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AGREEMENT OF MERGER AND CONTRIBUTION
Among
TIME WARNER INC.
SONY CORPORATION OF AMERICA
CDNOW, INC.
DELAWARE HOLDCO CORPORATION
PENNSYLVANIA SUBSIDIARY, INC.
DELAWARE SUB I L.L.C.
And
DELAWARE SUB II L.L.C.
Dated as of July 12, 1999
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Index of Defined Terms in the
Agreement of Merger and Contribution
Defined in
Term Section
---- -------
Acquisition Agreement............................................7.02(b)
affiliate..........................................................11.03
Arbitration................................................11.10(b)(iii)
Arbitration
Decision.............................................11.10(b)(iii)(G)
Arbitration
Hearing..............................................11.10(b)(iii)(D)
Arbitrators.............................................11.10(b)(iii)(B)
ARC..............................................................3.05(b)
Articles of Merger..................................................1.04
Audio License
Agreements....................................................Recitals
Canadian Competition
Act...........................................................3.05(b)
Canadian Competition Act
Approval......................................................3.05(b)
Canadian Sub....................................................Recitals
Canadian Sub Common
Shares.......................................................Recitals
Canadian Sub Exchange
Shares.......................................................Recitals
Canadian Transaction
Agreements...................................................Recitals
Canadian Transactions...........................................Recitals
CDnow...........................................................Preamble
CDnow Benefit Plans.................................................3.10
CDnow Board......................................................3.04(b)
CDnow By-laws.......................................................3.01
CDnow Capital Stock.................................................3.03
CDnow Charter.......................................................3.01
CDnow Common Stock ........................................Recitals
CDnow Disclosure
Letter........................................................3.02(a)
CDnow Employee Stock
Option........................................................8.04(d)
CDnow ERISA Affiliate...............................................3.10
CDnow Financing............................................7.01(a)(x)(A)
CDnow Financing
Warrants......................................................8.14(b)
CDnow Form S-4 Date.................................................3.06
CDnow Material Adverse
Effect...........................................................3.01
CDnow Online........................................................3.06
CDnow Pension Plans..............................................3.11(a)
CDnow SEC Documents.................................................3.06
CDnow Shareholder
Agreement....................................................Recitals
Cdnow Shareholder
Approval......................................................3.04(c)
CDnow Shareholders
Meeting.......................................................8.01(d)
CDnow Stock Plans................................................8.04(d)
CDnow Subsidiaries..................................................3.01
CDnow Takeover
Proposal..................................................7.02(e)(ii)
CDnow Takeover
Transaction...................................................7.02(b)
CDnow Warrants......................................................3.03
CDnow Working Capital
Facility......................................................8.14(b)
Certificates.....................................................2.02(b)
Closing.............................................................1.03
Closing Date........................................................1.03
Columbia House..................................................Recitals
▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇ Balance
Sheet............................................................4.06
▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇ Financial
Statements.......................................................4.06
Columbia House Balance
Sheet............................................................4.05
Columbia House Canada...........................................Recitals
Columbia House Closing
Date Balance Sheet............................................8.14(a)
Columbia House Credit
Agreement....................................................Recitals
Columbia House Entities.............................................4.01
Columbia House Entities
Benefit Plans....................................................4.10
Columbia House Entities
Canadian Plan.................................................4.11(g)
Columbia House Entities
Disclosure Letter.............................................4.02(a)
Columbia House Entities
Financial Statements.............................................4.06
Columbia House Entities
Foreign Plan..................................................4.11(g)
Columbia House Entities
Material Adverse Effect..........................................4.01
Columbia House Entities
Pension Plans.................................................4.11(a)
Columbia House ERISA
Affiliate........................................................4.10
Columbia House Mexico...........................................Recitals
Columbia House Mexico
Balance Sheet....................................................4.06
Columbia House Mexico
Financial Statements.............................................4.06
Columbia House Subsidiaries.........................................4.01
Code............................................................Recitals
Confidentiality Agreement........................................7.02(b)
Consent..........................................................3.05(b)
Contract.........................................................3.05(a)
Contribution Transactions........................................1.02(b)
Control-Shifting CDnow
Takeover Transaction..........................................8.07(b)
D&O Insurance....................................................8.06(a)
Delaware Sub I..................................................Preamble
Delaware Sub II.................................................Preamble
Designated CDnow SEC
Documents........................................................3.06
i
Defined in
Term Section
---- -------
Dissent Shares...................................................2.01(d)
Effective Time......................................................1.04
Environmental Laws..................................................3.17
ERISA............................................................3.11(a)
Exchange Act.....................................................3.05(b)
Exchange Agent...................................................2.02(a)
Exchange Fund....................................................2.02(a)
Exchangeable Shares.............................................Recitals
Filed CDnow SEC Documents...........................................3.08
Form S-4............................................................3.07
GAAP................................................................3.06
Governance Agreement............................................Recitals
Governmental Entity..............................................3.05(b)
Guaranteed Facility..............................................8.14(a)
Hazardous Substances................................................3.17
Holdco..........................................................Preamble
Holdco Class A Common
Stock.........................................................Recitals
Holdco Class B Common
Stock.........................................................Recitals
Holdco Common Stock.............................................Recitals
Holdco Employee Stock
Option........................................................8.04(d)
HSR Act..........................................................3.05(b)
Indemnity Agreement.............................................Recitals
Initial Agreements..............................................Recitals
Initial Period...................................................7.02(a)
Intellectual Property
Rights...........................................................3.20
Interim Loan Documents..........................................Recitals
▇▇▇▇▇ ▇▇▇▇ Employment
Agreement....................................................Recitals
Judgment.........................................................3.05(a)
Law..............................................................3.05(a)
Lenders.........................................................Recitals
Liens............................................................3.02(a)
Losses...........................................................8.06(e)
Master Canadian Transaction
Agreement....................................................Recitals
material adverse effect............................................11.03
Maximum Premium..................................................8.06(a)
MCo.............................................................Recitals
Mediation...................................................11.10(b)(ii)
Mediator.................................................11.10(b)(ii)(A)
Merger..........................................................Recitals
Merger Consideration.........................................2.01(c)(ii)
Merger Share Issuance............................................1.01(a)
Merger Transactions..............................................1.01(a)
Multiemployer Plan...............................................3.11(c)
Music Video License
Agreements ..................................................Preamble
Nasdaq..............................................................8.11
N2K..............................................................7.02(a)
Outside Date.................................................10.01(b)(i)
PBCL.............................................................1.01(a)
Pennsylvania Sub................................................Preamble
Permitted Tax
Distributions...............................................7.01(b)(i)
person.............................................................11.03
Primary Cdnow
Executives....................................................3.11(e)
Principal CDnow
Shareholders.................................................Recitals
Proxy Statement..................................................3.05(b)
qualified stock
options....................................................8.04(a)(i)
Registration Rights
Agreement....................................................Recitals
Release.............................................................3.17
SEC..............................................................3.05(b)
Securities Act......................................................3.06
Share Issuances..................................................1.02(b)
SMEI............................................................Recitals
Sony............................................................Preamble
Sony Audio License
Agreements....................................................Recitals
Sony Canada.....................................................Recitals
Sony Capital
Corporation..................................................Recitals
Sony Columbia House
Mexico Shares....................................................4.03
Sony Contribution................................................1.02(b)
Sony Contribution Share
Issuance......................................................1.02(b)
Sony Contribution
Transactions..................................................1.02(b)
Sony Corporation................................................Recitals
Sony Designees......................................................8.15
Sony Disclosure Letter...........................................6.02(a)
Sony Manufacturing
Agreements...................................................Recitals
Sony MCo Partnership
Interest......................................................1.02(b)
Sony Mexico.....................................................Recitals
Sony Mexico Shares...............................................1.02(b)
Sony Music Video License
Agreements...................................................Preamble
Sony Partnership
Interests.....................................................1.02(b)
Sony U.S. Contribution...........................................1.02(b)
Stock Option Agreement..........................................Recitals
Strategic Commitments
Dispute....................................................11.10(b)(i)
Strategic Commitments
Letter.......................................................Recitals
Subchapter D.....................................................2.01(d)
subsidiary.........................................................11.03
Superior CDnow
Proposal...................................................7.02(e)(i)
Supplemental Agreements.........................................Recitals
Supplemental Canadian
Agreements....................................................Recitals
Surviving Corporation............................................1.01(a)
Tax Return.......................................................3.09(k)
Taxes............................................................3.09(k)
Termination Fee..................................................8.07(b)
Time Warner.....................................................Preamble
Time Warner Audio License
Agreements...................................................Recitals
Time Warner Canada..............................................Recitals
Time Warner Columbia House
Mexcio Shares....................................................4.03
ii
Defined in
Term Section
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Time Warner Contribution.........................................1.02(a)
Time Warner Contribution
Share Issuance................................................1.02(a)
Time Warner Contribution
Transactions..................................................1.02(a)
Time Warner Designees...............................................8.15
Time Warner Disclosure
Letter........................................................5.02(a)
Time Warner Inc.................................................Recitals
Time Warner Manufacturing
Agreements....................................................Recitals
Time Warner MCo Partnership
Interest......................................................1.02(a)
Time Warner Mexico..............................................Recitals
Time Warner Mexico Shares........................................1.02(a)
Time Warner Music Video
License Agreements...........................................Preamble
Time Warner Partnership
Interests.....................................................1.02(a)
Time Warner Sub.................................................Recitals
Time Warner U.S.
Contribution..................................................1.02(a)
Trademark License
Agreements....................................................Recitals
Transaction Agreements..........................................Recitals
Transactions.....................................................1.02(b)
Transfer Taxes......................................................8.09
TWI.............................................................Recitals
Vco.............................................................Recitals
Voting Columbia House
Entities Debt....................................................4.03
Voting CDnow Debt...................................................3.03
Voting Preferred
Share........................................................Recitals
Warner Music Group..............................................Recitals
Year 2000 Compliant..............................................3.16(b)
iii
TABLE OF CONTENTS
Page
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ARTICLE I
The Merger and the Contributions
SECTION 1.01. The Merger......................................................7
SECTION 1.02. The Contributions...............................................8
SECTION 1.03. Closing........................................................10
SECTION 1.04. Effective Time.................................................10
ARTICLE II
Effect of Merger on the Capital Stock of the
Constituent Corporations in the Merger;
Exchange of Certificates in the Merger
SECTION 2.01. Effect on Capital Stock........................................11
SECTION 2.02. Exchange of Certificates.......................................12
ARTICLE III
Representations and Warranties of CDnow
SECTION 3.01. Organization, Standing and Power...............................16
SECTION 3.02. CDnow Subsidiaries; Equity Interests...........................17
SECTION 3.03. Capital Structure..............................................17
SECTION 3.04. Authority; Execution and Delivery;
Enforceability...............................................19
SECTION 3.05. No Conflicts; Consents.........................................20
SECTION 3.06. SEC Documents; Undisclosed Liabilities.........................22
SECTION 3.07. Information Supplied...........................................23
SECTION 3.08. Absence of Certain Changes or Events...........................23
SECTION 3.09. Taxes..........................................................26
SECTION 3.10. Absence of Changes in Benefit Plans............................28
SECTION 3.11. ERISA Compliance; Excess Parachute
Payments.....................................................29
SECTION 3.12. Litigation.....................................................31
SECTION 3.13. Compliance with Applicable Laws................................31
SECTION 3.14. Brokers; Schedule of Fees and Expenses.........................31
SECTION 3.15. Opinion of Financial Advisor...................................32
SECTION 3.16. Year 2000 Compliance...........................................32
SECTION 3.17. Environmental Matters..........................................33
SECTION 3.18. Contracts......................................................34
SECTION 3.19. Title to Properties............................................35
SECTION 3.20. Intellectual Property..........................................36
Page
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SECTION 3.21. Labor Matters..................................................36
SECTION 3.22. Insurance......................................................37
ARTICLE IV
Representations and Warranties of Time Warner
and Sony as to the Columbia House Entities
SECTION 4.01. Organization, Standing and Power...............................37
SECTION 4.02. Columbia House Subsidiaries;
Equity Interests.............................................38
SECTION 4.03. Capital Structure..............................................39
SECTION 4.04. Authority; Execution and Delivery;
Enforceability...............................................40
SECTION 4.05. No Conflicts; Consents.........................................40
SECTION 4.06. Financial Statements; Undisclosed
Liabilities..................................................41
SECTION 4.07. Information Supplied...........................................42
SECTION 4.08. Absence of Certain Changes or Events...........................43
SECTION 4.09. Taxes..........................................................45
SECTION 4.10. Absence of Changes in Benefit Plans............................46
SECTION 4.11. ERISA Compliance; Excess Parachute
Payments.....................................................47
SECTION 4.12. Litigation.....................................................50
SECTION 4.13. Compliance with Applicable Laws................................50
SECTION 4.14. Brokers; Schedule of Fees and Expenses.........................51
SECTION 4.15. Year 2000 Compliance...........................................51
SECTION 4.16. Environmental Matters..........................................51
SECTION 4.17. Contracts......................................................52
SECTION 4.18. Title to Properties............................................53
SECTION 4.19. Intellectual Property..........................................54
SECTION 4.20. Labor Matters..................................................55
SECTION 4.21. Insurance......................................................55
ARTICLE V
Representations and Warranties of Time Warner
SECTION 5.01. Authority; Execution and Delivery;
Enforceability...............................................55
SECTION 5.02. No Conflicts; Consents.........................................56
SECTION 5.03. Time Warner Interests..........................................57
Page
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ARTICLE VI
Representations and Warranties of Sony
SECTION 6.01. Authority; Execution and Delivery;
Enforceability...............................................58
SECTION 6.02. No Conflicts; Consents.........................................58
SECTION 6.03. Sony Interests.................................................59
ARTICLE VII
Covenants Relating to Conduct of Business
SECTION 7.01. Conduct of Business............................................60
SECTION 7.02. No Solicitation................................................68
ARTICLE VIII
Additional Agreements
SECTION 8.01. Preparation of the Form S-4 and
the Proxy Statement; Shareholders
Meeting......................................................71
SECTION 8.02. Access to Information; Confidentiality.........................73
SECTION 8.03. Reasonable Efforts; Notification...............................74
SECTION 8.04. CDnow Employee Stock Options...................................75
SECTION 8.05. Benefit Plans..................................................78
SECTION 8.06. Indemnification................................................79
SECTION 8.07. Fees and Expenses..............................................80
SECTION 8.08. Public Announcements...........................................82
SECTION 8.09. Transfer Taxes.................................................82
SECTION 8.10. Affiliates.....................................................83
SECTION 8.11. Stock Exchange Listing.........................................83
SECTION 8.12. Tax Treatment..................................................83
SECTION 8.13. Shareholder Litigation.........................................83
SECTION 8.14. Certain Financing Arrangements and
Contributions................................................83
SECTION 8.15. Initial Independent Directors of Holdco........................85
SECTION 8.16. Transition Services............................................85
ARTICLE IX
Conditions Precedent
SECTION 9.01. Conditions to Each Party's Obligation
To Effect the Transactions...................................85
Page
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SECTION 9.02. Conditions to Obligations of
Time Warner and Sony........................................86
SECTION 9.03. Conditions to Obligations of CDnow............................89
ARTICLE X
Termination, Amendment and Waiver
SECTION 10.01. Termination...................................................91
SECTION 10.02. Effect of Termination.........................................93
SECTION 10.03. Amendment.....................................................93
SECTION 10.04. Extension; Waiver.............................................93
SECTION 10.05. Procedure for Termination, Amendment,
Extension or Waiver.........................................94
ARTICLE XI
General Provisions
SECTION 11.01. Nonsurvival of Representations and
Warranties..................................................94
SECTION 11.02. Notices.......................................................94
SECTION 11.03. Definitions...................................................96
SECTION 11.04. Interpretation; Disclosure Letters............................96
SECTION 11.05. Severability..................................................96
SECTION 11.06. Counterparts..................................................97
SECTION 11.07. Entire Agreement; No Third-Party
Beneficiaries...............................................97
SECTION 11.08. Governing Law.................................................97
SECTION 11.09. Assignment....................................................97
SECTION 11.10. Enforcement...................................................98
Page
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EXHIBIT A Form of Master Canadian Transaction Agreement
EXHIBIT B Form of CDnow Shareholder Agreement
EXHIBIT C Form of Stock Option Agreement
EXHIBIT D Form of Financing Agreements
EXHIBIT E Form of Strategic Commitments Letter
EXHIBIT F Form of ▇▇▇▇▇ ▇▇▇▇ Employment Agreement
EXHIBIT G Form of Governance Agreement
EXHIBIT H Form of Registration Rights Agreement
EXHIBIT I Form of Indemnity Agreement
EXHIBIT J Form of Amended and Restated Articles of
Incorporation of the Surviving Corporation
EXHIBIT K Form of Certificate of Incorporation
of Holdco
EXHIBIT L Form of By-laws of Holdco
EXHIBIT M Form of Joint Venture Agreement for MCo EXHIBIT N Form of Joint
Venture Agreement of VCo EXHIBIT O Form of Joint Venture Agreement
of Columbia House
EXHIBIT P Members of Joint Transition Planning Team
EXHIBIT Q Form of Joint Press Release
EXHIBIT R Form of Affiliate Letter
AGREEMENT OF MERGER AND CONTRIBUTION dated as of July
12, 1999, among TIME WARNER INC., a Delaware corporation
("Time Warner"), SONY CORPORATION OF AMERICA, a New York
corporation ("Sony"), CDNOW, INC., a Pennsylvania corporation
("CDnow"), DELAWARE HOLDCO CORPORATION, a Delaware corporation
and a direct wholly owned subsidiary of CDnow ("Holdco"),
PENNSYLVANIA SUBSIDIARY, INC., a Pennsylvania corporation and
a direct wholly owned subsidiary of Holdco ("Pennsylvania
Sub"), DELAWARE SUB I L.L.C., a Delaware limited liability
company and a direct wholly owned subsidiary of Holdco
("Delaware Sub I"), and DELAWARE SUB II L.L.C., a Delaware
limited liability company and a direct wholly owned subsidiary
of Holdco ("Delaware Sub II").
WHEREAS the respective Boards of Directors of CDnow, Holdco and
Pennsylvania Sub have approved the merger (the "Merger") of Pennsylvania Sub
into CDnow on the terms and subject to the conditions set forth in this
Agreement, whereby each issued share of common stock, without par value, of
CDnow (the "CDnow Common Stock") not owned directly or indirectly by CDnow or
Pennsylvania Sub shall be converted into the right to receive one share of Class
A common stock, par value $0.01 per share, of Holdco (the "Holdco Class A Common
Stock");
WHEREAS, simultaneously with the Merger, Time Warner desires (i) to
cause WCI Record Club Inc., a Delaware corporation and an indirect wholly owned
subsidiary of Time Warner ("Time Warner Sub"), to contribute on the terms and
subject to the conditions set forth in this Agreement all of the right, title
and interest in, to and under, and all of the liabilities, obligations and
commitments of Time Warner Sub and Time Warner that relate to, or arise out of,
the general partnership interests in each of The CH-Music Company, a New York
general partnership ("MCo"), the general partners of which are Time Warner Sub
and Sony Music Entertainment Inc., a Delaware coporation ("SMEI"), and The
CH-Video Company, a New York general partnership ("VCo"), the general partners
of which are Time Warner Sub and SMEI, held by Time Warner Sub, to Holdco or, if
Holdco shall so direct, Delaware Sub I and (ii) to cause Warner Music Group
Inc., a Delaware corporation and an indirect wholly owned subsidiary of Time
Warner ("Warner Music Group"), to contribute on the terms and subject to the
conditions set forth in this Agreement all of the right, title and interest
2
in, to and under the shares of capital stock of Warner Music Columbia House
(Mexico) Inc., a Delaware corporation and an indirect subsidiary of Time Warner
("Time Warner Mexico"), and all of the liabilities, obligations and commitments
of Warner Music Group and Time Warner that relate to, or arise out of, the
shares of capital stock of Columbia House (Mexico) y Compania, S. en N. de C.V.,
an unlimited collective commercial company organized under the laws of Mexico
("Columbia House Mexico"), held by Warner Music Group, to Holdco, in each case
in exchange for shares of Class B common stock, par value $0.01 per share, of
Holdco (the "Holdco Class B Common Stock" and, together with the Holdco Class A
Common Stock, the "Holdco Common Stock") and the assumption of the foregoing
liabilities, obligations and commitments;
WHEREAS, simultaneously with the Merger, Sony desires (i) to cause
SMEI to contribute on the terms and subject to the conditions set forth in this
Agreement all of the right, title and interest in, to and under, and all of the
liabilities, obligations and commitments of SMEI that relate to, or arise out
of, the general partnership interests in each of MCo and VCo, held by SMEI, to
Holdco or, if Holdco shall so direct, Delaware Sub II, and (ii) to cause SMEI to
contribute on the terms and subject to the conditions set forth in this
Agreement all of the right, title and interest in, to and under the shares of
capital stock of Sony Music Entertainment Mexico, S.A., a Delaware corporation
and a direct wholly owned subsidiary of SMEI ("Sony Mexico"), and all of the
liabilities, obligations and commitments of SMEI and Sony that relate to, or
arise out of, the shares of capital stock of Columbia House Mexico, held by Sony
Mexico, to Holdco, in each case in exchange for shares of Holdco Class B Common
Stock and the assumption of the foregoing liabilities, obligations and
commitments;
WHEREAS, simultaneously with the execution and delivery of this
Agreement, Warner Music Canada Ltd., a corporation organized under the laws of
Ontario ("Time Warner Canada"), Sony Music Entertainment (Canada) Inc., a
corporation organized under the laws of Canada ("Sony Canada"), The Columbia
House Company (Canada), a general partnership organized under the laws of
Ontario ("Columbia House Canada"), the general partners of which are Time Warner
Canada and Sony Canada, 3030809 Nova Scotia ULC, an unlimited liability company
organized under the laws of Nova Scotia and a direct wholly owned subsidiary of
Columbia House Canada ("Canadian Sub"), and Holdco are entering into a master
Canadian transaction agreement in the form of Exhibit A attached hereto (the
"Master Canadian Transaction Agreement" and, together with all other agreements
attached
3
as schedules thereto (the "Supplemental Canadian Agreements"), the "Canadian
Transaction Agreements"), pursuant to which, simultaneously with the Merger and
on the terms and subject to the conditions set forth in the Master Canadian
Transaction Agreement, (i) Columbia House Canada will transfer all of the right,
title and interest in, to and under all the assets of Columbia House Canada
other than cash, and cash in the amount of Cdn$500,000, and all of the
liabilities, debts and obligations of Columbia House Canada, to Canadian Sub in
exchange for common shares in the capital of Canadian Sub (the "Canadian Sub
Common Shares") and special shares in the capital of Canadian Sub (the "Canadian
Sub Exchange Shares"), (ii) Columbia House Canada will transfer all of the
right, title and interest in, to and under the Canadian Sub Common Shares
received from Canadian Sub to Holdco in exchange for shares of Holdco Class B
Common Stock, (iii) all Canadian Sub Exchange Shares held by Columbia House
Canada will be transferred to Canadian Sub in exchange for shares of Canadian
Sub that are exchangeable for shares of Holdco Common Stock (the "Exchangeable
Shares") and the Canadian Sub Exchange Shares will be canceled, (iv) Holdco will
issue one share of voting preferred stock, par value $0.01 per share (the
"Voting Preferred Share") of Holdco to the Voting Trustee for the holders of the
Exchangeable Shares, (v) Columbia House Canada will distribute all of the right,
title and interest in, to and under all shares of Holdco Class B Common Stock
and other property (other than the Exchangeable Shares and cash) held by
Columbia House Canada to Time Warner Canada and Sony Canada in accordance with
their respective interests therein and (vi) Columbia House Canada will, pursuant
to a liquidating distribution, distribute all of the right, title and interest
in, to and under all of the remaining assets, including cash and Exchangeable
Shares, held by Columbia House Canada to Time Warner Canada and Sony Canada in
accordance with the partnership agreement and applicable law (collectively, the
"Canadian Transactions");
WHEREAS, simultaneously with the execution and delivery of this Agreement,
Time Warner, Sony and certain shareholders of CDnow (the "Principal CDnow
Shareholders") are entering into an agreement in the form of Exhibit B attached
hereto (the "CDnow Shareholder Agreement"), pursuant to which the Principal
CDnow Shareholders will agree to take specified actions in furtherance of the
Merger;
WHEREAS, simultaneously with the execution and delivery of this
Agreement, Time Warner, Sony and CDnow are entering into a stock option
agreement in the form of Exhibit C attached hereto (the "Stock Option
Agreement"),
4
pursuant to which CDnow is granting to Time Warner and Sony the option to
purchase shares of CDnow Common Stock on the terms and subject to the conditions
set forth therein;
WHEREAS, simultaneously with the execution and delivery of this
Agreement, Time Warner, SMEI and CDnow are entering into agreements in the form
of Exhibit D attached hereto (the "Interim Loan Documents", and, together with
this Agreement, the Master Canadian Transaction Agreement, the CDnow Shareholder
Agreement and the Stock Option Agreement, the "Initial Agreements"), pursuant to
which Time Warner and SMEI will agree to make available to CDnow a credit
facility for working capital purposes in the event that the Merger, the
Contribution Transactions (as defined in Section 1.02(b)) and the Canadian
Transactions shall not have been consummated prior to December 15, 1999;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, certain strategic commitments, which
commitments are described in a letter substantially in the form of Exhibit E
attached hereto (the "Strategic Commitments Letter"), of each of Time Warner,
Sony and Holdco will become effective;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, the business of Holdco is to be
organized so as to include an "online/retail division" and a "club division";
WHEREAS, simultaneously with the execution and delivery of this
Agreement, Holdco is entering into an employment agreement in the form of
Exhibit F attached hereto with ▇▇▇▇▇ ▇▇▇▇ (the "▇▇▇▇▇ ▇▇▇▇ Employment
Agreement"), to become effective upon consummation of the Merger, the
Contribution Transactions and the Canadian Transactions, pursuant to which ▇▇▇▇▇
▇▇▇▇ will serve as the Division Chief Executive Officer of the Online/Retail
Division of Holdco, an Executive Vice President of Holdco, Chairman of the
Technology Steering Committee of Holdco and a member of the Board of Directors
of Holdco on the terms and subject to the conditions set forth therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, Warner Music Group, Time Warner
Canada, SMEI, Sony Canada and Holdco desire to enter into a governance agreement
substantially in the form of Exhibit G attached hereto (the "Governance
Agreement"), relating to, among other things, the governance of Holdco and the
acquisition and divestiture of shares of Holdco Common Stock;
5
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, Time Warner, Sony and Holdco desire
to enter into a registration rights agreement substantially in the form of
Exhibit H attached hereto (the "Registration Rights Agreement"), pursuant to
which each of Time Warner, Sony and certain of their respective affiliates will
be granted certain rights to registration of shares of Holdco Common Stock held
by Time Warner, Sony or such affiliate, as the case may be, on the terms and
subject to the conditions set forth therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, Holdco, CDnow, Time Warner, SMEI and
Sony Capital Corporation, a Delaware corporation ("Sony Capital Corporation")
that is an affiliate of Sony, desire to enter into an indemnity agreement
substantially in the form of Exhibit I attached hereto (the "Indemnity
Agreement"), pursuant to which each of Holdco and CDnow will, under certain
circumstances, jointly and severally indemnify, defend and hold harmless each of
Time Warner, Sony and Sony Capital for all liabilities, obligations and
commitments, and all costs and expenses, and any damages or losses, that relate
to, or arise out of, the guarantee of borrowings under the Credit Agreement
dated as of March 18, 1993 (as amended, supplemented or otherwise modified from
time to time, the "Columbia House Credit Agreement"), among The Columbia House
Company, a New York general partnership ("Columbia House"), Columbia House
Canada, the financial institutions party from time to time thereto as lenders
(the "Lenders"), The Chase Manhattan Bank, formerly known as Chemical Bank, as
administrative agent for the Lenders, and ▇▇▇▇▇▇ Guaranty Trust Company of New
York, as co-agent for the Lenders, provided by such guarantor on the terms and
subject to the conditions set forth therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, (i) Columbia House desires, and Time
Warner desires to cause Warner Music Group to, enter into certain amended and
restated license agreements substantially in the form previously agreed to by
the parties hereto (collectively, the "Time Warner Audio License Agreements"),
pursuant to which Warner Music Group will license to Columbia House certain
rights to the audio repertoire of the majority owned record labels of Time
Warner and (ii) Columbia House and SMEI desire to enter into certain amended and
restated license agreements substantially in the form previously agreed to by
the parties hereto (the "Sony Audio License Agreements", and, together with the
Time Warner Audio
6
License Agreements, the "Audio License Agreements"), pursuant to which SMEI will
license to Columbia House certain rights to the audio repertoire of the majority
owned record labels of SMEI, in each case on the terms and subject to the
conditions therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, (i) Columbia House desires, and Time
Warner desires to cause Warner Communications Inc. to, enter into certain
amended and restated license agreements substantially in the form previously
agreed to by the parties hereto (collectively, the "Time Warner Music Video
License Agreements"), pursuant to which Warner Communications Inc. will license
to Columbia House certain rights to the music video repertoire of the majority
owned record labels of Time Warner and (ii) Columbia House and SMEI desire to
enter into certain amended and restated license agreements substantially in the
form previously agreed to by the parties hereto (collectively, the "Sony Music
Video License Agreements", and, together with the Time Warner Video License
Agreements, the "Music Video License Agreements"), pursuant to which SMEI will
license to Columbia House certain rights to the music video repertoire of the
majority owned record labels of SMEI, in each case on the terms and subject to
the conditions therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, Holdco and SMEI desire to enter into
certain amended and restated license agreements substantially in the form
previously agreed to by the parties hereto (the "Trademark License Agreements"),
pursuant to which SMEI will license to Holdco certain rights to specified
trademarks, in each case on the terms and subject to the conditions set forth
therein;
WHEREAS, upon consummation of the Merger, the Contribution
Transactions and the Canadian Transactions, (i) Holdco and Time Warner desire
to, and Time Warner desires to cause certain of its affiliates to, enter into
certain manufacturing agreements substantially in the form previously agreed to
by the parties hereto (collectively, the "Time Warner Manufacturing
Agreements"), pursuant to which Time Warner and such affiliates will
manufacture, for the benefit of Holdco, records and (ii) Holdco and SMEI desire
to enter into certain manufacturing agreements substantially in the form
previously agreed to by the parties hereto (the "Sony Manufacturing
Agreements"), pursuant to which SMEI will manufacture, for the benefit of
Holdco, records, in each case on the terms and subject to
7
the conditions set forth therein; the Sony Manufacturing Agreements, together
with the ▇▇▇▇▇ ▇▇▇▇ Employment Agreement, the Governance Agreement, the
Registration Rights Agreement, the Indemnity Agreement, the Audio License
Agreements, the Music Video License Agreements, the Trademark License
Agreements, the Time Warner Manufacturing Agreements and the Supplemental
Canadian Agreements are referred to herein as the "Supplemental Agreements"; the
Supplemental Agreements together with the Initial Agreements are referred to
herein as the "Transaction Agreements";
WHEREAS for Federal income tax purposes it is intended that the
Merger, the Contribution Transactions and the transfer to Holdco for Holdco
Class B Common Stock and Exchangeable Shares pursuant to the Canadian
Transactions qualify as exchanges under Section 351 of the Internal Revenue Code
of 1986, as amended (the "Code"); and
WHEREAS Time Warner, Sony, CDnow, Holdco, Pennsylvania Sub, Delaware
Sub I and Delaware Sub II desire to make certain representations, warranties,
covenants and agreements in connection with the Merger and the related
contribution transactions and also to prescribe various conditions to the Merger
and the related contribution transactions.
NOW, THEREFORE, the parties hereto intending to be legally bound
hereby agree as follows:
ARTICLE I
The Merger and the Contributions
SECTION 1.01. The Merger. (a) On the terms and subject to the
conditions set forth in this Agreement, and in accordance with the Pennsylvania
Business Corporation Law (the "PBCL"), Pennsylvania Sub shall be merged with and
into CDnow at the Effective Time (as defined in Section 1.04). At the Effective
Time, the separate corporate existence of Pennsylvania Sub shall cease and CDnow
shall continue as the surviving corporation (the "Surviving Corporation"). The
Merger and the issuance by Holdco of Holdco Common Stock in connection with the
Merger (the "Merger Share Issuance") are referred to in this Agreement
collectively as the "Merger Transactions".
(b) The Merger shall have the effects set forth in Section 1929 of
the PBCL. Without limiting the generality of the foregoing, and subject thereto,
at the
8
Effective Time, all properties, rights, privileges, powers and franchises of
Pennsylvania Sub shall vest in the Surviving Corporation, and all debts,
labilities and duties of Pennsylvania Sub shall become the debts, liabilities
and duties of the Surviving Corporation.
(c) The Articles of Incorporation of the Surviving Corporation shall
be amended and restated at the Effective Time to read in the form of Exhibit J
attached hereto and, as so amended, such Articles of Incorporation shall be the
Articles of Incorporation of the Surviving Corporation until thereafter changed
or amended as provided therein or by applicable Law (as defined in Section
3.05(a)).
(d) The By-laws of Pennsylvania Sub as in effect immediately prior
to the Effective Time shall be the By-laws of the Surviving Corporation, until
thereafter changed or amended as provided therein or by applicable Law.
(e) The directors of Pennsylvania Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be, in each case in accordance with
the Articles of Incorporation and By-laws of the Surviving Corporation.
(f) The officers of CDnow immediately prior to the Effective Time
shall be the officers of the Surviving Corporation, until the earlier of their
resignation or removal or until their respective successors are duly elected or
appointed and qualified, as the case may be, in each case in accordance with the
Articles of Incorporation and By-laws of the Surviving Corporation.
SECTION 1.02. The Contributions. (a) On the terms and subject to the
conditions set forth in this Agreement, at the Effective Time, Time Warner shall
(i) cause Time Warner Sub to contribute, assign, transfer, convey and deliver to
Holdco or, if Holdco shall so direct, Delaware Sub I (the "Time Warner U.S.
Contribution"), and Holdco, or, if Holdco shall so direct, Delaware Sub I shall
accept from Time Warner Sub, all the right, title and interest of Time Warner
Sub in, to and under (A) the general partnership interest in MCo held by Time
Warner Sub (the "Time Warner MCo Partnership Interest") and (B) the general
partnership interest in VCo held by Time Warner Sub (together with the Time
Warner MCo Partnership Interest, the "Time Warner Partnership Interests"), in
exchange for (x) the delivery to Time Warner Sub of 41,881,793 shares of
9
Holdco Class B Common Stock and (y) the assumption by Holdco or, if Holdco shall
so direct, Delaware Sub I of all of the liabilities, obligations and commitments
of Time Warner Sub and Time Warner that relate to, or arise out of, the Time
Warner Partnership Interests and (ii) cause Warner Music Group to contribute,
assign, transfer, convey and deliver to Holdco, and Holdco shall accept from
Warner Music Group, all the right, title and interest of Warner Music Group in,
to and under the shares of capital stock of Time Warner Mexico (together with
the Time Warner U.S. Contribution, the "Time Warner Contribution"), held by
Warner Music Group (the "Time Warner Mexico Shares"), in exchange for (x) the
delivery to Warner Music Group of 205,011 shares of Holdco Class B Common Stock
and (y) the assumption by Holdco of all of the liabilities, obligations and
commitments of Warner Music Group and Time Warner that relate to, or arise out
of, the Time Warner Mexico Shares. The Time Warner Contribution, the related
assumption of liabilities by Holdco or Delaware Sub I and Holdco and the
issuance by Holdco of Holdco Class B Common Stock in connection therewith (the
"Time Warner Contribution Share Issuance") are referred to in this Agreement
collectively as the "Time Warner Contribution Transactions".
(b) On the terms and subject to the conditions set forth in this
Agreement, at the Effective Time, Sony shall (i) cause SMEI to contribute,
assign, transfer, convey and deliver to Holdco or, if Holdco shall so direct,
Delaware Sub II (the "Sony U.S. Contribution"), and Holdco or, if Holdco shall
so direct, Delaware Sub II shall accept from SMEI, all the right, title and
interest of SMEI in, to and under (A) the general partnership interest in MCo
held by SMEI (the "Sony MCo Partnership Interest") and (B) the general
partnership interest in VCo held by SMEI (together with the Sony MCo Partnership
Interest, the "Sony Partnership Interests"), in exchange for (x) the delivery to
SMEI of 41,881,793 shares of Holdco Class B Common Stock and (y) the assumption
by Holdco or, if Holdco shall so direct, Delaware Sub II of all of the
liabilities, obligations and commitments of SMEI and Sony that relate to, or
arise out of, the Sony Partnership Interests and (ii) cause SMEI to contribute,
assign, transfer, convey and deliver to Holdco, and Holdco shall accept from
SMEI, all the right, title and interest of SMEI in, to and under the shares of
capital stock of Sony Mexico (together with the Sony U.S. Contribution, the
"Sony Contribution"); the Time Warner Contribution and the Sony Contribution are
collectively referred to herein as the "Contributions"), held by SMEI (the "Sony
Mexico Shares"), in exchange for (x) the delivery to SMEI of 205,011 shares of
Holdco Class B Common Stock and (y) the assumption by Holdco of all of the
liabilities,
10
obligations and commitments of SMEI and Sony that relate to, or arise out of,
the Sony Mexico Shares. The Sony Contribution, the related assumption of
liabilities by Holdco or Delaware Sub II and Holdco and the issuance by Holdco
of Holdco Class B Common Stock in connection therewith (the "Sony Contribution
Share Issuance") are referred to in this Agreement collectively as the "Sony
Contribution Transactions"; the Time Warner Contribution Transactions and the
Sony Contribution Transactions are referred to in this Agreement collectively as
the "Contribution Transactions"; the Sony Contribution Share Issuance, together
with the Merger Share Issuance and the Time Warner Contribution Share Issuance,
are referred to in this Agreement collectively as the "Share Issuances". The
Merger Transactions, the Contribution Transactions and the Canadian
Transactions, together with the other transactions contemplated by this
Agreement, are referred to in this Agreement collectively as the "Transactions".
SECTION 1.03. Closing. The closing (the "Closing") of the
Transactions shall take place at the offices of Cravath, Swaine & ▇▇▇▇▇, ▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ at 10:00 a.m., New York City time, on
the second business day following the satisfaction (or, to the extent permitted
by Law, waiver by all parties) of the conditions set forth in Section 9.01, or,
if on such day any condition set forth in Section 9.02 or 9.03 has not been
satisfied (or, to the extent permitted by Law, waived by the party or parties
entitled to the benefits thereof), as soon as practicable after all the
conditions set forth in Article IX (other than those conditions that by their
nature are to be satisfied at the Closing, but subject to the satisfaction or,
to the extent permitted by Law, waiver by the parties entitled to the benefits
of such conditions) have been satisfied (or, to the extent permitted by Law,
waived by the parties entitled to the benefits thereof), or at such other place,
time and date as shall be agreed in writing by the parties to this Agreement.
The date on which the Closing occurs is referred to in this Agreement as the
"Closing Date".
SECTION 1.04. Effective Time. Prior to the Closing, Time Warner and
Sony shall jointly prepare, and on the Closing Date CDnow shall file with the
Department of State of the Commonwealth of Pennsylvania, articles of merger or
other appropriate documents (in any such case, the "Articles of Merger")
executed in accordance with the relevant provisions of the PBCL and CDnow shall
make all other filings or recordings required under the PBCL. The Merger shall
become effective at such time as the Articles of Merger are duly filed with such
Department of State, or
11
at such later time as the parties to this Agreement shall agree and specify in
the Articles of Merger, and each of the Contribution Transactions and the
Canadian Transactions shall be effective as of the time at which the Merger
becomes effective (the time of the effectiveness of the Merger, the Contribution
Transactions and the Canadian Transactions being the "Effective Time"). At the
Effective Time, the provisions of each of the Supplemental Agreements and the
Strategic Commitments Letter shall become effective.
ARTICLE II
Effect of Merger on the Capital Stock of the
Constituent Corporations in the Merger;
Exchange of Certificates in the Merger
SECTION 2.01. Effect on Capital Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of CDnow Common Stock or any shares of capital stock of Pennsylvania Sub:
(a) Capital Stock of Pennsylvania Sub. Each issued and outstanding
share of capital stock of Pennsylvania Sub shall be converted into and become
one fully paid and nonassessable share of common stock, par value $0.01 per
share, of the Surviving Corporation.
(b) Cancelation of Treasury Stock and Certain Other Stock. Each
share of CDnow Common Stock that is owned by CDnow or Pennsylvania Sub shall no
longer be outstanding and shall automatically be canceled and retired and shall
cease to exist, and no Holdco Common Stock or other consideration shall be
delivered or deliverable in exchange therefor.
(c) Conversion of CDnow Common Stock. (i) Subject to Sections
2.01(b) and 2.01(d), each issued share of CDnow Common Stock shall be converted
into the right to receive one fully paid and nonassessable share of Holdco Class
A Common Stock.
(ii) The shares of Holdco Class A Common Stock to be issued upon the
conversion of shares of CDnow Common Stock pursuant to this Section 2.01(c) are
referred to collectively as "Merger Consideration". As of the Effective Time,
all such shares of CDnow Common Stock 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 of CDnow Common
12
Stock shall cease to have any rights with respect thereto, except the right to
receive Merger Consideration upon surrender of such certificate in accordance
with Section 2.02, without interest.
(d) Dissenters Rights. Notwithstanding anything in this Agreement to
the contrary, shares ("Dissent Shares") of CDnow Common Stock that are
outstanding immediately prior to the Effective Time and that are held by any
person who is entitled to demand and properly demands payment of the fair value
of such Dissent Shares pursuant to, and who complies in all respects with,
Subchapter D of Chapter 15 of the PBCL ("Subchapter D") shall not be converted
into Merger Consideration as provided in Section 2.01(c), but rather the holders
of Dissent Shares shall be entitled to payment of the fair value of such Dissent
Shares in accordance with Subchapter D; provided, however, that if any such
holder shall fail to perfect or otherwise shall waive, withdraw or lose the
right to receive payment of fair value under Subchapter D, then the right of
such holder to be paid the fair value of such holder's Dissent Shares shall
cease and such Dissent Shares shall be deemed to have been converted as of the
Effective Time into, and to have become exchangeable solely for the right to
receive, Merger Consideration as provided in Section 2.01(c). CDnow shall serve
prompt notice to Time Warner and Sony of any demands received by CDnow for
appraisal of any shares of CDnow Common Stock, and Time Warner and Sony shall
have the right to participate in and direct all negotiations and proceedings
with respect to such demands. Prior to the Effective Time, CDnow shall not,
without the prior written consent of Time Warner and Sony, make any payment with
respect to, or settle or offer to settle, any such demands, or agree to do any
of the foregoing.
SECTION 2.02. Exchange of Certificates. (a) Exchange Agent. Promptly
following the Effective Time, Holdco shall deposit with StockTrans, Inc.,
Ardmore, Pennsylvania, or such other bank or trust company as may be designated
by Holdco, Time Warner and Sony (the "Exchange Agent"), for the benefit of the
holders of shares of CDnow Common Stock, for exchange in accordance with this
Article II, through the Exchange Agent, certificates representing the shares of
Holdco Class A Common Stock issuable pursuant to Section 2.01 in exchange for
outstanding shares of CDnow Common Stock (such shares of Holdco Class A Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall,
pursuant to irrevocable instructions, deliver the Holdco Class A Common Stock
contemplated to be issued
13
pursuant to Section 2.01 out of the Exchange Fund. The Exchange Fund shall not
be used for any other purpose.
(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 (the "Certificates") that immediately prior to the
Effective Time represented outstanding shares of CDnow Common Stock whose shares
were converted into the right to receive Merger Consideration pursuant to
Section 2.01 (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 Holdco may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for Merger Consideration. Upon surrender of a Certificate for
cancelation to the Exchange Agent, together with such letter of transmittal,
duly executed, and such other documents as may reasonably be required by the
Exchange Agent, the holder of such Certificate shall be entitled to receive in
exchange therefor a certificate representing that number of whole shares of
Holdco Class A Common Stock that such holder has the right to receive pursuant
to the provisions of this Article II, and the Certificate so surrendered shall
forthwith be canceled. Until such time as a certificate representing Holdco
Class A Common Stock is issued to or at the direction of the holder of a
surrendered Certificate, such Holdco Class A Common Stock shall be deemed not
outstanding and shall not be entitled to vote on any matter. In the event of a
transfer of ownership of CDnow Common Stock that is not registered in the
transfer records of CDnow, a certificate representing the appropriate number of
shares of Holdco Common Stock may be issued to a person other than the person in
whose name the Certificate so surrendered is registered, if such Certificate
shall be properly endorsed or otherwise be in proper form for transfer and the
person requesting such payment shall pay any transfer or other taxes required by
reason of the issuance of shares of Holdco Class A Common Stock to a person
other than the registered holder of such Certificate or establish to the
satisfaction of Holdco that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.02, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender Merger Consideration as contemplated by this Section
2.02. No interest shall be paid or accrue on any cash payable upon surrender of
any Certificate.
14
(c) Distributions with Respect to Unexchanged Shares. No dividends
or other distributions with respect to Holdco Class A Common Stock with a record
date after the Effective Time shall be paid to the holder of any Certificate
with respect to the shares of Holdco Class A Common Stock issuable upon
surrender thereof until the surrender of such Certificate in accordance with
this Article II. Subject to applicable Law, following surrender of any
Certificate, there shall be paid to the holder the certificate representing
whole shares of Holdco Class A Common Stock issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of Holdco Class A Common Stock and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to such surrender and a payment
date subsequent to such surrender payable with respect to such whole shares of
Holdco Class A Common Stock.
(d) No Further Ownership Rights in CDnow Common Stock. The Merger
Consideration issued (and paid) in accordance with the terms of this Article II
upon conversion of any shares of CDnow Common Stock shall be deemed to have been
issued (and paid) in full satisfaction of all rights pertaining to such shares
of CDnow Common Stock; subject, however, to the Surviving Corporation's
obligation to pay any dividends or make any other distributions with a record
date prior to the Effective Time that may have been declared or made by CDnow on
such shares of CDnow Common Stock in accordance with the terms of this Agreement
or prior to the date of this Agreement and which remain unpaid at the Effective
Time, and after the Effective Time there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of shares of
CDnow Common Stock that were outstanding immediately prior to the Effective
Time. If, after the Effective Time, any Certificates are presented to the
Surviving Corporation or the Exchange Agent for any reason, they shall be
canceled and exchanged as provided in this Article II.
(e) Termination of Exchange Fund. Any portion of the Exchange Fund
that remains undistributed to the holders of CDnow Common Stock for six months
after the Effective Time shall be delivered to Holdco, upon demand, and any
holder of CDnow Common Stock who has not theretofore complied with this Article
II shall thereafter look only to Holdco for payment of its claim for Merger
Consideration and any dividends or distributions with respect to Holdco Common
Stock as contemplated by Section 2.02(c).
15
(f) No Liability. None of Time Warner, Sony, CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I, Delaware Sub II or the Exchange Agent shall be
liable to any person in respect of any shares of Holdco Common Stock (or
dividends or distributions with respect thereto) or cash from the Exchange Fund
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar Law. If any Certificate has not been surrendered prior to
five years after the Effective Time (or immediately prior to such earlier date
on which Merger Consideration or any dividends or distributions with respect to
Holdco Common Stock as contemplated by Section 2.02(c)(i) in respect of such
Certificate would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 3.05(b)), any such shares, cash,
dividends or distributions in respect of such Certificate shall, to the extent
permitted by applicable Law, become the property of the Surviving Corporation,
free and clear of all claims or interest of any person previously entitled
thereto.
(g) Investment of Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund, as directed by Holdco, on a daily basis. Any
interest and other income resulting from such investments shall be paid to
Holdco.
(h) Withholding Rights. Holdco shall be entitled to deduct and
withhold from the consideration otherwise payable to any holder of CDnow Common
Stock pursuant to this Agreement such amounts as may be required to be deducted
and withheld with respect to the making of such payment under the Code, or under
any provision of state, local or foreign tax Law. To the extent that amounts are
so withheld and paid over to the appropriate taxing authority, Holdco will be
treated as though it withheld an appropriate amount of the type of consideration
otherwise payable pursuant to this Agreement to any holder of CDnow Common
Stock, sold such consideration for an amount of cash equal to the fair market
value of such consideration at the time of such deemed sale and paid such cash
proceeds to the appropriate taxing authority.
16
ARTICLE III
Representations and Warranties of CDnow
CDnow represents and warrants to each of Time Warner and Sony as
follows:
SECTION 3.01. Organization, Standing and Power. Each of CDnow,
Holdco, Pennsylvania Sub, Delaware Sub I and Delaware Sub II and each of the
other subsidiaries of CDnow (Holdco, Pennsylvania Sub, Delaware Sub I, Delaware
Sub II and each other subsidiary of CDnow being collectively referred to in this
Agreement as the "CDnow Subsidiaries") is duly organized, validly existing and
in good standing under the Laws of the jurisdiction in which it is organized and
has full power and authority and possesses all governmental franchises,
licenses, permits, authorizations and approvals necessary to enable it to own,
lease or otherwise hold its properties and assets and to conduct its businesses
as presently conducted, other than such franchises, licenses, permits,
authorizations and approvals the lack of which, individually and in the
aggregate, has not had and could not reasonably be expected to have a material
adverse effect (as defined in Section 11.03) on CDnow and the CDnow
Subsidiaries, taken as a whole, or a material adverse effect on the ability of
CDnow or any of the CDnow Subsidiaries to perform its obligations under any of
the Transaction Agreements to which it is a party or to consummate the
Transactions, except to the extent such effect is the result of (i) actions
taken by Time Warner or Sony (other than actions required by any Transaction
Agreement) or economic factors affecting the economy as a whole or the industry
in which CDnow competes or (ii) payment of legal fees incurred in the defense of
any litigation by stockholders of CDnow challenging the Transactions (a "CDnow
Material Adverse Effect"). CDnow and each CDnow Subsidiary is duly qualified to
do business in each jurisdiction where the nature of its business or the
ownership or leasing of its properties makes such qualification necessary,
except where the failure to so qualify has not had and could not reasonably be
expected to have a CDnow Material Adverse Effect. CDnow has delivered to each of
Time Warner and Sony true and complete copies of the articles of incorporation
of CDnow, as amended to the date of this Agreement (as so amended, the "CDnow
Charter"), and the by-laws of CDnow, as amended to the date of this Agreement
(as so amended, the "CDnow By-laws"), and the comparable organizational
documents of each CDnow Subsidiary, in each case as amended to the date of this
Agreement. As of the Effective Time, the Certificate of Incorporation of Holdco
will be substantially in the form of
17
Exhibit K attached hereto and the By-laws of Holdco will be substantially in the
form of Exhibit L attached hereto.
SECTION 3.02. CDnow Subsidiaries; Equity Interests. (a) The letter,
dated as of the date of this Agreement, from CDnow to Time Warner and Sony (the
"CDnow Disclosure Letter") lists each CDnow Subsidiary and its jurisdiction of
organization. All the outstanding shares of capital stock of each CDnow
Subsidiary have been validly issued and are fully paid and nonassessable and,
except as set forth in the CDnow Disclosure Letter, are owned by CDnow, by a
wholly owned CDnow Subsidiary or by CDnow and a wholly owned CDnow Subsidiary,
free and clear of all pledges, liens, charges, mortgages, encumbrances and
security interests of any kind or nature whatsoever (collectively, "Liens").
(b) Except for its interests in the CDnow Subsidiaries and except
for the ownership interests set forth in the CDnow Disclosure Letter, CDnow does
not own, directly or indirectly, any capital stock, membership interest,
partnership interest, joint venture interest or other equity interest in any
person.
(c) Each of Holdco, Pennsylvania Sub, Delaware Sub I and Delaware
Sub II was formed solely for the purpose of engaging in the Transactions. None
of Holdco, Pennsylvania Sub, Delaware Sub I or Delaware Sub II has carried on
any business or conducted any operations since the date of its incorporation
other than the execution of this Agreement and the other Transaction Agreements
to which any of them are parties, the performance of their obligations hereunder
and thereunder and matters ancillary thereto.
SECTION 3.03. Capital Structure. The authorized capital stock of
CDnow consists of 200,000,000 shares of CDnow Common Stock, without par value,
and 50,000,000 shares of preferred stock, without par value (together with the
CDnow Common Stock, the "CDnow Capital Stock"). At the close of business on July
9, 1999, (i) 30,211,473 shares of CDnow Common Stock were issued and
outstanding, (ii) no shares of CDnow Common Stock were held by CDnow in its
treasury and (iii) 1,511,934 additional shares of CDnow Common Stock were
reserved for issuance pursuant to the CDnow Stock Plans (as defined in Section
8.04(d)). The CDnow Disclosure Letter sets forth a complete list of all CDnow
Employee Stock Options (as defined in Section 8.04) outstanding at the close of
business on July 12, 1999, together with the number of shares of CDnow Common
Stock subject to each such CDnow Employee Stock Option and the
18
exercise price thereof. The CDnow Disclosure Letter sets forth a complete list
of all warrants to acquire shares of CDnow Common Stock (the "CDnow Warrants")
outstanding at the close of business on July 12, 1999 together with the number
of shares of CDnow Common Stock subject to each such warrant and the exercise
price thereof. Except as set forth above or in the CDnow Disclosure Letter, at
the close of business on July 12, 1999, no shares of capital stock or other
voting securities of CDnow were issued, reserved for issuance or outstanding.
There are no outstanding CDnow stock appreciation rights. All outstanding shares
of CDnow Capital Stock are, and all such shares that may be issued prior to the
Effective Time will be when issued, duly authorized, validly issued, fully paid
and nonassessable and not subject to or issued in violation of any purchase
option, call option, right of first refusal, preemptive right, subscription
right or any similar right under any provision of the PBCL, the CDnow Charter,
the CDnow By-laws or any Contract (as defined in Section 3.05) to which CDnow is
a party or otherwise bound. There are not any bonds, debentures, notes or other
indebtedness of CDnow having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
holders of CDnow Common Stock may vote ("Voting CDnow Debt"). Except as set
forth above or in the CDnow Disclosure Letter, there are not any options,
warrants, rights, convertible or exchangeable securities, "phantom" stock
rights, stock appreciation rights, stock-based performance units, commitments,
Contracts, arrangements or undertakings of any kind to which CDnow or any CDnow
Subsidiary is a party or by which any of them is bound (i) obligating CDnow or
any CDnow Subsidiary to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or other equity interests in, or any
security convertible or exercisable for or exchangeable into any capital stock
of or other equity interest in, CDnow or any CDnow Subsidiary or any Voting
CDnow Debt, (ii) obligating CDnow or any CDnow Subsidiary to issue, grant,
extend or enter into any such option, warrant, call, right, security,
commitment, Contract, arrangement or undertaking or (iii) that give any person
the right to receive any economic benefit or right similar to or derived from
the economic benefits and rights accruing to holders of CDnow Capital Stock.
There are not any outstanding contractual obligations of CDnow or any CDnow
Subsidiary to repurchase, redeem or otherwise acquire any shares of capital
stock of CDnow or any CDnow Subsidiary. As of the Effective Time, each CDnow
Warrant will, by its terms, provide the holder thereof with the right to receive
the amount of Merger Consideration such holder would have received in the Merger
had such CDnow Warrant been exercised
19
immediately prior to the Effective Time (and no other consideration) upon
exercise thereof.
SECTION 3.04. Authority; Execution and Delivery; Enforceability. (a)
Each of CDnow, Holdco, Pennsylvania Sub, Delaware Sub I and Delaware Sub II has
all requisite power and authority to execute and deliver the Transaction
Agreements to which it is a party and to consummate the Transactions. The
execution and delivery by each of CDnow, Holdco, Pennsylvania Sub, Delaware Sub
I and Delaware Sub II of each Transaction Agreement to which it is a party and
the consummation by each of CDnow, Holdco, Pennsylvania Sub, Delaware Sub I and
Delaware Sub II of the Transactions have been duly authorized by all necessary
action on the part of CDnow, Holdco, Pennsylvania Sub, Delaware Sub I and
Delaware Sub II, subject, in the case of the Merger, to receipt of the CDnow
Shareholder Approval (as defined in Section 3.04(c)). Each of CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I and Delaware Sub II has duly executed and
delivered each Initial Agreement to which it is a party, and, assuming the due
authorization, execution and delivery by each person other than CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I and Delaware Sub II party thereto, each Initial
Agreement to which it is a party constitutes its legal, valid and binding
obligation, enforceable against it in accordance with its terms. On or prior to
the Closing Date, each of CDnow, Holdco, Pennsylvania Sub, Delaware Sub I and
Delaware Sub II shall have duly executed and delivered each Supplemental
Agreement to which it is a party, and, when so executed and delivered, and duly
authorized, executed and delivered by each person other than CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I and Delaware Sub II party thereto, each
Supplemental Agreement to which it is a party will constitute its legal, valid
and binding obligation, enforceable against it in accordance with its terms.
(b) The Board of Directors of CDnow (the "CDnow Board"), at a
meeting duly called and held prior to the date of this Agreement, duly and
unanimously (i) approved this Agreement, the other Transaction Agreements, the
Merger and the other Transactions, (ii) determined that the terms of the Merger
and the other Transactions are fair to and in the best interests of CDnow and
its shareholders and (iii) recommended that CDnow's shareholders approve and
adopt this Agreement. Such resolutions are sufficient to render inapplicable to
CDnow, Holdco, Pennsylvania Sub, Time Warner and Sony, and this Agreement, the
other Transaction Agreements, the Merger and the other Transactions, the
provisions of Subchapters D (Section 2538) and F of Section 25 of the PBCL to
the extent, if any, such
20
subchapters would otherwise be applicable to CDnow, Holdco, Pennsylvania Sub,
Time Warner, Sony, this Agreement, the other Transaction Agreements, the Merger
or the other Transactions. No other state takeover statute or similar statute or
regulation applies or purports to apply to CDnow, Holdco or Pennsylvania Sub
with respect to this Agreement, the other Transaction Agreements, the Merger or
any other Transaction.
(c) The only vote of holders of any class or series of CDnow Capital
Stock necessary to approve and adopt this Agreement and the Merger is the
adoption of this Agreement by the affirmative vote of a majority of the votes
cast by all holders of CDnow Common Stock entitled to vote thereon (the "CDnow
Shareholder Approval"). The affirmative vote of the holders of CDnow Capital
Stock, or any of them, is not necessary to approve any Transaction Agreement
other than this Agreement or to consummate any Transaction other than the
Merger.
SECTION 3.05. No Conflicts; Consents. (a) Except as set forth in the
CDnow Disclosure Letter, the execution and delivery by each of CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I and Delaware Sub II of this Agreement and each
other Transaction Agreement to which it is a party do not, and the consummation
of the Transactions and compliance with the terms hereof and thereof will not,
conflict with, or result in any violation of or default (with or without notice
or lapse of time, or both) under, or give rise to a right of termination,
cancelation or acceleration of any obligation or to loss of a material benefit
under, or to increased, additional, accelerated or guaranteed rights or
entitlements of any person under, or result in the creation of any Lien upon any
of the properties or assets of CDnow, Holdco, Pennsylvania Sub, Delaware Sub I,
Delaware Sub II or any other CDnow Subsidiary under, any provision of (i) the
CDnow Charter, the CDnow By-laws or the comparable organizational documents of
Holdco, Pennsylvania Sub, Delaware Sub I, Delaware Sub II or any other CDnow
Subsidiary, (ii) any contract, lease, license, indenture, note, bond, agreement,
permit, concession, franchise or other instrument (a "Contract") to which CDnow,
Holdco, Pennsylvania Sub, Delaware Sub I, Delaware Sub II or any other CDnow
Subsidiary is a party or by which any of its properties or assets is bound or
(iii) subject to the filings and other matters referred to in Section 3.05(b),
any judgment, order or decree ("Judgment") or statute, law (including common
law), ordinance, rule or regulation ("Law") applicable to CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I, Delaware Sub II or any other CDnow Subsidiary
or their respective properties or
21
assets, other than, in the case of clauses (ii) and (iii), any such items that,
individually and in the aggregate, have not had and could not reasonably be
expected to have a CDnow Material Adverse Effect.
(b) No consent, approval, license, permit, order or authorization
("Consent") of, or registration, declaration or filing with, or permit from, any
Federal, state, local or foreign government or any court of competent
jurisdiction, administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign (a "Governmental Entity") is
required to be obtained or made by or with respect to CDnow or any other CDnow
Subsidiary in connection with the execution, delivery and performance of any
Transaction Agreement to which it is a party or the consummation of the
Transactions, other than (i) compliance with and filings under the
▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and Competition Act (Canada) (the "Canadian Competition Act") and receipt
of the Canadian Competition Act Approval (as defined below), (ii) the filing
with the Securities and Exchange Commission (the "SEC") of (A) a proxy or
information statement relating to the adoption of this Agreement by CDnow's
shareholders (the "Proxy Statement") and (B) such reports under Sections 13 and
16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
may be required in connection with this Agreement, the other Transaction
Agreements and the Transactions, (iii) the filing of the Articles of Merger with
the Department of State of the Commonwealth of Pennsylvania and appropriate
documents with the relevant authorities of the other jurisdictions in which
CDnow is qualified to do business, (iv) such Consents, registrations or filings
as may be required under applicable state securities laws or the laws of any
foreign country, (v) compliance with and such filings as may be required under
applicable Environmental Laws (as defined in Section 3.17), (vi) such filings as
may be required in connection with the Taxes (as defined in Section 3.09(k))
described in Section 8.09 and (vii) such other items as are set forth in the
CDnow Disclosure Letter. "Canadian Competition Act Approval" means the relevant
waiting period under Section 123 of the Canadian Competition Act shall have
expired and (a) an advance ruling certificate (an "ARC") pursuant to Section 102
of the Canadian Competition Act shall have been issued by the Commissioner, (b)
a "no action letter" indicating that the Commissioner has determined not to make
an application for an order under Section 92 of the Canadian Competition Act
shall have been received from the Commissioner, and any terms and conditions
attached to any such letter shall be reasonably acceptable to each party or
22
(c) in the event that neither an ARC nor a "no action letter" is issued, there
shall be no threatened or actual application by the Commissioner for an order
under Sections 92 or 100 of the Canadian Competition Act.
SECTION 3.06. SEC Documents; Undisclosed Liabilities. All reports,
schedules, forms, statements and other documents required to be filed with the
SEC (i) by CDnow since March 17, 1999 and (ii) by CDnow Online, Inc. (formerly
known as CDnow, Inc.), a Pennsylvania corporation and a wholly owned CDnow
Subsidiary ("CDnow Online"), since February 9, 1998 (such reports, schedules,
forms, statements and other documents, the "CDnow SEC Documents") have been duly
filed by such parties. As of its date, each CDnow SEC Document complied as to
form in all material respects with the requirements of the Exchange Act or the
Securities Act of 1933, as amended (the "Securities Act"), as the case may be,
and the rules and regulations of the SEC promulgated thereunder applicable to
such CDnow SEC Document, and did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. Except to the extent that information
contained in (i) the Registration Statement on Form S-4 filed with the SEC by
CDnow on February 16, 1999 (the "CDnow Form S-4 Date"), (ii) all reports,
schedules, forms, statements and documents filed with the SEC by CDnow pursuant
to the Exchange Act and the rules and regulations of the SEC promulgated
thereunder since the CDnow Form S-4 Date and (iii) the Annual Report on Form
10-K of CDnow Online for the year ended December 31, 1998 (collectively, the
"Designated CDnow SEC Documents") has been revised or superseded by a subsequent
report, schedule, form, statement or other document filed with the SEC by CDnow,
which subsequent report, schedule, form, statement or other document is publicly
available prior to the date of this Agreement, none of the Designated CDnow SEC
Documents contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements included in the CDnow SEC Documents
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto in effect as of their respective filing dates, were prepared in
accordance with generally accepted accounting principles ("GAAP") (except, in
the case of unaudited interim statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto)
23
and fairly presented the financial position of the entities purported to be
covered thereby as of the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended (subject, in the case of
unaudited interim statements, to normal year-end audit adjustments). Except as
disclosed in the Filed CDnow SEC Documents (as defined in Section 3.08), and
except for liabilities and obligations incurred since December 31, 1998 in the
ordinary course of business consistent with past practice or as set forth in the
CDnow Disclosure Letter, neither CDnow nor any CDnow Subsidiary has any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) required by GAAP to be set forth on a consolidated balance sheet
or in the notes thereto, except those liabilities or obligations that,
individually and in the aggregate, have not had and could not reasonably be
expected to have a CDnow Material Adverse Effect.
SECTION 3.07. Information Supplied. None of the information supplied
or to be supplied by CDnow for inclusion or incorporation by reference in (i)
the registration statement on Form S-4 to be filed with the SEC by Holdco in
connection with the Share Issuances (the "Form S-4") will, at the time the Form
S-4 is filed with the SEC, at any time it is amended or supplemented or at the
time it becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or (ii) the
Proxy Statement will, at the date it is first mailed to CDnow's shareholders or
at the time of the CDnow Shareholders Meeting (as defined in Section 8.01(d)),
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material respects
with the requirements of the Exchange Act and the rules and regulations
thereunder, except that no representation is made by CDnow with respect to
statements made or incorporated by reference therein based on information
supplied by Time Warner or Sony in writing for inclusion or incorporation by
reference in the Proxy Statement.
SECTION 3.08. Absence of Certain Changes or Events. Except as
disclosed in the CDnow SEC Documents filed and publicly available prior to the
date of this Agreement (the "Filed CDnow SEC Documents") or set forth in
24
the CDnow Disclosure Letter, each of CDnow and each CDnow Subsidiary has
conducted its business only in the ordinary course, and there has not been:
(i) since March 18, 1999, any event, change, effect or development
that, individually or in the aggregate, has had or could reasonably be
expected to have a CDnow Material Adverse Effect;
(ii) since March 18, 1999, any declaration, setting aside or payment
of any dividend or other distribution (whether in cash, stock or property)
with respect to any CDnow Capital Stock or any repurchase for value by
CDnow of any CDnow Capital Stock;
(iii) since March 18, 1999, any split, combination or
reclassification of any CDnow Capital Stock or any issuance or the
authorization of any issuance of any other securities in respect of, in
lieu of, or in substitution for shares of, CDnow Capital Stock;
(iv) since March 18, 1999, (A) any granting by CDnow or any CDnow
Subsidiary to any director or executive officer of, or consultant (who
performs services comparable to an employee) to, CDnow or any CDnow
Subsidiary of any increase in compensation, except for customary increases
in cash compensation in the ordinary course of business consistent with
prior practice or as was required under employment agreements or plans in
effect as of ▇▇▇▇▇ ▇▇, ▇▇▇▇, (▇) any granting by CDnow or any CDnow
Subsidiary to any such director, executive officer or consultant of any
increase in severance or termination pay, except as was required under any
employment, severance or termination agreements or plans in effect as of
March 18, 1999, (C) except as permitted by Section 7.01(a)(viii) after the
date of this Agreement, any entry by CDnow or any CDnow Subsidiary into,
or any amendment of, any employment, consulting, deferred compensation,
indemnification, severance or termination agreement with any such
director, executive officer or consultant or (D) any acceleration of the
vesting of any CDnow Employee Stock Options or other equity-based
compensation;
(v) since December 31, 1998, any change in accounting methods,
principles or practices by CDnow or any CDnow Subsidiary materially
affecting the consolidated assets, liabilities or results of operations of
CDnow or such CDnow Subsidiary, except insofar as may have been required
by a change in GAAP
25
or by SEC interpretations with respect to filings therewith;
(vi) since December 31, 1998, any material elections or changes in
accounting methods with respect to Taxes by CDnow or any CDnow Subsidiary
or settlement or compromise by CDnow or any CDnow Subsidiary of any
material Tax liability or refund;
(vii) since March 18, 1999, any acquisition by CDnow or any CDnow
Subsidiary (A) by merging or consolidating with, or by purchasing assets
of, or by any other manner, any equity interest in or portion of any
business of any corporation, partnership, company, limited liability
company, joint venture, association or other business organization or
division thereof or (B) of any assets that, individually, are in excess of
$1 million or, in the aggregate, are in excess of $2.5 million, except
purchases of inventory for resale and renewals of licenses, in each case
in the ordinary course of business consistent with prior practice;
(viii) since March 18, 1999, any sale, lease, assignment, transfer,
conveyance, delivery or other disposition, or any divestiture, by CDnow or
any CDnow Subsidiary of any properties or assets of CDnow or such CDnow
Subsidiary, other than sales of inventory and renewals of licenses, in
each case in the ordinary course of business consistent with prior
practice and sale/leaseback transactions in respect of equipment
financings not to exceed $1 million in the aggregate; or
(ix) since March 18, 1999, any entry by CDnow or any CDnow
Subsidiary into, or any amendment or modification of, any agreement (A) in
respect of the licensing of any material Intellectual Property Rights (as
defined in Section 3.20) on an exclusive basis or for a term in excess of
two years or involving the cash payment, equivalent equity outlay or
provision of services in an amount greater than (I) $100,000 per annum or
(II) $500,000 over the term of the agreement, (B) with any "portal",
"internet service provider" or "internet search engine" that provides for
the cash payment, equivalent equity outlay or provision of services in an
amount greater than (I) $100,000 per annum or (II) $500,000 over the term
of the agreement or (C) with any record company or label or affiliate
thereof that provides for the cash payment, equivalent equity outlay or
provision of services in an amount
26
greater than (I) $100,000 per annum or (II) $500,000 over the term of the
agreement.
SECTION 3.09. Taxes. (a) Each of CDnow and each CDnow Subsidiary has
timely filed, or has had or caused to be timely filed on its behalf, all Tax
Returns (as defined in Section 3.09(k)) required to be filed by it, and all such
Tax Returns are true, complete and accurate, except to the extent any failure to
file or any inaccuracies in any filed Tax Returns, individually and in the
aggregate, have not had and could not reasonably be expected to have a CDnow
Material Adverse Effect. All Taxes shown to be due on such Tax Returns, or
otherwise owed, have been timely paid, except to the extent that any failure to
pay, individually and in the aggregate, has not had and could not reasonably be
expected to have a CDnow Material Adverse Effect. Each of CDnow and each CDnow
Subsidiary has withheld or collected and has paid over to the appropriate taxing
authority (or is properly holding for payment to such taxing authority) all
Taxes required by law to be withheld or collected, except for amounts that would
not, individually and in the aggregate, have a CDnow Material Adverse Effect.
(b) The pro forma financial statements contained in the Filed CDnow
SEC Documents reflect an adequate reserve for all Taxes payable by CDnow and the
CDnow Subsidiaries for all Taxable periods and portions thereof through the date
of such financial statements. No deficiency with respect to any Taxes has been
proposed, asserted or assessed or, to the knowledge of CDnow, threatened against
CDnow or any CDnow Subsidiary, no waivers of the time to assess any such Taxes
are outstanding and no requests for any waivers are pending, except for any such
deficiency, waiver or request for waiver, that individually and in the
aggregate, has not had and could not reasonably be expected to have a CDnow
Material Adverse Effect.
(c) Except as set forth in the CDnow Disclosure Letter, none of the
Tax Returns of CDnow or any CDnow Subsidiary has been examined by any taxing
authority or is currently being examined by any taxing authority or is the
subject of a pending examination. All assessments for Taxes due with respect to
any completed or settled examinations or any concluded litigation have been
fully paid. Except as set forth in the CDnow Disclosure Letter, neither CDnow
nor any CDnow Subsidiary has entered into a closing agreement with any taxing
authority with respect to Taxes.
(d) There are no material Liens for Taxes (other than for current
Taxes not yet due and payable or that are being contested in good faith in
appropriate proceedings) on
27
the assets of CDnow or any CDnow Subsidiary. Neither CDnow nor any CDnow
Subsidiary (i) is bound by any agreement with any affiliate with respect to
Taxes or (ii) otherwise is bound by any tax sharing, allocation or similar
agreement or any indemnification or reimbursement agreement with respect to
Taxes.
(e) Neither CDnow nor any CDnow Subsidiary has made an election
under Section 341(f) of the Code or otherwise, except for any elections that
would not, individually and in the aggregate, have a CDnow Material Adverse
Effect. Neither CDnow nor any CDnow Subsidiary (i) has agreed to or is required
to make any adjustments pursuant to Section 481 of the Code; (ii) has knowledge
that the Internal Revenue Service has proposed any such adjustment or a change
in accounting method with respect to such entity; or (iii) has an application
pending with the Internal Revenue Service or any other taxing authority
requesting permission for any change in accounting method.
(f) Neither CDnow nor any CDnow Subsidiary 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.
(g) Except as set forth in the CDnow Disclosure Letter, neither
CDnow nor any CDnow Subsidiary has been a member of a group filing combined,
consolidated or unitary Tax Returns other than a group of which CDnow is the
common parent, and neither CDnow nor any CDnow Subsidiary has any liability for
Taxes of any other person under Treasury Regulations Section 1.1502-6 (or
comparable provisions of foreign, state or local law), as a transferee or
successor, by contract or otherwise.
(h) CDnow has no reason to believe that any conditions exist that
could reasonably be expected to prevent the Merger and the Contributions from
qualifying as exchanges under Section 351 of the Code.
(i) No notice of a claim or pending investigation has been received,
or to the knowledge of CDnow or any CDnow Subsidiary, has been threatened, by
any state, local or other jurisdiction with which CDnow or any CDnow Subsidiary
does not currently file Tax Returns, alleging that CDnow or such CDnow
Subsidiary has a duty to file Tax Returns and pay Taxes or is otherwise subject
to the taxing authority of such jurisdiction, nor has CDnow or any CDnow
Subsidiary received any notice or questionnaire from any such jurisdiction that
suggests or asserts that CDnow or such
28
CDnow Subsidiary may have a duty to file such Tax Returns and pay such Taxes, or
otherwise is subject to the taxing authority of such jurisdiction.
(j) Except as set forth in the CDnow Disclosure Letter, the CDnow
Stock Plans and any awards or grants thereunder have been designed so that the
disallowance of a deduction under Section 162(m) of the Code for employee
remuneration will not apply to any amount paid or payable by CDnow or any of its
subsidiaries under any such plan, award or grant and, to the knowledge of CDnow,
no fact or circumstance exists that would cause such disallowance to apply to
any such amount.
(k) For purposes of this Agreement:
"Taxes" includes all forms of taxation, whenever created or imposed,
and whether of the United States or elsewhere, and whether imposed by a local,
municipal, state, foreign, Federal or other Governmental Entity, or in
connection with any agreement with respect to Taxes, including all interest,
penalties and additions imposed with respect to such amounts.
"Tax Return" means all Federal, state, local, provincial and foreign
Tax returns, declarations, statements, reports, schedules, forms and information
returns and any amended Tax return relating to Taxes.
SECTION 3.10. Absence of Changes in Benefit Plans. Except as
disclosed in the Filed CDnow SEC Documents or set forth in the CDnow Disclosure
Letter, as of the date of this Agreement, since March 18, 1999, there has not
been any adoption or amendment in any material respect by CDnow or any CDnow
Subsidiary or any CDnow ERISA Affiliate (as defined below) of any collective
bargaining agreement or any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, medical or other plan, arrangement or understanding
(whether or not legally binding) providing benefits to any current or former
employee, officer or director of CDnow or any CDnow Subsidiary or any entity
that, with CDnow or any CDnow Subsidiary, formed or forms a "Controlled Group"
within the meaning of Section 412(n)(6) of the Code (each, a "CDnow ERISA
Affiliate") (collectively, "CDnow Benefit Plans"). Except as disclosed in the
Filed CDnow SEC Documents or set forth in the CDnow Disclosure Letter, as of the
date of this Agreement, there are no employment, consulting, indemnification,
severance or termination agreements or
29
arrangements between CDnow or any CDnow Subsidiary and any current or former
employee, executive officer or director of CDnow or any CDnow Subsidiary. Except
as set forth in the CDnow Disclosure Letter, neither CDnow nor any CDnow
Subsidiary has any general severance plan or policy.
SECTION 3.11. ERISA Compliance; Excess Parachute Payments. (a) The
CDnow Disclosure Letter contains a list of all "employee pension benefit plans"
(as defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), whether or not subject thereto) (sometimes referred
to herein as "CDnow Pension Plans"), "employee welfare benefit plans" (as
defined in Section 3(1) of ERISA) and all other CDnow Benefit Plans maintained,
or contributed to, by CDnow or any CDnow Subsidiary for the benefit of any
current or former employees, officers or directors of CDnow or any CDnow
Subsidiary. CDnow has delivered to each of Time Warner and Sony true, complete
and correct copies of (i) each CDnow Benefit Plan (or, in the case of any
unwritten CDnow Benefit Plan, a description thereof), (ii) the most recent
annual report on Form 5500 filed with the Internal Revenue Service with respect
to each CDnow Benefit Plan (if any such report was required), (iii) the most
recent summary plan description for each CDnow Benefit Plan for which such
summary plan description is required and (iv) each trust agreement and group
annuity contract relating to any CDnow Benefit Plan.
(b) Except as set forth in the CDnow Disclosure Letter, each CDnow
Pension Plan that is intended to be qualified under Section 401(a) of the Code
has been the subject of a determination letter from the Internal Revenue Service
to the effect that such CDnow Pension Plan is qualified and exempt from Federal
income taxes under Sections 401(a) and 501(a), respectively, of the Code, and no
such determination letter has been revoked nor, to the knowledge of CDnow, has
revocation been threatened, nor has any such CDnow Pension Plan been amended
since the date of its most recent determination letter or application therefor
in any respect that would adversely affect its qualification or materially
increase its costs.
(c) No CDnow Pension Plan is a defined benefit plan subject to Title
IV of ERISA, and no CDnow Pension Plan is a multiemployer plan within the
meaning of Section 4001(a)(3) of ERISA (a "Multiemployer Plan"). None of CDnow,
any CDnow Subsidiary, any CDnow ERISA Affiliate, any officer of CDnow, any CDnow
Subsidiary or any CDnow ERISA Affiliate or any of the CDnow Benefit Plans which
are subject to ERISA, including the CDnow Pension Plans, any
30
trusts created thereunder or any trustee or administrator thereof, has engaged
in a "prohibited transaction" (as such term is defined in Section 406 of ERISA
or Section 4975 of the Code) or any other breach of fiduciary responsibility
that could subject CDnow, any CDnow Subsidiary, any CDnow ERISA Affiliate or any
officer of CDnow, any CDnow Subsidiary or any CDnow ERISA Affiliate to the tax
or penalty on prohibited transactions imposed by such Section 4975 or to any
liability under Section 502(i) or 502(1) of ERISA. None of such CDnow Benefit
Plans and trusts has been terminated, nor has there been any "reportable event"
(as that term is defined in Section 4043 of ERISA) with respect to any CDnow
Benefit Plan during the last five years. None of CDnow, any CDnow Subsidiary or
any CDnow ERISA Affiliate has incurred a "complete withdrawal" or a "partial
withdrawal" (as such terms are defined in Sections 4203 and 4205, respectively,
of ERISA) since the effective date of such Sections 4203 and 4205 with respect
to any Multiemployer Plan.
(d) With respect to any CDnow Benefit Plan that is an employee
welfare benefit plan, except as set forth in the CDnow Disclosure Letter, (i) no
such CDnow Benefit Plan is funded through a "welfare benefits fund" (as such
term is defined in Section 419(e) of the Code), (ii) each such CDnow Benefit
Plan that is a "group health plan" (as such term is defined in Section
5000(b)(1) of the Code) complies in all material respects with the applicable
requirements of Section 4980B(f) of the Code and (iii) each such CDnow Benefit
Plan (including any such plan covering retirees or other former employees) may
be amended or terminated without material liability to CDnow or any CDnow
Subsidiary on or at any time after the Effective Time.
(e) Other than payments that may be made to the persons listed in
the CDnow Disclosure Letter (the "Primary CDnow Executives") as set forth in the
CDnow Disclosure Letter, any amount that could be received (whether in cash or
property or the vesting of property) as a result of the Transactions by any
employee, officer or director of CDnow or any of its affiliates who is a
"disqualified individual" (as such term is defined in proposed Treasury
Regulation Section 1.280G-1) under any employment, severance or termination
agreement, other compensation arrangement or CDnow Benefit Plan currently in
effect would not be characterized as an "excess parachute payment" (as defined
in Section 280G(b)(1) of the Code).
(f) Each CDnow Benefit Plan has been maintained in all material
respects in accordance with its terms and
31
with all applicable provisions of the Code, ERISA and other applicable laws.
SECTION 3.12. Litigation. Except as set forth in the CDnow
Disclosure Letter, there is no suit, action or proceeding pending or, to the
knowledge of CDnow, threatened against or affecting CDnow or any CDnow
Subsidiary (and CDnow is not aware of any basis for any such suit, action or
proceeding) that, individually or in the aggregate, has had or could reasonably
be expected to have a CDnow Material Adverse Effect, nor is there any Judgment
outstanding against, or, to the knowledge of CDnow, investigation by any
Governmental Entity involving, CDnow or any CDnow Subsidiary that, individually
or in the aggregate, has had or could reasonably be expected to have a CDnow
Material Adverse Effect.
SECTION 3.13. Compliance with Applicable Laws. CDnow and each of the
CDnow Subsidiaries are in compliance with all Laws applicable to CDnow or such
CDnow Subsidiary, except for instances of possible noncompliance that,
individually and in the aggregate, have not had and could not reasonably be
expected to have a CDnow Material Adverse Effect. As of the date of this
Agreement, except as set forth in the CDnow Disclosure Letter, CDnow has not
received, and no CDnow Subsidiary has received during the past two years, from a
Governmental Entity, any written communication that alleges that CDnow or any
CDnow Subsidiary is not in compliance in any material respect with any
applicable Law. This Section 3.13 does not relate to matters with respect to
Taxes, which are the subject of Section 3.09, compliance with ERISA, which is
the subject of Section 3.11, or Environmental Matters, which are the subject of
Section 3.17.
SECTION 3.14. Brokers; Schedule of Fees and Expenses. No broker,
investment banker, financial advisor or other person, other than ▇▇▇▇▇ &
Company, Incorporated and Deutsche Bank Alex. ▇▇▇▇▇ Incorporated, the fees and
expenses of which will be paid by CDnow, is entitled to any broker's, finder's,
financial advisor's or other similar fee or commission in connection with the
Transactions based upon arrangements made by or on behalf of CDnow or any CDnow
Subsidiary. A copy of the engagement letter relating to the services to be
provided by ▇▇▇▇▇ & Company, which letter sets forth all fees and expenses to be
paid to ▇▇▇▇▇ & Company by CDnow and the CDnow Subsidiaries, has been delivered
to Time Warner and Sony; such letter is the only document related to the
services to be provided by ▇▇▇▇▇ & Company to CDnow and the CDnow Subsidiaries
in connection with the Transactions and such letter is in full force and
32
effect. A copy of the engagement letter relating to the services to be provided
by Deutsche Bank Alex. ▇▇▇▇▇ Incorporated, which letter sets forth all fees and
expenses to be paid to Deutsche Bank Alex. ▇▇▇▇▇ Incorporated by CDnow and the
CDnow Subsidiaries, has been delivered to Time Warner and Sony; such letter is
the only document related to the services to be provided by Deutsche Bank Alex.
▇▇▇▇▇ Incorporated to CDnow and the CDnow Subsidiaries in connection with the
Transactions and such letter is in full force and effect. The CDnow Disclosure
Letter sets forth an estimate of all legal and accounting fees and expenses
incurred as of the date of this Agreement by CDnow and the CDnow Subsidiaries in
connection with the Transactions.
SECTION 3.15. Opinion of Financial Advisor. CDnow has received the
opinion of ▇▇▇▇▇ & Company, Incorporated and Deutsche Bank Alex. ▇▇▇▇▇
Incorporated, each dated the date of this Agreement, to the effect that, as of
such date, the consideration to be received in the Merger by the holders of
CDnow Common Stock is fair to such holders from a financial point of view, a
signed copy of which opinion has been or will promptly be delivered to each of
Time Warner and Sony.
SECTION 3.16. Year 2000 Compliance. (a) Except as set forth in the
CDnow Disclosure Letter, the computer systems and software programs of CDnow and
the CDnow Subsidiaries are Year 2000 Compliant (as defined below). The best
current estimates of CDnow of capital expenditures to be Year 2000 Compliant are
set forth in the CDnow Disclosure Letter.
(b) The term "Year 2000 Compliant", with respect to a computer
system or software program, means that such computer system or program: (i) is
capable of recognizing, processing, managing, representing, interpreting and
manipulating correctly date-related data for dates earlier and later than
January 1, 2000; (ii) has the ability to provide date recognition for any data
element without limitation; (iii) has the ability to function automatically into
and beyond the year 2000 without human intervention and without any change in
operations associated with the advent of the year 2000; (iv) has the ability to
interpret data, dates and time correctly into and beyond the year 2000; (v) has
the ability not to produce noncompliance in existing data, nor otherwise corrupt
such data, into and beyond the year 2000; (vi) has the ability to process
correctly after January 1, 2000, data containing dates before that date; and
(vii) has the ability to recognize all "leap year" dates, including February 29,
2000.
33
SECTION 3.17. Environmental Matters. Except as disclosed in the
Filed CDnow SEC Documents or set forth on the CDnow Disclosure Letter, and
except as would not, individually and in the aggregate, be reasonably likely to
have a CDnow Material Adverse Effect, (i) CDnow and each of the CDnow
Subsidiaries are in compliance with all applicable Environmental Laws, (ii)
CDnow and each of the CDnow Subsidiaries have all permits, authorizations,
licenses, consents and approvals required under applicable Environmental Laws
and are in compliance with their respective requirements, (iii) there are no
pending, or to the knowledge of CDnow, threatened, claims, proceedings or
investigations against CDnow or any CDnow Subsidiary alleging a violation of
Environmental Law, (iv) neither CDnow nor any CDnow Subsidiary has received
written notice alleging that CDnow or any CDnow Subsidiary is potentially liable
for the costs of investigating or remediating Hazardous Substances at any
property; (v) to the knowledge of CDnow and each of the CDnow Subsidiaries,
there have been no Releases of Hazardous Substances in, on, under or at any
properties currently owned or leased by CDnow or any of the CDnow Subsidiaries;
(vi) to the knowledge of CDnow and each of the CDnow Subsidiaries, there are no
underground storage tanks at any properties currently owned or leased by CDnow
or any of the CDnow Subsidiaries; and (vii) to the knowledge of CDnow and the
CDnow Subsidiaries, CDnow and the CDnow Subsidiaries have made available for
review by Time Warner and Sony all material environmental reports, studies and
related correspondence, as of the date hereof, relating to properties currently
owned or leased by CDnow or any of the CDnow Subsidiaries. For purposes of this
Agreement, the term "Environmental Laws" shall mean any applicable foreign,
Federal, state or local statutes, laws, regulations, ordinances, rules or codes
in effect as of the Closing Date relating to protection of the environment or
human health, or to the use, management or disposal of Hazardous Substances. For
purposes of this Agreement, the term "Hazardous Substances" shall mean any
explosive or radioactive substances or materials, any toxic or hazardous
substances or materials, including asbestos or asbestoscontaining materials,
polychlorinated biphenyls, petroleum and petroleum products, and any other
substances or materials defined as, or included in the definition of, "hazardous
substances", "hazardous wastes", "hazardous materials" or "toxic substances"
under any Environmental Law. For purposes of this Agreement, the term "Release"
shall mean any spilling, leaking, pumping, pouring, discharging, emitting,
emptying, leaching, injecting, dumping or disposing into the environment.
34
SECTION 3.18. Contracts. Except as filed as an exhibit to the Filed
CDnow SEC Documents or set forth the CDnow Disclosure Letter, there are no
Contracts in effect as of the date of this Agreement that are material to the
business, properties, assets, condition (financial or otherwise) or results of
operations of CDnow and the CDnow Subsidiaries, taken as a whole. Except as set
forth in the CDnow Disclosure Letter and except for Contracts entered into after
the date of this Agreement not in violation of any other provision of this
Agreement, neither CDnow nor any CDnow Subsidiary is party to any:
(i) Contract with any labor union;
(ii) employment agreement, or consulting agreement or other contract
for services, pursuant to which an individual performs services comparable
to an employee, with annual financial obligations of CDnow or any CDnow
Subsidiary in excess of $100,000;
(iii) loan agreement or instrument relating to indebtedness for
borrowed money;
(iv) Contract with any agent, dealer or distributor acting on behalf
of CDnow or any CDnow Subsidiary;
(v) stand-by letters of credit, guarantees or performance bonds
involving amounts in excess of $100,000 in the aggregate;
(vi) Contract with any affiliate of CDnow;
(vii) Contract that provides for the cash payment, equivalent equity
outlay or provision of services (A) in an amount greater than $150,000 per
annum or (B) $500,000 over the term of the Contract;
(viii) Contract that establishes any form of exclusivity restriction
on CDnow or any CDnow Subsidiary, any exclusive or preferred vendor
relationship restricting CDnow or any CDnow Subsidiary in any material
respect, any covenant not to compete restricting CDnow or any CDnow
Subsidiary or any covenant restricting in any material respect the
development, marketing or distribution by CDnow or any CDnow Subsidiary of
any of its products, content or services, in each case that is binding on
CDnow or any CDnow Subsidiary for the calendar year 1999 or thereafter; or
35
(ix) Contract (A) in respect of the licensing of any Intellectual
Property Rights held by CDnow or any CDnow Subsidiary on an exclusive
basis or for a term in excess of one year or involving the cash payment,
equivalent equity outlay or provision of services in an amount greater
than (I) $100,000 per annum or (II) $500,000 over the term of the
agreement, (B) with a "portal", "internet service provider" or "internet
search engine" that provides for the cash payment, equivalent equity
outlay or provision of services in an amount greater than (i) $100,000 per
annum or (ii) $500,000 over the term of the agreement or (C) with any
record company or label or affiliate thereof that provides for the cash
payment, equivalent equity outlay or provision of services in an amount
greater than (I) $100,000 per annum or (II) $500,000 over the term of the
Contract.
Neither CDnow nor any CDnow Subsidiary is in violation of or in default under
(nor does there exist any condition which upon the passage of time or the giving
of notice would cause such a violation of or default under) any Contract to
which it is a party or by which it or any of its properties or assets is bound,
nor, to the knowledge of CDnow, is any other party to any such Contract in
violation of or in default under such Contract, except for violations or
defaults that, individually and in the aggregate, have not had and could not
reasonably be expected to have a CDnow Material Adverse Effect.
SECTION 3.19. Title to Properties. (a) Each of CDnow and each CDnow
Subsidiary has (i) good and marketable title to, or valid leasehold interests
in, all its real properties and (ii) good and valid title to, or valid leasehold
interests in, all its personal properties and assets, in each case except for
such as are no longer used or useful in the conduct of its businesses or as have
been disposed of in the ordinary course of business and except for defects in
title, easements, restrictive covenants and similar encumbrances or impediments
that, in the aggregate, do not and will not materially interfere with its
ability to conduct its business as currently conducted. All such assets and
properties, other than assets and properties in which CDnow or any CDnow
Subsidiary has leasehold interests, are free and clear of all Liens other than
those disclosed in the CDnow Disclosure Letter and except for Liens that, in the
aggregate, do not and will not materially interfere with the ability of CDnow
and the CDnow Subsidiaries to conduct business as currently conducted.
36
(b) Except as disclosed in the Filed CDnow SEC Documents or set
forth in the CDnow Disclosure Letter, each of CDnow and each CDnow Subsidiary
has complied in all material respects with the terms of all leases to which it
is a party and under which it is in occupancy, and all such leases are in full
force and effect. Each of CDnow and each CDnow Subsidiary enjoys peaceful and
undisturbed possession under all such leases.
SECTION 3.20. Intellectual Property. Except as set forth in the
CDnow Disclosure Letter, CDnow and the CDnow Subsidiaries own, or are validly
licensed or otherwise have the right to use, all patents, patent rights,
trademarks, trademark rights, trade names, trade name rights, service marks,
service ▇▇▇▇ rights, copyrights and other proprietary intellectual property
rights and computer programs (collectively, "Intellectual Property Rights")
which are material to the conduct of the business as currently conducted of
CDnow and the CDnow Subsidiaries, taken as a whole. The CDnow Disclosure Letter
includes a description of all Intellectual Property Rights which are material to
the conduct of the business of CDnow and the CDnow Subsidiaries, taken as a
whole. Except as set forth in the CDnow Disclosure Letter, no claims are pending
or, to the knowledge of CDnow, threatened that CDnow or any CDnow Subsidiary is
infringing or otherwise adversely affecting the rights of any person with regard
to any Intellectual Property Right, except in each case for any such claims
that, individually and in the aggregate, have not had and could not reasonably
be expected to have a CDnow Material Adverse Effect. To the knowledge of CDnow,
as of the date of this Agreement, except as set forth in the CDnow Disclosure
Letter, no person is infringing the rights of CDnow or any CDnow Subsidiary with
respect to any Intellectual Property Right. Except as set forth in the CDnow
Disclosure Letter, neither CDnow nor any of the CDnow Subsidiaries has licensed,
or otherwise granted, to any party (other than CDnow or any CDnow Subsidiary)
any rights in or to any Intellectual Property Rights (i) on an exclusive basis,
(ii) involving the cash payment, equivalent equity outlay or provision of
services in an amount greater than (x) $100,000 per annum or (y) $500,000 over
the term of the license or (iii) for a term in excess of one year.
SECTION 3.21. Labor Matters. Except as disclosed in the Filed CDnow
SEC Documents or set forth in the CDnow Disclosure Letter, (i) there are no
collective bargaining or other labor union agreements to which CDnow or any
CDnow Subsidiary is a party or by which any of them is bound and (ii) to the
knowledge of CDnow, during the past five years neither CDnow nor any CDnow
Subsidiary has encountered any
37
labor union organizing activity, or had any actual or threatened employee
strikes, work stoppages, slowdowns or lockouts.
SECTION 3.22. Insurance. CDnow and each of the CDnow Subsidiaries
have insurance covering their respective properties, operations and businesses,
which insurance is in amounts and insures against such losses and risks as are
adequate, in the opinion of CDnow, to protect CDnow and its business and each of
the CDnow Subsidiaries and its business. The CDnow "key man" insurance policy
covering ▇▇▇▇▇ ▇▇▇▇ and any of its other principal executive officers, is in the
amount set forth in the CDnow Disclosure Letter and insures against such losses
and risks as are adequate, in the opinion of CDnow, to protect CDnow and its
business.
ARTICLE IV
Representations and Warranties of Time Warner
and Sony as to the Columbia House Entities
Time Warner and Sony, jointly and severally, represent and warrant
to CDnow as follows:
SECTION 4.01. Organization, Standing and Power. Each of ▇▇▇▇▇▇▇▇
▇▇▇▇▇, ▇▇▇, ▇▇▇, ▇▇▇▇▇▇▇▇ House Mexico, Sony Mexico, Time Warner Mexico and
Columbia House Canada (collectively, the "Columbia House Entities") and each of
the subsidiaries of ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ (the "Columbia
House Subsidiaries") is duly formed and validly existing under the Laws of the
jurisdiction in which it is formed and has full power and authority and
possesses all governmental franchises, licenses, permits, authorizations and
approvals necessary to enable it to own, lease or otherwise hold its properties
and assets and to conduct its businesses as presently conducted, other than such
franchises, licenses, permits, authorizations and approvals the lack of which,
individually and in the aggregate, has not had and could not reasonably be
expected to have a material adverse effect on the Columbia House Entities and
the Columbia House Subsidiaries, taken as a whole, or a material adverse effect
on the ability of any of the Columbia House Entities, the Columbia House
Subsidiaries, Time Warner Canada or Sony Canada to perform its obligations under
any of the Transaction Agreements to which it is a party or to consummate the
Transactions, except to the extent such effect is the result of (i) actions
taken by CDnow (other than actions required by any Transaction Agreement) or
economic factors affecting the
38
economy as a whole or the industry in which the Columbia House Entities compete
or (ii) payment of legal fees incurred in the defense of any litigation by
stockholders of CDnow challenging the Transactions (a "Columbia House Entities
Material Adverse Effect"). Each of the Columbia House Entities and each Columbia
House Subsidiary is duly qualified to do business in each jurisdiction where the
nature of its business or the ownership or leasing of its properties makes such
qualification necessary, except where the failure to so qualify has not had and
could not reasonably be expected to have a Columbia House Entities Material
Adverse Effect. Time Warner or Sony has delivered to CDnow true and complete
copies of the joint venture agreements in respect of each of MCo, VCo and
Columbia House, the organizational documents of Time Warner Mexico, Sony Mexico,
▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ and the organizational documents
of each Columbia House Subsidiary, in each case as amended to the date of this
Agreement. As of the Effective Time, the joint venture agreement in respect of
MCo will be substantially in the form of Exhibit M attached hereto, the joint
venture agreement in respect of VCo will be substantially in the form of Exhibit
N attached hereto and the joint venture agreement in respect of Columbia House
will be substantially in the form of Exhibit O attached hereto.
SECTION 4.02. Columbia House Subsidiaries; Equity Interests. (a) The
letter, dated as of the date of this Agreement, from the Columbia House Entities
to CDnow (the "Columbia House Entities Disclosure Letter") lists each Columbia
House Subsidiary and its jurisdiction of organization. All the outstanding
shares of capital stock of each Columbia House Subsidiary have been validly
issued and are fully paid and nonassessable and, except as set forth in the
Columbia House Entities Disclosure Letter, are owned by a Columbia House Entity
or a wholly owned Columbia House Subsidiary or by a Columbia House Entity and a
wholly owned Columbia House Subsidiary, free and clear of all Liens. As of the
date of this Agreement, neither MCo nor VCo has any subsidiaries other than
Columbia House. As of the date of this Agreement, Time Warner Mexico and Sony
Mexico do not have any subsidiaries other than Columbia House Mexico. As of the
date of this Agreement, Columbia House Canada does not have any subsidiaries
other than Canadian Sub.
(b) Except for the interests in the Columbia House Subsidiaries and
the interests of Time Warner Mexico and Sony Mexico in Columbia House Mexico,
and except for the ownership interests set forth in the Columbia House Entities
Disclosure Letter, none of the Columbia House Entities owns,
39
directly or indirectly, any capital stock, membership interest, partnership
interest, joint venture interest or other equity interest in any person.
(c) Canadian Sub was formed solely for the purpose of engaging in
the Transactions. Canadian Sub has not carried on any business or conducted any
operations since the date of its incorporation other than the execution of the
Master Canadian Transaction Agreement and the other Transaction Agreements to
which it is a party, the performance of its obligations hereunder and thereunder
and matters ancillary thereto.
SECTION 4.03. Capital Structure. All of the general partnership
interests of Columbia House are held by MCo and VCo. MCo and VCo own 55% and
45%, respectively, of the general partnership interests in Columbia House, and
MCo and VCo have good and valid title to such general partnership interests,
free and clear of any Liens. All of the issued and outstanding shares of capital
stock of Columbia House Mexico are held by Time Warner Mexico (the "Time Warner
Columbia House Mexico Shares") and Sony Mexico (the "Sony Columbia House Mexico
Shares"). Time Warner Mexico and Sony Mexico each own 50% of the issued and
outstanding shares of capital stock of Columbia House Mexico. All of the general
partnership interests of Columbia House Canada are held by Time Warner Canada
and Sony Canada. Time Warner Canada and Sony Canada each own 50% of the general
partnership interests in Columbia House Canada. There are not any bonds,
debentures, notes or other indebtedness of any of the Columbia House Entities
having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which holders of equity interests in
such Columbia House Entity may vote ("Voting Columbia House Entities Debt").
There are not any options, warrants, rights, convertible or exchangeable
securities, "phantom" stock rights, stock appreciation rights, stock-based
performance units, commitments, Contracts, arrangements or undertakings of any
kind to which any of the Columbia House Entities or any Columbia House
Subsidiary is a party or by which any of them is bound (i) obligating any
Columbia House Entity or any Columbia House Subsidiary to issue, deliver or
sell, or cause to be issued, delivered or sold, additional equity interests in,
or any security convertible or exercisable for or exchangeable into any equity
interest in, any Columbia House Entity or any Columbia House Subsidiary or any
Voting Columbia House Entities Debt, (ii) obligating any Columbia House Entity
or any Columbia House Subsidiary to issue, grant, extend or enter into any such
option, warrant, call, right, security, commitment, Contract, arrangement or
40
undertaking or (iii) that give any person the right to receive any economic
benefit or right similar to or derived from the economic benefits and rights
accruing to holders of equity interests in any of the Columbia House Entities or
any Columbia House Subsidiary. There are not any outstanding contractual
obligations of any Columbia House Entity or any Columbia House Subsidiary to
repurchase, redeem or otherwise acquire any equity interests in any Columbia
House Entity or any Columbia House Subsidiary.
SECTION 4.04. Authority; Execution and Delivery; Enforceability. (a)
Each Columbia House Entity and Columbia House Subsidiary has all requisite power
and authority to execute and deliver the Transaction Agreements to which it is a
party and to consummate the Transactions. The execution and delivery by each
Columbia House Entity and Columbia House Subsidiary of each Transaction
Agreement to which it is a party and the consummation by each Columbia House
Entity and Columbia House Subsidiary of the Transactions have been duly
authorized by all necessary action on the part of such Columbia House Entity and
Columbia House Subsidiary, as applicable. Each Columbia House Entity and
Columbia House Subsidiary has duly executed and delivered each Initial Agreement
to which it is a party, and, assuming the due authorization, execution and
delivery by each person other than the Columbia House Entities and Columbia
House Subsidiaries, each Initial Agreement to which it is a party constitutes
its legal, valid and binding obligation, enforceable against it in accordance
with its terms. On or prior to the Closing Date, each Columbia House Entity and
Columbia House Subsidiary shall have duly executed and delivered each
Supplemental Agreement to which it is a party, and, when so executed and
delivered, and duly authorized, executed and delivered by each person other than
the Columbia House Entities and Columbia House Subsidiaries party thereto, each
Supplemental Agreement to which it is a party will constitute its legal, valid
and binding obligation, enforceable against it in accordance with its terms.
SECTION 4.05. No Conflicts; Consents. (a) Except as set forth in the
Columbia House Entities Disclosure Letter, the consummation of the Transactions
will not conflict with, or result in any violation of or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancelation or acceleration of any obligation or to loss of a
material benefit under, or to increased, additional, accelerated or guaranteed
rights or entitlements of any person under, or result in the creation of any
Lien upon any of the properties or assets of any of the Columbia House Entities
41
or any Columbia House Subsidiary under, any provision of (i) the organizational
documents of any of the Columbia House Entities or any Columbia House
Subsidiary, (ii) any Contract to which any Columbia House Entity or any Columbia
House Subsidiary is a party or by which any of its properties or assets is bound
or (iii) subject to the filings and other matters referred to in Section
4.05(b), any Judgment or Law applicable to any of the Columbia House Entities or
any Columbia House Subsidiary, other than, in the case of clauses (ii) and
(iii), any such items that, individually and in the aggregate, have not had and
could not reasonably be expected to have a Columbia House Entities Material
Adverse Effect.
(b) No Consent of, or registration, declaration or filing with, or
permit from, any Governmental Entity is required to be obtained or made by or
with respect to any of the Columbia House Entities or any Columbia House
Subsidiary in connection with the execution, delivery and performance of any
Transaction Agreement to which Time Warner and Sony are parties or the
consummation of the Transactions, other than (i) compliance with and filings
under the HSR Act and the Canadian Competition Act and receipt of the Canadian
Competition Act Approval, (ii) the filing with the SEC of such reports under
Sections 13 and 16 of the Exchange Act as may be required in connection with
this Agreement, the other Transaction Agreements and the Transactions, (iii)
compliance with and such filings as may be required under applicable
Environmental Laws, (iv) such Consents, registrations or filings as may be
required under applicable state securities laws or the laws of any foreign
country, (v) such filings as may be required in connection with the Taxes
described in Section 8.09 and (vi) such other items as are set forth in the
Columbia House Entities Disclosure Letter.
SECTION 4.06. Financial Statements; Undisclosed Liabilities. The
Columbia House Entities Disclosure Letter sets forth the combined balance
sheets, statements of operations, statements of cash flows and statements of
venturers' deficit as of and for the years ended December 19, 1997 and December
18, 1998 for ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ and the Columbia House
Subsidiaries (the "Columbia House and Columbia House Canada Financial
Statements"). The combined balance sheet for ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇ and the Columbia House Subsidiaries dated December 18, 1998 is referred
to in this Agreement as the "Columbia House and Columbia House Canada Balance
Sheet". The ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ Financial Statements were
prepared in accordance with GAAP applied on a consistent basis during the
periods
42
involved (except as may be indicated in the notes thereto) and fairly presented
the financial position of ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ and the Columbia
House Subsidiaries as of the dates thereof and the consolidated results of
operations and cash flows for the periods then ended. The Columbia House
Entities Disclosure Letter sets forth the balance sheets, statements of changes
in stockholders' equity and statements of changes in financial position as of
and for the years ended December 31, 1997 and December 31, 1998 for Columbia
House Mexico (the "Columbia House Mexico Financial Statements", and together
with the ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ Financial Statements, the
"Columbia House Entities Financial Statements"). The balance sheet for Columbia
House Mexico dated December 31, 1998 is referred to in this Agreement as the
"Columbia House Mexico Balance Sheet". Except as set forth in the Columbia House
Entities Disclosure Letter, the Columbia House Mexico Financial Statements were
prepared in accordance with accounting principles generally accepted in Mexico
and fairly presented the financial position of Columbia House Mexico as of the
dates thereof and the results of operations and changes in stockholders' equity
for the periods then ended. Except as disclosed in the Columbia House Entities
Financial Statements and except for liabilities and obligations incurred since
December 18, 1998 (with respect to ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ and the
Columbia House Subsidiaries) or December 31, 1998 (with respect to Columbia
House Mexico) in the ordinary course of business consistent with past practice
or as set forth in the Columbia House Entities Disclosure Letter, none of the
Columbia House Entities or the Columbia House Subsidiaries has any liabilities
or obligations of any nature (whether accrued, absolute, contingent or
otherwise) required by GAAP to be set forth on a consolidated balance sheet or
in the notes thereto (with respect to ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ and
the Columbia House Subsidiaries) or required by accounting principles generally
accepted in Mexico to be set forth on a balance sheet or in the notes thereto
(with respect to Columbia House Mexico), except those liabilities or obligations
that, individually and in the aggregate, have not had and could not reasonably
be expected to have a Columbia House Entities Material Adverse Effect. None of
the Columbia House Entities or the Columbia House Subsidiaries is, or has at any
time been, subject to the reporting requirements of Sections 13(a) and 15(d) of
the Exchange Act. The Columbia House Entities Financial Statements have not been
restated for adjustments which may be required in connection with the filing of
the Form S-4 with the SEC.
43
SECTION 4.07. Information Supplied. None of the information supplied
or to be supplied by any of the Columbia House Entities for inclusion or
incorporation by reference in (i) the Form S-4 will, at the time the Form S-4 is
filed with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or (ii) the Proxy
Statement will, at the date the Proxy Statement is first mailed to CDnow's
shareholders or at the time of the CDnow Shareholders Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
SECTION 4.08. Absence of Certain Changes or Events. Except as set
forth in the Columbia House Entities Disclosure Letter, since December 18, 1998,
each of the Columbia House Entities and each Columbia House Subsidiary has
conducted its business only in the ordinary course, and
there has not been:
(i) any event, change, effect or development that, individually or
in the aggregate, has had or could reasonably be expected to have a
Columbia House Entities Material Adverse Effect;
(ii) any declaration, setting aside or payment of any dividend or
other distribution (whether in cash, stock or property) with respect to
any equity interests of any of the Columbia House Entities or any
repurchase for value by any of the Columbia House Entities of any equity
interests of any Columbia House Entity, other than any of the foregoing
permitted by Section 7.01(b)(i);
(iii) any split, combination or reclassification of any equity
interests of any Columbia House Entity or any issuance or the
authorization of any issuance of any other securities in respect of, in
lieu of, or in substitution for, such equity interests;
(iv) (A) any granting by any of the Columbia House Entities or any
Columbia House Subsidiary to any director or executive officer of, or any
consultant (who performs services comparable to an employee) to, any
Columbia House Entity or any Columbia House Subsidiary of any increase in
compensation, except for customary increases in cash compensation in the
44
ordinary course of business consistent with prior practice or as was
required under employment agreements or plans in effect as of December 18,
1998, (B) any granting by any Columbia House Entity or any Columbia House
Subsidiary to any such director, executive officer or consultant of any
increase in severance or termination pay, except as was required under any
employment, severance or termination agreements or plans in effect as of
December 18, 1998, or (C) any entry by any Columbia House Entity or any
Columbia House Subsidiary into, or any amendment of, any employment,
consulting, deferred compensation, indemnification, severance or
termination agreement with any such director, executive officer or
consultant;
(v) any change in accounting methods, principles or practices by any
Columbia House Entity or any Columbia House Subsidiary materially
affecting the consolidated assets, liabilities or results of operations of
such Columbia House Entity or such Columbia House Subsidiary, except
insofar as may have been required by a change in GAAP or by SEC
interpretations with respect to filings therewith;
(vi) any material elections or changes in accounting methods with
respect to Taxes by any Columbia House Entity or any Columbia House
Subsidiary or settlement or compromise by any Columbia House Entity or any
Columbia House Subsidiary of any material
Tax liability or refund;
(vii) any acquisition by any Columbia House Entity or any Columbia
House Subsidiary (A) by merging or consolidating with, or by purchasing
assets of, or by any other manner, any equity interest in or portion of
any business of any corporation, partnership, company, limited liability
company, joint venture, association or other business organization or
division thereof or (B) of any assets that, individually, are in excess of
$3 million or, in the aggregate, are in excess of $7.5 million, except
purchases of inventory for resale and renewals of licenses, in each case
in the ordinary course of business consistent with prior practice; or
(viii) any sale, lease, assignment, transfer, conveyance, delivery
or other disposition, or any divestiture, by any Columbia House Entity or
any Columbia House Subsidiary of any properties or assets of such Columbia
House Entity or Columbia House Subsidiary, other than sales of inventory
and renewals
45
of licenses, in each case in the ordinary course of business consistent
with prior practice and sale/leaseback transactions in respect of
equipment financings not to exceed $3 million in the aggregate.
SECTION 4.09. Taxes. (a) Each Columbia House Entity and each
Columbia House Subsidiary has timely filed, or has had or caused to be timely
filed on its behalf, all Tax Returns required to be filed by it, and all such
Tax Returns are true, complete and accurate, except to the extent any failure to
file or any inaccuracies in any filed Tax Returns, individually and in the
aggregate, have not had and could not reasonably be expected to have a Columbia
House Entities Material Adverse Effect. All Taxes shown to be due on such Tax
Returns, or otherwise owed, have been timely paid, except to the extent that any
failure to pay, individually and in the aggregate, has not had and could not
reasonably be expected to have a Columbia House Entities Material Adverse
Effect. Each Columbia House Entity and each Columbia House Subsidiary has
withheld or collected and has paid over to the appropriate taxing authority (or
is properly holding for payment to such taxing authority) all Taxes required by
law to be withheld or collected, except for amounts that would not, individually
and in the aggregate, have a Columbia House Entities Material Adverse Effect.
(b) The Columbia House Entities Financial Statements contained in
the Columbia House Entities Disclosure Letter reflect an adequate reserve for
all Taxes payable by Columbia House and the Columbia House Subsidiaries for all
Taxable periods and portions thereof through the date of such financial
statements. Except as set forth in the Columbia House Entities Disclosure
Letter, no deficiency with respect to any Taxes has been proposed, asserted or
assessed or, to the knowledge of Time Warner or Sony, threatened against any
Columbia House Entity or any Columbia House Subsidiary, no waivers of the time
to assess any such Taxes are outstanding and no requests for any other waivers
are pending, except for any such deficiency, waiver or request for waiver, that
individually and in the aggregate, has not had and could not reasonably be
expected to have a Columbia House Entities Material Adverse Effect.
(c) Except as set forth in the Columbia House Entities Disclosure
Letter, none of the Tax Returns of any Columbia House Entity or any Columbia
House Subsidiary has been examined by any taxing authority or is currently being
examined by any taxing authority or is the subject of a pending examination. All
assessments for Taxes due with respect to any completed or settled examinations
or any
46
concluded litigation have been fully paid. Except as set forth in the Columbia
House Entities Disclosure Letter, none of the Columbia House Entities or any
Columbia House Subsidiary has entered into a closing agreement with any taxing
authority with respect to Taxes.
(d) There are no material Liens for Taxes (other than for current
Taxes not yet due and payable or that are being contested in good faith in
appropriate proceedings) on the assets of any of the Columbia House Entities or
any Columbia House Subsidiary. Except as set forth in the Columbia House
Entities Disclosure Letter, no Columbia House Entity and no Columbia House
Subsidiary (i) is bound by any agreement with any affiliate with respect to
Taxes, other than a tax-related service agreement with SMEI and an agreement
with respect to Permitted Tax Distributions (as defined in Section 7.01(b)) or
(ii) otherwise is bound by any tax sharing allocation or similar agreement or
any indemnification or reimbursement agreement with respect to Taxes.
(e) None of the Columbia House Entities or any Columbia House
Subsidiary (i) has agreed or is required to make any adjustments pursuant to
Section 481 of the Code; (ii) has knowledge that the Internal Revenue Service
has proposed any such adjustment or a change in accounting method with respect
to such entity; or (iii) has an application pending with the Internal Revenue
Service or any other taxing authority requesting permission for any change in
accounting method.
(f) Neither Time Warner nor Sony has any reason to believe that any
conditions exist that could reasonably be expected to prevent the Contributions
and the Merger from qualifying as exchanges under Section 351 of the Code.
(g) No notice of a claim or pending investigation has been received,
or to the knowledge of Time Warner and Sony, has been threatened, by any state,
local or other jurisdiction with which any of the Columbia House Entities or any
Columbia House Subsidiary does not currently file Tax Returns, alleging that the
Columbia House Entities or any Columbia House Subsidiary has a duty to file Tax
Returns and pay Taxes or is otherwise subject to the taxing authority of such
jurisdiction, nor, to the knowledge of Time Warner or Sony, has any of the
Columbia House Entities or any Columbia House Subsidiary received any notice or
questionnaire from any such jurisdiction that suggests or asserts that any of
the Columbia House Entities or any Columbia House Subsidiary may have a duty to
file such Tax Returns and pay such Taxes,
47
or otherwise is subject to the taxing authority of such jurisdiction.
SECTION 4.10. Absence of Changes in Benefit Plans. Except as set
forth in the Columbia House Entities Disclosure Letter, since December 18, 1998,
there has not been any adoption or amendment in any material respect by any
Columbia House Entity or any Columbia House Subsidiary or any Columbia House
ERISA Affiliate (as defined below) of any collective bargaining agreement or any
bonus, pension, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, stock option, phantom stock, retirement,
vacation, severance, disability, death benefit, hospitalization, medical or
other plan, arrangement or understanding (whether or not legally binding)
providing benefits to any current or former employee, officer or director of any
Columbia House Entity, any Columbia House Subsidiary or any entity that, with
any Columbia House Entity or any Columbia House Subsidiary, formed or forms a
"Controlled Group" within the meaning of Section 412(n)(6) of the Code (a
"Columbia House ERISA Affiliate") (collectively, "Columbia House Entities
Benefit Plans"). Except as set forth in the Columbia House Entities Disclosure
Letter, as of the date of this Agreement, there are no employment, consulting,
indemnification, severance or termination agreements or arrangements between any
of the Columbia House Entities or any Columbia House Subsidiary and any current
or former employee, executive officer or director of any Columbia House Entity
or any Columbia House Subsidiary. Except as set forth in the Columbia House
Entities Disclosure Letter, no Columbia House Entity or Columbia House
Subsidiary has any general severance plan or policy.
SECTION 4.11. ERISA Compliance; Excess Parachute Payments. (a) The
Columbia House Entities Disclosure Letter contains a list of all "employee
pension benefit plans" (as defined in Section 3(2) of ERISA, whether or not
subject thereto) (sometimes referred to herein as "Columbia House Entities
Pension Plans"), "employee welfare benefit plans" (as defined in Section 3(1) of
ERISA) and all other Columbia House Entities Benefit Plans (other than Columbia
House Entities Foreign Plans as defined in Section 4.11(g)) maintained, or
contributed to, by any Columbia House Entity or any Columbia House Subsidiary
for the benefit of any current or former employees, officers or directors of any
Columbia House Entity or any Columbia House Subsidiary. The Columbia House
Entities have delivered to CDnow true, complete and correct copies of (i) each
Columbia House Entities Benefit Plan (or, in the case of any unwritten Columbia
House Entities Benefit Plan, a description
48
thereof), (ii) the most recent annual report on Form 5500 filed with the
Internal Revenue Service with respect to each Columbia House Entities Benefit
Plan (if any such report was required), (iii) the most recent summary plan
description for each Columbia House Entities Benefit Plan for which such summary
plan description is required and (iv) each trust agreement and group annuity
contract relating to any Columbia House Entities Benefit Plan.
(b) Except as set forth in the Columbia House Entities Disclosure
Letter, each Columbia House Entities Pension Plan that is intended to be
qualified under Section 401(a) of the Code has been the subject of a
determination letter from the Internal Revenue Service to the effect that such
Columbia House Entities Pension Plan is qualified and exempt from Federal income
taxes under Sections 401(a) and 501(a), respectively, of the Code, and no such
determination letter has been revoked nor, to the knowledge of Time Warner and
Sony, has revocation been threatened, nor has any such Columbia House Entities
Pension Plan been amended since the date of its most recent determination letter
or application therefor in any respect that would adversely affect its
qualification or materially increase its costs.
(c) Except as set forth in the Columbia House Entities Disclosure
Letter, no Columbia House Entities Pension Plan is a defined benefit plan
subject to Title IV of ERISA. No Columbia House Entities Pension Plan is a
Multiemployer Plan. None of the Columbia House Entities Pension Plans has an
"accumulated funding deficiency" (as such term is defined in Section 302 of
ERISA or Section 412 of the Code), whether or not waived. None of the Columbia
House Entities, any Columbia House Subsidiary, any Columbia House ERISA
Affiliate, any officer of any Columbia House Entity, any Columbia House
Subsidiary or any Columbia House ERISA Affiliate or any of the Columbia House
Entities Benefit Plans which are subject to ERISA, including the Columbia House
Entities Pension Plans, any trusts created thereunder or any trustee or
administrator thereof, has engaged in a "prohibited transaction" (as such term
is defined in Section 406 of ERISA or Section 4975 of the Code) or any other
breach of fiduciary responsibility that could subject any Columbia House Entity,
any Columbia House Subsidiary, any Columbia House ERISA Affiliate or any officer
of any Columbia House Entity, any Columbia House Subsidiary or any Columbia
House ERISA Affiliate to the tax or penalty on prohibited transactions imposed
by such Section 4975 or to any liability under Section 502(i) or 502(1) of
ERISA. None of such Columbia House Entities Benefit Plans and trusts has been
terminated, nor has there
49
been any "reportable event" (as that term is defined in Section 4043 of ERISA)
with respect to any Columbia House Entities Benefit Plan during the last five
years. None of the Columbia House Entities, any Columbia House Subsidiary or any
Columbia House ERISA Affiliate has incurred a "complete withdrawal" or a
"partial withdrawal" (as such terms are defined in Sections 4203 and 4205,
respectively, of ERISA) since the effective date of such Sections 4203 and 4205
with respect to any Multiemployer Plan.
(d) With respect to any Columbia House Entities Benefit Plan that is
an employee welfare benefit plan, except as set forth in the Columbia House
Entities Disclosure Letter, (i) no such Columbia House Entities Benefit Plan is
funded through a "welfare benefits fund" (as such term is defined in Section
419(e) of the Code), (ii) each such Columbia House Entities Benefit Plan that is
a "group health plan" (as such term is defined in Section 5000(b)(1) of the
Code) complies in all material respects with the applicable requirements of
Section 4980B(f) of the Code and (iii) each such Columbia House Entities Benefit
Plan (including any such plan covering retirees or other former employees) may
be amended or terminated without material liability to any of the Columbia House
Entities or any Columbia House Subsidiary on or at any time after the Effective
Time.
(e) Any amount that could be received (whether in cash or property
or the vesting of property) as a result of the Transactions by any employee,
officer or director of any of the Columbia House Entities or any of their
affiliates who is a "disqualified individual" (as such term is defined in
proposed Treasury Regulation Section 1.280G-1) under any employment, severance
or termination agreement, other compensation arrangement or Columbia House
Entities Benefit Plan currently in effect would not be characterized as an
"excess parachute payment" (as defined in Section 280G(b)(1) of the Code).
(f) Each Columbia House Benefit Plan has been maintained in all
material respects in accordance with its terms and with all applicable
provisions of the Code, ERISA and other applicable laws.
(g) Each Columbia House Entities Canadian Plan (as defined below)
has been maintained in substantial compliance with its terms and with the
requirements of any and all applicable laws, statutes, rules, regulations and
orders in all material respects and has been maintained, where required, in good
standing with applicable regulatory authorities, and neither the Columbia House
Entities nor any
50
Columbia House Subsidiary has incurred any material obligation in connection
with the termination or withdrawal from any Columbia House Entities Canadian
Plan for which payment has not been fully made. Except for any failure to comply
that has not had and could not reasonably be expected to have a Columbia House
Entities Material Adverse Effect, (i) each Columbia House Entities Foreign Plan
(as defined below) has been maintained in substantial compliance with its terms
and with the requirements of any and all applicable laws, statutes, rules,
regulations and orders and has been maintained, where required, in good standing
with applicable regulatory authorities, and (ii) neither the Columbia House
Entities nor any Columbia House Subsidiary has incurred any material obligation
in connection with the termination or withdrawal from any Columbia House
Entities Foreign Plan for which payment has not been fully made. For purposes of
this Section 4.11, "Columbia House Entities Canadian Plan" shall mean any
Columbia House Entities Benefit Plan established or maintained in Canada
primarily for the benefit of employees residing in Canada and which plan is not
subject to ERISA. For purposes of this Section 4.11, "Columbia House Entities
Foreign Plan" shall mean any Columbia House Entities Benefit Plan established or
maintained outside the United States primarily for the benefit of employees
residing outside the United States and which plan is not subject to ERISA, other
than a Columbia House Entities Canadian Plan. In no event shall any provision
under this Section 4.11 other than this paragraph (g) relate to matters with
respect to any Columbia House Entities Canadian Plans or Columbia House Entities
Foreign Plans, which are the subject of this Section 4.11(g).
SECTION 4.12. Litigation. Except as set forth in the Columbia House
Entities Disclosure Letter, there is no suit, action or proceeding pending or,
to the knowledge of Time Warner and Sony, threatened against or affecting any
Columbia House Entity or any Columbia House Subsidiary (and Time Warner and Sony
are not aware of any basis for any such suit, action or proceeding) that,
individually or in the aggregate, has had or could reasonably be expected to
have a Columbia House Entities Material Adverse Effect, nor is there any
Judgment outstanding against or, to the knowledge of Time Warner and Sony,
investigation by any Governmental Entity involving, any Columbia House Entity or
any Columbia House Subsidiary that, individually or in the aggregate, has had or
could reasonably be expected to have a Columbia House Entities Material Adverse
Effect.
SECTION 4.13. Compliance with Applicable Laws. Each of the Columbia
House Entities and each of the Columbia House Subsidiaries is in compliance with
all Laws applicable
51
to such Columbia House Entity or Columbia House Subsidiary, except for instances
of possible noncompliance that, individually and in the aggregate, have not had
and could not reasonably be expected to have a Columbia House Entities Material
Adverse Effect. As of the date of this Agreement, except as set forth in the
Columbia House Entities Disclosure Letter, no Columbia House Entity or Columbia
House Subsidiary has received during the past two years, from a Governmental
Entity, any written communication that alleges that any Columbia House Entity or
any Columbia House Subsidiary is not in compliance in any material respect with
any applicable Law. This Section 4.13 does not relate to matters with respect to
Taxes, which are the subject of Section 4.09, compliance with ERISA, which is
the subject of Section 4.11, or Environmental Matters, which are the subject of
Section 4.16.
SECTION 4.14. Brokers; Schedule of Fees and Expenses. No broker,
investment banker, financial advisor or other person, other than Credit Suisse
First Boston Corporation, the fees and expenses of which will be paid by
Columbia House, is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the Transactions based upon
arrangements made by or on behalf of the Columbia House Entities and the
Columbia House Subsidiaries. The Columbia House Entities Disclosure Letter sets
forth an estimate of all legal, accounting and investment banking fees and
expenses incurred as of the date of this Agreement by the Columbia House
Entities and the Columbia House Subsidiaries in connection with the
Transactions.
SECTION 4.15. Year 2000 Compliance. Except as set forth in the
Columbia House Entities Disclosure Letter, the computer systems and software
programs of the Columbia House Entities and the Columbia House Subsidiaries are
Year 2000 Compliant. The best current estimates of Columbia House of capital
expenditures to be Year 2000 Compliant are set forth in the Columbia House
Entities Disclosure Letter.
SECTION 4.16. Environmental Matters. Except as set forth on the
Columbia House Entities Disclosure Letter, and except as would not, individually
and in the aggregate, be reasonably likely to have a Columbia House Entities
Material Adverse Effect, (i) each of the Columbia House Entities and each of the
Columbia House Subsidiaries is in compliance with all applicable Environmental
Laws, (ii) each of the Columbia House Entities and each of the Columbia House
Subsidiaries has all permits, authorizations, licenses, consents and approvals
required under applicable Environmental Laws and is in compliance with their
52
respective requirements, (iii) there are no pending, or to the knowledge of Time
Warner and Sony, threatened, claims, proceedings or investigations against any
of the Columbia House Entities or any of the Columbia House Subsidiaries
alleging a violation of Environmental Law, (iv) none of the Columbia House
Entities or Columbia House Subsidiaries has received written notice alleging
that such Columbia House Entity or Columbia House Subsidiary is potentially
liable for the costs of investigating or remediating Hazardous Substances at any
property; (v) to the knowledge of Time Warner and Sony, there have been no
Releases of Hazardous Substances in, on, under or at any properties currently
owned or leased by any of the Columbia House Entities or Columbia House
Subsidiaries; (vi) to the knowledge of Time Warner and Sony, there are no
underground storage tanks at any properties currently owned or leased by any of
the Columbia House Entities or Columbia House Subsidiaries; and (vii) to the
knowledge of Time Warner and Sony, the Columbia House Entities and Columbia
House Subsidiaries have made available for review by CDnow and the CDnow
Subsidiaries all material environmental reports, studies and related
correspondence, as of the date hereof, relating to properties currently owned or
leased by any of the Columbia House Entities or Columbia House Subsidiaries.
SECTION 4.17. Contracts. Except as set forth in the Columbia House
Entities Disclosure Letter, there are no Contracts in effect as of the date of
this Agreement that are material to the business, properties, assets, condition
(financial or otherwise) or results of operations of the Columbia House Entities
and the Columbia House Subsidiaries, taken as a whole, the termination of which,
other than in accordance with their respective terms, could reasonably be
expected to have a Columbia House Entities Material Adverse Effect. Except as
set forth in the Columbia House Entities Disclosure Letter and Contracts entered
into after the date of this Agreement not in violation of any other provision of
this Agreement, none of the Columbia House Entities nor any Columbia House
Subsidiary is party to any:
(i) Contract with any labor union;
(ii) employment agreement, or consulting agreement or other contract
for services pursuant to which an individual performs services comparable
to an employee, with annual financial obligations of any Columbia House
Entity or any Columbia House Subsidiary in excess of $300,000;
(iii) loan agreement or instrument relating to indebtedness for
borrowed money;
53
(iv) Contract with any agent, dealer or distributor acting on behalf
of any Columbia House Entity or any Columbia House Subsidiary;
(v) stand-by letters of credit, guarantees or performance bonds
involving amounts in excess of $300,000 in the aggregate;
(vi) Contract with any affiliate of any Columbia House Entity; or
(vii) Contract that establishes any form of exclusivity restriction
on any Columbia House Entity or any Columbia House Subsidiary, any
exclusive or preferred vendor relationship restricting any Columbia House
Entity or any Columbia House Subsidiary in any material respect, any
covenant not to compete restricting any Columbia House Entity or any
Columbia House Subsidiary in any material respect or any covenant
restricting in any material respect the development, marketing or
distribution by any Columbia House Entity or any Columbia House Subsidiary
of any of its products, content or services, in each case that is binding
on any Columbia House Entity or any Columbia House Subsidiary for the
calendar year 1999 or thereafter.
Except as set forth in the Columbia House Entities Disclosure Letter, none of
the Columbia House Entities nor any Columbia House Subsidiary is in violation of
or in default under (nor does there exist any condition which upon the passage
of time or the giving of notice would cause such a violation of or default
under) any Contract to which it is a party or by which it or any of its
properties or assets is bound, nor, to the knowledge of Time Warner and Sony, is
any other party to any such Contract in violation of or in default under such
Contract, except for violations or defaults that, individually and in the
aggregate, have not had and could not reasonably be expected to have a Columbia
House Entities Material Adverse Effect.
SECTION 4.18. Title to Properties. (a) Except as set forth in the
Columbia House Entities Disclosure Letter, each Columbia House Entity and each
Columbia House Subsidiary has (i) good and marketable title to, or valid
leasehold interests in, all its real properties and (ii) good and valid title
to, or valid leasehold interests in, all its personal properties and assets, in
each case except for such as are no longer used or useful in the conduct of its
businesses or as have been disposed of in the ordinary course of business and
except for defects in title,
54
easements, restrictive covenants and similar encumbrances or impediments that,
in the aggregate, do not and will not materially interfere with its ability to
conduct its business as currently conducted. All such assets and properties,
other than assets and properties in which any Columbia House Entity or any
Columbia House Subsidiary has leasehold interests, are free and clear of all
Liens other than those disclosed in the Columbia House Entities Disclosure
Letter and except for Liens that, in the aggregate, do not and will not
materially interfere with the ability of the Columbia House Entities and the
Columbia House Subsidiaries to conduct business as currently conducted.
(b) Except as set forth in the Columbia House Entities Disclosure
Letter, each Columbia House Entity and each Columbia House Subsidiary has
complied in all material respects with the terms of all leases to which it is a
party and under which it is in occupancy, and all such leases are in full force
and effect. Each Columbia House Entity and each Columbia House Subsidiary enjoys
peaceful and undisturbed possession under all such leases.
SECTION 4.19. Intellectual Property. Except as set forth in the
Columbia House Entities Disclosure Letter, the Columbia House Entities and the
Columbia House Subsidiaries own, or are validly licensed or otherwise have the
right to use, all Intellectual Property Rights which are material to the conduct
of the business as currently conducted of the Columbia House Entities and the
Columbia House Subsidiaries, taken as a whole. Except as set forth in the
Columbia House Entities Disclosure Letter, no claims are pending or, to the
knowledge of Time Warner and Sony, threatened that any of the Columbia House
Entities or any Columbia House Subsidiary is infringing or otherwise adversely
affecting the rights of any person with regard to any Intellectual Property
Right, except in each case for any such claims that, individually and in the
aggregate, have not had and could not reasonably be expected to have a Columbia
House Entities Material Adverse Effect. To the knowledge of Time Warner and
Sony, as of the date of this Agreement, except as set forth in the Columbia
House Entities Disclosure Letter, no person is infringing the rights of any
Columbia House Entity or any Columbia House Subsidiary with respect to any
Intellectual Property Right. Except as set forth in the Columbia House Entities
Disclosure Letter, none of the Columbia House Entities nor any Columbia House
Subsidiary has licensed, or otherwise granted, to any party (other than any
Columbia House Entity or any Columbia House Subsidiary) any rights in or to any
Intellectual Property Rights material to the conduct of the
55
business as currently conducted of the Columbia House Entities and the Columbia
House Subsidiaries, taken as a whole.
SECTION 4.20. Labor Matters. Except as set forth in the Columbia
House Entities Disclosure Letter, (i) there are no collective bargaining or
other labor union agreements to which any of the Columbia House Entities or any
Columbia House Subsidiary is a party or by which any of them is bound and (ii)
to the knowledge of Time Warner and Sony, during the past five years none of the
Columbia House Entities or Columbia House Subsidiaries has encountered any labor
union organizing activity, or had any actual or threatened employee strikes,
work stoppages, slowdowns or lockouts.
SECTION 4.21. Insurance. Each of the Columbia House Entities and
each of the Columbia House Subsidiaries have insurance covering their respective
properties, operations and businesses, which insurance is in amounts and insures
against such losses and risks as are adequate, in the opinion of Time Warner and
Sony, to protect each of the Columbia House Entities and its business and each
of the Columbia House Subsidiaries and its business.
ARTICLE V
Representations and Warranties of Time Warner
Time Warner represents and warrants to CDnow and Sony as follows:
SECTION 5.01. Authority; Execution and Delivery; Enforceability.
Each of Time Warner and Time Warner Canada has all requisite power and authority
to execute and deliver each Transaction Agreement to which it is a party and to
consummate the Transactions. The execution and delivery by each of Time Warner
and Time Warner Canada of each Transaction Agreement to which it is a party and
the consummation by each of Time Warner and Time Warner Canada of the
Transactions have been duly authorized by all necessary action on the part of
Time Warner and Time Warner Canada. Each of Time Warner and Time Warner Canada
has duly executed and delivered each Initial Agreement to which it is a party,
and, assuming the due authorization, execution and delivery by each person other
than Time Warner and Time Warner Canada party thereto, each Initial Agreement to
which it is a party constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms. On or prior to the Closing
Date, each of Time Warner and Time Warner Canada shall have duly executed and
56
delivered each Supplemental Agreement to which it is a party, and, when so
executed and delivered, and duly authorized, executed and delivered by each
person other than Time Warner and Time Warner Canada party thereto, each
Supplemental Agreement to which it is a party will constitute its legal, valid
and binding obligation, enforceable against it in accordance with its terms.
SECTION 5.02. No Conflicts; Consents. (a) Except as set forth in the
letter, dated as of the date of this Agreement, from Time Warner to CDnow (the
"Time Warner Disclosure Letter"), the execution and delivery by each of Time
Warner and Time Warner Canada of this Agreement and each other Transaction
Agreement to which it is a party do not, and the consummation of the
Transactions and compliance with the terms hereof and thereof will not, conflict
with, or result in any violation of or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination, cancelation or
acceleration of any obligation or to loss of a material benefit under, or to
increased, additional, accelerated or guaranteed rights or entitlements of any
person under, or result in the creation of any Lien upon any of the properties
or assets of Time Warner or Time Warner Canada under, any provision of (i) its
Certificate of Incorporation or By-laws (or comparable organizational
documents), (ii) any Contract to which Time Warner or Time Warner Canada is a
party or by which any of their respective properties or assets is bound or (iii)
subject to the filings and other matters referred to in Section 5.02(b), any
Judgment or Law applicable to Time Warner or Time Warner Canada or their
respective properties or assets, other than, in the case of clauses (ii) and
(iii), any such items that, individually and in the aggregate, have not had and
could not reasonably be expected to have a material adverse effect on Time
Warner and Time Warner Canada, taken as a whole, or a material adverse effect on
the ability of Time Warner or Time Warner Canada to perform its obligations
under any of the Transaction Agreements to which it is a party or to consummate
the Transactions, except to the extent such effect is the result of actions
taken by CDnow (other than actions required by any Transaction Agreement) or
economic factors affecting the economy as a whole or the industry in which Time
Warner competes.
(b) No Consent of, or registration, declaration or filing with, or
permit from, any Governmental Entity is required to be obtained or made by or
with respect to Time Warner or Time Warner Canada in connection with the
execution, delivery and performance of any Transaction Agreement to which it is
a party or the consummation of the
57
Transactions, other than (i) compliance with and filings under the HSR Act and
the Canadian Competition Act and receipt of the Canadian Competition Act
Approval, (ii) the filing with the SEC of such reports under Sections 13 and 16
of the Exchange Act as may be required in connection with this Agreement, the
other Transaction Agreements and the Transactions, (iii) such Consents,
registrations or filings as may be required under applicable state securities
laws or the laws of any foreign country, (iv) compliance with and such filings
as may be required under applicable Environmental Laws, (v) such filings as may
be required in connection with the Taxes described in Section 8.09 and (vi) such
other items as are set forth in the Time Warner Disclosure Letter.
SECTION 5.03. Time Warner Interests. (a) The Time Warner Partnership
Interests represent 50% of the general partnership interests in each of MCo and
VCo. Time Warner Sub has good and valid title to the Time Warner Partnership
Interests, free and clear of any Liens. Assuming Holdco or Delaware Sub I, as
applicable, has the requisite power and authority to be the lawful owner of the
Time Warner Partnership Interests, upon delivery to Holdco or Delaware Sub I, as
Holdco shall direct, at the Closing of a duly executed instrument of transfer in
customary form to effect the transfer of the Time Warner Partnership Interests
to Holdco or Delaware Sub I, as Holdco shall direct, and upon Time Warner Sub's
receipt of shares of Holdco Class B Common Stock and the assumption by Holdco or
Delaware Sub I, as Holdco shall direct, of all of the liabilities, obligations
and commitments of Time Warner Sub and Time Warner that relate to, or arise out
of, the Time Warner Partnership Interests (pursuant to an instrument of
assumption in customary form), in accordance with Section 1.02(a), good and
valid title to the Time Warner Partnership Interests will pass to Holdco or
Delaware Sub I, as Holdco shall direct, free and clear of any Liens.
(b) All of the issued and outstanding shares of capital stock of
Time Warner Mexico are held indirectly by Time Warner. A subsidiary of Time
Warner has good and valid title to such shares, free and clear of any Liens.
Assuming Holdco has the requisite power and authority to be the lawful owner of
the Time Warner Mexico Shares, upon delivery to Holdco at the Closing of a duly
executed instrument of transfer in customary form to effect the transfer of the
Time Warner Mexico Shares to Holdco, and upon Warner Music Group's receipt of
shares of Holdco Class B Common Stock and the assumption by Holdco of all of the
liabilities, obligations and commitments of Warner Music Group and Time Warner
that relate to, or arise out of, the Time Warner
58
Mexico Shares (pursuant to an instrument of assumption in customary form), in
accordance with Section 1.02(a), good and valid title to the Time Warner Mexico
Shares will pass to Holdco, free and clear of any Liens.
(c) Time Warner Canada is an indirect wholly owned subsidiary of
Time Warner. Time Warner Canada owns 50% of the general partnership interests in
Columbia House Canada, and Time Warner Canada has good and valid title to such
general partnership interests, free and clear of any Liens.
ARTICLE VI
Representations and Warranties of Sony
Sony represents and warrants to CDnow and Time Warner as follows:
SECTION 6.01. Authority; Execution and Delivery; Enforceability.
Each of Sony and Sony Canada has all requisite power and authority to execute
and deliver each Transaction Agreement to which it is a party and to consummate
the Transactions. The execution and delivery by each of Sony and Sony Canada of
each Transaction Agreement to which it is a party and the consummation by each
of Sony and Sony Canada of the Transactions have been duly authorized by all
necessary action on the part of Sony and Sony Canada. Each of Sony and Sony
Canada has duly executed and delivered each Initial Agreement to which it is a
party, and, assuming the due authorization, execution and delivery by each
person other than Sony and Sony Canada party thereto, each Initial Agreement to
which it is a party constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms. On or prior to the Closing
Date, each of Sony and Sony Canada shall have duly executed and delivered each
Supplemental Agreement to which it is a party, and, when so executed and
delivered, and duly authorized, executed and delivered by each person other than
Sony and Sony Canada party thereto, each Supplemental Agreement to which it is a
party will constitute its legal, valid and binding obligation, enforceable
against it in accordance with its terms.
SECTION 6.02. No Conflicts; Consents. (a) Except as set forth in the
letter, dated as of the date of this Agreement, from Sony to CDnow (the "Sony
Disclosure Letter"), the execution and delivery by each of Sony and Sony Canada
of this Agreement and each other Transaction Agreement to which it is a party do
not, and the
59
consummation of the Transactions and compliance with the terms hereof and
thereof will not, conflict with, or result in any violation of or default (with
or without notice or lapse of time, or both) under, or give rise to a right of
termination, cancelation or acceleration of any obligation or to loss of a
material benefit under, or to increased, additional, accelerated or guaranteed
rights or entitlements of any person under, or result in the creation of any
Lien upon any of the properties or assets of Sony or Sony Canada under, any
provision of (i) its Certificate of Incorporation or By-laws (or comparable
organizational documents), (ii) any Contract to which Sony or Sony Canada is a
party or by which any of their respective properties or assets is bound or (iii)
subject to the filings and other matters referred to in Section 6.02(b), any
Judgment or Law applicable to Sony or Sony Canada or their respective properties
or assets, other than, in the case of clauses (ii) and (iii), any such items
that, individually and in the aggregate, have not had and could not reasonably
be expected to have a material adverse effect on Sony and Sony Canada, taken as
a whole, or a material adverse effect on the ability of Sony or Sony Canada to
perform its obligations under any of the Transaction Agreements or to consummate
the Transactions, except to the extent such effect is the result of actions
taken by CDnow (other than actions required by any Transition Agreement) or
economic factors affecting the economy as a whole or the industry in which Sony
competes.
(b) No Consent of, or registration, declaration or filing with, or
permit from, any Governmental Entity is required to be obtained or made by or
with respect to Sony or Sony Canada in connection with the execution, delivery
and performance of any Transaction Agreement to which it is a party or the
consummation of the Transactions, other than (i) compliance with and filings
under the HSR Act and the Canadian Competition Act and receipt of the Canadian
Competition Act Approval, (ii) the filing with the SEC of such reports under
Sections 13 and 16 of the Exchange Act as may be required in connection with
this Agreement, the other Transaction Agreements and the Transactions, (iii)
such Consents, registrations or filings as may be required under applicable
state securities laws or the laws of any foreign country, (iv) compliance with
and such filings as may be required under applicable Environmental Laws, (v)
such filings as may be required in connection with the Taxes described in
Section 8.09 and (vi) such other items as are set forth in the Sony Disclosure
Letter.
SECTION 6.03. Sony Interests. (a) The Sony Partnership Interests
represent 50% of general partnership
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interests in each of MCo and VCo. SMEI has good and valid title to the Sony
Partnership Interests, free and clear of any Liens. Assuming Holdco or Delaware
Sub II, as applicable, has the requisite power and authority to be the lawful
owner of the Sony Partnership Interests, upon delivery to Holdco or Delaware Sub
II, as Holdco shall direct, at the Closing of a duly executed instrument of
transfer in customary form to effect the transfer of the Sony Partnership
Interests to Holdco or Delaware Sub II, as Holdco shall direct, and upon SMEI's
receipt of shares of Holdco Class B Common Stock and the assumption by Holdco or
Delaware Sub II, as Holdco shall direct, of all of the liabilities, obligations
and commitments of SMEI and Sony that relate to, or arise out of, the Sony
Partnership Interests (pursuant to an instrument of assumption in customary
form), in accordance with Section 1.02(b), good and valid title to the Sony
Partnership Interests will pass to Holdco or Delaware Sub II, as Holdco shall
direct, free and clear of any Liens.
(b) All of the issued and outstanding shares of capital stock of
Sony Mexico are held directly by SMEI. SMEI has good and valid title to such
shares, free and clear of any Liens. Assuming Holdco has the requisite power and
authority to be the lawful owner of the Sony Mexico Shares, upon delivery to
Holdco at the Closing of a duly executed instrument of transfer in customary
form to effect the transfer of the Sony Mexico Shares to Holdco, and upon SMEI's
receipt of shares of Holdco Class B Common Stock and the assumption by Holdco of
all of the liabilities, obligations and commitments of SMEI and Sony that relate
to, or arise out of, the Sony Mexico Shares (pursuant to an instrument of
assumption in customary form), in accordance with Section 1.02(b), good and
valid title to the Sony Mexico Shares will pass to Holdco, free and clear of any
Liens.
(c) Sony Canada is a direct wholly owned subsidiary of Sony. Sony
Canada owns 50% of the general partnership interests in Columbia House Canada,
and Sony Canada has good and valid title to such general partnership interests,
free and clear of any Liens.
ARTICLE VII
Covenants Relating to Conduct of Business
SECTION 7.01. Conduct of Business. (a) Conduct of Business by CDnow.
Except for matters set forth in the CDnow Disclosure Letter or otherwise
expressly permitted by
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this Agreement, from the date of this Agreement to the Effective Time, CDnow
shall, and shall cause each CDnow Subsidiary to, conduct its business in the
usual, regular and ordinary course in substantially the same manner as
previously conducted and, to the extent consistent therewith, use all reasonable
efforts to preserve intact its current business organization, keep available the
services of its current officers and employees and keep its relationships with
customers, suppliers, licensors, licensees, distributors and others having
business dealings with them to the end that its goodwill and ongoing business
shall be unimpaired at the Effective Time. In addition, and without limiting the
generality of the foregoing, except for matters set forth in the CDnow
Disclosure Letter or otherwise expressly permitted by this Agreement, from the
date of this Agreement to the Effective Time, CDnow shall not, and shall not
permit any CDnow Subsidiary to, do any of the following without the prior
written consent of Time Warner and Sony:
(i) (A) declare, set aside or pay any dividends on, or make any
other distributions in respect of, any of its capital stock, other than
dividends and distributions by a direct or indirect wholly owned
subsidiary of CDnow to its parent, (B) 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 (C) purchase, redeem or otherwise acquire any shares of
capital stock of CDnow or any CDnow Subsidiary or any other securities
thereof or any rights, warrants or options to acquire any such shares or
other securities;
(ii) issue, deliver, sell, grant, pledge or otherwise encumber or
subject to any Lien (A) any shares of its capital stock, (B) any Voting
CDnow Debt or other voting securities, (C) any securities convertible into
or exchangeable for, or any options, warrants or rights to acquire, any
such shares, Voting CDnow Debt, voting securities or convertible or
exchangeable securities or (D) any "phantom" stock, "phantom" stock
rights, stock appreciation rights or stock-based performance units, other
than the issuance of CDnow Common Stock upon the exercise of CDnow
Employee Stock Options and CDnow Warrants outstanding on the date of this
Agreement and in accordance with their present terms;
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(iii) amend its certificate of incorporation, by-laws or other
comparable charter or organizational documents;
(iv) acquire or agree to acquire (A) by merging or consolidating
with, or by purchasing assets of, or by any other manner, any equity
interest in or portion of any business of any corporation, partnership,
company, limited liability company, joint venture, association or other
business organization or division thereof or (B) any assets that,
individually, are in excess of $1 million or, in the aggregate, are in
excess of $2.5 million, except purchases of inventory for resale and
renewals of licenses, in each case in the ordinary course of business
consistent with prior practice;
(v) enter into any joint venture agreement or strategic alliance or
similar agreement or arrangement with any person;
(vi) sell, lease (as lessor), license, mortgage or otherwise
encumber or subject to any Lien or otherwise dispose of any properties or
assets (including securitizations), except sales of inventory and renewals
of licenses, in each case in the ordinary course of business consistent
with prior practice and sale/leaseback transactions in respect of
equipment financings not to exceed $1 million in the aggregate;
(vii) sell, lease, assign, transfer, convey, deliver or otherwise
dispose of, or divest, or purchase or acquire, or enter into any material
agreement with any person with respect to, any Intellectual Property
Rights, except in the ordinary course of business consistent with prior
practice;
(viii) (A) grant to any officer or director of CDnow or any CDnow
Subsidiary any increase in compensation, except in the ordinary course of
business consistent with prior practice or to the extent required under
employment agreements in effect as of ▇▇▇▇▇ ▇▇, ▇▇▇▇, (▇) grant to any
employee, officer or director of CDnow or any CDnow Subsidiary any
increase in severance or termination pay, except to the extent required
under any agreement or plan in effect as of March 18, 1999, (C) enter into
any employment, consulting, deferred compensation, indemnification,
severance or termination agreement with any such employee, officer or
director (other than such agreements with newly hired employees, in the
ordinary course of business consistent with prior practice, involving
total annual compensation not
63
to exceed $125,000 individually or $2,500,000 in the aggregate), (D)
establish, adopt, enter into or amend in any material respect any
collective bargaining agreement or CDnow Benefit Plan, (E) take any action
to accelerate any rights or benefits, or make any material determinations
not in the ordinary course of business consistent with prior practice,
under any collective bargaining agreement or CDnow Benefit Plan or (F)
take any action to accelerate, or, where CDnow has reserved the unilateral
discretion to prevent such acceleration, fail to take any action to
prevent the acceleration of, the vesting of any CDnow Employee Stock
Options or other equity-based compensation;
(ix) make any change in accounting methods, principles or practices
materially affecting the reported consolidated assets, liabilities or
results of operations of CDnow, except insofar as may be required by a
change in GAAP or by SEC interpretations with respect to filings
therewith;
(x) (A) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of CDnow or any
CDnow Subsidiary, guarantee any debt securities of another person, enter
into any "keep well" or other agreement to maintain any financial
statement condition of another person or enter into any arrangement having
the economic effect of any of the foregoing, except for (I) short-term
borrowings incurred in the ordinary course of business consistent with
prior practice, (II) incurrence by CDnow, on or after December 15, 1999,
of indebtedness for borrowed money in an amount not to exceed $30,000,000
("CDnow Financing") so long as such indebtedness (v) does not constitute
Voting CDnow Debt, (w) is not convertible into or exchangeable for, and,
except as provided in Section 8.14(b), does not include any options,
warrants or rights to acquire, shares of capital stock, Voting CDnow Debt,
voting securities or convertible or exchangeable securities, (x) may be
prepaid any time without premium or penalty of any kind, (y) does not
contain any covenants or restrictions that would impede or delay
consummation of the Transactions or adversely effect the ability of CDnow
or any of the CDnow Subsidiaries to perform its obligations under any of
the Transaction Agreements or that would survive any payment of such
indebtedness and (z) otherwise satisfies the requirements of "Permitted
Interim Financing" under the Interim Loan Documents (for the avoidance of
doubt, CDnow may enter into
64
definitive agreements for the CDnow Financing prior to December 15, 1999,
but shall not draw on any such facility prior to December 15, 1999), and
(III) as contemplated by the Interim Loan Documents, or (B) make any
loans, advances (other than for travel, entertainment and relocation
expenses of employees in the ordinary course of business consistent with
prior practice in an outstanding amount not to exceed $250,000 in the
aggregate at any given time) or capital contributions to, or investments
in, any other person, other than to or in CDnow or any direct or indirect
wholly owned subsidiary of CDnow;
(xi) make or agree to make any new capital expenditure or
expenditures that, individually, is in excess of $1 million or, in the
aggregate, are in excess of $2 million in any calendar quarter;
(xii) make or change any material Tax election, make any material
change in accounting methods with respect to Taxes or settle or compromise
any material Tax liability or refund;
(xiii) (A) pay, discharge, settle or satisfy any claims,
liabilities, obligations or litigation (absolute, accrued, asserted or
unasserted, contingent or otherwise) in excess of $500,000 individually or
$1.5 million in the aggregate, other than (i) the payment, discharge,
settlement or satisfaction, in the ordinary course of business consistent
with prior practice or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent
financial statements (or the notes thereto) included in the Filed CDnow
SEC Documents or incurred since the date of such financial statements in
the ordinary course of business consistent with prior practice and (ii)
with respect to Taxes, (B) cancel any indebtedness or waive any claims or
rights of substantial value or (C) waive the benefits of, or agree to
modify in any manner, any confidentiality, standstill or similar agreement
to which CDnow or any CDnow Subsidiary is a party;
(xiv) enter into, modify, amend or terminate any of the Contracts of
the type listed in Section 3.18, other than, in the case of Contracts of
the type listed in clause (iv) of Section 3.18, in the ordinary course of
business consistent with prior practice;
65
(xv) engage in any transaction or enter into any agreement or
arrangement with any shareholder or affiliate of CDnow or any of the CDnow
Subsidiaries; or
(xvi) authorize any of, or commit or agree to take any of, the
foregoing actions.
(b) Conduct of Business of the Columbia House Entities. Except for
matters set forth in the Columbia House Disclosure Letter or otherwise expressly
permitted by this Agreement, from the date of this Agreement to the Effective
Time each of Time Warner and Sony shall cause each Columbia House Entity and
each Columbia House Subsidiary to conduct its business in the usual, regular and
ordinary course in substantially the same manner as previously conducted and, to
the extent consistent therewith, use all reasonable efforts to preserve intact
its current business organization, keep available the services of its current
officers and employees and keep its relationships with customers, suppliers,
licensors, licensees, distributors and others having business dealings with them
to the end that its goodwill and ongoing business shall be unimpaired at the
Effective Time. In addition, and without limiting the generality of the
foregoing, except for matters set forth in the Columbia House Entities
Disclosure Letter or otherwise expressly permitted by this Agreement, from the
date of this Agreement to the Effective Time, Time Warner and Sony shall not
permit any Columbia House Entity to do any of the following without the prior
written consent of CDnow:
(i) (A) declare, set aside or pay any distributions in respect of
any of its partnership interests, other than (1) for the avoidance of
doubt, payments that reduce on a dollar-for-dollar basis the amount of
accounts payable to Time Warner or Sony or any of their affiliates and (2)
Permitted Tax Distributions (as defined below) or (B) purchase, redeem or
otherwise acquire any partnership interests or shares of capital stock in
any Columbia House Entity or any other securities thereof or any rights to
acquire any such interests or other securities; for purposes of this
Agreement "Permitted Tax Distributions" shall mean distributions to SMEI
and Time Warner Sub, with respect to any taxable period after March 31,
1999, in an aggregate amount not to exceed the amount payable by MCo or
VCo, as the case may be, pursuant to the tax distributions section (Annex
8, Section 6(ii)) of the Joint Venture Agreements dated December 29, 1994
among SMEI, Time Warner Sub and Warner Music Group;
66
(ii) issue, deliver, sell, grant, pledge or otherwise encumber or
subject to any Lien (A) any partnership interests, (B) any Voting Columbia
House Entities Debt or other voting securities or (C) any securities
convertible into or exchangeable for, or any options, warrants or rights
to acquire, any such partnership interests, Voting Columbia House Entities
Debt, voting securities or convertible or exchangeable securities;
(iii) amend its organizational documents, except as contemplated by
this Agreement and the other Transaction Agreements;
(iv) sell, lease (as lessor), license, mortgage or otherwise
encumber or subject to any Lien or otherwise dispose of any properties or
assets that are material to the business of the Columbia House Entities
and the Columbia House Subsidiaries, taken as a whole, (including
securitizations), except sales of inventory and renewals of licenses, in
each case in the ordinary course of business consistent with prior
practice and sale/leaseback transactions in respect of equipment
financings not to exceed $3 million in the aggregate;
(v) make any change in accounting methods, principles or practices
materially affecting the reported consolidated assets, liabilities or
results of operations of any Columbia House Entity, except insofar as may
have been required by a change in GAAP or by SEC interpretation with
respect to filings therewith;
(vi) (A) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, except pursuant to the Columbia House
Credit Agreement, issue or sell any debt securities or warrants or other
rights to acquire any debt securities of any Columbia House Entity or any
Columbia House Subsidiary, guarantee any debt securities of another
person, enter into any "keep well" or other agreement to maintain any
financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing, except for
(I) short-term borrowings incurred in the ordinary course of business
consistent with prior practice and (II) increases in accounts payable to
Time Warner and Sony and their affiliates in the ordinary course of
business consistent with prior practice and conversion of accounts payable
into indebtedness, or (B) make any loans, advances (other than for travel,
entertainment and relocation expenses of employees in the ordinary
67
course of business consistent with prior practice in an outstanding amount
not to exceed $500,000 in the aggregate at any given time) or capital
contributions to, or investments in, any other person, other than to or in
any Columbia House Entity or any Columbia House Subsidiary or pursuant to
the Interim Loan Documents;
(vii) (A) pay, discharge, settle or satisfy any claims, liabilities,
obligations or litigation (absolute, accrued, asserted or unasserted,
contingent or otherwise) in excess of $1.5 million individually or $4.5
million in the aggregate, other than (i) the payment, discharge or
satisfaction, in the ordinary course of business consistent with prior
practice or in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the Columbia House Entities
Financial Statements or incurred since the date of such financial
statements in the ordinary course of business consistent with prior
practice, (ii) the transactions contemplated by Section 9.03(f) and (iii)
with respect to Taxes or (B) cancel any indebtedness or waive any claims
or rights of substantial value; or
(viii) authorize any of, or commit or agree to take any of, the
foregoing actions.
(c) Other Actions. CDnow, Time Warner and Sony shall not, and shall
not permit any of their respective subsidiaries to, take any action that would,
or that could reasonably be expected to, result in (i) any of the
representations and warranties of such party set forth in this Agreement that is
qualified as to materiality becoming untrue, (ii) any of such representations
and warranties that is not so qualified becoming untrue in any material respect
or (iii) except as otherwise permitted by Section 7.02, any condition to the
Transactions set forth in Article IX not being satisfied.
(d) Advice of Changes. CDnow, on the one hand, and Time Warner and
Sony, on the other hand, shall promptly advise the other orally and in writing
of any change or event that has or could reasonably be expected to have a
material adverse effect on such party, in the case of CDnow, or the Columbia
House Entities in the case of Time Warner and Sony.
(e) Transition Planning. CDnow, Time Warner and Sony agree that they
shall work together to coordinate all aspects of transition planning and
implementation relating to the Transactions. During the period between the date
of
68
this Agreement and the Effective Time, CDnow, on the one hand, and Time Warner
and Sony, on the other hand, shall jointly examine, consistent with all
applicable laws, various alternatives regarding the manner in which to best
organize and manage the businesses of CDnow and the Columbia House Entities
after the Effective Time. The members of the joint transition planning team and
the parties designating such members are identified on Exhibit P. Each member of
the joint transition planning team shall have the right to grant waivers of
Sections 7.01(a) and (b) (excluding Section 7.01(b)(i)(A)) on behalf of the
party to this Agreement that designated such member; provided that any such
waiver shall be in writing and signed by the member of the joint transition
planning team designated by the party to be bound by such waiver.
SECTION 7.02. No Solicitation. (a) CDnow shall not, nor shall it
authorize or permit any of the CDnow Subsidiaries, any of its or their
respective officers, directors or employees or any investment banker, financial
advisor, attorney, accountant or other advisor or representative retained by
CDnow or any of the CDnow Subsidiaries to, directly or indirectly through
another person, (i) solicit, initiate or knowingly encourage (including by way
of furnishing information), or knowingly take any action designed to facilitate,
any inquiries or the making of a proposal which constitutes, or may reasonably
be expected to lead to, any CDnow Takeover Proposal (as defined in Section
7.02(e)) or (ii) participate in any discussions or negotiations regarding any
CDnow Takeover Proposal; provided, however, that during the 30-day period
following the date of this Agreement (the "Initial Period"), CDnow may, in
response to a Superior CDnow Proposal (as defined in Section 7.02(e)) that was
unsolicited and that did not otherwise result from a breach of this Section
7.02(a), and subject to providing prior written notice of its decision to take
such action to Time Warner and Sony and compliance with Section 7.02(c), (x)
furnish information with respect to CDnow to the person making the Superior
CDnow Proposal pursuant to a confidentiality agreement not less restrictive of
such person than the Confidentiality Agreement dated March 3, 1999, among CDnow
Online, N2K Inc., a Delaware corporation ("N2K"), CDnow, TWI and Sony (the
"Confidentiality Agreement") and (y) participate in discussions or negotiations
regarding such Superior CDnow Proposal.
(b) Neither CDnow, nor the CDnow Board nor any committee thereof
shall withdraw or modify, or propose publicly to withdraw or modify, in a manner
adverse to Time Warner, Sony or any of the Columbia House Entities, the
69
approval or recommendation by such Board or any such committee of this
Agreement, any other Transaction Agreement, the Merger or any other Transaction.
Neither CDnow, nor the CDnow Board nor any committee thereof shall, without the
prior written consent of Time Warner and Sony in their sole discretion, (i)
cause CDnow or any CDnow Subsidiary to enter into any letter of intent,
agreement in principle, acquisition agreement, joint venture agreement,
strategic alliance agreement or other similar agreement (each, an "Acquisition
Agreement") related to any transaction referred to in clause (A), (B) or (C) of
the definition of "CDnow Takeover Proposal" (a "CDnow Takeover Transaction") or
(ii) approve or recommend, or propose publicly to approve or recommend, any
CDnow Takeover Transaction. Notwithstanding the foregoing, at any time during
the Initial Period, in response to a Superior CDnow Proposal which was not
solicited by CDnow and which did not otherwise result from a breach of Section
7.02(a), the CDnow Board may (subject to this sentence and the definition of the
term "Superior CDnow Proposal") terminate this Agreement (and concurrently with
or after such termination, if it so chooses, cause CDnow to enter into any
Acquisition Agreement with respect to any Superior CDnow Proposal), but only at
a time that is during the Initial Period and is after the third business day
following receipt by Time Warner and Sony of written notice advising Time Warner
and Sony that the CDnow Board is prepared to accept a Superior CDnow Proposal,
specifying the material terms and conditions of such Superior CDnow Proposal and
identifying the person making such Superior CDnow Proposal (or if such third
business day would fall after expiration of the Initial Period, then such
shorter period (but in no event less than 24 hours notice) as is necessary for
such termination to occur prior to expiration of the Initial Period).
(c) In addition to the obligations of CDnow set forth in paragraphs
(a) and (b) of this Section 7.02, CDnow promptly shall advise Time Warner and
Sony orally and in writing of any request for information or of any CDnow
Takeover Proposal, or any inquiry with respect to or which would reasonably be
expected to lead to any CDnow Takeover Proposal, the material terms and
conditions of such request, CDnow Takeover Proposal or inquiry, and the identity
of the person making any such request, CDnow Takeover Proposal or inquiry. CDnow
will keep Time Warner and Sony informed of the status and details (including
amendments or proposed amendments) of any such request, CDnow Takeover Proposal
or inquiry.
(d) Nothing contained in this Section 7.02 shall prohibit CDnow from
(x) taking and disclosing to its
70
shareholders a position contemplated by Rule 14e-2(a) promulgated under the
Exchange Act or (y) making any disclosure to CDnow's shareholders if, in the
good faith judgment of the majority of the members of the CDnow Board, in
consultation with independent counsel, failure to so disclose would constitute a
violation of the Federal securities laws; provided, however, that neither CDnow
nor the CDnow Board nor any committee thereof shall withdraw or modify, or
propose publicly to withdraw or modify, its position with respect to this
Agreement, the other Transaction Agreements, the Merger or the other
Transactions, or approve or recommend, or propose publicly to approve or
recommend, a CDnow Takeover Transaction.
(e) For purposes of this Agreement:
(i) "Superior CDnow Proposal" means any bona fide proposal made by a
third party (i) to acquire, directly or indirectly, including pursuant to
a tender offer, exchange offer, merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar
transaction, for consideration consisting of cash and/or securities, more
than 50% of the combined voting power of the shares of CDnow Common Stock
then outstanding or all or substantially all the assets of CDnow, (ii)
that is otherwise on terms which the CDnow Board determines in its good
faith judgment (based on the advice of a financial advisor of nationally
recognized reputation) to be more favorable to CDnow's shareholders than
the Merger and the other Transactions after taking into account all
constituencies (including shareholders), the terms of this Agreement and
the other Transaction Agreements (including any proposal by Time Warner
and Sony to amend the terms of the Transactions) and pertinent factors
permitted under the PBCL, (iii) for which financing, to the extent
required, is then committed or which, in the good faith judgment of the
CDnow Board, is reasonably capable of being obtained by such third party
and (iv) for which, in the good faith judgment of the CDnow Board, no
domestic or foreign regulatory approvals are required, including antitrust
approvals, that could not reasonably be expected to be obtained; and
(ii) "CDnow Takeover Proposal" means any inquiry, proposal or offer
from any person relating to any (A) direct or indirect acquisition,
purchase, exchange or license of, or joint venture or strategic alliance
involving, a business or assets that constitute, in any such case, 20% or
more of the net revenues, net income or the assets of CDnow or the CDnow
Subsidiaries, taken
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as a whole, (B) direct or indirect acquisition or purchase of 20% or more
of any class of equity securities of CDnow or the CDnow Subsidiaries or
any tender offer or exchange offer that if consummated would result in any
person beneficially owning 20% or more of any class of equity securities
of CDnow or any of the CDnow Subsidiaries or (C) direct or indirect
merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving CDnow or any of
the CDnow Subsidiaries, in each case other than the Transactions.
ARTICLE VIII
Additional Agreements
SECTION 8.01. Preparation of the Form S-4 and the Proxy Statement;
Shareholders Meeting. (a) As soon as practicable following the date of this
Agreement, CDnow, Holdco, Time Warner and Sony shall jointly prepare and CDnow
shall file with the SEC the Proxy Statement in preliminary form and CDnow,
Holdco, Time Warner and Sony shall jointly prepare and Holdco shall file with
the SEC the Form S-4, in which the Proxy Statement will be included as a
prospectus, and each of CDnow, Holdco, Time Warner and Sony shall use its
reasonable efforts to respond as promptly as practicable to any comments of the
SEC with respect thereto. Each of CDnow, Holdco, Time Warner and Sony shall use
its reasonable efforts to have the Form S-4 declared effective under the
Securities Act as promptly as practicable after such filing. CDnow shall use its
reasonable efforts to cause the Proxy Statement to be mailed to CDnow's
shareholders as promptly as practicable after the Form S-4 is declared effective
under the Securities Act. Holdco shall take any action (other than qualifying to
do business in any jurisdiction in which CDnow or Columbia House are not now so
qualified) required to be taken under any applicable state securities laws in
connection with the issuance of Holdco Common Stock in the Transactions and
under CDnow Stock Plans and CDnow Warrants, and CDnow shall furnish all
information concerning CDnow and the holders of CDnow Common Stock and rights to
acquire CDnow Common Stock pursuant to CDnow Stock Plans and CDnow Warrants as
may be reasonably requested in connection with any such action. The parties
shall notify each other promptly of the receipt of any comments from the SEC or
its staff and of any request by the SEC or its staff for amendments or
supplements to the Proxy Statement or the Form S-4 or for additional information
and shall supply each other with copies of all correspondence between any of its
representatives, on the one hand, and the SEC or its staff,
72
on the other hand, with respect to the Proxy Statement, the Form S-4 or the
Transactions. No filing of, or amendment or supplement to, the Form S-4 will be
made by Holdco, or the Proxy Statement will be made by CDnow, without providing
each of Time Warner and Sony the opportunity to review and comment thereon and
receiving the prior approval thereof of each of Time Warner and Sony.
(b) If at any time prior to the Effective Time any event with
respect to CDnow or any CDnow Subsidiary or with respect to other information
supplied by CDnow for inclusion in the Proxy Statement or the Form S-4 shall
occur which is required to be described in an amendment of, or a supplement to,
the Proxy Statement or the Form S-4, CDnow shall promptly notify Time Warner and
Sony of such event, and CDnow and Holdco shall cooperate with Time Warner and
Sony in the prompt filing with the SEC of any necessary amendment or supplement
to the Proxy Statement and Form S-4 and, as required by Law, in disseminating
the information contained in such amendment or supplement to CDnow's
shareholders.
(c) If at any time prior to the Effective Time any event with
respect to any of the Columbia House Entities or any of the Columbia House
Subsidiaries, or with respect to any other information supplied by Time Warner
or Sony for inclusion in the Proxy Statement or the Form S-4, shall occur which
is required to be described in an amendment of, or a supplement to, the Proxy
Statement or the Form S-4, Time Warner or Sony, as the case may be, shall
promptly notify CDnow of such event, and Time Warner and Sony shall cooperate
with CDnow and Holdco in the prompt filing with the SEC of any necessary
amendment or supplement to the Proxy Statement and the Form S-4 and, as required
by Law, in disseminating the information contained in such amendment or
supplement to CDnow's shareholders.
(d) CDnow shall, as soon as practicable following the date of this
Agreement, establish a record date (which shall be as soon as practicable
following the date of this Agreement) for, and duly call, give notice of,
convene and hold, a meeting of its shareholders (the "CDnow Shareholders
Meeting") for the purpose of obtaining the CDnow Shareholder Approval. CDnow
shall use its reasonable efforts to cause the Proxy Statement to be mailed to
CDnow's shareholders as promptly as practicable after the Form S-4 is declared
effective under the Securities Act. CDnow shall, through the CDnow Board,
recommend to its shareholders that they give the CDnow Shareholder Approval.
Without limiting the generality of the foregoing, CDnow agrees that its
obligations pursuant to this Section 8.01(d) shall not be
73
affected by the commencement, public proposal, public disclosure or
communication to CDnow of any CDnow Takeover Proposal.
(e) CDnow shall use its reasonable efforts to cause to be delivered
to Time Warner and Sony a letter of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP, CDnow's independent
auditors, dated a date within two business days before the date on which the
Form S-4 shall become effective and addressed to Time Warner and Sony, in form
and substance reasonably satisfactory to Time Warner and Sony and customary in
scope and substance for comfort letters delivered by independent public
accountants in connection with registration statements similar to the Form S-4.
(f) Time Warner and Sony shall use their reasonable efforts to cause
to be delivered to CDnow a letter of Ernst & Young LLP, Columbia House's
independent auditors, dated a date within two business days before the date on
which the Form S-4 shall become effective and addressed to CDnow, in form and
substance reasonably satisfactory to CDnow and customary in scope and substance
for comfort letters delivered by independent public accountants in connection
with registration statements similar to the Form S-4.
(g) Time Warner and Sony shall use their reasonable efforts to cause
to be delivered to Holdco as soon as practicable following the date of this
Agreement combined financial statements for MCo, VCo, Columbia House, Columbia
House Mexico and Columbia House Canada that comply with the requirements of
Items 14(e), (f) and (g) of Form S-4 under the Securities Act, to be included
in the Proxy Statement and the Form S-4.
SECTION 8.02. Access to Information; Confidentiality. (a) Upon
reasonable notice, CDnow shall, and shall cause the CDnow Subsidiaries to, and
each of Time Warner and Sony shall cause the Columbia House Entities and the
Columbia House Subsidiaries to, afford to the other party and to the officers,
employees, accountants, counsel, financial advisors and other representatives of
such other party, reasonable access during normal business hours during the
period prior to the Effective Time to all their respective properties, books,
contracts, commitments, personnel and records and, during such period, each of
CDnow, Time Warner and Sony shall furnish promptly to the other party (a) a copy
of each report, schedule, registration statement and other document filed by it
or any of its subsidiaries during such period pursuant to the requirements of
Federal or state securities laws and (b) all
74
other information concerning its business, properties and personnel as such
other party reasonably may request. All information exchanged pursuant to this
Section 8.02 shall be treated confidentially in accordance with the provisions
of paragraphs A.1 through A.5 and B.1 through B.5 of the Confidentiality
Agreement and such provisions are hereby incorporated by reference herein with
the same force and effect as if restated herein in their entirety.
(b) CDnow shall provide, and Time Warner and Sony shall cause
Columbia House to provide, reasonable cooperation to CDnow's independent
auditors and to Columbia House's independent auditors to enable them to issue
the letters referred to in Sections 8.01(e) and (f) and shall use reasonable
efforts to cause such letters to be issued.
SECTION 8.03. Reasonable Efforts; Notification. (a) On the terms and
subject to the conditions set forth in this Agreement, each of the parties shall
use all reasonable efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Transactions,
including (i) the obtaining of all necessary actions or nonactions, waivers,
consents and approvals from Governmental Entities and the making of all
necessary registrations and filings (including filings with Governmental
Entities, if any) and the taking of all reasonable steps as may be necessary to
obtain an approval or waiver from, or to avoid an action or proceeding by, any
Governmental Entity, (ii) the obtaining of all necessary consents, approvals or
waivers from third parties, (iii) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
any other Transaction Agreement or the consummation of the Transactions,
including seeking to have any stay or temporary restraining order entered by any
court or other Governmental Entity vacated or reversed, and (iv) the execution
and delivery of any additional instruments necessary to consummate the
Transactions and to fully carry out the purposes of the Transaction Agreements;
provided, however, that none of Time Warner, Sony or any of their respective
affiliates shall be required to consent (or offer to consent) to (i) any
prohibition or limitation on the ownership or operation by Time Warner or Sony
or any of their respective subsidiaries or affiliates of any material portion of
the business or assets of Holdco, CDnow, any Columbia House Entity, Time Warner
or Sony or any of their respective subsidiaries or affiliates, (ii) the disposal
of or holding separate of any material portion of the business or assets of
Holdco, CDnow, any Columbia House Entity, Time
75
Warner or Sony or any of their respective subsidiaries or affiliates, (iii) any
limitations on the ability of Holdco, Time Warner, Time Warner Canada, Sony or
Sony Canada, or any of their respective subsidiaries or affiliates, to acquire
or hold, or exercise full rights of ownership of, any equity interests in
Holdco, CDnow, any Columbia House Entity or any of their respective
subsidiaries, including limitations on the ability of Time Warner, Time Warner
Canada, Sony or Sony Canada, or any of their respective subsidiaries or
affiliates, to vote Holdco Common Stock or instruct the voting trustee as to
voting the Voting Preferred Share on all matters properly presented to the
stockholders of Holdco, or limitations on the ability of Holdco to vote CDnow
Common Stock on all matters properly presented to the shareholders of CDnow, or
(iv) any prohibition on Time Warner or Sony or any of their respective
subsidiaries or affiliates effectively controlling in any material respect the
business or operations of Holdco, CDnow, any Columbia House Entity and their
respective subsidiaries or affiliates. In connection with and without limiting
the foregoing, CDnow and the CDnow Board shall (i) take all corporate actions
necessary to ensure that no state takeover statute or similar statute or
regulation is or becomes applicable to the Merger, any other Transaction, this
Agreement or any other Transaction Agreement and (ii) if any state takeover
statute or similar statute or regulation becomes applicable to the Merger, any
other Transaction, this Agreement or any other Transaction Agreement, take all
corporate action necessary to ensure that the Transactions may be consummated as
promptly as practicable on the terms contemplated by the Transaction Agreements
and otherwise to minimize the effect of such statute or regulation on this
Agreement and the other Transaction Agreements.
(b) CDnow shall give prompt notice to Time Warner and Sony, and Time
Warner or Sony, as applicable, shall give prompt notice to CDnow, of (i) any
representation or warranty made by it or any of its affiliates or subsidiaries
contained in any Transaction Agreement that is qualified as to materiality
becoming untrue or inaccurate in any respect or any such representation or
warranty that is not so qualified becoming untrue or inaccurate in any material
respect or (ii) the failure by it to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied by
it under any Transaction Agreement; provided, however, that no such notification
shall affect the representations, warranties, covenants or agreements of the
parties or the conditions to the obligations of the parties under the
Transaction Agreements.
76
SECTION 8.04. CDnow Employee Stock Options. (a) As soon as
practicable following the date of this Agreement, the CDnow Board (or, if
appropriate, any committee administering CDnow Stock Plans) shall adopt such
resolutions or take such other actions as may be required to effect the
following:
(i) adjust the terms of all outstanding CDnow Employee Stock Options
(as defined in Section 8.04(d)) to provide that, at the Effective Time,
each CDnow Employee Stock Option outstanding immediately prior to the
Effective Time shall be deemed to constitute an option to acquire, on the
same terms and conditions as were applicable under such CDnow Employee
Stock Option, the same number of shares of Holdco Class A Common Stock as
the holder of such CDnow Employee Stock Option would have been entitled to
receive pursuant to the Merger had such holder exercised such CDnow
Employee Stock Option in full immediately prior to the Effective Time, at
a price per share equal to (A) the aggregate exercise price for the shares
of CDnow Common Stock otherwise purchasable pursuant to such Employee
Stock Option divided by (B) the number of shares of Holdco Class A Common
Stock deemed purchasable pursuant to such CDnow Employee Stock Option;
provided, however, that in the case of any option to which Section 421 of
the Code applies by reason of its qualification under either Section 422
or 424 of the Code ("qualified stock options"), the option price, the
number of shares purchasable pursuant to such option and the terms and
conditions of exercise of such option shall be determined in order to
comply with Section 424(a) of the Code;
(ii) make such other changes to CDnow Stock Plans as it deems
appropriate to give effect to the Merger (subject to the approval of Time
Warner and Sony, which shall not be unreasonably withheld);
(iii) ensure that, after the Effective Time, no CDnow Employee Stock
Options may be granted under any CDnow Stock Plan; and
(iv) ensure that the conversion pursuant to Section 2.01 of CDnow
Capital Stock held by any director or officer of CDnow, and the conversion
pursuant to this Section 8.04 into Holdco Employee Stock Options of CDnow
Employee Stock Options held by any director or officer of CDnow, will be
eligible for exemption under Rule 16b-3(e) under the Exchange Act.
77
(b) At the Effective Time, and subject to compliance by CDnow with
Section 8.04(a), Holdco shall assume all the obligations of CDnow under CDnow
Stock Plans, each outstanding CDnow Employee Stock Option and the agreements
evidencing the grants thereof. As soon as practicable after the Effective Time,
Holdco shall deliver to the holders of CDnow Employee Stock Options appropriate
notices setting forth such holders' rights pursuant to the respective CDnow
Stock Plans, and the agreements evidencing the grants of such CDnow Employee
Stock Options shall continue in effect on the same terms and conditions (subject
to the adjustments required by this Section 8.04 after giving effect to the
Merger). Holdco shall comply with the terms of CDnow Stock Plans and ensure, to
the extent required by, and subject to the provisions of, such CDnow Stock
Plans, that CDnow Employee Stock Options that qualified as qualified stock
options prior to the Effective Time continue to qualify as qualified stock
options after the Effective Time.
(c) Holdco shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Holdco Common Stock for delivery upon
exercise of CDnow Employee Stock Options assumed in accordance with this Section
8.04. On the first business day after the Effective Time, Holdco shall file a
registration statement on Form S-8 (or any successor or other appropriate form)
with respect to the shares of Holdco Common Stock subject to such CDnow Employee
Stock Options and shall use its best 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
CDnow Employee Stock Options remain outstanding. With respect to those
individuals who subsequent to the Merger will be subject to the reporting
requirements under Section 16(a) of the Exchange Act, where applicable, Holdco
shall administer CDnow Stock Plans assumed pursuant to this Section 8.04 in a
manner that complies with Rule 16b-3 under the Exchange Act to the extent the
applicable CDnow Stock Plan complied with such rule prior to the Merger. Prior
to the Effective Time, Holdco shall take all actions as may be reasonably
required to cause the acquisition of equity securities of Holdco, as
contemplated by this Section 8.04, by any person who is or will become a
director or officer of Holdco to be eligible for exemption under Rule 16b-3(d)
under the Exchange Act.
78
(d) In this Agreement:
"CDnow Employee Stock Option" means any option to purchase CDnow
Common Stock granted under any CDnow Stock Plan or as described in Section
3.03 of the CDnow Disclosure Letter.
"CDnow Stock Plans" means the CDnow 1999 Equity Compensation Plan,
the CDnow 1996 Equity Compensation Plan, the N2K 1997 Directors Stock
Option Plan, the 1987 Telebase Employee Incentive Stock Option Plan, the
1996 N2K Employee Stock Purchase Plan and the 1996 N2K Stock Option Plan.
"Holdco Employee Stock Option" means any option to purchase Holdco
Common Stock granted under any equity-based compensation plan adopted or
maintained by Holdco.
(e) As soon as practicable after the date of this Agreement, CDnow
shall cause each CDnow Warrant outstanding immediately prior to the Effective
Time to be amended and converted, as of the Effective Time, into a warrant to
acquire, on the same terms and conditions as were applicable under such CDnow
Warrant, the same number of shares of Holdco Common Stock as the holder of such
CDnow Warrant would have been entitled to receive pursuant to the Merger had
such holder exercised such CDnow Warrant in full immediately prior to the
Effective Time, at a price per share equal to (A) the aggregate exercise price
for the shares of CDnow Common Stock otherwise purchasable pursuant to such
CDnow Warrant divided by (B) the number of shares of Holdco Common Stock deemed
purchasable pursuant to such CDnow Warrant.
SECTION 8.05. Benefit Plans. (a) For a period of one year after the
Effective Time, Holdco shall provide or cause the Surviving Corporation (or, in
such case, its successors or assigns) to provide retirement and welfare benefits
(1) to employees of CDnow and the CDnow Subsidiaries that, taken as a whole, are
not materially less favorable in the aggregate to such employees than those in
effect on the date of this Agreement and (2) to employees of the Columbia House
Entities and Columbia House Subsidiaries that, taken as a whole, are not
materially less favorable in the aggregate to such employees than those in
effect on the date of this Agreement.
(b) From and after the Effective Time, Holdco shall, and shall cause
the Surviving Corporation to, honor in accordance with their respective terms
(as in effect on
79
the date of this Agreement), all employment, severance and termination
agreements, plans and policies of CDnow disclosed in the CDnow Disclosure Letter
and all employment, severance and termination agreements, plans and policies of
the Columbia House Entities disclosed in the Columbia House Entities Disclosure
Letter.
(c) From and after the Effective Date, Holdco shall, and shall cause
the Surviving Corporation to, design all equity-based compensation plans (based
on shares of Holdco Common Stock) such that any stock options and stock
appreciation rights granted thereunder will be eligible to qualify as "qualified
performance-based compensation" as defined in Section 1.162-27(e) of the U.S.
Treasury regulation. As soon as practicable following the date of this
Agreement, CDnow shall use its best efforts to cause CDnow's shareholders to
approve such a plan of Holdco in accordance with Section 162(m) of the Code.
(d) To the extent that service is relevant for purposes of
eligibility, participation or vesting under any employee benefit plan or program
maintained after the Effective Time, employees of the Surviving Corporation (or
in the case of a transfer of all or substantially all the assets and business of
the Surviving Corporation, its successors or assigns) shall be credited for
service accrued or deemed accrued with CDnow and the CDnow Subsidiaries, or the
Columbia House Entities and Columbia House Subsidiaries, as the case may be,
prior the Effective Time.
SECTION 8.06. Indemnification. (a) Holdco agrees that all rights to
indemnification for acts or omissions occurring prior to the Effective Time now
existing in favor of the current or former directors or officers of CDnow as
provided in the CDnow Charter and the CDnow By-laws shall survive the Merger and
shall continue in full force and effect in accordance with their terms for a
period of time not less than the period necessary for the statutes of limitation
for all possible claims to have run. As of the Effective Time, Holdco shall
unconditionally and irrevocably guarantee, for the benefit of such persons, the
obligations of CDnow under the foregoing indemnification arrangements. Holdco
shall cause to be maintained for a period of not less than six years from the
Effective Time CDnow's current directors' and officers' insurance and
indemnification policy to the extent that it provides coverage for events
occurring prior to the Effective Time (the "D&O Insurance") for all persons who
are directors and officers of CDnow on the date of this Agreement, so long as
the annual premium therefor would not be in excess of 200% of the last annual
premium paid prior to the date of this Agreement (such 200%
80
amount, the "Maximum Premium"). If the existing D&O Insurance expires, is
terminated or canceled during such six-year period, Holdco shall use all
reasonable efforts to cause to be obtained as much D&O Insurance as can be
obtained for the remainder of such period for an annualized premium not in
excess of the Maximum Premium, on terms and conditions no less advantageous than
the existing D&O Insurance. CDnow represents to Holdco, Time Warner and Sony
that the Maximum Premium is $518,000.
(b) If the Closing shall occur, Holdco shall indemnify each of Time
Warner, Time Warner Sub, Warner Music Group, Sony and SMEI, and each of their
respective affiliates, stockholders, partners, directors, officers, employees
and agents, against and hold them harmless from (i) any and all losses,
liabilities, claims, damages, costs and expenses (including attorneys' fees and
disbursements and other reasonable professional fees and disbursements, whether
or not litigation is instituted) (collectively, "Losses") suffered or incurred
by any such indemnified party related to, or arising out of, the Time Warner
Partnership Interests, the Time Warner Mexico Shares, the Sony Partnership
Interests or the Sony Mexico Shares, as the case may be, and (ii) any and all
Losses related to, or arising out of, the business, operations, activities,
affairs, properties, assets or liabilities of any of the Columbia House Entities
or the Columbia House Subsidiaries, whether arising before, on or after the
Closing Date.
SECTION 8.07. Fees and Expenses. (a) Except as provided below, all
fees and expenses incurred in connection with the Transactions shall be paid by
the party incurring such fees or expenses, whether or not the Transactions are
consummated, except that expenses incurred in connection with filing, printing
and mailing the Proxy Statement and the Form S-4 (excluding legal and accounting
fees and expenses) as well as expenses incurred in connection with the formation
of Holdco, Pennsylvania Sub, Delaware Sub I and Delaware Sub II shall be shared
equally by Columbia House, on the one hand, and CDnow, on the other hand. For
the avoidance of doubt, fees and expenses of legal and accounting advisors to
Time Warner and Sony have been incurred for the benefit of, and shall be borne
by, Columbia House.
(b) In the event that (1) a proposal or offer for a CDnow Takeover
Transaction shall have been made known to CDnow or has been made directly to its
shareholders or any person has announced an intention (whether or not
conditional) to make a proposal or offer for a CDnow Takeover Transaction and
thereafter this Agreement is
81
terminated by either Time Warner and Sony, on the one hand, or CDnow, on the
other hand, pursuant to Section 10.01(b)(i), 10.01(b)(iii) or 10.01(c), and
within 12 months after such termination CDnow or any CDnow Subsidiary enters
into any Acquisition Agreement with respect to, or approves, recommends or
consummates, any CDnow Takeover Transaction, or any person consummates a tender
offer or an exchange offer constituting a CDnow Takeover Transaction, (2) this
Agreement is terminated by Time Warner and Sony pursuant to Section 10.01(d)(i),
and within 18 months after such termination CDnow or any CDnow Subsidiary enters
into any Acquisition Agreement with respect to, or approves, recommends or
consummates, any CDnow Takeover Transaction, or any person consummates a tender
offer or an exchange offer constituting a CDnow Takeover Transaction, or (3)
this Agreement is terminated (x) by CDnow pursuant to Section 10.01(f) or (y) by
Time Warner and Sony pursuant to Section 10.01(d)(ii), 10.01(d)(iii) or
10.01(d)(iv), then CDnow shall:
(A) in the case of a termination described in clause (1)
above, no later than the first to occur of (x) CDnow or any CDnow
Subsidiary entering into any Acquisition Agreement with respect to,
or approving or recommending any Control-Shifting CDnow Takeover
Transaction (as defined below), (y) CDnow or any CDnow Subsidiary
consummating any CDnow Takeover Transaction or (z) any person
consummating a tender offer or an exchange offer constituting a
CDnow Takeover Transaction, pay a fee equal to $19 million (As used
herein the term "Control-Shifting CDnow Takeover Transaction" means
any transaction referred to in clause (A), (B) or (C) of the
definition of "CDnow Takeover Proposal" (but replacing 20% with 45%
in clause (A) and (B) thereof);
(B) in the case of a termination described in clause (2)
above, no later than the first to occur of (x) CDnow or any CDnow
Subsidiary entering into any Acquisition Agreement with respect to,
or approving or recommending, any Control-Shifting CDnow Takeover
Transaction, (y) CDnow or any CDnow Subsidiary consummating any
CDnow Takeover Transaction or (z) any person consummating a tender
offer or an exchange offer constituting a CDnow Takeover
Transaction, pay a fee equal to $31 million; and
(C) in the case of a termination described in clause (3)
above, promptly, but in no event later
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than the date of such termination, pay a fee equal to $31 million
(any such fee described in clause (A), (B) or (C) above (the "Termination
Fee")), to Time Warner and Sony (to be shared by them equally) by wire transfer
of same day funds. If, prior to the time at which the Termination Fee becomes
payable pursuant to clause (A), (B) or (C) above, Time Warner and Sony shall
have exercised a Cash-Out Right (as defined in the Stock Option Agreement)
pursuant to Section 6(c) of the Stock Option Agreement, the amount payable by
CDnow under this Section 8.07(b), together with the aggregate amount previously
received by Time Warner and Sony under Section 6(c) of the Stock Option
Agreement, shall not exceed (i) in the case of a Termination Fee pursuant to
clause (A) above, $25 million and (ii) in the case of a Termination Fee pursuant
to clause (B) or (C) above, $31 million. CDnow acknowledges that the agreements
contained in this Section 8.07(b) are an integral part of the Transactions, and
that, without these agreements, Time Warner and Sony would not enter into this
Agreement or the other Transaction Agreements; accordingly, if CDnow fails
promptly to pay the amounts due pursuant to this Section 8.07(b), and, in order
to obtain such payment, Time Warner and Sony commence a suit which results in a
judgment against CDnow for the amounts set forth in this Section 8.07(b), CDnow
shall pay to Time Warner and Sony their respective reasonable costs and expenses
(including attorneys' fees and expenses) in connection with such suit, together
with interest on the amounts set forth in this Section 8.07(b) at the prime rate
of Citibank, N.A. in effect on the date such payment was required to be made.
(c) CDnow acknowledges and agrees that in the event of a breach of
Section 7.02, the payment of the Termination Fee shall not constitute the
exclusive remedies available to Time Warner and Sony, and that Time Warner and
Sony shall be entitled to the remedies set forth in Section 11.10, including
injunction and specific performance, and all other remedies available at law or
in equity to which Time Warner and Sony are entitled.
SECTION 8.08. Public Announcements. Time Warner and Sony, on the one
hand, and CDnow, on the other hand, shall consult with each other before
issuing, and provide each other the opportunity to review and comment upon, any
press release or other public statements with respect to the Transactions, and
CDnow shall not issue any such press release or make any such public statement
without the prior approval of each of Time Warner and Sony. The initial press
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release announcing the Transactions shall be in the form of Exhibit Q.
SECTION 8.09. Transfer Taxes. All stock transfer, real estate
transfer, documentary, stamp, recording, sales and other similar Taxes
(including interest, penalties and additions to any such Taxes) ("Transfer
Taxes") incurred in connection with the Transactions shall be paid by either
Holdco or the Surviving Corporation, and CDnow, Time Warner and Sony shall
cooperate with Holdco or the Surviving corporation in preparing, executing and
filing any Tax Returns with respect to such Transfer Taxes, including supplying
in a timely manner a complete list of all real property interests held
(including by lease) by CDnow that are located in New York State and any
information with respect to such property that is reasonably necessary to
complete such Tax Returns. The portion of the consideration to be received by
holders of CDnow Common Stock in connection with the Merger that is allocable to
the real property of CDnow and its subsidiaries in New York State shall be
determined by Holdco in its reasonable discretion.
SECTION 8.10. Affiliates. Prior to the Closing Date, CDnow shall
deliver to each of Time Warner, Sony and Holdco a letter identifying all persons
who are expected by CDnow to be, on the Closing Date, "affiliates" of CDnow for
purposes of Rule 145 under the Securities Act. CDnow shall use its best efforts
to cause each such person to deliver to each of Time Warner, Sony and Holdco on
or prior to the Closing Date a written agreement substantially in the form of
Exhibit R attached hereto.
SECTION 8.11. Stock Exchange Listing. Holdco shall use all
reasonable efforts to cause the shares of Holdco Class A Common Stock to be
issued pursuant to this Agreement and under the CDnow Stock Plans and the CDnow
Warrants to be approved for listing on the Nasdaq National Market ("Nasdaq"),
subject to official notice of issuance, prior to the Closing Date.
SECTION 8.12. Tax Treatment. Each party and its affiliates shall use
reasonable efforts (i) to cause the Transactions to qualify as exchanges
governed by Section 351 of the Code, (ii) to cause the Canadian Transactions to
qualify for tax-deferred treatment under the Income Tax Act (Canada) and (iii)
to obtain the opinions of counsel referred to in Sections 9.02(f) and 9.03(d).
SECTION 8.13. Shareholder Litigation. CDnow shall give Time Warner
and Sony the opportunity to
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participate in the defense of any shareholder litigation against CDnow and/or
its directors relating to any of the Transactions or any Transaction Agreement.
SECTION 8.14. Certain Financing Arrangements and Contributions. (a)
From and after the Closing Date and until the third anniversary of the Closing
Date, each of Time Warner and SMEI shall severally guarantee (on a 50-50 basis)
a credit facility (the "Guaranteed Facility") of Holdco, and Sony Capital
Corporation shall guarantee SMEI's obligations under the foregoing guarantee,
providing Holdco with availability of financing in an aggregate amount equal to
the sum of (i) "net debt", which shall be calculated as (x) the sum of
short-term debt and long-term debt less (y) cash and cash equivalents, in each
case as set forth on the combined balance sheet for ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ and the Columbia House Subsidiaries dated as
of the Closing Date (the "Columbia House Closing Date Balance Sheet") or in the
notes thereto, and (ii) $150 million less any amounts outstanding under the
CDnow Working Capital Facility or any CDnow Financing on the Closing Date. Each
such guarantee shall provide for an absolute and unconditional guarantee, as
principal and not as surety, of (i) in the case of the Time Warner and SMEI
guarantees, one-half of Holdco's obligations under the Guaranteed Facility, and
(ii) in the case of the Sony Capital Corporation guarantee, all of SMEI's
obligations under the foregoing Sony guarantee, and will provide the guarantor
with full rights of subrogation in respect of any payments made pursuant to such
guarantee.
(b) In the event that the Transactions shall not have been
consummated prior to December 15, 1999, Columbia House, or, in their sole
discretion, Time Warner and SMEI severally (on a 50-50 basis), shall make
available to CDnow, on and as of such date, a credit facility for working
capital purposes (the "CDnow Working Capital Facility") in an amount equal to
$30 million ($15 million from each of Time Warner and SMEI, in the case of a
non-Columbia House facility); provided that the obligations of Columbia House,
or Time Warner and SMEI shall be reduced, on a dollar-for-dollar basis, by the
amount of any committed CDnow Financing. The terms of the CDnow Working Capital
Facility shall be as set forth in the Interim Loan Documents. CDnow may issue
warrants to purchase shares of CDnow Common Stock to any lender in respect of
the CDnow Financing so long as (i) such warrants (the "CDnow Financing
Warrants") (x) represent the right to acquire, in the aggregate, not more than a
number of shares of CDnow Common Stock having a Market Value (as defined below)
at the time of issuance of such warrants equal to 10% of the principal amount of
the
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CDnow Financing and (y) by their terms provide that from and after the Effective
Time such warrants shall only represent the right to receive, upon exercise, the
amount and form of Merger Consideration the holder would have received in the
Merger had such CDnow Financing Warrant been exercised immediately prior to the
Effective Time (and no other consideration) and (ii) CDnow simultaneously issues
to Time Warner and SMEI warrants on the same terms (including exercise price and
tenor) as the CDnow Financing Warrants (provided that such warrants shall
provide that (a) they shall not vest until, but shall become fully vested and
exercisable immediately prior to, the Effective Time and (b) they shall be
exercisable for shares of Holdco Class B Common Stock) and in an aggregate
amount (to be split 50-50 between Time Warner and SMEI) representing the right
to acquire an aggregate number of shares of CDnow Common Stock that is equal to
the product of (x) 2.8462 and (y) the aggregate number of shares of CDnow Common
Stock issuable under the CDnow Financing Warrants. For purposes of this Section
8.14(b), "Market Value" shall mean the average of the daily closing prices of
CDnow Common Stock as reported on Nasdaq on each of the ten consecutive trading
days ending with the trading day immediately preceding the date of issuance of
the CDnow Financing Warrants.
(c) On the Closing Date, each of Time Warner and Sony shall, or
shall cause one or more of its affiliates to, contribute to Holdco cash in an
amount previously agreed upon by the parties.
SECTION 8.15. Initial Independent Directors of Holdco. The initial
Independent Directors to hold office at the Effective Time shall be designated
by the members of a committee consisting of the persons designated by the Time
Warner Group as the initial Time Warner Directors (the "Time Warner Designees"),
the persons designated by the Sony Group as the initial Sony Directors (the
"Sony Designees") and ▇▇▇▇▇ ▇▇▇▇. No person shall be designated as an initial
Independent Director unless the Time Warner Designees and the Sony Designees
agree to such designation. Capitalized terms used in this Section 8.15 and not
otherwise defined have the meanings assigned to them in the Governance
Agreement.
SECTION 8.16. Transition Services. On the Closing Date SMEI and
Holdco shall enter into a transition services agreement on terms, and in a form,
mutually agreeable among CDnow, Sony and Time Warner.
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ARTICLE IX
Conditions Precedent
SECTION 9.01. Conditions to Each Party's Obligation To Effect the
Transactions. The obligation of each party to consummate the Transactions and
any other transaction contemplated by this Agreement is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Shareholder Approval. CDnow shall have obtained the CDnow
Shareholder Approval.
(b) Listing. The shares of Holdco Class A Common Stock issuable to
CDnow's shareholders pursuant to this Agreement and under the CDnow Stock Plans
and the CDnow Warrants shall have been approved for listing on Nasdaq, subject
to official notice of issuance.
(c) Antitrust. The waiting period (and any extension thereof)
applicable to the Transactions under the HSR Act shall have been terminated or
shall have expired, and the Canadian Competition Act Approval with respect to
the Canadian Transactions shall have been received. Any consents, approvals and
filings under any domestic or foreign antitrust law, the absence of which would
prohibit the consummation of the Transactions, shall have been obtained or made.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Transactions shall be in effect; provided, however, that
prior to asserting this condition, subject to Section 8.03, each of the parties
shall have used all reasonable efforts to prevent the entry of any such
injunction or other order and to appeal as promptly as possible any such
injunction or other order that may be entered.
(e) Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order, and Holdco shall have received all state securities or
"blue sky" authorizations and all authorizations under the laws of any foreign
country necessary to issue Holdco Common Stock and the Voting Preferred Share
pursuant to the Transactions.
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(f) Required Third-Party Consents. All necessary consents, approvals
or waivers from third parties to the Transactions shall have been obtained,
except for those the failure of which to obtain, individually and in the
aggregate, are not reasonably likely to have a CDnow Material Adverse Effect or
a Columbia House Entities Material Adverse Effect, as the case may be; provided,
however, that prior to asserting this condition, subject to Section 8.03, each
of the parties shall have used commercially reasonable efforts to obtain such
consent, approval or waiver.
SECTION 9.02. Conditions to Obligations of Time Warner and Sony. The
obligations of Time Warner and Sony to consummate the Transactions and any other
transaction contemplated by this Agreement are further subject to the following
conditions:
(a) Representations and Warranties. The representations and
warranties of CDnow in this Agreement that are qualified as to materiality shall
be true and correct and those not so qualified shall be true and correct in all
material respects, as of the date of this Agreement and as of the Closing Date
as though made on and as of such time, except to the extent such representations
and warranties expressly relate to an earlier date (in which case such
representations and warranties qualified as to materiality shall be true and
correct, and those not so qualified shall be true and correct in all material
respects, on and as of such earlier date). Time Warner and Sony shall have
received a certificate signed on behalf of CDnow to such effect, in each case
signed by the chief executive officer and the chief financial officer of CDnow.
(b) Performance of Obligations of CDnow and its Subsidiaries. CDnow
and each CDnow Subsidiary shall have performed in all material respects all
obligations required to be performed by them under this Agreement and under the
Master Canadian Transaction Agreement on or prior to the Closing Date, and Time
Warner and Sony 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. Holdco shall have performed in all material respects all obligations
required to be performed by it under the Master Canadian Transaction Agreement
on or prior to the Closing Date, and Time Warner and Sony shall have received a
certificate signed on behalf of Holdco by the chief executive officer and the
chief financial officer of Holdco, who shall also be officers of CDnow, to such
effect.
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(c) No Governmental Proceedings. There shall not be pending or
threatened any suit, action or proceeding by any Governmental Entity, (i)
challenging the acquisition by Time Warner, Time Warner Canada, Sony or Sony
Canada or any of their respective subsidiaries or affiliates of any Holdco
Common Stock or CDnow Common Stock, seeking to restrain or prohibit the
consummation of the Transactions or seeking to obtain from Time Warner, Time
Warner Canada, Sony, Sony Canada, any Columbia House Entity or CDnow any damages
that are material in relation to CDnow and the CDnow Subsidiaries taken as a
whole, (ii) seeking to prohibit or limit the ownership or operation by Holdco,
CDnow, any Columbia House Entity, Time Warner or Sony or any of their respective
subsidiaries or affiliates of any material portion of the business or assets of
Holdco, CDnow, any Columbia House Entity, Time Warner or Sony or any of their
respective subsidiaries or affiliates, or to compel Holdco, CDnow, any Columbia
House Entity, Time Warner or Sony or any of their respective subsidiaries or
affiliates to dispose of or hold separate any material portion of the business
or assets of Holdco, CDnow, any Columbia House Entity, Time Warner or Sony or
any of their respective subsidiaries or affiliates, as a result of the Merger or
any other Transaction, (iii) seeking to impose limitations on the ability of
Holdco, Time Warner, Time Warner Canada, Sony or Sony Canada, or any of their
respective subsidiaries or affiliates, to acquire or hold, or exercise full
rights of ownership of, any equity interests in Holdco, CDnow, any Columbia
House Entity or any of their respective subsidiaries, including limitations on
the ability of Time Warner, Time Warner Canada, Sony or Sony Canada, or any of
their respective subsidiaries or affiliates, to vote Holdco Common Stock or
instruct the voting trustee as to voting the Voting Preferred Share on all
matters properly presented to the stockholders of Holdco, or limitations on the
ability of Holdco to vote CDnow Common Stock on all matters properly presented
to the shareholders of CDnow, (iv) seeking to prohibit Time Warner or Sony or
any of their respective subsidiaries or affiliates from effectively controlling
in any material respect the business or operations of Holdco, CDnow, any
Columbia House Entity, and their respective subsidiaries or affiliates or (v)
which otherwise is reasonably likely to have a CDnow Material Adverse Effect;
provided, however, that the provisions of this Section 9.02(b) shall not be
applicable to any suit, action or proceeding by any Mexican Governmental Entity.
(d) Absence of CDnow Material Adverse Effect. Except as disclosed in
the Filed CDnow SEC Documents or in the CDnow Disclosure Letter, since December
31, 1998, there shall not have been any event, change, effect or development
89
that, individually or in the aggregate, has had or could reasonably be expected
to have a CDnow Material Adverse Effect.
(e) CDnow Board. Each director of CDnow shall have resigned.
(f) Tax Opinion. Time Warner shall have received a written opinion,
dated as of the Closing Date, from Cravath, Swaine & ▇▇▇▇▇, and Sony shall have
received a written opinion, dated as of the Closing Date, from ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇
LLP, to the effect that, on the basis of the facts, representations and
assumptions set forth in such opinion, the Time Warner Contribution and the Sony
Contribution, respectively, will qualify as exchanges governed by the provisions
of Section 351 of the Code; it being understood that in rendering their
respective opinions, such tax counsel shall be entitled to rely upon
representations reasonably requested by such counsel from the parties to this
Agreement.
(g) Letters from CDnow Affiliates. Time Warner and Sony shall have
received from each person named in the letter referred to in Section 8.10 an
executed copy of an agreement substantially in the form of Exhibit R attached
hereto.
(h) Transaction Agreements. Each person, other than Time Warner and
Sony (and their respective affiliates), shall have executed and delivered to
Time Warner and Sony a counterpart to each Transaction Agreement to which it is
a party.
(i) Dissenters Rights. The shares of CDnow Common Stock held by all
persons who comply with all the provisions of the PBCL concerning the right of
any holder of shares of CDnow Common Stock to dissent from the Merger and obtain
payment of the fair market value of such holders' shares of CDnow Common Stock
shall constitute less than 5% of the issued and outstanding shares of CDnow
Common Stock immediately prior to the Effective Time.
SECTION 9.03. Conditions to Obligations of CDnow. The obligation of
the CDnow to consummate the Transactions and any other transaction contemplated
by this Agreement is further subject to the following conditions:
(a) Representations and Warranties. The representations and
warranties of Time Warner and Sony in this Agreement that are qualified as to
materiality shall be true and correct and those not so qualified shall be true
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and correct in all material respects, as of the date of this Agreement and on
the Closing Date as though made on and as of such time, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties qualified as to materiality shall
be true and correct, and those not so qualified shall be true and correct in all
material respects, on and as of such earlier date). CDnow shall have received a
certificate from each of Time Warner and Sony to such effect, in each case
signed by two executive officers of Time Warner or Sony, as applicable.
(b) Performance of Obligations of Time Warner and Sony. Time Warner
and Sony shall have performed in all material respects all obligations required
to be performed by them under this Agreement on or prior to the Closing Date,
and CDnow shall have received certificates from Time Warner and Sony to such
effect, in each case signed by two executive officers of Time Warner or Sony, as
applicable. Time Warner Canada and Sony Canada shall have performed in all
material respects all obligations required to be performed by them under the
Master Canadian Transaction Agreement on or prior to the Closing Date, and CDnow
shall have received certificates from Time Warner Canada and Sony Canada to such
effect, in each case signed by two executive officers of Time Warner Canada or
Sony Canada, as applicable.
(c) Absence of Columbia House Entities Material Adverse Effect.
Except as disclosed in the Columbia House Disclosure Letter, since December 18,
1998, there shall not have been any event, change, effect or development that,
individually or in the aggregate, has had or could reasonably be expected to
have a Columbia House Entities Material Adverse Effect.
(d) Tax Opinion. CDnow shall have received a written opinion, dated
as of the Closing Date, from ▇▇▇▇▇▇, ▇▇▇▇▇ & ▇▇▇▇▇▇▇ LLP to the effect that, on
the basis of the facts, representations and assumptions set forth in such
opinion, the Merger will qualify as an exchange governed by the provisions of
Section 351 of the Code; it being understood that in rendering such opinion,
such tax counsel shall be entitled to rely upon representations reasonably
requested by such counsel from the parties to this Agreement.
(e) Transaction Agreements. Each person, other than CDnow, Holdco,
Pennsylvania Sub, Delaware Sub I and Delaware Sub II (and their affiliates),
shall have executed
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and delivered to CDnow a counterpart to each Transaction Agreement to which it
is a party.
(f) Contribution of Notes; Contribution of Cash and Repayment of
Notes. Each of Time Warner and SMEI shall have either (i) contributed to the
capital of each applicable Columbia House Entity the Notes of such Columbia
House Entity dated March 1994 and December 29, 1994, held by Time Warner or
SMEI, as applicable, and such Notes shall have been canceled with no cost or
expense to any of the Columbia House Entities or (ii) contributed to the capital
of each applicable Columbia House Entity an amount in cash sufficient to repay
in full the principal of, accrued and unpaid interest on and premium, if any,
with respect to the Notes of such Columbia House Entity dated March 1994 and
December 29, 1994, held by Time Warner or SMEI, as applicable, and such Notes
shall have been repaid in full.
(g) Guaranteed Credit Facility. The closing of the Guaranteed
Facility shall occur concurrently with the Closing.
ARTICLE X
Termination, Amendment and Waiver
SECTION 10.01. Termination. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after receipt of the CDnow
Shareholder Approval:
(a) by mutual written consent of Time Warner, Sony and CDnow;
(b) by either Time Warner and Sony, on the one hand, or CDnow, on
the other hand:
(i) if the Merger, the Contributions and the other
Transactions are not consummated on or before March 13, 2000 (the
"Outside Date"), unless the failure to consummate the Transactions
is the result of a breach of any Transaction Agreement by the party
seeking to terminate this Agreement or any affiliate of such party;
provided, however, that the passage of such period shall be tolled
for any part thereof during which any party or any of its affiliates
shall be subject to a nonfinal order, decree, ruling or action
restraining, enjoining or otherwise prohibiting the consummation of
the Transactions;
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(ii) if any Governmental Entity issues an order, decree or
ruling or takes any other action permanently enjoining, restraining
or otherwise prohibiting the Transactions and such order, decree,
ruling or other action shall have become final and nonappealable; or
(iii) if the CDnow Shareholder Approval shall not have been
obtained at the CDnow Shareholders Meeting duly convened therefor or
at any adjournment or postponement thereof;
(c) by Time Warner and Sony, if CDnow or any CDnow Subsidiary
breaches or fails to perform in any material respect any of its
representations, warranties or covenants contained in any Initial
Agreement, which breach or failure to perform (i) would give rise to the
failure of a condition set forth in Section 9.02(a) or 9.02(b) and (ii)
cannot be or has not been cured within 20 business days after the giving
of written notice to CDnow of such breach (provided that neither Time
Warner nor Sony nor any of their respective affiliates is then in breach
of any representation, warranty or covenant contained in any Initial
Agreement);
(d) by Time Warner and Sony:
(i) if CDnow or any of its directors or officers shall breach
Section 7.02;
(ii) if CDnow, or the CDnow Board or any committee thereof, in
violation of Section 7.02, (A) withdraws or modifies, or proposes
publicly to withdraw or modify, in a manner adverse to Time Warner,
Sony or any of the Columbia House Entities, the approval or
recommendation by such Board or any such committee of this
Agreement, any other Transaction Agreement, the Merger or any other
Transaction, or (B) without the prior written consent of Time Warner
and Sony in their sole discretion, (x) causes CDnow or any CDnow
Subsidiary to enter into any Acquisition Agreement related to any
CDnow Takeover Transaction or (y) approves or recommends, or
proposes publicly to approve or recommend, any CDnow Takeover
Transaction;
(iii) if CDnow or any of its directors or officers shall make
any disclosure to the shareholders of CDnow permitted pursuant to
Section 7.02(d) that has the effect of
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(x) withdrawing, modifying or changing the approval or
recommendation of the CDnow Board or any committee thereof of this
Agreement, the other Transaction Agreements or the Transactions in a
manner adverse to Time Warner, Sony, Pennsylvania Sub, Time Warner
Canada or Sony Canada, (y) approving or recommending to the
shareholders of CDnow a CDnow Takeover Transaction or (z) approving
or recommending that the shareholders of CDnow tender their shares
of CDnow Common Stock into any tender offer or exchange offer that
is a CDnow Takeover Proposal or is related thereto; or
(iv) if any person shall have consummated a tender offer or an
exchange offer constituting a CDnow Takeover Transaction;
(e) by CDnow, if any of Time Warner, Sony, Time Warner Canada or
Sony Canada breaches or fails to perform in any material respect any of
its representations, warranties or covenants contained in any Initial
Agreement, which breach or failure to perform (i) would give rise to the
failure of a condition set forth in Section 9.03(a) or 9.03(b), and (ii)
cannot be or has not been cured within 30 days after the giving of written
notice to Time Warner, Sony, Time Warner Canada or Sony Canada, as
applicable, of such breach (provided that CDnow is not then in breach of
any representation, warranty or covenant in any Initial Agreement); or
(f) during the Initial Period, by CDnow in accordance with Section
7.02(b); provided that, in order for the termination of this Agreement
pursuant to this paragraph (f) to be deemed effective, CDnow shall have
complied with all of the provisions of Section 7.02, including the notice
provisions therein, and with applicable requirements, including prior
payment of the Termination Fee, of Section 8.07.
SECTION 10.02. Effect of Termination. In the event of termination of
this Agreement by CDnow or Time Warner and Sony as provided in Section 10.01,
(i) this Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of CDnow, Time Warner or Sony other than
Section 3.14, Section 4.14, the last sentence of Section 8.02(a), Section 8.07,
this Section 10.02 and Article XI, which provisions shall survive such
termination, and except to the extent that such termination results from the
wilful and material breach by a party of any of its representations, warranties
or covenants
94
set forth in any Transaction Agreement and (ii) the Master Canadian Transaction
Agreement shall simultaneously become void and have no effect, without any
liability or obligation on the part of Holdco, Columbia House Canada, Time
Warner Canada or Sony Canada other than Article 7 thereof, which provisions
shall survive such termination.
SECTION 10.03. Amendment. This Agreement may be amended by the
parties at any time before or after receipt of the CDnow Shareholder Approval;
provided, however, that after receipt of the CDnow Shareholder Approval, there
shall be made no amendment that by law requires further approval by the
shareholders of CDnow without the further approval of such shareholders. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties.
SECTION 10.04. Extension; Waiver. At any time prior to the Effective
Time, the parties may, to the extent legally allowed, (a) extend the time for
the performance of any of the obligations or other acts of the other parties,
(b) waive any inaccuracies in the representations and warranties contained in
this Agreement or in any document delivered pursuant to this Agreement or (c)
subject to the proviso of Section 10.03, waive compliance with any of the
agreements or conditions contained in this Agreement or the Master Canadian
Transaction Agreement. Except as otherwise provided in Section 7.01(e), any
agreement on the part of a party to any such extension or waiver shall be valid
only if set forth in an instrument in writing signed on behalf of such party.
The failure of any party to this Agreement to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of such rights.
SECTION 10.05. Procedure for Termination, Amendment, Extension or
Waiver. A termination of this Agreement pursuant to Section 10.01, an amendment
of this Agreement pursuant to Section 10.03 or an extension or waiver pursuant
to Section 10.04 (other than a waiver pursuant to Section 7.01(e)) shall, in
order to be effective, require in the case of Time Warner, Sony or CDnow, action
by its Board of Directors or the duly authorized designee of its Board of
Directors.
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ARTICLE XI
General Provisions
SECTION 11.01. Nonsurvival of Representations and Warranties. None
of the representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time. This
Section 11.01 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time.
SECTION 11.02. Notices. All notices, requests, claims, demands and
other communications under this Agreement shall be in writing and shall be
deemed given upon receipt by the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Time Warner, to
Time Warner Inc.
▇▇ ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: General Counsel
with a copy to:
Cravath, Swaine & ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
and:
▇▇▇▇, Weiss, Rifkind, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
(b) if to Sony, to
Sony Corporation of America
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
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Attention: Executive Vice President and
Chief Financial Officer
with a copy to:
Sony Corporation of America
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: Vice President,
Legal Department
and:
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
and:
Rosenman & Colin
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: H. ▇▇▇▇ ▇▇▇▇▇, Esq.
(c) if to CDnow, to
CDnow, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇. ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: General Counsel
with a copy to:
▇▇▇▇▇▇, ▇▇▇▇▇ & ▇▇▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, ▇▇., Esq.
SECTION 11.03. Definitions. For purposes of this Agreement:
An "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person.
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A "material adverse effect" on a party means a material adverse
effect on the business, assets, condition (financial or otherwise), or results
of operations of such party and its subsidiaries, taken as a whole.
A "person" means any individual, firm, corporation, partnership,
company, limited liability company, trust, joint venture, association,
Governmental Entity or other entity.
A "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its Board of Directors or
other governing body (or, if there are no such voting interests, 50% or more of
the equity interests of which) is owned directly or indirectly by such first
person.
SECTION 11.04. Interpretation; Disclosure Letters. When a reference
is made in this Agreement to a Section, 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". Any matter disclosed in
any section of either the CDnow Disclosure Letter or the Columbia House Entities
Disclosure Letter shall be deemed disclosed only for the purposes of the
specific Sections of this Agreement to which such section relates.
SECTION 11.05. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule or law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that transactions contemplated hereby are fulfilled to the extent
possible.
SECTION 11.06. Counterparts. This Agreement may be executed in one
or more counterparts, all of which shall
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be considered one and the same agreement and shall become effective when one or
more counterparts have been signed by each of the parties and delivered to the
other parties.
SECTION 11.07. Entire Agreement; No Third-Party Beneficiaries. The
Transaction Agreements, taken together with the Strategic Commitments Letter,
the CDnow Disclosure Letter, the Columbia House Disclosure Letter, the Time
Warner Disclosure Letter and the Sony Disclosure Letter and any other agreement
entered into by the parties hereto contemporaneously herewith (a) constitute the
entire agreement, and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the Transactions and (b)
except for the provisions of Article II, Section 8.04 and Section 8.06, are not
intended to confer upon any person other than the parties any rights or
remedies.
SECTION 11.08. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of New York, regardless
of the laws that might otherwise govern under applicable principles of conflicts
of laws thereof, except to the extent the laws of the Commonwealth of
Pennsylvania are mandatorily applicable to the Merger; provided, however, that
the laws of the respective states of incorporation of each of the parties hereto
shall govern the relative rights, obligations, powers, duties and other internal
affairs of such party and its Board of Directors.
SECTION 11.09. Assignment. Neither this Agreement nor any of the
rights, interests or obligations under this Agreement shall be assigned, in
whole or in part, by operation of law or otherwise by any of the parties without
the prior written consent of the other parties. Any purported assignment without
such consent shall be void. Subject to the preceding sentences, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
SECTION 11.10. Enforcement. (a) Except as provided in Section
11.10(b), the parties agree that irreparable damage would occur and that the
parties would not have any adequate remedy at law in the event that any of the
provisions of any Transaction Agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed that,
except as provided in Section 11.10(b), the parties shall be entitled to an
injunction or injunctions to prevent breaches of any Transaction Agreement and
to enforce specifically the terms and provisions of any Transaction Agreement in
any
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New York state court or, any Federal court located in the State of New York,
this being in addition to any other remedy to which they are entitled at law or
in equity. Each of the parties hereto (i) consents to submit itself to the
personal jurisdiction of any New York state court or any Federal court located
in the State of New York in the event any dispute arises out of any Transaction
Agreement or any Transaction (other than in respect of the Strategic Commitments
Letter to the extent provided in Section 11.10(b)) (ii) agrees that it will not
attempt to deny or defeat such personal jurisdiction by motion or other request
for leave from any such court, (iii) agrees that it will not bring any action
relating to any Transaction Agreement or any Transaction in any court other than
any New York state court or any Federal court sitting in the State of New York
and (iv) waives any right to trial by jury with respect to any action related to
or arising out of any Transaction Agreement or any Transaction, including in
respect of the Strategic Commitments Letter.
(b) (i) In the event of any dispute, controversy or claim whatsoever
arising out of or relating to the Strategic Commitments Letter, including the
existence, satisfaction, termination or breach of any obligation under the
Strategic Commitments Letter and the validity of the Strategic Commitments
Letter or any provision thereof (any such dispute, controversy or claim, a
"Strategic Commitments Dispute"), each of Time Warner, Sony and Holdco may
initiate negotiations to resolve such Strategic Commitments Dispute by
delivering to the other person or persons, as the case may be, with respect to
which such Strategic Commitments Dispute has arisen written notice, which notice
shall set forth a description of such Strategic Commitments Dispute and the
relief requested. Upon receipt of such notice, the recipient or recipients
thereof shall promptly prepare (but in no event later than 15 business days) and
deliver to the person sending such notice, a written response, which response
shall set forth the position of such recipient or recipients in respect of such
Strategic Commitments Dispute and propose a resolution to such Strategic
Commitments Dispute. If such Strategic Commitments Dispute shall fail to be
resolved through such correspondence to the satisfaction of the claimant, then
each of Time Warner, Sony and Holdco shall designate one senior officer to
participate in discussions designed to resolve such Strategic Commitments
Dispute, which discussions shall include an exchange of relevant information and
perspectives and shall begin no later than 10 business days from receipt of such
response.
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(ii) In the event that such representatives are unable to resolve
such Strategic Commitments Dispute through negotiation within 15 business days
from the start of such discussions or such longer period as may be unanimously
agreed among the three representatives, such Strategic Commitments Dispute shall
be submitted within five business days thereafter to J-A-M-S/Endispute (or its
successor) for nonbinding mediation (any such proceeding, a "Mediation") that
shall be governed by and conducted in accordance with the following rules:
(A) such Mediation shall be conducted in New York, New York before a
single mediator (the "Mediator") selected by a senior officer of
J-A-M-S/Endispute (or its successor);
(B) each of the parties to such Strategic Commitments Dispute shall
deliver to the Mediator a written description of such Strategic
Commitments Dispute and the relief requested; and
(C) any statements made or documents provided to the Mediator by
Time Warner, Sony or Holdco (or any of their respective agents or
representatives) shall simultaneously be delivered to each other such
person.
The Mediation shall be completed within 30 calendar days after submission to
J-A-M-S/Endispute (or its successor).
(iii) In the event that Strategic Commitments Dispute is not
resolved through Mediation, all information, events and all other matters from
the Mediation shall be disregarded in their entirety, and such Strategic
Commitments Dispute shall be determined in a binding arbitration proceeding (any
such proceeding, an "Arbitration") that shall be governed by and conducted in
accordance with the following rules:
(A) such Arbitration shall be conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration Association;
(B) such Arbitration shall be conducted in New York, New York before
a panel of three arbitrators (the "Arbitrators") (each of whom shall be a
lawyer duly admitted to practice law in the State of New York), which
Arbitrators shall be selected by the parties to such Strategic Commitments
Dispute (and shall be reasonably acceptable to any of Time Warner, Sony or
Holdco that is not a party to such Strategic Commitments Dispute); in the
event that the parties
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fail to select such Arbitrators within 30 calendar days after the
conclusion or termination of such Mediation, then the New York Regional
Director of the American Arbitration Association shall select the
Arbitrators upon receipt of a written request from any party to such
Strategic Commitments Dispute within 30 calendar days of receipt of such
request; unless otherwise agreed by the parties to such Strategic
Commitments Dispute, none of the Arbitrators shall have been a Mediator;
(C) each of the parties to such Strategic Commitments Dispute shall
deliver to the Arbitrators a written description of such Strategic
Commitments Dispute and the relief requested within 30 calendar days of
the appointment of the Arbitrators;
(D) a hearing (an "Arbitration Hearing") designed to resolve such
Strategic Commitments Dispute shall be held in accordance with the
Commercial Arbitration Rules of the American Arbitration Association and
shall commence within 45 calendar days following the submissions
contemplated in clause (C) above;
(E) any statements made or documents provided to the Arbitrators by
Time Warner, Sony or Holdco (or any of their respective agents or
representatives) shall simultaneously be delivered to each other such
person;
(F) each of Time Warner, Sony and Holdco may submit to the
Arbitrators such proposed findings and conclusions as such person shall
deem necessary or appropriate;
(G) at the conclusion of such Arbitration (which shall be conducted
as expeditiously as reasonably practicable by the American Arbitration
Association), the Arbitrators shall deliver a written decision (the
"Arbitration Decision") to each of Time Warner, Sony and Holdco that shall
set forth therein with particularity the Arbitrators' determinations with
respect to such Strategic Commitments Dispute; the Arbitrators shall not
have the power to award punitive or exemplary damages;
(H) the Arbitration Decision shall be final, binding and conclusive
on each of Time Warner, Sony and Holdco, and all other parties thereto,
with no right of appeal or judicial review therefrom in respect of TWI,
Sony Corporation or Holdco, or any other party thereto;
102
(I) the Arbitrators shall, upon the written application of Time
Warner, Sony or Holdco, or any other party to the Arbitration, have the
right and jurisdiction to resolve all disputes with respect to the
interpretation, application or implementation of the Arbitration Decision,
and any determinations made by the Arbitrators pursuant to this clause (I)
shall have the same force and effect as such Arbitration Decision; and
(J) any proceeding seeking a judgment confirming any Arbitration
Decision may only be brought in a New York state court or in any Federal
court located in the State of New York; provided, however, that following
the entry of judgment, it may be registered and enforced in any other
jurisdiction pursuant to that jurisdiction's laws and procedures.
(iv) THE PROVISIONS FOR NEGOTIATION, MEDIATION AND ARBITRATION SET
FORTH IN THIS SECTION 11.10(B) SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDY
FOR ANY AND ALL STRATEGIC COMMITMENT DISPUTES, REGARDLESS OF THE NATURE OF THE
CONDUCT GIVING RISE TO ANY STRATEGIC COMMITMENTS DISPUTE, AND THE CONCLUSIONS
REACHED UPON ANY SUCH NEGOTIATION, MEDIATION OR ARBITRATION SHALL BE FINAL,
BINDING AND CONCLUSIVE ON ALL PERSONS FOR ALL PURPOSES, AND ANY AND ALL RIGHT TO
SEEK MODIFICATION OR VACATION OF ANY ARBITRATION DECISION (OR ANY OTHER REMEDY)
UNDER SECTION 7511 OF THE CIVIL PRACTICE LAW AND RULES OF THE
▇▇▇
▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇, ▇▇ ANY SUCCESSOR OR SIMILAR RULE, OR OTHERWISE, SHALL BE
WAIVED BY EACH OF THE PARTIES TO ANY STRATEGIC COMMITMENTS DISPUTE.
IN WITNESS WHEREOF, each of the parties hereto have duly executed
this Agreement, all as of the date first written above.
TIME WARNER INC.,
by /s/ ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
-----------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Title: Executive Vice President
and Chief Financial Officer
SONY CORPORATION OF AMERICA,
by /s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
-----------------------------------
Name: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Title: Chairman and Chief
Executive Officer
CDNOW, INC.,
by /s/ ▇▇▇▇▇ ▇▇▇▇
-----------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇
Title: President and Chief
Executive Officer
DELAWARE HOLDCO CORPORATION,
by /s/ ▇▇▇▇▇ ▇▇▇▇
-----------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇
Title: President and Chief
Executive Officer
PENNSYLVANIA SUBSIDIARY, INC.
by /s/ ▇▇▇▇▇ ▇▇▇▇
-----------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇
Title: President and Chief
Executive Officer
104
DELAWARE SUB I L.L.C.,
by /s/ ▇▇▇▇▇ ▇▇▇▇
-----------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇
Title: President and Chief
Executive Officer
DELAWARE SUB II L.L.C.,
by /s/ ▇▇▇▇▇ ▇▇▇▇
-----------------------------------
Name: ▇▇▇▇▇ ▇▇▇▇
Title: President and Chief
Executive Officer