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AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 22, 1998
AMONG
N2K INC.,
CDNOW, INC.
AND
EXIT 8 HOLDING COMPANY
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TABLE OF CONTENTS
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PAGE
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ARTICLE I. THE MERGERS 2
Section 1.1. Articles of Incorporation and Bylaws of NewCo............................... 2
Section 1.2. The N2K Merger.............................................................. 2
Section 1.3. The CDnow Merger............................................................ 2
Section 1.4. Effective Time of the Mergers............................................... 3
Section 1.5. Closing..................................................................... 3
Section 1.6. Effect of the Mergers....................................................... 3
Section 1.7. Certificate of Incorporation and Bylaws of the Surviving
Corporations................................................................ 3
Section 1.8. Directors and Officers of the Surviving Corporations........................ 4
ARTICLE II. CONVERSION OF SECURITIES 4
Section 2.1. Conversion of N2K Capital Stock............................................. 4
Section 2.2. Conversion of CDnow Capital Stock........................................... 5
Section 2.3. Cancellation of NewCo Stock................................................. 5
Section 2.4. Exchange of Certificates.................................................... 5
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF N2K 8
Section 3.1. Organization of N2K......................................................... 8
Section 3.2. N2K Capital Structure....................................................... 9
Section 3.3. Authority; No Conflict; Required Filings and Consents....................... 10
Section 3.4. SEC Filings; Financial Statements........................................... 11
Section 3.5. No Undisclosed Liabilities.................................................. 12
Section 3.6. Absence of Certain Changes or Events........................................ 12
Section 3.7. Taxes....................................................................... 12
Section 3.8. Properties.................................................................. 14
Section 3.9. Intellectual Property....................................................... 14
Section 3.10. Agreements, Contracts and Commitments...................................... 14
Section 3.11. Litigation................................................................. 15
Section 3.12. Environmental Matters...................................................... 15
Section 3.13. Employee Benefit Plans..................................................... 16
Section 3.14. Compliance With Laws....................................................... 18
Section 3.15. Tax Matters................................................................ 18
Section 3.16. Registration Statement; Joint Proxy Statement/Prospectus................... 19
Section 3.17. Labor Matters.............................................................. 19
Section 3.18. Insurance.................................................................. 19
Section 3.19. Opinion of Financial Advisor............................................... 20
Section 3.20. No Existing Discussions.................................................... 20
Section 3.21. Section 203 of the DGCL Not Applicable..................................... 20
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ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF CDNOW 20
Section 4.1. Organization of CDnow....................................................... 20
Section 4.2. CDnow Capital Structure..................................................... 21
Section 4.3. Authority; No Conflict; Required Filings and Consents....................... 22
Section 4.4. SEC Filings; Financial Statements........................................... 23
Section 4.5. No Undisclosed Liabilities.................................................. 23
Section 4.6. Absence of Certain Changes or Events........................................ 23
Section 4.7. Taxes....................................................................... 24
Section 4.8. Properties.................................................................. 25
Section 4.9. Intellectual Property....................................................... 25
Section 4.10. Agreements; Contracts and Commitments...................................... 26
Section 4.11. Litigation................................................................. 26
Section 4.12. Environmental Matters...................................................... 26
Section 4.13. Employee Benefit Plans..................................................... 27
Section 4.14. Compliance With Laws....................................................... 29
Section 4.15. Tax Matters................................................................ 29
Section 4.16. Registration Statement; Joint Proxy Statement/Prospectus................... 29
Section 4.17. Labor Matters.............................................................. 30
Section 4.18. Insurance.................................................................. 30
Section 4.19. Opinion of Financial Advisor............................................... 30
Section 4.20. No Existing Discussions.................................................... 30
Section 4.21. Section 1715 of the PBCL Not Applicable.................................... 30
ARTICLE V. COVENANTS 31
Section 5.1. Conduct of Business......................................................... 31
Section 5.2. Cooperation; Notice; Cure................................................... 33
Section 5.3. No Solicitation............................................................. 34
Section 5.4. Joint Proxy Statement/Prospectus; Registration Statement.................... 35
Section 5.5. Nasdaq Quotation............................................................ 35
Section 5.6. Access to Information....................................................... 35
Section 5.7. Stockholders' Meetings...................................................... 36
Section 5.8. Legal Conditions to Merge................................................... 36
Section 5.9. Public Disclosure........................................................... 37
Section 5.10. Nonrecognition Exchange.................................................... 37
Section 5.11. Pooling Accounting......................................................... 38
Section 5.12. Affiliate Agreements....................................................... 38
Section 5.13. Nasdaq Listing............................................................. 38
Section 5.14. Stock Plans................................................................ 38
Section 5.15. Brokers or Finders......................................................... 40
Section 5.16. Indemnification............................................................ 40
Section 5.17. Letter of CDnow's Accountants.............................................. 41
Section 5.18. Letter of N2K's Accountants................................................ 41
Section 5.19. Stock Option Agreements.................................................... 41
Section 5.20. Transition Planning........................................................ 41
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Section 5.21. Post-Merger Corporate Governance; Employment Arrangements.................. 41
Section 5.22. Name of NewCo.............................................................. 43
Section 5.23. Warrants; Registration Rights Agreement.................................... 43
Section 5.24. Conveyance Taxes........................................................... 44
Section 5.25. Transfer Taxes............................................................. 44
Section 5.26. Stockholder Litigation..................................................... 44
Section 5.27. Employee Benefits; Severance............................................... 45
Section 5.28. Subsequent Financial Statements............................................ 45
Section 5.29. Control of Operations...................................................... 45
Section 5.30. Certain Modifications; Restructuring Charges............................... 46
ARTICLE VI. CONDITIONS TO MERGERS 46
Section 6.1. Conditions to Each Party's Obligation to Effect the Mergers................. 46
Section 6.2. Additional Conditions to Obligations of N2K................................. 47
Section 6.3. Additional Conditions to Obligations of CDnow............................... 48
ARTICLE VII. TERMINATION AND AMENDMENT 49
Section 7.1. Termination................................................................. 49
Section 7.2. Effect of Termination....................................................... 51
Section 7.3. Fees and Expenses........................................................... 51
Section 7.4. Amendment................................................................... 53
Section 7.5. Extension; Waiver........................................................... 53
ARTICLE VIII. MISCELLANEOUS 54
Section 8.1. Nonsurvival of Representations, Warranties and Agreements................... 54
Section 8.2. Notices..................................................................... 54
Section 8.3. Interpretation.............................................................. 55
Section 8.4. Counterparts................................................................ 55
Section 8.5. Entire Agreement; No Third Party Beneficiaries.............................. 55
Section 8.6. Governing Law............................................................... 56
Section 8.7. Assignment.................................................................. 56
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EXHIBITS
Exhibit A Stock Option Agreement (N2K)
Exhibit B Stock Option Agreement (CDnow)
Exhibit C Stockholder Support Agreement (N2K)
Exhibit D Stockholder Support Agreement (CDnow)
Exhibit E Form of Articles of Incorporation of NewCo
Exhibit F Form of Bylaws of NewCo
Exhibit G Form of N2K Affiliate Agreement
Exhibit H Form of CDnow Affiliate Agreement
Exhibit I Employment Agreement for Jason Olim
Exhibit J Employment Agreement for Jonathan Diamond
iii
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CROSS REFERENCE
<TABLE>
TERMS IN AGREEMENT
----- ------------
TABLES OF DEFINED TERMS
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Acquisition Proposal........................................................................ 34
Affiliate................................................................................... 38
Affiliate Agreement,........................................................................ 38
Affiliate Agreements........................................................................ 38
Agreement................................................................................... 1
Alternative Transaction..................................................................... 53
Bankruptcy and Equity Exception............................................................. 10
CDnow....................................................................................... 1
CDnow Balance Sheet......................................................................... 23
CDnow Common Stock.......................................................................... 5
CDnow Director.............................................................................. 42
CDnow Disclosure Schedule................................................................... 20
CDnow Employees............................................................................. 45
CDnow Exchange Ratio........................................................................ 5
CDnow Material Adverse Effect............................................................... 20
CDnow Material Contracts.................................................................... 26
CDnow Merger................................................................................ 3
CDnow SEC Reports........................................................................... 23
CDnow Stock Option.......................................................................... 38
CDnow Stock Option Agreement................................................................ 1
CDnow Stock Plans........................................................................... 21
CDnow Stockholder Support Agreement......................................................... 1
CDnow Stockholders' Meeting................................................................. 19
CDnow Sub................................................................................... 2
CDnow Surviving Corporation................................................................. 3
Certificate of Merger....................................................................... 3
Certificates................................................................................ 6
Certificates of Merger...................................................................... 3
Closing..................................................................................... 3
Closing Date................................................................................ 3
Code........................................................................................ 2
Confidentiality Agreements.................................................................. 34
DGCL........................................................................................ 2
Effective Time.............................................................................. 3
Environmental Law........................................................................... 16
Exchange Act................................................................................ 11
Exchange Agent.............................................................................. 6
Exchange Fund............................................................................... 6
Fee Payment Date............................................................................ 51
Governmental Entity......................................................................... 11
Hazardous Substance......................................................................... 16
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iv
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CROSS REFERENCE
<TABLE>
TERMS IN AGREEMENT
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HSR Act..................................................................................... 11
Indemnified Parties......................................................................... 40
IRS......................................................................................... 13
Joint Proxy Statement/Prospectus............................................................ 19
Material Contract........................................................................... 14
Mergers..................................................................................... 3
N2K......................................................................................... 1
N2K Balance Sheet........................................................................... 12
N2K Common Stock............................................................................ 4
N2K Director................................................................................ 42
N2K Disclosure Schedule..................................................................... 8
N2K Employees............................................................................... 45
N2K Exchange Ratio.......................................................................... 5
N2K Material Adverse Effect................................................................. 9
N2K Material Contracts...................................................................... 14
N2K Merger.................................................................................. 2
N2K Preferred Stock......................................................................... 9
N2K SEC Reports............................................................................. 11
N2K Stock Option............................................................................ 38
N2K Stock Option Agreement.................................................................. 1
N2K Stock Plans............................................................................. 9
N2K Stockholder Support Agreement........................................................... 1
N2K Stockholders' Meeting................................................................... 19
N2K Sub..................................................................................... 2
N2K Surviving Corporation................................................................... 3
Nasdaq...................................................................................... 7
NewCo....................................................................................... 1
NewCo Common Stock.......................................................................... 5
Order....................................................................................... 37
Outside Date................................................................................ 49
PBCL........................................................................................ 3
Registration Statement...................................................................... 19
SEC......................................................................................... 11
Securities Act.............................................................................. 8
Stock Option Agreements..................................................................... 1
Superior Proposal........................................................................... 34
Surviving Corporations...................................................................... 3
Tax......................................................................................... 12
Taxes....................................................................................... 13
Taxes,...................................................................................... 12
Third Party................................................................................. 34
Transfer Taxes.............................................................................. 44
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v
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of October 22,
1998, by and among N2K Inc., a Delaware corporation ("N2K"), CDnow, Inc., a
Pennsylvania corporation ("CDnow"), and Exit 8 Holding Company, a newly-formed
Pennsylvania corporation with nominal capitalization, one-half of the issued and
outstanding capital stock of which is owned by each of N2K and CDnow ("NewCo").
WHEREAS, the Boards of Directors of N2K and CDnow deem it advisable and
in the best interests of each corporation and its respective stockholders that
N2K and CDnow combine in a "merger of equals" in order to advance the interests
of N2K and CDnow and their respective stockholders;
WHEREAS, the combination of N2K and CDnow shall be effected by the
terms of this Agreement through (i) a merger of a wholly-owned subsidiary of
NewCo with and into N2K and (ii) a merger of another wholly-owned subsidiary of
NewCo with and into CDnow, such that N2K and CDnow become wholly-owned
subsidiaries of NewCo and the stockholders of N2K and CDnow become stockholders
of NewCo;
WHEREAS, concurrently with the execution and delivery of this Agreement
and as a condition and inducement to each of N2K's and CDnow's willingness to
enter into this Agreement, N2K and CDnow have entered into (i) a Stock Option
Agreement dated as of the date of this Agreement and attached hereto as Exhibit
A (the "N2K Stock Option Agreement"), pursuant to which CDnow has granted N2K an
option to purchase shares of common stock of CDnow under certain circumstances,
and (ii) a Stock Option Agreement dated as of the date of this Agreement and
attached hereto as Exhibit B (the "CDnow Stock Option Agreement" and, together
with the N2K Stock Option Agreement, the "Stock Option Agreements"), pursuant to
which N2K has granted CDnow an option to purchase shares of common stock of N2K
under certain circumstances;
WHEREAS, concurrently with the execution and delivery of this Agreement
and as a condition and inducement to N2K's willingness to enter into this
Agreement, a stockholder of CDnow has entered into a Stockholder Support
Agreement with N2K, dated as of the date of this Agreement and attached hereto
as Exhibit C (the "CDnow Stockholder Support Agreement"), pursuant to which such
stockholder has agreed, among other things, to vote all voting securities of
CDnow beneficially owned by him in favor of approval and adoption of the
Agreement and the CDnow Merger (as defined in Section 1.3);
WHEREAS, concurrently with the execution and delivery of this Agreement
and as a condition and inducement to CDnow's willingness to enter into this
Agreement, certain stockholders of N2K have entered into a Stockholder Support
Agreement with CDnow, dated as of the date of this Agreement and attached hereto
as Exhibit D (the "N2K Stockholder Support Agreement"), pursuant to which such
stockholders have
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agreed, among other things, to vote all voting securities of N2K beneficially
owned by them in favor of approval and adoption of the Agreement and the N2K
Merger (as defined in Section 1.2);
WHEREAS, for Federal income tax purposes, it is intended that (i) the
N2K Merger (as defined in Section 1.2) shall qualify as a reorganization
described in Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and/or, taken together with the CDnow Merger (as defined in
Section 1.3), as a transfer of property to NewCo by holders of N2K Common Stock
(as defined in Section 2.1) described in Section 351 of the Code and (ii) the
CDnow Merger shall qualify as a reorganization described in Section 368(a) of
the Code and/or, taken together with the N2K Merger, as a transfer of property
to NewCo by holders of CDnow Common Stock described in Section 351 of the Code;
and
WHEREAS, the Boards of Directors of N2K and CDnow have approved this
Agreement, the Stock Option Agreements and the Stockholder Support Agreements.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, and
intending to be legally bound hereby, the parties agree as follows:
ARTICLE I.
THE MERGERS
Section 1.1. ARTICLES OF INCORPORATION AND BYLAWS OF NEWCO.
----------------------------------------------
N2K and CDnow shall cause the Articles of Incorporation and Bylaws of NewCo to
be amended prior to the Effective Time (as defined in Section 1.4) to be
substantially in the forms of Exhibit E and Exhibit F hereto, respectively. From
the date hereof until the Effective Time, N2K and CDnow shall consult with each
other prior to causing or permitting NewCo to take any action and neither shall
cause or permit NewCo to take any action inconsistent with the provisions of
this Agreement without the written consent of the other.
Section 1.2. THE N2K MERGER.
---------------
N2K and CDnow shall cause NewCo to form a wholly-owned subsidiary named N2K
Acquisition Corp. ("N2K Sub") under the laws of the State of Delaware. N2K and
CDnow will cause NewCo to cause N2K Sub to execute and deliver a joinder to this
Agreement. Upon the terms and subject to the provisions of this Agreement, and
in accordance with the General Corporation Law of the State of Delaware (the
"DGCL"), N2K Sub will merge with and into N2K (the "N2K Merger") at the
Effective Time (as defined in Section 1.4). N2K Sub will be formed solely to
facilitate the N2K Merger and will conduct no business or activity other than in
connection with the N2K Merger.
Section 1.3. THE CDNOW MERGER.
-----------------
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N2K and CDnow shall cause NewCo to form a wholly-owned subsidiary named CDnow
Acquisition Corp. ("CDnow Sub") under the laws of the Commonwealth of
Pennsylvania. N2K and CDnow will cause NewCo to cause CDnow Sub to execute and
deliver a joinder to this Agreement. Upon the terms and subject to the
provisions of this Agreement, and in accordance with the Pennsylvania Business
Corporation Law of 1988, as amended (the "PBCL"), CDnow Sub will merge with and
into CDnow (the "CDnow Merger" and together with the N2K Merger, the "Mergers")
at the Effective Time (as defined in Section 1.4). CDnow Sub will be formed
solely to facilitate the CDnow Merger and will conduct no business or activity
other than in connection with the CDnow Merger.
Section 1.4. EFFECTIVE TIME OF THE MERGERS.
------------------------------
Subject to the provisions of this Agreement, a certificate or articles of merger
with respect to each Merger in such form as is required by the relevant
provisions of the DGCL and the PBCL, as the case may be, (individually, a
"Certificate of Merger" with respect to one of the Mergers, and collectively
with respect to both Mergers, the "Certificates of Merger") shall be duly
prepared, executed and acknowledged and thereafter delivered to the secretaries
of state of the State of Delaware and the Commonwealth of Pennsylvania, as the
case may be, for filing, as provided in the DGCL and the PBCL, as early as
practicable on the Closing Date (as defined in Section 1.5). Each Merger shall
become effective at such time as is specified in the Certificate of Merger (the
time at which both Mergers have become fully effective being hereinafter
referred to as the "Effective Time").
Section 1.5. CLOSING.
--------
The closing of the Mergers (the "Closing") will take place at such time and
place to be agreed upon by the parties hereto, on a date to be specified by
CDnow and N2K, which shall be no later than the second business day after
satisfaction or, if permissible, waiver of the conditions set forth in Article
VI (the "Closing Date"), unless another date is agreed to in writing by CDnow
and N2K.
Section 1.6. EFFECT OF THE MERGERS.
----------------------
As a result of the N2K Merger, the separate corporate existence of N2K Sub shall
cease and N2K shall continue as the surviving corporation (the "N2K Surviving
Corporation"). As a result of the CDnow Merger, the separate corporate existence
of CDnow Sub shall cease and CDnow shall continue as the surviving corporation
(the "CDnow Surviving Corporation" and together with the N2K Surviving
Corporation, the "Surviving Corporations"). Upon becoming effective, the Mergers
shall have the effects set forth in the DGCL and the PBCL. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, (i) all
properties, rights, privileges, powers and franchises of N2K and N2K Sub shall
vest in the N2K Surviving Corporation, and all debts, liabilities and duties of
N2K and N2K Sub shall become the debts, liabilities and duties of the N2K
Surviving Corporation and (ii) all properties, rights, privileges, powers and
franchises of CDnow and CDnow Sub shall vest in the CDnow Surviving Corporation,
3
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and all debts, liabilities and duties of CDnow and CDnow Sub shall become the
debts, liabilities and duties of the CDnow Surviving Corporation.
Section 1.7. CERTIFICATE OF INCORPORATION AND BYLAWS OF THE SURVIVING
--------------------------------------------------------
CORPORATIONS.
-------------
At the Effective Time, (i) the Certificate of Incorporation and Bylaws of the
N2K Surviving Corporation shall be amended to be identical to the Certificate of
Incorporation and Bylaws, respectively, of N2K Sub as in effect immediately
prior to the Effective Time (except that the name of the N2K Surviving
Corporation shall be N2K Inc.), in each case until duly amended in accordance
with applicable law, and (ii) the Articles of Incorporation and Bylaws of the
CDnow Surviving Corporation shall be amended to be identical to the Articles of
Incorporation and Bylaws, respectively, of CDnow Sub as in effect immediately
prior to the Effective Time (except that the name of the CDnow Surviving
Corporation shall be CDnow Inc.), in each case until duly amended in accordance
with applicable law.
Section 1.8. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATIONS.
-----------------------------------------------------
(a) N2K SURVIVING CORPORATION. The directors of N2K Sub
-------------------------
immediately prior to the Effective Time shall be the initial directors of the
N2K Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the N2K Surviving Corporation. The
officers of N2K immediately prior to the Effective Time shall be the initial
officers of the N2K Surviving Corporation, each to hold office in accordance
with the Certificate of Incorporation and Bylaws of the N2K Surviving
Corporation.
(b) CDNOW SURVIVING CORPORATION. The directors of CDnow
---------------------------
Sub immediately prior to the Effective Time shall be the initial directors of
the CDnow Surviving Corporation, each to hold office in accordance with the
Articles of Incorporation and Bylaws of the CDnow Surviving Corporation. The
officers of CDnow immediately prior to the Effective Time shall be the initial
officers of the CDnow Surviving Corporation, each to hold office in accordance
with the Articles of Incorporation and Bylaws of the CDnow Surviving
Corporation.
ARTICLE II.
CONVERSION OF SECURITIES
Section 2.1. CONVERSION OF N2K CAPITAL STOCK.
--------------------------------
At the Effective Time, by virtue of the N2K Merger and without any action on the
part of any of the parties hereto or the holders of any shares of Common Stock,
par value $.001 per share, of N2K ("N2K Common Stock") or common stock of N2K
Sub:
(a) Capital Stock of N2K Sub. Each issued and outstanding
-------------------------
share of the common stock, par value $.01 per share, of N2K Sub shall be
converted into and
4
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become one fully paid and nonassessable share of Common Stock, par value $.01
per share, of the N2K Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK AND CDNOW-OWNED STOCK.
-----------------------------------------------------
All shares of N2K Common Stock that are owned by N2K as treasury stock and any
shares of N2K Common Stock owned by CDnow or any wholly-owned Subsidiary (as
defined in Section 3.1) of CDnow shall be canceled and retired and shall cease
to exist and no stock of NewCo or other consideration shall be delivered in
exchange therefor.
(c) EXCHANGE RATIO FOR N2K COMMON STOCK. Subject to Section
------------------------------------
2.4(e), each issued and outstanding share of N2K Common Stock (other than shares
to be canceled in accordance with Section 2.1(b)) shall be converted into the
right to receive 0.83 of a share (the "N2K Exchange Ratio") of Common Stock, no
par value per share, of NewCo ("NewCo Common Stock"). All such shares of N2K
Common Stock, when so converted, shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each holder
of a certificate representing any such shares shall cease to have any ownership
or other rights with respect thereto, except the right to receive the shares of
NewCo Common Stock and any cash in lieu of fractional shares of NewCo Common
Stock to be issued or paid in consideration therefor, in each case upon the
surrender of such certificate in accordance with Section 2.4 and without
interest.
Section 2.2. CONVERSION OF CDNOW CAPITAL STOCK.
----------------------------------
At the Effective Time, by virtue of the CDnow Merger and without any action on
the part of any of the parties hereto or the holders of any shares of Common
Stock, no par value per share, of CDnow ("CDnow Common Stock") or common stock
of CDnow Sub:
(a) CAPITAL STOCK OF CDNOW SUB. Each issued and outstanding
---------------------------
share of the common stock, no par value, of CDnow Sub shall be converted into
and become one fully paid and nonassessable share of Common Stock, no par value,
of the CDnow Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK AND N2K-OWNED STOCK. All
---------------------------------------------------
shares of CDnow Common Stock that are owned by CDnow as treasury stock and any
shares of CDnow Common Stock owned by N2K or any wholly-owned Subsidiary (as
defined in Section 3.1) of N2K shall be canceled and retired and shall cease to
exist and no stock of NewCo or other consideration shall be delivered in
exchange therefor.
(c) EXCHANGE RATIO FOR CDNOW COMMON STOCK. Subject to
--------------------------------------
Section 2.4(e), each issued and outstanding share of CDnow Common Stock (other
than shares to be canceled in accordance with Section 2.2(b)) shall be converted
into the right to receive one share (the "CDnow Exchange Ratio") of NewCo Common
Stock. All such shares of CDnow Common Stock, when so converted, shall no longer
be outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a certificate representing any such shares shall
cease to have any ownership or other rights with respect thereto, except the
right to receive the shares of NewCo Common Stock, in
5
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each case upon the surrender of such certificate in accordance with Section 2.4
and without interest.
Section 2.3. CANCELLATION OF NEWCO STOCK.
----------------------------
At the Effective Time, by virtue of the Mergers and without any action on the
part of any holder of any capital stock of N2K, CDnow or NewCo, each share of
NewCo Common Stock issued and outstanding immediately prior to the Effective
Time shall be surrendered and canceled, and the amount paid by N2K and CDnow for
the shares of NewCo Common Stock held by them shall be returned by NewCo to
them.
Section 2.4. EXCHANGE OF CERTIFICATES.
-------------------------
The procedures for exchanging certificates which prior to the Effective Time
represented shares of N2K Common Stock and CDnow Common Stock for certificates
representing NewCo Common Stock pursuant to the Mergers are as follows:
(a) EXCHANGE AGENT. As of the Effective Time, NewCo shall
--------------
deposit with a bank or trust company designated by CDnow and N2K (the "Exchange
Agent"), for the benefit of the holders of shares of N2K Common Stock and shares
of CDnow Common Stock outstanding immediately prior to the Effective Time, for
exchange in accordance with this Section 2.4, through the Exchange Agent,
certificates representing the shares of NewCo Common Stock and, with respect to
shares of N2K Common Stock, cash in lieu of fractional shares (such shares of
NewCo Common Stock and cash in lieu of fractional shares, together with any
dividends or distributions with respect thereto, being hereinafter referred to
as the "Exchange Fund"), issuable pursuant to Sections 2.1 and 2.2 in exchange
for shares of N2K Common Stock and CDnow Common Stock, respectively, outstanding
immediately prior to the Effective Time.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable
--------------------
after the Effective Time, the Exchange Agent shall mail to each holder of record
of a certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of N2K Common Stock or CDnow Common Stock
(collectively, the "Certificates") whose shares were converted pursuant to
Section 2.1 or Section 2.2 into the right to receive shares of NewCo Common
Stock (i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such form and
have such other provisions as N2K and CDnow may reasonably specify) and (ii)
instructions for effecting the surrender of the Certificates in exchange for
certificates representing shares of NewCo Common Stock (plus cash in lieu of
fractional shares, if any, of NewCo Common Stock as provided below). Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by NewCo, together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing that number of whole
shares of NewCo Common Stock, the amount of any cash payable in lieu of
fractional shares of NewCo Common Stock (with respect to shares of N2K Common
Stock), and the Certificate so surrendered shall immediately be canceled. In the
6
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event of a transfer of ownership of N2K Common Stock or CDnow Common Stock prior
to the Effective Time which is not registered in the transfer records of N2K or
CDnow, respectively, a certificate representing the number of shares of NewCo
Common Stock issuable and any amounts payable in accordance with this Agreement
may be issued and paid to a transferee if the Certificate representing such N2K
Common Stock or CDnow Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No
-------------------------------------------------
amount in respect of dividends or other distributions declared or made after the
Effective Time with respect to NewCo Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of NewCo Common Stock the holder thereof is entitled to
receive in respect thereof and no cash payment in lieu of fractional shares
shall be paid to any such holder pursuant to subsection (e) below until the
holder of record of such Certificate shall surrender such Certificate to NewCo
in accordance herewith. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the record holder of
the certificates representing whole shares of NewCo Common Stock issued in
exchange therefor, without interest, (i) at the time of such surrender, the
amount of any cash payable in lieu of a fractional share of NewCo Common Stock
to which such holder is entitled pursuant to subsection (e) below.
(d) NO FURTHER OWNERSHIP RIGHTS IN N2K COMMON STOCK AND
---------------------------------------------------
CDNOW COMMON STOCK. All shares of NewCo Common Stock issued upon the surrender
-------------------
for exchange of Certificates in accordance with the terms hereof (including any
cash paid pursuant to subsection (c) or (e) of this Section 2.4) shall be deemed
to have been issued in full satisfaction of all rights pertaining to the shares
of N2K Common Stock or CDnow Common Stock theretofore represented by such
Certificates. Immediately prior to and all times after the Effective Time there
shall be no further registration of transfers on the stock transfer books of the
N2K Surviving Corporation or the CDnow Surviving Corporation, as the case may
be, of the shares of N2K Common Stock or CDnow Common Stock, respectively, which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to one of the Surviving Corporations
or NewCo for any reason, such Certificates shall be canceled and exchanged as
provided in this Section 2.4.
(e) NO FRACTIONAL SHARES. No certificate or scrip
---------------------
representing fractional shares of NewCo Common Stock shall be issued upon the
surrender for exchange of Certificates representing shares of N2K Common Stock,
and such fractional share interests will not entitle the owner thereof to vote
or to any other rights of a stockholder of NewCo. Notwithstanding any other
provision of this Agreement, each record holder of shares of N2K Common Stock
outstanding immediately prior to the Effective Time exchanged pursuant to the
N2K Merger who would otherwise have been entitled to receive a fraction of a
share of NewCo Common Stock (after taking into
7
<PAGE>
account all Certificates delivered by such holder) shall receive, in lieu
thereof, cash (without interest) in an amount equal to such fractional part of a
share of NewCo Common Stock multiplied by the last per share sales price of
NewCo Common Stock (as reported on the Nasdaq National Market (the "Nasdaq")) on
the closing of the first day of regular-way trading of NewCo Common Stock on the
Nasdaq after the Effective Time.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the
-----------------------------
Exchange Fund which remains undistributed to the former stockholders of N2K or
CDnow for 180 days after the Effective Time shall be delivered to NewCo upon
demand, and any former stockholder of N2K or CDnow who has not previously
complied with this Section 2.4 shall thereafter look only to NewCo for payment
of such former stockholder's claim for NewCo Common Stock, any cash in lieu of
fractional shares of NewCo Common Stock and any amounts in respect of dividends
or distributions with respect to NewCo Common Stock.
(g) NO LIABILITY. None of N2K, CDnow, NewCo or the Exchange
-------------
Agent shall be liable to any holder of shares of N2K Common Stock or CDnow
Common Stock, as the case may be, for any shares of NewCo Common Stock (or cash
in lieu of fractional shares of NewCo Common Stock) delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
(h) WITHHOLDING RIGHTS. NewCo and each of the Surviving
-------------------
Corporations shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of Certificates which
prior to the Effective Time represented shares of N2K Common Stock or CDnow
Common Stock such amounts as it is required to deduct and withhold with respect
to the making of such payment under the Code, or any provision of state, local
or foreign tax law. To the extent that amounts are so withheld by NewCo or one
of the Surviving Corporations, as the case may be, such withheld amounts shall
be treated for all purposes of this Agreement as having been paid to the holder
of the shares of N2K Common Stock or CDnow Common Stock, as the case may be, in
respect of which such deduction and withholding was made.
(i) LOST CERTIFICATES. If any Certificate shall have been
------------------
lost, stolen or destroyed, upon the making of an affidavit of that fact in form
and substance satisfactory to NewCo and the Exchange Act by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by NewCo or
one of the Surviving Corporations, the posting by such person of a bond in such
reasonable amount as NewCo or such Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of NewCo Common Stock and any cash in lieu of fractional
shares, and unpaid dividends and distributions on shares of NewCo Common Stock
deliverable in respect thereof pursuant to this Agreement.
(j) AFFILIATES. Notwithstanding anything herein to the
-----------
contrary, Certificates surrendered for exchange by any Affiliate (as defined in
Section 5.12) of
8
<PAGE>
N2K or CDnow shall not be exchanged until (i) NewCo has received an Affiliate
Agreement (as defined in Section 5.12) from such Affiliate or (ii) until the
date as such shares of NewCo Common Stock are freely tradable without violating
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder (collectively, the "Securities Act").
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF N2K
N2K represents and warrants to CDnow that the statements contained in
this Article III are true and correct except as set forth herein and in the
disclosure schedule delivered by N2K to CDnow on or before the date of this
Agreement (the "N2K Disclosure Schedule").
Section 3.1. ORGANIZATION OF N2K.
--------------------
Each of N2K and its Subsidiaries (as defined below) is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, has all requisite power to own, lease and operate its property and
to carry on its business as now being conducted and as proposed to be conducted,
and is duly qualified to do business and is in good standing as a foreign
corporation or other entity in each jurisdiction in which the failure to be so
qualified would have a material adverse effect on the business, properties,
financial condition or results of operations of N2K and its Subsidiaries, taken
as a whole (a "N2K Material Adverse Effect"). A true and correct copy of the
Certificate of Incorporation and Bylaws of N2K and each of its Subsidiaries has
been delivered to CDnow. Except as set forth in N2K SEC Reports (as defined in
Section 3.4) filed prior to the date hereof, neither N2K nor any of its
Subsidiaries directly or indirectly owns (other than ownership interests in N2K
or in one or more of its Subsidiaries) any equity or similar interest in, or any
interest convertible into or exchangeable or exercisable for, any corporation,
partnership, joint venture or other business association or entity, excluding
(i) securities in any publicly traded company held for investment by N2K and
comprising less than five percent (5%) of the outstanding stock of such company
and (ii) any investment or series of related investments with a book value of
less than $1 million. As used in this Agreement, the word "Subsidiary" means,
with respect to any party, any corporation or other organization, whether
incorporated or unincorporated, of which (i) such party or any other Subsidiary
of such party is a general partner (excluding partnerships the general
partnership interests of which held by such party or any Subsidiary of such
party do not have a majority of the economic interests in such partnership) or
(ii) at least a majority of the securities or other interests having by their
terms ordinary voting power to elect a majority of the Board of Directors or
others performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or by
any one or more of its Subsidiaries, or by such party and one or more of its
Subsidiaries.
9
<PAGE>
Section 3.2. N2K CAPITAL STRUCTURE.
----------------------
(a) The authorized capital stock of N2K consists of
100,000,000 shares of N2K Common Stock and 40,000,000 shares of preferred stock,
par value $.001 per share ("N2K Preferred Stock"). As of the date hereof, (i)
14,207,179 shares of N2K Common Stock were issued and outstanding, all of which
are validly issued, fully paid and nonassessable, (ii) no shares of N2K Common
Stock were held in the treasury of N2K or by Subsidiaries of N2K and (iii) no
shares of N2K Preferred Stock were issued and outstanding. Section 3.2(a) of the
N2K Disclosure Schedule shows the number of shares of N2K Common Stock reserved
for future issuance pursuant to stock options granted and outstanding as of the
date hereof and the plans under which such options were granted (collectively,
the "N2K Stock Plans"). There are no obligations, contingent or otherwise, of
N2K or any of its Subsidiaries to repurchase, redeem or otherwise acquire any
shares of N2K Common Stock or the capital stock of any Subsidiary or to provide
funds to or make any material investment (in the form of a loan, capital
contribution or otherwise) in any such Subsidiary or any other entity other than
guarantees of bank obligations or indebtedness for borrowed money of
Subsidiaries entered into in the ordinary course of business and other than any
obligation the failure of which to perform or satisfy would not have a N2K
Material Adverse Effect. All of the outstanding shares of capital stock or other
ownership interests of each of N2K's Subsidiaries are duly authorized, validly
issued, fully paid and nonassessable and all such shares (other than directors'
qualifying shares in the case of foreign Subsidiaries) are owned by N2K or
another Subsidiary of N2K free and clear of all security interests, liens,
claims, pledges, agreements, limitations in N2K's voting rights, charges or
other encumbrances of any nature.
(b) Except as set forth in this Section 3.2 or as
reserved for future grants of options under the N2K Stock Plans or the CDnow
Stock Option Agreement and the options and warrants described in Section 3.2(b)
of the N2K Disclosure Schedule, (i) there are no shares of capital stock of any
class of N2K, or any security exchangeable into or exercisable for such equity
securities, issued, reserved for issuance or outstanding; (ii) there are no
options, warrants, equity securities, calls, rights, commitments or agreements
of any character to which N2K or any of its Subsidiaries is a party or by which
it is bound obligating N2K or any of its Subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock or
other ownership interests of N2K or any of its Subsidiaries or obligating N2K or
any of its Subsidiaries to grant, extend, accelerate the vesting of, or enter
into any such option, warrant, equity security, call, right, commitment or
agreement; and (iii) to the best knowledge of N2K, there are no voting trusts,
proxies or other voting agreements or understandings with respect to the shares
of capital stock of N2K. All shares of N2K Common Stock subject to issuance as
specified in this Section 3.2 are duly authorized and, upon issuance on the
terms and conditions specified in the instruments pursuant to which they are
issuable, shall be validly issued, fully paid and nonassessable.
10
<PAGE>
Section 3.3. AUTHORITY; NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
-----------------------------------------------------
(a) N2K has all requisite corporate power and authority
to enter into this Agreement and the Stock Option Agreements and, subject to
obtaining any necessary stockholder approval of this Agreement, to consummate
the transactions contemplated by this Agreement and the Stock Option Agreements.
The execution and delivery of this Agreement and the Stock Option Agreements and
the consummation of the transactions contemplated by this Agreement and the
Stock Option Agreements by N2K have been duly authorized by all necessary
corporate action on the part of N2K, subject only to the approval and adoption
of this Agreement and the N2K Merger by N2K's stockholders under the DGCL. This
Agreement and the Stock Option Agreements have been duly executed and delivered
by N2K and constitute the valid and binding obligations of N2K, enforceable in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles (the
"Bankruptcy and Equity Exception").
(b) The execution and delivery of this Agreement and
the Stock Option Agreements by N2K does not, and the consummation of the
transactions contemplated by this Agreement and the Stock Option Agreements will
not, (i) conflict with, or result in any violation or breach of, any provision
of the Certificate of Incorporation or Bylaws of N2K or any of its Subsidiaries,
(ii) result in any violation or breach of, or constitute (with or without notice
or lapse of time, or both) a default (or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of any material benefit)
under, or require a consent or waiver under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, contract or other
agreement, instrument or obligation to which N2K or any of its Subsidiaries is a
party or by which any of them or any of their properties or assets may be bound
or (iii) conflict with or violate any permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to N2K or any of its Subsidiaries or any of its or their properties or assets,
except in the case of (ii) and (iii) for any such conflicts, violations,
defaults, terminations, cancellations or accelerations which (x) are not,
individually or in the aggregate, reasonably likely to have a N2K Material
Adverse Effect or (y) would not substantially impair or delay the consummation
of the N2K Merger.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality ("Governmental
Entity") is required by or with respect to N2K or any of its Subsidiaries in
connection with the execution and delivery of this Agreement and the Stock
Option Agreements or the consummation of the transactions contemplated hereby or
thereby, except for (i) any required filing of a pre- merger notification report
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), (ii) the expiration or termination of any applicable waiting period
under the HSR Act, (iii) the filing of a Certificate of Merger with respect to
the N2K Merger with the Delaware Secretary of State, (iv) the filing of the
Joint Proxy
11
<PAGE>
Statement/Prospectus (as defined in Section 3.16 below) with the Securities and
Exchange Commission (the "SEC") in accordance with the Securities Exchange Act
of 1934, as amended and the rules and regulations promulgated thereunder
(collectively, the "Exchange Act"), and the Securities Act, (v) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable state securities laws and the laws of any
foreign country and (vi) such other consents, authorizations, filings, approvals
and registrations which, if not obtained or made, would not (x) be reasonably
likely to have a N2K Material Adverse Effect or (y) substantially impair or
delay the consummation of the N2K Merger.
Section 3.4. SEC FILINGS; FINANCIAL STATEMENTS.
---------------------------------
(a) N2K has filed and made available to CDnow all forms,
reports and documents required to be filed by N2K with the SEC since October 17,
1997 (collectively, the "N2K SEC Reports"). The N2K SEC Reports (i) at the time
filed, complied in all material respects with the applicable requirements of the
Securities Act and the Exchange Act, as the case may be, and (ii) did not at the
time they were filed (or if amended or superseded by a filing prior to the date
of this Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated in
such N2K SEC Reports or necessary in order to make the statements in such N2K
SEC Reports, in the light of the circumstances under which they were made, not
misleading. None of N2K's Subsidiaries is required to file any forms, reports or
other documents with the SEC.
(b) Each of the consolidated financial statements (including,
in each case, any related notes) of N2K contained in the N2K SEC Reports
complied as to form in all material respects with the applicable published rules
and regulations of the SEC with respect thereto, was prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to such
financial statements or, in the case of unaudited statements, as permitted by
Form 10-Q under the Exchange Act) and fairly presented the consolidated
financial position of N2K and its Subsidiaries as of the dates and the
consolidated results of its operations and cash flows for the periods indicated,
except that the unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are not expected to
be material in amount. The balance sheet of N2K as of June 30, 1998 is referred
to herein as the "N2K Balance Sheet."
Section 3.5. NO UNDISCLOSED LIABILITIES.
--------------------------
Except as disclosed in the N2K SEC Reports filed prior to the date hereof,
and except for normal or recurring liabilities incurred since June 30, 1998 in
the ordinary course of business consistent with past practices, N2K and its
Subsidiaries do not have any liabilities, either accrued, contingent or
otherwise, of the type required to be reflected in financial statements in
accordance with generally accepted accounting principles, and
12
<PAGE>
whether due or to become due, which individually or in the aggregate are
reasonably likely to have a N2K Material Adverse Effect.
Section 3.6. ABSENCE OF CERTAIN CHANGES OR EVENTS.
------------------------------------
Except as disclosed in the N2K SEC Reports filed prior to the date hereof,
since the date of the N2K Balance Sheet, N2K and its Subsidiaries have conducted
their businesses only in the ordinary course and in a manner consistent with
past practice and, since such date, there has not been (i) any event,
development, state of affairs or condition, or series or combination of events,
developments, states of affairs or conditions, which, individually or in the
aggregate, has had or is reasonably likely to have a N2K Material Adverse Effect
(other than events, developments, states of affairs or conditions that are the
effect or result of actions taken by CDnow or economic factors affecting the
economy as a whole or the industry in which N2K competes); (ii) any damage,
destruction or loss (whether or not covered by insurance) with respect to N2K or
any of its Subsidiaries which is reasonably likely to have a N2K Material
Adverse Effect; (iii) any material change by N2K in its accounting methods,
principles or practices to which CDnow has not previously consented in writing;
(iv) any revaluation by N2K of any of its assets which is reasonably likely to
have a N2K Material Adverse Effect; or (v) any other action or event that would
have required the consent of CDnow pursuant to Section 5.1 of this Agreement had
such action or event occurred after the date of this Agreement other than such
actions or events that, individually or in the aggregate, have not had or are
not reasonably likely to have a N2K Material Adverse Effect.
Section 3.7. TAXES.
-----
(a) For the purposes of this Agreement, a "Tax" or,
collectively, "Taxes," means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
gains, franchise, withholding, payroll, recapture, employment, excise,
unemployment insurance, social security, business license, occupation, business
organization, stamp, environmental and property taxes, together with all
interest, penalties and additions imposed with respect to such amounts. For
purposes of this Agreement, "Taxes" also includes any obligations under any
agreements or arrangements with any other person with respect to Taxes of such
other person (including pursuant to Treas. Reg. ss. 1.1502-6 or comparable
provisions of state, local or foreign tax law) and including any liability for
Taxes of any predecessor entity.
(b) N2K and each of its Subsidiaries have (i) filed all
federal, state, local and foreign Tax returns and reports required to be filed
by them prior to the date of this Agreement (taking into account all applicable
extensions), (ii) paid or accrued all Taxes due and payable, and (iii) paid or
accrued all Taxes for which a notice of assessment or collection has been
received (other than amounts being contested in good faith by appropriate
proceedings), except in the case of clauses (i), (ii) or (iii) for any such
filings, payments or accruals that are not reasonably likely, individually or in
the
13
<PAGE>
aggregate, to have a N2K Material Adverse Effect. Neither the Internal Revenue
Service (the "IRS") nor any other taxing authority has asserted any claim for
Taxes, or to the actual knowledge of the executive officers of N2K, is
threatening to assert any claims for Taxes, which claims, individually or in the
aggregate, are reasonably likely to have a N2K Material Adverse Effect. N2K and
each of its Subsidiaries have withheld or collected and paid over to the
appropriate governmental authorities (or are properly holding for such payment)
all Taxes required by law to be withheld or collected, except for amounts that
are not reasonably likely, individually or in the aggregate, to have a N2K
Material Adverse Effect. Neither N2K nor any of its Subsidiaries has made an
election under Section 341(f) of the Code, except for any such election that
shall not have a N2K Material Adverse Effect. There are no liens for Taxes upon
the assets of N2K or any of its Subsidiaries (other than liens for Taxes that
are not yet due or delinquent or that are being contested in good faith by
appropriate proceedings), except for liens that are not reasonably likely,
individually or in the aggregate, to have a N2K Material Adverse Effect.
(c) Neither N2K nor any of its Subsidiaries is or has
been a member of an affiliated group of corporations filing a consolidated
federal income tax return (or a group of corporations filing a consolidated,
combined or unitary income tax return under comparable provisions of state,
local or foreign tax law) other than a group the common parent of which is or
was N2K or any Subsidiary of N2K.
(d) Neither N2K nor any of its Subsidiaries has any
obligation under any agreement or arrangement with any other person with respect
to Taxes of such other person (including pursuant to Treas. Reg. ss. 1.1502-6 or
comparable provisions of state, local or foreign tax law) and including any
liability for Taxes of any predecessor entity, except for obligations that are
not reasonably likely, individually or in the aggregate, to have a N2K Material
Adverse Effect.
(e) Neither N2K nor any of its subsidiaries (i) has
agreed to or is required to make any adjustments pursuant to Section 481 of the
Code; (ii) has knowledge that the IRS has proposed any such adjustment or a
change in accounting method with respect to such entity; or (iii) has an
application pending with the IRS or any other taxing authority requesting
permission for any change in accounting method.
(f) Neither N2K nor any of its subsidiaries was, at any
time during the period specified in Section 897(c)(1)(A)(ii) of the Code, a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code.
Section 3.8. PROPERTIES.
----------
(a) Neither N2K nor any of its Subsidiaries is in default
under any leases for real property leased by N2K or any of its Subsidiaries,
except where the existence of such defaults, individually or in the aggregate,
is not reasonably likely to have a N2K Material Adverse Effect.
14
<PAGE>
(b) With respect to each item of real property that N2K
or any of its Subsidiaries owns, except for such matters that, individually or
in the aggregate, are not reasonably likely to have a N2K Material Adverse
Effect: (i) N2K or its Subsidiary has good and clear record and marketable title
to such property, insurable by a recognized national title insurance company at
standard rates, free and clear of any security interest, easement, covenant or
other restriction, except for recorded easements, covenants and other
restrictions which do not materially impair the current uses or occupancy of
such property; and (ii) the improvements constructed on such property are in
good condition, and all mechanical and utility systems servicing such
improvements are in good condition, free in each case of material defects.
Section 3.9. INTELLECTUAL PROPERTY.
---------------------
N2K (or one or more of its Subsidiaries) owns, or is licensed or otherwise
possesses legally enforceable rights to use, all trademarks, trade names,
service marks, copyrights, and any applications for such trademarks, trade
names, service marks and copyrights, know-how, computer software programs or
applications and tangible or intangible proprietary information or material that
are presently employed by N2K or necessary to conduct the business of N2K as
currently conducted, subject to such exceptions that, individually and in the
aggregate, would not be reasonably likely to have a N2K Material Adverse Effect.
Neither N2K nor any of its Subsidiaries has received any written notice or
otherwise has actual knowledge of any infringement of or conflict with asserted
rights of others or any other claims with respect to any patent and proprietary
rights, or of any basis for rendering any patent and proprietary rights invalid
or inadequate to protect the interest of N2K or any of its Subsidiaries.
Section 3.10. AGREEMENTS, CONTRACTS AND COMMITMENTS.
-------------------------------------
(a) Neither N2K nor any of its Subsidiaries has breached, or
received in writing any claim or notice that it has breached, any of the terms
or conditions of any Material Contract ("N2K Material Contracts") in such a
manner as, individually or in the aggregate, are reasonably likely to have a N2K
Material Adverse Effect. Each N2K Material Contract that has not expired by its
terms is in full force and effect. For purposes of this Agreement, the term
"Material Contract" means, in the case of N2K or CDnow, any contract, agreement
or commitment that (i) provides for the cash payment, equivalent equity outlay
or provision of services (A) in an amount greater than $50,000 per annum (or, in
the case of contracts, agreements or commitments related to N2K's Encoded Music
Business, $10,000) or (B) $150,000 over the term of the agreement or (ii)
establishes any form of exclusivity restriction on such party for the calendar
year 1999 and/or thereafter. Each N2K Material Contract is listed on Section
3.10 of the N2K Disclosure Schedule and each N2K Material Contract that relates
to N2K's Encoded Music business is separately identified on Section 3.10 of the
N2K Disclosure Schedule.
(b) Without limiting Section 3.10(a), each of the N2K
Material Contracts to which N2K or any of its Subsidiaries is a party (i) is
valid and binding in accordance with its terms and is in full force and effect,
(ii) neither N2K nor any of its
15
<PAGE>
Subsidiaries is in default in any material respect thereof, nor does any
condition exist that with notice or lapses of time or both would constitute a
material default thereunder, and (iii) no party has given any written or (to the
knowledge of N2K) oral notice of termination or cancellation thereof or that
such party intends to assert a breach thereof, or seek to terminate or cancel,
any such agreement, contract or lease, in each case as a result of the
transactions contemplated hereby, subject to such exceptions that, individually
and in the aggregate, would not be reasonably likely to have a N2K Material
Adverse Effect.
(c) The execution and delivery of this Agreement by N2K
does not, and the consummation of the transactions contemplated by this
Agreement will not, result in any violation or breach of, or constitute (with or
without notice or lapse of time, or both) a default (or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
material benefit) under, or require the consent or waiver under, any of the
material terms, conditions or provisions of the N2K Material Contracts
identified on Section 3.10(c) of the N2K Disclosure Schedule.
Section 3.11. LITIGATION.
----------
(a) Except as described in the N2K SEC Reports filed
prior to the date hereof, there is no action, suit or proceeding, claim,
arbitration or investigation against N2K or any of its Subsidiaries pending or
as to which N2K or any of its Subsidiaries has received any written notice of
assertion, which, individually or in the aggregate, is reasonably likely to have
a N2K Material Adverse Effect or a material adverse effect on the ability of N2K
to consummate the transactions contemplated by this Agreement.
(b) The litigation referred to on Section 3.11(b) of
the N2K Disclosure Schedule is covered (subject to deductibles, limitations,
retentions and restrictions contained therein) by N2K's director and officer
insurance policies. N2K has provided to CDnow copies of all correspondence with
the insurance carriers with respect to such litigation.
16
<PAGE>
Section 3.12. ENVIRONMENTAL MATTERS.
---------------------
(a) To the knowledge of N2K and except as disclosed in the
N2K SEC Reports filed prior to the date hereof and except for such matters that,
individually or in the aggregate, are not reasonably likely to have a N2K
Material Adverse Effect: (i) N2K and its Subsidiaries have complied with all
applicable Environmental Laws (as defined in Section 3.12(b)); (ii) the
properties currently owned or operated by N2K and its Subsidiaries (including
soils, groundwater, surface water, buildings or other structures) are not
contaminated with any Hazardous Substances (as defined in Section 3.12(c));
(iii) the properties formerly owned or operated by N2K or any of its
Subsidiaries were not contaminated with Hazardous Substances during the period
of ownership or operation by N2K or any of its Subsidiaries; (iv) neither N2K
nor its Subsidiaries are subject to liability for any Hazardous Substance
disposal or contamination on any third party property; (v) neither N2K nor any
of its Subsidiaries has been associated with any release or threat of release of
any Hazardous Substance; (vi) neither N2K nor any of its Subsidiaries has
received any notice, demand, letter, claim or request for information alleging
that N2K or any of its Subsidiaries may be in violation of or liable under any
Environmental Law; (vii) neither N2K nor any of its Subsidiaries is subject to
any orders, decrees, injunctions or other arrangements with any Governmental
Entity or is subject to any indemnity or other agreement with any third party
relating to liability under any Environmental Law or relating to Hazardous
Substances; and (viii) there are no circumstances or conditions involving N2K or
any of its Subsidiaries that could reasonably be expected to result in any
claims, liability, investigations, costs or restrictions on the ownership, use
or transfer of any property of N2K or any of its Subsidiaries pursuant to any
Environmental Law.
(b) As used herein, the term "Environmental Law" means
any federal, state, local or foreign law, regulation, order, decree, permit,
authorization, opinion, common law or agency requirement relating to: (A) the
protection, investigation or restoration of the environment, health and safety,
or natural resources, (B) the handling, use, presence, disposal, release or
threatened release of any Hazardous Substance or (C) noise, odor, wetlands,
pollution, contamination or any injury or threat of injury to persons or
property.
(c) As used herein, the term "Hazardous Substance" means any
substance that is: (A) listed, classified or regulated pursuant to any
Environmental Law; (B) any petroleum product or by-product, asbestos-containing
material, lead-containing paint or plumbing, polychlorinated biphenyls,
radioactive materials or radon; or (C) any other substance which is the subject
of regulatory action by any Governmental Entity pursuant to any Environmental
Law.
17
<PAGE>
Section 3.13. EMPLOYEE BENEFIT PLANS.
----------------------
(a) Section 3.13 of the N2K Disclosure Schedule contains a
complete list of all employee benefit plans (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all
employment and severance agreements, and all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
and other similar employee benefit plans, programs, policies and agreements,
written or otherwise, in each case that is sponsored, maintained, contributed to
or required to be contributed to by N2K or any of its Subsidiaries or any trade
or business (whether or not incorporated) which, together with N2K or any of its
Subsidiaries, would be deemed a "single employer" under Section 4001(b) of ERISA
(an "ERISA Affiliate"), or to which N2K, any of its Subsidiaries or any ERISA
Affiliate is a party for the benefit of any current or former employee,
consultant, director or independent contractor of N2K or any of its Subsidiaries
(together, the "N2K Employee Plans").
(b) N2K has delivered or made available to CDnow: (i)
accurate and complete copies of all N2K Employee Plan documents and any summary
plan descriptions, summary annual reports and insurance contracts relating
thereto, (ii) accurate and complete detailed summaries of all unwritten N2K
Employee Plans, (iii) accurate and complete copies of the most recent financial
statements and actuarial reports with respect to all N2K Employee Plans for
which financial statements or actuarial reports are required or have been
prepared and (iv) accurate and complete copies of all annual reports for all N2K
Employee Plans (for which annual reports are required) prepared within the last
two years.
(c) All N2K Employee Plans conform in all material respects
to, and are being administered and operated in all material respects in
compliance with, the requirements of ERISA, the Code and all other applicable
laws, including applicable laws of foreign jurisdictions. There have not been
any "prohibited transactions," as such term is defined in Section 4975 of the
Code or Section 406 of ERISA, involving any of the N2K Employee Plans that could
subject N2K or any of its Subsidiaries to any penalties or taxes imposed under
the Code or ERISA.
(d) Except as set forth in the N2K Disclosure Schedule, any
N2K Employee Plan that is intended to be qualified under Section 401(a) of the
Code and exempt from tax under Section 501(a) of the Code has been determined by
the Internal Revenue Service to be so qualified, and such determination remains
in effect and has not been revoked. Nothing has occurred since the date of any
such determination that is reasonably likely to affect adversely such
qualification or exemption in any material respect, or result in the imposition
of material excise taxes or income taxes on unrelated business income under the
Code or ERISA with respect to any N2K Employee Plan.
(e) Except as set forth in the N2K Disclosure Schedule,
neither N2K, any of its Subsidiaries nor any ERISA Affiliate (i) has or at any
time in the past has had a
18
<PAGE>
current or contingent obligation to contribute to any multiemployer plan (as
defined in Section 3(37) of ERISA) or (ii) has or at any time in the past has
had any liability, contingent or otherwise, under Title IV of ERISA or Section
412 of the Code.
(f) There are no pending or, to the knowledge of N2K or
any of its Subsidiaries, threatened claims by or on behalf of any N2K Employee
Plan, or by or on behalf of any individual participants or beneficiaries of any
N2K Employee Plan, alleging any breach of fiduciary duty on the part of N2K or
any of its Subsidiaries or any of the officers, directors or employees of N2K or
any of its Subsidiaries under ERISA or any other applicable Regulations, or
claiming benefit payments other than those made in the ordinary operation of
such plans, or alleging any violation of any other applicable Laws. To the
knowledge of N2K or any of its Subsidiaries, the N2K Employee Plans are not the
subject of any investigation, audit or action by the Internal Revenue Service,
the Department of Labor or the Pension Benefit Guaranty Corporation ("PBGC").
(g) With respect to any N2K Employee Plan that is an
employee welfare benefit plan (within the meaning of Section 3(1) of ERISA) (a
"N2K Welfare Plan"), (i) each N2K Welfare Plan for which contributions are
claimed as deductions under any provision of the Code is in compliance in all
material respects with all applicable requirements pertaining to such deduction
and (ii) any N2K Employee Plan that is a group health plan (within the meaning
of Section 4980B(g)(2) of the Code) complies, and in each and every case has
complied in all material respects, with all of the requirements of ERISA and
Section 4980B of the Code. No welfare benefit fund (within the meaning of
Section 419(e)(1) of the Code) or voluntary employees' beneficiary association
(within the meaning of 501(c)(9) of the Code) has been established or maintained
in connection with a N2K Welfare Plan.
(h) Except as disclosed in the N2K Disclosure Schedule
or N2K SEC Reports filed prior to the date of this Agreement, and except as
provided for in this Agreement, the execution of this Agreement and the
performance of the transactions contemplated hereunder will not (either alone or
in combination with the occurrence of any additional or subsequent events)
constitute an event under any N2K Employee Plan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any current or former employee, director or consultant
of N2K or any of its Subsidiaries. No payments or benefits under any N2K
Employee Plan or other agreement of N2K would result in an "excess parachute
payment" under Section 280G of the Code that would cause a loss of tax deduction
that would be material.
Section 3.14. COMPLIANCE WITH LAWS.
--------------------
N2K has complied with, is not in violation of, and has not received any
notices of violation with respect to, any federal, state or local statute, law
or regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for
19
<PAGE>
failures to comply or violations which, individually or in the aggregate, have
not had and are not reasonably likely to have a N2K Material Adverse Effect.
Section 3.15. TAX MATTERS.
-----------
(a) To the best knowledge of N2K, after consulting with
its tax advisors, neither N2K nor any of its Affiliates (as defined in Section
5.12) has taken or agreed to take any action which would prevent the N2K Merger
from qualifying as a reorganization described in Section 368(a) of the Code
and/or, taken together with the CDnow Merger, as a transfer of property to NewCo
by holders of N2K Common Stock described in Section 351 of the Code. Except as
contemplated by the N2K Option Agreement, neither N2K nor any of its
Subsidiaries owns any shares of CDnow Common Stock or other securities
convertible into shares of CDnow Common Stock (exclusive of any shares owned by
N2K's employee benefit plans).
(b) To the best knowledge of N2K, the stockholders of
N2K as a group have no present plan, intention or arrangement to sell or
otherwise dispose of such number of the shares of NewCo Common Stock received in
the N2K Merger as would reduce their ownership in NewCo Common Stock to a number
of shares having a value, as of the date of the N2K Merger, of less than eighty
percent (80%) of the value of all the formerly outstanding stock of N2K as of
the same date.
Section 3.16. REGISTRATION STATEMENT; JOINT PROXY STATEMENT/PROSPECTUS.
--------------------------------------------------------
The information to be supplied by N2K for inclusion or incorporation by
reference in the registration statement on Form S-4 pursuant to which shares of
NewCo Common Stock issued in the Mergers will be registered under the Securities
Act (the "Registration Statement"), shall not at the time the Registration
Statement is declared effective by the SEC contain any untrue statement of a
material fact or omit to state any material fact required to be stated in the
Registration Statement or necessary in order to make the statements in the
Registration Statement, in light of the circumstances under which they were
made, not misleading. The information supplied by N2K for inclusion or
incorporation by reference in the joint proxy statement/prospectus to be sent to
the stockholders of CDnow and N2K in connection with the meeting of N2K's
stockholders (the "N2K Stockholders' Meeting") and the meeting of CDnow's
stockholders (the "CDnow Stockholders' Meeting") to consider this Agreement and
the Mergers (the "Joint Proxy Statement/Prospectus") shall not, on the date the
Joint Proxy Statement/Prospectus is first mailed to stockholders of N2K or
CDnow, at the time of the N2K Stockholders' Meeting and the CDnow Stockholders'
Meeting and at the Effective Time, contain any statement which, at such time and
in light of the circumstances under which it shall be made, is false or
misleading with respect to any material fact, omit to state any material fact
necessary in order to make the statements made in the Joint Proxy
Statement/Prospectus not false or misleading, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the N2K Stockholders' Meeting or the CDnow
Stockholders' Meeting which has become false or misleading.
20
<PAGE>
Section 3.17. LABOR MATTERS.
-------------
Except as disclosed in the N2K SEC Reports filed prior to the date hereof,
neither N2K nor any of its Subsidiaries is a party to or otherwise bound by any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization, nor, as of the date hereof, is N2K or
any of its Subsidiaries the subject of any material proceeding asserting that
N2K or any of its Subsidiaries has committed an unfair labor practice or is
seeking to compel it to bargain with any labor union or labor organization nor,
as of the date of this Agreement, is there pending or, to the knowledge of the
executive officers of N2K, threatened, any material labor strike, dispute,
walkout, work stoppage, slow-down or lockout involving N2K or any of its
Subsidiaries.
Section 3.18. INSURANCE.
---------
All material fire and casualty, general liability, business interruption,
product liability, and sprinkler and water damage insurance policies maintained
by N2K or any of its Subsidiaries are with reputable insurance carriers, provide
full and adequate coverage for all normal risks incident to the business of N2K
and its Subsidiaries and their respective properties and assets, and are in
character and amount at least equivalent to that carried by persons engaged in
similar businesses and subject to the same or similar perils or hazards, except
for any such failures to maintain insurance policies that, individually or in
the aggregate, are not reasonably likely to have a N2K Material Adverse Effect.
N2K has maintained such policies on a continuous basis since January 1996.
Section 3.19. OPINION OF FINANCIAL ADVISOR.
----------------------------
The financial advisor of N2K, Allen & Company, Incorporated, has delivered
to N2K an opinion dated the date of this Agreement to the effect that the N2K
Exchange Ratio is fair to the holders of N2K Common Stock from a financial point
of view.
Section 3.20. NO EXISTING DISCUSSIONS.
-----------------------
As of the date hereof, N2K is not engaged, directly or indirectly, in any
discussions or negotiations with any other party with respect to an Acquisition
Proposal (as defined in Section 5.3).
Section 3.21. SECTION 203 OF THE DGCL NOT APPLICABLE.
--------------------------------------
The restrictions contained in Section 203 of the DGCL applicable to
a "business combination" (as defined in DGCL Section 203) will not apply to the
authorization, execution, delivery and performance of this Agreement or the
Stock Option Agreements by N2K or the Stockholder Support Agreement by the
parties thereto or the consummation of the N2K Merger by N2K. No other "fair
price," "moratorium," "control share acquisition" or other similar anti-takeover
statute or regulation is applicable to N2K or (by reason of N2K's participation
therein) the N2K Merger or the other transactions contemplated by this
Agreement.
21
<PAGE>
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF CDNOW
CDnow represents and warrants to N2K that the statements contained in
this Article IV are true and correct, except as set forth in the disclosure
schedule delivered by CDnow to N2K on or before the date of this Agreement (the
"CDnow Disclosure Schedule").
Section 4.1. ORGANIZATION OF CDNOW.
---------------------
Each of CDnow and its Subsidiaries is duly organized, validly existing and
in good standing under the laws of the jurisdiction of its organization, has all
requisite power to own, lease and operate its property and to carry on its
business as now being conducted and as proposed to be conducted, and is duly
qualified to do business and is in good standing as a foreign corporation or
other entity in each jurisdiction in which the failure to be so qualified would
have a material adverse effect on the business, properties, financial condition
or results of operations of CDnow and its Subsidiaries, taken as a whole (a
"CDnow Material Adverse Effect"). A true and correct copy of the Certificate of
Incorporation and Bylaws of CDnow and each of its Subsidiaries has been
delivered to N2K. Except as set forth in the CDnow SEC Reports (as defined in
Section 4.4) filed prior to the date hereof, neither CDnow nor any of its
Subsidiaries directly or indirectly owns (other than ownership interests in
CDnow or in one or more of its Subsidiaries) any equity or similar interest in,
or any interest convertible into or exchangeable or exercisable for, any
corporation, partnership, joint venture or other business association or entity,
excluding (i) securities in any publicly traded company held for investment by
CDnow and comprising less than five percent (5%) of the outstanding stock of
such company and (ii) any investment or series of related investments with a
book value of less than $1 million.
22
<PAGE>
Section 4.2. CDNOW CAPITAL STRUCTURE.
-----------------------
(a) The authorized capital stock of CDnow consists of
50,000,000 shares of CDnow Common Stock and 20,000,000 shares of preferred
stock, no par value ("N2K Preferred Stock") As of the date hereof, (i)
17,674,405 shares of CDnow Common Stock were issued and outstanding, all of
which are validly issued, fully paid and nonassessable, (ii) no shares of CDnow
Common Stock were held in the treasury of CDnow or by Subsidiaries of CDnow and
(iii) no shares of CDnow Preferred Stock were issued and outstanding. Section
4.2(a) of the CDnow Disclosure Schedule shows the number of shares of CDnow
Common Stock reserved for future issuance pursuant to stock options granted and
outstanding as of the date hereof and the plans under which such options were
granted (collectively, the "CDnow Stock Plans"). There are no obligations,
contingent or otherwise, of CDnow or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any shares of CDnow Common Stock or the capital
stock of any Subsidiary or to provide funds to or make any material investment
(in the form of a loan, capital contribution or otherwise) in any such
Subsidiary or any other entity other than guarantees of bank obligations or
indebtedness for borrowed money of Subsidiaries entered into in the ordinary
course of business and other than any obligation the failure of which to perform
or satisfy would not have a CDnow Material Adverse Effect. All of the
outstanding shares of capital stock or other ownership interests of each of
CDnow's Subsidiaries are duly authorized, validly issued, fully paid and
nonassessable and all such shares (other than directors' qualifying shares in
the case of foreign Subsidiaries) are owned by CDnow or another Subsidiary of
CDnow free and clear of all security interests, liens, claims, pledges,
agreements, limitations in CDnow's voting rights, charges or other encumbrances
of any nature.
(b) Except as set forth in this Section 4.2 or as reserved
for future grants of options under the CDnow Stock Plans or the N2K Stock Option
Agreement and the options and warrants described in Section 4.2(b) of the CDnow
Disclosure Schedule, (i) there are no shares of capital stock of any class of
CDnow, or any security exchangeable into or exercisable for such equity
securities, issued, reserved for issuance or outstanding; (ii) there are no
options, warrants, equity securities, calls, rights, commitments or agreements
of any character to which CDnow or any of its Subsidiaries is a party or by
which it is bound obligating CDnow or any of its Subsidiaries to issue, deliver
or sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other ownership interests of CDnow or any of its Subsidiaries or
obligating CDnow or any of its Subsidiaries to grant, extend, accelerate the
vesting of or enter into any such option, warrant, equity security, call, right,
commitment or agreement; and (iii) to the best knowledge of CDnow, there are no
voting trusts, proxies or other voting agreements or understandings with respect
to the shares of capital stock of CDnow. All shares of CDnow Common Stock
subject to issuance as specified in this Section 4.2 are duly authorized and,
upon issuance on the terms and conditions specified in the instruments pursuant
to which they are issuable, shall be validly issued, fully paid and
nonassessable.
23
<PAGE>
Section 4.3. AUTHORITY; NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
-----------------------------------------------------
(a) CDnow has all requisite corporate power and authority to
enter into this Agreement, the Stock Option Agreements and, subject to obtaining
any necessary stockholder approval of this agreement to consummate the
transactions contemplated by this Agreement, the Stock Option Agreements. The
execution and delivery of this Agreement, the Stock Option Agreements and the
consummation of the transactions contemplated by this Agreement, the Stock
Option Agreements by CDnow have been duly authorized by all necessary corporate
action on the part of CDnow, subject only to the approval and adoption of this
Agreement and the CDnow Merger by CDnow's stockholders under the PBCL and the
DGCL. This Agreement, the Stock Option Agreements and the Stockholder Support
Agreement have been duly executed and delivered by CDnow and constitute the
valid and binding obligations of CDnow, enforceable in accordance with their
terms, subject to the Bankruptcy and Equity Exception.
(b) The execution and delivery of this Agreement and
the Stock Option Agreements by CDnow does not, and the consummation of the
transactions contemplated by this Agreement, the Stock Option Agreements and the
Stockholder Support Agreement will not, (i) conflict with, or result in any
violation or breach of, any provision of the Certificate of Incorporation or
Bylaws of CDnow or any of its Subsidiaries, (ii) result in any violation or
breach of, or constitute (with or without notice or lapse of time, or both) a
default (or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any material benefit) under, or require a consent or
waiver under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which CDnow or any of its Subsidiaries is a party or by which any
of them or any of their properties or assets may be bound or (iii) conflict with
or violate any permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to CDnow or any of its
Subsidiaries or any of its or their properties or assets, except in the case of
(ii) and (iii) for any such conflicts, violations, defaults, terminations,
cancellations or accelerations which (x) are not, individually or in the
aggregate, reasonably likely to have a CDnow Material Adverse Effect or (y)
would not substantially impair or delay the consummation of the CDnow Merger.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required by
or with respect to CDnow or any of its Subsidiaries in connection with the
execution and delivery of this Agreement and the Stock Option Agreements or the
consummation of the transactions contemplated hereby or thereby, except for (i)
the filing of the pre-merger notification report under the HSR Act, (ii) the
expiration or termination of the waiting period under the HSR Act, (iii) the
filing of Articles of Merger with respect to the CDnow Merger with the
Pennsylvania Secretary of State, (iv) the filing of the Joint Proxy Statement/
Prospectus with the SEC in accordance with the Exchange Act and the Securities
Act, (v) such consents, approvals, orders, authorizations, registrations,
declarations and filings
24
<PAGE>
as may be required under applicable state securities laws and the laws of any
foreign country and (vi) such other consents, authorizations, filings, approvals
and registrations which, if not obtained or made, would not (x) be reasonably
likely to have a CDnow Material Adverse Effect or (y) substantially impair or
delay the consummation of the CDnow Merger.
Section 4.4. SEC FILINGS; FINANCIAL STATEMENTS.
---------------------------------
(a) CDnow has filed and made available to N2K all
forms, reports and documents required to be filed by CDnow with the SEC since
February 9, 1998 (collectively, the "CDnow SEC Reports"). The CDnow SEC Reports
(i) at the time filed, complied in all material respects with the applicable
requirements of the Securities Act and the Exchange Act, as the case may be, and
(ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated in such CDnow SEC Reports or necessary in order to make
the statements in such CDnow SEC Reports, in the light of the circumstances
under which they were make, not misleading. None of CDnow's Subsidiaries is
required to file any forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements
(including, in each case, any related notes) of CDnow contained in the CDnow SEC
Reports complied as to form in all material respects with the applicable
published rules and regulations of the SEC with respect thereto, was prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except as may be indicated in the notes
to such financial statements or, in the case of unaudited statements, as
permitted by Form 10-Q under the Exchange Act) and fairly presented the
consolidated financial position of CDnow and its Subsidiaries as of the dates
and the consolidated results of its operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not or are not
expected to be material in amount. The balance sheet of CDnow as of June 30,
1998 is referred to herein as the "CDnow Balance Sheet."
Section 4.5. NO UNDISCLOSED LIABILITIES.
--------------------------
Except as disclosed in the CDnow SEC Reports filed prior to the date
hereof, and except for normal or recurring liabilities incurred since June 30,
1998 in the ordinary course of business consistent with past practices, CDnow
and its Subsidiaries do not have any liabilities, either accrued, contingent or
otherwise, of the type required to be reflected in financial statements in
accordance with generally accepted accounting principles, and whether due or to
become due, which individually or in the aggregate, are reasonably likely to
have a CDnow Material Adverse Effect.
Section 4.6. ABSENCE OF CERTAIN CHANGES OR EVENTS.
------------------------------------
25
<PAGE>
Except as disclosed in the CDnow SEC Reports filed prior to the date
hereof, since the date of the CDnow Balance Sheet, CDnow and its Subsidiaries
have conducted their businesses only in the ordinary course and in a manner
consistent with past practice and, since such date, there has not been (i) any
event, development, state of affairs or condition, or series or combination of
events, developments, states of affairs or conditions, which, individually or in
the aggregate, has had or which is reasonably likely to have a CDnow Material
Adverse Effect (other than events, developments, states of affairs or conditions
that are the effect or result of actions taken by N2K or economic factors
affecting the economy as a whole or the industry in which CDnow competes); (ii)
any damage, destruction or loss (whether or not covered by insurance) with
respect to CDnow or any of its Subsidiaries which is reasonably likely to have a
CDnow Material Adverse Effect; (iii) any material change by CDnow in its
accounting methods, principles or practices to which N2K has not previously
consented in writing; (iv) any revaluation by CDnow of any of its assets which
is reasonably likely to have a CDnow Material Adverse Effect; or (v) any other
action or event that would have required the consent of N2K pursuant to Section
5.1 of this Agreement had such action or event occurred after the date of this
Agreement, other than such actions or events that, individually or in the
aggregate, have not had or are not reasonably likely to have a CDnow Material
Adverse Effect.
Section 4.7. TAXES.
-----
(a) CDnow and each of its Subsidiaries have (i) filed
all federal, state, local and foreign Tax returns and reports, required to be
filed by them prior to the date of this Agreement (taking into account all
applicable extensions), (ii) paid or accrued all Taxes due and payable, and
(iii) paid or accrued all Taxes for which a notice of assessment or collection
has been received (other than amounts being contested in good faith by
appropriate proceedings), except in the case of clauses (i), (ii) or (iii) for
any such filings, payments or accruals that are not reasonably likely,
individually or in the aggregate, to have a CDnow Material Adverse Effect.
Neither the IRS nor any other taxing authority has asserted any claim for Taxes,
or to the actual knowledge of the executive officers of CDnow, is threatening to
assert any claims for Taxes, which claims, individually or in the aggregate, are
reasonably likely to have a CDnow Material Adverse Effect. CDnow and each of its
Subsidiaries have withheld or collected and paid over to the appropriate
governmental authorities (or are properly holding for such payment) all Taxes
required by law to be withheld or collected, except for amounts that are not
reasonably likely, individually or in the aggregate, to have a CDnow Material
Adverse Effect. Neither CDnow nor any of its Subsidiaries has made an election
under Section 341(f) of the Code, except for any such election that shall not
have a CDnow Material Adverse Effect. There are no liens for Taxes upon the
assets of CDnow or any of its Subsidiaries (other than liens for Taxes that are
not yet due or delinquent or that are being contested in good faith by
appropriate proceedings), except for liens that are not reasonably likely,
individually or in the aggregate, to have a CDnow Material Adverse Effect.
26
<PAGE>
(b) Neither CDnow nor any of its Subsidiaries is or has
been a member of an affiliated group of corporations filing a consolidated
federal income tax return (or a group of corporations filing a consolidated,
combined or unitary income tax return under comparable provisions of state,
local or foreign tax law) other than a group the common parent of which is or
was CDnow or any Subsidiary of CDnow.
(c) Neither CDnow nor any of its Subsidiaries has any
obligation under any agreement or arrangement with any other person with respect
to Taxes of such other person (including pursuant to Treas. Reg. ss. 1.1502-6 or
comparable provisions of state, local or foreign tax law) and including any
liability for Taxes of any predecessor entity, except for obligations that are
not reasonably likely, individually or in the aggregate, to have an CDnow
Material Adverse Effect.
(d) Neither CDnow nor any of its subsidiaries (i) has
agreed to or is required to make any adjustments pursuant to Section 481 of the
Code; (ii) has knowledge that the IRS has proposed any such adjustment or a
change in accounting method with respect to such entity; or (iii) has an
application pending with the IRS or any other taxing authority requesting
permission for any change in accounting method.
(e) Neither CDnow nor any of its subsidiaries was, at
any time during the period specified in Section 897(c)(1)(A)(ii) of the Code, a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code.
Section 4.8. PROPERTIES.
----------
(a) Neither CDnow nor any of its Subsidiaries is in
default under any leases for real property leased by CDnow or any of its
Subsidiaries, except where the existence of such defaults, individually or in
the aggregate, is not reasonably likely to have a CDnow Material Adverse Effect.
(b) With respect to each item of real property that
CDnow or any of its Subsidiaries owns, except for such matters that,
individually or in the aggregate, are not reasonably likely to have a CDnow
Material Adverse Effect: (i) CDnow or its Subsidiary has good and clear record
and marketable title to such property, insurable by a recognized national title
insurance company at standard rates, free and clear of any security interest,
easement, covenant or other restriction, except for recorded easements,
covenants and other restrictions which do not materially impair the current uses
or occupancy of such property; and (ii) the improvements constructed on such
property are in good condition, and all mechanical and utility systems servicing
such improvements are in good condition, free in each case of material defects.
Section 4.9. INTELLECTUAL PROPERTY.
---------------------
CDnow (or one or more of its Subsidiaries) owns, or is licensed or
otherwise possesses legally enforceable rights to use, all trademarks, trade
names, service marks, copyrights, and any applications for such trademarks,
trade names, service marks and copyrights,
27
<PAGE>
know-how, computer software programs or applications, and tangible or intangible
proprietary information or material that are necessary to conduct the business
of CDnow as currently conducted, subject to such exceptions that, individually
and in the aggregate, would not be reasonably likely to have a CDnow Material
Adverse Effect. Neither CDnow nor any of its Subsidiaries has received any
written notice or otherwise has actual knowledge of any infringement of or
conflict with asserted rights of others or any other claims with respect to any
patent and proprietary rights, or of any basis for rendering any patent and
proprietary rights invalid or inadequate to protect the interest of CDnow or any
of its Subsidiaries.
Section 4.10. AGREEMENTS; CONTRACTS AND COMMITMENTS.
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(a) Neither CDnow nor any of its Subsidiaries has breached,
or received in writing any claim or notice that it has breached, any of the
terms or conditions of any Material Contract ("CDnow Material Contracts") in
such a manner as, individually or in the aggregate, are reasonably likely to
have a CDnow Material Adverse Effect. Each CDnow Material Contract that has not
expired by its terms is in full force and effect. Each CDnow Material Contract
is listed on Section 4.10 of the CDnow Disclosure Schedule.
(b) Without limiting Section 4.10(a), each of the CDnow
Material Contracts to which CDnow is a party (i) is valid and binding in
accordance with its terms and is in full force and effect, (ii) neither CDnow
nor any of its Subsidiaries is in default in any material respect thereof, nor
does any condition exist that with notice or lapses of time or both would
constitute a material default thereunder, and (iii) no party has given any
written or (to the knowledge of CDnow) oral notice of termination or
cancellation thereof or that such party intends to assert a breach thereof, or
seek to terminate or cancel, any such agreement, contract or lease, in each case
as a result of the transactions contemplated hereby, subject to such exceptions
that, individually and in the aggregate, would not be reasonably likely to have
a CDnow Material Adverse Effect.
(c) The execution and delivery of this Agreement by CDnow
does not, and the consummation of the transactions contemplated by this
Agreement will not, result in any violation or breach of, or constitute (with or
without notice or lapse of time, or both) a default (or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
material benefit) under, or require the consent or waiver under, any of the
material terms, conditions or provisions of the CDnow Material Contracts
identified on Section 4.10(c) of the CDnow Disclosure Schedule.
Section 4.11. LITIGATION.
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Except as described in the CDnow SEC Reports filed prior to the date
hereof, there is no action, suit or proceeding, claim, arbitration or
investigation against CDnow pending or as to which CDnow has received any
written notice of assertion, which, individually or in the aggregate, is
reasonably likely to have a CDnow Material Adverse Effect or a
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material adverse effect on the ability of CDnow to consummate the transactions
contemplated by this Agreement.
Section 4.12. ENVIRONMENTAL MATTERS.
---------------------
To the knowledge of CDnow and except as disclosed in the CDnow SEC Reports
filed prior to the date hereof and except for such matters that, individually or
in the aggregate, are not reasonably likely to have a CDnow Material Adverse
Effect: (i) CDnow and its Subsidiaries have complied with all applicable
Environmental Laws; (ii) the properties currently owned or operated by CDnow and
its Subsidiaries (including soils, groundwater, surface water, buildings or
other structures) are not contaminated with any Hazardous Substances; (iii) the
properties formerly owned or operated by CDnow or any of its Subsidiaries were
not contaminated with Hazardous Substances during the period of ownership or
operation by CDnow or any of its Subsidiaries; (iv) neither CDnow nor its
Subsidiaries are subject to liability for any Hazardous Substance disposal or
contamination on any third party property; (v) neither CDnow nor any of its
Subsidiaries has been associated with any release or threat of release of any
Hazardous Substance; (vi) neither CDnow nor any of its Subsidiaries has received
any notice, demand, letter, claim or request for information alleging that CDnow
or any of its Subsidiaries may be in violation of or liable under any
Environmental Law; (vii) neither CDnow nor any of its Subsidiaries is subject to
any orders, decrees, injunctions or other arrangements with any Governmental
Entity or is subject to any indemnity or other agreement with any third party
relating to liability under any Environmental Law or relating to Hazardous
Substances; and (viii) there are no circumstances or conditions involving CDnow
or any of its Subsidiaries that could reasonably be expected to result in any
claims, liability, investigations, costs or restrictions on the ownership, use
or transfer of any property of CDnow or any of its Subsidiaries pursuant to any
Environmental Law.
Section 4.13. EMPLOYEE BENEFIT PLANS.
----------------------
(a) Section 4.13 of the CDnow Disclosure Schedule contains a
complete list of all employee benefit plans (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all
employment and severance agreements, and all bonus, stock option, stock
purchase, incentive, deferred compensation, supplemental retirement, severance
and other similar employee benefit plans, programs, policies and agreements,
written or otherwise, in each case that is sponsored, maintained, contributed to
or required to be contributed to by CDnow or any of its Subsidiaries or any
trade or business (whether or not incorporated) which, together with CDnow or
any of its Subsidiaries, would be deemed a "single employer" under Section
4001(b) of ERISA (an "ERISA Affiliate"), or to which CDnow, any of its
Subsidiaries or any ERISA Affiliate is a party for the benefit of any current or
former employee, consultant, director or independent contractor of CDnow or any
of its Subsidiaries (together, the "CDnow Employee Plans").
(b) CDnow has delivered or made available to N2K: (i)
accurate and complete copies of all CDnow Employee Plan documents and any
summary plan
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descriptions, summary annual reports and insurance contracts relating thereto,
(ii) accurate and complete detailed summaries of all unwritten CDnow Employee
Plans, (iii) accurate and complete copies of the most recent financial
statements and actuarial reports with respect to all CDnow Employee Plans for
which financial statements or actuarial reports are required or have been
prepared and (iv) accurate and complete copies of all annual reports for all
CDnow Employee Plans (for which annual reports are required) prepared within the
last two years.
(c) All CDnow Employee Plans conform in all material respects
to, and are being administered and operated in all material respects in
compliance with, the requirements of ERISA, the Code and all other applicable
laws, including applicable laws of foreign jurisdictions. There have not been
any "prohibited transactions," as such term is defined in Section 4975 of the
Code or Section 406 of ERISA, involving any of the CDnow Employee Plans that
could subject CDnow or any of its Subsidiaries to any penalties or taxes imposed
under the Code or ERISA.
(d) Except as set forth in the CDnow Disclosure Schedule, any
CDnow Employee Plan that is intended to be qualified under Section 401(a) of the
Code and exempt from tax under Section 501(a) of the Code has been determined by
the Internal Revenue Service to be so qualified, and such determination remains
in effect and has not been revoked. Nothing has occurred since the date of any
such determination that is reasonably likely to affect adversely such
qualification or exemption in any material respect, or result in the imposition
of excise taxes or income taxes on unrelated business income under the Code or
ERISA with respect to any CDnow Employee Plan.
(e) Except as set forth in the CDnow Disclosure Schedule,
neither CDnow, any of its Subsidiaries nor any ERISA Affiliate (i) has or at any
time in the past has had a current or contingent obligation to contribute to any
multiemployer plan (as defined in Section 3(37) of ERISA) or (ii) has or at any
time in the past has had any liability, contingent or otherwise, under Title IV
of ERISA or Section 412 of the Code.
(f) There are no pending or, to the knowledge of CDnow or any of
its Subsidiaries, threatened claims by or on behalf of any CDnow Employee Plan,
or by or on behalf of any individual participants or beneficiaries of any CDnow
Employee Plan, alleging any breach of fiduciary duty on the part of CDnow or any
of its Subsidiaries or any of the officers, directors or employees of CDnow or
any of its Subsidiaries under ERISA or any other applicable Regulations, or
claiming benefit payments other than those made in the ordinary operation of
such plans, or alleging any violation of any other applicable Laws. To the
knowledge of CDnow or any of its Subsidiaries, the CDnow Employee Plans are not
the subject of any investigation, audit or action by the Internal Revenue
Service, the Department of Labor or the PBGC.
(g) With respect to any CDnow Employee Plan that is an employee
welfare benefit plan (within the meaning of Section 3(1) of ERISA) (a "CDnow
Welfare Plan"), (i) each CDnow Welfare Plan for which contributions are claimed
as deductions
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under any provision of the Code is in compliance in all material respects with
all applicable requirements pertaining to such deduction and (ii) any CDnow
Employee Plan that is a group health plan (within the meaning of Section
4980B(g)(2) of the Code) complies, and in each and every case has complied in
all material respects, with all of the requirements of ERISA and Section 4980B
of the Code. No welfare benefit fund (within the meaning of Section 419(e)(1) of
the Code) or voluntary employees' beneficiary association (within the meaning of
501(c)(9) of the Code) has been established or maintained in connection with a
CDnow Welfare Plan.
(h) Except as disclosed in the CDnow Disclosure Schedule or
CDnow SEC Reports filed prior to the date of this Agreement, and except as
provided for in this Agreement, the execution of this Agreement and the
performance of the transactions contemplated hereunder will not (either alone or
in combination with the occurrence of any additional or subsequent events)
constitute an event under any CDnow Employee Plan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any current or former employee, director or consultant
of CDnow or any of its Subsidiaries. No payments or benefits under any CDnow
Employee Plan or other agreement of CDnow would result in an "excess parachute
payment" under Section 280G of the Code that would cause a loss of tax deduction
that would be material.
Section 4.14. COMPLIANCE WITH LAWS
--------------------
. CDnow has complied with, is not in violation of, and has not received any
notices of violation with respect to, any federal, state or local statute, law
or regulation with respect to the conduct of its business, or the o