a standard directors and officers liability insurance policy at its expense, or in lieu thereof, shall indemnify the Executive (and his heirs, executors and administrators) to the fullest extent permitted under Pennsylvania law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys, fees and the cost of reasonable settlements. 9-of-12 22. SUCCESSOR TO THE COMPANY. The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Agreement, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and its seal to be affixed hereunto by its duly authorized officer, and the Executive has signed this Agreement, on the ____ day of ____________, 1999. CDnow/N2K, Inc. By:_____________________________ Name: Title: ________________________________________ Jason Olim 10-of-12 EX-10.27 17 FORM OF EMPLOYMENT AGMT. EXHIBIT 10.27 FORM OF EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made effective as of ________________, 1999 by and between CDnow/N2K, Inc. (the "Company"), a corporation organized under the laws of Pennsylvania, and Jonathan V. Diamond ------------------- (the "Executive"). WHEREAS, the Company wishes to assure itself of the services of the Executive for the period provided in this Agreement; WHEREAS, the Executive is willing to serve in the employ of the Company for such period; and WHEREAS, the Executive has agreed to terminate his existing Employment Agreement dated as of February 13, 1996 with N2K Inc. (the "N2K Employment Agreement"). NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES. (a) During the period of his employment hereunder, the Executive agrees to serve as an employee of the Company, working on a substantially full- time basis for the term of this Agreement. The Executive shall perform certain duties on behalf of the Company, which duties shall include managing the Company's investors relations function, acting as a spokesman for the Company in industry and trade matters and assisting in strategic planning and development of new products and businesses for the Company, all in collaboration with the Chief Executive Officer of the Company (the CEO"), and such other duties as determined from time to time by the Board of Directors of the Company. The Executive shall perform such duties within a budget established for such activities by the Board of Directors of the Company (the "Board") in its normal budgeting process. During the period of employment hereunder, the Executive also agrees to serve, if elected, as a director of the Company and as an officer and director of any subsidiary of the Company. As of the date of this Agreement, the Board has elected the Executive as Chairman of the Board of Directors, and the Executive agrees that he will serve as Chairman of the Board of Directors as long as he is elected to that position by the Board. The Executive's office shall be located in New York, but the Executive shall not be required to reside in the New York area. (b) Notwithstanding the foregoing, the Executive may maintain his business interests existing as of the date of this Agreement in the entities set forth on Exhibit A hereto (the "Permitted Interests") and may accept one or more directorships in other companies and engage in various charitable and educational activities as described in Section 3(b). 2. TERMINATION OF N2K EMPLOYMENT AGREEMENT. 1-of-11 The Executive and the Company agree that the N2K Agreement is hereby terminated as of the date of this Agreement, and the Executive shall receive no benefits or compensation under the N2K Agreement, except that the 127,726 stock options granted to the Executive under the N2K Employment Agreement shall be fully vested as of the date of this Agreement pursuant to the provisions of the N2K Employment Agreement. 3. TERM. (a) The period of the Executive's employment under this Agreement shall commence on the date hereof, and shall continue for a period of 36 full calendar months thereafter (the last day of the 36-month period or any renewal period is referred to as the "Expiration Date"). Unless written notice shall have been delivered by the party desiring to terminate this Agreement, which written notice shall have been delivered not later than 120 days prior to the Expiration Date (including the Expiration Date with respect to any renewed term), this Agreement shall be renewed for consecutive one year periods after each Expiration Date. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, and reasonable vacation periods, the Executive shall devote the amount of time described in Section 1(a) and his attention, skill, and efforts to the faithful performance of his duties hereunder, including activities and services related to the organization, operation and management of the Company; provided, however, that, with the approval of the Board, as evidenced by a resolution of the Board, from time to time, the Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in the Board's judgment, will not present any conflict of interest with the Company. (c) Except as set forth in Section 3(d), notwithstanding anything herein contained to the contrary: (i) the Executive's employment with the Company may be terminated by the Company or the Executive during the term of this Agreement, subject to the terms and conditions of this Agreement; and (ii) nothing in this Agreement shall mandate or prohibit a continuation of the Executive's employment following the expiration of the term of this Agreement upon such terms and conditions as the Board and the Executive may mutually agree. (d) Notwithstanding anything in this Agreement to the contrary, the Executive's employment may not be terminated except by a vote of 80% of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Executive and an opportunity for him, together with counsel, to be heard before the Board); provided that a vote of 80% of the Board shall not be required with respect to the Company's decision whether or not to renew the Agreement at the Expiration Date pursuant to Section 3(a). Any Notice of Termination must be accompanied by a copy of such resolution of the Board. 4. COMPENSATION AND REIMBURSEMENT. (a) The Company shall pay the Executive compensation of not less than $250,000 for the first year of this Agreement (the "Base Compensation"). Any and all cash components of the Base Compensation (the "Base Salary") shall be payable in accordance with the Company's payroll 2-of-11 practices in effect from time to time. During the period of this Agreement, the Executive's Base Salary shall be reviewed at least annually by the Compensation Committee of the Board; the first such review will be made no later than one year from the date of this Agreement. The Board may increase (but not reduce) the Executive's Base Salary for the applicable year specified above. An increase shall become the "Base Salary" for purposes of this Agreement. (b) The Executive shall also receive each year an annual bonus in an amount to be determined by the Board (the "Annual Bonus"). The Executive shall be eligible for an Annual Bonus as long as the Executive remains an employee of the Company. (c) The Executive will be entitled to five weeks paid vacation annually. The Executive will be entitled to participate in or receive benefits under any employee benefit plans (including, but not limited to, retirement plans (i.e., 401(k) plans), supplemental retirement plans, pension plans, profit-sharing plans, health and accident plan, medical coverage, term life insurance plans and any other employee benefit plans or arrangements) generally made available by the Company currently or in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. (d) The Executive will be entitled to incentive compensation (including without limitation stock option grants) and bonuses as provided in any plan of the Company in which the Executive is eligible to participate. Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (e) The Company shall pay or reimburse the Executive for all reasonable travel and other expenses incurred by the Executive in performing his obligations under this Agreement, pursuant to the Company's expense reimbursement policy generally applicable to its senior executives and key management employees. (f) The Executive will entitled to receive an automobile allowance of $1,000 per month. 5. PAYMENTS TO THE EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement, the provisions of this Section 5 shall apply. As used in this Agreement, an "Event of Termination" shall mean a termination of employment, other than upon Retirement (as defined in Section 7), death or Disability (as defined in Section 7), or for Cause (as defined in Section 8), for either of the following reasons: (i) the termination by the Company of the Executive's employment hereunder, including, without limitation, as a result of the Company's failure to renew this Agreement or (ii) the Executive's resignation from the Company's employ because of a material breach of this Agreement by the Company. Upon the occurrence of an event described in clause (ii) above, the Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon not less than 30 days prior written notice given within a reasonable period of time not to exceed, except in case of a continuing breach, three calendar months after the 3-of-11 event giving rise to such right to terminate. The Company shall have the right to cure the event giving rise to the Executive's resignation within 30 days of receiving such notice. If the Company does not cure such event during the 30-day period, the Executive's termination under this Section 5 shall be effective immediately. (b) Upon the occurrence of an Event of Termination, the Company shall be obligated to pay the Executive (or, in the event of his subsequent death, his beneficiary or estate, as the case may be), as severance pay or liquidated damages, or both, severance compensation for the Separation Period. The Separation Period is the period beginning on the date of the Executive's termination of employment and ending on the later to occur of (i) 12 months after the date of termination or (ii) the Expiration Date described in Section 3(a) above. During the Separation Period, the Company shall pay to the Executive monthly an amount equal to the sum of (i) 1/12 of the Executive's Base Salary at the time of the occurrence of the Event of Termination plus (ii) 1/12 of the average of the Executive's Annual Bonus amount for the three prior years after the date of this Agreement (or such lesser number of years in which the Executive has been employed by the Company, in the event that the Executive has been employed by the Company for less than three years after the date of this Agreement). If a Change in Control (as defined in the Section 6(a)) has occurred, the salary and bonus described in this Section 5(b) shall be paid in a lump sum payment on the date of the Executive's termination of employment, and not in monthly payments. (c) Upon the occurrence of an Event of Termination, the Company will cause to be continued for the Separation Period life, medical, dental and disability coverage (to the extent available) substantially identical to the coverage maintained by the Company for the Executive and his dependents prior to his termination; provided that, in lieu of continuing the Executive in the Company's benefit plans, the Company may pay to the Executive a lump sum cash payment equal to the cost to the Executive of maintaining such coverage for the Separation Period; and further provided that the COBRA health continuation coverage period under Section 4980B of the Code shall run concurrently with the Separation Period. (d) Upon the occurrence of an Event of Termination, the Executive will be entitled to receive vested benefits due him under or contributed by the Company on his behalf pursuant to any retirement, incentive, profit sharing, bonus, performance, disability or other employee benefit plan maintained by the Company on the Executive's behalf to the extent that such benefits are not otherwise paid to the Executive under a separate provision of this Agreement. (e) Upon the occurrence of an Event of Termination, any unexercised stock options held by the Executive shall immediately vest and become fully exercisable upon the Executive's termination of employment. 6. CHANGE IN CONTROL. (a) No benefit shall be payable under this Section 6 unless there shall have been a Change in Control of the Company as set forth below. For purposes of this Agreement, a "Change in Control" of the Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1 (a) of the current report on Form 8-K pursuant to Section 13 or 15(d) of the Securities 4-of-11 Exchange Act of 1934 (the "Exchange Act") if the Company were (or is) required to file reports pursuant to the Exchange Act; or (ii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) individuals who constitute the Board on the date hereof (the "Incumbent Board")cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least a majority of the directors comprising the Incumbent Board, shall be, for purposes of this clause (A), considered as though he were a member of the Incumbent Board; or (B) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Company or similar transaction occurs in which the Company is not the resulting entity, provided that a Change in Control shall not be deemed to occur under this item (B) as a result of a transaction in which the shareholders of the Company immediately prior to the transaction, will beneficially own, immediately after the transaction, directly or indirectly, shares entitling such shareholders to more than 50% of all votes to which all shareholders in the resulting entity would be entitled in the election of directors; or (C) a proxy statement shall be distributed soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Company shall be distributed; or (D) a tender offer is made for 20% or more of the voting securities of the Company then outstanding. (b) If any of the events described in Section 6(a) hereof constituting a Change in Control have occurred or the Board has determined that a Change in Control has occurred, the Executive shall be entitled to the benefits provided in paragraph (c) of this Section 6 upon his subsequent termination of employment at any time during the term of this Agreement (regardless of whether such termination results from his dismissal or his resignation), unless such termination is because of his death, or Termination for Cause. (c) Upon the occurrence of a Change in Control followed by the Executive's termination of employment (as described above), then the Executive shall be entitled to the payments and benefits set forth in Sections 5(b), (c), (d) and (e) hereof as if an Event of Termination had occurred. 7. TERMINATION UPON RETIREMENT, DEATH, AND DISABILITY. (a) Termination by the Company of the Executive based on "Retirement" shall mean termination in accordance with the Company's retirement policy or in accordance with any retirement arrangement established with the Executive's consent with respect to him. Upon termination of the Executive upon Retirement, the Executive shall be entitled to all benefits owed to the Executive under any retirement plan of the Company and other plans in which the Executive is a participant, and this Agreement shall terminate. (b) This Agreement shall automatically terminate upon the death of the Executive. (c) If the Executive is Disabled (as defined below) for a continuous period of six months, the Company may terminate this Agreement upon written notice to the Executive. Upon termination of the Executive on account of Disability, the Executive shall be entitled to all benefits owed 5-of-11 to the Executive on account of Disability under any retirement and disability plans of the Company and other plans in which the Executive is a participant. In addition, if the Executive's employment terminates on account of Disability, the Company shall, for a period of 12 months from the date of termination, provide the Executive and his dependents with life, medical and dental coverage substantially identical to the coverage maintained by the Company for the Executive and his dependents prior to his termination; provided that, in lieu of continuing the Executive in the Company's benefit plans, the Company may pay to the Executive a lump sum cash payment equal to the cost to the Executive of maintaining such coverage for the 12-month period; and further provided that the COBRA health continuation coverage period under Section 4980B of the Code shall run concurrently with the 12-month period. The Executive, for purposes hereof, shall be deemed to be "Disabled" when, as a result of bodily injury or disease or mental disorder, he is so disabled that he is prevented from performing the principal duties of his employment and is under the regular care of a currently licensed physician or surgeon for such bodily injury, disease or mental disorder. 8. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of (i) any act, or failure to act, by the Executive involving fraud or willful malfeasance in the performance of his duties under this Agreement, including, but not limited to, the Executive's willful failure to serve as an employee of the Company pursuant to the terms and provisions of Section 1 of this Agreement, or (ii) the Executive's unlawful appropriation of a corporate opportunity or other breach of fiduciary duty or other obligation to the Company, or (iii) the conviction of the Executive of a felony under federal or state law. For purposes of this Section 8, no act, or the failure to act, on the Executive's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interest of the Company or its affiliates. Notwithstanding the foregoing, the Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to the Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any unexercised stock options held by the Executive shall become null and void effective upon the Executive's receipt of Notice of Termination for Cause, and such options shall not be exercisable by or delivered to the Executive at any time subsequent to such Termination for Cause. 9. NOTICE. (a) Any purported termination of employment by the Company or by the Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 6-of-11 (b) "Date of Termination" shall mean (A) if the Executive's employment is terminated for Disability, ten days after a Notice of Termination is given (provided that he shall not have returned to the performance of his duties on a full-time basis during such ten day period), and (B) if his employment is terminated for any other reason, the date specified in the Notice of Termination, subject to the Company's right to cure pursuant to Section 5(a). 10. CONFIDENTIALITY AND NON-COMPETITION AGREEMENT. Notwithstanding anything in this Agreement to the contrary, as a condition to the Company's obligations under this Agreement, the Executive agrees to execute and be bound by the Confidentiality and Non-Competition Agreement attached as Exhibit B hereto. 11. PARACHUTE PAYMENTS. (a) Notwithstanding the foregoing, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and that it would be economically advantageous to the Executive to reduce the payment to avoid an excise tax under Section 4999 of the Code, the aggregate present value of amounts payable or distributable to or for the benefit of the Executive pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced (but not below zero) to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be subject to the imposition of an excise tax under Section 4999 of the Code. The reduction described in this Section 11 shall only be made if the net after-tax amount to be received by the Executive after giving effect to the reduction will be greater than the net after-tax amount that would be received by the Executive without the reduction. (b) For purposes of this Section 11, "present value" shall be determined in accordance with Section 280G(d)(4) of the Code. All determinations to be made under this Section 11 shall be made by the Company's independent public accountant immediately prior to the change of control (the "Accounting Firm"), which firm shall provide its determinations and. any supporting calculations both to the Company and the Executive within ten days of the Executive's termination date. Any such determination by the Accounting Firm shall be binding upon the Company and the Executive. The Executive shall in his sole discretion determine which and how much of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 11. Within five days after the Executive's determination, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement. (c) All of the fees and expenses of the Accounting Firm in performing the determinations referred to above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm of and from any and all claims, damages and expenses 7-of-11 resulting from or relating to its determinations pursuant to this Paragraph, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Accounting Firm. 12. NO MITIGATION; NO OFFSET. In the event of any termination of the Executive's employment under the Agreement, he shall be under no obligation to seek other employment, and there shall be no offset against amounts due him under the Agreement on account of any remuneration attributable to any subsequent employment that he may obtain. 13. SOURCE OF PAYMENTS; WITHHOLDING. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Company. The Company may use insurance proceeds especially obtained therefore as partial payment in the event of disability. All payments shall be subject to all applicable federal, state, local and other tax withholding requirements. 14. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Company or any predecessor of the Company and the Executive (including without limitation the N2K Agreement as described in Section 2). No provision of this Agreement shall be interpreted to mean that the Executive is subject to receiving fewer benefits than those available to him under the Company's benefit plans without reference to this Agreement. 15. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, the Executive and the Company and their respective successors and assigns. 16. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as 8-of-11 to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 17. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 18. BYLAWS OF THE COMPANY. The Company shall cause to be maintained during the period of the Executive's employment hereunder Section [___] of the Bylaws of the Company, which requires a vote of 80% of the entire Board in order to remove the Executive from the positions described in this Agreement (other than at the Expiration Date of this Agreement if the Company elects not to renew the Agreement pursuant to Section 3(a)) or otherwise to amend or modify the terms of this Agreement. 19. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 20. GOVERNING LAW. This Agreement shall be governed by the laws of the Commonwealth of Pennsylvania without regard to conflicts of laws principles, unless otherwise specified herein. 21. PAYMENT OF LEGAL FEES; INTEREST. All reasonable legal fees paid or incurred by the Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Company, if the Executive is successful pursuant to a legal judgment, arbitration or settlement. If the Company fails to make any payments owed under this Agreement when due, the unpaid amounts shall bear interest at the prime rate of PNC Bank plus 1%. 22. INDEMNIFICATION. The Company shall provide the Executive (including his heirs, executors and administrators) with coverage under a standard directors and officers liability insurance policy at its expense, or in lieu thereof, shall indemnify the Executive (and his heirs, executors and administrators) to the fullest extent permitted under Pennsylvania law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and 9-of-11 liabilities to include, but not be limited to, judgments, court costs and attorneys, fees and the cost of reasonable settlements. 23. SUCCESSOR TO THE COMPANY. The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Agreement, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and its seal to be affixed hereunto by its duly authorized officer, and the Executive has signed this Agreement, on the ____ day of ____________, 1999. CDnow/N2K, Inc. By:_____________________________ Name: Title: ____________________________________ Jonathan V. Diamond 10-of-11 EX-10.28 18 WARRANT AGREEMENT EXHIBIT 10.28 WARRANT AGREEMENT This WARRANT AGREEMENT dated as of June 23, 1998 (the "Agreement"), is between N2K INC., a Delaware corporation (the "Issuer") and DISNEY ONLINE, a California corporation ("Disney"). R E C I T A L S: - - - - - - - - WHEREAS, Disney wishes to acquire from the Issuer, and the Issuer proposes to issue to Disney, 12,500 warrants as hereinafter described (each a "Warrant," and collectively, the "Warrants"). Each such Warrant will entitle Disney or any of its assigns (the "Warrant Holder," or "Holder"), subject to the terms and conditions set forth herein, to purchase from the Issuer one share of its Common Stock, $.001 par value (the "Common Stock"). NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth and for other good and valuable consideration, the parties hereto agree as follows: CERTAIN DEFINITIONS. As used in this Agreement, unless the context otherwise - ------------------- requires: "Affiliate" shall mean, with respect to a specified Person, any other --------- Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" shall have the meaning ascribed thereto in the --------- introduction to the Recitals. "Appraised Value" shall mean the fair market value of all equity --------------- capital, including all outstanding Common Stock and all options, warrants and rights to acquire Common Stock or convert into Common Stock, as determined by a written appraisal (the "Appraisal") prepared by an appraiser acceptable to the --------- Issuer and the Warrant Holder. "Fair market value" is defined for this purpose as the price in a single transaction determined on a going-concern basis that would be agreed upon by the most likely hypothetical buyer for 100% of the equity capital of the Issuer. In the event that the Issuer and Warrant Holder cannot, in good faith, agree upon an appraiser within 15 Business Days after the need for an appraiser arises, then the Issuer, on the one hand, and said holders, on the other hand, shall each immediately select an appraiser, the two appraisers so selected shall immediately select a third appraiser. The third appraiser shall be directed to prepare the Appraisal as promptly as practicable and the term Appraised Value shall mean the appraised value set forth in the Appraisal prepared in accordance with this definition. "Business Day" shall mean any day on which commercial banks are not ------------ authorized or required to close in New York, New York. "Commission" shall mean the Securities and Exchange Commission or any ---------- other similar or successor agency of the United States government administering the Securities Act. "Common Stock" shall have the meaning ascribed thereto in the ------------ Recitals, subject to adjustment pursuant to Section 3. "Convertible Securities" shall mean any securities which are ---------------------- convertible into or exchangeable for Common Stock (whether or not immediately exercisable, convertible or exchangeable). "Current Market Price" per share of Common Stock for the purposes of -------------------- any provision of this Warrant Agreement at the date herein specified, shall be deemed to be the price determined pursuant to the first applicable of the following methods. (i) If the Common Stock is traded on a national securities exchange or is traded in the over-the-counter market, the Current Market Price per share of Common Stock shall be deemed to be the average of the Daily Market Prices for 10 Trading Days immediately preceding the date of determination or, if the Common Stock has been traded for less than 10 Trading Days, then the average of the Daily Market Prices for all of the Trading Days before such date for which Daily Market Prices are available. (ii) If the Current Market Price per share of Common Stock cannot be ascertained by the method set forth in paragraph (i) immediately above, the Current Market Price per share of outstanding Common Stock shall be deemed to be the price equal to the quotient determined by dividing the Appraised Value by the number of shares (including any fractional shares) of Common Stock outstanding on a fully-diluted basis in accordance with GAAP. "Daily Market Price", for any date, means (i) if the Common Stock is ------------------ traded on a national securities exchange, its last sale price on such date, or if no sale takes place on such day, the average of the closing bid and asked prices on such date or (ii) if the principal market for the Common Stock is the over-the-counter market and the Common Stock is quoted on the Nasdaq system, the last sale price on such date as reported by Nasdaq, or, if the last sale price is not so reported by Nasdaq, the closing bid quotation on such date as reported by Nasdaq. "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended, and any similar or successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Exercise Price" shall have the meaning ascribed thereto in Section -------------- 2.B. 2 "GAAP" shall mean generally accepted accounting principles, ---- consistently applied. "Issue Date" shall mean the day, month and year of the initial ---------- issuance of the Warrants. "Payment Shares" shall have the meaning ascribed thereto in Section -------------- 2.C. "Person" shall mean a corporation, an association, a trust, a limited ------ liability company, a partnership, a joint venture, an organization, a business, an individual, a government or political subdivision thereof or a governmental body. "Restricted Certificate" shall mean a certificate for Common Stock or ---------------------- the Warrants bearing the restrictive legend set forth in Section 8. "Restricted Securities" shall mean Restricted Stock and the Restricted --------------------- Warrants. "Restricted Stock" shall mean Warrant Stock evidenced by a Restricted ---------------- Certificate. "Restricted Warrants" shall mean the Warrants evidenced by a ------------------- Restricted Certificate. "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. "Trading Day" shall mean any day on which trading occurs on the ----------- principal securities exchange or market upon which the Common Stock is listed or traded, if any. "Warrants" shall have the meaning ascribed thereto in the Recitals. -------- "Warrant Certificate" shall have the meaning ascribed thereto in ------------------- Section 2.A. "Warrant Holder" shall have the meaning ascribed thereto in the -------------- Recitals. "Warrant Stock" shall mean the shares of Common Stock purchased or ------------- purchasable by the Warrant Holder upon the exercise of Warrants, including any other capital stock into which such Common Stock may be converted or reclassified or that may be issued in respect of, in exchange for, or in substitution of, such Common Stock by reason of any stock splits, stock dividends, distributions, mergers, consolidations or otherwise. 3 ISSUANCE, FORM AND EXERCISE OF THE WARRANTS. - ------------------------------------------- Issuance and Form of Warrants. On the date hereof, the Issuer, upon the terms - ----------------------------- and subject to the conditions hereinafter set forth, will issue and deliver a certificate representing twelve thousand five hundred (12,500) warrants to purchase Common Stock (the "Warrant Certificate"). Exercise Price. The Warrant Certificate shall entitle the Warrant Holder, - -------------- subject to the provisions of this Agreement, to purchase one share of Common Stock for each Warrant represented thereby, in each case at a purchase price per share (the "Exercise Price") equal to the Daily Market Price on the date hereof. The Exercise Price may be adjusted pursuant to Section 3 hereof. As used throughout this Agreement, Exercise Price shall mean as adjusted. Manner of Exercise; Other Provisions Regarding Exercise. In order to exercise - ------------------------------------------------------- the Warrants, in whole or in part, the Warrant Holder shall deliver to the Issuer at its office maintained for such purpose pursuant to Section 13(i) a written notice of such Holder's election to exercise Warrants, which notice shall be in the Form of Election to Purchase attached to the Warrant Certificate, and (ii) aggregate payment in full of the Exercise Price then in effect for each share of Warrant Stock then being exercised. Upon delivery thereof, the Issuer shall cause to be executed and delivered to such Holder within five Business Days a certificate or certificates representing the aggregate number of fully-paid and nonassessable shares of Common Stock issuable upon such exercise. Payment of the Exercise Price then in effect may be made, at the option of the Warrant Holder, by certified or bank cashier's check or wire transfer. In addition, the Warrant Holder shall have the right, at its election, in lieu of delivering the Exercise Price then in effect in cash, to instruct the Issuer in the Form of Election to Purchase to retain in payment of the Exercise Price then in effect, a number of shares of Common Stock (the "Payment Shares") equal to the quotient of the aggregate Exercise Price then in effect of the shares as to which Warrants are then being exercised, including, but not limited to, the Payment Shares, divided by the Current Market Price determined immediately prior to the date of exercise and to deduct the number of Payment Shares from the shares to be delivered to the Warrant Holder. The stock certificate or certificates for Warrant Stock so delivered shall be in such denominations as may be specified in said notice and shall be registered in the name of the Warrant Holder or such other name or names as shall be designated in said notice. Such certificate or certificates shall be deemed to have been issued and such Holder or any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares, including to the extent permitted by law the right to vote such shares or to consent or to receive notice as a stockholder, immediately prior to the close of Business on the Business day on which said notice is delivered to the Issuer. If the Warrants shall have been exercised only in part, the Issuer shall, within five Business Days of delivery of said certificate or certificates, deliver to Warrant Holder a new Warrant Certificate dated the date it is issued, evidencing the rights of such Holder to purchase the remaining Common Stock called for by such Warrants, which new Warrant Certificate shall in all other respects be identical with the original Warrant Certificate, or, at the request of such Holder, appropriate notation may be made on the Warrant Certificate exercised in part and shall be returned to such Holder. 4 The Issuer will not close its books against the transfer of Warrants or of any share of Warrant Stock in any manner which interferes with the timely exercise of the Warrants. The Issuer shall issue certificates for fractional shares of stock upon any exercise of Warrants whenever, in order to implement the provision of the Warrants, the issuance of such fractional shares is required, or, at the Issuer's option, the Issuer may promptly pay cash in lieu of fractional shares determined by the Issuer by multiplying such fraction by the Current Market Price on the date immediately prior to the date of exercise. 5 Vesting of Warrant. The Warrants shall be exercisable, in whole or in part, - ------------------ unless earlier vested pursuant to Section 2.E or terminated pursuant to this Section 2.D, as follows: 50% of the total number of Warrants are exercisable on the thirteenth (13) month anniversary of the date hereof and the remaining 50% vest and become exercisable on the twentieth (20) month anniversary of the date hereof. The Warrants shall terminate on the earlier of (1) the termination or expiration of the Disney/N2K Affiliate Marketing Agreement between an Affiliate of Disney and Issuer and (2) the tenth anniversary of the date hereof; provided, -------- that any Warrants vested prior to the date referenced in (1) above shall not expire until the date referenced in (2) above. Acceleration of Vesting. Notwithstanding the foregoing provisions of this - ----------------------- Section 2, the Warrants shall become immediately exercisable: immediately prior to an assignment by the Issuer for the benefit of creditors or commencement of a voluntary case under the Federal Bankruptcy Code, or an entering into of an order for relief in an involuntary case under the Federal Bankruptcy Code, or adoption by the Issuer of a plan of liquidation or dissolution; or five business days prior to the proposed consummation with respect to the Issuer of a "Rule 13c-3 transaction" as defined in Rule 13c-3 under the Exchange Act (or, if necessary, such earlier date as the Issuer shall determine in good faith to be required in order for the Holder to be able to participate in such transaction), it being agreed that the Warrant Holder will receive actual notice of the 13c-3 Statement filed with the Commission on the date filed and actual notice of the date of acceleration hereunder no later than such date, and that if such transaction is not consummated, and the Warrants have been exercised, then the Warrant Holder (and to the extent that the Warrants would not but for this paragraph be exercisable, the Issuer) shall be entitled to declare the exercise null and void and the Warrant Holder shall, upon return of the Warrant Stock to the Issuer, be entitled to receive a refund of the Exercise Price and warrants identical to the Warrants, and such acceleration shall become void ab initio, and the Warrants shall (as to any -- ------ remaining unexercised portion thereof) remain in full force and effect in accordance with the terms hereof; or immediately upon the closing of a transaction described in Section 3.E (Merger or Consolidation) hereof. ADJUSTMENTS. - ----------- Adjustments To Exercise Price. The Exercise Price, the number of shares of - ----------------------------- Common Stock issuable upon exercise of each Warrant and the securities and other assets due to the Warrant Holder upon exercise of Warrants shall be subject to adjustment as set forth below from time to time as follows: Stock Dividends; Stock Splits; Reverse Stock Splits; Reclassifications. In case - ---------------------------------------------------------------------- the Issuer shall (i) pay a dividend or other distribution on its Common Stock in shares of any class or series of capital stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, the number of shares of Common Stock purchasable upon exercise of each Warrant immediately prior to the record date for such dividend or distribution or the effective date of such subdivision or combination shall be adjusted to that the Warrant Holder shall thereafter be entitled to receive for each Warrant the kind and number of shares of Common Stock that the Warrant Holder would have owned or have been 6 entitled to receive after the happening of any of the events described above, had the Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this Section 3(A)(1) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. Rights; Options; Warrants. If the Issuer fixes a record date for the - ------------------------- distribution of any rights, options or warrants to all holders of its Common Stock entitling such holders to subscribe for or purchase shares of Common Stock (or Convertible Securities), whether or not immediately exercisable, the number of shares of Common Stock such holders would be entitled to subscribe for or purchase upon exercise of each Warrant immediately prior to the record date shall be adjusted by subtracting from such number of shares the value of such rights, options or warrants to the Warrant Holder as if the Warrants had been exercised immediately prior to the record date for such distribution; provided, -------- that, if, after giving effect to such adjustment, the number of shares of Common - ---- Stock purchasable upon exercise of each Warrant would be less than the par value of the Common Stock, the Issuer shall distribute such rights, options or warrants to the holder as if the holder had exercised the Warrant and the shares of Common Stock had been issued in the name of the holder immediately prior to such record date for such distribution. An adjustment made pursuant to this Section 3(A)(2) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. Distributions of Debt, Assets, Subscription Rights or Convertible Securities. - ---------------------------------------------------------------------------- In case the Issuer shall fix a record date for the making of a distribution to all holders of shares of Common Stock of evidences of its indebtedness, assets, cash dividends or distributions (excluding dividends or distributions referred to in Sections 3(a)(i) or (ii) above and excluding distributions in connection with the dissolution, liquidation or winding up of the Issuer) or securities (excluding those referred to in Section 3(a)(i) or (ii) above), then, in each case, the number of shares of Common Stock purchasable after such record date for such dividend or distribution upon the exercise of each Warrant shall be determined by multiplying the number of shares of Common Stock purchasable upon the exercise of such Warrant immediately prior to such record date by a fraction, the numerator of which shall be the Current Market Price per share of Common Stock immediately prior to the record date for such dividend or distribution and the denominator of which shall be the Current Market Price per share of Common Stock immediately prior to the record date for such distribution less the then fair value (as determined in good faith by the Board of Directors of the Issuer) of the portion of the assets, evident of indebtedness, cash dividends or distributions or securities so distributed applicable to one share of Common Stock. An adjustment made pursuant to this Section 3(a)(iii) shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination or shareholders entitled to receive such distribution. Issuance of Common Stock at Less Than Public Market Price. If the Issuer issues - --------------------------------------------------------- shares of Common Stock (or rights, options, warrants or Convertible Securities containing the right to subscribe for or purchase shares of Common Stock) ("Additional Shares"), for a consideration per share less than the public market price per share of Common Stock on the date immediately preceding the date the Issuer issues such additional shares, the Exercise Price shall be adjusted (calculated to the nearest $.0001) so that it shall equal the 7 price determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be (i) an amount equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to such sale and issuance plus (B) the number of shares of Common Stock which the aggregate consideration received (determined as provided below) for such sale or issuance would purchase at such the public market price per share, and the denominator of which shall be (ii) the total number of shares of Common Stock outstanding immediately after such sale or issuance. Such adjustment shall be made successively whenever such an issuance is made. The number of shares of Common Stock purchasable upon the exercise of each Warrant shall also be adjusted and shall be that number determined by multiplying the number of shares of Common Stock issuable upon exercise immediately prior to such adjustment by a fraction, the numerator of which is the Exercise Price in effect immediately prior to such adjustment and the denominator is the Exercise Price as so adjusted. For the purposes of such adjustments, the shares of Common Stock which the holder of any such rights, options, warrants or convertible or exchangeable securities shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of the sale and issuance of the rights, warrants or convertible or exchangeable securities and the consideration received by the Issuer therefor shall be deemed to be the consideration received by the Issuer for such rights, options, warrants or convertible or exchangeable securities, plus the consideration or premiums stated in such rights, options, warrants, or convertible or exchangeable securities to be paid for the shares of Common Stock covered thereby. In case the Issuer shall sell and issue shares of Common Stock or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock for a consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the "price per share or Common Stock" and the "consideration received" by the Issuer for purposes of the first sentence of this Section 3(A)(4), the Board of Directors of the Issuer shall determine, in good faith, the fair value of said property. There shall be no adjustment of the Exercise Price in respect of the Common Stock pursuant to this Section 3(A)(4) if the amount of such adjustment shall be less than $0.0001 per share of Common Stock; provided, however, that any adjustments which by reason of this -------- ------- proviso are not required to be made shall be carried forward and taken into account in any subsequent adjustment. This Section 3(A)(4) does not apply to (i) any of the transactions described in Section 3(A)(1), (2) or (3), (ii) the conversion or exchange of securities convertible or exchangeable for Common Stock covered by this Section 3(A)(4), (iii) Additional Shares issued in a bona fide public offering pursuant to a firm commitment underwriting or issued in exchange for equity or assets in an acquisition or investment in any third party, (iv) the exercise of any options or issuance of any shares under any options or purchase or other rights that are outstanding on or prior to the date hereof and that were issued pursuant to any of the Issuer's employees stock option, appreciation or purchase rights plans, (v) the exercise of any options or purchase or other rights or the issuance of any shares under any options or rights that are granted after the date hereof, whether in accordance with the terms of any of the Issuer's employee stock option, appreciation or purchase right plans or otherwise, so long as the exercise price of 8 any such option, Warrant, subscription or purchase right is not less than the Daily Market Price on the date that such grant is approved by the Issuer's Board of Directors or a duly authorized committee thereof or, if later, the date that such exercise price is established, (vi) the exercise of any other options, Warrants or other subscription or purchase rights outstanding on or prior to the date hereof, including, without limitation, this Warrant, (vii) the exercise of any conversion or exchange rights outstanding on or prior to the date hereof issued by the Issuer, or (viii) the exercise of any conversion or exchange rights issued by the Issuer after the date hereof, so long as the conversion or exchange price is not less than the Daily Market Price on the date that such issuance is approved by the Issuer's Board of Directors or a duly authorized committee thereof or, if later, the date that such conversion or exchange price is established. 9 Expiration of Rights, Options and Conversion Privileges. Upon the expiration of - ------------------------------------------------------- any rights, options, warrants or conversion or exchange privileges, the issuance of which caused an adjustment pursuant to Section 3(A)(4) hereof, if any thereof shall not have been exercised, the Exercise Price and the number of shares of Common Stock purchasable upon the exercise of each Warrant shall, upon such expiration, be readjusted and shall thereafter, upon any future exercise, be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) as if (A) the only shares of Common Stock so issued were the shares of Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion or exchange rights and (B) such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Issuer upon such exercise plus the consideration, if any, actually received by the Issuer for issuance, sale or grant of all such rights, options, warrants or conversion of exchange rights whether or not exercised; provided, further, that no such -------- ------- readjustment shall have the effect of increasing the Exercise Price by an amount, or decreasing the number of shares purchasable upon exercise of each Warrant by a number, in excess of the amount or number of the adjustment initially made in respect to the issuance, sale or grant of such rights, options, warrants or conversion or exchange rights. Certain Other Events. If any event occurs as to which the foregoing provisions - -------------------- of this Section 3 are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the Board of Directors of the Issuer fairly protect the purchase rights of the Warrants in accordance with the essential intent and principles of such provisions, then such Board shall make such adjustments in the applicable of such provisions, in accordance with such essential intent and principles, as shall be reasonably necessary, in the good faith opinion of such Board, to protect such purchase rights as aforesaid, but in no event shall any such adjustment have the effect of increasing the Exercise Price or decreasing the number of shares of Common Stock subject to purchase upon exercise of the Warrants. When Adjustments To Be Made. The adjustments required by the preceding - --------------------------- subsections of this Section 3 shall be made whenever and as often as any specified event requiring an adjustment shall occur. Adjustments shall become effective immediately after the record date for the determination of stockholders entitled to receive an issuance or distribution, or if there is no record date, then the date of issuance or distribution described in this Section 3. Such adjustments shall be made successively whenever any event specified in this Section 3 shall occur. Notice of Adjustment. Whenever the Exercise Price or number of shares subject - -------------------- to each Warrant shall be adjusted pursuant to this Section 3, the Issuer shall forthwith obtain a certificate signed by the principal financial officer of the Issuer setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated and specifying the Exercise Price and the number of shares to each Warrant, after giving effect to such adjustment or change. Not less than 30 nor more than 90 days prior to the effective date or 15 days prior to the record date, as the case may be, of any action which requires or might require an adjustment or readjustment pursuant to this Section 3, the Issuer shall cause a signed copy of such certificate to be delivered to the Warrant Holder. The Issuer shall keep at its office or agency, maintained for the purpose pursuant to Section 13, copies of all such certificates and cause the same 10 to be available for inspection at said office during normal business hours by the Warrant Holder or any prospective purchaser of Warrants designated by the Warrant Holder. Upon the reasonable request of the Holder, Issuer shall cause independent public accountants of recognized national standing selected by the Issuer (which may be the regular auditors of the Issuer) to verify such computation and prepare a report setting forth such adjustment or readjustment and showing in reasonable deal the method of calculation thereof and the facts upon which such adjustment or readjustment is based, including a statement of (i) the number of shares of Common Stock outstanding or deemed to be outstanding and (ii) the Exercise Price and number of shares subject to the Warrants in effect immediately prior to such adjustment or readjustment and as adjusted and readjusted (if required by this Section 4) on account thereof. The Issuer will forthwith mail a copy of each such report to the Holder. The Issuer will also keep copies of all such reports at its principle office, and will cause the same to be available for inspection at such office during normal business hours by any holder of the Warrant or any prospective purchaser of a Warrant designated in writing by the holder thereof. Fractional Interests. In computing adjustments under this Section, fractional - -------------------- interests in Common Stock shall be taken into account to the nearest one- thousandth of a share. Merger or Consolidation. - ----------------------- Subject to the provisions of Subsection (2) below of this Section 3.E., in case of the consolidation of the Issuer with, or merger of the Issuer with or into, or of the sale of all or substantially all of the properties and assets of the Issuer to, any Person and in connection therewith consideration is payable to holders of Common Stock (or other securities or property purchasable upon exercise of the Warrants) in exchange therefor, the Warrants shall remain subject to the terms and conditions set forth in this Agreement and each Warrant shall, after such consolidation, merger or sale, entitle the Holder to receive upon exercise the number of shares of capital stock or other securities or property (including cash) of Holdings, or of such Person resulting from such consolidation or surviving such merger or to which such sale shall be made, as the case may be, that would have been distributable or payable on account of the shares of Common Stock (or other securities or properties purchasable upon exercise of the Warrants) if such Holder's Warrants had been exercised immediately prior to such merger, consolidation or sale (or, if applicable, the record date therefor); and in any such case the provisions of this Agreement with respect to the rights an interest thereafter of the Holders of Warrants shall be appropriately adjusted by the Board of Directors of the Issuer in good faith so as to be applicable, as nearly as may be reasonably be, to any shares or stock or other securities or any property thereafter deliverable on the exercise of the Warrants. Notwithstanding the foregoing, (x) if the Issuer mergers or consolidates with, or sells all or substantially all of its property and assets to, another Person and consideration is payable to holders of Common Stock in exchange for their Common Stock in connection with such merger, consolidation or sale which consists solely of cash, or (y) in the event of the dissolution, liquidation or winding up of the Issuer, then the Holders of Warrants shall be entitled to receive distributions on the date of such event on an equal basis with holders of Common Stock (or other securities issuable upon exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event, less the Exercise Price. Upon receipt of such payment, if any, the right of a Holder shall terminate and cease and such Holder's Warrants shall expire. 11 The foregoing provisions of Section 3.E shall similarly apply to successive mergers, consolidations or dispositions of assets as described in this Section 3.E. Notice to Holders of Corporate Action. In addition to other requirements of - ------------------------------------- notice separately provided for in this Agreement, in case at any time after the date hereof there shall be (i) the taking by the Issuer 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 or other distribution on such securities, or (ii) a voluntary or involuntary dissolution, total liquidation or winding up of the Issuer, then the Issuer shall cause to be mailed (by first- class mail, postage prepaid) to the Warrant Holder at such Warrant Holder's address as shown on the Warrant transfer books of the Issuer, at the earliest practicable time (and, in any event, not less than ten (10) calendar days before any date set for definitive action), notice of the date on which such dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of the shares of record of Common Stock shall be entitled to exchange their shares for securities, money or other property deliverable upon such dissolution, liquidation or winding up, as the case may be, on which date the Warrant Holder shall be entitled to receive upon surrender of the Warrants the cash or other property, less the Exercise Price for such Warrants then in effect, that the Warrant Holder would have been entitled to receive had the Warrants been exercisable and exercised immediately prior to such dissolution, liquidation or winding up and any and all rights of the Warrant Holder to exercise the Warrants shall terminate in their entirety. RESERVATION AND AUTHORIZATION OF WARRANT STOCK; REGISTRATION OF APPROVAL OF ANY - ------------------------------------------------------------------------------- GOVERNMENTAL AUTHORITY. The Issuer shall at all times reserve and keep - ---------------------- available for issue upon the exercise of the Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of the Warrants and all such shares of Common Stock will, at all times, be duly approved for listing subject to official notice of issuance on each securities exchange, interdealer quotation system or market, if any, on which such Common Stock is then listed. Issuer covenants that all Common Stock or other securities of Issuer that may be issued upon exercise of the Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free from preemptive rights and all taxes, liens, charges, encumbrances and security interests. If, at the time of the exercise of the Warrants, Issuer has the ability to issue registered Common Stock to the Warrant Holder (e.g., because of an existing registration, etc.), Issuer shall so issue registered Common Stock; otherwise, if Issuer does not have the ability to provide fully-registered Common Stock, Issuer shall provide piggyback registration rights with respect to any registration statement filed with respect to the Common Stock (whether by the Issuer or otherwise). 12 TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS. In the case of all - -------------------------------------------------- dividends or other distributions by the Issuer to the holders of its Common Stock with respect to which any provision of Section 3 refers to the taking of a record of such holders, the Issuer will in each such case take such a record and will take such record as of the close of business on a Business Day. The Issuer will not at any time, except upon dissolution, liquidation or winding up, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. PAYMENT OF TAXES. The Issuer will pay any and all taxes (excluding income taxes - ---------------- that may be payable by a Warrant Holder) and other governmental changes that may be imposed under the laws of the United States of America or any political subdivision or taxing authority thereof or therein in respect of a transfer of the Warrants or the issuance or delivery of shares of Common Stock or other securities deliverable on exercise of the Warrants. The Issuer shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the Warrants are registered, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Issuer the amount of any such tax, or has established, to the satisfaction of the Issuer, that such tax has been paid. NO VOTING RIGHTS. Except as expressly provided herein, the Warrants shall not - ---------------- entitle the Warrant Holder to any voting rights or other rights as a stockholder of the Issuer. RESTRICTIONS ON WARRANT TRANSFERABILITY; LEGEND. The Warrants are not - ----------------------------------------------- transferable except to Affiliates of Disney. Transfers shall be noted on the books of the Issuer to be maintained for such purpose, upon surrender of the Warrants at the office of the Issuer maintained for such purpose pursuant to Section 13, together with a written assignment of the Warrants duly executed by the Warrants holder or its agent or attorney and payment of funds sufficient to pay any stock transfer taxes payable upon the making of such transfer. Upon such surrender and payment the Issuer shall, execute and deliver a new Warrant Certificate(s) in the name of the assignee or assignees and in the denominations specified in such instrument of assignment, and the original Warrant Certificate shall promptly be canceled. The Issuer agrees to maintain at its aforesaid office books for the registration and transfer of the Warrants and Warrant Stock. Restrictive Legend. Unless and until otherwise permitted by this Section 8, the - ------------------ Warrant Certificate and each certificate for Warrant Stock issued upon exercise of any Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE PROPOSED TRANSACTION DOES NOT REQUIRE REGISTRATION OR QUALIFICATION UNDER FEDERAL OR STATE SECURITIES LAWS OR UNLESS THE PROPOSED TRANSACTION IS REGISTERED OR QUALIFIED, AS SO REQUIRED. 13 "THE TRANSFER OF AND OTHER TERMS OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE GOVERNED BY AND SUBJECT TO CONDITIONS SPECIFIED IN THAT CERTAIN WARRANT AGREEMENT DATED JUNE 16, 1998, AND NO TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. UNDER CERTAIN CIRCUMSTANCES, THE ISSUER HAS AGREED TO ISSUE TO THE HOLDER HEREOF A NEW CERTIFICATE, NOT BEARING THIS LEGEND, FOR THE SECURITIES EVIDENCED HEREBY REGISTERED IN THE NAME OF SUCH HOLDER. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE, AGREES TO BE BOUND BY ALL OF THE PROVISIONS CONTAINED IN SUCH WARRANT AGREEMENT." 14 LIMITATION OF LIABILITY. No provision hereof, in the absence of affirmative - ----------------------- action by the Warrant Holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the Warrant Holder hereof, shall give rise to any liability of such Holder for the purchase price of the Warrant Stock or as a stockholder of the Issuer, whether such liability is asserted by the Issuer or by creditors of the Issuer. LOSS OR DESTRUCTION OF WARRANT CERTIFICATES. Upon receipt of evidence - ------------------------------------------- satisfactory to the Issuer of the loss, theft, destruction or mutilation of the Warrant Certificate and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security satisfactory to the Issuer (the original Warrant Holder's indemnity being satisfactory indemnity in the event of loss, theft or destruction of any Warrant Certificate), or, in the case of any such mutilation, upon surrender and cancellation of such Warrant Certificate, the Issuer will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant Certificate, a new Warrant Certificate of like tenor and for a like aggregate number of Warrants. FURNISH INFORMATION. The Issuer agrees that it shall deliver to the Warrant - ------------------- Holder promptly after their becoming available copies of all financial statements, reports and proxy statements which the Issuer shall send to its stockholders generally. TAX TREATMENT. The Issuer and Disney agree to use their best efforts to agree - ------------- to a consistent determination of the fair value, if any, of the Warrants and to consistent treatment of such determination for income tax reporting purposes. OFFICE OF THE ISSUER. So long as the Warrants remain outstanding, the Issuer - -------------------- shall maintain an office or a transfer agent for the Warrant Certificate in New York, where the Warrant may be presented for exercise, transfer, division or combination as herein provided. Such office shall be at 55 Broad Street, New York, NY 10004, unless and until the Issuer shall designate and maintain some other office for such purposes and deliver written notice thereof to the Warrant Holder. NOTICES GENERALLY. Any notice, demand or delivery pursuant to the provisions - ----------------- hereof shall be sufficiently delivered or made if sent by first class mail, postage prepaid, addressed to the Warrant Holder at its last known address appearing on the Warrant transfer books of the Issuer, or, except as herein otherwise expressly provided, to the Issuer at its principal executive office, 55 Broad Street, New York, NY 10004, Attention: President, or such other address as shall have been furnished to the party giving or making such notice, demand or delivery. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the benefit of - ---------------------- and be enforceable by the parties hereto and their respective successors and assigns, and, without limiting the generality of the foregoing, shall inure to the benefit of and be enforceable by each person who shall from time to time be Warrant Holder, provided that this Agreement may only be assigned by the Issuer if, prior to such assignment, such assignee shall assume all obligations of the Issuer under this Agreement. GOVERNING LAW. The Warrant shall be governed by and construed in accordance - ------------- with the laws of the State of Delaware, without giving effect to principles of conflicts of laws. COUNTERPARTS. This Agreement may be executed in any number of counterparts and - ------------ each of said counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 15 HEADINGS. The descriptive headings of the several Sections of this Agreement - -------- are inserted for convenience and shall not control or affect the meaning or construction of any of the provisions hereof. PUBLIC ANNOUNCEMENTS. The issuer and Disney will consult with each other before - -------------------- issuing any press release or making any public statement with respect to the transactions contemplated hereby and, except as may be required by applicable law or any listing agreement with any securities exchange, will not issue any such press release or make any public statement unless the text of such statement shall first have been agreed upon by the parties. REMEDIES. Holder, in addition to being entitled to exercise all rights granted - -------- by law, including recovery of damages, will be entitled to specified performance of its rights under this Agreement. The Issuer agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive (to the extent permitted by law) the defense in any action for specific performance that a remedy of law would be adequate. AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the provisions of - ---------------------- this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Issuer has obtained the written consent of the Holders of at least a majority of the Restricted Stock. SEVERABILITY. In the event that any one or more of the provisions contained - ------------ herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the Holders shall be enforceable to the fullest extent permitted by law. 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed as of the day, month and year first above written. N2K INC. By: _____________________________ Name: Title: DISNEY ONLINE By: _____________________________ Name: Title: 17 EX-23.2 19 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.2 [ARTHUR ANDERSEN LLP LETTERHEAD] Consent of Independent Public Accountants To CDnow, Inc. As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made part of this Registration Statement. /s/ Arthur Andersen LLP Philadelphia, Pa., February 15, 1999 EX-23.3 20 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.3 [ARTHUR ANDERSEN LLP LETTERHEAD] Consent of Independent Public Accountants To N2K Inc. As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of this Registration Statement. /s/ Arthur Andersen LLP Philadelphia, Pa., February 12, 1999 EX-23.4 21 CONSENT OF BT ALEX. BROWN INC. EXHIBIT 23.4 Form of Consent for Filing with the SEC CONSENT of BT Alex. Brown Incorporated We hereby consent to (i) the inclusion of our opinion letter, dated October 22, 1998, to the Board of Directors of Cdnow, Inc. as Appendix V to the Proxy Statement forming part of this Registration Statement on Form S-4, and (ii) references made to our firm and such opinion in such Proxy Statement under the captions entitled "THE MERGER - Background of the Merger", "THE MERGER - CDnow Reasons for the Merger; Recommendation of the Board", "OPINIONS OF FINANCIAL ADVISORS - Opinion of CDnow's Financial Advisor". In giving such consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as Amended, and the Rules and Regulations Promulgated thereunder, and we do not admit that we are experts with respect to any part of the Registration Statement within the meaning of the term "expert" as used in the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. BT ALEX BROWN INCORPORATED /s/ J. Adam Hitt -------------------------- Name: J. Adam Hitt Title: Managing Director January 13, 1999 EX-23.5 22 CONSENT OF RICHARD A. EISNER & COMPANY, LLP EXHIBIT 23.5 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion in this Registration Statement on Form S-4 of our report dated January 31, 1996, February 13, 1996 with respect to Note F, on our audit of the financial statements of N2K, Inc., a New York Corporation, as of December 31, 1995 and for the period beginning March 7, 1995 (date of inception) through December 31, 1995. We also consent to the reference to our firm under the caption "Experts". /s/ Richard A. Eisner & Company, LLP New York, New York February 12, 1999 EX-27.1 23 FINANCIAL DATA SCHEDULE OF N2K INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF N2K INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 4,483,450 0 63,549 0 0 5,250,656 4,137,199 (1,002,435) 9,329,922 3,339,792 0 0 15,397 2,923 4,890,059 9,329,922 1,655,704 1,655,704 1,447,888 1,447,888 17,148,083 0 52,281 (16,992,548) 0 (16,992,548) (1,915,361) 0 0 (18,907,909) (6.85) (6.85)
EX-27.2 24 FINANCIAL DATA SCHEDULE OF N2K INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTRED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF N2K INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 36,831,748 0 777,431 (64,045) 0 57,190,423 8,522,832 (2,241,059) 64,021,556 6,331,072 0 0 0 12,118 53,135,817 64,021,556 8,108,449 8,108,449 6,212,741 6,212,741 21,166,209 64,045 653,455 (19,988,001) 0 (19,988,001) (8,108,973) (639,262) 0 (28,736,236) (5.88) (5.88)
EX-27.3 25 FINANCIAL DATA SCHEDULE OF N2K INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF N2K INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 178,966 0 401,090 (84,262) 0 5,117,523 6,316,994 (1,818,500) 10,283,256 13,902,643 0 0 17,757 3,083 (2,411,161) 10,283,256 4,115,458 4,115,458 3,284,672 3,284,672 12,569,746 84,262 484,486 (12,307,708) 0 (12,307,708) (3,232,186) 0 0 (15,539,894) (5.19) (5.19)
EX-27.4 26 FINANCIAL DATA SCHEDULE OF N2K INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF N2K INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 54,277,085 0 2,010,591 (315,942) 0 68,623,565 15,095,075 (4,353,721) 80,802,343 10,900,864 0 0 0 14,229 61,111,314 80,802,343 24,890,121 24,890,121 19,888,878 19,888,878 46,722,106 99,793 55,071 (41,875,727) 0 (41,875,727) (12,307,531) 0 0 (54,183,258) (4.03) (4.03)
EX-99.1 27 FORM OF PROXY - CDNOW EXHIBIT 99.1 CDnow, Inc. PROXY/VOTING INSTRUCTION CARD ________________________________________________________________________________ This Proxy is Solicited by the Board of Directors for the Special Meeting of Shareholders March 17, 1999, 9:00 a.m. Local Time, at CDnow, Inc., 1005 Virginia Drive, Fort Washington, Pennsylvania, 19034. The undersigned hereby appoints Jason Olim and David Capozzi, and each of them, proxies, with the powers the undersigned would posses if personally present, and with full power of substitution, to vote all common shares held of record by the undersigned in CDnow, Inc., upon all subjects that may properly cone before the meeting, including the matters described in the proxy statement furnished herewith, subject to any directions indicated on the reverse side of this card. IF NO DIRECTIONS ARE GIVEN, THE PROXIES WILL VOTE IN ACCORD WITH THE DIRECTORS' RECOMMENDATIONS ON THE SUBJECTS LISTED ON THE REVERSE SIDE OF THIS CARD AND AT THEIR DISCRETION ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF. If you do not sign and return a proxy, or attend the meeting and vote by ballot, your shares cannot be voted, nor your instructions followed. PLEASE SIGN ON THE REVERSE SIDE AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE. - -------------------------------------------------------------------------------- .DETACH PROXY CARD HERE. ________________________________________________________________________________ Directors recommend a vote "FOR": ________________________________________________________________________________ 1. Approval of an Agreement and Plan of Merger, dated as of October 22, 1998, among N2K Inc., CDnow, Inc. and CDnow/N2K, Inc. as amended, providing for the issuance of shares of CDnow/N2K, Inc. common stock to shareholders of CDnow, Inc. and N2K Inc. in consideration for the shares of CDnow and N2K Common Stock held by such shareholders. FOR [_] AGAINST [_] ABSTAIN [_] ________________________________________________________________________________ 2. Approval of the CDnow/N2K, Inc. 1999 Equity Compensation Plan. FOR [_] AGAINST [_] ABSTAIN [_] ________________________________________________________________________________ 3. In their discretion, the Proxies are authorized to vote upon such other business as may properly come before the special meeting. ________________________________________________________________________________ Please sign exactly as name or names appear on this proxy. If stock is held jointly, each holder should sign. If signing as attorney, trustee, executor, administrator, custodian, guardian or corporate officer, please give full title. DATE ____________________, 1999 SIGNATURE __________________________ SIGNATURE __________________________ Votes must be indicated (X) in Black - -------------------------------------------------------------------------------- DETACH PROXY CARD HERE EX-99.2 28 FORM OF PROXY - N2K EXHIBIT 99.2 N2K INC. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS SPECIAL MEETING OF STOCKHOLDERS - MARCH 15, 1999 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The undersigned hereby appoints Lawrence L. Rosen, Jonathan V. Diamond and Bruce Johnson, and each of them, as proxies of the undersigned, each with full power to act without the other and with full power of substitution and re-substitution, to vote all the shares of Common Stock of N2K Inc. that the undersigned is entitled to vote at the Special Meeting of Stockholders to be held March 17, 1999, at 9:00 a.m. (local time), and at any postponements or adjournments thereof, with all the powers the undersigned would have if personally present, as follows: THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING ITEMS: (continued, and to be signed, on other side) (continued from other side) (1) Approve the Agreement and Plan of Merger, dated as of October 22, 1998, among CDnow, Inc., N2K Inc. and CDnow/N2K, Inc., as amended, pursuant to which shares of CDnow/N2K Common Stock will be issued to the shareholders of CDnow and N2K in consideration for the shares of CDnow and N2K common stock held by such shareholders. [_] FOR [_] AGAINST [_] ABSTAIN (2) Approve the CDnow/N2K, Inc. 1999 Equity Compensation Plan. [_] FOR [_] AGAINST [_] ABSTAIN In their discretion, the proxies are authorized to vote upon such other matters as may properly come before the meeting, all in accordance with the accompanying Joint Proxy Statement/Prospectus, receipt of which is hereby acknowledged. IF THIS PROXY IS PROPERLY EXECUTED AND RETURNED, THE SHARES REPRESENTED THEREBY WILL BE VOTED. IF A CHOICE IS SPECIFIED BY THE STOCKHOLDER, THE SHARES WILL BE VOTED ACCORDINGLY. IF NOT OTHERWISE SPECIFIED, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR ITEMS 1 AND 2. DATED: , 1999 Sign exactly as name appears hereon. When signing in a representative capacity, please give full title. Joint Owners (if any) should each sign. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS EX-99.3 29 CONSENT OF ROBERT DAVID GRUSIN EXHIBIT 99.3 CONSENT TO THE INCLUSION OF NAME IN REGISTRATION STATEMENT Pursuant to Rule 438 of the Securities Act of 1933, as amended, the undersigned hereby consents to be named as a person about to become a director in the Registration Statement on Form S-4 of CDnow/N2K, Inc. and any amendment thereto. Date: February __, 1999 /s/ Robert David Grusin -------------------------------------- Name: Robert David Grusin EX-99.4 30 CONSENT OF PATRICK KERINS EXHIBIT 99.4 CONSENT TO THE INCLUSION OF NAME IN REGISTRATION STATEMENT Pursuant to Rule 438 of the Securities Act of 1933, as amended, the undersigned hereby consents to be named as a person about to become a director in the Registration Statement on Form S-4 of CDnow/N2K, Inc. and any amendment thereto. Date: February __, 1999 /s/ Patrick Kerins ---------------------------------------- Name: Patrick Kerins EX-99.5 31 CONSENT OF MATTHEW OLIM EXHIBIT 99.5 CONSENT TO THE INCLUSION OF NAME IN REGISTRATION STATEMENT Pursuant to Rule 438 of the Securities Act of 1933, as amended, the undersigned hereby consents to be named as a person about to become a director in the Registration Statement on Form S-4 of CDnow, Inc./N2K Inc. and any amendment thereto. Date: February __, 1999 /s/ Matthew Olim -------------------------------------- Name: Matthew Olim EX-99.6 32 CONSENT OF JOHN REGAN EXHIBIT 99.6 CONSENT TO THE INCLUSION OF NAME IN REGISTRATION STATEMENT Pursuant to Rule 438 of the Securities Act of 1933, as amended, the undersigned hereby consents to be named as a person about to become a director in the Registration Statement on Form S-4 of CDnow, Inc./N2K Inc. and any amendment thereto. Date: February __, 1999 /s/ John Regan ----------------------------------------- Name: John Regan EX-99.7 33 CONSENT OF LAWRENCE L. ROSEN EXHIBIT 99.7 CONSENT TO THE INCLUSION OF NAME IN REGISTRATION STATEMENT Pursuant to Rule 438 of the Securities Act of 1933, as amended, the undersigned hereby consents to be named as a person about to become a director in the Registration Statement on Form S-4 of CDnow, Inc./N2K Inc. and any amendment thereto. Date: February __, 1999 /s/ Lawrence L. Rosen --------------------------------------------- Name: Lawrence L. Rosen -----END PRIVACY-ENHANCED MESSAGE-----