<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1999
REGISTRATION NO. 333-73261
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
NETRADIO CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 7374 41-1819471
-------------------------- ---------------------------- ----------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
RIVERPLACE EXPOSITION HALL
43 MAIN STREET SOUTHEAST,
SUITE 149
MINNEAPOLIS, MN 55414
(612) 378-2211
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
EDWARD A. TOMECHKO
CHIEF EXECUTIVE OFFICER AND PRESIDENT
NETRADIO CORPORATION
RIVERPLACE EXPOSITION HALL
43 MAIN STREET SOUTHEAST, SUITE 149
MINNEAPOLIS, MN 55414
(612) 378-2211
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
THOMAS G. LOVETT, IV, ESQ. LAWRENCE D. LEVIN, ESQ.
JONATHAN B. LEVY, ESQ. SCOTT E. LYONS, ESQ.
CHRISTINE K. HANSEN, ESQ. KATTEN MUCHIN & ZAVIS
LINDQUIST & VENNUM P.L.L.P. 525 WEST MONROE STREET
4200 IDS CENTER CHICAGO, IL 60661
MINNEAPOLIS, MN 55402 (312) 902-5200
(612) 371-3211
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE REGISTRATION FEE(1)
<S> <C> <C>
Common stock, no par value per share.............................. $59,800,000 $16,625(2)
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee in accordance with Rule 457(o) under the Securities Act of 1933.
(2) A registration fee of $13,852 has previously been paid based on an estimate
of the aggregate offering price.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 27, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT A SOLICITATION TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
4,000,000 SHARES
[LOGO]
NETRADIO CORPORATION
COMMON STOCK
------------------
This is the initial public offering of our common stock. We are offering
4,000,000 shares. We anticipate that the initial public offering price will be
between $11.00 and $13.00. No public market currently exists for our common
stock. The common stock has been approved for listing on the Nasdaq National
Market under the symbol "NETR," subject to official notice of issuance.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ------------
<S> <C> <C>
Public Offering Price................................................ $ $
Underwriting Discount................................................ $ $
Proceeds to NetRadio Corporation..................................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 600,000
additional shares to cover any over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
GERARD KLAUER MATTISON & CO., INC. THE ADVEST GROUP, INC.
, 1999
<PAGE>
[FRONT COVER]
[Logo]
[The front cover will have a dark background and the text will be
printed in white]
[INSIDE FRONT COVER]
[Logo]
[A picture of a microphone will appear in the background. In the center
of the page the following four bullets will surround the words "LISTEN, CLICK,
BUY!":
- NetRadio is a leading network broadcaster of original audio
content programming on the Web
- NetRadio broadcasts more than 120 channels of music, news, sports
and entertainment information 24 hours a day, seven days a week
- NetRadio's distinctive music channels keep our listeners on
our Web site for over 16 minutes
- NetRadio's content is segmented by Communities of Similar Interest
(COSIs) targeted to distinct listener demographics
[Underneath the text will be three small boxes containing images of a
microphone, a shopping cart and a mouse.]
[INSIDE SPREAD]
[Logo]
[A two page spread depicting five pages of our Web site.]
www.netradio.com
[Left Page]
NetRadio offers listeners original content programming and a wide variety
of music on more than 120 channels. Our diverse offerings appeal to a wide
range of listener demographics.
NETCOMPANION
<PAGE>
A proprietary navigation and interface tool that appears on a listener's
computer screen and displays song title information, audio and text-based
advertising that link to our channels and other Web sites. Through
NetCompanion, users can stay connected to NetRadio and listen to their
favorite music as they browse the Web, work on other applications or click
through to an advertised Web site.
[Right Page]
CDPOINT [www.cdpoint.com] Our online retail store has an inventory of more
than 250,000 instantly accessible music titles.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary...................................................................................... 4
Risk Factors............................................................................................ 7
Warning Regarding Our Use of Forward-Looking Statements................................................. 17
Use of Proceeds......................................................................................... 18
Dividend Policy......................................................................................... 18
Capitalization.......................................................................................... 18
Dilution................................................................................................ 19
Selected Financial Data................................................................................. 20
Management's Discussion and Analysis of Financial Condition and Results of Operations................... 21
Our Business............................................................................................ 26
Management.............................................................................................. 40
Related Party Transactions.............................................................................. 45
Principal Shareholders.................................................................................. 48
Description of Capital Stock............................................................................ 49
Shares Eligible for Future Sale......................................................................... 50
Underwriting............................................................................................ 52
Legal Matters........................................................................................... 54
Experts................................................................................................. 54
Where You Can Get More Information...................................................................... 54
Financial Statements.................................................................................... F-1
</TABLE>
------------------------
Our executive offices are located at NetRadio Corporation, Riverplace
Exposition Hall, 43 Main Street Southeast, Suite 149, Minneapolis, Minnesota
55414. Our telephone number is (612) 378-2211.
------------------------
NETRADIO.COM-TM- and design, N NET.RADIO NETWORK-Registered Trademark- and
design, NET.RADIO-Registered Trademark-, CDPOINT-TM- and NETCOMPANION-TM- are
trademarks of NetRadio Corporation. All other trademarks and trade names
referenced in this prospectus are the property of their respective owners.
------------------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document. Information on our Web site is not a part of this
prospectus.
------------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE>
PROSPECTUS SUMMARY
BECAUSE THIS IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT MAY
BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING
THE RISK FACTORS AND FINANCIAL STATEMENTS, BEFORE YOU DECIDE WHETHER TO INVEST
IN OUR COMMON STOCK.
NETRADIO CORPORATION
We are a leading broadcaster of originally programmed audio entertainment
over the Internet through our Web site, www.netradio.com. We organize our music
and information content into highly targeted audio channels grouped as
communities of similar interest or "COSIs." We attract customers using audio
content, rather than relying solely upon a text-based site, to extend the time
visitors spend at NetRadio, thereby creating a "sticky" Web site. I/PRO,
Internet Profiles Corporation, an independent consultant that monitors Web site
traffic, has estimated that in June 1999 1,006,070 different users, each of whom
was counted only once, listened to one or more of our 120 music and news audio
channels. I/PRO has also estimated that in June 1999 the average time a visitor
spent listening to any of our audio channels was approximately 21 minutes.
We use audio content to generate revenues from sales of audio merchandise
through our online music store, CDPoint, and from Internet advertising,
including advertisements placed within our audio broadcasts. Our interactive
display, NetCompanion, encourages impulse purchases by providing information
about the music being played, or the products being advertised, and by linking
the listener directly to CDPoint or to our advertisers' Web sites.
OUR MARKET
We believe that broadcast audio is a major step in the continued
transformation of the Internet into a multimedia platform. Broadcast audio over
the Internet combines the passive listening attributes of radio broadcasting
with the interactive aspects of the Internet. According to a study performed in
January 1999 by The Arbitron Company, 27% of Internet users have listened to
Internet radio. As with traditional broadcast radio, our users can listen to our
programming while performing other tasks. Most other Web sites, by contrast,
require active, single-task "clicking" through pages. As with traditional
broadcast radio, we deliver advertising and purchasing opportunities passively
to our listeners. However, our audio broadcasts encourage listeners to react
impulsively to these opportunities.
The Internet improves commerce by substituting automated electronic sales
for traditional retail venues. The Internet can link consumers, while at home or
at work, directly to wholesale distribution channels and provide them with a
broad selection of products, convenience and optimal pricing. Forrester
Research, Inc. estimates that consumer sales over the Internet will account for
6% of the estimated $1.8 trillion of United States consumer retail spending in
2003. Forrester Research also estimates that music sales over the Internet will
grow at an annual rate of 68% from $187 million in 1998 to nearly $2.5 billion
in 2003, and will account for 20% of all estimated online retail spending in the
United States.
OUR CHALLENGE
To succeed, we believe that the Internet broadcaster and online retailer
must build a large loyal audience through content and technology and generate
revenues from advertising and product sales to that audience.
4
<PAGE>
OUR SOLUTION
We use entertaining audio content to attract and retain listeners and to
generate revenues. To do this, we:
- PROGRAM AND BROADCAST AUDIO CONTENT TO ATTRACT AND RETAIN LISTENERS. We
attract and retain listeners by offering a wide variety of entertaining
audio content broadcast over 120 distinct music and news channels. Our
programming has been assembled by a team of award-winning music
professionals.
- BUILD VISITOR TRAFFIC COST-EFFECTIVELY. We believe our targeted content
will encourage repeat visits, and our low cost marketing campaigns will
efficiently increase traffic to our Web site.
- CREATE STRONG COMMUNITIES OF SIMILAR INTEREST TO ESTABLISH BRAND
LOYALTY. We aggregate communities of listeners attracted to distinct
musical genres. These communities promote brand loyalty and create
targeted marketing opportunities.
- PROGRAM CONTENT TO GENERATE COMMERCE AND ADVERTISING REVENUES. We use our
audio content to generate both e-commerce and advertising revenues. The
extended time listeners spend on our Web site exposes them to multiple
advertising opportunities. Our advertising format combines audio
advertisements with links to our advertisers' Web sites, encouraging an
immediate consumer response.
- BUILD STRATEGIC ALLIANCES. We enter into strategic alliances to develop
our content, build our technology, generate and support traffic to our Web
site and fulfill our product distribution needs. We have alliances with
RealNetworks, AT&T @Home and major record labels, including EMI Music, BMG
Entertainment and Universal Music Group, as well as product fulfillment
agreements with Navarre Corporation, our majority shareholder, and Valley
Media, Inc., both leading music distributors.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by NetRadio 4,000,000 shares
Corporation................................
Common stock outstanding after the 10,522,900 shares
offering...................................
Use of proceeds.............................. Working capital and other corporate purposes,
including advertising and capital
expenditures. Please see "Use of Proceeds."
Proposed Nasdaq National Market symbol....... NETR
</TABLE>
This information is as of August 17, 1999; however, it reflects
ValueVision's purchase of 595,000 shares of common stock effective as of the
closing of this offering. You should be aware that we are permitted, and in some
cases obligated, to issue shares of common stock in addition to the common stock
to be outstanding after this offering. If and when we issue these shares, the
percentage of the common stock you own may be diluted. The following is a
summary of additional shares of common stock that we have approved for issuance
upon the exercise of options or warrants:
- 1,994,600 shares reserved for issuance upon the exercise of options under
our stock option plan, consisting of: 1,282,350 options outstanding at a
weighted average exercise price of $3.64 per share; and 712,250 shares
reserved for future issuance under the plan. Please see
"Management--Benefit Plans."
- 200,000 shares reserved for issuance upon the exercise of warrants. Please
see "Underwriting."
5
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes important financial information for NetRadio
and our predecessor, Net Radio Corporation, a Nevada corporation ("Net Radio
Nevada"). You should read this table in conjunction with our financial
statements and their notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
NETRADIO
NET RADIO NEVADA ------------------------------------------------------
------------------------------ PERIOD FROM
PERIOD FROM MARCH 21, SIX MONTHS ENDED
YEAR ENDED JANUARY 1, 1997 1997 THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, THROUGH MARCH DECEMBER 31, DECEMBER 31, ------------------------
1996 20, 1997 1997 1998 1998 1999
------------- --------------- ------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Product sales............................ $ -- $ -- $ -- $ 50 $ -- $ 259
Internet advertising..................... -- -- -- 205 113 147
Miscellaneous............................ 321 168 163 -- -- --
------------- ----- ------------- ------------- ----------- -----------
Total net revenues..................... 321 168 163 255 113 406
Gross profit............................... 321 168 146 190 103 163
Loss from operations....................... (2,261) (737) (1,955) (3,952) (1,256) (4,894)
Net loss................................... (2,254) (754) (1,987) (3,977) (1,269) (5,208)
Loss per share--basic and diluted.......... $ (.67) $ (.22) $ (.88)
Weighted average shares outstanding(1)..... 5,899,167 5,882,500 5,923,902
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
(UNAUDITED)
PRO FORMA
PRO AS
ACTUAL FORMA(2) ADJUSTED(3)
------- ----------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 16 $ 516 $ 44,620
Working capital (deficit)............... (949) (449 ) 43,655
Total assets............................ 4,541 5,041 48,381
Long term obligations, less current
portion............................... 9,880 4,645 4,645
Total shareholders' equity (deficit).... (8,142) (2,407 ) 40,933
</TABLE>
- ------------------------
(1) Please see Note 1 of our financial statements for an explanation of the
determination of the number of shares of our common stock outstanding.
(2) Pro forma to reflect the conversion of $5,234,840 in debt owed to Navarre
into equity and ValueVision's purchase of 595,000 shares of common stock for
$500,000, both occurring at the closing of this offering. Please see
"Related Party Transactions."
(3) Pro forma as adjusted to reflect the sale of 4,000,000 shares of common
stock offered by this prospectus at an assumed initial public offering price
of $12.00 per share and after deducting the estimated offering expenses of
1.3 million, the underwriting discount and reclassifying previously paid
offering expenses to equity. Please see "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
Investing in our common stock is very risky. You should be able to bear a
complete loss of your investment. In addition to the other information in this
prospectus, you should consider the following risks carefully in deciding
whether to invest in shares of our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU MAY EVALUATE US AND WE CANNOT
ASSURE YOU THAT WE WILL ACHIEVE MARKET ACCEPTANCE.
We have a limited operating history on which you may evaluate our business
and prospects. We began broadcasting live audio programming on the Internet in
November 1995 and began selling products over the Internet on a limited basis in
June 1998. We first recognized Internet advertising revenues in April 1998. Our
prospects must be considered in light of the risks, difficulties and
uncertainties frequently encountered by companies in an early stage of
development. This is particularly significant because we operate in a new and
rapidly evolving market.
WE MAY NOT ACHIEVE FUTURE PROFITABILITY DUE TO CONTINUING OPERATING LOSSES.
To date we have not been profitable. We have recorded a net loss for each
year since our inception in 1995. In 1998, we had net revenues of approximately
$255,000 and a net loss of approximately $4.0 million. We had an accumulated
deficit of approximately $11.2 million during the period from March 21, 1997 to
June 30, 1999. At June 30, 1999, we owed approximately $9.7 million to Navarre.
Concurrent with the closing of this offering, $5.2 million of this debt will be
converted into equity of NetRadio without the issuance of additional shares of
capital stock. We have incurred losses in each fiscal quarter since our
inception, and we anticipate that we will continue to incur losses for the
foreseeable future as we increase our operating expenses to expand our business.
IF OUR OPERATING REVENUES CONTINUE TO BE INSUFFICIENT TO SUPPORT OUR BUSINESS WE
MAY NOT BECOME PROFITABLE.
We have historically funded our business by selling capital stock and
borrowing money. We have not achieved sufficient revenues from sales of our
audio merchandise or advertising to meet our expenses in any quarterly or annual
period. We believe that our future profitability and success will depend in
large part on, among other things, our ability to generate sufficient revenues
from sales of compact discs and other audio merchandise and Internet
advertising. There can be no assurance that our revenues will increase or even
continue at their current levels or that we will achieve or maintain
profitability or generate cash from operations in future periods.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY NEGATIVELY AFFECT OUR STOCK
PRICE.
Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside of our control.
These factors include:
- availability of compelling content and costs of acquiring and distributing
it,
- demand for our products,
- demand for advertising on our Web site and on the Internet in general,
- seasonal trends in the traditional retail market and in advertising
placements, including expected declines in the summer months and expected
increases in the fourth quarter,
- amount and timing of capital expenditures and other costs relating to the
expansion of our operations,
- technical difficulties or system downtime,
7
<PAGE>
- new products or services that we, or our competitors, offer, and
- general economic conditions and economic conditions specific to the
Internet or to the retail sales or advertising markets.
As a result of these factors, our operating results for any particular
quarter may not be indicative of future operating results and you should not
rely on them as indications of our future performance. It is also possible that
our operating results in one or more quarters will fail to meet the expectations
of securities market analysts or investors. In such an event, the price of our
common stock could decline.
OUR ADVERTISING REVENUES MAY FLUCTUATE, WHICH MAY NEGATIVELY AFFECT OUR STOCK
PRICE.
Advertising sales in television, radio and print media fluctuate
unpredictably and are typically lower in the first and third calendar quarters
of each year. Advertising expenditures also fluctuate significantly with
economic cycles, which may negatively affect our stock price. A number of
factors may contribute to our ability to generate advertising revenues,
including:
- acceptance and continued growth of the Internet as an advertising medium,
- continued consumer Internet use,
- traffic on our Web site,
- pricing of advertising on other Web sites,
- our ability to generate listener demographic characteristics that are
attractive to advertisers,
- developing and expanding our advertising sales force, and
- establishing and retaining desirable advertising sales agency
relationships.
IF THE INTERNET IS NOT ACCEPTED AS AN ADVERTISING MEDIUM, OUR ADVERTISING
REVENUES MAY DECLINE.
The growth of Internet advertising requires validation of the Internet as an
effective advertising medium. This validation has yet to fully occur. Acceptance
of the Internet among advertisers will also depend on growth in the commercial
use of the Internet. If widespread commercial use of the Internet does not
develop, or if the Internet does not develop as an effective and measurable
medium for advertising, our advertising revenues may decline.
No standards have been widely accepted to measure the effectiveness of
Internet advertising. If these standards do not develop, existing advertisers
may not continue their current levels of Internet advertising and advertisers
who are not currently advertising on the Internet may be reluctant to do so. Our
business could be materially damaged if the market for Internet advertising
fails to develop or develops slower than expected.
WE MAY BE UNABLE TO CONTINUE TO EXPAND OUR TECHNICAL CAPACITY TO MEET AN
EVER-INCREASING USER BASE.
Our success depends in part upon our ability to deploy broadcasting
technology that delivers streaming audio content to an ever-increasing number of
simultaneous users. In the past, we have had periods of time when we were not
able to accommodate all users visiting our Web site. This has resulted in
unanticipated system disruptions, slower response times, impaired quality and
speed of order fulfillment, impaired customer service and lost sales
opportunities. To be successful, we must increase our capacity to deliver
content to larger audiences. We rely upon AT&T to provide bandwidth (i.e.,
transmission capacity) and technical support to meet our traffic needs. If AT&T
substantially increases the fees it charges us or refuses to contract with us
for its services, our business could be materially damaged. In addition, we must
acquire, test and deploy additional network equipment to successfully scale our
network infrastructure to serve mass audiences. There can be no assurance that
we will be successful in doing so. If we fail to scale our broadcasts to large
audiences of simultaneous users, our business could be materially damaged.
8
<PAGE>
INTENSE COMPETITION FOR THE PRODUCTS AND ADVERTISING WE SELL MAY RESULT IN A
DECLINE IN OUR REVENUES.
The Internet commerce market is new, rapidly evolving and intensely
competitive. We expect competition to further intensify as existing technologies
expand and new technologies are introduced. Barriers to entry into the Internet
commerce market are minimal, and competitors can launch new Web sites at a
relatively low cost. In addition, the retail music industry is highly
competitive. We compete with a variety of other companies for advertising and
market share, including:
- streaming media sites such as Broadcast.com, ImagineRadio Launch and
Spinner,
- online music providers, such as audiohighway, E-music, Musicmaker and MP3,
who broadcast music and information,
- online retail competitors, such as Amazon.com, CDNow, K-Tel and GetMusic,
who market audio merchandise, software, and entertainment-related
products,
- traditional radio broadcasters, and
- traditional retail competitors, including large specialty music stores
with significant brand awareness, sales volume and customer bases, such as
MusicLand, Tower Records, Barnes & Noble and Best Buy.
We believe that the principal competitive factors in our markets are brand
recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of music, site
content and reliability and speed of product fulfillment. Many of our
competitors have significantly longer operating histories, larger customer
bases, greater brand recognition and greater financial, marketing and other
resources. In addition, online retailers may be acquired by, receive investments
from or enter into other commercial relationships with larger, more
well-established and well-financed companies as use of the Internet and other
online services increases. For example, Yahoo! recently acquired Broadcast.com,
America Online recently acquired Spinner and Viacom acquired Imagine Radio.
IF WE ARE UNABLE TO ADAPT TO RAPID TECHNOLOGICAL CHANGE, OUR BUSINESS COULD BE
MATERIALLY DAMAGED.
The market for Internet audio is characterized by rapid technological
developments, frequent new product introductions, evolving industry standards,
and changes in transmission and content delivery mechanisms. It is possible that
an alternative technology will emerge that offers superior broadcasting
technology over the Internet. The introduction of new technology, products,
services or standards may prove to be too difficult, too costly or impossible to
integrate into our existing or any future products and services. In the event
that our technology is not successfully deployed in a timely manner or such an
alternative technology emerges, we would likely be required to expend
significant resources to deploy such alternative technology. This could
materially damage our business during the period in which we attempted such
deployment. We must also continue to add hardware and enhance software to
accommodate any increased content and use of our Web site. If we are unable to
increase the data storage and processing capacity of our systems at least as
fast as the growth in demand, our Web site may fail to operate at an optimal
level for unknown periods of time. Any difficulty keeping pace with
technological advancements could hurt the growth of our business, retention of
our customers and may materially adversely affect our business, financial
condition and results of operations.
RAPID TECHNOLOGICAL CHANGES IN MUSIC DISTRIBUTION METHODS IN OUR INDUSTRY MAY
MATERIALLY DAMAGE OUR BUSINESS.
Sales and distribution of music digitally could radically alter the current
music distribution methods used by artists, publishers, distributors, retailers
and media companies. One recent technological development is MP3, a standard for
digital music encoding, which generally permits a user to store and replay,
either on a personal computer or a specially-designed MP3 device, music selected
by the user as opposed to an Internet audio broadcaster. For example, a portable
device called the Rio is now
9
<PAGE>
available to consumers and can be used to play MP3-downloaded music files. This
technology permits the posting of music on Web sites either legally, by artists
or record labels on their own Web sites, or illegally on sites that have pirated
intellectual property owned by the major and independent labels. The ability to
immediately download music eliminates product shipping and handling. As a
result, acceptance of this technology could dramatically change the structure
and competitive dynamics of the market for sales of pre-recorded music over the
Internet. There can be no assurance that we will be able to respond quickly,
cost effectively and sufficiently to this or other technological developments,
and failing to effectively respond to technological developments could
materially damage our business.
Five major record companies have recently begun conducting market trials to
test selling music in digital form transmitted over the Internet. The
transmissions use IBM software and will allow approximately 1,000 cable
subscribers to download music from a library of 1,000 album titles and several
hundred song titles provided by the major record labels. This market trial is
viewed by many as the first step taken by the major record companies to consider
the sale of digital music online. Microsoft has developed a compression software
called MS-Audio, AT&T has developed a proprietary format called a2b, and Liquid
Audio has developed a third format, all of which are intended to compete with
MP3 and other formats. It is uncertain which distribution format will ultimately
achieve widespread market acceptance.
A task force of record companies, software programmers and consumer
electronics makers, called the Secure Digital Music Initiative, or SDMI, is
attempting to develop security and delivery standards by which songs available
in digital format can be disseminated without infringing upon third party
copyright or other intellectual property rights. In May 1999, Matshusita
Electric Industrial Co. Ltd., AT&T, BMG Entertainment and Universal Music Group
announced an alliance to develop a platform for digital delivery within the
network of the SDMI. Also in May 1999, RealNetworks, Inc. announced the
introduction of its RealJukebox, which permits recording and playback of music
CDs, digital downloads through a user's PC, and customization of user playlists.
In June 1999, the SDMI announced completion and adoption of specifications for
portable devices for digital music. If a proprietary music delivery format or
playback device receives widespread industry and consumer acceptance, we will be
required to license additional technology and information from third parties.
There can be no assurance that this third-party technology and information will
be available to us on commercially reasonable terms, or at all.
In order to ensure compliance with existing copyright laws, we provide music
content over the Internet that is licensed from labels in a traditional manner.
The acceptance and integration of any of these new methods of music
distribution, without sufficient protection of intellectual property or industry
uniformity, could materially adversely affect our business, financial condition
and results of operations.
OUR SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT WHICH COULD CAUSE OUR WEB SITE TO BE
UNAVAILABLE.
We may realize exposure and risk if the systems on which we are dependent to
conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, computers, software,
telephone systems and other equipment used internally. If our present efforts to
address Year 2000 compliance issues are not successful, or if distributors,
suppliers and other third parties with whom we conduct business do not
successfully address these issues, our business could be damaged.
In the event that our Web site is not Year 2000 compliant, we would not be
able to broadcast our programming and advertising or sell our products to our
customers. In the event that the technical support provided for our Web site is
not Year 2000 compliant, portions of our Web site may become unavailable. Please
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance" for a further discussion of Year 2000 risks.
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WE MAY BE UNABLE TO CONTINUE TO DEVELOP OUR BRAND, WHICH COULD HARM FUTURE
GROWTH OF OUR BUSINESS.
We believe that our growth has been largely attributable to word of mouth.
Despite this historical organic growth, we believe that continuing to strengthen
our brand is critical to achieving widespread acceptance of NetRadio,
particularly in light of the competitive nature of our industry. Promoting and
positioning our brand will depend largely on the success of our marketing
efforts. Therefore, we expect to increase our marketing budget to create and
maintain brand loyalty among our listeners and other visitors to our Web site.
There can be no assurance that our brand promotion activities will yield
increased revenues or that any such revenues would offset the expenses that we
may incur to build our brand.
IF THE COST OF STREAMING INTERNET AUDIO BECOMES PROHIBITIVELY EXPENSIVE, OUR
BUSINESS COULD BE MATERIALLY DAMAGED.
Our success also depends upon our reliance on streaming media technology
provided to us by RealNetworks. In order to provide our advertising and
products, we depend upon our listeners' ability to download or have installed
RealNetworks' RealPlayer software. If RealNetworks substantially increases the
license fees it charges us for the use of its products, refuses to license its
products to us or requires listeners to pay for its software, our business could
be materially damaged.
CAPACITY CONSTRAINTS ASSOCIATED WITH THE GROWTH OF INTERNET USAGE COULD CAUSE
OUR ADVERTISING AND PRODUCT SALES REVENUES TO DECLINE.
If the Internet continues to experience an increase in the number of users
and frequency of use, there can be no assurance that the Internet as a whole, or
our infrastructure, will be able to deliver high-quality musical content.
Internet experiences are affected by, among other factors, access speed.
Insufficient availability of telecommunications services to support the Internet
could result in unacceptable response times and could adversely affect Internet
use generally and traffic to our Web site in particular. Our revenues depend
upon the number of listeners who access our audio broadcasts and buy products
offered on our Web site, as well as the amount of advertising spots that we can
sell. Any system interruptions that would result in our Web site being
inaccessible would reduce the volume of goods sold, advertising revenue and the
attractiveness of our products and services. We have experienced periodic system
interruptions, which may continue to occur from time to time. If Internet usage
does not support the growth that may occur, our business could be materially
damaged.
IF CORPORATE INTRANETS DO NOT ACCEPT OUR PROGRAMMING, THE NUMBER OF LISTENERS TO
OUR AUDIO CONTENT MAY DECLINE.
A significant portion of our audience is in the workplace. Because of
bandwidth constraints on corporate intranets or fears that computer networks and
other computer systems' security could be compromised, some information systems
managers may block reception of streaming media. Widespread adoption of
streaming media technology depends upon overcoming these obstacles, improving
audio and video quality and educating users in the use of streaming media
technology. If streaming media technology fails to achieve broad commercial
acceptance or acceptance is delayed, our business could be materially damaged.
OUR INTERNALLY DEVELOPED AND COMMERCIALLY AVAILABLE SOFTWARE MAY NOT ADEQUATELY
SUPPORT OUR GROWTH.
We use internally developed and commercially available software for our Web
site, audio channels, search engines and substantially all aspects of
transaction processing, including order management, cash and credit processing,
purchasing, inventory verification and shipping. If we are unable to modify our
software as necessary to accommodate increased traffic to our Web site or
increased volume of transactions, our business could be materially damaged.
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BECAUSE WE HAVE MOST OF OUR OPERATIONS AT A SINGLE LOCATION AND WE HAVE LIMITED
REDUNDANT SYSTEMS, OUR OPERATIONS ARE VULNERABLE TO INTERRUPTIONS DUE TO
UNFORESEEN EVENTS.
Our success depends largely on the efficient and uninterrupted operation of
our computer and communications hardware systems. Our computer and
communications hardware and software are located at a single leased facility in
Minneapolis, Minnesota. Our systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, tornadoes and similar events. We presently have limited redundant
systems and no formal disaster recovery plan. We do not carry sufficient
business interruption insurance to compensate us for losses that may occur. Our
servers are also vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions which could lead to interruptions, delays or
loss of data. The occurrence of any of these events could prevent us from
broadcasting our audio programming, selling advertising or accepting and
fulfilling customer orders.
IF WE ARE UNABLE TO INTEGRATE NEW BUSINESSES, OUR BUSINESS MAY NOT GROW.
We may expand our operations by developing new Web sites, promoting new or
complementary products or sales formats, expanding the breadth of our products
and services, or expanding our market presence through relationships with third
parties. In addition, we may acquire new or complementary businesses, products
or technologies, although we have no present commitments for such activities.
There can be no assurance that we will be able to expand operations
cost-effectively, or that any of our efforts will increase market acceptance for
our products and services. Furthermore, any new business, Web site, or channel
that we launch that is not favorably received by consumers could damage our
reputation or brand. Any expansion would likely require significant additional
expenses and other operational resources. If the market does not react favorably
to our efforts, or if we are unable to generate sufficient revenues from our
expanded services or products to offset our costs, our business could be
materially damaged.
BECAUSE OUR INTERCOMPANY AGREEMENTS WERE NOT NEGOTIATED AT ARM'S LENGTH, WE MAY
NOT HAVE OBTAINED TERMS AS FAVORABLE TO US AS THOSE WE COULD HAVE OBTAINED
FROM THIRD PARTIES.
We have entered into intercompany agreements with Navarre that are material
to the conduct of our business. Because we are a majority-owned subsidiary of
Navarre, none of these agreements resulted from arm's-length negotiations and,
therefore, there is no assurance that the terms and conditions of these
agreements are as favorable to us as those that we could have obtained from
unaffiliated third parties. Please see "Related Party Transactions." In
addition, we have indemnification obligations with respect to Navarre in
connection with our agreements. Please see "Related Party
Transactions--Separation Agreement."
IF WE ARE UNABLE TO EXPAND INTO INTERNATIONAL MARKETS, OUR BUSINESS MAY NOT
GROW.
Expansion into international markets will require significant management
attention and resources. There can be no assurance that we will be successful in
expanding into international markets to generate revenues from foreign
operations. In addition, there are certain risks inherent in doing business in
international markets, including, among other things, regulatory requirements,
legal uncertainty regarding liability, tariffs and other trade barriers, longer
payment cycles, differing accounting practices, problems in collecting accounts
receivable, political instability and potentially adverse tax consequences. To
the extent that we expand international operations and additional portions of
our international revenues are denominated in foreign currencies, we could
become subject to increased risks relating to exchange rate fluctuations. One or
more of these factors could materially damage our business.
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IF WE ARE UNABLE TO PREVENT THIRD PARTIES FROM ACQUIRING WEB ADDRESSES SIMILAR
TO OURS, OUR BUSINESS MAY BE MATERIALLY DAMAGED.
We currently hold various Internet domain names relating to our products and
services, including the "netradio.net" and "netradio.com" domain names. The
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. In the past, third parties
have acquired domain names that are similar to ours, and we have had to expend
resources to protect our proprietary rights in this area. There can be no
assurance that in the future we will be able to prevent other third parties from
acquiring domain names that are identical to, similar to, infringe upon or
otherwise decrease the value of our trademarks, domain names and other
proprietary rights. If we are unable to protect our domain names from third
parties, our business could be materially damaged.
IF WE ARE UNABLE TO PROTECT OUR TRADEMARKS AND PROPRIETARY RIGHTS, OUR
REPUTATION IN THE MARKETPLACE MAY BE MATERIALLY DAMAGED.
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as important to our success. We rely
upon trademark and copyright law, trade secret protection, confidentiality and
license agreements with employees, customers, partners and others to protect our
proprietary rights. We have registered certain of our trademarks and service
marks with applicable governmental authorities. Effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our products and services are made available and we have not
sought protection for our intellectual property in every country where our
broadcasts may be heard. In the future, we may license certain of our
proprietary rights, such as trademarks or copyrighted material, to third
parties. While we will try to ensure that the quality of our brand is maintained
by such licensees, it is possible that such licensees could take actions that
might materially adversely affect the value of our proprietary rights or
reputation. There can be no assurance that the steps we take to protect our
proprietary rights will be adequate or that third parties will not infringe or
otherwise violate our copyrights, trademarks, trade dress or similar proprietary
rights.
WE MAY INFRINGE UPON THE PROPRIETARY RIGHTS OF OTHERS AND ANY RELATED
LITIGATION, REGARDLESS OF ITS MERIT, COULD MATERIALLY DAMAGE OUR BUSINESS.
We believe that our broadcasts of prerecorded music over the Internet are
permitted under the copyright laws of the United States, as long as we obtain
appropriate permission and pay appropriate royalties. We have entered into
licensing agreements with each of the major performing rights organizations,
including the American Society of Composers, Authors and Publishers, Broadcast
Music, Inc. and the Society of European Stage, Authors and Composers, Inc. We
believe that these agreements grant us licenses to broadcast music and other
copyrighted materials over the Internet, and obligate us to pay royalties in
connection with such broadcasts. The royalties that we must pay, or the terms
and conditions of the license agreements, may change, and such changes may
materially damage our business. There is also a risk that some music may not be
available for broadcast over the Internet. In addition, our license agreements
with performing rights organizations may not comply with the copyright laws of
jurisdictions outside the United States, and our broadcasts may violate the
copyright laws of jurisdictions where our Internet broadcasts may be heard.
The Digital Performance Right in Sound Recordings Act of 1995 provides that
the owners of sound recordings have exclusive performance rights in their
recordings, and, if applicable to us, will require us to pay additional
licensing fees for our broadcasts. We are a member of the Digital Media
Association, an industry trade association. The Digital Media Association is
currently in discussions with the Recording Industry Association of America to
determine the framework and fee structure for digital performance rights fees.
These fees are expected to be imposed retroactively to October 1, 1998. The
final determination of license fee structure could adversely affect our
financial results.
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We have been, and may continue to be, subject to claims and legal
proceedings, from time to time, in the ordinary course of our business. These
claims could include claims against us for alleged infringement of copyrights,
trademarks and other proprietary rights of third parties. These claims, even if
not meritorious, could result in the expenditure of significant financial and
managerial resources, which could materially damage our business.
IF WE ARE UNABLE TO MAINTAIN OUR STRATEGIC ALLIANCES WITH VALLEY MEDIA, NAVARRE
AND REALNETWORKS OUR BUSINESS COULD BE MATERIALLY DAMAGED.
Our success depends in part upon our strategic alliances. We purchase all of
our music products from two vendors, Valley Media and Navarre. For the fiscal
year ended December 31, 1998, and for the six months ended June 30, 1999, we
purchased approximately 95% of our music products from Valley Media, and the
remainder from Navarre. Our agreement with Navarre expires in December 2003 and
our agreement with Valley Media expires on March 1, 2000. We rely upon these two
vendors for rapid product fulfillment because we carry no inventory and have no
order fulfillment operations of our own. We have no contracts that guarantee the
availability of merchandise, the continuation of particular payment terms, or
the extension of credit. There can be no assurance that our current vendors will
be able to sell merchandise to us on terms as favorable as the current terms, or
that we will be able to establish new or extend current vendor relationships to
ensure order fulfillment in a timely and efficient manner, and on acceptable
commercial terms. We also rely upon relationships with Web site operators,
computer manufacturers, software developers and Internet service providers, or
ISPs, to deliver traffic to our Web site and to promote our brand. For example,
a significant portion of our listening traffic accesses NetRadio through
pre-sets on RealNetworks' audio player. There can be no assurance that our
relationships with ISPs or other providers will be maintained or that traffic
will continue to come from these entities. If any of these alliances were
terminated prematurely, or not extended, and we were not able to obtain the
products or services provided by that strategic partner, our business could be
materially damaged.
IF WE DO NOT CONTINUE TO DELIVER COMPELLING AUDIO CONTENT, TRAFFIC TO OUR WEB
SITE WILL DECREASE.
Our success depends in large part upon our ability to deliver compelling
audio content over the Internet. We do not create our own musical content.
Rather, we rely upon record labels, music publishers, performers and artists for
entertaining content. Our ability to maintain existing relationships with
content providers and build new relationships with additional content providers
is critical to the success of our business. Many of our agreements with third
party content providers are for limited terms or are not memorialized in a
formal written contract, and content providers may choose not to renew, or may
terminate, such agreements. Our inability to secure licenses from content
providers or performing rights societies, or the termination of a significant
number of content provider agreements, would decrease the availability of
content that we can offer our listeners. This may result in decreased traffic on
our Web site and decreased advertising and sales revenues, which could
materially damage our business.
OUR SUCCESS DEPENDS ON KEY PERSONNEL, MANY OF WHOM HAVE ONLY RECENTLY BEEN
HIRED.
We have rapidly and significantly expanded our operations and expect to
continue expanding to address potential market opportunities. This rapid growth
has placed, and is expected to continue to place, a significant strain on our
management. From June 30, 1998 to August 1, 1999, we expanded from 22 to 51
employees. Our new employees include a number of key employees who have not yet
been fully integrated into our management team, and we expect to add additional
personnel in the future. We also will be required to expand our accounting
staff. Historically, we have been dependent upon Navarre for various managerial,
warehousing, distribution and working capital needs. Please see "Related Party
Transactions." There can be no assurance that controls will be adequate to
support our future operations or that management will be able to hire and retain
required personnel. If we are
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unable to manage growth effectively, our business could be materially damaged.
Please see "Our Business--Employees" and "Management."
WE MAY BE VULNERABLE TO ONLINE COMMERCE SECURITY RISKS, WHICH COULD RESULT IN A
DECLINE IN OUR PRODUCT SALES REVENUES.
A significant barrier to online commerce and communications is the secure
transmission of confidential information, such as customer credit card
information. We rely upon encryption and authentication technology licensed from
third parties to transmit and protect confidential information. Advances in
computer capabilities, new discoveries in the field of cryptography, or other
developments may result in a compromise or breach of the systems that we use to
protect customer transaction data. If any compromise were to occur, or if our
customers, or Internet users in general believe that data transmissions over the
Internet are not secure, we would have to expend significant capital and other
resources to protect against security breaches or to alleviate concerns or
problems caused by security breaches. Concerns over the security and privacy of
transactions conducted on the Internet may inhibit the continued growth of the
Internet and accompanying growth of Internet commercial transactions. In
addition, security breaches in our storage, or our third party contractors'
storage of customer proprietary information could damage our reputation and
expose us to loss or possible liability. Our security measures may not prevent
security breaches, and if they occur, our business could be materially damaged.
RISKS RELATED TO THIS OFFERING
OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED, SO WE CANNOT PREDICT THE EXTENT
TO WHICH A TRADING MARKET WILL DEVELOP.
Prior to this offering, there has been no public market for our common
stock, and there can be no assurance that an active trading market will develop
or be sustained following this offering. The initial public offering price for
the shares was determined through negotiations between us and the
representatives of the underwriters and may not be indicative of the market
price of our common stock after this offering. Investors may not be able to
resell their shares at or above the initial public offering price. Please see
"Underwriting."
OUR STOCK PRICE MAY BE MATERIALLY AFFECTED BY MARKET VOLATILITY.
The stock market has experienced significant price and volume fluctuations,
and the market prices of securities of technology companies, particularly
Internet-related companies, have been highly volatile. These broad market
fluctuations, as well as general economic, market and political conditions, may
adversely affect the market price of our common stock. In the past, following
periods of volatility in the market price of a company's securities, securities
class action claims have often been brought against that company. This
litigation could result in substantial costs and a diversion of management's
attention and resources.
IF OUR CONTROLLING SHAREHOLDER DOES NOT CONTINUE TO FUND OUR CAPITAL NEEDS, WE
MAY HAVE DIFFICULTY SECURING ADDITIONAL FINANCING, IF REQUIRED.
We operate as a majority-owned subsidiary of Navarre. Prior to this
offering, Navarre has met our financial needs for working capital and general
corporate operations. Immediately following this offering, however, Navarre will
no longer be obligated to provide funds to finance our operations. We intend to
continue to invest in capital equipment, expansion and research and development.
We believe that the net proceeds from the sale of common stock in this offering,
together with existing cash balances and cash flow from operations, will be
sufficient to meet our liquidity and capital requirements for at least the next
18 months. We may, however, seek additional equity or debt financing to fund
further expansion of our broadcasting capacity or to fund other projects. The
timing
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and amount of our capital requirements cannot be precisely determined at this
time and will depend upon a number of factors, including demand for our products
and services, product mix, changes in the conditions of the Internet or music
industries and other competitive factors. There can be no assurance that this
additional financing will be available to us when needed or, if available, that
it will be on satisfactory terms or will be completed without dilution to our
shareholders.
ANTI-TAKEOVER PROVISIONS, OUR RIGHT TO ISSUE PREFERRED STOCK, AND OUR STAGGERED
BOARD COULD MAKE A THIRD-PARTY ACQUISITION OF US DIFFICULT.
We are subject to Chapters 302A.671 and 302A.673 of the Minnesota Business
Corporation Act, which may have the effect of limiting third parties from
acquiring significant amounts of our common stock without our approval. These
laws, among others, may have the effect of delaying, deferring or preventing a
third party from acquiring us or may serve as a barrier to shareholders seeking
to amend our articles of incorporation or bylaws. Our articles of incorporation
also grant us the right to issue preferred stock which could allow us to delay
or block a third party from acquiring us. Finally, upon the closing of this
offering, our bylaws will divide our board of directors into three classes to
serve staggered three-year terms. This could make it difficult for a third party
to effect a change in control of us.
MANAGEMENT'S INTEREST IN CONSUMMATING THIS OFFERING MAY DIFFER FROM THE
INTERESTS OF INVESTORS.
Some of our officers and employees will realize benefits from this offering,
including pay raises, additional stock options and bonuses. Please see
"Management--Employment Agreements and Change of Control Considerations." There
is a potential conflict between the immediate economic benefits accruing to
officers and employees upon the closing of this offering and the interests of
investors who may invest with the goal of long-term capital appreciation.
AFTER THIS OFFERING, NAVARRE AND VALUEVISION, ACTING TOGETHER, WILL HAVE THE
ABILITY TO CONTROL THE VOTE ON ALL MATTERS SUBMITTED TO OUR SHAREHOLDERS.
Navarre and ValueVision will beneficially own approximately 62% of our
outstanding common stock after this offering, 59% if the over-allotment option
granted by us is exercised in full. As a result, Navarre and ValueVision
together will have the ability to control the vote on all matters submitted to
shareholders for approval, including, but not limited to, the election of all
directors, and any merger, consolidation or sale of all or substantially all of
our assets, and to control our management and affairs. This concentration of
ownership may have the effect of delaying, deferring or preventing a third party
from acquiring us.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT SHAREHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE.
After this offering, the 4,000,000 shares of our common stock sold in this
offering will be freely tradeable. Beginning 180 days after the date of this
offering, approximately 6,512,900 additional shares will become eligible for
sale upon the expiration of lock-up agreements between our securityholders and
the underwriters. Representatives of the underwriters may from time to time, in
their sole discretion, release any of the securities subject to the lock-up
agreements. Of the shares that will first become eligible for sale in the public
market 180 days after this offering, approximately 5,912,500 shares will be
subject to volume and other resale restrictions. With respect to our stock
option plan, outstanding options to purchase 563,217 shares will be vested on
March 1, 2000. We may file a registration statement to register all of our
common stock under our stock option plan. After the registration statement
becomes effective, shares issued upon exercise of stock options will be eligible
for resale in the public market. The supply of substantial additional amounts of
common stock in the public market could lower the price of our common stock.
Please see "Description of Capital Stock" and "Shares Eligible for Future Sale."
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RISKS RELATED TO GOVERNMENT REGULATION AND LEGAL UNCERTAINTY
FUTURE REGULATION OF THE INTERNET COULD EXPOSE US TO SIGNIFICANT LIABILITY.
There currently are few laws and regulations directly applicable to the
Internet. However, new laws and regulations may be adopted in the United States
and elsewhere covering issues such as music licensing, broadcast license fees,
copyrights, privacy, pricing, sales taxes and characteristics and quality of
Internet services. Restrictive laws or regulations could slow Internet growth or
expose us to significant liabilities associated with content available on our
Web site. The application of existing laws and regulations governing Internet
issues, such as property ownership, libel and personal privacy, is subject to
substantial uncertainty. New laws and regulations, including laws and
regulations governing issues such as property ownership, content, taxation and
defamation, may expose us to significant liabilities, significantly slow
Internet growth or otherwise materially damage our business.
THE REGULATION OF INDECENT CONTENT OVER THE INTERNET COULD EXPOSE US TO
SIGNIFICANT LIABILITY.
The Communications Decency Act of 1996 proposed to impose criminal penalties
on anyone distributing "indecent" material to minors over the Internet. Although
this provision of this statute was held to be unconstitutional by the United
States Supreme Court, there can be no assurance that similar laws will not be
proposed and adopted. Although we believe that we do not currently distribute
the types of materials that this statute may have deemed illegal, the nature of
such similar legislation and the manner in which it may be interpreted and
enforced cannot be fully determined, and legislation or state or local laws
similar to this law could subject us to potential liability. This in turn could
materially damage our business.
IF WE ARE REQUIRED TO COLLECT SALES TAXES, OUR BUSINESS COULD BE MATERIALLY
DAMAGED.
We collect sales and other taxes only in the states and countries where we
believe we are required by law to do so. One or more states or countries have
sought to impose sales or other tax obligations on companies that engage in
online commerce within their jurisdictions. It is possible that the current tax
moratorium limiting the ability of state and local governments to impose taxes
on Internet-based transactions could fail to be renewed prior to October 2001.
Failure to renew this legislation would allow states to impose new taxes on
Internet-based commerce. A successful assertion by one or more states or
countries that we should collect sales or other taxes on products and services,
or remit payment of sales or other taxes for prior periods, could materially
damage our business.
WARNING REGARDING OUR USE OF FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements which relate to possible
future events, our future performance and future operations. In some cases, you
can identify forward-looking statements by the use of words such as "may,"
"will," "should," "anticipates," "believes," "expects," "plans," "future,"
"intends," "could," "estimate," "predict," "potential," "continue," or the
negative of these terms or other similar expressions. These forward-looking
statements are only our predictions. Our actual results could and likely will
differ materially from these forward-looking statements for many reasons,
including risks described above and appearing elsewhere in this prospectus. We
cannot guarantee future results, levels of activity, performance or
achievements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform them to actual results
or to changes in our expectations.
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USE OF PROCEEDS
We estimate that the net proceeds from this offering will be $43,340,000, or
$50,036,000 if the over-allotment option is exercised in full, based upon an
estimated initial public offering price of $12.00, and after deducting the
underwriting discount and estimated offering expenses.
We expect to use the net proceeds for working capital and other corporate
purposes, including advertising, capital expenditures and repayment of interest
on outstanding debt. We have not yet determined the amount of net proceeds to be
used specifically for each of these purposes. Accordingly, we will retain broad
discretion in the allocation of proceeds. We may also use a portion of the net
proceeds for strategic alliances or to acquire or invest in complementary
businesses, technologies or product lines. We have no current plans, agreements
or commitments with respect to any alliances or acquisitions of this kind, and
we are not currently engaged in negotiations related to any alliances or
acquisitions. Until we determine the allocation of these proceeds, we intend to
invest the net proceeds of this offering in short-term, interest-bearing,
investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently anticipate that we will retain all future earnings, if any, to fund
the continued development and growth of our business, and we do not anticipate
paying cash dividends in the foreseeable future.
CAPITALIZATION
The following table sets forth our capitalization at June 30, 1999 on:
- an actual basis;
- a pro forma basis to reflect the conversion of $5,234,840 in debt owed to
Navarre into equity and ValueVision's purchase of 595,000 shares of common
stock for $500,000, both occuring at the closing of this offering; and
- a pro forma as adjusted basis to reflect the receipt of the net proceeds
from this offering at an estimated initial public offering price of $12.00
and after deducting the underwriting discount and estimated offering
expenses.
The outstanding share information excludes 1,209,850 shares of common stock
reserved for issuance upon exercise of options outstanding on June 30, 1999,
with a weighted average exercise price of $3.14 per share, and 784,750 shares of
common stock reserved for future grants under our stock option plan as of June
30, 1999. After June 30, 1999, we granted options to purchase an additional
78,000 shares of common stock at an exercise price equal to the initial public
offering price.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long term debt................................................................ $ 9,748 $ 4,513 $ 4,513
Capital lease obligations, less current portion............................... 132 132 132
Shareholders' equity:
Common stock, no par value; 20,000,000 shares authorized; 5,927,900 shares
issued and outstanding, actual; 6,522,900 shares issued and outstanding,
pro forma; 10,522,900 shares issued and outstanding, pro forma as
adjusted.................................................................. 3,030 8,765 52,105
Accumulated deficit........................................................... (11,172) (11,172) (11,172)
--------- ----------- -----------
Total shareholders' equity (deficit).......................................... (8,142) (2,407) 40,933
--------- ----------- -----------
Total capitalization.......................................................... $ 1,738 $ 2,238 $ 45,578
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
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DILUTION
Our net tangible book value as of June 30, 1999, after giving effect to the
conversion of $5,234,840 in debt owed to Navarre into equity and ValueVision's
purchase of 595,000 shares of common stock for $500,000, both occurring at the
closing of this offering, was $(2,723,188) or $(.42) per share of common stock.
Net tangible book value per share represents the amount of our total tangible
assets, reduced by the amount of our total liabilities, divided by the number of
shares of common stock outstanding. After giving effect to the issuance and sale
of the 4,000,000 shares of common stock in this offering (after deducting the
underwriting discount and estimated offering expenses), the pro forma as
adjusted net tangible book value as of June 30, 1999 would have been $40,616,812
or $3.86 per share. This represents an immediate increase in net tangible book
value of $4.28 per share to existing shareholders and an immediate dilution of
$8.14 per share to new investors purchasing shares in this offering. The
following table illustrates the per share dilution to new investors:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Assumed initial public offering price................... $ 12.00
Pro forma net tangible book value per share as of June
30, 1999............................................ $ (.42)
Increase per share attributable to new investors...... $ 4.28
---------
Pro forma as adjusted net tangible book value per share
after this offering................................... $ 3.86
---------
Dilution per share to new investors..................... $ 8.14
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis after giving effect to
this offering, as of June 30, 1999, the differences between the existing
shareholders and new investors with respect to the number of shares purchased,
the total cash consideration paid and the average price paid per share. This
table and discussion assume no exercise of any stock options outstanding as of
June 30, 1999.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)......................... 6,522,500 62% $ 6,816,640 12% $ 1.05
New investors(2)................................. 4,000,000 38% $ 48,000,000 88% $ 12.00
------------ --- ------------- ---
Total............................................ 10,522,900 100% $ 54,816,640 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
- ------------------------
(1) Reflects the conversion of $5,234,840 in debt owed to Navarre at December
31, 1998 into equity, ValueVision's purchase of 882,500 shares for
$1,000,000 in cash in March 1997, ValueVision's purchase of 595,000 shares
of common stock for $500,000 at the closing of this offering, the issuance
of 40,000 shares of common stock for $65,600 in September 1998, and the
issuance of 5,400 shares for $16,200 in May 1999 pursuant to the exercise of
options held by a terminated employee.
(2) If the over-allotment option is exercised in full, the number of shares of
common stock held by new investors will increase to 4,600,000 shares, or 41%
of the total shares of common stock outstanding after this offering.
19
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our financial statements and their notes, and the other financial
information included elsewhere in this prospectus. The statement of operations
data for the period ended December 31, 1995, the year ended December 31, 1996,
the periods ended March 20, 1997 and December 31, 1997, and the year ended
December 31, 1998, and the balance sheet data at December 31, 1995, 1996, 1997
and 1998 are derived from our audited financial statements. The statement of
operations data for the six months ended June 30, 1998 and 1999 and the balance
sheet data at June 30, 1999 have been derived from unaudited interim financial
statements. The unaudited interim financial statements reflect all adjustments,
consisting only of normal recurring adjustments, which, in the opinion of our
management, are necessary for a fair presentation of the results for the interim
periods presented. Results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the full year.
<TABLE>
<CAPTION>
NETRADIO
NET RADIO NEVADA -----------------
-------------------------------------------------------------
PERIOD FROM INCEPTION YEAR ENDED PERIOD FROM JANUARY PERIOD FROM MARCH
(NOVEMBER 1, 1995) TO DECEMBER 31, 1, 1997 THROUGH 21, 1997 THROUGH
DECEMBER 31, 1995 1996 MARCH 20, 1997 DECEMBER 31, 1997
----------------------- --------------- ------------------- -----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Product sales........................ $ -- $ -- $ -- $ --
Internet advertising................. -- -- -- --
Miscellaneous........................ 22 321 168 163
----- ------- ------ -------
Total net revenues................. 22 321 168 163
Cost of revenues....................... -- -- -- 17
----- ------- ------ -------
Gross profit........................... 22 321 168 146
Operating expenses:
Operations and technical support..... -- -- -- 672
Sales and marketing.................. 12 427 53 161
General and administrative........... 82 2,154 852 1,268
----- ------- ------ -------
Total operating expenses........... 94 2,581 905 2,101
----- ------- ------ -------
Loss from operations................... (72) (2,260) (737) (1,955)
Net loss............................... $ (74) $ (2,254) $ (754) $ (1,987)
----- ------- ------ -------
----- ------- ------ -------
Loss per share--basic and diluted......
Weighted average shares
outstanding(1).......................
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------
1998 1998 1999
--------------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Product sales........................ $ 50 $ -- $ 259
Internet advertising................. 205 113 147
Miscellaneous........................ -- -- --
------- ----------- -----------
Total net revenues................. 255 113 406
Cost of revenues....................... 65 10 243
------- ----------- -----------
Gross profit........................... 190 103 163
Operating expenses:
Operations and technical support..... 686 606 1,996
Sales and marketing.................. 670 158 785
General and administrative........... 2,786 595 2,276
------- ----------- -----------
Total operating expenses........... 4,142 1,359 5,057
------- ----------- -----------
Loss from operations................... (3,952) (1,256) (4,894)
Net loss............................... $ (3,977) $ (1,269) $ (5,208)
------- ----------- -----------
------- ----------- -----------
Loss per share--basic and diluted...... $(.67) $(.22 ) $(.88 )
Weighted average shares
outstanding(1)....................... 5,899,167 5,882,500 5,923,902
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------
(UNAUDITED)
DECEMBER 31, -------------
------------------------------------------ PRO FORMA
1995 1996 1997 1998 ACTUAL (2)
--------- --------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 66 $ 91 $ 4 $ 51 $ 16 $ 516
Working capital (deficit).................................. 57 (828) (930) (176) (949) (449)
Total assets............................................... 206 223 2,395 2,740 4,541 5,041
Long term obligations, less current portion................ 111 486 1,389 5,363 9,880 4,645
Total shareholders' equity (deficit)....................... 37 (537) 13 (3,830) (8,142) (2,407)
<CAPTION>
PRO FORMA
AS ADJUSTED
(3)
-----------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 44,620
Working capital (deficit).................................. 43,655
Total assets............................................... 48,381
Long term obligations, less current portion................ 4,645
Total shareholders' equity (deficit)....................... 40,933
</TABLE>
- ----------------------------------
(1) Please see Note 1 of Notes to our Financial Statements for an explanation of
the determination of the number of shares outstanding.
(2) Pro forma to reflect the conversion of $5,234,840 in debt owed to Navarre
into equity, and ValueVision's purchase of 595,000 shares of common stock
for $500,000, both occurring at the closing of this offering. Please see
"Related Party Transactions."
(3) Pro forma as adjusted to reflect the sale of 4,000,000 shares of common
stock offered by this prospectus at an assumed initial public offering price
of $12.00 per share and after deducting the underwriting discount and
estimated offering expenses of $1.3 million, and reclassifying previously
paid offering expenses to equity. Please see "Use of Proceeds" and
"Capitalization."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT OUR PLANS, ESTIMATES
AND BELIEFS. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS INCLUDING, BUT NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a leading broadcaster of originally programmed audio entertainment
over the Internet. During the period from our inception through June 30, 1999,
we had insignificant revenues and were engaged primarily in developing
infrastructure, assembling our management team, and establishing our audio
channels. Our initial business model consisted of distributing coupons and other
promotional material on behalf of third parties. Substantially all of our
revenues prior to 1998 were derived from these activities. In January 1998, we
decided to add e-commerce to our operations and to discontinue distribution
activities.
Our current revenues are generated from sales of audio merchandise through
our online store, CDPoint, and from Internet advertising. Our Internet
advertising revenues consist of banner advertisements placed on our Web site,
special promotional advertisements and audio advertisements.
We recognize banner advertising revenues over the period in which the
advertisement is displayed on our Web site. We derive promotional advertising
revenues from product or artist related promotions, and recognize these revenues
over the term of the promotion. We derive audio advertising revenues from the
sale of advertising spots, and recognize these revenues when the audio
advertisement is broadcast.
In May 1996, Navarre acquired 50% of the stock of our predecessor, Net Radio
Nevada. On March 21, 1997, Navarre acquired the remaining 50%. This acquisition
was accounted for as a purchase. As a result, the accumulated deficit of Net
Radio Nevada as of March 21, 1997 was eliminated and goodwill of approximately
$1.3 million was recognized by Navarre at the time of the acquisition. The
goodwill has been "pushed down" to NetRadio for financial reporting purposes. As
a result, our financial statements for the periods prior to March 21, 1997 are
reflected as predecessor financial statements and the accumulated deficit at
June 30, 1999 reflects only losses incurred since March 21, 1997. We have
incurred significant losses since our inception. Our accumulated deficit of
approximately $11.2 million reflects our operating results during the period
from March 21, 1997 to June 30, 1999. In addition, we had incurred an
accumulated deficit of approximately $3.1 million prior to that date.
In the following "Results of Operations" section, we have combined the two
separate periods in 1997 to make the year-to-year comparison easier.
We believe that our success will depend largely on our ability to program
and broadcast original audio content to attract and retain listeners and to
generate e-commerce and advertising revenues. Accordingly, we intend to invest
heavily to develop and maintain content and network infrastructure and to expand
e-commerce. We expect to continue to incur substantial operating losses for the
foreseeable future.
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues and
operating results, including gross margin and operating margin, are not
necessarily meaningful and should not be relied upon as indications of our
future performance.
21
<PAGE>
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1999 AND 1998
NET REVENUES
Net revenues increased to $405,665 for the six months ended June 30, 1999
from $112,796 for the six months ended June 30, 1998, a 260% increase, and
consisted of product sales and Internet advertising revenues.
PRODUCT SALES. Product sales for the six months ended June 30, 1999
consisted of $258,607 of sales of audio merchandise, including shipping and
handling costs, compared with no product sales for the six months ended June 30,
1998. We began selling audio merchandise in the third quarter of 1998 when we
opened our online store, CDPoint, which became fully operational in November
1998.
INTERNET ADVERTISING. Internet advertising revenues for the six months
ended June 30, 1999 were $147,058, compared to $112,796 for the six months ended
June 30, 1998. Internet advertising revenues reflect audio and banner
advertising sales as well as promotional advertising revenues.
COST OF REVENUES
Cost of revenues includes the cost of audio merchandise that we sell,
including fulfillment costs through third party vendors which ship directly to
our customers, and include costs incurred in connection with the development of
specific advertising or promotional campaigns. Costs of revenues increased to
$242,415 for the six months ended June 30, 1999 from $10,058 for the six months
ended June 30, 1998. The increase in cost of revenues was due primarily to the
increased product sales associated with the opening of our online music store.
OPERATING EXPENSES
OPERATIONS AND TECHNICAL SUPPORT. Operations and technical support expenses
consist primarily of data communications expenses, personnel expenses associated
with broadcasting, software and content license fees, operating supplies and
overhead. Operations and technical support expenses were $1,995,516 for the six
months ended June 30, 1999, compared to $605,738 for the six months ended June
30, 1998. The increase in operations and technical support expenses was due
primarily to the building of technical and personnel infrastructure necessary to
meet listener demand and provide e-commerce opportunities to listeners.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel expenses associated with Internet advertising and the marketing of our
Web site. Sales and marketing expenses were $785,438 for the six months ended
June 30, 1999, compared to $157,673 for the six months ended June 30, 1998. The
increase in sales and marketing expenses was due primarily to the growth in our
sales force and marketing staff, use of $150,000 in advertising from
ValueVision, and the undertaking of marketing initiatives.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of administrative personnel expenses, professional fees, depreciation
and amortization, and expenditures for facility costs. General and
administrative expenses were $2,276,477 for the six months ended June 30, 1999,
compared to $595,491 for the six months ended June 30, 1998. The increase in
general and administrative expenses was due primarily to a one-time recognition
of $879,625 in compensation expense as a result of the issuance of stock options
to employees and directors with exercise prices below the estimated fair market
value of our common stock on the date of grant. The remaining increase reflects
the costs associated with adding key personnel and building infrastructure.
Interest expense for the six months ended June 30, 1999 was $314,156,
compared to $13,169 for the six months ended June 30, 1998. The increase was due
to the accrual of interest expense associated
22
<PAGE>
with the advances from Navarre. Interest expense was accrued beginning January
1, 1999 on all outstanding advances from Navarre.
RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NET REVENUES
Net revenues decreased to $255,062 in 1998, from $330,921 in 1997 and
$320,661 in 1996 due primarily to our change in business model. Net revenues in
1998 and 1999 consisted primarily of product sales and Internet advertising
revenues.
PRODUCT SALES. Product sales in 1998 consisted of $49,639 of sales of audio
merchandise, including shipping and handling costs, compared with no product
sales in 1997 and 1996.
INTERNET ADVERTISING. Internet advertising revenues in 1998 were $205,423,
compared to no Internet advertising revenues in 1997 and 1996. The 1998 Internet
advertising revenues reflect audio and banner advertising sales as well as
promotional advertising revenues.
MISCELLANEOUS REVENUES. We had no miscellaneous revenues in 1998, compared
to $330,921 in 1997 and $320,661 in 1996. Miscellaneous revenues consisted
primarily of payments from third parties for distribution of coupons and other
promotional material. We do not expect future miscellaneous revenues to be
significant.
COST OF REVENUES
Cost of revenues increased to $64,825 in 1998, from $16,989 in 1997 and no
cost of revenues in 1996. The increase in cost of revenues from 1997 to 1998 was
due primarily to the cost associated with the opening of our online music store.
The increase in cost of revenues form 1996 to 1997 was due primarily to costs
associated with the preparation of specific promotional campaigns.
OPERATING EXPENSES
OPERATIONS AND TECHNICAL SUPPORT. Operations and technical support expenses
were $685,767 in 1998, and consisted primarily of data communications expenses,
personnel expenses associated with broadcasting, software and content license
fees, operating supplies and overhead. We incurred operations and technical
support expenses of $672,061 in 1997, reflecting the cost of outside consulting
services for Web site development. We incurred no operations and technical
support expenses in 1996. We expect operations and technical support expenses to
continue to increase as we further develop our Web site.
SALES AND MARKETING. Sales and marketing expenses increased to $670,885 in
1998 from $213,784 in 1997 and $426,884 in 1996. The increase in sales and
marketing expenses in 1998 compared to 1997 was due primarily to growth in our
sales force and marketing staff and to increased advertising expenses. The
decrease in sales and marketing expenses in 1997 compared to 1996 was due
primarily to the scaling back of our marketing efforts during 1997, while we
reviewed our business strategy.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2,786,385 in 1998, $2,119,567 in 1997 and $2,154,455 in 1996. Goodwill
amortization recognized from Navarre's acquisition of Net Radio Nevada amounted
to $421,000 in 1998 and $316,000 in 1997. The increase in general and
administrative expenses in 1998 compared to 1997 reflects the costs associated
with developing our business strategy, acquiring personnel and building
infrastructure. The decrease in general and administrative expenses in 1997
compared to 1996 reflects a redeployment of our resources to the development of
our Web site operations.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through private sales
of equity securities and advances from Navarre.
Net cash used in operating activities was $3,126,703 and $1,055,687 for the
six months ended June 30, 1999 and 1998, respectively. Net cash used in
operating activities was $2,771,915 in 1998, $2,125,876 in 1997, and $1,289,352
in 1996. Net cash used in operating activities for the six months ended June 30,
1999 was primarily composed of our net losses offset in part by depreciation and
amortization, an increase in accounts payable and accrued expenses and non-cash
compensation expense associated with the issuance of incentive stock options.
The growth in accounts receivable to $105,128 at June 30, 1999 from $49,002
at June 30, 1998, and to $26,213 in 1998 from $9,084 in 1997, was due primarily
to a change in the mix of revenue from promotional events that had occurred
early in 1997 to advertising revenues and product sales in 1998 and in the six
months ended June 30, 1999. The accounts receivable balances at June 30, 1999
and December 31, 1998 consisted primarily of agency-placed advertising revenue
accounts. Advertising revenues placed by an agency typically are collected in 60
to 90 days. Promotional revenues in 1997 were collected on a chargeback basis
and resulted in a nominal accounts receivable balance at year end 1997.
Accordingly, accounts receivable balances at June 30, 1999 and December 31, 1998
were higher than at December 31, 1997. We expect advertising revenue accounts
generally to be collected within 60 to 90 days in the future.
The increase in prepaid expenses, other current assets, deferred revenue and
accrued expenses from December 31, 1998 to June 30, 1999 was primarily due to
the execution of two contracts with RealNetworks in May 1999.
The increase in accounts payable to $1,093,963 at June 30, 1999 from
$644,055 at June 30, 1998 and to $1,022,639 at December 31, 1998 from $737,300
at December 31, 1997 was due primarily to higher operating expenses as we
developed the infrastructure necessary to manage the growth of our business.
Net cash used in investing activities for the six months ended June 30, 1999
and 1998 was $847,721 and $32,871, respectively. Net cash used in investing
activities was $906,249 in 1998, $11,403 in 1997 and $329,831 in 1996. Net cash
used in investing activities in these periods was related primarily to purchases
of property and equipment.
We generated net cash from financing activities of $3,939,692 and $1,103,450
for the six months ended June 30, 1999 and 1998, respectively. We generated net
cash from financing activities of $3,724,667 in 1998, $2,049,616 in 1997 and
$1,644,629 in 1996. Net cash from financing activities for the six months ended
June 30, 1999 was generated primarily from $4,513,537 in advances from Navarre.
Net cash from financing activities in 1998 was generated primarily from
$4,022,529 in advances from Navarre while net cash from financing activities in
1997 was generated from a $1,000,000 purchase of equity securities by
ValueVision and $1,212,311 in advances from Navarre. Net cash from financing
activities in 1996 resulted primarily from a $1,500,000 purchase of equity
securities by Navarre.
We believe that the net proceeds from this offering, together with our
current cash and cash equivalents, will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next 18
months. In connection with this offering, we will convert $5,234,840 in debt
owed to Navarre into equity, and ValueVision has agreed to purchase 595,000
additional shares of our common stock for $500,000, both occurring at the
closing of this offering. We may need to raise additional funds through public
or private financings, or other arrangements. There can be no assurance that
these additional financings, if needed, will be available on terms attractive to
us, if at all. Our failure to raise capital when needed could have a material
adverse effect on our business, results of operations and financial condition.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our then-current shareholders will be
24
<PAGE>
reduced. Furthermore, these equity securities might have rights, preferences or
privileges senior to those of our common stock.
NET OPERATING LOSS CARRYFORWARDS
As of June 30, 1999, we had available net operating loss carryforwards
totaling approximately $6,600,000, which expire beginning in 2011. Please see
Note 7 of Notes to the Financial Statements included elsewhere herein. The Tax
Reform Act of 1986 imposes limitations on the use of net operating loss
carryforwards if specified stock ownership changes have occurred or could occur
in the future.
YEAR 2000 COMPLIANCE
STATE OF READINESS. Our information technology, or IT, systems (servers,
encoders, routers, etc.) and non-IT systems (desktop computers, printers, etc.)
consist of software developed either in-house or purchased from third parties,
and hardware purchased from vendors. Our systems and other business resources
rely upon IT systems and non-IT systems provided by service providers and,
therefore, may be vulnerable to those service providers' failure to remedy their
own presently unknown Year 2000 issues. These service providers include those
for our network elements and e-mail services and the landlord for our leased
office spaces. We have contacted our principal vendors of hardware and software,
who have notified us that the hardware and software that they have supplied to
us is either presently Year 2000 compliant or will be compliant before the Year
2000. However, we may nonetheless be affected by presently unknown Year 2000
issues related to non-compliant IT systems or non-IT systems operated by us or
by third parties. We currently have underway a substantial assessment of our
internal and external (third-party) IT systems and non-IT systems. At this point
in our assessment, we are not aware of any Year 2000 problems relating to
systems operated by us or by third parties that would have a material adverse
effect on our business, results of operations, or financial conditions without
taking into account our efforts to avoid Year 2000 problems.
COST. Based on our assessment to date, we do not anticipate that costs
associated with remediating our non-compliant IT systems and non-IT systems will
be material.
RISKS. To the extent that our Year 2000 assessment is finalized without
identifying any additional material non-compliant IT systems operated by us or
third parties, the most reasonably likely worst case Year 2000 scenario is a
systems failure beyond our control, such as a prolonged telecommunications or
electrical failure. A failure of this kind could prevent us from operating our
business or prevent users from accessing our Web site. We believe that the
primary business risks, in the event of a failure, would include, but not be
limited to, lost advertising and audio merchandising revenue, increased
operating costs, loss of customers or persons accessing our Web site, or other
business interruption of a material nature, as well as claims of mismanagement,
misrepresentation or breach of contract.
CONTINGENCY PLAN. As discussed above, we are engaged in an ongoing Year
2000 assessment. We plan to conduct a full-scale Year 2000 simulation of our IT
systems. The results of this simulation and assessment will be taken into
account in determining the nature and extent of any contingency plans.
25
<PAGE>
OUR BUSINESS
OVERVIEW
NETRADIO.COM
We are a leading broadcaster of originally programmed audio entertainment
over the Internet. I/PRO, an independent consultant which monitors Internet
traffic, has estimated that 1,006,020 different users, each of whom was counted
only once, listened to our 120 music and news channels in June 1999. I/PRO has
also estimated that, during June 1999, the average time a visitor spent
listening to any of our channels was approximately 21 minutes. We believe that
attracting users through audio entertainment creates a "sticky" Web site by
extending the time visitors spend on NetRadio.
INDUSTRY BACKGROUND
THE GROWTH OF THE INTERNET. International Data Corporation, or IDC, an
independent Internet market research firm, expects the number of Internet users
to grow 29% per year from approximately 142 million worldwide in 1998 to exceed
500 million by the end of 2003. In 1998, approximately 150 million devices were
used to access the Internet. By the year 2002, IDC estimates that the number of
Internet devices is expected to increase to more than 720 million, a compound
annual growth rate of 37%. A number of factors are expected to fuel the growth
of the Internet, including:
- the increasing number of computers installed in homes and offices,
- the decreasing cost of computers,
- lower cost and more efficient Internet access,
- improving network infrastructure,
- expanding Internet content, and
- increasing familiarity with and acceptance of the Internet as a resource
for businesses and consumers.
The vast amount of data available on the Internet requires users to find an
effective way to conduct efficient and organized searches for desired
information. The desire of many users to communicate and interact with others
having similar tastes and interests has spurred the growth of virtual Internet
communities. Communities serve an important function because they create a
virtual "town square" where users can meet and exchange ideas. Communities also
play a key role in the development of online commerce by providing advertisers
and businesses with a means to identify and target groups of users characterized
by distinguishing traits. Through its universal appeal, music entertains,
creates communities of people who have similar interests, and promotes sales of
music and other products.
GROWTH OF ELECTRONIC COMMERCE. The Internet has begun to transform much of
the economics of commerce by substituting electronic sales from a single
location for the large infrastructure of traditional retailers, including
management and sales staffs, numerous physical locations and relatively large
inventories. The Internet has the potential to replace many types of retail
stores and distribution methods by linking consumers directly to wholesale
distribution channels that provide superior selection, convenience and
competitive pricing. Online retailers typically offer products and services that
can be described, sampled and shipped easily and do not require the consumer's
physical presence. These products and services include compact discs, audio and
video cassettes, books and computer software. The Internet offers the
opportunity for a retailer with a single location or Web site to inexpensively
develop one-to-one relationships with customers worldwide. In June 1999, IDC
reported that the amount of total commerce conducted over the Internet is
expected to exceed $1 trillion by 2003.
26
<PAGE>
Another independent research firm, Forrester Research, estimates that
Internet sales to consumers in the United States will increase at a compound
annual growth rate of 69%, from an estimated $7.8 billion in 1998 to
approximately $108 billion by 2003. Forrester Research also predicts that by
2003, Internet sales will account for 6% of the estimated $1.8 trillion in
annual United States consumer retail spending.
THE INTERNET AS A BROADCAST, AUDIO STREAMING MEDIUM. The Internet has
quickly evolved from a relatively simple mechanism for the delivery of
text-based Web pages and electronic mail to a multimedia platform, providing an
interactive world of information, entertainment and commerce. The resulting
convergence of every day computer applications with communication, entertainment
and commerce platforms permits the Internet to deliver content in such areas as
music, sports, games, hobbies and shopping opportunities. The development of
streaming audio media, a new technology that permits the simultaneous
transmission and playback of digitized audio and video streams, allows the
Internet to broadcast music, information, advertising and other content to
hundreds of thousands of simultaneous listeners worldwide.
Streaming audio combines the Internet's interactivity with traditional, more
passive radio listening. Music broadcasts can serve as a unifying vehicle,
drawing Internet listeners into communities of similar musical tastes and
allowing them to interact with one another. Communities segregated by specific
musical tastes or interests provide Internet businesses with a target for direct
marketing and advertising programs. According to a study performed in January
1999 by The Arbitron Company, 27% of Internet users have listened to Internet
radio.
The development of the Internet as a broadcast medium suggests a comparison
to traditional radio. The following chart illustrates some of the differences,
in our view, between traditional radio broadcasting and Internet audio
broadcasting:
<TABLE>
<CAPTION>
TRADITIONAL RADIO BROADCASTING INTERNET AUDIO BROADCASTING
------------------------------------ ------------------------------------
<S> <C> <C>
- Generally limited by - Generally limited only by
DISTRIBUTION geographic region availability of Internet
AREA service
- Typically broadcasts to - Flexibility to reach wide or
AUDIENCE general audience narrow audiences
- Advertisers commonly target - Advertisers target immediate
future purchases purchases
PROGRAMMING - Programs typically designed - Programmed often for multiple,
CONTENT for broad audience appeal niche markets
- Programmed to single, licensed - Programmed to multiple,
frequency simultaneous channels
LISTENER - Estimates generally based on - More accurate measurement
TRAFFIC cross section sampling using server log files
MEASUREMENT
- Generally limited to estimates - Current audience measurements
of past listeners - Server logs record additional
listener information
- Audio advertisements are aired - Links audio and banner
LISTENER between songs advertising with other Web
INTERACTIVITY sites
- Advertised products purchased - Advertisements presented in
elsewhere audio, graphic and text
formats
- Listeners interact via - Users can purchase products
telephone, facsimile or in simultaneously, online
person
- Listeners can interact via
e-mail and chat rooms
</TABLE>
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DISTRIBUTION AREA. Traditional radio stations broadcast to listeners within
a defined geographic area. Atmospheric conditions and physical barriers can
interfere with radio transmissions. By contrast, Internet broadcasters transmit
music and information using audio streaming technology, which has inherent
advantages over traditional radio broadcasts, such as permitting the continuous
transmission of music to a virtually unlimited geographic region. Because audio
streams are transmitted in digitized form over telephone lines, they are
unaffected by atmospheric or structural barriers. They may, however, be limited
by Internet congestion and other factors unique to Internet traffic, such as a
user's or broadcaster's computer hardware or software. At times when bandwidth
is not available, Internet audio quality may not be as clear as traditional
broadcast radio. However, as bandwidth increases, Internet audio quality is
expected to improve and become comparable to, or even better than, the quality
of traditional broadcast radio.
AUDIENCE MARKETS. Traditional broadcast radio generally targets advertising
at peak listener traffic. For example, "drive time" audiences, listeners who
tune-in to a particular station while driving to or from work, represent a large
captive audience and therefore a potentially lucrative market for traditional
radio advertisers. This specific peak market, however, occurs only during
commuting hours. Traditional radio broadcasts generally must appeal to a broad
spectrum of listeners to capture the widest possible market for their
advertising. Internet audio streaming, by contrast, can be delivered to a large
number of computer users who can listen to music from the broadcaster's Internet
site while working on other applications. Advertisers who buy time or space on
Internet audio broadcasts can typically expect a more targeted audience with the
potential for immediate, impulse purchases.
PROGRAMMING CONTENT. Traditional radio stations generally program for broad
audience appeal by broadcasting content for the entire spectrum of their
audience. For instance, a traditional radio station that broadcasts jazz may be
the only commercially viable jazz station in a given geographic market.
Consequently, the station must design its programming from a number of different
jazz styles to broadly capture jazz listeners in such a market. Traditional
radio stations must consider broad audience appeal in their programming of
music, news, talk, ethnic or religious content. Internet broadcasters, by
contrast, can globally transmit a wide variety of specially designed programming
while targeting specific markets of listeners to enhance sales. An Internet
broadcaster can deliver multiple channels of music and information programmed to
specific markets, and can therefore design programming to maximize revenue
opportunities for its advertisers. The number of transmitted audio streams is
limited only by available bandwidth.
LISTENER TRAFFIC MEASUREMENT. Most traditional broadcast radio stations
rely upon reports from companies, such as The Arbitron Company, that use
statistical sampling methods to determine the size and demographic profile of
the station's audience. These companies periodically capture information
regarding listening habits from a cross section of the market and then estimate
the popularity of competing radio stations in the market. Web site audience
traffic measurements, by contrast, are not limited to statistical sampling and
can provide a more reliable measurement of listener traffic. Web sites or
servers communicate and respond to incoming requests from Internet users. These
servers can record listener and audience information on server log files and
provide current and exact measurements of the number of listeners and the length
of time listeners spend on a Web site.
LISTENER INTERACTIVITY. Traditional broadcast radio typically contains a
significant amount of advertising messages or commercials, often up to 12
minutes per hour. These commercials are designed to have the listener act on the
commercial impulse at a future time, possibly several days later. For example, a
commercial message for a soft drink product is typically acted upon during the
next trip to the supermarket. Similarly, the desire to buy a compact disc
triggered by listening to a song on the radio requires not only a trip to the
music store, but also requires the listener to remember the compact disc or
artist information.
By contrast, Internet audio broadcasting offers listeners the ability to
react immediately to an audio advertisement by clicking on the graphics link
displayed while the audio advertisement is being
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played. This link can connect the listener either to additional product
information or directly to a purchase option for the product itself. By
displaying information about the song and artist that is linked directly to a
purchase option, the listener can react immediately to a buying impulse for the
actual compact disc.
OUR CHALLENGE
We believe that there are several challenges to achieving success as an
Internet broadcaster and retailer. To be successful, an Internet broadcaster
must target an audience, develop compelling content, scale broadcasts from small
to large audiences, deploy new transmission and streaming technologies, provide
multimedia advertisements and attract and retain listeners. Internet
broadcasters must serve a large number of simultaneous users around the clock,
which requires complex network elements, extensive bandwidth, streaming
licenses, equipment and technical expertise. To be successful as a retailer, the
Internet broadcaster must integrate and use its content to convert its listeners
into revenue-generating opportunities. The online retailer must provide online
stores that feature broad selections of products and services, and provide a
high degree of customer service at competitive prices to compete with Internet
and non-Internet retailers.
OUR SOLUTION
Our solution is to provide entertaining audio content to attract and retain
large numbers of visitors who generate revenue through commerce and advertising.
The key elements of our strategy are to:
PROGRAM AND BROADCAST AUDIO CONTENT TO ATTRACT AND RETAIN LISTENERS. An
important element of our strategy is to attract and retain listeners by offering
a wide variety of entertaining audio content. We have created over 100 distinct
music channels and 22 information channels. Each music channel is devoted to a
narrow format of music within a broader musical genre, such as jazz or classic
rock and roll. Within the jazz genre, for example, we have created 18 music
channels, each dedicated to a different type of jazz music. The jazz music
channels include Acid Jazz, Big Band, Blues, Blues Revival, Cafe Jazz, Chicago
Blues, Classic Crooners, Divas, Horns, Jazz Rock, Lounge, New Blues, Quiet
Storm, Rockin' Blues, Rounder Blues, Smooth Jazz, Swing and Zydeco.
To program content, we have assembled a team of award-winning radio
professionals with considerable experience in radio programming. This team has
developed a significant inventory of songs from which they program our audio
channels. We believe that our programmed music and rotations: (1) attract and
retain a wide audience, (2) lengthen the time listeners spend listening, and (3)
increase product sales opportunities.
BUILD VISITOR TRAFFIC COST-EFFECTIVELY. Another element of our strategy is
to build Web site traffic. To do this, we focus on (1) providing listeners with
entertaining and highly targeted audio content which we believe will encourage
repeat visits and (2) undertaking low-cost marketing campaigns. Additionally, 14
of our channels are pre-sets on RealNetworks' audio player, which significantly
enhances our presence on the Internet, and increases the traffic to our Web
site.
We also build traffic through our affiliate program. In exchange for a
nominal fee, Web site operators contractually agree to display banners on their
Web sites that permit a visitor to click through to NetRadio. We have over 2,500
active affiliates.
CREATE STRONG COMMUNITIES OF SIMILAR INTEREST TO ESTABLISH BRAND LOYALTY. A
vital component of our strategy is to establish strong brand loyalty by creating
listener communities through niche programming. We believe that creating a
community enhances a listener's Internet experience and
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extends the length of time he spends on our Web site. Our programming is divided
by music genre into 15 communities of similar interest, or COSIs:
<TABLE>
<S> <C>
BroadbandPoint KidzHits
Cafe Jazz & Blues Modern Rock
Christian Hits New Age & Folk
Classical News & Information
Country Pop Hits
Dance/Urban Vintage Rock
Electronica Woodstock Music
World Music
</TABLE>
Each COSI targets a wide audience with similar musical preferences. Within
each COSI we generally have between seven and 20 music and information channels.
For example, the channels in the Country COSI comprise a community within
NetRadio's audience that reflects country music tastes and demographics. Our
online retail site and promotions are designed to respond to these tastes and
are fully integrated into each COSI. We believe that communities play a key role
in the development of online commerce by providing advertisers and businesses
with a means to identify and target groups of users characterized by similar
tastes. As we build communities of listeners through COSIs, we are constantly
developing and promoting the NetRadio brand name.
PROGRAM CONTENT TO GENERATE COMMERCE AND ADVERTISING REVENUES. In addition
to broadcasting entertaining music and information, we program content to
generate revenues from commerce and advertising. We accomplish this through a
marketing strategy we call content-enabled commerce or C-Commerce. This approach
uses music and advertising messages to direct and link listeners to our online
retail store, CDPoint. C-Commerce encourages impulse purchases by motivating and
enabling listeners to simultaneously acquire the music being played or promoted.
We apply a similar concept to advertisers by directing and linking listeners to
advertisers' Web sites through audio and text messages. These messages permit
our listeners to link immediately to the Web site where the product or service
being advertised can be purchased.
Our comprehensive interactive display, NetCompanion, links our audio content
with revenue-generating opportunities. NetCompanion appears on a listener's
computer screen and displays song title information, graphic and text-based
advertising and includes links to our COSIs and CDPoint. While listening to
music through NetCompanion a visitor may:
- change music channels,
- purchase the music that NetRadio is playing or promoting, or purchase
another title,
- browse CDPoint for music or information, or
- read an advertiser's banner and click through to an advertised Web site.
Another significant aspect of our C-Commerce strategy is to
cross-merchandise products, music and artists. For example, while an artist's
song is playing, we may advertise books, apparel, videos, or other
entertainment-related products connected to that artist or title.
BUILD STRATEGIC ALLIANCES. We will continue to capitalize on our
relationships with record labels, Internet traffic and technology companies and
fulfillment partners, including the following:
- RECORD LABELS. Record labels partner with us for artist and title
promotions. These promotions allow the labels to promote specific artists
in a targeted environment.
- INTERNET TRAFFIC AND TECHNOLOGY COMPANIES. We have an agreement with
RealNetworks, which licenses the use of its software to play our audio
streams and whose audio player includes pre-sets to 14 of our channels. We
have an agreement with AT&T to lease scalable bandwidth and provide
additional technical support. We are also in the process of licensing
technology to enable our listeners to download authorized music tracks
using AT&T's proprietary a2b music player.
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We also recently entered into an agreement with Liquid Audio. The
agreement will allow us to provide links from our Web site to a Liquid
Audio Web site where our visitors will have the opportunity to download
over 20,000 authorized music tracks using Liquid Audio's Liquid Player. In
addition, we have an agreement with a leading high-speed data network
services provider, @Home, which carries our programing. We also have an
agreement with Packard Bell/ NEC, whose computers come equipped with a
link to our Web site.
- FULFILLMENT PARTNERS. We have product fulfillment agreements with Navarre
and Valley Media, both major distributors of music and DVD products.
We believe that these strategic alliances have helped and will continue to
help, build content and traffic to our Web site, stimulate product and
advertising revenues, and build brand awareness.
MUSIC AND PROGRAMMING
By focusing on our breadth of music and information content, we seek to
capture a wide audience across a variety of musical tastes. Our programming has
been developed by a team of seven full-time and four part-time experienced,
award-winning content and programming professionals. These music programmers
bring specific musical expertise and an average of more than 17 years of
experience to us. Their awards have included national awards and nominations
from Billboard Magazine (Major Market Country Programmer of the Year--Nominee)
and Gavin Magazine (Programmer of the Year--multiple winner and nominee), as
well as Minnesota Music awards (Club DJ of the Year--Winner). As a result of our
programmers' musical expertise, NetRadio has received the 1998 RealNetworks
Streamers Award for "The Best Real Audio Net-Only Radio" Web site.
Our programming team has experience in traditional radio programming as well
as at club and concert venues. Members of our programming team have served as
music directors of leading "top 40," classic rock, jazz, country and alternative
radio stations in large and small markets throughout the United States. We
believe that our expertise in music and radio programming distinguishes us from
many of our competitors.
Our music professionals use the same song rotation software used by
traditional broadcast radio stations to program songs into light, medium and
heavy rotation patterns. This software enables them to include COSI or channel
identifiers and artist endorsements within the channel and to easily insert
advertising messages into the music programming.
COSIS AND CHANNELS. The NetRadio Web site resembles a hub and spoke
configuration. Our home page acts as the "hub" for each of our 15 COSIs. Each
COSI, whether music or news, reflects a distinctively branded name, look and
identity. Within a COSI, each music or information channel contains content that
can be targeted to specific audience segments and linked to potential revenue
opportunities. For example, if an artist announces a new world tour, that
information can be presented as a news segment in the appropriate COSI and
linked to products available in CDPoint.
The COSI structure provides a format to communicate with a loyal base of
listeners through the following:
- SPECIALIZED AUDIO CONTENT. Each COSI contains multiple specialized music
channels. For example, our Vintage Rock COSI includes Reggae, British
Invasion and Guitar Heroes. We believe these narrowly specialized channels
will appeal to our listeners' tastes and will encourage return visits and
brand loyalty.
- TEXT-BASED CONTENT. Each COSI contains text-based information through
which we communicate with our visitors. We offer articles written by music
professionals as well as information on new releases, concert tours,
ticket sales and other music-related products.
- ADVERTISING AND PROMOTIONAL CONTENT. Each COSI displays advertising
banners while channels within that COSI broadcast audio promotion messages
targeted to the COSI's demographics.
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- MERCHANDISING CONTENT. Each COSI contains a link to CDPoint, where
products specifically tied to the musical taste of the COSI's listeners
are available for sale. The assortment of products offered includes
compact discs and audio cassettes tailored to the COSI's demographics.
The number of songs within each channel ranges from 150 to over 1,000. The
breadth of our selection is significant compared to traditional broadcast radio
station play lists which typically include only 40 to 80 songs. The order and
frequency of the music is designed by our programming staff to reflect current
trends in the music business and the tastes of our listeners. We update
information channels daily.
Except for the BroadbandPoint Channel COSI, all channels can be heard using
a 28.8kbps narrow bandwidth modem through a telephone line. The BroadbandPoint
Channel is a special "higher quality" 40kbps stereo audio streaming channel
featuring music from NetRadio's most popular music channels, and requires a
high-speed connection.
NetRadio's channels as of August 24, 1999, grouped by COSI, are listed
below.
BROADBANDPOINT
Includes selections such as
60's Country and
Blues, Cafe Jazz,
Country, Maestro,
Modern Rock, Pop Hits,
Vintage Rock.
INFORMATION CHANNELS
CDPoint Update
NetRadio Network Today
CAFE JAZZ & BLUES
MUSIC CHANNELS
Acid Jazz
Big Band
Blues
Blues Revival
Cafe Jazz
Chicago Blues
Classic Crooners
Divas
Horns
Jazz Rock
Lounge
New Blues
Quiet Storm
Rockin' Blues
Rounder Blues
Smooth Jazz
Swing
Zydeco
INFORMATION CHANNELS
CDPoint Update
Jazz Notes
NetRadio Network Today
CHRISTIAN HITS
MUSIC CHANNELS
Christian Hits
INFORMATION CHANNELS
CDPoint Update
NetRadio Network Today
CLASSICAL
MUSIC CHANNELS
Chamber Music
Chant
Maestro
Opera
Piano
Quiet Classics
Symphony
INFORMATION CHANNELS
CDPoint Update
Classical Notes
NetRadio Network Today
COUNTRY
MUSIC CHANNELS
60's Country
70's Country
Alternative Country
Bluegrass
Dot.Comedy
Rounder Folk
Route 1 Country
INFORMATION CHANNELS
CDPoint Update
Country Music News
NetRadio Network Today
DANCE/URBAN
MUSIC CHANNELS
Acid Jazz
Ambient
Big Beat/Breaks
Club Mix
Disco Dance
Drum & Bass
Electronica
Experimental
Funk
Hip Hop
House
Industrial
Latin
Lounge
Mix Masters
Punk
Rap
Ska
Solid Gold Soul
Techno
Trip Hop
Urban
INFORMATION CHANNELS
CDPoint Update
NetRadio Network Today
ELECTRONICA
MUSIC CHANNELS
Ambient
DJ Mix
Drum & Bass
Dub Electric
Electronic World
Electronica
Hardcore
Industrial
Jungle Breaks
Musical Starstreams
New Age
Tech House
Techno
Trance/Acid
INFORMATION CHANNELS
CDPoint Update
NetRadio Network Today
KIDZHITS
MUSIC CHANNELS
KidzHits
KidzNews
INFORMATION CHANNEL
CDPoint Today
NetRadio Network Today
MODERN ROCK
MUSIC CHANNELS
Adult Alternative
Dot.Comedy
Industrial
New Wave
Punk
Ska
The 'X'
INFORMATION CHANNELS
CDPoint Update
NetRadio Network Today
NEW AGE & FOLK
MUSIC CHANNELS
Acoustic
Ambient
Celtic
Folk
Hearts of Space
Musical Starstreams
Nature Sounds
New Age
Rounder Folk
INFORMATION CHANNELS
CDPoint Update
NetRadio Network Today
NEWS & INFORMATION
NEWS CHANNELS
Business News
Celebrity News
Health File
Info Junkie
Infobahn News
Movie News
NetRadio News
Showbiz News
This Is True...Really News
World News
MUSIC NEWS CHANNELS
Classical Notes
Country News
Jazz Notes
Music Industry News
This Day in Rock History
SPORTS CHANNELS
Sports
(Various sports channels
depending on seasonal
interest)
Baseball News
Basketball News
Football News
Hockey News
POP HITS
MUSIC CHANNELS
80's Hits
Disco Fever
Dot.Comedy
Fab 60's
Groovin' 70's
Lite Hits
Party Hits
Pop Hits
Showtunes
Solid Gold Soul
Soundtracks
Teen Scene
INFORMATION CHANNELS
CDPoint Update
NetRadio Network Today
Pop Hits News
VINTAGE ROCK
MUSIC CHANNELS
British Invasion
Dot.Comedy
Guitar Heroes
Hard Rock
Jazz Rock
Party Rock
Pre-Fab 60's
Progressive Rock
Psychedelic Rock
Rockin' Blues
Rockin' Rhythm 50's
Vintage Rock
Vintage Surf
INFORMATION CHANNELS
CDPoint Update
NetRadio Network Today
This Day In Rock History
WOODSTOCK MUSIC
Woodstock 99
Woodstock 69
WORLD MUSIC
MUSIC CHANNELS
Ambient World
Celtic
Earth Beat
Electronica
Hawaiian
Latin & Salsa
Musical Starstreams
Native American
New Age
Reggae
Rounder Reggae
World Beat
INFORMATION CHANNELS
CDPoint Update
NetRadio Network Today
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C-COMMERCE, PRODUCT SALES AND FULFILLMENT
We believe that our C-Commerce strategy is effective because of the nexus
between playing a song, or viewing or listening to an advertising message, and
providing the listener the opportunity to immediately purchase the music,
product or service being promoted. Listeners do not need to be visually
connected to NetRadio's Web pages in order to receive audio content and
promotional messages. Listeners stay connected to audio content for extended
periods of time while NetRadio exposes them to commerce, advertising and
promotional messages.
CDPOINT. CDPoint (www.cdpoint.com) is our online music store. CDPoint
currently offers over 250,000 stock keeping units, and includes every title that
we play on our channels. CDPoint's wide selection complements and reflects the
breadth of our channels and the diverse tastes of our audience.
Our objective is to make CDPoint informative and authoritative, allowing
customers to easily learn about, discover and purchase compact discs, audio
cassettes and other entertainment-related products. CDPoint is designed to be
intuitive and easy to use. Our goal is to enable the purchasing process to be
completed with minimal customer effort and without interruption of the audio
stream. We offer a wide selection and competitive prices as well as a high
degree of customer service by, among other things, providing our customers with
numerous e-mail updates on the status of their orders, and other information
about our products and services. Customers can enter CDPoint.com directly or
through the NetRadio Web site, NetRadio affiliates' Web sites, a favorite COSI
or NetCompanion.
Once in CDPoint, customers can search for music by artist or title, browse
genres or featured titles, read release notes, participate in promotions,
respond to advertising or check the status of their orders. A search engine
feature remains visible on the user's screen and is always available to search
for artists or titles. To purchase music, a listener simply clicks on an item
and a virtual shopping basket displays the desired item and its purchase price.
Customers can add and remove products from their baskets prior to completing
their purchase.
We accept Visa, MasterCard and American Express for payment. For
convenience, we will soon permit customers to store credit card information on
secure servers to avoid the need to re-input this information when making a
repeat purchase. To maintain security, we rely on recent releases of
transaction-enabling software. We automatically confirm each order by e-mail
within 24 hours of the order, and subsequently confirm shipment of each order by
e-mail. A customer's credit card is charged when the product is shipped. We rely
upon a third party to process credit card billing.
SHIPPING, DISTRIBUTION AND FULFILLMENT. We maintain no product inventory.
Rather, the products we sell are owned and held by outside vendors who ship
directly to purchasers. We periodically update CDPoint with inventory
information that we receive from our fulfillment partners. When a customer's
purchases are completed, the order is electronically communicated to one of our
fulfillment partners. Music orders are electronically sent first to Navarre and
then, if not completely available in Navarre's inventory, to Valley Media. The
fulfillment partner ships products for delivery to the purchaser within two to
10 business days. United Parcel Service, the United States Postal Service or a
comparable ground service handles delivery.
DATABASE DEVELOPMENT AND MAINTENANCE. To more efficiently generate commerce
opportunities, we are building revenues by developing a database reflecting our
customer preferences. We intend to use customer information for internal
purposes only, such as targeted marketing campaigns and other advertising
programs. We disclose to all visitors and consumers that we are collecting this
information.
Our servers record where visitors to our Web site originate, where they go,
what they listen to and what advertising they click on. From CDPoint, we
accumulate product, order size, shipping destination and customer demographic
information. We use information about visitors and listeners to enhance our
content offerings, advertising strategies, marketing campaigns and Web site
design and navigation
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elements. Product and demographic information helps us conduct one-to-one
marketing campaigns with customers. In addition, we use this information to
project purchase patterns and to ensure maximum product availability, selection
and shipping efficiencies.
ADVERTISING AND PROMOTION
We use our content to generate advertising revenues. Our advertising
includes banner advertising, audio advertising and promotional advertising. All
three formats are incorporated into the COSIs, which allow advertisements to be
tailored to particular audiences.
BANNER ADVERTISING. Visitors to our Web site are exposed to banner
advertising messages placed on our Web pages. Banner advertising allows a user
to travel immediately to the Web site displayed in the banner. These banners are
sold to advertisers primarily by our sales staff and through a third party
contractor, 24/7 Media, a nationally recognized advertising placement firm.
AUDIO ADVERTISING. We incorporate audio advertisements into our
programming. We believe that audio advertising is well suited to advertisers
since it reaches listeners who are running multiple applications. Unlike banner
advertising, which requires the viewer to be visually connected to the Web site,
audio advertising allows the listener to hear streamed audio advertising while
he or she is working on other applications. Our innovative advertising format
combines audio advertisements with links to our advertisers' Web sites,
encouraging an immediate consumer response.
TARGETED PROMOTIONAL ADVERTISING. We have developed targeted promotions as
another means to generate revenues. In a targeted promotion, a record label pays
for space and audience exposure within our Web site. For example, NetRadio might
prominently feature a compact disc, artist or song on a Web page. We believe
that these special promotions are attractive to record labels which are
promoting particular artists or compact discs.
Our wide variety of music programming encourages targeted promotions for
niche music. For example, a Celtic record label may have difficulty reaching its
targeted audience due to limited exposure of Celtic music in the programming mix
of most commercial radio stations. NetRadio can offer a dedicated channel for
Celtic music. This has appealed to niche labels who do not want to pay for
traditional advertising in record stores, traditional broadcast radio or other
media.
NEW BUSINESS OPPORTUNITIES
We intend to generate additional revenues by selling other entertainment
products such as DVDs. To capture what we believe will be growing consumer
demand for DVDs, we expect to expand our commerce offerings to include DVDs in
late 1999.
STRATEGIC ALLIANCES
We have entered into several strategic alliances in the areas of content and
programming, Internet traffic and technology, and product fulfillment and
distribution.
CONTENT AND PROGRAMMING ALLIANCES. We have alliances with major record
labels and other content providers that help us continue to develop our
programming. Some of the record labels that have participated in featured
promotions include: A&M, American Gramaphone, Arista, Atlantic, AWA, Beacon,
Blue Note, Brentwood, Capitol, Caroline, CDM, CMC, DA Music, Damian, Decca,
Dreamworks, Durkin Hayes, Elektra, EMD Distribution, EMI/Angel, Forbidden, GRP,
Interscope, J Bird, Jellybean, Leviathan, Macola, MCA, MED, Mercury, Mission,
Moonshine, Motown, Nettwork, Nonesuch, Public Music, RCA, Relativity, Rhino,
RLM, Solid Disc, Un-D-Nyable, Unison, V-Wax, Van Richter, Vesper Alley, Virgin,
Warner Brothers and Windham Hill.
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For example, we have worked closely with the American Gramaphone record
label, which records the artist Mannheim Steamroller, a successful performer of
holiday music. We have developed custom programming for the Mannheim Steamroller
series of album releases, including a custom channel and a dedicated Web page
for Mannheim Steamroller products.
INTERNET ALLIANCES. We have entered into traffic and technology alliances
that we expect will continue to attract customers, build brand loyalty, and
improve the quality of our broadcasts, such as:
- RealNetworks. RealNetworks licenses software that allows our listeners to
hear our audio streams. In addition to providing technology, we believe
that RealNetworks is an important source of traffic to our Web site. We
have 14 channel pre-sets on G2, a recent version of RealNetworks' audio
player. RealNetworks operates a popular audio Web site called the Daily
Briefing. We supply seven information channels to the Daily Briefing.
- AT&T. We have an agreement with AT&T under which AT&T provides scalable
bandwidth, round-the-clock technical support and redundant back-up servers
to meet our increasing listener demand. We are also in the process of
licensing technology to enable our listeners to download authorized music
tracks using AT&T's proprietary a2b music player.
- Liquid Audio. We have an agreement with Liquid Audio under which our
visitors will be able to link to a Liquid Audio Web site and download over
20,000 authorized music tracks using Liquid Audio's Liquid Player.
- @Home Network. We offer two 80kbps channels to @Home Network, a division
of @Home Corporation. @Home provides high-speed, fully-integrated
multimedia Internet and online services using cable television technology.
@Home subscribers have the opportunity to listen to our programming
through a higher quality connection than is normally available through a
standard telephone line.
- Ark Interface II. Since August 1, 1997, we have had an Electronic
Advertising Agreement with Ark Interface II of Seattle, Washington. Ark
Interface II operates a Web site called MySpace Online, formerly known as
Planet Oasis. A radio tower branded "NetRadio" appears on the home page
cityview of MySpace Online. NetRadio also operates a custom,
commerce-enabled audio interface that appears on the MySpace Online Daily
page and provides access to 39 NetRadio music and information channels.
- Packard Bell/NEC, Inc. Under the Ark Interface II agreement, all Packard
Bell and NEC Ready brand multimedia personal computers sold in the United
States since July 1998 with Windows 98 operating systems feature an audio
player interface called Net Media Player on the desktop. The Net Media
Player provides access to 35 NetRadio music and information channels.
FULFILLMENT ALLIANCES. We have entered into fulfillment alliances to sell
products and provide customer service. By integrating multiple fulfillment
sources, we increase product fill rates and enhance customer service.
- Navarre. In December 1998, we entered into a five-year product fulfillment
agreement with Navarre, our majority shareholder, for fulfillment of music
purchases. We look to Navarre first for order fulfillment and delivery. We
currently buy approximately 5 to 10% of our music products through
Navarre. Purchases through Navarre improve our margins because we pay
lower shipping and handling fees to Navarre than we pay to Valley Media.
We also pay a lower acquisition cost for purchases of titles available
exclusively through Navarre. Finally, through Navarre we gain access to
artists and independent and national record labels.
- Valley Media. In 1998, we entered into a distribution agreement with
Valley Media to provide an alternative fulfillment source for products
that are not available through Navarre. Valley Media is the leading online
fulfillment source for music and other entertainment software products.
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Valley Media has approximately 250,000 stock keeping units in inventory,
and a wide selection of music, videos, DVDs, and music-related
merchandise.
TECHNOLOGY AND NETWORK INFRASTRUCTURE
Audio streaming is the one-way transmission of digitized audio data over the
Internet. The audio data begins in digitized form at the source or Internet
server. Upon transmission, the audio is divided into groups of data delivery
packets that are transmitted over the Internet to the receiving computer of the
listener. The receiving computer buffers the initial portion of the transmitted
audio data before sending it to the speakers. This buffering compensates for
momentary delays in packet delivery. Audio streaming technology permits the
simultaneous transmission and playback of continuous streams over the Internet.
Most transmissions over telephone lines occur at a rate of 28.8kbps.
Transmissions also occur at higher speeds using digital subscriber line, or DSL,
cable modem and broadband technologies. Audio clarity varies with speed of
transmission. Audio streaming differs from traditional radio broadcasting in its
ability to be transmitted to a worldwide audience. RealNetworks pioneered the
development of audio streaming technology in 1995. This technology has
transformed the Internet from a graphic and text-based information platform into
a multimedia audio/visual platform.
Our Web site is maintained on a Windows NT and Linux operating system
platform. Our audio content is programmed and housed in an internal computer
network. NetRadio's audio stream is encoded to the Real Audio G-2 format on
Linux servers. These servers are connected through a routing system provided by
Cisco Systems to multiple 45mbps T3 Internet connections.
We also have recently contracted with AT&T to support our bandwidth
requirements. Under our agreement, AT&T agrees to provide us as much bandwidth
as is needed to support the traffic to our Web site. AT&T also provides
round-the-clock technical support and redundant back-up servers in case we
suffer system failures. The agreement with AT&T expires in March 2001.
We have developed proprietary software, together with commercially available
music scheduling products, to produce a traditional radio-style broadcast with
real-time stream information. Our Internet and database servers run
industry-standard server software and are housed in our Minneapolis, Minnesota
facility. All mission-critical equipment is supplied with back-up power and
monitored for 24-hour operation.
We stream all of our audio music content through RealNetworks' current
technology, known as G2 (Generation 2).
To listen to NetRadio, a listener must have a computer with a minimum 486-66
processor (Pentium preferred), or 68040 or PowerPC-based Macintosh or Macintosh
clone, an operating system of either Windows 95, 98 or NT or 0/S 7.5.3 or
better, a modem having 28.8kbps or better connection speed, and a soundcard.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
COPYRIGHTS AND TRADEMARKS. The trademarks N NET.RADIO NETWORK and design
and NET.RADIO have been registered with the United States Patent and Trademark
Office. We have filed applications for registration of the trademarks
NetRadio.com and design, CDPOINT and NETCOMPANION. We have also applied for a
European Community Trademark registration for N NET.RADIO NETWORK and design.
Our success depends in part upon developing, building and protecting our
trademarks, trade secrets and similar intellectual property. We rely upon
trademark and copyright law, trade secret protection and confidentiality and
license agreements with employees, strategic partners and others to protect our
proprietary rights. Notwithstanding these precautions, there can be no assurance
that the steps that we have taken or will take will be adequate to prevent
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misappropriation, infringement or other violations of our intellectual property.
A third party could, without authorization, copy or otherwise use our
intellectual property. There also can be no assurance that the United States
intellectual property laws and our agreements with employees, consultants and
others who participate in developing our proprietary rights will adequately
protect our rights, or that our trade secrets will not otherwise become known or
independently developed by competitors. Moreover, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States, and effective copyright, trademark and trade secret
protection may not be available in those jurisdictions, and we have not sought
protection for our intellectual property in every country where our broadcasts
may be heard.
We have licensed in the past, and expect to continue to license certain
proprietary rights, such as trademarks or copyrighted material, to third
parties. We expect that the quality of our brand will be maintained and
protected by our licensees. There can be no assurance that such licensees will
not take actions that might materially adversely affect the value of our
proprietary rights or reputation.
LICENSES TO BROADCAST PRE-RECORDED MUSIC ON THE INTERNET. We believe our
broadcasts of pre-recorded music over the Internet are permitted under the
copyright laws of the United States as long as we have permission from
appropriate authorities and pay appropriate royalties. We have entered into
license agreements with the major performing rights organizations, including the
American Society of Composers, Authors and Publishers, Broadcast Music, Inc. and
the Society of European Stage, Authors and Composers, Inc. These agreements
license us to broadcast music and other copyrighted materials over the Internet
and obligate us to pay royalties in connection with our broadcasts. The amount
of royalties that we must pay, or the terms and conditions of the license
agreements, may change, and such changes may be detrimental to us. In addition,
our license agreements with performing rights organizations may not comply with
the copyright laws of jurisdictions outside the United States, and our
broadcasts may violate the copyright laws of those jurisdictions where our
broadcasts may be heard.
We believe our use of third-party material on our Web site is permitted
under current provisions of United States copyright law. However, legal rights
to certain aspects of Internet content and commerce are not clearly settled, and
our ability to rely upon one or more exemptions or defenses under copyright law
is uncertain. We may be unable to continue to provide rights to information,
including downloadable music samples and artist, title and other information.
The law regarding linking to and framing of third party Web sites without
permission is uncertain. NetRadio believes that its linking and limited framing
activities are lawful, but there is a possibility that we may be required to pay
a license fee or cease linking or framing. If we are required to pay fees, or
cease linking or framing, it could have a material adverse effect on us.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify and the number of competitors to
increase in the future. Barriers to entry on the Internet are minimal, and
current and new competitors can launch Web sites at a relatively low cost. In
addition, the broader retail compact disc, software and DVD industries are
intensely competitive. NetRadio currently or potentially competes with a variety
of other companies. These competitors include:
- streaming media sites such as Broadcast.com, Spinner, Launch and Imagine
Radio,
- online retail vendors of music, computer software and DVDs, including
CDNow, audio highway, E-music, Musicmaker, MP3, Amazon.com, Barnes &
Noble.com, and GetMusic,
- traditional radio broadcasters,
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- other small online vendors, and
- publishers and traditional retail vendors of music and software, including
large specialty music stores such as MusicLand, Tower Records and Best
Buy, that have significant brand awareness, sales volume and customer
bases. Many of these traditional retailers also support dedicated Web
sites that compete directly with NetRadio.
We believe that the principal competitive factors in our online market are
brand name recognition, product quality, variety of value-added services, ease
of use, price, quality of customer service, availability of customer support,
reliability, technical expertise, quality of search tools, quality of site
content and speed of order fulfillment. Many current and potential competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we have. In addition, online retailers may be acquired by, receive
investments from or enter into other commercial relationships with larger, well
established and well financed companies as use of the Internet and other online
services increases. Our competitors may be able to secure merchandise from
vendors on more favorable terms, devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing or inventory availability
policies and devote substantially more resources to Web sites and systems
development than we can.
In selling music and other consumer entertainment media products, we compete
generally with other content providers for the time and attention of users and
for advertising revenues. We also compete for advertising with online services,
other Web site operators and advertising networks, as well as traditional media
such as television, radio and print, for a share of advertisers' budgets. We
must license and provide high quality, sufficiently compelling and popular audio
content, along with technology and value-added Internet services, to attract
users, support advertising intended to reach those users and attract businesses
seeking Internet broadcasting and distribution services.
We believe that the principal competitive factors for attracting advertisers
include the number of users accessing our Web site, the demographics of those
users, our ability to deliver focused advertising and interactivity through our
Web site, and the overall cost-effectiveness and value of the advertising
offered. There is intense competition for the sale of advertising on
high-traffic Web sites. This has resulted in a wide range of rates quoted by
different vendors for a variety of advertising services and makes it difficult
to project levels of Internet advertising that will be realized generally or by
any specific company. Any competition for advertisers among present and future
Web sites, as well as competition with other traditional media for advertising
placements, could result in significant price competition. We believe that the
number of companies selling Internet-based advertising and the available
inventory of advertising space have recently increased substantially.
Accordingly, we may face increased pricing pressure for the sale of
advertisements.
We also compete for traditional media advertising sales with national radio
networks, as well as local radio stations. Local radio content providers and
national radio networks may have larger and more established sales organizations
than we have. These broadcasters may have greater name recognition and more
established relationships with advertisers and advertising agencies than we
have. They also may be able to undertake more extensive marketing campaigns,
obtain a more attractive inventory of advertising spots, adopt more aggressive
pricing policies and devote substantially more resources to selling advertising
inventory.
EMPLOYEES
As of August 17, 1999, we had 42 full-time and nine part-time employees. We
also employed nine independent contractors and other temporary employees in
connection with our content, operations and administrative functions. None of
our employees are represented by a labor union and we consider our employee
relations to be good. Competition for qualified personnel in our industry is
intense,
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particularly among software development and other technical staff. We believe
that our future success will depend in part upon our continued ability to
attract, hire and retain qualified personnel.
FACILITIES
Our offices are located in one facility in Minneapolis, Minnesota. We lease
approximately 10,500 square feet of office space under four separate leases,
which includes space for our executive offices, technical center, and content
and commerce area. Our administrative office lease expires in October 1999, and
our technical center lease expires in October 2000. Our content and commerce
area lease is month-to-month. If we grow as we expect, we may need to acquire
more space. There is no assurance that this space will be available.
LEGAL PROCEEDINGS
From time to time we have been, and expect to continue to be, subject to
legal proceedings and claims in the ordinary course of business, including
claims for breach of contract and for alleged infringement of third-party
copyrights, trademarks and other intellectual property rights. These claims,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources. We are not aware of any legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse effect on our business, financial condition or results of operations.
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MANAGEMENT
The following table sets forth the name, age as of August 26, 1999 and a
brief account of the business experience of our executive officers and
directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -------------------------------------------------
<S> <C> <C>
Edward A. Tomechko............ 50 Chief Executive Officer, President and Director
Michael P. Wise............... 42 Vice President and Chief Financial Officer
Eric H. Paulson............... 54 Chairman of the Board
Donavan W. Pederson........... 60 Chief Operating Officer, Secretary and Director
Richard W. Hailey............. 43 Chief Technology Officer
David R. Witzig............... 42 Senior Vice President of Content and Programming
Nancy R. Kielty............... 42 Vice President of Commerce
James Caparro(1)(2)........... 47 Director
Charles E. Cheney(2).......... 55 Director
Marc H. Kalman(1)(2).......... 55 Director
Gene McCaffery(1)............. 51 Director
</TABLE>
- ------------------------
(1) Member of our compensation committee.
(2) Member of our audit committee.
EDWARD A. TOMECHKO. Mr. Tomechko has served as our Chief Executive Officer,
President and a director of NetRadio since January 1999 and served as Chief
Financial Officer from August 1998 until March 15, 1999. From April 1997 to
April 1998, Mr. Tomechko served as Senior Vice President and Chief Financial
Officer of David's Bridal, Inc. From January 1996 to April 1997, Mr. Tomechko
was Senior Vice President and Chief Financial Officer of The County Seat Stores,
Inc., and from 1990 to 1996, Mr. Tomechko served as Vice President and Treasurer
of County Seat. In October 1996, County Seat filed a voluntary petition for
reorganization under Chapter 11 of Title 11 of the United States Bankruptcy
Code, in the United States Bankruptcy Court for the District of Delaware. On
October 29, 1997, the Plan of Reorganization was consummated.
MICHAEL P. WISE. Mr. Wise has served as our Vice President and Chief
Financial Officer since March 15, 1999. From December 1997 through March 1999,
Mr. Wise served as Vice President and Corporate Controller for Health Fitness
Corporation, a publicly held, Minneapolis-based manager of fitness centers for
Fortune 500 and large hospital clients. From April 1994 through October 1997,
Mr. Wise served as a consultant to and Chief Financial Officer, Treasurer and
Secretary of The Sled Dogs Company, a publicly held, Minneapolis-based
manufacturer, marketer and distributor of snow skates. On November 5, 1997, The
Sled Dogs Company filed a voluntary petition under Chapter 11 of the Bankruptcy
Code with the United States Bankruptcy Court for the District of Minnesota. From
April 1986 to March 1994, Mr. Wise was employed by National Computer Systems,
Inc., a publicly held, Minneapolis-based developer and marketer of information
systems and services for education, serving in various financial and sales,
marketing and management positions.
ERIC H. PAULSON. Mr. Paulson has served as our Chairman of the Board since
May 1996 and also served as Chief Executive Officer of NetRadio from April 1997
to January 1999. Mr. Paulson has served as Chairman of the Board, Chief
Executive Officer and a director of Navarre since 1983.
DONAVAN W. PEDERSON. Mr. Pederson has served as our Chief Operating Officer
since July 1999 and served as our Chief Technology Officer from September 1997
to June 1999. Mr. Pederson has served as Secretary and a director of NetRadio
since September 1997. From April 1994 to April 1997,
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he was President of ComNet Research Corporation, a marketer and integrator of
fiber channel networks. From 1986 to 1994, Mr. Pederson served as President of
Donavan International, Inc., an international trade services company.
RICHARD W. HAILEY. Mr. Hailey has served as our Chief Technology Officer
since July 1999. From November 1998 to July 1999, he served as the Technology
Services Practice Manager at Pragmatek Consulting Group, a Minneapolis-based
consulting firm. From July 1995 to October 1998, he served in various leadership
positions including Director of Technology for the U.S. Region at
MCI-Systemhouse. From October 1993 to July 1995, he served as a Senior Technical
Architect at Computer Sciences Corporation.
DAVID R. WITZIG. Mr. Witzig has served as our Senior Vice President of
Content and Programming since May 1996. From June 1989 to May 1994, Mr. Witzig
was Branch Manager, Chicago, of EMI Music Distribution, the distribution arm of
EMI Music, Inc. From May 1994 to May 1996, he served as Regional Director,
Chicago, of EMI Music Distribution. Mr. Witzig has more than 17 years of
experience in promotion, special accounts and sales capacities with major record
labels including Regional Director for EMI Music Distribution and National Sales
Director of Capitol Records.
NANCY R. KIELTY. Ms. Kielty has served as our Vice President of Commerce
since February 1999. From December 1996 to August 1998, she served as Divisional
Merchandise Manager, Airport Store Division, for Wilsons The Leather Experts, a
Minneapolis-based retailer of leather outerwear. From January 1992 to January
1996, Ms. Kielty was a Buyer for Fingerhut Companies, a Minneapolis-based direct
sales catalog retailer.
JAMES CAPARRO. Mr. Caparro has served as a director of NetRadio since
January 1999. He is Chairman and Chief Executive Officer of Island/Mercury/Def
Jam Music Group, a division of Universal/PolyGram Music Operations. From 1992 to
1998 he served as President and Chief Executive Officer of PolyGram Group
Distribution.
CHARLES E. CHENEY. Mr. Cheney has served as a director of NetRadio since
May 1996. From March 1997 to September 1998, he also served as our Chief
Financial Officer. Mr. Cheney has served as a director, Chief Financial Officer,
Executive Vice President and Secretary of Navarre since 1985.
MARC H. KALMAN. Mr. Kalman has served as a director of NetRadio since
January 1999. Mr. Kalman is affiliated with Chancellor Media, Inc. and since
1992, he has served as Vice President and General Manager for KDWB-FM, KTCZ-FM
and WRQC-FM, three leading FM stations in the Minneapolis/Saint Paul market.
Since 1993, Mr. Kalman also has served as an Executive Board Member of the
Variety Childrens Association Board of Directors and as a director of the
Minnesota Broadcasters Board of Directors.
GENE MCCAFFERY. Mr. McCaffery has served as a director of NetRadio since
November 1998. He currently is Chief Executive Officer, Chairman of the Board
and a director of ValueVision. Prior to joining ValueVision in 1998, Mr.
McCaffery served as Chief Executive Officer and Managing Partner of Marketing
Advocates, a celebrity-driven product and marketing development company based in
Los Angeles. From 1982 to 1996, Mr. McCaffery was employed in several capacities
with Montgomery Ward & Co., Inc., serving most recently as Senior Executive Vice
President. Montgomery Ward filed for Chapter 11 bankruptcy protection in 1997.
From 1994 to 1996, Mr. McCaffery also served as Vice Chairman of The Signature
Group, one of the nation's largest direct marketing companies. Mr. McCaffery
also serves as a director of Metal Management, Inc.
BOARD OF DIRECTORS
Each director currently serves until the next regular meeting of
shareholders after election or appointment and until his or her successor is
elected and is qualified to serve. Upon the closing of this offering, we will
divide our board of directors into three classes with staggered three-year
terms. The
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terms of Messrs. Cheney and Pederson will expire at the annual meeting of our
shareholders in 2000, the terms of Messrs. Caparro and Kalman will expire at the
annual meeting of our shareholders in 2001, and the terms of Messrs. Tomechko,
Paulson and McCaffery will expire at the annual meeting of our shareholders in
2002.
ARRANGEMENTS FOR NOMINATION AS DIRECTOR
Under the terms of a March 1997 stock purchase agreement among Navarre,
NetRadio and ValueVision, and based upon our total number of directors,
ValueVision has the right to elect the number of directors equal to its
proportionate share of ownership of NetRadio, rounded up to the next whole
number. Following ValueVision's purchase of 595,000 shares of common stock for
$500,000 occurring at the closing of this offering, ValueVision will have the
right to elect two directors of NetRadio. Please see "Related Party
Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established an audit committee and a compensation
committee. Both committees are currently composed entirely of directors who are
not officers or employees of NetRadio.
Our audit committee generally has responsibility for recommending
independent auditors to the board of directors for selection, reviewing the plan
and scope of the annual audit, reviewing our audit and control functions and
reporting to the full board of directors regarding these matters. The members of
our audit committee are Messrs. Caparro, Cheney and Kalman.
Our compensation committee generally has responsibility for recommending to
the board of directors guidelines and standards relating to the determination of
executive compensation, reviewing executive compensation policies and reporting
to our board of directors regarding these matters. Our compensation committee
also has responsibility for administering our stock option plan, determining the
number of options to be granted to the executive officers and reporting to our
board of directors on such matters. The members of our compensation committee
are Messrs. Caparro, Kalman and McCaffery.
COMPENSATION OF DIRECTORS
Each non-employee director receives $500 and reimbursement of any expenses
incurred for each board meeting attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Paulson is Chairman, President and Chief Executive Officer, and Mr.
Cheney is Chief Financial Officer of Navarre. Mr. McCaffery, who serves as a
member of our compensation committee, is also Chief Executive Officer of
ValueVision. Prior to this offering, after giving effect to the purchase of
595,000 shares of common stock by ValueVision, Navarre owned approximately 77%
of our common stock and ValueVision owned approximately 22% of our common stock.
Following this offering, Navarre will own approximately 48% and ValueVision will
own approximately 14% of our common stock, assuming the underwriters'
over-allotment option is not exercised.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
the compensation paid during the fiscal year ended December 31, 1998 to Eric H.
Paulson, who served as our Chief Executive Officer from April 24, 1997 to
January 10, 1999. No other executive officers received salary and bonus in
excess of $100,000 during 1998.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- --------------------
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- --------------------------------------------------- --------- ----------- ----------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Eric H. Paulson, Chief Executive Officer........... 1998 $ 0 $ 0 $ 0 90,000
</TABLE>
OPTION GRANTS IN 1998
The following table sets forth certain information regarding stock options
granted during 1998 to Mr. Paulson.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE PRICE PER EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- --------------------------- ------------- ------------- --------------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Eric H. Paulson............ 90,000(2) 9.8% $ 1.64 May 31, 2005 $ 60,088 $ 140,031
</TABLE>
- ------------------------
(1) The 5 and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the SEC. Potential realizable value is determined
by multiplying the fair market value at the time of grant as determined by
our board of directors by the stated annual appreciation rate compounded
annually for the term of the option, subtracting the exercise price or base
price per share from the product, and multiplying the remainder by the
number of options granted. Actual gains, if any, on stock option exercises
and common stock holdings are dependent on the future performance of our
common stock and overall stock market conditions. There can be no assurance
that the amounts reflected in this table will be achieved.
(2) The stock option is exercisable in annual increments of 18,000 shares
beginning in June 1998.
FISCAL YEAR END OPTION VALUES
The following table sets forth certain information regarding Mr. Paulson's
unexercised stock options as of December 31, 1998. Mr. Paulson did not exercise
any options in 1998.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER AT
31, 1998 DECEMBER 31, 1998(1)
---------------------- --------------------
NAME VESTED UNVESTED VESTED UNVESTED
- -------------------------------------------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Eric H. Paulson............................. 18,000 72,000 $ 60,480 $ 241,920
</TABLE>
- ------------------------
(1) Based on the fair market value of our common stock at the end of the fiscal
year minus the exercise price, multiplied by the number of securities
underlying the option.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL CONSIDERATIONS
We have entered into employment agreements with Edward A. Tomechko, Michael
P. Wise, Donavan W. Pederson, Richard W. Hailey, David R. Witzig and Nancy R.
Kielty. The term of Mr. Tomechko's agreement commenced on January 11, 1999 and
ends on January 10, 2002. The agreements between us and Mr. Pederson and Mr.
Witzig commenced on August 1, 1998 and end on July 31, 2000. Ms. Kielty's
agreement commenced on February 25, 1999, Mr. Wise's agreement commenced on
April 29, 1999 and Mr. Hailey's agreement commenced on July 26, 1999. Mr.
Tomechko's annual base salary is $175,000, subject to an immediate increase to
$200,000 upon the closing of this offering. Mr. Pederson's annual base salary is
$120,000, subject to an immediate increase
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to $140,000 upon the closing of this offering. Mr. Witzig's annual base salary
is $100,000, subject to an immediate increase to $130,000 upon the closing of
this offering. Mr. Tomechko will receive a one-time $20,000 bonus upon the
closing of this offering, and Messrs. Pederson and Witzig will each receive a
one-time $10,000 bonus upon the closing of this offering. The employment
agreements further provide that each executive is eligible to receive an annual
performance bonus of up to 60% for Mr. Tomechko, and 40% for Messrs. Pederson
and Witzig, of their respective base salaries, if we achieve certain operating
objectives. Ms. Kielty, Mr. Wise and Mr. Hailey received termination agreements
in February 1999, April 1999 and July 1999, respectively, that provide that if
there is a change in control of NetRadio and they are terminated, their status
with NetRadio adversely changes or their salary is substantially reduced, then
they will receive a cash severance payment equal to six months' salary.
In August 1998, Mr. Tomechko received an option to purchase 75,000 shares of
common stock that vests in equal increments over three years beginning in
September 1999. In January 1999, Mr. Tomechko received an option to purchase
125,000 shares of common stock that vests in equal increments over three years
beginning in January 2000. If Mr. Tomechko is terminated without cause before
these options are fully vested, these options will become exercisable in full
upon such termination. In connection with his initial employment with us and his
relocation to Minnesota, we advanced Mr. Tomechko $62,500 pursuant to a
promissory note. The note bears interest at an annual rate of 7.75% beginning
December 1999 and matures in December 2001. Mr. Tomechko is required to pay
interest on the note and repay principal in an amount equal to the appraised
increase in the value of his residence at December 2001.
In February 1999, Mr. Wise received an option to purchase 50,000 shares of
common stock that vests in equal increments over three years beginning in
February 2000. Also, in February 1999, Mr. Wise executed a stock option
agreement with NetRadio, that provides that if he is terminated without cause,
his stock options will immediately become fully vested. In June 1998, Mr.
Pederson received an option to purchase 100,000 shares of common stock that
vests in equal increments over three years beginning in June 1998. In June 1998,
Mr. Pederson also received an option to purchase 75,000 shares of common stock
that vests if we achieve certain milestones, including the completion of an
initial public offering but in any event in five years. In June 1998, Mr. Witzig
received an option to purchase 75,000 shares of common stock that vests in equal
annual increments over three years beginning in June 1998. In June 1998, Mr.
Witzig also received an option to purchase 75,000 shares of common stock that
vests if we achieve certain milestones, including the completion of an initial
public offering, but in any event in five years. If the employment of Messrs.
Pederson or Witzig is not renewed at the end of the term of his employment
agreement, except for cause, the terminated executive's option to purchase
75,000 shares of common stock will be immediately exercisable in full. In
February 1999, Ms. Kielty received an option to purchase 50,000 shares of common
stock that vests in equal increments over three years beginning in February
2000. In July 1999, Mr. Hailey received an option to purchase 50,000 shares of
common stock that vests in equal annual increments over three years beginning in
July 2000.
BENEFIT PLANS
THE NETRADIO CORPORATION 1998 STOCK OPTION AND INCENTIVE PLAN. In June
1998, our board of directors adopted, and our shareholders approved, the
NetRadio Corporation 1998 Stock Option and Incentive Plan, pursuant to which
officers, employees, consultants, independent contractors and non-employee
directors are eligible to receive options to purchase shares of our common
stock, stock appreciation rights and awards of deferred or restricted stock. A
total of 2,000,000 shares of common stock may be issued under our stock option
plan. The stock option plan is administered by our board of directors, or a
committee of at least two directors, and the committee must have at least two
members who are "disinterested directors" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934. Our board of directors, or the committee,
has the authority to interpret the stock option plan, to determine the eligible
recipients, terms and conditions of awards granted, to prescribe, amend and
rescind the rules and regulations of the stock option plan, to waive any
restriction
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on any award, and to make all other determinations necessary or advisable for
the administration of the stock option plan. If our board of directors or the
committee makes an award to an eligible participant, the recipient must enter
into an agreement with NetRadio in a form that our board of directors or the
committee determines is consistent with the stock option plan.
Options granted generally must be exercised within three months of the
optionholder's termination of employment. All outstanding options become
immediately exercisable in full upon certain changes in control of NetRadio. In
the event of a change in control, our board of directors or the committee may,
in its discretion without consent of the recipient, determine to award cash
equal to the fair market value of some or all of a recipient's options.
As of August 17, 1999, there were options to purchase an aggregate of
1,282,350 shares of common stock outstanding with exercise prices ranging from
$1.64 per share to the initial public offering price per share.
401(K) PLAN. At the present time, Navarre sponsors a savings and investment
plan, or 401(k) Plan, for our employees, which is intended to be qualified under
Section 401 of the Internal Revenue Code. Participating employees may make
pre-tax contributions, subject to limitations defined in the 401(k) Plan of a
percentage of their total compensation. Navarre may make discretionary matching
contributions on behalf of our employees. We intend to create our own plan that
will provide benefits similar to the 401(k) Plan currently administered by
Navarre.
LIMITATIONS OF DIRECTORS' LIABILITY AND INDEMNIFICATION
We plan to enter into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. Under
these agreements, among other things, we will indemnify our directors and
executive officers for expenses including attorneys' fees, judgments, fines and
settlement amounts incurred by any of them in any action or proceeding,
including any action by or in the right of NetRadio arising out of the person's
services as a director or executive officer of NetRadio, a subsidiary of
NetRadio or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements will be
necessary to attract and retain qualified persons as directors and executive
officers.
At the present time, there is no pending litigation or proceeding involving
directors or officers in which indemnification is required or permitted, and we
are not aware of any threatened litigation or proceeding that may result in a
claim for indemnification.
RELATED PARTY TRANSACTIONS
On May 1, 1996, Navarre purchased 50% of the issued and outstanding common
stock of Net Radio Nevada, our predecessor, for $1,500,000. In addition, Navarre
entered into an option agreement with our then existing shareholders under which
Navarre issued 190,000 shares of its common stock to such shareholders in
exchange for the right to acquire up to an additional 20% of the outstanding
common stock of our predecessor owned by these shareholders, pursuant to a
formula based upon our future earnings.
On March 7, 1997, Navarre and our predecessor entered into an Agreement and
Plan of Reorganization under which Navarre agreed to acquire all of our
predecessor's remaining issued and outstanding common stock, and our predecessor
was merged into a subsidiary of Navarre. In connection with the transaction,
Navarre issued 125,000 shares of its common stock to our predecessor's
shareholders and certain affiliates, and agreed to issue an additional 2,075,000
shares of its common stock, contingent upon us achieving specified levels of
sales and profits in the two years following the merger. We have not achieved
the levels of sales or profits targeted in the agreement with Navarre, and no
additional shares of Navarre common stock have been issued to our predecessor's
shareholders as of the date of this prospectus. As a result of the two
transactions, Navarre acquired
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<PAGE>
ownership of all of our issued and outstanding shares of common stock and
currently owns 5,000,000 shares.
Concurrent with Navarre's March 1997 acquisition of all of our issued and
outstanding common stock, ValueVision agreed to invest $3,000,000 in NetRadio,
consisting of $1,000,000 in cash and an agreement to provide $2,000,000 worth of
television advertising time, in exchange for 882,500 shares of our common stock.
ValueVision also was granted a right of first refusal to distribute any products
other than music and software sold by us. ValueVision is an integrated
electronic and print media direct marketing company that operates a television
home shopping network. At the time of the ValueVision investment, we determined
to assign a carrying value of $1,000,000 to the $2,000,000 of television
advertising time.
Under the terms of the stock purchase agreement by and among NetRadio,
ValueVision and Navarre, and based upon our total number of directors,
ValueVision has the right to elect the number of directors equal to its
proportionate share of ownership of NetRadio, rounded up to the next whole
number. Following ValueVision's purchase of 595,000 shares of common stock for
$500,000 occurring at the closing of this offering, ValueVision will have the
right to elect two directors of NetRadio.
In connection with ValueVision's investment in NetRadio, ValueVision and
Navarre entered into a conversion agreement. The conversion agreement grants
ValueVision the right to demand that Navarre buy back ValueVision's NetRadio
common stock for $3,000,000, less unused advertising time, or convert
ValueVision's NetRadio common stock into shares of Navarre common stock equal to
$3,000,000, less unused advertising time. These rights are exercisable if, among
other things, NetRadio does not register its common stock under the Securities
Act within five years from March 20, 1997. ValueVision's conversion rights will
terminate upon the closing of this offering.
ValueVision also has preemptive rights which entitle it to purchase
additional shares of our securities to maintain its current percentage ownership
if we issue additional equity securities. ValueVision has waived its future
preemptive rights, effective upon the closing of this offering.
ValueVision also has registration rights with respect to its shares of our
common stock, including the right to have 595,000 shares registered for resale
one year from the closing of this offering, and the right to have its remaining
shares registered two years from the closing of this offering. ValueVision also
has the right to have its shares included in other registration statements filed
by NetRadio. ValueVision has waived any registration rights it may have in
connection with this offering.
In addition, under the terms of the March 1997 stock purchase agreement, if
NetRadio has revenues, other than from product sales, of at least $3,000,000 in
any rolling consecutive four quarter period, NetRadio has a one-time option for
a 12-month period to require ValueVision to purchase 4.95% of the outstanding
shares of common stock of NetRadio for $500,000. ValueVision similarly has the
right during this period to purchase 4.95% of the outstanding common stock of
NetRadio for $500,000. In connection with this offering, NetRadio and
ValueVision have terminated this right in exchange for ValueVision's agreement
to purchase 550,000 shares of common stock immediately prior to the closing of
this offering for $500,000.
Because this offering will exceed 3,499,999 shares, ValueVision will receive
an additional 10,000 shares of common stock. In addition, for every 100,000
shares of common stock that we sell in this offering in excess of 3,499,999.
ValueVision will receive an additional 7,000 shares of common stock. Thus,
ValueVision will receive at least 595,000 shares in connection with this
offering.
The following are summaries of agreements that we have entered into with
Navarre. These summaries do not describe or contain every provision of the
agreements. These agreements are exhibits to the registration statement of which
this prospectus is a part, and you should review those exhibits if you would
like further information with respect to these agreements.
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<PAGE>
FULFILLMENT AGREEMENT. In December 1998, we entered into a five year
fulfillment agreement with Navarre, under which we are required to fulfill our
customer purchase orders for identified products from Navarre before any other
fulfillment source may be utilized. The fulfillment agreement governs order
procedures, product returns, shipping procedures, payments and price lists. The
fulfillment agreement may be terminated by either party if, among other things,
we discontinue online sales of pre-recorded music or Navarre discontinues
fulfilment services to online customers. For the fiscal year ended December 31,
1998, and for the six months ended June 30, 1999, we purchased approximately 5%
of our music products from Navarre under the fulfillment agreement.
SEPARATION AGREEMENT. In March 1999, NetRadio entered into a separation
agreement with Navarre to be effective upon the closing of this offering. Under
the separation agreement, Navarre and NetRadio will separate the accounting,
finance, human resources and other administrative functions of NetRadio and
Navarre in the 45-day period following the closing of this offering. NetRadio
has agreed to pay Navarre $7,500 for services provided during the transition
period. In addition, concurrent with the closing of this offering, Navarre will
contribute to the capital of NetRadio $5,234,840 of principal indebtedness owed
by NetRadio to Navarre. Navarre and NetRadio have also agreed that for a period
of four years from the date of the closing of this offering, Navarre will not
directly or indirectly engage in the Internet broadcasting of music and
information or online retail sales of entertainment-related products in
substantially the same manner and format as currently conducted by NetRadio.
NetRadio has indemnification obligations to Navarre and its affiliates under the
separation agreement, including indemnification for liability arising out of
statements made in connection with this offering. Except for the contractual
obligations set forth in the separation agreement or other intercompany
agreements, Navarre and NetRadio have agreed to discharge all claims they may
have against each other existing before the closing of this offering. In
connection with the execution of the separation agreement, NetRadio and Navarre
are entering into a Multiple Advance Term Note. Under the Note, NetRadio will
agree to repay to Navarre all amounts advanced to NetRadio beginning January 1,
1999 plus accrued interest on $5,234,840 of principal indebtedness incurred
through December 31, 1998. The Note bears interest at midwest prime plus one
half percentage point. The total amount of the Note is due on June 1, 2001.
SALES OF RESTRICTED STOCK TO CERTAIN INSIDERS
In September 1998, we sold an aggregate of 40,000 shares of common stock at
a price of $1.64 per share to Donavan W. Pederson, Jan K. Andersen, David R.
Witzig, and Karen W. Paulson, Eric H. Paulson's spouse. Mr. Anderson served as
the Senior Vice President for Global Sales and Marketing of NetRadio from
November 1997 until July 1999.
GRANT OF CERTAIN OPTIONS TO NAVARRE AFFILIATES
In June 1998, we granted options to purchase common stock to the following
executives and affiliates of Navarre:
Eric H. Paulson, Chairman of the Board and Chief Executive Officer of
Navarre and Chairman of the Board of NetRadio, aggregate options to purchase
90,000 shares of common stock at $1.64 per share, vesting annually in increments
of 18,000 shares, commencing June 1, 1998;
Charles E. Cheney, Chief Financial Officer and a director of Navarre and a
director of NetRadio, aggregate options to purchase 60,000 shares of common
stock at $1.64 per share, vesting annually in increments of 12,000 shares,
commencing June 1, 1998; and
James G. Sippl, a director of Navarre and former consultant to NetRadio,
aggregate options to purchase 20,000 shares of common stock at $1.64 per share,
vesting annually in increments of 4,000 shares, commencing June 1, 1998.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of our common stock as of August 17, 1999, as adjusted to reflect
ValueVision's purchase of 595,000 shares of common stock effective as of the
closing of this offering, and as adjusted to reflect the sale of shares of
common stock we are offering, for (1) each person who owns beneficially 5% or
more of our common stock (2) each of our directors, and (3) all executive
officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
NUMBER OF SHARES OF ------------------------
COMMON STOCK BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING(1)
- ---------------------------------------------------------------- ------------------------- ----------- -----------
<S> <C> <C> <C>
Eric H. Paulson (2)(4).......................................... 5,046,000 76.9% 47.8%
Charles E. Cheney (2)(5)........................................ 5,024,000 76.7 47.6
Navarre Corporation (2)......................................... 5,000,000 76.7 47.5
ValueVision International, Inc. (3)............................. 1,477,500 22.7 14.0
Gene McCaffery (3)(6)........................................... 1,477,500 22.7 14.0
Donavan W. Pederson (7)......................................... 101,666 1.5 1.0
Edward A. Tomechko (8).......................................... 25,000 0.4 0.2
James Caparro................................................... -- 0.0 0.0
Marc H. Kalman.................................................. -- 0.0 0.0
All executive officers and directors as a group
(11 persons)(9)............................................... 6,759,166 99.8% 62.7%
----------- ----- -----------
</TABLE>
- ------------------------
(1) Assumes the underwriters' over-allotment option is not exercised.
(2) The address of this shareholder is: Navarre Corporation, 7400 49(th) Avenue
North, New Hope, Minnesota 55428.
(3) The address of this shareholder is: ValueVision International, Inc., 6740
Shady Oak Road, Eden Prairie, Minnesota 55344.
(4) Includes 5,000,000 shares of common stock held by Navarre. Mr. Paulson is an
executive officer, director and shareholder of Navarre. He disclaims
beneficial ownership of the shares held by Navarre except to the extent of
his proportionate interest therein. Also includes 10,000 shares of common
stock owned by Karen W. Paulson, Mr. Paulson's spouse. Also includes options
to purchase 36,000 shares of common stock exercisable within 60 days of
August 1, 1999.
(5) Includes 5,000,000 shares of common stock held by Navarre. Mr. Cheney is an
executive officer, director and shareholder of Navarre. He disclaims
beneficial ownership of the shares held by Navarre except to the extent of
his proportionate interest therein. Also includes options to purchase 24,000
shares of common stock exercisable within 60 days of August 1, 1999.
(6) Includes 882,500 shares of common stock held by ValueVision and 595,000
shares of common stock to be purchased by ValueVision at the closing of the
offering. Mr. McCaffery is an executive officer, director and a
securityholder of ValueVision. He disclaims beneficial ownership of the
shares held by ValueVision except to the extent of his proportionate
interest therein.
(7) Includes options to purchase 91,666 shares of common stock exercisable
within 60 days of August 1, 1999.
(8) Includes options to purchase 25,000 shares of common stock exercisable
within 60 days of August 1, 1999.
(9) Includes options to purchase 251,666 shares of common stock exercisable
within 60 days of August 1, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of August 17, 1999, our authorized capital stock consisted of 50,000,000
shares of common stock, no par value, of which 5,927,900 shares were issued and
outstanding and held by seven shareholders. In addition, ValueVision has agreed
to purchase 595,000 shares of common stock concurrent with the closing of this
offering. All share amounts in this prospectus reflect a 500-for-1 stock split
effected June 1, 1998. Our authorized capital stock, as of August 1, 1999, also
included 10,000,000 shares of preferred stock, no par value, of which no shares
were issued and outstanding as of August 1, 1999.
COMMON STOCK
All holders of shares of our common stock are entitled to one vote per share
on all matters to be voted upon by shareholders. Cumulative voting in the
election of directors is not permitted. Each share of common stock is equal to
all other shares of common stock in all respects. All of our issued and
outstanding shares of common stock are, and the shares to be sold in the
offering will be when issued, fully paid and nonassessable. The shares of common
stock in this offering have no preeemptive or conversion rights, no redemption
or sinking fund provisions, and are not liable for further call or assessment.
Subject to the rights of holders of any preferred stock that may be outstanding,
each share of common stock is entitled to share in any distribution of capital
assets remaining after payment of liabilities. Subject to the rights of holders
of any preferred stock that may be outstanding, holders of common stock are
entitled to receive dividends when and as declared by our board of directors out
of legally available funds. Any dividends may be paid in cash, property or
additional shares of common stock.
PREFERRED STOCK
Under our articles of incorporation, our board of directors may issue up to
10,000,000 shares of preferred stock in one or more series with designations,
rights and preferences as may be determined from time to time by the board of
directors. Accordingly, the board of directors is empowered, under governing
Minnesota law and our articles of incorporation and without further shareholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights that may adversely affect the voting power or other
rights of the holders of our common stock. In the event of issuance, the
preferred stock could be utilized to discourage, delay or prevent an acquisition
or change in control. We do not currently intend to issue any shares of
preferred stock.
OPTIONS
As of August 17, 1999, we had outstanding options to purchase 1,282,350
shares of common stock, at exercise prices that range from $1.64 to the initial
public offering price per share and we have 712,250 shares of common stock
reserved for future option grants. Previous grants under our stock option plan
have been exempt from registration, and shares issued thereunder are subject to
resale restrictions. We intend to file a registration statement on Form S-8
registering shares to be issued in connection with current and future option
grants.
REGISTRATION RIGHTS
Navarre and ValueVision have rights with respect to the registration of
their common stock. Please see "Related Party Transactions."
ANTI-TAKEOVER PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT
Section 302A.671 of the Minnesota Business Corporation Act provides that,
unless the acquisition of new percentages of voting control (in excess of 20%,
33 1/3% or 50%) by an existing shareholder or
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<PAGE>
other person is approved by a majority of our disinterested shareholders, the
shares acquired above new percentage levels will have no voting rights. We are
required to hold a special shareholders' meeting to vote on any such acquisition
within 55 days after the delivery to us by the acquiror of an information
statement describing, among other things, the acquiror and any plans of the
acquiror to liquidate or dissolve us, and copies of definitive financing
agreements for any financing of the acquisition not to be provided by funds of
the acquiror. If any acquiror does not submit an information statement to us
within 10 days after acquiring shares representing a new threshold percentage of
voting control, or if our disinterested shareholders vote not to approve the
acquisition, we may redeem the shares so acquired by the acquiror at their fair
market value. Section 302A.671 generally does not apply to a cash offer to
purchase all shares of voting stock of the issuing corporation if the offer has
been approved by a majority vote of our disinterested board members.
Section 302A.673 of the Minnesota Business Corporation Act restricts
transactions between us and a shareholder who becomes the beneficial holder of
10% or more of our outstanding voting stock (an "interested shareholder") unless
a majority of our disinterested directors have approved, prior to the date on
which the interested shareholder acquired a 10% interest, either the business
combination transaction suggested by the shareholder or the acquisition of
shares that made the shareholder a statutory interested shareholder. If prior
approval is not obtained, the statute imposes a four-year prohibition on
mergers, sales of substantial assets, loans, substantial issuances of stock and
various other transactions involving us and the interested shareholder or its
affiliates.
These statutory provisions could have the effect of delaying or preventing a
change in control of NetRadio.
TRANSFER AGENT AND REGISTRAR
Norwest Bank has been appointed as the transfer agent and registrar for our
common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our shares of
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect prevailing market prices. As described below, for
a period of 180 days after this offering, all shares of common stock other than
shares sold in this offering will be subject to contractual restrictions
regarding resale. Sales of substantial amounts of common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price and our ability to raise equity capital in the future.
Upon completion of this offering and assuming no exercise of the
over-allotment option, we will have 10,522,900 shares of common stock
outstanding. Of this amount, the 4,000,000 shares of common stock offered will
be freely tradeable in the public market without restriction under the
Securities Act unless purchased by our "affiliates" as that term is defined in
Rule 144 under the Securities Act.
The remaining 6,522,900 shares of common stock held by existing shareholders
will be "restricted securities" as that term is defined in Rule 144 under the
Securities Act. Restricted securities may be sold in the public market only if
registered under the Securities Act or if they qualify for an exemption from
registration under Rules 144 or 701 promulgated under the Securities Act. Sales
of the restricted securities in the public market, or the availability of such
shares for sale, could adversely affect the market price of our common stock.
The executive officers, directors and current shareholders, who in the
aggregate hold 6,522,900 shares of our common stock, and the holders of all
options to purchase shares of common stock under our stock option plan, have
entered into lock-up agreements under which they may not dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock, without the prior written consent
of Gerard Klauer Mattison &
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Co., Inc. As a result of these contractual restrictions, notwithstanding
possible earlier eligibility for sale under the provisions of Rule 701, shares
subject to lock-up agreements will not be saleable until the agreements expire.
However, Gerard Klauer Mattison & Co., Inc. may, in its sole discretion, and at
any time without notice, release all or any portion of the securities subject to
these lock-up agreements. Immediately following expiration of the lock-up
agreements, and subject to limitations on the volume of sales, 5,922,500 shares
of common stock will be eligible for immediate sale pursuant to Rules 144 and
701 under the Securities Act. Additionally, following expiration of the lock-up
agreements, up to 563,217 of the 1,282,350 shares underlying options outstanding
as of August 17, 1999, will be exercisable and eligible for immediate sale
pursuant to Rules 144 and 701, subject to certain limitations on the volume of
sales.
We intend to file a registration statement approximately 180 days after the
closing of this offering on Form S-8 under the Securities Act covering the
shares of common stock reserved for issuance under our stock option plan. The
registration statement will automatically become effective upon filing.
Accordingly, shares of our common stock registered under the registration
statement will, subject to Rule 144 volume limitations applicable to affiliates,
be available for sale in the open market, unless the shares are subject to our
vesting restrictions or the lock-up agreements described above.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are combined under the Rule, who has beneficially owned restricted
securities for at least the holding period of any prior owner (except an
affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (1) one percent of the number of
shares of common stock then outstanding (approximately 105,229 shares
immediately after this offering) or (2) the average weekly trading volume of the
common stock during the four calendar weeks preceding the filing of a Form 144
with respect to the sale. Sales under Rule 144 are also subject to
manner-of-sale provisions and notice requirements and to the availability of
current public information about us. Under Rule 144(k), a person who is not
deemed to have been an affiliate of us at any time during the 90 days preceding
a sale, and who has beneficially owned the shares proposed to be sold for at
least one year (including the holding period of any prior owner except an
affiliate), is entitled to sell his or her shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated the
date of this prospectus, the underwriters named below for whom Gerard Klauer
Mattison & Co., Inc. and The Advest Group, Inc. are acting as representatives,
have severally agreed to purchase from us, and we have agreed to sell to the
underwriters, the following respective number of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ----------------------------------------------------------------- ---------
<S> <C>
Gerard Klauer Mattison & Co., Inc................................
The Advest Group, Inc............................................
---------
Total.......................................................... 4,000,000
---------
---------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
thereunder are subject to approval of certain legal matters by their counsel and
to various other conditions. The nature of the underwriters' obligation is such
that they are committed to purchase and pay for all shares of common stock if
any are purchased.
The underwriters propose to offer our shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus, and to a number of securities dealers (who may include the
underwriters) at a price, less a concession not in excess of $ per share
of common stock. The underwriters may allow, and the selected dealers may
reallow, a concession not in excess of $ per share of common stock to
various brokers and dealers. After this offering, the price to the public,
concession, allowance and reallowance may be changed by the representatives. The
representatives have informed us that the underwriters do not intend to confirm
sales to any account over which they exercise discretionary authority.
We have granted the underwriters an option, exercisable during the 30-day
period after the date of this prospectus, to purchase up to 600,000 additional
shares of common stock at the initial public offering price solely to cover
over-allotments, if any. To the extent that the underwriters exercise this
option, each of the underwriters will be committed, subject to certain
conditions, to purchase such additional shares of common stock in approximately
the same proportions as set forth in the above table.
The offering of the common stock is made for delivery when, as and if
accepted by the underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The underwriters
reserve the right to reject any order to purchase common stock.
We have agreed to issue to Gerard Klauer Mattison warrants to purchase
125,000 shares of common stock, at an exercise price per share equal to 120% of
the initial public offering price per share of common stock. We have also agreed
to issue warrants to purchase 75,000 shares of common stock to EVEREN
Securities, Inc. The warrants to be issued to EVEREN Securities are for advisory
services previously provided to us. The warrants are exercisable for a period of
four years, commencing one year from the effective date of the registration
statement of which this prospectus is a part and expire five years from the
effective date. The warrants will not be sold, offered for sale, transferred,
assigned or hypothecated for a period of one year from the effective date other
than to officers,
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<PAGE>
employees or partners of the underwriters and members of the selling group and
their officers and partners. The holders of the warrants will have no voting,
dividend or other shareholders' rights until the warrants are exercised. We have
granted demand and piggy-back registration rights in connection with the
warrants, which are applicable during the period that the warrants are
exercisable and expire five years from the effective date.
Subject to certain exceptions, we have agreed not to issue, and all our
officers, directors and securityholders have agreed not to offer, sell or
otherwise dispose of any shares of our common stock or our other equity
securities for a period of 180 days after the date of this prospectus (other
than shares sold pursuant to this prospectus) without the prior written consent
of Gerard Klauer Mattison.
We have agreed to indemnify the underwriters against material misstatements
and other claims arising under the Securities Act, or to contribute to payments
the underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price was negotiated between us
and the representatives. Among the factors considered in these negotiations
were:
- prevailing market conditions,
- an assessment of our management,
- our results of operations in recent periods,
- the present stage of our development,
- the market capitalizations and stages of development of other companies
which we and the representatives believe to be comparable to us, and
- estimates of our business potential.
There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market subsequent
to this offering at or above the initial public offering price. The initial
public offering price should not be considered an indication of the actual value
of our common stock. Such price is subject to change as a result of market
conditions and other factors. We cannot assure you that our common stock can be
resold at or above the initial public offering price.
In order to facilitate this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock during and after the offering. Specifically, the underwriters may
over-allot or otherwise create a short position in our common stock for their
own account by selling more shares of common stock than have been sold to them
by us. The underwriters may elect to cover any of these short positions by
purchasing shares of common stock in the open market or by exercising the
over-allotment option. In addition, the underwriters may stabilize or maintain
the price of our common stock by bidding for or purchasing shares of common
stock in the open market. They may also engage in passive market making
transactions, including imposing penalty bids, under which selling concessions
allowed to syndicate members of other broker-dealers participating in this
offering are reclaimed if shares of common stock previously distributed in this
offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of our common
stock to the extent that it discourages resales. No representation is made as to
the magnitude or effect of any possible stabilization or other transactions.
These transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
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LEGAL MATTERS
The validity of the issuance of the shares of our common stock offered
hereby will be passed upon for us by Lindquist & Vennum P.L.L.P., Minneapolis,
Minnesota and for the underwriters by Katten Muchin & Zavis, Chicago, Illinois.
EXPERTS
Ernst & Young LLP, independent auditors, has audited our financial
statements as of December 31, 1997 and 1998, and for the year ended December 31,
1996, the periods from January 1, 1997 through March 20, 1997 and March 21, 1997
through December 31, 1997 and the year ended December 31, 1998 as set forth in
their report. We have included our financial statements in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN GET MORE INFORMATION
Our fiscal year ends on December 31. We intend to furnish our shareholders
annual reports containing audited financial statements and other appropriate
reports. In addition, we intend to become a reporting company and file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy any reports, statements or other information we file
at the SEC's Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 and at the SEC's Regional Offices at 7 World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents, upon payment of a duplicating fee, by writing the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
Public Reference Room. Our SEC filings are also available to the public on the
SEC Web site at http://www.sec.gov.
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NETRADIO CORPORATION AND PREDECESSOR
FINANCIAL STATEMENTS
Year ended December 31, 1996, the Periods from January 1, 1997 through
March 20, 1997 and March 21, 1997 through December 31, 1997 and
the Year ended December 31, 1998 and the six Months
ended June 30, 1998 and 1999
(unaudited)
<TABLE>
<S> <C>
CONTENTS
Report of Independent Auditors........................................................ F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statement of Shareholders' Equity..................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
NETRADIO CORPORATION
We have audited the accompanying balance sheets of NetRadio Corporation as
of December 31, 1997 and 1998, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the year ended December 31,
1998 and for the period from March 21, 1997 through December 31, 1997 and the
statements of operations, shareholders' equity (deficit) and cash flows of the
Predecessor for the period from January 1, 1997 through March 20, 1997 and for
the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NetRadio Corporation at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the year ended December 31, 1998 and for the period from March 21, 1997
through December 31, 1997 and of the Predecessor for the period from January 1,
1997 through March 20, 1997 and for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Minneapolis, Minnesota
March 1, 1999
F-2
<PAGE>
NETRADIO CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY
---------------------- JUNE 30, (DEFICIT) AT
1997 1998 1999 JUNE 30, 1999
---------- ---------- ------------ ---------------
(NOTES 3 AND
10)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $ 4,253 $ 50,756 $ 16,024
Accounts receivable, less allowance for
doubtful accounts of $5,000 at December 31,
1997 and 1998 and June 30, 1999.............. 9,084 26,213 105,128
Prepaid advertising............................ 50,000 952,793 802,793
Prepaid expenses............................... -- -- 166,700
Other current assets........................... -- -- 763,333
---------- ---------- ------------
Total current assets............................. 63,337 1,029,762 1,853,978
Property and equipment, net...................... 395,900 881,478 1,538,415
Prepaid advertising.............................. 950,000 -- --
Note receivable--officer......................... -- 62,549 64,992
Deferred offering costs.......................... -- 239,643 764,295
Other assets..................................... 38,902 -- 3,175
Goodwill, net.................................... 947,250 526,250 316,000
---------- ---------- ------------
Total assets..................................... $2,395,389 $2,739,682 $ 4,540,855
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................... $ 737,300 $1,022,639 $ 1,093,963
Accrued expenses............................... 60,901 86,649 1,340,249
Deferred advertising revenue................... -- -- 250,000
Current maturities of capital lease
obligations.................................. 137,550 96,506 118,527
Current maturities of notes payable............ 57,855 -- --
---------- ---------- ------------
Total current liabilities........................ 993,606 1,205,794 2,802,739
Advances from Navarre............................ 1,212,311 5,234,840 9,748,377 4,513,537
Capital lease obligations, less current
portion........................................ 176,455 128,564 131,767 131,767
Commitments and contingencies....................
Shareholders' equity (deficit):
Common Stock, no par value:
Authorized shares--20,000,000
Issued and outstanding shares--11,765 at
December 31, 1997 and 5,922,500 at December
31, 1998 and 5,927,900 at June 30, 1999,
respectively............................... 2,000,000 2,134,150 3,029,975 8,764,815
---------- ---------- ------------ ---------------
Accumulated deficit............................ (1,986,983) (5,963,666) (11,172,003) (11,172,003)
---------- ---------- ------------ ---------------
Total shareholders' equity (deficit)............. 13,017 (3,829,516) (8,142,028) $ (2,407,188)
---------- ---------- ------------ ---------------
---------- ---------- ------------ ---------------
Total liabilities and shareholders' equity
(deficit)...................................... $2,395,389 $2,739,682 $ 4,540,855
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
--------------------------- ----------------------------------------------------------
PERIOD FROM PERIOD FROM SIX MONTHS
JANUARY 1, MARCH 21, ENDED
YEAR ENDED 1997 THROUGH 1997 THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, MARCH 20, DECEMBER 31, DECEMBER 31, ----------------------------
1996 1997 1997 1998 1998 1999
------------- ------------ ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Product sales............ $ -- $ -- $ -- $ 49,639 $ -- $ 258,607
Internet advertising..... -- -- -- 205,423 112,796 147,058
Miscellaneous............ 320,661 167,950 162,971 -- -- --
------------- ------------ ------------- ------------- ------------- -------------
Total net revenues....... 320,661 167,950 162,971 255,062 112,796 405,665
Cost of revenues........... -- -- 16,989 64,825 10,058 242,415
------------- ------------ ------------- ------------- ------------- -------------
Gross profit............... 320,661 167,950 145,982 190,237 102,738 163,250
Operating expenses:
Operations and technical
support................ -- -- 672,061 685,767 605,738 1,995,516
Sales and marketing...... 426,884 53,036 160,748 670,885 157,673 785,438
General and
administrative......... 2,154,455 851,688 1,267,879 2,786,385 595,491 2,276,477
------------- ------------ ------------- ------------- ------------- -------------
Total operating
expenses............... 2,581,339 904,724 2,100,688 4,143,037 1,358,902 5,057,431
------------- ------------ ------------- ------------- ------------- -------------
Loss from operations....... (2,260,678) (736,774) (1,954,706) (3,952,800) (1,256,164) (4,894,181)
Other (income) expense:
Interest................. (6,650) 17,694 32,277 23,883 13,169 314,156
------------- ------------ ------------- ------------- ------------- -------------
Net loss before taxes...... (2,254,028) (754,468) (1,986,983) (3,976,683) (1,269,333) (5,208,337)
Income tax expense......... -- -- -- -- -- --
------------- ------------ ------------- ------------- ------------- -------------
Net loss................... $ (2,254,028) $ (754,468) $ (1,986,983) $ (3,976,683) $ (1,269,333) $ (5,208,337)
------------- ------------ ------------- ------------- ------------- -------------
------------- ------------ ------------- ------------- ------------- -------------
Loss per share--basic and
diluted.................. $ (.67) $ (.22) $ (.88)
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares
outstanding.............. 5,899,167 5,882,500 5,923,902
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN RETAINED SUBSCRIPTION
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE TOTAL
----------- ----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance, December 31, 1995.............. 1,666,664 $ 16,667 $ 94,333 $ (73,706) $ -- $ 37,294
Stock issued.......................... 419,151 4,192 196,058 -- -- 200,250
Stock issued (Navarre)................ 2,085,815 20,858 1,458,946 -- -- 1,479,804
Stock subscriptions issued............ 1,082,430 10,824 647,941 -- (658,765) --
Net loss.............................. -- -- -- (2,254,028) -- (2,254,028)
----------- ----------- ----------- ------------- ------------ -----------
Balance, December 31, 1996.............. 5,254,060 52,541 2,397,278 (2,327,734) (658,765) (536,680)
Net loss.............................. -- -- -- (754,468) -- (754,468)
----------- ----------- ----------- ------------- ------------ -----------
Balance, March 20, 1997................. 5,254,060 52,541 2,397,278 (3,082,202) (658,765) (1,291,148)
THE COMPANY
Record effect of acquisition by
Navarre............................. (5,244,060) (52,541) (2,397,278) 3,082,202 658,765 1,291,148
----------- ----------- ----------- ------------- ------------ -----------
Balance, March 21, 1997................. 10,000 -- -- -- -- --
Stock issued for cash and advertising
rights.............................. 1,765 2,000,000 -- -- -- 2,000,000
Net loss.............................. -- -- -- (1,986,983) -- (1,986,983)
----------- ----------- ----------- ------------- ------------ -----------
Balance, December 31, 1997.............. 11,765 2,000,000 -- (1,986,983) -- 13,017
Stock split........................... 5,870,735 -- -- -- -- --
Stock issued.......................... 40,000 65,600 -- -- -- 65,600
Stock option compensation............. -- 20,500 -- -- -- 20,500
Notes forgiven by shareholders........ -- 48,050 -- -- -- 48,050
Net loss.............................. -- -- -- (3,976,683) -- (3,976,683)
----------- ----------- ----------- ------------- ------------ -----------
Balance, December 31, 1998.............. 5,922,500 2,134,150 -- (5,963,666) -- (3,829,516)
Stock option compensation............... -- 879,625 -- -- -- 879,625
Stock options exercised................. 5,400 16,200 -- -- -- 16,200
Net loss................................ -- -- -- (5,208,337) -- (5,208,337)
----------- ----------- ----------- ------------- ------------ -----------
Balance, June 30, 1999 (unaudited)...... 5,927,900 $ 3,029,975 $ -- $ (11,172,003) $ -- $(8,142,028)
----------- ----------- ----------- ------------- ------------ -----------
----------- ----------- ----------- ------------- ------------ -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
--------------------------- ------------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, MARCH 21, SIX MONTHS
YEAR ENDED 1997 THROUGH 1997 THROUGH YEAR ENDED ENDED JUNE 30,
DECEMBER 31, MARCH 20, DECEMBER 31, DECEMBER 31, ------------------------
1996 1997 1997 1998 1998 1999
------------ ------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................ $(2,254,028) $(754,468) $(1,986,983) $(3,976,683) $(1,269,333) $(5,208,337)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization......... 239,105 98,474 648,280 843,103 329,462 489,208
Stock option compensation............. -- -- -- 20,500 -- 879,625
Changes in operating assets and
liabilities:
Accounts receivable................. (3,500) (22,480) 16,896 (17,129) (39,918) (78,915)
Prepaid expenses.................... 5,795 -- -- 47,207 220 (16,700)
Accounts payable.................... 759,338 757,612 (780,100) 285,339 (93,245) 71,324
Accrued expenses.................... 153,429 (97,864) (5,243) 25,748 (21,775) 1,253,600
Deferred revenue.................... -- -- -- -- -- 250,000
Other assets........................ (189,491) -- -- -- 38,902 (766,508)
------------ ------------ ------------ ------------ ----------- -----------
Net cash used in operating activities... (1,289,352) (18,726) (2,107,150) (2,771,915) (1,055,687) (3,126,703)
INVESTING ACTIVITIES
Note receivable--officer................ -- -- -- (62,549) -- (2,443)
Purchases of property and equipment..... (329,831) 1,300 (12,703) (843,700) (32,871) (845,278)
------------ ------------ ------------ ------------ ----------- -----------
Net cash provided by (used in) investing
activities............................ (329,831) 1,300 (12,703) (906,249) (32,871) (847,721)
FINANCING ACTIVITIES
Proceeds from notes payable............. -- 36,879 -- -- -- --
Payments on notes payable............... (15,702) -- (68,994) (9,836) (54,494) --
Payments on capital lease obligations... (19,723) (42,848) (41,977) (113,983) (49,780) (65,393)
Deferred offering costs................. -- -- -- (239,643) -- (524,652)
Proceeds from stock issuances........... 1,680,054 -- 1,000,000 65,600 -- 16,200
Mandatory convertible equity............ -- (45,755) -- -- -- --
Advances from Navarre................... -- -- 1,212,311 4,022,529 1,207,724 4,513,537
------------ ------------ ------------ ------------ ----------- -----------
Net cash provided by (used in) financing
activities............................ 1,644,629 (51,724) 2,101,340 3,724,667 1,103,450 3,939,692
------------ ------------ ------------ ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................... 25,446 (69,150) (18,513) 46,503 14,892 (34,732)
Cash and cash equivalents at beginning
of period............................. 66,470 91,916 22,766 4,253 4,253 50,756
------------ ------------ ------------ ------------ ----------- -----------
Cash and cash equivalents at end of
period................................ $ 91,916 $ 22,766 $ 4,253 $ 50,756 $ 19,145 $ 16,024
------------ ------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ------------ ----------- -----------
Supplemental cash flow information
Significant noncash investing and
financing activity:...................
Stock issued for advertising
rights............................ $ -- $ -- $ 1,000,000 $ -- -- --
Fixed assets acquired under capital
lease............................. 405,766 -- -- 25,078 -- 90,617
Notes forgiven by shareholders...... -- -- -- 48,050 -- --
</TABLE>
See accompanying notes.
F-6
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
NetRadio conducts commerce on the Internet by providing a wide range of
music and information to attract visitors to its Web site. After attracting
traffic through its entertaining audio content, the Company leverages that
traffic into revenue from the sale of audio merchandise through its online
store, CDPoint, and Internet advertisements.
The Company's business is characterized by rapid technology change, new
product development and evolving industry standards. Inherent in the Company's
business are various risks and uncertainties, including its limited operating
history, unproven business model and the limited history of commerce on the
Internet. The Company's success may depend in part upon the emergence of the
Internet as a communication medium, prospective product development efforts and
the acceptance of the Company's solutions by the marketplace.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that we consider necessary for a fair
presentation of the financial position at these dates and the operations and
cash flows for the periods then ended. Operating results for the six months
ended June 30, 1999 are not necessarily indicative of results that may be
expected for the entire year.
BASIS OF PRESENTATION
NetRadio Corporation, Minnesota ("NetRadio Corporation" or "NetRadio") is a
subsidiary of Navarre Corporation ("Navarre"). NetRadio Corporation, Minnesota
commenced operations on March 21, 1997 upon acquiring the former Net Radio
Corporation, Nevada ("Predecessor"). NetRadio Corporation, Minnesota
individually or collectively with the Predecessor is hereafter referred to as
the "Company."
On March 21, 1997, Navarre, which already held a 50% interest of the
Predecessor, acquired the remaining outstanding shares of the Predecessor by
merging it into NetRadio. In connection with the merger, all outstanding common
stock of the Predecessor was cancelled, leaving Navarre as the owner of all of
the 10,000 outstanding shares of NetRadio. In connection with the acquisition,
Navarre issued 125,000 shares of its common stock to shareholders and affiliates
of the Predecessor and agreed to issue an additional 2,075,000 shares contingent
upon NetRadio achieving specified levels of sales and profits in the two years
following the transaction. NetRadio has not achieved the levels of sales or
profits targeted in the agreement with Navarre and no additional shares have
been issued. The acquisition was accounted for as a purchase. Goodwill of
$1,263,000 recognized at the time of the acquisition by Navarre has been "pushed
down" to NetRadio for financial reporting purposes.
Financial information for the Predecessor at dates and for periods prior to
March 21, 1997 is included at the Predecessor's historical cost basis.
Accordingly, the period from January 1, 1997 to
F-7
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
March 20, 1997 and for the year ended December 31, 1996 are not comparable to
the periods after March 20, 1997.
Certain operating expenses for the six months ended June 30, 1998 have been
reclassified to better compare such expenses with how they are being accounted
for in 1999.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with a maturity of three
months or less when purchased to be cash equivalents. Cash equivalents are
carried at cost, which approximates market value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets, as
follows:
furniture and fixtures--3 to 5 years
computer equipment and software--3 years
office equipment--3 to 5 years
Equipment under capital leases is stated at the present value of minimum lease
payments and is amortized using the straight-line method over the shorter of the
lease term or the estimated useful lives of the assets.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
F-8
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates to be
applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in results of operations in
the period that the tax change occurs. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized.
Net Radio Corporation, Nevada, was an electing S corporation through May 1,
1996. As such, the taxable income or loss of the Company was includable in the
individual returns of its shareholders.
During the period March 21, 1997 through March 31, 1998, NetRadio
Corporation, Minnesota was included in the consolidated federal and state income
tax returns of its parent company, Navarre. The tax benefits of net operating
losses of NetRadio Corporation, Minnesota during that period have been retained
by Navarre and no benefit has been shown to NetRadio since it would not have
been able to recognize any benefit on a stand-alone basis.
REVENUE RECOGNITION
The Company's revenues are derived from the sale of audio merchandise at its
online store and Web site banner and audio advertisements. Product sales,
including shipping and handling, are recognized in the period that the
merchandise is shipped to the customer. Advertising revenues are recognized in
the period in which the advertisement is displayed, provided that no significant
Company obligations remain and collection of the resulting receivable is
probable. Company obligations arising from prepayment of advertising fees were
recorded as deferred revenue. There were no prepaid advertising fees received at
December 31, 1997 and 1998.
Promotional revenues consisted of payments from third parties for the
distribution of coupons and other promotional material. Promotional revenues
were recognized at the time the associated services were completed. Collection
of these revenues occurred through a chargeback, or credit, against the advances
from Navarre. Promotional revenue was included in miscellaneous revenue in the
statement of operations.
INTERNAL SOFTWARE DEVELOPMENT COSTS
Internal software development costs incurred through outside contractors
consisting of costs to develop, test and upgrade the Company's Web site and
systems are capitalized and amortized over the estimated useful life of the
software, typically three years, in accordance with AICPA Statement of Position
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Uses."
F-9
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSES
Advertising expenses are capitalized during the production phase of specific
commercials or campaigns and charged to operations at the time the campaign is
initially presented to the audience. In addition, television advertising time
contributed by ValueVision International, Inc. (see Note 8) is charged to
operations as the advertising time is used. Advertising expenses, including
prepaid advertising costs charged to operations, were $104,943, $10,966, $90,785
and $71,615 and $212,581 in the year ended December 31, 1996, in the period
January 1, 1997 through March 20, 1997, in the period March 21, 1997 through
December 31, 1997, in the year ended December 31, 1998, in the six months ended
June 30, 1998 and the six months ended June 30, 1999 respectively, and are
included in sales and marketing costs in the accompanying statements of
operations.
DEFERRED OFFERING COSTS
Legal, accounting and registration costs directly related to the anticipated
initial public offering of the Company's common stock have been deferred and
will be offset against the gross proceeds of the offering.
GOODWILL
Goodwill is being amortized on the straight-line method over the estimated
useful life of three years. Accumulated amortization at June 30, 1999, December
31, 1998 and December 31, 1997 was $947,250, $737,000 and $316,000,
respectively. The Company periodically reviews goodwill for impairment in value.
NET LOSS PER COMMON SHARE
Basic earnings per share excludes any dilutive effects of options, warrants
and convertible securities, while diluted earnings per share gives effect to
dilutive potential common shares. Net loss per share for fiscal 1998 has been
presented on the face of the statements of operations. Prior year amounts have
not been presented on the statement of operations due to the recapitalization of
the Company in 1997. All earnings per share amounts for all periods have been
presented in this footnote to conform to the Statement No. 128 requirements.
F-10
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted earnings
per share:
In June 1998, the board of directors declared a five hundred-for-one stock
split. All per share, weighted average share, and stock option information has
been adjusted to reflect the five hundred-for-one stock split.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
--------------------------- ----------------------------------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, MARCH 21, SIX MONTHS
YEAR ENDED 1997 THROUGH 1997 THROUGH YEAR ENDED ENDED
DECEMBER 31, MARCH 20, DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1997 1998 1998 1999
------------- ------------ ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Net loss.............. $ (2,254,028) $ (754,468) $ (1,986,983) $ (3,976,683) $ (1,269,333) $ (5,208,337)
Denominator:
Denominator for basic
loss per share
weighted average
shares.............. 3,304,254 5,254,060 5,882,500 5,899,167 5,882,500 5,923,902
Dilutive securities:
Employee stock
options........... -- -- -- -- -- --
------------- ------------ ------------- ------------- ------------- -------------
Denominator for
diluted loss per
share adjusted
weighted-average
shares.............. 3,304,254 5,254,060 5,882,500 5,899,167 5,882,500 5,923,902
------------- ------------ ------------- ------------- ------------- -------------
------------- ------------ ------------- ------------- ------------- -------------
Basic loss per share.... $ (.68) $ (.14) $ (.34) $ (.67) $ (.22) $ (.88)
------------- ------------ ------------- ------------- ------------- -------------
------------- ------------ ------------- ------------- ------------- -------------
Diluted loss per
share................. $ (.68) $ (.14) $ (.34) $ (.67) $ (.22) $ (.88)
------------- ------------ ------------- ------------- ------------- -------------
------------- ------------ ------------- ------------- ------------- -------------
</TABLE>
2. FINANCIAL CONDITION
Since March 1997, Navarre has provided advances to the Company for working
capital and fixed asset purchases. The Company is currently not generating
operating income or positive cash flows and remains dependent on the continuing
financial support of Navarre. It is Navarre's intention to continue to fund
these cash needs and will not require repayment of the advances in the
foreseeable future until the Company is self-sufficient from funds raised from
an anticipated initial public offering of common stock.
F-11
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
3. RELATED PARTY TRANSACTIONS
ADVERTISING SERVICES
The Company provided advertising services to Navarre. Total services
provided were $312,499, $51,188, $0 and $0, $0 and $0 in the year ended December
31, 1996, in the period January 1, 1997 through March 20, 1997, in the period
March 21, 1997 through December 31, 1997, and in the year ended December 31,
1998 in the six months ended June 30, 1998 and in the six months ended June 30,
1999, respectively.
FULFILLMENT AGREEMENT
Navarre and NetRadio have entered into a five-year fulfillment agreement
(the "Fulfillment Agreement") under which NetRadio will seek to fulfill its
customer purchase orders for certain products from Navarre before any other
fulfillment source. The Fulfillment Agreement governs and describes order
procedures, product returns, shipping procedures, payments and price lists. The
Fulfillment Agreement may be terminated by either party if, among other things,
NetRadio discontinues online sales of pre-recorded music or Navarre discontinues
fulfillment services to online customers.
ADMINISTRATIVE SERVICES
Since March 1997, Navarre has supplied NetRadio with executive services,
certain administrative services such as human resources, marketing, accounting,
payroll, legal, and employee benefits for a fee of $5,000 a month. The Company
believes amounts charged are representative of the level of expense that would
have been incurred on a stand-alone basis.
MULTIPLE ADVANCE TERM NOTE
In February 1999, the Company executed a Multiple Advance Term Note ("Note")
pursuant to which NetRadio will repay Navarre all advances that Navarre has
provided to NetRadio to meet NetRadio's working capital needs and for NetRadio's
other general corporate purposes. The Note is due and payable June 1, 2001 and
bears interest at the prime rate plus one-half percent.
Upon the closing of an anticipated initial public offering of common stock,
Navarre, as part of its Separation Agreement with the Company, will convert
$5,234,840 of the Note to equity of NetRadio. No additional shares of NetRadio
common stock will be issued.
4. OTHER CURRENT ASSETS
Other current assets consist of 14 pre-set channels on RealNetworks, Inc.'s
(RealNetworks) RealPlayer and promotional space on RealNetworks' home page that
the Company acquired in May 1999 in exchange for cash and advertising of
RealNetworks on the Company's website. The Company acquired the one-year right
to the pre-set channels for $560,000 payable in four quarterly payments.
RealNetworks is also obligated, for one year, to promote the Company twice per
month on
F-12
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
4. OTHER CURRENT ASSETS (CONTINUED)
RealNetworks' home page in exchange for $250,000 in RealNetworks advertising on
the Company's website. These assets are being amortized over one year.
5. NOTE RECEIVABLE--OFFICER
The note receivable consists of an advance to an officer which is payable on
demand. The note bears interest at 7.75% per annum beginning December 1999.
Interest will accrue through December 2001, the duration of the note.
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998
----------- ------------ SIX MONTHS ENDED
JUNE 30, 1999
-----------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures.......................... $ 129,534 $ 129,534 $ 129,534
Computer equipment and software................. 699,432 1,541,700 2,468,714
Office equipment................................ 11,503 11,503 20,386
----------- ------------ -----------------
840,469 1,682,737 2,618,634
Accumulated depreciation........................ (444,569) (801,259) (1,080,219)
----------- ------------ -----------------
$ 395,900 $ 881,478 $ 1,538,415
----------- ------------ -----------------
----------- ------------ -----------------
</TABLE>
7. NOTES PAYABLE
The notes payable consist of advances from former shareholders repayable at
$4,561 per month. The notes bear interest at 10% and were due in 1998. The
remaining balance due of $48,050 was forgiven by the shareholders in 1998.
Interest paid was $3,563, $9,875, $29,627, $23,442, $12,142 and $10,958 for
the year ended December 31, 1996, for the period January 1, 1997 through March
20, 1997, for the period March 21, 1997 through December 31, 1997 and for the
year ended December 31, 1998 for the six months ended June 30, 1998 and for the
six months ended June 30, 1999, respectively.
8. INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $5,000,000. These carryforwards are available to offset future
taxable income, expire beginning 2011, and are subject to the limitations of
Internal Revenue Code Section 382 resulting from changes in ownership.
F-13
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
8. INCOME TAXES (CONTINUED)
Components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1997 1998
------------- -----------
Gross deferred tax assets:
Net operating loss carryforwards................................ $ 1,400,000 $ 500,000
------------- -----------
Valuation allowance............................................. (1,400,000) (500,000)
------------- -----------
$ -- $ --
------------- -----------
------------- -----------
</TABLE>
9. CAPITAL STOCK
THE COMPANY
The Company is authorized by its articles of incorporation to issue
20,000,000 shares of common stock, no par value, of which 5,922,500 shares were
outstanding and held of record by six shareholders on December 31, 1998.
Concurrent with Navarre's March 1997 acquisition of NetRadio, ValueVision
International, Inc. ("ValueVision") agreed to an investment in NetRadio,
consisting of $1,000,000 in cash and an agreement to provide $2,000,000 worth of
advertising time on television in exchange for 1,765 shares (pre-split, 882,500
shares post-split) of NetRadio common stock. ValueVision is an integrated
electronic and print media direct marketing company and operates a television
home shopping network. For financial reporting purposes, the advertising time
was valued at $1 million at the time of the transaction. Before NetRadio can
offer merchandise not distributed by Navarre or NetRadio prior to March 1997
(music and software), ValueVision has the right to distribute such merchandise
provided that ValueVision offers NetRadio similar terms as those of another
vendor.
ValueVision also had certain preemptive rights which entitled it to purchase
additional shares of NetRadio securities. If NetRadio achieves net revenues
(excluding revenues from product sales) equal to $3,000,000 in any 12-month
period, NetRadio has the right to require ValueVision to purchase for $500,000,
additional shares of common stock equal to 4.95% of NetRadio's outstanding
common stock and ValueVision has a similar right to purchase 4.95% percent of
the outstanding common stock for $500,000. NetRadio and ValueVision have agreed
to cancel these rights in connection with the issuance of 595,000 shares of
NetRadio for $500,000 concurrent with the closing of an initial public offering
by NetRadio.
PREDECESSOR
In May 1996, Net Radio Corporation, Nevada issued 2,085,815 shares of common
stock to Navarre in exchange for $1,000,000 and a $500,000 note receivable
valued at $479,804.
F-14
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
10. STOCK OPTIONS AND GRANTS
All stock option plans prior to the 1998 plan were terminated at the time of
the acquisition by Navarre in March 1997. No options were granted during fiscal
1997.
Pursuant to the 1996 and 1997 exercise of warrants and stock options, the
Company issued 1,082,430 shares of common stock to former shareholders under
non-recourse notes. The notes bore interest at 6% and extended for a term of 27
months upon execution of the note agreement. A subscription receivable of
$659,000 related to these shares was recorded at the time the notes were
executed in 1996. The note agreements were amended at the time of Navarre's
acquisition of the remaining 50% of the Company in March 1997, whereby a certain
pool of Navarre shares will be distributed upon payment of the notes.
In June 1998, the board of directors adopted, and the shareholders approved
the NetRadio Corporation 1998 Stock Option and Incentive Plan (the "1998 Stock
Option Plan") pursuant to which officers, employees, consultants, independent
contractors and non-employee directors are eligible to receive options to
purchase shares of NetRadio common stock, stock appreciation rights and awards
of deferred or restricted stock. A total of 1,475,000 shares of common stock may
be issued under the 1998 Stock Option Plan with vesting periods of up to five
years and maximum option terms of ten years. In February 1999, the board of
directors approved an increase in the number of shares reserved under the 1998
Stock Option Plan from 1,475,000 to 2,000,000 shares.
Option activity for the year ended 1998 and for the six months ended June
30, 1999 is summarized as follows:
<TABLE>
<CAPTION>
PLAN OPTIONS WEIGHTED
AVAILABLE PLAN OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
------------ ------------ ---------------
<S> <C> <C> <C>
Balance on December 31, 1997...................... -- -- --
Shares reserved................................. 1,475,000 -- --
Granted......................................... (939,500) 939,500 $ 2.27
------------ ------------
Balance on December 31, 1998...................... 535,500 939,500 $ 2.27
Shares reserved................................... 525,000
Granted........................................... (307,350) 307,350 $ 5.00
Forfeited......................................... 31,600 (31,600) $ 3.00
Exercised......................................... (5,400) $ 3.00
------------ ------------ -----
Balance on June 30, 1999 (unaudited).............. 784,750 1,209,850 $ 3.14
------------ ------------ -----
------------ ------------ -----
</TABLE>
The weighted average fair value of options granted in 1998 was $1.37. The
exercise price of options outstanding at December 31, 1998 ranged from $1.64 to
$5.00 per share. The number of options exercisable at December 31, 1998 was
117,333 with a weighted average remaining contractual life of 6.5 years.
F-15
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
10. STOCK OPTIONS AND GRANTS (CONTINUED)
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by Statement 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
Statement 123. The fair value for these options was estimated at the date of
grant using the Black Scholes option pricing model with the following weighted
average assumptions for 1998: risk-free interest rate of 4.7%, volatility of the
expected market price of the Company's common stock of 70% and a weighted
average expected life of the option of five years. The volatility used in the
model was based upon the volatility of other publicly traded companies in
similar industries.
The Black Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value statement, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
-------------
<S> <C>
Pro forma net loss............................................................. $ (4,123,837)
Pro forma basic and diluted loss per share..................................... $ (.70)
</TABLE>
The Company has granted 20,000 options to a non-employee. The fair value on
the date of grant of the option was treated as expense and was $20,500 in 1998.
In March 1999 NetRadio recognized $879,625 in compensation expense
associated with the issuance of incentive stock options to employees with strike
prices below the estimated fair market value of the Company's common stock on
the date of grant.
EMPLOYMENT AGREEMENTS
As of December 31, 1998, the Company had entered into employment agreements
with four executives. The term of three of the agreements commenced on August 1,
1998 and ends on July 31, 2000. The term of the fourth agreement commenced on
August 31, 1998 and ends on August 30, 2001. One executive will receive a
one-time $20,000 bonus upon completion of an initial public offering, and three
executives will each receive a one-time $10,000 bonus upon completion of an
initial public offering. The employment agreements further provide that each
executive is eligible to receive an annual performance bonus of up to 40% of his
base salary if the Company achieves certain operating objectives.
F-16
<PAGE>
NETRADIO CORPORATION AND PREDECESSOR
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996, THE PERIODS FROM JANUARY 1, 1997 THROUGH
MARCH 20, 1997 AND MARCH 21, 1997 THROUGH DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
11. COMMITMENTS
The Company is obligated under operating and capital leases for office space
and office equipment. Future annual minimum lease payments under leases in
effect at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- ----------
<S> <C> <C>
1999.................................................................. $ 16,275 $ 120,084
2000.................................................................. -- 84,673
2001.................................................................. -- 58,107
2002.................................................................. -- --
----------- ----------
Total minimum lease payments.......................................... $ 16,275 262,864
-----------
-----------
Less amount representing interest..................................... (37,794)
----------
Present value of minimum capital lease payments....................... $ 225,070
----------
----------
</TABLE>
Rent expense under the operating leases was $54,717, $32,605, $79,852 and
$134,491, in the year ended December 31, 1996, in the period January 1, 1997
through March 20, 1997, in the period March 21, 1997 through December 31, 1997
and in the year ended December 31, 1998, respectively.
F-17
<PAGE>
[Inside Back Cover]
[a picture of Web site design with the following words]
an all new NetRadio.com look is launching 4th Quarter, 1999.
[Depictions of the Home page, Listen Page, Learn Page and Buy Page, background
color is white and text printed in black]
[Logo showing Three Circle Configuration]
<PAGE>
[LOGO]
NETRADIO CORPORATION
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by us in connection with the sale of common stock
being registered. All amounts are estimates except the SEC registration fee, the
NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
------------
<S> <C>
SEC registration fee............................................................ $ 16,625
NASD filing fee................................................................. 6,480
Nasdaq National Market listing fee.............................................. 78,875
Printing and engraving expenses................................................. 235,000
Legal fees and expenses......................................................... 545,000
Accounting fees and expenses.................................................... 225,000
Blue Sky fees and expenses...................................................... 8,000
Transfer agent and registrar fees............................................... 7,500
Directors and officers insurance................................................ 69,350
Miscellaneous expenses.......................................................... 108,170
------------
Total....................................................................... $ 1,300,000
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Business Corporation Act ("MBCA") provides
that, unless prohibited or limited by a corporation's articles of incorporation
or bylaws, a corporation must indemnify its current and former officers,
directors, employees and agents against reasonable expenses (including
attorneys' fees), judgments, penalties, fines and amounts paid in settlement and
which were incurred in connection with actions, suits, or proceedings in which
such persons are parties by reason of the fact that they are or were an officer,
director, employee or agent of the corporation, if they: (1) have not been
indemnified by another organization, (2) acted in good faith, (3) received no
improper personal benefit, (4) in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful, and (5) reasonably
believed that the conduct was in the best interests of the corporation. Section
302A.521 also permits a corporation to purchase and maintain insurance on behalf
of its officers, directors, employees and agents of the corporation, whether or
not the corporation would have been required to indemnify the person against the
liability under the provisions of such section.
Article VI of our bylaws provides that we may indemnify each person who is
or was a director or officer to the full extent permitted by the MBCA. Article
VI also provides that we may, but we are not required to, indemnify employees
and agents (other than directors and officers) to the full extent and in the
manner permitted by the MBCA.
The underwriting agreement (Exhibit 1.1) provides for indemnification by the
underwriters of us, our directors and executive officers and other persons for
certain liabilities, including liabilities arising under the Securities Act.
We plan to enter into indemnification agreements with our directors and
officers to indemnify such persons against certain liabilities, including
liabilities under the securities laws.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1996, we have sold the following unregistered securities:
In 1996, our predecessor, Net Radio Corporation, a Nevada corporation, sold
a total of 419,151 shares of common stock to six individuals or entities and
received proceeds of $200,250. In 1996 and 1997, Net Radio Nevada also
issued 1,082,430 shares of common stock to approximately 34 individuals
under non-recourse promissory notes.
In May 1996, Net Radio Nevada, sold 2,085,815 shares of common stock to
Navarre in exchange for $1,500,000.
In March 1997, we entered into an Agreement and Plan of Reorganization with
Navarre, under which we became a wholly owned subsidiary of Navarre. In
connection with the reorganization, we issued 10,000 shares of common stock
to Navarre, and Navarre issued 125,000 shares of its common stock to our
former securityholders.
In March 1997, we sold 1,765 shares of common stock to ValueVision in
exchange for ValueVision's agreement to provide NetRadio with total
consideration of $3,000,000, of which $1,000,000 was paid in cash, and
$2,000,000 was paid in television advertising.
In June 1998, we adopted a plan of recapitalization, such that for every
share of common stock outstanding, each shareholder received 500 shares of
common stock. As a result, after June 1, 1998 Navarre held 5,000,000 shares
of common stock, and ValueVision held 882,500 shares of common stock.
In September 1998, we sold an aggregate of 40,000 shares of common stock for
consideration of $65,600 to three of our officers and the spouse of our
chairman.
From June 1998 through June 1999, we granted stock options to 39 employees,
consultants and directors under our stock option plan covering an aggregate
of 1,209,850 shares of our common stock at exercise prices ranging from
$1.64 per share to the initial public offering price per share.
In May 1999, a former employee exercised a stock option for 5,400 shares of
common stock at $3.00 per share.
In July and August 1999, we granted 78,000 stock options to seven employees
at an exercise price equal to the initial public offering price.
On August 24, 1999 we entered into a severance agreement with a former
executive officer. Under the terms of the severance agreement, we agreed to
permit this former executive to exercise options to purchase 150,000 shares
of common stock at an exercise price of $1.64 per share between August 24,
1999 and November 22, 1999.
At the closing of this offering, we expect to sell ValueVision approximately
550,000 shares of common stock for consideration of $500,000. Because this
offering will exceed 3,499,999 shares ValueVision will receive an additional
10,000 shares of common stock for no additional consideration. In addition, for
every 100,000 shares of common stock that we sell in this offering in excess of
3,499,999 shares, ValueVision will receive an additional 7,000 shares of common
stock. Thus, ValueVision will receive at least 595,000 shares of common stock in
connection with this offering.
Each of these sales was deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2), Regulation D, Section 3(a)(9) or
Rule 701 of the Securities Act, as transactions by an issuer not involving a
public offering, transactions involving an exchange of securities by the issuer
with its securityholders where no commission or remuneration is paid or given
directly or indirectly for soliciting such exchange, or transactions pursuant to
compensatory benefit plans and contracts relating to compensation. The
recipients of securities in each such transaction represented
II-2
<PAGE>
their intention to acquire the securities for investment purposes only and not
with a view to, or for sale in connection with, any distribution thereof, and
appropriate legends were affixed to share certificates and instruments issued in
such transactions. All recipients had adequate access, through their
relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
(a) Exhibits
1.1 Form of Underwriting Agreement
1.2 Form of Warrant Agreement between NetRadio and Underwriters
3.1* Articles of Incorporation of NetRadio, as amended
3.2* Bylaws of NetRadio, as amended
3.3* Amended and Restated Bylaws of NetRadio, to become effective upon the effective
date of this offering
4.1* Form of Common Stock Certificate
5.1 Opinion of Lindquist & Vennum P.L.L.P.
10.1* Employment Agreement dated as of the 11th day of January 1999 between NetRadio and
Edward A. Tomechko
10.1.1* Promissory Note dated December 1, 1998
10.2* Employment Agreement dated as of the 1st day of August 1998 between NetRadio and
Donavan W. Pederson
10.4* Employment Agreement dated as of the 1st day of August 1998 between NetRadio and
David R. Witzig
10.5* Termination Agreement dated February 25, 1999 between NetRadio and Nancy R. Kielty
10.6 Agreement and Plan of Reorganization dated March 7, 1997, by and among Net Radio
Nevada, Navarre and NetRadio (incorporated by reference to Exhibit 10.14 to the
Form 10-K of Navarre for the fiscal year ended March 31, 1997, as filed with the
Commission on June 30, 1997 (the "Navarre 1997 Form 10-K"))
10.7 Stock Purchase Agreement dated as of March 7, 1997, by and among ValueVision,
NetRadio, Navarre and Net Radio Nevada (incorporated by reference to Exhibit
10.18 to the Navarre 1997 Form 10-K)
10.8 Conversion Agreement dated March 20, 1997, between ValueVision and Navarre
(incorporated by reference to Exhibit 10.19 to the Navarre 1997 Form 10-K)
10.9* Waiver of Certain Provisions of the Stock Purchase Agreement dated as of March 7,
1997, dated as of February 26, 1999 by and among ValueVision, Navarre and
NetRadio
10.10* Fulfillment Agreement entered into the 1st day of December 1998 by and between
Navarre and NetRadio
10.11+ License Agreement dated September 3, 1998 between NetRadio and RealNetworks
10.11.1 RealNetworks Presets Agreement dated May 10, 1999
10.11.2 License Agreement dated June 7, 1999 between NetRadio and RealNetworks
10.12.1* Office Lease Agreement made the 31st day of May 1996 between Riverplace, Inc. and
NetRadio
10.12.2* Storage Lease Agreement made the 5th day of April 1996 between Riverplace, Inc. and
NetRadio
10.12.3 Third Amendment to lease dated March 27, 1999 between Riverplace, Inc. and NetRadio
10.13* Multiple Advance Term Note dated March 1, 1999 of NetRadio to Navarre
10.14* NetRadio Corporation 1998 Stock Option and Incentive Plan
10.15* Form of NetRadio Stock Option Agreement under the 1998 Stock Option and Incentive
Plan
10.16* Separation Agreement dated as of March 2, 1999 by and between Navarre and NetRadio
10.17*,+ Order Fulfillment Agreement dated as of March 2, 1999 by and between Valley Media
and NetRadio
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.18*,+ Agreement between AT&T and NetRadio dated March 12, 1999
10.19* Termination Agreement dated April 29, 1999 between NetRadio and Michael P. Wise
10.20 Termination Agreement dated July 26, 1999 between NetRadio and Richard W. Hailey
10.21 Severance Agreement dated August 24, 1999 between NetRadio and Jan Andersen
23.1 Consent of Ernst & Young LLP
23.2* Consent of Lindquist & Vennum P.L.L.P. (contained in Exhibit 5.1)
23.3 Consent of I/PRO, Internet Profiles Corporation
24.1* Power of Attorney (see Page II-5 of the registration statement)
27.1* Financial Data Schedule
(b) Financial Statement Schedules.
99.1* Schedule II: Valuation and Qualifying Accounts
</TABLE>
- ------------------------
* Previously filed.
+ Information contained in such agreement has been omitted subject to
confidential treatment request, marked with brackets and the statement
"Confidential Treatment Requested" and filed separately with the Commission.
ITEM 17. UNDERTAKINGS
(a) We hereby undertake:
(1) To provide to the underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in such names
as required by the underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons pursuant to
the foregoing provisions or otherwise, we have been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than our payment of expenses incurred or paid by any of
our directors, officers or controlling persons in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act, (1) the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective and (2) each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Minneapolis, State of Minnesota, on
this 27th day of August, 1999.
<TABLE>
<S> <C> <C>
NETRADIO CORPORATION
By: /s/ EDWARD A. TOMECHKO
-----------------------------------------
Edward A. Tomechko
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities indicated on August
27, 1999:
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ --------------------------
<C> <S>
*
- ------------------------------ Chairman
Eric H. Paulson
*
- ------------------------------ Director
Charles E. Cheney
*
- ------------------------------ Director
Gene McCaffery
*
- ------------------------------ Director
James Caparro
*
- ------------------------------ Director
Marc H. Kalman
Director, President and
/s/ EDWARD A. TOMECHKO Chief Executive Officer
- ------------------------------ (PRINCIPAL EXECUTIVE
Edward A. Tomechko OFFICER)
/s/ MICHAEL P. WISE Chief Financial Officer
- ------------------------------ (PRINCIPAL ACCOUNTING
Michael P. Wise OFFICER)
*
- ------------------------------ Director and Chief
Donavan W. Pederson Operating Officer
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ EDWARD A. TOMECHKO
-------------------------
Edward A. Tomechko
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ---------- -----------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Warrant Agreement between NetRadio and Underwriters
3.1* Articles of Incorporation of NetRadio, as amended
3.2* Form of Bylaws of NetRadio, as amended
3.3* Amended and Restated Bylaws of NetRadio, to become effective upon the effective date of this offering
4.1* Form of Common Stock Certificate
5.1 Opinion of Lindquist & Vennum P.L.L.P.
10.1* Employment Agreement dated as of the 11th day of January 1999 between NetRadio and Edward A. Tomechko
10.1.1* Promissory Note dated December 1, 1998
10.2* Employment Agreement dated as of the 1st day of August 1998 between NetRadio and Donavan W. Pederson
10.4* Employment Agreement dated as of the 1st day of August 1998 between NetRadio and David R. Witzig
10.5* Termination Agreement dated February 25, 1999 between NetRadio and Nancy R. Kielty
10.9* Waiver of Certain Provisions of the Stock Purchase Agreement dated as of March 7, 1997, dated as of
February 26, 1999 by and among ValueVision, Navarre and NetRadio
10.10* Fulfillment Agreement entered into the 1st day of December 1998 by and between Navarre and NetRadio
10.11+ License Agreement dated September 3, 1998 between NetRadio and RealNetworks
10.11.1 RealNetworks Presets Agreement dated May 10, 1999
10.11.2 License Agreement dated June 7, 1999 between NetRadio and RealNetworks
10.12.1* Office Lease Agreement made the 31st day of May 1996 between Riverplace, Inc. and NetRadio
10.12.2* Storage Lease Agreement made the 5th day of April 1996 between Riverplace, Inc. and NetRadio
10.12.3 Third Amendment to lease dated March 27, 1999 between Riverplace, Inc. and NetRadio
10.13* Multiple Advance Term Note dated March 1, 1999 of NetRadio to Navarre
10.14* NetRadio Corporation 1998 Stock Option and Incentive Plan
10.15* Form of NetRadio Stock Option Agreement under the 1998 Stock Option and Incentive Plan
10.16* Separation Agreement dated as of March 2, 1999 by and between Navarre and NetRadio
10.17*,+ Order Fulfillment Agreement dated as of March 2, 1999 by and between Valley Media and NetRadio
10.18*,+ Agreement between AT&T and NetRadio dated March 12, 1999
10.19* Termination Agreement dated April 29, 1999 between NetRadio and Michael P. Wise
10.20 Termination Agreement dated July 26, 1999 between NetRadio and Richard W. Hailey
10.21 Severance Agreement dated August 24, 1999 between NetRadio and Jan Andersen
23.1 Consent of Ernst & Young LLP
23.2* Consent of Lindquist & Vennum P.L.L.P. (contained in Exhibit 5.1)
23.3 Consent of I/PRO, Internet Profiles Corporation
24.1* Power of Attorney
27.1* Financial Data Schedule
(b) Financial Statement Schedules.
99.1* Schedule II: Valuation and Qualifying Accounts
</TABLE>
- ------------------------
* Previously filed.
+ Information contained in such agreement has been omitted subject to
confidential treatment request, marked with brackets and the statement
"Confidential Treatment Requested" and filed separately with the Commission.
II-6
<PAGE>
Exhibit 1.1
4,000,000 SHARES
NETRADIO CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
September ___, 1999
GERARD KLAUER MATTISON & CO., INC.
[CO-MANAGER]
As Representatives of the
Several Underwriters
c/o GERARD KLAUER MATTISON & CO., INC.
529 Fifth Avenue
New York, New York 10017
Dear Sirs:
NetRadio Corporation, a Minnesota corporation (the "Company"), proposes to
issue and sell 4,000,000 shares (the "Firm Shares") of its authorized but
unissued common stock, no par value ("Common Stock"), to the several
underwriters named in SCHEDULE I hereto (the "Underwriters"). The Company
proposes to grant to the Underwriters an option to purchase up to an aggregate
of 600,000 additional shares of Common Stock (the "Additional Shares"). The
Firm Shares and the Additional Shares are herein collectively referred to as the
"Shares". The Shares are more fully described in the Registration Statement and
Prospectus referred to below. Capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Registration Statement and
Prospectus.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder
(collectively, the "Act"), a registration statement on Form S-1 (No. 333-73261)
including a prospectus relating to the Shares, which may be amended. The
registration statement as amended at the time when it becomes effective,
including information (if any) deemed to be part of the registration statement
at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Act, is
hereinafter referred to as the "Registration Statement", and the prospectus in
the form first used to confirm sales of the Firm Shares is hereinafter referred
as the "Prospectus". Any registration statement filed by the Company pursuant
to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration
Statement", and from and after the date and time of filing of the Rule 462(b)
Registration Statement the term "Registration Statement" shall include the Rule
462(b) Registration Statement. "Amended," "amendment" or
<PAGE>
"supplement" with respect to the Registration Statement or the Prospectus
shall be deemed to include the filing by the Company of any document pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), after the date hereof.
2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations
and warranties contained in this Agreement, and subject to its terms and
conditions, the Company agrees to issue and sell the Firm Shares, and each
Underwriter agrees, severally and not jointly, to purchase from the Company at a
price per share of $_____ (the "Purchase Price"), the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) set forth opposite the name of such Underwriter on SCHEDULE I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell up to 600,000 Additional Shares and (ii) the Underwriters shall
have the right to purchase, severally and not jointly, up to an aggregate of
600,000 Additional Shares from the Company at the Purchase Price. Additional
Shares may be purchased solely for the purpose of covering over-allotments made
in connection with the offering of the Firm Shares. The Underwriters may
exercise their option to purchase Additional Shares, in whole or in part, from
time to time, by giving written notice thereof to the Company within 30 days
after the date of this Agreement. You shall give any such notice on behalf of
the Underwriters and such notice shall specify the aggregate number of
Additional Shares to be purchased pursuant to such exercise and the date for
payment and delivery thereof. The date specified in any such notice shall be a
business day (i) no earlier than the Closing Date (as hereinafter defined), (ii)
no later than five business days after such notice has been given and (iii) no
earlier than two business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Company the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in SCHEDULE I bears to the total number of
Firm Shares.
The Company shall, concurrently with the execution of this Agreement,
deliver agreements (collectively, the "Lock-up Agreements") executed by each of
the directors, executive officers and securityholders of the Company, pursuant
to which each such person agrees not to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of any Common Stock of the Company or any securities convertible into or
exercisable or exchangeable for such Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such Common Stock for a period of 180 days after the date of
the Prospectus without the prior written consent of Gerard Klauer Mattison &
Co., Inc. Notwithstanding the foregoing, during such period (i) the Company
may, in the ordinary course, grant stock options to purchase shares of Common
Stock pursuant to the Company's existing stock option plan, and (ii) the Company
may issue shares of its Common Stock upon the exercise of an option or warrant
or the conversion of a security outstanding on the date hereof.
-2-
<PAGE>
3. TERMS OF PUBLIC OFFERING. You have advised the Company that the
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the date the Registration Statement becomes
effective under the Act as in your judgment is advisable and (ii) initially to
offer the Shares upon the terms set forth in the Prospectus.
4. DELIVERY AND PAYMENT. Delivery to the Underwriters of and payment for
the Firm Shares shall be made to the Company at 10:00 a.m., New York City time,
on the fourth business day (the "Closing Date") following the date of the
initial public offering at such place as you shall designate. Payment for the
Firm Shares shall be made by one or more certified checks or official bank check
or checks in same day funds or by a wire transfer of immediately available
funds, as you and the Company may agree. The Closing Date and the location of
delivery of and the form of payment for the Firm Shares may be varied by
agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made to the Company at 10:00 a.m., New
York City time, on the date specified in the applicable exercise notice given by
you pursuant to SECTION 2 (an "Option Closing Date"). Payment for the
Additional Shares shall in each case be made by one or more certified checks or
official bank check or checks in same day funds or by a wire transfer of
immediately available funds, as you and the Company may agree. Any such Option
Closing Date and the location of delivery of and the form of payment for such
Additional Shares may be varied by agreement between you and the Company.
Certificates for the Shares shall be registered in such names and issued in
such denominations as you shall request in writing not later than two full
business days prior to the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you for inspection not
later than 9:30 a.m., New York City time, on the business day next preceding the
Closing Date or any Option Closing Date, as the case may be. Certificates in
definitive form evidencing the Shares shall be delivered to you on the Closing
Date or any Option Closing Date as the case may be, with any transfer taxes
thereon duly paid by the Company, for the respective accounts of the several
Underwriters, against payment of the Purchase Price therefor.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Additional Shares
are purchased for the account of such Underwriter. Any such payment by you
shall not relieve such Underwriter from any of its obligations hereunder.
5. FURTHER AGREEMENTS OF THE COMPANY AND NAVARRE CORPORATION. The
Company and Navarre Corporation, a Minnesota corporation and the majority
shareholder of the Company (the "Majority Shareholder"), covenant and agree as
follows:
(a) The Registration Statement has been declared effective under the
Act.
-3-
<PAGE>
(b) The Company will advise you promptly and, if requested by you, to
confirm such advice in writing, (i) when any post-effective amendment to
the Registration Statement has become effective (ii) of any request by the
Commission for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information, (iii) of the
receipt of any comments from the Commission or the Blue Sky or other
securities authority of any jurisdiction regarding the Registration
Statement, any post-effective amendment thereto, the Prospectus, or any
amendment or supplement thereto, (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or of the suspension of qualification of the Shares for offering or sale in
any jurisdiction, or the initiation of any proceeding for such purposes,
and (v) of the happening of any event during the period referred to in
PARAGRAPH (e) below which makes any statement of a material fact made in
the Registration Statement or the Prospectus untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectus in order to make the statements therein not misleading. If at
any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal or lifting of such order at the
earliest possible time. If the Registration Statement has become effective
with a form of prospectus omitting certain information pursuant to Rule
430A under the Act, or filing of the Prospectus is otherwise required under
Rule 424(b) under the Act, the Company will file the Prospectus, properly
completed, pursuant to Rule 424(b) within the time period prescribed and
will provide evidence satisfactory to you of such timely filing.
(c) The Company will furnish to you, without charge, four signed
copies of the Registration Statement as first filed with the Commission and
of each amendment to it, including all exhibits, and will furnish to you
and each Underwriter designated by you such number of conformed copies of
the Registration Statement as so filed and of each amendment to it, without
exhibits, as you may reasonably request.
(d) The Company will not file any amendment or supplement to the
Registration Statement, whether before or after the time when it becomes
effective, or make any amendment or supplement to the Prospectus of which
you shall not previously have been advised or to which you shall reasonably
object; and the Company will prepare and file with the Commission, promptly
upon your reasonable request, any amendment to the Registration Statement
or supplement to the Prospectus which may be necessary or advisable in
connection with the distribution of the Shares by you, and use its best
efforts to cause the same to become promptly effective.
(e) The Company will promptly after the Registration Statement
becomes effective, and from time to time thereafter for such period as in
the opinion of counsel for the Underwriters a prospectus is required by law
to be delivered in connection with sales by an Underwriter or a dealer,
furnish to each Underwriter and dealer as many copies of the Prospectus
(and of any amendment or supplement to the Prospectus) as such Underwriter
or dealer may reasonably request and during such period comply with all
requirements imposed upon it by the Act, as now existing and as hereafter
amended, so
-4-
<PAGE>
far as necessary to permit the continuance of sales of or dealings
in the Shares in accordance with the provisions hereof and the
Prospectus.
(f) If during the period specified in PARAGRAPH (e) any event shall
occur as a result of which, in the opinion of your counsel it becomes
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus
is delivered to a purchaser, not misleading, or if it is necessary to amend
or supplement the Prospectus to comply with any law, the Company will
forthwith prepare and file with the Commission an appropriate amendment or
supplement to the Prospectus so that the statements in the Prospectus, as
so amended or supplemented, will not in the light of the circumstances when
it is so delivered, be misleading, or so that the Prospectus will comply
with law, and furnish to each Underwriter and to such dealers as you shall
specify, such number of copies thereof as such Underwriter or dealers may
reasonably request.
(g) Prior to any public offering of the Shares, the Company will
cooperate with you and counsel for the Underwriters in connection with the
registration or qualification of the Shares for offer and sale by you and
by dealers under the state securities or Blue Sky laws of such
jurisdictions as you may request, continue such qualification in effect so
long as required for distribution of the Shares and file such consents to
service of process or other documents as may be necessary in order to
effect such registration or qualification.
(h) The Company will make generally available to its securityholders
as soon as reasonably practicable an earnings statement covering a period
of at least twelve months after the effective date of the Registration
Statement (but in no event commencing later than 90 days after such date)
which shall satisfy the provisions of Section 11(a) of the Act, and advise
you in writing when such statement has been so made available.
(i) During the period of five (5) years after the date of this
Agreement, the Company will (i) mail as soon as reasonably practicable
after the end of each fiscal year to the record holders of its Common Stock
a financial report of the Company, all such financial reports to include a
balance sheet, a statement of operations, a statement of cash flows and a
statement of shareholders' equity as of the end of and for such fiscal
year, together with comparable information as of the end of and for the
preceding fiscal year, certified by independent certified public
accountants, and (ii) make generally available as soon as practicable after
the end of each quarterly period (except for the last quarterly period of
each fiscal year) to such holders, a balance sheet, a statement of
operations and a statement of cash flows (and similar financial reports of
all unconsolidated subsidiaries, if any) as of the end of and for such
period, and for the period from the beginning of such fiscal year to the
close of such quarterly period, together with comparable information for
the corresponding periods of the preceding fiscal year.
(j) During the period of five years after the date of this Agreement,
the Company will furnish to you as soon as available a copy of each report
or other publicly
-5-
<PAGE>
available information of the Company mailed to the securityholders of
the Company or filed with the Commission, the National Association of
Securities Dealers, Inc. (the "NASD") or any securities exchange, and
such other publicly available information concerning the Company as you
may reasonably request.
(k) Whether or not the transactions contemplated hereunder are
consummated or this Agreement becomes effective or is terminated (whether
by you in accordance with the provisions of SECTION 9 or otherwise) the
Company will pay all reasonable costs, expenses, fees and taxes incident to
(i) the preparation, printing, filing and distribution under the Act of the
Registration Statement (including financial statements and exhibits), each
preliminary prospectus and all amendments and supplements to any of them
prior to or during the period specified in PARAGRAPH (e), (ii) the
preparation, printing and delivery of the Prospectus and all amendments or
supplements to it during the period specified in PARAGRAPH (e), (iii) the
preparation, printing and delivery of this Agreement, any Preliminary and
Supplemental Blue Sky Memoranda, the certificates for the Shares and all
other agreements, memoranda, correspondence and other documents printed and
delivered in connection with the offering of the Shares (including in each
case any disbursements of counsel for the Underwriters), (iv) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states (including in each case
the fees and disbursements of counsel for the Underwriters relating to such
registration or qualification and memoranda relating thereto), (v) filings
and clearance with the NASD in connection with the offering of the Shares,
(vi) the listing of the Shares on the National Association of Securities
Dealers Automated Quotation system ("NASDAQ National Market System") and
(vii) furnishing such copies of the Registration Statement, the Prospectus
and all amendments and supplements thereto as may be requested for use in
connection with the offering or sale of the Shares by the Underwriters or
by dealers to whom Shares may be sold.
(l) Except to the extent reasonably believed by the Company's Board
of Directors to be consistent with their fiduciary obligations to the
Company's shareholders, neither the Company nor the Majority Shareholder
shall take any action or fail to take any action which the Company or the
Majority Shareholder has agreed, prior to the date hereof, to take, nor
shall any such party authorize any employee, director, shareholder,
partner, affiliate (within the meaning of Rule 405 under the Act), agent or
other person to take any action or fail to take any action which the
Company or the Majority Shareholder has agreed, prior to the date hereof,
to take, directly or indirectly, during the five (5) years after the
Registration Statement becomes effective, which action or failure to take
such action shall be designed to, or might reasonably be expected to, cause
or result in the suspension, revocation or termination of the quotation or
trading of the Common Stock on the NASDAQ National Market System.
(m) Prior to the Closing Date and any Option Closing Date, as the
case may be, neither the Company nor the Majority Shareholder will issue
any press release or other communication relating to the offering of the
Shares or hold any press conference with respect to the Company or its
financial conditions, results of operations, business,
-6-
<PAGE>
properties, assets, or liabilities or this offering, without the prior
written consent of Gerard Klauer Mattison & Co., Inc., which consent
shall not be unreasonably withheld.
(n) The Company will apply the proceeds from the sale of the Shares
substantially as set forth under "Use of Proceeds" in the Prospectus.
Additionally, the Company shall report the use of the proceeds of the
issuance of the Shares as may be required under Rule 463 under the Act.
(o) The Company and the Majority Shareholder will use their best
efforts to do and perform all things required or necessary to be done and
performed under this Agreement by the Company and the Majority Shareholder
prior to the Closing Date or any Option Closing Date, as the case may be,
and satisfy all conditions precedent to the delivery of the Shares.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE MAJORITY
SHAREHOLDER. The Company and the Majority Shareholder, jointly and severally,
hereby represent and warrant to you that:
(a) The Company has filed with the Commission the Registration
Statement, including the Prospectus relating to the Shares.
(b) The Registration Statement has become effective under the Act, no
stop order suspending the effectiveness of the Registration Statement is in
effect and, to the Company's and the Majority Shareholder's knowledge, no
proceedings for such purpose are pending before or contemplated by the
Commission.
(c) (i) Each part of the Registration Statement, when such part
became effective under the Act, did not contain and each such part, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement and the Prospectus comply and,
as amended or supplemented, if applicable, will comply in all material
respects with the Act and the Exchange Act and (iii) the Prospectus does
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this PARAGRAPH (c) do not apply
to statements or omissions in the Registration Statement or the Prospectus
based upon information relating to any Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use therein.
(d) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the requirements of the Act and did not contain an untrue
statement of a material fact or omit to state a material fact
-7-
<PAGE>
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
(e) The documents incorporated by reference into the Prospectus, if
any, at the time they were filed with the Commission, complied in all
material respects with the requirements of the Exchange Act and the rules
and regulations thereunder, and, as of the date of this Agreement, the
Closing Date and any Option Closing Date, as the case may be, when read
together with the Prospectus and any supplement thereto, will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
and any documents filed after the date of this Agreement and so
incorporated by reference in the Prospectus will, when they are filed with
the Commission, comply in all material respects with the requirements of
the Exchange Act and the rules and regulations thereunder, and when read
together with the Prospectus and any supplement thereto, will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(f) The Company does not own or control, directly or indirectly, any
corporation, association or other entity. The Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the corporate
power and authority to carry on its business as it is currently being
conducted and to own, lease and operate its properties. The Company is
duly qualified and is in good standing as a foreign corporation authorized
to do business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification, except
where the failure to be so qualified would not have a material adverse
effect on the condition (financial or otherwise), earnings, assets, results
of operations, business affairs or business prospects of the Company (a
"Material Adverse Effect"), and no proceeding has been instituted in any
such jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification.
(g) The Company has authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus and all of the
issued and outstanding shares of capital stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable, have
been issued in substantial compliance with all federal and state securities
laws and, except as disclosed in the Prospectus, were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities.
(h) Except as disclosed in the Prospectus and the financial
statements of the Company and the related notes thereto included in the
Prospectus, the Company has no outstanding options to purchase,
registration rights, or preemptive rights or other rights to subscribe for
or to purchase, any securities or obligations convertible into, or any
-8-
<PAGE>
contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations.
(i) The Shares to be issued and sold by the Company hereunder have
been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided in this Agreement, will be validly
issued, fully paid and nonassessable. Except as disclosed in the
Prospectus, (i) neither the Company nor the Majority Shareholder is a party
to any agreement or understanding, and neither the Company nor the Majority
Shareholder has knowledge of any agreement or understanding, granting any
person or entity a right to acquire Shares or participate in the sale of
Shares pursuant to the Registration Statement; (ii) no person or entity has
the right to require registration under the Act of any securities of the
Company at any time; and (iii) neither the Company nor the Majority
Shareholder is a party to any agreement or understanding, or has knowledge
of any agreement or understanding, granting any person or entity a right to
acquire Common Stock or any other security of the Company at any time, upon
any conditions or upon the occurrence of any events.
(j) Both the Company and the Majority Shareholder have the requisite
corporate power and authority to enter into, execute and deliver this
Agreement and perform their respective obligations hereunder. This
Agreement has been duly authorized, executed and delivered by the Company
and the Majority Shareholder and is a valid and binding agreement of the
Company and the Majority Shareholder enforceable in accordance with its
terms, except as enforceability may be limited by general equitable
principles, including, without limitation, concepts of materiality,
reasonableness, good faith and fair dealing (regardless of whether such
enforceability is considered in a proceeding in equity or at law),
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium
or other laws affecting creditors' rights generally and except as to those
provisions relating to indemnity or contribution for liabilities arising
under the Act.
(k) The Company's Common Stock, including the Shares, is eligible for
trading on the Nasdaq National Market System.
(l) The Company is not in violation of its charter or by-laws or,
except for conditions that have been satisfied or waived, in default in the
performance of any obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of indebtedness or in any other
agreement, indenture or instrument material to the conduct of the business
of the Company to which the Company is a party or by which it or its
property is bound, except where such violations or defaults would not
result in a Material Adverse Effect.
(m) Except as disclosed in the Prospectus, (i) the Company is in
possession of and is operating in substantial compliance with all
authorizations, licenses, permits, consents, approvals, certificates,
orders and other rights of or with any court, regulatory, administrative or
other governmental body reasonably necessary or required and material
-9-
<PAGE>
to the conduct of its businesses as now conducted, all of which are
valid and in full force and effect in all material respects subject to
any conditions imposed by any such authority, (ii) neither the Company
nor the Majority Shareholder has reason to believe that any governmental
body or agency is considering limiting, suspending, revoking or refusing
to grant or renew any such authorizations, licenses, permits, consents,
approvals, certificates, orders or other rights in any material respect
reasonably necessary to the conduct of the Company's business as now
conducted or as proposed to be conducted as disclosed in the Prospectus
and (iii) the Company is in substantial compliance with all laws, rules,
regulations, judgments, decrees, orders and statutes of any court or
jurisdiction to which it is subject, except where noncompliance would
not have a Material Adverse Effect.
(n) No consent, authorization, approval, order, license, certificate,
or permit of or from, or declaration or filing with, any federal, state or
local governmental authority or any court or other tribunal is required by
the Company or the Majority Shareholder for the execution or delivery of,
or the performance of the Company's and the Majority Shareholder's
obligations under, this Agreement (except filings under Blue Sky or state
securities laws or as may be required under the rules of the NASD).
(o) Except for conditions that have been satisfied or waived, no
consent of any party to any material contract, agreement, instrument,
lease, license, arrangement, or understanding to which the Company or the
Majority Shareholder is a party, or to which any of their properties or
assets are subject, is required for the execution or delivery of, or the
performance of the Company's or the Majority Shareholder's obligations
under, this Agreement.
(p) Except for conditions that have been satisfied or waived, neither
the execution and delivery of, nor the performance of the Company's and the
Majority Shareholder's obligations under, this Agreement, nor the issuance
and sale of the Shares as contemplated hereby, nor the consummation of any
other of the transactions herein contemplated, nor the fulfillment of the
terms hereof, will violate, result in a breach of, conflict with, nor (with
or without the giving of notice or the passage of time or both) entitle any
party to terminate or call a default under any contract, agreement,
instrument, lease, license, arrangement, or understanding, to which the
Company or the Majority Shareholder is a party, or to which any of their
respective properties or assets are subject, nor violate or result in a
breach of any term of the charter or by-laws of the Company or the Majority
Shareholder, nor violate, result in a breach of, or conflict with any law,
rule, or regulation, or any order, judgment, or decree binding on the
Company or the Majority Shareholder or to which any of their respective
operations, businesses, properties, or assets are subject, except where
such violation, breach or conflict would not, individually or in the
aggregate, have a Material Adverse Effect and would not impair materially
the ability of the Company and the Majority Shareholder to perform their
respective obligations hereunder or thereunder.
(q) Neither the Company, any of its executive officers, directors, or
affiliates (as defined pursuant to the Act), nor the Majority Shareholder
has taken or will take,
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directly or indirectly, prior to the termination of the underwriting
arrangements contemplated by this Agreement, any action designed to
stabilize or manipulate the price of the Common Stock or which has
caused or resulted in, or which might in the future reasonably be
expected to cause or result in, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
any of the Shares.
(r) There is no legal or governmental proceeding pending or, to the
Company's and the Majority Shareholder's knowledge, threatened, to which
the Company is a party or to which its properties are subject which is
required to be described in the Registration Statement or the Prospectus
and is not so described or, or of any contract or other document which is
required to be described in the Registration Statement or the Prospectus or
is required to be filed as an exhibit to the Registration Statement, which
is not described or filed as required.
(s) To the Company's and the Majority Shareholder's knowledge, the
Company is conducting its business in compliance with, and has not
violated, any foreign, federal, state or local laws or regulations relating
to the protection of human health and safety, the environment or hazardous
or toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), any federal or state laws relating to discrimination in the hiring,
promotion or pay of employees nor any applicable federal or state wages and
hours laws, or any provisions of the Employee Retirement Income Security
Act or the rules and regulations promulgated thereunder, in each case that
are applicable to it, except where violation of or failure to be in
compliance with would not result in a Material Adverse Effect.
(t) The Company has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("Permits"),
including, without limitation, under any applicable Environmental Laws, as
are necessary to own, lease and operate its properties and to conduct its
business; the Company has fulfilled and performed all of its material
obligations with respect to such Permits and no event has occurred which
allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the
rights of the holder of any such Permit; in each case except where failure
to so have, fulfill or perform would not result in a Material Adverse
Effect.
(u) The Company has good and marketable title, free and clear of all
liens, claims, encumbrances and restrictions (collectively, "Liens"), to
all property and assets described in the Prospectus, except (i) Liens for
taxes not yet due and payable, (ii) Liens entered into in connection with
that certain Loan and Security Agreement, dated June 12, 1997, between
Congress Financial Corporation (Central) and the Majority Shareholder, as
amended, and (iii) Liens that are described in the Prospectus or where
failure to so have would not result in a Material Adverse Effect.
(v) All leases to which the Company is a party are valid and binding
on the Company and no default has occurred or is continuing thereunder,
except where such
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invalidity, unenforceability or default would not result in a Material
Adverse Effect, and the Company enjoys peaceful and undisturbed
possession under all such leases to which it is a party as lessee with
such exceptions as do not materially interfere with the use made by the
Company.
(w) Ernst & Young LLP, who have expressed their opinion with respect
to certain of the financial statements and schedules included in the
Registration Statement, are independent public accountants with respect to
the Company, as required by the Act.
(x) The financial statements and schedules of the Company, and the
related notes thereto, included in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) present fairly the
financial position, results of operations and changes in financial position
of the Company on the basis stated in the Registration Statement at the
respective dates or for the respective periods to which they apply; such
statements, schedules and related notes have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved as certified by the independent accountants
named in the preceding paragraph of this section, except as disclosed
therein; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectus (and any amendment
or supplement thereto) is, in all material respects, accurately presented
and prepared on a basis consistent with such financial statements and the
books and records of the Company.
(y) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described therein:
(i) the Company has not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or
written agreement or other transaction which is not in the ordinary course
of business or which could result in a material reduction in the future
earnings of the Company; (ii) the Company has not sustained any material
loss or interference with its business or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other
distributions with respect to its capital stock and the Company is not in
default in the payment of principal or interest on any outstanding debt
obligations; and (iv) there has not been any change in the capital stock or
indebtedness material to the Company (other than in the ordinary course of
business).
(z) The Company and the Majority Shareholder maintain a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
and (iii) access to assets is permitted only in accordance with
management's general or specific authorization.
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(aa) To the Company's and the Majority Shareholder's knowledge, and
except as disclosed in the Prospectus, the Company has sufficient
trademarks, trade names, patent rights, mask works, copyrights, licenses,
approvals and governmental authorizations reasonably necessary to conduct
its business as now conducted; the expiration of any trademarks, trade
names, patent rights, mask works, copyrights, licenses, approvals or
governmental authorizations would not have a Material Adverse Effect;
neither the Company nor the Majority Shareholder has knowledge of any
material infringement by the Company of trademark, trade name rights,
patent rights, mask works, copyrights, licenses, trade secret or other
similar propriety rights (collectively, "Proprietary Rights") of others,
and there is no claim being made against the Company regarding infringement
of any Proprietary Right which could have a Material Adverse Effect; and
except as disclosed in the Prospectus, the Company is not obligated or
under any liability whatsoever to pay any royalty, fee or other similar
payment in respect of any Proprietary Rights.
(ab) Except as disclosed in the Prospectus, to the Company's and the
Majority Shareholder's knowledge, the Company owns and has the unrestricted
right to use all trade secrets, including know-how, customer lists,
inventions, designs, processes, computer programs and technical data
necessary to manufacture, operate and sell all products and services sold
or developed and proposed to be sold by it as described in the Prospectus,
free and clear of any rights, liens and claims of others. To the Company's
and the Majority Shareholder's knowledge, the Company is not using any
material confidential information or trade secrets of any former employer
of any of its past or present employees.
(ac) The Company has filed all necessary federal, state and foreign
income and franchise tax returns and has paid all taxes shown as due
thereon; and neither the Company nor the Majority Shareholder has knowledge
of any tax deficiency which has been or might reasonably be asserted or
which has been threatened against the Company which could have a Material
Adverse Effect.
(ad) Except as set forth in the Prospectus, there are no agreements,
claims, payment, issuances, arrangements or understandings, whether oral or
written, for services in the nature of finder's, consulting or origination
fees with respect to the sale of Shares hereunder or any other
arrangements, agreements, understandings, payments or issuances with
respect to the Company or, to the knowledge of the Company and the Majority
Shareholder, any of its officers, directors, partners, employees or
affiliates that may affect the Underwriters' compensation, as determined by
the NASD.
(ae) The Company is not involved in any material labor dispute nor, to
the knowledge of the Company and the Majority Shareholder, is any such
dispute threatened.
(af) Except as described in the Prospectus or as set forth on SCHEDULE
II, neither the Company nor the Majority Shareholder maintains, sponsors or
contributes on behalf of the Company's employees to any program or
arrangement that is an "employee welfare benefit plan," "employee pension
benefit plan," or a "multiemployer plan" as such terms
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are defined in Sections 3(1), 3(2) and 3(37), respectively, of the
Employee Retirement Income Security Act of 1974, as amended (herein
called ERISA) (herein collectively called the ERISA Plans). Neither the
Company nor the Majority Shareholder maintains or contributes, now or at
any time previously, to a defined benefit plan, as defined in Section
3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has
engaged in a "prohibited transaction" within the meaning of Section 406
of ERISA or Section 4975 of the United States Internal Revenue Code of
1986, as amended (herein called the Code), which could subject the
Company to any tax penalty on prohibited transactions and which has not
adequately been corrected. Each ERISA Plan is in compliance with all
material reporting, disclosure and other requirements of the Code and
ERISA as they relate to any such ERISA Plan. Determination letters have
been received from the Internal Revenue Service with respect to each
ERISA Plan which is intended to comply with Code Section 401(a), stating
that such ERISA Plan (or the underlying prototype document relating
thereto) and the attendant trust are qualified thereunder. Neither the
Company nor the Majority Shareholder has ever completely or partially
withdrawn from a "multiemployer plan."
(ag) Except as set forth in the Prospectus, no officer, director (to
the extent required to be disclosed by applicable Commission regulations)
or shareholder of the Company or any "affiliate" or "associate" (as these
terms are defined in Rule 405 under the Act) of any of the foregoing
persons or entities has or has had (to the extent in excess of $25,000),
either directly or indirectly (i) an interest in any person or entity that
(x) furnishes or sells services or products which are furnished or sold or
that are proposed to be furnished or sold by the Company, or (y) purchases
from or sells or furnishes to the Company any goods or services, or (ii) a
beneficial interest in any contract or agreement to which the Company is a
party or by which it may be bound or affected. Except as set forth in the
Prospectus under the captions "Certain Transactions" and "Management" there
are no existing or proposed agreements, arrangements, understandings or
transactions, between the Company and any existing officer, director,
principal shareholder of the Company or any partner, affiliate or associate
of any of the foregoing persons or entities.
(ah) The minute books of the Company have been made available to the
Underwriters and contain an accurate summary of all meetings with respect
to which minutes exist and contain all actions taken by the directors and
shareholders of the Company during such meetings since the time of its
incorporation, and reflect accurately and fairly in all respects all
transactions referred to in such minutes. No material actions that would
materially adversely affect the Company have been taken by the directors
and/or shareholders of the Company at a meeting for which minutes do not
exist.
(ai) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(aj) To the Company's and the Majority Shareholder's knowledge, the
Company has complied with all provisions of Section 517.075, Florida
Statutes (Chapter 92-198,
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Laws of Florida) relating to doing business with the Government of Cuba
or with any person or any affiliate located in Cuba.
7. INDEMNIFICATION.(a) The Company and the Majority Shareholder, jointly
and severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages, liabilities and judgments caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) or any preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or judgments are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Underwriter or underwriting arrangements furnished in writing to the Company by
or on behalf of any Underwriter through you expressly for use therein. Both the
Company and the Majority Shareholder acknowledge that the only information
relating to any Underwriter or underwriting arrangements furnished in writing to
the Company by or on behalf of any Underwriter expressly for use in the
Registration Statement or Prospectus are the statements set forth in the third
and last paragraphs under the caption "Underwriting" in the Prospectus.
(b) In case any action shall be brought against any Underwriter or any
person controlling such Underwriter, based upon any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
and with respect to which indemnity may be sought against the Company, such
Underwriter shall promptly notify the Company and the Majority Shareholder in
writing and the Company shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such indemnified party and
payment of all reasonable fees and expenses. Any Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the employment of such counsel has been specifically authorized in
writing by the Company, (ii) the Company shall have failed to assume the defense
and employ counsel or (iii) the named parties to any such action (including any
impleaded parties) include both such Underwriter or such controlling person and
the Company, as the case may be, and counsel for such Underwriter or such
controlling person has reasonably concluded that there may be one or more legal
defenses available to such Underwriter or such controlling person which are
different from or additional to those available to the Company (in which case
the Company shall not have the right to assume the defense of such action on
behalf of such Underwriter or such controlling person, it being understood,
however, that the Company shall not, in connection with any one such action or
separate but substantially similar or related actions arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all such Underwriters and controlling persons, which firm shall be
designated in writing by Gerard Klauer Mattison & Co., Inc. and that all such
reasonable fees and expenses shall be reimbursed as they are incurred). The
Company shall not be liable for any settlement of any such action effected
without the written
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consent of the Company but if settled with the written consent of the
Company, the Company agrees to indemnify and hold harmless any Underwriter
and any such controlling person from and against any loss or liability by
reason of such settlement. If at any time the indemnified party shall have
requested the indemnifying party to reimburse the indemnified party for fees
and expenses of counsel as contemplated by the second sentence of this
paragraph, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than fifteen business days after receipt by
such indemnifying party of the aforesaid request and (ii) the indemnifying
party shall not have reimbursed the indemnified party in accordance with such
request prior to the date of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, the Majority Shareholder and their respective
directors and officers who sign the Registration Statement, any person
controlling the Company or the Majority Shareholder within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as
the foregoing indemnity from the Company and the Majority Shareholder to each
Underwriter but only with reference to information relating to such Underwriter
or the underwriting arrangements furnished in writing by or on behalf of such
Underwriter through you expressly for use in the Registration Statement, the
Prospectus or any preliminary prospectus. In case any action shall be brought
against the Company, the Majority Shareholder or any of their respective
directors, any such officer or any person controlling the Company or the
Majority Shareholder based on the Registration Statement, the Prospectus or any
preliminary prospectus and in respect of which indemnity may be sought against
any Underwriter, such Underwriter shall have the rights and duties given to the
Company and the Majority Shareholder (except that if the Company or the Majority
Shareholder shall have assumed the defense thereof, such Underwriter shall not
be required to do so, but may employ separate counsel therein and participate in
the defense thereof but the fees and expenses of such counsel shall be at the
expense of such Underwriter), and the Company, the Majority Shareholder and
their respective directors, any such officers and any person controlling the
Company, the Majority Shareholder shall have the rights and duties given to the
Underwriter, by SECTION 7(b) hereof.
(d) If the indemnification provided for in this SECTION 7 is unavailable
to an indemnified party in respect of any losses, claims, damages, liabilities
or judgments referred to therein, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities and judgments (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Majority Shareholder, on
the one hand, and the Underwriters, on the other hand, from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, the Majority Shareholder and the Underwriters in connection with
the statements or omissions which
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resulted in such losses, claims, damages, liabilities or judgments, as well
as any other relevant equitable considerations. The relative benefits
received by the Underwriters shall be deemed to be the total underwriting
discount received by the Underwriters and the relative benefits received by
the Company and the Majority Shareholder shall be deemed to be the total net
proceeds from the offering (before deducting expenses) received by the
Company, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company, the Majority Shareholder and
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Company, the Majority Shareholder or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such statement or omission.
The Company, the Majority Shareholder and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this SECTION 7(d)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this SECTION 7, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this SECTION 7(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) Notwithstanding anything to the contrary contained herein, an
Underwriter or person controlling an Underwriter shall not bring any claim
against the Majority Shareholder under this SECTION 7 with respect to any breach
of a representation, warranty or agreement contained in this Agreement unless
(i) such Underwriter or controlling person shall have first submitted such claim
to the Company and (ii) the Company shall not, within forty-five (45) days, (a)
have paid such claim in full or (b) be otherwise fully satisfying its
indemnification obligations with respect to such claim (by assuming the defense
of any proceeding giving rise to such claim or otherwise as set forth in this
SECTION 7); provided, however, that if at any time thereafter the Company is no
longer fully satisfying its indemnification obligations with respect to such
claim, such Underwriter or controlling person may immediately bring such claim
against the Majority Shareholder.
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8. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The several obligations of
the Underwriters to purchase the Firm Shares under this Agreement are subject to
the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company and the
Majority Shareholder contained in this Agreement shall be true and correct
as of the date hereof and as of the Closing Date with the same force and
effect as if made on and as of such date.
(b) The Registration Statement shall have become effective not later
than 5:00 p.m., New York City time, on the date of this Agreement or at
such later date and time as you may approve in writing, and at the Closing
Date no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been commenced or shall be pending before or contemplated by the
Commission.
(c) You shall be satisfied that since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, (i) there shall not have been any action or inaction which
might result in a Material Adverse Change of the Company which makes it
impractical or inadvisable in your judgment to proceed with the public
offering or purchase the Shares as contemplated hereby, (ii) except as set
forth in the Registration Statement and the Prospectus, no verbal or
written agreement or other transaction shall have been entered into by the
Company, which is not in the ordinary course of business or which could
result in a Material Adverse Change, (iii) no loss or damage (whether or
not insured) to the property of the Company shall have been sustained the
result of which would have a Material Adverse Effect, (iv) no legal or
governmental action, suit or proceeding affecting the Company the result of
which could have a Material Adverse Effect or may materially affect the
transactions contemplated by this Agreement shall have been instituted or
threatened and (v) on the Closing Date you shall have received a
certificate dated the Closing Date, signed by Edward A. Tomechko and
Michael P. Wise in their capacities as the Chief Executive Officer and
Chief Financial Officer of the Company, respectively, confirming the
matters set forth in PARAGRAPHS (a), (b) and (c) of this SECTION 8.
(d) You shall have received on the Closing Date and any Option
Closing Date, as the case may be, an opinion (satisfactory to you and your
counsel), dated as of the Closing Date or any Option Closing Date, as the
case may be, of Lindquist & Vennum, P.L.L.P, counsel for the Company and
the Majority Shareholder, to the effect that:
(i) The Company is duly qualified and is in good standing as
a foreign corporation authorized to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be
so qualified would not have a Material Adverse Effect and to the best
of such counsel's knowledge, after due inquiry, no proceeding has been
instituted in any such jurisdiction, revoking, limiting or curtailing,
or seeking to revoke, limit or curtail, such power and authority or
qualification.
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(ii) The Company has authorized and outstanding capital stock
as set forth under the heading "Capitalization" in the Prospectus and
all of the issued and outstanding shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid
and nonassessable, and, except as disclosed in the Prospectus, were
not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities.
(iii) The Firm Shares have been duly authorized and, when
issued and delivered, will be validly issued, fully paid and
non-assessable and free and clear of all liens and restrictions on
transfer. The Additional Shares have been duly authorized and,
when issued and delivered, will be validly issued, fully paid and
non-assessable and free and clear of all liens and restrictions on
transfer.
(iv) Except as disclosed in the Prospectus and the financial
statements of the Company and the related notes thereto included in
the Prospectus, or to such counsel's knowledge, the Company has no
outstanding options to purchase, registration rights, preemptive
rights or other rights to subscribe for or to purchase, any securities
or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations.
(v) This Agreement has been duly authorized, executed and
delivered by the Company and the Majority Shareholder and is a valid
and binding agreement of the Company and the Majority Shareholder
enforceable in accordance with its terms, except as enforceability may
be limited by general equitable principles, including, without
limitation, concepts of materiality, reasonableness, good faith and
fair dealing (regardless of whether such enforceability is considered
in a proceeding in equity or at law), bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or other laws
affecting creditors' rights generally and except as to those
provisions relating to indemnity or contribution for liabilities
arising under the Act.
(vi) The Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the best of such counsel's
knowledge, after due inquiry, pending before or contemplated by the
Commission.
(vii) The statements set forth in the Prospectus under the
headings "Risk Factors -- Shares eligible for future sale by our
current shareholders may adversely affect our stock price,"
"Capitalization" and "Description of Capital Stock" and Item 15 Part
II of the Registration Statement insofar as such statements constitute
a summary of documents referred to therein or of legal matters or
proceedings, are complete and accurate in all material respects and
fairly summarize in all material respects the information called for
with respect to such documents, legal matters and proceedings.
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(viii) The Shares and the Common Stock conform in all material
respects as to legal matters to the description thereof contained in
the Prospectus.
(ix) Neither the Company nor the Majority Shareholder is in
violation of its charter or by-laws and, to such counsel's knowledge,
and except for conditions that have been satisfied or waived, the
Company is not in default in the performance of any obligation,
agreement or condition contained in any bond, debenture, note or any
other evidence of indebtedness or in any other agreement, indenture or
instrument material to the conduct of the business of the Company to
which the Company is a party or by which it or its properties are
bound, except where such violation or default would not result in a
Material Adverse Effect.
(x) To such counsel's knowledge and except as disclosed in
the Prospectus, (i) the Company is in possession of and is operating
in substantial compliance with all authorizations, licenses, permits,
consents, approvals, certificates, orders and other rights of or with
any court, regulatory, administrative or other governmental body
reasonably necessary or required and material to the conduct of its
business as now conducted, all of which are valid and in full force
and effect in all material respects, subject to any conditions imposed
by any such authority and (ii) the Company is in substantial
compliance with all laws, rules, regulations, judgements, decrees,
orders and statutes of any court or jurisdiction to which it is
subject, except where noncompliance would not have a Material Adverse
Effect.
(xi) No consent, authorization, approval, order, license,
certificate, or permit of or from, or declaration or filing with, any
federal, state or local governmental authority or any court or other
tribunal is required by the Company for the execution or delivery of,
or the performance of the Company's obligations under, this Agreement
(except filings under the Act which have been or will be made before
the Closing Date or any Option Closing Date, as the case may be, and
filings under Blue Sky or state securities laws or as may be required
under the rules of the NASD).
(xii) Except for conditions that have been satisfied or waived,
no consent of any party to any material contract, agreement,
instrument, lease, license, arrangement, or understanding to which the
Company or the Majority Shareholder is a party, or to which any of
their properties or assets are subject, is required for the execution
or delivery of, or the performance of the Company's or the Majority
Shareholder's obligations under, this Agreement.
(xiii) Except for conditions that have been satisfied or waived,
neither the execution and delivery of, nor the performance of the
Company's and the Majority Shareholder's respective obligations under,
this Agreement nor the issuance and sale of the Shares as contemplated
hereby nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof, will
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violate, result in a breach of, conflict with, nor (with or without
the giving of notice or the passage of time or both) entitle any
party to terminate or call a default under any material contract,
agreement, instrument, lease, license, arrangement, or
understanding to which the Company is a party, or to which its
properties or assets are subject, nor violate or result in a breach
of any term of the charter or by-laws of the Company or the
Majority Shareholder, nor violate, result in a breach of, or to the
best of such counsel's knowledge, conflict with any law, rule, or
regulation, or any order, judgment, or decree binding on the
Company or the Majority Shareholder or to which any of its
operations, business, properties, or assets are subject, except
where such violation, breach or conflict would not, individually or
in the aggregate, have a Material Adverse Effect or would impair
materially the ability of the Company or the Majority Shareholder
to perform its obligations hereunder or thereunder.
(xiv) To such counsel's knowledge, such counsel does not know
of any legal or governmental proceeding pending or threatened to which
the Company is a party or to which any of its properties are subject
which is required to be described in the Registration Statement or the
Prospectus and is not so described or, or of any contract or other
document which is required to be described in the Registration
Statement or the Prospectus or is required to be filed as an exhibit
to the Registration Statement which is not described or filed as
required.
(xv) To such counsel's knowledge, the Company has such
permits, licenses, franchises and authorizations of governmental or
regulatory authorities ("Permits"), as are necessary to own, lease and
operate its properties and to conduct its business; the Company has
fulfilled and performed all of its material obligations with respect
to such Permits and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination thereof
or result in any other material impairment of the rights of the holder
of any such Permit; in each case except where failure to so have,
fulfill or perform would not result in a Material Adverse Effect.
(xvi) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(xvii) (1) The Registration Statement and the Prospectus and any
supplement or amendment thereto (except for financial statements and
notes, schedules and other financial statistical data included
therein, as to which no opinion need be expressed) comply as to form
in all material respects with the Act and the Exchange Act and (2) no
facts have come to the attention of such counsel that have led such
counsel to believe that the Registration Statement and the prospectus
included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact, or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not
-21-
<PAGE>
misleading, or that the Prospectus as amended or supplemented, if
applicable (except for financial statements as aforesaid) contained
any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading.
In rendering such opinion, such counsel may rely on (A) an opinion or
opinions of other counsel retained by them or the Company as to laws of any
jurisdiction other than the United States and Minnesota, provided that (i)
each such local counsel is acceptable to you, (ii) such reliance is
expressly authorized by each opinion so relied upon and (iii) each such
opinion is in form and substance satisfactory to you and your counsel; and
(B) as to matters of fact, certificates of officers of the Company and the
Majority Shareholder and governmental officials. In each such case, the
opinion of such counsel is to state that they are so doing and that they
have no reason to believe that the Underwriters are not justified in
relying on such opinions or certificates and copies of said opinions or
certificates are to be attached to the opinion. In addition, in giving
such opinion with respect to the matters covered by clause (xvii)(2) such
counsel may state that their opinion is based upon their participation in
the preparation of the Registration Statement and Prospectus, any
amendments or supplements thereto or other documents, as the case may be,
and review and discussion of the contents thereof, but is without
independent check or verification except as specified.
The opinion of Lindquist & Vennum, P.L.L.P. described in PARAGRAPH (d)
above shall be rendered to you at the request of the Company and shall so
state therein.
(e) You shall have received, on the Closing Date and any Option
Closing Date, as the case may be, a letter dated the Closing Date or any
Option Closing Date, as the case may be, in form and substance satisfactory
to you, of Ernst & Young LLP confirming that they are independent public
accountants within the meaning of the Act and stating that in their opinion
the financial statements and schedules examined by them and included in the
Registration Statement comply in form in all material respect with the
applicable accounting requirements of the Act; and containing such other
statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(f) You shall have received on the Closing Date, the Lock-up
Agreements referred to in SECTION 2 herein, duly executed by each of the
executive officers, directors and securityholders of the Company.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
-22-
<PAGE>
9. EFFECTIVE DATE OF AGREEMENT AND TERMINATION. This Agreement shall
become effective upon the later of (i) the execution of this Agreement and (ii)
when notification of the effectiveness of the Registration Statement has been
released by the Commission.
This Agreement may be terminated at any time prior to the Closing Date by
you by written notice to the Company if any of the following has occurred: (i)
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, any adverse change or development involving a
prospective adverse change in the condition, financial or otherwise, of the
Company or the earnings, affairs, or business prospects of the Company, whether
or not arising in the ordinary course of business, which would, in your
judgment, make it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus, (ii) any outbreak or escalation of
hostilities or other national or international calamity or crisis or change in
economic conditions or in the financial markets of the United States or
elsewhere that, in your judgment, is material and adverse and would, in your
judgment, make it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus, (iii) the suspension or material
limitation of trading in securities on the New York Stock Exchange, the American
Stock Exchange or the NASDAQ National Market System or limitation on prices for
securities on any such exchange or NASDAQ National Market System, (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of any court or other governmental authority
which in your opinion materially and adversely affects, or will materially and
adversely affect, the business or operations of the Company, (v) the declaration
of a banking moratorium by either Federal or New York State authorities or (vi)
the taking of any action by any Federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or the Additional Shares, as the case may be, which it or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in SCHEDULE I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or the Additional Shares, as the case may be, which such
defaulting Underwriter or Underwriters, as the case may be, agreed but failed or
refused to purchase on such date; PROVIDED, that in no event shall the number of
Firm Shares or Additional Shares, as the case may be, which any Underwriter has
agreed to purchase pursuant to SECTION 2 hereof be increased pursuant to this
SECTION 9 by an amount in excess of one-ninth of such number of Firm Shares or
Additional Shares, as the case may be, without the written consent of such
Underwriter. If on the Closing Date or on an Option Closing Date, as the case
may be, any Underwriter or Underwriters shall fail or refuse to purchase Firm
Shares or Additional Shares, as the case may be, and the aggregate number of
Firm Shares or Additional Shares, as the case may be, with respect to which such
default occurs is more than one-tenth of the aggregate number of Shares to be
purchased on such
-23-
<PAGE>
date by all Underwriters and arrangements satisfactory to you and the Company
for purchase of such Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or on the part of the Company and the Selling
Securityholder. In any such case which does not result in termination of
this Agreement, either you or the Company shall have the right to postpone
the Closing Date or the applicable Option Closing Date, as the case may be,
but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and the Prospectus or any
other documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.
10. MISCELLANEOUS. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (a) if to the Company or the Majority
Shareholder, to NetRadio Corporation, with copies to Lindquist & Vennum
P.L.L.P., 4200 IDS Center, Minneapolis, Minnesota 55402, attention: Thomas G.
Lovett, and (b) if to any Underwriter or to you, to Gerard Klauer Mattison &
Co., Inc., 529 Fifth Avenue, New York, New York 60601, attention: Dominic A.
Petito, with copies to Katten Muchin & Zavis, 525 West Monroe Street, Chicago,
Illinois 60661-3693, attention: Lawrence D. Levin, or in any case to such other
address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Majority Shareholder, their
respective executive officers and directors and of the Underwriters set forth in
or made pursuant to this Agreement shall remain operative and in full force and
effect, and will survive delivery of and payment for the Shares, regardless of
(i) any investigation, or statement as to the results thereof, made by or on
behalf of any of the Underwriters or by or on behalf of the Company or the
Majority Shareholder, the executive officers or directors of the Company or the
Majority Shareholder or any controlling person of the Company or the Majority
Shareholder, (ii) acceptance of the Shares and payment for them hereunder or
(iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters because of any
failure or refusal on the part of the Company or the Majority Shareholder to
comply with the terms or to fulfill any of the conditions of this Agreement, the
Company and the Majority Shareholder agree to reimburse the Underwriters for all
out-of-pocket expenses (including the fees and disbursements of counsel)
reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Majority
Shareholder, the Underwriters, any controlling persons referred to herein and
their respective successors and assigns, all as and to the extent provided in
this Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" shall not include a
purchaser of any of the Shares from the Underwriters merely because of such
purchase.
For purposes of this Agreement, the term "knowledge" means, with respect to
a person, knowledge that is possessed, or should have been possessed after due
inquiry, by such person.
-24-
<PAGE>
This Agreement shall be governed and construed in accordance with the
internal laws (and not the laws pertaining to conflicts of laws) of the State of
New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
-25-
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company, the Majority Shareholder and the Underwriters.
Very truly yours,
NETRADIO CORPORATION
By:
----------------------------------------
Title:
----------------------------------------
NAVARRE CORPORATION
By:
----------------------------------------
Title:
----------------------------------------
GERARD KLAUER MATTISON & CO., INC.
[CO-MANAGER]
Acting severally on behalf of
themselves and the several
Underwriters named in Schedule I
hereto
By: GERARD KLAUER MATTISON & CO., INC.
By:
----------------------------------
Title:
----------------------------------
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
UNDERWRITERS TO BE PURCHASED
- ----------------------------------------------------------------------------------------
<S> <C>
Gerard Klauer Mattison & Co., Inc. . . . . . . . . . . .
[CO-MANAGER] . . . . . . . . . . . . . . . . . . . . . .
----------
TOTAL 4,000,000
----------
----------
</TABLE>
<PAGE>
SCHEDULE II
EMPLOYEE BENEFIT PLANS
<PAGE>
Exhibit 1.2
- --------------------------------------------------------------------------------
NETRADIO CORPORATION
AND
GERARD KLAUER MATTISON & CO., INC.
-----------------
WARRANT AGREEMENT
Dated as of September __, 1999
<PAGE>
WARRANT AGREEMENT, dated as of September __, 1999, between NETRADIO
CORPORATION, a Minnesota corporation (the "Company"), and GERARD KLAUER
MATTISON & CO., INC., a Delaware corporation ("GKM").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to GKM warrants (each, a
"Warrant") to purchase up to an aggregate of 125,000 shares of Common Stock
(as defined in Section 8.3 hereof);
WHEREAS, pursuant to that certain Underwriting Agreement (the
"Underwriting Agreement"), dated as of the date hereof, among GKM and The
Advest Group, Inc. (the "Representatives"), as representatives of the several
Underwriters (as such term is defined in the Underwriting Agreement), Navarre
Corporation, a Minnesota corporation, and the Company, the Representatives
and the other Underwriters have agreed to purchase 4,000,000 shares of common
stock, no par value per share, of the Company, at a public offering price of
$_____ per share in connection with the Company's proposed public offering
(the "Public Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to GKM in consideration for, and as part of GKM's
compensation in connection with its service as financial advisor to the Company.
NOW, THEREFORE, in consideration of the premises, the payment by GKM to
the Company of an aggregate of one hundred dollars ($100.00), the agreements
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. GRANT. GKM is hereby granted the right to purchase, at any time
from September ___, 2000 until 4:30 p.m., Chicago time, on __________, 2004
(the "Exercise Period"), up to an aggregate of 125,000 shares of Common Stock
(the "Shares") at an initial exercise price (subject to adjustment as
provided in Section 8 hereof) of $__________ [120% OF THE INITIAL PUBLIC
OFFERING PRICE PER SHARE] per share of Common Stock subject to the terms and
conditions of this Agreement. Except as set forth herein, the Shares issuable
upon exercise of the Warrants are in all respects identical to the shares of
Common Stock being purchased by the Underwriters for resale to the public
pursuant to the terms and provisions of the Underwriting Agreement.
2. WARRANT CERTIFICATES. The warrant certificate(s) (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall
be in the form set forth on Exhibit A, attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions and other
variations as required or permitted by this Agreement.
3. EXERCISE OF WARRANTS.
<PAGE>
3.1 METHOD OF EXERCISE. The Warrants initially are exercisable at
an aggregate initial exercise price per share of Common Stock set forth in
Section 6 hereof (subject to adjustment as provided in Section 8 hereof)
payable by wire or certified or official bank check in New York Clearing
House funds. Upon surrender of a Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Purchase
Price (as hereinafter defined) for the shares of Common Stock purchased at
the Company's principal offices in Minnesota (presently located at Riverplace
Exposition Hall, 43 Main Street Southeast, Suite 149, Minneapolis, Minnesota
55414) the registered holder of a Warrant Certificate ("Holder" or "Holders")
shall be entitled to receive a certificate or certificates for the shares of
Common Stock so purchased. The purchase rights represented by each Warrant
Certificate are exercisable at the option of the Holder thereof, in whole or
in part for all or part of the shares of Common Stock represented thereby
(but not as to fractional shares of the Common Stock underlying the Warrant).
In the case of the purchase of less than all the shares of Common Stock
purchasable under any Warrant Certificate, the Company shall cancel said
Warrant Certificate upon the surrender thereof and shall execute and deliver
a new Warrant Certificate of like tenor for the balance of the shares of
Common Stock purchasable thereunder.
3.2 EXERCISE BY SURRENDER OF WARRANTS. In addition to the method
of payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any time
and from time to time to exercise the Warrants in whole or in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1
in exchange for the number of shares of Common Stock equal to (x) the number
of shares as to which such Warrants are being exercised MULTIPLIED BY (y) a
fraction, the numerator of which is the Market Price (as defined below) of
the Common Stock less the Exercise Price and the denominator of which is such
Market Price. The term "Market Price" as used herein shall mean, with respect
to shares of Common Stock, the average of the closing prices of such sale on
all recognized securities exchanges on which the Common Stock may at the time
be listed, or, if there has been no sale on any such exchange on any day, the
average of the highest bid and lowest asked prices on all such exchanges at
the end of such day, or, if on any day the Common Stock is not listed, the
average of the representative bid and asked prices quoted in the Nasdaq Stock
Market as of 4:00 p.m., New York time, or, if on any day the Common Stock is
not quoted in the Nasdaq Stock Market, the average of the highest bid and
lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged on a weighted basis over a
period of twenty-one (21) days consisting of the day as of which "Market
Price" is being determined and the twenty (20) consecutive trading days prior
to such day. Solely for the purposes of this paragraph, Market Price shall be
calculated either (i) on the date which the form of election attached hereto
is deemed to have been sent to the Company pursuant to Section 13 hereof
("Notice Date") or (ii) as the average of the Market Prices for each of the
five (5) consecutive trading days preceding the Notice Date, whichever of (i)
or (ii) is greater.
<PAGE>
4. ISSUANCE OF CERTIFICATES. Upon the exercise of a Warrant, the
issuance of certificates for shares of Common Stock or other securities,
properties or rights underlying such Warrant, shall be made forthwith (and in
any event within three (3) business days thereafter) without charge to the
Holder thereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to the
provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof; PROVIDED, HOWEVER, that the
Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder, and the Company shall
not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the Shares
(and/or other securities, property or rights issuable upon the exercise of
the Warrants) shall be executed on behalf of the Company by the manual or
facsimile signature of the then present Chairman or Vice Chairman of the
Board of Directors or President or Vice President of the Company under its
corporate seal reproduced thereon, attested to by the manual or facsimile
signature of the then present Secretary or Assistant Secretary of the
Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5. RESTRICTION ON TRANSFER OF WARRANTS. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the
Warrants are being acquired as an investment and not with a view to the
distribution thereof, and that the Warrants will not be sold, offered for
sale, transferred, assigned or hypothecated for a period of one (1) year from
the date of this Agreement other than to officers, employees or partners of
GKM, in which case, such officers, employees or partners shall be entitled to
receive a replacement Warrant Certificate in accordance with Section 9 hereof
upon presentment of a properly executed Form of Assignment (in the form
included on Exhibit A attached hereto).
6. EXERCISE PRICE.
6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise
provided in Section 8 hereof, the initial exercise price of the Warrants
shall be $__________ [120% OF THE INITIAL PUBLIC OFFERING PRICE] per share of
Common Stock. The adjusted exercise price shall be the price which shall
result from time to time from any and all adjustments of the initial exercise
price in accordance with the provisions of Section 8 hereof.
6.2 EXERCISE PRICE. The term "Exercise Price" as used herein
shall mean the initial exercise price or the adjusted exercise price,
depending upon the context.
7. REGISTRATION RIGHTS.
7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Warrants,
the Shares and any of the other securities issuable upon exercise of the
Warrants have not been registered
<PAGE>
under the Securities Act of 1933, as amended (the "Act"). Upon exercise of
the Warrants, in whole or in part, the certificates representing the Shares
underlying the Warrants and any of the other securities issuable upon
exercise of the Warrants (collectively, the "Warrant Shares") shall bear the
following legend:
The securities represented by this certificate have not
been registered under the Securities Act of 1933, as
amended (the "Act"), or any state securities laws, and
may not be offered or sold except pursuant to (i) an
effective registration statement under the Act and
registration under applicable state securities laws, (ii)
to the extent applicable, Rule 144 under the Act (or any
similar rule under the Act relating to the disposition of
securities) and any similar exemption under state
securities laws, or (iii) another available exemption
from registration under the Act and applicable state
securities laws.
7.2 PIGGYBACK REGISTRATION. If, at any time commencing after the
date hereof and expiring seven (7) years thereafter, the Company proposes to
register any of its securities under the Act (other than in connection with a
merger or pursuant to Form S-8 or a successor form) it will give written
notice by delivery in person, registered or certified mail (postage prepaid,
return receipt requested), telex, telecopier or overnight air courier
guaranteeing next day delivery, at least thirty (30) days prior to the filing
of each such registration statement, to GKM and to all other Holders of the
Warrants and/or the Warrant Shares (the "Registrable Securities") of its
intention to do so. If GKM or other Holders of the Warrants and/or Warrant
Shares notify the Company within twenty (20) days after receipt of any such
notice of its or their desire to include any such securities in such proposed
registration statement, the Company shall afford GKM and such Holders of the
Warrants and/or Warrant Shares the opportunity to have any such Warrant
Shares registered under such registration statement; PROVIDED HOWEVER, that
if GKM and such Holders shall be the only persons exercising such rights to
have securities registered under such registration statement, then the
Company shall not be obligated to comply with the registration request unless
it receives such notice from Holders (including GKM) of fifty percent (50%)
or more of the Warrants and/or Warrant Shares.
Notwithstanding the foregoing, if, in the case of an underwritten
offering by the Company, the managing underwriter of such offering shall
advise the Company in writing that, in its opinion, the distribution of the
Warrant Shares requested to be included in the registration concurrently with
the securities being registered by the Company would adversely affect the
market price of such securities by the Company, then the offering and sale of
such Warrant Shares shall be delayed for such period, not to exceed ninety
(90) days, as such managing underwriter shall request. In the event of a
delay as provided in the preceding sentence, the Company shall file such
supplements and post-effective amendments, and take any such other steps as
may be necessary, to permit the proposed offering and sale of such Shares for
a period of ninety (90) days immediately following the end of such period of
delay.
Notwithstanding the provisions of this Section 7.2, the Company
shall have the
<PAGE>
right at any time after it shall have given written notice pursuant to this
Section 7.2 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 DEMAND REGISTRATION.
(a) At any time commencing after the date hereof and expiring
five (5) years thereafter, the Holders of the Warrants and/or Warrant Shares
representing a Majority (as hereinafter defined) of such securities (assuming
the exercise of the Warrants in full) not previously sold pursuant to this
Section 7 shall have the right (which right is in addition to the
registration rights under Section 7.2 hereof), exercisable by written notice
to the Company, to have the Company prepare and file with the Securities and
Exchange Commission (the "Commission"), on one occasion, a registration
statement and such other documents, including a prospectus, as may be
necessary in the opinion of both counsel for the Company and counsel for GKM
and the Holders, in order to comply with the provisions of the Act, so as to
permit a public offering and sale of their respective Warrant Shares for six
(6) consecutive months by such Holders and any other Holders of the Warrants
and/or Warrant Shares who notify the Company within twenty (20) days after
receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice
of any registration request under this Section 7.3 by any Holder or Holders
to all other registered Holders of the Warrants and the Warrant Shares within
five (5) days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2
and subsection (a) of this Section 7.3, at any time commencing after the date
hereof and expiring five (5) years thereafter, any Holder of the Warrants
and/or the Warrant Shares shall have the right, exercisable by written
request to the Company, to have the Company prepare and file with the
Commission, on one occasion, a registration statement so as to permit a
public offering and sale for six (6) consecutive months by any such Holder of
its Warrant Shares; PROVIDED, HOWEVER, that the provisions of Section 7.4(b)
hereof shall not apply to any such registration request and registration and
all costs incident thereto shall be at the expense of the Holder or Holders
making such request.
(d) No right of the Holders under this Section 7.3 shall be
deemed to have been exercised if with respect to such right:
(i) the requisite notice given by Holders pursuant to
this Section 7.3 is withdrawn prior to the date of filing of a
registration statement or if a registration statement filed by the
Company under the Act pursuant to this Section 7.3 is withdrawn
prior to its effective date, in either case, by written notice to
the Company from the Holders of fifty percent (50%) or more of the
Warrants and/or Warrant Shares to be included or which are included
in such registration statement stating that such Holders have
elected not to proceed with
<PAGE>
the offering contemplated by such registration statement because
(i) a development in the Company's affairs has occurred or has
become known to such Holders subsequent to the date of the notice
by the Holders to the Company requesting registration of the
Warrant Shares of the filing of such registration statement which,
in the judgment of such Holders or the managing underwriter of the
proposed public offering, adversely affects the market price of
such Warrant Shares or (ii) a registration statement filed by the
Company pursuant to this Section 7.3, in the reasonable opinion of
counsel for such Holders or the managing underwriter of the
proposed public offering, contains an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which made (other
than any such statement or omission relating to such Holders and
based on information supplied or failed to be supplied by such
Holders) and the Company has not, promptly after written notice
thereof, corrected such statement or omission in an amendment filed
to such registration statement pursuant to Section 7.4(m); or
(ii) a registration statement pursuant to this Section
7.3 shall have become effective under the Securities Act and (i)
the underwriters shall not purchase any Warrant Shares because of a
failure of condition contained in the underwriting agreement (other
than a condition to be performed by or within the control of the
Holders) relating to the offering covered by such registration
statement or (ii) less than eighty-five percent (85%) of the
Warrant Shares included therein shall have been sold as a result of
any stop order, injunction or other order or requirement of the
Commission or other governmental agency or court.
7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registration under Section 7.2 or 7.3 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best efforts to file a
registration statement within thirty (30) days of receipt of any demand
therefor, shall use its best efforts to have any registration statements
declared effective at the earliest possible time, and shall furnish each
Holder desiring to sell Warrant Shares such number of prospectuses as shall
reasonably be requested.
Notwithstanding the foregoing, the Company shall be entitled
to postpone, for a period of not more than sixty (60) days after receipt of a
request to effect a registration, the filing of any registration statement
otherwise required to be prepared and filed by it pursuant to Section 7.3
hereof if, at any time it receives a request for registration, the Board of
Directors of the Company determines in its reasonable business judgment that
such registration and offering would interfere with any material financing,
acquisition, corporate reorganization or other material transaction or
development involving the Company and
<PAGE>
promptly gives the Holders demanding registration written notice of such
determination; PROVIDED that (i) upon such postponement by the Company, the
Company shall be required to file such registration statement as soon as
practicable after the Board of Directors of the Company shall determine, in
its reasonable business judgment, that such registration and offering will
not interfere with the aforesaid material financing, acquisition, corporate
reorganization or other material transaction or development involving the
Company, (ii) the Company may utilize this right once each year; PROVIDED,
HOWEVER, that the Company shall not utilize this right more than one time
unless, prior to utilizing such right, the Company delivers to the Holders an
opinion of counsel to the Company, satisfactory to the Holders, to the effect
that such postponement by the Company is necessary to avoid interference with
a material financing, acquisition, corporate reorganization or other material
transaction or development involving the Company, (iii) the Holders who made
such written request to effect such registration, may, at any time in
writing, withdraw such request for such registration and therefore preserve
the right provided in Section 7.3 hereof for such Holders to again request
such registration, and (iv) the Exercise Period shall automatically be
extended by an additional one hundred and eighty (180) days.
(b) The Company shall pay all costs (including fees and
expenses of one counsel to the Holder(s), but not underwriting or selling
commissions), fees and expenses in connection with all registration
statements filed pursuant to Sections 7.2 and 7.3(a) hereof including,
without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses. The Holder(s) will pay all costs, fees
and reasonable expenses in connection with any registration statement filed
pursuant to Section 7.3(c). If the Company shall fail to comply with the
provisions of Section 7.4(a), the Company shall, in addition to any other
equitable or other relief available to the Holder(s), extend the Exercise
Period by such number of days as shall equal the delay caused by the
Company's failure, and be liable for any or all damages as the Holder(s) may
be entitled to as a matter of law.
(c) The Company will take all necessary action which may be
required in qualifying or registering the Warrant Shares included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as the Holder(s) shall designate; PROVIDED that the
Company shall not be obligated to qualify to do business in any such
jurisdiction or to file any general consent to service of process in any
jurisdiction in any action other than one arising out of the offering or the
sale of the Warrant Shares.
(d) Nothing contained in this Agreement shall be construed as
requiring a Holder to exercise the Warrants prior to the initial filing of
any registration statement or the effectiveness thereof.
(e) Except for the shares of Common Stock held by ValueVision
International, Inc. that the Company may be required to register, the Company
shall not permit the inclusion of any securities other than the Warrant
Shares to be included in any registration statement filed pursuant to Section
7.3 hereof, or file any registration statement subsequent to the receipt of
any notice pursuant to Section 7.3 hereof and until one hundred and eighty
(180) days after the effectiveness of a registration statement filed pursuant
to Section 7.3 hereof or permit any other registration statement to be or
remain effective during
<PAGE>
the effectiveness of a registration statement filed pursuant to Section 7.3
hereof; PROVIDED, HOWEVER, that in the event of an underwritten public
offering, the Company shall have the right to permit the inclusion of such
other securities if the managing underwriter of such offering advises the
Company or the Holders in writing that, in its opinion, the inclusion of such
securities other than the Warrant Shares in such registration statement will
not adversely affect the distribution or the offering price of such Warrant
Shares.
(f) In connection with any registration statement filed
pursuant to Section 7.2 hereof, the Company shall furnish to each Holder
participating in any underwritten offering and to each underwriter, a signed
counterpart, addressed to such Holder or underwriter, of (i) an opinion of
counsel to the Company, dated the effective date of such registration
statement (and, if such registration includes an underwritten public
offering, an opinion dated the date of the closing under the underwriting
agreement), and (ii) a "cold comfort" letter, dated the effective date of
such registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing under
the underwriting agreement), signed by the independent public accountants who
have issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered
to underwriters in underwritten public offerings of securities.
(g) The Company shall as soon as practicable after the
effective date of the registration statement, and in any event within fifteen
(15) months thereafter, make "generally available to its security holders"
(within the meaning of Rule 158 under the Act) an earnings statement (which
need not be audited) complying with Section 11(a) of the Act and covering a
period of at least twelve (12) consecutive months beginning after the
effective date of the registration statement.
(h) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence and memoranda
described below, and to the managing underwriters, copies of all
correspondence between the Commission and the Company, its counsel or
auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the registration statement and permit each Holder and
underwriter to do such investigation, upon reasonable advance notice, with
respect to information contained in or omitted from the registration
statement as it deems reasonably necessary to comply with applicable
securities laws or rules of the National Association of Securities Dealers,
Inc. ("NASD"). Such investigation shall include access to books, records and
properties and opportunities to discuss the business of the Company with its
officers and independent auditors, all to such reasonable extent and at such
reasonable times and as often as any such Holder or underwriter shall
reasonably request.
(i) The Company shall enter into an underwriting agreement
with the managing underwriters selected for such underwriting by Holders
holding a Majority of the Warrant Shares requested to be included in such
underwriting, which may be any of the Underwriters. Such agreement shall be
reasonably satisfactory in form and substance to the
<PAGE>
Company, each Holder and such managing underwriters, and shall contain such
representations, warranties and covenants by the Company and such other terms
as are customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Warrant Shares and may, at their
option, require that any or all the representations, warranties and covenants
of the Company to or for the benefit of such underwriters shall also be made
to and for the benefit of such Holders. Such Holders shall not be required to
make any representations or warranties to or agreements with the Company or
the underwriters except as they may relate to such Holders and their intended
methods of distribution.
(j) For purposes of this Agreement, the term "Majority," in
reference to the Holders of the Warrants or Warrant Shares, shall mean in
excess of fifty percent (50%) of the then outstanding Warrants or Warrant
Shares that (i) are not held by the Company, an officer, creditor, employee
or agent thereof or any of their respective affiliates, members of their
family, persons acting as nominees or in conjunction therewith or (ii) have
not been resold to the public pursuant to a registration statement filed with
the Commission under the Act.
(k) The Company shall promptly notify each Holder of the
Warrants and/or Warrant Shares covered by such registration statement, at any
time when a prospectus relating thereto is required to be delivered under the
Act, upon the Company's discovery that, or upon the happening of any event as
a result of which, the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances under
which they were made, and at the request of any such Holder promptly prepare
and furnish to such Holder and each underwriter, if any, a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of
the circumstances under which they were made.
7.5 INDEMNIFICATION.
(a) In the event of the filing of any registration statement
with respect to the Shares pursuant to this Section 7, the Company agrees to
indemnify and hold harmless GKM and all other Holders of Warrants and/or the
Warrant Shares and each person, if any, who controls such Holder within the
meaning of the Act (each, an "GKM Indemnified parties"), against any losses,
claims, damages or liabilities, joint or several (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all reasonable attorneys' fees), to which any
GKM Indemnified Party may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any such registration
statement, or any related preliminary prospectus, final prospectus, or
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact
<PAGE>
required to be stated therein or necessary to make the statements therein not
misleading, provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, preliminary
prospectus, final prospectus or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
such GKM Indemnified Party specifically for use in the preparation thereof.
This indemnity will be in addition to any liability which the Company may
otherwise have.
(b) GKM and all other Holders of Warrants and/or the Warrant
Shares agree that they will indemnify and hold harmless the Company, each
other person referred to in subparts (1), (2) and (3) of Section 11(a) of the
Act in respect of the registration statement and each person, if any, who
controls the Company within the meaning of the Act (each, a "Company
Indemnified Party"), against any losses, claims, damages or liabilities
(which shall, for all purposes of this Agreement, include but not be limited
to, all costs of defense and investigation and all attorneys' fees) to which
such Company Indemnified Parties may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in such registration
statement, or any related preliminary prospectus, final prospectus or
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but in each case only to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was made in such
registration statement, preliminary prospectus, final prospectus or amendment
or supplement thereto in reliance upon, and in conformity with, written
information furnished to the Company by GKM specifically for use in the
preparation thereof. This indemnity agreement will be in addition to any
liability which GKM and all other Holders of the Warrant and/or the Warrant
Shares may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
shall, if a claim with respect thereof is to be made against any indemnifying
party under this Section 7, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise then under this Section 7. In case any such action is brought
against any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
<PAGE>
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party
or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of the indemnifying party's election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso in the preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section
7.5(a) or 7.5(b) hereof who are parties to such action), (ii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action or (iii) the indemnifying party
has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. In no event shall any indemnifying party
be liable in respect of any amounts paid in settlement of any action unless
the indemnifying party shall have approved the terms of such settlement;
provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnification could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release
of such indemnified party from liability on claims that are the subject
matter of such proceeding.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SHARES.
8.1 SUBDIVISION AND COMBINATION. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the
Exercise Price shall be decreased, in the case of subdivision, or increased,
in the case of combination, in the same proportions as the Common Stock is
subdivided or combined, in each case effective automatically upon, and
simultaneously with, the effectiveness of the subdivision or combination
which gives rise to the adjustment.
8.2 ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 8, the number of
Shares issuable upon the exercise of the Warrants shall be adjusted to the
nearest full amount by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
issuable upon exercise of the Warrants immediately prior to such adjustment
and dividing the product so obtained by the adjusted Exercise Price.
8.3 DEFINITION OF COMMON STOCK. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock
designated as Common Stock in the Articles of Incorporation of the Company as
may be amended as of the date hereof, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value,
or from no
<PAGE>
par value to par value. In the event that the Company shall after the date
hereof issue securities with greater or superior voting rights than the
shares of Common Stock outstanding as of the date hereof, the Holder, at its
option, may receive upon exercise of the Warrants either shares of Common
Stock or a like number of such securities with greater or superior voting
rights.
8.4 MERGER OR CONSOLIDATION. (a) In case the Company after the
date hereof (i) shall consolidate with or merge into any other person and
shall not be the continuing or surviving corporation of such consolidation or
merger, or (ii) shall permit any other person to consolidate with or merge
into the Company and the Company shall be the continuing or surviving person
but, in connection with such consolidation or merger, the Common Stock shall
be changed into or exchanged for stock or other securities of any other
person or cash or any other property, or (iii) shall transfer all or
substantially all of its properties or assets to any other person, or (iv)
shall effect a capital reorganization or reclassification of the Common Stock
(other than a capital reorganization or reclassification resulting in the
issue of additional shares of Common Stock for which adjustment in the
Exercise Price is provided in Section 8), then, and in the case of each such
transaction, proper provision shall be made so that, upon the basis and the
terms and in the manner provided in this Agreement and the Warrants, the
Holders of the Warrants, upon the exercise thereof at any time after the
consummation of such transaction, shall be entitled to receive (at the
aggregate Exercise Price in effect at the time of such consummation for all
Common Stock issuable upon such exercise immediately prior to such
consummation), in lieu of the Common Stock or other securities issuable upon
such exercise prior to such consummation, the highest amount of securities,
cash or other property to which such Holders would actually have been
entitled as stockholders upon such consummation if such Holders had exercised
the rights represented by the Warrants immediately prior thereto, subject to
adjustments (subsequent to such consummation) as nearly equivalent as
possible to the adjustments provided for in Section 8; PROVIDED that if a
purchase, tender or exchange offer shall have been made to and accepted by
the holders of more than fifty percent (50%) of the outstanding shares of
Common Stock, and if a Holder of the Warrants so designates in a notice given
to the Company on or before the date immediately preceding the date of the
consummation of such transaction, such Holder of the Warrants shall be
entitled to receive the highest amount of securities, cash or other property
to which such Holder would actually have been entitled as a stockholder if
such Holder of the Warrants had exercised the Warrants prior to the
expiration of such purchase, tender or exchange offer and accepted such
offer, subject to adjustments (from and after the consummation of such
purchase, tender or exchange offer) as nearly equivalent as possible to the
adjustments provided for in Section 8.
8.5 ASSUMPTION OF OBLIGATIONS. Notwithstanding anything contained
in the Warrants to the contrary, the Company will not effect any of the
transactions described in clauses (i) through (iv) of Section 8.4 unless,
prior to the consummation thereof, each person (other than the Company) which
may be required to deliver any stock, securities, cash or property upon the
exercise of the Warrants as provided herein shall assume, by written
instrument delivered to, and reasonably satisfactory to, the Holders of the
Warrants, (a) the obligations of the Company under this Agreement and the
Warrants (and if the Company shall survive the consummation of such
transaction, such assumption shall be in addition to, and
<PAGE>
shall not release the Company from, any continuing obligations of the Company
under this Agreement and the Warrants) and (b) the obligation to deliver to
such Holders such shares of stock, securities, cash or property as, in
accordance with the foregoing provisions of this Section 8, such Holders may
be entitled to receive, and such person shall have similarly delivered to
such Holders an opinion of counsel for such person, which counsel shall be
reasonably satisfactory to such Holders, stating that this Agreement and the
Warrants shall thereafter continue in full force and effect and the terms
hereof (including, without limitation, all of the provisions of this Section
8) shall be applicable to the stock, securities, cash or property which such
person may be required to deliver upon any exercise of the Warrants or the
exercise of any rights pursuant hereto.
8.6 DIVIDENDS AND OTHER DISTRIBUTIONS. In the event that the
Company shall at any time prior to the exercise in full of the Warrants
declare a dividend or otherwise distribute to its stockholders any assets,
property, rights, evidences of indebtedness, securities (other than shares of
Common Stock), whether issued by the Company or by another, or any other
thing of value, the Holders of the unexercised portion of the Warrants shall
thereafter be entitled, in addition to the shares of Common Stock or other
securities and property receivable upon the exercise thereof, to receive,
upon the exercise of the Warrants, the same property, assets, rights,
evidences of indebtedness, securities or any other thing of value that they
would have been entitled to receive at the time of such dividend or
distribution as if the Warrants had been exercised immediately prior to such
dividend or distribution. At the time of any such dividend or distribution,
the Company shall make appropriate reserves to ensure the timely performance
of the provisions of this Section 8.6.
8.7 OTHER DILUTIVE EVENTS. In case any event shall occur as to
which the purchase rights represented by the Warrants shall be diluted, then,
in each such case, the Exercise Price and/or the amount of any Common Stock,
cash, securities or other assets to be delivered upon exercise of the
Warrants shall be adjusted on a weighted-average basis, consistent with
preserving, without dilution, the purchase rights represented by the Warrants.
8.8 NOTICE OF ADJUSTMENT EVENTS. Whenever the Company
contemplates the occurrence of an event which would give rise to adjustments
under this Section 8, the Company shall mail to GKM (or its designee) on
behalf of each Holder, at least thirty (30) days prior to the record date
with respect to such event or, if no record date shall be established, at
least thirty (30) days prior to such event, a notice specifying (i) the
nature of the contemplated event, (ii) the date of which any such record is
to be taken for the purpose of such event, (iii) the date on which such event
is expected to become effective and (iv) the time, if any is to be fixed,
when the holders of record of Common Stock shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable in
connection with such event.
8.9 NOTICE OF ADJUSTMENTS. Whenever the Exercise Price or the
kind of securities or property issuable upon exercise of the Warrants, or
both, shall be adjusted pursuant to this Section 8, the Company shall make a
certificate signed by its President or a Vice President and by its Chief
Financial officer, Secretary or Assistant Secretary, setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment,
<PAGE>
the method of which such adjustment was calculated (including a description
of the basis on which the Company made any determination hereunder), and the
Exercise Price and the kind of securities or property issuable upon exercise
of the Warrants after giving effect to such adjustment, and shall cause
copies of such certificate to be mailed (by first class mail postage prepaid)
to each Holder promptly after each adjustment.
8.10 PRESERVATION OF RIGHTS. The Company will not, by amendment of
its Articles of Incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Agreement or the Warrants or the
rights represented thereby, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holders of the
Warrants against dilution or other impairment.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by
the registered Holder at the principal executive office of the Company, for a
new Warrant Certificate of like tenor and date representing in the aggregate
the right to purchase the same number of Warrant Shares in such denominations
as shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable
expenses incidental thereto, and upon surrender and cancellation of the
Warrant Certificates, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common
Stock upon the exercise of the Warrants, nor shall it be required to issue
scrip or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all
times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the exercise of the Warrants,
such number of shares of Common Stock or other securities, properties or
rights as shall be issuable upon the exercise thereof. The Company covenants
and agrees that, upon exercise of the Warrants and payment of the Exercise
Price therefor, all shares of Common Stock and other securities issuable upon
such exercise shall be duly and validly issued, fully paid, nonassessable and
not subject to the preemptive rights of any stockholder. As long as the
Warrants shall be outstanding, the Company shall use its best efforts to
cause all shares of Common Stock issuable upon the exercise of the Warrants
to be
<PAGE>
listed on all securities exchanges and/or included in the automated quotation
system of the Nasdaq National Market System (subject to official notice of
issuance) with respect to which the Common Stock issued to the public in
connection herewith may then be so listed and/or quoted.
12. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having
any rights whatsoever as a stockholder of the Company. If, however, at any
time prior to the expiration of the Warrants and their exercise in full, any
of the following events shall occur:
(a) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution payable; or
(b) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company,
or any option, right or warrant to subscribe therefor; or
(c) a voluntary or involuntary dissolution, liquidation or
winding-up of the Company (other than in connection with a consolidation or
merger) or any capital reorganization, recapitalization or reclassification
or a sale of all or substantially all of its property, assets and business as
an entirety shall be proposed;
then, in any one or more of said events, the Company will mail to each Holder
of the Warrants a notice specifying (i) the date or expected date on which
any such record is to be taken for the purpose of such dividend, distribution
or right, and the amount and character of such dividend, distribution or
right, and (ii) the date or expected date on which any such reorganization,
reclassification, recapitalization, consolidation, merger, sale, dissolution,
liquidation or winding-up is to take place and the time, if any such time is
to be fixed, as of which the holders of record of Common Stock shall be
entitled to exchange their shares of Common Stock for the securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, consolidation, merger, sale, dissolution, liquidation or
winding-up. Such notice shall be mailed at least thirty (30) days prior to
the date therein specified.
13. NOTICES.
All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly given or made at the time
delivered by hand if personally delivered; five calendar days after mailing
if sent by registered or certified mail; when answered back, if telexed; when
receipt is acknowledged, if telecopied; and the next business day after
timely delivery to the courier, if sent by overnight air courier guaranteeing
next day delivery (except that a notice of change of address shall not be
deemed to have been
<PAGE>
given until actually received by the addressee):
(a) If to the registered Holders of the Warrants, to the address
of such Holders as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3
hereof or to such other address as the Company may designate by notice to the
Holders.
14. SUPPLEMENTS AND AMENDMENTS. The Company and GKM may from time to
time supplement or amend this Agreement without the approval of any holders
of Warrant Certificates (other than GKM) in order to cure any ambiguity, to
correct or supplement any provision contained herein which may be defective
or inconsistent with any provisions herein, or to make any other provisions
in regard to matters or questions arising hereunder which the Company and GKM
may deem necessary or desirable and which the Company and GKM deem shall not
adversely affect the interests of the Holders of Warrant Certificates.
15. SUCCESSORS. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders
and their respective successors and assigns hereunder.
16. TERMINATION. This Agreement shall terminate at the close of
business on, 2004, provided, however, that the indemnification provisions in
Section 7 hereof shall survive such termination until such time for filing an
action for which indemnification is provided under Section 7 has expired
under the applicable statute of limitation.
17. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the state of Illinois and for all purposes shall be
construed in accordance with the laws of said State without giving effect to
the rules of said State governing the conflicts of laws.
Any process or summons to be served upon any of the Company, GKM and the
Holders (at the option of the party bringing such action, proceeding or
claim) may be served by transmitting a copy thereof, by registered or
certified mail, return receipt requested, postage prepaid, addressed to it at
the address set forth in Section 13 hereof. Such mailing shall be deemed
personal service and shall be legal and binding upon the party so served in
any action, proceeding or claim. The Company, GKM and the Holders agree that
the prevailing party(ies) in any such action or proceeding shall be entitled
to recover from the other party(ies) all of its/their reasonable legal costs
and expenses relating to such action or proceeding and/or incurred in
connection with the preparation therefor.
18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to
the subject matter hereof and may not be modified or amended except by a
writing duly signed by the party against whom enforcement of the modification
or amendment is sought.
<PAGE>
19. SEVERABILITY. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
20. CAPTIONS. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended to be, nor should
they be construed as, part of this agreement and shall be given no
substantive effect.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give any person or corporation other than the Company and GKM
and any other registered Holder(s) of the Warrant Certificates or Warrant
Shares any legal or equitable right, remedy or claim under this Agreement;
and this Agreement shall be for the sole and exclusive benefit of the
Company, GKM and any other registered Holder(s) of the Warrant Certificates
or Warrant Shares.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one
and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
NETRADIO CORPORATION
By:
GERARD KLAUER MATTISON & CO., INC.
By:
Its:
<PAGE>
[L&V Letterhead]
August 27, 1999
NetRadio Corporation
Riverplace Exposition Hall
43 Main Street Southeast, Suite 149
Minneapolis, Minnesota 55414
RE: OPINION OF COUNSEL AS TO LEGALITY OF 4,600,000 SHARES OF
COMMON STOCK TO BE REGISTERED UNDER THE SECURITIES ACT OF 1933
Ladies and Gentlemen:
This opinion is furnished in connection with the registration under the
Securities Act of 1933 on Form S-1 of 4,600,000 shares of Common Stock, no par
value per share, of NetRadio Corporation (the "Company"), including 600,000
shares of Common Stock subject to the Underwriters' over-allotment option, which
shares are being sold to the public through an underwriting group headed by
Gerard Klauer Mattison & Co., Inc.
As counsel for the Company, we advise you that it is our opinion, based
on our familiarity with the affairs of the Company and upon our examination of
pertinent documents, that the 4,600,000 shares of Common Stock to be offered
will, when paid for and issued, be validly issued and lawfully outstanding,
fully paid and non-assessable shares of Common Stock of the Company.
The undersigned hereby consent to the filing of this opinion with the
Securities and Exchange Commission as an Exhibit to the Registration Statement
with respect to said shares of Common Stock under the Securities Act of 1933.
Very truly yours,
LINDQUIST & VENNUM P.L.L.P.
/s/ Lindquist & Vennum P.L.L.P.
<PAGE>
Exhibit 10.11.1
REALNETWORKS
PRESETS AGREEMENT
This Agreement is made as of May 10, 1999 ("Effective Date") between
RealNetworks, Inc., a Washington corporation ("RN"); and
________________________________ ("Participant").
This Agreement sets forth the terms and conditions under which
Participant agrees to host live audio content in RealAudio format, and related
streaming media in RN proprietary formats (such as RealAudio, RealVideo, and
others), described in EXHIBIT A (collectively "Content"), for inclusion in RN's
Presets program, which will drive pointers to the Content into some of the most
popular Web sites and "push" applications delivering information directly to PC
desktops, and into proprietary online services and other specialized services
(collectively, "Content Delivery Channels"). RN will include Participant in the
Presets customization list of RN's RealPlayer. RN will point Participant's
Content daily to the Content Delivery Channels, and will include pointers to
allow end users to access the Content, whether the Content originates from
Participant's or RN's RealServer. Accordingly, in consideration for the mutual
promises and covenants contained herein, the parties agree as follows:
1. DESCRIPTION OF PRESET; LICENSE RIGHTS
1.1 PRESETS ON THE REALPLAYER. The RealPlayer is RN's proprietary client
software used by end users to access streaming media through the
Internet. RN has distributed the RealPlayer in several different
languages and in several versions based on geographic location. Current
versions of RN's RealPlayer software includes listings in a pull-down
menu and buttons that link directly to live RealAudio content delivered
via the Internet ("Presets"). End-users of the RealPlayer can customize
the Presets by selecting content providers from the Presets
customization list.
1.2 PARTICIPATION IN THE PRESET PROGRAM. Participant agrees to allow RN to
include Participant in the Presets customization list. Additionally, the
RealPlayer comes with certain pre-installed "default" Presets.
Participant agrees to allow RN to include Participant as a default
Preset for 14 of Participants programs as outlined in Exhibit A. RN will
also allow Participant's other existing presets in the RealPlayer to
remain in the RealPlayer until the release of the RealPlayer currently
named "Redstone." Participant acknowledges that Presets may be
customized by individual end-users and that any Preset, including
default Presets, may be removed or repositioned by end-users. The Preset
program's name and the RealPlayer user interface may change from time to
time, as RealNetworks develops new versions of its client software
1.2.1 As outlined in Exhibit A, Participant's Presets will be a pre-installed
default only in English, Spanish and Japanese RealPlayers downloaded
directly from RN web sites, or sold in non-bundled and non-customized
versions through retail distribution. Participant will substitute 2 of
its 14 presets in both the Japanese and Spanish language RealPlayers
with 2 presets each in the appropriate local language.
1.3 LICENSE.
1.3.1 Participant grants RN a non-exclusive, non-transferable, worldwide,
royalty-free license to: (i) use, reproduce, transmit, publicly
perform, and publicly display the Content in and through the
RealPlayer; and (ii) distribute Content and Content pointers to Content
Delivery Channels and allow Content Delivery Channels to use, transmit,
publicly perform, and publicly display the Content pointers in order to
make Participant's Content accessible to Content Delivery Channels'
end-users.
1.3.2 Participant grants RN a non-exclusive, nontransferable, worldwide,
royalty-free license to use Participant's trademarks and logos in
connection with this Agreement, in the style and manner currently used
by Participant or as communicated to RN. RN shall not be deemed by
anything contained in this Agreement
1
<PAGE>
to acquire any right, title or interest in any trademark of
Participant, and shall do nothing to prejudice the value or
validity of Participant's rights therein or ownership thereof.
2. PARTICIPANT OBLIGATIONS
2.1 NATURE OF CONTENT. Participant will provide Content for its Preset in
compliance with RN's Technical Specifications, available at http://ERROR!
BOOKMARK NOT DEFINED.presets6.real.com/partnerinfopages, which RN may
revise from time to time. Without limiting the foregoing, the Content must
be: (i) newsworthy, informational, educational or produced for
entertainment purposes, and not merely promotional in nature; (ii) streamed
in the current version of the applicable RN format, which, as of the
execution of this Agreement, is version G2 in the RealAudio format; and
(iii) streamed live, twenty-four hours per day, seven days per week. The
Content can be hosted by Participant or hosted by RN pursuant to the terms
of RN's standard Real Broadcast Network Services Agreement (if Participant
signs such agreement).
2.2 QUALITY OF SERVICE. The Technical Specifications set forth applicable
quality of service requirements for Participant's Preset. At a minimum,
Participant agrees to insure that at least 400 streams are available to end
users through Participant's Preset regardless whether Participant, RN, or a
third party selected by Participant serves the Content.
2.3 MAINTENANCE OF CONTENT. As between RN and Participant, and except as
expressly provided herein, Participant is solely responsible and liable for
the Content, and RN assumes no responsibility for editing, reviewing,
controlling or any other activities associated with distributing any of the
Content and shall not be liable to any third party in connection with such
activities, whether or not RN undertakes such responsibilities. Participant
shall be solely responsible for all costs and activities associated with
the creation, capture, maintenance, licensing, use and correction of the
Content.
2.4 DOWNLOAD REALPLAYER BUTTON. Participant will prominently display on its Web
site, for the Term, an RN approved standard "Download RealPlayer" button
that will link to the download area of RN's web page. Participant will not
promote any other streaming media player on its website to a degree greater
than Participant promotes RN's streaming media player. If Participant
chooses to provide a link from its Preset to its website, such link must be
to a web page containing only RealPlayer download opportunities, if
Participant includes media player download opportunities on that web page.
2.5 USE OF REALMEDIA FORMATS ON PARTICIPANT'S WEBSITE. Participant agrees that
any content made available in streaming media formats on Participant's
website during the Term will be made available in RealMedia formats (e.g.,
RealAudio, RealVideo, or other RN media formats). Participant will not
promote any other streaming media format on its website to a degree greater
than Participant promotes RN's streaming media formats. If Participant
chooses to provide a link from its Preset to its website, such link must be
to a web page containing only RealMedia formatted content, if Participant
includes streaming media content on that web page.
2.6 REVISION OR REMOVAL OF PARTICIPANT'S PRESET. Participant acknowledges that,
Preset listings can only be changed by RN at the time of a new release or
update of the RealPlayer. Upon termination or expiration of this Agreement,
RN will use commercially reasonable efforts to remove Participant's Preset
in the next release or update of the RealPlayer. Partner also acknowledges
that Preset can be removed at any time by RN if partner does not fulfill
its obligations under this agreement
2.7 AD INVENTORY ON NETRADIO SITE. RN will receive $250,000 worth of free
banner advertising on the Participant's web site with impressions
discounted at 25% of Participant's rate card.
3. RN OBLIGATIONS
2
<PAGE>
3.1 RN will include Partner in the customization list for Presets during the
Term. Each of Participant's presets will be listed in the top 5 potential
selections for its category. Participant shall have the opportunity to
switch stations within a given category, subject to the timing of player
releases
3.2 RN will promote Participant twice per month on the front page of
www.real.com.
3.3 All Participant stations, including those not in Presets, will be listed in
the RealGuide stations listing.
3.4 RN will promote Participant in appropriate RN syndication initiatives.
3.5 RN will use commercially reasonable efforts to make the Presets program
generally available to end users on a twenty-four hour basis, seven days per
week, throughout the term of this Agreement. Notwithstanding the foregoing,
Participant acknowledges that the availability and quality of Presets is
dependent on factors outside of RN's control, including other Participants'
quality of service obligations, Internet congestion and other factors. RN shall
not be liable under this Agreement for any failure to make the Presets program,
or any aspect of the Program, available without interruption throughout the term
of this Agreement.
3.6 See exhibit B.
4. ADVERTISING
4.1 INTRA-STREAM ADS. Participant shall retain one hundred percent (100%) of
the revenue from its sale of audio-based, multimedia-based or other
advertising embedded in the Content by Participant ("Intra-Stream Ads"). At
Participant's request, RN will assist Participant in generating
Intra-Stream Ad sales for a standard commission, the terms and conditions
of such advertising sales agreement to be negotiated separately.
Participant shall at all times clearly differentiate advertising from
Content.
4.2 OTHER ADS. Participant agrees that RN may insert pointers to RN's own
media-based advertisements prior to pointers to the Content clips RN
distributes to Content Delivery Channels. RN shall at all times clearly
differentiate advertising from Content. RN will retain one hundred percent
(100%) of the revenue from its sale of any non-Intra-Stream Ads.
5. PAYMENT
5.1 PAYMENT. Participant shall pay RN $140,000 per calendar quarter for
participation in the Presets Program. Such payment is due in quarterly
installments June 15 1999, September 15,1999, December 15,1999, and March
15, 2000. The pricing shall be as follows:
14 Presets (2 per Category in Seven Categories) $40,000 per
preset, $560,000 total
5.2 RIGHT OF FIRST REFUSAL. RN grants Participant the first option to extend
its Presets distribution prior to the expiration of the Term. Should
Participant decline to extend its Presets distribution, RN may offer
Participant's Preset distribution to third parties.
5.3 TAXES. Participant shall pay all taxes, duties and similar charges that
apply to or arise from this Agreement, excluding taxes on RN's income.
Notwithstanding the termination provisions of this Agreement, RN reserves
the right to terminate this Agreement and to remove Participant's Preset
immediately without further notice if payment is not received in accordance
with this Agreement. Invoiced amounts not paid when due shall be subject to
late fees equal to the lower of 1.5% per month or the maximum amount
allowed by applicable law. Termination of this Agreement and/or payment of
such late fees shall not prejudice any other rights or remedies that may be
available to RN with respect to any nonpayment or late payment.
6. PROPRIETARY RIGHTS
3
<PAGE>
6.1 OWNERSHIP OF CONTENT. As between RN and Participant, Participant remains
the owner of all right, title and interest in and to the Content, and all
copyrights, trademarks, patents and other intellectual property rights
therein.
6.2 RN'S OWNERSHIP. Except as provided in SECTION 6.1, RN shall be the sole
owner of all right, title and interest in and to any content made, created,
developed or used by RN in connection with the Content on RN's Web sites,
the Presets, and all copyrights, trademarks, patents and other intellectual
property rights therein.
7. WARRANTIES/INDEMNIFICATIONS
7.1 PARTICIPANT'S WARRANTY. Participant warrants and represents that: (i) the
Content does not in any way violate any existing law, infringe upon or
misappropriate any copyright, patent, trademark, trade secret, right of
publicity, right of privacy or other proprietary rights of any third party,
either in whole or in part; (ii) the Content contains no matter which, if
published, will be libelous or defamatory; (iii) Participant has the
necessary rights to grant RN the rights granted hereunder; (iv) the Content
complies with all laws applicable to the transmission or use of the Content
as specified in this Agreement for each country in which the Content is
intended to be delivered and (v) it is solely responsible for, and has paid
or will pay, all amounts due any person or entity that has a right to
receive any royalty or other payment as a result of RN's authorized use of
the Content pursuant to this Agreement.
7.2 PARTICIPANT'S INDEMNITY. Participant hereby agrees to indemnify, hold
harmless and defend RN from all claims, damages, costs and expenses,
including reasonable attorneys' fees and litigation expenses, arising out
of or as a result of Participant's breach of the above warranties and
representations or this Agreement. Participant, at its own expense, shall
have the right to employ separate counsel and participate in the defense
thereof.
7.3 RN'S INDEMNITY. RN shall, at its expense, indemnify, hold harmless and
defend Participant from and against all claims, damages, costs and
expenses, including reasonable attorneys' fees and litigation expenses,
arising out of or as a result of RN's breach of this Agreement.
7.4 RN YEAR 2000 WARRANTY. RN represents and warrants that the RealPlayer is
designed to be used prior to, during, and after the calendar year 2000
A.D., and that the RealPlayer will operate during each such time period
without error relating to date data, specifically including any error
relating to, or the product of, date data that represents or references
different centuries or more than one century. RN shall, as soon as
reasonably practicable and at its expense, repair any defect in the
RealPlayer that causes it to operate with error relating to date data.
8. TERM AND TERMINATION
8.1 TERM. Unless sooner terminated as provided herein, this Agreement shall
commence as of the date first written above and expire one year thereafter
(the "Term").
8.2 TERMINATION FOR BREACH. If either party materially breaches any provision
of this Agreement and such breach has not been cured within thirty (30)
days after the other party has given written notice of such breach, the
non-breaching party may terminate this Agreement upon fifteen (15) days'
written notice to the breaching party.
8.3 EFFECT OF TERMINATION. Upon termination or expiration of this Agreement for
any reason, all licenses granted herein shall terminate after removal of
Participant's Preset in accordance with Section 2.6. Sections 5 through 9
shall survive the expiration or termination of this Agreement.
9. MISCELLANEOUS
4
<PAGE>
9.1 EXCLUSION OF CERTAIN DAMAGES. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
PARTY IN TORT, CONTRACT OR UNDER ANY OTHER LEGAL THEORY FOR ANY
CONSEQUENTIAL, INCIDENTAL, PUNITIVE OR SPECIAL LOSS OR DAMAGES ARISING OUT
OF THIS AGREEMENT, EVEN IF APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES
OCCURRING.
9.2 NOTICES. Any notice or payment to be made or given to either party shall be
sufficiently made or given on the date of mailing if sent to such party by
facsimile, the receipt of which is confirmed by return facsimile, or if
delivered personally with receipt acknowledged or sent by first class
registered or certified mail, overnight courier, or the equivalent, return
receipt requested, postage prepaid, addressed to such party at the address
first set forth above, or to such other addresses as it shall designate by
written notice given to the other party.
If to RN: RealNetworks, Inc. If to Participant:_______________
Attn: Virl Z. Hill _______________
Fax: (206) 674- 3586 _______________
With a copy to: General Counsel _______________
Fax: (206) 674-2695
9.3 NON-ASSIGNMENT. This Agreement is personal to Participant. Participant may
not sublicense, assign, or otherwise transfer any of its rights in this
Agreement, without the express written consent of RN.
9.4 GENERAL. No waiver, amendment or modification of any provision of this
Agreement shall be effective unless it is in a document that expressly
refers to this Agreement and is signed by both parties. Except as
specifically provided herein, failure or delay by either party in
exercising any rights or remedy under this Agreement shall not operate as a
waiver of any such right or remedy. The parties are separate and
independent legal entities, and the relationship between the parties shall
be that of independent contractors. It is expressly understood that the
parties do not by this Agreement intend to form, nor shall this Agreement
be construed to constitute, a partnership or joint venture between them. If
any provision of this Agreement shall be held by a court of competent
jurisdiction to be illegal, invalid or unenforceable, the legality,
validity and enforceability of the remaining provisions shall not, in any
way, be affected or impaired thereby. This Agreement and the attached
EXHIBIT A, which is incorporated herein by this reference, constitute the
complete and entire agreement between the parties, and supersede and cancel
all prior negotiations, understandings, correspondence and agreements, oral
and written, express or implied, between the parties relating to the
subject matter hereof, and shall be binding only when executed by both
parties hereto. This Agreement shall be governed by the laws of the State
of Washington without regard to conflicts of law provisions, and
Participant consents to the exclusive jurisdiction and venue of the state
and federal courts sitting in the State of Washington. This Agreement shall
not be governed by the United Nations Convention of Contracts for the
International Sale of Goods, the application of which is hereby expressly
excluded.
IN WITNESS WHEREOF, the parties have executed this Agreement by their
duly authorized representative the day and year first written above.
REALNETWORKS, INC.
--------------------------------
(Participant)
By: By:
---------------------------- ----------------------------
Name: Name:
---------------------------- ----------------------------
Title: Title:
---------------------------- ----------------------------
5
<PAGE>
EXHIBIT A
DESCRIPTION OF CONTENT
LIST OF PARTICIPANT'S INITIAL PRESET STATIONS AND PLAYER LOCATION
<TABLE>
<CAPTION>
STATION PRESET GENRE PLAYER
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
1 The X Alternative U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
2 Vintage Rock Rock U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
3 Adult Rock Rock U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
4 Route 1 Country Country U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
5 60's Country Country U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
6 80's Hits Pop Hits U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
7 Hits! Pop Hits U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
8 Smooth Jazz Jazz U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
9 Cafe Jazz Jazz U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
10 Quiet Classics Classical U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
11 Latin International U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
12 Celtic International U.S., Spanish, Japanese
- ------------------------------------------------------------------------------------------------
13 Techno Alternative U.S.
- ------------------------------------------------------------------------------------------------
14 Symphony Classical U.S.
- ------------------------------------------------------------------------------------------------
15 TBD TBD Spanish
- ------------------------------------------------------------------------------------------------
16 TBD TBD Spanish
- ------------------------------------------------------------------------------------------------
17 TBD TBD Japanese
- ------------------------------------------------------------------------------------------------
18 TBD TBD Japanese
- ------------------------------------------------------------------------------------------------
</TABLE>
DESCRIPTION OF CONTENT:
Participant's Content will consist of the following: (insert short
description):
------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6
<PAGE>
EXHIBIT B
DESCRIPTION OF CONTENT
Addendum as 3.6:
RN will display NetRadio logo and/or site name as provided by NetRadio as
appropriate to fulfill RN's obligations in section 3 of this agreement.
7
<PAGE>
Exhibit 10.11.2
June 7, 1999
Jan Andersen
NetRadio Network Corporation
43 Main Street, SE
Suite 149
Minneapolis, MN 55414
Re: LICENSE OF REALNETWORKS SOFTWARE
Dear Mr. Andersen:
This letter agreement (this "Agreement") between RealNetworks, Inc. ("RN") and
NetRadio Network Corporation. ("NetRadio") shall be effective as of the date
first set forth above (the "Effective Date").
1. LICENSE. RN grants NetRadio a nonexclusive, nontransferable,
non-assignable license to use the RealNetworks RealSystem Internet Server
G2 (as described on Attachment A) solely according to the terms and
conditions of RN's standard RealSystem Internet Server License Agreement
(the "License Agreement"), attached hereto as Attachment B, as may be
revised from time to time with each Upgrade of the Software. NetRadio
previously purchased from RN a license to "Streams" (as defined in the
License Agreement) of up to 8,000 "Concurrent Client Connections" (as
defined in the License Agreement). Pursuant to this Agreement, and
subject to payment of the License Fee as set forth below, NetRadio agrees
to purchase a license to serve Streams to an additional 12,000 Concurrent
Client Connections (for a total of 20,000 Concurrent Client Connections).
2. CONSIDERATION.
(a) LICENSE FEE. In consideration for the license rights granted
herein, NetRadio shall pay RN a non-refundable fee discounted
license fee of Five Hundred Eighty-Eight Thousand Dollars
($588,000) the ("License Fee"). The License Fee shall include
Upgrades and Support for a period of one year from the Effective
Date for all 20,000 Concurrent Client Connections currently
licensed to NetRadio.
(b) PAYMENT. NetRadio shall pay the License Fee to RN in U.S. dollars
according to the following schedule:
<TABLE>
<S> <C>
June 7, 1999 $250,000
June 15, 1999 $148,000
September 15, 1999 $190,000
</TABLE>
(c) LICENSE KEYS. Upon execution of this Agreement, RN will issue to
NetRadio a temporary license key (expiring September 30, 1999)
enabling NetRadio to serve Streams to 12,000 Concurrent Client
Connections. RN will notify NetRadio two (2) weeks prior to each
payment due date as well as two (2) weeks after each payment due
date as to the status
<PAGE>
of RN's receipt of payment. Upon receipt of NetRadio's final
payment of the License Fee as set forth above, RN will issue
NetRadio a permanent license key enabling NetRadio to serve
Streams to 12,000 Concurrent Client Connections.
3. OPTIONS
(a) PURCHASE ADDITIONAL CONCURRENT CLIENT CONNECTIONS. For two years
from the date hereof, NetRadio will have an option:
(i) to license between 12,000-23,999 additional Concurrent
Client Connections for RealAudio/RealVideo Streams at
forty-three dollars ($43.00) per Concurrent Client
Connection; and
(ii) to license additional Concurrent Client Connections for
RealAudio/RealVideo Streams 24,000 or greater for forty
dollars and fifty cents ($40.50) per Concurrent Client
Connection.
The above license fees include one year of Upgrades and Support. Upgrades
do not include new media or data types other than RealAudio and RealVideo.
(b) PURCHASE OF UPGRADES AND SUPPORT. Upon the termination of the initial year
of Upgrades and Support, NetRadio will have the option for two additional
years to purchase an annual renewal of Upgrades and Support at ten dollars
and fifty cents ($10.50) per licensed Concurrent Client Connection. The
Upgrade and Support fees must be paid in advance.
(c) PURCHASE EVENT(S) ON THE REALBROADCAST NETWORK (RBN). NetRadio will have
the option to purchase event access on the RealBroadcast Network, RN's live
broadcast events network. Pricing is as follows:
<TABLE>
<S> <C>
Up to 4 hour event Audio only $3,400
Up to 24 hour event Audio only $4,675
Up to 4 hour event Audio/Video $4,250
Up to 24 hour event Audio/Video $5,100
</TABLE>
4. ADDITIONAL RN OBLIGATIONS.
(a) UPGRADES AND SUPPORT. RN shall provide NetRadio with Upgrades and
Support in accordance with the Upgrades and Support terms and
conditions attached in Attachment C. The Upgrades and Support set
forth in Attachment C is RN's highest technical support offering
to similarly situated customers, and will include a dedicated
prime technical contact, for as long as Upgrades and Support is
renewed by NetRadio.
(b) DESIGN DEVELOPMENT PROGRAM. RN will invite NetRadio to participate
in RN's design development program for input and discussion on new
feature incarnations for the RealAudio/RealVideo Server and
RealAudio/RealVideo Player software products.
(c) NEW RELEASE OF RN TECHNOLOGY. The parties agree to engage in good
faith negotiations at NetRadio's request, with regard to the terms
and conditions pursuant to which RN may grant a license to
NetRadio to use RN's SDKs to enable NetRadio to create custom
solutions for its own use.
If you agree with the terms of this Agreement, please sign below and return to
my attention. This agreement shall not be deemed effective until signed by all
three parties below.
<PAGE>
Sincerely,
REALNETWORKS, INC.
By: Jeff Mandelbaum
V.P. North American Sales
ACCEPTED AND AGREED TO:
NETRADIO CORPORATION
By:___________________________
Name:_________________________
Title:__________________________
Date:__________________________
<PAGE>
ATTACHMENT A
Description of Software:
The RN Software is RN's standard RealSystem G2 Internet Server with RealAudio
and RealVideo enabled.
The RN Software does not include, among other things, datatypes other than
audio or video, commerce or ad-insertion features, RN's intranet software or
capabilities, client software, vertical educational software or software which
RN uses or develops specifically for another customer's use.
<PAGE>
ATTACHMENT B
REALNETWORKS, INC.
END USER LICENSE AGREEMENT
REALNETWORKS REALSYSTEM G2 INTERNET SERVER
REDISTRIBUTION NOT PERMITTED
- -------------------------------------------------------------------------------
Server License for RealNetworks - REALSYSTEM G2 INTERNET SERVER
- -------------------------------------------------------------------------------
IMPORTANT -- READ CAREFULLY: THIS REALNETWORKS LICENSE AGREEMENT ("LICENSE
AGREEMENT") IS A LEGAL AGREEMENT BETWEEN YOU (EITHER AN INDIVIDUAL OR AN ENTITY)
("YOU" OR "LICENSEE") AND REALNETWORKS, INC. AND ITS SUPPLIERS AND LICENSORS
(COLLECTIVELY, "RN") FOR THE RN REALSYSTEM G2 INTERNET SERVER WHICH INCLUDES
COMPUTER SOFTWARE AND ASSOCIATED MEDIA AND PRINTED MATERIALS, WHETHER PROVIDED
IN PHYSICAL FORM OR RECEIVED ON-LINE IN ELECTRONIC FORM ("SOFTWARE"). YOU MAY
INSTALL ONLY ONE COPY OF THE SOFTWARE. BY CLICKING ON THE "I ACCEPT" BUTTON,
INSTALLING, COPYING OR OTHERWISE USING THE SOFTWARE, YOU AGREE TO BE BOUND BY
THE TERMS OF THIS LICENSE AGREEMENT. IF YOU DO NOT AGREE TO THE TERMS OF THIS
LICENSE AGREEMENT, CLICK ON THE "I DO NOT ACCEPT" BUTTON AND DO NOT INSTALL THE
SOFTWARE.
ANY THIRD PARTY SOFTWARE, INCLUDING ANY NON-RN PLUG-IN, THAT MAY BE PROVIDED
WITH THE SOFTWARE IS INCLUDED FOR USE AT YOUR OPTION. IF YOU CHOOSE TO USE SUCH
SOFTWARE, THEN SUCH USE SHALL BE GOVERNED BY SUCH THIRD PARTY'S LICENSE
AGREEMENT, AN ELECTRONIC COPY OF WHICH WILL BE INSTALLED IN THE "REALSERVER"
DIRECTORY ON YOUR COMPUTER, UPON INSTALLATION OF THE SOFTWARE.
- -------------------------------------------------------------------------------
1. SOFTWARE OWNERSHIP. This is a license agreement and NOT an agreement for
sale. Title, ownership rights and intellectual property rights in and to the
Software (including any images, animations, video, audio, music, and text
incorporated into the Software), accompanying printed materials, and any copies
Licensee is permitted to make herein are owned by RN or its suppliers and are
protected by United States copyright law and international treaty provisions.
Licensee may (a) make one copy of the Software solely for backup or archival
purposes (in accordance with customary practices for such purpose), provided
such copy must contain all of the original Software's proprietary notices, or
(b) transfer the Software to a single hard disk, provided Licensee keeps the
original solely for backup or archival purposes. Licensee may not copy the
printed or electronically transmitted materials accompanying the Software. Your
rights to use the Software are specified in this License Agreement, and RN
retains all rights not expressly granted to you in this License Agreement.
Nothing in this License Agreement constitutes a waiver of RN's rights under U.S.
or international copyright law or any other federal or state law.
2. GRANT OF LICENSE. Subject to the provisions contained herein and in return
for the payment of the requisite License Fees for the Software, RN hereby grants
you a non-exclusive, non-transferable, perpetual, worldwide license to the
version of the Software specified by your Software License Key for installation
of the Software,
(a) INSTALLATION. Licensee may install one copy of the Software on a single
computer containing one or more central processing units ("CPU's") (the computer
running the Software shall be referred to as the "Host Computer"). YOU MAY
INSTALL ONLY ONE COPY OF THE SOFTWARE ON UP TO 250 SINGLE COMPUTERS CONTAINING
ONE OR MORE CENTRAL PROCESSING UNITS ("CPU'S"). A license fee is required for
each Host Computer.
(b) USE. You may use your installed copy of the Software to deliver Streams of
RN media-compatible data (e.g., RealAudio, RealVideo or other RealMedia
specifically enabled by the Server License Key which accompanies the Software)
to the number of simultaneous, single End-User client computers ("Concurrent
Client Connections") specifically enabled by the Server License Key. A "Stream"
means the stream of digitally-encoded data that delivers the RealMedia type
(e.g., RealAudio, RealVideo, etc.) associated with the Software you have
licensed to a single, End User, client computer. You may only serve the
RealMedia types(s) that are authorized by your Server License Key. The number of
Concurrent Client Connections delivered by a given Host Computer is measured by
counting the number of End Users simultaneously served by Streams originating at
that Host Computer. If you wish to deliver additional Concurrent Client
Connections, you must purchase an additional Software License Key from RN. In
addition, you may not use the Software to serve Streams primarily to End Users
of your internal network or Intranet system. If you wish to do so, please
contact RN or visit our Website at http://www.real.com to obtain the appropriate
Intranet Systems License.
<PAGE>
(c) NO RESALE OF SOFTWARE OR STREAMS. YOU MAY NOT, UNDER ANY CIRCUMSTANCES,
RESELL, SUBLICENSE OR DELIVER THE SOFTWARE OR STREAMS ON A STAND-ALONE BASIS TO
ANY THIRD-PARTY. IF YOU DESIRE TO RESELL THE SOFTWARE OR TO DELIVER STREAMS ON A
STAND-ALONE BASIS, PLEASE CONTACT RN REGARDING PARTICIPATING IN ITS RESELLER
PROGRAM.
(d) HOSTING. YOU MAY NOT RENT, SELL OR SUBLICENSE STREAMS UNDER THIS LICENSE
AGREEMENT TO ANY THIRD PARTY FOR WHOM YOU ARE HOSTING A WEBSITE OR ANY EVENT
THAT IS BEING BROADCAST OR OTHERWISE TRANSMITTED OVER THE INTERNET. If you wish
to do so, please contact RN or visit our Website at http://www.real.com to
obtain the appropriate Commercial Network Operator License.
(e) ATTRIBUTION. You must indicate which publicly available files are in
RealAudio (.ra), RealVideo (.rm), or other RealMedia format. RN hereby grants
you a non-exclusive, limited license to use, and you agree that you shall always
use, RN's trademarks in accordance with RN's Trademark and Logo Usage Policy at
http://www.real.com/corporate/logos/policy.html, and for the sole purpose of
informing web page visitors that RealAudio, RealVideo, or other RealMedia
content is available at your web page. You may not without RN's express written
permission use any RN trademark in a way that may imply that you are an agency
or branch of RN or that RN endorses, is affiliated with, or sponsors you or your
products. You may not link directly to any media file or .ram file made
available from the RN Website.
3. OTHER RIGHTS AND LIMITATIONS. NOTICE TO USERS. You agree to inform all users
of the Software, other than End Users receiving Streams, of the terms of this
License Agreement. DUAL-MEDIA SOFTWARE. You may receive the Software in more
than one medium (e.g., by electronic distribution and on CD-ROM). Regardless of
the type or size of medium you receive, you may use only one medium that is
appropriate for your single computer. You may not use or install the other
medium on another computer. You may not loan, rent, lease, grant a security
interest in, or otherwise transfer the other medium to another user. NO COPYING.
You may not copy the Software or Documentation, except that you may make a
single copy of the software for archival purposes only, provided such copy must
contain all of the original Software's proprietary notices. NO MODIFICATIONS OR
REVERSE ENGINEERING. You may not modify, translate, reverse engineer, decompile
or disassemble (except to the extent that this restriction is expressly
prohibited by applicable law), or create derivative works based on the SOFTWARE.
RENTAL/TRANSFER. You may not rent, lease, sell, or transfer the Software or
documentation without RN's express written consent, which RN may withhold in its
discretion. AUDIT RIGHTS. You shall permit RN to audit your compliance with this
License Agreement, as RN deems reasonably necessary. RESERVATION OF RIGHTS. All
rights not expressly granted to you are reserved to RN.
4. SOFTWARE UPGRADES. Subject to your payment of Upgrades and Support fees as
set forth in the "letter" portion of this Agreement,. RN will provide Upgrades
and Support to you as set forth in Exhibit C. Upgrades do not include versions
of the Software for new media or data types other than what has been authorized
by your Server License Key. If the Software you have is labeled as an upgrade,
you must be properly licensed to use a product identified by RN as being
eligible for the upgrade in order to use the Software. Software labeled as an
upgrade replaces and/or supplements the product that formed the basis for your
eligibility for the upgrade, and following the upgrade you may use the resulting
Software only in accordance with the terms of this License Agreement. If the
Software is an upgrade of a component of a package of software programs that you
licensed as a single product, the Software may be used and transferred only as
part of that single product package and may not be separated for use on more
than one computer.
5. LIMITED WARRANTY. RN warrants for your benefit alone that for a period of
ninety (90) days from the date of delivery (a) the Software, if operated as
directed on a computer for which it was designed, will perform substantially in
accordance with the accompanying written materials; and (b) under normal use,
the media containing the Software, if provided by RN, will be free from defects
in material and workmanship. Any implied warranties on the Software and media
are limited to ninety (90) days. All other programs and accompanying materials
are provided "AS IS" without warranty of any kind, either express or implied.
The complete risk as to the quality and performance of any non-warranted program
is with you. Should the program prove defective, you assume the entire cost of
all necessary repair or correction. RN shall not be responsible for any defect
that results from your abuse, misuse or other conduct or conditions outside the
control of RN. Except as set forth herein, RN makes no representation or
warranty that the information or functions contained in the Software will meet
your requirements or that the operation of the Software will be uninterrupted,
error-free or secure, or that any Software defects are correctable or will be
corrected. In addition, any security mechanisms implemented by the Software have
inherent limitations, and you must determine that the Software sufficiently
meets your requirements.
(b) RN represents and warrants that the Software shall not contain any computer
code (i) intentionally designed to disrupt, disable, harm, or otherwise impede
in any manner, including aesthetic disruptions or distortions, the operation of
the Software, or any other associated software, firmware, hardware, computer
system or network (sometimes referred to as "viruses" or "worms"), (ii) that
would (except for Beta releases of the Software, which time out after a set
period of time) disable the Software or impair in any way its operation based on
the elapsing of a period of time,
<PAGE>
exceeding an authorized number of copies, advancement to a particular date or
other numeral (sometimes referred to as "time bombs", "time locks", or "drop
dead" devices) or (iii) that would permit RN to access the Software to cause
such disablement or impairment (sometimes referred to as "traps", "access
codes", or "trap door" devices), or any other similar harmful, malicious or
hidden procedures, routines or mechanisms which would cause such programs to
cease functioning or to damage or corrupt data, storage media, programs,
equipment or communications, or otherwise interfere with operations.
(c) RN represents and warrants that the Software is designed to be used prior
to, during, and after the calendar year 2000 A.D., and that the Software will
operate during each such time period without error relating to date data,
specifically including any error relating to, or the product of, date data that
represents or references different centuries or more than one century, provided
that the Software is used in accordance with the documentation and provided that
all other products (e.g., other hardware, platforms and software) used with the
Software properly exchange date data with the Software. RN shall, as soon as
reasonably practicable and at its expense, repair any defect in the Software
that causes it to operate with error relating to date data.
THIS IS A LIMITED WARRANTY AND IT IS THE ONLY WARRANTY MADE BY RN OR ITS
SUPPLIERS. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, RN AND ITS
SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING,
BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, WITH REGARD TO THE SOFTWARE, THE ACCOMPANYING WRITTEN
MATERIALS, AND ANY ACCOMPANYING HARDWARE. THIS LIMITED WARRANTY GIVES YOU
SPECIFIC LEGAL RIGHTS. YOU MAY HAVE OTHERS, WHICH VARY FROM STATE/JURISDICTION
TO STATE/JURISDICTION. If you make any modifications to the Software during the
warranty period; if the media is subjected to abuse, accident or improper use;
or if you violate the terms of this Agreement, this warranty shall immediately
be terminated.
6. REMEDIES. RN's and its suppliers' entire liability and your exclusive remedy
for any breach of warranty shall be, at RN's option: (i) to promptly repair or
replace the Software or media that does not meet RN's Limited Warranty; (ii) to
advise you how to achieve substantially the same functionality with the Software
as described in the accompanying written materials through a procedure different
from that set forth in the documentation; or (iii) refund the license fee you
paid for the Software. Repaired, corrected or replaced Software and media shall
be covered by this limited warranty for the remainder of the original warranty
period or for thirty (30) days, whichever is longer. Only if you inform RN of
the problem with the Software during the applicable warranty period and provide
evidence of the date you acquired the Software will RN be obligated to honor
this warranty. Outside of the United States, neither these remedies nor any
product support services offered by RN are available without proof of purchase
from a non-U.S. source.
7. LIMITATION OF LIABILITY. UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY,
WHETHER IN TORT, CONTRACT OR OTHERWISE, SHALL RN OR ITS SUPPLIERS OR RESELLERS
BE LIABLE TO YOU OR ANY OTHER PERSON FOR ANY INDIRECT, SPECIAL, INCIDENTAL, OR
CONSEQUENTIAL DAMAGES OF ANY CHARACTER ARISING OUT OF THE USE OF OR INABILITY TO
USE THE SOFTWARE, THE DOCUMENTATION OR ANY OTHER ACCOMPANYING MATERIALS,
INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF GOODWILL, WORK STOPPAGE,
COMPUTER FAILURE OR MALFUNCTION, OR ANY AND ALL OTHER COMMERCIAL DAMAGES OR
LOSSES, ARISING OUT OF THE USE OF OR INABILITY TO USE THE SOFTWARE, EVEN IF RN
HAS BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGES, OR FOR ANY CLAIM BY ANY
OTHER PARTY. FURTHER, IN NO EVENT SHALL RN'S LIABILITY UNDER ANY PROVISION OF
THIS AGREEMENT EXCEED THE LICENSE FEE PAID TO RN FOR THE SOFTWARE. BECAUSE SOME
STATES/JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF LIABILITY FOR
CONSEQUENTIAL OR INCIDENTAL DAMAGES, THE ABOVE LIMITATION MAY NOT APPLY TO YOU.
8. INDEMNIFICATION. (a) This software is intended for use only with properly
licensed media, content, and content creation tools. It is your responsibility
to ascertain whether any copyright, patent or other licenses are necessary and
to obtain any such licenses to serve and/or create or compress such media and
content. You agree to transmit and/or compress only those materials for which
you have the necessary patent, copyright and other permissions, licenses, and/or
clearances. You agree to hold harmless, indemnify and defend RN, its officers,
directors and employees, from and against any losses, damages, fines and
expenses (including attorneys' fees and costs) arising out of or relating to any
claims that you have encoded, compressed, copied or transmitted any materials
(other than materials provided by RN) in connection with the Software in
violation of another party's rights or in violation of any law. If you are
importing the Software from the United States, you shall indemnify and hold RN
harmless from and against any import and export duties or other claims arising
from such importation.
<PAGE>
(b) RN will hold harmless, indemnify and defend you from and against any
third party claim that any intellectual property rights of the claimant are
infringed by the Software, provided that RN's obligation hereunder shall not
exceed the limitations set forth in Section 7. RN's indemnification obligations
under this Section 7 shall not apply to the extent such third party claim of
infringement is attributable to design information or specifications provided to
RN by Licensee and which RN was required by Licensee to utilize in the Software.
In such event, the indemnification obligations and limitations set forth in this
Section 7 shall reciprocally apply to Licensee in favor of RN.
(c) You agree that should the Software or any portion of the Software
provided by RN become, or in RN's opinion be likely to become, the subject of a
third party claim of infringement, or should use of the Software be enjoined, RN
shall, at its option and expense, either:
(i) procure for Licensee or the right to continue using the
Software;
(ii) replace or modify the Software to make it non-infringing
without substantially altering its functionality; or
(iii) if RN deems the above options to be commercially
impracticable, terminate this Agreement and reimburse you
the price paid for the Software.
(d) Each party's obligation to indemnify the other under this Section 8
shall be contingent on the following: (i) the party seeking indemnity (the
"Indemnified Party") must promptly notify the other party (the "Indemnifying
Party") in writing of any such claim, (ii) the Indemnifying Party shall be
accorded control of the defense and of all negotiations for settlement or
compromise of such claim, (iii) the Indemnified Party shall cooperate with the
Indemnifying Party in the defense and settlement of such claim, including
providing to the Indemnifying Party, at the expense of the Indemnifying Party,
such information and assistance as the Indemnifying Party may reasonably
request; (iv) the Indemnified Party may, at its own expense, be represented in
such defense; and (v) the Indemnifying Party may not settle any claim in a
manner that compromises the rights of the Indemnified Party with the prior
written approval of the Indemnified Party.
(e) This Section 8 sets forth the parties' complete obligations to each
other in regard to the types of claims described in this Section 8.
9. TERMINATION. RN may terminate this License Agreement by written notice to you
if you have materially breached any provision hereof and such breach remains
uncured thirty days after written notice of such breach is sent by RN. You may
also terminate this License Agreement at any time by notifying RN in writing of
termination. Upon any termination of this License Agreement, you shall
immediately discontinue use of the Software and shall within three (3) days
return to RN, or certify destruction of, all full or partial copies of the
Software, documentation and related materials provided by RN. Your obligation to
pay accrued charges and fees shall survive any termination of this License
Agreement.
10. U.S. GOVERNMENT RESTRICTED RIGHTS. This Software and documentation are
provided with RESTRICTED RIGHTS. Use, duplication or disclosure by the
Government is subject to restrictions set forth in subparagraphs (a) through (d)
of the Commercial Computer Software--Restricted Rights at FAR 52.227-19 when
applicable, or in subparagraph (c)(1)(ii) of the Rights in Technical Data and
Computer Software clause at DFARS 252.227-7013, and in similar clauses in the
NASA FAR supplement, as applicable. Manufacturer is RealNetworks, Inc./1111
Third Avenue, Suite 2900/ Seattle, Washington, 98101. You acknowledge that none
of the Software or underlying information or technology may be downloaded or
otherwise exported or re-exported (i) into (or to a national or resident of)
Cuba, Iran, Iraq, Libya, North Korea, Syria, Sudan or Angola or any other
country to which the U.S. has embargoed goods; or (ii) to anyone on the U.S.
Treasury Department's list of Specially Designated Nationals or the U.S.
Commerce Department's Table of Denial Orders. By using the Software you are
agreeing to the foregoing and are representing and warranting that you are not
located in or under the control of a national or resident of any such country or
on any such list.
11. MISCELLANEOUS. This License Agreement and any accompanying order form for
the Software accepted by RN shall constitute the complete and exclusive
agreement between us, notwithstanding any variance with any purchase order or
other written instrument submitted by you, whether formally rejected by RN or
not. The acceptance of any purchase order you place is expressly made
conditional on your consent to the terms set forth herein. A separate written
agreement with respect to the subject matter hereof shall supersede this
instrument to the extent indicated in such separate agreement. This License
Agreement may not be modified except in a writing duly signed by an authorized
representative of RN and you. If any provision of this License Agreement is held
to be unenforceable for any reason, such provision shall be reformed only to the
extent necessary to make it enforceable, and such decision
<PAGE>
shall not affect the enforceability of such provision under other
circumstances, or of the remaining provisions hereof under all circumstances.
This License Agreement shall be governed by the laws of the State of
Washington without regard to conflicts of law provisions. This License
Agreement will not be governed by the United Nations Convention of Contracts
for the International Sale of Goods, the application of which is hereby
expressly excluded.
Should you have any questions concerning this License Agreement, or if you
desire to contact RealNetworks for any reason, please contact the RealNetworks
distributor serving your country.
Copyright -C- 1995-1999 RealNetworks, Inc. and/or its suppliers. 1111 Third
Avenue, Suite 2900, Seattle, Washington 98101 U.S.A. All rights reserved.
RealNetworks, RealAudio, RealVideo, RealSystem, and RealMedia are trademarks or
registered trademarks of RealNetworks, Inc.
<PAGE>
ATTACHMENT C
UPGRADES AND SUPPORT
This Attachment C (this "Attachment") to the RN License Agreement (the
"Agreement") between RealNetworks, Inc. ("RN") and NetRadio Network Corporation.
("Licensee") sets forth the upgrade and support obligations of RN and related
obligations of Licensee.
1. DEFINITIONS.
1.1 In addition to the capitalized terms defined elsewhere in this
Attachment, the following terms used herein shall have the meanings ascribed to
them below:
(a) "Error" shall mean any instance in which the Real Server
does not materially conform to the Documentation; provided, however,
than an Error shall not include any material nonconformance that is due
to hardware, software, or other equipment not referred to in the
Documentation as being compatible with the Real Server.
(b) "Level 1 Error" shall mean any condition that precludes
core functions of the Real Server (e.g. complete system hang or
unrecoverable loss of data) from being performed due to suspected or
actual Errors in the Real Server, for which no Workaround solution is
available, and which (i) in the case of an Error in the Real Server,
affects more than 25% of the Real Players, or (ii) in the case of an
Error in the Real Player, affects more than 25% of the Real Players.
All other Errors which preclude core functions in the Real Server from
being performed shall be Level 2 Errors.
(c) "Level 2 Error" shall mean any condition that precludes
one or more major functions of the Real Server (e.g. intermittent
system hang or temporary loss of data) from being performed due to
suspected or actual Errors in the Real Server, and which (i) in the
case of an Error in the Real Server, affects more than 25% of the Real
Players, or (ii) in the case of an Error in the Real Player, affects
more than 25% of the Real Players. All other Errors which preclude one
or more major functions in the Real Server from being performed shall
be Level 3 Errors.
(d) "Level 3 Error" shall mean any condition that results in a
significant loss or degradation of functionality of the Real Server due
to suspected or actual Errors in the Real Server.
(e) "Level 4 Error" shall mean any condition (i) that
precludes one or more non-essential functions of the Real Server from
being performed due to suspected or actual Errors in the Real Server;
or (ii) in which Licensee's technical support personnel need reasonable
assistance or information regarding the Real Server.
(f) "Workaround" shall mean: (i) a modification to the
Software Programs; (ii) an alteration to the configuration of the end
user's computer or software; or (iii) a change in the way the end user
accomplishes a task using the Software Programs; any of which may be of
a temporary nature, to help avoid the Error.
(g) "First Level Support" shall consist of accepting and
handling end user calls and troubleshooting to the point of verifying
that there is an Error and that the Error, if any, is in the Software
Program.
(h) "Second Level Support" shall consist of telephone and
remote diagnostic support to Licensee contact (not directly to end
users or other third parties) with regard to the operation and
utilization of the Software Program and maintenance modifications,
error
<PAGE>
corrections or bug fixes necessary to bring the Software Program
into conformance with the Documentation therefor.
(i) "Licensee Contact" shall mean an individual designated in
writing by Licensee who is authorized to contact the Support Center.
Licensee may substitute Licensee Contacts at any time upon written
notice thereof to RN.
(j) "Support Center" shall mean the RN facility or facilities
from which support obligations are to be provided hereunder. As of the
Effective Date, RN's Support Center is located at 1111 Third Avenue,
Suite 2900, Seattle, Washington 98101.
1.2 All other capitalized terms used in this Attachment and not
otherwise defined herein shall have the meanings ascribed to them in the
Agreement.
2. LICENSEE OBLIGATIONS
2.1 Licensee shall be responsible for providing First Level Support for
the Software Programs. RN shall not be required to have direct contact with
Licensee's distributors or end users with regard to Technical Support.
2.2 Licensee shall ascertain the nature of each reported Error, and the
circumstances under which such Error occurs. Licensee shall use reasonable
commercial efforts to provide RN with information, traces, server access or
documentation sufficient for RN to duplicate the Error. Upon RN's duplication of
such Error, the parties shall mutually determine in good faith the reasonable
classification of such Error.
2.3 Licensee shall designate a reasonable number of Licensee Contacts,
not to exceed three (3) individuals at any given time, for communication with
RN's representatives at the Support Center and shall make reasonable efforts to
minimize redundancy in support requests. All Licensee support requests must be
made through an Licensee Contact. Each Licensee Contact shall have adequate
technical expertise, training and experience to fulfill his or her
responsibilities. Licensee shall immediately provide RN with the name, title and
24-hour contact information for each Licensee Contact.
2.4 Licensee agrees that when requesting support services, it shall
follow the following procedures: (i) Licensee shall first contact the Support
Center through standard support channels. (ii) If Licensee does not receive a
response from the Support Center within the requisite time frame set forth in
Section 3.2 below, it shall contact, via pager, the technical support server
lead, 1-206-648-0788, and the technical support manager, 1-206-980-5027.
2.5 Licensee agrees that it will provide its end users up-to-date
technical support information through a link to RN's technical support site
(http://service.real.com). Licensee agrees that it will not post any technical
support information without RN's prior written consent.
3. RN SUPPORT OBLIGATIONS.
3.1 Support Center personnel shall be available for telephone contact
Monday through Friday, 7:00 AM to 5:00 PM Pacific Time, at the Support Center,
exclusive of RN's local holidays. RN shall ensure that Licensee has the
ability to contact a Support Center technician 24 hours per day, 7 days per
week, with regard to Level 1 Errors, through pager support at 1-206-980-6199.
Licensee shall have access to RN's toll-free priority support line at
1-888-768-4327 (1-888-RNTECHS). If calls are made from outside of the United
States or Canada, Licensee shall have access to RN's standard support line at
1-206-674-2681. RN shall also provide Licensee with a means of reporting
Errors to RN by electronic mail, voice mail, or telephonic recording
capability. Licensee shall have e-mail access via the Support Center's e-mail
World-Wide Web page at http://service.real.com/contact/email.htm.
<PAGE>
3.2 RN shall provide Second Level Support to Licensee in connection
with the Software Programs as follows: (i) assist Licensee Contacts in
determining the cause of Errors encountered by Licensee or end users in the
use of Software Programs; (ii) make commercially reasonable efforts to
classify and correct in accordance with the time frame set forth in the chart
below, all Errors that a Licensee Contact identifies, classifies and reports
to RN and that RN can substantiate; and (iii) provide an Upgrade if
appropriate. RN shall not be required to correct any Error caused by any
failure to implement any Upgrades to the Software Programs that are provided
by RN to Licensee.
<TABLE>
<CAPTION>
------------------------ -------------------------- ---------------------- ---------------------
TYPE OF ERROR RN TO ASSIGN PATCH WORK- UPGRADE WITHIN:
TECHNICIAN TO AROUND OR TEMPORARY
INVESTIGATE ERROR FIX WITHIN:
WITHIN:
------------------------ -------------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Level 1 thirty (30) minutes 4 business days 30 days
from having been alerted from assignment
of technician
------------------------ -------------------------- ---------------------- ---------------------
Level 2 four (4) business hours 15 business days from 60 days
from having been alerted assignment of
technician
------------------------ -------------------------- ---------------------- ---------------------
Level 3 eight (8) business 45 days from the next scheduled
hours from having assignment of Upgrade
been alerted (or, in technician
the case of technical
personnel requiring
assistance or
information, RN to
provide such
assistance or
information within
eight (8) business
hours)
------------------------ -------------------------- ---------------------- ---------------------
Level 4 two (2) business days 90 days from the next
from having been alerted assignment of scheduled Upgrade
technician
------------------------ -------------------------- ---------------------- ---------------------
</TABLE>
3.3 If Licensee desires to receive on-site technical support at any of
its locations, it shall pay RN based on RN's standard list prices for such
support or consulting services, and shall pay all direct RN expenses associated
therewith, including transportation, accommodations and meals.
3.4 For the avoidance of doubt, RN shall not have any support
obligations with respect to beta versions of Software Programs.
3.5 RN shall provide to Licensee all Upgrades for the Software
Programs. Such Upgrades shall be provided to Licensee electronically, together
with applicable Documentation and instructions for installation, use and
duplication. RN shall deliver to Licensee the beta and final release of each
Upgrade as and at the same time as such versions are generally made available.
<PAGE>
Exhibit 10.12.3
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE is made and entered into as of the 27th day of
March, 1999, by and between RIVERPLACE INC., a Minnesota corporation ("Lessor")
and NETRADIO NETWORK CORPORATION, a Minnesota corporation ("Tenant").
WITNESSETH, THAT:
WHEREAS, Lessor and Tenant made and entered into that certain Lease
dated October 4, 1995 as amended June 3, 1996 and September 1, 1998
(hereinafter called the "Lease") covering certain premises located on the
first and second floors of the building known as Exposition Hall Building at
Riverplace in Minneapolis, Minnesota, as more particularly described therein.
WHEREAS, the parties desire to supplement and amend the Lease.
NOW, THEREFORE, in consideration of the above premises, the mutual
covenants and agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which is acknowledged by each
of the parties hereto, the Lessor and Tenant hereby agree as follows.
The Lease shall be and hereby is supplemented and amended as follows:
1. DEMISED PREMISES. Tenant has elected to expand its net rentable
area as defined in Section One of the Lease dated October 4, 1995 and Second
Amendment dated September 1, 1998 comprising 3,771 net rentable square feet
on the first and second floor, known as suites 149 and 223/225 is hereby
expanded as of April 1, 1999 by 1,648 additional rentable square feet, known
as suite 236 (The "Expansion Area") so as to comprise a total of 5,419 net
rentable square feet. The Expansion Area is shown by cross hatching on
Exhibit A attached hereto and made a part hereof.
2. GROSS RENT. Commencing April 1, 1999, Tenant shall pay Gross Rent
for the Expansion Area at the Monthly Gross Rent of Two Thousand Five Hundred
and 00/100's Dollars ($2,500.00).
3. TERM. Tenant takes the Expansion Area from Lessor commencing on
the 1st day of April 1999 and continuing thereafter on a month-to-month
basis, unless sooner terminated as provided elsewhere in the Lease. Lessor
and Tenant may terminate this Amendment by giving thirty (30) days prior
written notice which, in any event, must have the last day of a month as the
termination date.
4. TENANT IMPROVEMENTS. Tenant agrees to take the Expansion Area in
an as-is condition except the wall separating suite #234 and #236 shall be
painted and baseboard installed.
<PAGE>
5. EARLY OCCUPANCY. If Tenant, at Tenant's option, elects to occupy
the Expansion Area prior to April 1, 1999, Tenant shall pay to Lessor for the
period prior to April 1, 1999, a pro rata share of the Gross Rent and all
other amounts to be paid by Tenant during the Lease Year. Such early
occupancy shall be pursuant to all of the terms and conditions of this Third
Amendment and shall not affect the termination date, which shall remain the
last day of the month following the thirty (30) day notice. The Gross Rent
and other amounts owing for the period of early occupancy shall be paid by
Tenant to Lessor on or before the first day of occupancy.
6. COMPREHENSION OF TERMS. Tenant, by execution hereof, states that
they have had the opportunity to obtain representation by legal counsel in
connection with the Third Amendment (whether they have elected to do so or
not) and that they understand fully and agree with each, all and every
provision hereof and acknowledge receipt of a copy hereof.
7. ATTORNEYS' FEES. If any action or claim is brought or asserted to
enforce any term or provision of this Third Amendment, Owner shall be awarded
its reasonable costs and expenses, including attorneys' fees incurred therein.
8. LEASE IN FULL FORCE AND EFFECT. Except as specifically amended and
supplemented hereby, all of the terms and provisions of the Lease remain in
full force and effect.
9. CAPTIONS. The captions set forth herein are for convenience only,
and are not a part of this Third Amendment. All capitalized terms not
separately defined herein shall bear the meaning assigned thereto in the
Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment as of the day and year first above written.
RIVERPLACE INC.
By:___________________________________
Takashi Ito
Its: Executive Vice President
NETRADIO NETWORK CORPORATION
By:___________________________________
Ed Tomechko
Its: Chief Executive Officer
<PAGE>
TERMINATION AGREEMENT
THIS AGREEMENT is made and entered into this 26th day of July, 1999, by and
between NETRADIO CORPORATION, a Minnesota corporation (the "Company"), and
RICHARD W. HAILEY, THE Company's Chief Technical Officer (the "Executive").
WHEREAS, the Company is engaged in the business of developing, marketing,
and selling products on the internet; and
WHEREAS, the Company and the Executive mutually desire to enter into a
Termination Agreement outlining specific terms and conditions in the case that
certain events trigger either the Executive's termination or diminishment in
position;
NOW THEREFORE, in consideration of the above recitals and the mutual
promises herein contained, the parties hereto agree as follows:
1. TERMINATION. This Agreement and the obligation to pay the Executive under
paragraph 2 of the Agreement will only be triggered if (i) there is Change
in Control (as defined below) and (ii) within one (1) year after such
Change in Control any one of the following events occurs:
(a) Executive's employment with the company is terminated by the Company;
or
(b) There is any adverse change in Executive's status or position as an
executive officer of the Company, including without limitation, any
adverse change in Executive's status or position as a result of a
material diminution in Executive's assignment to Executive of any
duties or responsibilities which, in Executive's reasonable judgment,
are inconsistent with the Executive's status or position; or
(c) The Company substantially reduces the Executive's base salary that
was in effect immediately before the Change in Control or otherwise
changes the eligibility requirements or performance criteria for any
benefit other than salary, which adversely effects Executive.
2. PAYMENTS DUE. If any of the events described in paragraph 1 above is
triggered, the Company shall pay Executive a cash bonus ("Severance
Payment") in an amount equal to six months of the Executive's salary,
provided, however, that in now event shall the amount due and payable
hereunder constitute a "Parachute Payment" within the meaning of the
Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended. In the
event that any portion of the Severance Payment would be deemed a Parachute
Payment, the amount of the Severance Payment shall be reduced only to the
extent necessary to eliminate any such treatment or characterization.
<PAGE>
3. DEFINITIONS. For purposes of this Agreement the following definitions
apply:
a) "AVERAGE ANNUAL COMPENSATION" shall mean the average of all taxable
compensation and fringe benefits paid to or on behalf of the Executive
by Company, based on the two (2) most recent calendar years.
b) "CHANGE IN CONTROL" shall mean:
(i) the sale of all or substantially all of the assets of the
Company.
(ii) The acquisition by any means of more than fifty percent
(50%) of the issued and outstanding voting stock of the
Company by any entity, person, or group of persons acting
in concert; provided, however, this subparagraph (ii) does
not apply to any offering by the Company to the public that
has been approved by the Company's Board of Directors,
(iii) The commencement by any entity, person or group (other than
the Company or a subsidiary of the Company) of a tender
offer or an exchange offer for fifty percent (50%) or more
of the outstanding voting stock of the Company; or
(iv) The election to the Board of Directors of the Company
without the recommendation or approval of the incumbent
Board of Directors of the Company the lesser of (i) three
director or (ii) directors constituting a majority of the
number of directors of the Company then in office.
4. MODIFICATIONS - WAIVER. No termination or modification of any
provisions of this Termination Agreement or waiver of any right provided
in it shall be effective for any purpose unless specifically set forth
in a writing signed by the party to be bound thereby. No waiver of any
right or remedy in respect of any occurrence or event on one occasion
shall be deemed a waiver of such right or remedy in respect of such
occurrence or event on any other occasion.
5. ENTIRE AGREEMENT. This Termination Agreement contains the entire agreement
of the parties with respect to the subject matter hereof and supersedes all
other agreements, oral or written, with respect to the subject matter
contained in the Agreement.
6. CONTROLLING LAW. All questions concerning the validity and operation of
the Termination Agreement and the performance of the obligations imposed
upon the parties hereunder shall be governed by the laws of the State of
Minnesota.
IN WITNESS WHEREOF, the parties have executed this Termination Agreement
as of the date first set forth above.
<PAGE>
NETRADIO CORPORATION,
A Minnesota Corporation
BY____________________________
ITS___________________________
______________________________
Richard W. Hailey
Chief Technical Officer
<PAGE>
Exhibit 10.21
SEVERANCE AGREEMENT
In exchange for the promises and covenants contained herein, NETRADIO
CORPORATION (the "Company") and JAN ANDERSEN (the "Employee") hereby agree as
follows:
1. DEFINITIONS. We intend all words used in this Severance Agreement (the
"Agreement") to have their plain meanings in ordinary English. Specific terms
we use in this Agreement have the following meanings:
A. The EMPLOYEE, as used herein, shall include the undersigned
Employee and anyone who has obtained any legal rights or claims through
the undersigned Employee.
B. The COMPANY, as used herein, shall at all times mean NetRadio
Corporation, its parent company, its subsidiaries, successors and
assigns, its affiliated and predecessor companies, their successors and
assigns, their affiliated and predecessor companies and the present or
former directors, officers, employees, representatives and agents
(including, without limitation, its accountants and attorneys) of any of
them, whether in their individual or official capacities, and the
current and former trustees or administrators of any pension or other
benefit plan applicable to the employees or former employees of the
Company, in their official or individual capacities.
C. EMPLOYEE'S CLAIMS, as used herein, means all of the rights the
Employee has now to any relief of any kind from the Company whether or
not the Employee now knows about those rights, arising out of his
employment with the Company, and his employment termination, including,
but not limited to, claims for breach of contract; fraud or
misrepresentation; the Age Discrimination in Employment Act; the
Minnesota Human Rights Act; the Americans with Disabilities Act; Title
VII of the Civil Rights Act of 1964, as amended; or other federal, state
or local civil rights based on age or other protected class status;
defamation; intentional or negligent infliction of emotional distress;
breach of covenant of good faith and fair dealing; promissory estoppel;
negligence; wrongful termination of employment; and any other claims for
unlawful employment practices. However, this release shall not affect
any claims which could be made under any employee welfare benefit plan
or any pension or retirement plan through the Company.
2. THE COMPANY'S OBLIGATIONS AND SEVERANCE AGREEMENTS. In consideration
for the Employee's promises contained herein, specifically including, but not
limited to, the release of all claims by the Employee and the Employee's
promises to refrain from disclosing confidential information and trade
secrets of the Company, the Company agrees as follows:
A. SEVERANCE PAYMENT. The Company agrees to pay to the Employee an
aggregate severance payment of $125,000 (the "Severance Payment") in
full satisfaction of all wage, commission, salary, bonus, royalty or
other compensation claim Employee had,
<PAGE>
has or may have against the Company. This Severance Payment will be payable
as follows:
i) bi-weekly, installment payments on the Company's regularly
scheduled paydays in accordance with the Company's pay
practices with the first such installment being made on the
first pay period following today's date;
ii) a payment of $50,000 on October 24, 1999;
iii) continuing bi-weekly installments on the Company's regularly
scheduled paydays in accordance with the Company's pay
practices; and
iv) a final installment equal to $13,461.60 payable on April 14,
2000.
Notwithstanding the foregoing, the Severance Payment shall be
accelerated and due and payable in full within ten (10) business days
following the occurrence of (i) successful consummation of an initial
public offering of the Company's common stock or (ii) a "Change in
Control" (as hereinafter defined). For purposes of this Agreement,
"Change in Control" shall mean (i) the sale of all or substantially all
of the assets of the Company, (ii) the acquisition by any means of more
than fifty percent (50%) of the issued and outstanding voting stock of
the Company by any entity, person or group of persons acting in concert,
or (iii) the merger of the Company with, or the consolidation of the
Company into, another corporation or entity.
The Severance Payment shall be subject to federal and state withholding
taxes and FICA.
B. ADDITIONAL TERMS.
i) The employee's effective date of termination shall be the date
this Agreement is executed by all of the parties hereto.
ii) The Company agrees to amend Employee's stock option agreements
dated June 1, 1998, numbered 5 and dated June 1, 1998,
numbered 8, respectively, to reflect that all 150,000 options
granted thereunder are vested and exercisable as of August 24,
1999 (subject to Section 5 hereof) for a period of ninety (90)
days thereafter as provided in said agreements. In return,
Employee agrees to execute a "lock up" agreement in the form
attached as Exhibit A with respect to 100,000 of such options
and any stock granted pursuant thereto.
iii) Unless modifications are required by the Company's
underwriters, the Company will not change the Employee's
"friends of the Company" selections in connection with the
Company's proposed public offering.
iv) The Company will pay Employee the sum of $5,000 for legal fees
incurred in connection with this transaction. The Company will
issue the Employee a 1099 with respect to such payment and the
Employee will be
<PAGE>
solely responsible for paying any and all income, FICA or
other taxes related thereto.
C. MEDICAL INSURANCE BENEFITS. The Company, pursuant to federal and
state law, will provide, for a period of eighteen (18) months following
the effective date of the Employee's termination (the "COBRA Period"), a
continuation of the group medical insurance coverage previously provided
to Employee by the Company. Through April 14, 2000, the Company will pay
that portion of the premium for group medical insurance that it paid
during the Employee's employment. After April 14, 2000, the Employee
will be required to pay for such benefits for the remainder of the COBRA
Period, should the Employee elect to continue COBRA coverage.
D. RESPONDING TO REFERENCE REQUESTS. The Company shall respond to
reference requests regarding the Employee's employment with the Company
by providing the dates the Employee worked for the Company and the
position in which he worked and the recommendation letter attached
hereto as Exhibit B. Employee agrees that he will direct all reference
requests to Margot McManus, c/o Navarre Corporation, 7400 49th Avenue
North, New Hope, Minnesota 55428.
E. CONFIDENTIALITY. The Company agrees that it will keep the terms
and conditions of this Agreement strictly confidential, provided,
however, that the Company may disclose the terms and conditions of this
Agreement to its officers and directors, its human resources department,
outside human resources consultants used by the Company, legal,
accounting and financial advisors, and any other third party who has a
bona fide and compelling need to know this information. Further, the
Company is permitted to disclose the terms of this Agreement as required
pursuant to any state or federal law, or as necessary to defend claims
made against the Company.
F. NO DISPARAGEMENT. Employee agrees that he shall not disparage or
defame NetRadio Corporation in any respect, or make any derogatory
comments concerning his employment relationship with the Company, and
the Company agrees that it shall not disparage or defame Employee in any
respect, or make any derogatory comments concerning his employment
relationship with the Company. These provisions include the Company's
officers, directors, agents and employees.
G. REMEDIES. The Company acknowledges that a breach of the promises
set forth in Sections 2.D., 2.E. and 2.F. may cause the Employee
irreparable harm for which there is no adequate remedy at law, and the
Company therefore consents to the issuance of any injunction in favor of
the Employee enjoining the breach of any of those promises by any court
of competent jurisdiction. The Company further agrees that the remedies
provided for herein are in addition to, and are not to be construed as
replacements for, or a limitation of, rights and remedies otherwise
available to the Employee.
H. REGISTRATION STATEMENT. The employee acknowledges that he has
participated in drafting the Company's Form S-1 Registration Statement
and Amendments No. 1, 2 and 3 under the Securities Act of 1933 (the
"Registration Statement") and has met with the Company's underwriters in
connection with the Company's planned initial public
<PAGE>
offering, and as of the date of the employee's last day of work for the
Company, the employee represents and warrants to the Company that, to the
Employee's knowledge, the Registration Statement did not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading.
3. EMPLOYEE OBLIGATIONS. As material inducement to the Company in entering
into this Agreement and providing the consideration described in Section 2,
the Employee hereby agrees as follows:
A. RELEASE. Employee agrees to release all Employee's Claims. The
Employee acknowledges that the money and promises received and to be
received by the Employee are in exchange for the release of the
Employee's Claims.
B. COVENANT NOT TO SUE. Employee agrees that he will not take any
action whatsoever to vindicate any rights he may have had if he had not
released the Employee's Claims. Further, the Employee agrees to pay the
Company's attorneys fees if the Employee breaches the covenant not to
sue contained in this Section 3.B (excluding, however, any litigation
Employee may commence to enforce the terms of this Agreement.
C. COMPANY PROPERTY. The Employee will return all property belonging
to the Company to the Company immediately upon the execution of this
Agreement, whether such property is currently on or off the premises of
the Company, including, without limitation, any and all computer
hardware and computer software.
D. CONFIDENTIALITY. At all times hereafter in perpetuity, the
Employee will not use or make available or divulge to any person, firm,
corporation or other entity any information of or regarding the Company,
including without limitation, trade secrets, customer lists, business
policies, financial information, technical information, methods of
operation, marketing programs, customer price lists or any other
confidential or secret information concerning the business and affairs
of the Company or any of its affiliates.
E. CONFIDENTIALITY OF AGREEMENT. The Employee agrees that he will
keep the terms and conditions of this Agreement strictly confidential,
provided, however, that the Employee may disclose the terms and
conditions of this Agreement to his spouse, his attorney, his financial
advisor, and as required pursuant to any state or federal law. The
Employee agrees that in the event that Employee discloses any of the
terms of this Agreement, including the fact of payment, other than as
set forth above, he shall be liable to the Company as set forth in
Section 3.G. of this Agreement and for any and all injuries or damages
sustained by the Company, including costs, disbursements and attorneys'
fees incurred by the Company as a direct result of the Employee's
disclosure.
F. COOPERATION WITH RESPECT TO CLAIMS AGAINST COMPANY. The Employee
agrees to make reasonable efforts to assist the Company in its defense
of any claims by current or former employees of the Company. Such
assistance shall include, but not be limited to, providing information
regarding claims, executing affidavits, and testifying on behalf of the
Company if issued a subpoena. The Company shall reimburse the Employee
for any
<PAGE>
out of pocket expenses such as mileage and lost wages incurred pursuant to
this Section 3.F.
G. REMEDIES. The Employee acknowledges that any breach of any of the
promises set forth in Sections 3.C, 3.D., 3.E. and 3.F. will cause the
Company irreparable harm for which there is no adequate remedy at law,
and the Employee therefore consents to the issuance of any injunction in
favor of the Company enjoining the breach of any of those promises by
any court of competent jurisdiction. If any promise made by the Employee
in this Section 3 should be held to be unenforceable because of its
scope or duration, or the area or subject matter covered thereby, the
Employee agrees that the court making such determination shall have the
power to reduce or modify the scope, duration, subject matter or area of
that promise to the extent that allows the maximum scope, duration,
subject matter or area permitted by applicable law. The Employee further
agrees that the remedies provided for herein are in addition to, and are
not to be construed as replacements for, or a limitation of, rights and
remedies otherwise available to the Company.
4. EMPLOYEE'S UNDERSTANDINGS. The Employee acknowledges and represents that:
A. The Employee understands that he has the right to consult with an
attorney regarding the meaning and effect of this Agreement.
B. The Employee also understands that he has a period of twenty-one
(21) calendar days from the date on which he receives an unsigned copy
of this Agreement in which to consider whether or not to sign this
Agreement, and that, having been advised of that entitlement, he may
elect to sign this Agreement at any time prior to the expiration of that
time period.
C. The Employee understands that he may rescind (that is, cancel)
within seven (7) calendar days of signing the Agreement the provisions
of Section 3.A. of this Agreement with respect to claims arising under
the Age Discrimination in Employment Act (the "ADEA Rescission Period")
and that he may rescind within fifteen (15) calendar days of signing the
Agreement the provisions of Section 3.A. of this Agreement with respect
to claims arising under the Minnesota Human Rights Act (the "MHRA
Rescission Period") (collectively, the "Rescission Periods"). To be
effective, rescission must be in writing, delivered to Margot McManus,
c/o Navarre Corporation, 7400 49th Avenue North, New Hope, Minnesota
55428, within the applicable rescission period, or sent to the Company,
at such address, by certified mail, return receipt requested, postmarked
within the applicable rescission period.
5. CANCELLATION OF AGREEMENT BY COMPANY. If the Employee exercises his
right of rescission under Section 4.C. of this Agreement, the Company will
have the right, exercisable by written notice delivered to the Employee, to
terminate this Agreement in its entirety, in which event the Company will
have no obligation whatsoever to the Employee hereunder. If the Employee
exercises his right of rescission under Section 4.C. of this Agreement, and
the Company does not exercise its right to terminate this Agreement
hereunder, the remaining
<PAGE>
provisions of this Agreement (including specifically the remaining provisions
of Section 3 of this Agreement) shall remain valid and continue in full force
and effect.
6. PERFORMANCE BY EMPLOYEE. Nothing contained herein shall operate as a
waiver or an election of remedies by the Company should the Employee fail to
perform any duty or obligation imposed upon him hereunder. Notwithstanding
anything contained herein to the contrary, this Agreement and the duties and
obligations of the Employee hereunder shall continue in full force and effect
irrespective of any violation of any term or provision of this Agreement by
the Employee.
7. EMPLOYEE ACKNOWLEDGEMENTS. The Employee acknowledges and represents
that: (a) he has read this Agreement and understands its consequences; (b) he
has received adequate opportunity to read and consider this Agreement; (c) he
has determined to execute this Agreement of his own free will and
acknowledges that he has not relied upon any statements or explanations made
by the Company regarding this Agreement; and (d) the promises of the Company
made in this Agreement constitute fair and adequate consideration for the
promises, releases and agreements made by the Employee in this Agreement.
8. SUCCESSORS AND ASSIGNS. The Employee may not assign this Agreement
without the express written consent of the Company. The Company shall assign
this Agreement to any successor to all or substantially all of the business
of the Company by purchase, merger, consolidation or otherwise, this
Agreement shall be binding upon and inure to the benefit of any successor of
the Company, and any such successor shall assume all of the Company's
obligations hereunder.
9. ENTIRE AGREEMENT. This Agreement, including any exhibits attached
hereto or documents expressly referred to herein, contains the entire
agreement between the Company and the Employee and supersedes and cancels any
and all other agreements, whether oral or in writing, between the Company and
the Employee with respect to the matters referred to herein.
10. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
11. EFFECTIVE DATE. This Agreement was originally offered to Employee on or
August 24, 1999. The Employee shall have until the close of business on
September 14, 1999, to accept this Agreement. If the Employee desires to
accept this Agreement, the Employee shall execute the Agreement and return
the same to the Company at the address set forth in Section 4.C. hereof. If
the Employee does not so accept this Agreement, this Agreement, and the offer
contained herein, shall be null and void as of the close of business on
September 14, 1999.
<PAGE>
12. COUNTERPARTS. This Agreement may be executed in counterparts with an
executed counterpart to be delivered to the other party. Each such executed
counterpart shall be deemed an original but shall constitute one and the same
instrument.
NETRADIO CORPORATION
By: ___________________________ ______________________________
Edward A. Tomechko JAN ANDERSEN
Its Chief Executive Officer
Dated as of ___________________, 1999 Dated as of _____________, 1999
<PAGE>
Exhibit A to
Jan Andersen Severance Agreement
Lock-Up Agreement
<PAGE>
Exhibit B to
Jan Andersen Severance Agreement
Letter of Recommendation
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 1, 1999, in Amendment No. 4 to the Registration
Statement (Form S-1 No. 333-73261) and related Prospectus of NetRadio
Corporation for the Registration of 4,000,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
August 25, 1999
<PAGE>
CONSENT OF I/PRO
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1, as amended, of our name and reports,
relating to visitor and listener traffic for NetRadio Corporation which
appear in such Prospectus.
I/PRO, Internet Profiles Corporation
August 26, 1999
/s/ Deborah McWhinney
- --------------------
Deborah McWhinney
President
